What is happening in the market???

Today, March 18, saw the market advance again, marking a rally. Whether this is a bear market rally, just a tease only to turn down markedly in the near term or if it indeed marks the bottom of an ugly market I don’t have a clue. Talking heads seem split and no one seems to know.

What I do know is that the stimulus package is going to put an unbearable burden on our kids and grand kids, and we should be ashamed of ourselves for being so selfish. Buy now, pay later is a phenomenon of the 1960’s and especially the 1980’s. After the economy came off the gold standard the money supply has exploded while savings declined dramatically. This problem took about 25 years to create and will not go away in just a year or two. This problem is going to change the way we live in very fundamental ways. We are already forgetting what $4 gasoline felt like evidenced by increased driving. It is unfortunate but we will soon be reminded. Maybe not $4 gasoline but $2.50 is a very real likelihood by the beginning of May. If summer driving does pick up and if the economy begins at least stop going down, we may see oil prices and gasoline rise considerably higher.

Income tax declines from both tax reductions and smaller payrolls due to unemployment will affect all levels of government revenue. Here in the Wilmington area we are seeing the layoff of a number of county employees. Cuts to the budgets of colleges and universities jeopardize our ability to train the future leaders of America and the free world. Communities will see declines in the handouts from State government which will put pressure on property taxes which will reduce the discretionary income available to spend on stuff. Consumer stuff is a huge piece of our economy, so when we can buy less the economy suffers. It is a downward spiral that is very hard to stop. The stimulus packages passed really aren’t high efficiency packages. This bill was too small and full of pork which, while perhaps worthwhile on their own, aren’t the kinds of projects that will generate jobs and economic impact in the very short term. Unemployment insurance increases, not so much in term but in getting the unemployed close to their full income, would allow them to continue purchasing stuff and help their neighbors keep jobs. This would assure that the economic downturn was less severe and shorter lived and that cities and states would not see the huge hits in sales tax revenue. This would, in turn, allow them to maintain their cadre of employees. Get the idea that the ripple effect would have been much larger and more immediate? I believe it would have been so.

What’s the future hold? Well one school of thought says the country is in really big trouble and that the Government has been cooking the books with inflation and unemployment figures being massaged using techniques that “adjust” the price of new goods downward if they are some how “improved” over the goods that were counted in the prior year which reduces the reported increase in prices and (In my judgment) underestimating the rate of inflation.

The government also “adjusts” the number of people unemployed by taking out those people who are no longer looking for a job and not counting those who are self employed and not eligible for unemployment compensation. Again, reporting rosier numbers than reality. Government does this to show voters that they are doing a good job. Maybe we should cap their salaries and pay for performance. Oh yeah, I forgot, they make the rules.

The other school of thought is that life has always been OK in the USA and this time will be no different. Sooner or later this too shall pass and we should just be patient. The government will do whatever is needed to fix what ails us and no amount of debt is a big deal. After all, the GDP will continue to grow and our debt is lower than many countries as a percentage of GDP. We will continue to be the economic engine of the world and all the world will need to help us with cheap energy and raw materials so that we can grow and support them.

Pick the scenario you most believe in and run with it. It maybe years before any of us know which was right or wrong.

Have a great rest of the month. I'll post again in early April.