All job cuts are not equal.  If we had to sum it up, paper pushing jobs in the financial sector seem more immune than good producing jobs.  Let us look at how the real employment situation is panning out:

government jobs

Since the start of the recession 22 months ago in December of 2007, the government has added 78,000 jobs employing some 22.44 million people.  It is interesting to look at local and state taxes that are being pummeled yet this sector is still up.  It would be one thing to create new jobs but looking at the chart above, jobs were never cut.  What did the government actually do?  States like California implemented furloughs and raised taxes in many cases.  Of course, the major issue in many states is the bloated pension system that puts an unsupportable burden on those who are actually still working.  I can understand that someone needs to live and support themselves in retirement.  But in California for example, you have many people receiving $100,000+ pensions and many only worked until their early 50s.  What is clear from the above is the government did not cut any jobs on a net basis.  So we can scratch this sector when looking at where the jobs were lost.

The next sector is the FIRE economy:

fire employment

Given the 8 million jobs officially lost in this recession, a mere 600,000 came from the finance, insurance, and real estate industries.  This is the sector that is largely responsible for the housing bubble and the entire finance mess yet it is not taking a major cut as it should.  Why?  The bailouts are targeted in protecting many of these Wall Street paper pushers.  In fact, you can see that in the last month it actually added jobs.  The 6.6 percent drop does not reflect the actual overall fall in employment.  Again, this sector is being supported by the trillions in taxpayer money.  So where are the job cuts really coming from?

Construction employment has taken it on the chin:

Construction employment is down by a stunning 20 percent since the start of the recession.  It is interesting that from the start of the recession, construction and the FIRE sector had roughly the same number of employees benefiting from the housing bubble but where the FIRE sector lost 600,000 jobs, the construction sector has seen 1,557,000 jobs cut, nearly 3 times the rate of the FIRE sector.  Apparently building a home is less valuable than writing a toxic mortgage.  Again, the government bailouts are protecting an over employed FIRE sector while throwing other sectors of the economy to the wolves. Keep in mind both of these sectors used the same underlying asset (real estate) to expand.  The housing bubble is now the U.S. Treasury and Federal Reserve bailout of the FIRE economy.

Durable goods manufacturing has also been slammed:

manufacturing jobs

Durable good manufacturing has fallen a stunning 18 percent since the recession started.  If we look at construction and durable goods, both sectors are experiencing depressions while the FIRE sector is experiencing a tiny recession.  And take this data point as a reference:

Durable goods and manufacturing:

December 2007 jobs:               8.728 million jobs

October 2009 jobs:                  7.121 million jobs

FIRE sector:

December 2007 jobs:               8.242 million jobs

October 2009 jobs:                  7.697 million jobs

This should tell you what is happening to many average Americans.  Only two years ago, the durable goods and manufacturing sector had 486,000 more jobs than the FIRE sector.  Now, the FIRE economy has done a role reversal and has 576,000 more jobs than the durable goods manufacturing sector!  Who are we really bailing out here?

Conclusion

Simply taking the employment report at face value is meaningless.  What is happening is the bailout structure is designed to prop up the primary industries that created the housing bubble.  Many of the FIRE jobs are over compensated Wall Street cronies who are using taxpayer dollars to gamble.  The real fact is many sectors of the American economy are in deep recession.  Unless you work for the government or the FIRE sector, chances are your industry is in a deep recession.  Then again, why else would the stock market be up by 60 percent since March?  It is easy to make money when you eliminate the biggest line item (employees) for short-term bottom line gains for those in the FIRE economy since your job is subsidized by the taxpayer.

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Let us first look at disposable income:

With over 70 years of data, disposable income has only gone negative on a year over year basis one other time and this was in the late 1940s.  This is really not a typical occurrence.  Yet when we deconstruct the GDP report and 3.5 percent growth, we realize that this equation:

GDP = private consumption + gross investment + government spending + (exports - imports)

A large part of that growth came from government spending.  The other growth came largely because of cash for clunkers with the auto sector contributing 1.6 percent of the 3.5 percent growth (typically about 0.1. or 0.2 percent).  In other words, there should be little shock that GDP was up.  Why not spend $2 trillion and make it go up by 7 percent?  Of course, any thoughtful analysis shows the error in this reasoning.  It is an adrenaline shot to the chest administered by the bailout syringe.  The U.S. Treasury and Federal Reserve are juicing the markets and hoping this recovery sticks.  The latest data relies on purely government back stops.  If we look at industrial production, things are still looking like a recession:

And much of the bounce is coming from restocking and refilling inventories to meet the current demand.  The real question is whether the demand will still be there without government spending.  That is yet to be seen.  In fact, there is already talks of a second stimulus and the government is still pumping money into the fragile housing sector trying to get Americans to buy homes yet again even though we just went through a decade long housing bubble.

Yet the average American is working less hours and earning less money:

This is a fundamental question here.  Most Americans don’t realize this but they are being taxed in numerous ways.  For one, the current bailouts and government spending is coming at the cost of a weaker and flailing dollar - you are being paid in a weaker currency:

Source:  Jesse’s Cafe

There is a cost for all this additional spending.  The only reason we have yet to see the higher cost hit the typical balance sheet is because there has been $12 trillion in household net worth balance sheet destruction.  This has occurred through the loss in real estate value and stock market value.  This is real wealth destruction.  Also, each bankruptcy and foreclosure in essence destroys the face value note and brings to reality a new cost.  In other words, a $500,000 mortgage that is now linked to a home that is worth $200,000 and is foreclosed and sold, will only produce a $200,000 mortgage (depending on down the payment).  So the system loses that $300,000 even if it was inflated values.  There is still unrealistic prices in the system especially in the $3 trillion commercial real estate sector.  That is why the Fed is reluctant to allow an audit of their books.

Americans haven’t yet felt the brunt of this but we are in a full-fledged disinflation period.  Rents are going down and this is the largest component of the CPI.  So those on fixed incomes are going to have to get by with less.  Just look at Social Security that suspended the COLA for the time being.  Have you looked at saving account interest rates?  Close to zero.  So the only game in town is basically the stock market (and commodities) if you want anything above 5 percent.  The risk-free days are over.  Even holding the U.S. dollar is now risky because of the massive spending.

If we look at the balance of trade, things have improved simply because Americans are spending more and our lower dollar has made our products a bit more competitive:

Make no mistake, the improvement above is largely due to less consumption.  So what will happen?  The U.S. Treasury and Federal Reserve want a systematic devaluation of the US dollar.  As the above chart points out, this is their current path.  They are satisfied that Wall Street is back to the good old days and the taxpayer is subsidizing their casino at the cost of the US dollar.  In their mind’s eye, they are looking for a decade long decline in the dollar followed by moderate to strong inflation.  When was the last time that you saw on the mainstream media the U.S. dollar debated?  In that way, we essentially inflate ourselves out of this bubble without the masses getting into a frenzy.  Even the banks are betting on this.

Wells Fargo is now talking about converting their option ARM loans into interest only loans:

“NEW YORK (Dow Jones)–Wells Fargo & Co.’s (WFC) strategy for modifying its billions in troubled Pick-A-Pay mortgages looks a lot like a game of kick-the-can-down-the-road.

Wells Fargo, the fourth-largest U.S. bank by assets, holds more than $107 billion in debt tied to option-adjustable rate mortgages, a quintessential loan product from the housing boom that allowed borrowers to make small monthly payments in return for increasing their mortgage balance. Now, many Pick-A-Pay borrowers own homes worth far less than they owe in mortgage debt, even as many of them can afford a full monthly payment that pays down principal.

To solve that conundrum, Wells Fargo is taking a gamble: The bank is issuing thousands of interest-only loans that will defer borrowers’ balances for as long as six to 10 years. Wells Fargo is wagering that an eventual rise in housing prices in the country’s worst-hit regions, along with a rise in consumers’ income, will eventually combine to cover the bank’s billions in underwater Pick-A-Pay debt.

“We’re banking on the fact the economy will improve and recover over time,” Michael Heid, co-president of Wells Fargo Home Mortgage, said in an interview.”

Wells Fargo is essentially betting on another housing bubble.  Think of an option ARM loan that is at $500,000 on a $250,000 home (58% of these loans are in California).  Wells Fargo is betting that the current borrower by 2019 or whatever date will then be in a home valued at $500,000 or more.  They are simply betting on another bubble spurred by the U.S. Treasury and Federal Reserve.  In Japan, real estate values remain depressed after 20 years.  This after trillions into their banking sector and trillions in fiscal stimulus (sound familiar?).

So going back to our initial question, if income is down where is the money coming from?  It isn’t coming from credit card companies because they are slashing limits and credit.  Right now it is coming from the government.  But it comes at the cost of breaking the dollar down.  Why else is gold now trading near $1,100?  The world won’t finance our spending spree forever.  Buying more cars and more homes is not a long lasting solution.  I doubt that has any long-term sustainability.  But the real question will come in 2010 with the stimulus running low.  Will the real economy make up for lost incomes?  Of course we need to create jobs and good paying positions for that but that has yet to be seen.  Until then, we are spending money we don’t have to buoy the economy.  Is that really good news?

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The problem we currently face is even after the global economy was brought to its knees by the current Wall Street banking structure, things still haven’t changed at the core of their mission.  The same banks are back taking inordinate amounts of risk with the now explicit backing of the U.S. Taxpayer.  It is no surprise then that our U.S. dollar has been pummeled by the policies of the Federal Reserve and U.S. Treasury.

Let us examine each component of the misery index.

Bankruptcies

Source:  Credit Slips

It shouldn’t come as a surprise that bankruptcy filings are now approaching their pre-2005 levels.  Keep in mind that in 2005, tough bankruptcy legislation came into effect thus spurring a massive wave of bankruptcies from people seeking to avoid the new tougher standards.  Even with these new standards in place, there is only so much blood that you can squeeze out of a turnip.  Some will be quick to point out that bankruptcy filings hurt big corporate giants mostly.  On the contrary, 98.5% of all bankruptcy filings come from individuals at the end of their rope.  Most people don’t file for bankruptcy with a smile on their face.

We will see a slowing or moderating pace for the fourth quarter since there is a bit of seasonality with filings.  But Q1 of 2010 should give us a better indicator of where things are heading.  But one thing is irrefutable, bankruptcy filings are going up.  In this category, the recovery is not taking place.

Food Stamps

Over 35,800,000 people are currently receiving food stamps in the U.S.  That is 11 percent of our entire population is receiving government assistance through the SNAP program (i.e., food stamps).  As the chart above can attest to, the number of people is still booming.  Obviously in any economic down turn, this rate will increase but this percentage is one of the highest on record.  It is also clear that the growth is currently exponential.

Here is the government expenditure per year on food stamps:

2006:     $30.6 billion

2007:     $30.3 billion

2008:     $34.6 billion

2009:  $40 billion (still need August and September data - average out we are approaching $50 billion for 2009)

Just think of how quickly this number is jumping.  The problem with the current system is that some people are still governed by the trickle down school of economics.  They believe that if Wall Street is up 60 percent (thanks to government bailouts) that somehow crumbs will trickle down to working and middle class Americans.  Clearly it isn’t happening right now.  The recovery is looking more like a minor depression to many.

Long-term unemployed

It is telling that the biggest category of our currently unemployed population is those classified as long-term unemployed.  These are people that have been out of work for 27 weeks or more.  Think of how grueling it is to be out of work for half a year in this economic climate.  The issue at the core of long-term unemployment is that it reflects potential permanent job losses.  That is, many of the 8,000,000 jobs lost since the recession started are never coming back.  For every one job opening you have six able bodied workers competing for it.

It is hard to see what industry is going to pick up the slack for these long-term unemployed.  Many are now coming to the end of their unemployment insurance and in many cases, in some states this can be as long as 90+ weeks.  The long-term unemployment trend tells us that we have yet to see any economic recovery as well.  Sure the stock market may be up but what use is that to the average American that pays most of their bills through a job?

Foreclosures

At the root of most of this is the housing market.  Take a long and close look at the chart above.  Q3 of 2009 was the worst foreclosure quarter on record.  Clearly foreclosures are not a sign of economic recovery but here we are, two years into the crisis and foreclosures are still at record levels.  Much of this comes from the decade long housing bubble.  But keep in mind each additional foreclosure is another home on the market, another family looking for different shelter, and an economic loss to the system.  It is hard to see any of the government stop-gap measures fixing this in the short-term.  The loan modification programs have yet to yield any significant change.

It is also the case that the government has gotten more risky with tax credits and allowing lax lending standards with FHA insured loans in getting more people to buy.  In the short run this may offer the appearance of growth but over the long haul, this will only add to future defaults.

The foreclosure numbers show us a very different picture from the current recovery rhetoric.

Credit Card Defaults

For the first time in data tracking history, has total revolving credit contracted on a year over year basis.  At a time when the above data shows that more Americans need more support, the credit card companies are yanking lines of credit.  They are also charging higher fees on good standing customers to make up for their rising defaults for years of easy financing.  Here is some sobering data:

Credit card direct mail offers:

Q3 of 2006:         2.1 billion

Q3 of 2009:         391 million

Now you know why your daily mail is much lighter.  Credit card companies who are giant receivers of taxpayer bailout money are actually closing their doors on the same people who are bailing them out.  They are hiking up fees and closing down credit lines unless consumers give in to their onerous ways.

The bottom line is the misery index shows no solid economic recovery.  I suppose it depends on what we are looking at if we want to say we are in a recovery.  If we are looking at banking profits and Wall Street then yes, the recovery is here.  If we are looking at other data like bankruptcies, unemployment or foreclosures then the story is very different.

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The commercial real estate sector is even more fragile than residential real estate because commercial space is a direct reflection of the health of the economy.  In other words, how much office space do you need without workers?  How many strip malls can you fill without shoppers?  Not many.  Commercial real estate is also financed in a unique way where loans are refinanced typically on five year terms.  Many are coming due starting next year.  Friday’s multiple bank failures, 9 in one day and a cost of $2.5 billion to the FDIC fund, was the most closures in one day since the recession started.  Even with this giant number, most of the assets at FDIC insured banks sit with a few banks:

The FDIC insures over 8,000 banks covering $13.3 trillion in assets.  In reality, 100 banks hold over $10 trillion of those assets.  The banks that are failing typically do not fall in the top 100.  And many of these recent bank failures are starting to show signs of commercial real estate fatigue.  Ross summed up the overall scenario well:

“(FT) All of the components of real estate value are going in the wrong direction simultaneously,” said Ross, one of nine money managers participating in a government program to remove toxic assets from bank balance sheets. “Occupancy rates are going down. Rent rates are going down and the capitalization rate - the return that investors are demanding to buy a property - are going up.”

There is some form of twisted irony in the above.  The government has tunnel vision focus on residential real estate.  The Federal Reserve has bought nearly $1.25 trillion in GSE MBS thus keeping mortgage rates at historical lows.  Not enough?  What about a nice $8,000 tax credit?  Still need more?  What about going with FHA insured loans that only require 3.5 percent down?  In other words, the government has stepped into the vacuum left by the toxic mortgage lenders.  So we shouldn’t be surprised when FHA insured loans, Fannie Mae, and Freddie Mac loan portfolios start showing historic amounts of defaults.  Yet the consequence of pushing many renters to homeownership, is you speed up the crash in commercial real estate.  We should be honest and admit that not everyone can be a homeowner.  And this is okay.  They can rent.  Nothing wrong with that.  But now we are seeing enormous apartment vacancy rates because we are temporarily shifting some into homes they cannot afford.  They will only default later as we have seen with the current decade long housing bubble.

Commercial real estate is a gigantic line item of the FDIC insured banks:

In fact, if you add up nonfarm residential, construction and equipment, and commercial/industrial loans the number is approximately $3 trillion.  Contrast this to the $2 trillion in more conventional residential loans.  In other words, this has the potential of being bigger than the residential downturn.  Commercial real estate values took longer to fall than residential property values, but not only have they caught up, they have surpassed the percentage amount of declines:

With many of these loans coming due in the next few years, the question will focus on the ability of companies to get the loans refinanced.  But who will take on a loan of an empty commercial building?  For residential property, the government for better or worse has a big mechanism through Fannie Mae, Freddie Mac, and FHA insured loans to buy up these loans.  The government currently backs 95 percent of all residential mortgages.  It is the market.  Yet with commercial real estate, there really isn’t a government mechanism fortunately (that is, unless the U.S. Treasury plows through with Plan C and starts bailing out this industry).

The FDIC and other agencies are trying to jump out in front of this freight train.  Maybe it isn’t call Plan C but something is in the works:

“(AP) WASHINGTON - Banks must accurately identify their potential losses when modifying troubled commercial real estate loans under federal guidelines issued Friday.

Regulators have warned that rising losses on commercial real estate loans pose risks for U.S. banks, with small and mid-size banks especially vulnerable. Nearly $500 billion in commercial real estate loans are expected to come due annually over the next few years.

Agencies including the Federal Deposit Insurance Corp., Federal Reserve and Office of Thrift Supervision released the new guidelines for banks, which emphasize that modifying loans in a prudent fashion is often in the best interest of both the bank and the creditworthy commercial borrower.

Under the guidelines, loans to creditworthy borrowers that have been restructured and are current won’t be classified as high risk by regulators solely because the collateral backing them has declined to an amount less than the loan balance.”

This will be a fascinating challenge here.  Jean Paul Getty had it right when he said, “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”  And the banks have a gigantic problem.  You can expect workouts but what can you workout with a property that is completely vacant?  Is there any price point that will work?  We are going to find out soon enough.

The commercial real estate debacle is coming in line with the appearance of a stabilization in the residential market.  The CRE debacle has the potential to destabilize the market again.  Expect to see more banks go under because of horrible CRE loans.

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Let us first take a look at the biggest down days for the Dow since the rally started in early March:

This was the biggest drop since April of 2009.  That is significant.  It took us nearly six months to have a down day of over 249 points.  And if you really think about it, the news wasn’t all that bad.  In fact, the GDP numbers should have kept things going.  But again, the reality is setting in that there will be no V-shaped recovery and 27 million unemployed and underemployed Americans benefit little from the current stock market rally. Most don’t get their monthly money from the stock market but an actual W-2 job.

This rally has also seen a significant number of up days:

Since the rally, we have yet to see a 300 point down day.  We have seen a nearly 500 point gain right after the low point was reached in early March and a 379 point rally the next day.  So nearly 900 points were made up in two days off the low bounce.

The Dow peaked in this rally at 10,081 and we currently stand at 9,712.  It will be interesting to see what happens next week with the BLS job report coming out.  The market expects a 9.9 percent official rate but there is a strong possibility of going over 10 percent.  You can expect a 10 percent unemployment rate to psychologically change the feel of the market.  Hard to believe in a rally when the unemployment rate (official) is at 10 percent.  Yet even now, we hear more and more people using the U-6 rate in official figures and that is already at 17 percent.

What we saw on Friday is a real true test of this rally.  Is this for real or simply a juicing of the markets by Wall Street and the government?  The figures coming out on Friday are starting to believe this rally is simply based on fumes.  An adrenaline shot from the government and Wall Street won’t sustain an economy since many average Americans are already tapped out on spending.

Notice how you are receiving less and less of those credit card offers in the mail?  There is a reason for this:

Source:  Paul Kedrosky

Direct mail credit card offers peaked in Q3 of 2006 with approximately 2.1 billion being sent out.  In Q3 of 2009 only 391 million have been sent out.  In other words, credit card companies definitely don’t believe in the recovery and they certainly don’t believe in the American consumer.  On top of this drop, credit card companies are now jacking up fees on good standing customers, adding annual fees for inactivity, and basically acting like your local loan shark.  At times they are even charging 79.99 percent interest rates that would make Tony Soprano blush.  If we really look at the data, the economy is doing anything but recovering.  Actually, it is recovering but for those on Wall Street and the banks.  The average American is merely subsidizing their party.  By the way, the banks are largely the reason for the decade long housing bubble.

If you really want to see how much insiders believe in this rally, let us look at some details from last week.  Insiders for the week with data from Thomson Reuters bought 8.2 million dollars worth of stock during last week.  How much was sold?  184 million dollars.  This pattern has been occurring the entire rally.  Now wouldn’t you think insiders would have a better sense of the true nature of this economic recovery?

Next week will be important and the jobs report number may go over 10 percent because many people hearing this good news, are now back looking for work but very few jobs are out there.  In other words, they will move from the shadows of the 2 million workers that have given up into the actual official pool.

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Americans leveraged debt in this decade to make up for their lost purchasing power.  Access to debt is now being limited.  But let us first look at a crucial aspect of the typical household that seems to be missing from the mainstream financial press, household incomes:

This is the latest data we have and we should spend some time on the above chart.  20 percent of American households make more than $100,000 per year.  The median income is $52,029.  In other words over 56,500,000 households make due with $52,029 or less per year.  This is the average American consumer and also helps to explain why things are still in a troubled state.  I put together a budget before for someone making the median income and given the updated income figure, things haven’t changed much.

Keep in mind the above data reflects the 2008 year.  A troubled year no doubt, but we have yet to factor in the increased unemployment brought about in 2009.  This data will be reflected in September of 2010 and we already know that incomes are going to fall yet again.  With 27,000,000 Americans unemployed or underemployed, we know the recession is deep and pervasive.  But what is usually missed, is even the employed in those 56.5 million households are struggling with rising costs of healthcare and education.  Housing costs may be going down but not because of a healthy economy.  What we are seeing is debt destruction.

Now try to factor this out with a real world budget:

We’ll go with the state of Georgia just as an example.  After taxes the median household is netting roughly $3,200 per month.  In August, the median home price in the United States came in at $177,700.  Now run the numbers on a FHA insured loan here with a 3.5% down payment:

Home Price:                 $177,700

Down payment:            $6,219.50

30 Year Mortgage Amount:                  $171,480.50

PITI:               $1,235

We’ll leave aside the $8,000 tax credit for the moment.  So let us run a simulation on this budget since this on the face seems to workout:

Before you start picking the budget apart, keep in mind this is only a sample.  If you look around your own neighborhood, how many people do you see with two relatively new cars?  A flat screen TV?  Designer clothes?  The above budget doesn’t allow for that.  And that is why we are seeing bankruptcies also rising in the current environment.  The spending was done outside of the budget via credit cards and other forms of revolving and non-revolving debt.

Credit card companies are quickly jacking up fees, putting onerous terms, and decreasing credit available to a consumer that is losing income.  You can see how quickly things can get out of hand.  Take for example the budget above.  What happens if one spouse loses their job?  The net income will fall but expenses will stay the same most of the time.  Or what about a medical emergency?  One night in a hospital can wipe out one or two years of an emergency fund without insurance and millions fall in this category.  What if the car busts the transmission?  There goes $2,000.  Things can escalate quickly without access to the easy debt machine that hid a decade of lost income.

But a sector that did do well in this time is the financial sector:

Source:  New York Times

The financial sector has cannibalized a large part of our economy.  After decades of bubbles and mismanagement, what have they left the average American with aside of the mountains of debt?  We have $3.5 trillion in commercial real estate debt to contend with.  Household net worth in the U.S. has fallen by over $12 trillion since this crisis started.  It is hard to see what benefit the financial sector has brought to the typical American family.  It gave people the illusion of wealth through debt but as we are now seeing, is quickly taking it away via bankruptcies, foreclosures, and yanking credit cards away.  I agree that many Americans over spent and now many are paying the price.  But what price does Wall Street pay?  In fact, they are rewarded with bailouts.

The notion that things are getting better is hard to understand.  If we mean that things are better because Wall Street is up, then yes, things are better.  But jobs are still not on the horizon and most people associate employment with a healthy economy:

During this earning season what is rarely reported is that the jump in profits with many companies is coming from one time inventory replenishment and also, by cutting your largest cost.  Employees.  Look at the above chart.  For every job opening you have six people trying to fill it.  And job openings are below levels at the start of the decade and we have more people in raw numbers plus, we have the 27 million unemployed and underemployed Americans. Just to replenish the lost jobs since December of 2007 we would need to find 8 million jobs.  Even if we added 150,000 jobs per month starting in November (not happening) it would take us over 4 years just to get back to where we were at the start of the recession.

Even after all the debt destruction, household debt is still weighing like an albatross on the American household balance sheet:

The above chart is important because it shows the stickiness of debt.  That is, unemployment has been going up since December of 2007 but debt goes down slowly.  The amount of workers in the U.S. economy is seeing a sort of lost decade.  But look at the financial obligations above.  We are only back to 2005 levels.  The bubble started much further back.  Why is that?  As we now know, a foreclosure takes a very long time while being laid off can happen in one day.  Those mortgage payments keep coming in while the income from work is cut off.  It isn’t like the mortgage suddenly adjusts to reflect the real economy.  The obligation is still there.  So is the auto payment.  And the credit card bill and everything else.  So debt that was once seen as a supplement to income is now a massive drain on your monthly balance sheet.

Just looking at this data I’m not convinced of this job less recovery.  We are still losing jobs at a rate of 3 million per year.  In fact, just to keep at a normal pace we need to be creating 150,000 jobs per month.  Until we get there, the average American is going to feel this as the deep recession that it is.

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For example, there are places in Nevada and Arizona that were built with no residences coming and commercial real estate to feed this ghost population.  Another point that makes commercial real estate more problematic is the way commercial projects are financed.  These projects are financed with short-term financing that requires refinancing every 5, 7, or even 10 years.  This stands in sharp contrast to the 30 year fixed mortgages on residential properties.

If you really want to see what is happening on the ground, you need to look at housing starts.  After all, these are the builders and should have a better sense of regional niches and demand.  Now their projections are never perfect but they probably have a better sense than say Wall Street which is a few thousand miles from billion dollar construction projects:

Now here is a fascinating case and point.  Single family starts have collapsed.  This is true.  Since the peak, they have been trending lower and lower.  The U.S. Treasury and Federal Reserve even with virtually interest free money cannot stimulate demand in an overbuilt market.  Single family starts are down 8.7 year over year.  But multifamily starts?  Try a stunning 67.4 percent.  Many of these projects are financed with commercial loans and you can see that the demand is virtually gone.  This is one of those unintended consequences that Wall Street and the government fail to notice.

With a tunnel vision focus on propping up the residential housing market, demand for homes has increased.  People are buying up foreclosures and financing their purchase with historically low interest rates courtesy of the Federal Reserve.  The government has also sweeten the pot with the $8,000 poorly targeted tax credit.  But what the Fed fails to see is that vacancy rates were already high for both residential and commercial buildings in the form of say, apartments.  So what happens?  You shift demand from lower priced rental units to homes.  Good news right?  Not at all.  Now what you have is an increase in defaults for commercial loans instead of residential loans because of even higher vacancy rates.

As I mentioned before, the problem with commercial real estate loans is also how they are financed.  Take a look at the turnover profile for the next few years:

Source:  Zero Hedge

From 2009 to 2010 the amount of MBS maturing is double and it only elevates from that point on.  Who is going to refinance an empty strip mall?  Or a gym with no membership?  What about an office complex with no tenants?  This is the big problem with commercial loans.  Consumer demand has shifted.  With the U.S. dollar tanking the average American is facing higher costs for daily items like food and is seeing some items like cars drop on the secondary market but what is a priority?

How deep have prices fallen on commercial real estate?  Try 41 percent:

Unlike residential housing that has stabilized in terms of pricing because of trillions in bailouts, commercial real estate is on the way down.  But make no mistake, the U.S. Treasury has been having off poorly publicized talks about preemptive bailouts in this market.  Even without the talks, the Fed is willing to take everything and anything in exchange for Treasuries.  While the residential housing market peaked in 2005, it looks like CRE peaked in late 2007.  It looks like a two year lag is in the commercial real estate market and this is typical.  These projects take longer to build and usually follow residential projects.

Rents have been falling and this has hurt real estate in Manhattan to apartments in Los Angeles.  In many cases, you would think that a lower price for something is good but this is only reflecting a weaker American consumer that is confronting an unemployment and underemployment rate of 17 percent.  We hear much about this jobless recovery but incomes are low, commercial real estate is a major problem, and the average American is seeing their view of the American Dream become more and more of a mirage.  The only winner seems to be Wall Street.

David Einhorn from Greenlight Capital summed it up well:

“And the neighbors are angry, because at some level, Americans understand that the Washington-Wall Street relationship has rewarded the least deserving people and institutions at the expense of the prudent.  They don’t know the particulars or how to argue against the “without banks, we have no economy” demagogues.  So, they fight healthcare reform, where they have enough personal experience to equip them to argue with Congressmen at town hall meetings.  As I see it, the revolt over healthcare isn’t really about healthcare, but represents a broader upset at Washington.  The lack of trust over the inability to deal seriously with the party goers feeds the lack of trust over healthcare.”

And this leads us to where we are at.  When have we heard prolonged debates regarding commercial real estate or even the bailouts?  We sometimes hear the plutocracy argument that we should have bailed out Lehman Brothers.  Really?  We should have a talk about why we didn’t let more firms fail.

From both parties we get estimates of healthcare reform between $800 billion and $1.2 trillion over a decade.  Commercial real estate has 3 times that sum!  Not one hour of airtime is dedicated to talking about this.  The U.S. Treasury and Federal Reserve have backstopped nearly $13 trillion from the banking sector.  The airwaves should be saturated on a daily basis talking about this and the other bailouts that were never fully vetted.  Don’t believe it?  Here is your bill:

If there is no resistance, we are going to have another major stealth bailout of the commercial real estate industry.  The U.S. Treasury already has a nice name of “Plan C” for it.  Next time you see those empty buildings keep in mind that you might be paying the mortgage on it pretty soon.

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Let us take a look at how this breaks down:

When we start narrowing down the big economic states, we can also look at their local dynamics to get a better understanding of why this recession has made it so difficult for jobs to be created.  In fact, we have yet to see a month of positive job growth since the recession started back in December of 2007.  The national official unemployment rate is 9.8 percent.  Out of the top 10 states, 6 have unemployment rates over 10 percent:

Think of the local dynamics of a few of these states.  California and Florida had enormous housing bubbles and the repercussion of a bursting bubble are still being dealt with.  These states are still losing jobs since a large part of their industries revolved around the housing market.  New York and New Jersey have big industries around the financial industry.  Now that the stock market has recovered, certain institutions are taking in gigantic profits since some of their competitors collapsed while the government selectively decided to bailout a few chosen.  But still, employment in these sectors do not come close to rivaling the peak of what we saw earlier in the decade.

The above data is important to focus on because these are the states that make up the bulk of GDP.  With rampant state budget deficits many of these states are cutting spending but also raising taxes.  Unlike the federal government that has access to the U.S. Treasury and Federal Reserve, states need to contend with balanced budgets.  These states are grappling with these problems so their GDP surely in 2009 will be lower than what was shown in 2008.  If tax collections are any sign, the contraction will be rather severe.

If you boil the data down further, the top 5 states make up 40 percent of GDP.  In a way, this is similar to the too big to fail banks.  Sure, the U.S. has some 8,000+ banks that are insured by the FDIC but approximately 100 hold over 70 percent of all assets.  If there are problems in these big states, will smaller states carry the slack in GDP?

Many of the smaller states are also contending with higher unemployment.  The economy is interconnected and many of these states export goods to higher populated regions.  If people stop spending and buying these goods, it will also hurt them.  Ask GM or Chrysler what happens when people stop buying your goods.

Looking at the list of the top 10 and four of the states had economies that benefited enormously by the housing bubble; California, New York, Florida, and New Jersey.  Other states also saw benefits from the housing bubble but nothing to the level of these states.  You would have to look at Nevada and Arizona but these two states do not make it to the list.

So why look at these states?  These are indicators of economic growth.  If these states can show that they can grow without the housing bubble, then we might begin seeing a recovery.  But instead, the government and Wall Street have decided to revive (or try) the housing bubble.  Giving away an $8,000 tax credit to potential home buyers, the Federal Reserve buying over a trillion in mortgage backed securities to keep interest rates low, and allowing banks to keep toxic assets hidden for as long as they like.  That is effectively the strategy.  The hope is that somehow, people go back to spending all their money on housing and cars again.  I’m not sure if that is going to happen because job growth is now nowhere to be found.  What did happen for their trust in a banking sector that largely led us into this crisis is that more and more money is now concentrated in fewer and fewer hands.  If anything the government is looking more and more like a kleptocracy.  27 million unemployed and underemployed are wondering where that $13 trillion in bailouts and backstops has gone?  Clearly it hasn’t gone to create jobs.

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Take for example a report that NBC San Diego did.  They found a credit card that was offering a 79.9% annual rate.  Not bad enough?  They also charge an annual fee:

Source:  The Consumerist

Even the recent historic equities rally is in the 60 percent range.  Yet these are common tactics.  Some more troubling trends are going after customers that pay their bills on time:

“(USA Today) You floss regularly, yield to oncoming traffic and use your credit cards judiciously, dutifully paying off your balance every month.

You may believe that your exemplary behavior shields you from unexpected credit card fees. Sadly, that is no longer the case.

Starting next year, Bank of America will charge a small number of customers an annual fee, ranging from $29 to $99. The bank has characterized the fee as experimental. But card holders who have never carried a balance or paid late fees could be among those affected.”

To show you how rampant this is, take a look at changes customers are seeing to their credit cards over the last few months even though the Fed and U.S. Treasury have rescued many of these companies:

Much of this is coming in a hurry trying to beat the 2010 new credit card legislation that will make it harder for credit card companies to milk consumers like nationwide loan sharks.  At this point, they can’t squeeze blood out of a turnip or break kneecaps so they are now going after good paying customers since it would seem they are the only folks with money left.  Even if you pay off your balance every month, you can expect some credit card companies to start charging an annual fee just for having the account.  I would imagine that many accounts that have been open with no usage will also be shut down or have their lines decreased.  This has occurred personally to me and I can verify the rate increases as well (nothing like 79.9% however).

So why is this happening right now aside from the legislation?  Credit card companies are bleeding money.  Let us look at Capital One and Discover:

The current net charge off rate for Capital One is 9.24%. An astounding number that puts it into a historical level.  This is up from the 6.1% of last year.  A 30 percent increase in charge offs will hurt your bottom line.  The average American is dealing with the realities of the recession and many have simply stopped paying.  Others have gone through bankruptcy and credit card debt is wiped away during bankruptcy.

Discover is also seeing a similar trend:

I think you get an understanding of why credit card companies are starting to look at “innovative” ways to raise revenue.  So much for asking “what’s in your wallet?”

Yet why are Americans having such a hard time paying their debts?  In a few words, people have less money.  For the first time in 60 years has disposable income fallen on a year over year basis into negative territory:

Now think of all the recession since the 1950s.  Not once did we see a negative year, until now that is.  So with the deep recession, many are unable to keep the debt musical chairs going any longer.  The trend of paying one credit card with another is coming to an end.  How many 0 percent 12 month balance transfer offers have you seen in 2009? I used to get about 5 of these a week during the debt boom.  Now?  Zero.

This isn’t just anecdotal.  The credit card industry has yanked over 10 million credit cards from the market and overall revolving debt is declining:

The trouble here is that revolving debt has fallen while disposable income has also fallen.  Since Americans have relied on credit cards so heavily, this is being felt in profound ways.  The credit card companies are getting a chance to remedy their balance sheets on the back of consumers.  The U.S. Treasury and Federal Reserve have extended what seems to be unlimited life lines to these companies, paid by the taxpayers, yet these companies are doing nothing to help the overall average American.

At a certain point people will wake up and realize that there is a war going on in our country in the financial world.  A battle that threatens the financial security of millions.  In fact, it may be the biggest battle we face.  Yet many Americans seem okay with this or have become apathetic to the new financial serfdom.  Why take to the streets for a few million bonus when we have trillions of dollars being yanked by our own government and Wall Street?  We need to channel our energy to where the real money is at.  Wall Street and the government are all too happy to slap a few hands with mid-level players while the top rung keeps on sucking the American taxpayer dry.

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The Federal Reserve can easily strengthen the U.S. dollar.  All they would need to do is increase interest rates to reign in liquidity.  Yet this would crush the debt consumption in housing and autos.  To show you the insidious way how the value of the currency is being washed away, take a look at the recent Dow rally in terms of Euros, a more stable currency:

In U.S. dollar terms, the Dow is up 56 percent but when measured in Euros the rally only comes out to be 31 percent.  A strong rally no doubt but nothing close to the 56 percent.  We can also measure the Dow in relation to gold that can be used as another vehicle for storing wealth:

When we place the Dow in gold terms, there is no rally.  Just a slow decline.  Take this for example.  In 2000 gold hit a low of roughly $260 per ounce.  The Dow in January stood slightly higher than it does today at 10,900.  So if we take this as a measure:

10,900 (Dow January 2000) / $260 per ounce 2000 = 41.9 ounces needed to buy index value

Today the number is very different even though the Dow is virtually the same:

10,092 (Dow October 2009) / $1,063 per ounce 2009 = 9.4 ounces needed to buy index value

That is why there is a danger in believing the current stock rally is actually as positive as the raw number may indicate.  It is not.  The U.S. dollar since 2000 has fallen by approximately 38 percent.  The Fed and U.S. Treasury have been slowly robbing the buying power of each American dollar for nearly 3 decades.   That is why even though the median income has not moved for nearly a decade, buying power has collapsed.  These are methods of making Americans poorer in more hidden ways that politically work in favor of the banking elite.

Source:  Market Oracle

The median household income for the average American is approximately $50,000.  Just imagine if the U.S. Treasury and Fed didn’t have these mechanism in place.  Do you think Americans would be furious that their median income would now be $31,250 after a decade?  Of course.  Yet most look at their income and see it moving sideways yet they are really earning less because they are being paid in a weaker currency.

Just think of everything that has gone up in value over the past decade:

-Housing

-Autos

-Clothing

-Healthcare

-Food

-Energy

-Education

The list goes on and on.  Yet pay has stayed in place.  Some of these sectors are correcting like housing.  Yet even after the housing crash, in many areas homes are still too expensive given local area incomes.  The Dow has rallied but what has really fueled the rally is the boom in the financial sector from the March lows:

Source:  Sudden Debt

While the S&P 500 is now up a stunning 62 percent from the bottom, the KBW bank share index (black line) is up over 160 percent.  The reason for this is the government has largely subsidized the banking sector on the backs of the American public.  Nearly 27 million are unemployed or underemployed yet we have spent trillions for what?  The above rallies will tell you for what.

The bailouts come at a cost.  A low Fed rate hurts the dollar.  Which in turn hurts the American consumer since we are not designed as an export economy.  This can change but it will take years.  Our economy is designed to consume and we have done too much of this.  Oil is now back up reflecting our weaker dollar:

Oil is now up 128% from the lows reached in March.  Is this because there is a surge in demand?  Not really:

Source:  Calculated Risk

This has more to do with the decline in the U.S. dollar.  This in turn means Americans are going to spend more money on energy with their weaker dollars.  Don’t be fooled that a declining dollar is somehow good for the economy.  It helps in certain areas but isn’t a panacea like some policy makers would like to believe.

Currently we are facing dis-inflation from a decade long glut.  But once things stabilize, we can expect that our U.S. dollars are going to buy a lot less than we once thought.  The above charts point to a slowly declining standard of living if we don’t change our policies and our way of life.  Spending beyond our means does have long-term repercussions.

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