06/17/2010 05:12 am ET Updated May 25, 2011

Who Needs Kindergarten Economics?

No two ways about it, the economy is moderately beginning to hum again. Perkier consumer spending, a pickup in manufacturing activity and 5.6% GDP growth in the fourth quarter are obvious signs and something to cheer about. But to suggest, as a growing number of media reports are doing these days, that we're now officially over the economic hump, that the days of financial anguish are behind us, is little more than editorial hogwash unsupported by the facts.

Take the New York Times, which apparently holds such a sunny view. It recently featured a front-page analysis to inform its readers that the skeptics are wrong to be so glum since the numbers signal better times: wrong too to question the vigor of the recovery.

Judging, though, from the reality of what's really happening in America -- namely the risk galore and the shoddy economic and financial underpinnings in a variety of critical areas that continue to wreak havoc on household wealth -- the Times' economic assessment comes across as naïve journalism, the kind you might expect from a kindergarten class, not from a paper that boasts it offers all the news that's fit to print.

In contrast to the Times' ebullience, a realistic appraisal of what's actually taking place on the economic front is offered by Madeline Schnapp, the economics skipper at West Coast liquidity tracker TrimTabs Research, which is partially owned by Goldman Sachs. "Things feel and look better, but we're far from out of the woods," she says.

Documenting her case, Schnapp offers up what might well be described as the "gruesome four-some, "four gigantic problems that she says the government is sweeping under the rugs in the hopes they'll go away." The big worry, as she sees it, is that any of these problems could explode, leading to a renewed, significant battering of the economy.

For starters, she points to the obvious -- ongoing high national unemployment, currently 9.7%. That's equivalent to about 15.4 million jobless Americans or actually around 25 million if you factor in the unemployed part-timers who can't get full-time work and those discouraged people who have quit looking for a job.

Schnapp thinks the extent of the jobs problem is being somewhat minimized by the recent boost in March employment (the creation of 162,000 new jobs) - -which largely reflected temporary government hiring to conduct the census and private hiring for restocking inventories, and which, she notes, is hardly indicative of a major recovery in the job market. Likewise, the economic boost from the government's extension of unemployment benefits, in the case of California, to nearly two years or 103 weeks.

Another of her fearless four-some centers on housing, notably surging mortgage delinquencies, which now stand at a record 8.4 million. That's equivalent, Schnapp says, to an estimated loss to mortgage holders of between $80 billion and $150 billion, which is more than the Obama tax credits.

How long, she asks, can these delinquencies -- which are running at a rate of one million every three months -- continue and the banks pretend they don't exist? Banks are not required to take a loss on these mortgages because they're carried on the books as a non-performing asset. Still, she points out, it's phantom money on the balance sheet. At some point, though, she notes, the devil will come home to roost.

Speaking of housing, she says it's worth keeping in mind that 25% of the country's housing stock, or some 12.5 million homes, are worth less than what's owed on the mortgage. In some areas, such as Las Vegas, the figure is up to 40%.

Yet another of the gruesome four-some cited by Schnapp is the question of whether the Treasury can raise the necessary cash to fund current operations and retire maturing debt. If it can't -- and there's evidence there are no guarantees on this front -- interest rates will go up, ditto the cost of borrowing, and housing and the economy will suffer.

A few weeks ago, the Treasury fared poorly on a $175 billion auction of Treasury securities, primarily five and seven-year notes, which, in turn, pushed interest rates higher. Over the next year, the Treasury will have to raise $2.5 trillion via weekly auctions averaging about $80 billion a week. Schnapp figures there's reason to be concerned that this goal can be achieved. And she's hardly alone.

With the world's economies so inter-related, our economic worrier wraps up with her fourth big concern -- the threat of a spreading sovereign debt crisis. Taking note of the recent bailout of Greece, thanks to the efforts of the European Union and the International Monetary Fund, Schnapp finds it noteworthy that no one has yet stepped up and written a check.

What does it all mean? As Schnapp sees it, the U.S. economy should continue on a path of slow to moderate growth, fueled, she says, by the power of the government printing presses. Short term, she thinks, stocks will likely continue to grind higher, but if there's a crisis in any of the four areas that worry her, she thinks the market will take a shellacking.

Her wrapup: This may be a good trading period for investors with a three-week horizon, but this is a highly risky environment for the investor looking out a year or two.

My wrapup: Down with kindergarten economics!

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