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CNBC Broadcast: Financial Markets Manipulated By Washington?

(Hat tip, Signs Of The Times):

From CNBC feed out of Chicago this past Monday (2 minutes in):

SecretsOfTraders.com’s Larry Levin: This market continues to be propped-up by government intervention, and manipulation, and, unfortunately, as that continues to happen, I think this market can go higher. The government’s been doing a good job of keeping it that way no matter what the real underlying current is, unfortunately…

You’re gonna have to… right on Obama and his staff as basically trying to prop this market up on a daily basis. They’re doing a good job…

But it really is a situation where, every single day, we have some kind of backstop from the government. I mean, these markets are not free markets anymore. You know, this whole year has been absolutely ridiculous…

CNBC’s Rick Santelli: Well, I think Larry’s doing a darn good job. I tend to agree with most of what he’s saying…

Survivalists No Longer On The Fringe

Some time ago, I learned about a work of fiction that dealt with survival during a full-scale socioeconomic collapse… in America. Intrigued, I picked up James Wesley, Rawles’ Patriots: A Novel of Survival in the Coming Collapse last weekend. Some of you may have already heard of Rawles, who is also the editor of SurvivalBlog.com, the Internet’s most popular blog on family preparedness. I’m still working on the book (about to begin Chapter 20), but if asked what I thought about it so far, I would say “frightening.” So much so, that the day after I began reading the book, I sat around thinking to myself, if the kind of scenario which Rawles conjures up ever materializes, we are screwed. With a capital S. What scenario is that, you might ask? From the back cover:

America faces a full-scale socioeconomic collapse in the near future. The stock market plummets, hyperinflation cripples commerce and the mounting crisis passes the tipping point. Practically overnight, the fragile chains of supply and high-technology infrastructure fall, and wholesale rioting and looting grip every major city.

Not much of a stretch, considering the “progress” we’ve already made in bringing about something like this.

Even though the book is scary, it’s also gripping, hard to put down, and incredibly-detailed, especially when it comes to survival equipment and techniques.

Speaking of survivalists, I came across a piece by the Arizona Republic’s Ryan Randazzo that you might find interesting (hat tip Michael Panzner at When Giants Fall). Randazzo wrote Tuesday:

As the recession lingers, some Phoenix-area residents are shifting attention from their financial troubles, including falling home values and shrinking retirement savings, to stockpiling food and ammo.

They worry the economic turmoil could lead to skyrocketing inflation, food scarcity, even violence. To prepare, they are forming social-networking groups to discuss how to store grains, purify water, plant gardens and, if needed, shoot guns.

“Most of us feel that if things do get better, it will be a long way out,” said Jeff Rodriguez, a 26-year-old software engineer from Glendale. “I want to have some preparations in place.”

The economy has him thinking a lot more about things like where his food comes from, how much cheap oil is left in the world and how people in the blazing-hot Valley would survive a major economic failure.

He has carefully prepared a 12-row, 384-square-foot garden, stores a ton and a half of grain in his home, and is considering buying pygmy goats or chickens.

He also has researched solar electricity and a rainwater-collection system.

He is far from alone. Rodriguez belongs to a local network of like-minded people who include retirees, young mothers and successful professionals.

These people are joining thousands nationwide who are studying survival tactics far from the backwoods bunkers associated with “survivalists.”

At least two survival-related groups have formed in since December, and groups with varying outlooks and politics have sprouted nationally from Kentucky to New York.

Of course, it’s not unheard of for mainstream groups to prepare for emergencies. The Mormon Church, which reports 13.5 million members worldwide, has long counseled self-sufficiency and encourages families to keep a prudent supply of food on hand.

Disasters such as hurricanes and 9/11, and even perceived troubles like the Y2K bug, always increase interest in survivalism. The men behind the counters at U.S. Surplus Corp. in Phoenix see a crush of new customers every time tragedy strikes.

The newbies stand out from the military personnel and outdoor enthusiasts who stop in for rugged clothing, rations or canteens.

“They are the ones trying to fix up a cave to live in,” store manager Gary Pickering said. “They are asking a lot of questions and buying things they normally wouldn’t, like water purification tablets.”

Sales at the store haven’t slid with the rest of the economy, officials said. Preparing for a disaster makes sense only if people actually know how to use the equipment they are buying, said Cody Lundin, who runs a survival-skills school in Prescott and authored two books on the subject.

He says people should learn to care for themselves in case of emergency whether a disaster is pending or the economy is tanking.

Last year was among the best ever for his school, although it’s not always clear what motivates people to sign up.

“I’m seeing an influx of people simply calling to inquire what I think about stuff,” Lundin said. “They are probing the waters because they are getting freaked out.”

Professional counselor Rita Archambault said her East Valley clinic is treating more people with anxiety over the economy.

“I have not seen so much concern about the economy in my entire life,” she said.

If planting a garden, raising poultry or stockpiling ammunition makes people feel better about their situation, good for them, she said.

“If you are not hurting anybody and you are reducing your anxiety, what harm is there?” Archambault said.

The only danger is if people get so obsessed that they neglect their job or family, she said.

It’s not surprising that many of the people preparing for tough times are educated professionals, said Heidi Wayment, a social-psychology professor at Northern Arizona University who has researched disasters and anxiety.

“To understand the huge potential crisis that could come from economic collapse, you have to be educated,” Wayment said. “I wouldn’t say these people are crazy – far from it.”

Source:

“Survivalism grows popular in Valley”
Ryan Randazzo
Arizona Republic, June 23, 2009

Too Much Hopium?

If Washington, in its regulatory mood these days, wants to clamp down on something, it might want to take a good look at Hopium.

You’d be tempted to think the U.S. financial system and markets were back to “normal” after listening to what some had to say to the financial media today.

From Bloomberg’s Jeff Kearns:

“The market has run out of fantastic reasons to sell,” said Stephen Wood, who helps manage $136 billion as chief market strategist for North America at Russell Investments in New York. “Those Armageddon, Great Depression, worst-case scenarios being priced in a few months ago are now a low probability, and the recovery reflects that.”

“We think we’re in a recovery stage and there’s a lot of government support for growth,” said Hayes Miller, who helps manage $33 billion at Baring Asset Management Inc. in Boston. “When summer is over and we all come back in the fall we’re going to be seeing some positive economic news.”

Positive, or less-worse news? And from CNBC:

Federal Reserve Chairman Ben Bernanke deserves to be reappointed, because he did a great job in saving the US banking system from collapsing, Jack Welch, author of “Winning” and “Straight from the Gut,” told CNBC Thursday.

“I think he saved the system, I think he’s a national hero,” Welch said. “I think Bernanke seems to be a guy operating on a clear intellectual framework. This guy’s done a hell of a good job.”

“Abracadabra!”
Source: Inner City Press

I’m not so sure I’d like to watch a baseball game with Mr. Welch. He’d be calling the outcome of the game while it was still in the early innings.

Sources:

“U.S. Stocks Gain as Data Boosts Optimism Economy Is Recovering”
Jeff Kearns
Bloomberg, June 18, 2009

“Reappoint Bernanke, He’s a ‘National Hero’: Welch”
CNBC, June 18, 2009

Boom2Bust Turns Two Years Old

Memorial Day Weekend 2007. Sure seems like yesterday….

Friday, May 25, 2007.

The Dow Jones Industrial Average closed out the week at 13,507.28. The S&P 500 index finished up at 1,515.73.

The median house price is $222,700, according to the National Association of Realtors.

Family net worth is at an all-time high of $64.36 trillion for the quarter.

The number of unemployed persons is 6.8 million and the unemployment rate is 4.5 percent.

Total public debt outstanding in the United States is $8.8 trillion.

Talk of the “Goldilocks economy” rules the day, and Washington and Wall Street are in “don’t worry, be happy” mode.

Federal Reserve chairman Ben Bernanke doesn’t believe the nation will slip into a recession, and he rejects the notion raised by his predecessor, Alan Greenspan, that the economy’s expansion could be in danger of fizzling out…

The Fed chief testified on Capitol Hill amid growing concerns that problems with risky mortgages and a painful housing slump could send the economy into a tailspin. Greenspan recently said there’s a one-in-three possibility of a recession this year.

But Bernanke — while acknowledging there are risks — told Congress’s Joint Economic Committee that the Fed does not see such negative forces pushing the economy into a recession.

“I would make a point, I think, which is important, which is there seems to be a sense that expansions die of old age, that after they reach a certain point, then they naturally begin to end,” Bernanke said. “I don’t think the evidence really supports that. If we look at history, we see that the periods of expansions have varied considerably. Some have been quite long.”

-Associated Press, March 29, 2007

…a new SUV in every McMansion’s garage

Fast forward to today…

The Dow Jones Industrial Average closed at 8,473.49. The S&P 500 index finished up at 910.33.

The median house price in the first quarter of 2009 is now $169,000, according to the National Association of Realtors.

Banks and businesses worldwide have lost $1.47 trillion in write-downs and credit losses in the past 22 months stemming from the collapse of the subprime-mortgage market.

Household net worth dropped a record 9 percent in the fourth quarter of 2008, pushing total net worth down to $51.48 trillion. It was the sixth straight quarterly decline from the peak of $64.4 trillion in the second quarter of 2007. Also, the drop in net worth in the fourth quarter of 2008 was the largest drop in dollar terms on record, going back to 1951, when the U.S. government began keeping quarterly records. The 9 percent drop was also the largest drop as a percentage change on record.

In April (the last month data is available for), the number of unemployed Americans reached 13.7 million persons and the unemployment rate was 8.9 percent. According to the Bureau of Labor Statistics, 5.7 million jobs have been lost since the recession began in December 2007.

The total public debt outstanding in the United States is now $11.3 trillion. Furthermore, as Bloomberg’s Mark Pittman and Bob Ivry pointed out on March 31:

The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from U.S. banks. The money works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.

Goldilocks made a fine meal for the bears.

But I’m convinced our fuzzy friends still want more.

Thank you all for reading and contributing comments to Boom2Bust.com, and for inspiring me to post about some of the financial research I come across on a daily basis.

Personally, I think that while we may get out of this recession soon enough, I fear all the additional obligations accrued since 2007 will only have made the house of cards that is the U.S. financial system weaker, thereby setting ourselves up for more pain when the eventual crash comes.

You can only kick the can down the road for so long before you have to call it a day.

Year three, here we come!

Christopher E. Hill
Editor

‘Fear Gauge’ Returns To Pre-Banking Crisis Levels

The VIX, a measure of market volatility that some associate with investor confidence, has returned to levels not seen since before the collapse of Lehman Brothers last fall. From MarketWatch’s Nick Godt this afternoon:

The Chicago Board Options Exchange’s volatility index, otherwise known as the market’s fear gauge, has slumped to levels unseen since before the collapse of Lehman Brothers…

On Tuesday, the VIX (VIX 28.61, -1.63, -5.39%) slumped 3% to 29.33, a level last seen in early September 2008, just days before Lehman Brothers shut down. The announcement had sent the VIX sharply higher, a move up that continued through December…

According to FactSet Research, the VIX spiked to record highs of between 81 and 96 in late October, as panic gripped markets worldwide. From 2003 to July 2007, readings below 20 were the norm.

Steven Sears wrote on Barron’s website today that a related volatility index had also pulled back. Sears pointed out:

VIX’s big brother — Realized Volatility — who almost no one but the options insiders mention because he complicates the investor-sentiment conversation — has been edging lower and lower. Implied volatility — essentially a view of the future — is influenced by what happens in the past, which is realized volatility. Like VIX, realized volatility has steadily declined since October, making it possible for implied volatility to decline, too.

So, will we soon be seeing big money returning to Wall Street? Maybe not. Sears added:

Volatility analysis is very complicated. The genius of VIX is that it expresses something very complicated into a simple number that anyone can understand.

But investors need to fight the urge to view VIX as the ultimate red or green light in the investment world…

One of the least understood parts of VIX is that it only offers a 30-day snapshot of expected volatility, which is a lot different than a flashing neon sign of oversimplified investor sentiment.

Sources:

“Is lack of fear such a good thing for stocks?”
Nick Godt
MarketWatch, May 19, 2009

“Don’t Get Euphoric About a Falling VIX”
Steven M. Sears
Barrons.com, May 19, 2009

Robert Prechter Sees Stock Plunge, Deflationary Depression

If Marc Faber’s prediction that the U.S. government will go bust didn’t start your weekend off on a positive note, how about Robert Prechter’s forecast that U.S. stocks will plummet in advance of a deflationary depression? From Reuters (UK) yesterday:

Longtime technical analyst Robert Prechter, who forecast the 1987 stock market crash, predicted this week that U.S. equities may plunge to half their lows hit in March as a deflationary depression bites.

Oil and U.S. Treasury bonds are also locked in long term bear markets, while corporate bond prices will plunge precipitously by next year as broad economy, banking system and company earnings sustain more damage from a financial crisis that’s akin to the Great Depression, he said.

The U.S. S&P 500 stock index’s rebound by nearly 40 percent since it sagged to a 12-year closing low of 676 points on March 9 is not sustainable, Prechter said in an interview with Reuters.

“It’s not the start of a new bull market,” said Prechter, chief executive at research company Elliott Wave International in Gainesville, Georgia. “Our models are (showing) right now that it is a much bigger bear market than most people realize, something along the lines of 1929-1932,” he told Reuters in a wide ranging interview. “It’s a very rare event,” he added.

“I think the next leg down will be at least as severe if not more severe than what we just experienced. So you want to stay on the side of safety,” he said.

As in his 2002 book “Conquer the Crash,” which warned of the dangers of a U.S. debt bubble and deflationary depression, Prechter continues to advocate safer cash proxies such as Treasury bills…

“Deflation is coming, it’s going to lead to a depression. We’re not at the bottom yet,” Prechter said. “I think we are going to have bouts of deflation separated by recoveries.”

Source:

“Stocks still face deflationary collapse: Prechter”
Haitham Haddadin, Ellis Mnyandu, and John Parry
Reuters (UK), May 14, 2009

I’d Be Broke If Ben Bernanke Were My Financial Adviser

Yesterday, I came across an Associated Press piece that attempted to track Federal Reserve Chairman Ben Bernanke’s recent economic predictions. From the article:

Federal Reserve Chairman Ben Bernanke said Tuesday that the U.S. economy could begin to grow later this year if the government can gradually repair the financial system. His testimony to Congress’ Joint Economic Committee largely echoed statements he’s made in recent months. But this time, Bernanke was a bit more optimistic: He said not just that the recession could end but that the economy could start growing again by year’s end.

Here’s a look at Bernanke’s recent comments on the economy:

May 5 — “We continue to expect economic activity to bottom out, then to turn up later this year,” Bernanke told lawmakers, sounding more confident about the prospects for a recovery later in 2009.

April 14 — “Recently we have seen tentative signs that the sharp decline in economic activity may be slowing,” Bernanke said in a speech at Morehouse College in Atlanta. “To be sure, we will not have a sustainable recovery without a stabilization of our financial system and credit markets.”

April 3 — He said he expects a “gradual resumption of sustainable economic growth.” However, he didn’t say when in remarks to a Fed conference in Charlotte, N.C.

March 15 — “We’ll see the recession coming to an end probably this year,” if the government succeeds in bolstering the banking system, Bernanke said in an interview with CBS TV program “60 Minutes.”

March 10 — The recession was more severe than the Fed had expected, Bernanke acknowledged after a speech to the Council on Foreign Relations. Still, he added there’s a “good chance” the recession could end this year if the government managed to get financial markets to operate more normally again.

March 3 — Testifying to the Senate Budget Committee on the bailout of American International Group Inc., Bernanke didn’t repeat remarks he had made a week earlier that the recession could end this year if the government succeeded in turning around wobbly financial markets.

Feb. 24 — Bernanke said he hoped the recession will end this year, but that there were significant risks to that forecast. Any economic turnaround will hinge on the success of the Fed and the Obama administration in getting credit and financial markets to operate more normally again. ”

Jan. 13 — “Fiscal policy can stimulate economic activity, but a sustained recovery will also require a comprehensive plan to stabilize the financial system and restore normal flows of credit,” Bernanke said at the London School of Economics.

There’s no doubt that Mr. Bernanke is consistent with his statements.

And when you look further back at the Fed chair’s economic forecasts, the consistency becomes even more remarkable.

As in remarkably wrong on a consistent basis.

From a Boom2Bust.com post on March 16:

Lest we forget some of his other notable predictions, such as:

“Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, ‘largely reflect strong economic fundamentals,’ such as strong growth in jobs, incomes and the number of new households.”

-Washington Post, October 27, 2005

“A leveling out or a modest softening of housing activity seems more likely than a sharp contraction…”

-in testimony to a House Financial Services Committee, Thursday, February 16, 2006, (source: Washington Times, February 16, 2006)

“We think that, by the spring, early next year, that as these credit problems resolve and as we hope, the housing market begins to find a bottom, that the broader resiliency of the economy which we are seeing in other areas outside of housing will take control and will help the economy recover to a more reasonable growth pace.”

-in testimony to the Joint Economic Committee on Thursday, November 8, 2007 (source: “Nightly Business Report,” Thursday, November 8, 2007)

“The Federal Reserve is not currently forecasting a recession.”

-after a speech given in Washington, D.C., on Wednesday, January 9, 2008 (source: AFP, Thursday, January 10, 2008)

“My baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of (Fed) and fiscal stimulus begin to be felt.”

-in testimony to the U.S. Senate Committee on Banking, Housing, and Urban Affairs on February 14, 2008 (source: FederalReserve.gov)

I cannot help but wonder how anyone could take Mr. Bernanke’s economic forecasts seriously, considering his track record over time.

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Source:

“Tracking Bernanke’s comments on the economy”
Associated Press, May 5, 2009

IMF: Global Recession Deeper, Recovery Slower Than Previously Thought

“It’s going to be a while before a report is going to say there’s clear
signs of an economic recovery.”

-Colin Bradford, Brookings Institution economist, on today’s IMF report

More gloomy economic projections from the International Monetary Fund. Bloomberg’s Timothy Homan and Simon Kennedy wrote this morning:

The International Monetary Fund said the global recession will be deeper and the recovery slower than previously thought as financial markets take longer to stabilize.

The Washington-based IMF said in a new forecast released today that the world economy will shrink 1.3 percent this year, compared with its January projection of 0.5 percent growth. The lender predicted expansion of 1.9 percent next year instead of its earlier 3 percent projection.

The fund’s latest outlook highlights the precarious state in which the world economy remains, even amid signs the worst slump since World War II may be easing. Recovery isn’t assured and will depend on policy efforts to cleanse banks’ balance sheets and craft measures that spur demand, the IMF said.

“The key factor determining the course of the downturn and recovery will be the rate of progress toward returning the financial sector to health,” the fund said in its semi-annual World Economic Outlook. “Even once the crisis is over, there will be a difficult transition period, with output growth appreciably below rates seen in the recent past.”

Having said this time last year that the world economy would grow 3.8 percent in 2009, the IMF tied its more pessimistic assessment to a “recognition that financial stabilization will take longer than previously envisaged.”

Homan and Kennedy discussed the details of the semi-annual publication. They wrote:

Advanced economies will continue to lead the slump by shrinking 3.8 percent this year and failing to grow in 2010, the IMF said. The fund cut its forecasts for this year and next for all the Group of Seven economies and said Germany, Italy and the U.K. will still be shrinking in 2010…

The U.S. economy will slide 2.8 percent this year before stalling next year.

On the job front, the Bloomberg reporters noted:

Such cutbacks will propel unemployment to 9.2 percent next year in the advanced economies from 8.1 percent this year, while in the U.S. the jobless rate will jump to 10.1 percent in 2010. The Labor Department said this month that unemployment in the U.S. climbed to a 25-year high of 8.5 percent in March.

You can access the latest edition of the “World Economic Outlook” here.

Source:

“IMF Says Global Recession Will Be Deeper, Recovery Slower”
Timothy R. Homan, Simon Kennedy
Bloomberg, April 22, 2009

Jim Cramer Says Depression Over, Expects New Bull Market

Have you heard the latest prediction from CNBC television personality and best-selling author Jim Cramer? From Jeff Poor of the Alexandria, VA-based Business & Media Institute last week:

It came and went – and some might not have even noticed it – despite the seriousness of its use. On April 2, CNBC’s Jim Cramer proclaimed the Depression over.

Throughout that day, the “Mad Money” host told viewers of MSNBC’s “Morning Joe,” CNBC’s “Street Signs” and finally on his own program that the Depression was over and that we were on the verge of a bull run for the financial markets.

“We have reached the land of a thousand bull dances – phoney maroney, why? Because the market swallowed its Prozac,” Cramer said on CNBC’s “Mad Money” April 2. “And right now, right here on this show – I am announcing the Depression over!”

FREE FINANCE/INVESTING PUBLICATIONS for qualified readers!

Poor pointed out that the former hedge fund manager credits rhetoric from U.S. President Barack Obama for the predicted turnaround in the economy and financial markets. From the piece:

“And then today, we got the second big positive – President Obama praised, what did he praise? The stock market! This is a total 180 from his position a few months ago. You got to admire a president who can change his mind, especially after eight years of George W. Bush’s laissez-faire philosophy – that almost led rapacious late-stage capitalism to devour itself.”

Cramer attributed his new bullishness to a change in Obama’s rhetoric from proredistribution to pro-stock market.

“The Depression is over and now we have a president who has gone from bear-in-chief to bull-in-chief, and that’s why we now like him,” Cramer said. “He’s change his genus, if not his phylum. We keep ours and now Obama knows if he kills your 401(k), IRA and 529 plan, he can’t make it up by taking some money from the rich and just giving everybody a G or two.”

Eveblast.tv Video Link

Time will tell, right folks? I’m still waiting to see if Jim Cramer’s prediction that the U.S. housing market will reach a bottom by June 30, 2009, pans out. Although, I must admit, I’m somewhat skeptical about Cramer’s abilities as a financial prophet. Reason being? Who remembers this classic? Back on July 30, 2008, Cramer said:

I am indeed sticking my neck out right here, right now, declaring emphatically that I believe the market will not revisit the panicked lows it hit on July 15, and I think anyone out there who’s waiting for that low to be breached is in for a big disappointment and [they’re] missing a great deal of upside… Stop waiting, buy the next dip because I think it might be the last big one.

For the record, the Dow Jones Industrial Average closed at 10,962.54 and the S&P 500 at 1,214.91 back on July 15, 2008.

Today (April 6, 2009), the Dow stood at 7,975.85 and the S&P 500 at 835.48 at the end of the trading day.

Source:

“Cramer Declares End of ‘Depression’; Credits Obama’s Rhetoric, not Actions”
Jeff Poor
Business & Media Institute, April 3, 2009

Recession Almost Over? Show Me The Evidence

Here’s a cheery headline making the rounds today:

“New signs emerge that recession may be near bottom”

Too bad the “evidence” put forth in the accompanying article isn’t exactly what I’d call compelling. The Associated Press’ Christopher S. Rugaber wrote today:

New signs that the recession could be nearing a bottom emerged Thursday, as factory orders were far better than expected and the Dow industrials surged over 8,000 for the first time in two months.

The Commerce Department said orders for manufactured goods rose 1.8 percent in February, reversing six straight monthly declines and easily beating estimates of another drop. Other economic indicators came in better than expected Wednesday, including construction spending and pending home sales.

The Associated Press piece suggested the recession could be near a bottom based on “far better than expected” factory orders that were up 1.8% in February from the previous month. Pulling up Commerce Department data for orders of manufactured goods from the beginning of this recession (December 2007) reveals that since that time, orders for manufactured goods were up a total of 7 out of 15 months for which data is available for. Factory order levels even went on a tear and went up month-over-month from March through July of last year. In fact, February’s reading of 1.8% was surpassed back in December 2007 and June 2008, which saw increases of 1.9% and 2.1%, respectively.

All of this during the ongoing recession.

Based on these findings, I find it hard to argue that a one-month increase in factory orders means we’re near a bottom.

The AP piece also suggests we could be nearing a bottom based on surging stock prices. Long-time readers of this weblog might remember something I wrote back on October 14, 2007:

Wall Street As An Economic Barometer

The Wall Street Journal’s Economics Blog caught up with Merrill Lynch economist David Rosenberg back on October 2 as he examined the effects of Federal Reserve interest rate cuts on the U.S. stock market. Rosenberg found that the stock market always rises in the first month after an initial interest-rate cut, and the average increase is almost 4%. It’s interesting to note that since the federal funds rate cut back on September 18, the Dow Jones Industrial Average and the S&P 500 are up 2.6% and 2.8%, respectively.

Rosenberg also looked at whether or not recessions happen while the stock market is booming. In looking at the 1990-91 recession, he saw that the S&P 500 peaked on July 16, 1990, after rising 3.4% over the previous month. The recession also happened to start that July. Looking back further, Rosenberg studied the recession of the early 1980s and found that the stock market peaked on February 13, 1980, even though a recession had started the month before.

As Rosenberg’s findings demonstrate, surging stock prices don’t exactly correlate with a robust economy. Stock indexes may even peak— just as the economy starts to nosedive.

Once again, the Dow Industrials heading over 8,000 for the first time in two months isn’t a convincing argument that we’re about to see an economic turnaround.

Rugaber also threw in two more indicators for which I had problems seeing a correlation. He wrote:

Other economic indicators came in better than expected Wednesday, including construction spending and pending home sales.

Take a look at the following chart for U.S. construction spending from the beginning of the recession:

Source: New York Times

As you can see, monthly construction spending actually improved month-over-month in March, May, August, and September of last year. And still, recession. I’d be hesitant to declare a bottom is near from one month of “better than expected” construction spending data.

Finally, we come to pending home sales. From an AP colleague of Rugaber’s, Alan Zibel, on Wednesday:

An index that tracks signed contracts to purchase previously occupied homes rose in February from a record low a month earlier as buyers took advantage of deeply discounted prices and low interest rates.

The National Association of Realtors said Wednesday said its seasonally adjusted index of pending sales for previously occupied homes rose 2.1 percent — in line with expectations — to 82.1 in February from January’s record low of 80.4.

Typically there is a one- to two-month lag between a contract and a done deal, so the index is a barometer for future home sales.

However, Zibel dispelled the notion of a U.S. housing market recovery taking place anytime soon when he wrote:

Prices, however, are expected to keep falling for at least another year. Tens of thousands of homes are tied up in the foreclosure process and not yet for sale. Plus, as the recession deepens and job losses mount, many buyers are likely to stay on the sidelines.

The Realtors estimate that 45 percent of existing home sales are now foreclosures and other distressed properties.

Pending home sales up? Yep, but almost half are being sold at deep discounts. Not exactly the sign of a healthy real estate market, or offering hope for a consumer spending rebound, if you ask me.

Folks, I hate recessions as much as the next guy. But if you’re going to tell me we’re coming close to a bottom, you darn well better have better evidence than this.

And before I forget, Rugaber also wrote the following in a separate piece today:

Fresh signs that factories are coming back to life and a bank CEO’s encouraging outlook fueled more hopes Thursday that the economy may soon emerge from the cellar, briefly lifting the Dow Jones industrials over 8,000 for the first time in two months…

Bank of America CEO Ken Lewis also bolstered the financial markets when he told CNBC that the recession is “getting close to the bottom.”

You remember Ken Lewis, don’t you? Back on June 21, 2007, I wrote on Boom2Bust.com:

In an interview with Bloomberg on Tuesday, Bank of America’s Chief Executive Officer Kenneth Lewis said the U.S. economy will pick up speed due to a recovery in the housing sector. Lewis predicted, “You’ll see the economy begin to pick up in the third and fourth quarters,” and the slowdown in home sales is “just about to be over.” He went on to say that the housing market will begin to improve in the next month or two, forestalling a recession, according to Bloomberg. Lewis believes that job growth will lift home prices and reinvigorate construction by early 2008.

That was summer 2007. A year later, on July 21, 2008, I wrote:

This morning, I read a piece by Marshall Eckblad of the Dow Jones Newswires on the CNN Money website. Bank of America Corp. Chief Executive Ken Lewis shared his outlook on the U.S. economy and housing market earlier today, after which Eckblad wrote:

Chief Executive Ken Lewis said Monday that the U.S. economy would see “sluggishness” through the rest of 2008 but eventually would stabilize this year and then begin its recovery in the early part of next year. Lewis made the comments during a conference call with analysts to explain the bank’s second-quarter earnings results…

Lewis said one component of those optimistic forecasts is his projection that the peak of the housing crisis is growing closer. “We see housing price depreciation being mostly over this year, maybe going into next year,” Lewis said.

I’ll leave you all with the following excerpt from that July 2008 post:

The Wall Street Journal’s Mark Gongloff pointed out yesterday that some individuals keep calling for a turnaround in the economy, housing market, what have you, only to be proven wrong time and time again. Gongloff said:

Like Chicago Cubs fans always looking to the next season, there are analysts who have been calling for a turnaround for months despite evidence to the contrary, yelling their hearts out for what so far has been a losing cause.

According to their theory, this has all been a fever dream, a midcycle slowdown like the one the economy suffered in 1998, when stocks briefly swooned, but the technology bubble quickly went right back to inflating. This is the same crowd who dismissed the collapse of the housing market because it’s just a small part of gross domestic product and who said the subprime mortgage meltdown would be no big deal.

And now, $400 billion in losses and one bear market later, they’re still calling for the rosy outcome…

Sources:

“New signs emerge that recession may be near bottom”
Christopher S. Rugaber
Associated Press, April 2, 2009

“US Factory Orders-STATS-Historical, New Orders”
FXStreet.com, April 2, 2009

“Pending home rise 2.1 percent in Feb. from Jan.”
Alan Zibel
Associated Press, April 1, 2009

“More signs of economic hope; grim jobs report due”
Christopher S. Rugaber
Associated Press, April 2, 2009

Stop Me If You Think You’ve Heard This One Before

What you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.

-U.S. President Barack Obama, during an appearance with British Prime
Minister Gordon Brown this past Tuesday

The Wall Street Crash of 1929 was marked by an initial collapse on Thursday, October 24, 1929, with subsequent downturns on Monday, October 28, and Tuesday, October 29. The carnage on the Street would continue for the next month. With broader effects lasting for years…

We feel that fundamentally Wall Street is sound, and that for people who can afford to pay for them outright, good stocks are cheap at these prices.

- Goodbody and Company market letter, as quoted by the New York Times, October 25, 1929

Buying of sound, seasoned issues now will not be regretted.

- E.A. Pearce market letter quoted in the New York Herald Tribune, October
30, 1929

This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan… that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years.

- R.W. McNeel, market analyst, as quoted in the New York Herald Tribune, October 30, 1929

I know that we did the right thing.

-U.S. President Barack Obama, during an Ohio police academy graduation
earlier today

I am convinced that through these measures we have reestablished confidence.

-U.S. President Herbert Hoover, December 1929

If we can summon that spirit once more, if we’re willing to look out for one another and listen to one another, if we are willing to pull together and do our part, if we can show even a fraction of the courage and selflessness that these cadets have already demonstrated, then I have no doubt that we will emerge from this crisis stronger than before and keep this nation’s dream alive for future generations.

-U.S. President Barack Obama, during an Ohio police academy graduation
earlier today

While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States – that is, prosperity.

-U.S. President Herbert Hoover, May 1, 1930

Some would say the Great Depression didn’t end until America’s entry into World War Two, eleven-and-a-half years after President Hoover’s statement in the spring of 1930…

The Boomer Bust

Bad news for the Baby Boomer generation. CNN Money’s Les Christie reviewed a new report from the Center for Economic and Policy Research on the financial well-being of Americans born between 1946 and 1964, and wrote this afternoon:

What a turnaround for the American Dream!

According to a report released Wednesday, the real estate market bust and stock market declines have carved a huge chunk out of the assets of baby boomers, the largest age cohort in U.S. history.

So much home equity has been lost that should boomers need to sell their homes, 30% of those aged 45 to 54 would owe money at closing, according to “The Wealth of the Baby Boom Cohorts After the Collapse of the Housing Bubble,” a report released by the Center for Economic and Policy Research, a Washington, D.C.-based, non-partisan think tank. About 18% of boomers aged 55 to 64 are underwater and would have to bring money to the table.

The CEPR also found that people who were renting homes in 2004 will have more wealth in 2009 than those who were owners. That’s true for all five wealth groups the study analyzed, from the poorest to the wealthiest.

“The collapse of the housing bubble, which led to the current recession, has already destroyed almost $6 trillion dollars in housing wealth for homeowners,” said report co-author Dean Baker. “This reality is compounded by the recent collapse of the stock market. Many baby boomers will only have Social Security and Medicare to rely on in their retirement.”

“Crap!”

The CNN staff writer noted the following about the change in net worth for this demographic. Christie wrote:

Boomers between 45 and 54 have lost 45% of their median net worth, leaving them with just $80,000 in net worth, including home equity, according to the report.

Older boomers have fared marginally better. Those between 55 and 64 have lost 38% of their net worth, leaving them with $140,000. But this group is rapidly nearing retirement age and they have few working years left to make up the losses.

You can read the CEPR report here.

Source:

“Boomers: 30% underwater”
Les Christie
CNN Money, February 25, 2009

From Wall Street To Fall Street

There can be no doubt these are trying times down on Wall Street. The Associated Press’ Tim Paradis wrote this evening:

An important psychological barrier gave way on Wall Street Thursday as the Dow Jones industrials fell to their lowest level in more than six years.

The Dow broke through a bottom reached in November, pulled down by a steep drop in key financial shares. It was the lowest close for the Dow since Oct. 9, 2002, when the last bear market bottomed out.

The blue chips’ latest slide dashed hopes that the doldrums of November would mark the ending point of a long slump in the market, which is now nearly halfway below the peak levels reached in October 2007.

Unfortunately, this latest milestone down on The Street comes after another one that BusinessWeek’s Michael Mandel picked up on Tuesday. Mandel wrote:

During the darkest 10 years of the Great Depression, from September 1929 to September 1939, the stock market dropped roughly 50%, adjusted for inflation. With today’s drop in the stock market, the U.S. has now matched that unfortunate milestone. The Standard & Poor’s 500-stock index, adjusted for inflation, is now down about 50% over the past 10 years from Feb. 17, 1999 to Feb. 17, 2009…

Mandel noted something rather unfortunate about the occasion. From the piece:

The Depression-level decline in the market has come during a stretch when many small investors, on the advice of financial advisers and the financial media, put much of their savings into equities.

Sources:

“Dow ends at lowest close in more than 6 years”
Tim Paradis
Associated Press, February 19, 2009

“Stock Decline Hits Depression Levels”
Michael Mandel
BusinessWeek, February 19, 2009

Blamed For Financial Crisis, Bill Clinton Responds

Speaking of the Clintons, former President Bill Clinton doesn’t think he should be included in a recently-released TIME list of people responsible for the global economic crisis. From TIME’s S. James Snyder yesterday:

Given the sweep and severity of today’s global economic crisis, it would seem there’s plenty of blame to go around. But Bill Clinton doesn’t think any of it should fall on his shoulders.

On Monday morning’s Today Show, Ann Curry’s interview with the former president – recorded over the weekend outside a Clinton Global Initiative event in Texas – addressed Clinton’s inclusion on TIME’s list of the “25 People to Blame” for the global economic collapse. “Oh no,” he responded, “My question to them is: Do any of them seriously believe if I had been president, and my economic team had been in place the last eight years, that this would be happening today? I think they know the answer to that: No.”

The magazine’s story, which apportioned blame widely between such figures as Countrywide co-founder Angelo Mozilo, former Federal Reserve Chairman Alan Greenspan, Lehman Brothers CEO Dick Fuld and President George W. Bush, zeroed in on two specific economic policy decisions made during the Clinton administration. Clinton ushered out the Glass-Steagall Act, which for decades had separated commercial and investment banking, and signed the Commodity Futures Modernization Act – which exempted all derivatives, including the now-notorious credit-default swaps, from federal regulation. His administration also loosened housing rules, which added pressure on banks to lend in low-income neighborhoods.

“None of it was an endorsement of permissive lending and risk-taking,” the magazine concluded. “But if you believe deregulation is to blame for our troubles, then Clinton earned a share too.”

Source:

“Clinton Says Don’t Blame Him for the Economic Crisis”
S. James Snyder
TIME, February 16, 2009