Take for example what Americans are saving.  A recent survey from the Employee Benefit Research Institute’s annual Retirement Confidence Survey found some startling data:

43% of workers in the survey stated they had less than $10,000 in savings while an amazing 27% of workers said they had $1,000 saved.  Many of these Americans are one illness or a job loss away from being broke (many are called the working poor).  It is no surprise that the survey found that only 16% of those who responded felt comfortable about retiring, the lowest rate in a generation.  What this survey highlights is that more and more middle class Americans are going to struggle in their retirement.  Thanks to the Federal Reserve artificially slamming interest rates lower, many Americans on fixed incomes or Social Security will see no cost of living adjustments even though their daily cost of living items will increase in price.  This is targeted destruction of the middle class.

And keep in mind this survey is comparing 2009 and 2010.  What happened to the rally here?  Workers clearly did not participate in the stock market rally.  Why?  Because a large part of the rally also hinged on “productivity gains” which is a nice euphemism for laying off people and making current workers juice out more production.  So this translates to great profits for the Wall Street elite while unemployment in the last year has done this:

Source:  BLS

It might be hard to save for retirement if you are getting fired.  And that is what millions of Americans experienced in 2009 as the stock market went on a massive rampage as Wall Street was fueled by taxpayer bailout money and decided to load into stocks.  Keep in mind that many of the large multinational companies are making a boatload of their profits internationally.  This is great for those companies but as most Americans know, small business is the juice of the American economy and most small businesses sell to domestic clientele.  A clientele that is increasingly poorer and unemployed.  We used to call this group the middle class.  This isn’t lost on some:

“(RR) Companies in the Standard&Poor 500 stock index had sales of $2.18 trillion in the fourth quarter, up from $2.02 trillion last year, and their earnings tripled. Why? Mainly because they’re global, and selling into fast-growing markets in places like India, China, and Brazil.

America’s biggest companies are also showing fat profits and productivity gains because they continue to slash payrolls and cut expenditures. Alcoa, for example, had $1.5 billion in cash at the end of last year, double what it had on hand at the end of 2008. Sounds terrific until you realize how it did it. By cutting 28,000 jobs – 32 percent of workforce – and slashed capital expenditures 43 percent.

The picture on Main Street is quite the opposite. Small businesses aren’t selling much because they have to rely on American – rather than foreign – consumers, and Americans still aren’t buying much.”

One of the disturbing trends especially when it comes to retirement is the massive increase in health care costs.  It is absurd to use health care costs (i.e., premiums, etc) to inflate GDP but that is exactly what is happening:

Source:  BEA

It is absurd that in 2008, as the economy was flying off a cliff and other service industries were contracting health care still managed to pull in 0.31 of the 0.32 gain in the entire year for this sector.  Take a look at 2009.  What service sector did the best in another troubled year?  Health care.  So to say that gouging Americans like the 39% hike in premiums in California is good for GDP is nonsense:

“(ABC) Reports that Anthem Blue Cross is raising premiums on some customers by 39 percent on March 1, have prompted the Secretary of the Department of Health and Human Services, Kathleen Sebelius, to write a letter to the company, Golden State’s largest private insurer, asking the company to “provide a detailed justification for these rate increases to the public.”

“Additionally, you should make public information on the percent of your individual market premiums that is used for medical care versus the percent that is used for administrative costs,” Sebelius wrote, noting that the profits of Anthem Blue Cross’s parent company, WellPoint Incorporated, have soared.”

Ask any middle class American about their health care costs and the likely story is that prices have gone up consistently over the last decade as incomes have gone stagnant.  How is this good especially when many baby boomers are now reaching retirement age with little savings as we have seen and are now going to shift a larger portion of their income to health care?

In many ways the health care industry is much in line with how Wall Street banks have operated for the last forty years.  They’ll gouge and exploit the middle class until every dollar you earn is either yanked by bank bailouts, health care costs, or taxes.  Let us run the numbers on a hypothetical family in California to see how this plays out.  We’ll use a family making $61,000 a year (Census 2008 data):

Now the above is merely a hypothetical budget.  I welcome people to comment on different items one way or another.  The above is a two adult household with no children with two cars.  This is very typical for California but I’m sure for other states as well.  But as you can see from the above, given that this household is at the median there isn’t much room for large amounts of flat screen TVs, expensive nights out on the town, or leased BMWs.  Yet many across the country lived like this and clearly that was on borrowed time and was all a ruse usually magnified by credit cards.  Now as many near retirement they are realizing that the only game in town is Wall Street and that has now become a large casino.

I know many people scream personal responsibility.  I’m the first to agree.  But there is this massive amount of cognitive dissonance when people blame the middle class and working class for this mess when Wall Street who created the financial instruments of destruction, not only got away with the biggest transfer of wealth in history, they are actually getting richer because of bailouts.  This is like putting a bank robber in prison for stealing $100 to feed his family while letting that same banker go to Wall Street and rob millions of Americans for billions of dollars and not only letting him go, but putting structures in place to make him richer!  Is it any wonder why there is so much anger festering in America?

Retirement is getting harder and harder for many middle class Americans.  What use is $1,000 a month in Social Security when your out of pocket costs for medicine is going to cost you $300 to $500 per month?  How did we do it before?  Stable banking that allowed people to pay off their mortgages and allowed people to live securely in their homes once they retired even with a small Social Security check.  But now, many have tapped out their equity and mortgaged their future.  Unlike Wall Street Americans don’t have access to the Federal Reserve.  Massive part-time employment, weak worker protection, a corporatocracy raiding the workers, and a disappearing middle class.  Get ready to work longer America because Wall Street needs that money to fund their bailouts and billion dollar bonuses for wrecking the economy.

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What constitutes “middle class” in the United States?  If we go by the median household income the figure is roughly $52,000 per year.  Some 57 million households live on $52,000 or less per year.  This is based on 2008 Census data so it is very likely that figure is down to $50,000.  In fact, 38 million households are receiving food assistance so some are below the poverty line.

Let us look at how much income is used up by breaking down a few hypothetical budgets:

Source:  U.S. Department of Commerce

The biggest line item for most American families is housing.  When housing prices expanded into a massive bubble, more Americans to keep up with the middle class ideal took on more and more mortgage debt.  But without growing incomes they were seeing more of their money being funneled into servicing the mortgage debt.  With the advent of interest only and negative amortization loans, the process of building equity never took place and in some cases actually grew the initial mortgage balance.  Instead of saving, many middle class families saw their net worth retreat backwards.  This was one really new facet in this current economic crisis.  Traditional mortgages were once seen as a forced savings account because every month a portion of the principal was paid off.  Once you reached the later years of the mortgage, more and more went to paying off the mortgage.  That was not the case with some of the debt we saw in the last decade.

Part of the two income trap is hidden in more troubling ways.  Take for example automobile costs.  Most Americans with a two income household have two cars.  Let us assume that both cars were bought for $20,000 each and carry a $300 monthly payment.  So $600 a month right?  Wrong.  What about fuel?  Add $100 to $200 per month depending on how much you drive.  Car insurance?  This will be roughly $100 per month.  Car service?  Try another $50 to $100 per month.  So in total, many families are spending $600 to $900 per month on car costs.  And people aren’t taking much home after taxes:

So the take home pay for the middle class family is $3,400 if they live in California.  Subtract that $900 in auto costs and you are now down to $2,500.  In places like California where the median home price went up to $500,000 any middle class family stood no chance at buying a home.  Well, they were able to buy but holding on to the home was another story.  Yet people bought at these peak levels and that is why we are seeing such large number of foreclosures in the state but also in other states.  Even last month the number of foreclosure filings in California was near record levels.  The middle class is finding it tougher and tougher to keep their head above water.

Let us run the numbers if someone were to buy a home:

The latest home price for existing home sales in the U.S. is $164,700 for the median.  It is interesting to note that we are now back to January of 2009 levels and for 2009, prices did go up but went full circle back.  Let us assume this family uses a FHA backed loan and is only required to put 3.5% down:

Down payment:                               $5,764

Mortgage payment (PITI):           $1,098

So take that $2,500 left over and now subtract this amount.  $1,402 is what is left over.  This is the amount of money left over for food, healthcare (one illness and that is it with no insurance), and other daily good costs.  What about retirement savings?  That has to come from here as well.  The money can go quickly.  What about cells phones?  Utility bills?  Quickly that number dwindles.  And keep in mind this is household income.  As we now know many families are seeing one of their incomes disappearing and people are having a hard time finding work:

Source:  Itulip

When I look at the above chart it doesn’t take a rocket scientist to figure out that many people are still in the throngs of the recession.  The talk of recovery is muted by the reality of the numbers and all the average American will see is a recovery on Wall Street but in terms of their pocket book, little is funneling to them.  I’ve heard from people across the country looking for work and being unable to find anyone hiring.  And if they do find something, the wages are much less than what they once earned.  This isn’t reflected in the data.  How many people that are now marked as fully employed are in jobs that now pay less than what they once had?  That is why problems even in credit cards are filtering all the way to the bottom of the bank balance sheet.  People are relying on credit cards as their last lifeline and many banks are now shutting these off.

What was once thought of as middle class security is now heavily at risk:

-Secure job   [no longer]

-Steady home values [no longer]

-Access to affordable education [costs are outpacing inflation]

-Healthcare costs are skyrocketing with an aging population [just look at your insurance premiums]

The middle class is really coming under an onslaught of issues.  What we do in terms of financial reform and also, how we view our compact with our nation are going to be really important going forward.  But if the only sure thing is protecting banks from failure, then we are seeing the fruits of that decision playing out.

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Let us first look at a Gallup poll registering underemployment:

Source:  Gallup

Now the Bureau of Labor and Statistics usually measures the above through their U-6 rate.  This rate measures those that are working part-time but would like to have a full-time job.  There is something psychological about this that makes it seem a lot better than full unemployment but the repercussions on the working class is deep and profound nearly as deep as full unemployment.  First, if you are working part-time you have less money to spend and this showed up in the survey clearly:

Source:  Gallup

This is important in understanding that even with a 6 percent growth rate in GDP last quarter that many people still feel this recession deep in their pocketbooks.  In addition, that latest GDP number is based on companies cutting their top line item, employees and also inventory restocking.  But these are usually one time measures.  What we want to be seeing is GDP growth because of additional consumption and growth through hiring.  That is the real nature of a healthy expanding economy.  Cutting and firing middle class workers isn’t exactly the recipe for a longer-term recovery.

Americans are having to do more with less and are facing new measures of austerity.  Many are adapting and many are simply unable to cope with the radical changes taking place.  Even in the past decade, many Americans came to rely on credit cards and home equity as some kind of embedded ATM for most households.  For over a decade this seemed to be the case.  Even many that relied on this deep down realized that something just wasn’t right when home prices kept going up by double-digits while their salaries remained stagnant.  Any lack of wage growth was made up by additional borrowing.  Banks were willing to lend out this money.  But now that the bubble has burst, Americans are filing for bankruptcies in record numbers, losing jobs, and losing their homes through foreclosure.  At the same time, the banking industry has kept their practices going thanks to taxpayer bailouts.  The middle class is bailing out the same industry that was largely at the center of this financial crisis and their practices still largely remain the same.

This struggle to maintain the middle class is going to be the story of the next decade.  But beyond that headline, we now have over 38,000,000 Americans receiving food assistance in this country:

Source:  SNAP

The most prosperous nation in this world has over 12 percent of its population receiving food assistance.  It is tough to see fellow Americans in such difficult times.  You can see on the chart above how quickly the rate has risen in this recession.  Clearly in every recession the rate will go up but in this recession the number has struck many more Americans.  In fact, the length of unemployment is a large reason for this as people eat into emergency funds.  Beyond that, we now have the largest percentage and number of Americans working part-time in history:

Source:  Itulip

In fact, the large number of underemployed has been a shadow to how deep this crisis really is.  For example, the headline unemployment rate nationwide is 9.7 percent.  That seems bad but nothing historical.  But just look above and add in that underemployment rate.  In reality, we can understand why middle class Americans are struggling so much with daily financial life.  Think of someone that lost their job and is now working at Wal-Mart as a greeter.  Sure they aren’t part of that 9.7 percent but they probably would think so:

“(The Atlantic) Over lunch I spoke with one attendee, Gus Poulos, a Vietnam-era veteran who had begun his career as a refrigeration mechanic before going to night school and becoming an accountant. He is trim and powerfully built, and looks much younger than his 59 years. For seven years, until he was laid off in December 2008, he was a senior financial analyst for a local hospital.

Poulos said that his frustration had built and built over the past year. “You apply for so many jobs and just never hear anything,” he told me. “You’re one of my few interviews. I’m just glad to have an interview with anybody, even a magazine.” Poulos said he was an optimist by nature, and had always believed that with preparation and hard work, he could overcome whatever life threw at him. But sometime in the past year, he’d lost that sense, and at times he felt aimless and adrift. “That’s never been who I am,” he said. “But now, it’s who I am.”

Recently he’d gotten a part-time job as a cashier at Walmart, for $8.50 an hour. “They say, ‘Do you want it?’ And in my head, I thought, ‘No.’ And I raised my hand and said, ‘Yes.’” Poulos and his wife met when they were both working as supermarket cashiers, four decades earlier—it had been one of his first jobs. “Now, here I am again.”

We are in a deep struggle and fight to preserve the middle class of this country.  What has made this country strong has been a compact between the government and the citizenship between work and some semblance of financial protection.  Yet right now with the banking system in power, it is all about that bottom line and they have no idea what is happening in Main Street USA.  They are happy with GDP going up by 6 percent even though this was based on restocking lost supply and firing workers.  But how is this really good for the middle class?

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I think most Americans have noticed new methods of austerity all around them.  For example, I’m sure many of you have seen the Wal-Mart ad that talks about taking lunch to work.  They even break down the numbers to show you how much your budget will save by doing this.  Contrast that ad with this one below talking about taking a home equity loan while having a couple in a speed boat cruising in the background:

Source:  YouTube uploaded on June, 2007

When you contrast the two messages, one of easy money and endless excess and the new ads talking about brown bagging your lunch to work, we realize that average Americans are finding it much harder to saddle on more debt.  Some might try to recall the last decade as a wonderful time but the economic data shows otherwise.  Much of the spending and consumerism was built around easy access to debt.  People weren’t buying new automobiles with cash, they were financing it with 5 or even 7 year loans.  Want a new surround sound system but are low on cash?  No problem, just take on an extra credit card and charge it up.  Now, the ads highlight a very different economic climate.

I stopped by a local dollar store to pick up some items for the house and noticed that first, the parking lot was full.  A few years ago the parking lot was two-thirds empty.  This trend has been going on for about two years since the recession hit.  After entering the store I noticed that people for the most part were buying groceries.  Now this area is one that I wouldn’t consider poor but more along the lines of middle class.  Yet this is the new reality for the middle class.  There is no sharper contrast than seeing a women load her leased Mercedes full of dollar store groceries.  Austerity doesn’t happen overnight.

On Monday we received news that some of the most egregious practices from credit card companies will need to change now that legislation is in effect.  Yet credit card companies have already adapted by hiking up rates, charging annual fees on good customers, and other methods of front loading earning before the law came into effect.  So Americans who have relied so heavily on credit cards will now have to be extremely cautious when using these items of consumption.  Even the tried rule of paying off your balance every month may not save you from the annual fee that some companies are now imposing.

Casinos Lose Money for Second Time in History

In another clear example of changing habits of the American middle class, Casinos in Nevada lost money last year for only the second time in history:

“(Las Vegas Sun) CARSON CITY – For only the second time, Nevada casinos posted a loss – but this time it was the biggest.

The state Gaming Control Board today released its “Gaming Abstract” for fiscal year 2009, which ended June 30, showing a net loss of $6.7 billion among the 260 major casinos in Nevada.

Clubs along the Las Vegas Strip, which makes up 53 percent of the gambling revenue in Nevada, registered a $4.1 billion loss. The only bright spot, from a financial standpoint, was that people drank more. Sales of booze rose by 2.5 percent while revenue tied to casinos, rooms and food dropped. But 36 percent were recorded as “comp” drinks.

“It was a horrendous year,” said Bill Bible, president of the Nevada Resort Association, which represents several casinos on the Strip. He said many of the casinos had three and four waves of layoffs to cut cost during this national recession.”

I find it really telling that the only “bright spot” was that people drank more booze.  Self medication for the realities of the new economy.  Gambling whether it is in Las Vegas or through lottery tickets is a form of escapism.  I think many people in places like Las Vegas go to strike it big.  The irony of how the city has morphed is a large part of their revenues now come from other sources outside of gaming.  These include boutique stores and high end restaurants.  I was in Vegas only a few months ago and strolled down some of the shops and the higher end stores were very empty.  A few years back, these places were bustling with people.  It is a microcosm of the new austerity in our country.  Contrast the $100 t-shirts versus the Wal-Mart ad highlighting the benefits of taking your lunch to work at the cost of a few dollars per day.  Things are shifting out of a practical necessity.

And this isn’t simply a function of discretionary spending like trips and gambling.  Even in more practical aspects of daily life this is changing and evolving.

Fast-food Breakfast Slumps with Fewer Workers

You know things are tough when even low cost fast food is taking a hit:

“(WaPo) The nation’s high unemployment rate has thrown millions of people out of work, scared shoppers away from stores and threatened the economic recovery. Now it’s taking a bite out of breakfast.

Breakfast sales had grown at a ravenous pace during the boom years as busy workers scarfed down sausage biscuits on the way to the office, fueling a $57 billion business and accounting for as much as a quarter of sales at some fast-food chains. Chains opened earlier and expanded their morning menus to accommodate the traffic as lunch and dinner sales flatlined.

But as the jobless rate hit 26-year highs fewer people headed to work, and even those who did worried about their spending. So they poured bowls of cereal at home or simply slept in, putting breakfast on the back burner.

“Typically, if you’re unemployed, you’re not getting up at six and not going through the drive-thru,” said Jeffrey Bernstein, an analyst at Barclays Capital. “There is a direct correlation between unemployment and breakfast sales.”

It is hard to even comprehend that breakfast sales accounted for $57 billion in revenue.  However, with more people out of work many are skipping breakfast or eating at home.  On my early morning drives I will always see cars pulling up to McDonalds or Starbucks for that early morning purchase.  The lines seemed a lot shorter and looking at the data it is part of the new frugality that Americans are having to deal with:

Source:  Washington Post

And this recession is shaping how people view their future and what they expect out of it:

“(New York Times) See that,” she said, spotting a man dressed as the Statue of Liberty. Standing on a sidewalk, he waved at passing cars with a sign advertising a tax preparation business. “That will be me next week. Do you think this guy ever thought he’d be doing this?”

And yet, she would gladly do this. She would do nearly anything.

“There are no bad jobs now,” she says. “Any job is a good job.”

That person dressed up as the Statue of Liberty is a very common vision especially with tax season here.  2010 is a very different world from 2007.  I wonder what lady liberty would think about how we are spending our tax dollars in bailing out banks while average Americans are forced to tighten their belts?

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The first important thing to understand is that yes, the income of middle class families has gone up since the 1950s but a large part of this was the rise of the two income households with women entering the workforce:

The above chart is disturbing in many ways because it bucks the nearly 50 year long-term trend of employment.  Now, even with two income households many with rising job losses are finding they now have to make it with one income while inflation has eroded their buying power over the decades.  In this recession 3 out of 4 job losses have been men.  If you have any doubt regarding the insidious nature of inflation I put together a chart looking at various costs over the last few decades:

Part of this is due to the Federal Reserve and U.S. Treasury trashing the U.S. dollar over the decades.  For example, in 1950 it took the median household income (which was largely a one income household) about 2 times the annual household income to purchase the median priced home.  In 2008, it took the median household income (now largely a two income household) four times annual earnings to purchase the median priced home.  In fact, the two income household has hidden a large part of how much the middle class has fallen behind in this country.  Now with this recession, the deep cracks are now being exposed in the system.

Income inequality has also risen in this country and a large part of it is due to the financial sector.  1 percent of our population control 42 percent of all financial wealth.  In fact, in the last decade the only segment of our population that has seen any sizeable gains in true wealth is the top 1 percent.  Every other category has seen a loss of housing net worth, wage stagnation, and higher costs for daily items that consume a larger part of their budget.  Just take a look at the chart below showing this change:

Source:  CNN

The above is looking at a one income household in 1973 versus the two income household in the 2000s.  It is interesting to note that in the 1970s Nixon took the dollar into a purely fiat system and since that time, the dollar has lost much of its actual value.  This would be expected.  The Federal Reserve with its banking lieutenants has been able to put our country so deep into debt that realistically we are in a position of never paying back all our outstanding obligations.  The only way out is via inflation and with a fiat system that is the path we are heading down.  This is important because when you look at the charts above prices rise for various reasons and inflation is a hidden tax.  No need for higher taxes to bailout the banking sector when you can just destroy the purchasing power of middle class Americans by monetizing enormous amounts of debt as we have done.

That is why in the next decade, Americans are now working for someone else beyond their immediate household.  A large chunk of their money is now going to the banking sector.  This can be in absurd payments to credit card companies, loss of purchasing power because of the Fed, or other hidden methods of taxing the public.  We are really at a crossroads for the middle class.  If we dissect the data further we realize that even though things cost more, much of it has been financed through debt:

Ironically the family in the early 1970s had more discretionary income than the family in the early 2000s even with a dual income.  Yet if you look around, it isn’t immediately apparent because of the massive debt bubble financed by the banking sector.  Sure people bought bigger homes and newer cars but all this was under a phony veneer of success and was financed with debt.  All of it was built around a mountain of debt.  Yet here is where the big divide hits.  Middle class families are now losing their homes through foreclosure.  Many are having their cars repossessed because they can’t make their payments.  Bankruptcy filings are soaring because people cannot service their debt.  So middle class Americans are paying the price with the rules that are setup.  Yet banks are not.  They are sucking the American taxpayer for all their horrible bets and are not dealing with the ramifications of their actions.  In other words, the bill is going to the middle class as the middle class is dealing with their own bad decisions.  This is part of the system built around the corporatacracy model of government.  Losses are socialized while gains are privatized.

And don’t kid yourself, this entire game was financed on debt:

And the small group of banks at the top now control a large portion of all FDIC backed assets in our country:

Source:  FDIC, Bank Financial Statements

Forget about the Republican or Democrat parties, we are being governed by the financial sector of this economy.  It is amazing how hard it is to get sensible legislation even after this great calamity.  To prove this point, in California an insurance company announced they are hiking healthcare premiums by 30 percent in the midst of this recession even though they pulled in billions in profits.  The government will sit back and let the middle class get fleeced because they are part of the problem.  They speak a good game but are bought by the industry.  Prove us wrong if this isn’t the case.  Enough talk, time for action.  From now on we need to focus on who is delivering results.  If you can, take you money out of the big banks and put them in local regional banks.  Let your local representatives know that their number one priority should be focusing on protecting our struggling middle class.  Time to get some real reform or we really risk losing our middle class.

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Commercial and construction loans combined are bigger than the entire subprime market and CRE values have now fallen by 43 percent from their peak across multi-family units, hotels, and retail space.  And with the CRE collapse there is a harder time selling off this space if there is no economic demand for certain spaces.  You also have a smaller pool of borrowers looking for retail space.  Take for example retail space near empty suburban housing divisions.  With the busted homes if you lower prices enough, there will be a market created at a certain point.  Yet this takes time.  But with commercial real estate you may have no market at any price.  Much of the CRE space is used as a business.  With no business there is no need for CRE.  So we have a giant $3.5 trillion market of loans that are largely toxic but the market seems to be ignoring this.  Take a look at the combined CRE collapse from data collected by MIT:

And the worst isn’t behind us.  It is still to come:

“(Moody’s) The delinquency rate on CMBS conduit and fusion loans increased by more than 50 basis points in January, bringing the total rate to 5.42%. The total delinquent balance is now more than $36 billion, a $3 billion increase over the month before. By dollar and basis points, this is the largest increase in the delinquency rate thus far in the downturn, as measured by the Moody’s Delinquency Tracker (DQT).”

Source:  Calculated Risk

So the speed of value declines in CRE is still deep and troublesome.  Why is it then that the market is ignoring this data?  Part of it has to do with the banking system bailouts.  It is now assumed that any large and significant problems are going to be handled by the U.S. Treasury and Federal Reserve.  In 2008 when the market was pricing in reality based risk and valuing companies on their own ability to succeed, countless firms were going to zero because that was their actual value.  Today, with the entire banking sector bailed out the market is now pricing in no failure and subsequently even companies with enormous amounts of commercial real estate seem to be doing well.  Take a look at one of the larger holders of commercial real estate in Simon Property Group (SPG):

This institution is now up by 159 percent since the March lows.  Has CRE really changed that dramatically in the last year?  And this is one of those areas being hit extremely hard:

“(Reuters) Simon’s Mills properties portfolio is comprised of two types of assets: regional malls and Mills properties, totaling over 45 million square feet of gross leasable area. A Mills property typically comprises over one million square feet of gross leasable area and has a combination of traditional mall, outlet center and big box retailers and entertainment uses, all focused on delivering value for the consumer. These assets are located in major metropolitan markets. The Mills is Simon’s fifth retail real estate platform.

Simon’s Community / Lifestyle Center Division consist of more than 70 centers comprising over 20 million square feet in size. These properties range in size from 30,000 square feet to over 900,000 square feet. All of the properties in the Community Lifestyle Center Division are an open-air format and offer a range of merchandise opportunities in a well located and convenient setting. These daily-need centers operate with the who’s who of big box anchor stores and many national, regional and local small store operators.”

Giant holding of retail space in a time when retail spending is collapsing.  We have seen consumers pulling back usage of credit cards and discretionary spending.  The only reason for this enormous price increase is the market is now highly mispricing risk because of the enormous moral hazard embedded in the entire system.  We went from having a bank failing causing the market to react to now, we need an entire country to reach collapse like in Greece to yield any reaction to the markets.  And this notion that companies are no longer at risk is naïve and at worst, problematic for our entire system.  We took systemic risk and digested it to the entire network of our economy.  The risk is now directly linked to taxpayers through various bailouts and Federal Reserve programs aiding banks.  Yet the problems are still there.  Unemployment is still at its peak and we’ve been losing jobs for 25 straight months.  Prices on residential real estate and CRE have yet to come back because people no longer have access to loans that don’t verify their income or ability to pay the loans back.  The market is mispricing risk yet again believing that these trillions in loans at risk will simply be back stopped by the entire country.

Japan gives us an example of what happens when a country turns their banking system into a zombie like nation.  The big banks like hungry alligators demand more and more money and this sucks away from the productive economy.  You also have a rise in part-time employment (Japan has one-third of their workers on part-time status).  We now have seen a massive rise in this part of our underemployed economy, the largest ever.  And Japan spent trillions in trying to stimulate their economy and here they are two decades later with little to show for their massive financial bailout.  Instead of facing the music at once it was spread throughout the Japanese citizens to pay over decades.  The outcome is the same, someone has to pay for the bad bets.  Will it be the institutions or the people?  The United States with their bailout policy has decided that it will be the people who pay for this mess.

So when you look at the CRE market, don’t be deceived that things are suddenly better.  In fact, they are as bad as they ever were.  The market is simply assuming that the taxpayer will make all these bad loans whole like Goldman getting protected via AIG and taxpayer funding.  In the end someone will pay and true values will eventually have to be reflected.

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If you are wondering why those on Wall Street have a hop to their step, it is because the stock market wealth is concentrated in the hands of very few:

The top 1 percent control 42 percent of financial wealth in the United States.  Now think about that fact.  Let us assume you have saved diligently for a few years into your 401k.  Before the crisis hit, you had amassed $100,000 (much higher than the median amount for Americans but we’ll just use this to highlight our point).  At the low, that $100,000 was probably down to $50,000 even being diversified.  With the major run up, the amount might now be back to $75,000 to $80,000.  Has the life of the average American really changed?  This money is actually retirement funds and this amount is not going to make a big difference in the way people live on a day to day basis.  Yet those in the top 1 percent with the current shift have seen billions go their way and this does make a big difference since many draw off capital gains on a yearly basis.

The 401k structure is problematic in many ways.  It is a method to lure in money from people to give them a taste of the Wall Street money machine.  Most of these funds are designed for retirement.  And with massive baby boomers retiring in the next few years, billions of dollars in funds will be sold into the market (which ironically will add pressure on prices because of demographic shifts).  This will push prices down right when people will start drawing from their nest egg.  The notion that you can garner 7 percent each year into infinity is a fallacy that has been exposed in this market crash.

We have been getting richer as a nation overall.  This is true.  But why is it so hard for average Americans to now get by with two incomes when one income seemed adequate 40 years ago?  The income gains have largely gone to the top 1 percent from 1979 to 2005:

Source:  Wikipedia

The above gains are inflation adjusted over three decades.  While income did increase across categories this distribution was not even.  It was largely shifted to the top of the pile.  Now it would be one thing if the top was being run by companies that actually provided jobs for a large part of America.  But it isn’t.  You have CEOs of Manhattan banks that are trading derivatives on toxic mortgages and betting up oil futures all so they can skim the system for money.  How has that added value to our country?  It hasn’t.  All it has done is transformed part of our economy into one subsidized taxpayer casino at the expense of the working middle class.

If you want to visualize this class division, it would roughly break down like this:

But even here, the top 1 percent isn’t even reflected.  Even working families with say a nurse and an engineer can bring in $100,000 to $150,000 a year.  But with things like the AMT even this tranche is feeling the burden.  The big transfer of wealth is going to the top 1 percent:

“(Wikipedia) As of 2005 there are approximately 146,000 (0.1%) households with incomes exceeding $1,500,000, while the top 0.01% or 11,000 households had incomes exceeding $5,500,000. The 400 highest tax payers in the nation had gross annual household incomes exceeding $87,000,000. Household incomes for this group have risen more dramatically than for any other. As a result the gap between those who make less than one and half million dollars annually (99.9% of households) and those who make more (0.1%) has been steadily increasing, prompting The New York Times to proclaim that the “Richest Are Leaving Even the Rich Far Behind.” Indeed the income disparities within the top 1.5% are quite drastic. While households in the top 1.5% of households had incomes exceeding $250,000, 443% above the national median, their incomes were still 2200% lower than those of the top .01% of households. One can therefore conclude that almost any household, even those with incomes of $250,000 annually are poor when compared to the top .1%, who in turn are poor compared to the top 0.000267%, the top 400 taxpaying households.”

So we see where the money is really going.  Even if we break down a family in California earning $100,000 you can see what was once considered rich is no longer the case:

And for those out in high cost states they will realize that a $350,000 home does not buy you much even after the tremendous crash in housing values.  The cost of healthcare is rising and college costs are going up so with one child, they will want to set aside some money if they want to see their child have a decent college education when they are ready to go.  And keep in mind that making $100,000 puts you in the top 17 percent of households in the U.S.:

So in reality, we should look at household that brings in $65,000 per year to get a more accurate feel of what the middle class is going through:

So after taxes, this family is taking home $4,240 a month.  With rising taxes, higher food costs, healthcare rising, and wages stagnant you can see how the middle class is falling behind on a daily basis.  We can further breakdown the class distribution as follows:

We do have class in our system and the biggest misnomer that has been perpetrated is that somehow, our goals are aligned with those of the banking Wall Street elite.  How much longer do people need to realize that both political parties seem to serve one master and it has an address on Wall Street?  The debates and battles seem to amount to this charade because once it comes time for policy, nothing gets done.  Even Elizabeth Warren who is fighting for basic consumer rights is finding it even hard to get through because of banking lobbyist:

“It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street — and the mortgage won’t even carry a disclosure of that fact to the homeowner.”

The battle has gotten intense.  Credit card companies have been doing criminal activities by jacking fees up and setting up traps for consumers before simple regulations come into effect.  Banks have pulled back on lending to average Americans while profits from stock speculation have soared.  They don’t call it speculation but label it as hedge funds, proprietary trading, or some other Orwellian language that hides the true nature of the system.

With the underemployment rate at over 17 percent and bankruptcies, foreclosures, and other financial distress rising for average Americans one small chunk of our population is benefitting on the backs of bailout funding.  This has been characterized as it “taking a plunder” to rip off the village:

So what you do is take from the public:

Source:  It Takes a Pillage

And give to the people that created this crisis:

I completely agree with Elizabeth Warren who is adamantly arguing that we are at a cross-road in terms of defending the middle class of this country.  Instead, Wall Street enjoys the fact that Americans are split down the middle on issues and fighting over petty things while trillions keep rolling into their coffers.  Time to wake up and see what is really happening to our nation.

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It is amazing that we even have to debate the issue of employment.  Our economy cannot function and provide the middle class a thriving environment without jobs.  This should be obvious yet the Wall Street crowd is feeling comfortable even though the public is still dealing with double-digit unemployment (we’ve lost jobs for 24 straight months and would have to go back to the Great Depression to find a similar streak).  In fact, the largest state economy in our nation that of California with an economy of over $1.8 trillion managed to average out an underemployment rate of 21.1 percent for all of 2009:

Source:  BLS

This chart is downright troubling.  Who would have thought that Michigan and California would lead the way in 2009 with underemployment rates over 21 percent?  Michigan has had issues for many years and their economy pulls in a GDP of $380 billion.  But California being the biggest economic state in our country with a GDP of $1.8 trillion should make you pause before you think we are somehow in recovery mode.  And from the looks of it, California with their historical housing bubble looks to have years of financial trouble to work through.  These issues are large and we haven’t even begun examining their state budget issues that are projected to come in at $21 billion.

Having a job is the cornerstone of our economy and also our vibrant middle class.  This has been the case for multiple decades and actually has been part of our identity since the disastrous years of the Great Depression.  Having a job is a pact with our country and Wall Street has taken this for granted in the last thirty years.  Slowly we moved from an economy that valued work to a casino like economy that funneled money into Wall Street and whatever demand came after the spending of the corporatocracy was given as crumbs to the public.

This notion of “jobless recovery” is such an oxymoron.  How can we have a recovery while losing 8 million jobs?  Just because bank bonuses are back to record breaking levels does not mean a recovery is in place.  Statistically we can massage the numbers however we like.  And what else would you expect?  We pumped $14 trillion in bailouts, backstops, and gifts to bankers so of course something was bound to happen.  Even a mountain can move with enough force.  Yet where are the jobs?

We should examine job gains after previous recessions to see the erosion of our middle class base:

Source:  NBER

The above chart marks the month ending of all recessions since 1945 and how long it took to have a net positive month in job gains.  For the most part, jobs were added fairly quickly and in many cases the month right after the official end of the recession.  But starting in 2001 we start noticing this shift to the jobless recovery era.  Now why did this occur?  Well for previous recessions the business cycle was easy to follow and track.  The economy pulled back and so did employment.  But once the economy got back on track demand followed and so did employment.   But since the banking oligarchs have taken over our economy, a gain in the economic indicators does not mean additional employment.  Since we now are largely importers we can buy cheap goods but have dismantled our goods producing base.   Ask yourself this, where did banks make their profits in 2009?  It definitely wasn’t because employment boomed.  Demand has been mute.  So where did it come from?  The profits came from gambling on exotic financial instruments all over the world with taxpayer money.  In other words, the recent stock market rally is artificial and no longer represents the economic reality for most Americans.

Another key indicator to look at is long-term unemployment:

It is amazing that the largest group of unemployed Americans falls under the long-term unemployed category.  Over 6,130,000 Americans fall in this group.  These are people that have been out of work for at least 27 weeks and will most likely, need to find a job in a different industry.  We’ve discussed this in previous posts that the groups that took the biggest hits in this recession are manufacturing and construction.  The financial industry has contracted as well but nothing compared to what other sectors have.  The above chart should be indicative of where we are.  This recession may be over in terms of GDP increasing but remove the bailouts and the stimulus and you get a deep economic mess.  Plus, we have yet to add any net jobs.  Think about this, we’ve added some $14 trillion in bailouts and backstops and we have yet to add a net job in the economy.  Is this really the reflection of a healthy economy?

The middle class since the 1970s has seen their savings dwindle, their work week increase while their pay lags, and the cost of necessities like housing and healthcare zoom past any income gains.  Even with two income households many Americans are simply trying to make ends meet.  Even those who are doing well, those making enough to be hit with the Alternative Minimum Tax (AMT) are feeling the pinch as well.  Because in reality, the last decade has been a gift to the top 1 percent of the nation.  Think about how taxes play out.  Many of these people live off capital gains that are taxed at 15 percent while even a physician working 70 hours a week will need to pay the top federal tax bracket of someone actually working.  In other words, our system values people who put their money into the casino as opposed to working.

How else can we explain the cheerful smiles of Wall Street traders while the nationwide underemployment rate is up over 17 percent?  How else can we explain the giddiness of bankers counting their bonuses while home values are still in the dumps for most Americans?  The continuous chants of “jobs lag the stock market” are absolutely tiresome and in fact, wrong.  The current system is only waiting like a beggar hoping Wall Street creates enough demand so most Americans can get a piece of the action.  We already saw what this creates with the housing bubble.  You can enjoy the ride for a few years but you’ll be kicked out once the fun is over.  While the public gets kabuki theater programs like HAMP bankers get bailed out 100 cents on the dollar like Goldman Sachs did through the AIG gift exchange.  In other words, this bailout isn’t for you and it certainly isn’t about creating jobs.

There is this argument about global bubbles.  Gold bubbles, a China bubble, another stock market bubble.  But take China for example.  Even though they are spending enormous amounts of money they have pumped billions into infrastructure projects that are at least building up their economy and putting people to work.  Engineering analysts for the U.S. estimate that we have about $2 trillion in infrastructure upgrade projects that we have delayed or simply ignored.  Why not take some of that $14 trillion and put it to at least reinforcing that core of our economic structure?  I’m not talking about building strip malls and dumping more money into the commercial real estate pit.  How about reinforcing our highways, bridges, universities, and other key components that make our economy strong and envied around the world?  If we are going to spend at least spend in the right place.

Yet the irony of this is the Wall Street system still believes in a “free market” world yet they’ve never even lived in anything resembling a free market.  Their idea of financial innovation is setting up credit cards with 79.9 percent interest rates and creating mortgages that harm your financial health when you’re not looking.

People are focusing on places like Greece, no doubt a big problem but California has an economy that is 13 percent of U.S. GDP!  Michigan has a bigger GDP than Greece ($357 billion) yet so much attention is being given to this issue.  Our nation’s number one GDP state has an underemployment rate of 21 percent and is on the precipice of financial insolvency.  Not only California, but other states.  In fact, many have been borrowing for their unemployment insurance funds trying to keep those long-term unemployed from going into despair:

Source: Propublica

Four enormous GDP states in California, Texas, Florida, and New York have bankrupt unemployment insurance funds and are now borrowing from the federal government who is also broke (not broke enough to bailout Wall Street however).  How anyone can look at the above and claim we are in recovery is really beyond me.

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It is troubling to see a sudden complacency entering into the market.  The VIX which measures option volatility is back to the point reached in August of 2007, right when the crisis ignited:

vix volatility index

The VIX was in the lows 20s in August of 2007, traded within a range until August of 2008 then exploded in October of 2008 and remained high until March of 2009.  Suddenly, we are back to levels seen in pre-crisis mode.  Even if we are to assume a recovery, are we really at a volatility level that justified a peak S&P 500?

Given all the movement in the market, it is hard to accept that we have been merely running the Red Queen race for over a decade.  Running faster and faster only to stay in the same spot:

The level we are at today was the same as it was in October of 1998.  A lost decade when we factor in inflation adjustments.  But over this time we have gone through two busted bubbles in technology and housing.  The housing bubble was the ultimate culmination because it also popped the consumer oriented debt bubble.  A new austerity is being forced on many Americans as they come to terms with a debt induced economy.

To comprehend the drop in earnings it is important to put the overall event in context:

snp earnings

Source:  Chart of the Day

For the first time ever did S&P 500 earnings go negative for a quarter.  This recession actually caused across the board losses to bring the earnings negative.  It has since rebounded but adjusting for inflation we are merely at Great Depression levels.  Is this cause for celebration?  For the moment, the current S&P 500 P/E ratio puts us at approximately 70 which is fantastically high.  If we use a broader valuation of ten year intervals we find that the current S&P is still over valued by 100 percent:

The above data comes from studies by Robert Shiller.  As you can see, after most severe downturns the P/E ratios hit a trough in a tight range of 5 and 10.  Our current 20 moving trend is high by 100 percent.  If we were to use a top line P/E of 10 then the S&P 500 should be valued between 500 and 600 as it was in March of 2009.  Until we see real significant jumps in earnings, most of this is just hype.

Keep in mind much of the gains come after a horrific 2008.  So anything above zero is going to look like a gigantic jump.  The fact that inventory depletion caused a void that is now being filled causes the market to over react.  Plus cutting fixed costs like employees helps the bottom line in the short run.  Yet the real mover of employment is still weak.  27 million unemployed and underemployed Americans.  A large part of our economy is consumption based so how is this going to impact the bottom line of many companies in the S&P 500?

Take for example a diversified company like Proctor and Gamble:

Even Buffet’s mentor Mr. Graham would reject this bread and butter company:

“However, Graham also preached Margin of Safety. Therefore, taking this formula and allowing a 50% Margin of Safety you arrive at a P/E of 14.25 in the above example. Many value investors would take a hard look at a company with a 14.5 P/E growing earnings at 10% a year.”

Take a look at one of the too big to fail banks of BofA and the P/E is off the charts:

Even Wal-Mart has a P/E above 15.  The point is, some companies like Wal-Mart are slightly overvalued given earnings but some of the hottest stocks in financials including BofA have P/E ratios with no justification.

Be cautious in this current market since current earnings do not justify the current S&P 500 level.  We heard similar arguments back when the NASDAQ hit 5,000 and we know how that turned out.

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Food Stamps

Nearly 37 million Americans are on some form of food assistance, the largest percentage on record.  It is hard to argue with food stamp data since these are usually allocated to Americans who can least afford any bumps in their income.  They are simply trying to meet the basic necessities of daily life.  That is why we have heard multiple stories of people waiting until the clock strikes midnight so they can begin shopping at Wal-Mart for food.  It is also the case that those at the bottom of our economic ladder are usually the first to be let go when recessions hits.  The unemployment rate for those with a college degree is 5 percent while those with no college education have a rate of 15 percent.  If we dig deeper, only 1 out 4 Americans have a bachelor’s degree so the average American has none to little college education and thus makes it harder to compete in the current troubled workforce.

I’ve seen many reports were schools, companies, and even households have cut back on manual labor positions which are usually very low paying.  This is one of the primary reasons why those at the bottom are seeing such crushing blows in this recession.  The above data tells us a very different story from what is happening on Wall Street.

There is also a financial cost to this:

Last year $37 billion was spent on food stamps.  This year we are going to be solidly over $40 billion (possibly $45 billion).

Bankruptcy

There are few things more painful than bankruptcy.  Bankruptcy is largely a disappearing middle class phenomenon.  Whereas with food stamps, you have to have virtually zero in assets with bankruptcy it is expected that you have something that you are filing bankruptcy against.  In many cases this is crushing debt from credit cards and other consumer loans but now, a large number of bankruptcy is now caused by the popping housing bubble.  Bankruptcy filings are typically the end of the line for many Americans.  They no longer can sustain their payments and have to file.  In 85 percent of the cases there is “no-asset” for creditors to go after.  This number is very high contrary to what is happening on Wall Street.

Credit Access

Americans have come to rely on their credit cards as if they were part of their monthly budget.  No longer just a convenience product it has become the payment option of choice.  It also made it easier for people to spend beyond their means because credit card companies understand human nature.  Well that is now coming back to hit many people including credit card companies.  But unlike the credit card companies, the average American doesn’t have access to unlimited funds from the U.S. Treasury and Federal Reserve.

During the peak, Americans came close to touching $1 trillion in credit card debt.  That number has now fallen to approximately $890 billion due to defaults and credit card companies simply removing access to credit in the marketplace.  Yet this pinch is hurting Americans in the short run.  Many of us will agree that many spent beyond their means.  Yet the hypocrisy that we are seeing is that banks are not needing to cut back because of their taxpayer bailout while they expect customers to tighten their belts.  It is the ultimate double standard but it shows who is running the show in D.C.

The fact that credit card companies are now adding onerous terms and traps for good paying customers shows how desperate they are to milk every last penny from the average American.

Unemployment and Hiring

If you look at the latest data from Gallup, employers are hiring and firing at the same rate as in March of this year when it seemed the entire world was flying off a cliff.  Yet today, we are still seeing the exact same numbers.  The fact that there are 6 Americans for every 1 job opening shows that the employment situation is still deep in the hole.  Without hiring or job growth, how are we to expect and sustainable recovery.  Things have gotten so bad that people cheer simply because the unemployment rate didn’t go up.  Too bad they ignore discouraged workers or part-time workers but that is of no consequence to the Wall Street crowd.

Until hiring picks up, the employment situation is still going to feel miserable.

Housing

And finally, the last piece we will look at in our misery index is monthly foreclosure filings.  Even with every kind of bailout and government assistance, monthly foreclosure filings are still near their peak.  It is hard to make any housing payment without a job, moratorium or no moratorium.  And that is largely a problem of how we attacked this problem.  It was assumed that if you fixed the banks and housing, all else would be fine.  But the banks only wanted to fix housing because that is where their money and leverage was.  They didn’t care about job growth.  In fact, if employment was solid and wages hadn’t been stagnant for a decade then higher home prices would have made sense.  Yet higher home prices merely because of higher bank leverage was the ultimate recipe for disaster.  The average American is now paying this bill by losing their home and bailing out Wall Street.  A two hit combo.

Until overall foreclosures begin decreasing, many are still going to deal with the burden of too much debt on homes that are worth less than they once were.

When we look at these five sectors most directly linked to Americans, you can see why there is very little to any recovery.  Unless you only care about the stock markets we have much to fix before we can issue a recovery statement.  The facts are very different from what is coming from Wall Street and D.C.

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