Checking in from vacation. The Wall Street Journal is reporting that the market sell-off is due to investors taking money off the table because the global economy is not yet expanding. No kidding! The Journal states that the previous market rally was due to investor optimism because economic data, although worsening, was worsening at a slower pace. I warned in this space that merely slowing the economic contraction is not sufficient to justify the so-called "green shoots" in the market. All that was growing were weeds.
Some argue that when economic data worsens at a slower pace, recovery is approaching. That may or may not be true. Slower contraction could merely mean that the economy is approaching replacement levels of activity. After all, consumers must consume at a level where they replace goods which have worn out or which have been, well consumed.
When recovery comes, what will it look like? I will probably look very mild, tame even. There will be much less uses of leverage in the immediate future. Credit will be given to the creditworthy. No more zero money down, low-interest financing of a $45,000 Tahoe for your favorite waitress. No more running to Best Buy for that 50 inch TV right before the Super Bowl. People will have to live within their means (for the first time in more than a generation). The problem is, our economy is not currently set up to function on such a reduced level of economic activity. Good luck GM and Chrysler, you are going to need it. That or more government (taxpayer) aid.
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