Beware The False Economic Recovery – 1938, The Rest Of The Story: Dow ends best 6 weeks since 1938

You may have seen the following headline and story:

Dow ends best 6 weeks since 1938 on econ hopes

Stocks rose on Friday, with the Dow scoring its biggest six-week gain since July 1938, helped by a reassuring report on the mood of consumers and stabilization in General Electric (GE.N) and Citigroup’s (C.N) quarterly results.

The Dow is up 22.7 percent over the past six weeks, making this the largest six-week gain since July 29, 1938.

As famed commentator Paul Harvey would have said, “and now for the rest of the story”.

The year 1938 was a year during the “Great Depression”. 1938 did not signal the end of the “Great Depression”. The “Great Depression” lasted ” 4 more years” after 1938, not ending until 1942.

How did the “stock market” fare during the Great Depression? In 6 of the 11+ years of the Great Depression the “Stock Market” closed up despite the fact that unemployment continued to rise, home foreclosures hit all time highs and thousands of businesses and farms were lost.

Following the 1938 “bounce” in the DJIA, the “stock market” closed down for 4 straight years. The Market was down in 1938 – 1939, 1939 – 1940, 1940 – 1941 and 1941 – 1942. During that time period the DJIA lost nearly 25% of its value. In fact, the DJIA closed lower in 1942 than it did in 1937.

Economists note that these years of the “Great Depression”, 1939 -1942, followed the implementation of FDR’s “New Deal” and that the “New Deal” may have, in fact, caused this, the second half, of the Great Depression”. (New Deal or Raw Deal?: How FDR’s Economic Legacy Has Damaged America,  by Burton W., Jr. Folsom, )

This writer is hoping an economic recovery is underway, however, that is not what the data suggests. As you can see, the DJIA, does not necessarily reflect the direction of  economic activity – the DJIA can register gains while the “economy” slips futher into a “Great Depression” or, in other words, Government bailout programs can make the politically connected extremely rich while the Country, as a whole, slips below water.

April 2009 unemployment continues to climb at 600,000 + per week. Unemployment, with the addition of the newly unemployed in April 2009,  is now above 9%, nearly one full percentage point above the Obama Administration’s “worse case estimate” for a “maximum unemployment figure” of 8.1% in 2009. Economists are now examining whether unemployment will top 11% before year end, 40% higher than the Administration’s forecast.  Between January of 2004 and January of 2008 unemployment in the US averaged 4.5%. 1/2 the current rate. Twice that number of people are currently unemployed and the fact that the unemployment number will continue to rise is undisputed. There are no (zero) projections that the US unemployment rate will return to a 4.5% rate prior to 2017, a full 8 years from now.  

Despite the moratorium on “Mortgage Foreclosures”, March 2009 foreclosures were 46% above March 2008 figures. Fannie & Freddie’s moratorium on foreclosures ended on March 31st 2009, so this increase occurred prior to the moratorium’s expiration. A huge backlog of foreclosures were placed on “hold” and will now move forward.  In many parts of the Country “housing surpluses” will take 4 to 7 years to be absorbed. Reaching a floor in the housing market is years off. Maybe 5 years off, if we pursue the correct policies and restore confidence in  American mortgage backed securities and the international investment community commits to investing in those “derivatives” once again.

New home starts are way down. New single family home starts for March 2009 are 45% lower than March 2008.

March 2008 was a very bad year in it’s own right. Housing starts will need to increase 500% before reaching the levels seen in 2005.

In March 2009 there was nearly 1 home foreclosure for every new home start.

Auto sales remain down, despite dishonest claims to the contrary. March 2008 to March 2009 auto sales are down an additional 40%. . February 2008 to February 2009 auto sales were also down, almost 50%. . March 2008 auto sales figures were no reason for optimism. Even if sales figures should suddenly leap “up to” 2008 sales levels, one needs to recall that 2008 sales figures were dismal in there own right and were down 20% from 2007 sales levels. GM’s sales volumes in 2007 were 40% less than in 2006. Current auto sales levels will need to triple to catch back up with the “profitable” levels of 2006. After “special items” GM only lost $2 Billion in 2006.

The current cause for “economic optimism”?  Two banks reported “profits” at the end of the first quarter. What do the bank’s financial numbers mean? Where did the profits come from? Who really knows?

Both “banks” received Billions in bailout funds that have not been repaid. Despite promises of “transparency” the Government’s Stress tests formulas are a secret and the “formula” applied changes from bank to bank. The “stress test” results are also being kept secret. Who passed? Who failed? Who knows? What transparency!

The recent “mark to market” accounting changes are a sham. There is no way for the public to know exactly what a banks exposure to toxic mortgages are, nor can the public determine how the bank is evaluting those assets or exposures. Isn’t this is exactly how we got into this mess in the first place, financial institutions overstating the value of their investments in Mortgage backed securities?

The recent accounting changes allow banks to evaluate the same piece of property differently, depending on how the bank chooses to classify the property. If a property or asset is to be put up for sale in the near future, the expected sale price is to be used. If the property is to be held for a longer period of time, the anticipated value at the time of sale can be used. How can the public discern whether a piece of property or asset currently valued at $1,000,000, doesn’t in fact have a “real” current value of $10,000. The bank, when it cannot sell the property for $1 Million, simply changes the “asset classification” to a long term hold rather than calling the property what it is, an overvalued piece of realestate with a $1 Million asking price and a current $10,000 value.

Is TALF responsible for the Bank’s stated profits, profits made at taxpayer expense? Who knows? Are these profits a sign of economic improvement or a sign of the fleecing of America?

Had the Government allowed this sham, the change in accounting practices,  months ago, the Financial Institutions bailout would not have been necessary.

Nothing has changed in terms of the availability of “zero down” mortgages or the “Liar” or “Ninja” loans. The actions of Congress and the Boston Federal Reserve still stand, nothing has been repealed or revoked. Now those without a “down payment” can acquire their “down payment” through the use of a “second mortgage” where the “downpayment” is funded through a “second mortgage” or other “give away programs” intended to create the illusion that a purchaser has a “down payment”. , (An ACORN Scam), .

The “leveraging” in the US banking system remains unchanged. Certain US banks are still permitted to “leverage” up to 40%.  The “dangers” of leveraging, another lesson that went “unlearned” from the “Great Depression”.

The Government TALF Program even encourages the Hedge Funds and Banks to “leverage up” at taxpayer expense.  Do these Bank and Hedge Fund profits signal economic recovery or are they simply derived from looting “taxpayer” provided funds.

Beware the “false recovery”. Many things can be learned from the 1938 “bounce” in the DJIA. One of those things is that the “1938 Bounce” did not signal an economic recovery. That recovery was 4 long years away.

Signs of a pending economic recovery in 2009 are few and far between. Next to nothing has been done to prevent a repeat of the current crisis. The Government, Regulatory Agencies and Financial Institutions are busy cooking with the old recipe.  

Don’t delude yourself, when clear thinking is needed.

The ship may be sinking at a slower rate, but the ship is still sinking. The time to call the orchestra on deck and dance has not arrived. It is time to man the buckets and bail like crazy.

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