Economic Downturn in the Face of Infallible Markets

Does the stock market know something we don’t? Yesterday, investors bid up prices on the Dow stocks to a new high. The index rose 115 points.

According to theory, the markets know more than any single investor, analyst or economist. In theory, the markets know everything there is to know. In theory, the markets are always right.

But what the heck? This is the same stock market that signaled clear sailing ahead ten years ago. Soon after, equities hit an iceberg. They sank for the next decade.

Here at The Daily Reckoning, we had our own views. At the beginning of the ’00s, we told readers to sell their stocks. We were right. The stock market was wrong. Heh heh.

So, who ya gonna trust now? The stock market… Or, The Daily Reckoning?

Who knows… Maybe we’re wrong this time, but we see another 10 years of trouble coming. Two years ago, the credit cycle peaked out. After half a century of adding debt, the private sector had had enough. Borrowing turned down. Last November, it registered its 10th month in a row of declines, something that had never happened since they began keeping records after WWII.

Consumer spending has held up surprisingly well. But with credit contracting and unemployment high and rising, it can’t continue.

Small businesses create jobs. But who wants to take the risk of funding a small business now? Not the banks. And the capital markets are closed off to small businesses. You have to have a big business – preferably one that is dying… Then, you can get all the money you want from Wall Street and the feds.

Since the downturn began two years ago, 7.5 million jobs have been lost. There is no sign that they will be found anytime soon. Jobless people do not spend a lot of money. Ergo, you can’t really expect an economic surge until people get jobs.

When will that happen? Possibly years from now…maybe 2…maybe 5…maybe 10…

Yes, dear reader, we are in a depression. It is a period of adjustment…of correction…of de-leveraging…of paying down debt. And there’s not much the feds can do about it – except disguise it…delay it…and make it worse.

The government can spend money. The government can inflate the currency. But it’s neither government spending nor inflation of the currency that makes an economy healthy. If inflating the currency could make an economy prosper, where did Zimbabwe go wrong? And if government spending could boost an economy, what did Cuba do wrong? Or Venezuela? The two-bit, banana republic economies are almost all burdened by too much government stimulus. The feds tax too much, spend too much, borrow too much and inflate too much. Instead of doing their jobs – enforcing property rights, protecting people from crime, and staying out of the way – they meddle and spend. The president gets a fancy house and lots of security guards. And the economy rots.

Of course, we could be wrong about what is happening in the US. But our guess is that the stock market is wrong instead. Stock market investors anticipate a return to ‘normal.’ But the normal they’re looking at is a very unusual credit bubble that blew up and can’t be mended. The real normal is what we’re getting. And the real normal is a world where bad stuff happens. Investors make mistakes. Markets make mistakes. Often, they are misled by their own financial authorities, such as Ben Bernanke. The US Fed chief meddles in the economy and distorts the picture. Investors look, but get the wrong idea.

Our guess is that stock market investors are seeing the distorted picture caused by the feds’ meddling…not the real picture. They look. They see low interest rates. They see stimulus. They see a stock market that seemed so friendly and so rewarding for so long that they can’t imagine anything else. They see a government taking action…and making things better. They read Thomas Friedman and think the ‘political class’ can fix whatever problems it encounters.

But in the real world, the political class is a life-threatening parasite. Allow it to grow large enough and the host – the private economy – will shrivel up and die.

And in the real normal world, markets go up…and then they go down. We are in one of those periods of decline. We are in a depression, with a growing, parasitic political class. This phase won’t end any time soon.

The Daily Reckoning