Two Lost Decades for Americans

recessionIn 2010, the average American family was no wealthier than they were in early 1990s—meaning the financial crisis of 2008 erased two decades of wealth (source: New York Times, June 11, 2012).

The Federal Reserve released this very sobering but not surprising news this week. The average American family’s wealth has been wiped out with the financial crisis of 2008 to the tune of 38.8%!

The Federal Reserve also noted that three-quarters of the loss of wealth was attributed to the decline in housing prices; no surprise here. The reports pointed out that middle-class families were the ones hardest hit.

The Federal Reserve’s survey also highlighted how the average American family income declined to $45,800 in 2010 from $49,600 in 2007. Add the fact presented by the Federal Reserve that real disposable income for the average American household continues to decline, and there can be no consumer confidence or spending.

Another disturbing trend noted in the Federal Reserve’s survey, which other current economic data have been pointing to as well, is a lack of savings by consumers.

Only half of American families have any type of retirement account!

The Federal Reserve report found that those who did save were doing so to ensure they could make their payments should they lose their jobs. This is the clearest sign of the lack of consumer confidence out there…which means there is no chance of increased consumer spending.

Consumers not only have less wealth and lower income, but also, when many assets dropped in value with the economic crisis, their debt stayed the same—a major contributor to a lack of consumer confidence.

The Federal Reserve noted that, after trying to pay off the debts consumers had accumulated, there was nothing left over for savings.

For the first time in the history of the Federal Reserve survey, the largest portion of household debt was related to student loans. The number of families with such loans climbed to 19.2% in 2010 from 2007’s 15.2%. With student loans crossing the trillion-dollar mark in 2012, this trend is poised to continue.

This latest survey by the Federal Reserve highlights the difficulties the average American family is living through right now. Although many talk of an economic recovery, the average American is curious about who is experiencing this economic recovery when they are clearly not.

Special Report…

Ben Bernanke Ready to Help Big Banks Again
~ by Danny Esposito, B.Comm., BA

It is amazing how many economists out there continue to hold onto the notion that, should a financial crisis take place in Europe, the U.S. will not be affected.

Their argument is based on the fact that trade with the European Union is only 1.1% of overall U.S. output and only 1.5% of America’s gross domestic product (GDP). A total of 17.8% of U.S. exports make their way to Europe, which is very small. This means that, in their estimation, the impact of a European Union financial crisis on us is minor.

Then why is it that, in his last few testimonies, Ben Bernanke has emphasized the risk that Europe poses to the U.S. From his latest testimony last week, this quote is reflective of his sentiment on Europe:

“The situation in Europe poses significant risks to the U.S. financial system and economy, and must be monitored closely.”

I’d like to point out that the most fascinating part of this quote by Ben Bernanke is that he mentions Europe posing significant risks to the U.S. financial system before the economy. Why? Europe’s big banks are teetering on bankruptcy.

The big banks here in the U.S. certainly own a portion of the sovereign debt of nations in Europe. The big banks would suffer quite the loss should any of the big banks in Europe go bankrupt.

I think Ben Bernanke is alluding to forces even greater. Credit Default Swaps (CDSs) are instruments of destruction that should never have been allowed to exist in the first place. The reason big banks created so many exotic CDSs is that they earn such high commissions on them.

According to the Bank of International Settlements (BIS), there is over $700 trillion in CDSs in the world. World GDP is only $65.0 trillion, which gives one the sense of how outrageous this figure is. A large portion of these CDSs are underwritten by the big banks in the U.S.

Should even one Spanish or Greek big bank declare bankruptcy, all of the investors who bet that that a Spanish or Greek big bank was going to go under want to get paid on their bet (i.e. their CDS).

The big banks that underwrite the CDSs on that bankrupt bank have to pay up. What that amount is no one knows, because the CDS market is a black market played by big investors, yet the public ironically ends up paying the price through bailouts. So why are the CDS market records not public? That is a debate for another day.

Needless to say, the big banks in the U.S. could be on the hook for hundreds of billions of dollars, which would bankrupt them. Ben Bernanke will not allow this to happen.

Although all sorts of platitudes will be spoken about how the next bailout of the big banks here in the U.S. is about the U.S. economy and preventing us from entering a recession, don’t believe a word of it. The bailout would go directly to and will only help the big banks.

Economists can argue all they want about how insignificant Europe is to our economy. The point is that we live in a financially connected world. One domino falls in Europe—i.e. one of their big banks—and it will send shockwaves around the world that could destroy the financial system.

(Danny Esposito is a senior economist at Lombardi Financial. You’ll find his daily research and economic analysis at Investment Contrarians.)

Back to Michael…

Where the Market Stands; Where it’s Headed:

Instead of the usual on the stock market today, it’s about the gold market…

The chairman of Franco-Nevada Corporation (NYSE/FNV) did a presentation at the Toronto Club on May 24, 2012, where he pointed out a very interesting fact. The dollar amount of all the financial markets in the world added together is about $152 trillion (stocks, bonds, funds, managed money, etc.). All the gold bullion outstanding in the world is worth less than one percent of all global paper assets.

Very little money moving into gold-related investments could have a huge impact on the price of gold bullion and quality gold stocks.

What He Said:

“Starting two years ago, I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending, and a lower stock market.” Michael Lombardi in Profit Confidential, August 15, 2007. You would have been hard-pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October 2007.