After plunging early in the week, the S&P500 jumped back to finish the week up about 1.3%, but on lower volume than the preceding two weeks when it fell. Technically, as predicted last week, the S&P did drop quite a bit (almost two percent at one point), but it did not carry through on the sell-off. As discussed many times over the past three months, it seems that virtually nothing (short of nuclear war perhaps?) is able to counter the power of the Fed’s QE2 stimulus, which is almost 90% correlated with the entire bull market rebound starting in March 2009. So we will wait patiently until QE2 begins to wind down, over the next 45 days. And now, technically, in addition to the positive monetary stimulus, the S&P is poised to bounce up even further, if it breaks above the 1335 resistance level.
We could be in for another 30-45 days of Fed-induced stock market pumping.
There wasn’t a lot of macro data announced last week. Housing starts were slightly better than expected, but much improvement came from multi-family units, not single family homes. Existing home sales in March were also a little better than predicted, but they were 6.3% lower than they were last year in March. Initial jobless claims were weaker than expected, again coming in above 400,000. The Philly Fed Survey shocked everyone by plunging to 18.5, when a reading of 36.0 was expected. And the FHFA House Price Index fell 1.6%, also much worse than expected.
Charles Hugh Smith, from Of Two Minds, recently published a neatly packaged description of the two faces of the US economy.
There’s the “let’s pretend” economy that’s touted by the government and media propaganda machines, and then there’s the real economy, “which is in decline”.
He cleverly compares the “let’s pretend” economy to the game little children play, and lists the number of ways our leaders are brainwashing us into believing that the “pretend” economy is real.
First, he states “let’s pretend that jobs are coming back”, and ignore the fact that total payrolls today are lower than where they were in 2001, and not much higher than they were last year. And we must ignore the little fact that the employment population ratio (the simple percentage of all folks in the US who are working) has fall back down to levels from the 1970’s.
Second, he says “let’s pretend that households, corporations and government are reducing their debt”. So we must ignore that total credit market debt is still—today—at record highs, almost two years after the so-called recovery began.
Third, he asks us to “let’s pretend that wages are rising”. Just ignore the fact that real wages age back to the “pre-dot com bubble days of 1996, when–as mentioned above–the household debt loads have soared since then.
Fourth, “let’s pretend corporate profits are the most important metric of our financial well-being”, and that “those corporate profits trickle down to the greater good”. Forget the reality that the record corporate profits mostly benefit the upper 5% of income earners and wealth holders in this country. And nevermind that the lower 95%, who depend on pensions in retirement, are still severely damaged by the Great Recession because their pension fund assets have not fully recovered.
Smith concludes that we can keep playing this game of “let’s pretend” for a while longer. But eventually, this game—as all games do—must end. Eventually, we will have to return to the grown-up world and face reality.
And the reality is very scary.