Use access key #2 to skip to page content.

Could the 'Great Discounting Machine' be wrong again??? I think so!!!



April 10, 2009 – Comments (6)

With the stock market rip-roaring upwards, one can only assume that by late Q3-early Q4 the economy will be on the road to recovery (we keep hearing that the market heads higher 3-6 months before the economy turns around, after all). I have a hard time believing this to be true. The good news, for me anyway, is that I'm not alone in this thinking. Nearly all of the top fools - Dwot, SpecBear, GMX, Abitare, Alstry, Deej, StatsGeek, EverydayInvestor, DemonDoug, Dexion (and I could go on and on), all believe that we are in for more pain. Most of these Fools have written exellent blogs with great research and analysis that make for a very convincing case. Chris Martenson, an superb analyst that I agree with most of the time, wrote an article today that provide a lot of support to this thesis as well. As always, here's the  link and a few excerpts. You'll have to use the link in order to see the supporting charts:

No Raise, Fewer Jobs, Less Dividends, Less Credit = No Economic Growth.

Much is being trumpeted by the government and the press about “the bottom being in” and that a recovery is right around the corner. The recent stock market gains are being used as a primary source of evidence for this idea.

But is the stock market a good indicator of anything? We might note, somewhat critically, that the stock market did a terrible job of predicting the downturn (see below) and wonder why it should be any better at predicting the recovery.

Now that the NBER has finally backdated the recession to the 4Q07 (marked by the blue and gray rectangle), we can see that “the great discounting machine” known as the stock market failed to foresee the current downturn and does not appear to predict anything. With a track record like that, we might want to get ourselves a “second opinion” on where things stand right now.

So let’s turn again to the base data. We know that just over 70% of the economy rests on consumers. How are “the consumers” doing here? One thing we might analyze is how much money and credit consumers have, under the theory that the more they have, the more they’ll spend. Let’s start with jobs.

Job losses

NEW YORK ( -- Job losses continued to mount in March and unemployment hit a 25-year high, according to the government's latest reading on the battered labor market Friday.

For the first three months of the year, 2 million jobs have been lost, and 5.1 million jobs have been lost since the start of 2008.

Assuming that each of those jobs was at the average yearly wage of roughly $40,000, or $3,300 per month, we can estimate that 2M x $3,300 or $6.6 billion of income per month is now gone from the national stream just in 2009.

Since the start of 2008, this number would be nearly $17 billion per month in lost spending power.


NEW YORK ( -- About a quarter of businesses have frozen workers' salaries for 2009 in the wake of a pessimistic economic outlook, according to a survey released Monday. Outsourcing and consulting firm Mercer said 25% of organizations surveyed said they have already decided not to raise their employees' pay, and another 20% are considering a salary freeze this year. A year ago, just 5% of companies planned to suspend raises for their staff.

It would appear that wage hikes are not going to be a comforting source of income gains this year. No surprise there. In aggregate, this has added up to a nearly $30 billion per month decline in wage and salary disbursements according to the BEA:

Private wage and salary disbursements decreased $29.9 billion in February, compared with a decrease of $27.1 billion in January. The January change in private wages and salaries was reduced by an adjustment of $20.0 billion (at an annual rate) for smaller-than-usual bonus payments.


Well then, how about dividends? Dividends are a major source of income in this country...

...we might wonder what a $77 billion dollar reduction in dividends would mean.

NEW YORK, April 7 /PRNewswire/ -- Standard & Poor's, the world's leading index provider, announced today that a record 367 of the approximately 7,000 publicly owned companies that report dividend information to Standard & Poor's Dividend Record decreased their dividend payment during the first quarter of 2009…

'The mammoth $77 billion reduction in dividend payments during the first quarter is eye popping,' says Howard Silverblatt, Senior Index Analyst at Standard & Poor's. 'The full impact of these cuts will be felt this quarter, when the dividend check is sent in the mail.'

...I can estimate the size of the impact on personal income at nearly $58 billion or 5.8% of personal income.

When we review this corporate reduction in dividends against past years, we see that 2009 stands out as being not just slightly different, but starkly different...

Declines in consumer credit

The largest drop in consumer credit ever recorded was just announced this week, which is really quite a shocking thing to those who believe that you “should never underestimate the US consumer.”

WASHINGTON (MarketWatch) – The balances on American consumers’ credit cards fell at a 9.7% annual rate in February, the fastest rate of decline since 1976, the Federal Reserve reported Tuesday.

Total outstanding consumer credit, including both revolving and nonrevolving credit, fell at a 3.5% annual rate, or $7.5 billion to a seasonally adjusted $2.56 trillion, the Fed said. Credit expanded by a revised $8.1 billion, or 3.8%, in January.

Adding it all up

Wage and salary declines (due to freezes and job losses): ~$30 billion/monthDividend hits: ~$75 billion/quarter or $25 billion/monthCredit declines: ~$7 billion/month (if February results repeated). Together we are in the vicinity or $60 billion per month in reduced money or credit, which, if translated directly into reduced economic activity, would be a nearly 5% decline in US GDP this year.

Of course, any propensity towards additional saving would only compound the amount of decline in GDP, and the rate of personal savings is up quite a bit on a year over year basis.

I have not yet seen any change in this sort of fundamental data that would indicate that a bottom is in, or that the recovery has begun yet.

I cling to the antiquated notion that the economy consists of real people spending either real money or using credit.

The stock market seems to differ with this view and appears to me to be overly anxious to return to “how things used to be,” without taking into account the possibility that things are now different that they used to be.

At least, that's how I see it.


6 Comments – Post Your Own

#1) On April 10, 2009 at 1:16 AM, uclayoda87 (28.68) wrote:

It's interesting that the market started going up even though stock mutual fund money was going down.  I would guess that private equity money started this rally with the hope that if it was able to sustain it for a month that individual investors and mutual funds would take the bait and jump in.

This may have just happened.  It seemed that the market manipulators hooked a big fish today (small investors).  Now its time to let the fish run the market up another 100 points on the S&P.  The financial news channels appear to be cheering it on (look for private fund managers predicting a long rally).  Once the "dumb" money has lost the euphoria, the big private money will quickly cash out, reigniting the investors' fear by triggering a sudden large price drop.

The mass rush to the exits will over shoot the previous bottom.  The same private fund managers will be warning about the coming doom as they prepare to buy in at another low.

This is just a cynical guess, but so far playing this market timing game has worked better than the traditional buy and hold method that I used in 2008.

Report this comment
#2) On April 10, 2009 at 1:40 AM, bigpeach (30.10) wrote:

The stock market rose before the last two severe recessions we've had. Those of the mid 70s and early 80s.

I would add that many of these people are at the top now because they're good at forecasting declines. Can they predict a rise? Time will tell. I'm using my money to bet no.

Don't spend too much time looking at employment, wages, and credit availability. Those are all lagging economic indicators. You're guaranteed to miss the bottom (wherever that may be) if you focus on those. 

Report this comment
#3) On April 10, 2009 at 9:05 AM, sentinelbrit (58.44) wrote:

I agree with bigpeach. I just wrote a blog called - the case for remaining "long" which while not quoting all the economic stats above, points to a few indicators that lead me to believe this rally is not a flash in the pan. 

What the bears seem to focus on almost entirely is the negative news and they seem to have this belief that the world is ending. "The dollar is going down", "gold is the only place to be", "banks are insolvent" and so it goes. The banks may be insolvent but that doesn't mean they're going bust. The Fed is underwriting their recovery.

So the article above makes no reference to the impact the massive spending by the Fed and government might have on the economy. It makes no reference to the fact that those still employed are seeing a boost to their incomes from lower mortgage rates. Someone told me that they were quoted 4.75% for a 30 year jumbo mortgage - that it would cost $10k but they would break even in about 12-18 months. That seems a pretty good deal to me. And will lead to him having more disposable income. It makes no reference to WFC's record earnings (maybe it came out before the news).

I admire those MFs mentioned in the blog above, they have a fantastic record! But do they use real money in their trades on CAPs. Using real money is a true test of your investment ability. Like you, I wonder if they can do it in a rising market. I have seen a lot of money managers and they all have a style and are good in some markets and not so good in others. Time will tell.


Report this comment
#4) On April 10, 2009 at 12:12 PM, BradAllenton (31.67) wrote:

This rally is like when your Mom would pretend to eat your strained peas and say mmmmmm now you have some. If you don't I will eat them all up. When in reality, they strained peas are nasty and nobody wants them. The way I see it is people can't wait to sell this rally and when they see people bringing in sideline cash they will fold their positions. The market is manipulated with big money and big money is saying "come on in the water is fine"............ no thanks.

Report this comment
#5) On April 10, 2009 at 2:31 PM, kaskoosek (30.31) wrote:

Nominal != Real

Report this comment
#6) On April 16, 2009 at 10:02 AM, huddaman (99.00) wrote:

my response:

Report this comment

Featured Broker Partners