Why You Shouldn’t Worry About the Economic Recovery

The stock market is rolling over. The Dow went down 133 points yesterday. Gold gained $4.

Stocks went down early in the summer. We thought that was the beginning of the big “second shock” we’ve been waiting for. But we were wrong. The stock market rebounded.

But now it is back at its July lows…and appears ready to keep going down.

Why? Because small investors are leaving the stock market. And large investors are beginning to realize that there is no real recovery taking place.

“Worries about US recovery deepen,” says a headline in The Financial Times.

Not here! Not at The Daily Reckoning headquarters. We’re not worried about the recovery. Because there is none.

None of the key components of recovery – housing, jobs, or consumer spending – suggest that the economy is returning to its pre-recession habits.

This from Bloomberg:

Sales of existing houses plunged by a record 27 percent in July as the effects of a government tax credit waned, showing a lack of jobs threatens to undermine the US economic recovery.

Purchases plummeted to a 3.83 million annual pace, the lowest in a decade of record keeping and worse than the most pessimistic forecast of economists surveyed by Bloomberg News, figures from the National Association of Realtors showed today in Washington. Demand for single-family houses dropped to a 15- year low and the number of homes on the market swelled.

“Today’s data do not bode well for home prices,” said Michelle Meyer, a senior economist at BofA Merrill Lynch Global Research in New York. “There is a decent chance we reach a new bottom for home prices. There’s going to be a prolonged, painful drop.”

Record Low

The pace of existing home sales is the slowest since comparable records began in 1999. The agents’ group revised the June sales figure down to 5.26 million from a previously reported 5.37 million.

Economists projected sales would fall 13 percent. Estimates in the Bloomberg survey of 74 economists ranged from 3.96 million to 5.3 million. Previously owned homes make up about 90 percent of the market.

Purchases of single-family homes also dropped 27 percent, the biggest one-month decrease in data going back to 1968. July’s 3.37 million annual rate was the lowest since May 1995.

But fear not, dear reader, the feds are on the case. As usual, they are making things worse. The obvious problem in the housing market is that there are too many houses and too much mortgage debt. And the obvious solution is to clear the market by allowing prices to fall and let the debt wash itself out.

Instead, the feds are trying to prevent the market from clearing. Bloomberg continues:

To help prop up the market, the Obama administration will offer $1 billion in zero-interest loans to help homeowners who’ve lost income avoid foreclosure as part of $3 billion in additional aid targeting economically distressed areas.

The Department of Housing and Urban Development plans to make loans of as much as $50,000 for borrowers “in hard hit local areas” to make mortgage, tax and insurance payments for as long as two years, according to an Aug. 11 statement. The Treasury Department will also provide as much as $2 billion in aid under an existing program for 17 states and the District of Columbia, according to the statement.

That’s right. What a plan! Do you have too much mortgage debt? Heck, the feds will lend you more money!

Bill Bonner
for The Daily Reckoning