The economy is not dead yet! The Commerce Department
reported that the U.S. glowed under the warm light created
by 3.3 percent real economic growth in the second quarter.
This new reading almost doubles the original tally of 1.9
percent- which provided barely enough wattage needed
to read the fine print on mortgage, credit card and auto
loan statements.

According to Marketwatch.com, the jolt to the economy’s vital
signs stemmed from robust exports and hefty inventory
accumulation. (Uncle Sam’s stimulus package- complements of
China and various oil exporting autocracies- helped as well.)

The American economy, once the object of envy and grudging
admiration, has been struggling since the fourth quarter of 2007.
Real economic growth over the past year reads an anemic,
European-style 2.2 percent. This marks a drastic slowdown from
the credit-fueled growth in the second and third quarters of last
year (the website Data360 has a nice graph of recent
GDP activity).

Marketwatch also surveyed practitioners of the dismal science
(a.k.a. economists). It seems that they underestimated the
strength of the U.S. economy in the second quarter, but they
are still very pessimistic about the second half of this year.
They expect growth to skid toward 2 percent for the current
quarter and to practically vanish (0.3 percent is the latest
estimate) as the year comes to a close.

I find that I agree with this dour assessment. The easy
money that created the fire to keep American growth sizzling
is now a pile of smoldering embers. The banks are not through
confessing their misdeeds, consumers are beyond tapped out,
and the housing market is limping toward the valley of shame
(where it will rent a modest dwelling). The recent rise in the
dollar will hit exports in the current quarter and, last but
certainly not least, Uncle Sammy will not be borrowing
money to send his spoiled nieces and nephews to the mall
anytime soon.

©Greg Strid 2008

The market giveth on Friday and taketh away on Monday.
It seems that panic was in vogue today as more bad news
surfaced concerning the lousy state of the nation’s financial
institutions.

The Dow Jones forfeited just over 240 points, and the
broader Standard & Poor’s 500 index sank a hair more than
25 points. The Nasdaq felt the pain as well, shedding almost
50 points. In percentage terms, each index lost approximately
2 percent to start the week on a less than glorious note.

Before the open, the Financial Times ran a story concerning
a South Korean bank regulator’s hesitation toward the Korea
Development Bank’s idea of purchasing Lehman Brothers,
the highly distressed U.S. brokerage company. The regulator
was critical of using state money to buy such a heavily
burdened institution. (He recommended the use of private
funds instead.) This helped send the shares of Lehman Brothers
down by 4 percent.

Then, an hour after gambling began, Marketwatch reported that
Credit Suisse Group analysts took a swipe at American International
Group when they raised the possibility that the struggling
insurance giant could take a cold third quarter earnings bath due to
large write-downs of their deteriorating derivatives portfolio.
AIG shares swooned by 5.5 percent as a result.

Funny how manic this market is these days. Just Friday
investors were rushing out of the gates, sopping up the
soothing remarks of Fed chairman Bernanke, and bidding up
the shares of financial stocks as if happy days were really, truly
here again. With Monday’s unpleasant news, the very same
investors are blue once more.

It seems that until all of the red ink is reported, the share
prices of America’s financial companies will be riding the
headlines up and down. I, for one, counsel patience- and
if you register a nice gain punting on these stocks, cash it
in for a good night’s sleep.

©Greg Strid 2008

“What’s in your wallet?”, the fierce looking Viking
asks at the end of the Capital One commercial. Now,
Wall Street investors are asking the same question
of the creator of this amusing advertising spot.

As the headlines scream about the collapse of the
subprime mortgage market and the relentless
meltdown of real estate prices, far too little attention
is being paid to the other shoe that is about to hit
the floor- which sports the consumer debt fashion
label in bold type on its side.

Credit card delinquencies (the percentage of accounts
that are unpaid after the due date) are increasing for
serial issuers such as Capital One. But, theses outfits
are actually stepping up their lending activity. They
are following in the footsteps of their inbred cousins
in the mortgage lending arena, which means that they
are sowing the seeds of their own demise.

Just like mortgage issuers, Capital One and other large
publicly traded peddlers of credit card debt have
depended on the securitization of loans (packaging them
as asset-backed securities that are sold to investors) in
order to keep them off their own balance sheets, allowing
for the continuing issuance of consumer credit.

This charade is what allowed mountains of debt to be
created, from housing to credit cards to auto loans.
The problem is that given rising credit card delinquency
rates, investors are becoming much less enthusiastic
about purchasing securities that are backed by such
questionable assets. This will eventually force credit
card issuers such as Capital One to curb their lending
to consumers.

This will rain heavily on their earnings parade, reducing
the revenue streams derived from charging criminally
high interest rates and siphoning sleazy fees from their
docile customer base.

Rising delinquencies also means that credit card issuers
have to increase loan-loss reserves to cover the looming
stain of red ink from customers who are no longer paying
their bills. This has already reduced profits for Capital
One in the second quarter of this year.

The combination of a growing pot of delinquent
consumers and an increasingly hostile asset-backed
market will continue to squeeze Capital One and
other big issuers of credit card debt. And, as their
profits dive, so to will their lending activity, which
will dampen overall consumer spending.

The picture perfect conditions that brought eager
borrowers and gullible investors together is unraveling
into a nightmare that will feature the Capital One Viking
turning on its creator.
© Greg Strid 2008

Less than swell news came from the bowels of
government bureaucracy this morning. The
Commerce Department reported that the US
economy grew at an annual rate of 1.9 percent
in the second quarter, which was less than
predicted by economists, and it actually
contracted by 0.2 percent in the final three
months of 2007.

It appears that the sources of growth in America’s
sputtering economy are fueled by this country’s
lack of political will and our flagging currency.
Stimulus checks totaling $100 billion were doled
out in April and May, making mall cash registers
ring in June, and the terminally ill dollar helped
boost exports during the quarter.

Consumption (of goods, not thoughts or ideas) is
what drives this nation’s economy, accounting for
close to 70 percent of gross domestic product. The
government’s largess provided temporary life
support to this vital economic cog, but new
handouts are not expected for quite some time.
This means that the next quarter will undoubtedly
disappoint Wall Street as it pummels Main Street.

Exports are swell, but they cannot be expected to
keep America afloat on their own. (Just ask the
Japanese, their economy never races ahead because
they rely too much on exports while domestic
demand limps along.) Tourists from around the
globe come in droves to scavenge cheap consumables
in America’s glittering retail districts- which, by the
way, usually feature goods made elsewhere. And the
few companies left that actually make things are
successful selling them overseas. But those Americans
not peddling to tourists or overseas markets are left
to swelter in the sun.

This year has seen job losses each and every month,
and tomorrow’s numbers from the Labor Department
will most likely show more of the same. The American
economy cannot survive on government handouts and
exports alone. The bursting of the housing and credit
bubbles is taking a serious toll on jobs and overall
economic activity. Instead of handouts, the government
should fund programs that rebuild our crumbling
infrastructure and help establish energy independence.

I am NOT a socialist- nor do I wish to play one on TV-
but if our worthless political class is determined to
spend their way out of this mess, why not focus on
productivity enhancing investments instead of merely
funding pointless trips to the mall?

© Greg Strid 2008

Banks shares are back in style again. Even after
staggering losses were announced by the likes of
Wachovia, which registered a $8.9 billion loss in the
second quarter, and Washington Mutual, which
posted a $3.3 billion stain of red ink in the same
period, their shares traded up by 27 percent and
6 percent, respectively.

The share prices of other banking industry invalids
also rose smartly on crappy results- Fifth Third Bank,
KeyCorp and SunTrust all witnessed miraculous
increases in their market values since late last week
after reporting major losses during the past
quarter.

What do all of these banks have in common? The
answer is that they are all suffering the dire
consequences of souring real estate loans.
Washington Mutual admitted that a record number
of customers were falling behind on their mortgage
payments. And Wachovia is experiencing a scary
rise in defaults on its big basket of pay-option
mortgages- which are among the most reckless
loan products created during the giddy years of
the now late real estate bubble.

The real problem for banks is that the bad loan
contagion is spreading well beyond dubious
subprime mortgages. As the economy slows (due
in large part to the downward tug on home prices
and the subsequent drag on spending), consumers
and businesses alike are struggling to service more
conventional types of loans. Once happy
consumers are rapidly falling behind on auto and
credit card loans, and big banks are beginning to
write off larger numbers of small business loans.

After the stomach-turning sell-off in financial shares
that started early this summer, the sector was due
for a bounce. But, many investors are waving the
“all-clear” signs too soon by bidding up bank share
prices just because the earnings news was not biblically
bad, and they are clinging to the belief that the worst
news has been reported.

As the bursting of the housing bubble and the resulting
credit crunch ripples through the economy, more
consumers and businesses will be caught in the undertow.
This means that more conventional loans will continue
their descent into the non-performing category. As for
banks, business will get worse in the months ahead.
If you are an investor interested in plucking some cheap
banking shares, please tread carefully.

©Greg Strid 2008

Poof! That was the sound of approximately 62,000
jobs vanishing from the U.S. economy last month.
June marks the sixth straight month of payroll declines.
As for the month of May’s half percentage point spike in
the unemployment rate to 5.5 percent- it stayed the
same for June as well. It appears that the huge
percentage jump in unemployment was due to a lousy
economy and was not just a statistical fluke.

May and April’s job destruction number’s were revised
as well- it turns out that companies shed 52,000 more
jobs than the government originally estimated. The total
number of jobs lost for the first half of 2008 stands at
438,000.

The construction, manufacturing and temporary-help
sectors took the heaviest losses. Payrolls in the construction
trade declined by 33,000, factory employment fell by
43,000 and temporary employment agencies shed 30,000
jobs. The retail and financial sectors reduced staff as well.

Those with jobs brought in less money in June than they
did a year ago. Hourly earnings rose a paltry 6 cents, or
0.3 percent- the slowest pace of growth since September
of 2005. Over the past year, wages have increased 3.4
percent while consumer prices have risen 4.2 percent.

The economy has yet to experience a quarter of negative
growth. It seems that economic growth is being supported
by exports and government stimulus checks. That is really
quite sad. The American economy will not survive on exports,
and the boost provided by the stimulus checks has already
come and gone.

This pathetic report should lay waste to the idea that the
worst is behind us, and that brighter days are ahead. The
bursting of the housing and credit bubbles is now sending
shock waves through the real economy. Over the past several
years, America was living the good life on borrowed money-
it supported consumption and therefore economic growth
and job creation. We are now experiencing the hangover
from a wild and reckless orgy of debt accumulation- and
this one will not fade quickly.

© Greg Strid 2008

Maybe, instead of letting all of the useless hot air
generated in Senate hearings on the evils of speculation
with regard to record high energy prices, it should be
harnessed to power Washington DC. This would be real
action that could actually drive down prices, whereas
pointing fat fingers at speculators only makes headlines
and does nothing to address the real causes of the energy
price explosion.

The nasty combination of rising demand from emerging
economies and the downward spiral of the US dollar is
driving prices increasingly higher- speculators are merely
acting on current market conditions. ( Physical “barrels”
or “bushels” of commodities do not even change hands,
and the overall dollar value of futures contracts traded
is dwarfed by the value of goods actually consumed.)

A few weeks ago, Senator Joseph “Droopy Dog” Leiberman,
-Independent in name only- was slaving away on a
ridiculous proposal to ban large institutional investors
from participating in commodity markets altogether.
Bravo, a-hole. Droopy’s behavior seems to fit a long,
boring and destructive pattern. God forbid blame was
assigned where it actually belongs- this would cost
votes and create even longer and sadder faces in the halls
of government.

The silliness in DC is just another instance of shallow
politicians seeking scapegoats to appease a restive and
angry public- a public that has helped create the massive
rise in energy prices.

The American consumer has also fueled the growth in
emerging economies by blindly purchasing all that hums
and whirs- and to top it off, the money spent was borrowed
equity from over-inflated home prices- which is also helping
to drive the dollar lower. (Most of those nasty subprime
loans doled out like crack candy over the past few years
are souring, making US dollar denominated assets all the
more unappealing to global investors, which has helped
fuel the dollar’s decline.)

Pointing fingers solves nothing. Americans, and their
idiot representatives in Washington, will be forced to
clean up the mess they together have made. It will be
painful. It will take a long time. But, it is inevitable.

© Greg Strid 2008

Record high oil prices and a warning about inflation
from the Federal Reserve smacked sobriety into
investors in US shares yesterday. Oil traded at $135
a barrel, and the minutes from the Fed’s late April
policy meeting implied that further interest rate
cuts are unlikely due to rising prices for goods and
services.

For the past few weeks, stock prices were merrily
marching higher. Investors were ignoring the
continuing demise of the housing market, weak
retail sales, paltry consumer confidence readings
and pitiful numbers from the labor market. Now,
global inflation is handcuffing the Fed’s ability to
deliver monetary stimulus to the economy.

Consumption (some would add “mindless” to this
term) drives this nation. By most estimates, it
accounts for approximately 70 percent of overall
economic activity. For years, consumers borrowed
heavily against their homes, or just outright, in
order to fill their lives with shiny things. Now, their
homes are no longer assets from which to borrow,
but liabilities from which to run. And, despite the
Fed’s feverish interest rate cuts, credit is getting
harder to come by.

Now inflation is gathering steam. Oil and food prices
are reaching record high levels, leaving consumers
with less money to spend at malls and food courts.
A vicious cycle is developing. Higher prices lead to
lower spending, which reduces profits and employment-
and this drives spending lower still.

Wall Street may finally be realizing what is really
happening on Main Street. But, the party could
easily last several months longer- with the final
round of drinks to be served this fall.

©Greg Strid 2008

The stock market was rumbling ahead on a wave of
delusion induced by the glimmer of light that seems
to be flickering at the end of the credit crisis tunnel.
But Thursday afternoon brought sobering news that
the light signaling hope may be an oncoming freight
train.

After the closing bell Thursday, American International
Group, the giant insurance and financial services
conglomerate known by it’s ticker AIG, announced a
staggering loss of $7.8 billion and the need to raise $12.5
billion in fresh capital. (This is in addition to $5.3 billion
dollars worth of red ink in the previous quarter- and the
capital infusion request is larger than the street’s sages
expected.)

This news, coupled with another spike in oil prices,
contributed to swift price declines on global equity
markets Friday. It seems as though the effects of the
credit crisis will be with us for longer than the eternally
happy wizards on Wall Street expect.

The fact that stock prices have rallied over the past few
weeks as the economy struggles under the weight the
housing market’s death spiral and the tightening of
consumer purse strings, highlights the disconnect
between investors expectations and reality.

Even after a series of panicky whacks at short-term
interest rates and the rescue of Bear Stearns by the Fed,
credit conditions remain tight for consumers and small
businesses. And, worst of all for the struggling housing
market, mortgages are harder to come by. (Speaking of
America’s most notorious sinking asset class, more than
50 percent of mortgages issued over the past three years
are for sums that exceed the price of the homes that
they purchased.)

Wall Street has been digesting lousy economic news for
several weeks as prices continue to climb toward the sky,
and the sad numbers spewed out by AIG will probably be
ignored when trading resumes this week. But, there seems
to be a disconnect shaping up between what investors want
to believe and the bleak reality that is facing most Americans.

Easy credit, rising home prices and tame inflation rates
created a wave of false prosperity. Now, the tide of easy money
has receded, exposing a nation with a weak job market and
virtually no money in its collective savings account. And, as
the news from AIG showed, the losses from the credit bubble
still keep piling up. It is just a matter of time before these
facts smack investors in the face.

© Greg Strid 2008

An inflationary wave is building around the globe and
it threatens living standards and political stability. Prices
for food, energy and industrial commodities have been
rising steadily for the past few years. (The soaring cost
of food has sparked riots in Bangladesh and China this
year.) There are two main components that are giving
life and breath to the steady rise in global inflation. The
first is the erosion of the U.S. dollar, and the second is
the strong economic growth of developing economies.

Although the once mighty dollar has witnessed a period
of relative stability as of late, it’s overall direction is most
definitely lower. As the Federal Reserve and the U.S.
government scramble to resuscitate terminally ill U.S.
financial institutions and a weak economy, the Fed is
printing money- and the government is spending it- with
reckless abandon. Just as with commodities, the value of
a currency depreciates when its supply is drastically
increased. More money ends up chasing the same amount
of goods and services, causing prices to rise.

The nations that comprise the developing world- China
and India in particular- are becoming the new engines of
global economic growth. This boom in activity has increased
demand for all goods, thus fueling global inflation. Millions
of new consumers are being minted each year, mainly in
Asia. As the American religion of consumption spreads like
wildfire, it is sparking increased competition for raw
materials between nations. This causes both component and
wage costs to increase, thus fueling inflation. (Flat screen
TVs are made with industrial commodities by people who
eat expensive wheat.)

The U.S. economy will continue it’s struggle to move forward
as it is forced to drag the heavy baggage of a housing bust
and banking crisis. Therefore, monetary policy will continue to
expand in a vein attempt to lessen the load of that these
economic maladies are creating. As a result, the dollar will
inevitably continue its steady decline. The developing world’s
new consumer class is just starting to grow, and will continue
to put more pressure on the world’s finite supply of resources.
It appears that global inflation is here to stay.

© Greg Strid 2008