The U S gross domestic production contracted by 5.7% in the first quarter of 09

The World economy is forecast to contract by 3% for all of 09.

In a world of steady population increases, and a standard of living which has been improving worldwide for the better part of 20 years, a contracting economy is dramatic and dangerous.

In the U S , real estate values have been the savings account, which gave people the freedom to borrow and spend. Home equity was alway an easy loan in a market that increased steadily .

Retirement funds have been traditionally  augmented by the cushion that our home equity provided.

The crashing real estate market has been a severe blow to our psyche.When the steep decline in Wall Street wiped out our retirement savings, we could no longer look to our home equity as an alternative  hidden cushion.

Defaulting loans and home foreclosures has left many parts of the country looking like ghost towns, and the ripple effect has affected all aspects of our economy.

Every reported slight increase in pending home sales is examined  with wishful optimism, but the sad truth is , any glimmer of optimism is fueled by short sales and foreclosures sold by the mortgage companies; most  at a loss.

The economic recovery can not begin until home prices stabilize and begin to recover.

With the inventory glut of available homes equal to almost a full years supply, values are still falling.

Property values can’t begin to recover with the economy stuck in a cycle of higher savings and lower spending.

The stagflation which we have talked about many times, is getting a stranglehold on any recovery.

World wide, factories have a glut of excess capacity, built for the bubble economy, which is now deceased.

With the Democrats agenda of big spending and massive stimulation, the Treasury Department is running the printing presses on a 24/7 basis.

This excessive growth in the money supply has only just begun to trickle into the general economy.

This trickle will soon become a torrent, as the Fed hopes to pay back the   $ trillions  in borrowed funds with inflated dollars. The potential for this unprecedented money expansion to trigger a hyper inflation recalls visions of modern day Zimbabwe, and post WW I Germany. Both resulted in scenarios of wheel barrow loads of paper currency to purchase a loaf of bread.

If you depend upon a fixed income to survive, be very cautious.

More later

I happen to be CEO of a small import export business, in the construction supply industry.

My business is down almost 40 % year to year. Several of my largest credit worthy customers have filed Chapter 11. My bad debt is growing, and the phones barely ring during the height of the construction season.

I have been forced to lay off 5 workers, and reduce the hours of my other 10 employees.

If this is economic stimulation I must be missing something. With state and federal taxes increasing in a dozen direct and indirect ways, I feel squeezed,

People have become mean spirited and very antagonistic.

Every day I speak to customers and suppliers  around the country, Almost every one of them tells me that they are laying people off, cutting back hours, and cutting expenses at every turn.

Small business is struggling to survive.

Despite the Stock Markets being 40 % above their March lows, I don’t believe this recovery is real. This economy is still dropping, The glimmers of rebound that “they” keep telling us about, represent the optimism born of Spring and warm weather.

The Federal Stimulus spending bill has made a bad situation worse because:

1. Investors and the public are mislead into thinking that all the money being thrown at the problem economy will make the problem go away.

The spending psychology has seen the markets go up almost 35% off their March lows. The public sees this performance, and accepts that things must be getting better. They are tempted to put money back into stocks. They chase the market after the bounce has almost run its course, in a vain attempt to recoup their losses and replenish their retirement savings.

Chasing a running market bouncing off a deep dive is a futile strategy destined to fail.We are not at the beginning of the next boom, and the bottom of our depression has not been seen yet.

2. The stimulus money delays a real recovery by keeping bad businesses afloat. Instead of letting the incompetents die off they are keeping alive dead wood for political agenda.

If General Motors and Chrysler had been allowed to fail on their own without bail outs, new American entrepreneurs would rush in to fill the void with viable new lean companies, and the American spirit of investment.

What should have been a 2-3 year shakeout and restructuring in a free market is destined to become a prolonged 10 year, slow recovery,(If it ever recovers from all of the interventions)

3 Basic laws of economics have been ignored. When a corporation goes broke due to a  faulty business plan, stock holders, bond holders, and labor unions should all suffer a proportionate loss.

In the case of the auto bailouts and subsequent bankruptcy, the labor unions have come out as the big winners, while the bond holders have been left holding a bag of pain. Rewarding the unions as political allies at the expense of the rule of law and free enterprise , sends a very stilted message of  distrust and legal disregard.

Politicians should not decide the outcome of free market movements for partisan reasons.

4 The current upward trend in stock prices is ultimately a fools gold fake out. The recession is a depression, and we appear to be doing everything possible to duplicate the errors of our predecessors in the early 1930’s.

Those who do not study history are doomed to repeat it.

The era of bubble economics is over. We have broken the engine which drove our economy. The banking system has been bailed out and regulated but not fixed.

The final bubble, which the government is attempting to inflate, to pull us out of this disaster is the US Treasury.

When this bubble pops from too much hot air too fast, who will bail out the treasury?

As the sub prime Adjustable Rate Mortgages (ARM’s) began to reset higher. in 06- 08, defaults began.

The steady climb in home prices slowed , then stalled as the economy floundered.

Sub prime ARM borrowers no longer had the automatic option of selling at a profit, or refinancing and pulling out equity for living expenses and new real estate purchases.

As real estate continued to decline, more and more people found themselves “under water”( their mortgage balance was higher than the value of their house) Many of these people chose to default, simply turning in their key and walking away from their obligation, amid their home.

The value of the derivative insurance instruments  declined, exposing the dubious value of  this form of collateral.

By the end of 08, most of the sub prime ARM’s had reset, dragging the markets into a precipitous crash, and leaving the banking system on the verge of collapse.

The unprecedented infusion of $ hundreds of billions, in TARP funds, put a temporary halt to the free fall, and helped to stem the panic in the banking system.

There is a second ARM problem, which is not considered sub prime, but appears to be a much bigger disaster because of the timing.

ARM’s for non sub prime purchasers has been a mortgage tool utilized by home buyers and lenders for many years. It is a method for giving  first time buyers or recent graduates and newlyweds a means of purchasing a home while they establish their career and earnings levels.

When home prices began their steep rise in 2002 and 2003, lenders utilized the ARM  with a wrinkle to help credit worthy buyers purchase homes that were   larger  and expensive.

The new wrinkle in the prime ARM’s is designated AltARM’s.

An Alt ARM is a mortgage loan where the borrower chooses what payments he will make for the first 5 or 6 years.

Interest only loans, or even less than interest, delaying all additional payments until after the mortgage adjusts.

This enabled credit worthy people with careers that appeared to be on the upswing, to purchase larger more expensive homes, to live the life style of their contemporaries, to purchase above their means.

The recession and job market shrinkage along with the massive losses on Wall Street have put these Alt ARM’s at great risk, and the derivatives insuring them in a very precarious position.

These Alt ARM’s are scheduled to begin adjusting in the Fall of 09, with the heavy resetting beginning in the Spring of 2010, and turning into a tidal wave through the end of 2011.

These are former Yuppies, and middle to upper middle class  successful people who lost jobs or a career due to the recession/depression.

That is a disaster in waiting, and the disaster is being ignored by our instant gratification politicians.

Perhaps they should see an eye doctor.

What a mess!!!! (more…)

This is really great news.

The Stock market which hit its peak in October 07, then fell by 55% to its low in March of 09, and now has rallied by over 30% ,is back.

The recovery is under way.

 The worst is behind us.

We have survived “the worst economic recession of  the last 80 years”, and now confidence is returning to the market place.

What a relief.

 Back to normal.

It only took us 17 or 18 months to go to the gates of hell, and now we come back reborn.

It must be a miracle!

A fiscal program of  obscene deficit spending, social engineering, and socioeconomic bludgeoning must be the nectar  of the gods of economics.

 Get out the credit cards, and lets start keeping up with the Jonses once again.

Or NOT!!!

The ” perfect storm” series of events,which have attacked the foundations of our economy, have created a serious void, necessitating  dramatic long term actions as part of the  healing process.

Sadly we haven’t even begun the first small step towards a recovery.

How did this happen?

The market high point in October 07, was fueled by the real estate bubble and low interest rates, pegged at 1% by the Fed, in an attempt to keep the bubble inflated.

The mortgage industry found itself in a situation, where the average home was more expensive than the average person could afford.

To keep the ponzi scheme going, the bankers had to utilize an alternate method of making a mortgage affordable, even when it was more than a buyer could afford.

In order to comply with government dictates, the mortgage lenders began offering sub prime borrowers, the Adjustable Rate Mortgage ( Sub-prime ARM) as an option.

The ARM offered the purchaser a low introductory rate for the first 5 or 6 years of the mortgage. Usually based upon interest only, it offered the buyer an opportunity to purchase a home that was more that he could afford, with the expectation that when the rate adjusted upwards after the 5 year introductory period, the home owner could  sell the home at a large profit, or refinance at a new lower rate.

These sub prime ARM’s are what have been defaulting since 07, dragging down the banking system. Home prices began to stop going up, and instead of selling at a profit, many home owners found themselves “under water”, and chose to default.

Fanny & Freddie had been “encouraged” to make these sub prime loans in the late 90’s, and many people rode the new wealth and pride of home ownership up and then crashed as home prices reached a peak and stalled.

The bankers who made these sub prime, loans began to worry about the exposure if the loans defaulted, so they packaged their sub prime loans and took out mortgage insurance called Credit Default Swaps( CDS)

These mortgages were sold and resold with ever increasing leverage, based upon the steady increasing prices of homes during the early and middle 2000’s. These highly leveraged CDS’s became more and more shaky.

More Later

I don’t want to overload your  attention span.

Our cheap money policy helped to fuel the boom in real estate.

People were able to buy more expensive houses than they could really afford , due to the low interest rates. This helped to stimulate demand, and pushed the price of  houses even higher.

The system began to stall, when the average house became more expensive than the average person could afford.

When rising mortgage rates in 2007 and 08 caused buyers to turn away, prices stalled, and began to slide.

The inventory of unsold houses on the market was inflated, as the sub prime mortgages ,many being Sub Prime ARM’s (SPARM’S),began to reset at much higher rates.

The subprime defaults which resulted, further depressed prices. The resulting halt to new construction and speculative renovations took down builders, suppliers, and financial institutions.

As the deflating bubble accelerated, bad debt and faulty derivatives caused banks to pull back on lending in fear of seas of red ink. This helped to create a worsening credit crunch.

The slump in construction and lending had a ripple effect on the economy.

As the Stock Market inploded, businesses cut payroll.

Banks stopped lending, and began to tighten up on customer credit. Consumer loans and credit limits on credit cards  became tighter.

Consumers stopped shopping and stayed at home to save on expensive gasoline costs.

Automobile manufacturers found themselves buried in unwanted inventory.

The world wide economy began to follow suit.  Demand for exports shrank,  and commodity prices fell along with oil and real estate values world wide.

By the end of February 09, the value of most stock markets around the globe had fallen by better than 50%.

The crash had turned into a torrent of red ink, wiping out $ trillions in assets.

In early March of 09, the percieved turn around began.

From their bottoms, stocks world wide rebounded by around 30%, and oil had once again become a speculative darling, showing increases over 50%.

The worst is over!!!

On to the next adventure.

We are all saved!!

Or Not

Part 2 later