After the WSJ article last week that 1/4 of US homeowners have negative equity, below are some interesting facts about the surprising weakness of the US economy. What shocks me is the huge disconnect between the markets and the economy. Some of the analysis I have done recently with regards to sluggish post recession recoveries points to the fact that this disconnect can go on for years. In other words, strong financial market performance is possible even with a weak economic performance. I would argue that the 2Q and 3Q recovery in the underlying economy has two characteristics: (1) it is an anemic / sluggish recovery and (2) it is “inorganic” and highly dependent on monetary stimulus. Regarding the stimulus, note that of the full outlay presented by government authorities we have only put 30% of that capital to work. The big question is whether this will turn into a self sustaining recovery. I personally think it will but that needs to be evaluated further down the road.

With 1-year Cash yields at 24 bps, money is flowing into riskier assets. The largest factor that the market rally hinges on (for the next few months) is continued government stimulus. After that it depends on if the government – liquidity led rally, turns into a profit rally. For positioning in this environment, I have stressed that as long as the US government is flooding the economy with money (i.e. continued sluggish recovery, thus government maintains stimuli), Equity markets will be well-bid. So what is the take away from that? Bad news is good news for the Equity markets!

Regarding the “pre-Lehman” levels it is important to note that many markets have returned to October levels. In the stock and bond markets, prices and spreads are at pre-Lehman levels. But look at this tally from David Rosenberg (from Gluskin Sheff) regarding how the economy has fared since then. It is pretty shocking:

Since Lehman, we have lost 6.2 million jobs;
The unemployment rate is 10.2% now, versus 6.2% the day before Lehman collapse;
Real gross domestic product is still down 3% since the summer of 2008;
Housing starts are down 30%;
Auto sales are down 23%;
Bank credit has contracted by $500 billion, or 8%;
Household net worth is down $7 trillion;
Home prices are down an average of 10%;
Office-vacancy rates are up 3.5 percentage points, to 17.2%;