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November 30, 2012

Dangerous Signs of Market Indifference To Economic Conditions

By Russ Winter 

“I’ve been clear that the law (Obamacare) has to stay on the table as both parties discuss ways to solve our nation’s massive debt challenge.” – John Boehner, Wednesday after the close.

Corporations are cutting their spending plans at the fastest pace since the end of the recession.  The outlook for jobs over the next six months is likely to be weak. The large layoffs since the election were noted in my post on Obamacare part II. The auto industry is overproduced and cutbacks are inevitable.

Participants right now are indifferent to an economic slump (so far).  This is simply a reflection of where we are culturally, bankrupt and blase about it. It probably reflects strong misplaced belief in the bailouts, the tooth fairy and Wizard of Oz.

Via UBS’ Paul Donovan: The barometer of blasé

To test whether consumers and businesses are more inclined to overreact to economic events we have compiled a blasé barometer. This is a relatively simple process. We take the three year standard deviation of a sentiment index, and we compare it to the three year standard deviation of a pertinent economic variable. For example, we could compare the volatility of US consumer sentiment with the volatility of real consumer spending growth. (We use consumer spending growth to match the dynamic nature of the sentiment index).

If sentiment volatility is rising relative to the volatility of the underlying variable that would indicate that the consumer (or business) is tending to overreact to changes in the economy. If the volatility of sentiment is declining relative to the volatility of economic data, that indicates that the consumer is becoming immune to tales of economic disaster – or at least is not prone to overreact.

The second chart shows that hourly earnings are a decent proxy for retail sales, and right now that has diverged sharply lower .

About The Author - Russ Winter is a veteran investor, financial writer, world traveler, and he blogs at Winter Watch.  (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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