Upside momentum pushed the S&P500 to another small gain this week, rising 1.3%. The S&P, although still down for the year, has bounced back strongly since its March 6 lows, less than two months ago.
The fundamental data, on balance, are still pointing to an economy that’s deteriorating, not rebounding. The Case-Shiller index fell 18.6% on an annual basis for the 20 city composite; not to mince words, housing prices are still collapsing. Initial claims came in at 631,000 and continuous claims hit 6.27 million–a record high for the 13th consecutive week. First quarter GDP, at -6.1%, was far worse than consensus estimates of -4.9%. Personal spending was lower than forecast. Personal income was also lower than estimated. And personal savings (the enemy of spending and support for the economy) rose to 4.2% in March from 4.0% in February. Factory orders were lower than forecast and auto sales for March were also at, or below, consensus estimates. Although consumer confidence and Michigan sentiment rose, they’re still at abysmally low absolute levels.
Technically, the charts are screaming overbought on a daily basis. Longer term, on a monthly basis, the bear market is still in effect. We’re a long way away from breaking a downtrend that began in November 2007.
Which leads to the big picture question: if the market is signalling a turning point, what’s changed–at the root level–with the economic causes that created the bear market and great recession in the first place?
As explained in prior posts, the underlying cause of our recession was a massive asset and credit bubble that began to burst about a year and a half ago.
How big did the bubble get? Total U.S. debt (all credit market debt, including household debt, corporate debt and government debt) peaked at 370% of GDP over the last 12 months. This level of debt was typically only 150%-200% of GDP for the last 90 years.
In the Great Depression, the credit bubble peaked at about 250% of GDP, and then promptly deflated and stayed beneath 200% until the early 1980’s when it began its rise to 370%. Not coincidentally, the great secular bull market in equities also began in the early 1980’s.
Where is the total credit level today–17 months into the worst recession since World War II?
The point is that when anyone–especially on CNBC–peddles the government’s propaganda-like victory message, namely that the economy has turned a corner, try to remember that the root cause of our great recession has not gone away. On the contrary, simple math suggests that to revert back to pre-bubble credit levels, the amount of credit that needs to be paid down or written down is about 200% of GDP–or $30 trillion.
Conceivably, the worst is yet to come.