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The Dangerous Financial Markets Confidence Game

Stock-Markets / Financial Markets 2010 Aug 02, 2010 - 08:47 AM GMT

By: Martin_D_Weiss


Best Financial Markets Analysis ArticleWe are near a major turn in markets and preparing landmark new recommendations this week. So I’m going to be very brief and get straight to the point:

Wall Street brokers and pundits seem to think their dangerous con game can prevail despite a major decline in the real economy.

Well, I have news for them: They may have lured a few investors into the recent stock market rally. But they’re certainly not convincing the hundreds of millions of consumers and businesspeople who have to deal with the worst housing depression, the highest long-term unemployment, and the most chronic credit squeeze ever recorded.

chart1 The Dangerous Game of Confidence

The proof?

First, look at consumer credit — one of the best barometers of consumers’ appetite for spending.

Compared to the prior year, new borrowing has now suffered its deepest plunge since World War II!

In fact, this is only the second time in the past 60 years that we’ve actually seen consumers borrow less than they’re paying back. The last time was in 1991; this time, the decline is more than TWICE as bad and lasting a lot longer.

What about the so-called recovery? Well, there was none whatsoever in consumer credit. It has continued plunging virtually nonstop.

chart2 The Dangerous Game of Confidence

Second, look at consumer confidence.

Every single survey — by the Conference Board, the University of Michigan, and others — confirm the same trend:

Consumer confidence plunged massively in 2008 and 2009 as the housing market collapsed.

Then, it rallied moderately with the Obama stimulus package.

And now, it’s suddenly suffering a new plunge … and that spells trouble for the entire U.S. economy.

Ditto for small businesses. The National Federation of Independent Business (NFIB) just reported that its optimism index plunged to a low of 81 in March of last year, enjoyed a moderate rally, and is now falling again! The main reason, according to NFIB, small business credit is in a DEEP RECESSION.

All this is very obvious to virtually everyone in America except the denizens of Wall Street.

Equally obvious, as I explained here last week, are the three main reasons for this great malaise:

Reason #1. The U.S. housing market is now locked into a chronic, long-term depression, with housing starts still in a disaster zone.

chart3 The Dangerous Game of Confidence

Beginning in January 2006, they suffered their worst plunge in recorded history — from an annual rate of 2.3 million to a meager 477,000 in April 2009. Thus …

In just three years, 79 percent of America’s largest industry, impacting more Americans than any other, was wiped away.

Then, despite a series of government agency programs to shore up the industry … plus $1.25 trillion poured in by the Fed to buy up mortgage-backed securities … plus a big tax credit for new homebuyers … housing starts perked up only a tad.

In fact, this recovery was so small, it retraced just 7.5 percent of the prior fall. In other words, even after massive government efforts and even at the highest point in their recovery this year, the housing industry recouped less than one-tenth of its historic three-year bust from 2006 to 2009.

Worse, the housing industry has now resumed its decline with housing starts falling sharply again!

chart4 The Dangerous Game of Confidence

Reason #2. Long-term unemployment in the United States is now the worst since the government began keeping records over 60 years ago.

A record 4.39 percent of the work force — or 46.2 percent of the unemployed — have been out of work for 27 weeks or more. That’s DOUBLE the worst level ever recorded and TRIPLE the peak level seen in five of the past six recessions.

Plus, on average, America’s unemployed have been out of work for 35.2 weeks, also the highest on record.

Reason #3. Most American consumers and business people clearly see all this in the real world. So they refuse to believe Wall Street b.s. and Washington propaganda. They are fed up and voting “NO” with their dollars each and every day.

My recommendation: You should be doing the same. Do NOT fall victim to the siren songs of those who would lure you back into the same kinds of stocks and bonds that torpedoed your portfolio last time.

Instead, act on the new, landmark recommendations my team is issuing this week.

Good luck and God bless!


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