-F. Scott Fitzgerald

The gospel of infinite prosperity is back in full bloom.  Echoing from the television talking heads and radio pundits preach that the economy is on the mend because we have spent our way into prosperity.  This recovery, as we are led to believe, is occurring even though jobs are being lost at the rate of 2.5 million a year and this is somehow good (or less bad in their words).  We are now led to believe that jobless recoveries are simply part of the new economic landscape.  This coming from a group of people that missed the largest recession since the Great Depression (maybe they should avoid predictions for a few years).  Since the recession started in December of 2007, a painful 20 months indeed, the U.S. economy has shed 6.9 million jobs.  That is the official number.  If we dig deeper, we have 26.3 million unemployed and underemployed workers in the economy.  For a recession that is the “worst since the Great Depression” we sure got out of it fast.

Getting out of it fast is what we are being led to believe.  Yet the public is being fed a bunch of nonsense from the gospel of infinite prosperity.  Much of this philosophy was also part of the Roaring 20s.  The near religious belief in the big business culture of the U.S.  Of course, much of this has influenced the way the crony capitalist have infected Wall Street with their cannibalistic method of destroying wealth for the country for short-term gain.  The notion that spending trillions of dollars and giving authority to those that have led us to financial Armageddon is perverse as it is backwards.  If anything, it simply demonstrates that Washington and Wall Street are wedded at the hip while ignoring the plight of the average American.

For a country that talks about the “small business owner” the reality is much different.  During this economic crisis it is the mighty who are receiving the biggest handouts.  You don’t see Jim’s local hardware shop getting a bailout.  But Bank of America, Wells Fargo, and JP Morgan all received their piece of the economic handout.  And look at all the bank failures.  In relative terms, the small are being allowed to implode.  In reality, they hold very little of the banking wealth.  The U.S. currently has 8,195 banking institutions according to the latest FDIC report.  116 institutions or slightly above 1 percent own and control 77 percent of all banking assets.

And wealth inequality is at record levels once again:

Source:  William Domhoff

81 percent of all financial wealth is concentrated with the top 10 percent.  If you are wondering about another time in history when so much wealth was concentrated in a few hands you can look to the Great Depression.  Even though the punditry proclaims to believe in the middle class the data paints a very different picture.

In today’s Lessons from the Great Depression series we are going to examine the Roaring 20s.  Much like our economic climate today, much of the “success” was confined to a small group.  Sure, many lived up the good times like during our HELOC housing bubble mania but once the tide went out, people learned a quick lesson between wealth and income.  Income can be taken away rather quickly as many people are now realizing.  Wealth on the other hand has longer sustainability and can impact control including favorable policies enacted by lobbyist to protect the unequally weighted status quo.

This is part XXVIII in our Lessons from the Great Depression series:

22.  The Infection of Consumerism and Living Fake Lives.

23.  The Worst Housing Crash in American History.

24.  Economic Crises Around the World in Synchronization.

25. Reconstruction Finance Corporation II

26. Pecora Commission Where Art Thou?

27. Current Net Worth Drop of $13.8 Trillion Equivalent to 21 Percent Drop.

I’ve studied the Great Depression in great detail.  Some of the best books on the topic include:

Only Yesterday by Frederick Lewis Allen

The Great Crash of 1929 by John Kenneth Galbraith

The World in Depression by Charles Kindleberger

Today I’ll be focusing on a few passages from The Year of the Great Crash 1929 by William Klingaman.  People think of the Roaring 20s with images from the privileged elite that may come from F. Scott Fitzgerald’s Gatsby like literature.  Yet the reality is very different.  What we find is a nation that shuns savings, spends on credit, cuts deep in to the working class, and ultimately leads the nation into financial Armageddon:

“Beneath all the sanctimonious probusiness rhetoric, the Coolidge boom was based upon the tremendous expansion in productive capacity of American factories in the 1920s, particularly in such basic industries as iron, steel, petroleum, chemicals, and light metals.  Because America’s fundamental transportation and manufacturing systems had been completed before 1914, and because the war had suddenly thrust the United States into an entirely unfamiliar role as a creditor nation possessing a record-breaking stock of European gold, businessmen were free to turn their attention toward refinements in the production and distribution processes.  Spurred by military demands during the war, and sustained by the adoption of scientific management techniques in the years immediately afterward, U.S. industrial production nearly doubled between 1919 and 1929.  Automobiles production skyrocketed; by 1929, Detroit was turning out nearly five million new cars a year.”

America is anything but a creditor nation.  We are a nation full of debt.  The green shoot argument was based on spending money we didn’t have.  The use of Keynesian philosophy in such a poorly managed way is disturbing.  It would be one thing if the bulk of the money was spent on average working Americans but the vast amount of bailout funds went to the top 10 percent while the middle class is seeing the American dream largely disappear.  If you want to see a current breakdown of the current bailouts, this is how it would look:

How the stimulus package can garner more heat when we have given the banking and financial sector nearly 20 times more in funds is amazing.  The crony capitalist have figured out a way to get the public to focus on smaller shiny things while ignoring the massive exploitation of fraud going on.
To think that suburban sprawl is only a thing from our current housing bubble is incorrect:

“Highway construction (funded primarily by state and local expenditures) provided thousands of new jobs; and as Americans enjoyed the benefits of increased mobility, sprawling networks of suburban development grew up virtually overnight, further fueling the building boom that also provided most of the nation’s cities with brand-new skylines, symbolized by the graceful, unadorned, and ultra-modern brick, cement, and stone skyscrapers that kept soaring higher and higher each year.  Utility companies expanded their grids throughout the countryside, bringing the blessings of inexpensive electric light and power to most of rural America for the first time; power consumption in the United States increased at the rate of 15 percent a year during the decade.”

The perma-growth model was in full force back then as well.  But I am certain that we protected the mom and pop shops back then right?  I mean that is the story of small business:

“In a never-ending quest for efficiency and greater control over every aspect of their operations, businessmen in the 1920s became obsessed with bigness.  Local utility companies merged into mammoth regional empires; nationwide chain stores such as A&P, Piggly-retail shops, and Woolworth’s squeezed out thousands of small, independent retail shops; big-city banks gobbled up defenseless competitors and turned them into branches of multitiered holding companies.”

Many things are large myths.  The Roaring 20s roared for a select few until it all imploded with the Great Depression.  Mega organizations ate and swallowed up small businesses like breakfast bars just like gigantic too big to fail banks are eating up smaller banks that are not too big to fail in the current recession.  Even in the 1920s, pushing an anti-saving mentality was easy to do in the United States:

“Unfortunately, there was no corresponding expansion of employment or wages to accompany this boom in industrial output – which was, after all, achieved largely by the substitution of machinery for manpower.  Without some powerful outside stimulus, production soon would have outpaced consumer capacity.  So, to encourage a wider distribution of the mushrooming supply of goods and services, advertising became a major industry in itself.  Saving was condemned as hopelessly out of fashion and almost unpatriotic; it was every American’s duty to provide himself with as many wristwatches, electric floor scrubbers, Frigidaires, Kriss-Kross razor blades, ultraviolet sun lamps, exercise machines, and canned peas as humanly possible.”

Does this sound familiar?  Just replace the Frigidaires with Sony plasma TVs and every other consumer good you can squeeze into your Visa card.  Only this time, we took it to another level with the home equity ATM because back in the 1920s homeownership was roughly 45 percent while this time we nearly took it to 70 percent.  The home became the personal stimulus machine sanction by the U.S. Treasury and Federal Reserve.  Once again spending does not equal wealth.  But for those at the top, they have to find ways to keep the consumer running on the treadmill faster and faster.  The birth of adverting was a good way to get this going:

“Advertising “makes new thoughts, new desires and new actions,” declared Coolidge approvingly in 1926.  “It is the most potent influence in adopting and changing the habits and modes of life, affecting what we eat, what we wear, and the work and play of the whole nation.”  In preaching the gospel of material abundance, advertisers received an incalculable boost from the invention and popularization of the radio; although the medium had been wholly unknown to most Americans before the war (only one American family in ten thousand owned a radio in 1920), the seemingly unlimited potential of radio captured everyone’s imagination during the twenties and revolutionize the nation’s communications and entertainment industries.  The advent of installment purchasing plans provided additional impetus to consumption; all one needed to buy a new washing machine or diamond necklace was a minimal down payment.  As the decade progressed, credit terms became even easier, with payment extended over longer and longer periods.”

Easy credit and media encouraging folks to buy things that are simply beyond their means.  Now those in advertising understand basic rules in human psychology.  People want to be loved, feel important, and take care of their family.  If you can make someone feel inadequate in any of these areas and promise them that your product will take care of the void, you have a good chance of selling it.

Speaking of making someone feel inadequate, remember this wonderful ad for real estate during the boom?

How many people bought a home because of a conversation like this?  I would wager that tens of thousands did because they wanted to avoid pain or be loved (both are bad reasons for making the biggest financial purchase of your life).

But the real underlying weakness could only be masked for so long:

“High-powered sales strategies only camouflaged the basic weaknesses in the American economy, however.  At one end of the scale there was too much idle capital; at the other end were too many idle workers.  Income and purchasing power were dangerously concentrated in the hands of a favored few: government statistics showed that 90 percent of the nation’s wealth was owned by 13 percent of the people.  While the number of truly rich Americans kept rising – a study by the Federal Reserve Bank of New York revealed that there were forty thousand millionaires in the United States at the end of 1928, where there had been only seven thousand in 1914 – millions of American families remained locked outside the charmed circle of prosperity.  Farm income declined steadily throughout the twenties, and unemployment kept climbing until it neared the four million mark by the end of 1928.  The coal and textile industries remained depressed for most of the decade, producing pockets of appalling poverty in the South and especially in Appalachia.  Federal surveys revealed that two-thirds of American families were struggling to survive on incomes below $2,500, the official minimum standard for a decent living.  Lured into exorbitant installment purchases, workers watched as a growing percentage of their wages was sacrificed every week to meet mounting interest payments.”

We find ourselves in a similar predicament.  All these cash for clunkers and tax credits for purchasing homes are simply a way to get people back into major debt.  How many people bought those cars with cash?  I would venture to say very few.  In fact, many now have 5 to 7 year auto loans that will commit a certain amount of their income to a depreciating asset.  Good move.  And those buying homes with the tax credit?  How many bought in areas where prices will continue to fall?  After all, a jobless recovery is in the books and it is hard to make a 30 year mortgage payment with no job.  This act of encouraging massive debt purchases in the midst of the deepest recession since the Great Depression is a page out of the Roaring 20s.  Wealth does not equal debt!  Those in the top 10 percent can tell you that but probably won’t.  Anyone that tells you spending more than you earn or can afford is a path to wealth is out of their mind or doesn’t understand the basics of finance.

One group that is on a quick way to financial wealth are those awesome Wall Street CEOs:

CEOs’ pay as a multiple of the average worker’s pay

If this is the reward they get for leading us into economic disaster, can you imagine the pay with green shoots involved?

At a certain point the gig is up:

“In the second half of the decade, as the struggle among producers for customers grew ever more vicious, it became clear that “prosperity” was the exclusive province of big corporations, as the mortality rate among smaller businesses increased inexorably.  “The business structure of the United States is undergoing a rigorous process of ‘rationalization,’” explained the managing director of the National Industrial Conference Board in early 1928, “in which many of the smaller companies find it increasingly difficult to compete with the high efficiency standards set by well-managed, large-scale enterprises.”  The New York World was less enthusiastic about the trend: “In the intensive competition which is now under way, and which shows no signs of immediate abatement, only the large organizations able to apply the best that science and skill have to offer are showing satisfactory earnings.  This goes far to explain what is sometimes called the ‘miracle’ of prosperity and falling prices.  When the nature of this prosperity is understood its miraculous features become less evident.”

History doesn’t repeat but it does bring back stupid financial moves.  I know I know, this isn’t the Great Depression.  But what industry is going to lead us out of this deep funk?  Are we going back to selling houses to one another while Tetris experts sell mortgage backed securities on their Bloomberg terminals on Wall Street to other foreign countries?  Is that our idea of a booming economy?  Do we think that putting a granite countertop on every home is the idea of a healthy economy while people max out their credit cards?  If anything, during the 1920s we did produce and produced a lot.  We were a creditor nation and exporter.  Now we export debt and U.S. Treasuries while we spend to no end.  The fact that we used the $8,000 tax credit to encourage home buying is disturbing because excessive home buying is what led us into this Great Recession!

But don’t let this get in the way of the new gospel of prosperity.  Everything is fine.  Just go out there and spend the money that you don’t have and wealth will magically appear.  The financial elite of the country appreciate your service to their wealth building.

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Driving through these states and the vast subdivisions hugging the desert you can quickly put a face to the economic devastation.  How many of these homes sit empty?  Will these homes ever have occupants?  How much money has been lost in this pursuit of endless housing wealth?  You also witness the countless commercial real estate developments that encircle these areas with your typical chain fast food restaurants and your mega shopping center.  Some don’t realize that these commercial real estate developments are usually brought out 12 to 18 months after the construction of the new subdivisions.  That is, the commercial real estate bust is the next big thing to watch since these stores were developed to service a population that isn’t moving in.

Let us first take a quick look at the numbers:

These four states make up 56% of all U.S. foreclosure filings.  And this trend does not show any signs of abating given that these states also hold a disproportionate amount of Alt-A loans which are tied to some of the more toxic recast type mortgages that I have discussed.  So how many Alt-A loans reside in these states?  Let us break down those numbers further:

Again, what you will find is that these four states hold a disproportionately high amount of Alt-A loans.  To be precise, these four states hold 46 percent of all active Alt-A mortgages.  Now why would this be so problematic?  A large portion of these loans have yet to face a serious recast.  Forget about the resets that are tied to LIBOR for example, with rates at historically low levels.  This isn’t the issue.  The problem with the recast is the massive jump in payments that can easily double the monthly payment as I have discussed in detail in a previous article.  The major concern is these four states have seen there large metropolitan areas face some of the deepest year over year price drops in history.  Take a look at the Case-Shiller price drops for the largest MSA data series for each state:

Florida and California have multiple MSA data points in the Case-Shiller monthly reports but I used Miami and Los Angeles as samples for the two states.  For Nevada and Arizona I used the Las Vegas and Phoenix MSA data which is the largest for each state.  And herein lies the coming tsunami.  The L.A. MSA is doing the best out of the four and that is now down 40.4% from the peak reached in September of 2006.  Arizona with Phoenix is being slammed with a 50.8% drop in housing prices.  In fact, the 111 mark assigned to this MSA now puts us back in 2001 price territory.  These markets are flooded with inventory.  So when the recasts hit with those Alt-A mortgages they will be hitting a market that is extremely depressed.  Keep in mind that many of these Alt-A products have negative amortization which allowed the principal balance to actually increase.  This has created a time bomb with these mortgages.  They will be going off in the most depressed markets possible.  The endgame is a flood of foreclosures in markets that already have a flood of foreclosures.

Someone sent me over this must watch video called Lost Vegas from Vanguard:

The video highlights the troubles faced by Las Vegas.  In the episode, you will see a story that is all too common where a would-be investor bought a property and “forgot” to tell the renters that he was being foreclosed on.  You will also see projects stalled since growth has halted given the current economy.  We also see a former mortgage company worker who is now an exotic dancer and calls it a “big step up” from her previous job.  It is definitely worth watching.

These states are facing the double whammy of the debt bubble.  A fall from grace is always painful.  States that did not see major housing bubbles are still having difficulties but these four states went from perma-growth and never ending housing appreciation to an absolute bust.

It would appear that financial prudence is now going mainstream and I saw this funny clip from a show being aired on ABC this Friday called Un-Broke.  In this one clip, Seth Green highlights a Real Home of Genius here in California:

You have to watch the clip, it is hilarious.  But aside from the humor, I couldn’t believe that I was getting better financial advice in two minutes from Seth Green rather than on CNBC, a supposedly self labeled financial network.  In this little clip, we are told about living within your means, driving a paid off car, and not buying a McMansion.  Living prudently has now gone mainstream in a big way.

Yet going back to our four states, living within your means is something that has been foreign for over a decade.  The massive McMansions that I saw in three states is a sad reminder to the perma-debt growth model.  In this model, you couldn’t have enough fast food chains or auto dealers and forget about the mega department stores.  If we were to study this as an ecological environment, you would think that humans as a species only had one purpose in life.  That purpose was to eat junk food, buy gigantic cars, and upgrade every countertop in the globe to granite.

Yet there is a finite number of what we can consume and we hit it.  The empty subdivisions are a testament to this over building and over consuming era.  And that is a large reason I do not see a second half recovery.  Because to recover, we have to assume we are going back to the ways of old.  Do you see that happening?  Do you see us once again going back to buying massive gas guzzling highway tanks and buying 3,000 square foot McManions again in a mega way?  I don’t and that was a large contributor to our growth.  Let us not even talk about the ancillary crony banking system and lenders that fed on this bubble for their life.  The two biggest purchase items for Americans are homes and cars.  How are those two industries doing?

So looking at these four states, I’m not sure I see a second half recovery.  We are still heading directly into the Alt-A and pay Option ARM tsunami and these four states are hurting in a big way.  Need we examine the California budget boondoggle?  If these four states are any indication, we won’t be out of this mess in 6 months.  The clock starts next week.

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I want to focus on the I Bond because this product highlights many problems that we are currently experiencing in our economy.  First, let us look at the fixed rate component of the product:

The only time the fixed rate part of this product has trended upward was in the late part of the 1990s when the technology bubble was raging.  But after 2000, the fixed rate component of this product has followed a strong trend to zero.  The rate did hit zero in May of 2008.  Currently the fixed rate stands at 0.10%.

If the zero percent fixed rate isn’t enough to keep you away, the limit on how much of this product you can buy in a calendar year was also dropped in May of 2008 (it used to be $30,000):

Now this should all be further evidence that the U.S. Treasury and Federal Reserve want to punish savers and force Americans back onto the consumption machine.  An unintended consequence of financial crashes like this one is people start finding a desire to save.  Many don’t follow things this closely but the U.S. Treasury and Federal Reserve knew people were going to start gravitating to more secure and low-risk saving vehicles.  So to create very little options for Americans, they have pushed interest rates to absolutely pathetic levels while many Americans search for secure investments away from the Wall Street casino:

So with this new found desire to save, what rate would you get with I Savings Bonds?

Bwahahaha!  You might as well stuff your money into your mattress.  The government is now offering you 0 percent for purchasing I Savings Bonds.  Now of course, this is largely due to the negative CPI rate but you would get a lot of buyers if you offered a more lucrative fixed rate that would adjust in the next semi-annual rate adjustment.  Yet this would encourage saving money, which if you have read any over the counter finance book, is actually good for you!  But the Wall Street crony machine only wants you to pump money into stocks via your 401k to fund the global debt casino.  That is why when we look at actual indicators on Main Street we realize the recent 31% rally is nothing more than a reflection of pit bosses on Wall Street trading with one another.  Insiders are selling a lot more than buying.

So now, if you simply want a safe and secure investment like an I Savings Bond you are going to get zero percent for locking up your money for six months.  This is the biggest “do not save, and go out and spend” sign you can ever create.

This is a philosophical problem with our current economy.  The current economy is so driven by consumption that even prudent measures of savings will punish the system.  No government official would ever come out and admit this but for the most part, these actions and what has been occurring over the past decade show contempt to the American public.  Not one of my successful friends or colleagues (Republican or Democrat) has ever become financially independent by spending more than they earn.  You would think something as painfully obvious as spending within your means would resonate with many but it has not.  That is why the credit crunch is hitting Main Street so hard.

You want to see how ridiculous this has become?  Take a look at this:

Source:  Zero Hedge

I’ve put together the above chart in a clean format to show the insane amounts of debt floating in the system.  If you look at the U.S. debt side, you will see that we have some $115 trillion in debt/obligations through various bailouts, national, corporate, and consumer debt.  On the consumer balance sheet, you still see that residential real estate by far is still the biggest asset of most Americans.  Another 10 percent decline in real estate which is very likely would wipe out another $2 trillion in wealth.

The above chart is a site to behold.  It is also apparent that we will never ever pay off that debt.

Even in previous wars, we would encourage the population to buy bonds to support the cause:

Now, we just expect to finance all this debt and external expenses with no cost to citizens?  Where is this money coming from?  The point is that the money is not even here and at a certain point, this Ponzi scheme of an economy is going to put Bernard Madoff to shame.  We have already seen glimmers of this unfortunately with the March market lows.  The bailouts are only a sign that we are willing to put our entire future at risk to keep the debt pushers up on the taxpayer’s dime.  If we are going to argue that we need debt, then let us create a national Good Bank and lend money out directly.  People would argue that logistically this won’t work but if we look at the current bailout funds, most of the money isn’t making it to the hands of consumers anyway.  I think we can somehow manage to create a decent bank with $10 trillion.

Saving is a hard concept for many.  People are now conditioned to expect zero down mortgages, multiple credit card offers, and zero down car loans.  It was bound to end at some point.  Our economy needs to rely on financial responsibility and an economy built on producing goods and services that the world wants and needs.  The world has enough credit default swaps and derivatives.  The message right now is to spend.  Don’t follow that siren call.  Start saving if you have not done so even if it means getting 1 or 2 percent in a savings account.  Wall Street would want you to believe that you should put your money into the casino so it can be gambled away.  Even with the recent bear market rally, many are still looking at portfolios that are down 40 percent only a few years before retirement.  These are going to be lean economic times for many years.

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The market has been on a tear, come bad news, really bad news, or flat out horrible news:

Since the low of March 6^th, the market has gone up a stunning 31%!  As you can see from the chart above this increase has gone non-stop.  When was the last time things were this frothy?  Try the summer of 2007.  Need we remind you what happened after that?  The wheels of the global economy came flying off.  Now of course, given the massive injections of capital into the banking sector this rally could go higher.  But make no mistake, this rally is for the banks and Wall Street since the average American is seeing very little real world benefit aside from a psychological relief.  If you break down the numbers, the situation is still troubling of course.  13 million Americans are unemployed.  9 million are working part-time looking for full-time employment.  Another 1.9 million are not working because of other reasons including giving up.  All in all we have about 24 million Americans either unemployed or underemployed.  This is the Fed’s idea of green shoots.

In this article I want to look at 10 charts that clearly show we are nowhere near a bottom.  These charts will also show that for trillions in bailouts, we have seen a marginal gain in the real economy.

Chart 1 – Retail Sales

In the past two quarters, we have seen a strong contraction in retail sales.  This is critical since two-thirds of our economy depends on consumption.  And in the recent GDP report, we saw a slight improvement here but all mitigating factors point to this being a temporary jump up.  Now why would something like this occur?  Well think about what has occurred over the past year.  Going out of business sales, gimmicks, and other cheap debt offers have brought in a few more people into the fold.  Yet it has been tiny for the price we will pay.  You will also see this reflected in a later chart with home sales.  We have burdened ourselves with massive debt for a slight uptick in these sectors so banks and Wall Street can figure out a way of screwing the American taxpayer through their government branch offices at the U.S. Treasury and Federal Reserve.  When you look at the above chart, there are no green shoots here.

Chart 2 – Motor Vehicle Sales

The third largest American automaker Chrysler is now bankrupt.  It is official.  What does this mean?  Job losses, product line cuts, and further restructuring.  Yet the market rallies.  Since when is it a good thing that a large American manufacturer goes bankrupt assuring future job losses for thousands more?  If you need further proof how disconnected Wall Street is from Main Street you shouldn’t look any further.  Take a look at the chart above.  Auto sales have fallen off a cliff for both domestic and foreign automakers.  You notice that slight uptick?  All the debt and gimmicks we have thrown at the industry including fuel falling back down to record lows is not enough to get Americans to buy more cars.  Why?  We already have too many!  Technology has made cars more resilient.  If you actually treat your car well, you can easily get 10 years out of it.  And more people are realizing this either out of necessity or because of a new austerity.  Local auto repair shops have seen more people actually bringing in cars for repairs.  Instead of trashing the car when the transmission goes out, many people would rather pay $2,500 to have it replaced instead of buying a new car.  With the average new car costing $25,000 is it any wonder?

Chart 3 – Housing Starts

Housing, housing, and housing.  Isn’t housing the epicenter of all of this mess supposedly?  We haven’t even addressed the pay option ARM fiasco waiting for us later this year but suddenly we keep hearing that housing is shooting to the moon.  Really?  Sure doesn’t look like it from the chart above.  In fact, the collapse in housing starts above is the steepest since the Great Depression.  And as you can see from the chart above, the number isn’t bouncing back up.  Meaning all those home builders and those that work in the construction industry don’t have as much work.  Work is what occurs on Main Street.  You wouldn’t know that by looking at Wall Street of course. The fact of the matter is we have enough inventory for a couple of years.  With record foreclosures and all the building that occurred this decade, we are assured a few years of excess inventory.  Bottom line?  Don’t expect this to be jumping up any time soon.

Chart 4 – Single Family Home Sales

Well look at that, home sales aren’t moving like pancakes.  Yet industry insiders are telling us the bottom is in and all is well!  These people either:

(a)  Have jobs that depend on real estate going up

(b)  Are flat out blind to the macro data

(c)  Don’t have a clue

(d)  All of the above

The housing market is far from a bottom.  As I have discussed about the California housing market we will not see a bottom until 2011, some people think this short-term change in the trend is suddenly 2005 redux.  As you can see from the chart above, that is not the case.  In 2005 we had a SAAR of home sales well over 6 million.  We are currently at 4.1 million.  And new home sales have dropped off a cliff and are still near the trough.  Although home sales may pick up or move sideways, that does not mean prices will be coming up anytime soon.  Again, Wall Street is operating under a different system compared to Main Street.

Chart 5 – Personal Savings Rate

There are two main reasons why Americans are saving more.  First, they are in financial trouble and have less money.  Second, they have had their access to credit limited.  How so?  Let me give you an over simplified example.  In California if you made $40,000 a year, you probably had 10 credit card offers a week and the ability to buy a $500,000 home at the peak of the debt insanity.  So let us run that math:

2005 Access to Credit:

Income:  $40,000

Home Mortgage Credit:  $500,000

Credit Cards:  4 x $10,000 each

Auto Loan:  $30,000

Total access to credit:  $570,000

Now fast forward to 2009.  Those credit card offers don’t come in for many.  You now can only borrow half of the mortgage amount.  And for that car?  Look at sales above.  So the access to credit now looks like:

2009 Access to Credit:

Income:  $40,000

Home Mortgage Credit:  $250,000 (top)

Credit Cards:  1 x $10,000

Auto Loan:  $20,000 (if credit good)

Total Access to Credit:  $280,000

People mistake debt with wealth.  More specifically, they confuse access to debt with wealth.  So that person now has access to half of the debt they once did in 2005.  Many see this as a cut but the current ratio is where it should have always been and lending terms are still generous in historical terms.  Yet at this same time, banks and Wall Street now have access to trillions courtesy of the Federal Reserve and the U.S. Treasury.  Once again, Wall Street is playing on a very different field from Main Street.

Chart 6 – Real GDP

As I pointed out earlier, GDP is contracting at the fastest pace in 50 years.  The recent Q1 2009 number surprised on the downside yet the market rallied.  The market is rallying because those playing the stock market are treating it as a casino.  If it were an accurate reflection of the real economy with record unemployment, historically high debt ratios, crushing contractions, it would be going down further.  Many pundits, those that also said there was no housing bubble, point to the stock market as a leading indicator.  That is, the market recovers before Main Street does.  These pundits are using out dated models.  How many times have we had a Fed interest rate that is 0 (actually lower because of quantitative easing)?  We haven’t and the only other experience in our history like this is the Great Depression.  People point out that the stimulus plan was a big burden.  Nearly half of it was tax cuts and the rest was fiscal programs and extension of benefits such as unemployment insurance.  If anything, it was the only thing that actually went straight into Main Street.  But this came as a diversion to the approximately $13 trillion in bailouts and commitments to banks and Wall Street.  In many community colleges, 70 to 80 percent of students need remedial math.  When I see people screaming about millions in executive compensation yet sitting idly by when trillions are thrown out to the most crony corporate welfare kings,  it makes me wonder if there is a sinister anti-math plan to keep people in the dark.  Or maybe, it is a more simple explanation like people can’t step away from America’s Got Talent?

Chart 7 – Hours Worked

Back in the real world, Americans are seeing their hours cut back.  Now most people that are seeing wage cuts, job losses, and less hours are probably not in the mood to buy homes even if interest rates are cheap.  Employment is the key factor for the vast majority of Americans.  The stock market has become more of a casino and a shattered dream of the get rich without working world.  What many Americans are realizing is Wall Street never looked out for them.  They tried to convince most Americans that, “just put X amount into your 401k for 30 years and you’ll be fine.  Diversify and you should be okay.”  As many Americans saw 40 to 50 percent of their wealth evaporate they are now told, “you are an idiot for not actively managing and keeping your asset allocation in sectors that avoided the crash.  Did you actually diversify into THAT?  Who told you to do that?”  It is the height of hypocrisy between Wall Street and Main Street.  The money from Main Street was only a shell game for the connected.  In fact, some of the investment firms on Wall Street made money betting that companies would fail!  How about that!  If there is any clearer sign between Wall Street and Main Street it is this.  Let us see who owns those profitable CDS on Chrysler.  Someone made money on the failure of a large American company.  And it is probably an investment firm closely connected to Washington.  Want to take a wild guess who that is?

Chart 8 – Household Debt

Ironically American households have to mark to market their assets.  If you paid $400,000 for your home at the peak and now can only sell it for $250,000, then to you your wealth just took a $150,000 haircut especially if you need to sell.  Not so for the banks.  That home is still worth $400,000.  The accounting rules favor a select few and that does not include those on Main Street.  The above chart shows that many Americans still have a giant debt burden.  Even though this burden has decreased slightly recently, banks and credit card companies who never cared about credit ratings for this decade all of a sudden want people to pay up even if they have no job.  Not having a job was no problem when they were blasting out those 20 to 40 weekly credit card offers in the mail.  It wasn’t a problem that you had massive debt when they sent you those HELOC offers.  All of sudden they have found religion and they are ready to collect money from bailouts and also squeezing you for everything you got.  In the end game, the average American is going to lose out because:

(a)  At a certain point the U.S. dollar will suffer

(b)  At a certain point stocks will need to reflect reality

You cannot lend out trillions and expect nothing to happen.  Sure, what is occurring is deflationary in the sense that prices are collapsing but this is only because more wealth is being destroyed than is actually being created.  What is to stop the Fed and U.S. Treasury to give out more bailouts in the future?  Just wait until the FDIC starts getting owned if we go with the PPIP.  We are already seeing that the faux stress tests show banks are going to need more capital.  Since they’re models operate in LaLa world and at a certain point they have to meet with the real world, they will have to deal with “shocking” losses.

Chart 9 – Stock Markets

The stock market has witnessed the largest wealth destruction since the Great Depression.  If you look at the above chart, it is a tale of 2 bubbles.  First, we had the tech bubble followed by the housing bubble.  What other bubble do we have?  There is no other bubble aside from the debt bubble  It is time to pay the piper.  Even that slight jump is all courtesy to the current disconnect between Wall Street and Main Street.  It would be one thing if Wall Street was rallying because employment was healthy and companies were raking in tons of profits.  Real companies.  Not banks that say they have a profit because of accounting gimmicks and bailout money.  Give me $25 billion and I’ll show you a $3 billion quarterly profit!

Chart 10 – Trade

Both exports and imports have fallen.  Yes, our trade imbalance got a little better on the ledger but overall the reasons for this are not good.  It occurred because we are buying less and selling less.  This is a global recession.  The challenge of global recessions is we all face falling incomes and demand together.  The decoupling school is now largely running away with their tail between their legs.  These were the folks who thought the U.S. having a massive recession would somehow not impact the world.  Really?  The U.S. who contributes about 28 to 30 percent of global GDP is not going to have an impact?  What utter insanity.

So as you can see from the above charts, there is no green shoots in the Main Street economy.  Sure, Wall Street is shooting to the moon but that is because the pit bosses are now trading amongst themselves fleecing the public.  Recent data shows insiders actually selling into the momentum:

“(Barrons) Leading us to the question with which we began these musings: If those now infamous shoots of recovery are popping up all over, why would insiders be so aggressively dumping stocks?

Yet, they indisputably are. According to a study prepared for Bloomberg by Washington Service, a research outfit, directors, officers and the like have sold $353 million worth of stock in this fading month, or 8.3 times the total bought. As a matter of fact, according to the firm, insider purchases of $42.5 million are on track to make April the skimpiest month for such buying since July 1992.

The pace of selling in the first three weeks of this month, incidentally, was the swiftest since the market peaked and the bear came out of hibernation with a vengeance in October ‘07.

We’re quite aware that insiders are not infallible. But they are, after all, in the front lines of commerce and industry and so presumably have a better fix on the economy and the prospects for recovery than analysts and economists, whether of macro or micro persuasion.”

This is the ultimate bear market rally so proceed with caution.

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The advertising world is catching on.  I’m sure many of you have seen the Dominoes commercial in which someone tells the audience that they don’t need any stinking bailout like Wall Street folks but they’re going to give you on Main Street a bailout through better pizza prices. A slap to Wall Street and cheap pizza?  Talk about a winning combination.  Other advertisements have also highlighted the recession in different perspectives.  Jet Blue runs an ad where CEOs who have fallen from grace now need to learn how to fly on commercial airlines with all the regular people:

*Click on image to watch video

So some companies have taken a more comedic angle.  Other companies have even harkened the dark days of the depression.  This one minute ad from All-State called “Back to the Basics” drives the point home clearly:

The point of this ad?  Time to focus on what matters and that includes family and security – preferable without spending tons of money.  They even mention their history of starting during the Great Depression.  Contrast these current ads with some that were run during the boom time.  Like this very popular Century 21 clip:

This 30 second clip basically shows a guy receiving a browbeating about buying a home.  In the background, a realtor attentively listens given a commission is riding on the sale.  The underlying message of this ad is buying a home is a no lose proposition.  I can only imagine how many times this sad scenario occurred in America during the bubble.  Watching this ad drives shivers down my spine.

Or what about this great ad from Countrywide where you can combine practically every piece of debt you have into one loan.  Fantastic idea!

An advertisement by its structure has a desired reaction on an audience.  The Domino ad for you to buy pizza.  The Jet Blue ad to make you fly.  That All-State ad to make you feel secure with an insurance company.  The Century 21 to buy a home.  The Countrywide ad to consolidate your 4 toxic loans into one nicely packaged toxic loan.  They all had their method of achieving their results.  But the current ads reflect a more cautious, more reserved, less wealthy, and more concerned population.  A price conscious society that no longer believes in many of the bull market mantras.  A new generation will emerge from these ashes and will never forget this economic calamity just like the generation that lived through the Great Depression.

To a large extent, Wall Street and Washington for a decade have missed many key points.  The average American did not participate in the boom in real terms.  Many are now worse off pre-bubble.  Wages have been stagnant for over a decade and now over $11 trillion has been wiped off the balance sheet of Americans.  This kind of real wealth destruction etches long lasting scars.  Many of you have seen the graph of household debt which combines mortgage debt (the largest line item) and also revolving debt (through credit cards, student loans, and auto loans).  But what you may not have seen is a graph showing how quickly debt is contracting in the market for the average consumer:

As you can see from the chart above, this is the steepest year over year contraction in household debt on record.  Given that much of the last decade could have been described as the pseudo prosperity decade, now with debt being extinguished from the system more and more Americans need to save to buy goods.  Hence these ads are a reflection of this new found reality.  Now an issue with the new public and private program with the U.S. Treasury backed by FDIC non-recourse loans is the assumption that the last decade did see real wealth gains.  The flaw in their bet, which by the way is 93 percent financed on the taxpayer dime if they are wrong, is the current market pricing of toxic assets is low only because of the fear in the market.  This is incorrect.  The gains for the last decade in large part where fueled by a massive global debt bubble.  The concern in the market is well founded.  Those gains are gone and never coming back.  The bubble was so massive and lasted so long that people are slowly awaking to this reality.

As I had discussed in a previous post, nearly 50 percent of American households are one paycheck away from falling behind on their financial obligations.  What do you think this does to consumer confidence?  It crushes it:

Consumer sentiment is at record lows matching those from the early 1980s.  The reality is we are not going back to the good old days anytime soon.  And they really weren’t that good for many if you stripped away the massive debt.  Now that the masquerade of debt is withdrawing, we realize how phony much of the “prosperity” really was.

We also recently found out that credit card companies have pulled 8 million credit cards from consumers’ hands. Lines are being cut down to the tune of $320 billion.  In a society with 13 million Americans unemployed and 9 million working part-time but wanting full-time work, consumption making up 70 percent of our GDP is going to take a direct hit.

Psychologically consumers will not buy big ticket items if they have misgivings regarding their future.  With the rise in unemployment many more Americans are going to be more cautious buying these items in the future.  And this recession is deep enough and wide enough in reach that many will no longer believe the mantra that “real estate is the best investment” or “stocks always go up in the long run.”  If you look at the Great Depression and invested at the peak, it would take you nearly 25 years to get back to your initial point:

And many recent newspaper outlets have suffered as well because of the drop in advertising revenue.  Many of the large print newspapers have cut back severely and many have gone under.  So it is important to pay attention to these sentiment indicators because they reflect what Americans are going through.  Consumption is down.  Excessive consumption is being looked at with disgust as many saw with the outrage over the AIG bonuses.  Yet this isn’t something new.  This anger toward prestige occurred during the Great Depression as well:

“The Depression sharply lowered the prestige of businessmen.  The worst sufferers were the bankers and brokers, who found themselves translated from objects of veneration into objects of public derision and distrust – the distrust being sharply increased by the evidences of financial skullduggery which came out in successive congressional investigation.  But even business executives in general sank in the public regard to a point from which it would take them a long time to recover; and in this decline the conscientious and public-spirited suffered along with the predatory.”

Frederick Lewis Allen presents the scene of the 1930s yet we can directly apply this to our current climate.  The Jet Blue and Dominoes ads merely reflect this new disgust and mistrust of Wall Street and the pinstriped suit crowd.  Take heed of these signs.  Advertisements are only reflecting the public sentiment.  In fact, many of your favorite sitcoms have now had episodes were part of the major theme revolved around how bad the economy is.  Heck, even the Simpsons made light of this when Homer’s annual Mardi Gras party comes home to roost after financing the celebrations on home equity lines of credit:

The recession has gone viral.

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