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Monday, August 18, 2008

Economic Reality, The Perfect Storm Continues to Rage

Reality hurts. I write a lot on what I call “feel good” reporting or reporting through “rose colored glasses”. My concern with this type of reporting is that hiding the truth does the American people a disservice. Telling us that the economic situation is beginning to get better, that the worst is over and a recovery is on its way only leads to erroneous financial planning on the part of already strapped Americans.

By coloring the truth, presenting it in unrealistic but optimistic manners, only leads to a longer cycle of recovery. As in any recovery process, be it alcoholism, drug addiction, spending addiction or economic crisis, no recovery is possible until admission of the problem is verbalized and faced head on.

One great media source for “real” news is It is one reason Bloomberg TV appears automatically on this site.

In an article written August 12, 2008 by Lynn Thomasson, U.S. Stocks Fall on Banking Concern; JPMorgan, Goldman Retreat, reality is reported.

I urge you to click the link to the article and read it in its entirety. But let me highlight some important parts of it.

JPMorgan Chase & Co. said it may post more credit losses, pushing the worldwide costs for the collapse of the subprime mortgage market to more than $500 billion.

…JPMorgan, the second-largest U.S. bank by
market value, dropped the most since 2002 after saying trading conditions have ``substantially deteriorated.
What is interesting here is that J. P. Morgan if you remember received $55 Billion from the Federal Reserve for the purchase of failing (already failed) Bear Stearns. Other reports indicated that this money, about half of which was to be used directly for the Bear Stearns (BS) acquisition was all needed to shore up J. P. Morgan. Additionally, just days before this report, J. P. Morgan announced a loss of 1.5 billion dollars.

What is even more interesting is that for months now, they have been claiming to be “healthy” and ready, willing and able to pursue more acquisitions as has been their practice in recent years.

It is obvious, to me at least, that they are not as solvent as they claim and perhaps teetering on the brink of insolvency themselves.

…. Goldman Sachs Group Inc. had its worst decline in five months as Deutsche Bank AG analyst Mike Mayo and Oppenheimer & Co.'s Meredith Whitney cut profit estimates for the biggest securities firm. Wachovia Corp. slid 12 percent and Morgan Stanley tumbled 6.4 percent as financial shares erased yesterday's advance.
More bitter news. We know that Deutsche bank is already in trouble to the heavy amount of Mortgage Backed Securities (MBS) they were involved in. Wachovia is probably insolvent but regulators are probably unsure of how to handle insolvency as large as this one.

Here is one of the most honest comments I have heard in quite some time and one I have been stressing for months.

``It's going to be like a long, slow car crash to work through the housing situation,'' Joseph Veranth, chief investment officer at Dana Investment Advisors, which manages $2.8 billion in Brookfield, Wisconsin, told Bloomberg Radio. ``We're still in the middle of it.''

“We’re still in the middle of it” says Mr. Veranth. Notice he does not believe we are at the bottom, nearing the bottom or heading towards recovery.

Benchmark indexes extended losses after Freddie Mac said it will stop buying subprime loans issued in New York state…
I thought we just had a bailout program for Freddie Mac. Evidently, the problems there are larger then reported. But then again, proper accounting reporting has been an issue at both Freddie Mac and Fannie Mae. They are called Government Supervised Enterprise (GSE). Evidently our government is lax in its supervision role.

Dallas Federal Reserve Bank President Richard Fisher said the current financial turmoil is worse than the savings and loan crisis of the late 1980s and early 1990s.

I not only agree with Mr. Fisher, I believe this turmoil is worse then the Great Depression if truth were really known.

In a regulatory filing recently, J. P. Morgan said the following according to this Bloomberg report.

“…capital markets to remain under stress and for a continued decline in U.S. housing prices,''

“A continued decline in housing prices” not as we have been hearing from many other sources such as the National Association of Realtors (NAR) that the market and prices are bottoming out. Now they say is a great time to buy. Someone even told me recently that Donald Trump, on a national TV program said that the bottom is here and now is a good time to buy. Could it be that the Great Donald is wrong?

“Billionaire investor Michael Price is betting on further declines at Citigroup Inc. because the bank has ``more pain coming,'' “

Let’s remember that Citigroup is the largest banking company in the U.S. and J. P. Morgan Chase is number 2. Given these facts and the facts reported above, I believe there should be a great cause of concern for our banking system and our economy.

Speaking about retreating values of many major banks, insurers and investment houses the following comment was made.

``There's still a lot of hair and a lot of dirt on these financials,'' said Stephen Wood, who helps manage $213 billion as a senior portfolio strategist at Russell Investments in New York. ``This is something the average investor at home should be very careful about.''
The financials Mr. Woods refers to, in my belief, are covered and buried under lots of dirt. Once cleaned up and exposed, we are in for some very shocking reality.

The report continues on with declines of other major American corporations from McDonalds to Macy’s, indicating retail sales declining and hurting companies earnings including Wal Mart the worlds largest retailer.

All in all a very sobering but real reporting by Bloomberg. Sure reality hurts but masking the pain with drugs does not cure the disease.

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