Halftime?

The middle of the road
Is trying to find me
I'm standing in the middle of life
With my pains behind me

- The Pretenders

Though all our "pains" are surely not behind us, it could be that we are standing in the middle of this life of economic collapse.

It's now been 23 months since the first sign of market destruction came about in the form of extendible commercial paper actually extending. What followed was a domino effect, as investors continuously pulled out of all investments with any subprime exposure, liquidity issue, downgrade potential or even alphabetical abbreviation.

So, being in the middle of life perhaps implies we have at least another two years until the economy returns to normal. Nothing to cheer about.

If the stock market is the barometer of the economy, then perhaps we are doing all right. Though still down 36 percent from its high on October 9, 2007, the Dow Jones has rallied 39 percent since the recent low on March 9, 2009. In other words - and again assuming the stock market is the correct barometer - the economy remains 36 percent worse than pre-crisis levels.

However, who can remember that far back, anyway? Let's review what's changed from an economic environment perspective.

First and foremost, there are the 6.5 million (and counting) jobs that have been lost. This equates to about one in 20 workers who have lost their jobs on a net basis as of January 2008. Of course, this number is expected to continue to grow, but at a slower pace.

Second, we have a housing market that has not only been crushed, but remains unstable due primarily to a lack of willingness of investors to put their money into mortgages. I believe one of the main reasons investors are avoiding the sector is the open issue of Fannie/Freddie and how this combined entity will fit into the market in the future. As the 600-pound gorilla of this market, it is unlikely to garner the confidence of private investors in significant fashion until this most important issue is resolved.

Third, the Fed has ballooned its balance sheet beyond what was previously believed possible, and debate is ensuing about how they can rein it back in (and how they can do so at the correct pace). While I applaud Bernanke's statements of last week, it remains uncertain whether he has the political clout to pull the punch bowl when the time comes.

Fourth, the securitized markets are all but shut, cutting drastically the supply of consumer lending. This includes many sectors, but mostly affects credit card and auto lending. As an economy that is typically two-thirds consumption, this presents no small issue.

Fifth and perhaps most important, uncertainty reigns supreme regarding the future tax and regulatory structure. This does not only apply to the financial sector, but - given GM and Chrysler events, healthcare legislation, etc. - many other sectors.

Of course, I'm admittedly leaving out the positives - and there are some. The most recent is the market solution for CIT. I see last week's events as a sign of strength that market participants are willing to solve their own problems, rather than lean on the government. Even though CIT is still saying it may have to file bankruptcy if it does not have a successful tender in August, I believe the bond vigilantes may have it right this time.

So, are we halfway through this mess or are we just "pretending?" Only future history books will reveal the correct answer to this question. In the meantime, keep your pith helmet on, and defend your cash wisely!

Key Developments

Last week, Fed Chairman Ben Bernanke provided his semiannual Monetary Policy Report to Congress, saying essentially that there has been some improvement in economic prospects, but downside risks remain. He repeated the mantra that monetary policy will remain "accommodative" for an extended period, but that the Fed will rein in its policy stimulus smoothly and in a timely manner, in order to contain inflation.

Existing home sales rose 3.6 percent to an annual rate of 4.89 million units in June due largely to tax incentives, lower borrowing costs and foreclosure-driven price declines. According to the National Association of Realtors, median prices fell 15 percent. The stronger-than-expected sales figure decreased inventory by 0.7 percent to 3.82 million in June, although excess inventory still stands at 9.4 months.