Is it on…or off?
The bear market rally, that is? The Dow was down again yesterday…but just a little…52 points.
The short-covering rally is finished, says David Rosenberg, formerly one of Merrill’s top analysts.
“Everyone I know is laying people off…cutting back…and generally struggling to survive,” said a colleague from Florida. “I don’t believe this recovery story. The stock market might be up, but the real economy is still sinking.”
Yesterday, we went to get our teeth checked out.
“Hey…I’m a Markets and Money reader,” said our dentist. “So, I knew you were in town.”
Asked about the state of the economy, he had this comment:
“Our business is a little counter-cyclical. People get laid off from work, but they still have their health benefits – at least for a while. They want to make use of them while they can. And they’ve got the time to do it. So, our business actually goes up.
“But then, when the recovery comes they go back to work…they’re busy…and they’ve already had their teeth fixed. We’re not seeing that yet.”
House prices are still falling. The average house in Southern California has fallen to $247,000 – a big drop from the top set two years ago. Toll Bros., one of the country’s biggest builders, reports revenues down 51%.
If the US economy is really following Japan, things are going to get a lot worse. Japan’s output is collapsing – at a 15% annual rate last quarter. The Land of the Rising Sun is a major exporter. For the first time ever, exports are falling…taking the Japanese economy down with it.
Internally, the Japanese are still not big spenders. The population is not only aging…it’s shrinking. That’s not happening in the United States. Thanks largely to its immigrants and Hispanics, the US population is expanding. But this new population is not the same as the old one. At the top of the socio-economic pyramid in the United States is a huge group of aging, mostly white baby boomers. Naturally, the geezers vote. And naturally, they vote themselves more benefits at the expense of the next generation.
In fact, you can look at the entire bailout/stimulus program…and the $1.8 trillion US budget deficit for 2009…as a huge transfer of wealth. Benefits are provided to the present generation at the expense of the next generation. The white boomers borrow – through their elected federal representatives. The next generation – much more Hispanic and much more immigrant – is stuck with the bill.
But it’s not that simple.
The bailout/stimulus program is a scam on top of a scam. One generation may be trying to get something at the expense of the next – but they’re both losing. On the surface, the next generation gets stuck with the cost of bailing out the present generation. But underneath, the bailout is a sham; it doesn’t really work. It doesn’t revive the economy. All it does is move money from sensible households and good businesses to reckless spenders, mis-managed firms, and foolish projects. The losers are the winners.
What it doesn’t do is bring about a general recovery in the economy. It can’t – for all the many reasons we’ve described in these Markets and Moneys.
The feds can spend money. But they can’t turn bad investments into good ones…nor turn hopeless, brain-dead companies into successful ones…nor erase $20 trillion of excess debt.
All the feds can do, in other words, is make a bad situation worse.
First, they mislead investors into believing the fix is in. With all that money coming into the market, people think the problems are going away. “Everything is under control,” they say to themselves. Then, they put their money into stocks, deluding themselves that a new boom is underway. Later, when it becomes clear that the boom is a long way off, they are deeply disappointed. Stocks fall…and the economy enters a long, dark period of workouts, defaults, bankruptcies, disgrace and suicides.
Then, as we have explained many times, the feds’ money actually delays the process of creative destruction. Instead of burning off the dead wood and making room for new growth, the smoke jumpers at the Fed parachute out of airplanes to smother the flames. Instead of a hot fire that burns itself out in 24 months…the economy suffers a slow burn for 10 years.
Another way they make the situation worse is by undermining the rule of law and the predictability of economic rules. When a corporation goes broke BOTH the bondholders and the stockholders should suffer. But in bumbles the Federal government with bailout money. The share price plummets as investors anticipate a clumsy takeover – wiping out the shareholders. But the bonds could even go up – as the firm is given easy credit, allowing it to stay out of bankruptcy and continue paying off the bondholders.
Worse, as in the case of the Chrysler bailout, the feds jumped in and upset everybody. Instead of letting the markets sort out the stockholders and bondholders, they forced a political settlement that rewarded one class and punished another. Bondholders got less than they should have…and the autoworkers union got more.
What is this? A free-market country with the rule of law? Or a third- world basket case in which the politicians decide who gets what?
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