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It’s hard to find anyone who’s still bearish on the economy or the market these days. Listen to the average pundit on CNBC and this is what you’ll hear:
The credit crisis? It’s over! Quit worrying.
The real estate mess? Fixed! No problem.
The economy? Rebounding. The worst is behind us.
The markets? They’re headed to infinity and beyond! Better get on board.
I’ve talked about the credit crisis a few times in previous Money and Markets columns. And no less an authority than the International Monetary Fund (IMF) believes we’ve only acknowledged $1.29 trillion of the $4 trillion in total global credit losses to date. That means we’re not even a THIRD of the way through the process.
In the real estate arena, we’re seeing tentative signs of life in some hard-hit markets. But it’s the distressed, “fire sale” stuff that’s moving. Inventory levels remain high, and foreclosures show no sign of abating. In fact, foreclosure filings hit a new record high of 341,000 in March — a gain driven by rising unemployment, falling home prices, and the expiration of several, temporary state and industry moratoriums.
And that’s just on the RESIDENTIAL front!
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| Commercial real estate is suffering, too. In fact, General Growth Properties, the second-largest mall operator in the U.S., just filed the biggest real estate bankruptcy in U.S. history. |
The COMMERCIAL real estate business is in full-scale meltdown mode. Prices are plunging, vacancies are soaring, and rents are dropping. Office tenants recently vacated a whopping 24.9 million square feet of space, the most since the 9/11 attacks. And General Growth Properties, the second-biggest mall operator in the U.S., just filed for Chapter 11 bankruptcy protection. The company is buried under $27 billion in debt, and its bankruptcy is the largest EVER seen in the commercial real estate industry.
It’s (still) the Economy, Stupid!
But it’s the economy that could be the weakest link here. Several companies have come out and said that business isn’t getting any worse. Some of the earnings reports I’ve read talk about how conditions are now simply horrendous, rather than Armageddon-like.
But does that mean things are getting better? Is the economy really ramping up? Is the worst really behind us? I find that hard to believe. Just consider what we learned this week …
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- The consumer is still on the ropes! Retail sales plunged 1.1 percent in March. That was a huge swing from the 0.3 percent gain in February, and much worse than forecast.
No matter how you slice and dice the numbers (exclude autos, exclude gas, etc.), you still come to the same conclusion: The consumer is on the ropes and not in the mood to blow his dwindling paycheck at the mall. That’s unlikely to change anytime soon, not with the level of continuing jobless claims now running at more than 6 MILLION — the highest in U.S. history.
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| The amount of factory space being used fell to 69.3 percent — its lowest level … EVER! |
- Factories are sitting idle! Industrial production dropped 1.5 percent in March. That was far worse than the 0.9 percent dip that was expected and the 14th decline in the past 15 months. Capacity utilization — the amount of available space that’s actually being used — fell to 69.3 percent. That’s the lowest level in the 42 years the government has been keeping track!
- Deflation is far from dead! The Federal Reserve has been pumping money into the economy like mad to offset deflation. But so far, it doesn’t seem to be working out that well. The Producer Price Index (PPI) dropped 1.2 percent last month, much worse than the forecast for a flat reading.
On a year-over-year basis, wholesale prices are now falling at a 3.5 percent rate. That’s the deepest rate of deflation recorded in this country since January 1950! In addition, consumer-level deflation came in at 0.4 percent, the most since 1955.
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Garden Variety Recession …
Or Something Else?
Many Wall Street investors are operating under the assumption that this is a garden variety recession. They’re saying that the modicum of “less worse” news we’ve seen is a harbinger of “recovery.” They expect consumer spending to resume its normal pace, factories to ramp production back up, and everything to be hunky dory by year end.
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| This recent rally will be very sharp, relatively short-lived, and ultimately, doomed to fail. |
But if this is a much deeper economic decline … one driven by the biggest bout of debt destruction and deleveraging this country has seen since the Great Depression … that’s a different story. In that case, the Fed’s reflation efforts will fail. At best, the economy will muddle along. At worst, it will slip even further down the rabbit hole. And stocks will ultimately head lower.
I don’t have a perfect crystal ball. But I believe the risk of a Japan-style economic stagnation is much higher than the traditional Wall Street pundit thinks it is. And I believe this recent rally smells more like the bear market variety — very sharp, relatively short-lived, and ultimately, doomed to fail. So I most certainly wouldn’t be chasing it.
Until next time,
Mike
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