On the Good Ship Lollipop [View All]

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On the Good Ship Lollipop
By David Glenn Cox


We are living with a school of economic thought that can best be described as the Shirley Temple school of wishful economic thinking. They trumpet the good news and ignore the bad; they shake hands and appear on TV shows pretending that it is all getting better. Housing prices were up 1%! See, they were up 1%. It’s getting better everyone; home prices were up 1%! You see, it’s getting better. I knew it would get better, and now it is! It’s finally getting better!

Except that during the same time period home foreclosures hit an all time record high. Some 42% of the homes sold last month were sold on the court house steps. They want to compare month-to-month rather than year-to-year. Home prices in Nevada are down 30% year-to-year. At the peak of the bubble in 2007, median homes prices were more than $250,000. Today the median price is below $175,000 and buyers are scarce. But month-to-month, it is looking so much better!

It is as if America is in an economic Godzilla movie. The monster tears through our economy and the Shirley Temples proclaim, “See, it’s better now! Godzilla has gone down the street!” They just ignore the damage and the refugees and pretend that all will be fine because Godzilla is destroying the neighbor's house down on the corner.

The ISM manufacturing report showed that great things are in store for us; life will just be wonderful in the very near future!

“In September, 13 of the 18 manufacturing industries reported growth. Purchasing remains a challenge as suppliers now seem to be trying to raise pricing at any sign of life in the economy."

New orders are down 4%. Production down 6.2%. Customer inventories are flat, no change from August. Prices down 1.5%. Exports down .5%. Imports up 2.5%. Well, sure it sounds bad when you look at the stark figures, but hey, 13 of the 18 manufacturing industries reported growth!

Manufacturing unemployment figures went down .2%, but it's like the first mate on the Titanic said, “Good news, Captain! The waters have stopped flooding 'B' Deck!”

“That’s great news! How did you do it?”

“Well, 'B' deck is under water, Captain; it’s moved on to 'C' deck now.”

Supplier deliveries are shown as being faster which is an inverted indicator. Domino’s will get that pizza to you much quicker when business is bad. When they can’t keep up, that means business is good. Manufacturer inventories are growing. Again, that’s not a good number; it means that their customers are afraid to add inventory. How long have supplier inventories been building? Try forty-one months!

Buried in the bottom of the report, almost as a footnote, is the following: “No commodities are reported down in price.” See the good news! Manufacturer prices are down, but commodity prices, the prices they must pay for their raw materials, are up. It’s a big bowl of vanilla ice cream in the middle of a snow storm!

“I've thrown away my toys
Even my drum and train.
I wanna make some noise
With real live aeroplanes. “

On Friday CIT Group filed for bankruptcy protection. The 101-year-old commercial lender is upside down and unable to fulfill its requirements. CIT Group is the fifth largest bankruptcy by assets in history. The largest since the Washington Mutual collapse. The Treasury Department advised, “The government probably won’t recover much, if any, of the $2.3 billion in taxpayer money that went to CIT.” The failure of CIT raises the number of bank failures to 115 this year with two months still left to go.

“On the good ship Lollipop
It's a sweet trip to a candy shop
Where bon-bons play
On the sunny beach of Peppermint Bay.”

But it's not just Uncle Sucker taking a bath, CIT owes Bank of America $7.5 billion, Bank of New York $3.2 billion, and Citi Group $2.1 billion due next year. There’s no FDIC here, boys! So lather up and be prepared to take a bath.

"See the sugar bowl do the tootsie roll
With the big bad devils food cake
If you eat too much, ooh ooh
You'll awake with a tummy ache.”

Oct. 30 (Bloomberg) -- Billionaire investor Wilber L. Ross Jr, said today the U.S. is in the beginning of a “huge crash in commercial real estate.

“All of the components of real estate value are going in the wrong direction simultaneously,” said Ross, one of nine money managers participating in a government program to remove toxic assets from bank balance sheets. “Occupancy rates are going down. Rent rates are going down and the capitalization rate -- the return that investors are demanding to buy a property -- are going up.”

“Lemonade stands everywhere
Crackerjack bands fill the air
And there you are
Happy landing on a chocolate bar.”

Remember when the mortgage crisis first began? How advocates said we must try to help homeowners to keep their homes? They were met with a chorus from the holier than thou, “Why should the government help bail out my neighbor to keep his house when I still have to make my mortgage payment every month? That’s his tough luck!”

This is what happens. It spreads throughout the economy, and like Godzilla there’s no way to stop it except by starting at the bottom instead of at the top. To support the banks by supporting the homeowner and to stop pouring money through the sieve of the banking industry. There’s a quote from the Grapes of Wrath, “Had me a little store back in Arkansas, and when the farms went then the stores went, too.”

"A lot of damage was caused by this crisis. It's going to take some time for us to grow out of this. It could be a little choppy," Treasury Secretary Timothy Geithner said. "It could be uneven. And it's going to take a while."

A bright spot in the recovery identified by Geithner is the banking system, which he said is "dramatically more stable" because of the government bailout.

“On the good ship Lollipop
Its a night trip into bed you hop
And dream away
On the good ship Lollipop.”