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.