~ Clipped from The Daily Reckoning May 22, 2011
So far, the big sell-off has not even begun. But it could start any day. Maybe Friday’s numbers reflected the new trend. Maybe not.
But just so we get to say ‘I told you so’ here is what we expect:
1) Stocks will be weak…maybe a big sell-off in the summer months. Investors will begin to realize that the economy is not as healthy as they thought. And the effects of QE2 will wear off.
2) The Great Correction, combined with the feds’ battle against it, will continue. Economic reports will be mixed and confusing as a result. But no clear, real recovery will begin.
3) The Fed will announce new measures - QE3. These could come anytime, but will most likely follow a new crisis. For example, a default by Greece…or a sharp break in the stock market.
Analysts say the punky figures are not confined to the US. The entire world is slowing down. Emerging markets are being forced to try to control inflation. Europe is worried about what happens when Greece defaults - which is coming soon. And the US is suffering from the worst housing slump in its history. Prices are already down 33%…more than one out of four homeowners is already underwater…and prices are falling at the rate of about 1% per month.
This latest bit of information is worth a pause. The total value of US housing stock is about $20 trillion. So, a 1% loss equals $200 billion. That’s $9 billion every working day.
Now, say there are about 100 million wage earners. This puts the losses per day at about $90 per day per wage earner. The typical worker takes home about $2,500 per month - by our calculations, barely more than he loses in housing prices.
And here’s another fact to toss in front of you this morning. In 1980, US federal, state and local debt per person declined at the rate of $2 per working day. As recently as 2000, debt declined again - at the rate of $4 per day.
But never have we seen anything like this. Government debt per working person is now increasing at $115 per working day. And that doesn’t include the build-up in social welfare obligations.
Add housing losses to government debt, and the typical working person’s balance sheet is deteriorating at the rate of $205 every working day.
The poor lumpen! He rolls out of bed this morning. By Friday evening he’s $1,025 poorer! How long can that go on?
And here’s another thing. Seniors are supposed to be protected from inflation by COLA (cost of living) adjustments to their Social Security payments. But the feds compute the CPI as they choose. And they make their adjustments when it pleases them. The result is a big lag between the supposedly inflation-proof Social Security payments and the actual costs of living that old people face. According to a study done by a senior group, the post-65 population has suffered a real loss of purchasing power of 32% over the last decade.
This is a serious situation. The average household is desperately trying to hold onto its standard of living. It has not had a real, substantial hourly wage gain in 40 years. Prices are now rising faster than income - both for people who are working and for people who are retired.
And those people who own a house are losing wealth, collectively, at the rate of about $200 billion a year.
In a way, of course, this is good news. The whole point of the Great Correction is to wipe out bad debt, eliminate bad investments, and reduce living standards to a level people can afford.
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