07/26/2009 05:12 am ET | Updated May 25, 2011

Everything Is Not Coming Up Roses

Billionaire money manager George Soros, Federal Reserve chief Ben Bernanke and the National Association of Business Economists, all agree: The U.S economic crisis is just about history. Plenty of Wall Streeters buy this rosy view, theorizing that this fall will mark the end of the nasty recession and produce a conspicuous economic upswing that will subsequently drive stock prices higher.

On top of that, just about anyone on Wall Street who is anyone is saying pretty emphatically that this year's fourth quarter will produce positive economic growth (which is the basis of the recent sizzling 40% rally in the S&P 500 from its March low).

The problem, though, is what often looks likes a sure thing -- such as the fact Tiger Woods would absolutely win the recent U.S. Open, which he didn't -- frequently turns out not to be anything but a sure thing.

Meanwhile, given ballooning unemployment, the sharp slowdown in consumption, no letup in the steady stream of foreclosures, rising interest rates and the threat of a new inflationary outbreak, skeptics abound, a number of whom argue that talk of a sunnier outlook at this time, given the slew of land mines all around us, is little more than economic hogwash.

One of them is Madeline Schnapp, the skipper of economic research at TrimTabs Investment Research of Santa Rosa, Ca., partly owned by Goldman Sachs and one of the country's leading liquidity trackers. Her view: Not everything is coming up roses.

"A financial collapse is now history, but the notion of a return to a full-scale recovery in the fourth quarter or positive economic growth in the period just doesn't make any sense," she says. "We're recovering from the worst economic downturn since the Great Depression and that's not going to happen overnight." Forecasts of positive growth this fall are a fantasy, she observes, because they're based on hope and expectations, not reality.

Her fourth quarter GDP outlook: "It will be another quarter of negative growth." In contrast, many economists are looking for positive GDP growth for the period of about 3% to 3.5%. For the current quarter, the consensus calls for a retreat of 3.5%, following a decline of a revised 5.5% in the first quarter and a drop of 6.1% in last year's fourth quarter.

Why such an economic bear? For starters, Schnapp -- who might aptly be called "Lady Doom" -- says real-time indicators suggest the U.S. economy is still contracting rapidly. Kicking off, she points to the prospects of a wave of defaults in Alt-A mortgages (low-risk, low-rate loans that are better than sub-prime and less than prime and are often made with little or no proof of a borrower's income). About 3 million U.S. borrowers have Alt-A mortgages and 36% of them have missed at least one payment in the last 12 months. Moreover, almost 16% of all Alt-A mortgages issued since January of 2006 are said to be 60 days late. All told, there are about 3 million Alt-A mortgages totaling $1 trillion

Schnapp also notes that wages plunged 6.1% year-over-year in the past four weeks, much steeper than the 4.8% year-over-year decrease in May. That means, she explains, $250 billion less this year in consumer pocketbooks. She also notes that income tax withholdings plunged an adjusted 8.8% year-over-year in the past two weeks, indicating wage declines and job losses have accelerated.

The labor market, as Schnapp sees it, is still in horrible shape. Granted, she observes, weekly unemployment and continuing unemployment claims have declined slightly, but they remain at high levels, while online job demand appears to have stabilized at an extremely low level. As for housing, she says the notion that it's starting to recover is nonsense. Aside from the growing defaults in Alt-A mortgages, California foreclosures are up 156% since March.

Another big worry, according to Schnapp, is the huge government debt. Spendthrift Uncle Sam, she points out, has to sell $1.5 trillion of new debt every quarter just to finance the deficit and pay down existing debt.

Her worrisome economic bottom line: "How can anyone say the economy is out of the woods?" Taking that concern a step further, she feels the economy is unlikely to expand until well into 2010.

Interestingly, despite Wall Street's feverish, go-go pitch to entice investors to put more money to work in the stock market, would-be equity buyers remain extremely cautious. Indicative of this, though investors are sitting on mounds of cash (about $3.5 trillion in money-market funds alone), much of it is being channeled into asset-preservation U.S. Treasury securities and FDIC-insured savings accounts. For example, from March through May, Treasuries and savings accounts posted an inflow of $615 billion.

Schnapp apparently thinks those cautious investors are on the right track. Her outlook: a U-shaped market (where stocks languish at a large bottom before rising), versus a V-shaped forecast (where stocks go up and down sharply). As the folks at TrimTabs see it, there's a time to buy stocks and a time not to buy stocks, and now is the time not to buy unless the loss of money is irrelevant.