The glass half full or half empty?Which camp are you in?I'm referring to the supposed economic recovery we are experiencing.Most people are getting off the fence of 'I dunno' and taking one side or the other.Either you buy into the green shoots being offered up daily by CNBC business reporting and the White House economic advisors or you see thru the false numbers and are just waiting for the crash.
I am firmly in the latter camp.I don't buy it for a second.Things happen for a reason but unfortunately some of us remain blinded by the power of positive thinking.It just has to get better.America has always come back.We have,by far,the largest and most resilient economy the world has ever seen.Now this is true without a doubt.But it doesn't happen in spite of itself.
Economists should all be forced to take courses in human behavior.Most simply make no accounting of our traits in their black and white world of number crunching.That's why people like Gerald Celente have been able to outperform their forecasts on a regular basis.His 'Trends Research Institute' is obviously a for profit enterprise designed to make money from us.But it must have the track record to be viable.That's why they weight trends so heavily.They factor in how humans act and react into their forecast modeling.
Housing still remains at the core of misunderstanding.The genesis of the bubble is still heavily debated.Was it the Community Re-investment Act developed under Jimmy Carter in 1977?Was it the greedy,evil bankers?Was it the greedy,evil consumers buying more house than they could afford?Should we blame the Republicans?The Democrats?The government?Do some googling and you will find support for all of these.
As is almost always the case with these things,you will find it's a combination of events.One thing may trigger it,but it usually takes a sequence of events to occur for it to run it's course.The housing bubble is no different.I believe all of the above listed played a part.They all must do their part in generating the perfect storm required to bring down such a resilient economy as we have here in America.
You needed the government manipulation of regulations to enable it.Fannie Mae and Freddie Mac were primary in this.You needed the bankers to play along and we saw the credit derivatives markets play their key part.Of course,the consumers were an easy mark.Offered a chance to get much more house they could afford,their mentality was whatever,if the banks are dumb enough to give it to me,I'll take it.
There were lots of factors.I only mention a few key ones.And they all had to occur just right for the bubble to inflate.Then you had the key events in the summer of 2008.As we now know,the economy had already slipped into recession in December of 2007.But it took the pressure on consumer prices to trigger the bubble to burst.Oil prices spiked and we had gas prices over $4 a gallon.
We had one other event not often mentioned.George Bush implemented his ethanol mandate which forced the cost of corn to skyrocket.That's when we found out that,just like oil,it's in a vast cross section of products.Not just food.We saw retail prices of food and these other products reliant on corn skyrocket in price.
You had the one-two punch of high oil prices and high food prices,as well as the various other products with those ingredients,put tremendous pressure on our purchasing ability.This just happened to occur at the same time we had so many mortgages starting to reset.Either in the form of ARM's resetting or balloon payments coming due from the avalanche of risky loans sold a few years earlier.
Once people started to miss a couple of house payments because the cost of retail goods were skyrocketing,it didn't take much to collapse the flimsily designed credit derivative market built on the basis that housing values would never decline.
There is one other event that occurred that has never been explained nor really even investigated.It was the electronic run on the banks of September 11,2008.The financial 9-1-1 and it is now just a footnote in history.Who was behind the $550 billion dollar run that morning?It was 11 am when the fed took action to snuff it out or it would have resulted in an estimated $5.5 trillion dollar run by the afternoon.
Remember,it was the severity of this crisis which laid the groundwork for TARP.This bank run was the defining event which triggered the stock market crash and the start of the immediate crisis requiring urgent action model we now seem to follow with every piece of legislation.There are no answers and nobody is officially even looking.
Today,we have a strong run up in stocks.We also have a consumer buying surge.These fly in the face of the other factors out there like the persistent high unemployment rate.The stock rise has generally been attributed to businesses becoming more lean and productive.They have trimmed staff to the bone as well as inventories.Refilling those inventories has created a false sense of demand.Better earnings reports are the results of becoming leaner and more productive.We are at the end of that cycle where productivity gains have maxed out.
Consumer spending is also false.The foreclosure world has completely evolved.Once a stigma that no one wanted to be attached to,it is now openly embraced and maybe even a badge of honor.People brag to their friends about walking away from their mortgages and sticking it to those greedy,evil banks.They pocketed months of mortgage payments before being forced out of their homes and this has lead to a surge in buying goodies like electronics and other convenience items.Not only that,even casino profits are up as people use the last of their unemployment money or stashed mortgage payment money to try to escape with a big win.
People signed onto those big,fat mortgages they shouldn't have ever qualified for and then took out home equity loans to buy cars and other big ticket items.Now we have strategic defaults where people are gaming the system for maximum gain.They stay current on their credit cards while blowing off the mortgage payments.
The stock surge is not false.Businesses have shown a better bottom line for the above reasons and the market is simply responding to that.It is setting itself up for the fall,however,due to the reasoning behind the improved profits.Demand has not increased overall.Businesses are not growing accordingly.Once productivity and efficiency peak,the earnings will have run their course and the end will come.
You simply can't take the numbers at face value.We see a reduction for a week in jobless claims for unemployment and then we hear it's all better and the recovery is underway.The numbers rise at all and it's 'unexpected'.The unemployment rate decreases and the Obama stimulus is working.If it stays flat,then the rebound is going to take a long time.
We always get a short-term reaction to events.One must look long-term to see clearly.The government intervention programs are slowing or ending.The stimulus money is nearing an end.The government mortgage programs and bond buying are slowing.A cash crunch is a very real possibility soon.The foreclosure crisis is far from over.And the debt bubble is ever growing.The derivatives market is the largest in the world at over $600 trillion and it is also growing again.
I can't predict when the real crash will occur.Nobody can with certainty.But you can read between the lines and see that it is coming.Probably another as yet unknown factor will be the trigger for it.Choose your side wisely.It's great to be a positive thinker,but don't do it without good cause.Unless you can substantiate why you discard all of the data showing what is ahead,protect yourself now while you still can.More to come...