Think We’re in a Recovery? Think Again
posted at 7:32 am on June 13, 2009 by The Other McCain
printer-friendly
The Dow Jones Industrial Average closed Friday at 8,799.26, having gained 36 points (0.4%) in the past week, more than 2,200 points (34%) above the March 9 low of 6,547.05. Does this signal a real recovery or is it a “sucker’s rally”?
Suckers may be ignoring evidence that a new wave of foreclosures and bank failures is approaching, and that the current approach to the economic crisis will only make matters worse. James Quinn sees Federal Reserve Chairman Ben Bernanke, Treasury Secretary Tim Geithner and President Obama as the Larry, Curly and Moe of this economic slapstick. But it’s no laughing matter, when you read Quinn’s analysis of prospects for another real-estate meltdown:
A housing rebound is a virtual impossibility. Homeowners currently have the least amount of equity in their homes on record. Overall, the number of borrowers underwater climbed to 20.4 million at the end of the first quarter, up from 16.3 million at the end of the fourth quarter. . . .
41% of all homeowners with a mortgage are underwater. With prices destined for another 10% to 20% drop, the number of underwater borrowers will reach 25 million. . . .
And there’s a tsunami of Alt-A mortgage resets now approaching our shores. That will get under way in 2010, and won’t peak until 2013. These Alt-A mortgages are already defaulting at a 20% rate today. There are $2.4 trillion Alt-A loans outstanding. . . .
With the 30-year mortgage rate approaching 5.7%, mortgage refinancing activity has plunged about 60% in the last 2 months. Mortgage applications for new home purchases collapsed at a 20% annual rate in May, too. Normality in the mortgage market appears to be years away.
Read the whole thing. (H/T: The Johnsonville News.) The Obamanomics approach of freezing foreclosures and forcing payment readjustments for underwater homeowners has only delayed, not prevented, the inevitable “reset” of market valuations. How scary is it? The chairwoman of the FDIC is literally knocking on wood:
Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said Friday that while the crisis that swept through the financial world last year has subsided somewhat, it was far from over and there would be “many more bank failures” ahead. . . .
“Hopefully there are no more events that create liquidity stresses on the banks,” Bair said, knocking on a wooden conference room table, “and now we’re having more good old-fashioned capital insolvencies.”
And even though unemployment is nearing double digits, the fact is that the unemployment numbers don’t capture the whole picture: “Furloughs, pay cuts and reduced hours are taking a toll on workers who so far have escaped job cuts.” (H/T: Instapundit.)
Given this abundance of causes for gloom, why has the stock market kept rising? Forget the bulls and bears — it’s the silly squirrels with their 401K accounts pre-set to keep buying stock every payday who are pushing the market up now. In the event of another meltdown, these typical 401K holders will be the real suckers of the “sucker’s rally.”
Blowback
Note from Hot Air management: This section is for comments from Hot Air's community of registered readers. Please don't assume that Hot Air management agrees with or otherwise endorses any particular comment just because we let it stand. A reminder: Anyone who fails to comply with our terms of use may lose their posting privilege.
Trackbacks/Pings
Trackback URL
Comments
No other way to put it – the “squirrels” idea is plain silly. Dollar cost averaging is nothing new and it’s nothing reckless.
corona on June 13, 2009 at 8:33 AM
Heck that is only the tip of the iceberg. Check out business inventories which have not yet caught up to the decline sales.
Check this chart out.
Then we have the fun fact that business is still leveraged out the ass…and BoF doesn’t have thrills running up its leg about it.
Then we have the marvelous price increases in food that are coming.
Concerns mount over sharp rise in food costs
By Javier Blas in London
After a year worrying about the piggy bank, the world economy is turning its attention to the cupboard.
Almost unnoticed, agricultural commodities prices have returned to levels last seen at the start of the 2007-2008 food crisis, prompting concerns about a fresh rise in food costs.
The increase in soyabean, corn and wheat prices – to their highest level in eight to nine months and up more than 50 per cent from their December lows – comes on the back of strong Chinese demand, a forecast of lower supply due to reduced planting, and the impact of a drought in Latin America.
Argentina’s crops have been devastated.
“We are not in the comfortable food surplus environment of the 1980s and 1990s.”
GOSH the fun is only just beginning…greenshoots. Maybe those green shoots are sprouting out of the top of the heads of Bernanke and Paulson whose heads are filled with enough manure to support green shoots.
We are screwed and there isn’t a darn thing we can do about it except allow the pain to begin so we can get through it.
One bright spot is that Obama may not have enough money do mess up very much more of the US economy.
PierreLegrand on June 13, 2009 at 8:57 AM
Good article. I hope the economy will rebound sooner than later, but don’t expect any great news soon. If we pull out of this by 2010, it will be because of the resiliency of the U.S. economy and in spite of the Obama teams’ “brilliant” economists.
cs89 on June 13, 2009 at 9:41 AM
How about a GOOD CONTRACT WITH AMERICA!!
.
Well, civics is not being taught in schools these days is it. So this is where we are at. Okay guys what is the plan. Could it be that the economic design for recovery was off by a tad. Maybe that plan was implemented poorly. No….well it appears to me at least that a course correction would required without delay.
.
1) Take all those new government spending proposals off the table. Health care, Cap & trade and any other bullsh@t my fellow countrymen can think of.
.
2) President Incubis will sign an executive order suspending future spending of the stimlus package Monday morning.
.
3) Write and pass a bill recinding the porkulus package funding like yesterday and Mr, Presidaent you will sign said bill into law. What do you think of that America.
Apparently its proposed crisis recovery design was ill conceived.
.
4) Energy: We will open up those oil fields the were recently taken off the list and resume drilling, pumping tomorrow. And another thing, congress will excitingly draft legilation to open up to offshore drilling for oil which includes ANWR. We will drill here and drill now. Their can be a little green energy investment to appease the wackos but more importantly congress will get off their butts and work with the state governments to build nuke energy plants across this nation. We don’t want to let Iran be online before us now do we
.
5) Acorn organization will receive no government funding. They can still be there if George Soros want to waste his private fortune.
.
6) All those so called Czars will be forced to resign & all oversight of those obtained positions will be return to congress as per the U.S. Constitution.
.
7) Welfare reform….. well that pretty much goes without saying. We will just look up what old Newt did back in the 90′s. easy enough for that bugger.
.
.
I know I am leaving alot off this list. So everone else on this thread feel free to join in on the fun and add to this list.
.
The key phrase is “Government, this is what you should have considered and done”.
.
and pass it on.
Americannodash on June 13, 2009 at 9:44 AM
The stock P/Es tell just how hollow this stock rally is. I suspect when the 2nd Qtr earnings reports come out, the truth will puncture this rally because it is, in fact, a bubble. I simply do not believe there are enough profits being made in this economy to even come close to justifying these valuations. So, the clock is ticking on this market.
AUINSC on June 13, 2009 at 11:12 AM
Of course, but the media will find a way to spin it pro-Obama, no matter what happens. If I’m right — if the DJIA is currently double what it will be a year from now — then the disaster will be blamed on Bush. But if somehow we get a miraculous recovery despite everything, then the Democrats will claim credit.
So you can’t really expect any serious political damage to Obama and the Dems, no matter what. I think, however, the miracle recovery scenario would help Obama — imagine a Senate with 65-70 Democrats, and a House with 300 Democrats — whereas a real meltdown might at least result in a 2010 mid-term that erodes the Dems’ dominance.
Most realistic analysts see it the same way. This was where I got my “squirrel” theory, because there had to be some explanation for a stock market that kept rising while all the signals pointed toward a stagflation scenario ahead.
Right now, the bulls are making fun of the guys who have stayed in cash or gold since the rally began in March, claiming the people who are staying out of stocks are the real “suckers” in this rally. But you’ve seen a clear loss of upward momentum in the past week or 10 days. I’m thinking one of two scenarios will play out. Either (A)the recovery is real, in which case this plateau is the staging area for the next 3-month climb; or (B) the recovery is phony, in which case we’re approaching the edge of the cliff.
We’ll get a new batch of data in early July, but the smartest market-timers will anticipate that, so expect the market to move sharply one way or another in the next couple of weeks. All of this is just educated guess-work, of course, but I certainly don’t hear a lot of bullish talk from experienced investors and other sharp observers who have no incentive to hype the market.
The Other McCain on June 13, 2009 at 7:23 PM