Jubilant Traders Miss Another Ominous Sign

Yesterday morning, an hour into the new trading week, we covered a small short position in the Diamonds, booking a loss of $92 on some September put options. This speculative bet, initiated on the closing bell Friday, was inspired by a hunch that if Mr. Market really wanted to catch investors with their pants down, the Tuesday after Labor Day would be a perfect time to do it. Alas, even with news that should have been helpful in catalyzing a stock-market plunge, stocks trudged higher. The news concerned consumer credit, and it could have left no doubt about the dire condition of  the American consumer. He in fact reduced his borrowing in July by a record $21.6 billion, for a seasonally adjusted 10.4% drop to $2.472 trillion. This was the sixth straight month of declines, and it would seem to cast a pall on whatever “green shoots” Mr. Obama’s spinmeisters have reported sighting lately.

Stocks-leaped-small2

Because U.S. GDP is 70% consumption, rapid credit growth is the only way to keep the economy nominally afloat, let alone growing. Although this blunt fact may not have registered on traders’ tiny brains yesterday, its importance was not lost on some who frequent the Rick’s Picks chat room. One denizen pronounced the consumer credit report “absolutely stunning. Simply put,” he explained, “it is rugged, first-line evidence that there is no recovery taking place. Yet the market paid no attention.”  Indeed, the market might have shrugged off the outbreak of nuclear war just as easily. It’s a cyclical thing, of course, and stocks seem likely to remain in a “don’t-worry-be-happy” phase until the day when some piece of seemingly insignificant news causes them to plummet as they have not in recent memory.

It’s Not Ignorance

Mysterious cycles that we will never fully understand are at work, and we therefore should not blame the stock market’s alarmingly stupid behavior on the ignorance of individual investors.  Ignorant they most surely are not, since each and every person can judge for himself whether the supposed recovery is helping him regain his footing. Unfortunately, we know few people personally for whom this is true. For most Americans, in fact, mortgages are sinking deeper underwater; health care, even with insurance, is becoming more ruinously expensive; and college tuition, more unaffordable. Meanwhile, retirement dreams are growing not merely less feasible, but downright impossible.

The very idea that the economy is recovering is a pernicious lie that makes recovery itself impossible.  Increased saving and investment alone can help us recover over time, but a return to economic health is pushed back every time the government (i.e., the taxpayer) goes deeper into hock to promote consumption.

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  • ben September 10, 2009, 5:31 am

    Some guy’s house burned down.
    The next day his uninsured car was stolen.
    And the day after that he merely loses his wallet.
    He turns to the heavens and thanks the lord for his improving luck.

    One month 700k jobs are lost.
    The next month 400k jobs are lost.
    And then the month after that just 200k jobs are lost.
    I guess things are getting better. Never mind that you need too add well over 100k jobs per month just to keep up with natural population growth. The rally is well justified.

  • Rich September 9, 2009, 8:48 pm
  • FranSix September 9, 2009, 8:00 pm

    @Derivatives

    Ok, so here is an easier way of looking at derivatives and how to understand them better. I liken them to an inverted pyramid, a networked junk bond regime, based on interest rates, where the apex is a ‘risk-free better than AAA’ asset called gold where liquidity is brought into the commercial banking sector. But there’s another way of looking at the whole thing.

    An elephant is surrounded by visually-impaired economists each trying to determine what it is they have in the room with them. But the elephant goes on a rampage.

    Allow me to point out that if you want to avoid being trampled by the elephant, then you have no choice except to grab the animal by the short and curlies. You might not find out exactly what the elephant is like, but man, did you ever just get intimate.

    F6

  • Junior September 9, 2009, 7:31 pm

    [Mysterious cycles that we will never fully understand are at work]

    I see this mysterious cycle as being inflation concentrating in the stock market again.

    The chances of a steep bear market in stocks is unlikely if the dollar continues it’s descent.
    I expect we’d be close to new highs in the DOW of a DX of 60 or lower.
    Middle class will get much poorer going into the next decade. But that doesn’t mean the stock market will go down. I only have small hedging positions on the short side. I don’t buy the “coming stock crash” and deflation. We saw that already. Many predicted deflation first followed by inflation. It’s all right on target.

    I heard a good interview by Prechter the other day and I agree with him greatly but he’s only looking at things from a U.S. only domestic perspective. This is world wide and anything can happen. China will continue to dump their dollars via the commodities market.

    As a side note, don’t be surprised to see manufacturing come back to the U.S. and we become a major exporter again in the next 2 decades. Our credit has run out. The only alternative is that we all starve.

  • Dean B. September 9, 2009, 7:26 pm

    For what it’s worth, the Economic Cycle Research Institute ( http://www.businesscycle.com ) last week reported its highest Weekly Leading Index since 1971. They feel that a double-dip recession in the fourth quarter is “out of the question.” Read the Reuters report here:
    http://www.reuters.com/article/economicNews/idUSNYS00538520090904

  • Rich September 9, 2009, 4:30 pm

    Wiley Coyote Economy already over the cliff, not yet looking down.
    Commodity, real estate and stock prices have not figured it out yet.
    Rick Ackerman, Doug Kass, Robert Prechter, Gary Shilling have.
    Consumer citizens have: All bubbles lead to deflation.
    Trillions of dollar debt holders, Helicopter Ben Bernanke, Turbotax Tim Geithner and Inflationist 0 adviser Christina Romer apparently have not, as they continue to spend and create more bad debt, robbing Peter Private to pay Paul Public.
    M-3 money supply is collapsing, not growing, going to Cayman Islands.
    Look at the fewer wrinkled worn out Federal Reserve Notes still circulating.
    Fed Banks and Treasury could create quintillions of new dollars and derivatives.
    Who would use them except a few big banks who can’t loan them out at real interest rates approaching 33% adjusted for collapsing prices?
    Who trusts big bank or government debt anymore?
    Only big banks and government.
    A true audit of the Fed, Mint and Treasury could confirm the emperor has no clothes, credit or power to prevent deflation.
    They fight the last war of the Roses, when the dollar devalued 98% in terms of the price of gold. CPI is a lagging indicator. GDP contracts while government debt increases, leading inexorably to fatal leveraging of the government economy.
    If central planning worked, Cuba would rule the world.
    There may be no new highs in anything except bad debt during this depression, which may lead to foreclosure of every dollar of debt before it is over.
    Government is merely swapping an ocean of bad IOUs, rearranging the deck chairs on the Titanic.
    First deflation, then inflation.
    We are in Depression, defined as GDP contracting over -10%.
    Never mind specious talk of dollar inflation, hyperinflation or devaluation.
    Talk is cheap and the dollar is walking, running away.
    http://www.netcastdaily.com/broadcast/fsn2009-0905-3a.m3u

  • Occdude September 9, 2009, 2:10 am

    Somethings amiss. Gold hit 1000 and where is the tsunami? Gold has been picking its way towards a grand like a nervous netty navigating a patch of land mines. Oil is gummed up at the mid 60s-low 70s. The China story is looking tired and again The Hang Seng has hit the glass ceiling.

    Of course the buck did fall 1 percent, but thats not exactly an implosion or even a stamped out of the dollar. Get ready for some fireworks is my advice. One more good thrust by the market to still get people on the “sucker money express” and then it’s gonna be time for a little market pay back.