"What the hell happened!!"

So markets were off around 3% today and folks are scratching their heads, their ass and anything else they can scratch to figure out what the hell happened. And all I can say is "duh." I hope I am spelling this right.

Now the leading candidate for markets falling today - other than options expiring - is consumer sentiment. It seems to have fallen off a cliff.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=atiU89eI_SqA&pos=2

Indeed the results were well - and I mean WELL - below even the most pessimistic expectations of 62 economists surveyed by Bloomberg. So what gives? Well, what gives first is that economists being surveyed by Bloomberg seem to be largely out of touch with the man or woman on the street. Now I was not surveyed and I made no estimate but I find a big drop off in confidence to be well expected.

So let's explore the very secret reasons that economists cannot find out why folks would be a bit economically depressed. Please do not tell the economists about these as it will spoil the surprise. Let's begin with a survey of this weeks economic data. Fortunately for me and you, the kind folks at Calculated Risk have once again done a dandy job of putting it together for us:

http://www.calculatedriskblog.com/2010/07/quick-summary-of-week.html

Unless I counted wrong, of the 14 major data points out this week none were evenly mildly positive and many were down right ugly. And this summary does not even include the fact that the FDIC closed six more banks yesterday, bringing us up to 96 year-to-date.

This week's data aside, let's consider the failure to extend unemployment benefits. This immediately cut off funds to roughly 1.3 million folks and in relatively short order will cut off around three million, with more to come in months ahead. Now I assume this three million impacts the spending ways of around 10 million folks since the average family size is just over three, so you have roughly ten million people, approaching 3% of our population, that are curtailing spending. Given that consumer spending is 70% of our GDP, knocking out 3% of that group cannot be a good thing for GDP. I am no economist but the math seems relatively easy to me. At a minimum, one can see how this might just put a bit of a damper on consumer sentiment.

Okay, let's forget for a moment the millions being cut off from benefits. There are still tens of millions in the unemployed ranks, we are not creating jobs fast enough to even support population growth, two thirds of a a million folks last month alone gave up even looking for a job and for those still trying to find a job, good luck. Even those with jobs are increasingly part time or seeing their work hours shortened. Yep, there are plenty of big confidence builders here. I keep scratching.

Let's talk about credit issues. One of the drivers for today's market problems was the results from financial companies showing quite clearly that credit continues to be frozen and lending by big boys is quite selective. It also seems the big banks are having to repurchase a bit of the junk they previously off-loaded on us taxpayers, and this is not helping results either.


http://www.calculatedriskblog.com/2010/07/mortgage-repurchase-growing-writedown.html

Now it is not a surprise that lending is down as a full 25% of folks these days have credit scores that will not get them a credit card, and with so many under water on their mortgages, they are not coming up for credit air any time soon. And these are not all irresponsible idiots. I know one couple, where both work, he served at least two terms in Iraq, they have four kids, they are both college graduates (she has a Masters), they have a modest house and do not waste money. Yet they can barely pay the mortgage, have a poor credit score and are struggling. I know this situation is repeated all over the country. Yes, there are the usuals that folks like to point to as losers we should not support, but there are plenty of folks doing what society has told them to do and it is still not working. Perhaps this is affecting consumer confidence scores?

In my book, most economists are ignoring fundamentals and out of touch with the regular guy on the street. Only time will tell but, unfortunately, time is running out for a lot of people in this economy. No surprises to me with the confidence numbers. The surprise is that economists did not see it coming. Then again, perhaps I just need to scratch something else and forget about economists.

Disclosures: none.