The fact that stock prices have been drifting lower, doesn’t prove that the economy is headed for recession. Nor does political dysfunction (government shutdown), droopy home sales, plunging confidence, chronic high unemployment, rising levels of extreme poverty, unprecedented public dependence of food stamps, weak personal consumption, stagnant wages, falling middle class incomes, or gaping inequality.
They may show a country that is on the wrong track and has its priorities mixed-up, but they don’t show that another recession is imminent. Even so, it’s easy to wonder how bad things have to get before the economy more closely reflects the mood of the country which is relentlessly pessimistic.
To say that no one believes in Obama’s recovery would be a gross understatement. Obama supporters feel duped, misled, and despondent. Obama is not the agent of change they’d hoped for. He’s expanded the wars, slashed vital safety net programs, exonerated Wall Street criminals, and continued the vicious attack on civil liberties. He’s done everything in his power to boost the profits of the big corporations and banks, but hasn’t lifted a finger to help ordinary working people. And his efforts have paid off, too. Just look at this from Huffington Post:
“Corporate profits have increased by 18.6 percent over the past year…. In fact, corporate earnings now represent a larger share of GDP than during any other period in history…
Real wages have declined by nearly seven percent in the past seven years, according to data collected by the compensation research company Payscale. In other words, US workers have less buying power now than they did before the financial crisis…
Payscale’s findings are just the latest in a slew of research that indicates the sluggish economic recovery has not been beneficial for most of us. Income inequality in the US is at a new high as skyrocketing income gains for the top one percent are met by stagnating wages for practically everyone else.”
Okay, so you’ve heard it all before, but here’s something you might not know. At the same time the corporations and banks are reporting record profits, Gallup surveys show that “trust in all three branches of the federal government remains on the lower end of what Gallup has measured historically” while “Americans’ trust in banks fell to an all-time low of 18% – lower than its level at the height of the global financial collapse.” (Gallup)
So, there is a tradeoff for all loot Obama’s friends have been pilfering from working people, and that tradeoff is trust. Americans no longer have confidence in the government, the market or the justice system. Gradually, that lack of trust will cross-over into the economy as wary consumers set aside more of their earnings to protect themselves from the government-corporate-racketeer oligarchy.
A slowdown in personal consumption will impact retail sales, durable goods, hiring and capital investment. It will douse those green shoots with motor oil and push the economy back into negative territory. And while that might not happen in the next month or two, there are sectors of the economy that are showing signs of weakness already. Take housing, for example, which is progressively losing momentum as the year drags on. This is from an article at Global Economic Intersection:
“Existing Home Inventories are building, which clearly reflects a fall in demand; and also possibly greater motivation amongst sellers to get out. The inventory trajectory continues to closely shadow the pattern of 2010…. This pattern suggests that the housing market is reaching a critical point at which further intervention from both the Federal Reserve and Federal Government may be needed to give it some more momentum.”
Then there’s this from Wells Fargo concerning the vanishing of investors who’ve been driving the market for the last year:
“The housing market is transitioning away from a rebound driven primarily by speculative forces to one where the underlying fundamentals will be much more important,” Wells Fargo said in a report.
“Over the past few years investor purchases have been the primary driver of the housing recovery, helping clear inventories of foreclosed and lender-owned properties and pulling home prices dramatically higher. Home prices, which tumbled 33.7 percent from peak to trough using the S&P/Case-Shiller Home Price Index, have since rebounded 16.3 percent and are up 12.4 percent over the past year alone.
The swing in prices exaggerates the extent of improvement and likely reflects the whipsaw effect of prices overshooting to the downside during the worst of the housing bust.”
And here’s more from CNBC’s Realty Check:
“A potential stall in home price gains and a large drop in the number of distressed properties have some big investors pulling out of the single-family rental market…
“I think the investor market is largely past us,” Doug Lebda, chief executive of Lending Tree told CNBC. “People were buying investment properties three, four, five years ago. What I hear is that’s slowing now.”
Recent reports that Oaktree Capital Group is selling about 500 of its homes added fuel to other reports that Och-Ziff Capital management is selling its homes as well. Both declined to comment on the reports. Carrington Mortgage Services stopped buying distressed homes late last year, claiming the market was “a bit too frothy…”
We’ve been predicting that the speculators would exit the market eventually, but we didn’t think it would happen this fast. This news should have the administration and the Fed sweating bullets as the Potemkin housing recovery is the only sector that was showing improvement at all. A drop-off in demand should show up in the October existing homes sales data which will put more pressure on the Fed to increase its purchases of mortgage-backed securities (MBS) even though bubbles are popping up everywhere in the financial markets.
As Pimco’s Mohamed El-Erian said in recent Bloomberg interview “Virtually every market is trading at artificial levels” while investors are “taking more risk than is justified.” Aside from historic levels of margin debt and a splurge of corporate stock buybacks, there are also signs of froth in fixed income and junk. Take a look at this from Reuters:
“Retail money keeps flooding into loan funds, marking 66 straight weeks of heavy inflows, according to Lipper data. Loan funds pulled in $1.3 billion in the week ended September 18, during which the Fed surprised the markets with its plan to keep on buying $85 billion of bonds weekly to keep rates low and boost economic growth.
Loan fund inflows accelerated over the summer on expectations that the U.S. central bank was about to reduce those bond purchases this month, keeping interest rates rising. Issuance of collateralized loan obligations (CLO), another key source of demand for leveraged loans, at $57 billion so far this year already topped last year’s issuance.”
Yipee! Another gargantuan asset bubble!
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