Gap Between Economic Reality And Market Fantasy Hits New High

As I noted in an article published Thursday morning, the government bought three quarters of a percentage point worth of growth in the third quarter leading several hapless commentators to opine on national television that the U.S. economy was not only on solid footing but was in fact experiencing "above trend" growth. Of course if you're the mainstream financial media what is good for the Q3 goose is not necessarily good for the Q4 gander and so when fourth quarter GDP printed in contraction territory Wednesday, viewers were encouraged (much to the chagrin of a predictably irate Rick Santelli) to discount "volatile" government consumption expenditures and focus only on the components that made a positive contribution.

If Thursday's headlines are any indication however, it is going to get more and more difficult to turn a blind eye to the inescapable reality that is America's centrally planned economic quagmire. Put differently, data out Thursday suggests that on many fronts, the economic chickens are coming home to roost (to continue with the "foul" analogies). Jobless claims for instance, had their biggest jump (38,000) since November last week and while the spin campaign continues (witness the "slowly growing labor market" and "we're still below the magic 400,000 level" banter) common sense dictates that if weekly claims were at 377,000 as of January 26 of last year and 368,000 as of January 31 of this year, really not much has changed at all.

Witness also the dramatic rise in the personal savings rate in December (6.5% of disposable income compared to 4.1% in November). That's the highest rate since May of 2009 when the Dow was sitting at around 8,500. Now obviously this was attributable to the concurrent surge in personal incomes but equally obvious is the fact that the personal income surge was simply attributable to special dividends and other disbursements being pulled forward to avoid higher taxes in 2013. So that part of the equation is a wash; that is, personal incomes aren't going to grow at that pace going forward unless you think incomes can rise at 2.6% with wages growing at a laughably slower pace. For illustration purposes, have a look at the following graphic which shows the hilarious disconnect between sequential personal income growth and monthly wage growth:

So the point here is that if retail sales only rose .5% in a month where personal incomes rose 2.6% and the savings rate rose 2.4%, that should tell you that even in the event of an extraordinary rise in disposable cash, Americans are too scared to spend it. They are so scared in fact, they'd rather park their cash in a savings account on which they are receiving a negative real return. That doesn't bode well for consumption going forward -- sorry Steve Liesman.

Another piece of ominous news out Thursday came courtesy of the Wall Street Journal. In a piece entitled "Risky Student Debt Is Starting To Sour," the Journal notes that not only is the rate of subprime student loans 90 days or more past due rising (now at a staggering 33%), but the percentage of all student loans classified as "subprime" is also rising and, in an eery coincidence, also hit 33% last year. Reading the article I can't help but harken back to my own piece from January 10 in which I said the following about the consequences the bursting of the student debt bubble would have:

"The student-debt bubble is yet another defining characteristic of the "New Normal" and is perhaps far more important in terms of its potential deleterious effect on economic progress than negative real wage growth, depressed capex, or a hamstrung housing market...Rising delinquency rates should serve as the proverbial canary in the coal mine and indeed suggest that this is no more of a far-off problem than the subprime crisis was in 2007. This is perhaps the best reason of all to bet against the U.S. economy in 2013...A crippled consumer equals crippled consumption, hobbled corporate profits, and a sluggish economic environment."

The Journal quotes a Moody's senior director as saying essentially the exact same thing only in a more deadpan fashion:

"The high debt loads could weigh on consumer spending and the economy."

Investors (or algos, or highly leveraged institutional clients, etc) are of course taking all of this in stride. Stocks traded near the flat line Thursday morning proving once again that one of three things must be true: 1) the market's collective analytical reasoning skills are quite poor, 2) no amount of bad news is enough to trump an overwhelming tendency to deny reality, or 3) trillions of dollars in excess liquidity make negative economic news largely irrelevant.


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