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US consumer raises red flag to stock markets

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red-flag-IIThis week a number of major US retailers will report earnings. But stock watchers looking for a forward indicator on these numbers seem not to be paying enough attention to consumer lending.

US consumer credit fell in September for an eight straight month and fell by a more than expected annualized rate of 7.2 per cent. These declines are the worst on record since records began in 1943, and the only parallel is the 1930s.

10.2% jobless rate

Perhaps then it is unsurprising that the US economy is still bleeding jobs. October figures showed employers cutting staff by 190,000, more than expected.

In September consumer spending dipped for the first time in five months. Is this the end of the recovery phase of a W-shaped recession?

Around 70 per cent of GDP in the US is represented by consumer spending. You therefore can not maintain an economic expansion without having the US consumer on board, and if they can not borrow, or refuse to do so, then the economy is in trouble again.

What we have seen since March is an artificial recovery driven by government spending and bank rescues, a liquidity boost that has inflated global stock markets greatly while barely reviving economic growth.

Crisis coming

This has postponed the real crisis, not prevented it. Governments are almost at the limit of what they can do. The next phase is another shake-out with more bank and corporate failures among the over-borrowed, and a currency and bond crisis with higher global interest rates.

This is how capitalism works. The weak make way for the strong who become stronger. And in the long run the whole economy becomes richer and stronger as a consequence. But that is no compensation for the losers who do now have to lose. There are no games in which everybody wins.

Indeed, the illusion of instant recovery created by government action is highly dangerous as it is luring more and more into its grasp. When this bubble blows another generation of wealth will be destroyed, and the recovery may not be nearly so strong or swift the next time. That will not matter in any case to those who have lost all their money.

Red flag

The problem is that while it is possible to raise a warning flag, these market movements come suddenly and unexpectedly. You need not to be there, waiting for the 10-ton concrete block to drop on your head.

Move to the sidelines, and stay in cash and gold. Short stocks. Then buy the good stuff when it is sold off with the bad. The Dow Jones at 10,000 is a double-top indicator for chartists, and the US retail figures this week might be the signal to sell on fundamentals.

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Written by Peter Cooper

November 8, 2009 at 9:08 am

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