May - 2009 Economic Brief

(Part one of two)
The U.S. equity market is in the midst of the strongest rally, the Dow has now rallied a whopping 28 percent from its March low.

That's the biggest, most powerful rally in the Dow in 76 years — since its Great Depression low in 1933!

You might think that we entered a new bull market because corporate earnings are better than expected, but less bad than expected is still bad. But still, you think that things are not that bad, for example:

Consumer confidence climbs to highest level since November
Consumer confidence in the U.S. exceeded the predictions of economists in April, the Conference Board reported. The Consumer Confidence Index, a widely followed benchmark of how consumers feel about the economy, reached its highest level since November. Google/The Associated Press (28 Apr.)

According to The Big Picture blog, the only times we have ever seen the stock market surge close to this much in such a short time frame were:
• December 1929
• June 1931
• August 1932
• May 1933
• July 1938
• September 1982

Given the extensive parallels we and others have pointed out between circumstances then and now, one would think it would be natural to assume that the worst is behind us, and like that last rally, on September of 1982, that we are at the beginnings of a new bull market, but you would be wrong; because there is too much effort and money being thrown around for you to be right!

It’s a new ball game, confidence is at issue. Even at the G-20 summit in London acknowledged this when they called for an additional $1.1 trillion in loans for a new global Financial Stability Board to regulate hedge funds so that now we can know, for the first time, ~ that “The era of banking secrecy is over”.

Small comfort when you realize that they failed to address $684 TRILLION in dangerous derivatives worldwide plus tens of trillions of debt still likely to go bad; and for this reason, the government has maintained that it must continue to prop up the former insurance giant American International Group (AIG) because allowing the company to fail would result in a cascade of counterparty losses that would cause the entire system to collapse. This doesn’t look good.

And neither does this proxy statement.

 Proxy statement: AIG chief a major Goldman shareholder
A recent Goldman Sachs proxy statement shows that American International Group CEO Edward M. Liddy owns 18,244 units of restricted Goldman stock, which would have a value of about $2.2 million if they could be sold today. This potential conflict of interest could raise more questions from Congress and taxpayers about AIG's relationship with Goldman, which benefited from AIG's government bailout. The New York Times (16 Apr.)

All this good market news is happening, yet, is it rational? What’s really happening out there?

 U.S. industrial production fell 1.5% in March, down to as little as half of the peak production levels and has dropped by 13.3 percent since the recession began in December 2007. That's the largest percentage decline since the end of World War II. During the first quarter of 2009, annualized industrial output fell a staggering 20 percent.

 Capacity utilization at factories plunged to a record low, the lowest level in the 42 years the government has been keeping track!

 Globally, $50 TRILLION in net worth has vanished in the past 18 months alone. This includes more than $37 trillion in LOST stock market value worldwide, plus a sharp and ongoing plunge in real estate values both at home and abroad. For the full year, household wealth dropped $11.1 trillion, or about 18 percent. That's the largest decline EVER recorded.

 Thus sending the global economy into its first contraction — a drop of 1.7 percent — for the first time since World War II.

 The U.S. economy contracted by 6.1% in the first quarter. Between last November and the end of March, the economy shriveled more than in any six-month period in over 50 years.

 The International Monetary Fund (IMF) believes we've only acknowledged $1.29 trillion of the $4 trillion in total global credit losses to date. That means we're not even a THIRD of the way through the process.

 The COMMERCIAL real estate business is in full-scale meltdown mode. Wall Street Journal ran a story called "Commercial Property Faces Crisis." It reported default rates on $700 billion of commercial mortgage-backed securities could hit 50%, and noted that as many as 700 banks could fail as property loans go sour.

 U.S. consumers cut back their spending in March but yes, it was "up" in March. But by a lousy 0.7 points. The reading of 26 was worse than economists were expecting and the second-worst reading (after February) in the index's 42-year history.

 U.S. job losses total 742,000 for March

 The pace of job losses is worse now than in the past five recessions going back to July of ’74... This makes the total jobs lost in the first quarter of the year nearly 2 million. By comparison, a total of just over 3 million jobs were lost all of last year.

 This pushed the unemployment rate to 8.5%, the highest reading since late 1983. But it's really a lot worse.

- It excludes workers seeking full-time jobs, failing to find them, and then accepting part-time work that almost invariably pays far less.

- It excludes discouraged workers who have given up looking for jobs because they can't find any.

 The World Bank's Vikram Nehru, the World Bank's chief economist for its East Asia region, cautioned:

"We are still in the middle of a perfect storm. For example over the last four months things have gone from bad to worse in many of the advanced economies."

 Retail sales plunged 1.1 percent in March. That was a huge swing from the 0.3 percent gain in February, and much worse than forecast. Down a disturbing 10.6 percent from March 2008.

 Declines in the Consumer Price Index of 1.6% in February and 1.2% in March reveal fundamental weakness in consumer demand.

 For the 12-month period ending in March, prices for consumer goods dropped 0.4 percent. That's the first 12-month bout of deflation in 44 years! Medical care costs rose yet again during the month of March, bucking the overall trend. And while food prices dipped 0.1 percent, they were UP 4.3 percent during the rolling 12-month period.

 On a year-over-year basis, wholesale prices are now falling at a 3.5 percent rate. That's the deepest rate of deflation recorded in this country since January 1950! In addition, consumer-level deflation came in at 0.4 percent, the most since 1955.

 Japan has reported that auto exports to the U.S. are down more than 66 percent.

 House prices in U.S. continue rapid decline
Suggesting that the U.S. recession has not yet bottomed out, home prices fell in January at a record pace, according to the S&P/Case Shiller index. On average, houses nationwide have lost almost a third of their value from the 2006 peak. Reuters (31 Mar.)

- 7 percent of homeowners with mortgages were at least 30 days late on their loans in February, an increase of more than 50 percent from a year earlier.

- 39.8 percent of subprime borrowers were at least 30 days behind on their home mortgage loans, up 23.7 percent from last year.

 Moody's said many cities, counties and school districts face the risk of downgrade in the coming months. The New York Times (07 Apr.)

 Moody's downgrades Berkshire Hathaway to Aa2

 More companies cut dividends in the first quarter of 2009 than since 1955, when Standard & Poor’s began tracking dividends.

 1 in 10 Americans receiving food stamps
Showing the recession's impact, 10% of Americans -- 32.2 million people -- received food stamps in January, setting another record, according to the Agriculture Department.

 The quality of the balance sheet of the U.S. central bank is deteriorating.

- And the Fed banks are holding total capital of just $45.7 billion against the sum total of $2.19 trillion in assets, meaning the Fed is leveraging its capital 48-to-1. That compares to only 27-to-1 two years ago.

 This week, software giant Microsoft reported its first quarterly sales drop since it went public in 1986. It was one of the greatest unbroken strings of profit growth in history.

 Six of the nation's ten largest banks are currently at risk of failure, including JPMorgan Chase, Goldman Sachs, Citibank, Wells Fargo, Sun Trust Bank, and HSBC Bank USA.

 These banks in trouble are the biggest, controlling 63 percent of the assets of the nation's 19 largest banks.



You can see the extremes quite clearly, the 1929 extreme high was above the upper trend line, and the bottom that followed in the early 1930s touched the lower boundary.

The last time this lower boundary was reached happened during the early 1980s, at the end of the secular bear market that began in the mid-1960s ... 15 years before.

Cheers! See Part two of two

Is the US Government “for the people”?

Is the economy based on the irrational assumption that the economy won’t get as bad as it already is?