Consumerism On Life Support

What a week in the market. I have all but given up on predicting direction. I remain short, but it really hurt me this past week. Still, I think this is a bear market rally & the S&P will break through its lows by the end of March.

Why? Because the primary driver of GDP growth over the last 15 years or so has been consumption. Conspicuous consumption is dead. (for now) See GDP (otherwise known as Gross Domestic Product) = C + G + I, where C =consumption G=government spending and I= investment. This is a very basic explanation. If you want more detail read:

http://en.wikipedia.org/wiki/Gross_domestic_product

When an economy is growing, GDP is increasing. When an economy is contracting, it is decreasing. "Keynesian" economics is a school of economic thought says that the government can and should intervene in economies to "smooth" the business cycle. This can be temporarily effective. It can slow economies when they grow too quickly. It can "stimulate" economies when they are contracting.

GDP is contracting right now, and has been since December 2007 because consumers are dramatically reducing their spending. Keynesian policies that have worked to stimulate demand are not working anymore. In other words, the "C" in GDP is falling off a cliff... no matter what the Government does. In the Fortune Encyclopedia of Economics, 1993 edition, I found the following in the section on GDP:

"GDP measures production, not exchange. If economists, policymakers, and news commentators kept this simple truth in mind, much confusion over the interpretation of economic statistics might be avoided. Many proposals to cut taxes, for example, are aimed at 'stimulating consumer spending', which is expected to cause an increase in GDP. But consumer spending is a use of GDP, not production. A rise in consumer demand could simply crowd out investment, not raise GDP." The writing goes on to explain that in the short run, Keynesian emphasis on demand is, "relevant and alluring". But, government reliance in "demand management" can "distort market prices, generate major inefficiencies, and destroy production incentives." Sound familiar? Is it possible that we are currently experiencing the effects of years of government binging on Keynesian policies to artificially prop up demand (consumer spending)? I not only think it is possible, I think it is true.

Now that propping up consumption is no longer working, the government is going to drastically increase the "G" in the formula above. We already see this beginning with all the bailouts and no doubt we will see it in Obama's New, New Deal.

These policies will lead us into a socialist state. I am sad to say this is where we are headed. I can only hope there are enough people out there who will grasp what is happening and try to save our country.

Luckily, the market, like the"force" in Star Wars has a way of letting us know when things are out of whack. They are very out of whack right now. If we try to fight gravity by "propping up demand" we only continue dependence on the same policies that created this mess in the first place.

Check out how much America has been consuming:

http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/leadingtraders.html

Look where government spending is headed:

http://www.gao.gov/cghome/hccrisis/img6.html


Try to get a good night's sleep, anyway.