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Markets Versus Economic Reality

I’ve been watching the markets rise with… I guess the word is surprise. It hasn’t really made any sense to me. I’ve written before that I expected to see the Dow Jones Industrial Average (DJIA) trading at around 5,000. Yet, it has been steadily rising for weeks. That is until today.

See, today’s plunge makes sense. There is nothing that has been in the economic news over the last several weeks that should give investors confidence. Banks stress test were reported and, despite the federal claims to the contrary, it was not pretty:

The nation’s biggest banks are regaining their health, but some need to replenish their coffers to withstand any new difficulties, the government said in an upbeat report Thursday.

The Federal Reserve’s highly anticipated “stress tests” found that 10 of the 19 largest banks needed to bolster their capital by a combined $75 billion. Most of that must be raised by two banks with a large California presence — Bank of America Corp. and Wells Fargo & Co. — highlighting the role of the state’s housing market meltdown in the recession.

After the billions in bailouts more than half of the major banks are still in trouble. There are claims that the new housing market has picked up, but not enough attention seems to be paid to the fact that the foreclosure rate continues to rise:

Despite the efforts, however, more homeowners fell into default in March. Servicers initiated foreclosure proceedings against 290,000 mortgage borrowers, a jump of nearly 20% from February’s 243,000, and the highest monthly total since the coalition began tracking data in mid-2007. Starts have risen by more than a third since January.

Stimulus packages have, as expected from this blogger, not resulted in people going out and spending more:

Retailers logged a second straight month of sales declines in April as consumers continued to pull back on all types of unessential purchases, the government reported Wednesday.

The Commerce Department said total retail sales fell 0.4% last month, compared with March’s revised decline of 1.3%.

Sales in March were originally reported to have declined 1.2%. Economists surveyed by had been expecting April sales to be unchanged from the previous month.

And, today anyone paying attention to what Main Street looks like today, this should not come as a surprise. My youngest son attends a Charter School in Albuquerque. When I drive back to my home office after dropping him home, I more often than not drive up Menaul. If you haven’t done so lately, I suggest you take the drive and pay particular attention to the number of empty store fronts between San Mateo and Louisiana. You’re in for a shock. It looks to me that about 20% of those places of business are vacant.

It’s not just the traditional bricks and mortar stores that are suffering:

The Eight Northern Indian Pueblos Arts & Crafts Show has become another victim of the weak economy. Organizers announced Tuesday they have canceled the annual show for the first time in its 38-year history.

“We all are” disappointed, director of programming and development Valerie Lyon said Tuesday. “It’s just the economy. The economy had its impact on artists and sponsors.”

The show, scheduled for July 18-19, had attracted only 51 artists willing to pay $400 for a booth instead of the usual 150-200, according to ENIPC executive director Michael Miller. And instead of $60,000 to $70,000 that has come in sponsorships in previous years, “we had one committed sponsor for $5,000,” he said.

Keep in mind that New Mexico has traditionally been somewhat sheltered when it comes to radical swings of the economy because of our heavy reliance on federal spending. Yet, we are obviously hurting as much as the next state right now.

Even more troubling is that on an anecdotal level I’ve heard of more and more unemployed people taking their severance packages and jumping into day trading – because they are “some great opportunities to make quick money.” Personally, I think that is nuts. I still think we’re going to see the DJIA at 5,000 going into the 4th quarter of this year or the 1st quarter of next year. The worse is still ahead of us.

This brings me to President Obama’s visit to New Mexico tomorrow. He is coming to hold a credit card town hall. If you think the housing collapse had a negative effect on the economy, wait until you see what happens when the current unsecured debt bubble bursts. Combined that with the ugly truth about current government spending:

The government will have to borrow nearly 50 cents for every dollar it spends this year, exploding the record federal deficit past $1.8 trillion under new White House estimates. Budget office figures released Monday would add $89 billion to the 2009 red ink – increasing it to more than four times last year’s all-time high as the government hands out billions more than expected for people who have lost jobs and takes in less tax revenue from people and companies making less money.

The unprecedented deficit figures flow from the deep recession, the Wall Street bailout and the cost of President Barack Obama’s economic stimulus bill – as well as a seemingly embedded structural imbalance between what the government spends and what it takes in.

We’ve only hit the tip of the iceberg.