As the most hated rally in the history of rallies continues the entirety of Main Street remains entrenched in recession. The truth is, little has changed since we last took an in-depth look at the so-called recovery on Main Street. Unemployment remains extraordinarily high, consumer sentiment remains near its lows, small businesses continue to struggle and consumers are still burdened with heavily indebted balance sheets.
The latest NFIB status report on small business continues to report a recession-like environment:
For small business owners, 2009 ended with a thud. The Optimism Index
fell and finished just seven points ahead of March which was the second
lowest reading in 35 years of survey history, even though the economy
posted positive growth in the second half of the year.
Despite signs of a mild recovery, small businesses see little to be excited about. What has changed in the last 18 months that should give a small business owner more confidence about the future? According to the NFIB and their respondents, not a whole lot:
Interest rates are at historically low levels, inflation virtually non-existent
and real hourly earnings have held up well. In the first quarter of 1980, the
Index reached 100 and then went on to top 107, the record high reading a
few quarters later, a huge surge after a tough recession. But now the Index
is 12 points below 100 and has been below 90 for nearly two years.
So why hasn’t owner optimism soared like it usually does at the end of a
recession, especially one that cut so deeply into our economic fabric? The
answer is “hope and change.” There is little hope and the change that is
being delivered is far from encouraging. Washington is offering nothing
but higher taxes and fines and fees and more regulation. Congress is
passing bills with thousands of pages of hidden bombs that will go off as
the legislation is passed and implemented. Federal spending has soared
amazingly, yet been ineffective except at pushing the federal deficit to
incomprehensible heights, promising to double our national debt in just a
few years. The interest burden this will place on average Americans is
astounding. Uncertainty is the enemy of economic growth and investment,
and Washington, D.C., the usual source of uncertainty, is delivering plenty
of it. Confidence in our political leadership has tanked.
As reported above, the NFIB optimism index continues to show very depressed readings. Unlike past recessions, the index has failed to bounce back to pre-recession levels:
Much of this is due to the continuing weak earnings environment we are witnessing. Although corporations have done a spectacular job in cutting costs and boosting operating margins there has been little to no recovery in top-line growth – an absolutely vital component in an organic and sustainable recovery. This sentiment is best represented in the consistently pessimistic insiders selling trends we present. Insiders simply don’t see the sharp economic rebound.
Although we have seen a slight increase in consumer sales over the past few months the sustainability of the move higher is very much in doubt as the de-leveraging cycle progresses.
The truth of the matter is, consumer balance sheets remain highly indebted. last week’s consumer credit report showed a record $17.5B decline in consumer credit. With continuing low employment, stagnant wages and ballooning debts the likelihood of a spend happy U.S. consumer remains in doubt. There is still much work to be done in the consumer de-leveraging process.
All of this has resulted in a consumer that remains severely depressed. Consumer sentiment remains near its lows as Main Street continues to feel little to no effect from the big banks bailouts and the trillions in government stimulus.
Making matters worse is the Wall Street rally. While Main Street flounders its appears as though it’s business as usual on Main Street. The new administration promised change, but nothing has changed since the credit crisis occurred. After 20 years of failure the Fed continues its printing press experiment, the banks continue to gamble their vaults away, no new regulations have been applied and no one appears to be taking the blame for the massive downturn on Main Street. The new system can best be described as Capitalism without losers – now that’s an oxymoron!
Unfortunately, the frustrations are likely to grow on Main Street for Wall Street isn’t a place that lives in the same reality as the rest of us. Wall Street is a world based on expectations and as long as investors remain depressed and corporations continue to outperform these low estimates the likelihood is for a continued rise in stock prices. Unfortunately, a recovery that doesn’t involve Main Street is destined to fail sooner or later.
As we mentioned in our 2010 outlook, this year is likely to be characterized by the passing of the baton from the public sector to the private sector. Clearly, that isn’t going to be as smooth as many hope. It’s obvious to me that the balance sheet recession continues.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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