Wall Street's performance of late seems to have everyone convinced that the good times are coming. But the market's resilience is about to be tested. The result could be diabolical and send the Dow Jones into another tail spin.
Certainly for now, Wall Street seems to have investors' hearst pumping with the Dow Jones hitting an 18 month high. The Conference Board's Consumer Confidence Index for March is up 6.1 points to just over 50 which is good news.
But David Rosenberg, formerly chief North American economist for Merrill Lynch and now with Canada's leading wealth management firm Gluskin Sheff & Associates is warning that this is anything but a normal recovery. The market, he suggests, was a lot healthier in September 2008 just before the collapse of Lehman Brothers brought everything crashing down.
In a note to clients, he says that employment would be at a new high, not 8.4 million shy of the old peak and that one in six Americans would not be either unemployed or underemployed, the level of real GDP would already be at a record high, not almost 2% below the old peak, consumer confidence would be closer to 100 than 50, bank credit would be expanding at a 14% annual rate, not contracting by that pace, the government deficit would not be running in excess of 10% of GDP, there would be 5-6 months' supply of homes on the market, which isn't the case now, and mortgage applications for new home purchases would not be down 13.9% year-over-year on top of the already depressing 29.4% trend a year ago.
In other words, a real recovery will depend on Main Street, not Wall Street. And at the moment, small businesses in the US aren't selling much as they have to rely on American consumers and Americans still aren't buying much and small businesses are also finding it hard to get credit. This is no recovery.
And there are a number of other credit pressures building up with Elizabeth Warren, chairperson of the TARP Congressional Oversight Panel warning that by the end of this year, about of all commercial real estate mortgages will be under water. She warns that there are nearly 3000 mid-sized banks that have "dangerous concentrations in commercial real estate lending".
Which means by the end of the year, there will be many more bank closures in the US. If or when that happens, it will hit the market badly.
Now the stock market performance might make some people feel richer but the reality is unemployment or fear of it continues to haunt the American population. True, the US economy is showing signs of improvement but that's only because the US Government is spending money and because the Fed is printing more of the folding stuff. The performance of Wall Street is a mirage and there is every sign that we could be looking at another meltdown.
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