What is wrong with the U.S. economy can be easily surmised from reading the opening paragraphs in this story from the Associated Press, however, to most, this merely passes as conventional wisdom, wisdom that few realize is often wrong.
Stocks are shaking off a two-week slump after a report on retail sales wasn’t as bad as economists had predicted.
The Dow Jones industrial average, the Standard & Poor’s 500 index and the Nasdaq composite index are all on track to have their best day so far in June.
The government said Tuesday that retail sales edged down 0.2 percent last month, the first decline in nearly a year. That was slightly better than analysts were expecting. Americans bought fewer cars during the month, but the decline reflected temporary supply chain disruptions caused by the earthquake and tsunami disaster in Japan. Excluding weak car sales, retail sales rose 0.3 percent.
“The good news is the consumer is hanging in there,” said Rob Lutts, president and chief investment officer of Cabot Money Management.
At some point in the future, historians will marvel at how ordinary Americans watched the stock market go up and down – cheering its rise along with the mainstream financial media and lamenting its fall – in the mistaken belief that their economic well-being was somehow inextricably tied to it … well, it’s not.
Another mistaken belief these days is that, somehow, the over-leveraged U.S. consumer is still the main growth engine for the U.S. economy simply because, during the credit orgy of the last few decades, personal consumption rose to account for 70 percent of the economy.
During that same time, bank shares grew to record levels as a share of total stock market capitalization and, even after the events of the last few years, for some reason, most people think that we’re supposed to just pick up where we left off in 2008.
The era of economic growth fueled by expanding credit and consumer spending is over, yet so few seem to realize it (though another really good asset bubble could forestall a broader realization of this yet again).
“Neither a lender nor a borrower be.” If you borrow to invest, it will interfere with your survivability. Unleveraged portfolios cannot be stopped out, leveraged portfolios can. Leverage reduces the investor’s critical asset: patience. (To digress, excessive borrowing has turned out to be an even bigger curse than Polonius could have known. It encourages financial aggressiveness, recklessness, and greed. It increases your returns over and over until, suddenly, it ruins you. For individuals, it allows you to have today what you really can’t afford until tomorrow. It has proven to be so seductive that individuals en masse have shown themselves incapable of resisting it, as if it were a drug. Governments also, from the Middle Ages onwards and especially now, it seems, have proven themselves equally incapable of resistance. Any sane society must recognize the lure of debt and pass laws accordingly. Interest payments must absolutely not be tax deductible or preferred in any way. Governments must apparently be treated like Polonius’s children and given limits. By law, cumulative government debt should be given a sensible limit of, say, 50% of GDP, with current transgressions given 10 or 20 years to be corrected.)
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