Everything Is Not Coming Up Roses

Billionaire money manager George Soros, Federal Reserve chief Ben Bernanke and the National Association of Business Economists, all agree: The U.S economic crisis is just about history. Plenty of Wall Streeters buy this rosy view, theorizing that this fall will mark the end of the nasty recession and produce a conspicuous economic upswing that will subsequently drive stock prices higher.

On top of that, just about anyone on Wall Street who is anyone is saying pretty emphatically that this year's fourth quarter will produce positive economic growth (which is the basis of the recent sizzling 40% rally in the S&P 500 from its March low).

The problem, though, is what often looks likes a sure thing -- such as the fact Tiger Woods would absolutely win the recent U.S. Open, which he didn't -- frequently turns out not to be anything but a sure thing.

Meanwhile, given ballooning unemployment, the sharp slowdown in consumption, no letup in the steady stream of foreclosures, rising interest rates and the threat of a new inflationary outbreak, skeptics abound, a number of whom argue that talk of a sunnier outlook at this time, given the slew of land mines all around us, is little more than economic hogwash.

One of them is Madeline Schnapp, the skipper of economic research at TrimTabs Investment Research of Santa Rosa, Ca., partly owned by Goldman Sachs and one of the country's leading liquidity trackers. Her view: Not everything is coming up roses.

"A financial collapse is now history, but the notion of a return to a full-scale recovery in the fourth quarter or positive economic growth in the period just doesn't make any sense," she says. "We're recovering from the worst economic downturn since the Great Depression and that's not going to happen overnight." Forecasts of positive growth this fall are a fantasy, she observes, because they're based on hope and expectations, not reality.

Her fourth quarter GDP outlook: "It will be another quarter of negative growth." In contrast, many economists are looking for positive GDP growth for the period of about 3% to 3.5%. For the current quarter, the consensus calls for a retreat of 3.5%, following a decline of a revised 5.5% in the first quarter and a drop of 6.1% in last year's fourth quarter.

Why such an economic bear? For starters, Schnapp -- who might aptly be called "Lady Doom" -- says real-time indicators suggest the U.S. economy is still contracting rapidly. Kicking off, she points to the prospects of a wave of defaults in Alt-A mortgages (low-risk, low-rate loans that are better than sub-prime and less than prime and are often made with little or no proof of a borrower's income). About 3 million U.S. borrowers have Alt-A mortgages and 36% of them have missed at least one payment in the last 12 months. Moreover, almost 16% of all Alt-A mortgages issued since January of 2006 are said to be 60 days late. All told, there are about 3 million Alt-A mortgages totaling $1 trillion

Schnapp also notes that wages plunged 6.1% year-over-year in the past four weeks, much steeper than the 4.8% year-over-year decrease in May. That means, she explains, $250 billion less this year in consumer pocketbooks. She also notes that income tax withholdings plunged an adjusted 8.8% year-over-year in the past two weeks, indicating wage declines and job losses have accelerated.

The labor market, as Schnapp sees it, is still in horrible shape. Granted, she observes, weekly unemployment and continuing unemployment claims have declined slightly, but they remain at high levels, while online job demand appears to have stabilized at an extremely low level. As for housing, she says the notion that it's starting to recover is nonsense. Aside from the growing defaults in Alt-A mortgages, California foreclosures are up 156% since March.

Another big worry, according to Schnapp, is the huge government debt. Spendthrift Uncle Sam, she points out, has to sell $1.5 trillion of new debt every quarter just to finance the deficit and pay down existing debt.

Her worrisome economic bottom line: "How can anyone say the economy is out of the woods?" Taking that concern a step further, she feels the economy is unlikely to expand until well into 2010.

Interestingly, despite Wall Street's feverish, go-go pitch to entice investors to put more money to work in the stock market, would-be equity buyers remain extremely cautious. Indicative of this, though investors are sitting on mounds of cash (about $3.5 trillion in money-market funds alone), much of it is being channeled into asset-preservation U.S. Treasury securities and FDIC-insured savings accounts. For example, from March through May, Treasuries and savings accounts posted an inflow of $615 billion.

Schnapp apparently thinks those cautious investors are on the right track. Her outlook: a U-shaped market (where stocks languish at a large bottom before rising), versus a V-shaped forecast (where stocks go up and down sharply). As the folks at TrimTabs see it, there's a time to buy stocks and a time not to buy stocks, and now is the time not to buy unless the loss of money is irrelevant.

Comments

[gspurlock]

I cannot believe this is news to anyone. As long as the threat of increased socialism is hanging over the neck of our nation, the economy will not recover. Socialism, including the Stimulus Package, the Omnibus Spending bill, Nationalized Health Care and the new Cap and Trade legislation, will lead to bankruptcy. As long as the Democrat led Congress is the President's lickspittle and refuses to represent the people as required by the Constitution, and continues shoveling socialism down the throat of our nation, both busineses and citizens will refuse to spend or invest their money and the economy will continue to sink. If the President and Congress are not trying to destroy our nation and erase its prosperity, they need to completely change tactics. If they are trying to destroy America from within, they are succeeding.

Now for the $64,000 question, will completely eviscerating our economy and military cause other nations to like us? That appears to be the strategy. Sort of like the submissive behavior of a dog, who rolls over on his back, exposing his vulnerable underbelly to demonstrate that he is not dangerous, and hopes that no one will attack him.

Good luck to all of us.

Best regards,
GSpurlock

[Adartist777]

Throw your money into Wall Street. I'm heading to the casino. At least I have a better chance there!

[clevelandchick]

Unemployment is still a huge issue. I found this research report from an economist on the job losses in Ohio and Cuyahoga County (where Cleveland is) on a local blog in a post from a long time local investigative reporter/muckraker. The numbers are down right scary:

http://www.nacs.net/~georgez/newclaims062009.pdf

Unemployment in the Greater Cleveland are is up 91% from June of last year. Statewide, the unemployment figures for Ohio are up 78%. In certain counties unemployment claims are up to three times the normal level and for the whole state it's 171% above the normal level.

I'm really sick to death of pundits and politicians equating a few good weeks on Wall Street with economic health when the reality out there for the average American is losing their job, taking work for much lower wages, having their wages cut, losing their home, lost retirement savings, obnoxious health care costs and living week to week in economic insecurity.

The economic strategy by the Obama Admin should have focused a hell of a lot more on job creation and revising trade policies that grow industry here at home. Instead, the people got crumbs and the banks got everything...and the banks STILL ARE NOT releasing commercial credit. Sickening.

[iblogleft]

Some call them skeptics, others, realists. Great story.

[RogerHWerner]

I am bemused by statements that the worst is over. Such statements as is noted are based largely on wishful thinking. Too much emphasis is placed on the Dow and Wall Street. It should be obvious by now that a healthy stock market does not mean a healthy economy. That was the mantra for how many years until last year? Too many. The Federal Reserve and Congress have done next to nothing as far I can tell to curb the worst abuses of corporate America. Banks remain out of control, there is still too much concentration of wealth. The tax structure is a mess with those who can most afford to pay paying too little. As a long time investor I have to say that I have zero faith in the so called market. I no longer am sure what to have faith in. It certainly isn't my 'elected' government either.

[GrainOSand]

Your family, your friends, the good ideas this country was founded upon, and the spirit that binds us all -- believe in those entities, then branch out cautiously from there.

[Marlyn]

"As a long time investor I have to say that I have zero faith in the so called market."

I agree. I'm out of the stock market now, and I'll never go back.

[iblogleft]

After July, cautious support could bring very lucrative gains over the long term, so never say never.

[Vinca]

I don't know anyone who trusts the stock market. they are also not too much trusting the banks. WHEN ARE WE GOING TO SEE JOB GROWTH? THATS THE BACKBONE OF ECONOMIC RECOVERY.

[clevelandchick]

The stock market is not for your average American who cannot afford to gamble what little they can save for retirement away. Playing the stock market is a rich man's game.

We were all duped in the 90's with being marketed into b.s. 401K plans, told that putting your money in 'mutual funds' aka the stock market would get you 1 million for retirement. I was a few years into my career back then and was told to 'invest aggressively' to build my portfolio until I was 40. Ha.

In twenty years I've built it up, lost it all and built it back up again......to the level it was ten years ago. In 2007 I moved it out of stocks and put it all into T-bills. I'd rather make a guaranteed 5% than lose the whole fund's value every five-ten years when one of these economic bubbles occurs.

And these bubbles are going to keep occurring because the Obama Admin and Congress are completely toothless as far as regulating Wall Street. With Geithner and Summers in charge you can be sure any regulation will strictly be cosmetic and do nothing to reign in risky practices that got us here.

[jimrs6]

The situation is getting worse. Businesses are looking at what's coming down the pike from this Congress and preparing for the worst.

[RogerHWerner]

WTF are you taking about? Do you really expect anyone to understand what you mean? The biggest issue with the US economy isn't with business it is with consumers and people and they are looking at what this Congress isn't doing. It remains owned by special business interests and there has been precious little re-regulation. Bankruptcies continue unbated, unemployment is increasing. None of these has anything to do with this Congress but with decades of patented inane policies by a largely conservative dominated political establishment from both parties.

[GrainOSand]

“Meanwhile, given ballooning unemployment, the sharp slowdown in consumption, no letup in the steady stream of foreclosures, rising interest rates and the threat of a new inflationary outbreak...”

“Schnapp also notes that wages plunged 6.1% year-over-year in the past four weeks, much steeper than the 4.8% year-over-year decrease in May. That means, she explains, $250 billion less this year in consumer pocketbooks. She also notes that income tax withholdings plunged an adjusted 8.8% year-over-year in the past two weeks, indicating wage declines and job losses have accelerated.”

Grim...

I will take the sunny view please.

I could offer a credible dark pessimistic view but I would like to think that America is going to be ok out into the near and distant future. There are signs of recovery and then there are signs that recovery is a subjective term allowing for the demise of many. It is that subjectivity and the willingness of the social marketplace to allow for a mass cram down (irony intended) of living standards, or in some cases -- actual living that I can draw the most pessimistic forecast. For it is the blowback of such an allowance that is most unsettling to consider. The cauldron is smoldering. The heat is on and sustainability is all the question -- sustainability of a nation -- forget about an empire.

[bramapanzer]

Look into the term "Bear Rally" and you may understand why all these "economists" are saying this. Essentially, public perception of the economy is an integral part of how the economy actually functions. This may seem counter-intuitive, but look at it this way. If I think the economy is "bad" I will transfer my money to savings and other low-risk investments, I will also cut back on spending and build up a cash reserve. All of these actions lead to what we call a "bad economy."

So! What these guys are trying to do is make a buck off ya one more time before the real bubble (see business real estate, credit card defaults, Alt-A mortgadges and a ton of ARM's that are re-adjusting in 2010) bursts. The fact of the matter is that the fundamentals of the economy are BAD and downright UGLY. Don't put all your faith in that magic DOW number (which only includes 50 companies....)

Well then, who do we trust? Find a friend, local financial advisor, someone that has some standing in your community to give you good fair advice. Ask THEM what they are doing with THEIR money and WHY.

[GrainOSand]

Sound assessment and sound advice.

I am reminded of Fast Eddie Felson:

"How should I play that one, Bert? Play it safe? That's the way you always told me to play it: safe... play the percentage. Well, here we go: fast and loose. One ball, corner pocket. Yeah, percentage players die broke, too, don't they, Bert?"

I just love that movie. (-:
http://www.imdb.com/title/tt0054997/quotes

This to say that one must be frugal to be magnanimous, or in order to play it fast and loose one must be a master (studied) who having accumulated wealth of wisdom over time and circumstance can take the risk of the fast and loose path, otherwise it is indeed a gamble. The advice you gave is a path to mastery and guard rails for shaky drivers. It also ever-so-slightly touches the edges of my main meme, my primary consideration concerning politics, economics, and such things -- the corrupt human heart killing us all. Your description of bend over “one more time” made me smile.

I salute and thank you. It is each of our duties to try and support others in living their lives. The spirit of that is not lost upon me in your effort. Life is the life you live not the one you plan, however, may your well conceived plans bear significant fruit in the life you live. This is what I wish, hope, and pray for the masses of people.

[clevelandchick]

That's tough, you have to have a financial advisor that is willing to tell you not to play in the stock market which is how they make money.

I told my guy to move my money out of the market in 2007, he tried to talk me out of it. He had to eat crow because I'm one of his few clients that didn't see their IRA's completely evaporate.

After losing 70% of it's value by the end of 2001 and building it back up in 2007 to what it's peak value was in 2000? I had enough of gambling with my savings.

The stock market is for the wealthy, not your average American who would do better to pay down their credit, save money, buy some bonds or T-bills.

[hopeca]

Thanks for your insightful perspective. Please keep probing and posting.

RE: "Billionaire money manager George Soros, Federal Reserve chief Ben Bernanke and the National Association of Business Economists, all agree: The U.S economic crisis is just about history."

None of those people are in touch with the realities of the shifting U.S. labor market. I know dozens of multi-degreed formerly six-figure earning professionals out of work or under-employed. This is the group that used to have discretionary income - that is more than day-to-day or week-to-week survival money - for restaurant meals, vacations, home renovations, private school educations, camp fees, two cars per household, home insurance, health insurance, charity donations, birthday gifts, regular haircuts, regular automotive service, magazine subscriptions, theater tickets, museum memberships, the more expensive eco-friendly products, apparel updates, housekeepers, handymen, nannies, dog walkers, taking care of their parents, and even, investing or more appropriately risking on the stock market... but no more. Until our banking controlled Congress and FED wake up and recognize that investments in new industries and entrepreneurial efforts is the only way to even possibly restore even a fraction of the U.S. professional class earning power, the crisis will not end and the country's future will not be bright. When will any of these visionless "leaders" even talk to someone outside of their rarefied circles?!?

[FoonTheElder]

Nothing has been done in Washington to help the average American. The only help has been to prop up the banks and Wall Street. Just another example of big business owning the government and using their power to jerk over workers. Unemployment and underemployment will continue just as it has for the past decade.

[Mugzi]

This situation did not happen overnight and it won't be resolved overnight. It's been 5 months and yes, it is very painful for many people, but I never expected a miraculous recovery in weeks.

[FoonTheElder]

All Obama has done is promote Bush Lite policies. Propping up the banks with trillions of dollars isn't going to do much of anything for unemployment. They would have been better off reorganizing them, but that wasn't going to happen when Obama appointed a bunch of center-right Wall Street insiders to his administration.