Sunday, May 29, 2011 – 09:30 p.m.
The situation for Americans in general isn’t so hot these days, and it’s likely to worsen.
Energy prices are strangling the discretionary income of most American consumers. The spectre of higher retail gas prices over the summer has not only a direct effect on the pocket book, but also on consumer and investor psyche.
State and local governments across the country are cutting payrolls. While at the same time the federal government is forced to cutback spending due to the massive national debt, which is somewhere in the area of $14.3 trillion. Soon the U.S. Treasury will encounter difficulty making the interest payments in an inflationary backdrop should interest rates rise.
The only silver lining is that treasury securities issued in the early 1980’s bearing double-digit interest rates are now at maturity and being replaced by new bonds at significantly lower rates.
Government at all levels helped drive the last run up in overinflated asset prices. Now that stimulus source is not as readily available as before.
Stock prices have been the only saving grace for most investors, while not recovering to all time highs, the indexes have climbed with government help to prop up prices. The effect has helped pension funds recoup some losses.
However this scenario too shall come to an end.
Why? Because the U.S. Treasury and Federal Reserve can’t print money forever, and it’s printed money that has delayed state and local governments from shrinking their payrolls.
Mortgages Still a Problem
Mortgages, particularly residential, are still a problem on bank balance sheets. Instead of trying to dispose of the assets or workout problem loans with borrowers, banks have basically done nothing. Banks hold millions of defaulted loans and foreclosed properties on their balance sheets, in addition to highly leveraged derivative investments held off balance sheet.
The prime example of a time bomb in action is Citigroup (NYSE: C).
Citigroup recently executed a 10:1 reverse stock split. Meaning for every ten shares an investor held they received one new share at a price approximately ten times higher than the old share.
The only problem is Citi remains a time bomb waiting to go off.
Investors seem to recognize this. The stock was near $46 per share, post split. Now the shares of the money center bank have began to slowly slip.
Friday’s closing price was $40.97 per share.
Expect shares of Citi and other banks with serious mortgage exposure to deteriorate.
Gross Domestic Product
The U.S. economy grew at an anemic 1.8% in the first quarter of 2011.
The term life support is appropriate.
Several economists believe the number will weaken further in the second quarter.
The government numbers on unemployment are highly suspect.
The number of weekly first time claims is floating just north of the 400,000. An unhealthy condition under any circumstance.
More problematic is the actual rate. The government published rate of 9% is a complete fabrication.
The number excludes, those who have lost weekly benefits, stopped looking, and working part-time but seeking full-time employment.
Gallup pegs the real unadjusted “underemployment” rate at 19.3%.
In places as depressed as Southern California’s Inland Empire the underemployment number is likely near an amazing 25%.