Friday, September 15, 2006

Evidence Mounts of Strong Recovery??

Mainstream media has provided lots of positive economic articles over the past few weeks. The following is a front page article in the Wall Street Journal this morning.

Evidence Mounts Of Strong Recovery

Shoppers turned up in surprising force at U.S. stores, auto dealers, restaurants and elsewhere in March, adding to a growing sense that the recovery could prove faster than anticipated.

Combined with a rebounding service sector, rising financial markets and new efforts to forgive mortgage debts, March's 1.6% surge in retail sales is tempting forecasters to upgrade their assessments of the economy's ability to restore the 8.2 million U.S. jobs lost since the recession began.

The renewed consumer and business activity also helped propel J.P. Morgan Chase & Co. to a 55% profit gain in the first quarter, increasing optimism among investors that banks, too, are rebounding from the crisis that floored the industry.

"There's a growing risk that we're underestimating the strength of the recovery," said Stephen Stanley, chief economist at Pierpont Securities, noting that deep recessions tend to be followed by steeper recoveries. "If the economy pops, it's going to be faster than anyone is forecasting."

What is the truth? Can you have an economic recovery in this system if lending and our money supply continues to contract? Can you have economic recovery if unemployment continues to rise? Can you have economic recovery if $8+ million Americans have lost their jobs during this recession with little chance of finding a new job anytime soon?

I assure you – you cannot.

We see this in the housing market.

March Foreclosures Surge To Absolute Record, At 369,491, 19% Jump from February

April 15, 2010

RealtyTrac reports the next catalyst that will surely take the Dow to 12,000 by 9:31 am tomorrow. "Foreclosure filings were reported on 367,056 properties in March, an increase of nearly 19 percent from the previous month, an increase of nearly 8 percent from March 2009 and the highest monthly total since RealtyTrac began issuing its report in January 2005." And people were wondering where consumers get all their money from. Of course, those foreclosed upon have likely figured out ways to continue squatting in their house so they dont have to pay mortgage and rent.

We continue to see this in unemployment data.

Jobless Claims Rise for Second Straight Week

Wall St. Journal

April 15, 2010

WASHINGTON—The number of workers filing new claims for jobless benefits surged last week despite expectations of a drop, but a Labor Department economist blamed the increase on technical factors and not on rising layoffs.

The Labor Department said in its weekly report Thursday that initial claims for jobless benefits rose by 24,000 to 484,000 in the week ended April 10.

The previous week's level was left unrevised at 460,000. Economists surveyed by Dow Jones Newswires expected initial claims to decrease by 15,000. This marks the second straight week of increases in initial claims. Last time the increase was blamed largely on the Easter holiday and other seasonal factors. A Labor Department economist said Thursday that this latest rise can also be pegged to lag effects from the spring holidays including Easter and Cesar Chavez Day, which is celebrated in worker-heavy California.

Labor Department ‘economists’ can make all the excuses they want (Cesar Chavez day – are you kidding me?) – the truth is that we are not in a recovery. Our economy continues to deteriorate.

Many people that are paying attention now believe that the recent increase in consumer spending is due primarily to many consumers no longer paying their mortgage. What did Bank of America say last week? They expect foreclosures to increase significantly over the next year. Housing sales and prices continue to decline – there’s no way for housing to recover quickly with so many foreclosures on the market.

Big banks and Wall Street may be enjoying profits at the expense of American taxpayers – but small businesses continue to struggle. Who provides the majority of jobs in the U.S. – that would be small businesses.

Optimism at Small Businesses Falls

Wall St. Journal

Economists may be debating when the recession ended, but small business owners report little pick up in their sales or confidence in March, according to a report released Tuesday. The weak readings explain why small businesses remain reluctant to hire.

The Small Business Optimism Index lost 1.2 points to 86.8 in March, said the National Federation of Independent Business.

The NFIB noted that nine of the 10 components declined or failed to contribute to an increase in the top-line index. The lone improvement came in the subindex covering expected business conditions. It rose 1 percentage point to -8%.

The report said 34% of respondents said “weak sales” were their top business problem. The subindex on earnings trends fell 4 points to 43%, and sales expectations subindex dropped 3 points to -3% in March.

The lack of revenue may be holding back job growth. The March employment index fell 1 point to -2%. The NFIB said businesses may be finished with layoffs, but companies will only add workers if owners think “new hires can generate enough additional business to pay their way.”

Earlier in April, payroll giant ADP reported that its jobs survey showed small businesses — with 49 or fewer employees — cut 12,000 jobs in March.

A New York Times poll reported this morning that 77% of Americans believe the economy is ‘fairly bad’ or ‘very bad’. You can try – but you can’t hide the truth.

So – what is the real purpose of all of this positive media spin?

I believe we’re being conditioned for a couple of things. Whatever the ‘event’ is that finally triggers a collapse (stock market crash, sovereign debt default – see Greece, etc.) – our financial and political leaders will say that they did everything they could to help us get back on track. If this ‘event’ had not happened – our economy would be A-OK. Disregard the fact that our monetary system will have caused the ‘event’.

I believe that the other possible reason for all of the positive spin is so the Federal Reserve (and other Central Banks throughout the world) can justify raising interest rates. As you’ve seen me say before – if something else hasn’t already caused a collapse – raising interest rates on a heavily indebted world will certainly be the final nail in the coffin.

There is a very deceptive game being played here – and few can see it.

The following is another very well written and researched article by Chris Martenson that examines many of the contradictions we’re seeing within government economic data.

jg – April 15, 2010

Irreconcilable Differences

Wednesday, April 14, 2010, 5:35 pm, by cmartenson

I may have to get a divorce from the news, nothing adds up anymore.

For example, even as the stock market surges along, as one might expect at the tail end of trillions in stimulus and bailouts, and retail sales apparently roared ahead in March according to the Commerce Department, small businesses are as gloomy as they've ever been.

I really do have a difficult time trying to understand the source of the disconnect between these entirely divergent reports:

Retail sales surge in March

NEW YORK ( -- Retail sales soared in March, the government said Wednesday, in the latest sign of improving consumer confidence.

The Commerce Department said total retail sales jumped 1.6% last month, the largest monthly increase since November, from an upwardly revised 0.5% gain in February.

Peering into these excellent results a bit deeper, we find many sources of strength:

Thomson Reuters, which tracks monthly same-store sales for 30 chains including Costco and Target said last week that chain stores posted the biggest single monthly sales gain on record in March, extending a run of seven straight monthly increases.

It would appear, then, that the consumer is back and that we're all but out of the woods.

Then how come nobody invited small businesses to the party? Look at this dismal survey of small businesses, comprising 50% of GDP and over 60% of hiring, for the same month of March.

Small Business Optimism Declines in March

WASHINGTON, April 13, 2010 – The National Federation of Independent Business Index of Small Business Optimism lost 1.2 points in March, falling to 86.8. The persistence of index readings below 90 is unprecedented in survey history.

“The March reading is very low and headed in the wrong direction,” said Bill Dunkelberg, NFIB chief economist. “Something isn’t sitting well with small business owners. Poor sales and uncertainty continue to overwhelm any other good news about the economy.”

The index has posted 18 consecutive monthly readings below 90. In March, nine of the 10 Index components fell or were unchanged from February’s not-so-great readings.

This is a very sour report and does not reconcile well with the idea of surging sales and seven straight months of increasing consumer activity. Even more to the point, the report continues with some dire specifics about the state of retail affairs for small businesses.

Sales and Inventories

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months improved 1 point to a net negative 25 percent.

Widespread price cutting continued to contribute to reports of lower nominal sales. The net percent of owners expecting real sales gains lost three points, falling to a net negative 3 percent of all owners, seasonally adjusted.

Small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stock. A net negative 18 percent of all owners reported gains in inventories (more firms cut stocks than added to them, seasonally adjusted), 10 points better than December’s record reading but unchanged from February.

Widespread price cutting and negative sales? Continued liquidation of inventory stock? These are not even remotely consistent with the retail reports coming out of the government right now. Something doesn't add up.

But wait, the disconnect gets worse. According to the retail data supplied by the government not only are sales up seven months in a row, they are up a hefty 7.6% on a yr/yr basis. That's huge.

The only problem is, somebody forgot to tell the retailers to collect and remit sales tax on those purchases to the states in which they are operating.

Texas sales tax revenue down 7.8 percent in March

April 7, 2010

Texas sales tax collections were down 7.8 percent in March, compared with the same month a year ago.

Texas Comptroller Susan Combs said Wednesday that the state collected $1.46 billion in sales tax revenue in March. Although that's down, she said collections continue to moderate for the second month in a row.

How are we supposed to reconcile a 7.6% surge with a 7.8% decline? Oh well, Texas is just one out of 50 states, albeit a big one, so perhaps their experience is highly unusual?

New Jersey Taxes $250 Million Behind Christie Plan

April 6 (Bloomberg) -- New Jersey will get about $250 million less revenue than Governor Chris Christie projected for this fiscal year and next because of lagging retail sales taxes, according to a copy of a legislative analyst’s report provided by a person who received it before its release.

Okay, so New Jersey is in the same boat but good state-by-state sales tax receipt data is hard to come by, so perhaps there's a lot of good news coming from all the other states besides the two I listed. I'll keep searching.

For now, the difference between what small businesses are reporting about the condition of their businesses and what the government and major chains are reporting is hard to reconcile. There's an enormous gap there.

States and Municipalities Experiencing Real Pain

The other disconnect is between the incredibly optimistic stories we are reading about how great the economy is doing and how poorly states and municipalities are doing. The size of the gap is very difficult to reconcile. Much of the income for states and municipalities comes from sales, property and income taxes. While there appears to be some evidence that these tax receipts have stopped declining, there is as yet no major evidence of a strong rebound. I remain at a loss to understand how retail sales can be up while sales tax receipts remain flat or even down.

Illinois owes its contracted business partners more than $4.5 billion which it has simply failed to pay and the 'plan' for dealing with them is to build them up even higher and roll $6 billion of them into the next budget year.

Los Angeles is desperately trying to avert outright bankruptcy. California has an enormous hole in its budget and Minnesota is delaying payments on some bills so it can afford to pay others. Don't even ask about Detroit, it's too scary.

There are dozens more stories like these and they speak to mounting, not easing, fiscal pressures.

Individuals Experiencing Real Pain

Meanwhile individuals are experiencing mounting fiscal pain as well as evidenced by rising bankruptcy and foreclosure rates in recent months to new highs. It is hard to reconcile massive increases in consumer spending with these data unless we consider the theory that people suddenly freed from credit card or mortgage payments are spending that additional cash on stuff. I can't discount this entirely as a possible explanation for the apparent renewed consumer buying frenzy.

Still, I have great difficulty in reconciling the idea of a buoyant, consumer led recovery when I read items like this each week:

One Out of Ten Mortgages is Delinquent

Despite a slight seasonal improvement over last month, mortgage delinquencies still hover near record highs, 21 percent above a year ago. One of ten mortgages are delinquent as of the end of February and new delinquencies continue to run at record rates.

The total number of non-current first-lien mortgages and REO properties is now more than 7.9 million loans.

Furthermore, the percentage of new problem loans is also at its highest level in five years.

More than 1.1 million loans that were current at the beginning of January 2010 were already at least 30 days delinquent or in foreclosure by February 2010 month-end.

That’s the frightening news from Lender Processing Services latest Mortgage Monitor Report, which also reported that the nation’s foreclosure inventories also reached record highs. February’s foreclosure rate of 3.31 percent represented a 51.1 percent year-over-year increase.

One out of ten mortgages? The highest percentage of bad loans in five years? 7.9 million bad loans? A 51.1% increase in foreclosure inventories?

Further, a record breaking number of Americans are on food stamps and fully 44% of the 15 million unemployed have been out of work for more than 6 months.

While I understand that at bottoms and tops the signals are sometimes mixed, these data are not mixed, they are simply horrible. These are signs of severe economic pain and are entirely inconsistent with the notion of a buoyant recovery.

Stock Market on a Tear While Bonds Float Along

Today the stock market put on yet another display of force not only magically levitating along in heavily over bought territory but even peeking up through the upper Bollinger band and closing there right at the high of the day.

There can be no doubt that there is a lot of liquidity and bullishness available as fuel for the stock market. I've long been warning my readers that the flood of liquidity offered up by the stimulus, bailout and GSE MBS purchase programs would have to go find something useful to do, and it seems to have wandered over to the stock market to have a party.

You've got to admit, that's a pretty impressive run. Meanwhile, given all the stock market bullishness, and the bearish talk about bonds coming from some pretty big players, such as Bill Gross, you might think that bonds would be in retreat.

You'd be wrong.

The ten-year bond interest rates is exactly where it started the year, give or take a basis point or two. If this were a normal set of markets at all, then we might expect to see more of the normal see-saw relationship between stock and bonds prices.

But we don't, and I chalk that up to the enormous distorting influence provided by the Fed's actions. Under normal conditions we might expect that money might slosh back and forth between the stock and bond markets but all we see is a strangely quiet bond market coincident with a rising stock market.

To me this is indicative of the massive official support for bond sales and other forms of ersatz liquidity trampling across the normal relationships that exist between the various markets.

It has been one of my enduring mysteries as to how the Treasury bond market can float hundreds of billions in new issuances and rollovers each week without a hitch while the interest rate remains pegged in an extremely narrow range even as the stock market surges along.


My main conclusion is simply this; we are experiencing the very best recovery that several trillion in freshly minted money and credit can buy. Frankly, I expected more. I am underwhelmed with a recovery that mainly seems to exist on Wall Street and in government statistics more than it does on Main Street and in people's real lives.

I have no doubt that we are experiencing a bounce, the question is whether it is the enduring sort or a flash in the pan. Without the participation of small businesses, and with states and municipalities retreating and retrenching, I remain quite skeptical of this recovery.

My prediction is that much of this manufactured bounce will wear off this summer and that we'll see another renewed round of stimulus and Fed liquidity programs before November and the elections. Given the political dimensions involved, it is almost certainly a slam-dunk to predict more money being dumped into the situation prior to the elections, so that's not really much of a prediction at all. It's more a characterization of the American political process.

I remain glued to the markets seeking signs that a change in trend is upon us. So far, I haven't seen anything to suggest that the flood of liquidity has crested and has begun to fall.

Until the situation clears up, consider me to have irreconcilable differences with the news.

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