Depression Continues Despite Optical Illusions and Happy Talk
Posted by Michael A. Kamperman on July 15, 2009
The global economic depression is not over, not close. Bank of America/Merrill Lynch replaced their market strategist and the new one has called an end to the recession. After the markets closed yesterday, there was jubilation over a much better than expected report from Intel. One talking head on the show Fast Money gleefully declared that Intel is indicating the recession is over. Funny, I must not have studied hard enough in my economics classes. I didn’t know that a near monopoly company that reports a greater than 15% year over year drop in revenues indicates anything good for the economy. Now I do know that some stocks are overvalued and some stocks are undervalued every day in the stock market. Having declining revenues that are still better than expected can be positive for the price of a stock. But declining revenues from the world’s premier microchip company with few competitors is not indicative that the depression is over. To think so because of the happy talk is to be tricked by an economic optical illusion.
Merrill’s old analyst David Rosenberg is not calling for an end to the economic malaise. To me he is one of the few economists out there that seems to really get it. He said “what I see is a forecasting community that continues to make predictions based upon linear data that have been completely interrupted by the secular change in the credit cycle. And I think because this is all so far beyond our own collective experience, the tendency has been to underestimate the role that asset deflation and debt repayment plays in the economy….The average FICO score today now is down to 690 after the borrowing spree of the past seven years. Yet to obtain a plain-vanilla 30-year fixed rate mortgage, the minimum score is 760. For a 15-year HELOC, it is 740. And, for a three-year auto loan, the minimum FICO is 720.”
Two corporate reports yesterday were much more telling about what is really going on in the economy. Martin Marietta said they saw a significant drop in orders for crushed stone to build and repair roads. The stimulus money is not showing up in shovel ready infrastructure projects and the states are cutting back. Yum brands lowered their outlook because of the weakness they see amongst the consumers in their two biggest markets, the U.S. and China. That’s right, in spite of the Chinese government’s stimulus money actually building shovel ready roads and bridges, the Chinese consumer is slowing down. As the consumer goes, so goes the economy. The consumers will continue to sit on their wallet as long as unemployment keeps rising and the ability to borrow money to buy a home or a car remains excessively tight.
