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Friday, October 30, 2009

Sugar High Recovery

My favorite radio guy, Charlie Sykes has often called the economic numbers driven by Cash for Clunkers and the housing tax credit a "sugar high" for the economy.

Yesteday everyone on the left side of the aisle in DC was touting the economic numbers that showed the recession had ended, based on the last quarter GDP numbers. Wall St., never folks to pass on good news, added well over 100 points to the Dow.

Ah but the sugar high. Today numbers came out that showed consumer spending growth, even with Cash for Clunkers, was only up for one month, and down for the next, wages are stagnant, and employment numbers aren't great.

Consumer sentiment dropped, and the outlook for the quarter, with holiday spending is for spending growth to be about 1%. That's not the stuff lasting recoveries are made of.

The Dow dropped 249 points on todays news, it's biggest one day drop since July. Wall St. isn't, evidently buying into the idea of a full blown recovery.

I actually have another thing that made me realize this is a sugar high. My 401(k) statement came in the mail a few days ago. Generally things looked pretty good, the market has moved mostly up the last quarter, which made my stock based funds perform pretty well. But even with the market moving up, my bond fund outperformed the stock funds. That's very unusual, and almost never happens.

Why are they going up so quick? Investors don't buy the recovery, and would like to put money into the standard 'safe haven' instrument of choice. However, since so much is being borrowed, they also doubt the ability to repay them; bonds are loans you know; and are demanding a better return on investment.

Basically, the investor class has put the government bond market into a 'sub prime' category in all but name.

The crash from that sugar high is going to be much worse than anything we've seen before, unless somehow fiscal discipline returns to Washington.

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