Unemployment is capitalism's way of getting you to plant a garden. ~ Orson Scott Card
If you spend much time watching financial news (which frankly, I don’t recommend), you have probably heard the term ‘green shoots’ too many times to count in recent weeks. For those of you who have been saved from the financial news media, green shoots is the term de juer for glimmers of hope that pundits are trying to find in the dismal economic data, the implication being that before the economy can blossom we have to see signs that the economy will come back like a garden after a hurricane. Hope springs eternal and I don’t begrudge anyone their fantasies but, ignoring reality isn’t going to do anyone any good either.
The stock market’s rally off the March bottoms has been significant but, not unprecedented. In bear markets such as this, explosive rallies are actually quite normal. The problem is that once the general population begins to believe it might be a real rally based on economic fact instead of feelings and false hopes, the professional traders take their profits and head to the sidelines, leaving the Mom & Pop investors holding stocks that are too expensive given the still dismal economic condition.
Two of the economic indicators that the green shoot brigade has cited as reasons to uncork the champagne are both from the Conference Board: the index of leading economic indicators (LEI) and consumer confidence. The biggest positive contributor to the LEI in April, interestingly, was stock prices, which we’ve already discussed. Consumer confidence has also risen in April and May, but until the May reading the level would still be the lowest of any since 1970 if it weren’t for the worse readings in February and March! The ‘high’ May confidence level is now at roughly the same level where some of the nasty recessions of the past 40 years bottomed out. Put another way, the outlook isn’t as bad as it was a few months ago but there’s still a lot of rebuilding to do before we can expect everything in the economic garden to come up roses.
I've said this before, but one of the things that continues to give me pause (really, it pretty much makes me stutter) is the consumer’s debt level. The US economy is almost 70% consumer related expenditures. This has been posted before, but bears reposting: imagine my dismay when I discovered this chart from an ex-banker turned Columbia Business School professor:
The personal debt of U.S. consumers equals U.S. Gross Domestic Product today - for the first time since 1929 – which makes us pretty certain that leaf rot on those green shoots is at least likely if not a sure thing.
The garden in the form of the stock market might look healthy for the next several months – until second quarter earnings are announced and expectations for the rest of the year are given by corporate management teams. It should be a little like waiting for plants to grow and produce fruit, just to find out that we’d been pinning our hopes on weeds.
While I'm not a professional gardener (honestly, I have a black thumb), even I know that in order to have a successful future harvest, the land has to be tilled, the seeds planted, young plants fertilized, the garden weeded and then after an appropriate amount of time, the fruits can be enjoyed. My problem with current circumstances is that it is apparent that fertilizer has been spread far and wide but, over rocky soil that harbors an abundance of weeds. I believe that the economic soil isn’t really ready to grow healthy plants and the plentiful government fertilizer has kept alive numerous noxious weeds (banks, car companies, insurance companies) that are stealing nutrients from companies that managed their businesses well enough for normal times but were caught up in extraordinary circumstances. Eventually the weeding out will happen and some good companies will be thrown on the burn pile along with the nasty weeds, an unfortunate reality of capitalism. Until that weeding is finished however, why not stay out of harm's way? When the garden is full of weeds, it’s time to go to the orchards and other locales for food.