Let’s say that you just spent a large sum, to the tune of several trillion Dollars, bailing out various businesses that were literally run into insolvency by shortsighted and greedy business practices.

Having spent this money, your next concern becomes avoiding popular outrage as sooner or later folks will find out that this money was practically given away and that everyone else got a raw deal.

So, at that point your primary focus must become convincing the world that your policies worked and that you did in fact save the world.

How do you do this?

1)   The businesses you bailed out need to appear successful and profitable again

2)   The economy you “saved” needs to look to be in recovery

This is precisely the blueprint for what the Powers That Be have followed post 2009.

Regarding the bailed out businesses, the large banks are posting great profits by writing down bonds they own (and recording this as a profit) and by lowering loss reserves.

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported an aggregate profit of $26.3 billion in the fourth quarter of 2011, a $4.9 billion improvement from the $21.4 billion in net income the industry reported in the fourth quarter of 2010. This is the 10th consecutive quarter that earnings have registered a year-over-year increase. As has been the case in each of the past nine quarters, lower provisions for loan losses were responsible for most of the year-over-year improvement in earnings…

Fourth-quarter loss provisions totaled $19.5 billion, about 40 percent less than the $32.7 billion that insured institutions set aside for losses in the fourth quarter of 2010. Net operating revenue (net interest income plus total noninterest income) was $3.8 billion (2.3 percent) lower than a year earlier, due to a $4.4 billion (7.4 percent) decline in noninterest income.

http://www.fdic.gov/news/news/press/2012/pr12023.html

Nevermind that most of these profits are illusory and that the policies used to create them (not thinking ahead but focusing on the near-term) are precisely what caused the 2008 Crisis. As long as headlines ready “great profits” all will be well.

Then of course there’s General Motors, the other bailout darling.

GM’s Crowded Truck Stop

A year ago today analysts rained on General Motors’ parade. Wall Street’s finest pointed out that GM’s strong February 2011 sales were boosted by extremely generous incentives to customers. These turned out to be wholly unnecessary too: Japan’s earthquake 10 days later wrecked competitors’ supply chains. U.S. carmakers gained market share, slashing inventory and making record profits with solid pricing over the next several months.

While not wishing natural disasters on anyone, GM could use a deus ex machina of some sort this year. Not only did it lag every major carmaker last month with a mere 1.1% U.S. sales gain (fellow bankruptcy victim Chrysler notched 40%). But GM’s dealer inventories are also at a post-bankruptcy record of 667,000 vehicles, up 29% versus a year ago and 59% compared to two years ago.

And it’s the wrong sort of inventory to boot: With pump prices surging, GM has 116 selling days’ worth of trucks gathering dust. Zero percent financing, anyone?

http://blogs.wsj.com/overheard/2012/03/01/gms-crowded-truck-stop/

In this situation, GM is seeing some sales growth, though it’s the worst of any major carmaker. However, what the company is really excelling at is delivering cars to dealers, in a sense, maintaining the appearance of economic growth, when in reality the cars are just sitting on the lots unsold.

Here again, the “success” is illusory in nature.

As for the other issue, (making the economy you “saved” look like it’s in recovery), you’ve got Government bean-counters with an entire arsenal of seasonal adjustments and other accounting gimmickry to make the economy look far better off than it really is.

Case in point, the BLS claims we ADDED 243,00 jobs in January. That’s an odd claim given that the BLS admits, in the very same report, that without adjustments, the US actually LOST 2.69 MILLION jobs in January.

This is roughly a discrepancy of 3 MILLION jobs. And this 243,000 jobs number for January also comes along with upward revisions that saw roughly 50,000 jobs added in both October and November.

So according to the BLS, the US is on the upswing again, maybe not in a HUGE way, but overall things are improving: we’re adding jobs and unemployment is falling (from 8.5% to 8.3%).

In the end, both policies (making the bailed out businesses look successful and the economy strong) essentially boil down to fudging the numbers. And whether or not people fully understand these issues, most Americans have a sense that the Government is lying to them about the “success” of the 2008 bailouts and the recovery.

Put another way, most Americans know that all this talk of recovery is just putting lipstick on a pig. They know that the economic reality facing the US is in fact far worse than the numbers claim. Heck, it’s the people are on unemployment, food stamps, and are unable to find jobs that know the real situation in the US.

An equally dangerous problem is the fact that professional investors (institutions, hedge funds, traders) are investing based on this fudged data. We’ve already seen how this kind of situation plays out before (2007-2008). What happens when the REAL situation in the economy and the financial system comes home to roost? What happens when Americans’ retirement accounts get decimated by yet another collapse as most asset managers and financial advisors have yet to even regain their 2008 losses.

Big hint: it won’t be pretty.

Make no mistake, the entire “success” of the 2008-2009 bailouts and stimulus is just a mirage. And the people simply aren’t buying it. Which is why they’re pulling their money from the markets en masse (investors pulled $132 billion from Us-stock based mutual funds in 2011, that’s only $15 billion short of the record amount they pulled in 2008).

On that note, if you’re looking for actionable investment strategies on how to markets I suggest checking out my Private Wealth Advisory newsletter.

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My research has been featured in RollingStone, The New York Post, CNN Money, the Glenn Beck Show, and more. And my clients include analysts and strategists at many of the largest financial firms in the world.

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Graham Summers

Chief Market Strategist