Question: How does it get better when it gets worse?
Last week we had a jobs report from Washington that there were fewer jobs created than they had anticipated, but the stock market took that as good news and the DOW had a strong rally. WOW! The bad news somehow turned into good news because the unemployment rate dropped one tenth of one percent.
Wait a minute. We had fewer employed yet the unemployment rate went down. How can that be? It seems that if you have been out of work for a while and your unemployment benefits have run out and you have become so discouraged you are no longer looking for work you are not counted as unemployed. You should read that sentence again. This is government statistics to make you think that black is white.
It is pointed out that many in that category have gone into business for themselves so they don't count - as they should not. Remember that people work to provide income and most folks work for other folks. Usually new businesses take about 18 months to get to break even so these entrepreneurs must eat of their savings until new purchasing power is realized. (I know. I've been there.) Unfortunately, 80% of new businesses fail within the first 5 years. (I've been there too.)
It is amazing that the stock market can find enough new money to propel it higher. Where is all this cash coming from? You can thank Sir Alan Greenspan, head of the Federal Reserve. He has been flooding the economy with cash so banks will have cheap money to make loans to businesses yet when I look at the trend of Commercial Bank Loans for the past 2 years they have been steadily declining. Banks want to loan, but businesses don't want to increase their borrowing for expansion. No expansion, no new jobs created.
Why don't the businesses want to buy new machinery to expand their production and hire new people? Because they have excess production capacity now. According to business surveys most companies are only running their plants at 75% of capacity. When you have 100 machines of which only 75 are working why would anyone buy more to produce nothing?
Yet the stock market keeps going up. Why? Investors believe, rightly or wrongly, that there is light at the end of the tunnel. Things will get better. They think world buying will pick up and capacity utilization will increase to the point more machines and workers will be hired. The market is going up on anticipation.
Now you've got it. The bad news is really good news. And the stock market always comes back.
Copyright Albert W. Thomas All rights reserved. Author of "If It Doesn't Go Up, Don't Buy It!" www.mutualfundmagic.com comments to email@example.com