Unemployment

I have just a short observation tonight. I read an article today predicting that companies have ringed as much as they could out of productivity enhancements and should soon be forced into more hiring. I only wish that were true. I left a comment to the article with two main points.

First, I contend that there is a fairly significant level of shadow inventory out there. Official unemployment numbers do not count those that have given up, but this does not mean they will not try again if there is any sign of decent jobs becoming available. If you read the numbers properly you will see that several percent of the employable population has simply given up. They are down, but not necessarily out.

Second, and more importantly, the employed workers have during the last few years had their hours cut rather significantly. This means, despite all the firing, employers have done what they can to keep a staff around should things rebound. And if they rebound, they have a lot of room to take in significant new levels of work without adding to ranks. After all, why hire new workers and pay benefits to new people if you current work force is underemployed. Just getting over folks working short hours will take a good bit of time, even assuming the article I read is correct that companies have already done what they can on productivity enhancements, which is a suspect proposition given the rate of tech innovation these days.

Disclosures: None.

"Surge"

Let's talk real estate for a moment. CNNMoney today ran a headline that housing starts had "surged" in August. Yes they said "surge." I just went to the site and now they are down playing the situation just a tad. The current headline notes the housing market is showing a "glimmer" of hope. From "surge" to "glimmer" in one day.

http://finance.fortune.cnn.com/2010/09/21/housing-market-shows-glimmer-of-hope/

Actually, neither is true. Yes, single family home starts are up nicely (10.5%) off of an adjusted down July figure and they were the highest in four months. But they are still horribly low. For some perspective go to the linked chart at Calculated Risk to see the - barely perceptible - "surge."

http://www.calculatedriskblog.com/2010/09/single-family-housing-starts-increase.html

Now in typing the above I almost said that the housing start number was at the "best" it has been in four months but then corrected myself and inserted "highest" instead. This is because at the moment highest is not necessarily best.

You see we have over ten months of existing housing inventory, a bunch of shadow inventory from foreclosures and people just waiting for prices to improve and a lot of homeowners under water. There is no good news here. Until folks get their personal debt within reason, save up a good down payment and qualify for credit to buy a home, building homes serves no purpose. It only adds inventory and depresses prices further. Builders should simply stop building, period, unless they have someone paying them to build a specific home. It will be several years before we work off inventory and new homes make sense, so more construction does not make any sense to me. In my book, it is bad news. And I did not even mention the problems with personal debt levels.

I noted the under water homes above as a problem in part because a lot of home buying comes from people moving more so than first time home buyers and if you are under water or even close to it you cannot move unless you somehow get rid of your current house and still have money to put the down payment on the next one. For a good quarter or more of folks with a mortgage that is simply not an option. Even if they can get their bank to do a short sale they have to save up for a new down payment. And if they do jingle mail they are not getting a new loan any time soon. The only folks under water or close to it who can move are those with money to make up the difference and still pay a new down payment. That is a major disincentive to moving, a major downward pressure on housing and a tough cycle to break. Add in all the foreclosures taking place and it is a toxic mix for at least another year or two (and I fear 5 of more years as the situation is really that bad). Folks lost trillions of dollars in real estate values the past few years and for many that was their piggy bank. Piggy has run away. Did I mention unemployment is increasing and those without jobs cannot buy a home? Did I need to?

http://www.calculatedriskblog.com/2010/09/state-unemployment-rates-in-august.html

So back to the housing starts. From what I have seen it is mostly multi-family starts and these are highly variable. Moreover, to the extent these are being built to rent, the rental market has a glut too, so good luck with that. Build it and they will come is not working here.

I simply do not get why anyone is building anything right now, why anyone is wanting something built or why folks think more starts are good news. More starts, without more buyers, are not good news at all.

Let me add two more things before I am done. First, I read last week that some developers are instituting resale fees. These tend to be hidden in the paperwork but basically they call for the developer to be paid say 1% of the resale price on any property they sell for 99 years. So you buy a property for $200,000 and sell it in five years for $200,000 and you have to send the developer $2000. And everyone who sells that property for 99 years needs to do the same, which will significantly reduce the value of the property. Developers are packaging these fees and securitizing them to turn them into instant cash. Gee, that sounds familiar.

http://www.nytimes.com/2010/09/12/business/12fees.html?pagewanted=all

Second, I have a relevant story about a neighbor of mine. I will call him Joe. Joe bought a run down house down the street a decade or so ago and paid roughly $190,000 for it with $150,000 in mortgage. Over the years the assessed value went up to $250,000 and Joe refinanced, eventually peaking in 2005 at a mortgage of $395,000. I knew Joe had a blue collar job that was respectable but did not pay tons, yet he always had a new car, had ATVs like crazy, had jet skies, a big ass enclosed trailer for everything and a major motor home. His house was nothing great but Joe had all the toys and then some. I would estimate he had a good $200,000 in toys. Joe moved out a few weeks ago and I suspect jingle mail. The house was never worth more than say $250,000 even given the market bubble, so he did well to pump a bank for $395,000. I do not feel sorry for Joe or the foolish bank, but the bank will be lucky to cover half its loan and Joe will be lucky to get any credit for a few years. And this story is repeated millions of times across this great nation.

None of this bodes well for real estate any time soon. And you also have all the problems banks are having foreclosing. Apparently, during the bubble the paper work was not always optimal, a third party entity (MERS - the Mortgage Electronic Registration Systems) may not meet legal muster in its system (which may negate certain mortgage securitizations) and folks are now having to make up affidavits to try to make a case, so it will be a bumpy and perhaps slower mortgage road for many banks going forward. GMAC just stopped all foreclosure activity in 23 states due to certain such issues.

http://www.nakedcapitalism.com/2010/09/how-serious-is-the-gmac-problem-pretty-serious-and-not-just-gmac.html

http://www.calculatedriskblog.com/2010/09/on-gmac-foreclosure-stories.html

Yes, all this mess is obviously going to clear up any day now and we should start building a lot more homes to satisfy the massive pent up demand! That is the good news? You decide.

Update: New mortgage applications have now declined three weeks in a row (and most or refis anyway) and are now at their lowest in six weeks. Sounds like an excellent time to build new houses.

Disclosures: None.

Get Ready

This is short, very short. All I have to say is the market this far into September is up the most for the start of September since 1939. I am seeing a lot, and I mean a lot, of mixed data. Nothing great and nothing terrible (at least not terrible by recent standards), so I am not expecting doom-and-gloom but I also see little to justify this month's gain on very low volume. We will see, but I do not have a good feeling about the rest of the month as little really explained the recent gains. Without good support, what goes up must come down.

Disclosures: None.

Pesky Questions

I am breaking from my usual format tonight (like I have one) to simply ask some questions that I think are worth asking. Things that may have no answer but are I think worth chewing on. You decide. Feel free to posit any answers in comments. So here we go:

1. Private debt reached all time highs in the past couple of years no matter how you measure it, but it has been coming down. I think it will take through 2012 at least to get back to historic norms but there are a host of variables impacting that time frame that are difficult to predict. Now there are various ways to reduce debt with the leading two being paying it down and default. Given unemployment, the markets being down drastically, home prices being down and the like, did the reduction in private debt to date in the U.S. for the past couple of years come mostly from people being frugal and paying it off or people defaulting? I have not seen stats on this so if you have I would appreciate seeing them.
2. Related to the last point, you have people saving more (though still not enough), some debt being paid off, unemployment high and everything else I said above, so where is consumer spending, which is around 70% of GDP, going to come from for the next year or two?
3. I just got a rescue dog recently and he takes a leak in the house every time I come home from work (really), so what can I do to stop this?
4. If the level of economic activity in this country for the past 10 years or more was built largely on easy credit and the resulting increased debt instead of people actually being able to afford what they could buy at the time they buy it, and if people are making less today collectively than they used to make due to unemployment, debt reduction and the like, where is the economic recovery coming from other than people foolishly returning to debt-laden ways if they are allowed to do so (as in a new bubble)?
5. Why do I always have to move toys to pull into my garage space at home?
6. If we do recover but in fact live within our means, instead of off debt, how much will that reduce GDP versus where it was in its debt-fueled days?
7. How does infusing banks with money (in multiple ways) so they can lend lead to a recovery when people have no way to pay the debt they already have and are becoming more frugal?
8. On a related note, what sense does it make to try to spur a heavily debt-laden country into spending again?
9. If Republicans in large part caused this mess and Democrats apparently failed miserably in fixing it, who the hell do you vote for?
10. We have massive excessive factory capacity in this country, so why would you give tax benefits to companies to spend more on factories and equipment?
11. Houses are selling in many markets for less than it would cost to build them and excess capacity along with shadow inventory will keep this so for a long time, so exactly how do we help builders by giving folks credits to buy houses they would buy anyway?
12. The stock market is up the past couple of days on very low volume on news that was mediocre at best, can it, will it, continue?
13. Do you double down on 7s when the dealer has 16 showing?
14. Everyone now, including those doing the tests, acknowledge that the EU bank tests really did not test everything they needed to test and major capital infusions are likely needed there (even if there is no sovereign defaults). And the spreads there for the PIIGS are at, above or near record highs reached in May, so what does the bond market there know that the stock markets seem to be ignoring?
15. Why is the toilet paper roll always empty when I go to take a dump?

Disclosures: None.

The Jones Factor

I have read a lot recently but have not read anything on the potential impact of this idiot Terry Jones with a church in Florida burning the Koran (Quran if you prefer) on the economies of the world. Now I am not expecting an immediate response economically but this jerk could easily cause a massive uptick in religious and political tensions, which last I checked is not good for economies. Last thing we need here is more troops going into the Middle East because some idiot in Florida wanted to make a name for himself. But it can happen and it can have a high cost - on many levels - to many countries, in terms of lives, in terms of folks having to serve time away from home, in terms of kids missing their mom or dad and in economic terms. Personally, the economic terms are the lowest consequence on my list but they are still there.

Even more personally, I vote for the U.S. making an exception, drafting the bastard Jones and sending his ass to Iraq. He wants to take a stand, let him do it next to those risking their lives. Indeed, better yet, he says he wants us to "stand up, confront terrorism," then give him and all those that support him the opportunity to go to Iraq, Iran, Afghanistan or the "evil" country of their choice with guns and let them "stand up" to terrorism personally and on their own. That should solve the issue. It is easy to sit behind a desk in Gainesville, FL, pontificate about standing up and burn some books for attention; it is different to actually put your life on the line for your country every day. I apologize for the less than PG fodder, which I truly do try to avoid, but this jerk has me really pissed off.

Rage aside, I return to the thought that this headline seeking A-hole will lead to a possible ignition of global repercussions, but nothing I have read is talking about this. As Taleb might say, this is in the fat tail of unexpected consequences. We will see, perhaps in as little as two days.

P.S. I wish all these generals and politicians would stop making speeches on how terrible the whole Quran burning thing is and simply call Jones and try to convince him to lay off. He is obviously just doing it for the publicity and headlines about Obama saying this, Hillary saying that, one general saying this and another general saying that, are only fueling the flames here. Note, I recognize the bit of irony in me doing a blog post on this and then saying folks should stop building press over it, but I tend to think the three of four people who read this post will not give Terry Jones a big head.

P.S.S. I read an Obama interview where he said Jones is causing a recruitment bonanza for al Qaeda but also noted there is nothing legally we can do about it because it is First Amendment protected free speech. Now I am a big fan of the Constitution and I know religious and political speech are in highly protected categories, but there are still limits. Remeber the whole "you cannot shout 'fire!' in a crowded theater" thingy? Well, you cannot hide behind the First Amendment and incite violence or support terrorists. I know Jones is not intending to support terrorists, but it is pretty blatant that he is doing precisely that. I doubt there is any one thing a Taliban leader could do to inspire so many to join his cause moreso than what Jones is doing. So yes, Jones is supporting terrorism. And he will incite people to commit murder. I do not view this as a First Amendment protected act.

Disclosures: None.

Build It and They Will Come

You see, once again the Administration takes a bass ackwards approach to fixing things. Now they want to front load for companies their ability to write off expense on investments in plants and equipment through 2011 instead of the over a longer period. In other words, the Administration is saying to companies go ahead and use some of the capital on your books to build plants and buy new equipment and we will provide billions in up front tax breaks instead of billions in over time deductions. Obviously the Administration thinks such spending will help spur the economy.

Only problem is that companies right now have more plants and equipment than they can use. Sure, maybe some equipment is a bit old and needs to be replaced but I suspect companies with the capital to do it are not holding off on needed purchases, and a tax break ain't going to get them spending capital on unneeded stuff. I just do not see it happening. Companies want solid proof that the economy is going to improve in a significant and sustained way before they spend, and they are not seeing it yet. With talk of double-dip, the EU having numerous countries in doubt and plenty of folks talking about Japan style stagnation in the U.S. for years, companies know that cash is king.

The other problem, as pointed out in this linked post, is that offer by the government really is very little financial incentive to them. If they have the money to spend in the first place they are not needing an instant deduction and with rates low waiting to get the deduction over time is not a big problem.

http://www.calculatedriskblog.com/2010/09/reactions-to-obamas-business-tax-break.html

This program is similar to what the Administration has tried with housing and cars; they incentivize folks to spend with tax credits or direct financial support but all they achieve is (1) giving breaks to those who would have bought anyway - including me on cash-for-clunkers and (2) front loading expenditures to the detriment of later spending. They consistently fail to realize that this is a debt driven recession and it can only end when debt is paid down, which will take a long time to achieve.

Don't Shed a Tear

Meredith Whitney believes Wall Street has some tough times ahead and she expects them to cut 80,000 jobs over the next 18 months. She expects 2010 bonus payouts to be down drastically and then the cuts. Now you might think good riddens but I suspect those being cut are not the idiots that produced this mess. Those idiots are still getting the big bonuses and are off thinking up new fleecing techniques to rebuild company profits. No, the 80,000 that may be let go are likely the folks at the other end of the totem pole.

http://www.bloomberg.com/news/2010-09-07/wall-street-firms-will-cut-up-to-80-000-jobs-over-18-months-whitney-says.html

Knock, Knock, Knocking at Greece's Door

The price to protect debt for the PIIGS is again reaching the record heights it saw in May. I noted a week and a half ago that the EU problems had been off the radar screen for a while but they were still there and would in time become the focus again. Well, it seems that this week they are back in focus. So what will the EU do for its next hat trick?

http://www.bloomberg.com/news/2010-09-07/u-s-stock-futures-decline-bank-of-america-citigroup-alcoa-shares-drop.html

http://www.bloomberg.com/news/2010-09-07/greek-debt-deals-hidden-from-eu-probed-as-400-yield-gap-shows-bond-doubts.html

Disclosures: None

Double Dip Not Likely?

According to some folks interviewed by Bloomberry, a double dip is not likely in large part because things are already terrible and it has not happened yet.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aXNpH2TK4EJI&pos=1


While I see their point, they seem to ignoring the fact that we are just now weaning ourselves off of trillions in government stimulus, which is the only thing that brought us out of a recession in the first place. Without trillions more a double dip is certainly a possibility and I do not see the government going that extreme with more stimulus. The amazing part is the bounce from the last recession was so anemic despite the government pouring trillions into the system. Accordingly, I am of the mind a double dip (which is really dependent on how you define things as I do not think we ever came out of the recession) is not only possible but likely.

Disclosures: None.

September Will Be Interesting

Markets were pretty much down, up, down, up, down up, side-ways all day. Consumer sentiment, while very low, still better than expected. Housing prices up but that is due to the tax credit so the other direction is to be expected in upcoming reports. FOMC minutes, not so good. Overall, mixed news and nothing too significant. And August was not such a good month to speak of for the market. Will September be better?

I have read several pieces today saying October is known for the steeper drops but September overall is the bigger month for being down. We will see. I have for some time predicted a bad Fall for the U.S. and if you predict enough stuff you will eventually be right and then get to say afterwards how intelligent you are for your predictions, so if September sucks wind I will be shouting from the roof tops how intelligent I am. If not, expect silence. I have done it before and am not beyond doing it again. It is a secret of the blogger trade.

Not in the Mood(y)

Apparently SEC is not in the mood to sue Moody's over bogus ratings during the crisis. Now I am certain this has nothing to do with Buffet being a shareholder and there are certainly no politics behind this decision. It has to be totally above board.

http://www.bloomberg.com/news/2010-08-31/sec-says-it-declined-to-sue-moody-s-for-fraud-over-company-s-cdo-ratings.html

Good Luck With That

Bloomberry reports that Emirates is needing to raise $28 billion to build its aircraft fleet through 2017. They are seeking to compete with other airlines by adding 45,000 more seats. At a time when many airlines are idling airplanes to lessen seats and improve pricing this just seems to be a bit against the grain of what is going on elsewhere in the industry. Go figure and good luck with that.

http://www.bloomberg.com/news/2010-08-31/emirates-to-raise-28-billion-for-fleet-expansion-seeks-majority-in-debt.html

Not Eating Our Way Out of This One

In another sign that consumers are cutting back, restaurant spending has contracted for a fourth month in a row. Face it folks, despite consumers showing a slight uptick in spending in the latest figures they need to deleverage big time. Savings are up but need to go up more to be at historic norms and with incomes down and debt maintenance payments high any expectations of higher savings rates need to be tempered. This will take years to correct and the government just needs to stabilize as minimally as they can while it happens.

http://www.calculatedriskblog.com/2010/08/restaurant-index-shows-contraction-in.html

Just my take.

Disclosures: None

Just Precious

I think it is just precious that Bernanke can speak at some conference out in the Hole, reference that things are not going so swimmingly - at least not as swimmingly as he and the main-stream economist crowd had predicted - and that QE2 is in the offing. And the market bounces big time with no real positive news. Now reading between the lines there is a bit of dissent at the Fed on what to do and QE2 may not be in the cards as readily as Mr. Ben says, but what the hell, let's have a market rally on speculation that the Fed might do more easing, effective or not. Bartender, another round for my friends - and I think we need a cab for Ben as he has obviously had too much of his own rhetoric to understand reality.

And oh, what a difference a weekend can make. Ben gets to sober up, as do his friends, and all does not look so great in the sober light of day. At least that is what the markets suggested today. So what happened, what caused the drop today - nothing.

Seriously, nothing happened. Trillions of dollars in stimulus flushed and nothing much happened. Unemployment stays stubbornly high, housing still in a funk (with strong signs the borrow-it-forward stimulus approach does not work), folks are still paying off debt (very slowly), incomes are not increasing as much as hoped (for those who have jobs), and, well, folks are still in the doldrums facing the new reality. So nothing happens at a time when investors are desperately seeking something to hang their hat on, even if it is just Ben in the Hole speaking without actually saying anything.

Stupid is as Stupid Does

So HUD Secretary Donovan comes out and indicates they are going to do everything they can to help support the housing market. Calculated Risk does a nice analysis that I will not repeat.

http://www.calculatedriskblog.com/2010/08/lawler-hud-secretary-may-have-just-made.html

The point here is you do not suggest the possibility of another home buyer tax credit and expect that to help stabilize anything. First of all, the prior credit was a total disaster to the point where one major home builder in their recent results asked that the government stop doing things to try to help. Credits front load sales and now the prospect of more down the road could very well dampen sales while people wait and see. It is very hard to plan your business as a builder if the government keeps meddling in things.

Second, as noted, the credit did not work. You are just giving money to people who by and large would have bought anyway. Third, there ain't nothing wrong with renting. Renting has a certain freedom to it. Sure you are stuck for the term of the lease but after that you are free to walk, move across the country, live in a cave, whatever, without having to worry about selling the house. And you never have to worry about your house being under water as it is not your house. I can guarantee you there are millions of people out there wishing they had never bought and for whom the American Dream is their worst nightmare. I know people struggling to make payments on homes they cannot sell and it is a terrible situation. The dream for them would have been to rent and not buy. Fourth, there is already too much supply and that will take time to adjust. There is absolutely nothing the government can due to fix this other than to simply help those with homes they cannot afford get by. Promoting more sales is the wrong thing to do.

Immigrants - Good For Business?

A study by the Fed finds that immigrants do not take jobs from U.S. born workers and indeed serve to stimulate the economy and lift wages. This is obviously going to be highly controversial - especially in certain states like Arizona.

http://www.bloomberg.com/news/2010-08-30/immigrants-don-t-take-jobs-away-from-americans-fed-study-finds.html

Now if this study is true, we have an interesting situation; the U.S. just started using unmanned drones to help protect our borders so these illegal immigrants cannot come into the country and boost our economy. Yes, the government is actively protecting us from a better economy and, I might add, at great cost. Go figure.

http://www.reuters.com/article/idUSTRE67T5DK20100830

Disclosures: None

Can - Road - Down

Obviously the numbers out this week show that residential real estate is on life support. The scary part is that things could be worse. For a long time now a lot of lenders have been holding off on foreclosing on homes and even for those they now own have been holding off on putting them on the market. I have reported on this numerous times before but the situation is very much still continuing, and perhaps in some respects getting worse.

http://www.americanbanker.com/issues/175_165/foreclosures-modifications-california-1024663-1.html

The GSEs have picked up the foreclosure rates a bit of late and real estate prices will likely suffer more over time for it (the median was down even more in this week's report), but if the banks start foreclosing and stop kicking the can, then all hell will break loose. The market is collapsing, sales are at record lows despite record low mortgage rates and prices are continuing to fall, yet there are over four million homes over 90 days delinquent and the banks are holding off on foreclosing big time. There are a number of "possible" reasons for this including the banks not wanting to come clean on the impact of their problem loans. What this will do is prolong the housing crisis for a very long time. I thought we would come out of the forest on residential RE next year but am now having second thoughts.

Not helping things is the percentage of homes under water. We are talking 11 million, or 23% of all homes with mortgages, are under water. That is a tad better than last quarter but largely because of foreclosures taking homes off the list. Think about that - 23%. That kind of pain will take a very long time to heal as house prices are not likely to recover to any significant degree for quite a while - not with all the foreclosures that will come on the market.

http://www.corelogic.com/uploadedFiles/Pages/About_Us/ResearchTrends/CL_Q2_2010_Negative_Equity_FINAL.pdf

Mind you, housing in most areas is priced below what it costs to build new housing and expectations are for further drops in prices. It could take a long time for home builders to be competitive and other than certain folks who insist on new homes, they probably have a few more tough years ahead.

Commercial real estate is no better off and it will likely suck wind for at least a couple of years too. In some markets there are improvements, but the reality is that malls are still overbuilt, consumers are continuing to cut debt (thank goodness), which does not bode well for malls and the like, businesses have rebuilt profitability by letting people go, which does not bode well for commercial RE, and so forth and so on. Did you know that the U.S. has 50% more retail space than the second closest country? Go figure. Really, go figure what that means for commercial RE when consumers are cutting back, facing high unemployment, homes under water and the like. Ain't pretty at all.

Most recessions were fixed by housing rebounds and/or consumer spending. This recession is not going to be fixed by either. So what will fix it? I am still trying to figure this out myself.

Across the Pond

Not a lot to say here but I just need to send out a reminder that the EU has a bunch of problems. After the EU went nuclear with it massive rescue effort, the problems in the PIGS - then PIIGS - were quickly forgotten, which is exactly what officials in the EU wanted. I do not want to burst their bubble, but getting people to forget about it for a while does not make the problem go away. Ask Ireland - Irish debt was just downgraded by S&P and it came at a very improvident time as Irish banks are in the process of trying to roll over 30 billion euros in debt. The downgrade makes this difficult to do and may force them to the ECB, which draws more attention to their problem, which may lead to more lenders being concerned and more downgrades and so forth and so on.

http://www.independent.co.uk/news/business/news/irish-debt-downgrade-raises-fears-of-international-deflation-spiral-2062136.html

My point is that EU problems have not gone away and with their lust to cut debt as a percentage of GDP, their economies are definitely going to be challenged for the next few years. Double dip, quite possibly. As I noted the other day, Stiglitz, the Nobel Prize economist, thinks this will happen. Either way, it is just a matter of time before the world will again focus on the EU problems. And focus they will because the EU collectively has the world's largest economy, ahead of the U.S. and China (Japan just got relegated to not getting to stand on the medal stand). When the next wave of problems surface in the EU (they are there just not to the surface yet) it will be problematic for us here in the U.S. as well. Just one more thing to worry about.

I promise I will try to think of something more optimistic to report; as long as I believe what I am reporting I have no problem with it - really.

Survey

Help me out here. I have had a significant up tick in folks visiting this site. The two or so regulars I had are I assume still around but I am really seeing an up tick. So do me a favor and tell me why. Here are the reasons I can assume:

• I am posting on a more regular basis
• The economy is sucking wind so doom-and-gloomers like me are getting more attention
• Someone somewhere linked me or recommended me
• I suddenly became a much better writer than I was
• I have actually been more right than most folks of late
• It is a direct correlation to increases in population
• It is off season for most TV shows and you are tired of reruns
• My friends are paying you to mess with me

Please let me know. Vote now and vote often.

Disclosures: None.

Economist's Says . . .!

A mathematician, an accountant and an economist apply for the same job.
The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."
Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."
Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, "What do you want it to equal"?

I cannot take credit for the joke but the best part is I think it reveals a bit of truth; economists give us what we want to hear, and right now that is anything but reality. Their jobs may be short-lived if they spoke the truth. For example:

The durable goods orders came out this morning and the bookings increased .3 percent, which is just a smiiiiiidge below (as in one tenth of) the 3% median of economists' forecasts based on a Bloomberry survey of 75 economists.


http://noir.bloomberg.com/apps/news?pid=20601087&sid=acPSIQI5pXfw&pos=2

Indeed, it was just a smiiiidge below every single economist forecast of the 75 surveyed by Bloomberry, who ranged from 1.2 to 6.8%. Imagine that, even the most pessimistic economist was off by 400%. I wish they would post the names of the surveyed economists as I would sure like to see who said 6.8%. He got some splainin' to do.

So you think this is an isolated incident, well let's talk about the new housing sales number out today. Sales fell 12% to an annual pace of 276,000. I like the Bloomberry headline:

"Sales of U.S. New Homes Unexpectedly Declined to a Record Low Last Month"

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aMPHz7m3ZYq0&pos=2

So this was "unexpected"? By who, might you ask. Well, you got it, economists. Bloomberry surveyed 74 on this topic and the median was 330,000, just a smiiidge over 276,000. Now, admitedly, it would be rare for an economist to predict a number that would be the worst ever result on record. So rare, in fact, that not one of the 74 surveyed economist was even close. The lowest forecast was 291,000. And some economist who apparently lives in a cave with no access to the outside world forecast 355,000.

By the way, henceforth I am referring to Bloomberg as Bloomberry. I like the sound of it.

Update: Out this morning is the weekly jobless claims report came in with initial applications at 473,000. Econmists predicted a worse number. So I suspect an apology is in order. But before I do so, let me note that every one of the 48 economists surveyed by Bloomberry had more pessimistic numbers than what was being reported, though one economist at 475,000 was darn close. So I apologize. Let me also note the weekly numbers are quite volatile and most folks prefer to focus on the four week moving average.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aIdbC83.n6KM&pos=1


Disclosures: None.

Clouds Forming

What a difference a few weeks makes. Some disappointing news on the jobs front, disappointing consumer sentiment reports, disappointing housing numbers and, before you know it, everyone is a doom and gloomer. Even folks from the Fed are becoming more reserved in their carefully worded presentations. And the chief economist (I love economists) at the S&P is now fearful that the U.S. has a realistic prospect of stagnation, Japan style.

http://www.bloomberg.com/news/2010-08-24/u-s-has-realistic-chance-for-japan-style-stagnation-s-p-s-wyss-says.html

Negative pundits are cropping up every where, and some who were never too optimistic to begin with are getting even a bit more pessimistic. Take Joseph Stiglitz, for example, this Nobel Prize winning economist (I found one I like) thinks Europe has a serious threat of a double-dip recession due to its attempts to reign in government deficits to be less than 3% of GDP per year, a target he considers arbitrary and an objective he considers ill-conceived in the current environment.

http://www.bloomberg.com/news/2010-08-24/stiglitz-says-government-cuts-set-to-push-europe-into-double-dip-recession.html

I frankly agree with him. I am not a big fan of stimulus spending beyond what is need to maintain stability (and I have problems with where much of it is spent) but a heavy attack on government deficits at the moment is not the solution. Yes, to the extent a given sovereign is perceived by its lenders as problematic to the point it can no longer borrow on reasonable terms, that is a problem that might need to be attacked with austerity measures, but otherwise the goal should be to stabilize the economy with some government dollars and let it fix itself. Withdrawing government dollars now only worsens the GDP (ask Ireland) and exasperates the sovereign debt issues by lowering taxes and increasing unemployment. And when this takes place in multiple economically connected countries in the EU all at the same time there is a real chance of a nasty spiral effect throughout the entire EU, which may explain why investor confidence in Germany, a pretty well off country financially, is the worst it has been in 16 months.

Given that the EU is the largest single economy on earth if you treat it as one union, then you can see where it heading into a double-dip is not good for the rest of the world. Unless you still believe that decoupling thingy, we can all be in for a world of hurt if the EU has significant problems - i.e. above and beyond the problems we are facing here as well. And even though China has now passed Japan in terms of the size of their economies, now third to the EU and the U.S., it is still not nearly big enough to lift all these boats.

Refinance Debate

Okay, no real debate here; with mortgage loans at historic lows - 30 years fixed below 4.5% and adjustables under 4% - there is no question that if your rate is more than a couple of years old you should consider refinancing if you can. Sure, every one's situation is different. If your loan is close to being paid off or if monthly payments are already pretty small because you bought cheap, the savings may not pay the closing costs off very quickly or at all. But most folks looking at it would like to refinance if they can.

There are plenty of folks who cannot refinance for a multitude of reasons. These include:

• they are underwater on their homes or at least do not have enough equity to qualify;
• they have no job;
• they have poor credit;
• they cannot afford the closing costs; or
• they do not expect to be in their homes long enough for it to make sense.

Some of these reasons have no easy cure. If your credit rating is too low you need to do what you can to improve it and that can take time. No job - well you have worse things to worry about than refinancing. You cannot afford closing costs is one that is not a big problem. So long as you have enough equity and decent credit there are plenty of low to no closing costs options still available, so start looking and do the math. The problem I am personally dealing with is that due to price decreases, I do not believe I have 80% equity in my home. Absent 80%, I am looking at higher rates and/or PMI, which takes the benefit out of refinancing.

So here is the debate, do I take money out of my investments to increase my equity to 80% so I can refinance. I have come to the conclusion that I should, but this is personal to me and my situation. Let's say that I need around $10,000 to bring my house back up to the 80% mark. Add to that probably a couple thousand in closing costs and you have $12K up front to refinance. I calculate that refinancing will save me around $150 a month in payments. Accordingly, some would say, don't do it, it will take around eight years just to break even. But I do not see it that way.

Here is my logic. I figure the $10,000 more I sink into my house I will not lose unless my house somehow becomes worth less than $10,000. Barring a nuclear war, I do not see this happening. Sure, my house could lose $10,000 more in value but that loss will happen whether I put $10,000 more in or not. It has nothing to do with the $10,000 I put in. Accordingly, from my view, my principal, the $10,000, is about as safe as it can get locked up in my house.

Now I say "locked up" as that is the major issue with putting it into my house. Assuming you have the money, the question is whether you want to make it illiquid, perhaps very illiquid, by locking it up in your house. You need to consider how much savings you have, how many months you need to have set aside, etc. But if the money is not for liquidity needs but rather for long term investment, I propose that shifting it into the house - if needed to refinance - is not the worst investment you can make.

Back to my example, I am hypothetically putting $12 K up front into refinancing. $2000 of that is for closing costs, so that is out the window until I recoup it through reduced payments. With payments going down $150 a month, I will recoup that in just over a year, so not a big problem. If recouping it will take years, I would need to consider various other issues, including the years left on my existing loan, the years I plan to be there, etc. I am okay on these fronts.

But recouping the whole $12 K will take over 12 years and I do not plan on being in my current house 12 years, so does it make sense? I think for me it does. After a year the closing costs are paid off. After that I am getting an $1800 return on my $10,000 investment and, as explained above, the invested principal is very safe, though very illiquid. So I have to ask, where else can I get a guaranteed annual return of 18% (assuming I keep my house and do not default)? I am reducing my interest tax deduction minimally on the one hand but the 18% is in after tax money on the other, so the real return is much more than 18%. And so, I ask my readers, what am I missing here?

I know I need to consider the pros and cons of replacing a loan with a remaining term under 30 years with a loan with a 30 year term. Another alternative, however, is to cut several years off the loan term and keep my payments the same. My returns at that point are in eventual increased equity that is harder to quantify, but it should still be a good return that is quantifiable. Either way, I think I can trade in a very uncertain return on the $10,000 invested in equities for an investment with a defined very good return and very low risk to principal.

Obviously, few people are probably in my situation and everyone's situation is different, so everyone has different considerations they need to consider, but for me, when I figured out I could take some long term holdings I do not need to be liquid and turn them into a guaranteed high rate of return, it seems like a no brainer. The point being, if your home is below the 80% LTV figure and you think it makes no sense to refinance, you should look at other holdings, do the math, and see what works for you.

Disclosures: None.

Yeah, We Sure Showed Those Credit Card Companies

So the government beats its chest and enacts legislation to show how it is whipping those credit card companies and banks into shape, saving the consumer and making life good for us all. So the credit card companies respond and beat their chests and raise rates to the highest level in nearly a decade even though their borrowing rates are at record lows, thanks to our government (namely us taxpayers). Nice pay back.

http://www.nakedcapitalism.com/2010/08/credit-card-companies-jack-up-rates-despite-flagging-economy-super-low-funding-costs.html

Wanna' guess what this will do to the 70% of the GDP represented by consumer spending or the impact on small businesses that rely on credit cards to cover expenses? Go ahead, guess. Yep, not good.

That Real Estate Drum Keeps Pounding

Here is some hot off the presses news from Bloomberg - housing is putting a drag on our recovery from the recession.

http://www.bloomberg.com/news/2010-08-23/housing-slide-in-u-s-may-drag-economy-into-recession-as-foreclosures-rise.html

Glad they are on top of things.

Seriously though, they are right about it, just the news seems a bit old. Anyone really paying attention to real estate has seen this coming for a very long time and has known it is a key fundamental precluding the recovery so many economists envisioned. Then again, economists are a bit delusional (okay, a lot delusional). But I have had that rant here before. For a good gauge on where RE is and is heading, I recommend this link to Calculated Risk, where the author also seems to think the economist consensus is off the mark just a tad:

http://www.calculatedriskblog.com/2010/08/lawler-existing-home-sales-consensus-vs.html

Anyone want to bet on whether the mean economists' number from Bloomberg is too optimistic tomorrow?

Update 10/24: If you took the bet you can send your check to me. As expected, the delusional economists were once again with their heads in the clouds or the sand (your pick). The sales of existing homes number for July came out this morning and it was bugly. A drop of over 27% in the annual sales rate and inventories rising to 12.5 months, the highest in over a decade. Moreover, of the 74 economists surveyed by Bloomberg how many do you think either got it right or were even more pessimistic than the actual number in their forecast? If you guessed the big old goose egg, as in zero, zip, nada, you are correct. Seriously, not a one. The lowest of the 74 was at 3.96 million sales and the actual number was at 3.83 million. One "economist" predicted 5.3 million sales and he should have stayed home today. And it seems reality is setting in for the markets. When it sets in for economists, we are all in trouble.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aTa9xAXkpKaU


Disclosures: None.

And Another One Down

Now I am not sure my count is totally correct but if I am correct FDIC took down another 8 banks today. Friday is bank take down day and this Friday is the worst in terms of number of banks that I can remember. Certainly bigger dollars have been involved in past take downs but eight in one day is truly impressive. They are:


Sonoma Valley Bank, Sonoma, CA
Los Padres Bank, Solvang, CA
Butte Community Bank, Chico, CA
Pacific State Bank, Stockton, CA
ShoreBank, Chicago, IL
Imperial Savings & Loan Association, Martinsville , VA
Independent National Bank, Ocala, FL
Community National Bank of Bartow, Bartow, FL


Now if you place close attention you will see a pattern here. Go ahead and look, I will wait. Ding, ding, ding, you have it. Yes the taken down banks are by-and-large in states that built the real estate bubble. Go figure.

Disclosures: None.

Tootin' New Hampshire's Horn

A site called Daily Beast has released a survey ranking the states in terms of most corrupt to least. Most corrupt was a surprise to me - Tennessee. I have not had a lot of contact with that state but certainly have not read a lot about corruption there. Frankly, I thought Louisiana would lead the list. I apologize to some friends of mine from that state but I have read, and had experience with, regular stories out of Louisiana on corruption, both public and private, including a story this week on some official hiring his live-in girlfriend for a big job over many more qualified folks. In any event, Louisiana still ranks up there.

I am happy to note I am from New Hampshire and it ranked as the least corrupt state. And so, let me take a few paragraphs to sing the praises of my home state for the past 8 years.

NH is often noted as one of the states with the lowest tax burdens, which is probably due to no income tax and no sales tax (other than on prepared food). I am not sure why there is a tax on prepared food. You can buy a car and pay no tax but if you buy a burrito, watch out. There is a real estate tax, but after living in NY it does not seem too bad to me. Indeed, I moved here after 17 years in NYC and cannot believe how well NH does with so little after seeing how poorly NY does with so much.

Now part of this may be due to NH being a state among the highest median incomes in the country, and at least one year since I have been here the highest, but since income is not taxed, median income should not really impact how well the state does that much.

Somehow, NH has mastered the art of doing more with less. The state motto is live free or die, which probably initially meant personal freedom but these days stands as a very prominent anti-tax motto. Any politician not running on an anti-tax motto will not get elected. Despite having one of the lowest tax burdens in the country, us here in NH want even a lower burden.

Now I am not one to complain about paying taxes. I do appreciate that we need government and the services it supplies. I also appreciate that taxes are in some respects a redistribution of wealth, and that does not really bother me. But while I do not mind paying taxes, or even more taxes if it makes sense, I get a bit outraged if I think my tax money is being put to bad use. I will not go on further on this point other than to note Obama has given most of my tax dollars to support undeserving financial institutions who are in large part to blame for our problems and that outrages me. Moral hazard be damned. Again, taxes do not bother me nearly as much as tax money being wasted. Thus, I am happy to live in a state with low taxes with low corruption where I can see my dollars doing what they should do. If only every state could be this efficient. If only the federal government could be this efficient.

This Economy is Coming Home to Roost

Well, today was an interesting day. The trickle of bad economic news seems to have become more of a steady flow and the markets did not like it, not one bit. If you are reading this you already undoubtedly know about the bad unemployment numbers out today, worse than any of Bloomberg's surveyed economists predicted. Ask me if I am surprised? The "economists" being surveyed have been too optimistic on 18 of 21 of the most recent unemployment reports. Are these people paid to be wrong? Well, quite possibly.

The Philly manufacturing index down as well, from positive territory to negative in one fell swoop. Economists really did not see that one coming either.

Now you cannot say I have not been telling you about this. My timing has not necessarily been the best but I have been saying consistently for a year and a half that the fundamentals are simply not there. Stimulus certainly glossed over this fact but the fact is still there and now that stimulus is fading fast the reality is setting in equally fast.

Now I know I sound like a broken record as I keep spouting off the same stuff (which is a major reason I have been posting less of late) but the fundamentals are again worth noting, with a few more linked stats to support the situation:

Tonight I will limit myself to real estate. There is way too much property under water, unemployment continues to lead to more foreclosures, more foreclosures lead to more REOs sold at depressed prices, which in turns further lowers the price of RE, which puts more folks underwater on their mortgages, which leads to more foreclosures, and so forth and so on. Interesting cycle. As you can see in this link, the number of foreclosures continues to increase. Fannie, Freddie and FHA had an increase of 22% in Q1 versus the prior quarter, which is an increase of 59% versus Q1 2009, when RE was already sucking wind:

http://www.calculatedriskblog.com/2010/05/fannie-freddie-fha-reo-inventory-surges.html

Now some of this may be due to ARMs resetting, some due to unemployment, some due to continuing declines in RE prices in some areas, but some are due to banks, Fannie, Freddie and others holding off on foreclosures in the past and spreading them out. This was not just something they decided to do on their own, as now we learn the official government objective was to spread out foreclosures to give financial institutions time to deal with them. Call it extend and pretend or kicking the can, either way something right now is coming home to roost. I get this inside line from John Lounsbury who had the opportunity to hear it first hand from Geithner earlier this week.


http://seekingalpha.com/article/221249-further-thoughts-on-my-treasury-meeting?source=dashboard_macro-view

There is, however, a prospect for foreclosure rates to slow if the courts continue to hold that the mortgage industry screwed itself through MERS, an electronic recording system developed during the frantic housing bubble to make it easier for financial institutions to securitize mortgages and not bother with pesky time consuming and costly recording requirements. As it turns out, some courts are saying using MERS not only saved on fees but it ventured outside of certain legal requirements for documenting things properly. In short, there could be 62 million properties in this country where the current financial institution holding the mortgage cannot legally prove it - as in the homeowner could be free and clear on their mortgage whether they know it or not. This is by no means a legal certainty in any jurisdiction, but it is getting the attention of a few courts. For a lot more detail on the situation, I recommend the following link:

http://seekingalpha.com/article/221344-homeowners-rebellion-could-62-million-homes-be-foreclosure-proof?source=dashboard_macro-view

If the trend in courts continues, many financial institutions could once again find themselves on the rope.

Disclosures: None.

Resources

Let me address a topic I do not believe I have ever touched upon but that I do like to follow, and that is resources, as in the stuff we use. This includes fuels, metals, precious gems and pretty much anything you can dig up, pump up or shovel up. China has over the past decade been on a rampage buying all this stuff up. Indeed they have at least at the moment cornered the market on rare Earth metals (which are not so rare but difficult to process - and it takes many years to build the infrastructure to process them). We cannot compete with China but there are some investments we can still capitalize upon. Let me give a few options for you to chew upon:

• renewable energy is all the rage but most, if not all, cannot presently economically compete with oil. This will eventually change and the range of estimates on oil supplies is all across the board. Yet investing in some alternative energy areas can make money in the long term. Research it and pick your own entry point. I personally believe algae has the most promise. Yet there still needs to be a lot of research to make it work.
• Biofuels are another topic related to the last. A lot of issues were created when we tried to use crop land needed for food to make fuels. Food needs will win out in time so it is better to focus on biofuels that can be made without using crop acreage, crop water or crop fertilizer. By the way, algae meets these requirements
• Crops, by the way, are a very very important resource. Right now they are mostly grown with a host of fertilizers and water that is needed for other purposes. Thus, this week's multi-billion dollar bid for Potash. But there is so far you can go with fertilizer and water. Both are limited resources. In time we need to grow crops and feed an increasing population without them. And that will be difficult.

Disclosure: I have a few thousand, much less than I initially invested, in Valcent Technologies. It was in the algae field but has not done anything there for a while. It is more into hydroponic crops in vertical systems that use less water, fertilizer and the like. The crops can also be grown in urban areas, saving fuel. I have money in them because I believe in the idea but it could clearly be decades before it becomes popular.

Nationalize Mortgage Lending

Bill Gross, you know the big PIMCO guy, came out at a government sponsored idea-fest and recommended a novel idea - "full-nationalization" of the mortgage finance system. Now I agree with Bill much more than I disagree and I like to think that the feeling is mutual (or that he has ever read anything I have written), but on this one I am a bit mystified.

http://noir.bloomberg.com/apps/news?pid=20601010&sid=aQrLLpgud3rI

I am mystified because I thought our mortgage finance system was already pretty much nationalized. Seriously, there is no securitization market outside of Fannie Mae and Freddie Mac and banks simply are not lending unless they can pass the risk on to the Fannie or Freddie or they have insurance against loss from FHA. Fannie, Freddie and FHA represent 90-95% of all mortgages now being given and these entities are all government based mortgage finance. This will change in time but right now it appears that Gross has what he wants. Now he may want these government institutions to lower lending standards to support more mortgage lending, but that ain't happening, and it should not. Housing, whether the government supports lending or not, is going to take a few years to rebound. It is over-built, inventory is soon to go back to over a year, foreclosures are near all time highs, unemployment is a problem, underwater homes prevent people from selling and moving up (or down) and lending standards are much tighter than they used to be (including very conservative - newly so - folks doing appraisals). A housing recovery is not, and should not be, in the cards.

And let me add one more factor I have NOT read about; I do not think most people (other than investors) want to buy a house. Now I know housing prices have fallen drastically, interest rates are at record lows and it is in many respects an ideal time to buy. But there are some respected folks predicting a further decline in prices, foreclosures are at very high levels, folks see nightmares (not American dreams) among those that bought before and lending standards are much more conservative. For buyers on the edge who see what has happened financially to a large percentage of the population who are underwater, I have to think they are saying to themselves they are better off to rent. This seems to be proven in part by low home sales, I might add. Sure there are plenty of reasons to dispute this and say it is a good time to buy, but I am not about to argue with them. After all, rental rates are low too and with housing prices down they will need to continue to drop to compete. We will see.

Industrial Production Up

So the markets in the U.S. and, as I write, in Asia are up on unexpectedly high U.S. production numbers, not to mention decent results by WalMart and Home Depot. Add in a little bump by a purchase bid for Potash (I thought about buying some months ago, darn it) and you get a good bounce. Now I admit I would not expect a U.S. production bounce, not with poor economics, low consumer spending, the EU in doldrums, unemployment and inventory corrections largely done, but hey, what do I know. I do know that fundamentals, while gradually improving or at least stabilizing, have a couple of years to get there. Maybe a melt-down is not in the cards (though I predict a pretty big down-turn this fall absent major stimulus delaying same), yet even with no down-turn I do not see any real support for a major bounce or sustained rally from here either. Friday, with options expiring, should be interesting.

Disclosures: None.

Across the Pond

I raise the EU as things have been a bit silent on the EU front for a while. Seriously, they do a few hundred billion in emergency funds, tie it to some extreme austerity measures, hide the EU bank stress tests from any implication of sovereign debt issues and then cross their fingers and pray people ignore them for a very very long time. Because if people pay attention then they will notice things the EU does not want them to notice.

They will start seeing that austerity is extremely painful - on private and governmental basis. Extreme austerity, which is being required in Greece and certain other EU countries, can quite easily lead to significant GDP reductions. Don't believe me, ask Ireland, which has been seeing negative GDP due to its extreme austerity. The good news is that if you survive you will come out of the tunnel and be ahead of the game. In that respect it may make some sense, like Ireland, to dive in the pool early and get it behind you. The bad news is that if too many countries dive into the pool at the same time, especially a lot of politically and economically connected countries, then all boats take on water at the same time and no one is around to through the life ring. And so we wait and we will see.

Then again there are a number of countries, like Hungary, who said no. Yes, they said no. No to austerity and the authorities can take their emergency measures and shove them. We will see.

Now some of these problems have been building for a very long time. EU has certain sovereign debt versus GDP ratios that are required for memebership. As it turns out, various EU countries, with the assistance of certain financial institutions, have been hiding their financial issues for many years. And yet, right now, things seem a bit quite there. I suspect there are some major rumblings behind those closed doors.

http://www.nakedcapitalism.com/2010/08/satyajit-das-grecian-derivative.html

I have no new negative news on the EU to pass on just at the moment, but wait, it will come. Here is a piece on the EU bank stress tests not really doing much and how things might just do a little more poorly there than the tests suggests:

http://www.calculatedriskblog.com/2010/08/sovereign-debt-part-5d-european-banks.html

And here on this side of the pond, at least one well respected expert expects housing inventory to shoot up, perhaps to a year of inventory. Boy, that is going to suck.


http://www.calculatedriskblog.com/2010/08/one-year-supply-of-houses-and-other.html

Negative

I am just passing on a post I just read from Calculated Risk noting some negative news expected out. Before going there, this blog also has a nice, unofficial, problem bank list. While the FDIC has only taken down a couple of banks the past couple of weeks - well off their YTD average - that does not mean things are improving as the problem bank list ain't shrinkin'! Okay, that last sentence had just a tad of flashback to my wife's reunion recently in WV. It was a three day reunion and included one night with both of us and our two kids in the ER (though everything turned out fine.) But I digress. Back to the post of the negative news, which is mostly focused on real estate. As the link notes, expect some bad number in that category in the weeks and months to come. Also, expect a major downward revision to the second quarter GDP estimates. I have seen another article calculating that the GDP - originally estimated at 2.4% - will be reduced to 1.2% due in large part to the new trade deficit numbers out this week. Undoubtedly, when it is officially announced the market will react, but the numbers are already in so the result is expected.


http://www.calculatedriskblog.com/2010/08/negative-news-flow.html

I may post a bit more later.

Disclosures: None

My Own Two Cents

I typically try to pass on to readers the best - in my opinion - of what I am reading to share the information. But after reading a lot sometimes the temptation is too much not to share my own view, for the two cents it is worth. I am not an economist and do not have any formal education in economics or finance and so this post is certainly not to be viewed as anything other than the views of another by-stander, though I hope from one who has followed the economy more closely than most other by-standers. So here I go:

I have read a lot of very convincing posts and articles on the need for austerity here in the U.S. to reduce government debt and the need for massive additional government spending to stimulate us back to growth. I have read equally convincing articles and blogs on deflation on the horizon and inflation, indeed hyper-inflation, on the horizon. I spend hours daily reading this stuff and find myself more confused than ever. One thing I do know is that fundamentals, economically, are messed up here in the U.S., in the EU, increasingly in China and - by default - in many other countries. The economy is global now and while some countries are not suffering like the EU and U.S., they nonetheless are not immune to what is happening. After looking at where all these countries stand, you certainly realize there is a very mixed bag of problems. So what do we do now?

I hear the arguments of those supporting massive stimulus. To them I must say we have already done that and, frankly, it did not work. It may have briefly brought us out of the recession and it may have helped to significantly stabilize a very volatile situation in our economy, but at the end of the day stimulus will not cure massive personal debt, housing problems more pervasive than we have ever seen and unemployment that simply will not go away. Stimulus, beyond stabilizing an economy on the edge of the abyss simply is not doing anything in this situation. Don't get me wrong, there may still be a need for stimulus here and there, but it is a bandaid, not a cure.

The other side of the coin is austerity. I am convinced from what I have read that the U.S. has spent massively but not to the point where it is a material problem. In other words, the extreme austerity measures being enacted in Greece and many other EU countries is not wise for the U.S.. Ireland is a prime example of how extreme austerity can lead to extreme recession. Our current debt levels in the U.S. are not a significant isssue at the moment, though they need to be addressed before our country's demographics push a host of folks onto Social Security and Medicare. In any event, government debt does not need to be the top priority at the moment, though it does need to be considered and dealt with in time. Again, I am not saying austerity in certain EU countries was not needed. Sovereign debt was becoming radioactive in certain countries so extreme measures were probably needed to renew confidence and keep banks supporting sovereign debt. Yet, the austerity will lead to significant recessions in the EU for years to come, which will certainly spill over to other countries, but perhaps this is the medicine they need.

The current course for the U.S. in my view is to have enough government stimulus or support to avert any melt downs but otherwise let nature take its course. We have years ahead, perhaps over a decade, where personal debt levels need to normalize, also called deleveraging. It is happening, but with unemployment, houses under water and the like, it will take a long time for folks to deleverage. We have a similar time period for housing prices to get normalized. Foreclosures are a significant issue for the next couple of years. Lenders are holding most REOs off the market, on a massive scale, and the market will take years to correct. The same goes for commercial real estate. I read a few months back that the U.S. has 50% more CRE than the second closest country. With 70% of our GDP from consumer spending, no wonder. Well, that consumer spending piggy bank (be it due to unemployment, housing prices down where folks have no money to take out of their homes or tight credit standards that are taking hold) is gone forever and CRE will face years of doldrums. The same issues hold true for retailers. Yep, 70% of the GDP is on hold for a long time to come. Years of debt reduction are needed to repair this situation.

The bottom line in my book is enough stimulus to keep the world from falling apart but not enough to build a new bubble or inspire more debt. Years are needed for us to correct to a sustainable level, probably over five and perhaps much more. It will be a boring half decade or decade financially speaking, the stock market will suck or be stagnate, housing prices will likely fall further, more businesses will fail or cut back, and we will not have a lot of fun, but we will survive and get back to a place where we can sustain our activity. This is my prescription for success. Not very exciting, is it?

Disclosures: None.

Tick, tick, tick . . .

In my opinion, our current situation is a time bomb ticking away. The Fed's -totally expected - announcement today on the minimal relief they will provide was simply an inept attempt to diffuse the bomb, and it did not work (it only muffled the ticking sound). Yet the clock continues to tick. Mind you, it is a clock of undetermined length and the explosion when it stops ticking will likely be more like one of those snake fireworks that you light and they burn and grow for a long time, but the clock will eventually get there. So why the snake analogy? Well, I do not see the market or the economy falling off a cliff when reality sits in. Folks will figure out that we are in for a long period of a stagnant economy and things will get to a sustained long downward direction. The direction will be down for a long sustained period and, while it will have a lot of violent bounces, will over time (a long time) trend downwards.

It may be like Japan but I suspect it will not last as long. Japan is working on over two decades of stagnation and no relief is in sight. The U.S. has problems but the U.S. bubbles were not that extreme. I remember at one point, at the height of the Japan real estate bubble, an article proclaimed that the many acres of, I believe it is called, the Royal Palace in Japan, was alone worth more than all the real estate in the U.S. Now I never saw any verification of this, but it is clear that RE in Japan set a new standard in insanity. Now Japan has set a new insanity in terms of the poster child of what can go wrong. And this, my friends, is what we have to fear.

The FOMC results today were totally expected. I think the Fed is out of any big bullets and reality is about to set in. The next 12 months will not be a happy time - and you can quote me on that or shove it in my face a year from now to tell me how wrong I am. I have been for some months predicting a problematic third and fourth quarter. More specifically I have been expecting a very trying September and October and have not changed my opinion. I thought briefly in June that the market had reacted negatively before I expected but a nice 10% or so bounce over the past month and a half have given me the expectation my timing was right.

Many months ago I noted some option mortgage issues peaking this fall and now you have many banks, Fannie Mae and Freddie Mac accelerating foreclosures on what happened earlier this year and last. REOs are shooting through the roof, employment sucks wind, saving rates are going up, companies are cutting back and, well, it is time to get out of the pool. Good luck if you decide to stay in for a while. I am on the side-lines and have been mostly for two and a half years. Being on the side-lines helped me miss the big drop and the big run-up since March of 2009. But I sleep at night. And I am still going to sleep well the rest of this year as I sit on the side-lines waiting to see if I am right or wrong. I rest much better knowing that the market has had an incredible run the past year and a half that was not at all based on fundamentals. So I ask myself, is there more upside potential or downside potential? Good question to ask yourself at the moment. And remember, while you are pondering that question, the clock continues to tick.

Update 8/11/10 at 9:35: Then again, given the market dive this morning, it looks like we may not make it to September.
Disclosures: None

Unemployment blues!

I just got back from a long weekend visiting former neighbors. They live on a lake and have a boat. Proves that it is great to have friends in high places. We had a great time and their son, who turned 7 this weekend, had a great time with my kids. In any event, great time but little to no time for reading up on stuff and posting. Still, I have found a nugget or two in late night reading. Let's start with this interesting piece and a very interesting chart on unemployment. Pay particular attention to the percentage unemployed over 27 weeks, which would simply represent those still looking. I do not think this needs explanation.

http://www.calculatedriskblog.com/2010/08/duration-of-unemployment.html

Commercial RE Numbers are down big time in June:

http://www.calculatedriskblog.com/2010/08/costar-commercial-real-estate-prices.html

And consumer credit continues to decline:

http://www.calculatedriskblog.com/2010/08/consumer-credit-declines-in-june.html

But the good news is that only one more bank failed last week. Mind you that we went a couple fo back-to-back years this decades with no bank failures but only one last week - 109 this year to date - is not an improvement.

http://www.calculatedriskblog.com/2010/08/bank-failure-109-ravenswood-bank.html

Unless you are asleep, all the links have been from Calculated Risk, one of my favorite sites and a good one to follow for weekly stats and good, I think unbiased, commentary on where things stand. In any event, the next few months will be very interesting.

P.S. Let me add one more tidbit today from Calculated Risk - Freddie Mac ROEs are up 79% - yes 79% - YOY. Lest you forget, last year was not a good year in terms of foreclosures and RE either. Fannie and Freddie, however, held off for a long time doing foreclosures in an apparent attempt to help families live the American Dream. Now they are ramping up the foreclosures big time, so forecasts - like that of Merridth Witney predicting another 10% drop in house prices this year - seem to have some basis.

[Okay, you will have to go to Calculated Risk to find the intended link as, apparently, I linked an article about early puberty in girls, which was not quite on point.

Disclosures: None.

Another Day Another Dollar

Disappointing employment numbers this morning, to say the least:

http://www.calculatedriskblog.com/2010/08/employment-population-ratio-part-time.html

another bank closed today, consumer spending still horid this back-to-school season, Fannie Mae REOs on a drastic rise,

http://www.calculatedriskblog.com/2010/08/fannie-mae-reo-inventory-doubles.html

and all is well - or not. As I have been saying, not much happening to lead us out of our doldrums very fast. Perhaps not a second dip but certainly not a nice solid climb as we have seen in past recessions. Perhaps we will see a steady diet of poor performance for a decade that has become the norm in Japan. Either way, no popping of corks. There is increasing noise about QE2, but even if that happens it simply adds liquidity to banks who have no one to lend to; consumers are cutting back, banks will not lend to small businesses with anything less than stellar credit and big businesses mostly have money but are not yet putting it to use. Accordingly, any stimulus - other than some targeted to create jobs - seems just a bit foolish at the moment.

Unemployment and consumer spending, which are closely tied, remain stubornly in problem territory. So it is another day and there may not be another dollar.

Disclosures: None.

Time to Hunker Down?!

I consider myself an optimistic realist. The glass is always half full but if it is draining out of a hole in the bottom then it is damn well time to do something. So I guess I am a pragmatic optimist. If you read my blog you probably consider me a doom-and-gloomer, a chicken-little. And you would probably be right. That characterization, however, is not about outlook on life, in my opinion, it is about reality. And reality right now, by more and more folks input, seems to be in keeping with where I see it.

I posted on the new reality well over a year ago. The folks at PIMCO are now calling it the new Normal. Whatever you call it, it is the realization of a few facts of life that the government officials are now having to face as they are not going away with the stimulus for financial institutions. I will miss some, but here are the key points to keep in mind:

1. Let's start with the savings rate in the U.S. It has recovered nicely from negative rates a few years ago but still needs to get up several percentage points to resemble historic norms. Moreover, while private debt is slowly being paid off, it still has a long way to go to get back to historic norms in relation to national GDP. While a fair amount of progress has been made in this category the past couple of years, it can probably be mostly attributed to government stimulus, which is fading fast. I would not look for personal debt levels in the U.S. to get back to norms for several years to come, and some of this is due to my next point.
2. Unemployment is persistent and stats out today on it are not promising. I am not focused on week-to-week or even month-to-month stats but overall unemployment has been rather stagnant all year around the same levels. I do not see this changing in either direction significantly though there are folks forecasting it to get better and those, including Geitner, who expect it to get worse in the short term. Obviously, unemployment directly affects point 1 above.
3. The GDP growth in the first quarter fell drastically in the second and there is a good recognition that a lot of the GDP was due to inventory build-up, which is largely done at this point.

There are a lot more than these three points - like commercial real estate at historic lows, carry trade currency issues that are really disturbing:

http://www.nakedcapitalism.com/2010/08/summer-rerun-carry-trade-threatens-a-deflationary-global-collapsse.html

And foreclosure activity mounting in a serious way. Invest in this market at your own risk:

http://www.calculatedriskblog.com/2010/08/fannie-mae-reo-inventory-doubles.html

Disclosures: None.

Listen . . .

Do you hear that? I hear a few different things. First, I hear a rushing sound, like money rushing into the markets. It is a tidal wave and it has been waiting on the side-lines, just waiting, for the moment to rush in. And now the wave seems to be coming ashore big time. Markets were aflush with a rush of money today. A bit of good news on EU banks and the flood gates were opened to the money rushing into the markets. Now, I must admit, there is not a lot of difference in the sound between the money rushing in and it flushing out. One seems to follow the other. We will see.

The other thing I hear is silence. Silence in terms of anything positive happening in housing, foreclosures, commercial real estate, unemployment, inventories, exports, GDP growth, etc., etc. For this stage in a recovery the numbers on all these are still sucking wind and some are clearly signalling a double-dip. This is certainly not a consumer led recovery as they are still lacking confidence, lacking jobs and buried in debt. It is not a housing led recovery as many respected - and generally correct folks - are expecting prices to continue dropping this year with sales to be very poor. So what will lead this economy out of recession? China- well it did for a while and now is having its own problems with its economic indicators the worst in 17 months. EU ain't going there. Thus, I hear only silence in terms of positive news that may lead us out of this recession. If you hear something different, I am all ears.

Don't believe me as I am an attorney and we always lie, or at least most folks believe we do, here are some links supporting the above:

Residential real estate still sucking wind: http://www.calculatedriskblog.com/2010/08/private-construction-spending-declines.html

http://www.nakedcapitalism.com/2010/08/new-push-to-prop-up-housing-market-via-mass-refis.html

Commercial real estate ugly: http://www.nakedcapitalism.com/2010/08/getting-ugly-on-the-commercial-real-estate-front.html

Disclosures: None.

Stimulus Anyone?

The pressures are certainly mounting for more stimulus well beyond the just passed unemployment benefits extension. And here is where the immovable object runs up against the irresistible force; Obama and crowd certainly will be pushing for more stimulus, especially with a mid-term election in the offing and Republicans can be well expected to push for more austerity. Their line will be that government debt is too massive and we need to pull back spending. There are very plausible arguments for both sides of the spectrum and, personally, I am not convinced either is right or wrong.

Certainly, if you believe me or a growing majority of folks that we are teetering on the edge of a double-dip recession, then there is certainly a strong Keynesian push to print dollars and avoid this situation. Nonetheless, there is a plausible argument that doing so simply builds government debt to increasingly dangerous levels and only serve to kick the can down the road. With GDP adjustments announced this week it is pretty apparent that the trillions in stimulus to date has done nothing really to stimulate the economy and the supposed growth this year has all been stimulus dollars, so the latter argument - on the stimulus being a waste of time - built a bit of street cred this week.

This all goes back to what PIMCO calls the new normal and what I have for nearly two years been calling the new reality. It actually is not new at all. It has been around all the time. We have, however, as an economy been ignoring it and trying to avoid it. But it is there and not going away. It is simply an economy where people live within their means. Now, unfortunately, due to a decade or so of folks living well beyond their means, living within means no longer makes the cut. Now, due to excessive debt, homes under water, unemployment and the like, we are compelled to live below our means so we can save and pay off debt. And it appears - despite government pushes to the contrary, that this is happening - finally!

Obviously, this on the ground austerity is not good for the markets, company profits or the government as it will surely mean a new recession with a very slow long climb out. In other words, if this happens, we may actually be on the way to a sustainable recovery. Go figure.

Disclosures: None.

Brief Post

I was not planning on posting tonight. I am still recovering from vacation, had meetings all day and have not had time to do the level of reading I like to do before posting. Nonetheless, I saw this piece of data well worth passing on. This article notes that a projected 20% of households in this past recession lost 25% or more of their income. If this holds it is significant.


http://www.nytimes.com/2010/07/27/opinion/27herbert.html?_r=1

Not a promising stat.

Disclosures: None.

I Can Relax Now

I was a bit worried. A couple of months ago I predicted the second dip in this recession would come this fall. Then June happened. Markets were down substantially, worries arose about sovereigns in Europe, housing was facing head winds and so forth and so on. I feared that I predicted the second leg down as too late in the year. Then came July.

July has reinvigorated the markets. Don't ask me why but they are invigorated. Actually, go ahead and ask me why. It is relatively simple. There is a massive amount of money on the sidelines waiting to come into the markets, especially in institutions, like pension funds, mutual funds and the like. They need very little excuse to dive into the pool and they have raised their equity allocations several percent over the past couple of months, which is many billions of dollars flooding into equities. And so the July spike was, in retrospect, not that surprising. So we look to the fall . . .

I still stand by my dire fall prediction. Most stimulus is ending or has already ended here and in other countries, the political will to incur the cost of more stimulus is gone (here and in other countries), housing is still problematic, manufacturing is still problematic - and so forth and so on. I am really not seeing any significant bright spots in the data. Look at this link from Calculated Risk in case you disagree, it is not pretty:

http://www.calculatedriskblog.com/2010/07/2nd-half-slowdown-update.html

I suspect now that the S&P has crossed its 200 day moving average the spark is still there to carry us through August. It is traditionally a low volume month so I do not expect anything serious to happen, but watch out come September and/or October. I have been wrong many times but this is a prediction I feel a bit more confident about and I cannot fully explain why. Fundamentals have sucked wind for a long time so pointing to them does not explain it all. It is mostly the lost steam of government stimulus in conjunction with people coming into the new (old) reality, also referred to as back to normal by some commentators.

The point being quite simply that for a good decade or two we have lived rather substantially beyond our means, especially here in the U.S., but also in the UK and EU and other countries. We have been a consumpti0n machine, be it real estate, electronics, clothes or whatever, we have consumed it like there is no tomorrow. We have not said no to ourselves or our kids. Commercial retail space has exploded to where the U.S. has roughly 50% more than any other country. Real estate prices went through the roof due to speculation and anyone who could fog a mirror being able to finance a purchase. There was no end to our consumption orgy - that is until the recession of 2008.

Now lending standards are overly conservative (both for individuals and companies) , 95% of all mortgages end up with a GSE, consumers are starting to save despite a dismal job market, and the only good news for the economy this past year has come from government stimulus, which is ending. Let me add that foreclosures are on the rise and ARMs are resetting at an alarming pace this fall and next year. With over a hundred banks put down by the FDIC this year, it is clear the mortgage stats are not that great. In short, I am not popping any corks just yet.

I personally think this is leading to a new lower level of economic activity. A sustainable level of economic activity to which the markets have still not fully adjusted. And that is what I think will happen this fall. As government stimulus fades away and the fog clears, people will see where we are and what lies ahead more clearly. That, to me, is a good thing. Time to get real folks and the sooner the better. It will be painful but I am not sure there is any other better alternative.

Disclosures: None