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Irreconcilable Differences

Original Content
By Chris Martenson
Wednesday, April 14th, 2010

Irreconcilable Differences

Original Content
By Chris Martenson on
Wednesday, April 14th, 2010

I may have to get a divorce from the news, as nothing adds up anymore.

For example, even as the stock market surges along, as one might expect at the tail end of trillions in stimulus and bailouts, and retail sales apparently roared ahead in March according to the Commerce Department, small businesses are as gloomy as they’ve ever been.

I really do have a difficult time trying to understand the source of the disconnect between these entirely divergent reports:

Retail sales surge in March

NEW YORK ( — Retail sales soared in March, the government said Wednesday, in the latest sign of improving consumer confidence.

The Commerce Department said total retail sales jumped 1.6% last month, the largest monthly increase since November, from an upwardly revised 0.5% gain in February.

Peering into these excellent results a bit deeper, we find many sources of strength:

Thomson Reuters, which tracks monthly same-store sales for 30 chains including Costco and Target said last week that chain stores posted the biggest single monthly sales gain on record in March, extending a run of seven straight monthly increases.

It would appear, then, that the consumer is back and that we’re all but out of the woods.

Then how come nobody invited small businesses to the party?  Look at this dismal survey of small businesses, comprising 50% of GDP and over 60% of hiring, for the same month of March:

Small Business Optimism Declines in March

WASHINGTON, April 13, 2010 – The National Federation of Independent Business Index of Small Business Optimism lost 1.2 points in March, falling to 86.8. The persistence of index readings below 90 is unprecedented in survey history.

“The March reading is very low and headed in the wrong direction,” said Bill Dunkelberg, NFIB chief economist. “Something isn’t sitting well with small business owners. Poor sales and uncertainty continue to overwhelm any other good news about the economy.”

The index has posted 18 consecutive monthly readings below 90. In March, nine of the 10 Index components fell or were unchanged from February’s not-so-great readings.

This is a very sour report and does not reconcile well with the idea of surging sales and seven straight months of increasing consumer activity.  Even more to the point, the report continues with some dire specifics about the state of retail affairs for small businesses:

Sales and Inventories

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months improved 1 point to a net negative 25 percent.

Widespread price cutting continued to contribute to reports of lower nominal sales. The net percent of owners expecting real sales gains lost three points, falling to a net negative 3 percent of all owners, seasonally adjusted.

Small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stock. A net negative 18 percent of all owners reported gains in inventories (more firms cut stocks than added to them, seasonally adjusted), 10 points better than December’s record reading but unchanged from February.

Widespread price cutting and negative sales?  Continued liquidation of inventory stock?  These are not even remotely consistent with the retail reports coming out of the government right now.  Something doesn’t add up.

But wait, the disconnect gets worse.  According to the retail data supplied by the government, not only are sales up seven months in a row, they are up a hefty 7.6% on a yr/yr basis.  That’s huge.

The only problem is, somebody forgot to tell the retailers to collect and remit sales tax on those purchases to the states in which they are operating:

Texas sales tax revenue down 7.8 percent in March

April 7, 2010

Texas sales tax collections were down 7.8 percent in March, compared with the same month a year ago.

Texas Comptroller Susan Combs said Wednesday that the state collected $1.46 billion in sales tax revenue in March. Although that’s down, she said collections continue to moderate for the second month in a row.

How are we supposed to reconcile a 7.6% surge with a 7.8% decline?  Oh well, Texas is just one out of 50 states, albeit a big one, so perhaps their experience is highly unusual?

New Jersey Taxes $250 Million Behind Christie Plan

April 6 (Bloomberg) — New Jersey will get about $250 million less revenue than Governor Chris Christie projected for this fiscal year and next because of lagging retail sales taxes, according to a copy of a legislative analyst’s report provided by a person who received it before its release.

Okay, so New Jersey is in the same boat, but good state-by-state sales-tax-receipt data is hard to come by, so perhaps there’s a lot of good news coming from all the states besides the two I listed.  I’ll keep searching.

For now, the difference between what small businesses are reporting about the condition of their businesses and what the government and major chains are reporting is hard to reconcile.  There’s an enormous gap there.

States and Municipalities Experiencing Real Pain

The other disconnect is between the incredibly optimistic stories that we are reading about how great the economy is doing and how poorly states and municipalities are doing.  The size of the gap is very difficult to reconcile.  Much of the income for states and municipalities comes from sales, property, and income taxes.  While there appears to be some evidence that these tax receipts have stopped declining, there is as yet no major evidence of a strong rebound.  I remain at a loss to understand how retail sales can be up while sales tax receipts remain flat or even down.

Illinois owes its contracted business partners more than $4.5 billion, which it has simply failed to pay, and the ‘plan’ for dealing with them is to build them up even higher and roll $6 billion of them into the next budget year.

Los Angeles is desperately trying to avert outright bankruptcy.  California has an enormous hole in its budget, and Minnesota is delaying payments on some bills so it can afford to pay others.  Don’t even ask about Detroit; it’s too scary.

There are dozens more stories like these, and they speak to mounting, not easing, fiscal pressures.

Individuals Experiencing Real Pain

Meanwhile, individuals are experiencing mounting fiscal pain as well, evidenced by rising bankruptcy and foreclosure rates to new highs in recent months.  It is hard to reconcile massive increases in consumer spending with this data, unless we consider the theory that people who are suddenly freed from credit card or mortgage payments are spending that additional cash on stuff.  I can’t entirely discount this as a possible explanation for the apparently renewed consumer buying frenzy.

Still, I have great difficulty in reconciling the idea of a buoyant, consumer-led recovery when I read items like this each week:

One Out of Ten Mortgages is Delinquent

Despite a slight seasonal improvement over last month, mortgage delinquencies still hover near record highs, 21 percent above a year ago. One of ten mortgages are delinquent as of the end of February and new delinquencies continue to run at record rates.

The total number of non-current first-lien mortgages and REO properties is now more than 7.9 million loans.

Furthermore, the percentage of new problem loans is also at its highest level in five years.

More than 1.1 million loans that were current at the beginning of January 2010 were already at least 30 days delinquent or in foreclosure by February 2010 month-end.

That’s the frightening news from Lender Processing Services latest Mortgage Monitor Report, which also reported that the nation’s foreclosure inventories also reached record highs. February’s foreclosure rate of 3.31 percent represented a 51.1 percent year-over-year increase.

One out of ten mortgages?  The highest percentage of bad loans in five years?  7.9 million bad loans?  A 51.1% increase in foreclosure inventories?

Further, a record-breaking number of Americans are on food stamps, and fully 44% of the 15 million unemployed have been out of work for more than 6 months.

While I understand that the signals at bottoms and tops are sometimes mixed, this data is not mixed; it is simply horrible.  These are signs of severe economic pain and are entirely inconsistent with the notion of a buoyant recovery.

Stock Market on a Tear While Bonds Float Along

Today, the stock market put on yet another display of force, not only levitating magically along in heavily over-bought territory, but even peeking up through the upper Bollinger band and closing there right at the high of the day:

There can be no doubt that there is a lot of liquidity and bullishness available as fuel for the stock market.  I’ve long been warning my readers that the flood of liquidity offered up by the stimulus, bailout, and GSE MBS purchase programs would have to go find something useful to do, and it seems to have wandered over to the stock market to have a party. 

You’ve got to admit, that’s a pretty impressive run.  Meanwhile, given all the stock market bullishness and the bearish talk about bonds coming from some pretty big players, such as Bill Gross, you might think that bonds would be in retreat.

You’d be wrong.

The ten-year bond interest rate level is exactly where it started the year, give or take a basis point or two.  If this was a normal set of markets at all, then we might expect to see more of the normal see-saw relationship between stock and bonds prices.

But we don’t, and I chalk that up to the enormous distorting influence provided by the Fed’s actions.  Under normal conditions, we might expect that money might slosh back and forth between the stock and bond markets, but all we see is a strangely quiet bond market coincident with a rising stock market.

To me this is indicative of the massive official support for bond sales and other forms of ersatz liquidity that is trampling across the normal relationships that exist between the various markets.

It has been an enduring mystery as to how the Treasury bond market can float hundreds of billions in new issuances and rollovers each week without a hitch, while the interest rate remains pegged in an extremely narrow range, even as the stock market surges along.


My main conclusion is simply this:  We are experiencing the very best recovery that several trillion in freshly minted money and credit can buy.  Frankly, I expected more.  I am underwhelmed with a recovery that  seems to exist more on Wall Street and in government statistics than it does on Main Street and in people’s real lives.

I have no doubt that we are experiencing a bounce.  The question is whether it is the enduring sort or a flash in the pan.  Without the participation of small businesses, and with states and municipalities retreating and retrenching, I remain quite skeptical of this recovery.

My prediction is that much of this manufactured bounce will wear off this summer and that we’ll see another renewed round of stimulus and Fed liquidity programs before November and the elections.  Given the political dimensions involved, it is almost certainly a slam-dunk to predict more money being dumped into the situation prior to the elections, so that’s not really much of a prediction at all.   It’s more a characterization of the American political process.

I remain glued to the markets, seeking signs that a change in trend is upon us.  So far, I haven’t seen anything to suggest that the flood of liquidity has crested and has begun to fall.

Until the situation clears up, consider me to have irreconcilable differences with the news.

– Peak Prosperity –

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