Flight to Crisis?

The US economic recovery is a fairy tale...

WE'RE NOT THE FIRST to say it, but we have said it repeatedly, writes Eric Fry in The Daily Reckoning.

The US economic recovery is a myth...a fairy tale.

The more enthusiastically the Wall Street rah-rahs proclaimed the start of a new growth phase, the more emphatically your editors pooh-poohed the idea. "The non-recovery seems to be gathering momentum," we observed from California in the March 2 edition of the Daily Reckoning. "Almost every day we receive fresh evidence of economic non-growth and non-vitality.

"The economy does manage to get out of bed every morning. Some folks applaud this fact and declare, 'Aha! A recovery!' Other folks...observe that the economy usually crawls right back into bed after brushing its teeth. We see no recovery. We see a coach potato with a very bright smile...an economy that still lacks essential qualities like jobs, corporate revenue growth and credit. The visible effects of this widespread malaise are...well...widespread."

Falling prices tell us that the private sector de-leveraging is continuing. These processes take time, dear reader. Rome wasn't built in a day, and neither did it burn to the ground overnight. Likewise, the vast American economy does not improve or degrade all at once. Even in the midst of difficult conditions, for example, some facets of the economy manage to flourish.

On the other hand, isolated instances of economic growth should not be confused with resurgent national prosperity. Sure, a few government agencies in Washington and a few financial firms in New York may have resumed hiring. But that doesn't mean General Motors can sell a car...or that home prices will rebound from their depressed levels.

In fact, General Motors can't sell a car...and home prices are not rebounding from their depressed levels.

"For US home and auto buyers it's 1983 again," observes Eric Janszen of iTulip.com. "New home sales fell to an annual pace of 300,000 units this May, the lowest yearly unit volume since 1983...An optimist might conclude that home sales are thus only as bad as in 1983, except that the economy was only one quarter the size of today's, [which means that] this post-recession housing market contraction is proportionally four times worse than the housing downturn that occurred at the end of the early 1980s recessions."

Slowly but surely, therefore, investors are beginning to realize that America's economy recovery may be less robust than advertised. This week, the Conference Board's disclosed that its Consumer Confidence Index for June tumbled to 52.9 from 62.7 in May.

The stock market did not greet this news warmly, as the Dow Jones Industrial Average dropped 268 points – falling below 10,000 to within a whisker of a new 9-month low. The Dow has fallen 428 points, or 4.2%, in the past four days. Most overseas markets also slumped Tuesday. The Shanghai Composite Index fell 4.3% to a 14-month low. Britain's FTSE 100 fell 3.1%, Germany's DAX index dropped 3.3%, and France's CAC-40 fell 4%.

Meanwhile, a "flight to safety" pushed the yield on 10-year Treasury notes below 3 percent for the first time in since April 2009, when the financial markets were still in crisis mode.

Bond yields and share prices do not usually tank when economic conditions are improving. Maybe this time is different...Probably it is not.

Ready to buy gold...?