Who's right: the stock market or the economy?

Jul 28, 2011

Vancouver, Canada

Big down day for stocks.

The Dow lost 198 points.

Why? Are investors worried about gridlock in Washington? Or falling property prices in Beijing? Or maybe it's the European debt crisis that has them bugged?

It doesn't matter. When Mr. Market wants to go down, he'll go down. He'll leave to us to come up with the 'reasons' afterwards.

The real reason? The US economy is sinking into a deeper Great Correction.

No kidding. Here's the latest:

WASHINGTON (AP) - Businesses cut back on orders for aircraft, autos, heavy machinery and computers in June, sending demand for long-lasting manufactured goods lower for the second month in the past three.

The Commerce Department says orders for durable goods fell 2.1 percent in June, with the weakness led by a big drop in orders for commercial aircraft. A number of other categories also showed weakness including autos and auto parts. A key category that tracks business investment plans fell 0.4 percent in June.
But domestic sales of durables are much worse...the lowest in 20 years.

For the last year and a half, the stock market has been signaling 'recovery.' Prices rose from a Dow low on March 9, 2009 below 7,000 to a high over 12,500.

But while stocks recovered, the economy didn't. The rich got richer - those who owned stocks. The middle classes - who tend to own houses, but not stocks - got poorer.

So, the big question: who's right? The stock market? Or the economy? Which way is it going to go? Is the stock market going to fall to meet the real economy? Or is the economy finally going to recover to justify the kind of stock prices people are paying?

Our money is on falling stock prices. For all the many reasons we've told you in these Daily Reckonings, we don't think you can turn this economy around ...not anytime soon. This is a debt contraction. It takes time. Years. In fact, at the present rate - about 5% of GDP per year - we'll have to wait another 36 years before consumer debt to GDP is back to the 100% level. For reference, it was about 33% when then expansion began after WWII.

We've been waiting a long time for the stock market to prove we are right. Until now, neither it nor the economy was willing to give. Stocks stayed high. The economy stayed low. Maybe yesterday, stocks began to ebb lower. Maybe they are just bouncing around.

We'll have to wait to find out. Investors are probably a little jittery...waiting for a deal on the debt ceiling. When the deal is announced, stocks will probably rise again.

But maybe not. Sooner or later they'll have to come to terms with the Great Correction. Maybe they'll do now. Stay tuned.

*** You might think Americans would be making fun of their soldiers, not idolizing them.

It's one thing to get bread from the feds. But overseas, never-ending circuses are getting expensive. The Guardian reports:
...a Brown University study released last month, estimates at $3.7tn for the Afghanistan and Iraq wars. Our military presence - to say nothing of our reconstruction and stabilisation expenses - costs the American taxpayer a whopping $1m per soldier per year. We'll spend almost $120bn in Afghanistan in 2011 alone. Recently, the nonpartisan congressional budget office noted that ending our current wars would save the American taxpayer over $1.4 tn...

Why are our wars so costly? Despite the Pentagon-friendly Rand Corporation citing policing, intelligence and negotiations as the most effective strategies in ending or dismantling 84% of terrorist movements, we continue to rely on heavy military and air presence, including big-ticket items like the $40bn Joint Strike Fighter. These strategies are ineffective against increasingly mobile and amorphous groups. Why the reliance? Because the defence industry has built operations in every state and almost every congressional district, and because its lobby is extremely powerful in Washington.
That's right, even the military has been zombified. It's run to benefit people in the defense industry, not to defend the nation. Present wars-if you can call them that - are already scheduled to cost the US $4 trillion. That's about $40,000 per household. You can buy a lot of big screen home entertainment centers for that kind of money.

Why don't the people back home would object? They should be fed up. You'd at least expect them to hiss or snigger when a soldier walks by. After all, they mocked soldiers returning from Vietnam in the '60s and '70s. In Vietnam, US troops faced a real enemy in a real war - even if it was a stupid one. Now, troops fight 'terrorists,' not an opposing army. Nobody understands who the enemy is...or why it is worth going to war with him. But Americans are neither embarrassed by their men in arms nor ashamed of them. They say prayers for them in church...and let them board airplanes first.

In America, circa 2011, people put their faith in guns...and the men carrying them. The soldier, the policeman, even CIA operatives are given the respect once accorded to clergymen, doctors, and bartenders.

Go figure. ----------------------------- A Good Time To Sell Bad Stocks -----------------------------

It's never too late to get rid of 'bad stocks'.

After all, you never know how bad a market crash could get.

But what are these 'bad stocks'? How do you identify them?

For answers to these questions, and more, click here to read on...


*** We are not a 'ladies man.' But nor are we a man's man. We don't hang out with other men. We don't follow sports. We have no interest in politics or hunting or automobiles, or any of the other things men are supposed to be interested in.

The trouble with men is that they are too predictable. You admire a smart man for the speed and agility of his brain. But you always know where he is headed.

A smart woman is different. Her brain works fast too. But her destination is a mystery. You only know where she is going when she arrives. And then you are astonished by how she got there.

But last night we enjoyed a good night with a small group of men and a large group of wine bottles. Included in the first group were 3 Texans, one New Yorker, two Irish Americans, and one Sicilian. Included in the second group were two white French, two red Italians...and many others we can't remember.

We won't bore you with the evening's discussions. Instead, here is a tally of the group's conclusions (we merely listened...having no opinion or experience to contribute):

On Sex - Cialis is better than Viagra.

On Sports - Mark Cuban is not a bad guy.

On Money - the average guy is going to be whacked; if the bear market doesn't get him inflation will.

On Pretty Women - don't hire them; it will lead to trouble in the office On Politics -- Rick Perry is a nice guy, but too dumb to be president.

This last item touched off a lively debate.

"What do you mean, too 'dumb' to be president? Didn't you Texans send us George W. Bush, the biggest disappointment since Bill Clinton?"

"Hold on. George is not stupid. He just pretends to be dumb. Like you pretend to be smart. It's just his stage role. He's actually very smart."

"Then, what about Perry? Maybe he just pretends to be stupid too. Texans like bonehead politicians. Especially if they're wealthy too. They figure they're too dumb to lie. And too rich to steal."

"No Perry is the real McCoy. He's as dumb as he appears. Maybe dumber."

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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