Wednesday, August 26, 2009

Consumer Confidence Game and Housing's False Bottom

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Signs of a "resurgent economy" are everywhere - at least if you believe the reporting of the mainstream media. The "recession appears to be over" and "the U.S. economic ship is finally righting itself" according to one 'expert' after another quoted in news articles. Examination of the data backing up these claims indicates the truth might be quite different. While there was supposedly 'good news' on consumer confidence and housing prices yesterday (as long as you didn't look too closely at the numbers), it was little noticed that the White House raised its projected budget deficits to a total $9 trillion between 2010 and 2019. The budget deficits for the next decade will only be this good as long as the economy is growing at a robust pace and inflation remains unusually low. This is the most optimistic possibility imaginable, with imagine being the key concept here.

The Conference Board released its monthly consumer confidence survey yesterday. It came in at 54.1 and was up from 47.4 in July. The results are very different form the University of Michigan survey which had consumer confidence plummeting only a couple of weeks ago. What caused the big rise? Consumer's view of the current economy are still highly negative, but they see a rosier future - especially after hearing how the economy is recovering every time the turn on the TV or open a newspaper. Surprisingly after being bombarded (perhaps brainwashed is a better term) with news about an improving economy, more survey respondents when questioned whether they thought the economy was going to get better said yes. To put the 54.1 number in context, the average number over time is 95. A robust economy has a number well over 100, so we are about at half that level.

According to Case-Shiller, U.S. housing prices have now gone up two months in a row - May and June. This got huge coverage in the mainstream media yesterday. Did this actually happen? Well, not exactly, if you're a stickler for details. The Case-Shiller numbers are not seasonally adjusted and late spring is usually the strongest part of the year for home sales. If you seasonally adjust the numbers, it turns out May was actually negative. June was still positive, but you would need a magnifying glass to see the number it was so small. Suppose you adjusted the numbers for the $8000 tax credit the federal government was giving first time buyers? Well, the June number would sort of be negative too. What about year over year numbers? Well for the entire U.S. they're down 15%. From the peak there has been a 30% drop so far. The 20-city index, which is the one that was up in May and June has fallen 45.3% since the 2006 top. Yeah, those numbers really scream recovery.

The underpinnings for a housing recovery are also just not there. Colonial BancGroup just filed for bankruptcy. It was closed down by the FDIC about two weeks ago and was the sixth largest failure in U.S. bank history. A lot of bad mortgages did it in. The bank is under criminal investigation for accounting irregularities (you should wonder how many other banks may have engaged in similar behavior, but have not yet been found out). Bank of New York is its biggest creditor. Yes, the big banks have exposure to these medium and small banks. Taylor, Bean & Whitaker Mortgage Corp., one of the largest independent mortgage companies in the U.S. was also forced into bankruptcy as well because it relied on Colonial for its funding. Bank failures can have a lot of collateral damage. So far this year we are at 81 and counting. Despite the 'resurgent' economy and 'bottomed' real estate market, I have a feeling there's going to be a lot more.

NEXT: Enron Accounting and GDP; FDIC's Money Shortage

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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