A Tale of Two Economies

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Are you getting that déjà vu feeling all over again like I am?

In the past few days, some market “experts” are giving 50/50 odds that the Dow goes to 15,000 by 2015.  Others say 17,000 by whenever.

Really?

Is that what we need or want today; more experts repeating the Dow predictions of 2007?

Do they not remember what happened the following year?

That’s right, markets taking the big ride over the falls with the rest of the world markets…

You would’ve thought that these experts’ reputation would’ve gone with them.

And yet, people are still listening to these guys.

Why would they?

And does anyone really who cares who predicts what anyway?

Just for the sake of discussion, say that the Dow does go to 20,000.

What then?

What would it mean?

The answer is that it really wouldn’t matter as much as you might think it would.

But it will not be the sign that the economy has recovered

Here’s what I mean…

The Consumer Economy

The old economy—the one you and I lived and prospered in for the past several decades—is largely over for the near term.

The era of widespread credit available for all levels of the economy has mostly gone away.

But if that’s true, what has replaced the “old” economy?

Well, the fact is that credit has dried up for the consumer economy.

You can see this by the lousy housing market, for example.

Even with prices falling by 40% or even 50% in some areas, and even with mortgage rates at historical lows of 4%, the housing market is still falling.

Why would this be?

Too many Americans just can’t qualify for a mortgage.

That’s a much clearer sign of where the economy is right now than a high Dow.  Without a recovery in the housing market, there is no recovery; it’s as simple as that.

But it’s not just the housing market that shows the great divided between consumer and commercial credit.

Look at the latest figure for consumer durables, they tell the same story.

Those are basic items like washing machines, dishwashers, consumer electronics, and those kinds of things.

Despite Apple’s great success, the sales of consumer durables dropped 4.2% in March, the largest drop since January 2009.

Granted, part of this drop is tied to the depressed housing market…

But the drop is also a result of credit just not being there for many consumers.

But why not?

Banks are awash in cash and have begun lending to businesses again...Why not to consumers?

There are several reasons.

Consumer wages have fallen.  Lower income means lower credit worthiness.

Also, unemployment is still high.  People not working usually don’t qualify for loans.

And in many cases, consumer credit scores have dropped.  Even as some folks regain their financial footing, it takes years longer for their credit to recover.  In the meantime, lending standards have risen.

And with mortgage loans, banks are loathe to lend on depreciating assets, which is the case in most housing markets.

The bottom line in all of this is that less consumer credit is now the new normal.

That’s why a skyrocketing Dow has almost no impact on the consumer economy far below it…

Today, the consumer economy is largely divorced from Wall Street.

The Corporate Economy

But if you’re a corporation, the picture looks much different.  Higher stock prices mean more money in your coffers, more investment dollars, higher salaries, and a war chest to buy up smaller competitors.

And the fact is that stimulus spending, greater government spending, and the TARP bailouts all helped banks and big businesses survive and thrive coming out of the Credit Crisis.

Economists who look at the health of corporate earnings, corporate cash levels—and banks’ cash levels—will see healthy, cash-rich companies buying and investing in other businesses.

But there is also a lot of political capital in a high stock market as well, and politics plays a huge role in economic policies.

Granted some of the corporate gains do trickle down to the consumer levels, but it is slow in having its full effect for the reasons I gave above.  The vast majority of benefit goes to those in the “higher” economy.

In the long term though, this is neither a positive nor sustainable process for the economy as a whole.  It hurts the "low economy" of the middle class first and hardest, but eventually hurts the "high economy" as well.

And it's important to remember that even though stock prices may well rise as prices rise and corporations can adjust prices to keep up with inflation or deflation...

It is middle class consumption--the driver of the US economy--that will be wiped out if trends do not change.

This is not a good result, and as I said, the current benefits to the corporate economy will not last forever.

Eventually, businesses and banks will have to begin putting money back into the middle class, one way or another, or the 1%/99% economy may become much more of a reality than it is.

And those are…The Gorrie Details.

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