RECOVERY OR RELAPSE?
True economic recovery or a dead cat bounce hangs in the balance
With each passing day we read and hear about the vital signs of the economy like it was a patient at a hospital on life support. Every little sign of improvement seems to be accompanied by pundit’s proclamations that the worst is behind us. Even bearish commentators like me have admitted to seeing signs of life that the economy is improving and that capital formation appears to be gaining some legs. Are we to believe that this 2000 point rally in the market as well as surging oil prices is a sign the recession is over? Well, take a deep breath and brace yourself for what I’m about to say:
This is a “dead cat” bouncing off the street after being dropped off the Empire State building. For a shimmering second or two people point at the cat and Proclaim “Look the Cat is flying, its alive, it’s flying”! Then they are disappointed when the limp lifeless body of Felix the Cat crashes back to earth a second time. Once again I will point out that I am not one of these so called experts on Wall Street who constantly predicted that housing would stabilize in 2007…then again in 2008…and now 2009. I do not utilize charts or 200 day moving averages because quite frankly I’m more concerned what geopolitical and economic events happen during that period, not whether a certain stock touches it 200 day average on a Tuesday at 11:45 am. What good is a moving average if you have 9-11-2001 as one of the days in your average? I use common sense and no amount of bobble headed foolishness on CNBC will ever prove to be better then good old common sense when it comes to investing. Everyday I hear how the housing market is showing signs of recovery and the pundits take the slightest improvement and manipulate the figures, feed it to the people and get a rally in the market. Unfortunately the numbers do not add up for one simple reason: JOBS. Since November, every month the U.S has reported new unemployment claims in excess of 500,000. Just last week they announced April claims of over 600,000. Now ask yourself this question: how many of these unemployed individuals will be falling behind on their mortgage payments? 25-50% seems like a conservative figure to use and we will assume the balance have sufficient reserves to make payments for the next 3 months. Using the governments own unemployment figures, it means that between 125-300,000 new delinquencies will be effecting the mortgage and housing market EVERY month. What’s even more disturbing is that these will not be the ‘toxic loan’ mortgages that TARP was supposed to fix. No Job equals means no mortgage payment for millions of Americans each month since last year…and there is no indication that this trend is ending anytime soon. Sure, there can be some better signs of employment, but when half a million or more Americans are losing their jobs each month the mortgage mess will enter a new phase. They better hold onto that TARP money really tight because Banks are now in for another round of mortgage tsunamis. Foreclosures will have unexpected jumps in the coming months and all the pundits will be scratching their heads and wondering how this could happen. The other growing problem with the jobless rate is American spending. When a house loses its source of income, they have no choice but to cut back spending. Purchasing plasma screens, new cars, and travelling for vacation are put on the back burner. Recently lost amongst all the rah rah crowd on Wall Street was the 3rd Quarter profit report of Costco which stated profits dropped 30% in the last quarter. Costco does not cater to the wealthy but rather the thrifty. It’s where a working class mom and dad go to buy 8 dozen eggs and 20 lbs of Cheerios for their kids at a bulk rate. Yet even this low priced section is seeing spending decrease rapidly. That’s bad news for our economy as well as our job predicament because as each store closes (see Circuit City) tens of thousands of additional jobs are thrown out the door and the collapse of the house of cards continues. While many on Wall Street cheer the latest GM and Chrysler bankruptcy deals, I see approximately 400,000 job losses from all the related entities and parts suppliers in the next six months. Last but not least we have the oil dilemma. Speculators have been driving the price up to yearly highs betting on the continued devaluing of the U.D Dollar as well as an end to the recession which will cause the demand to increase again. There’s just one little sticking point in this Wall Street gamble and that is that half a million people a month are losing their jobs, thus their need to buy gas to commute to work no longer exists. As this trend continues you will see greater and greater gluts of oil. Last week the U.S energy department reported a 19 year high in oil reserves. Once again, common sense dictates that if you are out of a job you do not need to use your car as much and more importantly, the planned road trip with your family this summer has been cancelled due to the fact your unemployed. Even those that are employed are so fearful of their job security that many workers have put off or greatly reduced their summer trips. Look for Oil reserves to continue to soar until someone on Wall Street wakes up one day and bails on his investments and A large oil sell off ensues. I apologize if this gloom and doom view is a buzz kill for the Wall Street party, but it’s a grim reality that most of Wall Street’s bobble heads want to ignore…much the same way they tried to ignore the impending Banking collapse in 2007 and 2008. Things will eventually improve but until President Obama’s so called “clean energy jobs” produce the 3-5 million new jobs he predicted during the election, its going to be a very slow and painful recovery. We cannot have recovery until we hit the bottom. Don’t look now but here comes Felix the cat crashing to earth for a second time.
