Is The Worst Over?

The worst is over says Wall Street and the worst is yet to come says Main Street. The politicians are having their best days in six months as more evidence is flooding in that they are doing the right thing. They have authorized the Federal Reserve Board and the U.S. Treasury Department to unleash the hounds of hell against poverty. "Green shoots" as Ben Bernanke fondly says, are popping up like tulips in Holland.
 
Recent polls find that Americans are going to spend their tax refunds on paying bills. There is evidence pointing to that all right. Last month found most of us paying down credit card debt at its fastest rate in modern times. People who enjoyed the good life of recent years are finding that debt is swallowing them up and are "de-leveraging" and saving. 
 
We have two dynamics at work: the government saying that spending is increasing and all is well versus the public who says things are awful and are closing their purses. Clearly we cannot have both so which is it?
 
It appears that both are right but now the question is sustainability. Wells Fargo's surprise announcement last week caught everyone off guard. It seems that they are on track for spectacular earnings. Huh? Spectacular earnings? We thought they were flat broke and needed our tax money to ensure their very survival. They did until they figured out how to game the system. Here is how it seems to be working. They get a lifeline from taxpayers, then Ben and Company floods the system with money which lowers rates to stimulate borrowing and finally, they thank us all by raising fees including credit card rates and borrowing costs! 
 
Rinse and repeat. Other banks are gleefully joining the fray. On the other side of the river, the rest of us are concerned about our very existence which includes our jobs, our 401(k) s and our mountains of debt. There are indeed many who are benefiting right now. Those with great credit and equity in their homes are able to borrow at favorable rates. Others are buying homes at 40% and 50% discounts. These are great signs. On the other hand, this seems to be a short lived glimmer of hope.
 
What needs to happen is for stability to increase via a slowing down of job losses. Americans are still losing jobs in record numbers. Most disturbing is the trend in layoffs in the baby boomer sector. The baby boomers are the one category of unemployed that are being affected severely. This should be the peak earning years for the 45-55 year old category but instead they are most likely going to have to work much, much longer to repair their balance sheets. 
 
Home sales need to pick up. USA Today reported that 1 in 9 homes are currently unoccupied. Furthermore, squatters are finding cheap housing as consumer advocacy groups are helping folks move into these bank owned properties. Because there are so many banks that own homes, they are reluctant to put them on the market for fear of flooding the system with more homes which would drive prices down more. As more folks notice inactivity, they are moving in. Many are actually hooking up power, turning on cable TV and setting up Internet services! 
 
State and municipality pension funds are in bad shape. Ditto for corporate pension funds. During the good times, pension sponsors found other ways of spending money other than funding their obligations. Now, they have no money to fund pensions. Now what? The most likely scenario is future reduction of benefits. The days of guaranteed health insurance will probably end and new methods will need to be devised to pay current and future retirees. One of the most compelling reasons to allow GM to go bankrupt is to get rid of their pension and insurance obligations. By shedding past baggage they have hopes that they can return to profitability. 
 
There may be "green shoots" as Ben Bernanke says but our guess is the harvest is still a long time off. The stock market while having its best run since the Great Depression is most likely going to experience more anxieties as we move into earnings season. The next few months will give us more clues as to when the real recovery will take place. The coming freeze in corporate earning will most likely kill Ben's green shoots but we may see new ones reappear later in the year as our economy repairs itself. It is time to be hopeful but not foolish and wait for the real deal, the "evergreens."