The stock market keeps going up.  Its now about to hit 10,500 for the first time since early September 2008.  As we continue the V-shaped recovery, there is one thing thats missing: JOBS.  We’ve discussed how the only reason people still aren’t hiring is because they lack any faith in the future of the economy.  Today, the Gallup tracker of whether the public believes the economy is “getting better” hit a 4 and a half month low, reaching just 31 percent saying its getting better.  At the same time, the Dow Jones hit another 52 week high and just keeps on going with good fundamentals driving it on.  So where’s the disparity? It all started 3 months into the recovery in mid-June when the stock market had flattened for about a month.  (Below is a graph of the increase in the percent of people not saying the economy is poor [green] compared to the increase in the Dow Jones [brown]):

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We are exactly 8 months in from the Dow bottom that everyone now refers to as the economic nadir of this recession and things are more convoluted than ever before, due to the worsening job situation. Today, we are building on our last look half a year into the recovery in the month of October, to give you a more time-pertinent look at the state of the economy.  The economy has truly reached a critical juncture, where the question is will the indicators flat-line and stop the robust recovery, or will they continue to improve and give us a very strong, quick recovery.  To answer this, the key questions must first be answered, how is the recovery holding up, will it continue, will it be jobless, and will it be widespread.

NOTE: Click on the graph to see a larger picture.

1. How is the recovery holding up? Even though the net change in payrolls continues to improve, and the Dow continues to increase, it is clear that the rate at which both of these indicators are increasing has slowed.  The Dow saw a down month in October, and is only up since 10/09/09 because of the strong week that just passed.  Meanwhile, other indicators are showing substantial weakening in the face of increasing impatience as consumers wait for true recovery.

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GDP results are coming out early tomorrow morning, before the markets open and Fiscal Frenzy is giving its final minute estimates.  Although 3.2 % GDP growth has generally emerged as the consensus estimate amongst economists of all types, we believe that is a little cautious.  Our GDP estimate is an real GDP growth rate of 3.5 percent for third quarter of 2009, effectively ending the recession.  However, it should be noted that just because we believe reality to best 3.2 % does not mean that a result of around 3.2 percent is in any way bad news.  First off, it can pretty clearly be established that investors generally have more bearish views of the economy than economists due, especially when coming out of a recession because they are more tied to the losses they have experienced.  Thus, while we see 3.5 % as the closest estimate we can give to what will come out tomorrow, the reality is that almost any number that presents growth of greater than 3 percent will be spun by the media as a clear sign of substantive recovery.  While it is lower than the consensus estimate, it is investors that are going to be buying or selling contingent on the news, and I believe that if all investors were polled, the estimate would be significantly lower than the 3.2 percent presented by economists.  Look for a great day on the street tomorrow!

Contributing Editor:

I am now fully used to U.S. Fed Chairman Ben Bernanke’s extraordinary self-regard.

However, I have to admit that even I was surprised by last Friday’s CBS Marketwatch headline: “We Saved the World From Disaster, Bernanke Says.” Although that’s an extraordinarily cheeky claim, it seems to have persuaded U.S. President Barack Obama, who yesterday (Tuesday) recommended reappointing the central bank chief to a second, four-year term.

From the investor’s point of view, this is not good news.

Bernanke’s claim that the world’s central bankers rescued the global economy from collapse – even if true – fails to recognize the role they played in actually creating the disaster in the first place.

Excess money expansion throughout the world (a problem that dates all the way back to 1995 in the United States, although it really ramped up after the 2001 stock-market crash) – led to an asset bubble and a situation of over-leverage that left the global financial system in a highly vulnerable situation.

Yes, greedy bankers were part of the problem, but they got greedy because there was too much money sloshing around. History has shown time and again that excessive money always leads to a burst of bad banker behavior. Read the rest of this entry »