Where is the Market Going?!

Obviously I have been wrong on the market direction for some time. Daily I scratch my head and elsewhere and wonder how in the world can people be buying stocks and believing we are in a rebound. I will admit we may be at or near the bottom of the recession, but there is a stark difference between bottom and recovery and the markets of late are apparently predicting a fairly significant recovery back to our spending ways of yesteryear. I view that as an impossibility, literally. The math simply does not add up and won't for some time. And so I will stay on the sidelines kicking myself and waiting.

So why am I saying impossibility, let me count the ways:

1. While U.S. consumers have in fact been paying down debt, it is still near record levels and I suspect much of the debt reduction has either been from government stimulus or defaulting on the debt (which results in it being eliminated);
2. We had the destruction of over $13 trillion in wealth in this country during this recession and outside of government stimulus little of this has returned;
3. Median incomes are down over 3% this month YOY so we do not have more money to spend absent government stimulus, which is the government borrowing money for us to repay later;
4. Housing is nearing a bottom generally but still sluggish;
5. Commercial real estate is just starting to get to its lowest point and will not likely get there until 2010 or well beyond;
6. Mortgage foreclosure issues will continue to be an issue as Alt-A mortgages, especially Option ARMs, and prime mortgage defaults continue to rise and will not likely peak until 2010 or 2011;
7. We have major shadow inventory on the real estate market, which is homes that are not officially for sale but belong to people wanting to sell. Reportedly, a lot of banks have held off on foreclosures as they do not want to deal with the costs of foreclosure (shadow inventory) and 24% of homeowners would like to put their homes up for sale if the market were better (shadow inventory). That is enough shadow inventory to keep home prices depressed for years to come;
8. The retail space in the U.S. is roughly 50% overbuilt compared to any other country in the world; and
9. Unemployment may have stabilized a bit but there is not likely to be a big bounce off the bottom.

I have more, but this can get depressing, so let's take this a few steps at a time. Any hoot, do you see my point? And one last point here, I do not like at all the Administration response to this crisis. I voted for the guy but he has surrounded himself with idiots and he listens to them way too much. Actually, I am not sure they are idiots. I just think they are answering to the big banks and not the people they are sworn to serve - the taxpayers. I would like to hang them high, very high. They are bending over backwards to please the AHs that got us into this mess. And that keeps me up at night wishing I had voted for the other guy.

Here is an important piece on what the Administration is doing about banks too big to fail. It starts by noting many very prominent economists who think they should be dismantled, which is what I favor and have touted for months, but then it notes what Geithner, Summers and the like are still kissing A with the big banks, who have treated them well in the past. Makes me a bit ill to read it.

http://www.nakedcapitalism.com/2009/09/guest-post-top-economists-say-we-must-break-up-the-insolvent-banks-government-says-lets-make-them-bigger.html

Disclosures: None.

Debt, Debt and More Debt

I have little time today for anything in depth, so I am mostly going to provide a few interesting links I have read worthy of a read, in my opinion. Let us start with a post detailing information from some scholarly folks as at University of Chicago, a well respected institute of higher learning. They are talking about debt and make pretty much the unsurprising deduction that people in areas with the most leverage off of homes are doing the worst in this downturn.

http://www.calculatedriskblog.com/2009/05/mew-consumption-and-personal-saving.html

Incomes down! Yep, that spells good news for consumer spending and for GDP, which is two thirds consumer spending. Median income off 3.6% should spell roughly a 1-2% decline in GDP.

http://www.calculatedriskblog.com/2009/09/census-bureau-real-median-household.html

Disclosures: None.

Are Consumers Paying Down Debt?

Click on image for larger graphic.

Karl Denninger provides us with the chart above. It does not include the past few months of consumer debt reduction, but otherwise it tells the story. It is especially telling in terms of debt versus income. Does this debt level look sustainable? Here is a link to the entire post, which is somewhat enlightening.

http://market-ticker.denninger.net/archives/1414-2009-Labor-Day-Ponderings.....html

And so now we hear that consumer debt fell at a 10.4% annual rate in July. That folks is six straight months of decline and 11 straight months of credit card debt decline. Five times the debt reduction economists expected.

http://www.marketwatch.com/story/us-consumer-credit-down-record-amount-in-july-2009-09-08

Whether this is good news or bad depends (a) on your perspective and (b) on the reason for the reduction. Let me start with (b). According to the following link to Bloomberg, while debt was reduced the past couple of months, incomes declined slightly and spending went up slightly.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aAYZpSNGocVM

Now I am no math major, but how can debt go down if incomes went down and spending went up? The only answer I can think of is the fact that debt can be reduced in two ways. Number one, it is being paid off. Given lower incomes and higher spending, paying down debt seems unlikely in general. Number two, debt can go away by being written off, as in credit card defaults, bankruptcy filings and the like. I have seen no official stats on what caused the reductions but I suspect some reduction through defaults is a big factor here. Oh, and there is a third way, government stimulus is used to pay down debt, which is not to be underestimated in the present environment. Government debt replacing individual debt is not, however, a debt reduction. It may move debt to a lower rate and put off to another day the payoff, but it is not reduction.

Now the prospect that some, perhaps a significant, part of this reduction is people defaulting on debt is not good news from any perspective. Yet some of it may be due to people actually paying off debts and whether this is good also depends on your perspective. Some of it is likely due to tightening credit standards, leading to less credit with which we can grown debt and which leads to a forced reduction in debt. Reading between the lines on the Bloomberg link, the mainstream press, and undoubtedly the Administration, view this reduction in consumer debt as a negative. Low spending and more savings does not spell recovery for the economy in the short term.

Yet there are those of us who view the short, even medium, term as pretty much a lost cause. We have way too much debt and the only cure (correction) to our situation is to gradually reduce it. It took us an entire generation to build the debt to record levels and it may take longer to bring it back down as it was built by baby boomers who increasingly cannot afford to pay it off. If you question me on our debt load, this link may wake you up a bit. The graphic at the beginning of this post comes from it.

http://market-ticker.denninger.net/archives/1414-2009-Labor-Day-Ponderings.....html

Sorry friends but until the debt situation is under control we have no recovery. We may stabilize at a bottom but we will stagnate there. I prefer to take the pain for a few years and do what we can to reduce debt so less is pushed off on generations to come, but that does not seem to be the Administration game plan. They seem hell bent on getting people back to their spending ways and on supporting the financial companies that got us into this mess. I am done for now standing on my soap box, but I am starting to percolate with anger on what is happening, so watch for more. The market being up is fool's gold in my opinion. There is nothing other than government stimulus around the world keeping us there.

Disclosures: None.