by Chuck Butler
“I saw a good story on The Fiscal Times website that really touches home with the stuff I’ve been trying to get across to investors, and that is that the economy here is built on a house of cards. The cards are the stimulus. When that stimulus is removed I just don’t see how things like stocks continue to gain. Here’s the snippet from the story that I thought played well with these thoughts I’ve been trying to get across…
“From September through April, inflation-adjusted consumer spending slowed, but still grew three times faster than the sluggish pace of household income. To keep up their spending as soaring gas prices grabbed more of their take-home pay, consumers drew down their savings by $149 billion, which cut savings to 4.9 percent of income, from more than 6 percent last year.
Two things there 1.) We spend more than we make, again! And 2.) Savings rates are taking a HUGE hit. And then just wait when stimulus is removed, and stocks (in my opinion) take a dive.
The guys and girls over at the National Inflation Association (NIA) are at it again. I find what the NIA has to say very thought provoking and interesting. They also tell it like it is (to them), which, dear reader, you know I love! So, what’s the NIA saying these days? Ahhh grasshopper… The NIA believes that Fed Chairman Ben Bernanke will, “do everything possible to disguise QE3, and will never admit to there being a QE3.” They went on to explain, “The Federal Reserve’s balance sheet just reached a brand new record of $2.832 trillion, up from $2.815 trillion in the prior week, as we approach the end of QE2 at the end of June. The stock market is already anticipating the end of QE2 with the Dow Jones currently down over 900 points from its high at the end of April. The declining stock market is pretty much sowing the seeds for a QE3. After all, Federal Reserve Chairman Ben Bernanke doesn’t want to see the phony US economic recovery blow up in smoke.”
Hmmm… Seems to go along quite well with what I’ve been saying, that QE3 will eventually come, but might not be called QE3 by the Fed. I truly believe that we’ve become addicted to stimulus in this country, and as long as the Fed Reserve believes it’s the best thing for what ails the economy, that’s what we’ll get. Doesn’t make it right, except in the eyes of the Fed Reserve. And they truly believe that it helps, so you can’t get upset with them. I disagree with them, but who am I to argue with these guys? Oh, and in a recent survey of 58 economists, 79% of them (46) believe that the Fed will sustain their balance sheet at current levels until October or later. The 79% is up from 52% that thought that at the last survey…
I tell you all of this, so that you can be prepared for more of the same, low rates, that deep-six savings, and more dollar weakness, for the foreign markets can see through the smoke screens that may be wrapped around the next round of stimulus. Well, yesterday, I told you that we would see the May print for Existing Home Sales today… and we will. The May Existing Home Sales data looks to have fallen about 5%. That’s not a good thing, folks.
Then there was this. My friend, Addison Wiggin, (for whom I wrote the foreword for the second edition of his book, “The Demise of the Dollar”) had something on The Daily Reckoning site, yesterday. Addison was talking about The Return of the Misery Index, from the Jimmy Carter days, where you take the unemployment rate + inflation rate to equal the Misery Index. Well, with all the funny games the government plays with data these days, it’s better to go to John Williams over at Shadow Stats, where he computes things like unemployment and inflation using the old formulas before the hedonic adjustments were added…
9.1% unemployment + 3.6% consumer price index = 12.7% misery index
Now, John Williams’ way of calculating the Misery Index:
22.3% unemployment + 11.2% consumer price index = 33.5% misery index
The all time record was in 1980, when the Misery Index was: 22%!