TRUST – the missing part of the economic recovery
June 5, 2009
June 10th class in Los Angeles at 6pm
June 17th webinar from 6-8pm (same material)
My daily update gave readers notice of a stronger Aussie dollar and gold earlier this year. The cost is only $1 a night and is must reading if you want to make sure your net worth grows every year (including 2008).
The most important word for this year is TRUST and the lack of it in decision making by investors, consumers, business owners, borrowers and lenders. At http://www.dictionary.com the definition is listed as “confident expectation of something, hope” and that is not a current condition for any of the above categories with the exception of short-term stock market traders. In the past five years consumer confidence surveys bolstered the views of many giving them the courage to continue borrowing for the purchase of assets. Prices continued to rise confirming to investors that they had made the right decision and that created more buying on leverage. Unfortunately these consumer surveys done by the University of Michigan and the Conference Board are a relection of recent stock market activity and don’t show the long-term confidence needed to make major decisions. Up until recently following these surveys was profitable because asset prices continued to rise annually but the sea change of the past 19 months is one everyone must adapt to or risk a continuing decline of their net worth.
TRUST encouraged the homeowner to borrow against their residence “knowing” the price would continue to rise allowing them to refinance their credit card balances into mortgage debt at lower interest rates. TRUST that the past would repeat pushed stock investors to not use stop losses and blindly follow investment managers that believed stock prices would never fall as much as they did last year. The result is that most investors no longer TRUST themselves to make a decision about investment managers ability to make them money and are now sitting in cash on the sidelines not sure when they will ever move back into the stock market. (Higher prices?) TRUST in always bullish real estate agents and mortgage brokers that can’t ever be objective about the direction of home prices helped create the meltdown that has caused so many to lose their residences. The never ending belief that real estate prices must rise again has many blindly buying homes with FHA loans that allow buyers to use a small down payment hoping that prices have hit bottom knowing if they don’t the government will step in and modify their loan. Of course they could also walk away without much loss of capital. Business owners TRUSTED that banks would be willing to lend for inventory or new equipment to expand but are now afraid they will be turned down because banks are afraid they won’t be repaid. Consumers for years TRUSTED they could purchase whatever they needed or desired knowing their credit card limit could be increased if needed or a new card acquired. We all remember the stories of pets receiving unsolicited credit card applications. TRUST that banks would lend, the government would not increase regulation, that prices would rise over time due to inflation and that we would always have a job to make monthly credit card, mortgage or insurance payments allowed the U.S. economy to grow for decades. Cycles were welcomed and accepted as a cost of doing business but knowing that a short period of time would heal all financial wounds.
The past two years have NOT been part of a regular cycle in a normal growth period for the U.S. We have witnessed a secular or long-term change that will take a decade or more to resolve due to the fact that we no longer TRUST our ability to make key financial decisions and that markets (stocks, real estate, businesses, etc.) no longer operate like they did over the past 30 years. Since we only see the future from our own past experiences the longer the recession lasts the more it will inhibit risk taking by investors, consumers and businesses. Risk taking will be essential for the U.S. economy to rebound and that only occurs when perceived return is great enough to warrant the risk involved in the investment. When TRUST goes down it takes risk taking with it and that almost always creates lack luster growth at best for the economy. I have written for over a year that the U.S. economy and markets are not binary, if they are not falling it does not mean they are rising, they can be flat or in a tight trading range for many years. I anticipate a very shallow bounce back in the economy in the fall but more from a lessening of the rate of decline than actual growth. Stock investors have been celebrating the past 75 days because the end of world scenarios present in March have been replaced with “green shoots” that have the potential to grow in the next 12 months but it comes with a great cost. The only $$$ entering the economy is from the U.S. government and NOT from risk taking business investment. The patient is breathing only because of intervention by the government and if taken away would be back in the ICU. The business media is focused on a return to the past but that is almost impossible even if the government, Fed and Treasury increase their intervention and assistance to markets. TRUST is lacking and will take years to rebound but society is impatient and not ready to adjust their lifestyles but will be forced to in the next two years.
Consumer Credit
Today’s Consumer credit report showed a massive decline of $15.7 billion for April with credit card debt falling by $8.6 billion. Credit is contracting not because consumers are paying down debt from a surplus of funds but because lenders are cutting credit lines because they don’t TRUST that consumers will be able to pay back new debt. If consumers know they have less credit they are reluctant to spend except for emergencies. Banks have increased their cash holdings at the Fed by over $650 billion in the last year because their TRUST is so low that the Fed is the only place they feel safe with their $$$. It’s a circle of FEAR that can only be broken with lots of time (years) and patience, not one of the strengths of most Americans who always want it now or yesterday. A lack of TRUST has caused the savings rate to rise to a 14 year high of 5.7% and I expect it to rise to the 10%+ level last seen in the early 1980’s.
Employment
This morning’s jobs report appears to show a slowing in job losses in May BUT the government birth/death model (seasonal adjustment) added 220,000 phantom jobs based on previous May job growth which has nothing to do with today’s economy. Many people continue to leave the work force as they become discouraged about the prospect of finding work and 174,000 last month accepted part time work because they can’t find full time jobs. This “real” unemployment rate rose again last month as is now above 16%. The employment to population ratio continues to decline with less people working and more people entering the work force (college graduates, etc.). The most disturbing part of the report was average weekly hours which fell 0.1 hours and the fall of 0.2% in average weekly earnings. Employers are cutting hours from workers instead of laying them off thus cutting earnings instead of overall employment. If businesses had fired workers instead of cutting hours or pay it would have added 400,000 to the unemployment numbers for May. If the stock market had declined the last two months everyone would interpret today’s news as bearish but because the market has rallied it has taken on a bullish spin. History has shown the stock market frequently discounts events that never occur and the strength being anticipated by stock investors may be disappointing and cause selling later this summer.
Interest rates
As anticipated by the EWW long-term interest rates have risen in May and June as expectations for runaway inflation increase almost daily in the marketplace. A excess of capacity and the fact that $$$ being printed by the Fed is NOT going into the economy but back to the Fed makes it unlikely that we will witness a resurgence in inflation in the next year. If oil and commodity prices continue to increase it will have a devastating effect on consumer spending patterns and return us to the events of last summer when oil prices forced consumers to curtail driving and spend less on other non-essential items. The 10-year Treasury rate rose today to 3.83% with the inflation component at 1.99%. The 2-year rose to 1.29% on fears of an imminent Fed increase in the overnight Fed Funds rate and offers tremendous opportunity for risk averse investors. Do you remember last June when the “experts” told us that the Fed would not ease again and the problems in the mortgage market would be resolved soon? Rates peaked on June 16, 2008 and June 12th, 2007 and June 28th, 2006 and have fallen in the 2nd half of the past 7 out of 10 years.
Summary
Even though the stock market has rallied over 35% in the past two months from a deeply oversold condition today’s news only confirms we are declining at a lesser rate than the market was expecting two months ago. We remain in the early stages of a decade that will be remembered for its slow to no growth due to a lack of risk taking and availability of credit. The patient is alive and breathing but it will be years before it is healthy enough to return to its energetic levels of the early 2000’s.
I look forward to seeing readers at Wednesday’s (6/10) class.
For those not located in Los Angeles my webinar on June 17th.