You could just eat them...?

After yesterday’s bloodbath in the global stock markets, a stark grimness has descended on the world, like execution hour at a hanging jail.

The culprit of course, was US unemployment, now at a 26 year low. Prior to this, the markets had displayed a frisky exuberance, rising for almost three months straight. Trite terms like ‘green shoots’ were tossed casually around by all manner of moron (to our knowledge, all shoots are green), just because it sounded clever.

But we always said the optimism was a striking example of human perceptual bias in action. The data starkly said that unemployment was rising steadily, assets were falling and output was contracting. But no, we wanted to see good news.

So we invented nonsense terms like ‘less than expected’ to describe falling indicators. But such self-deception can only last so long. There comes a time when, however painful the truth, that you must admit your wife has grown a moustache.

That time is now. When people lose their jobs, quite understandably, they don’t spend very much. Which means companies produce less- and need fewer people. So they lay off some more, and the death spiral continues until enough people have committed suicide to restore equilibrium to the labour market.

It just ain't working, darling

It just isn’t pretty. However much lipstick you put on a pig, it just can’t be pretty enough to smooch. And neither can the economy’s current outlook.

We reluctantly bear the mantle of economic Cassandras. We want the recession to end as much as anyone. But the excesses that built up during the years of frantic over-borrowing must first be purged from the distended belly of the beast.

As we predicted yesterday, US unemployment has continued to rise, to an excruciating 9.5%. With such an abundance of people desperate for work, wages have fallen.

On the news, US stock markets swoon in surrender, and the UK markets weakly buckle at the knees. 7 more US banks stumble and die, and the typhoon of misery is made a perfect storm as oil prices plummet on expectations of low demand.

Men in power are struck by their powerlessness in staying the market’s ruthless correction. President Obama commiserates grimly on the ill news, while his administration continues to pour his peoples’ money into the black hole of toxic bank securities. Equally desperate, European Central Bank Governor JC Trichet virtually begs banks to unleash the flood of easy money to prime the pump.

They might as well be pushing on a string. Mr Market will take his time adjusting to his new reality, and the norm of the interim will be pain. Over the next few weeks, stock market participants will wait eagerly for quarterly earnings reports, hungry for some faint vestige of hope. They will largely be disappointed.

Someone will land on their feet...

As prognosticators of every stripe scan the heavens for signs of recovery, the proof of the pudding is imminent.

Q2 is over, and an onslaught of earnings reports will befall the world’s stock markets over the next few weeks. When that happens, all speculation about the significance of payroll data, or manufacturing output, or mortgage approvals, will be put to rest. Profits will prove the recovery. 

Or not. No significant economic indicator has risen in Q1: the best we can say is that blind panic abated, the pace of decline slowed, and we settled into a comfortable routine of bad news.

For example, corporate sackings have continued apace. No, the portents are not good, and the recent market rise may prove over-optimistic.

The first corporate results give interesting clues. It is infinitely comforting to hear that big law firms are falling on hard times- it is hard to lament the shrinking of a hive of lawyers. Quite the opposite reaction must greet Diageo’s downsizing. We cannot in good conscience approve of a fall in production of good whisky.

Virgin Atlantic too is reporting bad news- much air travel spending is discretionary, even for businesses. Not a good sign. And the fact that food manufacturer General Mills reported solid profits is not as comforting as it might seem: people eat out less when they’re cash-strapped.