“Are things getting worse or are things getting better?” we wondered aloud in yesterday’s edition of the Rude Awakening.

In today’s edition, we provide a few answers – well, not answers, really…just observations from you, the Rude readership. In the column below, we present a few real-world anecdotes from Rude Awakening readers. This narrow sampling of economic observations is hardly scientific, but it may be illuminating nonetheless.

Before we get into these real-world stories, let’s examine a couple of recent stories from Fantasyland – otherwise known as Wall Street. Seven of America’s largest banks repaid their TARP borrowings to the US Treasury yesterday, in the process providing one more occasion for hopeful investors to proclaim the end of the credit crisis. The details of the repayments were as follows:

• Morgan Stanley repaid $10 billion

• Goldman Sachs – $10 billion

• BB&T – $3.1 billion

• US Bancorp – $6.6 billion

• Bank of New York Mellon – $3 billion

• Capital One – $3.57 billion

• American Express – $3.39 billion.

Lost in the euphoric brouhaha over the TARP repayments was the dispiriting news that Standard & Poor’s had downgraded the credit ratings of 18 large American banks, including one of the seven that repaid its TARP loan!

Incredibly, the US Treasury deemed Capital One sufficiently healthy to repay its $3.57 billion loan while, at the very same moment, Standard & Poor’s downgraded the credit card firm to BBB – just two notches above “junk.” Standard & Poor’s also characterized the credit outlook for Capital One as “negative.”

We would not place much faith in the analyses of either the Treasury Department or Standard & Poor’s. But we are nevertheless fascinated by their conflicting conclusions. Maybe they’re both right. Maybe Capital One is in fine shape today, as the Treasury Department’s stress test implies. But maybe the credit card company will be in miserable shape tomorrow, as Standard & Poor’s downgrade implies.

As investors, we see these conflicting assessments of Capital One as a metaphor for the entire American financial sector. This sector is a hodgepodge of conflicting opinions, data points and risk/reward assessments. Both sides of every trade in the financial sector can point to some sort of fundamental justification. The buyers see a sector on the mend; the sellers see a sector in the mire.

Your California editor is not smart enough to know which assessment is correct; but he is fearful enough to recognize a potential tar pit when he sees one. So he’s got no problem watching others wade into the water while he remains back on the bank…at least for now.

Curiously, bank stocks have gotten worse, ever since the government told us things are getting better. Most finance company stocks have been performing poorly, ever since the upbeat headlines about the “stress test” results first crossed the newswires. The BKX Index of bank stocks has tumbled nearly 19% since the close of trading on May 8, the first trading day after the Federal Reserve announced the “better than expected” results of its stress tests on America’s 19 largest financial institutions.

The TARP repayment announcements did not alter the downward trend of the BKX. Since June 9, when the Treasury Department disclosed which banks may repay their TARP loans, the BKX Index has dropped 5%.

Apparently, the finance company sector of the stock market has shifted into the “good news is no longer good news” phase. The BKX’s dazzling 135% rally between March 6 at May 8 may have adequately “priced in” all the good news that is likely to emerge for a while from the financial services industry.

Furthermore, the conspicuous recent weakness of the BKX Index is probably not good news for the overall stock market, since financial shares have been leading the market – both to the upside and the downside – during the last year and a half.

To cite just one example of this phenomenon, between February 1 and May 31 of 2008, the BKX slumped 21% while the S&P 500 actually advanced 1%. But during the ensuing month and a half, the S&P fell 13%. The BKX initiated a similar “bearish divergence” in early December last year, as it tumbled 35% between December 5 at February 6. The S&P 500 barely budged during this timeframe, but fell 20% over the next 30 days.

Obviously, the most recent decline of the BKX does not guarantee a subsequent decline in the S&P 500. But neither does it give us a warm, fuzzy feeling. So let’s call the weakness of the BKX a warning sign. Heed the warning, if you are so inclined.

From Michigan, a reader reports:

Traveling thru some western and southern suburbs of Detroit for the first time since my cessation of employment at Chrysler showed some disturbing sights. Four of my old suppliers’ factories were either demolished completely, or in the final stages of demolition. This means the roughly 3-4,000 jobs won’t be returning at all.

The only “construction” I have seen in three years was a McDonalds restaurant, coincidently on the same trip. There you have it, four demolished factories that used to provide living wages, offset by a fast food place that provides minimum wage jobs earned by the sale of dollar meals.

PS. My relatives told me the McDonalds ran an ad for employment at that restaurant. Well over 2,000 desperate people showed hoping for a minimum wage job.

From Georgia, a reader reports:

Based on [what] I observe in my community – business either down or way down – and the information I hear from family, friends and acquaintances – major job losses – the green shoots bandied about in the press are not green shoots. They are really mushrooms growing on what is left of a rotting economy.

From Alabama, a reader reports:

Hi Y’all (haha), Houses are for sale and in foreclosure everywhere. My daughter, who is a student delivers newspapers in the summer, said that there are 54 homes vacant and for sale on her route.

The company I work for gave us a 5% pay cut 4 months ago, then 2 months ago they gave all full-time employees 2 weeks unpaid furlough, 2 days ago we were again advised that starting on the 29th of June we will be getting another 5% pay cut. A lot of hourly employees have been laid off and the salaried employees like myself are doing double duty. Half the people I know are unemployed and my teenage sons cannot find a summer job. My husband is a flooring installer and is contracted to the largest carpet store in the area. He has been there 12 years so he gets priority on work, which is 3 to 4 days a week and much smaller jobs than 2 years ago. His pay is about 1/3 of 2 years ago.

There are empty commercial buildings everywhere.

As for credit, I had several cards most did not have a balance, I was advised on 2 of them that they were being closed due to inactivity, on 2 that had balances I was advised that due to the economic situation that my interest rates were being raised. And one that had a very large credit limit but a small balance, changed by available credit to match the balance due, due to economic conditions.

From Texas, a reader reports:

Hello, I am a commercial property owner in a small town in East Texas. This property has been in my family for 50 years. I have been remodeling and building new retail space for the last 5 years. There is still additional bare land to develop, and currently, I am at 100% occupancy. “Mom and Pops” are my main tenants with 2-3 major corporations. I have held off from further development since last August to see what the new administration would do. I guess, I am one of the exceptions. Debt is low and the only reason I have any debt is due to a buy-out of a sibling and major renovation. I am cautiously optimistic. If other commercial market retailers get in trouble and reduce rental rates, it could adversely affect my position. The future of commercial real estate, according to your reports, looks dismal. I hope our area will be spared from the fallout, but anything is possible.

From Oregon, a reader reports:

Here in Portland Oregon, home of the second highest unemployment rate in the nation, jobs are scarce. Graduates are finding it hard to find jobs, even in “recession proof” areas like Healthcare. A year and half ago, an employer might receive 100 applicants for an open position, now he receives a thousand. Residential real estate is slow to sell, and most sellers are still in denial, not wanting to reduce their price. Not many for sale signs either, most are bravely waiting for the new recovery, sure to be just around the corner. Folks are still visiting the malls (less than usual, but still many) and carrying fewer bags. Scamps at the mall shut down just last weekend. The manager told me that they could not get the needed funding to continue operations. And one of the trendy cheap clothing stores also went out of business last month. Most others are still open, but offering big discounts. Lots of inventory in many of the higher end stores. Appears folks are going for the cheaper stuff. Starbucks is still busy, fancy drinks still in vogue.

From Nevada, a reader reports:

I’ll give you some “boots on the ground!”

Until yesterday, when I met with a bankruptcy attorney, I thought I could financially survive this debacle. But it doesn’t look like I can.

I live in Vegas, own a high rise condo at the Strip that is worth $125K less than the loans on it, am a 50% partner in an LLC that developed 4 fabulous warehouse buildings. Sold one a year ago but still have 3 warehouses for sale that have been sitting empty since built in January, ‘08, possess First Deeds of Trust with face value of about $500,000 that haven’t made any payments in over a year (just now starting to foreclose to get property that can’t be sold today) and are worth about 10-25 cents on the dollar (but have no idea when I will see it), have a $1M investment in a mezzanine loan on a high rise condo that is probably worth 30-40 cents on the investment dollar (but have no idea when I will see it), and of course I still have to pay my alimony, pay for my kids college and private high school education, not to mention my health insurance premiums (WHICH RECENTLY INCREASED 22% FROM LAST YEAR), auto insurance and every other daily expenditure to live. My retirement accounts are down 50% and my income from all sources has basically dried up (a few sales commissions and consulting jobs bring in some cash)…Bottom line is unless something happens quickly on the upside, I am in a bit of financial trouble.

The point is, there are probably tens of thousands, if not millions of people in the same overall trouble that I am in…and my story doesn’t make the headlines!!! Perhaps it will as my BK filings will ultimately be magnified by those thousands who soon will flood the system with such filings.

I know for a fact that there are no green shoots…everything is browning out! After talking to my bankers who are about to foreclose on my warehouses, from my attorneys who tell me I am not alone and some of the most successful and well known developers in town are in worse shape, and from my “friends” at Bank of America, who after 4 months of trying to get a loan modification so I can continue to live in my hi-rise condo told me “NO” twice, once from their internal “Loss Mitigation” division who said I don’t have enough income relative to my expenses to modify, and then from their “Obama Modification Plan” division because the bank had not sold my 2nd TD to FNMA, thus I don’t qualify, clearly the world I am living in is not improving.

I only wish the “spin machine” of Wall Street would turn into a “truth machine,” but I guess truth, integrity, transparency, etc. are not in our best interests!!!

Source: For Better or Worse

In an effort to demonstrate how serious they are about this whole “recession thing,” they stated that their new interbank loan rate target was zero. Zip. Nada.

When asked if this meant they had run out of bullets, Bernanke implied they could always simply inject money directly into the system by buying billions of dollars worth of Treasury bonds.

This is actually a peculiar thought, because Treasury bonds are the one asset that is actually in demand these days (whereas dollar demand is actually rather tepid).

In fact, Chairman Bernanke’s rather alarming statement caused the U.S. dollar to fall against the euro by the biggest amount in the latter currency’s history. The dollar also notched up a 13-year low against the yen.

Why Are They So Scared of American Banks?

But let’s go back to T-Bills for a moment. Right now, there is so much desire out there for the darn things, the Treasury Department can actually offer interest rates of zero, and even less than zero, and they just keep on selling.

To explain this, I’ve heard a dozen or so terms bandying about: words like inflation, deflation and stagflation. What I want to know is this: why would somebody want to buy T-Bills at zero percent, when they could park them at most any American bank for 2% or 3%? And that’s just for short-term notes – commit to a longer time spread and you can crank that up to nearly 5%.

The only reason I can think of is that despite all the efforts to secure the banks – all the billions and indeed trillions of dollars we have poured into their coffers, and all the various deposit insurance promises Washington has made – whoever is buying all those T-Bills has reason to think America’s banks are still not good risks right now.

And that’s a scary thought indeed.

No More Failures (Please?)

In a press conference on Wednesday, U.S. Secretary of the Treasury Henry Paulson assured us to the contrary. Paulson is so sure that the banks are completely secure, he might not even ask for the second half of his “TARP” money. “I don’t expect any more major financial institutions to fail during the current credit crisis,” he said.

Shortly after Paulson made this categorical statement, Morgan Stanley (MS: NYSE) announced that it had lost another $2.2 billion in the three months ending on Nov. 30.

They were kind enough to point out that while this loss was some 558% higher than they had led folks to expect, it was actually a 39% improvement over the same time period last year.

Another scary thought.

The Wrong Kind of Record Gain

Meanwhile, things are still tough down in the trenches (where success or failure is measured by whether you still get a paycheck). Last week saw new applications for unemployment surge to a 26-year high.

The only good news to come out of all that was analyst expectations that unemployment had peaked. Unfortunately, we are now being told to look out for another record-breaker.

Indeed, Nobel prize-winning “Neo-Keynesian” Professor Paul Krugman has warned that if Washington does not continue to dump billions (if not trillions) into the economy, unemployment could climb as high as 10%.

Krugman shouldn’t worry but so much: The incoming Obama administration has pledged an immediate flow of additional billions aimed directly at unemployment – not to mention a highway and bridge program as big as anything we’ve seen since Eisenhower in the 1950s.

The Perfect Accessories For Troubled Times

So, given all that, here are a few things you might care to invest in during these troubled times.

Back in the days of FDR, they used to call idle hands the tools of the devil. Certainly unemployed folks are occasionally driven by desperation to seek out cash by removing it from other folks’ wallets. Usually by threat of force.

I don’t think that but so many middle-class working stiffs are going to start carrying serious heat. In fact, Smith and Wesson (SWHC: NASDAQ) are in a bit of a pickle this quarter, as only their lower-margin Saturday night specials seem to be selling well right now.

But I do think sales for those nifty little shock guns TASER (TASR: NasdaqGS) sells could be just the thing in 2009.

And if Obama is bound and determined to spend trillions building roads, I suppose a few shares of Caterpillar (CAT: NYSE) would do well as a stocking stuffer.

Finally, I suspect that all these trillions and trillions of loose dollars that Washington seems intent on forcing on us will quickly reverse the minor deflation we have seen over the past few weeks. So I would strongly suggest adding shares of PowerShares Bearish Dollar ETF (UDN) as a hedge against the return of inflation.

Source: What to Buy as the Dollar Stumbles

It’s one year later. From what I hear from my dad, after plunging the Merrill Lynch bond is back up. And the Bank of Nova Scotia’s shares are exactly where they were a year ago. That’s much better than most North American banks have done over the past year.

No harm, no foul?

I’d be the stupidest guy on the planet if I thought that there were no lessons to be learned just because these investments didn’t turn to mush.

Fact is, my assumptions have changed. If my dad showed me the same Merrill Lynch bond today, I would’ve told him not to touch it.

And I wouldn’t have cared if a high-ranking official from an American bank swore to me they weren’t exposed to the subprime mortgage market. I wouldn’t have believed him. I would definitely have put off investing.

The housing bust, subprime mess, credit crunch and resulting financial crisis have done more than just bring the market down.

They’ve led to a stunning collapse of confidence that has infected the entire investment world. Banks don’t want to lend to each other … institutional investors don’t know what’s safe anymore … and retail investors don’t believe anything anymore.

How can they? The rating agencies have proved beyond a shadow of a doubt that they do not understand derivatives. Their ratings are worthless.

And the brokers and analysts who follow every twist and turn the market makes? It must have made them so dizzy that they can’t see the forest for the trees. They’ve been making one bad call after another.

Just a couple of weeks ago, for example, Buckingham Research estimated that Bear Stearns had $35 billion in liquid assets and borrowing capacity, enough to operate for 20 months. Turns out it had enough for three days. This is one of dozens of examples I could cite.

There’s so much uncertainty in the investment world that we can no longer fall back on our long-held ideas of what makes a safe investment.

Munis? Sorry, thanks to the shaky status of the monoline insurance companies (which insure munis), they’re no longer the safe investments they used to be.

Money market funds? They’ve been hit too. Some brokerages are covering losses with their own money rather than pass it on to those who invested in these supposed safe havens.

Good move. I don’t blame them.

Corporate bonds? The spread on what you can earn from them is tempting, but along with falling employment there is increasing evidence that Wall Street’s problems have become Main Street’s. By no means can these be considered rock-solid safe investments.

What’s left? Oh, yes, how could I forget. U.S. government bonds. Okay, they’re still safe but are they really investments? I mean, can anything you get a negative return on be considered an “investment?”

I don’t think so, and that’s exactly what you’re getting with them. A ten-year note would give you 3.6 percent yield.

Inflation is running at 4.1 percent, and that excludes food and energy prices. The real rate of inflation (as my colleague Rusty McDougal would attest) would be much higher.

U.S. bonds are worse than giving the government a free loan. Instead of the government paying you extra money for the loan, you pay the government for the privilege of loaning it money.

Do you feel honored? Or cheated?

Well, I can’t speak for you. But this is the kind of honor that could land me in the poor house. I’d say cheated.

Well, is there any investment that is truly safe?

There sure is. Australian government bonds have never looked better than they do right now. And it’s the perfect time to jump into them…

Not only because Australia has one of the strongest economies in the world. Unemployment is at a 33-year low. And prices of its two big exports – coal and iron ore – are at historical highs. It doesn’t hurt that around 66 percent of Australia’s exports are commodities.

And not only because Australia is effectively shielded from the problems we’re having in the U.S. They trade mostly with fast-growing Asia. In fact, 60 percent of its exports go to Asia.

The biggest reason the timing couldn’t be better is because the Aussie government has been raising its key interest rate to stave off inflation. They’ve raised it all the way to 7.25 percent.