Next Week's Showdown

[natrat]

Saturday November 7, 2009

Things in the financial markets should be interesting as the Dickens next week, since a number of major economic drivers are piling up the pressure. Let me run through the list for you:



First - although it's not a BIG pressure, America's banking system is still over-extended to the point where FDIC had to reorganize another five banks this week, the largest of which had 63 branches in the SF Bay area:


United Commercial Bank
Gateway Bank of St. Louis
Prosperan Bank
Home Federal Savings Bank
United Security Bank



The year-to-date today is 120 banks reorganized impacting 1,378 branches and since IndyMac last year, we're up to 3,985 branches impacted and 142 banks. Nothing as big as WAMU's 2,239 branch operation, but stick around, this really is a Depression, whether mainstream economystics will admit it or not.

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There's a headline in the LA Times today not to be missed: "Fannie Mae to allow borrowers in foreclosure to lease back homes" is the gist of it.

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Bottom line of what's going on in real estate presently: Everyone involved is hoping this Fannie plannie stems the amount of property that is flooding onto the market.



Elaine & I have noticed that in many markets, homes will go on the market for six months or so, then be taken off the market with a note that 'Deal Pending - Back up offers welcome" which really means the house isn't sold...but it helps everyone's statistics. The foreclosure holder claims a sale, looks like the house has moved, but in reality....well, what's reality anymore in finance, huh?



Crazy, huh? Then they can say "Oh, so sorry - deal fell apart - and recycle houses on and off market to 'paint the tape' on housing numbers. Is this a great country, or what?

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The ongoing problems of banks may fade to the background next week because the much larger problem is the systemic inflation that continues to evolve. If you need evidence of inflation expectations, you have no further than the price of gold to go looking: It closed this week in the $1,095 range and next week could easily be seen closing over the $1,100 mark.



The Dow had a fine gain for the week and might go on to a new high next week, but "new high" would only be for the period since the march low this year: Recall the Dow in October of 2007 hit an intraday high of 14,279.96. With this week's close at 10,023 and change, my calculator says the Dow is off its high by 29.9% basis 2007 - and even more if we consider the effects of inflation.



And just to keep things in perspective here, let's recall that the Dow hit an intraday high of 11,908.50 in first week of January way back in 2000, which using the Fed's own numbers means that to just break-even on a purchasing power basis, the Dow needs to be at 14,743.86 - but it gets even better! We are almost through with 2009 and throw in another 4% for inflation to ballpark it and the Dow would need to be north of 15,333.



My surly attitude on this stuff has been known to flood my email with complaints that I'm not being fair because I don't count splits and I don't count dividends. But my usual retort that I also don't back out Dow components which have bitten the dust. I may be one of the few people who actually made money on Lehman in its final days. Nor - if you invest via mutual funds - do I back out fund management fees, commissions, tax bracket creep, and so forth. But enough on that old thread.

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Then there's the little matter of the Federal Reserve (we know they're not really 'federal;' but that's another discussion) which put out the Consumer Debt Report on Friday. The scary fact is that consumer debt is dropping at a 7.2% annual rate.



But no one is writing yet about what this really means and why? Because it's disastrous - that's why!



When you look at the Fed numbers, you'll see the consumer is dropping debt at the fastest rate since 2004 on their report. Yep. Consumers have gone on vacation - and still no one on Wall Street has figured out the obvious implications of crashing consumer spending.



Here's a hint: The Second Depression is picking up speed.



You have to be really precise in your thinking on this stuff because it's not always evident. But look back to 2005 - just for the sake of discussion. The consumer debt was increasing at a 4.5% annual rate. But we need to correct for the underlying change in pricing due to inflation. This means that real growth in 2005 should be around 4.5% consumer debt, less 3.99 % inflation for a real economic growth rate of around 0.56%. (This is using the BLS inflation numbers compiled by John Williams at Shadow Government Stats)



Why do all that math? Because if the Consumer debt is really declining 7.2% annualized, we still have to back out the underlying inflation which I'd guess at around 4%. All that printing up bail-out money has to show up somewhere, eh?



That means that real economic growth is likely negative something like 11% - which (hate to tell you this) is why the unemployment rate just ticked past 10.2% (officially) this week.



But even worse? What if the Shadow Government Stats site which only has BLS figures in their calculator through August of 2009 is right - what if the August 2008 to August of 2009 BLS number is right and inflation is running (better have a nitro pill ready for this one) 14.94%.



THAT means that the true decline of economic activity will be -7.2% and then we discount those dollars by the annualized inflation change.- which means economic activity is dropping by something closer to 20% annually.

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You saw where the NY Times is reporting 17.5% for a broader measure of unemployment. As one reader commented: "Look! Someone else is getting it!" Indeed.

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This is where a little Saturday morning/deep thinking comes into play: On one side of the trades down on Wall Street (besides the 'tape painters' you've got people who are buying the Dow and other stocks because they believe company market share means something.



On the other side are the bears who can pencil things out as I have, and they'd be short in here.



My best guess (and no, I don't make recommendations on investments, sorry you're on your own here) is that the market will go off to set a new high next week, or the week after, and we could see 10,400-10,500 in the Dow.



That in turn - following yesterday's discussion of 'time to crash' behaviors - would put the next real low sometime this winter to early spring 2010 and then one last good run back up from there before the end of economic life on earth begins in the August/September period of next year.



What I'm telling my kids is pretty simple since no one has money left to invest: Get yourself into jobs which will be needed no matter what and do whatever it takes to keep those jobs. Son's an EMT, one daughter works in a grocery store as a check-out clerk and the other daughter is working for a state unemployment office. Than heaven, they seem to be taking old dad's advice for once.



With any luck, they might buy some gold or silver colds along the way, too.

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