Financial Armageddon

Time for Another Pop Quiz...

(Hopefully, you've been paying attention.)

In your opinion, which of the following choices best depicts where things stand in today's America (choose "A," "B," or "C"):

A. "All Areas of the Country Show Growth, Fed Reports" (Associated Press)

The U.S. economy started the year off well with busier factories, higher retail sales, more jobs and growth in home sales.

The Federal Reserve said Wednesday that all 12 of its banking districts reported some level of growth in January and the first half of February.

The Fed's report "was surprisingly more upbeat than we've seen lately," said Jennifer Lee, an economist at BMO Capital Markets. "The employment picture is certainly brighter."

Overall economic activity increased at a "modest to moderate" pace, the Fed noted. That roughly matches the Fed's assessment of the economy in the final weeks of 2011. And it is slightly better than the "slow to moderate" growth cited for October and mid-November.

The pickup in growth reported by each Fed region corresponds with stronger hiring and declining unemployment over the past three months.

The latest Beige Book, as the Fed report is formally known, sketched a picture of an economy improving in most major sectors.

B. "Growing Number Of Americans Can't Afford Food, Study Finds" (Huffington Post)

More Americans said they struggled to buy food in 2011 than in any year since the financial crisis, according to a recent report from the Food Research and Action Center, a nonprofit research group. About 18.6 percent of people -- almost one out of every five -- told Gallup pollsters that they couldn't always afford to feed everyone in their family in 2011.

One might assume that number got smaller wrapped up with the national unemployment rate falling for several consecutive months. In actuality, the reverse proved true: the number of people who said they couldn't afford food just kept rising and rising.

The findings from FRAC highlight what many people already know: The economic recovery, in theory now more than two years old, has done little to keep millions of Americans out of poverty and deprivation. Incomes for many haven't kept pace with the cost of living, and for a large swath of the country, things today are as bad as ever, or worse.

Forty-six million people lived below the poverty line as of 2010, a record number, according to the Census Bureau, and one that's not even as high as some other estimates would have it. Take a further step back and the situation appears even more dire. About 45 percent of people in the U.S. have reported not being able to cover their basic living expenses, including food, shelter and transportation, according to the group Wider Opportunities for Women.

C.

How'd you do?

(Image: source and source)

Soft and Hard

In "What's Your Favorite 'On the Ground' Recession Indicator?" California-based author and publisher of the Of Two Minds blog (a longtime favorite of mine), Charles Hugh Smith, writes about an interesting development in his neck of woods:

I've sold a few cars myself at the local "sell your own car" lot, so I know it's reputable and a model that works for buyers and sellers. For a flat fee, you park your car on their lot and price it however you want. Potential buyers get to test-drive it, take it to their mechanic, etc. It's a big lot, so the selection of cars and prices is suggestive of larger trends--at least to me.

Back in 2009 at the initial depths of the recession, the used Toyotas and Hondas vanished and the lot filled with Volvos and other big-car-payment brands. I took this to reflect people were ditching their car payments and snapping up older reliable cars they could buy for cash and get another 100,000 miles out of.

I hadn't been by the lot in a while and what I saw astonished me. The lot was packed with "fun" cars and luxury brands: four recent-vintage Cooper-Minis were lined up (none sold in the week I monitored the lot). A cute yellow VW Beetle--another "fun" car-- was over by the Mercedes. Yes, Mercedes, and Porsches, all beautfully maintained.

For the first time in the two decades I've scanned this lot, it was chockful of luxury cars: a pristine black 2002 Porsche Boxter with low mileage that raised my blood pressure and sorely tempted me because it was "priced to sell"--and for a Scots-Irish-French tightwad, that's saying something; an equally beautiful Mercedes 500-series two seater, low mileage, brand-new in appearance; a fairly decent Jaguar; another pristine 300-series Mercedes, a classic, unbelievably well-maintained Porsche 911 (1991)-- the list goes on.

In the good old days, these "still look new" luxury cars would have been snapped up at these prices. But now they sit here, unsold, day after day.

Another class of "fun" car was also represented--the muscle car: a very clean recent vintage red Trans Am attracted onlookers in one corner of the lot.

Sellers can add comments to the sales tag, and on at least two of the luxury vehicles it was noted that the car had been their father's, one owner. Others indicated the original owner was selling.

If you know some car buffs, or you are one, then you know what these low-mileage super-clean luxury cars represent: they represent the lifetime achievement car for a guy, or the trophy car the rising exec takes out on the weekend. There is no other explanation for a 10-year old car to have 17,000 miles, or 33,000 miles--they were all garaged and enjoyed as a third or fourth car.

It seems Dad is getting too old to drive, or it's no longer feasible to ease into the low-slung Porsche, and so he's given it to one of his kids. And the kid drove it to the lot to turn into cold hard cash.

As for the "fun" cars: maybe they're still selling big numbers of new vehicles, but the glow of owning a mediocre-mileage car with no room for the dog or kids seems to be fading for existing owners. My sister-in-law spent a fortune having her Mini Cooper fixed last year, and our friend with a cutsy VW Beetle had a repair bill after a few years of ownership that could have bought a decent used car instead.

For whatever reason, "fun" cars that I never saw on the lot before are now there in abundance.

This is all anecdotal, of course, and wide open to interpretation. If you go to the techie-hipster favored neighborhoods in San Francisco, the tony cafes and restaurants are crowded: there's plenty of Web 2.0 money floating around. If you only look at these concentrations of talent and free-flowing investment capital, the economy looks like it's booming. Ditto if you try to book a table near the Opera on performance night: there's plenty of old money around that can spend $100 per dinner, too.

Once again, there were no older Toyotas or Hondas on the lot, only a few 2-year old models asking near-new prices. I interpret this thusly: older reliable cars that will last another five years without major expense are snapped up immediately, and superfluous "fun" cars and luxury trophy vehicles are being turned into cash.

When people are driving their pride and joy cars out of their pampered garages and selling them for cash, not trading them in for a new car or keeping them for pleasure, I think that's saying something about the "real" economy you won't find if you hang around Twitter HQ or the bejeweled Opera crowd.

Of course, anecdotal reports like this don't quite jibe with the allegedly hard data that policymakers and economists keep feeding us. For those who prefer that I refute the "we're in a recovery" line with data points and trendlines, I present a chart from UBS (via The Reformed Broker) detailing the significant and historically unusual gap between our nation's unemployment rate and Americans' perceptions about how plentiful jobs are [red annotations mine]:

Of course, none of this matters if your an equity trader -- right?

Lookin' Real Good

According to a Bloomberg report published earlier, "Jobs Outlook in U.S. Improves for 2012, Business Economists Say," professional prognosticators seem to be growing more optimistic by the day:

Employment will improve more this year than economists previously estimated, helping the world’s largest economy to keep growing, a private survey showed.

Payrolls will rise 170,000 a month on average in 2012, up from a November projection of 127,000, according to the results of a survey by the National Association for Business Economics issued today in Washington. Unemployment will average 8.3 percent, down from 8.9 percent in the prior forecast.

The better outlook for jobs coincides with larger gains in business investment and homebuilding than were anticipated, the survey showed. At the same time, economists maintained forecasts for consumer spending, which may rise 2.1 percent, and predicted economic growth of 2.4 percent in the fourth quarter from a year earlier, unchanged from the November survey.

Respondents “are seeing strength in a number of economic measures,” Gene Huang, NABE president and chief economist at FedEx Corp., said in a statement.

Just for fun, why don't we go through a list of recent developments to try and figure out how they arrived at that conclusion:

Fuel costs hitting new highs? Check.

"Gas Prices Keep Rising: $3.70 Nationally, $4.29 in California" (Los Angeles Times)

Going somewhere? It’ll cost you even more this week, with the national average price of a gallon of regular fuel now up to nearly $3.70 and rising 26 cents to $4.29 in California.

That’s up 14 cents a gallon from a week ago and a 29-cent increase from a month ago. A gallon is now more than 10% more expensive than the $3.35 it cost this time last year, according to the AAA Fuel Gauge Report.

But in California, drivers are wishing prices were still that low. The state’s average cost for a gallon is $4.29, compared to $4.03 a week ago. That’s nearly 15% more than the year-ago cost of $3.74 a gallon.

For more than a year, gas prices in California have hovered above the national average. Prices have already reached levels usually not seen until springtime, when refineries temporarily close for maintenance and more expensive summertime fuel blends are being swapped in at the pump.

Concerns about troubles in the Middle East could also be a factor in the spike, some said. The Obama administration cautioned last week that it may decide to draw from the nation’s emergency oil reserve to keep high prices from slowing the economic recovery.

World's largest economic region entering a downturn? Check.

"Euro Zone in Recession, Commission Declares" (Irish Times)

The European Commission yesterday said the euro zone had entered its second recession in three years.

Economics commissioner Olli Rehn insisted the recession was “mild” and that the European economy was showing signs of stabilising, but his new forecast said the recovery would be more modest than hoped and would come later this year than previously expected.

With no end in sight to the sovereign debt crisis, the European Commission believes the euro zone economy will shrink by 0.3 per cent this year on a gross domestic product (GDP) basis, while the EU as a whole stagnates.

It previously said the euro zone would expand by 0.5 per cent and the EU by 0.6 per cent.

The commission scrapped the growth forecast for Italy and Spain, saying the Italian economy would shrink by 1.3 per cent, with Spain falling 1 per cent.

Longstanding global economic locomotive running out of steam? Check.

"China Economy Faces Risk of Hard Landing: Shi Xiaomin, Govt Economist" (Economic Times)

BEIJING: A property sector downturn and slumping global demand may knock China's economy into a hard landing in 2012, a senior government economist told Reuters, putting more pressure on Beijing to speed up economic reforms and to open up the market.

The economy is not just slowing but is also haunted by over-investment that could constrain Beijing's options, said Shi Xiaomin, vice president of China Society of Economic Reform (CSER), a Beijing-based think-tank.

No real turnaround in a key sector of the economy? Check.

"'Welcome To The Housing Non-Recovery' In Three Simple Charts" (Zero Hedge)

Below is some more hard data where you won't find the much anticipated, 'any minute now', housing recovery. While the first chart shows the annualized new home sales sold data, which came in at meaningless 321K in January on expectations of 315K, and a meaningless drop from an upward revised 324K, all this shows is that 3 years after the "recovery", there is zero improvement in housing. In non-SAARed terms, there were just 22K homes sold in January. Naturally, this is to be expected because as long as the government continues to prevent true price discovery, there will be no real housing market. Which is just what the second chart  shows: Completed houses for sale at the end of period dropped to 57K - this is the lowest point in the 40 years of this data series. Said otherwise nobody has any hopes that there will be a pick up in housing demand. And why should they - after all as the third and final chart shows, shadow inventory is at a record, and about to be unleashed on the market at bargain basement prices courtesy of the Robo-settlement, which in turn will drag down prevailing prices far, far lower everywhere. Welcome to the latest housing non-recovery.

New Homes for sale, courtesy of John Lohman:

Record low completed houses for sale at the end of the period:

And record high shadow inventory:

Growing potential for upheaval in the Middle East? Check.

"US Planning to Boost Sea and Land Defences in Gulf as Iran War Fears Grow" (Telegraph)

The Pentagon has begun to take tangible steps to prepare for a possible conflict with Iran by making formal plans to boost US sea and land defences in the Persian Gulf, it has been claimed.

Military planners have asked for emergency funding from Congress to address a perceived shortfall in defence capabilities that could undermine the ability of US forces to respond to an Iranian closure of the Strait of Hormuz, the Wall Street Journal quoted American officials as saying.

Gen James Mattis, the head of the US Central Command, has privately informed Congress of his intentions to place mine detection and clearing equipment in and around the Strait and to boost surveillance capabilities in the Gulf.

There are also plans to modify weapons systems on ships that are at present vulnerable to Iranian fast-attack boats, many of which carry anti-ship missiles.

Reflecting Pentagon fears that the US could be sucked into a war by the end of the year, the Central Command told Congress that it wanted the new systems in place by the autumn

Consumers turning back to old bad habits? Check.

"US Credit-Card Debt Nearing Toxic Levels" (New York Post)

More American households are falling back into the debt hole — this time without the safety net of home values to help bail them out.

Last year, total US consumer debt reached the highest point in a decade, according to a credit-card industry observer.

“Now more than ever, families need to work at saving and paying off any outstanding debts,” says Howard Dvorkin, a CPA and founder of ConsolidatedCredit.org, a credit counseling service.

He says that, after a few months of reducing credit-card debt levels, Americans are starting to return to their reliance on debt.

“People made some progress in reducing card debt earlier in the year, but in the last few months, as the stock market started to rise, they started to return to their old ways of charging things,” Dvorkin says.

In December, the total consumer debt, which is the combination of non-revolving and revolving debt, rose by some 9.3 percent to $2.498 trillion, according to the latest Federal Reserve Board numbers.

Both revolving debt and non-revolving debt increased. Revolving debt, which is credit-card debt, went up by 4.1 percent. Non-revolving debt, which includes loans for cars and education, rose 11.8 percent, the central bank’s report said.

The trend — month to month, quarter to quarter and year to year — is rising steeply

Yeah, they're right. Things are lookin' reeeaaaalllllllll good.

Going Swimmingly

(Image: source)

Americans are cutting spending on...

pets --

"Dog Owners Seeking Discounts as Petsmart Confronts Bite: Retail" (Bloomberg)

Liz Harper’s dog once dined on bowls of Mars Inc.’s Royal Canin tailored to the Boxer breed and packed with the heart-healthy amino acid L-carnitine. She’d wash it down with Bowser Beer, a dog drink brewed from malt barley and salt-free chicken stock. Today, Billie Holiday has to settle for kibble from the local Target Corp. (TGT) store.

“It’s probably worse than toxic waste, but she loves it,” said Harper, a 36-year-old attorney from Pelham, New York. “It’s cheap and way easier to buy than anything else. She’s a dog -- she eats out of the garbage can and drinks out of the sewer. She doesn’t need organic dog food.”

Harper is among a growing proportion of pet owners who are seeking bargains and shunning more opulent items such as $600 Swarovski crystal dog collars, according to researchers Packaged Facts and Mintel. The $87 billion pet-product market, once deemed recession-proof, is starting to show cracks as owners struggle to make ends meet.

Nearly four out of 10 U.S. pet owners in a September Packaged Facts survey said they’re spending less on pet products, up from 27 percent in February 2010. Three-quarters of them are looking for deals, particularly on non-food items like apparel and toys. The U.S. is the world’s largest pet product market, according to researcher Euromonitor International.

“The totally discretionary stuff is increasingly being cast aside,” said Lee Linthicum, head of food research at Euromonitor. “People still want to spend a fair bit of money on their pets, but they are reevaluating their priorities.” --

health care --

"Americans Cut Down On Checking For Colon Cancer During Recession" (Huffington Post)

The recession pushed many Americans to cut back on a vital service, one that could have cost some their lives.

Americans between the ages of 50 to 64 got 500,000 fewer colonoscopies, or screenings aimed at detecting colon cancer, during the recession, compared to the two years before, according to a recent study from researchers at the University of North Carolina's medical school.

The cut back may have had adverse affects on Americans’ health; another recent study found that removing polyps detected by colonoscopies can cut the risk of dying from colon cancer in half.

The study on the prevalence of screenings during the recession also found that regardless of the economic climate, cost is often a barrier for patients looking to get screened. Patients with out-of-pocket costs that were $300 or more were less likely to get screened then those with costs that were $50 or less, Spencer Dorn, one of the study's authors told the Wall Street Journal, and that gap grew during the recession.

The downturn has pushed many Americans to cut back on health care across the board. High unemployment during the recession and into the recovery has meant that many Americans scaled back on going to the doctor and hospital, either because they don’t have employer-sponsored health insurance or because they have limited funds, according to health companies cited by Dow Jones. --

meat --

"Price Becomes Even Bigger Factor for Meat Shoppers" (Supermarket News)

ORLANDO, Fla. — Price has always played a major role in the consumer's final decision when shopping supermarket meat departments, and that role appears to be growing, according to the seventh annual Power of Meat study, presented here today at the 2012 Annual Meat Conference, a joint production of the American Meat Institute and the Food Marketing Institute.

Most importantly, price per pound solidified its number-one ranking as the most important consumer decision factor, but total package cost is now the second most important factor that shoppers consider, making it more important than product appearance for the first time in the study's history.

“It's all about price. We've got some incredibly savvy consumers out there, and they're really cautious about what they are doing with their dollar today,” noted presenter Micheal Uetz, principal of Chicago-based Midan Marketing.

A large segment of shoppers continue to do “a tremendous amount of planning” both before they get to the store and while they are shopping, in an effort to get the best deals, Uetz said. The recession and the sluggish recovery has honed their shopping skills, and they are now able to dial up or dial down money saving measures quickly. --

and driving --

"U.S. Motorists Drive Fewer Miles in 2011" (Detroit News)

Washington— Americans hit the brakes on travel in 2011, as travel on U.S. roads fell to its lowest level since 2003, government data shows.

Last year, U.S. drivers logged 35.7 billion fewer miles over 2010 — down 1.2 percent — to 2.963 trillion miles, the Federal Highway Administration reported.

That's the fewest number of miles since Americans drove 2.890 trillion miles in 2003.

Stubbornly, high gas prices and an economic slowdown since 2008 have convinced some Americans not to drive as much. --

but other than that, things are going swimmingly for the U.S. consumer.

Yeah, right.

Fantasy vs. Reality

The fantasy they want you to believe:

"Sales of New Homes Dip, but Reports Suggest a Recovery Is Under Way" (Reuters)

New single-family home sales fell in January, but an upward revision to December’s data and a drop in the supply of properties on the market added to growing signs of a budding recovery in the housing sector.

The reality I want you to see:

"The Housing Recovery In One Index" (Streettalk)

The Total Housing Activity Index shown here is a composite of the sales of new and existing homes, new construction permits for single family homes and new single family home starts.  As you can see we are still near the same lows that we were in 2009 at the end of the recession.  Furthermore, and what is really worse, is that the "recovery" was built on the bank of a whole slew of tax payer funded bailouts, tax credits and incentives from HAMP to HARP to the Home Buyer Tax Credit.  Not quite the recovery the government was hoping for.

"AP's Kravitz Plays 'Let's Pretend the New-Home Market Is Recovering' Again" (NewsBusters)

In his Friday report on new-home sales, [Associated Press journalist Derek] Kravitz noted a seasonally adjusted January drop, but trumpeted a minuscule upward adjustment to fourth-quarter sales which was barely more than a rounding error:

New-home sales dip after 4 straight monthly gains
 
Sales of new homes dipped in January but the final quarter of 2011 was stronger than first estimated.
 
The Commerce Department said Friday that new-home sales fell 0.9 percent last month to a seasonally adjusted annual rate of 321,000 homes. That followed four straight months of gains in which home sales rose 10 percent.
 
The gains came after the government upwardly revised October, November and December's figures. December's annual sales pace of 324,000 was the highest in a year.
 
Even with more sales, just 304,000 new homes were sold in 2011 - the fewest on records dating back to 1963. And new homes are selling well below the 700,000-per-year rate that economists equate with healthy markets.
 
Still, the pickup in sales at the end of last year coincides with other improvements in the housing market and should bolster the view that the depressed sector is starting to revive.

[Below] is the raw data which forms the basis for Kravitz's first-paragraph placement of the fourth-quarter revision and its characterization as "stronger than first estimated."

You've got to be kidding me, Derek.
 
A whopping 2,000 more homes were sold in December (because of rounding, it could be anywhere from about 1,000 to about 3,000 more).
 
This is supposed to indicate that the industry is "starting to revive"? If Kravitz thinks that 23,000 is "stronger," he must want us to believe that original 21,000 was "strong."

"Measuring Housing’s Drag on the Economy" (Economix)

[A new paper presented Friday at a monetary policy conference in New York] says, “more than half the underperformance in this recovery is associated with housing-related sectors.”

Yes, that's right. Housing is more than half of our problem.

The details by now are probably familiar: The crash in housing prices erased a vast amount of wealth and, perhaps even more importantly, it severely restricted borrowing power. Many people are unable to refinance and unable to tap the value of their homes to finance consumption or investments.

In other words, the housing crash not only caused the crisis, it is impeding the recovery – it is interfering with the Federal Reserve’s easy-money aid campaign, which aims to promote growth by encouraging new borrowing.
 
“Housing problems have both offset the stimulative impact of easy monetary policy and have impaired the link between policy and the economy,” says the paper by Michael E. Feroli, a J.P. Morgan economist, and three collaborators.

The paper offers a striking way of thinking about the depth of this housing problem. It calculates that at the end of 2010, the total value of American homes exceeded demand by about 9 percent, or about $1.5 trillion.

"Warren Buffett: Housing Remains In a Depression" (Deal Journal)

Warren Buffett says the economy is improving from the devastation of the financial collapse, but that the housing world remains “in the emergency room.”

Buffett’s annual letter to shareholders Saturday spends a good deal of time self-deprecating his previous calls, as he is wont to do. He now says his statement last year that a “housing recovery will probably begin within a year or so,” was in fact “dead wrong.”

The businesses his Berkshire Hathaway empire owns that are tied to housing–including a brick maker, a pre-fabricated home builder and a building products company–reported similar pre-tax profits to last year, but less than a third of what they reported in 2006.

“This hugely important sector of the economy, which includes not only construction but everything that feeds off of it, remains in a depression of its own,” Buffett writes. “I believe this is the major reason a recovery in employment has so severely lagged the steady and substantial comeback we have seen in almost all other sectors of our economy.”

All Over Again

(Image: source)

Call me cynic, but it's hard to see this as a good thing:

"Junk ETFs Draw Most Cash on Record as High-Yield Hunt Speeds Up" (Bloomberg)

Exchange-traded funds for speculative-grade bonds are drawing the biggest inflows on record from investors seeking easier access to higher-yielding assets.
 
ETFs that track junk-bond indexes have tapped $5.5 billion of investments in the securities this year, according to data from Lipper. That almost quadruples the $1.4 billion recorded during the same period of 2011, which was then the highest since the fund research firm started tracking junk ETF data in 2007.
 
While exchange-traded funds comprise 2 percent of the $1 trillion in U.S. corporate speculative-grade debt outstanding, they accounted for more than a third of the total $14.8 billion of inflows this year into mutual funds and ETFs that buy junk bonds. With the Federal Reserve pledging to hold its benchmark interest rate near zero until at least late 2014, investors are seeking better returns, said Peter Tchir, founder of New York- based hedge fund TF Market Advisors.
 
"ETFs are giving people a fair degree of comfort, providing them with daily transparency and the ability to see a trade in and out, and asking for relatively low fees," Tchir said. The funds allow individual investors to speculate on debt ranked below investment grade without owning the bonds, which is stoking more flows into ETFs.

In fact, it's looking more and more like 2007 all over again.

Got those crash helmets ready?

Certain About Nothing

In "US Corporates Shy to Offer Guidance," the Financial Times reports that those who are at the economy's front lines have a less than clear vision of where things are headed:

US companies are more uncertain about the future than at any point since the financial crisis, with just one in five of the country’s biggest corporations making any predictions as they published fourth-quarter results.

“We’re seeing a marked reluctance from companies to be concrete in their forecasts,” said Christine Short at data provider Standard & Poor’s Capital IQ. “When companies have talked about prospects for 2012, they have tended to make generic comments, which could apply to any company in any sector.”

Some 410 companies in the S&P 500 index have reported results so far and just 86 of them offered an earnings per share forecast for the first quarter of 2012. That is on track to be the lowest number since the third quarter of 2009, when companies were still weighing up the impact of the financial crisis.

And yet, those whose view of reality comes largely by way of Excel spreadsheets, Bubblevision, and Wall Street watering holes appear to be exceptionally confident about the outlook, as Business Insider reveals in "All Of The Stock Market Sentiment Indicators Combined Into One Index" [italics mine]:

There are various measures of sentiment that stock market watchers follow. RBC [Capital] blended six of the biggest ones to form one comprehensive market sentiment indicator.  It consists of the 1) CBOE put-to-call ratio, which is currently neutral; 2) the American Association of Individual Investors Bull ratio, which is bullish; 3) the Investors Intelligence Bullish Ratios, which is neutral; 4) the National Association of Active Investment Managers Survey of Manager Sentiment, which reflects extreme optimism; 5) the NYSE New High to New Low ratio, which reflects extreme bullishness and 5) the CBOE Volatility Index, which is neutral relative to long run averages.
 
According to RBC's aggregation of the sentiment readings, the stock markets reflect extreme optimism.

Of course, they don't call that latter group the "smart money" for nothing -- right?

Off in the Distance

If history is any guide, then the following chart from the 2012 Economic Report of the President suggests that any recovery in housing prices, contrary to what Wall Street is saying, is at least 15 to 30 months away [dotted line annotations mine].

Of course, that doesn't even take into account the unprecedented scale of the bubble that preceded the current bust, as well as supply-and-demand fundamentals that remain largely negative (not to mention the fact that when bubbles burst, they tend to overshoot on the downside).

One Ugly Picture, a Few Sad Words

The long-term unemployment problem, courtesy of Business Insider:

In pictures --

and in words --

Veronica Orozco has been unemployed since June, 2007

Veronica Orozco

Nearly five years gao, Orozco was working as a full-time civil engineer in Chicago when she had to go to the emergency room to get her gallbladder removed.

When she returned to work two weeks later, her employers told her business was slow and that they didn't have any projects for her at the moment.

They told her to call back in two weeks and when she did, she received the same answer. During this time, she was paid a stipend, but not a full paycheck and was having a difficult time paying her bills. This happened for six months before Orozco decided to apply for unemployment.

Orozco, 30, has two young daughters and a husband who's currently in school. She makes most the income in her family and needed to get back to work as quick as possible, so she sent out applications for any positions in any field, including Walmart postings. She quickly realized getting another job would be a lot more difficult than she thought.

"The problem is that people don't want to hire people who are unemployed. And it's definitely more who you know, not what you know," Orozco said. "I have to hope that eventually I'll be able to find work again."

The family has had to cut out expenses such as cable or going to Whole Foods for their groceries. Orzoco is still actively applying for a job that will bring in a steady income and is planning on returning to school in the summer of 2012.

But stocks are going up, so that's all that matters, right?

Not the Whole Story

Not surprisingly, there was plenty of hoopla over today's larger-than-expected drop in first-time applications for unemployment insurance compensation.

"U.S. Jobless Claims Drop Points to Spending Gains" (Bloomberg)

Americans filed the fewest claims for jobless benefits since 2008, surprising forecasters and signaling that an improving labor market will give the world’s largest economy a boost.

Claims dropped by 13,000 in the week ended Feb. 11 to 348,000, less than the most optimistic estimate of 45 economists surveyed by Bloomberg News. Other reports today showed consumer confidence improved, housing starts climbed and manufacturing in the Philadelphia area accelerated.

Stocks rose on evidence that the U.S. expansion is gaining strength in the face of the European crisis and a slowdown in China. The decline in claims for jobless benefits coincides with a pickup in hiring that pushed the unemployment rate down to a three-year low last month, giving consumers the confidence to increase spending.

Unfortunately, the initial claims data doesn't tell the whole story. While weekly tallies of first-time applicants for unemployment benefits have drifted back towards the lower end of their historical range, those figures do not include Americans who have been out of work for more than a week. If you take the sum total of initial, continuing, extended, and emergency claims -- which runs the gamut of insurance programs for the unemployed - it remains more than 70% above the high end of the range that prevailed during the past two-and-a-half decades.

So, while the number of newly unemployed workers is considerably less than it was, the number of Americans who are jobless and collecting benefits remains far above the levels that have been seen in the past, including during periods when the U.S. has been in recession.

But as usual, Wall Street must know better -- right? Otherwise, why else would they keep buying stocks?

Anybody Left to Buy (Technology Stocks)?

While at least some market-watchers will view today's key reversal (on extremely heavy volume) in technology bellwether Apple as a potential turning point for the sector, which has been on an incredible tear in recent weeks, there's no shortage of data suggesting that enthusiasm for the group has reached historically untenable extremes.

For example, based on figures derived from the Commodity Futures Trading Commission's weekly Commitments of Traders report, traders categorized as "speculators" by the CFTC (including hedge funds) now have a record net-long position in futures on the technology-laden NASDAQ-100 index.

The obvious question, of course, is if a large chunk of the speculative crowd has already placed its bets on higher prices, who is left to buy?

Retail Sales: A Leading Indicator for the Jobs Market?

If recent history is any guide, a notable deceleration in the pace of U.S. retail spending following a period of strong gains signals trouble ahead for the jobs market.

As the chart shows, each time that monthly retail sales growth has risen above 8.5 percent and subsequently reversed course (by roughly two percentage points or so), the turnaround has preceded a peak in year-on-year increases in total nonfarm payrolls.

Whether it reflects the fact that people are quick to rein in spending when they sense trouble brewing at work (or in the economy as a whole), or are having a harder time finding a job than previously, is not clear, but it makes intuitive sense that spending shifts would become evident before companies begin the difficult process of freezing or slashing head counts.

Of course, correlation is not causation, and two decades worth of monthly data is not what some would consider sufficient for a rigorous analysis. Nonetheless, it may be another reason not to take today's "unexpectedly" weak retail sales report, or the less-than-robust data reported in last year's final two months, too lightly.

The Washington Clown Show

Based on the President's public pronouncements, things look to be getting better by the day:

"We've got an economy that is showing some positive signs. We've seen many consecutive months of private sector job growth." (12/23/11)

"We’re moving in the right direction. We have made real progress. Now is not the time to stop." (1/6/12)

"The economy is growing stronger.  The recovery is speeding up." (2/3/12)

"We are seeing signs that our economy is on the mend." (2/13/12)

But is that what he really thinks?

"Privately, Obama Sees Recovery 1-2 Years Off" (Washington Examiner)

The public President Obama, bubbly in his reelection campaigning about a recovering U.S. economy, isn’t as optimistic in private, telling a select few that it will likely take up to two years for any recovery to click in.

A letter provided to Washington Secrets from Obama to a long-unemployed Portland, Maine carpenter pulls back the curtain of economic hope to reveal the truth about the stagnant economy. “I won’t lie to you,” Obama penned in hand to Charles Oliver in October. “It will probably take another year or two to fully dig our way out of this hole.”

Oliver had written the president in June to ask: “Are we as Americans going to be alright?” Answered Obama, “Yes, we will be ok. Because America has gotten through tough times before, and because of good people like you.”

While happy for the response, Oliver told us that he hasn’t seen any of the recovery the president and media have been heralding. “He’s out campaigning saying everything is coming up roses. He’s a lying SOB,” Oliver said of Obama, who has tried to temper his hopefulness with cautions that the recovery could hit speed bumps.

Surely, I can't be the only one who believes it is better for all Americans to hear the truth, so that we know exactly what we're dealing with (and how best to address it)?

Jeez, what a clown show.

Trickle-Up Austerity

In the good old days before the financial crisis struck, trickle-down prosperity was the rage. But in today's new normal, as My Budget 360 reminds us in "United States of Dollar Stores," it's more a matter of what one might call "trickle-up austerity."

The fastest growing segment of dollar store customers are coming from those making $70,000 a year or more.  In fact, 1 out of 5 dollar store shoppers come from this group.  Keep in mind the median household income in the US is $50,000 and those that make $70,000 a year or more are in the top 35 percent of households.

...

The rise of the dollar store goes hand and hand with the loss of the middle class in America.  The largest customers at dollar stores are still those with lower incomes, households making $40,000 a year or less make up nearly half the customer base.  But when this pool continues to grow you have business growth and that is what we are seeing here.  The average per capita income in the US is $25,000 which doesn’t go far given the cost of healthcare, energy, and education.

It is also fascinating to see that 40 to 45 percent of dollar store items now come from big name brand companies.  This industry is now a multi-billion dollar industry.  I’ve driven around and see Subway and KFC for example now having marketing material showing “EBT accepted here” and dollar stores with a large and growing segment of their aisles made up of by food, are seeing a boon in this economy.  I mean think about it with 45,000,000+ Americans receiving food assistance this is a large customer base.  You also have many retirees who heavily rely only on Social Security stretching their declining buying power at these stores.  Even with low profit margins business can be good.  Not sure if we should be thrilled that dollar stores are one business segment that is booming in our modern day economy.

Click here to read the rest.

Anything But Normal

In "Lack of Lending to Creditworthy Borrowers Restricting Housing: Bernanke," HousingWire details remarks from the Fed Chairman on the state of the U.S. mortgage finance market.

Mortgage originators who are reluctant to extend credit to potential borrowers who meet underwriting standards set by Fannie Mae and Freddie Mac are hindering the nation's economic turnaround.

Fed Chairman Ben Bernanke, speaking Friday at the International Builders Show in Orlando, Fla., said the wave of creditworthy households that are finding it difficult to obtain mortgage credit or to refinance is resulting in actions taken by the Federal Reserve — such as lowering interest rates to record lows — is helping to prevent a boost to the housing industry.

Fewer than half of lenders are offering mortgages to borrowers with a FICO score of less than 620 and a down payment of 10%, even though such loans are within the government-sponsored enterprises' purchase parameters.

Bernanke referrenced a number of possibilities that could explain the reluctance.

He said that because borrowers are unable to obtain private mortgage insurance required by the GSEs, the weakened finances of private mortgage insurers could be damping mortgage credit availability for some potential borrowers. In other cases, lenders may be concerned about high servicing costs if mortgages become delinquent.

Another set of concerns relates to representations and warranties, which are contractual commitments by an originator concerning the quality of the loan.

The contracts are designed to protect the GSEs or other purchasers of loans, but originators appear uncertain about how they will be enforced going forward and thus have been very cautious about making loans that could be viewed as less than perfect from an underwriting perspective.

If Mr. Bernanke's explanations are correct, that would suggest a key part of the U.S. financial system remains broken, putting paid to the notion set forth by Treasury Secretary Timothy Geithner (and others) that things are returning to normal.

Then again, there could be another explanation. Since interest rates represent the price of money and mortgage rates are near all-time lows, wouldn't that indicate that the supply of loanable funds, including mortgages, far exceeds the demand? Based on the laws of economics -- which I'm sure Mr. Bernanke is well aware of -- wouldn't that imply that qualified borrowers should have no problem getting a loan?

Unless, of course, you have a situation akin to that which exists in dysfunctional third world countries, where the "official" rates tend to be far different than those found in the shadow, or "black," economy. That, too, would indicate that current conditions are anything but normal (if history is any guide). It also suggests that that those who are relying on official statistics to assess the health of the economy may be making a serious mistake.

Either way, it's hard to see how the current situation could be seen in anything other than a negative light, no matter how hard you spin it.