During the 1930s Great Depression, there were 7 rallies from the 1929 peak to the bottom stretching over a period of 3 years. Each rally produced a peak that was lower than the preceding one. But this time, it's different. The new peak is higher than the old peak. However if you dig deep into the causes, you'll realise that the playbook is the same. Misleading metrics have been put up to give an impression of an economic recovery. Given the right metrics, it'll soon be obvious that the pattern hasn't changed, only that the movement has been exaggerated because of Obama's deficits and Bernanke's QE that have topped trillions of dollars.
The future is portending worse conditions. On the surface, however, things have brightened up: stocks, home prices and payroll number are all up. The bullish talking heads are back to rationalising why markets are going to breach new highs. A co-author of Dow 36,000 has come out of hiding to unabashedly declare that his prediction would be borne out in due course. Remember that the book was published in 1999, before the dotcom bubble. It's no coincidence that stock market crashes tend to follow preposterous claims of suchlike.
Our three trusted charts — the total credit, the home price index and the labour force participation rate — can adequately explain the goings-on in the economy.
But aren't the rising stock prices justified by the improving profits of the US corporations? Remember our monopoly board game. The sole winner will continue winning as long as others, which in the real world means the US government, continues spending. But the stock indices capture only the performance of the small number of winners, not the majority who are on the losing side. With the sequestration in effect, future credit growth will be stymied and so will GDP growth and corporate profits.
Our final true indicator, the labour force participation rate, needs no chart. You can view it at the Bureau of Labor Statistics website. The US unemployment rate has just registered a record four-year low at 7.7%. That's nothing compared to the LFPR which is at a record 31-year low at 63.5%. Actually, the number was reached in August 2012. It improved slightly over the last few months but now has fallen back. Again the next few months will confirm the direction in which the employment market is heading to.
So with metrics, be very wary of what is being presented. In the business world, everyone is well versed at gaming the numbers. So it is in economics. If you're investing, generate your own metrics as things portrayed by the media are not what they seem.