Posted By: Matthias Paul Kuhlmey

From my days in the music industry (story for another day), I learned the somewhat inconceivable:  Mega-stars would tour the world to play live concerts, and it was not uncommon for them to have a “small army” of supporting musicians playing backstage during shows. Shocker! Not really – the additional support put on stage would have left the performance “crowded,” and the audience with something to desire – it was the star (not the support staff) that they wanted to see, experience, and perceive to be responsible for all the “awesomeness.”

Now let’s pull back the curtain on economic affairs. Believe it or not, there is such a thing as the U.S. Government Accountability Office, or GAO, for short. According to a recent report, more than half of the financial institutions that were in need for emergency government funding have repaid the money that was originally provided under the Capital Purchase Program (CPP),  established as the primary framework in restoring liquidity and stability to the financial system under the Troubled Asset Relief Program (TARP); this is beautiful, and very much in line with current thinking about the matter. The reality, however, is that an increasing number of financial institutions are missing scheduled dividend or interest payments and … be prepared for this one(!) … are using government money from other programs to repay their TARP obligations. A perfect “left into right pocket scenario” – nothing has really changed.

Let’s spend more time backstage. The media postulates that more and more Americans, when considered on the basis of Household Wealth, “are climbing further out of the hole they sank into during the Great Recession (of 2008/2009 that is),” and that the largest increase in consumer borrowing (November through January) in a decade(!) is clearly indicative of better sentiment and a recovering economy. The sad reality is that the biggest asset of the American household, real estate, continues to decline in value. Home values fell 1.3% in the 4th Quarter of 2011, to approximately $16 trillion, leaving the housing stock nearly 24% below its peak of December 2007. Yet, Household Wealth, over the same time period, climbed for the first time in 3 quarters, with an increase in stock prices more than compensating for the decline in home values. Great, you may think – but, please keep in mind that Benny B., the FED-man, made commitments some time ago to “propel” stock prices. What happens if his “good will” ceases to exist? Curtain please!

One more look at consumer borrowing (truly mind-boggling):  According to the latest Federal Reserve’s Flow-of-Funds Report, Household Debt grew at an annualized rate of 0.25% in Q4 2011 – not a big increase, but, “until now there hadn’t been any uptick at all in household debt since the 2008 crash.” In our view, it is not an encouraging sign if one considers that nominal income has not held up with inflation – this is most likely about “filling the income gap.” With total consumer credit of $2.5 trillion and mortgage debt totaling $9.8 trillion (both Q4 2011), we can only imagine what will happen when the day of higher rates comes.

The curtain is what makes the world go round … or behind the curtain is where the world is “being rounded,” leaving front-and-center stage as an illusion or romantic notion. Be certain what side you want to “play” on before the final curtain is drawn.