Bubbles and Disconnects

Paul Krugman starts his column today with:

“The big rise in the stock market is definitely telling us something. Bulls think it says the economy is about to take off. But I think it’s a sign that America is still blowing bubbles ?— that a three-year bear market and the biggest corporate scandals in history haven’t cured investors of irrational exuberance yet.”

A news story this morning, Foreclosures Hit Record High in 1st Qtr:

Home loans in the process of foreclosure climbed to 1.2 percent of all mortgages in the first quarter, beating the previous high of 1.18 percent set in the fourth quarter of 2002, the Mortgage Bankers Association of America said.

Mortgages entering the foreclosure process rose in the quarter to 0.37 percent from 0.35 percent in the fourth quarter.

The percentage of all loans for one- to four-unit homes that were delinquent — at least 30 days overdue — slipped to 4.52 percent from 4.53 percent in the fourth quarter.

And a little story in this morning’s San Jose Mercury News, Home sellers paring prices to speed deals:

“In general, homeowners are selling at lower prices, even in the lower-end ranges of homes,” said Richard Calhoun, of Creekside Realty, who tracks Silicon Valley real estate data. “With increased inventory, buyers have more choice. And if a seller is not aggressive on pricing, the property doesn’t sell.”

The drop in prices in May was steeper than in previous months this year, suggesting that sellers are accepting lower prices to close sales.

Meanwhile, the Federal Reserve sees a need to cut interest rates further,

All the debate in financial markets this week has been on exactly how much “insurance” the Fed will want to take out. Fed Chairman Alan Greenspan said recently that in the face of sluggish growth, insurance is cheap compared to the cost of disappointing growth that could eventually lead to deflation.

And the trade deficit, expected to decrease as the dollar falls, is rising, U.S. trade deficit swells,

The latest snapshot of trade activity reported by the Commerce Department Thursday shows that the mushrooming “current account” deficit in the first quarter was 5.8 percent larger than the previous record deficit of $128.6 billion set in the fourth quarter of 2002.

OK, the Federal Reserve is concerned enough about the economy that they are using up their last interest rate cut. The housing bubble looks like it could burst very soon. The Federal budget deficit is wildly, massively, unbelievably out of control. Japan is in deflation and Germany looks like it’s there as well. The dollar has dramatically fallen, but the trade deficit is UP. And the jobs picture is still declining.

But the stock market is engaged in a major rally. What’s up?

I think we’re seeing one more part of what I will call a “disconnect society.” This is the disconnect between the top tier of people who are doing well and managing things, and the rest of us. I think we are seeing the effects of a widening gap between the affluent and regular people, where the affluent lifestyle depends on greater and greater isolation from reality — a reinforced head-in-the-sand view of the world.

In today’s stock market rally we see a disconnect between the wealthy elite who manage the stock funds, and the real economy. They live well, they commute from the wealthy suburbs around New York into office buildings inhabited by other top tier elites, they don’t know anyone who is hurting, they read the Wall Street Journal (written by other top tier elites) and they watch the world on TV. They think things are great, everyone THEY know is doing well, and we’re in a “recovery” and heading for a prosperous Republican future.

We see the same disconnect in news reporting. Our local paper, the San Jose News, occasionally runs stories about how people live, and invariably picks people living in four-bedroom million-dollar houses, with six-figure incomes, and tells their readers how hard things are for them because their exclusive private school tuitions have risen. It is infuriating! The paper’s managers, editors and reporters are well-paid and live in that top-tier world. The news anchors and reporters on the networks make seven figure salaries. The head of the companies they glorify make hundreds of millions! The politicians make six figures and live in the Washington yuppisphere – and say that people who talk like I am talking are on the “fringe.”

And people in business are living this disconnect. Look what they expect people to be able to pay. Cable TV with a premium channel is $65-70 per month. A cable modem or DSL is another $40-50. (Cable modem is better.) A cell phone account for two is $65 or so. Then they show up with offers for internet or satellite radio for another $10-20 per month and think people can afford it – because THEY can. Never mind that they are moving YOUR job to India. I’m not talking about essential services here; my point is that they’re trying to get customers and are pricing for a society that is living like they are. (Health insurance – $500 a month for a couple, minimum.)

I’ll write more about this disconnect society. Leave a comment.