Whatever the stock market does next, it’s been in rally mode for the last month, the US economy continues to sputter and slide lower. I was assessing the latest economic data late last week, starting with housing, and recent developments continued to get worse, not better. In spite of US housing starts and permits dropping drastically, we continue to have a huge supply of housing inventory. While adjustable rate resets should peak over the next two months, foreclosures, which lag resets by about six months, keep increasing which means more houses coming on to the market and these lower foreclosure “fire sale” prices just pressure existing house sellers to lower their stated prices. One somewhat little talked about problem with our persistent housing inventory overhang and thus ever lower price scenarios is that it keeps increasing the pressure on institutional investors now stuck with and holding these asset-based investments. Lower and lower housing prices mean larger and larger paper losses for any/all holders of bundled-together, securitized mortgages. And that means more huge write offs to come from money center banks, investment banks, institutional investors, etc. in future quarters since few can get rid of these unpriced, opaque and now despised (to most) securities. I’m waiting to see when these securitized investment prices come down so low that venture hedge funds figure they can finally take these investments off the hands of the banks without much risk. That should be a bottom. But I don’t see that light at the end of the tunnel quite yet.
In the meantime, the real economy is starting to get closer to meeting the paper economy somewhere in the middle. Paper losses by paper shuffling banks, brokers, are now leading to real job losses in financial firms. And that, with a lag, will lead to further job losses by those servicing the paper shufflers, the rich and their assets, their lifestyles, their jobs and their homes. And then these additional job losses will begin finally hurting the real economy, those businesses actually producing the products that are needed. When we parse the statistics, we see today’s financial problems are now hurting overall retail sales -- throw out restaurant receipts and gasoline sales which look better than they really are because of price increases -- which were down -2.2% in 2008 Q1 which is the worst overall sales report since the first quarter of 2002. Elsewhere industrial production remains down. And payroll employment has starting losing jobs, not gained like is normal during normal times, net losing jobs for each of the last three months.
Schwartz View: In other words, we continue to see a slowing economy, but one beset by higher inflation, and an economic slide showing no signs of turning around any time soon. Hopefully we and the overall economy will get a boost by the government’s stimulus plan, the checks should start arriving next month, but this seems just a temporary boost and a sop to calm down the public and give us all something to look forward to. The current economic problem was brought to a head by large investors getting too greedy but the can of worms it opened has been a longstanding, underlying chronic problem, and now is gaining traction. According to the Pew Research Center, “The percentage of middle-class Americans saying they were better off than they were five years ago fallen to its lowest level in 44 years.” Just ponder that a little when it comes to resolving this nexus of credit crisis, recession and inflation. In other words we’re at a very weakened state economically and psychologically and heading into trouble.