Consumers Not Doing Their Part in the Recovery

After yesterday’s manic rally, the major US indexes opened down a bit this morning. Earlier, the Commerce Department reported consumer spending “unexpectedly” stalled in April – the first time since last September the numbers didn’t go up. Incomes rose, and so did the savings rate.

Of course, this is a good thing in the long haul. We need savings to rebuild a healthy economy. But in the credit-addled mind-set of Wall Street, the mighty consumer who drives 70% of the economy isn’t doing his part to support “the recovery.” The Dow sits at 10,205 as we go to print.

The volatility index has retreated to around 30 as traders prepare for the holiday weekend. It was just a week ago that it reached 45 – something that’s happened only four other times in the last two decades.

Gold pulled back overnight to $1,207 this morning. The dollar index recovered some of yesterday’s losses and sits at 86.3.

A 10-year Treasury bill yields 3.31% this morning. Not quite the insane lows of earlier this week, but still good enough to keep a 30-year fixed mortgage at 4.87%.

Despite the stock market’s ups and downs this week, the fundamental weakness remains unchanged, both in the US and in Europe. “The notion that the Greek financial crisis is contained and soon to be forgotten,” asserts The Richebächer Letter’sRob Parenteau, “is dead wrong.

“Our experience in recent years,” Rob continues, “is that when professional investors play the denial game, they play it to the hilt. Their walls of denial are made of brick and remarkably thick, and they do not come down easily.

“But when current events blatantly reveal the incompleteness, if not the insanity, of consensus views, the walls of denial maintained by professional investors are undermined swiftly, and nothing more is left on the ground than a pile of red bricks with dust rising from them.

“When the thundering herd, in its infinite stampeding wisdom, turns tail, best to go find a ditch to jump into so you do not get trampled to death.”

For what it’s worth, the Treasury still pegs the national debt this morning just shy of $13 trillion. The website apparently jumped the gun. As if it matters.

The latest jobs bill Congress is discussing (they don’t want us to call it a “second stimulus,” because that implies the first didn’t do the trick) has been scaled back from $200 billion to $143 billion to $84 billion. As if that matters, either.

“Government has grown too big, promised too much and delivered too little,” says our friend David Walker, assessing what really matters from his vantage point as the former US comptroller general. “We are not exempt from the fundamental laws of prudent finance, and we should quit acting like we are.”

Assuming that does not happen, how to invest accordingly?

“People still think of emerging-market economies as poor cousins,” offers Marc Faber hopefully, “but because 80% of the world’s people are here, in aggregate the consumption is huge. Everybody should have 50% of their money in the emerging world, outside the West.”

Another way of looking at it: In emerging markets, private investment and enterprise is making up a greater proportion of GDP. Here at home, it’s just the opposite.

Addison Wiggin
for The Daily Reckoning