Slow Down on All the Economic Optimism

I will go out an a massive limb and disagree with both Ben Bernanke and Warren Buffett and say that all this happy talk about the worst being over and the end being near is a bunch of hooey. To me, the numbers tell the story and they say we are nowhere near the end.

For the last month we have seen the stock market rise by leaps and bounds due to a flurry of positive numbers. They were economic data like housing starts, consumer confidence, consumer spending, etc. I try to simplify things when looking at the economy on a macro scale. I only look at three economic indicators: employment, GDP, and inflation. That's because those three accumulate all the other numbers. Things like housing starts are important for someone like a home builder, but they tell a very small story in a larger picture. GDP is the accumulation of all the other numbers combined.

The most recent GDP, for the first quarter of 2009, decreased by 6.1% That's a startling drop. It also means that the sum total of all the supposed happy numbers was really a contraction of our economy to the tune of 6.1%. As for jobs, we have been losing north of 500,000 jobs each and every month since October. The next unemployment figure comes out this Friday and the consensus is a negative number of 631,000. I don't know anyone that expects this number to change substantially till at least the end of the summer. That means through the month of August at least we'll continue to lose north of 500,000 jobs monthly. We'll be at about 10% unemployment by then. If we are to believe the optimists, for the first time in history, an economy is bottoming out and recovering at the same time it is losing an obscene number of jobs monthly for the indefinite future. (keep in mind during the recover of 2002-2003 the job losses were much milder)

So, are people saying the worst is over as we head for ten percent unemployment? How exactly does the economy recover and grow at the same time we lose 500k in jobs monthly? All those people are NOT going to contribute positively toward the economy.

Then, there's the stress tests. The latest rumor is that between six and ten of the largest banks will fail. Each of these banks will be expected to raise even more capital in the coming six months. That means that after pumping nearly one trillion dollars in capital into the banking system anywhere from a third to a half of the banks are still UNDERCAPITALIZED. Furthermore, this leads to a few obvious questions. First, if a third to a half of these banks FAILED, how healthy can our banking system be? If the banks are expected to raise more capital, how will the loan money? If they aren't lending, doesn't that mean that we are still in a credit freeze? If we are still in a credit freeze, how is the worst over?

Then, there is the issue of commercial mortgages. These have become the eight hundred pound gorilla in the room. No one wants to talk about them, but they are the next banking crisis. Commercial real estate values are busting. Defaults on commercial mortgages are exploding. It's all only natural. First, we had the subprime mortgage bust. That moved into Alt A, and eventually it even ate up Fannie/Freddie. Soon enough, we had a full residential mortgage bust. Would anyone be surprised if soon enough that turned into a commercial mortgage bust? Well, in varying degrees, most of the same lenders that got crushed by the sub prime bust, are holding onto billions in commercial mortgages. What happens when that explodes? It means that all of these same banks will realize they all have trillions more in "toxic assets" no one was counting yet. All of these same banks will again be struggling just to stay afloat. Lending will be frozen again. We'll be back in the crisis mode we were in September of last year.

All of this happy talk is nonsense, in my opinion. There's absolutely nothing that says we are anywhere near over with any of this.