Sugar High From Sugar Daddy

Fritz Pfister
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Posted: Jun 07, 2013 12:01 AM

Much has been made about rising consumer confidence, the record high stock market, and the housing recovery. The main stream cheerleaders tout these numbers like the band on the deck of the Titanic playing upbeat music ignoring what is lurking under the surface.

A friendly reminder, the Great Recession ended four years ago the end of this month, but the final GDP growth rate for Q1 was adjusted down to 2.4% extending the longest stretch of sub 3% GDP growth since 1929.

Yet the cheerleaders continue to report positive ‘growth’, not as fast as we would like but growth. After all Obama had to deal with the worst financial collapse since the Depression. And the band played on.

Let’s look under the surface of the Obama recovery shall we?

What could be the reason consumers would gain confidence? Increased disposable income? That can’t be the reason because the BLS reported this week labor costs plunged 4.3%. A record decline on a stunning 3.8% drop in hourly wages, and a 6.9% decline in manufacturing pay.

The rise in confidence must be coming from falling prices then if real income is headed south. Beef prices? Record high and climbing. Gas? National average of $3.62 up only 3 cents from last year but 10 cents the past month. The winner is the Midwest with gas soaring past $4.00 a gallon in Indiana and feckless Illinois.

Perhaps the answer can be found in this Bloomberg poll taken May 31-June 3:

People are more upbeat about a range of financial issues —job security, retirement savings, home values andhousehold income— than they were in February, the last time Bloomberg asked the question.

Followed by this ditty:

Asked about events in the U.S., 60 percent say the country is on the wrong track, while just 32 percent say things are headed in the right direction.

This is where I will give up trying to understand why consumer confidence is up.

How about that record high stock market? After the bad news on manufacturing the market rallied early in the week with analysts saying bad news is good news because that means Bernanke won’t slow easing. Sugar high from Sugar Daddy?

Then something happened and the market dipped below 15,000 with an over 200 point drop on Wednesday. We’ll see if any major players buy into the dip. Probably if they get a note from Bernanke.

How about the housing recovery? Zero Hedge sums it up nicely while researching the S-1 filing from American Homes 4 Rent:

  • Residential housing is the single largest “tangible” US real estate asset, worth roughly $18 trillion (but well below thetotal financial assetsin circulation in the US).
  • Housing inventory as of Maywas 133.2 million units, of which owner occupied is 78.9 million, renter occupied was 41.7 million, but most troubling:12.6 million was Vacant.Some shortage.
  • About the Owner-occupied units, 3.3 million units were 90+ delinquent or in foreclosure, 2.0 million units were 30-90 days delinquent, and 5.8 million were current but with negative equity.
  • It is this mismatch between 11.1 million in negative equity “owner occupied” units and 12.6 million vacant units that all those who peddle the rent-to-own dream is focused on as America becomes increasingly a society of rents.
  • It also means that the millions in soon to be formerly owner-occupied homes (once the anticipated switch to rental ownership takes place) have to stay on bank booksand not enter the marketin order to generate the illusion of scarcity (see: foreclosure stuffing), or else the myth that there is a housing shortage will be blown right out of the water.

Well now, that doesn’t seem to contain the seeds of a rip roaring recovery. The inventory manipulation continues but at a bad time for the mortgage industry. Interest rates are rising.

It appears Bernanke’s drive for low mortgage rates has lasted long enough for everyone with a pulse and a mortgage to have refinanced as major mortgage lenders laid off 25% to 50% of their labor force last week. This on the heels of the worst decline in mortgage applications in May since 2009.

Interestingly interest rates have fallen below 4% for only 17 months since 1972, the preceding 17 Bernanke manipulated months.

Since housing is dependent upon job creation for adding demand, a look below the surface has ADP projecting 135,000 jobs in May. The second worst in eight months. We’ll see what the BLS conjures up on Friday.

This concludes your reality check on what is lurking beneath the surface. Those who can see below the surface may proceed to preparing your lifeboat. Liberals may return to the deck, the band is back from their break.

The opinions expressed here are solely those of Fritz Pfister or identified sources, and not necessarily those of RE/MAX Professionals of Springfield or RE/MAX International.