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.