The financial press is bubbling with optimism. The road to recovery seems all but paved. We are bulletproof! Scary isn’t it, how after only a few years our financial community has forgotten the view from the edge of failure. What is even scarier than this bubble of optimism, is their dreams are resting on the exact same game plan that pushed the economy to the brink before.
Several years ago the real estate market collapsed and a large portion of American homeowners are underwater in their mortgages today because of it. When the crisis started most bad mortgages where held by private parties (investors) and insured by private organizations and known as sub prime. Just a few short years later FHA (Federal Housing Administration, insured by the US Government) mortgages are the new low and in some cases no money down solution. Fannie Mae and Freddie Mac (Who where taken over by the US Government in the beginning of the crisis) are buying most of mortgages banks are originating. So what was at one point a Wall Street problem seems to have become a taxpayer problem. Seems like the real estate problem was really just “solved” by the US government cosigning the kids’ debt on Wall Street.
The stock market has all but forgotten the crisis and has passed over the levels before it all began. According to the majority on Wall Street, the worst is over and the sky is the limit. Profits are on the rise. China and the other emerging nations will save us all as they move from export economies to import ones.
The US GDP (Gross Domestic Product) for 2010 was estimated to be about 14.6 trillion dollars; China’s 2010 GDP was estimated to be just over 6 trillion dollars. The dream of China saving the world seems as doomed as an 180lb man trying to save a drowning elephant.
The stock market has managed to recover past the pre crisis levels without much help from Main Street. Outflows on Mutual Funds have far exceeded inflows over the past few years. The stock market went from being populated with long-term investors to short term traders.
Current earnings carry less impact than future ones. When the financial press refers to a company’s price to earnings ratio, commonly they are referring to their future potential earnings. The current P/E’s (Price to earnings ratios) seem a little less spectacular and largely overlooked. If a meteorologist can’t predict the weather with much accuracy over 10 days, how can a company predict their earnings 365 days into the future? It’s like saying since it is sunny today it will be sunny next year on the same day.
Commodities prices have sky rocketed as a result of the government’s sure-fire cure of making the USA an export giant by devaluing the US Dollar. Gas is over $3.00 a gallon for most Americans and the cost at the grocery store is on the rise. Wall Street sees this rise in prices as validation of the ensuing recovery, while the rest of America finds less money in their pockets for the same amount of goods. 70% of the United State’s economy is based on Consumer spending, paying more for the same does not constitute growth in my book. Wait until manufacturers have to restock the shelves using record high basic materials. If the US Consumer can’t afford to go to the doctor and pay a co pay (as seen in a recent health insurance companies earnings helped by less people going to the doctor), I highly doubt these manufacturers will be able to pass on the higher costs. If the goods prices are firm and what the consumer is willing to pay is equally firm, than the only weak point is the manufacturer’s employee’s job.
One thing is for sure; nothing truly has changed for those who pushed the cart to the edge. The economic optimism is not based on fundamental changes to the system but rather the hope that the ship will right its self. Unfortunately most of us who live in the real world know that there is no such thing as a happy ending, if you pour water on a person who is drowning, it probably won’t help.
Sometimes it pays to look at the glass as half empty to ensure you conserve what is left.
