Irreconcilable Differences

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.

This is a companion discussion topic for the original entry at

FWIW, the two small businesses my wife & I own/run are most of the way back to pre-Fall 2008 levels of revenue.  Between 9/08 and 6/09 biz dropped by about 40%, riiiight down to the break even point.  (I kept visualizing trying to fly a aircraft over the Alps or Himalayas and when we just nosed over the peaks the topmost rocks took some paint off the belly of the plane…)
Starting in January of this year (i.e., 4-6 weeks post 2009 bonuses on Wall Street [and related businesses]) our client load began to ramp up.  It’s risen about 25-30% in 2010.  Still not back to pre-bust levels, but comfortably up.

Of course, we’re fortunate inasmuch as our clientele are the well-to-do of Westchester County.  Many of these families either work on the Street or in businesses that are intimately related (big merger-oriented law firms, etc.).  So immediately upon receiving their bonuses for '09, their spending came back strong.

Of course, for 98% of the small businesses in the US, big Wall Street bonuses mean nothing to their cashflow (I would guess).

We are, naturally, most grateful and relieved.  How long it lasts is what keeps my blood pressure up these days...  And I concur, Dr. Chris -- I would expect (a) more stimulus between now and the election, (b) no action on a VAT [or whatever new taxes fed/state/local govs desperately need], and (c) an extension of the homebuyer credit [or some kind of boondoggle to prop up the housing market].  Methinks the days after November 2010 -- the story will change, perhaps dramatically.

Viva – Sager

I think the whole idea is to prevent people from being able to accurately asess the general state of affairs for themselves - they are expected to rely on ‘official sources’ for both their ‘facts’ and especially for interpretations and assessments of the state of the economy. As long as the number of jobs doesn’t even keep up with the expansion of the available workforce - let alone gain back some of the losses - unemployment must continue to rise. States are desprately trying to avoid laying of public sector employees at the moment - still hoping for mana from heaven I suppose, but if those begin to be shed in large numbers that will cause additional stress, foreclosures, etc. I think the nation is supposed to survive on ‘happy talk’ for the foreseeable…

Keep in mind that the tax receipts data that is generally presented is misleading.  Over the course of this recession 33 states have raised taxes.  Despite these higher taxes of various types, receipts are lagging and at the end of February there were 41 states that were showing budget shortfalls for 2010 (and more through 2011).  Without the increased tax rates, tax receipts would likely be showing an even greater drop from previous years.


Chris, thank you, thank you so very much for your insights. I am so grateful.
Here’s the answer to you question. Is it possible that we have to live with cognative dissonance?

One might compare it to the aging process. For example, I know I’m 61. Yet I feel somewhere in the 40’s. I can look in the mirror and see “truth”, yet that’s not how  I feel.

It seems that we’re in that time of ‘elephant in the room’, yet no one sees it but us. It can be a ‘dilemma’ , or it can be who we are as a human species. When I have no other answers, I accept  “mystery”.



Hi Chris,
Karl Denninger has an interesting take on this phenomenon. He thinks that the uptick in consumer spending is due to people who are not paying their mortgages and spending the money in the retail businesses. You can read his full article here:,-So-The-Recovery-Is-About-Delinquency.html
I wonder if this might be the missing piece to help you explain the disconnect in those reports.

Ive been saying this for over a year: mortgage defaults are neccesary in order to have a proper recovery.
Think of all the people that bought homes from 2003 to 2008. Most of them overpaid as home values were being bid higher and higher. Now that many of these people are foreclosing, there disposable cash to be spent on other things. This is the basic premise of austrian economics, that bubbles cause a misallocation of capital. During the bubble capital was allocated to mortgage debt. Now with the mortgages being terminated, there is more and more money to be spent on other things. Also, we have so many people that are living in their homes for free (up to 24 months) these households now get to use that money to go to the movies, buy some clothes, go out and eat dinner, etc. In addition, many of these foreclosures and defaults are happening in the bubble states so we can assume that the mortgage payments were higher. Consider the accountant that bought a house in cali in 2006, paid 750k for it. Thats a mortgage payment of $5800, not including property taxes of $1,000 a month. So nearly $7,000 a month is freed up to spend on other areas. Now this specific case is not indicative of every default, but do realize that the average home price in california reached 500k.

The more foreclosures, the better for the economy. My brother is short selling his investment home which he bought for 425k to a family for 185k. My brother took a loss (down payment, bad credit, and mortgage payments, taxes, insurance). The family, however, is taking a gain as they get to buy a 3 bedroom house for .43 cents on the dollar.

I went to our local Pappasitos Cantina last Wednesday evening to pick up some 1/2 price Fajitas, and the place was dead, maybe 20 people in the place (on 1/2 off sale night, no doubt). I have never been to this restaurant when there wasn’t 250 people in the house and at least a 1 hour wait. I asked the ToGo guy what happened to their usually crowd and he said that business had been slowing dramatically since early March.
I have to admit that I am dumbfounded by the stock market. Every sentiment indicator that I track has been blown out of the water at this point. I know these bear-market rallies can last longer than anyone expects but sheesh, Pretcher must have a full-blown ulcer by now, LOL.

The Rich get richer, and the Poor get poorer, and the middle class thinks it still middle-class.

Jeff (Texas)


Deflation is Dead. Dow 1,000,000. Money mouth
In all seriousness - I’m starting to think that the increase in retail numbers may have to do with freed up spending money, caused by defaulted mortgages as mentioned in the above posts. Mark Zandi, via Diana Olick at CNBC, also thought this was a possiblity today:

[quote] No, not crazy. With some 6 million homeowners not making mortgage payments (some loans are in trial mod programs and paying something but still in delinquency or default status) , this is probably freeing up roughly $8 billion in cash each month. Assuming this cash is spent (not too bad an assumption), it amounts to nearly one percent of consumer spending. The saving rate is also much lower as a result. The impact on spending growth is less significant as that is a function of the change in the number of homeowners not making payments. [/quote]

As for why the retail numbers don’t match up with the sales tax numbers, I don’t know. Are people shopping online and not paying sales tax? I don’t get it either. Anyone else have any thoughts on the discrepancy?

And the CPI report, released today showing a .1% increase in March was just mind-boggling. I’ve said it before and I’ll say it again - how can healthcare make up 1/5th or 1/6th of the economy, and all the while premiums have been rising 20, 30 even 40%, and yet the CPI is nearly flat? As we saw in the Crash Course with hedonics, other items would have had to go way down in price to get the CPI flat. It’s just not possible.

Iin any event, is this even the type of recovery we want as a nation? If the definition of insanity is doing the same thing over and over again and expecting different results, then an economic recovery built on consumer spending is INSANE. Frown

What’s the lag time before mortgage non-payment shows up in reliable data reports?

In other words, if a gazillion people stopped paying their mortgage last month, we wouldn’t know about it yet (on a national statistical basis) because a mortgage that’s only one month late doesn’t count as a default and doesn’t show up in the data.

What I’m driving at is that if the Denninger speculation were true (consumers are spending the cash they saved by not paying their mortgage), we wouldn’t be able to veryify it with statistical data until X months had passed, when all those non-payments start being reported as mortgages in default. I’ve seen stuff floating around about “Mortgages more than 3 months delinquent”, others 6 months, others 12. Who publishes the most reliable data on this and how long must a mortgage be delinquent before it is included in the delinquency numbers?

The reason I ask all this… I can very easily imagine a wave of capitulation where homeowners stop paying their mortgages having occurred over the last few months. If it wouldn’t hit the data for 6 months, I’d say there could be a real wake up call on the horizon! (If the data isn’t ultimately suppressed, that is).


If the banks are not marking their assets to market, chances are they are not reporting the depth of their delinquencies, either.
Truth #1 is that ALL the too big to fail banks are on the ropes or so far past bankrupt it’s a wonder they can answer their phones.

Truth #2 is that the stock market is doing well because of the TARP money doing a circle jerk, but also because there’s a nice new crop of heroin coming out of Afghanistan and those billions have to be laundered somewhere. The con men on Wall Street would like to thank our young men and women in uniform for policing Afghanistan just enough to make sure the Taliban doesn’t restrict the opium trade.  We are quite obviously not there to kill the poppy trade but to protect it.

Truth #3:  There’s a pipeline running between the Iraqi fields and Saudi Arabia, conveniently filling out the deficit now becoming ever more clear in the Saudi field production.  Couple million barrels a day and nobody is the wiser that SA is way past peak. 

What, you didn’t think we’re in Afghanistan and Iraq to ‘spread democracy’ did you?   I’ve come to wonder if the root word of democracy is ‘demon’.

I can understand that not paying your mortgage frees up capital which is temporarily good for the economy, but what happens once the house is foreclosed upon?  The bad debt is on the books of the banks–or of Fannie or Freddie–or of AIG or whoever is insuring the derivitives.  Whoever it is is left holding these ‘toxic assets’ and eventually even a FASB rule change wont be able to cover them up.  If the government bails them out they simply transfer the debt to the public sector.  The problem is too much debt and is handled in one of three ways:

  1. Pay it off (means decades of pain for US)

2…US Treasury default (yikes)

  1. Inflate debt away (who knows how far dollar would need to drop–which causes its own problems)

Presently Obama is trying a bit of number #3 and hoping someday to manage #1.  He vastly underestimates the pain the US will have to go through. 

Erik…  funny you should ask!?

Mortgage Defaults May Be Driving Consumer Spending

Hate to be an "I told you so..."

Lender Processing Services just put out its "Mortgage Monitor Report," and we have a new record:

The nation's foreclosure inventories reached record highs. February's foreclosure rate of 3.31 percent represented a 51.1 percent year-over-year increase. The percentage of new problem loans also remains at a five-year high. 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.

Okay, so 7.9 million Americans are not paying their mortgages.  Are we really thinking about the implications of that? 

I've already reported studies that show Americans are now far more likely to pay their other bills first before their mortgage (which is a big turnaround historically speaking.)

That means they pay off their credit cards, cable bills, car loans in place of their home loans. Some are forced to, while others are doing so strategically. Don't get me started again on strategic defaults...

The discrepancy between retail sales and the sales tax revnues could be attributed to what basically is an upward manipulation of the former, at least partially, as Nathan from Economic Edge says here:
“The media is all ga-ga over the March Retail Sales figures – up 1.6% month over month, and year over year the figure is up 7.6%. Supposedly this report is adjusted for seasonality, but March contained Easter shopping week this year, so look for April to possibly show relative weakness. Secondly, the retail sales numbers fail to capture the effects of survivor bias. That is, companies who have failed, their lack of sales are not figured into the equation just like stock market indices. This is why sales tax receipts are a far better indication of what is truly happening, but even those are measured in dollars and not in actual goods sold”

Also, I’m sure the freed up cash from mortgage defaults plays a role in explaining this seemingly upside down world we are living in.

In terms of the pain being felt by average Americans, here is a great article that shows how “average” Americans were already in bad shape before this crisis and pushed into debt, and now it’s going to be much worse without the comfort of that debt or over-inflated asset values… or jobs:


Take a look at the unemployment numbers in detail.   You’ll see that among college educated it is only 5%, whereas among those with no college it is 15%.    In simple terms, people with money still have money to spend.   People without money have less money to spend.



How much are Home Depot and Lowe’s selling?  Seems to me one way to test the theory about people defaulting on mortgages spending the money, is to look at some of the large ticket items that people had been purchasing in the go-go days, but that they cannot take with them when they leave the house.  Air conditioning, heating, floors, countertops, etc.  I would think that purchases of these items would have dropped considerably compared to the more consumable items that you buy to keep a house operating.

Underestimate the power of Central Planners

Welcome to the site! Have you seen the crash course?? Im pretty sure you have if you are registered with the site, but either way its good to see new faces.

With regards to the future bank writedowns due to mortage loan losses I have absolutely no idea how this is going to play out. What I do know is this:

(1) The federal reserve purchased 1.25 trillion in MBS. Did the banks sell their bad loans to FNM FRE and then FNM FRE to the fed? If this occurred, then the worst paper is sitting on the feds balance sheet.

(2) With absolutely NO transperancy in the banking sector, it is highly possible that banks are selling loans intrabank, i.e., BAC sets up a trust to buy some bad mortgage paper from another trust (Structured investment vehicle SPV which is off balance sheet). While the original balance of the note was, say 400k, trust 1 sells the note to trust 2 for 200k. Lets assume that 200k is the market value of the home. Presto! No write down. The house goes into foreclosure, the bank sells it at auction and makes its money back. The point, is that banks can pretty do whatever the hell they what at this point.

(3) Banks borrow at 0 and lend at 10-20-29.99%. They are making money hand over fist to rebuild their capital reserves.

These frankenbanks will probably be around in some form or another for quite some time.

My .02




Nothing seems to add up.
Jobless Claims Jump, Industrial Production Inches Up

The number of newly laid off people signing up for unemployment benefits rose sharply for the second straight week, suggesting that jobs are still hard to come by even as the economic recovery gains traction.

The Labor Department reported Thursday that first-time requests for jobless benefits rose by 24,000 last week to a seasonally adjusted 484,000, the highest level since late February. Economists were predicting claims would fall.

It marked the second week that claims took an unexpected leap. In the prior week, claims rose by 18,000 to 460,000.

A government analyst, however, cautioned against reading too much into both weeks’ figures, saying they were clouded by seasonal adjustment difficulties related to the Easter holiday, which falls on different weeks each year.

Still, other reports showed mixed impressions about the economy. Industrial production rose 0.1 percent in March, far less than economists had expected, held back by a drop in utilities output as heating demand fell, Federal Reserve data showed.

But manufacturing activity in the New York area jumped to a six-month high, according to the New York Federal Reserve’s “Empire State” general business conditions index rose to 31.86 in April, the highest since October and up from 22.86 in March. Economists polled by Reuters had expected a figure of 24.00.

“Everything on the manufacturing side is clearly pointing to an acceleration,” said Phil Orlando, chief equity market strategist at Federated Investors in New York.

“The consumer side, the retail sales data we saw yesterday was off the charts. So there is no reason for me to believe that the labor market has organically turned sour.”

Even with the increases in jobless claims over the last two weeks, the trend in claims have been slowly drifting downward. Fewer people overall have been seeking unemployment insurance as the job market recovers.

For instance, for the same week a year ago, first-time claims totaled 609,000, compared with the current 484,000. Applications for jobless claims peaked during the recession at 651,000 in late March 2009.

The four-week moving average of claims, which smooths out weekly volatility, also moved up. They grew by 7,500 to 457,750 last week, the highest since mid-March.

The number of people continuing to draw unemployment benefits moved higher. They rose to 4.64 million, from 4.57 million.

Bada-bing  Badda-boom.
RealtyTrac says foreclosure filings were reported on 367,056 properties in March, a jump of nearly 19% from February, an increase of nearly 8% from March 2009 and the highest monthly total since beginning its reports in January 2005.