The Persistence of Fantasy

(Image: MoMA.)

It's not quite as surreal as Salvador Dalí's "The Persistence of Memory," but there is definitely something otherworldly about the continuing run-up in share prices in the face of renewed uncertainty about the fundamental outlook.

Indeed, in "A Missive From Main Street," the Reformed Broker relays a first-hand report from the economy's front lines that underscores the differences between the unpleasant reality on the ground and the one that exists in equity traders' minds:

Reader Alex M gives us a glimpse into the real economy, relaying the following from a rural town on the east coast:

"Hi Josh. I own a business(redacted) in a small town in eastern pa. There is a major disconnect between the stock market and what's happening on main street.

My local community bank holds meetings for small groups of businessmen to exchange ideas. They do this frequently and it helps us manage our businesses. Yesterday the bank meeting was a real "downer".

The bank reported mortgage delinquencies are increasing as people deplete their savings, small business sales decline and homeowners lose their second income. In our community most people would rather skip a meal and pay their bills, mortgages being at the top of the list.

The bank FDIC insurance premium has  increased from $25000 annually in 2007 to $475,000 this year eating up a significant portion of net income. The local businessmen at the table were all struggling except the apple orchard business.

The bank told us that the various other local businesses in previous meetings were trying to be creative to survive."

Comments

[Next Financial Group]

Interesting post. I used to own a small business and had a hard time getting a loan last year because of the economy. I think banks are scared and they should be. The stock market is volatile it will go up and down. Unfortunately it went down a lot in 2009. On the bright side it looks like things are on the upswing. Great post though. Thanks

[Nikki Turner]

I own a small business in the UK which isn't trading because we've been defrauded by a major bank (as have many others). But I'm continually amazed and frustrated by the fairy stories the British Government continually put out as to the state of our economy. It is very easy to see that every shopping centre in England has more and more empty shops; the shops that are still there have continual sales to attract customers; everyone you talk to is tightening their belt; and even the major supermarkets are competing to see what they can sell for £1.00.

last month we had a minor outcry when, in the midst of all this economic down turn, the UK bankers were shouting and screaming because the Government wanted to tax their bonuses. Some of us were asking why the bankers were getting bonuses? But a few weeks later all that has subsided and we have ridiculous stories in the press like 'Lloyds Bank predict profits for 2010'. Despite the fact these are 'predictions' and not facts and despite the fact that story swamped the press on the same week the Telegraph, the Guardian and the FT ran a few isolated stories about a senior employee of Lloyds banking Group alleging the Bank had avoided at least £1BN in tax for 2007 and continues to so so, our Government chooses to spin the story that the rescued banks are making a profit.

I wish the Government ministers would get out more. Not to Committee meetings, awards ceremonies and charity dinners - but out on the street where everything is falling apart thanks to them.

[NowWhat]

YES Nikki.
Something doesn't feel right. 11000? come on
Well BooYah anyway!

[W.C. Varones]

Seeing the same thing out in San Diego. Main Street dying, no jobs.

Economy down, market up. Even the REITs with extended valuations and falling rents and rising vacancies.

It makes sense if the market is looking over the double dip toward future inflation. I myself am long equities, gold, and real estate expecting an eventual dollar collapse. I may be early, but I think the trade will work eventually.

[GreenAB]

i have to admit that i am in the long term bear camp due to the structural issues we face.

at the same time i accepted, what many bears refuse to recognize: the stock market doesn´t mirror the well being of main street.

i can tell you that because over here in Germany we have had some pretty rough years of our own.

after the post reunion boom the unemployment rate jumped from 7.3& in 1991 to 12.7% in 1997. that didn´t prevent the stock market from rising, even when we hit new unemployment highs of 13% in 2005.

the reason is that corporate leaders are really good when it comes to adjusting operating costs to changes in revenue. after lehman everybody went into survial mode, thereby cutting costs (=jobs) to the bone.

with this improved cost structure all it took to stop the recessionary slide was a further drop in demand.
trillions of stimulus all over the world did this job.

so while for many americans the current environment still feels like a depression, companies are very fine from an operating view.

now we have to see if the economy can move from artificially pumped demand to a renewed cycle of corporate investment.

what could bring down this fragile recovery is a renewed weakening in demand potentially from weaker growth in china and europe, rising taxes, higher interest rates and expiring stimulus programs.

but if that doesn´t happen and we muddle trough with 0-3% growth and unemployment stays high, that doesn´t mean the stock market is disconnected.

the sad truth is that high unemployment bodes well for the stock market because it puts pressure on wages, lifts productivity (workers scared to lose their jobs work harder) and shifts power away from unions to corporations.
that is what happende here in germany over the last 10years.

[GreenAB]

"with this improved cost structure all it took to stop the recessionary slide was a further drop in demand.
trillions of stimulus all over the world did this job."

should be read as

"with this improved cost structure all it took to stop the recessionary slide was to prevent a further drop in demand.
trillions of stimulus all over the world did this job."

sorry about that.

[GreenAB]

let me add another point.

you also have to recognize that there are huge regional differences in economic activity.

for instance here in germany the eastern part (former GDR) where i live is plagued by deep underemployment of 20% and more.

that has structural roots,because after the fall of the GDR a huge part of uncompetitive capacity was simply destroyed.

these conditions never changed during the last 15 years even at the hight of the 2005-2008 economic (and stock market) boom.
even with significantly lower wages in the east it was still western Germany that was thriving.

so even if you see the former boom states like california suffer remember there many other economies outside your state.

[W.C. Varones]

I wouldn't be surprised if China's been buying S+P futures. If I were China, I'd be getting the hell out of Timmy the Tax Cheat's Treasuries and into real assets including equities.

[lisa]

My husband and I was heading down that same financial staircase. Until we decided to take a chance at Internet Marketing. Its been a year since we began Internet Marketing but it was worth it. We haven't hit the jackpot and became over night millionaires, but we were able to generate a steady flow of income to pay our bills ,save, and to keep us afloat.

[Panzer Fan]

Thanks for the story and the links. It was very interesting.