Is the House of Cards Falling Down?

Stocks are tumbling down a steep turn in the roller coaster again this morning. Just another day of 400 to 500 point swings in the Dow Jones and 4% losses across the board. The trend suggests this will all swing back up the same degree tomorrow, but who knows.

The question at hand, though, is not necessarily what is causing the markets today to tumble (they might be up by the time the closing bell rings), but what is causing the overall turbulence. A few things, but primarily it is the cracks forming and exploding in the facade of the fauxcovery experienced last year.

The past few years have been characterized by stimulus programs, housing recovery assistance projects, monetary easing, and just straight bribes (i.e. cash for clunkers). America was told this was immediately needed to get the economy moving again and once growth was back on track the private sector would take over. We suggested that the government can not perpetuate economic growth through spending and cheap money, particularly when the problem is an anvil of debt sitting on our chest.

The recovery touted last year as the success of the administration caused most to believe the worst was behind us. Yes there was talk of a double dip, but the Fed projected good growth at the start of the year, and most economists dismissed the idea of a recession coming back to bite. Now the Fed is so worried about the economy that it is extending monetary policy through 2013—a move so unorthodox that three FOMC members dissented, the first time that has happened in decades.

What jobs the stimulus did create were temporary—unemployment is still with us.

What brief economic growth was gained quickly went away—so we’re back to those double dip fears.

What we thought was an indicator of economic growth, growth in the financial markets, was just monetary policy goosing stocks and not having any real main street impact—so the house of cards starts to fall.

Going from the big picture back to our present day turbulence, we see the rough ride on Wall Street the past two weeks being set off by a mountain of weak economic news from around the world. Europe tried to bail its way out of a banking crisis the past few years but it just delayed the inevitable. On fears of a weak European economy the global markets have shuddered, and that was felt in New York the days after S&P’s downgrade. Meanwhile, bad economic news on the home front—from weak GDP a few weeks ago to bad housing and jobs numbers this week—are depressing State-side investors. Combined it creates a collective gloom as investors rush out of their stock positions that were just play things anyway.

Consider the following just from today:

  • A monthly survey by the Federal Reserve Bank of Philadelphia showed that factory activity in the mid-Atlantic region plummeted to a reading of negative 30.7 points in August, indicating contraction and falling to the lowest level since March 2009. It was up 3.2 in July.” (NYT) This pretty bad report could be taken to signal a recession, though is not necessarily predictive.
  • Existing-home sales declined 3.5% from a month earlier to a seasonally adjusted annual rate of 4.67 million, the National Association of Realtors said Thursday. Economists surveyed by Dow Jones Newswires had expected home sales to rise by 4.0% to an annual rate of 4.96 million.” (WSJ) And this is even worse than last year’s sale rate, which was the worse in over a decade. Though hopefully it means lower housing prices that are more affordable and in line with the historical price trend that would get us fully out of the housing bubble.
  • Initial claims for state unemployment benefits increased 9,000 to a seasonally adjusted 408,000, the Labor Department said. Economists polled by Reuters had forecast claims rising to 400,000. The prior week’s figure was revised up to 399,000 from the previously reported 395,000.” (Fox) The good news is that we really did break the 400K weekly new unemployment claim streak last week. The base news is that it was still 399K and then went back up again this week. This signals a weak job market in the months ahead.
  • Another report from the Labor Department on Thursday showed the Consumer Price Index increased 0.5 percent in July, the largest gain since March, after falling 0.2 percent in June. That was above economists’ expectations for a 0.2 percent gain.” (Reuters)

So are we heading back to 6000? Probably not. But this is not necessarily a time for optimism either.