11/16/10 Baltimore, Maryland – We were curious about what would happen yesterday. The market sold off on Friday. The question was: are investors rejecting Ben Bernanke and his printing press money?
Another big drop in stocks yesterday would have confirmed the rejection hypothesis. A big increase in stock prices would have suggested that investors were on board with QE.
So what happened?
Nothing. The Dow was either up 9 or down 9, we can’t remember which. Gold was up $3. Nothing significant, in other words, in either direction.
So, Mr. Market is going to keep us wondering…guessing…cogitating…
…what’s going on?
And here’s something that has us wondering about. Retail sales are up. Here’s the Bloomberg report:
Sales at US retailers climbed in October by the most in seven months, brightening the outlook for holiday shopping even as unemployment holds near 10 percent.
Purchases rose 1.2 percent, exceeding the highest forecast among economists surveyed by Bloomberg News, according to data from the Commerce Department issued today in Washington. Another report showed manufacturing in the New York region unexpectedly shrank in November as orders dropped.
“We expect the holiday shopping season to really ramp up in November,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, who forecast a 1.1 percent gain in sales. “The breadth of discounting” and steady income gains are “providing some support,” he said.
The improvement in spending comes as other parts of the economy show signs of cooling.
Wait a minute. Isn’t the consumer de-leveraging? Isn’t he paying down debt and defaulting on his mortgage? How can he be increasing spending?
Well, maybe with all this talk of quantitative easing has unsettled him. Maybe he thinks the world as we have known it is ending…maybe he’s decided to enjoy it. Or maybe the consumer believes that the Fed will really succeed in stirring up the economy. So, maybe he’s feeling more confident. Or maybe he thinks the Fed will destroy the value of the dollar, so he’s getting ready for inflation – spending his money as fast as possible.
Or, most likely…this is just a little, insignificant blip of information…meaningless noise, in other words.
Households are not likely to really increase spending. They don’t have more income. Their houses are worth only about 70% of what they were three years ago, and still going down. Their credit ratings are impaired. Lenders are more cautious. And so are consumers themselves.
So, we’re not going to take this news very seriously. We just didn’t want you to think that we were hiding developments that don’t seem to fit our Great Correction hypothesis. We’re not hiding them; we’re just ignoring them.
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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Bill, people are social animals, which is a polite way of saying “herd animals”; they follow the majority. Media is capable of creating a perceived majority. The power of media lies in this ability.
If you want people to go out and buy stuff on credit, you tell them everyone else is doing it. It’s a statistical fact people who read and believe the article will behave the way the article claims everyone else is behaving. Even if his neighbor is out of work, his home is in foreclosure and he was just forced to take a pay cut. If everyone else is jumping off the bridge, he will too.
It’s burned into the genes.
If it don’t get consumed, inventory will build up and soon it won’t get produced (Not in the former quantities)
Leading to layoffs, leading to less money for consumers, leading to less consumption, leading to production cutbacks, leading to layoffs… and on and on.
Which explains Bernanke furiously priming the pump. Let’s hope he is not pushing on a String. If so another dose of financial viagra is needed.
Not every consumer is out of a job, underwater on a mortgage, and no longer has chamber pot to fill. Those who did not join the herd in its real estate and home equity feeding frenzy may be coming out to graze amongst the wreckage.
If I’m not mistaken, healthcare spending is included in consumer spending. 1.2% easily explained by this fact.