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Wednesday, August 10, 2011

Why The Psychological Recession Never Ended, Part 1

Food lines during the Great Depression.
According to economists, the recession ended in mid to late 2009. These number-crunchers have a fancy way of determining the beginning and end of recessions. They even have a fancy formula to compute it all. Based on their math, we were in the clear. But none of their calculations account for the mindset of people in America. Today, I'm going to tell you why the psychological recession never ended. 

The fancy number guys determine whether there is a recession or not based on GDP (Gross Domestic Product). If GDP is rising, that is called expansion. If it is sinking, they call it contraction; and if it does it for two quarters in a row, then they call it a recession.

Somewhere in 2009, we had two quarters of expansion - not a big feat after the beating everyone took in 2008. Obama proclaimed his economic superiority and pronounced that his billions of dollars of stimulus were working. Good job Baracky.

These pencil pushers with their magic calculators gave hope to Wall Street investors. Stocks rallied. And people mistakenly thought that was a sign that things were headed in the right direction. Wrong!

You have to understand how Wall Street works. Big institutions pay a lot of attention to things like a company's earnings. Earnings are at the center of a teeter-totter with fear on one side and greed on the other. When the stock market crashed in 2008, companies were reporting horrible earnings. To remedy that, they overhauled their operations, which meant cutting expenses. The biggest expense most companies have on their balance sheet is labor. So, jobs were cut or operations were shipped overseas, where they could be run for a fraction of the cost.

A 15% increase in sales looks good, if you're willing to forget that sales dropped 60% the year before. With a modest gain in sales and a big whack to the folks on the line, earnings increased and Wall Street institutions bought up shares. Obama, the savior, was now riding on the shoulders of his Democratic Congress and Senate - but they weren't doing anything, except spending.

What the economists and the president failed to compute was what goes on in our households. We don't give a crap about GDP. We don't care how they compute it. There are three things that Americans care about:
  1. Job security or the security of their business
  2. Value of our 401(k) or retirement/investments
  3. Value of our homes
We don't live on a multi-point GDP calculation. We live on a three-legged stool.

Everyone in Washington gets excited when they knock a tenth off of the unemployment figure. But Beltway math is not the math you and I use to balance our checkbook. Beltway math ignores all of the people who have given up on looking for jobs - they don't get counted. Estimates are that real unemployment is in the 12% range or higher. And every day I hear about another company moving its operations to China or India or cutting staff. There are pockets of growth, but they are pockets.

In 2008, the average retirement account was slashed by 40% or more. Most 401(k) plans revolve around an assortment of mutual funds. About 90% of mutual funds lose money, even in the best of times. So, a lot of people are still nervous about their retirement cache or if they can afford to put their kids through college or if they can replace that old car in the drive.

Then, there is the housing market. Your pain regarding your home value is directly proportional to when you purchased that home. If you bought around 2000 or earlier, you still may have some equity in your home. But its value is far from the highs it hit in 2007. If you purchased after 2000 and closer to 2007, you've either lost your home, gone severely upside down or been forced to short sell the property - taking a huge loss.

The bottom of the housing market is far from sight. Banks have been so overwhelmed with foreclosures that they cannot get to them all in a timely fashion. Plus, many banks have slowed down on foreclosures in the first six months of this year.

All those homes that were foreclosed on in your neighborhood are only going to bring your home value down. The inventory of homes for sale is at or near all-time highs. Too much supply - prices will fall.

When the NASDAQ dot-com bubble burst in 2000, the tech sector had been driven up to 4,800 points. It took three years to hit a bottom of 788 and the NASDAQ has never gotten above 2,500 in the eight years since.

The great stock market crash of 1929 plunged the Dow into a roller coaster that did not recover to the same level as the peak of the crash until 1955 during the Eisenhower administration. These things run in long cycles.

If more people lose their jobs, we'll have more foreclosures, which will continue to drive home prices down. Right now, the stock market is doing what Wall Streeters call a "correction" - which means you're losing your ass.

Yesterday, the stock market rallied hundreds of points going into the close. The bozo analysts said it was because the Fed was not going to raise interest rates. That might have had something to do with it, but it was what is know on Wall Street as a "short squeeze."

What happens in a short squeeze is there are tons of investors betting the market will go down - they are shorting stock, which means they borrowed stock and agreed to buy it back later to cover their obligation.

Other investors look at dips as buying opportunities and a little spark of news can ignite a flame-filled panic. If prices are shooting up, the people shorting the market are losing their asses - so they start buying stock like crazy to mitigate their losses - and you get a rally. It's not a turnaround. It's a bunch of scared shitless investors trying not to lose it all in an hour.

Right now, the market is experiencing "volatility" - a fancy way to say your stocks are tanking. Don't pay any attention to Wall Street right now. It's going to go through an emotional period and you may be better off in cash. 

Things have only gotten worse because we have a president that cannot lead, even when he gets pushed to the front of the line. He let our country go to within hours of default. Standard & Poors dropped America's credit rating from AAA to AA+ - which means no more road trips and we all have to stop drinking.

GDP. GDP. We don't care about GDP. To most of us, GDP doesn't stand for Gross Domestic Product, it stands for God Damned Politicians.

To me, there is a simple solution that attacks the job situation. More Americans have to become entrepreneurs. All those manufacturing jobs that went away - well - they ain't coming back. We are the land of opportunity. We are the ones that went to the moon. Our technology has revolutionized the way people live all over the world. And it all came from an American with an idea, a dream, a vision and the passion to follow it through.

Our preparatory schools and colleges teach us to be good employees. Is there anywhere in this country where entrepreneurship is being taught? The people that founded this country didn't say, "We'll be back for that turkey dinner right after we go out and apply for jobs." No, they were risk-takers, they learned skills that they could turn into an occupation. We need to get back to our roots and teach people how entrepreneurship works. For many, that will be their only path out.

It will get worse before it gets better. And that is why the psychological recession never ended.

In the second part of this recession series, I'll discuss why the president cannot fix the economy. Bookmark this site. It will give you a much better understanding of how useless our lawmakers are.

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