Second Half, 2003… or 1987!?!
Fiscal Ruin Of The Western World Beckons
9 Reasons Jobs Won't Recover Soon;
7 Reasons Why Housing Isn’t Bottoming Yet
By John Galt | 23 July 2009
The Dow has rallied nicely since March of this year.
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Washington, D.C. appears to be returning to the 'good' status of "stalemate" which satisfies the world. The "War against Terror" is now 'the police action against misguided radicals'. All must be well with the world because U.S. bankster profits are [once again] off the scale [[thanks to some very funny accounting: normxxx]] and I swear 'Maria the Money Honey' had an actual Bubblegasm reporting Apple’s earnings.
Welcome to the eye of the storm. And that storm, as displayed above, is Hurricane Wilma, the most intense storm in recorded history. That storm is getting ready to move again and the most powerful part of the eyewall is about to slam into our economic fantasy land at full force.
Without going into great detail, let me try to outline in brief the series of events which will be swirling like the eye wall, with 200 mph gusts and record low pressure. Duck if you see one of those buildings coming at you, it’s probably a foreclosed home being 'wiped off' the books.
1. Iran— Israel will not sit by idly waiting on the Messiah to ‘talk’ to them, they will act. Fall would be the perfect time as the Iranian defenses should be exhausted from all that probing. [[Not to mention riots in the street.: normxxx]]
2. The banking system is still extremely unstable. Despite saving those deemed "too large to fail"— now there are too many [little ones] to 'save'. The rumors about a bank holiday are swirling— but what would be logical (good luck with this one) is if they did execute such an action, consolidate or close the 2000 or so bad banks, put the assets into a RTC style liquidation firm, then re-open in less than 14 days, it might work. But the panic it would create would be astonishing at every level. [[Forget it; it would take a veritable army of CPAs, attorneys, etc.— none of whom are in sufficient quantity for even the current operations of the Fed.: normxxx]]
3. The U.S. Dollar is losing steam and the threats made by the BRIC nations to create separate trading blocs that do not use the USD is becoming reality. Without its reserve currency status— which will not be at risk this year, but just the threat of that action— the U.S. dollar is little more than an Argentine peso, albeit from a country with a big navy, air force and ['repurposeable'] ICBMs.
4. Unemployment is deteriorating at a faster and deeper level than any projections. According to numbers produced from various sources, unemployment really ranges from 18.2% to over 20.6% which matches some of the estimated 1893 and 1930’s depression levels.
5. Derivatives: From Martin Weiss July 10th— The Giant Accumulation of High-Risk Debts and Bets Called "Derivatives"
A must read and I really do not have much more to add to this subject as the risk is now on full display with the still ongoing 'three+ circus rings' of the monoline insurers, Fannie, Freddie, AIG, and CIT.
6. Swine Flu— As of this entry there just may be a vaccine, but the virus is rapidly mutating making it difficult to create an effective vaccine. This challenge could create another flu panic this autumn and winter that further impacts our financial system. [[But I'm looking out for the 'double dip' as more likely in Fall, 2010.: normxxx]]
7. Bankruptcies— Personal and Corporate bankruptcies are accelerating and as we head into the fiscal year end for many corporations, Chapter 11 could be a viable option. As individuals lose hope and can not escape the debt spiral they are filing at a pace unseen since the modification to the bankruptcy laws in 2005.
8. The P/E ratio for the S&P 500 is an absurd 15.74 on forward earnings and the NASDAQ an even more absurd 19.22. Traditional recession level ratios are between 5 and 8 (Source WSJ, 7/21). Considering the spin being put on earnings this week, the potential for a major corrective move to the downside is wide open. [[But much more likely to strike in the 3Q, since 2Q earnings estimates were (often absurdly) low-balled, but 3Q earnings estimates are now hastily being revised upwards: normxxx]]
9. Manufacturing is not recovering— just slowing its descent— with little evidence that the automotive sector will 'spring' quickly back to life. New single family home construction trailing levels have been unseen since before 1958, and there is no logical reason to think the 'housing recovery' has begun (see item 12).
10. The retail disaster is still ongoing with further bankruptcies likely, including some historic and major names which will add further pressure to an already devastated Commercial Real Estate market.
11. Import/Export data via rail car bookings, TEU container counts, etc. indicates that our export markets are still declining at about 14-29% per month depending on the port and our imports are still declining at a 20-28% decline year over year. Thus validating a continuing manufacturing disaster.
12. Real Estate Reality— Despite a mass move of foreclosed homes, the banksters are still sitting on numerous months of inventory which have not been put up for bid or worse, have often postponed final foreclosure action to prevent further market price deterioration [[an estimated 8-10 months delay between first non-payment and final auction, if any— and, despite all, new foreclosures are accelerating faster then the banks can get rid of the old ones. See also "What Can a Half Century of Housing Inventory Data and Past Recessions Tell Us?"; "Lenders Abandoning Foreclosed Properties"; and "In 'Foreclosure Limbo'".: normxxx]].
Add in the CRE disaster which is starting to pile up and the projected delinquency rates in the 8K’s for the real commercial banks (not Goldman) and you can see that any improvement is [very likely] seasonal only and will resume a steep deterioration in the fall.
That's why I am keeping up the 'hurricane warning' signs for everyone. For those of you who have never experienced a storm like this, the eye is the deceiving part. You can either keep the storm shutters on and get ready for the worst part of the storm or you can be like the idiots on Bubblevision [[and at the Fed?: normxxx]] and begin taking the storm protection down. For what it is worth, I think Dennis Kneale (CNBC) is that fool you see in every storm with a beer can in one hand trying to lean into the 150 mph winds right before a tin awning cuts him in half. In other words, as every other economic storm in our history, there is always some fool proclaiming "this is nothing, come on out, enjoy the rain"; famous last words, like these, don’t you think? :
"…there are indications that the severest phase of the recession is over…"
— Harvard Economic Society (HES) Jan 18, 1930
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Fiscal Ruin Of The Western World Beckons
By Ambrose Evans-Pritchard | 22 July 2009
For a glimpse of what awaits Britain, Europe, and America as budget deficits spiral to war-time levels, look at what is happening to the Irish welfare state. Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15% of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous compounding debt trap.
A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12% and heading for 16% next year. Education must be cut 8%. Scores of rural schools must close, and 6,900 teachers must go. "The attacks outlined in this report would represent an education disaster and light a short fuse on a social timebomb", said the Teachers Union of Ireland. Nobody is spared. Social welfare payments must be cut 5%, child benefit by 20%. The Garda (police), already smarting from a 7% pay cut, may have to buy their own uniforms. Hospital visits could cost £107 a day, etc, etc.
"Something has to give," said Professor Colm McCarthy, the report's author. "We're borrowing €400m (£345m) a week at a penalty interest."
No doubt Ireland has been the victim of a savagely tight monetary policy— given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.
As the International Monetary Fund made clear last week, Britain is lucky that markets have not yet imposed a "penalty interest" on British Gilts, given the trajectory of UK national debt— now vaulting towards 100% of GDP— and the scandalous refusal of this Government to map out any path back to solvency.
"The UK has been getting the benefit of the doubt, both in the Government bond market and also the foreign exchange market. This benefit of the doubt is not going to last forever," said the Fund.
France and Italy have been less abject, but they began with higher borrowing needs. Italy's debt is expected to reach the danger level of 120% next year, according to leaked Treasury documents. France's debt will near 90% next year if President Nicolas Sarkozy goes ahead with his "Grand Emprunt", a fiscal blitz masquerading as investment.
There was a case for an emergency boost last winter to cushion the blow as global industry crashed. That moment has passed. While I agree with Nomura's Richard Koo that the US, Britain, and Europe risk a deflationary slump along the lines of Japan's 'Lost Decade' (two decades really), I am ever more wary of his calls for Keynesian spending a l'outrance.
Such policies have crippled Japan. A string of make-work stimulus plans— famously building 'bridges to nowhere' in Hokkaido— has ensured that the day of reckoning will be worse, when it comes. The IMF says Japan's gross public debt will reach 240% of GDP by 2014— beyond the point of recovery for a nation with a contracting workforce. Sooner or later, Japan's bond market will blow up.
Error One was to permit the bubble in the 1980s. Error Two was to wait a full decade before opting for monetary "shock and awe" through quantitative easing. The US Federal Reserve has moved far faster, but already seems to think the job is done. "Quantitative tightening" has begun. Its balance sheet has contracted by almost $200bn (£122bn) from the peak. The M2 money supply has stagnated since January. The Fed is talking of "exit strategies".
Is this a replay of mid-2008 [[or 1936: normxxx]] when the Fed lost its nerve, bristling over criticism that it had cut rates too low (then 2% in 2008)? Remember what happened. Fed hawks in Dallas, St Louis, and Atlanta talked of rate rises. That had consequences. Markets tightened in anticipation, and arguably triggered the collapse of Lehman Brothers, AIG, Fannie and Freddie that Autumn.
The Fed's doctrine— "New Keynesian Synthesis"— has let it down time and again in this long saga, and there is scant evidence that Fed officials recognise the fact. As for the European Central Bank, it has let private loan growth contract this summer. The imperative for debt-bloated Western [governments] is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us.
My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.
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9 Reasons Jobs Won't Recover Soon
By Mortimer Zuckerman, U.S. News & World Report | 20 July 2009
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Recent unemployment numbers have undermined confidence that we might be nearing the bottom of the recession. The appropriate metaphor is not the green shoots of new growth. It's better to view the total of jobless people as a prudent navigator perceives an iceberg. What we see on the surface is disconcerting enough. The Bureau of Labor Statistics estimate of 467,000 jobs lost in June increases to 7.2 million the number of unemployed since the start of the recession.
The cumulative job losses over the past six months have been greater than for any other half-year period since World War II, including demobilization. What's more, the job losses are now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all employment growth from the previous business cycle. That's bad enough. But here are nine reasons we are in even more trouble than the 9.5% unemployment rate indicates:
1. June's total included 185,000 people assumed to be at work but many of whom probably were not. The government could not identify them; it made an assumption about trends. But many of these mythical 'estimated' jobs were 'imputed' in industries such as finance that, in fact, have absolutely no job creation. As official numbers are adjusted over the next several months, some of those 185,000 will likely be added back to the unemployment totals.
2. More companies are asking employees to take 'unpaid leave'. These people don't count on the unemployment rolls.
3. At least 1.4 million people weren't counted among the unemployed, even though they wanted work or were available in the past 12 months. Why? Because they hadn't searched for work in the four weeks preceding the survey. The assumption is that they had found work or don't want it, but there are other explanations: school attendance, family responsibilities, sheer exhaustion.
4. The number of workers taking part-time jobs because of the slack economy, a kind of stealth underemployment, has doubled in this recession to about 9 million, or 5.8% of the work force. Add those whose hours have been cut and the total of unemployed and underemployed rises to 16.5%, putting the number of involuntarily idled workers in the range of an overwhelming 25 million.
5. The inside numbers are just as bad. The average workweek for production and nonsupervisory private-sector employees, around 80% of the work force, dropped to 33 hours. That's 48 minutes a week less than before the recession began, the lowest level of (weekly) activity since the government began tracking such data 45 years ago.
Full-time workers are being downgraded to part-time as businesses slash labor costs to remain above water. Factories are operating at only 65% of capacity. If American workers were still putting in those extra 48 minutes a week, 3.3 million fewer employees could perform the same aggregate amount of work. With the longer workweek, the unemployment rate would reach 11.7%, not the official 9.5% (which in turn dramatically exceeds the 8% rate projected by the Obama administration).
6. The average length of official unemployment increased to 24.5 weeks. This is the longest term since the government started to track these data in 1948. The number of long-term unemployed (those out of a job for 27 weeks or more) has now jumped to 4.4 million, an all-time high.
7. The average worker saw no wage gains in June, with average compensation running flat at an average of $18.53 an hour.
8. The jobs report is even uglier when you consider that the sector producing goods is losing the most jobs— 223,000 in the last report alone.
9. The prospects for job creation are equally distressing. The likelihood is that when economic activity picks up, employers will first choose to increase hours for existing workers and bring part-time workers to full-time status.
Many unemployed workers looking for jobs once the recovery begins will discover that jobs as good as the ones they lost are almost impossible to find because more layoffs in this recession have been permanent and not temporary. Instead of shrinking operations, companies have closed whole business units or made sweeping structural changes in the way they conduct their business. For example, General Motors and Chrysler shut down hundreds of dealerships and reduced brands; Citigroup (C) and Bank of America (BAC) cut tens of thousands of jobs and exited many parts of the world of finance.
In other words, we could face a very low upswing in terms of the creation of new jobs, and we may be facing a much higher level of joblessness on an ongoing basis. Job losses may last well into 2010, and unemployment may peak at close to 11%. Can we find comfort in knowing that employment has long been considered a lagging indicator? It is conventionally seen as having limited predictive power because employment reflects decisions taken earlier in the business cycle.
But today is different.
Unemployment doubled from 4.8% to 9.5% in just 16 months, a rate so rapid it may influence future economic behaviors and outlooks. Bear in mind that the lackluster increase in inventories suggests that there's little prospect of real growth in consumption, investment or exports. So the terrible state of the labor market is likely to be a strong headwind against consumer spending as wages and overall income growth are decelerating.
And households soon will have received their full portion of the stimulus package. How could this happen when Washington has thrown trillions of dollars into the pot, including the famous $787 billion in spending that was supposed to yield $1.50 in growth for every dollar spent? For a start, too much of the money went to transfer payments— Medicaid, jobless benefits and the like— that do nothing for jobs and growth. The spending that creates jobs is new spending, particularly on infrastructure. [[But, as Japan has aptly demonstrated over almost 20 years, such spending— necessary as it is— seems to be almost useless as a "kickstart" for the economy.: normxxx]] It amounts to less than 10% of the stimulus package today.
Second, while the stimulus package may have been well intentioned, it was too small and too badly constructed to get money into the economy fast enough to replace lost consumer and business spending and to slow unemployment. Workers' pessimism is justified: About 40% believe the recession will continue for another full year. And, as paychecks shrink or disappear, consumers are more hesitant to spend and won't lead the economy out of the doldrums quickly enough.
It may have made him unpopular in parts of the Obama administration, but Vice President Joe Biden told it as it is when he said the administration misread how bad the economy was. The administration inherited the problem but then failed to understand how ineffective its solutions would be. The program was supposed to be about jobs, jobs and jobs. It wasn't. The recovery act included thousands of funding schemes for tens of thousands of projects, but those programs are stuck in the bureaucracy as the government releases funds with typical inefficiency.
An additional $150 billion, allocated to state coffers to continue existing programs like Medicaid, did not add jobs. Hundreds of billions of dollars were set aside for tax cuts and for benefits for the poor and the unemployed, and that did not add jobs. Now, state budgets are drowning in red ink as jobless claims and Medicaid bills climb.
Next year, states will have depleted their initial rescue dollars. Absent another rescue plan, they will have no choice but to slash spending or raise taxes, or both. The state and local government sector, comprising about 15% of the economy, is beginning the worst contraction in post-World War II history in the face of a deficit gap of $166 billion for fiscal 2010, according to the Center on Budget and Policy Priorities, and a cumulative gap of $350 billion in fiscal 2011.
Similarly, households overburdened with historic levels of debt will be [[mostly involuntarily: normxxx]] saving more. The savings rate has already jumped from zero in 2007 to almost 7% of after-tax income and is rising. Every dollar of saving comes out of consumption. Because consumer spending is the economy's main driver, we are going to have a weak consumer sector, and many businesses simply won't have the means or the need to hire employees.
In the aftermath of the 1990-1991 recession, Americans bought houses, cars and other expensive goods. This time, the combination of a weak job picture and the (continuing) severe credit crunch means that people won't be able to get the financing for big expenditures, and those who can borrow will be reluctant to do so. In recent times, Americans found myriad ways to fuel spending, even as incomes stagnated, by borrowing against once-rising home values, by tapping credit cards… No longer. The paycheck has returned as the primary source of spending, and pay is eroding even for those who have jobs. [[Welcome to deflation, stage I: normxxx]]
This process is nowhere near complete, and, until it is, the economy will barely grow, if at all, and may well oscillate between sluggish growth and modest decline for the next several years until the rebalancing of over 30 years of an accumulated excessive debt has been completed. Until then, the private economy will be starved of adequate credit, profits and cash flow, and businesses will not hire for expansion. Nor will they race to make capital expenditures when they have vast idle capacity.
In other words, there are many more reasons today to expect the downturn to continue than to expect a turnaround. Consumer spending and residential investment could be even weaker than most estimates, and, as the level of fiscal stimulus starts to decline in the second half of 2010, we may be facing an even more difficult future. No wonder poll after poll shows a steady erosion of confidence in the stimulus measures. One survey showed 45% believe the limited results suggest they should simply be abandoned midway. The disappointment is understandable, but that would only make things worse.
So what kind of second-act stimulus program should we look for? This time, it should not be an excuse to pass a lot of programs that don't really have a multiplier effect on job creation and economic growth. And it should not be a handout for the fat-cats. Given the trends, it is critical that the Obama administration not play politics but begin to prepare a second stimulus program to sidestep a major downturn. It will be possible this time to provide much more rapid government support to infrastructure spending that will maximize the creation of jobs.
The time to get ready is now.
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7 Reasons Why Housing Isn’t Bottoming Yet
Click here for a link to complete ORIGINAL article:
By Barry Ritholtz | 20 July 2009
On Saturday, I posted the chart above and wondered why "Some people were calling for a housing bottom". That generated a ton of emails asking about further clarification. The people I referred to [in the quote] were mostly the usual happy talk TV suspects (i.e., Cramer) who have been perpetually wrong about Housing for nigh on 3 years. I not only disagree with them, but don’t respect their opinion— essentially headline reading, gut instinct, big-money-losers. No thanks.
Then there were the slew of MSM who insist each month on reporting that 3% (±11%) is a positive integer. We disposed of that silliness on Friday.
But the crux of the email was over this post. There are a handful of people whom I disagree with, but nonetheless have a great deal of respect for [because of] their [sound] methodology and process. Over the past year, these have included Doug Kass and Lakshman Achuthan and Bill of Calculated Risk. We may reach different conclusions about a given issue, or disagree on timing, but these are the folks whose opinions force me to sharpen my own.
When I tossed up that chart yesterday, I had not yet seen Bill’s comments on the subject (McCartney!) but he is one of those people I can respectfully disagree with. We simply have reached different conclusions about the timing and shape of the eventual Housing lows. There are a plethora of reasons why I believe we are nowhere near a bottom in Housing prices or activity.
Here are a few:
• Prices: By just about every measure, Home prices on a national basis remain elevated. They are now far off their highs, but are still remain about ~15% above their historic metrics. I expect prices will continue lower for the next 2-4 quarters, if not longer, and won’t see widespread Real increases for many years after that; Indeed, I don’t expect to see nominal increases anytime soon;
• Mean Reversion: As prices revert back towards historical means, there is the very high probability that they will careen past the median. This is the pattern we see after extended periods of mispricing. Nearly all overpriced asset classes revert not merely to their historic trend line, but typically collapse far below them. I have no reason to believe Housing will be any different;
• Employment & Wages: The rate of Unemployment is very likely to continue to rise for the next 4-8 quarters, if not longer. This removes an increasing number of people from the total pool of potential home buyers. There is another issue— Wages have been flat for the past decade (negative in Real terms), crimping the potential for families to trade up to larger houses— a big source of Real Estate activity. Plus, more unemployment means more . . .
• Foreclosures: We likely have not seen the peak in defaults, delinquencies and foreclosures. Many more foreclosures— which are healthy in the long run but wrenching during the process of dislocation— are very likely. These will pressure prices yet lower. And Loan Mods are not working— they are being redefaulted on in less than a year at between 50-80%, depending upon the mod conditions themselves.
• Inventory: There is a substantial supply of "Shadow Inventory" out there which will postpone a recovery in Home prices for a significant period of time. These are the flippers, speculators, builders and financers that are sitting with properties that they do not want to bring back to market yet. Given the extent of the speculative activity during the boom years (2002-06), and the number of foreclosures so far, my back of the envelope estimates are there are anywhere from 1.5 million to as many as 3 million additional homes that could come to market if prices were more advantageous.
• Psychology: The investing and home owning public are shell shocked following the twin market crashes and the Housing collapse. First the dot com collapse (2000-03) saw the Nasdaq drop about 80%, then the Credit Crisis of 2008 saw the unprecedented near halving of the market in about a year. Last, Homes nationally have lost about a third of their value since the 2005-06 peak. Total losses to the family balance sheet of these three events are about $25 trillion dollars. These losses not only crimp the ability to make bigger purchases, it dramatically curtails the willingness to take on more debt and leverage. Speaking of which . ..
• Debt Service/Down Payment: Far too many Americans do not have 20% to put down on a home, have poor credit scores, and way too much debt. All of these things act as an impediment to buying a home. At the same time, to get approved for a mortgage, banks are tightening standards, including 1) requiring higher Loan to Values for purchases; 2) better credit scores to get approved for a mortgages; 3) Lower levels of overall debt servicing relative to income for applicants. Yes, the NAR Home Affordability Index shows houses as "more affordable," but it conveniently ignores these [other] real world factors.
• Deleveraging: For the first time in decades, the American consumer is in the process of saving money and deleveraging their balance sheets. After a 40 year credit binge, it's long overdue. The process is likely to go on for years, as a new generation is losing confidence in the stock market, Corporate America and their government. Think back to the post-Depression generation that were big savers, modest consumers, who eschewed credit and borrowing. The damage is going to take a while to repair.
• Zero % Interest Rates: As many have written, when rates are this low, they only have one direction to go: Up.
There are more reasons I expect the Real Estate market to remain punk for many years, but these are a good place to start when considering the question. The Housing Boom & Bust, and the 2002-07 credit bubble created massive excesses. More than anything, it is going to take time to resolve them. [[Probably at least as long as it took to create them in the first place! : normxxx]]
More Doom and Gloom
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Normxxx
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The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.
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