August, 2009

Is the Recession in the United States Really Nearing an End?

You must be kidding! It’s going to get a lot worse!

Recently there have been reports from supposedly knowledgeable sources that the U.S.’s longest lasting recession since the Great Depression of the 1930’s may be nearing an end. Here are just a few examples of this, in my opinion, incorrect position:

1. in early August, 2009, The Wall Street Journal posted the results of a poll of 47 economists in which the majority of the economists opined that the recession either ended in July, 2009 or will end in August, 2009;
   
   
2. Newsweek magazine, in the cover story of its August 3, 2009 issue, declared that the recession was over;
   
   
3. the New York Times, in its August 12, 2009 lead story said the following:
   
   
   “Almost exactly two years after it embarked on what was the biggest financial rescue in American history, the Federal Reserve said on Wednesday that the recession is ending and that it would take a step back toward normal policy.
   
   Though the central bank stopped well short of declaring victory, policy makers issued their most upbeat assessment in more than a year by saying that the downturn appears to have hit bottom and that consumer spending, financial markets and inventory-building by corporations all continued to stabilize;”
   
   
4. on August 21, 2009, Federal Reserve Board Chairman, Ben Bernanke, in a prepared speech delivered at the Kansas City Federal Reserve Bank’s conference in Jackson Hole, Wyoming, said the following:
   
   
   “After contracting sharply over the past year, economic activity appears to be levelling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good…The economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels.”
   
   

So there you have it! Better times are right around the corner! After all, we are being told so by the same sources who played an active role in creating the mess that we now find ourselves in (the Federal Reserve and Chairman Bernanke) or failed to issue warnings to us long before the problems surfaced (economists in general, Newsweek and the New York Times).

Let’s Look at the Real Facts to See What the Future Holds

Derivatives
If you reference my March, 2009 and June, 2009 Commentaries, you will note that I attribute the financial and economic crises in the U.S. to the manufacture, sale and distribution of so-called “derivatives products” by well-known U.S. investment and commercial banks (Goldman Sachs, JP Morgan Chase, Bank of America, HSBC, Citicorp, etc.) and an insurance company (AIG). The current reality of the derivatives situation is as follows:

1. the Obama administration is attempting to pass legislation to get the “derivatives problem” under control. Wall Street is not embracing any proposed legislation because they don’t want to surrender this source of “obscene profits” which have made so many of them “filthy rich” nor do they want the exposure which would likely result in accusations of criminal wrong-doing;
   
   
2. even if legislation is ultimately passed, I see the following problems:
   
   
   1. the legislation may or may not solve the “derivatives problem” going forward, depending on the details in the legislation which is likely to be watered down due to the efforts of the Washington, D. C. politicians on behalf of their “Wall Street Masters;”
      
      
   2. even if the final legislation is strong, I have “zero confidence” that the government regulators, based on what they’ve done over the last several years, will properly implement and enforce the detailed legislation;
      
      
   3. the legislation is highly unlikely to have any impact on the existing level of derivatives which is now estimated at $1.4 quadrillion (a quadrillion is one followed by 15 zeros; it is also the next number after a trillion). Even if only a relatively small amount of the derivatives – e.g. 18% – turn out to be worthless, they would wipe out the total global asset values of stocks, real estate and businesses.
      
      

Simply put, if the U.S. Government can’t solve the problem which created the original financial and economic crises – i.e. derivatives – how can it realistically suggest that the recession is coming to an end?

Unemployment
If people don’t have income-generating jobs, they don’t have the capacity to materially impact the U.S. economy in a positive way. Remember – about 70% of the U.S. Gross Domestic Product (GDP) is the result of consumer spending.

The July 2009 unemployment figures are now in. Although slightly better than the June, 2009 numbers, the U.S. still lost 247,000 jobs in July and had unemployment rates of 9.4% (U-3), 16.3% (U-6) and 20.6% (shadowstats.com). The explanation of these unemployment rates can be obtained by reading my April 2009 Commentary. Suffice it to say, I believe that the shadowstats.com figure represents reality.

The unemployment situation in the U.S. since December, 2008 is shown in the table below and is, in a word, horrific:

Month / Year		Jobs Lost Based on Latest Revision		Unemployment Rate (%) U-3   U-6   Shadowstats
Dec. 2008		681,000		7.2   13.5   17.5
Jan. 2009		741,000		7.6   13.9   18.0
Feb. 2009		681,000		8.1   14.8   19.1
Mar. 2009		652,000		8.5   15.6   19.8
Apr. 2009		519,000		8.9   15.8   20.0
May 2009		322,000		9.4   16.4   20.5
June 2009		443,000		9.5   16.5   20.6
July 2009		247,000		9.4   16.3   20.6

Until we start to see jobs being added on a monthly basis for several months as opposed to being lost, we have not reached the bottom of this so-called recession and it will continue on.

Debt Levels
The latest figures released by the Obama administration estimate a budget deficit of about $1.6 trillion dollars for the fiscal year ended September 30, 2009. Further, the administration estimates that the budget deficits for the ten years from 2010 through 2019 will amount to $9 trillion or almost $1 trillion per year on average.

Even before these estimated deficits of $10.6 trillion, the U.S. Government had, based on GAAP (Generally Accepted Accounting Practices) a negative net worth of $59.3 trillion (ITS BANKRUPT) and total Federal obligations of $65.5 trillion. The $65.5 trillion exceeds the GDP (Gross Domestic Product) of the ENTIRE WORLD by approximately $10 trillion.

There simply is no way that the U. S. recession can end if we add massive annual deficits over the next 10 to 11 years on an already highly over-indebted system.

Residential Real Estate
There are some optimists who believe that the decline in residential real estate prices and the increase in foreclosure activity is close to ending because the sub-prime loan problems are behind us. Sub-prime loans, as you may recall, were loans made to borrowers who didn’t qualify for loans under normal terms and conditions (so-called “poor people loans”).

I strongly disagree with the optimists for the following reasons:

1. the $50 billion mortgage aid program advanced by the Obama administration to ease the foreclosure crisis has, as of July, 2009, resulted in only 9% of eligible borrowers having their mortgage payments reduced. The eligible borrowers are those already on life support and many simply won’t be around to participate by the time that the program(s) reach them;
   
   
2. the mortgage aid program is flawed in that it fails to provide for reductions in loan principal balances, which, I believe, would have a far more significant positive impact on borrowers in trouble;
   
   
3. the sub-prime segment of residential real estate loans is actually a relatively small piece of the total market. The bigger pieces of the residential real estate loan market actually fall into categories such as the following:
   
   
   1. Option ARM – loans which permitted borrowers to pay less than the required interest, to let the loan balance rise even when the property was losing value;
      
      
   2. Alt A – loans made to borrowers with less than full loan documentation, lower credit scores, higher loan-to-values and/or more investment properties;
      
      
   3. Prime Conforming – loans made to the most credit worthy borrowers;
      
      
   4. Prime Jumbo – loans over $417,000 made to the most credit worthy borrowers.
      
      

These four loan categories are currently undergoing increased foreclosure activity leading to further declines in prices.

In a recently completed study, Deutsche Bank estimated that, by 2011, the percentage of U.S. homeowners, who will owe more than their house is worth (in real estate terms, they will be “underwater”), will be as follows:

Sub-Prime		69%
Option ARM		89%
Prime Conforming		41%
Prime Jumbo		46%
Total Average		48%

The residential real estate market impacts a tremendous number of industries such as construction, banking, home furnishings, etc. How can the recession be ending when the outlook for residential real estate remains so bleak?

Commercial Real Estate
Most people in the U. S. are unaware that the $3.5 trillion U.S. commercial real estate market (apartment buildings, office buildings, shopping and strip malls, hotels, hospitals, etc.) is rapidly deteriorating. In fact, commercial real estate prices have fallen by 40% from their peak in 2007 based on a study done by the MIT (Cambridge, MA) Center for Real Estate. With these declines in values, the owners of the commercial properties will be unable to refinance them and they will be foreclosed on (Note: most commercial real estate loans are written for short periods of time such as 3-5 years and must be refinanced at that time.)

The full impact of the commercial real estate collapse has not materialized yet. When it does materialize, it will prolong the existing recession by a significant period of time. So much for the recession ending in July or August!

Banking Crisis
All has been relatively quiet on the “banking front” in recent months leading (falsely, I believe) many people to conclude that the worst is behind us. In fact, Ben Bernanke in the August 21, 2009 speech, mentioned at the beginning of this Commentary, said the following:

“Overall, the policy actions implemented in recent months have helped stabilize a number of key financial markets, both in the United States and abroad. Short-term funding markets are functioning more normally, corporate bond issuance has been strong, and activity in some previously moribund securitization markets has picked up. Stock prices have partially recovered, and U. S. mortgage rates have declined markedly since last fall. Critically, fears of financial collapse have receded substantially.”

Unfortunately, the truth is as follows:

1. since IndyMac Bank was closed on July 8, 2008, the Federal Deposit Insurance Corporation (FDIC) has closed 103 banks covering 3,610 bank branches (go to http://www.fdic.gov/bank/individual/failed/banklist.html);
   
   
2. the Chairman of the FDIC, Sheila Bair, has gone on record as saying that another 500 – 1,000 banks will fail before this recession is over;
   
   
3. Chairman Bair has also said that the FDIC deposit fund, which currently insures individual deposits up to $250,000, will become bankrupt without new funding due to the increased number of bank failures;
   
   
4. CIT (http://www.cit.com/index.htm), a 100 year old bank holding company, which provides lending, leasing and advisory services to over 1,000,000 small and medium sized businesses, is hovering on the edge of bankruptcy. If it isn’t rescued by the FED and or FDIC, there will be a slew of bankruptcies in small and medium sized businesses who depend on CIT for their financing needs.
   
   

Listen carefully to Chairman Bair’s words! If a government official admits to a problem of this magnitude, you can “take it to the bank (no pun intended)” that the problems are significantly greater than what was stated. Further, a continually eroding banking system would seem to clearly indicate that this recession has a long way to go before it runs its course.

In addition, keep your eyes on the CIT situation. If the FED and/or FDIC don’t provide it with the same type of help that has been provided to the “big boys,” it will be a clear sign that the U.S. Government has abandoned small and medium sized businesses in the U.S.

What Do I See Coming, When Will It Happen and What Will the Trigger Event(s) Be

My thoughts on the above are as follow:

1. Derivatives tsunami #2 (June, 2009 Commentary) followed by Hyperinflation (July, 2009 Commentary) will result in a Depression which will make the Great Depression of the 1930’s (of which most Americans have little or no knowledge) look like a “Sunday School Picnic;”
   
   
2. anticipate a war, a “false flag” event such as 9-11 and/or swine flu outbreak to distract Americans from their on-going economic misery;
   
   
3. the timing of # (1) and # (2) is imminent. Expect these issues to show up anywhere from right now until the first quarter, 2010;
   
   
4. it is impossible to select a single “trigger event.” The problems are so numerous and so acute that almost anything could set off an implosion of an increasingly fragile system which is being held together by “spit, chewing gum and baling wire.” In fact, the words of Abraham Lincoln seen to best describe the situation:
   

“I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. Corporations have been enthroned, an era of corruption in high places will follow, and the money-power of the country will endeavor to prolong its reign by working upon the prejudices of the people until the wealth is aggregated in a few hands and the Republic is destroyed.”

What Should You Do To Protect Yourself and Your Loved Ones
Please read and re-read the 9 items mentioned at the end of my July, 2009 Commentary. Print it out. Post it on your wall, desk, bulletin board, etc.! Above all, please heed this advice as it is given “free of charge” with “no strings attached.”