As the bulls whistled the last six months while passing the graveyard, pretending that the undead was just a myth that the recovery was on schedule, on Friday, the flesh rotting, decomposing zombie financials stocks leapt from their government-lined stimuli sarcophaguses, and scared investors back to reality.
The preliminary GDP number of a plus 3.5 percent, announced the day before, and lifted the DJIA up 200 points, was just like in the movies when everyone exhales because the worst is over – but it’s not.
Digging deeper into the report by Stephanie Pomboy, highlighted in Market Watch in Barron’s, shows what should have been common knowledge: companies aren’t spending, consumers aren’t spending, it’s the government that is keeping the economy afloat. The cash-for clunkers program represented 1 percent of the GDP; the homebuyer credit relief another .5 percent, and government expenditures of added 0.5 percent. The $30 billion reduction in inventory liquidation accounted for 1 percent of the 3rd quarter number.
This Frankenstein-type economic bounce is just as unnatural as Marry Shelly’s memorable monster from her 18th century gothic novel and is just as enduring. When bulls begged bears this spring not to attempt to resurrect dead investment advice with black-box incantations, twitching green shoots, only encouraged their laughter and derision at macroeconomics.
How do you persuade companies to build things for customers they have recently laid and will not rehire anytime soon? How do you convince employees in between employers, or are afraid they will be in between employers soon, to spend money on things, which do not need replacing?
These two minor details happen to remind traders that the future comes with less E in their P/E ratios.
The Obama administration is holding back on lion’s share of the $787 billion stimulus package, waiting for the 2010 election year, but unlike previous recessions, the cumulative toll of foreclosures, unemployment, an unresolved banking crisis, and the psychological cost baby boomers nearing retirement, I suspect, will diminish the remaining tax-dollars’ impact.
Next week, after the FOMC meeting, the markets face another test with economic reports on jobless claims, productivity, employment, and consumer credit. Laced in these October numbers is some portion of the sentiment, which led September Conference Board’s consumer confidence lower, from 53.1 percent to 47.7 percent, reported on Tuesday.
When we set our clocks back a thin one hour this weekend, we can only lament that it cannot be reset years, to the time before repealing Glass-Steagall. Had we only listen to lessons offered by Marry Shelly. Playing God with the natural order of things, by passing into law the Graham-Leach-Bliley Act can only lead us to being a world of TARP. The monster continues to roam the countryside.