Where the Future Lies

The front page of today’s WSJ highlights the sharp rally we’ve had off the lows and whether it’s an indicator of future action and has a ‘bull market’ started. Also, others are making comparisons with prior periods when we had double digit one month gains as we currently have in March so far and what that may mean for the future.

To me, all this action is just indicative of a secular bear market where we have very sharp declines followed by some mean reversion when we get dramatically oversold. The March gain comes after 6 month’s in a row of declines that took us down about 40%. It’s the longest monthly stretch since ’02 and the early ’80’s before that and a big bounce was inevitable.

But, while we’re not in another great depression in its depth, from other perspectives, this market should be compared to the movements in the ’30s where we had many double digit monthly losses followed by a few double digit gains.

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Feb Personal Income fell .2%, .1% more than expected and Jan was revised down by .2% to a gain of .2%. Jan was influenced by an increase in COLA payments and some one time transfer payments. Spending rose .2%, in line with estimates but Jan was revised up by .4% to a gain of 1%. Because the PCE rose .3% in Feb, REAL spending was down by .1%. The Savings rate was 4.2% down from an adjusted 4.4% in Jan (revised from 5%). The savings rate I believe is headed to the 7-9% range over the next year and for every 1% increase, is about $100b of less spending. Thus, we may be only half way there in the deleveraging and saving process of the US consumer. We can talk about all the things the Fed, Treasury, Congress, and President want to do to ‘save the economy’ but nothing will stop the inevitable deleveraging that needs to happen at the household level.

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An aside, oh to be a fly on the wall in the meeting of Obama with bank execs today at 12pm. Spending, Income and Confidence are out today.
 

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