Once again, we have that same old disconnect: Wall Street and Washington say that things are looking up, while most Americans continue to believe otherwise, as CNNMoney.com's Paul La Monica reveals in "The Economy Feels Better. Why Don't You?":
Wall Street's celebrating "strong" earnings and the Fed thinks the recession may soon end. But consumers won't be confident until the housing woes are over.
The economy seems to be getting better. That's what Wall Street is telling us. Stocks soared Wednesday thanks to a slew of decent earnings reports.
That's also what C Street -- home of the Federal Reserve -- is telling us. In the minutes from the Fed's last meeting, released Wednesday afternoon, policymakers indicated that the recession could be over "before long."
But on Main Street, people seem to have a decidedly different view. It's hard to find things to be happy about when the unemployment rate is at a more than quarter-century high of 9.5% and the housing market remains in shambles.
The mess in housing -- foreclosures in the first half of the year were up 15% from the first six months of 2008 -- is something that some fear could keep a lid on an economic recovery.
So even though investors, CEOs and Fed chair Ben Bernanke may be seeing green shoots everywhere they look, many average Americans have to squint very hard in order to find them. Just try telling a Zillow.com-obsessed home owner who's watched the value of his home continue to plummet in recent months that the economy is getting better.
"The big unknown variable in the economy still is housing," said Haag Sherman, managing director with Salient Partners, an investment firm based in Houston. "The worst may be behind us with subprime loans, but I don't think housing has found a bottom. We could have a recovery in Corporate America that's much narrower than the recovery in the broader economy."
Sherman pointed out that banks are starting to experience waves of delinquencies and defaults with higher-quality mortgages such as alt-A loans and prime loans.
To that end, JPMorgan Chase, which posted strong second-quarter results Thursday morning thanks to healthy gains in its investment banking division, reported some fairly dismal numbers out of its consumer lending unit.
The bank said that net charge-offs, a figure that measures the amount of debt written off as bad, were $1.3 billion from home equity loans, double the $511 million of a year earlier. And net charge-offs related to prime mortgages quadrupled to $481 million from $104 million last year.
JPMorgan Chase is widely considered one of the healthier banks around. So if it's experiencing more difficulties in its home loan business, it's likely that two of the more troubled big banks, Citigroup and Bank of America, will also disclose more bad news from their mortgage units when they each report their second-quarter numbers Friday morning.
Rising delinquencies could lead to more foreclosures. If so, it's harder to envision a scenario where prices will rebound since foreclosed homes just add to the inventory of unsold real estate.
Steven Kyle, professor of applied economics at Cornell University, said the fear that prices will fall further is discouraging some homeowners from even putting their homes on the market because they're worried about the existing glut of homes.
Kyle added that with unemployment nearing 10% and likely to exceed that level before long, he worries many consumers won't be willing to buy homes -- even if prices stay relatively affordable and mortgage rates remain fairly low.
"Housing is not going to go rocketing off anytime in the near future. Interest rates are already low, so you won't get a boost from that. And unemployed people aren't buying houses," Kyle said.
Sherman said that, ironically enough, more talk of an economic recovery could actually hurt chances of a housing rebound, since it could lead to higher rates in the future.
That's because some fixed-income investors may start to fear inflation and start selling long-term bonds, which would drive up their yields. Bond rates and prices move in opposite directions.
In fact, it's already happened to some extent. The yield on the U.S. 10-year Treasury has surged from a low of about 2% in December to about 3.5% currently. Many fixed-rate mortgages are closely pegged to longer-term Treasury rates, so a further dumping of Treasurys won't help prospective home buyers.
"You can have housing stabilize for a bit and then take another leg down. Continued affordability is what we want to see, but if bonds sell off, that weighs on affordability," Sherman said.
0:00 /4:19Housing market's false hope
Nonetheless, there are some pieces of good news about the housing market. The National Association of Home Builders reported Thursday that builder confidence in July was it its highest level since last September.In addition, finance professors Paola Sapienza of the Kellogg School of Management at Northwestern University and Luigi Zingales of the University of Chicago's Booth School of Business, said consumers are much more confident about the housing market now than they were just a few months ago. The professors run a quarterly survey of consumers that looks at their trust in the financial system.
Sapienza said that a majority of consumers polled in June thought that prices in their market would be stable over the next 12 months and that only 26% thought prices would decline. By way of comparison, nearly half of the consumers surveyed in December were predicting price drops, Sapienza said.
We'll find out even more about the state of housing Friday morning when the Census Bureau reports its latest figures on housing starts and building permits. Both numbers are key measures of potential demand for new homes.
Economists surveyed by Briefing.com are forecasting that the number of permits rose slightly in June to an annualized rate of 524,000 from 518,000 in May and that starts dipped a tad last month -- from a rate of 532,000 in May to 530,000 in June.
The consensus estimates for both permits and starts are considerably higher than the record lows set in April. So as long as the June numbers are close to forecasts, one could make the case that the housing market is stabilizing and that the worst may be over.
But as I pointed out in Wednesday's column about earnings, stabilization is not the same thing as a recovery. And even though Wall Street still seems willing to subsist on a diet of green shoots salad, consumers are hungering for more substantial evidence of a recovery.
"The end of the world didn't in fact happen so people got more optimistic earlier this year. But to say the end of the world was avoided doesn't mean we're now swimming in rose petals," Kyle said. "The real estate market is still looking rocky. The danger is we just bump along in this stagnating saggy state for awhile."
And as long as that's the case, consumers are unlikely to feel much better about the economy.
"People are still nervous. We haven't seen an actual turn in housing yet, just signs of bottoming," said Brad Sorensen, director of market and sector research with Charles Schwab. "This isn't rocket science but an improvement in the housing market will make consumers feel more confident and more willing to spend and that will have a trickle down effect on the overall economy."
While it is possible that the permabulls, pundits, and politicians are right and ordinary folks are missing the boat , the experience of the past several years suggests it has not made sense to bet against the masses when it comes to describing the true state of affairs.
In fact, some might argue, based on the following commentary from syndicated columnist Paul Craig Roberts, "Can the Economy Recover?" that the fundamentals are so bad that it won't take long before even the most deluded of establishment shills is forced to see the world in a darker, though more realistic light.
There is no economy left to recover. The U.S. manufacturing economy was lost to offshoring and free-trade ideology. It was replaced by a mythical "New Economy."
The "New Economy" was based on services. Its artificial life was fed by the Federal Reserve's artificially low interest rates, which produced a real-estate bubble, and by "free market" financial deregulation, which unleashed financial gangsters to new heights of debt leverage and fraudulent financial products.
The real economy was traded away for a make-believe economy. When the make-believe economy collapsed, Americans' wealth in their real estate, pensions and savings collapsed dramatically while their jobs disappeared.
The debt economy caused Americans to leverage their assets. They refinanced their homes and spent the equity. They maxed out numerous credit cards. They worked as many jobs as they could find. Debt expansion and multiple family incomes kept the economy going.
And now suddenly Americans can't borrow in order to spend. They are over their heads in debt. Jobs are disappearing. America's consumer economy, approximately 70 percent of gross domestic product, is dead. Those Americans who still have jobs are saving against the prospect of job loss. Millions are homeless. Some have moved in with family and friends; others are living in tent cities.
Meanwhile, the U.S. government's budget deficit has jumped from $455 billion in 2008 to $1 trillion this year, with another $2 trillion on the books for 2010. And President Obama has intensified America's expensive war of aggression in Afghanistan and initiated a new war in Pakistan.
There is no way for these deficits to be financed except by printing money or by further collapse in stock markets that would drive people out of equity into bonds.
The U.S. government's budget is 50 percent in the red. That means half of every dollar the federal government spends must be borrowed or printed. Because of the worldwide debacle caused by Wall Street's financial gangsterism, the world needs its own money and hasn't $2 trillion annually to lend to Washington.
As dollars are printed, the growing supply adds to the pressure on the dollar's role as reserve currency. Already America's largest creditor, China, is admonishing Washington to protect China's investment in U.S. debt and lobbying for a new reserve currency to replace the dollar before it collapses. According to various reports, China is spending down its holdings of U.S. dollars by acquiring gold and stocks of raw materials and energy.
The price of 1 ounce gold coins is $1,000 despite efforts of the U.S. government to hold down the gold price. How high will this price jump when the rest of the world decides that the bankruptcy of "the world's only superpower" is at hand?
And what will happen to America's ability to import not only oil, but also the manufactured goods on which it is import-dependent?
When the oversupplied U.S.
dollar loses the reserve currency role, the United States will no longer be able to pay for its massive imports of real goods and services with pieces of paper. Overnight, shortages will appear and Americans will be poorer.Nothing in Presidents Bush and Obama's economic policy addresses the real issues. Instead, Goldman Sachs was bailed out, more than once. As Eliot Spitzer said, the banks made a "bloody fortune" with U.S. aid.
It was not the millions of now homeless homeowners who were bailed out. It was not the scant remains of American manufacturing — General Motors and Chrysler — that were bailed out. It was the Wall Street Banks.
According to Bloomberg.com, Goldman Sachs' current record earnings from their free or low-cost capital supplied by broke American taxpayers has led the firm to decide to boost compensation and benefits by 33 percent. On an annual basis, this comes to compensation of $773,000 per employee.
This should tell even the most dimwitted patriot whom "their" government represents.
The worst of the economic crisis has not yet hit. I don't mean the rest of the real-estate crisis that is waiting in the wings. Home prices will fall further when the foreclosed properties currently held off the market are dumped. Store and office closings are adversely affecting the ability of owners of shopping malls and office buildings to make their mortgage payments. Commercial real-estate loans were also securitized and turned into derivatives.
The real crisis awaits us. It is the crisis of high unemployment, of stagnant and declining real wages confronted with rising prices from the printing of money to pay the government's bills, and from the dollar's loss of exchange value. Suddenly, Wal-Mart prices will look like Neiman Marcus prices.
Retirees dependent on state pension systems, which cannot print money, might not be paid, or might be paid with IOUs. They will not even have depreciating money with which to try to pay their bills. Desperate tax authorities will squeeze the remaining life out of the middle class.
Nothing in Obama's economic policy is directed at saving the U.S. dollar as reserve currency or the livelihoods of the American people. Obama's policy, like Bush's before him, is keyed to the enrichment of Goldman Sachs and the armament industries.
Matt Taibbi describes Goldman Sachs as "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." Look at the Goldman Sachs representatives in the Clinton, Bush and Obama administrations. This bankster firm controls the economic policy of the United States.
Little wonder that Goldman Sachs has record earnings while the rest of us grow poorer by the day.
There are some very thick skulls out there,left over
from the Cro- Magnon period.leaving the comfort zone
is a no no,they will not acknowledge that this is a
breakdown a total collapse.(see seeking Alpha on Carolin
Baker) Having lived thru world war 2 I'm not a bit
surprised ,the same type of denial on bad news was very
prevalent at he time. But Capitalism (as we have known it)
is Dead/kaput/finis/ as ta la vista!
Posted by: roger | July 16, 2009 at 08:14 PM
Q: "The Economy Feels Better. Why Don't You?"
A: Simple. I am a member of the reality based community. Unlike large banks I received no bailout. I know many people who have been laid off. The layoffs continue. People are having a heckuva time finding new jobs and settling for part-time work or whatever paying jay-oh-bee they can find. Every neighborhood has some homes in foreclosure.
So it's simple really. There is a confluence of three events:
1. Layoffs & job market. Whether or not you've been laid off you know people who have. My wife works with eight women. Every one of their husbands or SOs have been laid off at least once within the past 18 months. Forget about looking for a new job. Plus, we've already been beaten by falling real wages. This creates enormous damage to psychology and confidence.
2. Realty. Falling home prices and foreclosures and folks being upside down. This creates enormous damage to psychology and confidence.
3. 401k's, Keogh's, 403bs. Everyone was socking it away. For a time it was impossible to not get good returns. Now everyone has been hurt, and hurt badly. When you see that the value of your savings have declined by five or six figures this creates enormous damage to psychology and confidence.
Posted by: Abraham | July 17, 2009 at 09:02 AM