Benson's Economic
& Market Trends
The Economy's Last Hurrah
Before That Big Sucking Sound
Richard Benson
Dec 7, 2007
As 2007 winds down,
it's time to reflect on how bogus government statistics along
with Wall Street media hype have impacted the psychology and
perception in the financial markets. Sheer disappointment is
one way to describe what the financial markets will experience
as the existing belief in a Goldilocks economy is challenged
by sobering facts and a hard landing, yet to come.
Christmas is meant to be a
festive and happy time of year spent with family and friends,
but there is a dark side to this year's holiday. The picture
of the father, mother, son, or daughter pulling out the only
credit card left that's not maxed out in order to buy that special
gift for a loved one, is not the face you'll see portrayed in
the media. The TV and newspapers show only affluent-looking preppy-faced
Americans wearing pricey Italian shoes and sunglasses, shopping
the malls and luxury stores for 50-inch flat screen TVs,
cashmere sweaters, Tiffany diamond rings and fancy chocolates.
The media will avoid at all costs the large percentage of Americans
on the brink of bankruptcy and foreclosure, living paycheck to
paycheck, because there's nothing Christmassy about that picture.
I have to wonder, though, if
Americans are really shopping (i.e., spending money), or just
looking for bargains at the major department stores that began
running fire sales as early as October. Foreigners will undoubtedly
be the luckiest group this season as they take full advantage
of the declining dollar. Contrary to what you may have read in
the American financial press about the declining dollar being
good for America, you'll read a different viewpoint in the foreign
press, as many people overseas think America is getting what
it deserves: a real comeuppance, as the dollar and our empire
literally go down the tubes.
The US Economy is in terrible
shape! Our government has been psychologically manipulating the
American people every time they publish blatantly false data
on employment and income that makes our economy look stronger
than it really is. If the average Americans realized how
bad things were, they might try to save more. But spending would
collapse if they did, so the goal of the Bush Administration
seems to be to hide any signs of a recession as long as possible.
If you don't see it, it
must not be there
For those familiar with the
government releases, the Bureau of Labor Statistics ("BLS")
just posted a benchmark data revision that showed the total number
of workers employed on the payroll survey was 300,000 less than
originally estimated for March 2007 (900,000 versus the 1,200,000
that was reported). By the time the dust settles, and later benchmark
revisions come in for the whole year, it is likely that all of
the jobs added by the BLS Birth/Death Model in 2007 will be fictitious.
This could mean there hasn't been any job growth at all! Without
the fiction of job growth, you can imagine how much worse it
will be for consumer income, spending, and sentiment not to mention
business investment plans.
The reason employment is
weak is because at least 40 percent of all job growth was tied
directly or indirectly to housing. With housing in free fall,
the solid job growth reported by the BLS Payroll Survey simply
does not make sense.
The Department of Commerce
keeps statistical estimates such as Personal Income, which is
based on the estimated number of workers in the BLS Payroll Survey.
So now, based on the revisions to the BLS Payroll Survey for
March (and other data), revised Personal Income (wages, salaries,
interest income, etc.) grew at an annual rate of only 1.6 percent
in the second quarter of 2007, not the 4.5 percent originally
reported. That's three percent less in Personal Income. These
imaginary workers with no Personal Income will not be shopping
this December or anytime soon, so we can expect to see lower
retail sales and corporate profits. Income never made, can't
be spent.
As these pretend workers turn
out to be a myth, they will eventually show up in the government
statistics. When that happens, corporate sales will suffer and
the financial markets will take notice. This is also a reminder
that for statistics, the government's game is to report the false
glowing numbers to the financial markets in the full light of
day, and then report the corrections and horrible truth in the
dead of night, and hope no one notices.
The big reason the economy
is going over the cliff is not the direct result of the subprime
mortgage debacle and the hundreds of billions in investor dollars
that have been lost, although this is a major contributing factor.
The reason, we focus on, is that the economy is already in recession
as a direct result of homeowners having had that ATM ripped out
of their house. Stories like the homeowner who purchased a home
for $100,000 years ago but got carried away in the frenzy of
the last decade by doing 4 cash out REFI's, running their mortgage
balance up to $625,000 while living large, are last year's stories.
That $800 billion a year in Mortgage Equity Withdrawal ("MEW")
has come to a sudden end and with the average homeowner no longer
living large off the house, the economy is left with that "big
sucking sound".
With home prices falling,
there frequently is no equity to take out! Potential borrowers
don't have verifiable income to actually pay back a loan unless
home prices are rising rapidly, so they can no longer buy or
refinance. Meanwhile, with lenders asking for down payments,
housing prices will just keep heading down for another year.
The US economy is continuing
to weaken in many areas: The US Treasury has received lower income
tax receipts forcing state and local governments to cut back
because they're coming up short; capital gains on home sales
are falling as home prices fall; property tax receipts are also
declining as assessed values go down; weak retail sales mean
lower sales tax receipts; corporate profits are down, along with
corporate taxes paid; and, many self-employed workers may be
employed, but they're not making anything or only half of what
they used to.
Moreover, America is not the
only country with an economic problem. The housing bubble is
turning out to be worldwide, with a major impact on England and
much of Europe. The biggest economic losers include the emerging
markets, especially China. Don't believe for one second those
Wall Street touts selling the notion that the emerging markets
have "decoupled" from the US economy and their growth
will lead the world forward without the American consumer. That's
hogwash. Where do you think their trade surpluses and big sales
gains (driving investment in plants and equipment) came from
anyway? From the American consumer and MEW! Take $800 billion
of easy spending away from the American consumer and you're going
to see a lot of blow back in lost sales by the emerging market
countries, including China.
As the recession takes hold,
I see this holiday shopping hype as the Economy's Last Hurrah,
but it's not just the American economy that's going to hear that
"big sucking sound" in the New Year!
Dec 6, 2007
Richard Benson
Archives
President
Specialty
Finance Group, LLC
Member FINRA/SIPC
2505 S. Ocean Boulevard
- Suite 212
Palm Beach, Florida 33480
1 800-860-2907
email: rbenson@sfgroup.org
Richard Benson, SFGroup, is a widely-published
author on securitization and specialty finance, and a sought after
speaker at financing conferences on raising equity for mid-market
companies.
Prior to founding
the Specialty Finance Group in 1989, Mr. Benson acted as a trading
desk economist for Chase Manhattan Bank in the early 1980's and
started in the securitization business in 1983 at Bear Stearns,
and helped build the early securitization businesses at Citibank
and E.F. Hutton.
Mr. Benson graduated
from the University of Wisconsin in 1970 in the Honors Program
in Math, and did his doctoral work in Economics at Harvard University.
Mr. Benson is a member of the Harvard Club of New York and Palm
Beach.
The Specialty
Finance Group, LLC is a Florida Limited Liability Company and
is registered with FINRA/SIPC as a Broker/Dealer.
321gold Ltd
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