Thursday, March 11, 2010

Wall St Celebrates while Main St Suffers

One year ago this week many were wondering if the economy was going to collapse. The market found itself at 666 on the S&P. Most investors had once again lost 50% of their life savings for the second time in less than 10 years.

I was seriously worried that we were not going to be able to break out of the economic "death spiral" that started in the fall of 2008.

The reversal

A few days after hitting the lows, the "too big to fail" bankers all came out within a week of each other in an obvious "coordinated effort" and said that things were looking better.

Sentiment then immediately changed, and Wall St hasn't looked back since. The market has now roared back over 60% from the lows without one serious pullback. The bankers saved the day!...For now. I guess this is all part of doing "gods work".

I for one am glad things came back. I wasn't looking forward to living in a country following an economic collapse.

So what's next?

I think Wall St. is asking themselves the same question. The market has basically done nothing the last few weeks. The volumes have been extremely low which is extremely concerning in my view.

Everyone knows that the economic recovery we have seen since last year has been stimulus based. The Fed basically replaced the consumer hoping that it would instill confidence in the economy.

In previous recessions, renewed confidence usually brought out the "animal spirits" from the private sector. The economy would then slowly grow out of its problems as companies and consumers began to spend again.

The huge move that we have seen since last year has basically been a large bet that we will grow out of this recession just like we have in every other recession since the early '80's.

Did it work?

Wall St isn't sure which is why the market is going nowhere IMO. There are very few signs that anything has improved. In my view there is no way it can work because the losses haven't been taken.

We will not recover from this economic nightmare as long as the fraudulent behaviour of "hiding the losses" is allowed to continue.

We didn't recover in the 1990's until the banksters were put in jail, and the losses were taken on housing using the resolutions trust which was used to auction off and liquidate the housing bubble.

Today, the only recovery we have seen is on Wall St in the form of huge banker bonuses!

So how did Main St. do following this incredible rally?

Uhh...Not so well....

As you can see above, over 11% of Main St is now on food stamps. This is the highest percentage in decades. Of course you don't hear about this part in the news.

We are constantly told that "the recession is now over!" and the "recovery" has now begun. Yeah OK: Tell that to the 11% above who can't even afford to even put food on the table.

The huge increase in the usage of food stamps is mainly because there are no jobs! Jobless claims are still running at over 400k a week which is pretty horrifying this late into a recession.

You cannot have a sustained "jobless" recovery. It's impossible!

When will the recovery really begin?

That's the million dollar question. I believe it starts when the cooked books are exposed and everyone involved in fraudulent behaviour is put in jail.

Now let's be realistic here. I don't think the criminals will ever go to jail, but i do believe that the cooked books will eventually become exposed.

As I have said before, you can cook the books for only so long before you run out of cash. Can you say Enron? Folks, once you can't make payroll the game is over.

The government may be able to indefinitely hide the losses of the "too big to fail banks" but they can't stop the bleeding everywhere.

As a result, I think you are going to start seeing signs of our hidden economic nightmare in areas of the economy that the Fed isn't involved in.

The state budgetary nightmares are a great example. Illinois, New York, and California are on the verge of financial ruin.

Kansas City announced yesterday that they plan to close 50% of their schools.

This is what happens when you run out of money. Expect to hear more and more of these types of problems as the economy continues to deteriorate.

The Bottom Line

I believe Wall St is getting a little nervous about the strength of the recovery. When volumes drop off like this you really need to be careful.

For once I am on the side of Wall St when it comes to the markets.
It's time to sit on the sidelines and see how this all plays out.

In my view it's not going to be pretty.

The next "watershed" moment for the markets will come later this month when the Fed attempts to pull out of the MBS and Treasury markets.

The volume and volatility should go through the roof once this occurs. If rates start to rise sharply because the private sector doesn't have the ability to replace the Fed then I predict we will see another sharp move to the downside.

Hang on tight folks, the ride is about to get pretty bumpy.

Disclosure: No new positions were taken at the time of publication.


getyourselfconnected said...

hey Jeff!
Wall Street is not waiting they are just seeing how far they can push things. S&P 500 1500 is great unless UE is 10% and foreclosures/credit charge offs/bad loans are at an all time high! Cannot wait for the economic disconnect, lol.

Drop me a line my friend, too long.

Anonymous said...

there no jobs,but my tax return is great,When I made 100,000+ a year ,only got back $1,000 now lay off i got back $7500, only gave them $1500,
I think I will sign up for food stamps.

jeff said...


Great to hear from you!

I haven't had a chance to write much this week because of work.

It felt good to put something up!

jeff said...



Sucking off the government tit is a sweet ride while you have it.

Sorry to hear about the job. Enjoy your unemployment benefits and take a break and figure things out.

Good luck finding a job. I know its tough out there.

Scary times

Anonymous said...

As I have learned during this fiasco, there is a much bigger disconnect from Wall St. & the real economy. Today retail sales were better then expected signifying the consumer is back but are they really, have we really corrected our issues or is this just dumb consumers not saving thier tax refunds and continueing their old habits. Retailers and their multi-million dollar marketing had an ally in the government as everyone is trying to be incented to spend whether it is on "percieved sales", tax credits on certain purchases and the constant barrage of how the economy is improving. Don't get me wrong I think the economy is healing slowly but we are still in la la land right now. It is just amazing how manipulative the government is, they are basically causing people to take on more risk just for yield as any safe asset classes are returning nothing so either you take nothing, take on risk or spend the money so either way the government and the market are coming out ahead and the manipulation continues.

jeff said...


Well said. Couldn't agree more.

Everyone is looking for yield and they are buying garbage in the process in order to get it.

Buying garbage junk bonds with a 9% yield that has a change to go to zero because fundementally they are worthless is insane.

What fuels all of this is investors who need the yield to live on. It will be interesting to see how long they can keep this game going.

flipdippy said...
This comment has been removed by a blog administrator.
Bill Hicks said...

When is the economy coming back? Never. And the reason is right in front of us. $80 oil in the midst of the worst downturn since WW2? That's Peak Oil rearing its ugly head. World oil production has been essentially flat for nearly five years. When it begins to drop on the back side of Hubbert's Peak, all hell is going to break loose.

Jeff said...


Great points.

Never thought of it that way. They certainly they have consolidated their power by creating too big to fail banks.

It will be interesting to see if this banking record has any bite.

I will believe it when I see it.

Jeff said...


Scary times for sure. Let's hope we start using our own resources like natural gas.

I was reading that 27% of the country has less than 1 grand saved. What happen to these people when the economy collapses?


Jeff said...
This comment has been removed by the author.
Jeff said...

Sorry flip

I deleted your post by mistake. I meant to delete my post that I double posted by accident

Anonymous said...

"I for one am glad things came back. I wasn't looking forward to living in a country following an economic collapse."

No you havent. How many times have you been saying "rip the band aid off" or "end all this extend and pretend nonsense"??? Your motto all along has bee, let it collapse NOW so we can get on with true healing and growth.

Dont try and pretend otherwise.

Jeff said...


There is a lot of room in between your two scenarios.

You can pull off the band aid without having an Zimbabwe/Weimar Germany.

I'll take a deflationary depression over those two examplesor any toher collapse any day of the week.