Disappearing Green Shoots

Remember back, just a few months ago, when it seemed (to most, at least) that a recovery from this current crisis was just around the corner? Well, judging from the growing sentiment on Wall Street and beyond, this crisis is far from over.

“The markets cannot just rely on less bad news, we need to see signs of an underlying improvement in the economy,” says Jane Caron, chief economist at strategists at Dwight Asset Management. But don’t take it from us…see what Bill has to say, in the DR’s highlight of the week, below…

Beginning on March 9th, we also got a big bounce in the world’s stock markets – just as we should. US stocks are up about 40% since then. Some foreign markets are up even more. Russian stocks, for example, have more than doubled. Chinese stocks are up more than 60%.

As the bounce continued, people began to get the wrong idea. They thought they saw ‘green shoots’ and the ‘light at the end of the tunnel.’ But if the economy is really improving, we haven’t seen much evidence of it here at The Daily Reckoning headquarters. As near as we can tell, housing prices are still going down and unemployment is still going up…and most important…people are still acting as though we were on the downward slope of the credit cycle. The latest numbers we’ve seen show that they saved more money in the first half of the year than the total in extra ‘stimulus’ that they received. Savings – last reported at 5% in this space – are now close to 7%. This is a just what you’d expect. But it is a huge turnaround, too.

As to housing prices, there are a million option ARMs still to be reset over the next four years. They won’t peak out until 2011…with average increases of about 80%. That will cause hundreds of thousands more houses to be dumped onto the market…and probably push the bottom of the housing decline to 2012.

As long as housing prices are falling, jobs are declining, and consumers are inclined to save rather than spend, there will be no real recovery.

In our book, recovery is impossible anyway. Because the pre-crisis economy had reached the terminal stages of the credit cycle. It was like someone in the terminal stages of a fatal illness. After they have died, you don’t wish that they could recover…and be just like they were before they died. They were sick and dying then! No, you sign the book of memories and condolences and turn the page. You let new life take the place of the dead. You move on.

But the feds have their ghoulish agenda. They have the poor thing on life-support. One tube feeds the oxygen of easy credit. Another drips in more ‘stimulus.’ The economy rattles every time it breathes. Dead companies, such as GM, say they are reborn. But take away the tubes…and they collapse. Dead-in-the-water households learn to live submerged in debt …with special tubes provided by the feds – such as the underwater mortgage refinancing offered by Fannie and Freddie, where homeowners can get up to 125% of the value of their houses. And the brain dead economists at the Fed and the Treasury department continue to offer their elixirs and panaceas – even though they have never worked.

Everything is happening as it should, in other words. But what happens next?

The above is just an excerpt from Bill’s standout essay from this week. You can read it in its entirety here.

We’re going to have to make this Weekend Edition a bit shorter than usual, as we are busy getting ready for Agora Financial’s Investment Symposium in Vancouver. Say ‘hi’ if you are there – we’ll be in the back of the room, furiously taking notes during the presentations.

If you can’t make it to Vancouver this year, we have you covered. We’re going to be updating you live from the symposium using the DR Twitter feed. If you haven’t already, you can sign up for a free account and follow us here.

Enjoy the rest of your weekend!

Kate Incontrera
The Daily Reckoning

The Daily Reckoning