Bipolar Disorder?

While there is a chicken-and-egg debate about which comes first, historically there has been a strong relationship between economic conditions and the national psyche. In other words, when Main Street is in trouble, people feel troubled and vice versa. That is one reason why, for example, forecasters pay close attention to consumer sentiment. If Americans are uncertain and unsettled, they are inclined to save for a rainy day and less keen to splash out on anything other than the bare necessities.

But in many respects, this relationship has gone awry. For instance, polls clearly show that growing numbers of Americans are worried about the threat of recession, the deteriorating health of their personal finances, and the direction the country seems to be headed in. Just yesterday, in fact, a Gallup survey noted that trust in the federal government, on nearly all issues, had hit a record low. Yet many individuals continue to spend freely, despite low savings, stagnant earnings, and high levels of debt.

At the same time, the stock market, a traditional barometer of the national mood, is trading not far off its record levels. Oil, grains, precious metals, and other commodity markets are roaring amid rampant speculation. Bankers are still keen to do deals, expand balance sheets, and lend money at an aggressive pace despite all the recent turmoil in credit markets. As far as Wall Street is concerned, few seem worried in the least about warning signs that suggest the good times are nearing an end.

What accounts for this current anomaly, a kind of bipolar disorder? Some might argue that it’s the inevitable byproduct of decades of manipulation and distortion of the money supply, interest rates, financial markets, the social contract, the legal system, societal mores, public opinion and more. Others might say it represents a fleeting lapse in the national consciousness, like a daydream in the middle of the afternoon. Some might wonder if it reflects a collective last-gasp panic to stay afloat before the economic tide rushes out.

Whatever the reasons, the pattern of the past suggests that current circumstances won’t remain as they are. Either the dour social mood will catch up with developments in the financial realm or economic and market conditions will stage an abrupt and dramatic reversal to the downside. Given the serious structural imbalances that exist nowadays and such unpleasant realities as the interest compounding effect, which will turn already large piles of borrowed money into towering infernos of unpayable debts, odds are that it won't be the former.

Comments

[Enough Wealth]

I suppose if you keep predicting a market crash long enough, eventually you'll get it right. There's a saying that the market has predicted 20 of the past half dozen recessions. Looks like you'll end up having predicted 20 or the past half dozen market corrections!

Regards
http://enoughwealth.com

[Michael Panzner]

You've got that wrong. I am not predicting a "correction," but a devastating bear market that slices at least 30% (and probably much more) off the value of the equity market. Of course, it's possible we'll see a crash, but I'm not so sure about that. It might just be one of these long, grinding affairs that keeps the permabulls hanging on until they've lost most or all of what they've got. At that point, it will be no wealth, rather than "Enough Wealth."

[Boom2Bust.com]

I'm also perplexed that the U.S. consumer is saying one thing (negative sentiment) yet doing another (increasing spending). With the housing ATM out of money, consumers are being forced to turn to what's left of their personal savings and revolving credit, such as credit cards, to pay bills and maintain their lifestyle (or, parity with the Joneses). I have no doubt that sentiment will indeed catch up with spending in the near future as savings and credit are increasingly tapped out.

[Peetie]

I think the only thing holding up the stock market is a hope that the feds will keep lowering the funds rate. The twentieth anniversary of the 1987 stock market crash on Oct. 19 as well as the Fed's next meeting on Halloween, of all days should make for a nervous Oct. market.

CNBC's Larry Kudlow thinks investors playing the Fed are making a big mistake. "Investors betting on stocks because they expect the Fed to ease in October and after that..that's the wrong reason to buy stocks. You buy stocks for earnings and the economy, not the Fed," he said.

The dollar index went into record uncharted territory this week, below its 1967 level.

[scott]

What do you think about China's role in all of this? Does China's cheap labor and their providing financing of U.S. debt have a "keeping the ship afloat" effect? I believe it was a huge mistake to remove governmental restrictions for U.S. corporations to move manufacturing operations to China and was yet another in a long line of stop gap measures to maintain "infinite growth".

I think the U.S. reached capacity for growth in the early 70's when the U.S went from leading exporter to net importer in a very short time and has imported more every year since. We were mired in an endless war and foreign central bankers were looking to redeem dollars for gold. (sound familiar?) Of course Nixon closed the gold window, cut a deal with the Saudis to price crude oil in dollars and the rest is history.

Along comes Clinton in the early nineties with the economic stimulous package of ignoring the commander-in chiefs responsibility to enforce the law as to corporations and businesses hiring illegal immigrants. The icing on the stimulous cake though was removing governmental impediments for corporations to move manufacturing to China. Maybe a certain corporation in Bentonville, AR had something to do with this plan?

Today we are rapidly approaching a global extrapolation of the 70's U.S. economy, but there is no where left to extrapolate since we only have one planet.

[scott]

I meant oil imports, sorry.