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A Different Light

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Published : March 13th, 2012
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Category : Crisis Watch





In "7 Reasons Why The Jobs Recovery Is Real This Time," the Associated Press details what I would consider to be the positive spin on a variety of economic and political developments [highlighted in red italic for clarity]. In the interest of fairness and balance, I thought it only right to annotate each of their bullet points with statistics, reports, and arguments that show things in a different light:


During and right after the Great Recession, companies shrank their work forces because demand plunged and fewer workers were needed.

Once demand started growing again, companies were reluctant to hire immediately. They managed to produce more with the employees they had. But now many companies are finding they can't continue to do more with less. As demand grows, they're finding they have to hire.

As I noted in "Not So Encouraging,"

history suggests that's not quite correct. As the following chart shows, a relatively sharp deceleration in the rate of productivity growth -- like we've seen recently -- has, except on two occasions over the past five decades, preceded or been associated with a slowdown in the pace of hiring.


Since the recession, households have cut their debts and rebuilt savings. One key measure of household debt burdens — debt payments as a percentage of after-tax income — is at its lowest point since 1994, according to the Federal Reserve.

"Consumer finances are fundamentally healthier than they were," says Stuart Hoffman, chief economist at PNC Financial Services Group.

As the labor market has healed, Americans have worried less about losing their jobs. As a result, they're less likely to curtail spending — even in the face of shocks such as a 29-cent jump in gasoline prices in the past month to an average $3.78 a gallon.

But are they really better off than they were? As the following chart shows, per capita consumer debt outstanding -- that is, the amount per person -- is only 3.4 percent below its 2008 peak, and nearly 50 percent above where it was at the start of the last decade.


The debt-limit showdown waged last summer between the Obama administration and congressional Republicans rattled confidence in America's leadership. It looked as if the United States might default on its debts for the first time in history because leaders couldn't reach a deal.

Since then, thanks in part to election-year pressures, tensions have eased. Republicans dropped threats to let the payroll tax expire. And in an unusual show of cooperation, House lawmakers from both parties backed a bill last week to make it easier for small businesses to obtain financing they need to hire and expand.

All I can say is: Just wait until the summer rolls around, the Republicans have chosen their candidate, and each side begins doing its best to inflict maximum political damage on the other side. At that point, the economic uncertainty and concerns about the future that have already impacted corporate decision-making will have an even more corrosive effect on overall activity. Anybody who thinks otherwise is kidding themselves.


The collapse of real estate lies at the heart of America's economic problems. House prices have plunged 30 percent since 2006. The drop has wiped out $7 trillion in homeowners' equity. Millions of construction workers have lost jobs.

Now, there are tentative signs of recovery. Apartment construction is growing. Construction jobs are slowly returning. Home builders are seeing more foot traffic and gaining confidence that sales will pick up in the spring buying season.

No one expects another boom. But real estate is no longer subtracting from U.S. employment. And there's hope among economists that higher sales could stop prices from falling further by spring.

Once home prices stabilize, more people will likely decide it's time to buy. And consumers who worry less about a loss of home equity — the main source of wealth for most people — are more likely to keep spending.

Some experts take issue with the notion that a bottom is at hand, as Zero Hedge reports in "No Housing Recovery - Case Shiller Shows 8th Consecutive Month Of House Price Declines":

Little that can be added here. The December Case Shiller came, saw, and shut up all those who keep calling for a home price recovery. The Index printed at 136.71 on expectations of 137.11, with the prior revised to 138.24. The top 20 City composite was down -0.5% on expectations of a 0.35% drop. 18 out of 20 MSAs saw monthly declines in December over November, with just the worst of the worst - Miami and Phoenix - posting a dead cat bounce, rising 0.2% and 0.8% respectively. And granted the data is delayed, but the fact that we have now had 8 consecutive months of home price declines even with mortgage rates persistently at record lows, and the double dip in housing more than obvious, can we finally shut up about a housing bottom? Because as Case Shiller's David Blitzer says: "If anything it looks like we might have reentered a period of decline as we begin 2012.” QED

From the report:

"In terms of prices, the housing market ended 2011 on a very disappointing note,” says David M. Blitzer, Chairman of the Index Committee at S&P Indices. “With this month’s report we saw all three composite hit new record lows. While we thought we saw some signs of stabilization in the middle of 2011, it appears that neither the economy nor consumer confidence was strong enough to move the market in a positive direction as the year ended.

"After a prior three years of accelerated decline, the past two years has been a story of a housing market that is bottoming out but has not yet stabilized. Up until today’s report we had believed the crisis lows for the composites were behind us, with the 10-City Composite originally hitting a low in April 2009 and the 20-City Composite in March 2011. Now it looks like neither was the case, as both hit new record lows in December 2011. The National Composite fell by 3.8% in the fourth quarter alone, and is down 33.8% from its 2nd quarter 2006 peak. It also recorded a new record low.

"In general, most of the regions also posted weak data in December. Eighteen of the cities saw average home prices fall in December over November. Seventeen of the cities have seen monthly declines for at least three consecutive months. In addition to both monthly composites, 10 of the cities saw home prices fall by more than 1.0% during the month of December. The pick-up in the economy has simply not been strong enough to keep home prices stabilized. If anything it looks like we might have reentered a period of decline as we begin 2012.”


The Great Recession and the housing collapse dried up tax revenue for state and local governments. Many were forced to lay off teachers and other public workers. Since December 2008, state and local governments have slashed 613,000 jobs, offsetting some of the hiring by private companies.

But the cuts appear to be easing. State governments have added 10,000 jobs so far this year. Local governments last month added 2,000 — a modest total but only the third increase in two years.

"There's only so many teachers you can cut, so many police officers, so many firemen," says Mark Vitner, senior economist at Wells Fargo Economics.

Who says things can't get any worse? In "Meredith Whitney Was Right" Fortune's Term Sheet blog suggests problems in that area of the economy may actually be approaching a crisis point.

FORTUNE -- To readers of the business press, the story is a familiar one: fifteen months ago, superstar analyst Meredith Whitney rocked the world of municipal finance with a December 2010 prediction on 60 Minutes that a wave of municipal debt defaults was headed our way. Her forecast was quite specific: "You could see fifty to a hundred sizable defaults," she told her interviewer, correspondent Steve Kroft. "This will amount to hundreds of billions of dollars' worth of defaults."

The bottom fell out of the muni bond market as a result. Investors pulled some $14 billion from muni bond funds between December 22 and February 2, 2011, and returns in the fourth quarter of 2010 were the lowest in 16 years. Long-time players in the space, including analysts, fund managers, and muni brokers, reacted with indignation that an arriviste such as Whitney—the woman who made her name calling out Citigroup (C) as an emperor with no clothes at the dawn of the mortgage crisis—dared to try to expand her analytical purview into their cozy little corner of the capital markets.

She was wrong, they said. She didn't know squat about how their market worked. The kind of defaults she called for were never going to happen. And they were right, in the most literal sense. Since then, there have only been $2.6 billion in defaults from the $3.7 trillion market. And the muni bond swoon didn't even last very long: in 2011, Barclay's muni bond index returned 10.7%, more than five times the 2.1% return of the S&P500.

Nothing satisfies like a comedown of a prominent prognosticator, and Whitney has taken her lumps in both the business press and the more unbridled blogosphere ever since. She deserves at least some of it, but that's only for being overly specific. The more general point that she was trying to make—that municipal finances in this country were a mess that was only going to get messier—was dead on. Laugh at her all you want, but then try this: go find one person who says their local taxes are falling or their municipal services have improved in the past year or two. I wish you luck in your endeavor.

"States have pushed more and more expenses down to the local level," Whitney tells Fortune. "And municipalities don't have the money to make up the difference. That is where you see the real strain, especially after the American Reinvestment Recovery Act expired in June 2011."


Consider the email I received on March 7 from former New York State Assemblyman Richard Brodsky about Yonkers Mayor Mike Spano's recently formed Commission of Inquiry into what he refers to as that city's "Great Unraveling." (Brodksy is serving on the commission.)

"[Yonkers has] a budget of about $1 billion and a budget gap in the upcoming year that looks like it can't be bridged. There are reasons aplenty. Like may urban centers the Yonkers manufacturing base disappeared, the middle-class moved out and the people simply can't afford the property and sales tax burden that ensured. Anti-tax fervor hit and elected officials refused to raise recurring revenues. Gimmicks, one-shots, borrowing for operating expenses, assets sales, and assorted maneuvers 'kicked the can down the road' for a couple of years…The city has now run out of gimmicks."

And then he sounds very Whitney-like: "It's as though we stand on the shore and watch a tsunami gather and shrug and hope we'll get through it…That needs to change, and if the list of endangered cities gets larger this will force itself onto the national stage. [For now] the great national battle about the size of government and the level of taxation will be played out in the streets of small cities across America, with school kids, garbage pick-up, fire-protection, and safe streets competing with each other for inadequate resources. It's an ugly way to solve a problem."

And then there are reports like this:

"Deficits Push N.Y. Cities and Counties to Desperation" (New York Times)

ALBANY — It was not a good week for New York’s cities and counties.

On Monday, Rockland County sent a delegation to Albany to ask for the authority to close its widening budget deficit by issuing bonds backed by a sales tax increase.

On Tuesday, Suffolk County, one of the largest counties outside New York City, projected a $530 million deficit over a three-year period and declared a financial emergency. Its Long Island neighbor, Nassau County, is already so troubled that a state oversight board seized control of its finances last year.

And the city of Yonkers said its finances were in such dire straits that it had drafted Richard Ravitch, the former lieutenant governor, to help chart a way out.

Even as there are glimmers of a national economic recovery, cities and counties increasingly find themselves in the middle of a financial crisis. The problems are spreading as municipalities face a toxic mix of stresses that has been brewing for years, including soaring pension, Medicaid and retiree health care costs. And many have exhausted creative accounting maneuvers and one-time spending cuts or revenue-raisers to bail themselves out.


Investors panicked last year over the prospect that Greece and some other European countries would default on their debts, stick banks with huge losses and trigger a global credit crunch. Such fears sent stocks tumbling and helped diminish U.S. consumer confidence in the second half of 2012.

But confidence is rebounding. Greece has received a $172 billion bailout, pushing back the threat of a destructive default. And the European Central Bank has made more than $1.3 trillion in low-rate three-year loans to banks since December, making clear it won't let the European banking system fail.

Anybody who's been paying attention would know that the problem goes beyond Greece. Other countries in the region are similarly exposed, as Forbes notes in "After Greek Default, Spain And Portugal Pose Major Risk":

With the Greek problem off the table for the very near-term, markets will turn their eyes mainly to Portugal and Spain as the European sovereign debt crisis continues. Portuguese sovereign bonds (PGBs) are still trading at distressed levels, with the spread over German bunds at more than 1,200 basis points.


Europe’s sovereign debt crisis is far from over. While Greece’s managed default marks a break in the road, and markets appear calm in its aftermath, the remaining PIIGS are still under pressure. Schauble noted a third bailout for Greece can’t be ruled off, while Barclays suggests PSI remains a possibility in Portugal. For now, though, the major risk of a disorderly default in Greece has passed. This could be the calm before the storm, though.

What's more, it's not just sovereign states in the region that are at risk. According to the New York Times, the banking system also remains on shaky ground.

"Report Shows Depth of the Distress in Europe"

FRANKFURT — While the European Central Bank’s emergency loan program late last year helped avoid a banking crisis, there is doubt over whether the action will promote economic growth by encouraging lending to businesses and consumers, according to a new report by the Bank for International Settlements.

European banks remain highly leveraged and will not be able to substantially step up lending until they have further reduced risk, said Stephen Cecchetti, head of the monetary and economic department at the Bank for International Settlements, which acts as a clearinghouse for the world’s central banks and released its quarterly report late Sunday. Emergency loans provided by the European Central Bank will help stabilize banks, but it will take a while for the money to reach bank customers.

“Do not expect banks to respond by increasing their lending,” Mr. Cecchetti said during a conference call with reporters on Friday.


After the September 2008 collapse of Lehman Brothers shook the financial system, U.S. banks cut loans to businesses in 2009 and 2010. The credit crunch fed the economy's misery by starving many companies of financing needed to grow and hire.

But banks are healthier now. So are the prospects for their business customers. Bank lending to businesses rose nearly 14 percent last year to $1.35 trillion, according to the Federal Deposit Insurance Corp. Loans to small businesses grew at the end of last year for the first time since the FDIC started tracking them nearly two years ago.

William Dunkelberg, chief economist of the National Federal of Independent Business, says the outlook for hiring by small businesses offers "a better picture than we have seen for years."

Perhaps that's true, but it appears to be at odds with reports like these:

"Entrepreneurs Scramble as Banks Call in Loans" (News & Observer)

Bud Matthews has been battling for months to avoid foreclosure on his small company's offices in Chatham County, a scenario that he says would put him out of business. He faces this predicament even though he's been diligently making the monthly payments on his loan.

Matthews rails that his lender, SunTrust Banks, hasn't been willing to renew his five-year commercial real estate loan, which ran out in June. In the absence of a new loan, he owes SunTrust a balloon payment of more than $200,000 - money he doesn't have.

"You just don't shoot the people that have been good to you," Matthews said, referring to his years of doing business with the Atlanta-based bank. "It just isn't right to take someone's business who has made all the payments and has played by all the rules."

"Why Banks Won't Lend to This Guy's Profitable Business" (Bloomberg)

Turns out customizing video game controllers for gaming addicts who want to shoot faster can be a decent business. Tim Erven says his five-year-old venture, Custom Gaming in Whippany, New Jersey, has been profitable since he started it, with revenue around $300,000 in 2011, and some 250 orders a week now, mostly through its Amazon storefront.

To keep up with demand, the 22-year-old has been trying to get banks to lend him as little as $10,000 to improve his website and rent a warehouse near his home. The six banks he’s approached have rejected his applications because of his age and because he hadn’t gotten a business loan before, even though his tax returns show profits and his parents were willing to put up their home as collateral. “From what the banks told me, asking for 10 percent of my annual revenue was reasonable, and what tends to be conventional, but even by decreasing the amount I was seeking I was still unable to obtain approval,” says Erven, who juggles balances on six credit cards to manage cash flow.

Erven’s situation isn’t unusual for small business owners navigating post-crisis banking. A recent National Federation of Independent Business study shows that even while demand for credit is on an upward trajectory, the number of small employers able to land a bank loan has not moved in parallel. Bank credit for small firms (defined as businesses with annual sales of less than $50 million) has been ticking up, slightly, since the third quarter of last year, according to the Federal Reserve’s quarterly surveys of senior loan officers and other government data. “But it should be much stronger at this point in the economic recovery,” says Paul Merski, chief economist at the Independent Community Bankers of America in Washington.

One reason, not surprisingly, is that many U.S.-based lenders aren't on a particularly solid footing, as Bloomberg reveals in "Shaky Banks Still Haunt the Bailout":

Right now, taxpayers are in the black on the program that bailed out banks. But weaker banks that haven’t repaid their loans may still leave us in the red. That’s the problem the Government Accountability Office points to in a new report looking at the government’s single largest bailout effort, the Capital Purchase Program. Treasury started CPP in October 2008 to provide liquidity and stability for banks. Ultimately Treasury propped up more than 700 banks with almost $205 billion. The banks make dividend and interest payments to Treasury; then, to exit the program, they repurchase warrants and preferred shares and repay loans. The GAO says those revenue sources have brought in $211.5 billion for taxpayers—a $6.6 billion profit above the initial infusion into the institutions.

But the picture’s not all rosy. First, the GAO says that almost half of the banks that have exited CPP did so by refinancing their debt into other Treasury-run programs, in particular the Small Business Lending Facility and the Community Development Capital Initiative. Second, the GAO highlights 366 banks that haven’t repaid CPP and still owe a combined $16.7 billion. Those banks, the GAO says, are less healthy than the banks that have already repaid CPP and other similar-size banks which didn’t participate in the program at all. In December 2011, 130 of the remaining banks were on the FDIC’s “problem” bank list, meaning their viability is threatened by financial, operational, or managerial problems. And 158 banks missed their quarterly interest and dividend payments to the Treasury in November 2011.

Michael J. Panzner 



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Michael J. Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes, published by Kaplan Publishing.
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