The Stock Market Squares Off Against the Economy

Big down day for stocks.

The Dow lost 198 points.

Why? Are investors worried about gridlock in Washington? Or falling property prices in Beijing? Or maybe it’s the European debt crisis that has them bugged?

It doesn’t matter. When Mr. Market wants to go down, he’ll go down. He’ll leave to us to come up with the ‘reasons’ afterward.

The real reason? The US economy is sinking into a deeper Great Correction.

No kidding. Here’s the latest:

WASHINGTON (AP) – Businesses cut back on orders for aircraft, autos, heavy machinery and computers in June, sending demand for long-lasting manufactured goods lower for the second month in the past three.

The Commerce Department says orders for durable goods fell 2.1 percent in June, with the weakness led by a big drop in orders for commercial aircraft. A number of other categories also showed weakness including autos and auto parts. A key category that tracks business investment plans fell 0.4 percent in June.

But domestic sales of durables is much worse…the lowest in 20 years.

For the last year and a half, the stock market has been signaling ‘recovery.’ Prices rose from a Dow low on March 9, 2009 below 7,000 to a high over 12,500.

But while stocks recovered, the economy didn’t. The rich got richer – those who owned stocks. The middle classes – who tend to own houses, but not stocks – got poorer.

So, the big question: who’s right? The stock market? Or the economy? Which way is it going to go? Is the stock market going to fall to meet the real economy? Or is the economy finally going to recover to justify the kind of stock prices people are paying?

Our money is on falling stock prices. For all the many reasons we’ve told you in these Daily Reckonings, we don’t think you can turn this economy around …not anytime soon. This is a debt contraction. It takes time. Years. In fact, at the present rate – about 5% of GDP per year – we’ll have to wait another 36 years before consumer debt to GDP is back to the 100% level. For reference, it was about 33% when then expansion began after WWII.

We’ve been waiting a long time for the stock market to prove we are right. Until now, neither it nor the economy was willing to give. Stocks stayed high. The economy stayed low. Maybe yesterday, stocks began to ebb lower. Maybe they are just bouncing around.

We’ll have to wait to find out. Investors are probably a little jittery…waiting for a deal on the debt ceiling. When the deal is announced, stocks will probably rise again.

But maybe not. Sooner or later they’ll have to come to terms with the Great Correction. Maybe they’ll do now. Stay tuned.


Bill Bonner,
for The Daily Reckoning