Consumer Driven

I read today, that the more accurate figure of 17% is closer to the reality of unemployment in the USA. Add to that the decline of outstanding consumer credit by 8 percentage points in the last year. This means that fewer people are working as well as fewer people are using their credit cards or dipping into their lines of credit. Unemployed folks are not big spenders. They cannot afford to be. And those that are working are trying to re-establish their financial position of a few years ago and are saving, not spending.

These factors do not bode well for an economy that depends on consumer spending for 70% of its existence. If consumers are not spending, that means that retail outlets are not making much money, in fact many of them are laying off people and many are closing their doors. This results in fewer factory orders and soon factories are laying off people also. These companies, many of whom are publicly traded, are not making the profits of the good old pre-recession days.

So, when I read today that stocks in these companies are over priced, it came as no surprise.

A few months back I was saying the price to earnings ratio on the stock exchange was 27 to 1. Since then the stock markets have risen, while earnings have fallen, until today, the earnings ratio is 100 to 1! This means that for every dollar that is spent on stocks, one penny is earned in dividends. This has got to be the worst investment around and still you hear these financial institutions say that we should be getting into the markets because they keep going up.

The average investor sees the dismal returns on GIC's and interest rates and thinks the market is the place to be. It is exactly the place not to be when it crashes, and it will. The next wave of 'option ARM' mortgages are coming due right now and there will be more foreclosures, more fallout from that, and the economy will slide farther downhill.

In the end, the folly of government bailouts will be revealed. It is said that if it were not for the stimulus programs in the USA, there would 2 million more unemployed than there are now. That works out to $800,000.00 spent for every job saved. If I were Obama, I would not be too proud of that.