Monday, March 9, 2009

The Consumption Index broke out above the Production Index for the first time since late September last week (in the context of its 28-day moving average), continuing its trend implying strengthening of consumer spending since its December 30th recession-bottom.
With consumption above production, the Production Index played follow-the-leader, inching up to its highest point since its more-recent February 13th recession-bottom.
Within the past week, gas-flows into industrial facilities seemed oblivious to the stock-market carnage, with "Part-7" industrial flows rising above 22 BCF on Friday for the first time in weeks, hitting 22.37 BCF, the highest since December 17th's 22.68 BCF.
Gas flows into paperboard (cardboard) facilities, however, did fade with the markets briefly, suggesting that consumers are still taking their cues from equities, even while producers are taking their cues from consumers.
At this point it appears a recovery is still intact, though fragile and in peril should stocks continue to fall. At this point the stock market appears to be the tail that wags the consumers dog.
Part of the problem is that the US has become a country of two currencies. For our debts, we prefer to denominate our liabilities in cash. Mortgages, car loans, credit cards, and the like, we tie to the dollar. For our assets, however, we prefer to denominate in shares. Brokerage accounts, mutual funds, pensions, and retirement accounts have grown fat with equities, while we have shunned the dollar to foreign investors and the worlds central banks due to its poor, sub-inflation returns.
When equities collapse, the consumer sees it in their monthly statements. They see their account values decline, they feel poorer, they doubt their furures, they doubt their retirements. They therefore do the natural thing... they cut back, and conserve. For many, the stock market is THE money supply, and their money supply is falling.
If we can get a bottom to equities... I believe the recovery will rapidly accelerate. I believe the consumer is tired of cutting back and wants to spend. I believe as well that producers want to produce. The only thing holding them back is liquidity in the hands of spenders.
Best way out of this mess (In my opinion... if I ran the government) would be a payroll-tax holiday, on a week-by-week basis, weighted heavily towards the lower-income end, starting tomorrow, ending when the Industrial Index crossed 105. Bank-bailouts, pork-barrel spending programs (and the like) may be nice, but they won't get the job done quickly or purely. I would monitize the payments to keep the funds flowing to social security, unemployment, etc (I doubt the portrayal of the money supply as expanding). And I would begin an extensive review of the Federal-Reserve's money-supply methodologies and assumptions.