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.
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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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.