The Mystery of the "Great Disconnect"

We are living in the time of the "Great Disconnect".
Nothing reported, either economically or politically, seems to connect with reality. The reality of which I speak is of the look around you and the look it up variety. The reported cause never seems to line up with the reported effect. Most often, they are two completely unrelated events that are formed by the masters of spin into an unintelligible & intentionally misleading corollary.

Let give you a simple example using a recent event on the Dow Jones.

An investment newsletter to which I subscribe reported that on Monday, the Federal Reserve Bank of Dallas released its latest manufacturing survey. This wasn't old, stale data; this survey was conducted in mid-July. And the results were bloody awful, with the headline index plunging to -21 from -4 a month earlier. That was the worst showing in a year.

Yet the Dow Jones Industrial Average jumped 101 points.?

Now that jump was rationalized by reports that many companies were reporting good earning, example; FedEx boosted its 2010 earnings target and Harley Davison showed excellent earnings. But wait a minute: If you know anyone living in South Eastern PA, you know that Harley’s sales are in the tank. But they also have laid off over 1500 bodies in recent months – no wonder they have good numbers, at least for the nonce. As for FedEx, they can boost their projected earning all the want, but I ask; how many cuts have they made and from what direction are those consigned loads travelling? West to East, or East to West?

Or how about what happened a few days earlier? The ECRI ( The Economic Cycle Research Institute’s US weekly leading index) released its latest index report, and the results were dismal once again ... and I mean beaucoup ugly- slumping to -10.5 percent. I am told that is the worst reading going all the way back to May 2009. Every single time this indicator has slipped into double-digit negative territory, a recession has followed. Every single time.

Yet that Friday, the Dow kited another102 points. The reported rational? Honeywell and Verizon topped earnings targets, while companies such as Ford talked about a brighter 2011. Big DEAL. What did Honeywell & Verizon adjust or cut to eek out some earnings and “ brighter” isn’t any indices I would hang my hat upon, although I say good for Ford for surviving without the bailout.

You can get the disconnected spun bull on from CNBC all day long. Pundits claim investors are ignoring the bad economic news because things are about to turn, and because company comments should outweigh macroeconomic data.

Prosperity is just around the corner. There is light at the end of tunnel.

Companies, politicians, bureaucrats, real estate hustlers and those who tout them for a living, Can't — or Don't Want to , See the Train Bearing Down on Them!

If you were to climb into a time machine and go back to late 1999 and early 2000, you'd hear corporate executives waxing extremely bullish about their prospects. The heads of Cisco, Intel, Amazon.com, and many others saw nothing but rainbows and blue skies ahead. This continued even as all the leading economic indicators of the day began to slump.

What about a more recent example — say, in real estate or mortgage lending? You should go back and read the transcripts from 2005 or 2006. These guys were falling all over themselves talking about the new paradigm in housing ... the surging sales ... the soaring prices.

They continued to spout happy talk even as the underlying, empirical economic data and leading indicators began to roll over. Result: Yet another pasting for anyone who listened to the supposedly clued-in execs.

It's hard not to conclude that the corporate & political classes of America are full of liars, cheats, and charlatans. And in SOME instances, that's exactly the case. But more is going on here ...

For starters, corporate execs, especially the Real Estate Hustlers extrapolate too much from current trends. If sales are improving, say, because of the biggest government bailouts and stimulus packages in the history of the world, they tend to view the trend as sustainable. That forms the basis of their forward projections.         If sales fell sharply and they cut production (and payroll!) but were able to sustain current sales levels from already paid for stock inventory and with much reduced labor outlay – in these times of the “Great Disconnect” – that calls for a great earning report. The Harley Davidson spin is a fine example.

These are the lessons of Enron, Tyco, and WorldCom. Why haven’t we learned them?

But that tendency is precisely the most dangerous at turning points in the underlying economy!

Here's something else to consider: CEOs depend on positive market perceptions of their prospects. That's because most of these guys have thousands and thousands of company shares in their portfolios.

If a corporate CEO came on the phone during a conference call and said: "You know what guys? Business stinks, and it's getting worse. Better sell your stock ... fast!" what do you think would happen?

The stock would tank, and his or her personal wealth would evaporate. So of course most CEOs are going to talk a big game just like any politician or Real Estate Hustler

The U.S. economy is stuck in the mire. But overseas economies ... particularly in Asia ... are doing better. Multinational companies that have exposure to those healthier regions are temporarily able to offset their lousy U.S. operations with foreign strength. That was definitely the case with FedEx, to cite just one example.

But we need to Cut through The BS !

When I survey the economic landscape, I see:

• Consumer confidence falling to multi-month lows,


• Regional manufacturing indices falling off a cliff,


• Banks lending less money, and mortgage and consumer credit plunging, and


• Durable goods orders falling, and job creation completely MIA.


• Real estate sales at a standstill & values cratering –again!


• And a government hell bent on destroying wealth.

And against that, I hear plenty of optimistic comments from corporate execs/ politicians, /bureaucrats / reporters/pundits and real estate hustlers who stand to benefit by talking up their prospects.

They just don't match up to reality.

A Dead Cat Bounce: Your Real Estate Values, Employment Stats.& The Federal Reserve,

Dead Cat Bounce

In testimony before Congress last week, Ben Bernanke lifted the Fed's skirt and gave us a glimpse of the disasters now sweeping through the U.S. economy. 
To my knowledge, he was not asked nor did he volunteer whether or not a dead cat bounced, but there were 3 other bombshells he surely did NOT talk about.

 

#1. What's CAUSING the economy to sink?

The stock market has not yet crashed.

Interest rates have not yet surged.

Gasoline prices have not skyrocketed.

There has been no recent debt collapse, market shock, or terrorist attack.

So what is the invisible force that's suddenly gutting the housing market, driving consumer confidence into a sinkhole, and killing the recovery that Washington was so avidly touting in this Summer of Recovery?

Bernanke didn’t say but the answer is clear enough: The recovery had very little substance to begin with. Rather, it was a dead cat bounce!  An illusion bought and paid for with massive bailouts, stimulus programs, borrowing and money printing.

Put another way, the recession never really ended. Yes, we saw some growth in GDP. And yes, thanks to that growth, some companies are still reporting better earnings — the news that spurred a rally in the stock market last week. But at the core of the economy, the fires that started the recession are still burning intensely.

#2.The U.S. Housing Market Is Now LOCKED Into a Chronic, Long-Term Deflation

Housing starts — traditionally the most important measure of the housing industry — is still a disaster zone, despite the latest spin. If viewed beginning in January 2006, they suffered their worst plunge in recorded history — from an annual rate of 2.3 million to a meager 477,000 in April 2009. Thus...

In just three years, 79 percent of America's largest industry, impacting more Americans net worth & American jobs than any other was wiped away.

Then, despite a series of government agency programs to shore up the industry ... plus something like $1.25 trillion poured in by the Fed to buy up mortgage-backed securities ... plus a big tax credit for new homebuyers, housing starts perked up ever so slightly: They recovered to an annual rate of 612,000 in January of this year.

It took me a day or two to look up the numbers and fiqure it out, but this recovery was so small, it retraced just 7.5 percent of the prior fall.
In other words,
Even after massive government efforts, and even at the highest point in their recovery this year, the housing industry recouped less than 1/10th of its historic three-year bust from 2006 to 2009.
Worse, existing housing value has now resumed its deflationary decline.

The most alarming factor is that widespread reports of "strategic defaults" on home mortgages have returned.

These are defaults by homeowners who can afford to meet their monthly mortgage payments, but have deliberately decided to stop paying. Their home is now worth much less than they owe and recovery of value is nowhere in sight. They know their bank won’t or can’t get around to evicting them for as long as two years, (in many states), allowing them to live in the house cost-free. They also know this tactic can give them tens of thousands of dollars in extra cash. So they're defaulting en masse and getting away with it.

To add fuel to this fire, many sellers bought in on the bounce produced by the tax credit driven sales, believed they were seeing price stabilization and placed their properties on the market this spring, only to languish as those buyers dried up.

End result:
• Market inventories are once again ballooning as far as the eye can see ...
• Bankers who would rather cut their wrists than finance new homes, and ...
• A new slump in housing that's worse than even some pessimists were expecting.

#3. Despite his now-famous quote that this is "the worst labor market since the Great Depression," Bernanke failed to reveal that...

Official Government Data Continues to GROSSLY Understate the Magnitude of Unemployment
Bernanke did not mention that the percentage of long-term unemployed in America is the worst it's been since the government began keeping records in 1948. Two facts availalable from The Heritage Foundation's website:

• Fact #1:  46.2 percent of the unemployed — have been out of work for 27 weeks or more. That's DOUBLE the worst level ever recorded and TRIPLE the peak level seen in five of the past six recessions.

• Fact #2: On average, America's unemployed have been out of work for 35.2 weeks, also the highest on record.

Bernanke did not remind Congress that based on the government's own broad measure; the true unemployment rate in the U.S. is not 9.5 percent. It's 16.5 percent — or seven full percentage points more than the figure anyone in government ever refers to.

This broader measure includes workers seeking full-time employment, but temporarily settling for lower paying part-time jobs. Plus, it's supposed to also include "discouraged workers" — those who have given up looking for work because there are no jobs to be found. During the Clinton administration, discouraged workers were "redefined" to EXCLUDE those who had been out of work for more than a year — and that definition continues to be used to this day.

That makes absolutely no sense. If they're out of work for a year, they're discouraged. But as soon as they're out of work for a year and one day, it's suddenly assumed they're happily going about their life?!

Thus, precisely when economists now recognize that one of the biggest challenges of this Great Recession is long-term unemployment ... the Obama administration, both parties in Congress, and all U.S. government agencies continue to exclude the longest term unemployed from every single one of their unemployment statistics.

This could go down in history as one of the greatest deceptions about the true state of U.S. labor markets. And according to John Williams of Shadow Government Statistics, it's big: When you add these long-term discouraged workers back into the jobless count, you find that the real unemployment rate in the U.S. is actually 21.6 percent!

But no matter how you count it, some outstanding facts are absolutely self-evident:

FACT: The enormous magnitude of the government's intervention FAR surpasses anything ever witnessed in the history of humankind.


FACT: It's not working! Housing is still collapsed. Long-term unemployment is the worst ever recorded. And the recovery, already anemic, is aborting prematurely.

Bottom line: Dead Cats Do In Fact NOT Bounce. If you were counting on the government to prevent the second major leg in this great double-dip recession, don't hold your breath.
Your Action: If you are a real estate seller, time is of the essence. Shortening your time on market is more important than ever. The need for aggressive, market capturing marketing is paramount. If you are in the position to accept current market value, the competitive bidding format and time defined nature of auction marketing may be right for you.

Real Estate Catastrophe! Or Real Estate Hyperbole?

BREAKING NEWS: The industry that triggered this great recession in the first place is coming apart at the seams ... AGAIN!


The U.S. Commerce Department just reported that all the gains made in home-building activity since last October have just been wiped out — construction of new homes and apartments just fell off the cliff:

Between May and June, new housing starts plunged 5%. That’s an absolutely astounding annualized rate of decline of nearly 50%.  At this rate, HALF of all home construction — and construction jobs — would vanish in a year!

Plus for companies involved in building condos and apartments, things are even worse: Their activity plunged 19.3% IN A SINGLE MONTH!

Bottom line: This could NOT be a more serious blow for the U.S. economy. After all — it was the housing bust that drove foreclosures sky-high and pushed our largest financial institutions to the brink of bankruptcy in the first place.

OR? NAR economist expects stabilization in 2010

The National Association of Realtors’ chief economist, Lawrence Yun, Ph.D., told his constituency at the NAR convention here that the national real estate market should stabilize in 2010.

He got a big ovation from a packed ballroom at the San Diego Convention Center this morning when he heralded the “power of the NAR” for successfully encouraging Congress to extend the $8,000 first-time home buyer tax credit. As a result, “the credit is working better than first projected,” Yun said. “It now looks like we’ll have 2.3 to 2.4 million first-time buyers this year.”

OR ? ! New data: Home inventory rises as prices continue to get slashed!

All three of these headers appeared on industry newsletters over the last few days. My inbox is full of such weakly.  But what is the truth? Which statement can one trust to make a real estate decision?

ALL Three statements are TRUE & All Three are also Hyperbole.

And there in lies the 2010 Real Estate Dilemma.

1. New home construction is at the precipice, ready to fail as an industry. A large swath of the nation’s unemployment number relates to that fact. Yet in my own zip code, a long stalled 55 & over apartment tower is currently under way and moving forward at a brisk pace. Once competed will it sell or sit? Will a run by local empty nesters from their too big and overtaxed single homes push that local inventory over the tipping point? Seems that the value here will get punished by success or failure of this project.

2. NAR chief economist Yun’s numbers are also correct, but also hyperbole. All I can say to the so called success of the tax credit is, “so what”? What is the net result of an $8,000 tax credit in the overall picture in the purchase of a property in excess of $200,000.00 and was offered to a very small sector of the buying public? But it did get some people in the market and the numbers reflect it.

3. With the withdrawal of this credit and the usual summer lull in sales, prices are falling again. Sharply. Despite the hype over the credit, real interest in housing hasn’t returned.

4. For commercial real estate, multiply by a factor of 3. It hasn’t had any of the attention that housing has received and is outright foundering with no relief in sight.

Yet, despite all this negativity, a family member recently successfully marketed their attached home and traded up to a larger single property to accommodate a growing family. No tax credit was involved by either party and the price paid in both transactions reflected fair market value. Nobody got rich in the deal, but no one was distressed by it either. All were in positions whereby they COULD accept current market value.

I said in March that if one didn’t sell by May 31st, that they won’t be able to sell until September or later. I appeared to have been right. On June 1st, I said that if you bought in the last ½ of May, you probably paid too much and if the deal relied on a tax credit to qualify, you will be underwater by August. I believe that will be proven to correct as well.

Hyperbole ? No, because there are always exceptions.

Some markets have stabilized, but not due to the tax credit.
Are we “at the bottom”?
Depends upon where you are standing and what you are standing on.

We are still in a market whose overall price trends are “lending limited”.
Uncertainty is still a dominate market influence.

Time on market will now return to the front burner.

We used to just call these guys Assholes, but today we diagnose them.

This Obama guy is failing more completely than any president in my lifetime. One may need to go quite a’ways back in history to even find a close comparison for failure this expeditious. On every front he is floundering, overreaching, or outright flunking. His only success — health care legislation — was achieved over the will of the people. That is rarely a good idea.


His greatest success is rate at which he is manufacturing conservatives and libertarians, the ranks of which are expanding at an unprecedented clip. The only mystery left for the coming November election is how bad this beating will be.

Why has this happened?

There are several obvious answers. Obama, too inexperienced for his office, never expected to accede to it so quickly in the first place. The public (correctly) has no stomach for a multicultural foreign policy. Almost 20 years of liberal economics, (as much congressional as presidential) has reached the end of its Ponzi scheme road. Adding Obama’s & congress’ doubling down on war & foreign sourced debt and we’re in a recession/depression with no end in sight. Then there is that little eco-catastrophe in the Gulf that Mr. Obama manages with a summer golf tour.

All of that aside, there is another reason, perhaps more important than all of them. Obama has been unable to use the Bully Pulpit. No one pays attention to him. The vaunted Demosthenes of the campaign trail disappeared literally upon inauguration. He hasn't’t been able to convince anyone of anything. He only succeeds when he acts purely as a thug, muscling through legislation.

Some say and I strongly concur that this is because he wasn’t such a great orator in the first place. He just reads well enough from the teleprompter and with the prompter gone the emperor has no clothes.

But I think it is something more complex and deeper. There have been plenty of presidents with limited abilities. Many who were not orators and some with limited executive experience, although not many with NO experience. Even his less than experienced challenger and current Sec. of State could at least claim 1600 Pennsylvania Ave as her mailing address for 8 years.

No, I think it is because Obama was elected on a lie and not the lie you think. ( Although anything is possible)  A big lie that was enabled by the mainstream media, and that by the time he was in office he had spent his all his credit. Belief was gone. Everyone knew he was a liar, including many liberals, even if they can’t or won’t admit it to themselves and even if they had colluded with him in the lie.

I am referring to the Reverend Wright affair. I thought it was serious at the time. In retrospect, I think it was disastrous, probably fatal. There isn’t a bus big enough to throw The Reverend under to cover this attempted deception.

Obama told us on several occasions then that he had not been aware of Wright’s extreme Black Nationalist views during the candidate’s twenty years in the reverend’s church. That made no sense at the time, but for many it flew. Obama had dedicated his book to Wright, had his children baptized by him, etc.

Wright’s separatist brand of black liberation theology was no doubt quite familiar to Obama. More familiar than it had been to many of us for decades. But likely quite unfamiliar to those 40 & under white voters who pulled the change lever. Especially the Jewish ones.

How would those too young to remember the sixties, those who wouldn't know Bobby Seal, John Africa, Elijah Muhammad or Angela Davis as anything other than names from a modern history curriculum with a nostalgic leftest bias for those wonderful 60's, and the hate and anti-semitism that they were all about. How would those sheltered from this particular brand of hate detect this lie for it gravity? 

Because, the mainstream media paid little attention, or tried not to, certainly did not investigate in any depth. Indeed they went so far that many of them declared Obama’s Philadelphia speech on race a masterpiece of the MLK level, when it was no more than an assemblage of clichés and mendacious clichés at that, since they covered up the obvious uncomfortable truth that the candidate knew all about Wright and his ilk. Unlike Oprah Winfrey, who left the Trinity Church years before, Obama chose to ignore it for reasons he could or would not be honest about.

So we were lied to about this by Obama and the MSM winked. Yet it was a far more significant lie than those Presidential lies we have become all too familiar with. Obama’s prevarication was about the very essence of his political zeitgeist. Widely desirous of electing its first black president — I felt this myself but did not act upon it — the nation closed its eyes and ears, and swallowed the lie. But, whether consciously or unconsciously, it did not forget.

We have a president that no one wants to listen to because we do not believe him. His own party ignore him and not just because they fear his growing unpopularity. They also know he is unable to convince anyone of anything. He has 0 credibility because we the voter have shut him off. When his face appears on the tube, I can hear millions of remotes switching to anything – infomercials, World Cup Soccer – anything.

And now the testimony of the Christian Adams has shown that his Department of Justice has a racial bias not entirely dissimilar to those of Reverend Wright. Again the MSM is doing its best to ignore this, but the damage is still there and growing and Obama will not be able to make a speech in his defense.
I am reminded of something I was taught about people by a business mentor. It was, “when someone says to you that money is no object, you better believe that money is the ONLY object.” Now, when Obama or his surrogates try to say that race isn’t the issue, America will hear that race is the only issue.

With this fundamental obfuscation of one of his core fundamentals, his whole political persona becomes a lie. Sure, everyone tries to project the image we want people to accept and respond to, but this man's arrogance seems pathological and he has plenty of enablers.

In this short time, we are already at the “diagnoses stage” with this president. Even Nixon had a longer run of trust before his pathology caught up with him and the diagnoses began. For Nixon it was “paranoid.” For Obama? Socialist will be the least of his labels. I’m betting on narcissist.

It’s over. For all the excitement of his election, having lied his way into office, Barack Obama was essentially DOA his first night at the White House.

Obama’s place in history is assured as the 1st black president, but that fact may only be the byline. The subtitle and his real legacy may be for the shortest tenure of trust of any president in our history.

The Road Signs of Reality

The New Reality

Today, we are in the midst of a massive global revolution — the East, reaping the benefits of its industry and thrift; the West, paying the price for its sloth and extravagance.

Former "Third World" countries are resource-rich, virtually debt-free and have vast cash reserves. (Most troubling is that it’s mostly our cash!) And the so-called "advanced" nations — in Europe and the United States — are nearly bankrupt, drowning in debt; most available cash, borrowed or printed.

As happens every half-millennium or so, the economic sun is setting in the West and is rising in the East.

Moral lessons aside, the reality is that a revolution of this magnitude — the historic changing of the planet's leadership — can be expected to impact the value of every conceivable store of wealth. And it's only natural that these changes be as extreme as the events that drive them.

When those on the left of the economic paradigm, like Nobel laureate, New Times contributor and liberal fascist mouthpiece for the current regime, Krugman himself began to use the “D” word ( as in depression), I realized just how radical this “Road of Change” was becoming . So what where the “Road Signs” that even the most leftist of the economic elite couldn’t ignore?

Road Sign #1— Key Reversal Signal in Stocks

After retracing nearly 10 percent from its June low, the S&P 500 topped out on the day China announced its new currency policy. That marked a bearish outside day, a key technical reversal indicator.

Now the stock market ( S&P) has formed the historically dreaded “head and shoulders pattern” that suggests a move down to 860 ... 24 percent lower than the peak level seen just two weeks ago.

I know that I usually comment on the Dow Jones numbers as that is the most visible index, but it’s S&P that is calling the important shots at this time. The Dow is playing follow the leader.

Road Sign #2—Ten Year Yields Below 3 Percent

While many market followers have been forecasting higher interest rates, the ten-year Treasury market is responding with the exact opposite.

As risks of sovereign debt problems rise and the probability of a return to recessionary GDP’s for the world increases, global investors are continuing to pile into the U.S. Treasury market for safe haven. And that's driven 10-year yields back below 3 percent.

Road Sign #3—Commodities Breaking Down

There's a famous historical study on sovereign debt crises that suggests sovereign defaults are typically triggered by a collapse in commodity prices.

So what are commodities telling us?

A surprise to me, the second quarter has been the worst quarter in more than a year for commodities. The total return index of 24 raw materials plunged 10 percent since the end of March. So I suppose that study is right.

This week the price of crude oil broke through trendline support. Moreover, the technical pattern suggests crude could fall to the mid-50s, at minimum, as hard as that is to get my head around. The only causality I can render is that global consumption must be way off.

To sum it up, the key barometers of stocks, interest rates and commodities are all pointing to lower levels. And from a big-picture standpoint, the combination of these signals should concern anyone who is not prepared to weather another economic and financial market storm.

Roads Signs to Come.

#1. Breaking down of local & state pension funds.
One may even say collapse in some states. Many are already borrowing to keep up pension commitments.

#2. Cutting loose of government sector employees.
Estimates run to as high as 400,000 public sector jobs being cut by states, counties and municipalities in the coming year as tax revenues founder and stimulus goes wherever stimulus goes – which seems to usually be up in smoke. If this developes as a trend, it will send the employment issue to a crisis level.

#3. Municipal Debt Default.
And why not? If the states go, what is there to prevent the debt crisis of major cities & municipalities from spilling over into the general debt crisis? How much is there and who will buy it?

#4. Mortgage collapse.
The return of mortgage defaults as front page news. And again, who will buy it?

These are all signs of further deflation of value.  We are in the grips of Deflation in every market except debt.

If you bought real estate in May, while you got a tax credit, you probably paid too much.
Gold is in a “reset”, awaiting inflation to leapt back to new highs. Hold it.
Buy silver. It has the most headroom at this time.
Shed debt. I know I will ASAP.

Omar P Bounds III