By Robert Reich, Robert Reich

What passes for business reporting in the United States is too often a series of breathless reports about the stock market. When the Dow rises precipitously, as it did today (Wednesday), the business press predicts an end to the Great Recession. When the stock market plummets, as it did last week, the Great Recession is said to be worsening.

Pay no attention. The stock market has as much to do with the real economy as the weather has to do with geology. Day by day there’s no relationship at all. Over time, weather and geology interact but the results aren’t evident for many years. The biggest impact of the weather is on peoples’ moods, as are the daily ups and downs of the market.

The real economy is jobs and paychecks, what people buy and what they sell. And the real economy — even viewed from a worldwide perspective — is as precarious as ever, perhaps more so.

Today’s rally was triggered by news that one of China’s official measures of its growth – its Purchasing Managers Index – rose. The index had been in decline for three straight months.

Why should an obscure measurement on the other side of the world cause stock markets in New York, London, and Frankfurt to rally? Because China is so large and its needs seemingly limitless that its growth has been about the only reliable source of global demand.

Many big American companies have been showing profits because they’re doing ever more business in China while cutting payrolls at home. American consumers aren’t buying much of anything because they’ve lost their jobs or are worried about losing them, and are still trying to get out from under a huge debt load (the latest figures show more consumer debt delinquent now than last year and a surge in personal bankruptcies). The U.S. housing market is growing worse, auto and retail sales are dropping, and the ranks of the jobless continue to swell.

Europe is in almost as much a mess. The problem there isn’t just or even mainly that Greece and other nations on the “periphery” have too much public debt. A bigger problem is European consumers aren’t buying nearly enough to generate more jobs. Unemployment remains high, and the trend is bad. Manufacturing growth there has slowed to its weakest pace in six months. Yet bizarrely, Europe’s large economies – Britain, Germany, and France – are paring back their public budgets. It’s exactly the wrong time, and a recipe for disaster.

Germany’s so-called “job miracle” (as Chancellor Angela Merkel calls it) is more mirage than miracle. Most of the gains in employment there have come from part-time jobs, often at low pay. Average annual net income per German employee continues to drop. This explains why domestic demand there is so sluggish and why Germany is desperately dependent on its exports of machinery and manufacturing components to Asia, especially China.

Meanwhile, Japan, now the world’s third-largest economy, is a basket case. Japanese consumers aren’t buying much of anything, and why would they? The country is still in the grip of a deflationary cycle that shows no end. Japanese consumers reason if they can buy it cheaper next week there’s no reason to buy now. Basically the only thing keeping Japan’s economy going are its exports of cars and electronic components to China.

Australia is booming, but look closely and you see the same buyer. Australia is making a boatload of money selling its minerals and raw materials to China (Australia is fast becoming one big Chinese mine shaft). The Brazilian economy is soaring. Why? Exports of wheat and cattle to China. Middle East oil producers are getting richer. Why? China’s insatiable thirst for oil.

Elsewhere around the globe the picture is as uncertain. Much of Pakistan is under water. Much of the rest of the Middle East is under tyrannical or corrupt regimes. Russia has suffered such a dry spell it’s hoarding wheat. Despite its wealthy few, India’s masses are still terribly poor.

The stock market could plunge tomorrow or the next day because the world’s economic fundamentals are so precarious.

The global economy cannot be sustained by one big, voracious nation – especially one that’s suffering bouts of civil unrest, actively repressing dissent, suffocating under a blanket of pollution and coping with other environmental hazards, and whose biggest companies are run by the state.

More articles from Robert Reich….

The Daily Reckoning

Well, August washed up. It was the worst month for US stocks in almost a decade. And yesterday didn’t help. The Dow couldn’t manage a rally. It rose just 4 points.

The British newspaper, The Telegraph, has the story:

Those fears took centre stage again during the final day of trading.

In New York, markets enjoyed some brief respite from the blizzard of weak data as reports on the US housing market and consumer confidence proved better than feared. The Conference Board’s index of consumer confidence climbed to 53.5 last month from 51 in July, while the latest reading from the respected S&P/Case-Shiller index showed that home prices were up 4.2pc in June compared with a year ago.

The day’s rally proved short-lived, however, after the minutes of the Federal Reserve’s latest meeting returned investors to the summer’s familiar themes. Fed chairman Ben Bernanke has spent the past few weeks facing increasing pressure from markets to publicly declare he will do more to fight the prospect of a second recession if the recovery stumbles further. According to the minutes, some members of the Fed’s Open Market Committee saw “increased downside risks to the outlook for both growth and inflation”.

That admission left the Dow up just 4.99 points at 10,014.72 for the day, while the S&P ended the day up 0.41 at 1,049.33.

As predicted on this page, both Martin Wolf and Paul Krugman are taking the low road. Not that we wouldn’t take it too, were we in their position. They urged the Obama team to undertake massive programs of “stimulus.” Now that the stimulus hasn’t worked, they say it wasn’t massive enough.

And thank God the administration at least took some of our advice, they add. Otherwise, things would be a lot worse!

In today’s Financial Times, Wolf refers to a recent paper by Alan Blinder and Mark Zandi. The two use a “standard macro-economic model” to determine that without the feds’ intervention the decline in GDP would have been three times worse and unemployment would have risen to over 16%. And, can you believe it, we would have had a federal deficit of $2.6 trillion.

Oh man, oh man…we’re so grateful to Wolf, Krugman, Summers, Obama, Bernanke and all the other savants who protected us from such a dreadful fate.

But wait a minute, this “standard macro-economic model” sounds great and all…but we can’t help but wonder. It can predict precise outcomes based on federal policy inputs, right? That is, if the feds were to do such and such…it tells us what will happen, right? And Wolf says it’s “standard,” so we imagine that you can get it at any Wal-Mart or filling station. So, the Obama team must have had it two years ago, right? We can’t help wonder if this was the same model they used when they forecast that unemployment wouldn’t go over 8% – if Congress agreed to the stimulus bill the administration proposed. Must have been a different one… Because Congress did pass the stimulus bill and unemployment rose over 9% anyway.

And it’s still over 9% – almost 2 years after the stimulus effort got underway.

So, maybe this “standard macro-economic model” is full of… But let’s imagine that it isn’t. Let’s allow our imaginations to take flight…to soar…to loose themselves from the gravity of worldly cares or practical reality. Let’s imagine that these economists have a clue!

Imagine that the feds had done nothing – which was more or less standard policy for the nation from its founding in 1776 up until the middle of Herbert Hoover’s term in 1930…and for all the years that preceded them…all the way back to the founding of Rome. Now, let’s imagine that Blinder and Zandi are right. Without fed intervention, GDP would have sunk 12% – three times more than the actual loss…and half the loss of the Great Depression. Well, that would have been a disaster, right?

Well. Maybe not. It might have been a blessing. The point of a correction is to correct. The Blinder/Zandi study tells us that the economy had mistakes equal to 12% of GDP. Okay…well, maybe the correction overshoots. Who knows? But think of the crazy years of the Bubble Epoque…when lenders were giving unemployed people a mortgage for 110% of the inflated value of a house. Think about the Private Equity deals based on growth assumptions that were hallucinatory. Think about the hundreds of trillions’ worth of derivatives based on complex formulae that were phony and silly? Think of all the decisions made on the assumption that consumer credit would continue to expand as it had from 1949 to 2007. Was one of every 8 of them too optimistic? Too ambitious? Too unrealistic? We’d be surprised if there weren’t more errors…far more than 12% of GDP.

Now ask yourself…what good was done by failing to correct those mistakes? By failing to wash out the excess debt? Failing to allow insolvent banks to go broke? Failing to permit worn-out, uncompetitive businesses to die in peace?

We don’t know how many mistakes there were. We don’t know how far GDP SHOULD go down. And we don’t know what would have happened if willing buyers and sellers had been allowed to sort themselves out in the age- old ways – by panic, default, bankruptcy, restructuring, and reconstruction.

We don’t know. We’ll never know. But there is no reason to think we’d be any worse off if we’d found out a year ago. A 12% drop in GDP might have been just what we needed. We could be on the road to prosperity now, rather than looking at another 5 to 15 years of stagnation, decline, and desperation.

And more thoughts…

But we have good news. Yes, dear reader, genuine, no-doubt-about-it good news.

Two bits of good news, actually.

First, the café across the street from our office serves a proper café au lait. A real one.

In Paris these days, if you ask for a “café au lait” they mark you as a foreigner. Parisians ask for a “café crème.” Trouble is, the café crème doesn’t have much milk in it. It tends to be a bit watery and bitter.

A proper café au lait, on the other hand, is served with a little pitcher of hot milk. Not many cafes in Paris still serve it that way – unless you ask them specifically. Fortunately, the one across the street still does it the right way.

Second, and perhaps more important, we discovered yesterday that tea- totallers die sooner than heavy drinkers. This comes as a great relief to your editor. He sat down last night with a bottle of Lussac St. Emilion to celebrate.

Here’s the story from John Cloud (originally appearing in Time Magazine):

Why Do Heavy Drinkers Outlive Nondrinkers?

One of the most contentious issues in the vast literature about alcohol consumption has been the consistent finding that those who don’t drink actually tend to die sooner than those who do. The standard Alcoholics Anonymous explanation for this finding is that many of those who show up as abstainers in such research are actually former hard-core drunks who had already incurred health problems associated with drinking.

But a new paper in the journal Alcoholism: Clinical and Experimental Research suggests that – for reasons that aren’t entirely clear – abstaining from alcohol does actually tend to increase one’s risk of dying even when you exclude former drinkers. The most shocking part? Abstainers’ mortality rates are higher than those of heavy drinkers.

Moderate drinking, which is defined as one to three drinks per day, is associated with the lowest mortality rates in alcohol studies. Moderate alcohol use (especially when the beverage of choice is red wine) is thought to improve heart health, circulation and sociability, which can be important because people who are isolated don’t have as many family members and friends who can notice and help treat health problems.

But why would abstaining from alcohol lead to a shorter life? It’s true that those who abstain from alcohol tend to be from lower socioeconomic classes, since drinking can be expensive. And people of lower socioeconomic status have more life stressors – job and child-care worries that might not only keep them from the bottle but also cause stress-related illnesses over long periods. (They also don’t get the stress-reducing benefits of a drink or two after work.)

But even after controlling for nearly all imaginable variables – socioeconomic status, level of physical activity, number of close friends, quality of social support and so on – the researchers (a six- member team led by psychologist Charles Holahan of the University of Texas at Austin) found that over a 20-year period, mortality rates were highest for those who had never been drinkers, second-highest for heavy drinkers and lowest for moderate drinkers.

The sample of those who were studied included individuals between ages 55 and 65 who had had any kind of outpatient care in the previous three years. The 1,824 participants were followed for 20 years. One drawback of the sample: a disproportionate number, 63%, were men. Just over 69% of the never-drinkers died during the 20 years, 60% of the heavy drinkers died and only 41% of moderate drinkers died.

These are remarkable statistics. Even though heavy drinking is associated with higher risk for cirrhosis and several types of cancer (particularly cancers in the mouth and esophagus), heavy drinkers are less likely to die than people who have never drunk. One important reason is that alcohol lubricates so many social interactions, and social interactions are vital for maintaining mental and physical health. As I pointed out last year, nondrinkers show greater signs of depression than those who allow themselves to join the party.

The authors of the new paper are careful to note that even if drinking is associated with longer life, it can be dangerous: it can impair your memory severely and it can lead to nonlethal falls and other mishaps (like, say, cheating on your spouse in a drunken haze) that can screw up your life. There’s also the dependency issue: if you become addicted to alcohol, you may spend a long time trying to get off the bottle.

That said, the new study provides the strongest evidence yet that moderate drinking is not only fun but good for you. So make mine a double.

Bill Bonner
for The Daily Reckoning Australia

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More articles from The Daily Reckoning….

By Karl Denninger, The Market Ticker

Again, I must say……

The same principal has left the nations public and private pension funds badly underfunded.

We are actually more underfunded than we were at the end of 2008 because of the drop in interest rates since then, said John Ehrhardt, who tracks fund performance for benefits consultant Milliman.

That "same principal" is The Fed’s ZIRP policy.

By picking winners – in this case the banks who made imprudent loans and should have been forced out of business, along with "protecting" the imprudent buyers of bonds in institutions that made those imprudent loans, the prudent are getting hammered.

There is no solution to this other than to stop doing that.  And this means withdrawing liquidity and forcing the borrowing of money to have a reasonable cost, so that those who lend money through the purchase of bonds can earn a reasonable inflation-adjusted return.

The initial "impact" of low interest rates appears seductively good.  It’s not – it’s always bad.  It forces people to take imprudent risks (how do you think we got a housing bubble in the first place?) and destroys the prudent investor, lender of capital and saver.

As these people are eviscerated their ability to contribute positively to the economy is likewise destroyed, and in particular, capital formation is critically damaged.

This is the real story on how Japan lost two decades. 

We will follow them unless we stop this insanity, and soon.

(PS: Are the unions still sheep on this issue, more than two years after I started sounding this alarm?)

More articles from the Market Ticker….

By Karl Denninger, The Market Ticker

I have a very disturbing email that came in this evening.

It alleges out-and-out fraudulent reporting of home sales in one of the regional MLS systems.

That is, prices paid that are in fact much lower than the "sold" prices reported in the MLS.

The person in question claims to have seen over 100 of these in his area.  I have copies of two, and it appears, from the evidence that I have, that at least for those two the claim is accurate.

One in particular I was able to pull the auction data on.  It "sold" under reserve, is listed as sold in the MLS at ~25% higher than the "sold" bid, and the premium is disclosed as 5%.  This property also has a 90-day "anti-flip" provision on it, implying that the paper may be held by one of the GSEs.  (It’s a nice-looking place, incidentally.)

Here’s the problem, obviously – Case-Schiller and other "home statistics" numbers related to price paid are all computed off these numbers provided by the local Realty boards (via NAR.)  If the data in the MLS is bogus then so is the so-called "median sales price" and so are Case-Schiller’s numbers!

These are not small discrepancies either – in both cases the "over-reporting" is by approximately 25%! 

Both subject properties sent to me were auctions.

I am going to dig into this – if this can be verified and is happening nationally the claims of recent price stabilization are utter crap, and the first obvious question that arises is "how far back does this go?"

It also raises a key question when it comes to BPOs, not only from a standpoint of bank valuations (e.g. "drive-bys") but additionally if you’re buying a house and your agent is showing you comparable sales predicated on faulty MLS data you are going to be induced to RADICALLY overpay.

For the time being I would verify any claimed "sold" prices with the county recorder before believing any alleged "sold" prices you’re being fed as comparables.

This might be an anomaly, an "isolated incident", or it may not be what it appears to be, but with a 25% disparity we’re not talking small potatoes if this is accurate.

I’ll post follow-up Tickers on this as I learn more…..

More articles from the Market Ticker….

Felix Salmon submits:

Read more…. »

Fortune Magazine questions the usefulness of government programs to aid struggling homeowners:

It’s easy to see the need for such programs. Theoretically, they keep people in their homes and bring some stability to fragile housing market. But the plethora of programs announced since the housing crisis started have largely been failures, suggesting that any effort to fight foreclosures and boost home sales is going to be a futile one. …

Not even record low mortgages rates have boosted home sales or enticed a debt-weary public. Of course, this doesn’t seem much of a shocker. Experts say home prices — which have fallen by more than 30% since 2006 — are still inflated by 15% to 20% in many areas.

So why try to prop up prices any longer with federal programs? …

Evidence is mounting that government interference in the housing market might be doing the broader economy more harm than good, at least for the long-term. …

The few who are buying homes now might likely be overpaying for them. And many latching onto their properties are being convinced it’s okay to continue trying to pay off a home they can barely afford — echoes of the homeownership encouragement that led us into the bubble in the first place. …

Paving the way for a true market correction would not be easy to endure — letting home prices free-fall is a scary thought. But is a gradual decline that could prolong real economic recovery really any easier to stomach?

Read more….

Canada could be heading into a rapid drop in housing prices according to a report issued by the Canadian Centre for Policy Alternatives on Tuesday. : But while the CCPA is raising an alarm, others are not so concerned. Ted Tsiakopoulos, a regional economist with the Canadian Housing and Mortgage Corporation, says that with Canada’s steady labour market and relative lack of speculative housing purchases, there is little indication that high prices reflect a housing bubble.

Read more….

By Charles Hugh Smith, OFTWOMINDS
A generation too poor to retire but healthy enough to keep working into their 70s is a new and not necessarily positive phenomenon.

Go to my main site at www.oftwominds.com/blog.html
for the full posts and archives.

More articles from Charles Hugh Smith….

By Karl Denninger, The Market Ticker

The next two days could prove to be very interesting – but probably won’t.

Dick Fuld is prepared to later assert:

Lehmans demise was caused by uncontrollable market forces and the incorrect perception and accompanying rumors that Lehman did not have sufficient capital to support its investments.

Uh huh.  It wasn’t caused by 30:1 leverage Dick?  You know, leverage you got "enabled" to use by Pauslon?  Of course you weren’t forced to use that, but heh, if the music is playing, you had to get up and dance, right?

In 2007, when the U.S. housing market began to show signs of weakening, Lehman Brothers and many of its competitors had already accumulated large positions in what were considered less liquid assets. Many market observers, including government officials charged with oversight of the financial markets, believed that the problems in the subprime residential mortgage market were and would be contained.

You were wrong.  But a prudent CEO, and a prudent company, doesn’t "bet the firm" on a premise that their largest-concentration of assets in what is clearly a bubble economic environment, unsupported by the macro level fundamentals, will not only go on forever but will see it’s equivalent of multiple expansion continue forever. That by definition – the belief in expansion of a compound-growth function at ever-increasing rates – is a Ponzi Scheme.

Ponzi schemes are broadly illegal.  While it’s not illegal to place bets on asset appreciation, when you claim to be in a position of "systemic risk" you should be held to a higher standard.  That standard was not only loosened it was destroyed in the years from 2003-2007.  Bear Stearns was a final warning that the Ponzi had collapsed, yet Lehman refused to heed that warning, instead choosing to rely on the premise that a government tit would be proffered to suckle from.  When it was not the firm collapsed.

Then there’s Wachovia.  I read through Scott Alvarez’s testimony (FRB’s Counsel) which goes through the usual mantra of how Wachovia’s business deteriorated due to macro-level economic developments not under it’s control, along with the seizure of WaMu. 

Notably missing from this analysis, along with Steele’s, Wachovia’s former CEO, is any mention of the fact that Wachovia was writing credit-default swaps (CDS) on their own deals in the Option ARM space and bundling them with the lower-rated tranches as a means of being able to sell them!

This is important for two reasons: It is roughly equivalent to you writing fire insurance on your own house, when the entirety of your net worth including all your liquid cash is contained within the house in a shoebox.  Should the house burn you will of course be unable to pay off on your self-dealt "insurance."  Second, there is no mention as to where those instruments are now or what they’re actually worth.  We know where they are – they’re off-balance sheet at Wells, which now has roughly one trillion dollars of off-balance sheet exposure – with no way to evaluate the "wisdom" (or lack thereof) on the marks on those "assets."

It is that fact, incidentally, that led myself and many others, including hedge fund managers, to short the stock.  That in turn drove the CDS spreads out.  But the predicate act that led people like myself to reach this conclusion – that the bank was hiding losses and likely was insolvent – was an act taken by their own hand and enabled by willfully-blind regulators.

Indeed, the bottom line problem here with Wachovia is the same as it has been up and down the line since this mess began – ridiculously over-optimistic asset "values".  This has not abated, as we keep seeing every week with FDIC bank seizures, where banks that are allegedly solvent (by their accounting of "assets" and "liabilities") are nonetheless seized and huge losses, often as much as 30% of the asset base, are absorbed.  This isn’t possible unless the "asset values" are pure works of FICTION.

After the 1929 crash the Pecora Commission was formed to find the causes and prevent it from happening again.  What Pecora found was that too much leverage combined with self-dealing and lies about asset valuations led to the collapse of banks and other members of the financial system when the falsehood of those asset "value" claims was exposed to the light of day, and that self-dealing in various forms led to covering up these deficiencies until they reached critical levels (where banks were literally unable to pay the light bill), by which point the entirety of the depositors’ funds were often gone.  Just as today, banks often maintained that they were "fine" right up until the fact that their assets were worth pennies was exposed.

Glass-Steagall was an attempt to prevent that from happening again by separating deposit-holding banks from securities activities.  Between that and strict leverage limits, along with bank examiners, it was believed that loss-hiding would no longer be possible to a degree where these sorts of panics could develop.

For 40 years it worked.

Then we had the S&Ls, which gamed the system.  Bluntly, they broke the law, "trading" assets between themselves with a wink and a nod, thereby "establishing" asset valuations that were false.  This "supported" their lending and other activities – right up until, just as with the 1920s (and now) it led to their destruction when the truth began to leak out. 

But unlike today Bill Black came in with a mandate and started referring cases to prosecutors, who promptly sent over 1,000 people to prison for their lies and scams.

The FCIC will fail to be effective unless we have another Bill Black.  We must reverse those decisions of Congress to extort FASB, as well as exposing and laying bare on the table the inside baseball, hidden caches of alleged "assets" that are not really worth what is being claimed, and other forms of rooking the public while laying off the costs on taxpayers.

Sadly, I see no evidence that the FCIC will do any of this.  There is nothing in the hearings I’ve seen to date that suggests that Wachovia’s Steele, for example, nor The Fed, will be called to account on exactly where are those CDS, what are they worth, and why did The Fed and other regulators ignore their existence and lack of public valuation and disclosure?

Nor has the FCIC asked Henry Paulson (or Tim Geithner for that matter) why is it that the former 14:1 leverage limit was removed and why shouldn’t it be put back in force now, since it is now a known fact that had it been in place neither Lehman or Bear would have failed, and if it had applied to AIG they wouldn’t have failed either!

No, instead we have a circle jerk of monkeys, prancing before the cameras, but with no substantive progress and disclosure.

Phil Angelides is no Ferdinand Pecora.

More articles from the Market Ticker….

By Karl Denninger, The Market Ticker

Well that’s not so good.

Service employment is estimated to have risen by 30,000, goods producing down 40,000.  Manufacturing down 6,000.

Large business employment was flat, medium and small decreased by 5,000 and 6,000, respectively.

Construction employment was down 33,000 – there’s no joy there.  Anyone looking for construction to "lead us out" is out of their frapping minds, as I’ve repeatedly asserted – yet we keep focusing policies on construction through the housing sector.   THIS IS A LOST CAUSE FOLKS – oversupply will make certain of it no matter what else you do.

Given that the government was firing more Census workers this last month, I expect the Friday report to be solidly negative, and I would not be surprised to see a 0.2 or even 0.3 increase in the official U-3 reported unemployment rate.

More articles from the Market Ticker….