Who out there doesnâ€™t know by now that we are enjoying the best of all worlds with our domestic economy and stock markets? To hear the promoters tell it, the â€œGoldilocks Economyâ€ is creating economic wonders for the country as a whole. The fact that only those in the top tiers are benefiting is just a minor annoyance. In time, weâ€™ll all enjoy the benefits of making the rich even richer. But when I read the headlines, it appears that Goldilocks has fallen down — and canâ€™t get up.
Todayâ€™s stock market bulls are doing their level best to portray the near-dead housing market as simply going through a necessary flat spell before charging even higher. Theyâ€™re getting plenty of support from people like Chairman of the Federal Reserve, Ben Bernanke, who repeatedly points to fresh signs of a bottom in the housing market.
But each month, as those proclamations are issued for public consumption, fresh data belies his optimism. Top executives at the nationâ€™s largest home builders have commented that Bernanke apparently sees what they do not — but wish they could. Is it odd only to me that the Fed chairman has evidence of a housing recovery while those in the industry do not?
We are experiencing now nearly a nine-month supply of homes for sale nationally, with close to 4.5 million homes listed for sale. An area that was one of the hottest real estate markets in the country during the boom, west central Florida reports that only about 6% of listed single-family homes have sold in the past few months, the â€œSpring/Summer selling season,â€ that, traditionally, is the best time of year for home sales. Condo sales rates have dropped even lower, with close to 4% of listed units finding buyers.
Does this sound like a â€˜â€™Goldilocks Economyâ€™â€™ to you, when what might be the most important industry in the country is falling flat on its back? Isnâ€™t this the kind of news you would hear in a recession?
Of course, we should never take just one data point and call it symptomatic for anything as complex as the U.S. economy. We should look for corresponding evidence. So letâ€™s check the jobs market for additional data.
When checking your local news sources, which do you tend to see more of lately — announcements of new job creation at one (or more) major employer — or job cuts? In recent months, major domestic auto makers have announced cutbacks in jobs, and downsizing is the order of the day.
New reports are emerging about the next round of wage negotiations between the auto workersâ€™ union and the big auto makers, and theyâ€™re not haggling over the size of pay increases for workers. The big issue seems to concern how many more concessions on pay and benefits workers will absorb with the hope, at least, of keeping their jobs. Is that what we should expect in a growing, healthy economy?
LaSalle Bank, Micron Technology, Delphi, Medtronic, LSI Corp., Tropicana, Tyco, Dell, Motorola, IBM, Ford, Capital One and Palm are among the companies recently issuing layoffs notices. So, as quickly as you can, name those companies that have recently announced hiring campaigns. Iâ€™ll wait right here while you make your list.
My local newspaper today features a front-page story about job cuts in local government agencies in response to calls for lower property taxes and general shortfalls in tax revenues. Also, layoffs of teachers in Needham, Massachusetts; Racine, Wisconsin and Boca Raton, Florida show more of the strains facing local governments.
Is this something to expect in times of economic strength? Of course, as many in Bear circles already know, new job creation as announced monthly by the Bureau of Labor Statistics (BLS) is supplemented with hundreds of thousands of phantom jobs that were never actually identified but are still counted, using the so-called â€˜birth/death model.â€™â€™ That nifty tool allows that government agency to turn negative job creation numbers into positive ones. By simply assuming a number and plugging it into the data, BLS can offer a resulting report that provides numbers that are neither too good â€“ or too bad. Welcome to the Goldilocks job markets!
Of course, talk about a Goldilocks economy and the â€˜â€™economic sweet spotâ€™â€™ our country is now enjoying involves not just solid economic growth but also low rates of inflation. Just this morning, further evidence of our low inflation appeared when the BLS announced that inflation, at its â€˜â€™core level,â€™â€™ is again muted and showed how costs in May, when annualized, evidenced a rise just over 1%.
Talk about miracles, eh? With gas prices now above $3/gallon in most places and ongoing news about rapidly rising costs of milk, corn, wheat, health care and so many other things we need daily or monthly, isnâ€™t it odd that, overall, inflation has remained so contained? The dollar has lost close to 30% of its value in the last six years, but prices remain stable?
But much like the job creation numbers, official inflation estimates are also phony. So maybe the â€œGoldilocks Economyâ€™â€™ label is exactly the right way to describe todayâ€™s economic situation now. Both are fictional creations!
Our economic miracle is the product of record levels of money printing and credit creation. Debt levels have soared in recent years, and the savings rate for workers is now negative. Thatâ€™s a new trend here. What does the inability of most Americans to save even one dollar of their monthly income say about the true health of our economy going forward?
And how does that work in conjunction with todayâ€™s rising prices for gas and food? Where will the money come from to pay rising living costs? And with millions of home owners who hold various kinds of funky mortgages, such as adjustable rate, interest-only and â€˜â€™Alt-Aâ€™â€™ (or â€˜â€™liar loansâ€™â€™), anticipating interest rate hikes either this year or next, can we still see support for the â€˜â€™just rightâ€™â€™ economy?
Already, foreclosures have increased nationally by almost 90% since last May, and homeowners who have fallen behind in their payments are piling up in Michigan, Ohio and Indiana, with several other states moving in the same direction. Nationally, statistics regarding homeowners who are â€˜â€™non-current,â€™â€™ or at least 90 days behind on mortgage payments, have reached the highest level since tracking began in 1990. While this factor may help tame inflation and support the â€˜â€™Goldilocksâ€™â€™ theme, it canâ€™t be a healthy way to rein in costs.
Adding to the housing debacle are recent troubles at Bear Stearns, one of the countryâ€™s top investment banks. Bear is a major player in the market for mortgage bonds and derivatives, like collateralized debt obligations, which are cut up into different tranches, or levels of risk and yields. The difficulty is that many of its billions of dollars worth of bonds were valued by Bear according to a mathematical model rather than what the market would actually pay for them at sale. An attempt to assign a market price to them was a disappointment, since many of those bonds received no bids — at any price.
So how does that occurrence bode for the billions of dollars worth of mortgage bonds held by hedge funds, pension plans and â€˜â€™stable valueâ€™â€™ bond funds, which are, in turn, held by investors? The possibility exists that billions of dollars worth of these bonds are worth much less than their marked value. So who owns these losses — and how big are they?
Wall Street and Washington policy makers try hard to keep this news from surfacing. Yet if our economy truly was strong and benefiting from nearly ideal economic conditions — an â€œeconomic sweet spot,â€ as I heard reported again today, shouldnâ€™t it be strong enough to absorb these losses without significant resulting damage to our economy?
Apparently not! This news is â€œpapered overâ€ until some form of bailout can be arranged to hide the losses. And it will be covered up, just as inflation and job creation numbers are â€œmanipulatedâ€ each month. When governmental agencies see data which they donâ€™t like or doesnâ€™t support current fiscal or economic policy, they just present them in ways that look good enough for touting on CNBC, where they are labeled, once again, as more of those glorious wonders engineered for us by our beneficent leaders.
If, as an investor, you are looking for economic â€œsweet spotsâ€ or those places where our economy truly enjoys strong growth and relatively low inflationâ€¦well, actually, there arenâ€™t any! But our rising inflation can still be partially offset with other strong economic growth. And plenty of other places offer just that, places such as Brazil, India and other emerging markets.
But in the U.S., Goldilocks is treading in mud. And when she finally falls, getting up will take years. The growing pile of economic excesses — like money printing, debt and credit creation and miserable tax policies — has done too much damage to be swept quietly under a rug.
Have a great week. Bob
Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., email@example.com.