Sorry Folks, But the Pain Ain't Over Yet

I keep looking for signs of hope that the worst is behind us, and there is anecdotal evidence that it is, but I don't like anecdotal evidence. Rather I like - let me correct - I love data and statistics. Why do I love data and statistics? Because they do not lie. CEOs of top banks lie, politicians lie and many others giving opinions lie. Data, if read properly, does not lie. So, my friends, why is the data leading me to my continued pessimism?



Let's begin with option ARMs (Adjustable Rate Mortgages). In case you do not know what an option ARM is, it is an adjustable rate mortgage that for an initial period, before reset, allows the mortgage holder to take the option of paying less than interest. Also referred to as reverse amortization. In other words, the loan principal increases during the initial period before the reset, allowing people who cannot really afford a home get by for a few years paying minimal payments, but when it resets they need to pay interest and principal based on an amortization schedule for the remaining life of the loan. Translation - even with currently low interest rates their payments are going up significantly. Now add to this equation job losses, housing prices down up to 50% and more in certain areas and all the other stresses on our economy and you have more trouble on the horizon. You figure for yourselves how many of the option ARMs will get paid off or go into default. The linked site has a nice chart on how the option ARMs seem to be peaking in resets in 2010 and 2011 (near the end of the article). I did a post the other day on how we are in the eye of the hurricane here. It may be a big eye, but it is an eye.



By the way, the good news in the linked article is that other adjustable rate mortgages are probably - this year at least - resetting to lower rates, which is a very good thing. Those who have enough equity to refinance at a fixed rate are going to do well, but I suspect that is a very, very small percentage of those with ARMs. For the rest, if inflation takes off a few years from now, as some suspect, those rates will sky-rocket. Another eye-of-the-storm factor to consider.



http://globaleconomicanalysis.blogspot.com/2009/05/arms-reset-crisis-revisited.html



I am doing a footnote here on commercial real estate loans, which are now sucking wind and credit card defaults that are mounting. Just a couple of asides to consider in determining whether we are past this.



So Let's Look at Consumer Spending



Consumer spending is 70% of our GDP in the U.S. Government is 20%. How much can that 20% make up for deficits in the other 70% - not that much is my answer. And more importantly, the government is wasting its time and our money focusing on the financial sector as opposed to other stimulus for the guy on the street. Don't get me started but the government spending literally trillions on unfreezing credit seems to me a bit odd when our current problems are due to too much credit. The linked articles agree -please read them.



http://suddendebt.blogspot.com/2009/04/culprit-revealed.html



http://suddendebt.blogspot.com/2009/04/crisis-part-two.html





The good news (not for the government) is that U.S. citizens are deleveraging. The savings rate continues to climb despite job losses. The government should be supporting this and spending their trillions of our dollars for long term domestic sustainable job support (you know, like supporting new green technologies, college tuition support, infrastructure and the like) versus spending trillions on the *&^%$'s that got us here. Nonetheless, whether the government knows the right thing to do, individuals do. Saving rates are on the increase even while job losses continue.



http://suddendebt.blogspot.com/2009/04/culprit-revealed.html



Bottom line - the government is doing absolutely the wrong thing. They are supporting those that created this mess (with significant moral hazard) to prompt more credit when the root of our problems is too much credit. We need to flush the system and get rid of the credit spending but instead we are pushing for a new bubble. At best, if it works, we are kicking the problem down the street. Not a good plan - not at all!!



The other day I mentioned I do not like Geithner or Summers. That is not an understatement. Pleeeeeeeeeease Obama, put Volcker in charge. I truly implore you to do this. If you like Summers and Geithner, please take the time to read up on them. They are insiders on the banks we are supporting with obscene amounts of money, which makes me sick. These people need a public flogging, not taxpayer support.



And in case you missed it, here is my tribute to Dr. Seuss, were he alive today, turned 105 last month. It is on point and I think the Dr. would agree:

• I do not like Geithner,
• I do not like Summers,
• I do not like them,
• I do not,
• I do not.
• They spend my money,
• They give it away,
• They think that is funny,
• And I have no say.
• They like big banks,
• They like them a lot,
• They give them my money,
• They give all I got.
• I would not help banks,
• Not give them a dime,
• I would not help banks,
• Even give them the time,
• I would not help banks,
• With all the subprime,
• I would not help banks,
• Their mess is a crime.
• It is their problem,
• They made their own bed,
• It is their problem,
• Their stock price is so red,
• It is their problem,
• You heard what they said,
• It is their problem,
• Yet they score from the Fed.
• The TARP is bad,
• The TARP is sad,
• The TARP is making me,
• Oh so mad!
• PIPP PIPP hooray,
• I hear them say,
• PIPP PIPP hooray,
• And again I pay!
• We give banks money,
• So they will lend,
• We give banks money,
• So they will spend,
• But we give them the money,
• And they pay dividends,
• Please tell me Obama,
• When it all ends.
• The toxic assets,
• They must be bought,
• They must be bought,
• For a lot,
• And then the bank stocks,
• Will be so hot,
• And yet the economy,
• Still goes to pot.
• I do not like it,
• I like it - not!
• I do not like it,
• Please make it all stop!!
• I do not like Geithner,
• I do not like Summers,
• I do not like them,
• I do not, I do not!!!http://www.nakedcapitalism.com/2009/04/knives-are-coming-out-for-geithner.html
  

Disclosures: None.

Rejoice - Consumer Spending Up!!

Oh joy, oh joy, consumers are going back to their spending ways. Now some might say this is a good thing. Obviously the market said this today. I, on the other hand, think it is in the medium to long term a very bad thing. I read a very good piece today from RGE Monitor (Nouriel Roubini's blog, which has a number of well educated and versed authors. I highly recommend going there and signing up. It is a free, and very informative. They send you a great email or two each day.) on the imbalances in part attributed to the so-called Brent Woods 2 system. At base, certain export countries - Asia, Middle East and the like - have been funding the U.S. and certain European countries to enable us to buy more products than we can afford. RGE puts a lot of nice economic terminology around it but at the base, these countries for years have funded our debt spending to buy their stuff - oil, consumer products, and the like. We have been spending more than we make buying this stuff, in part due to a housing bubble and in part due to easy and low rate lending (partially made possible by our trading partners). So the problem in large part has been Americans spending too much, and the market now celebrates that we are gradually returning to those unsustainable ways. I am not liking this.

I have written on numerous occasions on what I call the new reality. Over the past few years we have lived in a ferry-tale world. We have been spending more than we make and that has been tied to easy credit and an ever-expanding household piggy-bank (otherwise known as housing prices). We have had one heck of a good run. But it has been a run with a false premise. We could not afford it and now, with debt built up and housing prices down 15-50% across the board, we do not have the collateral to support it. Even if we briefly start spending again, this will disappear - it must - it has not choice. We have to live within our means and, to properly recover, must live well enough within our means to pay down debt. Think about it - the baby-boom generation just lost 30-50% of their retirements and most probably did not have enough saved anyway. Do you really think these people are about to go on a sustained spending spree? No, they need to save every cent the can (I am) to restart their retirements. And these for the most part are people still at the peak of their earnings.

We need to consume less and the countries that sold to us need to focus on domestic consumption, which they need to support through domestic stimulus, versus supporting exports to debt-laden Americans. We are like recovering crack addicts and the government wants to give us more drugs to fix our pain. Eventually, we need to get off the drugs. We need to go straight, as in without a debt addiction. Time to get real and the sooner the better with our own economy and the world economy. The new reality is upon us. The countries exporting to us need to understand this as much as we do. It is a new and necessary dynamic. You might call it the new reality.

I will be the first to admit that my predictions on us not yet being to a true bottom might be wrong. Yet, more importantly, even if we have seen a bottom, I do not see us escaping it any time soon. To me the bottom is the new reality. It is where we would be - should be - absent the last couple of bubbles. With job losses and real estate prices still dropping, I can still see us hitting a new bottom, but there is a real prospect that the massive government spending will support a false bottom and even provide a false and significant bounce. I simply suggest you study the long term fundamentals before getting all excited. If you want to play the short term possibility of a stimulus bounce, go for it at your own risk. It might happen. Nonetheless, I suggest the reality will keep us close to the range we are in for the medium range at a minimum.

Disclosures: None.

Stess Tests In Fact Causing Stress

I wrote a couple of posts last week questioning whether the government stress tests were really going to test the banks. Word today is that at least a few of the 19 banks being tested will likely need to raise new capital - though they are protesting the results, so who knows. If the government comes out saying certain banks need more capital I will eat (some of) my words. The stress tests baseline is foolish at this point as the economy is trending towards the worst case stress tests scenarios. I am not certain where the government will come in, but certainly some banks, like Bank of America and Citigroup, are needing more capital no matter what test you use.

And talking about tests. Mr. Lewis (I use "Mr." generously) is perhaps soon to see the door at Bank of America. Given the BofA acquisitions over the past year or so, I would have voted his hide out a long time ago. Some major shareholders are waking up finally to the terminally ill condition he has caused with acquisitions. I mean if I could tell they were stupid without any due diligence then he is an idiot. Just my humble opinion, by the way. Don't shed a tear here as I am sure he has made many millions for his foolish ways and undoubtedly has a contract that will give him many millions more if he is put out to pasture. If only shareholders could figure a way to sue him to get it back. Were I still in private practice I would love to spend countless hours figuring out how to sue these (fill in your own derogatory term here) on behalf of shareholders or even taxpayers. I would even do it for reasonable flat fee just to make these (fill in again) pay for what they have done to this country and the world. These individuals need to be hung very high.

Are we hanging them high? Of course not. We are rewarding them with hundreds of billion - trillions - in taxpayer largess. I am truly sick!!

I truly hope Lewis is hung high by his own shareholders. When they have to convert the government prefered shares to common, they will be highly diluted. They cannot be happy. I am certainly not.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aqtmeiUmp8ug&refer=home

Other than the true tragedy developing with a potential swine flu pandemic, there is nothing else I saw worth reporting.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aiUTjQxkoGZM&refer=home

Disclosures: None

I Do Not Like It, I Do Not, I Do Not!

I do not like Geithner,
I do not like Summers,
I do not like them,
I do not, I do not.

They spend my money,
They give it away,
They think that is funny,
And I have no say.

They like big banks,
They like them a lot,
They give them my money,
They give all I got.

I would not help banks,
Not give them a dime,
I would not help banks,
Even give them the time,
I would not help banks,
With all the subprime,
I would not help banks,
Their mess is a crime.

It is their problem,
They made their own bed,
It is their problem,
Their stock price is so red,
It is their problem,
You heard what they said,
It is their problem,
Yet they score from the Fed.

The TARP is bad,
The TARP is sad,
The TARP is making me,
Oh so mad!

PIPP PIPP horay,
I hear them say,
PIPP PIPP horay,
And again I pay!

We give banks money,
So they will lend,
We give banks money,
So they will spend,
But we give them the money,
And they pay dividends,
Please tell me Obama,
When it all ends.

The toxic assets,
They must be bought,
They must be bought,
For a lot,
And then the bank stocks,
Will be so hot,
And yet the economy,
Still goes to pot.
I do not like it,
I like it - not!
I do not like it,
Please make it all stop!!

I do not like Geithner,
I do not like Summers,
I do not like them,
I do not, I do not!!!

http://www.nakedcapitalism.com/2009/04/knives-are-coming-out-for-geithner.html

Disclosures: None!