by Dave McGill

REALITY NUMBER ONE

The stock market is on a roll. The Dow Jones Industrial Average is up 13% in just 19 days. The biggest daily drop in the past month was only 39 points, a far cry from a year ago. The S&P 500 Index is up 47% since reaching a 12-year low on March 9.

Some investments considered to be safe havens have experienced an outflow of funds recently, suggesting an increase in investor confidence. The U.S. Dollar has been trending down and the yield on the 10-year Treasury note has been trending up as its price has fallen.

Corporate earnings announced in the second quarter were generally up or better than expected.

Indexes reporting July manufacturing activity in the U.S., Britain and China all rose this past week. The latest report on U.S. construction spending also showed an increase. On Tuesday, the Commerce Department reported an upswing in consumer spending and the National Association of Realtors reported that pending home sales had risen for a fifth consecutive month.

Information on the financial sector has revealed an improving trend. Many companies that needed bailout funds have turned profitable.

The Cash-for-Clunkers program has been allotted an additional $2 billion by Congress this evening. The program has been credited with breathing new life into the auto industry. Ford Focus has been leading the pack of new models purchased and, as a result, the company’s July sales were up for the first time since 2007.

Yesterday, President Obama told an audience near Elkhart, Indiana that the stimulus program is working and he announced $2.4 billion in additional federal grants to stimulate the U.S. production of electric cars.

The Institute for Supply Management announced on Monday that U.S. manufacturing activity should grow again next month. The L.A. Times reported on Tuesday that “this adds to evidence that the longest recession since World War II may be over…”

Paul Ashworth, economist for Capital Economics U.S., said, this week, that he believed the recession actually ended “around the middle of the year.”

REALITY NUMBER TWO:

According to a report issued today, 550,000 people filed their initial claims for unemployment last week, approximately the same number as the four-week moving average. Over one million, out-of-work Americans are filing first-time claims every two weeks.

Elkhart, Indiana, the site of President Obama’s speech yesterday, has seen its industrial production drop 27%, in the past year, and its unemployment rate rise to 17%. The national unemployment rate is expected to be 9.6% when it is announced tomorrow, up one tick since last month. Treasury Secretary Timothy Geithner told Congress this week that he was expecting unemployment to continue increasing until the middle of next year.

Many job cuts are already planned for the future. Here are just two examples. California will report the loss of 70,000 teaching jobs in September. Secondly, the employees of two companies involved in a soon-to-take-place major merger have been told that the deal, already approved by the government, will result in the elimination of another 70,000 jobs.

Foreclosures are also continuing unabated. Over one million men, women and children are being evicted each month. Despite alleged pressure from the administration, banks are dragging their feet on providing loan modifications to those who need them. In many cases the institutions are deciding that it will be more profitable, in the long run, to foreclose. Only 9% of all modification requests are being approved, according to a Treasury Department report released this week.

Real estate problems are now spreading to commercial properties. Vacancies are rising rapidly and lenders who avoided sub-prime mortgages in favor of commercial real estate loans are beginning to experience significant losses.

Many of the companies that reported better-than-expected earnings in the second quarter were only able to do so as a result of their cost-cutting efforts, consisting mainly of layoffs.

Furthermore, one of the reasons that the financial sector has looked better is due to the fact that a change in the accounting rules has produced billions in earnings simply by tweaking the bookkeeping practices employed. The new rules allow assets to be shown at their initial value rather than at market value. The result has placed the true status of the banking industry in a sort of black hole. Just imagine what it would be like if homeowners were allowed to show their assets at cost instead of at market when dealing with lenders.

Critics of the Cash-for-Clunkers program claim it is only a short term fix that represents yet another government give-away rewarding those who exhibited poor judgment by buying inefficient vehicles to begin with.

The national misery is now spreading to municipalities as the economic crisis cascades from the national level to many of our state governments and then down to the cities and towns. Layoffs are increasing along with reductions in the number of working days for courts, vehicle departments and other services.

California, far from the most depressed state, but accounting for 12% of the U.S. population, has slashed services to the poor, the sick and the elderly in order to somewhat balance its budget.

Programs in the state that have been eliminated or pared to the bone involve child welfare, children’s healthcare, AIDS treatment, and home care for the elderly, among others. As things stand now, approximately 100 state parks will be closed and 43,000 felons will be released early from the prison system.

Not included in the list of possible solutions to the problems in California were any tax increases on those who could afford it. Also shunned was the imposition of an oil severance tax that could have been assessed against most onshore oil production, a revenue-raising tool employed by every other major petroleum state.

This tendency to try to solve the economic crisis, caused in large part by the abuses of the wealthy, by foisting miseries on those at the lower rungs of the economic ladder, is a scenario that has become all too familiar.

In this respect, evidence of skullduggery by overly greedy executives and companies continues to pile up. In the past week alone, we’ve learned that GE is coughing up more than $20 million to make a charge of fraudulent reporting go away, that BofA has offered $33 million to the SEC to squelch a charge that it misled shareholders regarding the Merrill Lynch acquisition, and that Goldman Sachs is the subject of two and possibly three separate investigations.

Meanwhile, business inventories in the U.S. have been trimmed to the bone and consumers are increasing their savings, prudent moves in both cases but, it just so happens that they are also significant symptoms of deflation. The Bank of Japan predicted today that deflation would persist in that country until 2011.

As the dollar has trended down, the prices of some commodities have risen. Crude oil is back over $70 per barrel, raising fears that it will slow any economic recovery and contribute to a period of stagflation. The price of sugar hit a 30-year high today.

Another related area of concern involves the government deficit and the growing debt. Even the post office has lost nearly $5 billion so far this year. The overall picture represents an immense problem that few seem to want to even acknowledge. Alan Greenspan, arguably a major villain in causing the ongoing crisis, was quite accurate when he predicted several years ago that the much smaller deficits he saw at that time could trigger a vicious cycle of ever-increasing debt leading to a financial collapse.

With the national debt now soaring towards $15 trillion, it is not difficult to foresee an aggregate annual interest cost in excess of $1 trillion, well above the military budget, and significant enough to require additional borrowing just to be able to pay it.

These are the realities that we face each day. Which one do you live in?