The Stock Market is Up!

theCL  2009-05-05  Economic, Op-Ed

"It's pretty clear that the worst is over for the economy right now," says Steve Massocca, of Wedbush Morgan Securities.

Sweet! Stocks are now up over 30% off their lows, and all the pundits agree ... the BULL MARKET is back!  Sing it with me now ... Yahoo!

Celebrate good times,come on! (Let's celebrate)
Celebrate good times, come on! (Let's celebrate)

There's a party goin' on right here
A celebration to last throughout the years
So bring your good times, and your laughter too
We gonna celebrate your party with you

WARNING: Never take financial advice from a pundit.  Why?  Because market punditry/opinion is a lagging indicator, not a leading one. They're good at telling you happened, but not at telling you what will happen.  But, you say, "You've been a bear all along, and the market's up huge!  Shouldn't you be telling us it's safe to get back in the market?" Nope.

A little perspective:

Dow Jones Industrial Average
October 9, 2007 - 14,164
May 4, 2008 -         8,426

As the late Bon Scott would say, "it's a long way to the top if you want to rock n' roll."

Sorry to bring you such doom and gloom.  I know we're supposed to stay "positive" about the economy and everything.  It's just personally, I'd rather see you hang on to your wealth then give you a Tony Robbins pep talk.  This is not your average recession.

Let's take a look at 3 important factors - unemployment, housing, and inflation.  I'll try to keep it each brief as possible.

Unemployment:

great-depression-photoUnemployment is another lagging indicator. In the first quarter of 2009, more than 2 million jobs were lost, driving the unemployment rate up to 8.5%, which is the highest since November 1983. During March of this year, the unemployment rate went up in 46 states, with California (the 8th largest economy in the world) hitting 11.2%, and Michigan (home of the auto industry) climbing to 13.4%.

According to Deutsche Bank, wages and salaries shrank at a 4% annual rate during the quarter, and Treasury receipts from payroll tax-withholding is down 8.2% from a year ago. Even temporary work is declining. In March, employers cut 71,700 temporary jobs.

This tells us personal income growth will continue to remain weak, resulting in reduced savings, reduced purchasing, and a weaker economy ahead. Another concern from the income data gives are loan delinquency rates.  According to the American Bankers Association (ABA), 3.22% of consumer loans were delinquent at the end of 2008, the highest level recorded since the ABA began tracking delinquencies back in the 1970's. And take note, that was before more than 2 million jobs were lost last quarter.

Bankruptcy filings, primarily driven by job losses, are increasing too. In March, an average of 5,945 bankruptcies were filed each day, up 9% from February, and up 38% from March 2008. Also, data from RealtyTrac tells us job losses result in a home foreclosure 10-15% of the time. So, even if job losses shrink during the rest of the year to half the first quarters monthly average, we're still looking at another 301,000 to 452,000 foreclosures coupled with an unemployment rate of over 11%!

More and more middle and upper middle income workers are losing their jobs too. These are the folks generally considered prime borrowers and hold 2/3rds of the mortgages in the U.S. The ABA reports that 5.06% of these prime borrowers have missed at least one mortgage payment, meaning 1.8 million prime mortgages are in default.  And we haven't even included the subprimes.

Housing:

A little secret nobody seems to be talking about, is the crisis coming via the Federal Housing Authority (FHA).  In reality, FHA loans are subprime loans. If you have a low income, poor credit, and/or no down-payment, then FHA is the mortgage for you! Built into these loans are high up-front costs (usually hidden by sales concessions and/or down-payment assistance), as well as paying higher yield spreads to the banker (often resulting in shadier deals). But here's the real kicker ... they carry a 100% taxpayer guarantee!

FHA now insures almost 1/3rd of new mortgages today, up from only 2% in 2006, and according to The Wall Street Journal:

Nearly 10.2% of borrowers who took out FHA-backed loans in the first quarter of 2008 had missed at least two consecutive monthly payments within the first 10 months ...

About 12.3% of loans made in 2007 were seriously delinquent -- 90 days or more late -- in February 2009, for example, including 4% that were in foreclosure or bankruptcy. The 2007 delinquencies helped to boost the overall delinquency rate on FHA-backed loans in February 2009 to 7.46% from 6.16% a year earlier.

Created during the Great Depression, FHA was supposed to help first-time homebuyers, and people with moderate-incomes purchase a home. But when the subprime market became more competitive, banks stopped writing FHA loans.

Congress and the Bush Administration decided they needed to increase FHA's business and the housing market as a whole, so they increased the maximum loan amounts and softened the underwriting standards in an effort to boost them both. The maximum loan available to "first-time homebuyers and people with moderate incomes" today, is a whopping $719,000!

That sure is much more than a starter-home or even "McMansion" in my neck of the woods ...

250-million-dollarsInflation:

The federal government is on a "stimulus" binge, spending money that even your great grandchildren have yet to earn.  The first problem with this "stimulus," is simply that It Won't Work! The second problem is the cost we'll all pay (dearly) for it - inflation.

As our previous data has shown, the trillions printed by the Federal Reserve and pumped into the banking system hasn't resulted in an increase in economic activity. This is because money is only a means of exchange. Its main function is to make trade between ourselves easier. Arbitrarily printing more of it to spend cannot increase real savings or create real economic growth.

Real economic growth is made possible by production. This is the same whether you are an individual, family, business, or government. Production creates income, which in turn increases real savings. Higher savings rates result in more capital being made available for investments in improved production infrastructure (tools, machinery, etc.). This improved infrastructure brings us both better quality, and a greater quantity of goods and services, thus creating more and more jobs.

Unfortunately, the Washington Establishment has decided against this common sense law of economics, and chose to inflate (devalue) the currency instead, weakening the flow of real savings, and sabotaging any real prospect of a sustained recovery.

We are going to see inflation levels not seen in our lifetimes, and we may start to experience it by the end of this year.  Also, hyper-inflation is a real possibility. If hyper-inflation hits, our dollars will be worth more as toilet-paper than they are as money, substantially disrupting the normal flow of commerce, and turn what is now (really) a depression, into another Great Depression.

Summary:

History is littered with dead paper currencies. Every single time, the central bank (or government) prints too much money trying to buy votes and/or pay for things it doesn't have the money for otherwise.  This diminishes the value of the dollar until eventually, it ends in disaster. This time is no different.

The U.S. Dollar is going to cease being the world's reserve currency, especially considering that Russia and China have already called for a new world reserve currency. Add to that Putin backing a return to the gold standard, and China "canceling America's credit card," and you don't have to be an economist to see where things are heading.

It's critical that you start taking precaution now! Buy gold bullion, gold stocks, and move your assets out of the country (perhaps Canada).  When things start getting really bad, start buying assets that would be most important to the government, such as energy, communication, and transportation. We can look at each of these things individually in the future, but for now, don't panic, just make sure you start taking this stuff seriously!

 

[adsense]

 

Wait, Just In! Pelosi Wants $94.2 Billion More For Emergency Spending!

 

chicago-tribune-1934

There are no comments for this post.

Comments are closed.

Leave a Comment