Can Main Street Catch Up with Wall Street?

tortoise and hare

“The Dow is up and many economists see an end to the recession. Try telling that to the rising ranks of those losing their jobs and houses.” — Moira Herbst

Investors should not confuse the economy with the stock market, if they both usually follow similar trends. Today, however, the economy and stock markets have become completely disconnected.

The U.S. dollar is in structural decline since they have used almost every means to fight against deflation. They have excesses in the retail, manufacturing, real estate, and, more ominously, employment. Based on the technique “jobless recoveries,” the U.S. will spend another two years with over 400,000 registered unemployed, and will not see a drop in unemployment below 9% until the end of 2011. This means that much of the pain that has not been digested.

The excesses of the credit bubble will be a drag on the economy of at least two more years, yet the stock market rallied because the cost reduction benefits stimulated. It seems that investors are trapped in two camps who do not speak to each other (like debate on the reform of health care): The bulls believe that the sun rises, and we will improve our way out of Debt, unemployment, and structural excess of bubbles past. Bears do not think we can solve the credit bubble with another bubble. Indeed, it does not cure a drunkard in giving him another drink.

The bulls and bears are talking past each other, not each other. It allows a dynamic rather strange market, where the bearish arguments do not count – until they do. Then, the bearish arguments will be the only thing that matters.

Can Main Street Catch Up with Wall Street?
By Moira Herbst

On the one hand, the Dow Jones industrial average once again danced around 10,000 last week. Earnings of Caterpillar (CAT), Google (GOOG), and Apple (AAPL) far exceeded expectations. If U.S. gross domestic product rebounds as expected on Oct. 29 and turns positive for the first time in 15 months, it would confirm that the recession ended in the third quarter, at least statistically.

Meanwhile, back on Main Street U.S.A., the picture is drastically different. Unemployment has doubled in a year, to 9.8% in September, and there are about six unemployed Americans for every job opening. Home foreclosure-related filings—including default notices, foreclosure auctions, and bank repossessions—are on pace to reach about 3.5 million this year, up from more than 2.3 million last year.

Gap Between Leading, Lagging Indicators

It’s normal for Wall Street to recover more quickly than the job market in the wake of a recession. Figures like stock prices and the difference between short- and long-term borrowing costs are known as “leading indicators” because they tend to be among the first to signal a recovery. Unemployment and consumer credit volumes fit into the “lagging indicators” category that bounce back afterward.

What’s different in this recovery is the extent to which the leading indicators are soaring ahead of the lagging ones. Wall Street cheered on Oct. 22 when the Conference Board’s measure of the economic outlook for the next three to six months rose a greater-than-expected 1%. But the same report saw the gauge of lagging indicators fall 0.3%.

The Real Economy and the False One
By Cynicus Economicus

Do you remember the stress tests for the banking system in the US? They were the subject of negotiations by the banks with regards to the outcomes, making them remarkably relaxed stress tests. There was an assumption in the stress tests for an unemployment rate of 8.9% (a curiously precise figure), and 10.3% in 2010. The unemployment rate had already reached 9.8% in September, with expectations of further rises. In other words, the worse case scenario was not indeed the worse case scenario.

Despite this, it appears that business as usual is continuing in the world of banking. When we consider that the stress tests were heavily negotiated and the worse case scenarios are being broken, this is a puzzle.

The real economy is, as you would expect, having an impact upon the banks. Bank of America, the second largest lender against credit cards is reporting massive losses on their lending, and bank failures continue at a shocking pace (106 so far this year). And then there is the exploding numbers of mortgage foreclosures, including prime loans, such that foreclosure counsellors are being deluged with requests for assistance. Commercial real estate loans in default have now reached about 6% of all loans. Small and medium size businesses are seeing continuing high levels of arrears on loans, with those that are moderately delinquent increasing (but a tiny fall in the numbers that are severely delinquent).

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