(1.) All is right with the world again. The economy is recovering. The US stock market is going to the moon.
The stimulus efforts put in place several months ago are working. And the worst is behind us. The government and its many acts of benevolence have saved us all from another Great Depression. Don’t pay any attention to the inconvenient truth of 9.8% unemployment. After all, the unemployment report is a lagging indicator. Declining income tax receipts should also be ignored, as should the increased bankruptcy filings and rising rates of foreclosure.
Oh yeah, don’t worry about the collapsing U.S. dollar. It allows U.S. companies to sell more things overseas. So really, a declining dollar is a good thing. Just look at the stock market. If it’s rallying, then all must be well and good. Yes, I’m being sarcastic. And no, I don’t really believe the government has saved us from anything. It has only delayed the inevitable pain associated with living within one’s means. For the time being, though, the stock market rally continues.
So many of my friends and most of my readers think I am totally out to lunch on my economic predictions, as they think the roaring stock market is really about fundamentals and earnings. You must remember that the stock market is only about fear and greed. Right now greed is winning. I hear that there are now as many people day trading as there were during the Internet bull market. This always happens when there are no real corrections during major rallies. The stock market is up almost 54% with no major correction.
(2.) Those who fight the momentum of the stock market when greed is in charge are destined to spend most of their mornings wiping egg off their faces.
As I have already predicted, the US stock market would top somewhere between 9900 and 11,000. Greed is now firmly in control, so it might be 11,000 and it might not crash until next year.
This stock market is just like the Internet bubble of 1999-2000. Longer term, I am overwhelmingly bearish on the stock market. Just as I was convinced Internet stocks would crash and burn in 2000, I am absolutely convinced stocks are in a long-term bear market and will ultimately fall below the March lows. In the short term, however, anything can happen. And in this case, the term “anything” means stocks are likely to go higher for now.
(3.) U.S. foreclosures jumped to an all-time high of 937,840 in the third quarter.
That’s a 23% rise from the same time last year, says a report from RealtyTrac today. One in every 136 households received a filing, also a record. And Obama assures us the economy is recovering? But here’s the kicker, this isn’t about subprime anymore. The most recent data from the Mortgage Bankers Association claims subprime mortgages currently account for hardly a third of foreclosure starts, down from 50% last year. Prime loans, the gold standard of the mortgage business, now take up a 58% share. Even the foreclosure scene in terms of home prices has been turned on its head. Check it out:
(4.) The delinquency rate on commercial mortgages soared sevenfold last month.
The Swiss bank reports that $22.4 billion in commercial mortgages were at least 60 days past due in September, up from just over $3 billion in September 2008.
And most of the corporate earning reports now being reported are garbage. Earnings are whatever an accountant wants them to be. Compared to last year, this year’s earnings are bound to be better.
The latest retail sales numbers are also tempering market gains. Retail sales fell 1.5% in September.
(5.) A second Great Depression is still possible. by Thomas Palley
Over the past year the global economy has experienced a massive contraction, the deepest since the Great Depression of the 1930s. But this spring, economists started talking of “green shoots” of recovery and that optimistic assessment quickly spread to Wall Street. More recently, on the anniversary of the Lehman Brothers crash, Ben Bernanke, Federal Reserve chairman, officially blessed this consensus by declaring the recession is “very likely over”.
The future is fundamentally uncertain, which always makes prediction a rash enterprise. That said there is a good chance the new consensus is wrong. Instead, there are solid grounds for believing the US economy will experience a second dip followed by extended stagnation that will qualify as the second Great Depression. Some indications to this effect are already rolling in with unexpectedly large US job losses in September and the crash in US automobile sales following the end of the “cash-for-clunkers” programme.
That rosy scenario thinking has returned to Wall Street should be no surprise. Wall Street profits from rising asset prices on which it charges a management fee, from deal-making on which it earns advisory fees, and from encouraging retail investors to buy stock, which boosts transaction fees. Such earnings are far larger when stock markets are rising, which explains Wall Street’s genetic propensity to pump the economy.
As for mainstream economists, their theoretical models were blind-sided by the crisis and only predict recovery because of the assumptions in the models. According to mainstream theory, it is assumed that full employment is a gravity point to which the economy is pulled back.
Empirical econometric models are equally questionable. They too predict gradual recovery but that is driven by patterns of reversion to trends found in past data. The problem, as investment professionals say, is that “past performance is no guide to future performance”. The economic crisis represents the implosion of the economic paradigm that has ruled US and global growth for the past thirty years. That paradigm was based on consumption fuelled by indebtedness and asset price inflation, and it is done.
There is a simple logic to why the economy will experience a second dip. That logic rests on the economics of deleveraging which inevitably produces a two-step correction. The first step has been worked through, and it triggered a financial crisis that caused the worst recession since the Great Depression. The second step has only just begun.
Deleveraging can be understood through a metaphor in which a car symbolises the economy. Borrowing is like stepping on the gas and accelerates economic activity. When borrowing stops, the foot comes off the pedal and the car slows down. However, the car’s trunk is now weighed down by accumulated debt so economic activity slows below its initial level.
With deleveraging, households increase saving and re-pay debt. This is the second step and it is like stepping on the brake, which causes the economy to slow further, in a motion akin to a double dip. Rapid deleveraging, as is happening now, is the equivalent of hitting the brakes hard. The only positive is it reduces debt, which is like removing weight from the trunk. That helps stabilise activity at a new lower level, but it does not speed up the car, as economists claim.
Unfortunately, the car metaphor only partially captures current conditions as it assumes the braking process is smooth. Yet, there has already been a financial crisis and the real economy is now infected by a multiplier process causing lower spending, massive job loss, and business failures. That plus deleveraging creates the possibility of a downward spiral, which would constitute a depression.
Such a spiral is captured by the metaphor of the Titanic, which was thought to be unsinkable owing to its sequentially structured bulkheads. However, those bulkheads had no ceilings, and when the Titanic hit an iceberg that gashed its side, the front bulkheads filled with water and pulled down the bow. Water then rippled into the aft bulkheads, causing the ship to sink.
The US economy has hit a debt iceberg. The resulting gash threatens to flood the economy’s stabilising mechanisms, which the economist Hyman Minsky termed “thwarting institutions”. Unemployment insurance is not up to the scale of the problem and is expiring for many workers. That promises to further reduce spending and aggravate the foreclosure problem.
States are bound by balanced budget requirements and they are cutting spending and jobs. Consequently, the public sector is joining the private sector in contraction.
The destruction of household wealth means many households have near-zero or even negative net worth. That increases pressure to save and blocks access to borrowing that might jump-start a recovery. Moreover, both the household and business sector face extensive bankruptcies that amplify the downward multiplier shock and also limit future economic activity by destroying credit histories and access to credit.
Lastly, the US continues to bleed through the triple haemorrhage of the trade deficit that drains spending via imports, off-shoring of jobs, and off-shoring of new investment. This haemorrhage was evident in the cash-for-clunkers program in which eight of the top ten vehicles sold had foreign brands. Consequently, even enormous fiscal stimulus will be of diminished effect.
The financial crisis created an adverse feedback loop in financial markets. Unparalleled deleveraging and the multiplier process have created an adverse feedback loop in the real economy. That is a loop which is far harder to reverse, which is why a second Great Depression remains a real possibility.”
Thomas Palley is former chief economist of the US-China Economic and Security Review Commission and is currently Schwartz Economic Growth Fellow at the New America Foundation
(6.) Icahn: Risk of Double Dip, Investor ‘Bloodbath’
“The amateur investor is going to get hit badly again because they’re pouring money into these funds. Some of these funds managers I do not think are experienced enough to handle some of the distressed stuff they’re buying and they’re going to get burned,” he said. Icahn said he still sees investment opportunities in advertising, telecom, the Internet and bankruptcies. But making money out of bankruptcies should only be attempted by the experts, he said.
Meanwhile, real estate is a perfect example of a good market to short, according to Icahn. Icahn said he questions why “any individual in their right mind” would buy into Real Estate Investment Trusts (REIT). Investors could never liquidate the underlying value of the buildings on their portfolios, he said.
“I think there’s overcapacity in the office market and in shopping centers because you have a secular change in the way retailers are behaving and the way consumers are behaving,” he added. There are still opportunities in the debt markets, but “it’s not what it was,” he said.
The economy is in a precarious position and the outlook for consumer confidence and unemployment remains bleak, according to Icahn. “I think that you have to be cautious. It’s on a precipice right now and it could really go either way,” he said. Icahn warned against seeing the recent stock rally as a sign that the economy has turned a corner. “It’s a myth to say the market is a good indicator of the economy. I think individuals are much more of an indictor,” he said. “The market is schizophrenic at this point. So you have trillions of dollars literally in consumers hands, they don’t want to spend it, they’re afraid to spend it,” he added. ”
(7.) By year-end, the Dow will drop below 6,300 and by 2011 to 4,200. by Michael Cuggino
“So 26 to 27 million people who are out of work isn’t going to help the economy,” he said. “And until that number gets better, we will not see a recovery.” Lekas told investors to sell equities, buy short-term fixed income, stay with high quality names and stay safe.”
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