market continues to be disjointed from the real U.S. economy. It feels like the current government statistics are orchestrated propaganda. The credit-dependent, consumer-dependent U.S. economy is going down, and the trillions of dollars borrowed and spent by the U.S. government and Federal Reserve to start up a recovery has basically fallen flat. The US economy needed several trillion of dollars in deficit spending to pull off the meager jobless growth of 2001-2007.The U.S. economy has been dependent on Federal stimulus for years now, both the indirect stimulus of artificially low interest rates, unlimited liquidity, and the direct spending of hundreds of billions of borrowed dollars. Even before the financial crisis of 2008-2009, the Federal government was borrowing and spending $400 billion a year to prop up the US economy to look prosperous.
The primary fuel that supports the U.S. economy is consumer spending which is ultimately based on household income and assets. The US economy is dependent on consumer spending for 70% of the GDP. Earned income has been flat to down for most Americans for years. According to the Bureau of Economic Analysis, real disposable personal income adjusted for inflation and taxes declined 3.4% in the third quarter.
In an economy dependent on consumer spending for 70% of GDP, how can GDP rise by 3.5% while personal income plummeted by 3.4%? If the boost in GDP is real and not just statistical then where did it come from? The answer is from borrowed money. The Federal government borrowed and spent over $1.4 trillion in fiscal year 2009.
During the housing bubble of 2002-2007 households borrowed and spent hundreds of billions. But the consumer, beset by declining assets ($13 trillion lost in the past two years), declining income, falling housing values and horrible employment trends (17.5% unemployment/underemployment, broadly measured). Also add into the mix declining available credit.
Revolving credit (credit cards) decreased at an annual rate of 13%, and non-revolving credit. So while households are still burdened with almost $2.5 trillion in credit card and non-revolving debt, they are paying debt down, not adding more. Less debt spending by consumers means less spending to drive the GDP. And let's not forget that homeowners pulled out about $5 trillion in home equity during 2001-2007, and the home equity ATM has been closed by banks for a majority of Americans even those with excellent credit.
The primary asset for most Americans is a home, and home values are still dropping, foreclosures are still rising and the only force keeping the market
Of the $1.5 trillion mortgage securities issued in 2009 over 90% are backed by the government. The government owns over half the nation's $10 trillion in mortgages via quasi ownership of Fannie Mae (FNM
Earning surprises with higher profits, is there real growth going on? By slashing payrolls, R&D and various accounting tricks. Actual revenue growth is still missing in action for the most part. Once the cost cutting activates have run there course it will be much harder for upside surprise earning announcements without true revenue growth. The stock market is rising on the hopes of an actual, real, tangible recovery in household income, home equity and creditworthiness. At some point soon investors will have to take pause and take a hard look under the hood of the US economy and it will not be a pretty site.
The mirage of recovery has been propping up the stock market for nine months I suspect that when investors see through the illusion the market will make a major retracement and head back near the March lows, or perhaps even lower. The major correction of 2010 will simply reflect the state of the real economy. 11/23/2009
Major correction of 2010 same as the talk of W shape recovery. Hope 10% for 2010 materializes.
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