“(Prison Planet) A new advisory being sent by America’s third largest bank to its account holders has stoked fears that major financial institutions could be preparing for old fashioned bank runs if the economy takes a turn for the worse.

Originally reported by John Carney over at the Business Insider website, Citigroup is sending the following information to customers along with their bank statements.

“Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change.”

In other words, let us assume many clients decide to withdraw all their funds in a short period of time because people suddenly realize that $250,000 is actually being supported by pure faith.  In addition, average Americans realize that -$20.8 billion will certainly not cover $5.3 trillion in actual deposits that can be redeemed at any given time!  That is the psychology of our current banking system.  As long as people believe the wizard behind the curtain can back up the deposits then all is fine.  This worked as long as assets actually had values that banks claimed were true.  We know that game is over.  In fact, that is why the entire banking system has received roughly $13 trillion in bailouts and backstops.  It really is this fragile.  This is how the deposit insurance fund looks like:

Source:  FDIC

So you would think that people would at least try to diversify their investments since even a minor bank run would cause major damage.  But instead, people have increased their deposits at these banks at a rapid pace:

And I can’t blame them.  What choice is there?  Gamble in the Wall Street rigged casino or put it in the bank.  If we go back to December of 2007 when the crisis started, DIF-Insured deposits have shot up by $1.1 trillion and the actual fund has gone negative because of all the additional bank failures.  This psychology really does remind me of the mania surrounding the housing bubble boom. What if, hypothetically, people decide that one of the too big to fail is suddenly not that big at all, and Americans start withdrawing funds to some other institution.  Worse yet, they take their funds out and put them in a non-DIF insured institution.  Then what?  Or maybe people want the actual cash.  This is what is so troubling.  Just go to any local store and see how much actual cash is being exchanged.  It is all electronic debits and credits.  Insured to $250,000?  On what?  Clearly the U.S. Treasury would step in at this point and flat out start printing money but what use would that be since the dollars you are being paid with would quickly devalue (even more).

I’ve seen a few people dismiss the current negative DIF fund by saying “the FDIC is flush with cash.”  Really?  Let us examine that part of the equation.  From the latest FDIC quarterly bank report:

“In June 2008, before the number of bank and thrift failures began to rise significantly, total assets held by the DIF were approximately $56 billion and consisted almost entirely of cash and marketable securities (i.e. liquid assets). As the crisis has unfolded, liquid assets of the DIF have been to protect depositors of failed institutions and were exchanged for less liquid claims against assets of failed institutions. As of September 30, 2009, although total assets had increased to almost $63 billion, cash and marketable securities had fallen to approximately $23 billion.”

Did you get that?  The FDIC “cash” went from roughly $56 billion in June of 2008 to $23 billion in September of 2009.  And supposedly, they now have “assets” of $63 billion but how much of this is crap mortgages from failed banks like WaMu and IndyMac?  In reality, the FDIC at this point only had $23 billion to back up $5.3 trillion.  But in December of 2009 the FDIC took the radical step to front-load prepaid assessments:

“To provide the FDIC with the funds needed to carry on with the task of resolving failed institutions in 2010 and beyond, but without accelerating the impact of assessments on the industry’s earnings and capital, the FDIC approved a measure to require insured institutions to prepay 13 quarters worth of deposit insurance premiums. These prepayments—about $46 billion—were collected on December 30, 2009. Cash and marketable securities stood at $66 billion on December 31, 2009.”

Now don’t you feel better?  The FDIC took in 13 quarters of prepaid deposit insurance premiums and we now have a combined total of cash and marketable securities of $66 billion.  In other words, one too big to fail going down and good luck with that $250,000 backup really being worth what you would actually think.  This is what surprises me here.  We all know things are actually getting worse with the banking system yet we keep piling on the risk.  In fact, the FDIC has even upped the number of troubled banks on their list:

You know if the FDIC is saying 702 we know it is much higher.  I still stand by my prediction that this crisis will bring down at least 1,000 banks when all is said and done.  I love how the FDIC lists “assisted institutions” as 8 with total assets of nearly $2 trillion.  I wonder who those could be?

The bottom line is, we are playing a very big game of confidence here.  Gallup just ran a poll showing that 19.9 percent of Americans are underemployed.  That number is getting really close to the 25 percent rate of the Great Depression but with part-time employment.  That does a number on the psyche of average Americans.

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75,000,000 U.S. households (66 percent of all households) live on $75,000 a year or less.  54,000,000 live on $50,000 or less a year (47 percent of all households).  This is where the average American is financially in today’s economy.  And most of this money comes from a job that pays a weekly or monthly paycheck and not some dividend check from a trust fund.  You always hear that the top “x percent” pay all the taxes.  Well the burden is now falling squarely on people that make $200,000 or less a year.  Just run the numbers for a $50,000 household:

After taxes a tax payer here in California is taking home about $2,900 per month.  The notion that the very rich pay all the taxes is really a misnomer.  They also get the most breaks.  And the distribution is even more skewed.  It should be said that most of the taxes are paid by those under the top 1 percent umbrella.  But once you get over that hurdle, the numbers become more interesting.

The extremely wealthy are the people getting all the perks of the current system; accounting gimmicks, offshore accounts, capital gains tax rates that are favorable, and other items like carryover losses that most Americans never even deal with.  The bailouts, the tax breaks, and items that specifically only improve their bottom line.  First, let us move up the financial ladder:

In fact an income of $100,000 or more a year puts you in the top 15 percent of wealth earners in this country.  Looking at 2006 IRS records shows that an income of $108,904 would put you in the top 10 percent while an income of $388,806 would put you in the top 1 percent.  And here is the real break.  Because tax breaks become more generous for the ultra rich especially when a large number live off of capital gains and only pay 15 percent in taxes on this while working grunts have to pay every imaginable tax on the books.  Let us run the numbers for a family making $100,000 in California:

A single filer in California making $100,000 a year will take home roughly $5,000 per month.  They are paying in taxes nearly 40 percent per year.  But take for example someone that is taking in $100,000 a year in capital gains.  The W-2 worker is paying roughly $40,000 in taxes per year while the capital gains earner is paying $15,000 per year.  That is a significant difference but this is how the ultra wealthy protect their money.  This argument that all these gains are earned through the free market belies the fact that right now the vast majority are implementing bailout policies that are protecting the mega rich.  Why else do you think Wall Street is jumping up and down because of this 70 percent stock market rally while most Americans still have little faith in the economy:

Funny how only 12 percent actually think the economy is excellent or good.  Probably the people that have their money loaded up in Wall Street.  However the vast majority still see the economy as performing poorly because it is.  The unemployment and underemployment rate is up to 17.3 percent and would be higher if we calculated the numbers more accurately.  For example, we have people that are simply dropping out of the work force and no longer impact the headline rate.  So for many Americans, the recession is still dragging them further into a slump.

And this observation is not limited just to the facts.  Take a look at some analysis (a 2005 article before the bust):

“(NY Times) The Times analysis also shows that over the next decade, the tax cuts Mr. Bush wants to extend indefinitely would shift the burden further from the richest Americans. With incomes of more than $1 million or so, they would get the biggest share of the breaks, in total amounts and in the drop in their share of federal taxes paid.

One reason the merely rich will fare much less well than the very richest is the alternative minimum tax. This tax, the successor to one enacted in 1969 to make sure the wealthiest Americans could not use legal loopholes to live tax-free, has never been adjusted for inflation. As a result, it stings Americans whose incomes have crept above $75,000.

The Times analysis shows that by 2010 the tax will affect more than four-fifths of the people making $100,000 to $500,000 and will take away from them nearly one-half to more than two-thirds of the recent tax cuts. For example, the group making $200,000 to $500,000 a year will lose 70 percent of their tax cut to the alternative minimum tax in 2010, an average of $9,177 for those affected.

But because of the way it is devised, the tax affects far fewer of the very richest: about a third of the taxpayers reporting more than $1 million in income. One big reason is that dividends and investment gains, which go mostly to the richest, are not subject to the tax.”

And this is exactly what we saw in the following five years and are still seeing.  Republicans and Democrats alike seem destined to protect this elite group.  Hedge fund gains and Wild West gambling on Wall Street allowed the ultra rich to pull away from the average American pack while not even paying their fair share in taxes.  This is still going on by the way since the system also allows carryover losses in stocks and wonderful loopholes to game the system.

“Another reason that the wealthiest will fare much better is that the tax cuts over the past decade have sharply lowered rates on income from investments.

While most economists recognize that the richest are pulling away, they disagree on what this means. Those who contend that the extraordinary accumulation of wealth is a good thing say that while the rich are indeed getting richer, so are most people who work hard and save. They say that the tax cuts encourage the investment and the innovation that will make everyone better off.

“In this income data I see a snapshot of a very innovative society,” said Tim Kane, an economist at the Heritage Foundation. “Lower taxes and lower marginal tax rates are leading to more growth. There’s an explosion of wealth. We are so wealthy in a world that is profoundly poor.”

Of course that was their impression before they realized all the wealth of the average American was merely debt financed gains pushed out by Wall Street.  It was all hat and no cattle.  The real wealth, financial wealth is controlled by the top 1 percent who control the levers of 42 percent of our nation’s financial wealth.

“But some of the wealthiest Americans, including Warren E. Buffett, George Soros and Ted Turner, have warned that such a concentration of wealth can turn a meritocracy into an aristocracy and ultimately stifle economic growth by putting too much of the nation’s capital in the hands of inheritors rather than strivers and innovators. Speaking of the increasing concentration of incomes, Alan Greenspan, the Federal Reserve chairman, warned in Congressional testimony a year ago: “For the democratic society, that is not a very desirable thing to allow it to happen.”

And this is an enormous issue of framing the argument with phony data.  “Poor people don’t pay taxes.”  Actually they do.  A poor person who buys a $100 TV here in California pays the same 9.25% sales tax as the wealthy person.  They also pay into the Social Security and Medicare system.  But again, the uber wealthy only like to look at Federal tax rates and frame the issue to their own liking.  What about the hidden tax of inflation that has pushed up the cost of food and education?  Remember that estate tax debate?  Most of us have heard of it but this turns out to be an incredibly narrow issue that only helps the ultra rich:

Source:  IRS

So we had a major debate for 50,000 tax filers in a nation with over 113,000,000 households?  The top 1 percent are betting on you not doing the numbers.  They want to keep the game going because it is rigged in their favor.  The banking bailouts are largely a transfer of wealth to those who least need it.  Until we get this thing under control, the average American is going to feel the pinch of the economy deeper and deeper.

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First, the S&P 500 is down a stunning 24.1 percent since the start of the decade.  Yet Goldman Sachs managed to pull off almost an 80 percent gain during the same time:

So for the poor average American who simply dollar cost averaged into the stock market as every good corporatocracy banker would tell them, they would have fallen behind someone who simply dollar cost averaged into their mattress.  Yet if you happened to dump your money with the government sponsored and back stopped Goldman Sachs you would have done much better.  Ironically these bankers are the same people who created the financial instruments that sent our economy into a tailspin.

The average American is finally realizing that much of the corporate power in Washington is doing very little for them and doing more and more for Wall Street.  So the stock market over the decade brought negative returns to Americans.  How did the housing market do?

The median U.S. home price in November of 1999 came in at $137,600 and ended November 2009 at $172,600.  This 25 percent gain is wiped out once we factor in the Federal Reserve inflating away the U.S. Dollar.  Housing over the decade is actually down 3 percent.  This is where the largest store of the average American wealth is stashed and it went negative for the decade.  Yet somehow the ultra rich seemed to make out like bandits with all the bailouts even though are economy was still fizzling out from two mega bubbles.  There is a reason they call it a golden parachute.

Let us recap.  The stock market brought negative returns both nominally and in real terms for the decade and housing is actually down in real terms.  So how did Americans do over the decade in the employment front?

The unemployment rate is the highest it has been since the early 1980s.  If we look at the employment population ratio we will see that our economy is still trending to the downside.  Yet the corporatocracy is happy to feed the propaganda line that the average American is better off.  Really?  How so?  Once the bubble decade wealth imploded the typical American is now in a worse position.  The national debt also exploded during this decade.  So housing values cratered, the stock market is still massively down, and employment is still in shambles.  Yet we are to believe things are just fine.  People are now finally waking up to the reality that the current system is designed to rip them off and steal from them at every point in the road.

Take credit cards and bailouts for example.  Some credit card companies are hiking fees up on customers before new regulations hit this year.  These are the same companies that benefitted handsomely from the corporatocracy bailouts.  This money came from the average American yet they are sticking it to them each and every other way.  For example, last month I was stuck by a “savings withdrawal fee” from Chase.  I never saw this before.  So I called up the bank and asked them what this was.  It amounted to a $12 fee for each transaction.  As it turns out, the wonderful Federal Reserve through Regulation D yanks money out for people making more than 6 ACH transfers per month from savings accounts.  So if you wanted to move your money from say your toxic too big to fail bank to say a local community bank, make sure you don’t do more than 6 transfers for the month or you are going to be hit with a $12 fee for this.  Insane policies like this make me realize that something is going to give in this decade.

But over the decade our U.S. dollar must have gone up right?  Let us take a look:

The U.S. dollar is down 23.5 percent for the decade.  So if any of you actually left the country and spent abroad you would quickly realize how weak the dollar has gotten.  This has to do with the massive government spending over the decade.  Over the holiday Congress voted to up the debt ceiling since we are breaking through every imaginable barrier possible.  Take a look at this below chart:

We went from $5.7 trillion to over $12 trillion in Federal government public debt in 10 years.  And what did we really get?  We just went through countless data points and where are we better off?  The reality is the money is being dumped into the vortex of the banking and corporate interest that run this country.  It is amazing that even with unemployment claims the media is championing this as a good sign yet they don’t even bother to look at emergency unemployment claims that are flying off the chart!  That is, they are focusing once again on the wrong data.

So it is going to be a challenging decade for average Americans.  The economy flew off the cliff and instead of reforming the system things are back to normal and the corporatocracy keeps on stealing from the population.  The mega wealthy are doing fine and the gap between rich and poor is the largest it has been since the Great Depression.  Welcome to the new gilded age.  Our lost decade is now in the bag.  Are we up for another one?  Let us hope not.

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Many Americans are still struggling at the depths of this recession.  We have 37 million Americans on food stamps and many wait until midnight of the last day of the month so checks can clear to buy food at Wal-Mart.  Do you think these people are starring at the stock market?  The overall data is much worse:

Source:  William Domhoff

If we break the data down further we will find that 93 percent of all financial wealth is controlled by the top 10 percent of the country.  That is why these people are cheering their one cent share increase while layoffs keep on improving the bottom line.  But what bottom line are we talking about here?  The Wall Street crowd would like you to believe that all is now good that the stock market has rallied 60+ percent.  Of course they are happy because they control most of this wealth.  Yet the typical American still has negative views on the economy because they actually have to work to earn a living:

The above daily poll asks Americans about their view on the health of the economy.  Only 13 percent believe the economy is good or excellent.  Funny how that correlates with the top 10 percent who control 93 percent of wealth.  Many Americans were sold the illusion of the bubble.  They were sold on the idea that their homes were worth so much more than they really were.  And many used this phony wealth effect to go out and spend beyond their means.  They started spending as if they were part of this elite 10 percent crowd.  But once the tide rolled out, it was clear they were not.  And the horribly built bailouts demonstrate who is controlling our political system.  This was not the rule of a capitalist system but a corporate run government.

Just think about the bailouts and which companies were saved.  We ended up bailing out the worst performing and troubled companies thus keeping alive companies that should have completely failed.  Did we bail out Google?  Proctor and Gamble?  Of course not.  These companies actually produce something that people want.  Banks and especially the Wall Street kind merely keep that 42 percent happy by making sure their stock values stay high so they can keep on making money while the average Americans is sold up the river.

Yet many were brought into the easy money fold by going into massive amounts of debt.  And who has most of the debt?  That is right, the average American:

The bottom 90 percent have been saddled with 73 percent of all debt.  In other words much of their so-called wealth is connected to debt.  Debt is slavery for many especially with egregious credit card companies taking people out with absurd credit card tricks and scams.  Yet the corporate propaganda machine is strong and mighty.  Have you ever received an inheritance?  A large one?  Probably not because only 1.6% of all Americans receive an inheritance larger than $100,000.  If this is the case, why in the world do politicians worry so much about the tax impacts of this?  Because they want to keep the corporatocracy alive and well so their spawn can get a piece of their pie.  They give the illusion to average Americans that if you only work hard enough you too can join this elusive club of cronies.  The data shows otherwise.

But if we start looking at investment assets, the true wealth in the country, we start realizing why Wall Street is all giddy about the recent stock market government induced rally:

Of investment assets 90 percent of Americans own 12.2 percent.  The rest goes to the top 10 percent.  Welcome to the new serfdom.  The bailouts that went out to the filthy rich were more about protecting their tiny corner of the world than actually making the economy better.  That is why it is interesting to see companies fire people and Wall Street cheer for the increase in earnings per share.  Good for the few at the expense of the many.  Yet the propaganda out of Wall Street and our government is what is good for Wall Street is good for you.  Just like that 1.6% inheritance issue, the vast majority of Americans won’t deal with that and their primary concern is simply a job.  A job that has provided stagnant wages for a decade while the ultra wealth get richer and richer in a phony form of corporate socialism.

If you break down the data you realize that most Americans don’t have time to speculate in stock markets:

Only 34% of U.S. households make more than $65,000 per year.  What is that after taxes?  Let us use a state like California for example:

Now if we breakdown this data further you will realize that most of the money is consumed by cost of living necessities, not Wall Street speculation.  Just to show this example let us look at a family budget for someone in California making $100,000:

Notice after running the budget we are in the hole for $1,000?  That is because of many costs that typical families have.  We can debate the merits of where they are spending money but the point is this; are these people really making beaucoup money from the stock market?  They are putting away $12,000 a year into their 401k.  As we have now found out, 8 percent a year is never guaranteed in the stock market although the corporate powers would like you to believe that so they can have other suckers to unload stocks onto.

“Yet the median household income in the U.S. is $50,000 and not $100,000.  They have even less to invest.”

They are more concerned on working to have a paycheck to pay for necessities.  They are more concerned about paying their house off by the time they retire and hopefully, have a little bit of retirement funds coming in.  The sad fact is most Americans rely on Social Security when they retire.  All those ads of unlimited golf and daily trips to Tahiti are propaganda of how Wall Street lives and they want to sell you the sizzle, and clearly not the steak.  They live their lives paper pushing and sucking the life out of the productive part of our economy.  The average American should now realize this since this financial crisis was primarily caused by them.  They are now on a massive campaign to blame Americans for this.  This is hypocrisy to the next level.  Many Americans have paid for their mistake by losing their home through foreclosure.  We have 300,000 foreclosure filings a month.  Many have taken a hit to their overall stock portfolio (if they have one).  Yet the corporate cronies have protected their horrible economy crushing debts at the taxpayer expense.  Unlike you, many hold bonds on the companies and not common stock like many Americans.  Bondholders have been protected at all costs during this crisis.  Goldman Sachs through AIG received 100 cents on the dollar for their horrible bets.  The banks have unlimited back stops thanks to taxpayers.  This is how the top 1 percent rule the new feudal state.

Welcome to the 2010 serfdom.  Time to wake up and restructure the system.  Many people are starting to wake up to this massive scam.

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In the latest data, the median American household brings in $52,000 per year.  Let us break down this data:

Using Texas or any state with no income tax is a good starting point because it puts us at the higher end of the take home pay bracket.  Some states like California have state income taxes reaching up to 10 percent.  However, this allows us to see how much actual take home pay the average American family is working with.  By looking at the above it looks like people have roughly $3,400 a month for all additional expenses.  Keep in mind that we are also not putting money away in any retirement accounts or paying for health insurance and that can add a large line item.

Let us see how the average family spends money:

So let us use these estimates with the monthly take home to get an idea of what people are working with:

From here you can understand why the current recession is hurting so deeply.  Take for example the housing expense.  The current median home price in the U.S. is $174,000.  So if the family above with the median income went to purchase this median priced home, how much are they looking to spend?  Let us assume they buy the home via a FHA insured loan requiring only 3.5 percent down:

Down payment:            $6,009

Mortgage:                     $167,910  (at 5.5 percent 30 year fixed)

PI:                                $953

On the surface this may seem okay.  But we are not including taxes and insurance above.  If you include taxes and insurance, let us assume this family buys in Texas, the taxes with insurance can range from 2.5 to 3 percent of the purchase price of the home:

Insurance and Taxes:                $362 per month

Total monthly housing payment: $1,315

The median family in the U.S. spends $1,165 per month on housing.  This may not seem like a big difference but we are looking at an 11 percent difference for the biggest line item here.  That is why housing in many parts of the country is still having trouble.  Americans have become more price conscious in a time with 17 percent unemployment and underemployment.

The transportation item in the budget above is also high.  Spending nearly $600 a month Americans have become more reluctant to buy expensive autos.  This number looks to include one car payment and fuel cost for the average family with two cars.  Assuming a $300 car payment and $300 in insurance and fuel cost per month, many families are now unable to purchase a new car that averages close to $30,000.  That is why the government found it necessary to offer a program like cash for clunkers to get people buying.  But that program has run out of steam:

Source:  Calculated Risk

It is obvious what occurred above.  Sales for autos were front loaded into August and fell off when the cash for clunkers program wore off.  We can expect a similar thing to happen for home sales that have benefited from the $8,000 tax credit.  What is largely missed in all of this is the actual money Americans have in their wallet.  That money comes from working and with unemployment rising, more and more people are having less and less money to spend.
With no job or hours being cut, Americans are all feeling this recession including those who are working:

The above gives a better perspective on the new consumption era.  Even those that are working are having shorter work weeks.  This is happening from less overtime and also employees who are furloughed.  These people are still considered fully employed yet their wages do not reflect a fully employed work schedule.

So when we break down the above budget and see what is happening it is clear that Americans are going to permanently shift their spending habits short of us going back to the bubble peak days.  Not by choice this change is occurring, but by economic force.  The U.S. Treasury and Federal Reserve are targeting the dollar so we can expect imported good prices to increase in the next few years (short of the dollar becoming strong again).  It is a new era for the middle class dream.

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On the unemployment front, the rally is being bolstered by “slower job losses.”  However, since the rally took off we have lost over 2 million jobs showing up the entire 2001 recession.  In total, we have 26.3 million unemployed and underemployed Americans.  Many of those that are working are seeing wage cuts or stagnant wages.  And on the hiring front, we are at lows that were reached in March:

Source:  Gallup

There is little good news here.  Although job cuts might have come down from the 741,000 in January who really expected cuts to stay at that level?  At that rate, we would have lost nearly 9 million jobs in one year.  That was clearly unsustainable.  But even the current 216,000 job cuts in August put us at a rate of 2.5 million job losses a year.  The market is rallying as if this is good.  It is also ignoring that hiring figure and assuming that somehow jobs will come out of some new field (or maybe from finance and real estate as bulls would hope).  From what industry?  That is the real question.

The P/E ratio based on operating and reported earnings is all fantasy.  Take a look at this chart:

Source:  Chart of the Day

Now this chart is based on the current quarter and most analysts look forward in coming up with an accurate figure.  Bulls on the street are obsessed with operating earnings because this is where you can fudge the data and it is always higher than actual reported earnings.  For example, with the $3.5 trillion commercial real estate bust coming many financial institutions currently have these properties on their balance sheets at peak values!  These companies know full well that an avalanche is heading their way but they’ll milk the accounting as much as possible.  Why else would they be developing clandestine pre-emptive bailout plans if all was well?

If you look at the past 75 years of data, market peaks were hit at a P/E of roughly 20 times reported earnings and troughs occurred at about 10.  With the mania we hit a peak of 40.  The current P/E is off the chart because of the weak quarter.  So think about this for a few minutes.  This is the worst recession since the Great Depression.  You would think that a P/E would reflect this actual fact.  Not the case.  That is why the P/E is blowing right through the chart.

Just run the numbers for Q2 of 2009.  With 99 percent of S&P 500 companies reporting earnings the earnings per share is $13.51.  That would put the current P/E at $77.  That is insanity.  If we were at even the previous bubble averages of a P/E of 20, the current S&P should be at 270.  Now this is merely an observation.  Most market bulls will point to future projected operating earnings which are glossed over with onetime gains and other gimmicks.  If you want to believe in a P/E of 20 then you need to believe that somehow, we are going to get $50+ per share earnings in the next quarter.  And 20 is a historically high P/E ratio.  And these are some of the kinds of earnings folks are projecting even though the consumer (aka the American worker) is losing their consumption power.  Keep in mind that many of the short-term operating earnings are going to be based on these onetime injections.  To expect them going forward is to believe in the reemergence of the bubble economy.

Take a look at the contraction in private inventory:

Now obviously a drop like this reflected an end of the world scenario.  So much of the recent jump in activity is now reflecting this more normal pre-bubble world behavior.  Yet the stock market is reflecting valuations from the bubble coming back.  As usual, a bubble will end bad.  And banks have been juiced to the max:

Source:  NY Times

The biggest banks have regained $700 billion in market cap since the March lows.  How many jobs can you get with $700 billion?  Obviously zero if you’re the average American given the trend.  Either way, the S&P 500 is massively over value and is predicated on the bubble coming back.  That is not the case.  When reality hits and those onetime fixes run out, the rug will be pulled out again.  The media and pundits are claiming we are now officially out of recession.  If that is the case, you can rest assured this will be a double-dip recession.  That is virtually assured given these absurd valuations and putting all the money back in the casino known as Wall Street.

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The current recession by many accounts is one of the worst since the Great Depression.  Some 26 million Americans are without work or underemployed and many other millions have seen no pay raises or have seen their hours cut back.  With an aging population and rising healthcare costs, many are facing a balance sheet that seems impossible to balance:

To understand this data even better, let us break out the income by top earning households:

In order to be in the top 20 percent of households, a family would need to earn $90,000 a year.  To be in the top 10 percent a family would need an income of $118,200.  Yet these numbers are clearly out of the reach of the 50 percent of U.S. families making $50,000 or less a year.  Let us put out a hypothetical budget of a household making $50,000:

With this budget we are assuming a few things.  First, we are being generous in assuming no state income tax.  In a state like California, this can add up to a 10 percent burden depending on the circumstances.  But for our purposes, we are assuming no tax here (for example, Texas).  The gross monthly pay comes out to be $4,166 but after taxes, the net pay is $3,287.  This is where you can see why the middle class is having a tough time maintaining in the U.S.

We are assuming the person is renting a home.  Rent of $1,200 should be sufficient for a nice home (a 3 bedroom and 2 bath home in Texas).  In terms of utilities including gas, electric, and phone I went on the conservative side.  These costs have been creeping up now that oil is back up.  Groceries are always a big expense in a household.  For the middle class family, food can take up to 15 to 20 percent of their net pay.  And food has gone up in price.  Now, people are getting more for less because of smart packaging:

You also see less quantity in items like cereal for example.  For most middle class Americans housing is the biggest line item.  This applies to both renters and homeowners.  Roughly one-third of net pay will go to housing.  In the above budget, we are assuming the household has one car payment at roughly $300 per month.  They may have two car payments so you would have to adjust for this.

Next, we need some form of emergency fund.  We are setting aside $400 per month here.  Ultimately, you want to have 3 to 6 months of expenses set aside.  At roughly $2,800 in monthly expenses, we need to set aside $8,400 at a minimum.  At $400 a month, this will take us 21 months.

We are spending $100 in entertainment.  This probably amounts to 2 movies and 1 night eating out.  Many Americans do more of this.  I’m not advocating one thing or another but just pinpointing why someone at the middle income level is going broke and it doesn’t take extravagant spending.

Haircut and clothes are optional, I know but if you work in a professional environment you might need to have a decent set of clothes.  This line item can adjust depending on your work environment.

So what are we missing?  How about retirement funds and healthcare?  These are expensive items.  You can see that $300 to $500 a month for healthcare will have to come from another line item in the budget.  Retirement?  Ideally they will invest pre-tax dollars into the market but people are shaken up since the S&P 500 has become basically a Wall Street casino.

So it is easy to see how people can go under with a $50,000 household income and that is what we are seeing with the rising unemployment rate and the massive jump in bankruptcies.  It is interesting to note that states with income tax and no tax are having problems.  California for example had to patch up $60 billion in deficits this year alone.  But if you think states with no taxes are immune to problems, take a look at the Gini Index for states in the U.S.:

It is interesting to note that a handful of states have higher income inequality and two states that you would expect at opposite ends of the spectrum, New York and Texas both show up in this data point.  Only 5 states have higher than the U.S. Index average for the Gini Index.  It is also interesting that some of the states also have some of the highest poverty rates:

So the solution to the current crisis isn’t so clear cut.  You have states with high taxes like California having problems and states like Texas with no income tax having some of the highest poverty rates.  Bottom line is many families making the median of $50,000 a year are being crushed in the current recession.  It is all good to say things are getting less worse but we are not seeing any job growth.  That is a major issue.  With an aging population, how are people going to pay for food and healthcare?  Social Security just announced no cost of living adjustment for the year.  These are all issues we will be facing in the upcoming years.

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First, let us look at this insanity on a chart:

Source:  Chart of the Day

I think when people see charts like this they start doubting the source.  This unfortunately is accurate.  Even during the Great Depression, when the market plunged to the depths, the PE ratio never even touched 20 and some of the many mini-rallies after the crash of 1929 involved legitimate looks at low PE ratios.  A PE ratio is important because it factors in the price of a stock to the actual earnings.  This matters.  Even right before the tech bubble burst in 2000 the S&P 500 had a PE ratio over 40 and this was extremely expensive.  In this case, we have 26,000,000 Americans unemployed or underemployed and earnings are simply not there with consumers pulling back.  So what is causing this massive rally if not earnings?  This recent rally is being driven by the “getting less worse” mentality.  Sure, we lost 247,000 official jobs last month but sure beats 700,000!  Okay, earnings are way low but it beats actually losing money!  This kind of thinking is leading many sheep to the slaughter again.

Take a look at some of the official data from S&P itself:

Source:  S&P

At the end of last month, only three weeks ago the S&P 500 data had the PE ratio at 143.  So to currently have it at 129 is a slight improvement.  But with only 3 percent of companies reporting to close out the quarter, we are massively over priced.  We have never seen the entire index suffer a negative earnings quarter that is until recently.  So the crash wasn’t a panic but actually based on declining earnings.  That quarter saw $202 billion in negative earnings (losses) from S&P 500 companies reporting.  Q1 of 2009 saw reported earnings come in at $7.52 per share.  So right now, everything looks good when looking from the ground up.

Yet to show you how off predictions have been and how wrong analyst can have earnings, let us look at the Q3 2009 estimates and how they have evolved over one year:

Now this chart is something.  Back in June of last year, the Q3 2009 estimate was coming in at $27.68.  Keep in mind we were already in recession at that point.  In September of 2008, the EPS didn’t change much for analysts.  After the market crashed and the U.S. Treasury and Federal Reserve had to step in to save the financial world supposedly, they finally revised earnings lower.  The market went lower and lower and now, the latest estimate for Q3 of 2009 earnings is $14.57.  This new revised estimate is a drop of 47 percent from the June 2008 estimate.  Sounds about right with the market.  Yet the market is up 50 percent while earnings estimates are down by 50 percent.  Any value investor will tell you that looking at PE ratios is absolutely crucial.  Some of the top experts avoided the tech stock mania because they were seeing stocks with PE ratios of 100 or even 200 on the prospect of making it big.  Some did survive but the vast majority didn’t.  Even a high flying stock like Google has a PE slightly above 30.

Now assuming the $14.57 EPS for Q3 of 2009.  Is this necessarily good?

1026 (current S&P level) / ($14.57 estimated EPS) = 70 PE ratio

Even with this estimate, the PE ratio would still be at 70!  At record levels.  And keep in mind, a big jump of earnings in these last few quarters involved massive infusions of free money into the banking sector.  Do they not realize that there are still some $3 trillion in toxic commercial real estate debt left?  Of course on the estimates, you can see that the financial sector is having the best expectations.  The industry that brought us the credit and housing bubble is now going to lead us out of this massive recession.  We are in good hands.

Many now agree that this is the worst recession since the Great Depression.  Yet many think things will turn around in a few months.  These kind of market dislocations last years and impact generational thinking.  There is a new austerity out in the market.  In fact, this new spending habit is taking hold so deeply that the government had to entice people to trash their working vehicle for a new car.  People are surprised that the cash for clunkers program worked.  How are they shocked?  Free money for your bucket and a new car?  Who could have ever seen that coming!

Yet even the analyst estimates put the S&P 500 at a PE ratio of 70 for Q3 of 2009.  A more normal average PE ratio even at the high end would be 20.  From the mid-1930s to the 1980s the PE range would peak out in the low 20s.  But then, the technology bubble and housing bubble gave us two decades of wild valuations.  But let us assume a high 20 PE ratio.  What should the stock market be valued at?

(X/ $14.57 Q3 2009 estimate) = 20 PE ratio

291.40

This is the insanity of the current market.  For the PE ratio to come in at 20 for Q3 of 2009 and with estimated earnings of $14.57 per share, the S&P should have a value of 291.40.  This is even less than that the 666 low reached in March.  So why the rally?  Because people believe we’ll be back to peak earnings again.  And insiders seem to have a different opinion.  Last week, insiders had 18 buys for $30 million while on the sell side some 131 sold for over $889 million.  Maybe the insiders know something that the public doesn’t regarding the S&P casino?

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The irony of what is going on is that many items are now reverting back to the inflation adjusted mean now that credit is being sectioned off from the current economy.  What this also implicitly tells us is much of the rise in the price of homes, cars, and other debt items was largely inflated by the access to credit.  Let us for example look at the price of a Los Angeles home over the past decade:

What this chart shows us is that the median home price in Los Angeles is now back to 2003 price levels and the trend is still moving lower.  It is highly likely that once we reach bottom, we will be back to 2000 price levels.  This has much to do with the intricacies of the California housing situation but also the fact that over time many systems including those economic, revert back to the historical mean.

In December of 1999, the median home price in Los Angeles was $192,000.  It reached a peak of $550,000 in August of 2007.  Currently, the median price is $300,000.  Just for the sake of reference, I went to the BLS inflation calculator and put in $192,000 in 1999 and wanted to see what it would by 10 years later:

It is interesting to note that simply by using the data from the BLS, we already see that Los Angeles home prices for example are quickly reverting to the mean.  In fact, all this would mean is a further reduction of 19% or allowing inflation to erode the price further.  My guess is we will have a combination of both.  Currently we are facing massive debt destruction so we are dealing with prices actually decreasing as the money supply contracts.  In an economy where debt equals money, debt being destroyed through writedowns or defaults is the actual destruction of money.

I have discussed this in the menace of deflation since the supply of money is currently being destroyed at a quicker pace than all the debt we are creating.  How can this be?  Well look at the U.S. equity markets.  $11 trillion has evaporated since the crisis started and we have used up $2.1 trillion in multiple bailout programs (although we have allocated nearly $9 trillion).  Globally, $50 trillion has been wiped off.  So more money (debt) is being destroyed than is being created.

The prospect of what is happening is somewhat stunning and shocking to many.  In fact, if we look at the S&P 500 over the past 12 years, you would might want to consider stuffing money into your mattress!

You would have done better by simply sticking your money into an inflation adjusted account like savings bonds or a CD.  This is how bad the stock market is performing.  But yet again, we see things reverting back to the mean.  And the mean we are reverting to is a mean that focuses on stable amounts of debt.  Let us take a look at how much debt is floating in the system:

As you can see from the above chart, household debt has topped off.  We can expect this to continue to decline especially with all the foreclosures coming online and also, all the revolving debt that is unable to be paid because of the unemployment situation.

So what is happening is more and more Americans are working harder and harder just to stay in the same spot.  A story hit the wires about a janitor position in Ohio with 700 applicants.  This tells you a lot more of the story than the headline 8% unemployment rate.  Many are coming to the realization that the stock market was really a big gamble even though countless advisors kept stating that it was the only game in town.

Just imagine if you had all your money in the S&P 500.  Even if you dollar cost average on your way up to 2007, the market has tanked by 57% from that point.  So let us assume you had approximately $500,000 at the peak in 2007.  You are now looking at sub-$250,000.  This on top of your home price falling.  That is why many are feeling they are running in the same spot and going nowhere fast.  You need to be prepared and ready for tough times.  There is no reason to believe the economy will rebound in 2009.  Earnings are still pointing lower and until job losses abate, there is very little reason to think that we have hit bottom.  The Red Queen knows that the faster you run, the more you will remain in the same place.

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The stock market is off to a horrible start for 2009.  Many thought that things could not get worse than what we experienced in 2008.  Yet market volatility, a sign of an unhealthy economy, is still with us and appearing again in a ferocious way.  From January 4, 2008 to February 21, 2008 the S&P 500 was off by -9.2%.  The S&P 500 during that same time for 2009 is now off by -14.75%.  The issues we will now face are a continuing stream of declining earnings because of the pullback in consumption and the tightening up of the credit markets.  It also doesn’t help that consumers are psychologically more cautious because of what is going on.

The S&P 500 hit a peak in October of 2007 at slightly over 1,560.  At the peak, the S&P 500 had an adjusted market cap of $13.754 trillion.  The current value of the S&P 500 is $6.7 trillion and the losses are across all industries:

The only sector that is not seeing double-digit losses is healthcare but even that, it is still down for the year.  Of course, much of the downfall has occurred because of the pounding financials keep taking.  The current level for financials is an adjusted 99.19.  What was the level of financials back in the October 2007 peak?  Try 475.86.  What that means is the financial portion of the S & P 500 has fallen 79% in less than 2 years.  Many other areas are also facing pain in the mean time.  You don’t lose $7 trillion in market cap and expect other sectors to be fine.

Earnings for the S&P 500 have fallen off a cliff and are going to face their first quarterly loss since the Great Depression:

Consequently, the P/E ratio has increased in the past 2 quarters although I expect this to go down.  Why has this occurred?  Easy, prices have collapsed in line with earnings:

You need to remember how this ratio works.  If earnings are increasing at the bottom and prices drop or stay steady, the P/E will have a smaller nominal value.  This is good.  It means the price of the stock is cheaper.  But what is occurring even though the S & P 500 is off 50.6% from its peak value is that earnings have been tanking as well.  So that is why in 2008 you see the P/E move up.  This is somewhat counterintuitive but happens in most recessions.  Take a look at the 2001 recession and the bubble peak.  The P/E shot up to over 45 before bottoming out at 19.29 in 2004.

If we are to believe this is one of the worst and deepest recessions since World War II, we can expect prices to continue to fall.  Now let us go back to the P/E chart above.  During the 1940s the S&P 500 dropped to a P/E of 5.9 in 1949.  We are nowhere remotely close to that and until we see the P/E at 10 or so, then we can assume a bottom (that is unless earnings start exploding to the upside which is not going to happen).

I ran a quick analysis and the average quarter earnings since 1940 is 15.79.  We are still above that.  So there is much more correcting to do.

Some are arguing that the fair value of the S&P 500 should be somewhere around 440 if we take a multiple of 15 which would be in line with historical P/E ratios.  That is a stunning number but makes sense.  That means the S&P would need to fall an additional 330 points, a drop of 42% from where we are currently at.  That is hard to imagine yet the math points us in that direction.

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