THE RECESSION ON MAIN STREET CONTINUES

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.

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Great timing here given the dismal sales data out this morning. Not that disappointing news about the consumer will thwart the relentless melt-up higher.

    I just noticed that Clarium Capital lost 25% in 2009..safe to say Thiel wasn’t net long..hope his investors stay with him a bit longer.

  2. Hadn’t read that about Clarium. Thiel’s a brilliant guy, but I hate the way he places big bets on one macro outcome. When he’s wrong he’s really wrong. That’s essentially what LTCM did. No black swan protection in a portfolio like that….

  3. “…small businesses continue to struggle and consumers are still burdened with heavily indebted balance sheets.”

    A debt slave is a bank slave. Small businesses and consumers are working so that the bankers can ‘get paid’. I’ve had enough cake. CAN WE ALL, PLEASE, START A REVOLUTION!?!?

  4. Great point, though I have to say LTCM was doomed from the start. I mean, when the whole premise of your shop begins with “The Markets Are Efficient”, something bad is bound to happen to you.

    One question I have, can you elaborate on your source for Figure 1? The level of household debt is really intriguing and demonstrates how deleveraging has only begun. I’m curious to follow that number..it’d be great if we reverted to the mean in 2010, but I got a feeling it will take much longer to flush out all this excess.

  5. That’s from a SocGen report. It’s actually a few months old, but the data is essentially the same now as it was then.

  6. the country voted for change and look what it got them.

    studying change by gun barrel, history tells me it’s much worse.they are even bigger liars.

    it’s basic human nature,we are in it for ourselves.

    its why capitalism works and socialism doesn’t.

    it’s why the left irks me more than the right does.the left tells us they’re doing it for us…….liars even worse.

  7. I doubt you are going to see the passing of the baton at any time this year. What evidence is there to suggest that’s going to happen? Employment is still weak, and where people are employed, they are often at lower income levels (outside of Wall St. of course). My company took 40% paycuts a year and a half ago and we’re all still thrilled to just be employed. I know that’s anecdotal and no one should make forecasts via anecdote, but I think our situation is pretty widespread. The retail numbers out this morning underscore this.

    Corporations may have cost cut their way to profitability but that is not sustainable without growth in end user demand. Will end user demand increase when consumer credit is declining? Can you increase borrowing when consumers are deleveraging? Is the increase in commodity prices truly signaling a recovery? The last time that happened wasn’t it the last hurrah before a near catastrophic deflationary collapse? There are trends at work here that are contradictory and unsustainable. If you are playing the “Don’t fight the Fed” game, you’re no doubt having a ball, but you should be very careful about making the assumption that you’ll be smart enough or nimble enough to get out quickly when the music stops playing.