The bulls have their reasons, of course. Manufacturing is recovering, they say. Green shoots are sprouting! What they don’t seem to know/care about is that the reason manufacturing is recovering has little to do with a better economy.

This from Payout Trader editor Charles Delvalle (who, by the way, is bullish on US equities in the medium term):

Truth is the economy is still circling the drain, albeit at a slower pace. The real reason why the Institute of Supply Managements Factory Gauge showed better than expected numbers was because of the 12% increase in government spending due to fiscal ‘stimulus’ programs.

The June report showed up at 48.9 – just shy of the 50 mark. If the ISM rises above 50 it signals growth in manufacturing; less than 50 signals contraction. This 50 mark is extremely important, because most economists look at it to determine whether we are in a recession or not. In the whacky world of economic theory when that number jumps above 50 it signals a rebounding economy.

As more stimulus funds filter into the market over the next few months – and more companies decide to restock their historically low inventory levels – we’ll see the ISM Factory Gauge rise above 50 – fueling positive GDP growth and, most likely, one heck of a stock market rally.

Charles may be bullish on stocks, but that doesn’t mean he believes the recovery hype and bunkum. Charles – a technical trader whizz – lives in Salem, Oregon, with his fiancée. But he keeps in regular email contact with Notes HQ via email. This from an email we got from Charles:

How is the economy supposed to grow once the government stops spending money? Is the consumer supposed to magically come back and spend all of their hard earned savings? Not a chance. Consumers will be busy repairing their balance sheet for years to come.

Let’s not forget the US economy is more leveraged than at any time in history (even more so than during the Great Depression). That means we simply can’t expect things to quickly go back to normal just because the government has promised to spend nearly a trillion dollars in ‘stimulus’ funds.

The most obvious example of stimulus failing is Japan. Japan’s stimulus plans gave the country plenty of bridges to nowhere and nicely paved roads – and two lost decades to show for it!

As Will’s father, Bill, put it in the Daily Reckoning yesterday stimulus spending is just another way of spending what you haven’t earned. At the same time as it shoddily papers over the cracks of the current debt deflation, it’s setting the economy up for a new bout of demand destruction.

When you borrow in order to consume, what you are really doing is consuming something today that you would have normally consumed in the future. You spend money you haven’t earned yet on something you’re not really ready to buy. You’ve heard the expression, ‘time is money.’ That’s why borrowing money is really borrowing time. Later, you have to make it up. You have pay off the debt. When you do, you take money out of current consumption; you’ve already consumed it!

This is what economists refer to as “demand destruction.” It’s what happens in a depression. People are replacing what they took from the future. They’re can’t consume because they’ve already spent their money in the last boom. Demand collapses.

We’ve seen that happen in the last two years. Savings rates went from zero to 7%. Sales have declined (the latest revisions show them off more than was previously thought.) Profits are shrinking.

This is, of course, a completely natural and necessary adjustment. You can’t take things from the future without putting them back eventually. The future won’t stand for it. But the feds, in their benighted confusion, fight the problem like a farmer who plows backwards to fool the crows. They think the problem is too little demand. So, they try to add demand… with tax cuts… spending programs… low rates… easy credit… cash for clunkers and other fixes. What do these policies achieve? Do they really increase demand? No, they can’t do that… that would require a richer population with more money to spend. What they try to do is to move demand forward.

The problem, of course, is that too much demand has already been moved forward. But they’re nevertheless trying to steal even more of it… taking away demand that would normally show up two, three, four… ten years from now. That car that you might buy next year, for example. With the ‘cash for clunkers’ program, you might make the purchase now instead of waiting until you actually have the money. Or, that new parking lot behind the town hall. We won’t really need it for a few years, but heck, if they’re giving away money now… Or how about that trip to Europe? With a big tax rebate check, you might decide to take it on your 20th wedding anniversary, rather than wait ’til your 25th.

That doesn’t mean you can’t make money from the trillions of dollars Washington is throwing around. Our friends at Street Authority have worked out how to do exactly that. It allows you to get in on the health care, infrastructure and energy companies bound to see their shares rise as a result of government spending. Click here for details.