In July, I wrote an article titled ‘Is The Recovery An Illusion?’ With the additional evidence that has come in since there really is no doubt about it.
Economic recovery means consumers are convinced the worst is over, are becoming more confident and beginning to spend. It means businesses are selling more products, exporting more product, spending on anticipated growth, and hiring again. It means homes are selling at an encouraging pace, construction is picking up, unemployment is declining. It means investors are returning to the stock market.
We saw some of that last year and thought it was a recovery. But it wasn’t.
We didn’t see consumers spending their own money. For the first time in decades consumers were saving and paying off debt, convinced the worst was not over. They only spent the government’s money, bonuses that were given to them as part of stimulus efforts. First-time home-buyers dominated home purchases, buying with the $8,000 government rebates. Home sales plunged back into the recessionary hole the instant the government rebates stopped. They bought autos with the ‘cash for clunkers’ government money, appliances with the ‘cash for appliances’ program. With those and other programs ended, consumer confidence has plunged again and retail sales have slowed. Autos are back to selling at recessionary levels, only fractionally above last year’s levels, with what sales there are primarily due to 0% financing and rebates.
Large banks recovered and made profits not from a recovering economy, but from hundreds of $billions of government bailout money they then used in their trading departments. Small banks, not receiving such gifts, remain in recessionary trouble, still failing at a recessionary pace. Business confidence remains at recessionary levels, corporations hoarding cash, worried they’ll need the cash in the future. In fact, much of the cash they are hoarding is money raised by further borrowing for a rainy day, with their debt levels rising significantly, including increasing debt by issuing more bonds to satisfy investor demand for ‘safer havens’.
As for the bull market, investors did not begin buying stocks again. In fact, throughout last year’s new bull market investors continued to pull still more money out of stocks and equity mutual funds, putting it in money market funds, bank CD’s, and treasury bonds, in spite of near zero yields on those holdings.
The bull market was on very low trading volume, an indication that it was the result of the hundreds of $billions of cash and loans provided to large financial institutions in stimulus money, which they used for trading for their own accounts in their trading departments. The very low volume indicated it was also due to the activities of other short-term traders, including program-trading firms and flash-traders, in there every day doing their job of making short-term trades for quick profits. It was a time, when in a mini-version of the dotcom period, their sentiment was to the bullish side, and their trading against each other was mostly to the upside, driving prices up on each other, with periodic profit-taking and then trying to race each other to buy the dips. It was created by the massive amounts of liquidity the government flooded into the system. It was not the result of investors, including institutional investors like pension plans and insurance companies, or even hedge funds, pouring money into the market. In fact, hedge-funds, known as big risk-takers, sat on unusual levels of cash. After losing big time in the 2007-2009 bear market, they were under pressure from their investors to take less risk.
Yes, the economic recovery was an illusion.
So let’s not talk of double-dips. Let’s face the reality that the real economy’s first dip is still underway, that the real economy is still scraping along a bottom.
That’s not a bad thing. It’s better than the thought that the economy recovered but is already heading back into another recession. That the real economy is still scraping along a bottom brings hope that at some point soon it will begin a real recovery. That could come quicker than having to survive another dip into recession and another fear-filled wait for that recession to reverse into another recovery.
Maybe with the economy now shaking the artificial recovery out of the economic reports, showing us where the real economy lies, the government should just keep its hands off and let the free market system play out its normal cycle.
