07/31/2010 06:14 pm ET Updated May 25, 2011

Watch out for 'Black Friday'

Common sense tells you that if you keep walking in a field riddled with land mines, you stand a good chance of getting killed.

Financially, the same fate may well await investors who've been swallowing the party line from those economic hucksters in Wall Street and the White House. These are the folks who have been relentlessly assuring us for months that we're in the early stages of a sustainable economic expansion.

After Friday's report of slower than expected second-quarter GDP growth of 2.4%, it should be obvious that such assurances bear no resemblance to reality.

These hucksters almost remind me of the people I occasionally come across on the street who carry on vigorous conversations and arguments with themselves, schizophrenics who have no sense of reality.

Unfortunately, many investors, some market watchers insist, are being suckered, Including those non-thinking daredevil types who plowed into stocks following Friday's early morning Dow selloff of more than 80 points in response to the glum economic tidings. As a result of this buying, the Dow staged an impressive recovery, winding up the day with a tiny decline of just over a point..

The reason for the buying, so I'm told: a general view that the disappointing GDP report was little more than a minor and temporary interruption in what still remains a growing economy.

Some economic watchers, though, such as Madeline Schnapp, a crack and savvy economist, disagree, suggesting the GDP report was another confirming signal that economic growth has slowed.

Equally significant in her mind is that the Bureau of Economic Analysis, which came up with the GDP figure, also revised downward GDP numbers dating back to 2007. It means, she says, the recession was much worse than we thought, that it could take a lot longer than expected for the economy to rebound and maybe, like in the past three years, the latest 2.4% growth number is overstated.

"Who knows," she says. "Maybe we're only really growing at 2%."

What's more, Schnapp, the economic chief at West Coast liquidity tracker TrimTabs Research, which is partly owned by Goldman Sachs, figures investors, come this Friday, will get another loud, clear and painful message about the true state of the economy.. That's the release date for which she predicts will be a disappointing July employment report.

In effect, she's challenging the over-riding view that the month will show the creation of 50,000 to 100,000 new jobs.

In contrast, her forecast calls for a flat to down month, based on her expectations of a layoff of 75,000 Census Bureau workers and the creation of 50,000 to 75,000 private sector jobs. So, as Schnapp sees it, the month could produce an overall loss of 25,000 jobs.

"It should be a bad Friday for the stock market," she says, versus, she points out, this past week when stock prices galore moved higher in reaction to the recent bevy of positive second-quarter earnings reports, 80% of which were above expectations.

Hong Kong Trader Selwyn Ortz tells me if Schnapp is right in her assumption that jobs were actually lost in July, " we could see a Black Friday with all hell breaking loose."

Making matters worse this week, Schnapp observes, will be additional signs of economic weakness, reflected in a trio of economic indicators, namely pending home sales, manufacturing activity and personal income.

Schnapp reckons sustainable economic growth will remain elusive until there's a recovery in the housing market, which she contends is presently in a depression. Unfortunately, she doesn't see a meaningful recovery anytime soon, an outlook that is supported by some pretty depressing numbers.

Among them: an unsold inventory of 4.2 million homes, or an 8.9 months supply, is sitting on the market; mortgage delinquencies, currently totaling 7.3 million, are growing at the rate of one million a quarter, and about 25% of all mortgages are under water

As such, Schnapp sees home prices -- which are down 25% to 40% since mid-2007-- perhaps dropping another 10% to 15%.

Factoring in, as well, the end of the stimulus, stalling consumption, little or no home construction, the collapse in lending, the onset of higher taxes and the expiration of the Bush tax cuts, Schnapp figures consensus expectations of
GDP growth of a little above 3% in 20010 and 2011 may be too buoyant and that 2% may be closer to the mark.

Schnapp says it's clear the early phase of the recovery has stalled. "And slowing economic growth going forward," she observes, "means no rebound in 2011."

As for the stock market, she notes you have two competing forces, with the downside case supported by slowing GDP and the bull case by higher earnings. "The bear case," she predicts, "will win because the economy is weaker than most economists expected."

Incidentally, in a commentary to clients a number of months ago, Schnapp warned of slowing economic growth. I subsequently reported her thoughts, which prompted one angry HuffPost reader to complain that I was duped into quoting "a terrorist who was trying to destroy America." The reader was wrong. "Mad Madeline," as he described her, wasn't dispensing bombs, but a good old fashioned commodity called common sense.

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