The usual strategies to start a rally were tried.

1. Jam the futures in the runoff (the 4 to 4:15 time after the cash market closes but futures and index options still trade).
2. Start a rumor of a Fed rate cut.
3. Pump up the tech stocks in the pre-market.

We’ll see if they work. In the meantime, GE warned of a poor quarter, unemployment claims jumped to nearly half a million and durable goods orders dropped by 4.5%. Rate cuts are really working, eh? In the meantime the bailout package is getting done, despite massive public opposition, to keep the “campaign contributions” flowing. If as much attention was paid to the real economy as is being paid to Wall Street and maintaining stock prices, we might make some progress.

The employment report was pretty much as expected (-62,000, 5.5%) and so the index futures are up. Or maybe it is because oil is a few pennies lower. Not that it matters. The birth-death model contributed 177,000 new jobs for the report, including an increase of 29,000 in construction. The last two months employment reports were revised downward (bigger losses than originally reported) and, perhaps more tellingly, the weekly jobless claims number popped over 400,000. That’s a bit of a magic number for recession.

Anyway, despite the waterboarded statistics, unemployment is clearly on the rise. We’re going to see how the “services” economy holds up under stress. Not well, I expect. What needs to be done for recovery, in my not-so-humble opinion:

• Replace the income tax with a consumption tax to encourage saving and investment and eliminate the huge adminstrative overhead.
• Change the Federal Reserve’s mission to solely that of providing a currency with stable purchasing power.
• Stop the wars and drastically reduce the defense budget so that the resources used by the military are re-allocated to the consumer.
• Stop sending money to thugs. Reduce energy consumption by taxing transportation fuels at levels similar to those in Europe, and quickly clear the way for development of the domestic oil shale resources. The technology is ready, politicians are the problem.
• Develop the equivalent of the Resolution Trust Corp. to take over the assets of failing banks and S&Ls, to protect depositors. The FDIC is not up to the task.

Edit: The ISM Services number came in at 48.2, indicating that service businesses are contracting. No surprise.

Obviously the title refers to Friday’s 400-point drop in the Dow. Although the weakening economy has given off many signs and portents, share prices have remained at very high levels. Even at the March bottom, the Dow did not fall more than about 17% from its all-time highs in October 2007, less than the 20% magic number that many people consider to be the cutover between “correction” and “bear market.” Even after Friday’s tumble, the major indices are little more than 10% off their highs. Of course the shills immediately stepped forward to denounce the sellers who drove prices down on Friday as idiots. Perhaps the most outrageous shill was - no - who would have guessed - the derivatives tower - J.P. Morgan:

The biggest rise in the unemployment rate since 1986 is an “aberration” and investors who sold equities today are “completely misreading” the outlook for economic growth

All I can say is, we’ll see about that. The consumer is tapped out. The housing ATM is out of money, food and energy prices are through the roof, unemployment is rising, household net worth is dropping with real estate prices. Businesses are being squeezed between rising costs and shrinking sales. Falling tax collections are forcing government spending to be cut. Wake up! This is a recession. And it it is going to get worse. Much, much worse.

If you want to believe the shills, read this analysis first to get a flavor of how you will be treated.

I certainly spend a fair quantity of bits criticizing conventional economics and economists. However, there are always exceptions who question authority and see what is really going on. Paul Kasriel of Northern Trust is notable, but here’s another, Richard Alford. He is interviewed by Institutional Risk Analytics.

If the US consumer were to go back to savings rates of the 1996 period, then you are talking about savings going from essentially zero today to approximately 8% of disposable income. Since US GDP is about 70% consumption, that implies a decline in demand of about 5 to 5.5%. That would be a very dramatic effect.

No kidding. Because of course the decline in demand would reduce employment, which would further reduce income in a vicious circle. That is why Ben is moving heaven and earth to avoid an increase in savings.

Politically and economically, there is no painless solution to the imbalances in the US. For US policymakers, it seems that even short-term pain is intolerable. Nobody in Washington wants to bite the bullet and explain the full dimension of the required change to the US electorate, so we muddle. Going back to the early 1990s, US politicians have bought support from the voters by keeping consumption on an ever rising trajectory. For at least 12 years, we’ve had debt induced increases in consumption and the political class optimized their behavior to maintaining that illusion of rising consumption even as the economic fundamentals worsened.
…
The US population is not ready to hear that their real levels of income, assets prices and other indicia of national well being may be falling or relatively stagnant for the foreseeable future. This is just politically not acceptable. So our politicians will attempt to maintain the appearance of growth, but not address the underlying causes.

Steven Pearlstein writes a good overview in the Washington Post - “The Fading of the Mirage Economy.”

Energy and food prices are soaring. The housing market continues to collapse. Government revenue is falling, and taxes are rising. Airlines are jacking up fares and fees while reducing service. Banks are pulling credit lines. Auto companies are cutting production once again. Even investment bankers are losing their jobs.The tendency is to see these as separate developments, each with its own causes and dynamic. Fundamentally, however, they are all part of the same story — the story of the global economy purging itself of large and unsustainable imbalances that for a time allowed many Americans to think they were richer than they really were.