Bailout Monday

Secretary of the Treasury Hank Paulson issued a statement last Friday saying the federal government would NOT be bailing out mortgage lenders Fannie Mae and Freddie Mac.

That was Friday.

By Sunday, word came down the Bush administration was prepared to provide whatever funding necessary to ensure Fannie Mae and Freddie Mac would not go belly up.

As Cunning Realist noted Friday, this looked like it was going to be an exact repeat of the Bear Sterns debacle.

The Friday before Bear Sterns was essentially liquidated, the Bushies said there would be no government action to aid the firm but they would be monitoring the situation over the weekend.

Of course by Sunday night it became clear that the Bush administration considered Bear Sterns one of those "Too Big To Fail" institutions and was already in the process of providing $30 billion taxpayer dollars to back up Chase's acquisition of Bear Sterns.

Same thing happened this weekend.

As many have started to note, while the Bush administration has sold us for years on the Ownership Society in which people are supposed to take the risks and responsibilities for their own lives, livelihoods and retirements, what they've really been doing behind the scenes is creating the the socialization of capitalism - if you're big and rich and powerful, there's safety net for you in Washington DC ready print up lots of dollars and send 'em your way.

At least for the investment class, that is.

For the rest of us, bailouts only come when they are forced to do them (i.e., when the press cameras are on them.)

Thus New Orleans got "help" or what what Hank Paulson would call a "government bailout" when the media were paying attention.

He does not call the Bear Sterns/Freddie Mac/Fannie Mae taxpayer bailouts by that name however.

Rather they are instead a means of "providing liquidity to ensure an orderly operation of markets during a period of financial stress."

See the difference?

Anyway, when the press got bored with the Katrina story and went on to following the next ball of yarn, there wasn't much of a government bailout for the Katrina victims anymore anyway, especially once the Bushie cronies had gotten their hands on as much of the reconstruction funds as they could.

The same will happen for the homeowners going belly-up on their mortgages. It's an election year, so both parties are ready to "help" but you can bet the help will be pretty ineffectual for most and fade away after the election.

You see, Joe and Susie Upside Down Mortgage aren't "Too Big To Fail" once the election season is over and their votes are counted.

Ahh, yes, we are all equal in Bush's Ownership Society, but some of us are more equal than others.

As a side note to this mess, can you imagine if Bushie and the Republicans had gotten their way and had privatized Social Security and put the dough in blue chip stock like GM, Lehman, Bear Sterns, or Freddie Mac/Fannie Mae?

Yeah, that would have been fantastic for the long-term health of the Social Security program.

Okay, not really.

But it absolutely WOULD have been fantastic for the long-term wealth of the Wall Street shills and Bush cronies handling the money and taking their fees.

You know, the very same guys who created messes like Bear Sterns, Indymac, and Fannie Mae/Freddie Mac.

The ones we as tax payers are bailing out this morning.

The guys who are "Too Big Too Fail."

I Believe In Magic

Woke up and put on CNBC this morning like I do every weekday morning.

On Tuesday one of the "perma-bears" on the channel told me the market had bottomed and Tuesday was a wonderful day to buy, buy, buy. Oil was heading downward (it eventually fell from the mid-$140's to the mid-$130's this week), the battered financial sector was ripe for bottom-picking, the market was on the way up and all was well with America.

Yesterday the McCain campaign, echoing the CNBC perma-bears, dismissed the economic problems the country is facing as a "mental recession" and called Americans a "nation of whiners" for not seeing the silver lining in outsourcing, record high oil prices, record high food prices, record high health care costs, soaring inflation, a credit crisis, a tanking stock market, record foreclosures, and a housing market in depression.

You see, the problem is with your mindset, not the Bush financial policies of tax-cut and spend and business deregulation that brought so many of these problems to fruition in the first place.

And yet this morning when I turned on CNBC, all I heard was panic.

Here's why:

Shares of Fannie Mae and Freddie Mac, two pillars of the nation's housing market, continued to plummet yesterday as investors and federal officials contemplated the possibility that the giants of the mortgage business could require a federal bailout.

...

The failure of Fannie Mae or Freddie Mac could be devastating, making it harder for people to buy and sell homes and sending ripple effects through the broader economy.

If Fannie and Freddie go under, you're looking at a trillion dollar taxpayer bail-out that will make the Bear Sterns bailout look small.

If Fannie and Freddie go under and they aren't bailed out, the housing market is REALLY going to get hammered.

The credit crisis has already choked off mortgage money for many borrowers; Fannie and Freddie have picked up the slack - but if they can't lend, then very few people will be able to get home loans.

With home values already down 15% in many areas around the country, the bottom would fall out of the market and you'd have an awful lot of homeowners with upside down mortgages (owe more than the home is worth.)

That really would complicate the foreclosure problem, wouldn't it?

Which would really complicate this "mental recession" so many of us are suffering from.

Couple the Fannie/Freddie panic with spiking oil prices (oil futures are back up to an all-time high - $146.90) and the Dow threatening to fall below the 11,000 support level this morning, and I get why the CNBCers sound so panicked.

But here's what I don't get. Throughout the economic problems of the last year and a half, from the failing hedge funds to the Bear Sterns bailout to the locking up of the credit markets to the dismal job numbers to the soaring commodity prices, so often I hear from the boys and girls who supposedly know about these things is "The worst is over, the markets have bottomed, this economy is the greatest story never told..."

And yet, isn't it becoming increasingly clear that the worst is NOT over for either the main street economy, the housing market or Wall Street?

Now today's CNBC panic may turn out to be nothing - lately every time there is a really bad crisis in the stock market or the economy, money has a funny way of finding it's way where it's needed (think Federal Reserve credit market infusions, think Bear Sterns) so I'm sure Hank Paulson is cranking up the currency printing press and Ben Bernanke is warming up the helicopter to start throwing money at the problem right now.

But what do you think all this newly-minted money is going to do to already record oil and food prices?

You got it - they're going to continue to go up, up, up.

So maybe the CNBC perma-bears have got it right - maybe the worst is over and the market is on an upswing.

All you've got to do is ignore the plummeting home prices, the bear market at the Dow and the S&P, the soaring commodity prices, and the constant news about new write-downs at the banks related to the mortgage crisis which continue to complicate the foreclosure problem.

All you've got to do is believe in magic.

Stayin' Alive

Remember the 70's?

I do.

I was born in 1967, so the 70's were my formative years.

Some of my first memories in life are of oil embargoes, gas lines, blackouts, riots, high unemployment, mass layoffs, Mom complaining bitterly about double digit inflation and double digit interest rates (which kept her from selling our old house and buying a newer one in a nicer neighborhood) and Dad pontificating about President Nixon taking us off the gold standard and Federal Reserve Chairman Arthur Burns creating a spiral of hyper-inflation with his monetary policies

I know, I know - a truly twisted childhood, which is why I'm in therapy now and working through those awful memories. But I'll save that story for another post and focus on this:

Watching the TV news or reading the papers these days, I'm starting to have deja vu all over again to my childhood.

I mean, have you seen these headlines?

Inflation fears spark global market rout

Reports show U.S. growth weak if not in recession

Geopolitical worries send oil above $143

Eurozone inflation soars to new high

Prices for commodities and oil likely to stay high

Broad Says Economy in Worst Slump Since World War II

I must not be the only person sensing something is wrong these days. Take a look at the consumer confidence chart for the last nine years:




Consumer expectations for the future are just as dismal - people expect their standards of living to continue to diminish as incomes fail to keep pace with price increases for food, energy, health care, and education costs for the overwhelming majority of Americans.

Notice that I haven't mentioned the one place in the economy where prices aren't going up - housing. That's because the Greenspan/Bush housing bubble created over the last few years that saw housing prices increase astronomically in many markets around the country is the root cause of so many of the economic problems we are facing today.

The theory goes like this: in the early part of this decade, Federal Reserve Chairman Uncle Alan Greenspan needed to create another bubble to replace the tech bubble. Though the economy was already tanking by the fall of 2001, the financial fall-out from the 9/11 attacks gave Uncle Alan all the cover he needed to decrease interest rates to historically low levels (1%) and keep them there for a long, long time. Cheap money solves lots of economic ills and there is little doubt that Greenspan's monetary policies, fully backed by the Bush administration, took the country out of the tech bubble and the 9/11 attacks and into a minor economic recovery.

The problem, of course, was that Greenspan had created another bubble to replace the last one - in this case, a credit/housing bubble. Couple the cheap money with lax lending standards and little accountability or oversight of the financial institutions and banking system lending that money and you get what we have today - banks and financial institutions dealing with lots of bad debt lent to people who shouldn't have been allowed to borrow money to buy houses they couldn't afford to buy. On top of that, Wall Street created all kinds of new "innovative" ways to chop up these debts and sell them to investors - including hedge funds, pension funds and ultimately even mom and pop investors - so everyone is getting to share in the fall-out from the bursting of the credit/housing bubble.

The Dow is down 19.9% in the last year and with futures showing a triple digit down opening, it looks like we will officially hit a "bear market" in the Dow today. Banks have been writing off billions of bad mortgages and while we have heard more than once that "the worst of the credit crunch has passed," it is becoming increasingly obvious that this is not so. Rumors swirled yesterday that investment bank Lehman Brothers could follow in brother Bear Sterns' footsteps and be put to a fire sale. Lehman's stock is down 70% in the last year. The Dow Jones Wilshire U.S. Banks Index was down 26% for the second quarter. Writedown rumors continue to swirl around Citigroup and a few other banks. There seems to be a lot of bad debt still in the pipeline that needs to be worked out before the credit crisis can truly be declared over and the financial system can heal itself.

To compound matters, the Federal Reserve's solution to the problem of falling housing prices, increases in homeowners defaulting on their mortgages and a slowing economy was to lower interest rates again and keep them there. The result has been a tanking dollar and sky-rocketing commodity prices.

Bill Fleckenstein sums up the current crisis quite well on MSN Money:

The aftermath of this housing/credit bubble is far different from that of the stock bubble. Now the lending institutions are swimming in bad debts. Homeowners have mortgages they can't pay, just as the assets (houses) behind those debts are dropping in price.

As if that weren't enough, consumers' paychecks are eroding, thanks to galloping inflation created by the money printing that fomented the housing bubble (and by the credit that Greenspan's replacement, Ben Bernanke, has subsequently thrown in to ameliorate the aftermath).

Thus $143 a barrel oil, $4.79 a gallon gasoline and record grain, corn, and soybean prices. With the Bush administration playing pre-election games with oil-supplier Iran (somebody has been leaking news of an imminent Israeli attack on Iran), you can bet oil and gas are going much higher in the near term.

Which brings me back to my memories of the 70's. Here we are with a president more unpopular than Jimmy Carter (23% approval in the latest LA Times/Bloomberg poll) in office, increasing tensions with Iran, American forces fighting overseas (remember those other two wars Bushie started in Iraq and Afghanistan that he never finished?) rising inflation, rising unemployment, rising oil, gas and food prices, falling incomes, falling home prices, a falling dollar, tanking consumer confidence and expectations for the future and an overall "malaise" around the country that has 80% of the country saying we are on the wrong track for the future.

Of course all this bad news means even worse news for the Republican Party which will be saddled with the blame for the economy (75% of people in the Times/Bloomberg poll blame Bush for the worsening economy.) Since this is an election year, you can bet that doesn't make the boys and girls in the White House and the RNC happy. And that's why you can bet that the Bushies will trigger some international event to try and take people's minds off the economic problems and overall malaise the country is suffering from. Cunning Realist thinks it's an attack on Iran that's coming. So does Sy Hersh. What better way t distract people from their problems than by ginning up another war against a Middle Eastern "Hitler".

Except that this attack, if it comes, will take oil well above $150 a barrel, maybe even to $200 a barrel. The LA Times looked at what $200 a barrel oil would do to the American economy and the consumer:

with oil closing above $140 a barrel Friday, more experts are taking those predictions seriously -- and shuddering at the inflation-fueled chaos that $200-a-barrel crude could bring. They foresee fundamental shifts in the way we work, where we live and how we spend our free time.

"You'd have massive changes going on throughout the economy," said Robert Wescott, president of Keybridge Research, a Washington economic analysis firm. "Some activities are just plain going to be shut down."

Besides the obvious effect $7-a-gallon gasoline would have on commuters, automakers, airlines, truckers and shipping firms, $200 oil would drive up the price of a broad spectrum of products: Insecticides and hand lotions, cosmetics and food preservatives, shaving cream and rubber cement, plastic bottles and crayons -- all have ingredients derived from oil.

...

With every penny hike in the price of gas costing American consumers about $1 billion a year, sharply higher pump prices would lead to "significant bankruptcies and store closings," said Scott Hoyt, director of consumer economics at Moody's Economy.com.

Consumer spending has held up surprisingly well in the face of skyrocketing pump prices -- bolstered in part, perhaps, by federal tax rebates. But the same day the government reported a 0.8% rise in May consumer spending, a research firm said consumer confidence had plunged to its lowest level since 1980 -- hinting at the catastrophic effect another big gas price surge could have on retailers and customers.

"The purchasing power of the American people would be kicked in the teeth so darned hard by $200-a-barrel oil that they won't have the ability to buy much of anything," said S. David Freeman, president of the L.A. Board of Harbor Commissioners and author of the 2007 book "Winning Our Energy Independence."

70% of the American economy is driven by consumer consumption. If the LA Times article is right and consumers wouldn't have the ability to buy much of anything with oil at $200 a barrel, economic conditions would get really ugly, really fast. And what could Helicopter Ben Bernanke do then? Take interest rates down to 0%? Surely that wouldn't help either the inflation problem, the tanking dollar or increasing commodity prices.

So will Bushie, DeadEye Dick, Condi and gang do it before they leave office?

If I had to place a bet on it, I'd say yes.

I mean, they forged the Niger documents and created all kinds of crapola about Saddam, didn't they? And they ignored the real threat to the U.S. ("Bin Laden Determined To Attack U.S.") while planning for the Iraq war. Then they used 9/11 as a perfect excuse for the Iraq misadventure.

So why wouldn't they create one more misadventure before they leave Washington?

Yes, if I had to bet I'd say something big surrounding Iraq is coming before the election.

But let's make the bet in euros.

The dollar isn't worth what it used to be, you know?

"Bear Sterns Is Fine!"

Here's some great video of CNBC's Jim Cramer, host of Mad Money, explaining last week why a viewer shouldn't sell Bear Sterns stock: "Bears Sterns is not in trouble...Bear Sterns is fine!"

Gee, once again Jim Cramer couldn't have been more wrong about a stock (if you want to see his track record on stocks, see this article from Barron's.)

And yet, there was Mr. Cramer on a CNBC special tonight about the Bear Sterns collapse to provide his "expertise" without noting how he had been absolutely, totally and completely wrong about Bear Sterns the week before.

Once again, we see how accountability is only for public school teachers.

H/T to TPM.

Collapse

I've been blogging for a while at NYCEducator about problems in the financial and economic sectors.

With the collapse of Bear Sterns this morning, those problems have grown immensely.

The ironic thing is that as of last Thursday, S&P said all was well in the financial sector and that most bank writeoffs related to the mortgage mess were over.

The Dow Jones, which had been down all day, responded with a triple point turn-around and finished the day up.

But behind the scenes on Thursday, there was a run on Bear Sterns, the fifth largest brokerage in the country with tons of investments in garbage mortgage securities.

By Thursday night, Bear Sterns told the Federal Reserve they might have to file bankruptcy.

As a result of Bear's impending collapse, a bunch of laissez faire capitalists who hate government regulation and intervention got together to try and save Bear.

By Sunday night, J.P. Morgan had agreed to purchase Bear Sterns for $236 million in a deal brokered by the Fed. On Friday afternoon, Bear Sterns had been worth $3.5 billion and as of January 2007 Bear Sterns was worth $20 billion. Now it was being sold for about $2 a share, truly a firesale.

To get J.P. Morgan to purchase Bear Sterns and keep this financial crisis related to the mortgage mess from spreading to other vulnerable banks like Lehman and Citigroup, the Federal Reserve is providing as much as $30 billion in financing for Bear Stearns's less-liquid assets, such as mortgage securities that the firm has been unable to sell.

In other words, the Federal Reserve is buying a bunch of crap mortgage securities that are worthless for $30 billion.

Barry Ritholtz at The Big Picture wonders just who is buying Bear Sterns, J.P. Morgan or the Federal Reserve.

It kinda sounds like this is a government bailout to help out a bunch of laissez faire capitalists who made some awful (and greedy decisions) over the past few years.

It's funny how all these laissez faire capitalists hate government bailouts unless they are on the other end of it.

At any rate, rumors are swirling that Lehman Brothers will be next to collapse and that Citigroup could go to.

It is not in the country's interest to have these major financial institutions collapse even if the reasons why they are vulnerable to collapse are due to their own misguided and/or greedy decisions so I can understand why the Fed needed to step in to avoid a possible financial system meltdown.

Nonetheless, the next time some billionaire businessman or greedy hedge fund manager tells us in print that the problem in education is that there is no accountability and what we need to do is bring more business and corporate principles to education to make sure the system, the administrators and the teachers are held accountable for their performances, let's ask the billionaire businessman and greedy hedge fund manager where the accountability in this mortgage crisis is.

Accountability Is For The Other Guy Redux

The NY Daily News reports that Chancellor Klein plans to meet with nearly 200 principals over the next couple of weeks about the mayor's current and proposed future budget cuts for the New York City school system.

You see, these New York City principals were given extra money earlier this year for the school budgets "in exchange for higher consequences if they fail to raise test scores" as part of the mayor's and chancellor's vaunted Children First education reform movement.

The extra money could be used for a variety of programs including after-school and Saturday tutoring to help students on the battery of standardized tests the mayor and the chancellor have instituted per year.

Unfortunately for all involved, the U.S. economy has begun to tank (see here) and the mayor has ordered a bunch of city-wide budget cuts including ones in the public school system. Principals were ordered to cut 1.75% from their school budgets this year while much of the central administrative NYCDOE budget was saved. In addition, the mayor has ordered additional cuts to city agency budgets between 5% and 8% for the next fiscal year, although it is unclear just how much schools will have to cut.

Nonetheless you can bet individual schools will be forced to shoulder the fiscal burden while the central administrative budget (and all those yummy, yummy central administrative consultants and even yummier no-bid contracts handed out to Klein and Bloomberg cronies) will see few if any cuts.

And that makes sense. I mean, why cut the $80 million dollar ARIS computer system that doesn't work the way it's supposed to or the no-bid standardized testing contract Bloomberg handed to McGraw-Hill, the company that STILL hasn't delivered on the standardized ELA tests kids are supposed to be taking nearly nine months after the company first got the contract, when you can cut after-school Regents tutoring, arts and enrichment programs, and field trips and force principals to try and raise their test scores and graduation rates with much less money than they were promised.

Oh, and you can bet the mayor's and chancellor's vaunted school report cards and quality review program won't be cut, even if the programs that might help schools improve in some of the categories measured will be.

Remember, it's Children First and children always, as long as Bloomberg's and Klein's corporate cronies are not hurt in the pocketbook or the balance sheet.

No wonder principals are mad as hell over the budget cuts. Unlike the CEO's from Citigroup, Merrill Lynch and Countrywide Financial who got dragged in front of Congress yesterday after receiving millions in executive "performance" compensation even as they made terrible business mistakes that cost their companies and shareholders hundreds of millions of dollars, you can bet Klein and Bloomberg will hold principals, assistant principals and teachers accountable for "improvement" even as he cuts the school budget by as much as 10% (and perhaps even more if the economy continues to worsen.)

You see, accountability is for everybody except the big-time businessmen, the corporate CEO's, the short-selling hedge fund managers, or billionaire media moguls.

Batten Down The Hatches

Tough times ahead.

The February job numbers released by the Bureau of Labor Statistics today showed nonfarm payrolls fell by 63,000 last month, the worst showing in five years.

Payroll numbers were also revised downward for December and January.

There have now been two consecutive months of negative job growth.

Economists had been expecting job growth between 20,000 and 50,000 for the month.

How did economists react to the bad job numbers? Here's a taste:

"Turn out the lights the party's over," wrote Joseph Brusuelas, U.S. chief economist for IDEAglobal. "We are in a recession."

"Folks, based on today's employment report, if we are not in a recession, it is a darned good imitation of one; we are in an unprecedented real estate and credit crisis that is whipping its way through the U.S. economy," said Kevin Giddis, managing director, fixed income trading, Morgan Keegan & Co.

The unemployment rate actually fell for the month of February, but that's because the job climate is so bad that many Americans simply stopped looking for work and weren't counted in the statistics.

I guess that's one way to lower the unemployment rate.

The bad economic news didn't stop there.

The Federal Reserve reported Thursday that Americans were poorer at the end of 2007 than they were the year before:

The net worth of U.S. households fell by $533 billion, or a 3.6% annual rate, in the fourth quarter of 2007, the first time total wealth has fallen since late 2002, the Fed said.

For all of 2007, household net worth rose 3.4% to $57.7 trillion, the slowest growth in five years. After the effects of 4.1% inflation are included, real net worth fell for the year.

The Wall Street Journal reports that more Americans are working multiple part-time jobs in order to make ends meet as salaries fall and job security disappears:

More and more people are working part-time jobs for economic reasons, rather than by choice. That figure rose by 100,000 in February for the second month in a row, the Labor Department reported yesterday, bringing it to 4.79 million -- compared to 4.13 million a year ago, and the highest since 1993.

More people also are holding multiple part-time jobs out of economic need. In 2007, an average of 1.8 million people held two jobs for that reason, the highest since the government began regularly tracking the statistic in 1994. The growth was largely fueled by women, who overtook men to make up the majority of the multiple-job market for the first time, according to a labor bureau study.

Even the investor class is taking a hit these days.

Stocks ended lower for the week, with the Dow Jones Industrials (11,894) down 1,370 points since the start of the year (-10%) and down more than 2,300 points since the all-time high reached last October. The S&P and Nasdaq also are down sharply for the year.

With the housing market continuing to tank in all areas around the country except for Manhattan, it looks like economic conditions are going to get a lot worse before they get better. Increasing foreclosure rates are likely to increase the problem:

CHICAGO (MarketWatch) -- More foreclosure records were broken in the fourth quarter of 2007, the Mortgage Bankers Association reported on Thursday.

The rate of mortgages entering foreclosure was at it highest level in the history of the MBA's quarterly national delinquency survey and the percent of loans somewhere in the foreclosure process also hit its highest level.

The delinquency rate of loans past due but not in foreclosure was at its highest since 1985.

Rising right along with the foreclosure and delinquency rates are commodity prices. Oil remains over $105 a barrel and Goldman Sachs said Friday that $200 a barrel oil could be a possibility.

And of course food prices have increased dramatically in the last few months:

SAN FRANCISCO (MarketWatch) -- The soaring cost of grains, dairy products and other edible commodities continues to pile up on consumers as producers seek to dull the impact of higher prices on their own bottom lines, according to scanner data from U.S. supermarkets.

According to Citigroup, which based its research on AC Nielsen data, food categories with the biggest price spikes for the 12 weeks ended Feb. 23 were:

*
Cheese, up 14.1%
*
Yogurt, up 8.3%
*
Ground coffee, up 7.1%
*
Frozen pizza, up 5.5%

Food makers have been boosting product prices to offset the surging cost of ingredients. Corn, wheat, soybeans and cocoa are all trading at or near record highs.

Tough times indeed.

Of course, the White House says everything is fine and the president's got it all under control - the $600 rebate checks are going to be in the mail soon.

Yeah, that should solve all the economic problems the country's facing.

How far do you think $600 goes these days?

I'm betting not too far.

Bad News? What Bad News?

Take a look at that diagram to the left - that's the Case-Schiller Home Price Index for December 2007.

The Case-Schiller Home Price Index measures the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States.

Notice the trend of home prices lately - straight into the toilet. Prices fell 8.9% in 2007 and 10.2% from peak prices.

In addition, foreclosures in the U.S. were up 8% in January compared to December and nearly 57% from January 2007.

Why should you care about falling home prices, increasing unsold home inventories and rising foreclosures?

Because the recession the country is either already in or is about to descend into has been driven by the bursting of the housing bubble and the more the damage from the housing market spreads outward to other sectors of the economy, the worse this recession is going to be.

Just to give you an idea how bad things are already, home prices declined nationally in 2007 for the first time since 1932. Now nobody's saying we're entering another Great Depression, but there surely are warning signs of some serious, long-term problems coming.

For example, Home Depot reported an annual loss sales decline for the first time in its history today. That's a bad sign for a country that relies upon consumer spending to power over 70% of the economy.

Here's another example: the Wall Street Journal reported today that the FDIC is bracing for an increase in bank failures as a result of the fall-out from housing market problems and the credit crunch.

And while the Federal Reserve has decided to address the problem by lowering its benchmark interest rate to near-Greenspan levels, it also is stoking a big-time inflation problem:

Feb. 26 (Bloomberg) -- Prices paid to U.S. producers rose more than twice as much as forecast in January, pushed up by higher fuel, food and drug costs, signaling inflation may keep accelerating even as growth slows.

The 1 percent increase followed a 0.3 percent drop in December, the Labor Department said in Washington. The median forecast in a Bloomberg News survey of economists was for a 0.4 percent gain. Excluding food and energy, so-called core wholesale prices climbed 0.4 percent, the most in almost a year.

...

``What you've got is a lot of inflationary pressures building,'' said Roger Kubarych, chief U.S. economist at Unicredit Global Research in New York, who correctly forecast the rise in core prices. For now, ``the Fed will put them in second position in terms of priority until this financial strife settles down,'' he said.

Just how bad is that inflation problem?

Well, oil futures closed at a record $100.88 a barrel today. Heating oil also surged to an all-time record. Gas prices are near summer levels. Wheat is also at an all-time high and products from bread to pasta to pizza to bagels have shot up as a result. Overall, consumer food prices were up 4.9% in comparison with January 2007. With all this inflation and bad economic news, consumer confidence has hit a 17 year low this month. And the U.S. dollar has hit an all-time low against the euro on speculation that more rate cuts are coming (which means even higher inflation and higher consumer prices in the future.)

Yes, between the tanking housing market that shows no signs of turning around, the retail industry that is taking a hit as a result of slower consumer spending, the inflation problem, the slowing growth problem, job market problems, the tanking U.S. dollar and worries that some major financial institutions could be in danger of going under, times are tough.

But not for the hedge fund managers and investor class on Wall Street.

The markets rallied again for the third straight day.

Makes you wonder just what economy they're looking at.

Surely it isn't the one the average American is looking at and paying for every time they fill up their cars, pay their heating bills or mortgages, buy bagels at the deli or milk at the supermarket, or fill drug prescriptions at the pharmacy.

Running Hot, Hot, Hot

The government released inflation data today showing U.S. consumer prices rose across the board in January.

U.S. consumer prices rose a seasonally adjusted 0.4% last month. Excluding food and energy prices, the core consumer price index rose 0.3% in January, the biggest gain since June 2006.

December inflation numbers were also revised upward to 0.4%.

On a year-over-year basis, inflation was running at 4.3% in January. Energy, food, clothing housing, hotel, medical, transportation and drug prices all rose substantially last month. Food prices rose the most in nearly a year.

Given that fourth quarter GDP was 0.6%, the January job numbers were negative, the service sector contracted last month and many economists fear the U.S. economy either teeters on recession or has already fallen into one, the high inflation numbers ought to be cause for concern.

The Federal Reserve keeps trying to jump start the economy, heal sick credit markets and help the housing market by lowering interest rates (they lowered the Fed benchmark rate by 1.25% in one week's time in January), but even as they continue to lower the benchmark interest rate, mortgage rates for most borrowers continue to rise and fall-out from problems in the credit markets continue to spread (here's one example.)

Nonetheless the Fed is expected to lower the benchmark interest rate another half point next month to 2.5% even as oil hit $100 a barrel yesterday, food prices are at or exceeding all-time highs, gold is near an all-time high, and platinum hit a record (all inflationary signs.) Just wait until the panic rate cuts the Fed made earlier this year filter completely through the economy for some really scary inflation numbers.

And yet, as Barry at The Big Picture blogged this morning, the cheerleaders on Wall Street are still calling for Helicopter Ben Bernanke to cut rates back to the 1% Uncle Alan Greenspan had them at for so long back earlier this decade and create some more bubbles to save us from the wreckage of the Greenspan-created housing bubble.

I even heard some shill on CNBC say it might be time to take the interest rate down to 0.5% (as it is in Japan) or even 0% to jump start the economy and save the U.S. from a very scary recession.

Yeah, that will be good for price pressure containment.

You know, given that the U.S. consumer has been living way above his/her means and putting the tab on credit cards or home refis for the last half-decade or more and given that the U.S. government has fought two wars on credit ($800 billion and counting) while cutting taxes and increasing overall spending, you'd have to think that maybe the country is in for a tough economic time for awhile.

It might even be good to have a bit of tough time economically so we can clean up some of the wreckage from the more irrational exuberance of the housing bubble and the other excesses of the Bush years and get back to operating on more practical ground.

Heck, it might even be a good idea to start telling people shopping is NOT their patriotic duty and saving a little bit each month is a healthy alternative to living on credit and from pay check to pay check.

But of course we're not going to do that. Instead, the Federal Reserve, undoubtedly pressured by politicians in Washington uncomfortable with an election-year recession, is throwing caution to the wind and creating a stagflationary environment like we haven't seen since the late 70's/ early 80's.

And as Cunning Realist notes all the time over at his blog, the current crop of politicians are counting on the Fed moves to stave off economic collapse just long enough for another crop of politicians to come into office and take the blame for the mess.

Kinda like how Ford and Carter were blamed for problems that originated during the Johnson and Nixon administrations.

In any case, just how bad are things going to get? Well, Nouriel Roubini sets out the worst case scenario in this Martin Wolf piece from the Financial Times.

I hope Roubini is wrong about that, but if you turn on the business channels these days, you can hear some of the panic about the future from even people who used to seem like "permabulls" (check out this Ron Insana piece at Huffington Post for some of that.)

Got Any Cash To Spend?

I walked from Fulton Street all the way up to 23rd Street today and noticed tons of empty storefronts with "Commercial Space For Rent" signs.

Even the venerable Soho shopping district had some, though the area just below NYU around Astor Place seemed pretty hard hit. One block had three empty storefronts and the space where Barnes and Noble used to be around the corner is still empty.

The Barnes and Noble on 6th Avenue and 21st Street is also going out of business in March. I've noticed quite a few other stores with "Going Out Of Business sales (and not the usual scam "Going Out Of Business" sales some stores use to draw in tourists.) CompUSA is closing all their stores including the one on Fifth Avenue and 36th Street and the one on West 57th Street.

According to a store clerk at the B&N in Chelsea, insane rents are putting many of these stores out of business, but with retail sales down pretty drastically the last few months, I imagine lack of customer traffic must be adding to the problem. Even when retail sales numbers increase, as they did last month, it's because of inflation rather than an increase in actual sales. As Floyd Norris wrote in the NY Times recently, Americans are spending 13% more on food and energy this year than last year, which means that

FACED with tightening credit and a slowing economy, America’s consumers are being forced to scale back their purchases, but high prices of necessities are keeping their overall purchases rising at a reasonably strong rate.

We're buying less but paying more for what we have to buy. Not a good trend overall considering consumer spending accounts for 72% of the American economy these days.

Dunno if that is why so many commercial and retail spaces seem to be empty around Manhattan, but something sure seems to be happening around here.

What about where you are? Notice an increase in stores going out of business or commercial spaces staying unrented for long periods of time?

And how about your own spending? Are you holding back from purchases because you're worried about a near-term economic slowdown or buying things per usual?

Here Come The Budget Cuts

Back in his State of the City address, Mayor Moneybags warned that all city agencies would be facing budget cuts both this year and next year as a result of projected declining tax revenues for the city.

With the nation either in a recession already or facing the prospect of one later in the year, with the financial markets on Wall Street turning bearish (at least before Tuesday's emergency rate cut of 75 basis points), with the unemployment rate rising to 5% last month (just 18,000 new jobs were added to the economy in December), with manufacturing contracting in December and with much of the nation's housing market in a recession (2007 saw the first decline in home prices since the Great Depression and existing home sales are at a 25 year low while inventories are near an all-time high), Moneybags expects the national recession to hit New York City pretty hard even though the city's economy, employment numbers and housing market seem to be doing better than the nation at large right now.

Falling revenues or even projected falling revenues usually mean budget cuts for the city (usually starting at the city libraries and parks first), but with the mayor planning to run against "fiscally irresponsible Washington" when he launches his 2008 independent campaign to buy the White House the way he bought City Hall, this year means especially stringent belt tightening:

A day after Mayor Bloomberg cast himself as a fiscally responsible leader and decried Washington's "reckless" spending habits, he is calling for cuts to all city agencies.

The cuts in his $58.5 billion budget proposal would reduce the Department of Education's budget by about $180 million this year and $324 million next year, and the plan calls for the police department to cut its budget by $33.8 million this year and $95.6 million next year. The cuts and new sources of revenue would yield $1.42 billion in savings. Overall, the budget proposal would increase spending by nearly 4%.

With inflation currently running at 4.1% (and expected to go even higher when the Fed interest rate cuts filter through the economy later in the year), the mayor's budget proposal increase of 4% doesn't really amount to increase.

And it's subject to change, of course.

Just a few weeks ago, the mayor thought the city's budget would allow for a proposed extension to a 7% property tax cut.

Now he says the extension is contingent upon future revenue and may have to be cut from the budget.

So much of the mayor's proposal is probably going to be changed before everything is said and done, and given the trajectory of the American economy these days, city agencies are probably subject to more cuts than spending increases.

Not to mention that now that the mayor has settled on a "I'm a fiscally prudent, post-partisan businessman who can solve the nation's economic ills that the current crop of politicians in Washington have ignored," you can bet he's going to lean toward more cuts rather than less so he can show just how "fiscally responsible" he is.

Here's what the budget cuts mean for those of us in the Department of Education:

On a list of about 20 line-item cuts outlined yesterday, principals are asked to shave $99 million in direct spending, an average of about $70,000 each; the Department of Education is to scale back a vaunted new program to test students regularly, moving to four tests a year from five, and, starting this June, an incentive program developed by the teachers union loses its central funding.

Principals who wish to keep the program, known as Lead Teacher, will have to pay for it with their own budgets, school officials said.

I won't cry to see the Lead Teacher position go the way of the reading rugs in most schools, nor am I sad to see one less "No Stakes" standardized test per year. Frankly, if that's the kind of stuff they're going to cut out of the education budget, count me in.

But remember that these cuts are just a start. As soon as the city's economy worsens (and it will - check out NY Post business columnist John Crudele for an inkling why), more cuts will be coming.

Will the mayor continue to cut his "vaunted" battery of No Stakes standardized tests when he needs to make cuts?

Doubtful.

So, let me throw this out there: if and when the mayor needs to make more budget cuts to city agencies later in the year, what additional cuts will the schools have to make?

Work

Bob Rosner at ABCNews.com writes that Japanese workers are some of the hardest working in the world. They total 1,842 work hours a year.

In fact, the Japanese are so renowned for work that the culture has a word for the condition known as death from overwork - it's called "karoshi."

The Japanese government has admitted 147 cases of karoshi in the last year for workers who regularly put in 70-80 hours of work a week and suffered heart attacks, strokes or other fatal health conditions as a result of overwork.

Now we "lazy" Americans don't have a term in our culture for the condition of death from overwork, but perhaps we should. It turns out that Americans actually work longer hours than even the Japanese. We work 1,979 hours a year.

That's right, Americans are now the hardest working people on the planet, having passed the Japanese in annual work hours back in the 1990's.

We are also some of the most productive workers on the planet. Productivity has grown steadily since 2000. According to the BBC

During the five years from 2000 to 2005, the US economy grew in size from $9.8 trillion to $11.2 trillion, an increase in real terms of 14%. Productivity - the measure of the output of the economy per worker employed - grew even more strongly, by 16.6%.

Americans are working longer and harder than any other people in any other industrialized country on the planet and are more productive than ever, yet the overwhelming majority have seen little economic gain from all this work and all this productivity.

According to Paul Waldman at The American Prospect, real wages in 2007 are actually lower now than they were before the recession in 2001 and barely higher than they were 35 years ago.

Millions of people lack health coverage, manufacturing and service jobs continue to be moved overseas, further undercutting any real wages gains for many Americans.

Many Americans have made up for the slim gains in real wages by taking on debt to maintain their standards of living.

Personal credit card debt in America is equal to 100% of GDP. Total credit market debt, including mortgage debt, is nearly equal to 325% of GDP.

For awhile, increases in home values helped people borrow enough money to maintain their standards of living even as inflation increased and their wages didn't keep pace. But now home values across the country are tanking and many people are suddenly finding that they own homes that are worth less than their mortgages.

Nouriel Roubini writes on his blog that we are in the midst of the worst housing recession since the Great Depression and home values are likely to fall 20% overall around the country while some of the more bubblicious real estate markets like California, Florida, Nevada, Arizona, etc.) could see value declines of 40%.

While most Americans can no longer tap the equity in their homes for money, credit cards aren't much of an option either.

Credit card debt is near an all-time high and the Associated Press reported on Christmas Eve that delinquencies and defaults on credit card payments have sky-rocketed in the latter part of 2007. The worst-hit areas have been the South and the Midwest where real estate market problems and job losses have exacerbated economic problems for people. Mark Zandi, chief economist for Moody's Economy.com, said he expects delinquencies and defaults to get much worse in 2008.

With energy and food costs at or near all-time highs (oil is above $97 a barrel; wheat, soybeans and other commodities are at highs for the year), with health care costs increasing far above the annual inflation rate, with real wage gains stagnant and with many Americans carrying astronomical debt loads, I wonder just why we are working so long and so hard with such productivity.

And it turns out that we're doing it so that the top 10% of the country - and especially the top 1% - can do better than they have at any time since before the Great Depression:

Income inequality grew significantly in 2005, with the top 1 percent of Americans — those with incomes that year of more than $348,000 — receiving their largest share of national income since 1928, analysis of newly released tax data shows.

The top 10 percent, roughly those earning more than $100,000, also reached a level of income share not seen since before the Depression.

While total reported income in the United States increased almost 9 percent in 2005, the most recent year for which such data is available, average incomes for those in the bottom 90 percent dipped slightly compared with the year before, dropping $172, or 0.6 percent.

The gains went largely to the top 1 percent, whose incomes rose to an average of more than $1.1 million each, an increase of more than $139,000, or about 14 percent.

The new data also shows that the top 300,000 Americans collectively enjoyed almost as much income as the bottom 150 million Americans. Per person, the top group received 440 times as much as the average person in the bottom half earned, nearly doubling the gap from 1980.

As for the really, really rich - the Mayor Bloombergs of the country - they've done the best of any other group in the last 30 years. Since the 1970's, Forbes has been tracking what it calls the CLEWI - the Cost Of Living Extremely Well index. While the Consumer Price Index (CPI) - which tracks the increase in the cost of living for average Americans - has doubled since 1982, the CLEWI - which tracks the cost of living for the really, really wealthy - has quadrupled in the last 25 years. But the amount of money the extremely wealthy have made during that time has increased ten-fold. So these days, the extremely wealthy are spending a lot less money to live as well as they did 25-30 years ago.

And you, my fellow Americans, with your hard work and your long hours and your increased productivity and your unused vacation time and your weekend work days, have brought this to pass.

Mayor Moneybags and Steve Forbes and the really, really wealthy thank you from the bottom of their greedy little souls. And the people just under them on the economic ladder, the investment bankers and the hedge fund managers and the corporate CEO's, also thank you as they hand themselves huge bonuses this Christmas and begrudge you, the average American worker, any increase in wages or health benefits.

Happy New Year everybody and take solace in one thing - at least it's not as bad for you as it is for the Little Tramp in that picture at the top of this post.

Not yet, at any rate.

No Lobbyist Left Behind

The NY Daily News reports today that Mayor Bloomberg's top aides were aggressively lobbied by former Bloomberg aide Anthony (Skip) Piscitelli just days after Piscitelli left city government to join the city's most influential lobbying firm, Wilson, Elser, Moskowitz, Edelman & Dicker.

The Daily News spent six months investigating Piscitelli's lobbying of pending legislation for clients that included the Rochester Institute of Technology, the Bankers Association of New York, a racetrack partnership called Excelsior Racing Association, a taxi company and the League of American Theaters and Producers.

They found that Piscitelli had at least 127 email contacts with members of the mayor's staff lobbying on behalf of his clients.

Piscitelli received $697,000 this year from those clients for his lobbying efforts.

Piscitelli - who often referred to Mayor Bloomberg only by his initials MRB in his communications with Bloomberg's aides - says in one email the Daily News obtained that the goal of lobbying the city is always to get to the "right people" to gain advantage for your lobbying clients.

He sure got to the right people in the Bloomberg administration:

City officials are strictly prohibited from lobbying their former colleagues for a year after leaving public service, but Anthony (Skip) Piscitelli started up days after leaving city government in November, internal e-mails The News obtained under the Freedom of Information Act show.

The e-mails reveal that Piscitelli gained unusually free access to the top levels of the Bloomberg administration, especially to his former boss, Kevin Sheekey, deputy mayor for governmental affairs and Bloomberg's top political adviser.

...

At one point, while discussing with Sheekey a campaign to keep tax loopholes in place for bankers, Piscitelli even paraphrases "The Godfather," stating, "Never let someone outside the family know what you're thinking."

Kevin Sheekey, btw, is the political genius behind Mayor Bloomberg's independent 2008 presidential bid. Other Bloomberg aides involved in Piscitelli's lobbying efforts include the mayor's director of operations Jeffrey Kay and the deputy mayor for economic development Daniel Doctoroff.

The mayor's spokesman claims nothing wrong occurred between Piscitelli and the mayor's top aides, but the Bloomberg administration nonetheless referred the Daily News stories to the city's Conflicts of Interest Board.

Now I don't know if Piscitelli actually had any influence on Bloomberg's positions on legislation affecting Piscitelli's clients, but I do know that he got access for his clients that you or I wouldn't have gotten.

I'm sure this kind of access happens at all levels of government all of the time. That's why they have laws that restrict lobbying by former government employees for a period of time after they leave government.

I do know one thing, however. The mayor is planning to run for the White House in '08 as a fresh, independent, non-political politician who can get things done and will change the cozy "business as usual" environment of corruption that afflicts much of Washington D.C .

But ironically the Bloomberg political aide who helped develop that Bloomberg campaign theme, Kevin Sheekey, is also the aide former Bloomberg lobbyist Piscitelli went to most when he wanted illegal lobbying access to the Bloomberg administration.

If the mayor makes good on his threat to run in '08, the press better take a closer look at the Bloomberg campaign's claims that Moneybags will change "business as usual" in Washington since it seems the Bloomberg administration seems to work just the way so many politicians in Washington do.

While they're at it, they ought to take a look at the bank accounts of the mayor's top aides too.

Just because they work for a billionaire doesn't mean they don't pay to play.

Bull@#$% Market

If you were just paying attention to the financial markets and the official government statistics, you would surely think the American economy is zooming.

The Dow Jones Industrial Average ended the week at 13,806, just a few of hundred points off an all-time high. The S&P 500 Index finished the week at 1535, just 60 points off its all-time high. The Nasdaq is nowhere near an all-time high, but it did finish the week at 2804, the highest level since the dot.com crash of 2000-2001.

With the the Federal Reserve set to cut its benchmark interest rate next week by either a quarter or a half point, the equity markets are sure to go even higher in the near-term.

The government says unemployment remains well under 5% and core inflation (inflation stripped of food and energy costs) is running at 1.9%.

Wow - everything is great!!! We've got low inflation, low unemployment, relatively low interest rates that are set to go even lower, and the financial markets are near all-time highs!!!!

What a great economy!!!

And yet a new LA Times/Bloomberg News poll finds that 2/3rds of Americans are very sour on the economy and expect a recession within the next year. That finding jibes with an August Wall Street Journal/NBC News poll that also found 2/3rds of Americans believe the nation is either in a recession or soon will be in one.

Both polls found Americans have little-to-no confidence in political leaders in either party, in corporate heads in the financial, energy, insurance or real estate industries, or in Federal Reserve Chairman Ben Bernanke to handle future economic crises. Many Americans feel they are getting screwed as they have to work longer and harder to make less, but pay more for the things they need like food, housing and gas. As Journal/NBC News pollster Peter Hart said:

"There's a combination of anxiety and loathing," Mr. Hart said. "There's a sense that every single one of these institutions is totally out for their own betterment, versus the public they serve."

What's going on here that so many Americans can be so pessimistic about the future and gloomy about the direction of the economy while unemployment and inflation are so low and the financial markets are doing so well?

The answer lies in two rarely stated truths:

The first is that the economic gauges/numbers the government uses to measure unemployment, inflation, home sales and the like are rigged and manipulated to make conditions look better than they really are.

The second is that Wall Street doesn't need the people on Main Street to be doing well financially to do well itself. In fact, Wall Street tends to do better when people on Main Street are getting screwed (for example, watch what happens to a stock when a company announces lay-offs or wage cuts; also watch what happens to stocks when the government announces consumer debt has increased and savings decreased...)

Let's take a look at the first rarely stated truth - they're funking with the numbers to make things look better.

The Bureau of Labor Statistics does not count people as unemployed if they are not working for pay and have no interest in finding a job. Homemakers, some retirees, incarcerated people and students fit this description and since they are not willingly looking for work, it is apt.

But BLS also does not count workers who have stopped looking for work because they cannot find any or because they cannot find any that they are willing to take. Middle-aged workers who have lost their jobs to downsizing or outsourcing constitute a fair amount of the kinds of workers who are unemployed but are not counted in the unemployment stats because they are no longer looking for work. Almost certainly, unemployment numbers would be higher were workers who have lost good paying jobs but refuse to stock shelves at Walmart or sling coffee at Starbucks counted in the statistics.

Another problem with using the unemployment rate to measure the overall health and wellness of the economy is that it only measures whether people are working, not whether they are working and making good pay.

The American economy has seen a steady erosion of good-paying manufacturing and tech jobs over the last seven years due to outsourcing, downsizing and other factors. Many of those good-paying jobs have been replaced with lower-paying service jobs. While it is technically correct to say that the country has replaced lost jobs with new ones, is it correct to say that a lower-paying job in the service sector is equal to a better-paying manufacturing or tech job?

No wonder Americans are feeling so insecure about the future. Many worry that they will reach middle age and lose their jobs to downsizing or outsourcing. They worry that they will have to take a lower-paying job that lacks benefits just to make a paycheck every week. They worry that just because they give their loyalty to a company doesn't mean they won't be part of a corporate downsize or exercise in belt-tightening. Yet, this anxiety is not measured by in the official stats.

The way the government calculates the inflation rate is also particularly deceptive. The government looks at two measures of inflation - headline inflation (the rate at which the cost of living is rising) and core inflation (the rate at which the cost of living is rising minus food and energy costs, which are considered volatile and subject to rapid fluctuations.)

When you see a headline in the paper or hear a talking head on TV say "Inflation is in check," they are talking about the headline inflation numbers. Currently, headline inflation is in check - the cost of clothes, computers, electronics, cars, even houses are rising at a very low annual rate of inflation. In some cases, prices are actually falling (housing in many markets, for instance.)

Now if you were able to live by just purchasing clothes, computers, electronics, cars, et al., you could say that inflation is pretty much in check. But you can't. You need food and energy and that's where inflation is really increasing. Currently oil is at $91.86 a barrel and expected to go even higher after the Federal Reserve cuts rates next week. The price of oil has gone from $18 a barrel in 2001 to near $92 now, an increase of more than 510% over that time period. While the increase in oil prices hasn't filtered through to gas prices at the station pumps yet, it will soon enough. The all-time high for oil, adjusted for inflation, was $101.70 dollars and it came in 1980. We are less than 10 bucks away from breaking that record in 2007.

Food prices are also up over the last year. While the price of corn has fallen since the summer, wheat, soybeans, coffee, and livestock are either at highs for the year or near highs for the year. When I went to the farmers' market this week to buy produce, the prices of tomatoes, lettuce, carrots and fruit were all up - in some cases as much as 50%-75%.

It is dishonest to measure inflation stripped of food and energy costs and declare inflation under control. And yet, that is how the Federal Reserve looks at it. Federal Reserve Governor Frederic Mishkin said this week that inflation measures that exclude food and energy costs are a "better guide'' to underlying changes in prices because they strip out volatility. Part of the increase in food prices is due to higher energy costs, of course - it costs more to produce food and transport items - but since oil has been on a long, steady climb since 2001, it's not as if anybody should expect energy costs to decrease soon and cause wild fluctuations in prices. The price of energy has gone all one way - up.

The only reason to publicize the core inflation numbers over the headline numbers is because they look better. But people who buy food and use energy know better.

One last piece of data that the government manipulates that I'd like to look at is the new home sales numbers. This week the U.S. Census Bureau and the Department of Housing and Urban Development released new home sales for September 2007. The government reported that new home sales increased by an annual rate of 4.8% from the previous month. The news media, particularly the business press, wasted no time in hitting the news wires with stories like "Has Real Estate Hit A Bottom?" and "New Homes Sales Rebounding," but as Barry Ritholtz at The Big Picture noted on his blog, the increase in new home sales for September needs some context to be truly understood.

First, the July and August home sales numbers were revised downward, making the increase in September sales marginal at best.

Second, year-over-year new home sales were down 23.3% from September 2006 to September 2007 (margin of error 8%, therefore statistically significant)

Third, the margin of error for the 4.8% September increase in new homes sales was 10.3%, making the increase statistically insignificant.

Fourth, new homes sales are subject to major revisions in coming months - July and August, for instance, were both revised downward. September's sales contain some questionable stats (38% increase in new homes sales out West, for example) and if those numbers are revised downward as expected in coming months, September new homes sales will actually have decreased.

Finally, cancellations of new homes sales are not calculated in the statistics. As Barry at The Big Picture notes, cancellations of new home sales are huge:

Cancellation rate for Quarter
Centex (CTX) 35%
MDC Holdings (MDC) 57%
KB Homes (KBH), 50%
Lennar Homes (LEN) 32%
D.R. Horton (DHI) 48%
Beazer Homes (BZH) 68%
NVR (27%)

Add all this together and you can see that the real estate market for new homes is not getting better. Yet how would you know this unless you dig deep into the stats for the context? You certainly cannot count on the veracity of the government stats or the news media to provide the context for you.

As for existing home sales, they were released on Tuesday and they were dismal. Sales of previously occupied homes in September dropped 19% from the same month a year ago and The Wall Street Journal's quarterly survey of housing-market conditions in 28 major U.S. metropolitan areas showed that inventories of unsold homes are still rising in most areas, prices are falling and overdue loan payments are piling up.

Take a look at the default rate in California to get a good idea of where things stand in the housing market:



Remember that many of these mortgages that are in default are backing bonds owned by investors, hedge funds, pension funds, etc. Just yesterday, Moody's downgraded $33 billion dollars in CDO's (collateralized debt obligations) backed by sub-prime mortgages to junk bond status (some of these CDO's were rated as high as AAA, but today they're garbage.)

As defaults and foreclosures continue to increase and problems in the mortgage industry spread (and they will - see this Associated Press article from today for some reasons why), you can expect even more CDO's backed by sub-prime, Alt A and even some prime mortgages to be relegated to junk status. Yet so far, investors on Wall Street have chosen to focus on the coming Fed interest rate cuts and continue to bid up the financial markets.

Apparently only the people on Main Street are worried about the economy.

And they should be. Because Wall Street does not care one whit for how people on Main Street are doing. So long as the people on Main Street are kinda employed, paying their credit cards and mortgages on time, and continuing to fuel the economy with consumer purchases, Wall Street is happy.

Which brings me to my second rarely stated truth: Wall Street does better financially when Main Street is not doing so well.

70% of the U.S. GDP comes from consumer purchases. Corporate profits are clearly driven by the people on Main Street. But Wall Street doesn't really care if the people on Main Street can actually afford the consumer purchases they are making, just so long as they are making them and making their credit card bills. It's only when bankruptcies and defaults start to rise that Wall Street worries. And then, they can always count on the politicians in Washington to rewrite the bankruptcy laws or come to the rescue with a government-sponsored bail-out to save investors from harm.

And as I said earlier, there is no better move a company can make then downsize its workforce if it wants its stock price to increase. Countrywide Financial saw it stock rise 32% yesterday despite the problems in the housing and mortgage industries primarily because they have promised large job cuts and increased productivity in the next quarter. Boston Scientific, plagued by weak sales and debt problems, saw its stock rise after it announced thousands of lay-offs last week. Circuit City laid off 3,400 hundred "overpaid" employees back in March of this year in order to cut costs and make Wall Street happy. It didn't work - Circuit City stock has plunged since then - but the move often works for most other corporations.

Lay-offs are great for Wall Street, not so good for Main Street.

Crushing levels of debt are also bad for individuals but good for investors. This is why the housing boom of the last few years was so good to Wall Street. Investors were happy to see many Americans refinance their home mortgages to adjustable rates in order to splurge on home improvements, vacations, or cars. Wall Street likes it when people borrow money in order to spend money. So does Washington. Former Fed Chair Alan Greenspan urged homeowners to switch to adjustable rate mortgages and of course President Bush famously told America it was their patriotic duty to go shopping after 9/11.

But the results of all this spending are very, very bad. Currently the total credit card debt of all Americans is equal to 100% of GDP. Total credit market debt (credit card debt, car loan debt, mortgages, government debt, etc.) is equal to almost 325% of GDP. The savings rate in this country is negative (and has been for a while.) The dollar is at an all-time low against a host of foreign currencies. We are financing two foreign wars completely with borrowed money (adding $1-$2.4 trillion dollars in government debt.)

We are a nation of debtors living on borrowed money and borrowed time. At some point, these debts will come due, but we do not have the money or strength of currency to pay them.

And yet, if you were just looking at the official government stats and the state of the financial markets, you'd think all is well.

To which I say - bull@#$%.