The Paradoxically "Sick" Economy

Dow up…gold down. That’s been the micro-trend over the past few days. The 30 bluest chips are up about 400 points since last Thursday. The Midas metal, having suffered a $21 selloff since this time yesterday, is down to around $1,160 an ounce.

At first glance, it would appear that things are looking up for the world’s most indebted economy. People are selling their catastrophe insurance – gold – and freeing up a bit of cash to take to the casino – stocks. But as our fellow reckoners already know, things are not always as they seem.

For the impossibly trendy youth here in “the O.C.” – where your editor is an impossibly uncool observer – the words “sick” and “dank” are employed to describe favorable outcomes or conditions. “You missed it, dude. The waves were sick/dank,” one might say in reference to a particularly enjoyable session in the surf. Conversely, the word “beat” is used to express one’s disapproval, as in, “Mrs. Thompson’s algebra class was, like, totally beat.”

Similarly misleading, a “beat” economy occasionally produces “sick” short-term stock market rallies. While this may appear to be a good thing, however, the result over the long term may end being far more “beat” than “dank.”

In other words, sound markets need sound economic fundamentals. Sick economies make for sick markets, however one chooses to define the word. So just how sick is the underlying economy, then?

One report, hot off the press this morning, tells us that home ownership in the US fell to its lowest level in a decade during the last quarter. The number of vacant properties – including foreclosures, residences for sale and vacation homes – rose from 18.6 million in the year-earlier quarter to 18.9 million, according to figures released by the US Census Bureau. And there’s plenty more to come down the pipes, too. Data compiled by Irvine-based RealtyTrac Inc. suggests foreclosures will top the 1 million mark this year. 269,962 US homes were seized in the second quarter alone, an all-time record.

Accordingly, consumer confidence is languishing around 5-month lows. Bloomberg has the details:

The Conference Board’s confidence index fell to 50.4 from a revised 54.3 in June, figures from the New York-based private research group showed today. The gauge was forecast to drop to 51, according the median estimate in a Bloomberg News survey.

Of course, it’s hard to be optimistic about consumption – which reportedly accounts for 70% of the US economy – when consumers don’t have any money. The same report showed income expectations at their lowest in over a year. The proportion of respondents who expect their incomes to rise over the coming six months fell to 10%, the lowest reading since April 2009.

“An important drag on household spending is the slow recovery in the labor market and the attendant uncertainty about job prospects,” Ben Bernanke explained last week. According to the Fed Chairman, it’ll take a “significant” amount of time to restore the almost 8.5 million jobs lost in 2008 and 2009.

In the meantime, worries over deflation are beginning to find their way into even the mainest-stream press.

“Eyes Turn to the Danger of Deflation,” announced a headline on the front page of yesterday’s Los Angeles Times.

“…increasingly, economists and other analysts are expressing concern that the US could be edging closer to a different problem – the kind of deflationary trap that cost Japan more than a decade of growth and economic progress,” the paper reported.

Consumer prices have declined during each of the last 3 months. The core inflation rate – which excludes food and energy items – has fallen to a 44-year low of 0.9%, well below the Fed’s target rate of 1.5-2%.

Bill Bonner, who has more on the ongoing battle of the ’flations below, outlined his 7-point case for “Soft-Core Deflationism” in yesterday’s issue:

1) There is no recovery; there won’t ever be a recovery
2) The de-leveraging period will be longer and harder than people expect…leading to spells of deflation and double…triple…dipping
3) The feds will fight it with every weapon available
4) However, they will not push the ‘nuclear button’ – wanton, reckless money printing – until the bond market cracks
5) It will not crack soon, because the feds are incompetent; they will not succeed in getting higher rates of inflation; at least, not soon.
6) The dollar will remain strong. Bonds will go up…for now…
7) The Dow will fall…but not below 1,000…probably not below 5,000

Time will tell which prediction is the dankest of all but, for now, we’ll just have to wait and see.

Joel Bowman
for The Daily Reckoning