S&P 500 at All Time High as “Economic Recovery” Stalls
Great Disconnect Part III

by The Curmudgeon

Two previous Curmudgeon posts called attention to the huge dichotomy between U.S. stock prices and the real economy.  This gap has now gotten wider with the S&P 500 joining the DJI in making new highs today.


Here are a few data points to ponder on the current U.S. economic conditions:


·                     New Home Sales unexpectedly fell 4.6% in February, the biggest monthly decline in two years.

·                     Consumer Confidence fell sharply in March, dropping from 68.0 in February to 59.7 in March.

·                     Pending Home Sales declined 0.4% in February.

·                     New weekly unemployment claims were up 16,000 last week to 357,000.

·                     FedEx - a bellwether for the transportation industry- reported an unexpected 31% decline in quarterly earnings and warned that global trade has slowed to levels not seen since the last two significant economic downturns.

·                     Caterpillar, also a bellwether for global economic conditions, reported a 13% plunge in orders for the three-month period from December to February.

·                     The Cypress bank bailouts show the Euro Zone problems are not over and may be getting significantly worse in Italy.

·                     Crude oil futures and gas prices are on the rise again.  This acts like a tax, leaving consumers with less money to spend.

·                     The WSJ reports that College Grads May Be Stuck in Low-Skill Jobs.  "New research suggests their job prospects may not improve much when the economy rebounds," says WSJ author Ben Casselman. 

·                     Food stamp enrollment has risen sharply to a record high according to today's WSJ and also by Erika Johnson. 


A recent WSJ op-ed by Mortimer Zuckerman (chairman and editor in chief of U.S. News & World Report) explains in detail that this so called "economic recovery" is really an illusion. 


Here are selected quotes from Mr. Zuckerman's opinion piece:


"The country isn't really advancing. By comparison with earlier recessions, it is going backward. Despite the most simulative fiscal policy in American history and a trillion-dollar expansion to the money supply, the economy over the last three years has been declining. After 2.4% annual growth rates in gross domestic product in 2010 and 2011, the economy slowed to 1.5% growth in 2012. Cumulative growth for the past 12 quarters was just 6.3%, the slowest of all 11 recessions since World War II."


"And last year's anemic growth looks likely to continue. Sequestration will take $600 billion of government expenditures out of the economy over the next 10 years, including $85 billion this year alone. The 2% increase in payroll taxes will hit about 160 million workers and drain $110 billion from their disposable incomes. The Obama health-care tax will be a drag of more than $30 billion. The recent 50-cent surge in gasoline prices represents another $65 billion drag on consumer cash flow."


"If you account for the people who are excluded from that number—such as "discouraged workers" no longer looking for a job, involuntary part-time workers and others who are "marginally attached" to the labor force—then the real unemployment rate is somewhere between 14% and 15%"


"The number of Americans unemployed for six months or longer went up by 89,000 in February to a total of 4.8 million. The average duration of unemployment rose to 36.9 weeks, up from 35.3 weeks in January. The labor-force participation rate, which measures the percentage of working-age people in the workforce, also dropped to 63.5%, the lowest in 30 years. The average workweek is a low 34.5 hours thanks to employers shortening workers' hours or asking employees to take unpaid leave."


"The U.S. is more than 60 months away from its previous employment high in 2007, and the economy is still down 3.2 million jobs from that year. Just to absorb the workforce's new entrants, the U.S. economy needs to add 1.8 million to three million new jobs every year. At the current rate, it will be seven years before the jobs lost in the Great Recession are restored. Employers will need to make at least 300,000 hires every month to recover the ground that has been lost."


But who on Wall Street cares about the real economy, the unemployed and massive number of under-employed?   Not many!  The Great Disconnect continues to widen.


As long as the Fed keeps pumping, the big boys on the Street feel compelled to pour money into U.S. equities in a herd like instinct.  We are convinced that this will end very badly - just like the 1987 crash, dot com bust in 2000 and the credit bubble meltdown that caused the Fall 2008-Spring 2008 financial crisis.  But we don't know when the music will stop and the dance ends.


Till next time.....................................


The Curmudgeon

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.