Monday, January 11, 2010

Sales Tax Receipts Reveal A False Recovery

The concensus view is that the Recession is over and the economy will grow at a 2-3% pace in 2010. All prognosticators hedge their bets by reminding the public that the recovery may not feel good and employment may not grow robustly, but GDP will be increasing so we are on the way to prosperity again.

I haven't joined that camp. You cannot solve a debt crisis by simply swapping the obligor of the debt. Instead of over-extended consumers and real estate developers, we now have the US government, ultimately the taxpayer, on the hook. The big question is how long before we must face the music.

The stock market's current game of musical chairs is about to end. Everyone, including myself, thinks they will be able to find an available chair as the music stops. That's not reality. A significant test is coming soon. While 4th quarter earning reports are likely to look good when compared to a vile 4th quarter in 2008, that will only mask the state of the economy. The Liscio Report has noted recently that preliminary sales tax receipts for the current period are down dramatically. They have not been bouncing back as the job losses shrink, the GDP rises, and the stock market flourishes. Real money that the states receive, from consumers, is shrinking. Hence, the market has gotten ahead of itself. This will be an eye opener for all playing the musical chairs game.

My ultimate goal, as a retiree, has been to transition from a heavy dose of equities to a more conventional fixed income strategy. That hasn't been easy as yields have been so low on bonds and the government's spending ultimately will cause current holdings to lose value as rates rise. And rise they will. While I've admitted to playing the musical chairs game, I've started to lessen positions as of last Friday. When it becomes well known that sales tax revenues, about the only calculation available that isn't an estimate, are not improving, the stock market "should" pull back. Timing is difficult, if not impossible, so if the music plays for much longer I will rue my decision. But, I'll be well rested and still have my principal and rates have been rising. Even if you are old life is a journey.

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