Capitalize on the Disconnect

In "Have Consumers Gone on Strike?" CNBC.com's John Carney discusses an issue I've raised many times at Financial Armageddon: the disconnect between what people believe is happening with the economy and what is actually going on.

The economy may be in worse shape than many economists and businesses expect.

Orders for US durable goods—manufactured items expected to last more than three years—were predicted to rise 1.5 percent overall, and to rise 2.5 percent excluding the volatile transportation sector.

Instead orders fell 0.9 percent overall, and 0.6 percent net transportation.

That’s a huge gap between expectations and actual numbers.

For several weeks, consumer activity has been tracking significantly lower than the expectations of economists. Similarly, the consumer numbers—consumer purchases, consumer sentiment, home sales, home prices—keep showing up lower than you would expect based on business numbers—employment, manufacturing orders, factory production.

What seems to be happening is that businesses have been ramping up their production and hiring in expectations of strong consumer demand.

Consumers, however, have failed to provide that expected demand.

The Obama administration’s payroll tax cut may be contributing to this widening gap between expectations and consumer activity. The administration expected the temporary tax cut to stimulate more spending by consumers, boosting overall activity. But it now appears that the stimulus effect was over-estimated, as consumers have decided to save more of the tax cut than they spent.

The relationship between durable goods orders, economic growth and stock markets is ambiguous. Sometimes drops in durable goods orders are accompanied by falling stock prices and a slowing economy.

Sometimes they go in opposite directions. Although durable goods orders are described as a "leading indicator," it's not exactly clear whether it is very good at forecasting the economy or financial markets. Part of the problem may be that durable goods is a broad category that includes both consumer appliances and businesses equipment. This means that if economic expectations of businesses and consumers diverge, the data may be more noise than signal.

If the increased hiring and production by businesses can drag reluctant consumers into spending, the effect may be a supply-side driven economic boost. But if consumers continue to hold out—refusing to drive up demand at the cash register—businesses could find themselves with a surplus of inventory and employees. Liquidating the newly created inventory and jobs could push the economy into a renewed economic slump.

What Carney is suggesting, in essence, is that many decisionmakers have been lured by the false promise of ultra-cheap money, quick fix stimulus programs, misguided regulatory and accounting forebearance, and relentless economic cheerleading, into thinking that the worst is over, and they've acted in ways that likely ensure that is not the case.

As it happens, this current disconnect may represent one last opportunity for those who haven't been taken in by all the delusions and chicanery to get their affairs in order. While I don't believe there's any way to stop the coming train wreck, there may be ways to capitalize on that knowledge.

That might mean selling or swapping risky assets, which is somewhat easier when prices are artificially inflated by low rates and high expectations (house prices, unfortunately, are a bit of an exception, though I and others like my friend Charles Hugh Smith believe that if you can sell now, it's still a good idea).

It might also mean paying down or restructuring debt to take advantage of today's unrealistically low rates and appetite for risky assets. And, finally, for those who are in a position to do so, it might make sense to line up whatever job or freelance work you can find with firms that are anxious to secure staff in anticipation of a "boom."

Whatever the case, now is probably not the time to be thinking that Financial Armageddon is history.

Comments

[Freida Smith]

Alot of people think we are doomed, but there are still great ways to make money. Even while the economy is collapsing around us.

Yes Micheal, great post!

ultra-cheap money, quick fix stimulus programs, misguided regulatory and accounting forebearance, and relentless economic cheerleading is the quickest way to lead everyone into a false sense of security, and now they have us right where they want us. NOT GOOD!

The guy over at http://www.forecastfortomorrow.com talked about this in one of his newsletters and says that we aint seen anything yet. He has forecast many things like the stockmarket crash in 2008 and gold prices skyrocketing and more.

But I just bought a new house 640k and not too sure it was a wise move now??? Maybe I was too blind to see what was happening too.

[Coming to America...]

BRINGING THE CUTS HOME

http://www.youtube.com/watch?v=_LgDjHOX_UE

[Doable Finance]

I believe we as consumers ought to take care of our family finances first. Once we start doing that - saving a little spending a little - the national economy might do better than expected.

There will always be a difference between the expected and actual. Very seldom the two have agreed completely. We start worrying when the difference gets to be too much like suggested in the article.

[People worry when they realize they could be next...]

Indiana Prosecutor Suggested Scott Walker Fake Attack On Himself To Discredit Unions

NDIANAPOLIS — An Indiana prosecutor said one of his deputies resigned Thursday after admitting he sent an email to Wisconsin Gov. Scott Walker suggesting the Republican fake an attack on himself to discredit the public employee unions protesting his plan to strip them of nearly all collective bargaining rights.

Johnson County Prosecutor Brad Cooper said Carlos Lam resigned in a phone call about 5 a.m. Thursday after acknowledging that he sent the Feb. 19 email to Walker suggesting "the situation in WI presents a good opportunity for what's called a 'false flag' operation."

"If you could employ an associate who pretends to be sympathetic to the unions' cause to physically attack you (or even use a firearm against you), you could discredit the public unions," Lam wrote in the email, which was obtained by The Associated Press.

http://www.huffingtonpost.com/2011/03/24/carlos-lam-scott-walker-fake-attack_n_840383.html

[Moneta]

A huge percentage of our economy is based on discretionary spending. If everybody cuts on the non-essentials to increase savings, a large % of the population will lose its livelihood.

That is what we are up against.

A lot of people calling for austerity will be hit in ways they never imagined.

[What a joke...]

Well you can throw trickle down out the window...how much lower can taxes go on big business?

G.E.’s Strategies Let It Avoid Taxes Altogether

G.E. Avoids Paying Any Tax Last year, the nation's largest corporation reported worldwide profits of $14.2 billion. Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.

A review of company filings and Congressional records shows that G.E. has lobbied for, won and taken advantage of tax breaks. Meanwhile, President Obama has designated G.E.'s chief executive, Jeffrey R. Immelt, as his liaison to the business community.

http://www.nytimes.com/2011/03/25/business/economy/25tax.html

[roger]

A huge percentage of our economy is based on discretionary spending. If everybody cuts on the non-essentials to increase savings, a large % of the population will lose its livelihood. This is true!
And the credit system is part of that madness,
Credit and the huge waste are part and parcel
of the system,without them this country would
have been in a major depression decades ago .
Producing for our needs is one thing,making money
the only source of life will always end in disaster.

[Another joke..oh wait....they're serious!]

Thank god we don't reward for failure in this country!

OOPS!!
Hey but it's just a little disconnected compared TO TBTF!

Borders Seeks to Pay $8.3 Million in Bonuses

Book retailer Borders Group Inc., which is shuttering hundreds of stores in a bid to stay alive, is seeking bankruptcy court approval to hand out as much as $8.3 million in executive bonuses, including nearly $1.7 million to President Mike Edwards.

Papers filed with the U.S. Bankruptcy Court in Manhattan outline a proposed pay enhancement program that is keyed to the company either reorganizing under Chapter 11 or selling itself as a going concern. The bonus proposal is due for review April 14.

http://online.wsj.com/article/SB10001424052748704474804576222642969830886.html

[roger]

If I was pocketing $1.7 million, I would
not call it a failure.
There is connection in the disconnect.

[Blurtman]

The "false flag" strategy is what destroyed Dan Rather's career, skillfully orchestrated by Karl Rove. It went like this: George W. Bush was AWOL at the National Guard, a big problem as he must engineer the invasion of Iraq and get elected. What to do? Whip up a false document showing that he was AWOL, and then discredit that document and the newsman who leaked it. The problem goes away. Brilliant!

[roger]

What disconnect???
From the Huffington post; NEW YORK -- Despite high unemployment and a largely languishing real estate market, U.S. businesses are more profitable than ever, according to federal figures released on Friday.

U.S. corporate profits hit an all-time high at the end of 2010, with financial firms showing some of the biggest gains, data from the federal Bureau of Economic Analysis show. Corporations reported an annualized $1.68 trillion in profit in the fourth quarter. The previous record, without being adjusted for inflation, was $1.65 trillion in the third quarter of 2006.
When they say recession is over,they are talking of self (big corporations) after getting rid of the rift raft over paid laborers, profits are soaring again.
Maybe you don't know it,but class warfare never ended.

[SurvivalAndProsperity.com]

Great post. I agree that Americans should be taking advantage of this "recovery" to get their affairs in order. "But it now appears that the stimulus effect was over-estimated." Seems like I've heard that one before.

[RPY]

"What Carney is suggesting, in essence, is that many decisionmakers have been lured by the false promise of ultra-cheap money, quick fix stimulus programs, misguided regulatory and accounting forebearance, and relentless economic cheerleading, into thinking that the worst is over, and they've acted in ways that likely ensure that is not the case."

Hyman Minsky said: "capitalists will dance themselves right off a cliff."

[Tony]

Hey, come on up to OREGON.
The State has a new program to help distressed homeowners.
They pay your mortgage AND property taxes for a year.
It is not a loan. It NEVER has to be paid back.

[Doing life for stealing bread....NEXT!]

Disconnects everywhere....

In Prison for Taking a Liar Loan

“The Department of Justice has made prosecuting financial crimes, including mortgage fraud, a high priority,” said Neil H. MacBride, the United States attorney for the Eastern District of Virginia, in a statement. (Mr. MacBride, whose office prosecuted Mr. Engle, declined to be interviewed.)

Apparently, though, it’s only a high priority if the target is a borrower. Mr. Mozilo’s company made billions in profit, some of it on liar loans that he acknowledged at the time were likely to be fraudulent and which did untold damage to the economy. And he personally was paid hundreds of millions of dollars. Though he agreed last year to a $67.5 million fine to settle fraud charges brought by the Securities and Exchange Commission, it was a small fraction of what he earned. Otherwise, he walked. Thus does the Justice Department display its priorities in the aftermath of the crisis.

http://www.nytimes.com/2011/03/26/business/26nocera.html

Prosecute Guppies; Let the Sharks Roam Free
http://www.ritholtz.com/blog/2011/03/prosecute-guppies-let-the-sharks-roam-free/

[Hail Caesar!]

Just in case their rosy scenario needs a plan c?

Emergency Unlimited FDIC Coverage Extended to Clearing Accounts Until 2013
"
Do you think Goldman has a program to sweep all of their funds and their partners' personal money into accounts such as this at the first sign of trouble? Just as GE pays no taxes, expect Wall Street to take no pain, in the very troubles which they have caused.

As an aside, I would have used the FDIC and the government to backstop 100% of all customer money in the banking crisis, and let the banks themselves go through a debt reorganization, taking the executives, bondholders and shareholders to the woodshed, in the manner in which Sweden had dealt with its banking troubles. In the US, UK, and Ireland we saw the opposite approach: save the banks, and the people be damned.

But then again, I am not a major contributor to the campaign coffers of Washington, nor a member of the old boy network, and chances are, neither are you. So there you are."

http://jessescrossroadscafe.blogspot.com/2011/03/emergency-unlimited-coverage-extended.html

[Intrinsic]

If consumers are on strike,

the budget cutbacks will make the economy even worse.