Saturday, September 3, 2011

September Jobs Report

It's about 6:30 AM as I write this on Saturday morning.  I'm sitting on a screened in porch overlooking the beach and watching the sunrise.  It is an incredible view.

In other news, we received the monthly jobs report Friday morning, which is the most important piece of economic news released all month.

The number of new jobs created during August totaled 0.0.  A complete disaster.

I will not rehash my monthly explanation of how this number is manipulated higher through labor force "participation" and birth death models. See The June Jobs Report for a complete analysis.

Just know that at a time when we need to be creating hundreds of thousands of jobs per month to get our country back to full employment, we are now losing jobs.

As I discussed in Gold Corrects, What Next?, look for shock and awe coming from both the Obama economic team and Federal Reserve to provide new "stimulus" heading into election season.

Their next round of poison injected should be the final nail in the coffin for both our currency and economy.

Thursday, September 1, 2011

Housing Recovery 2011

With a brush of good news coming out once again regarding the housing market's bottom, recovery, or whatever the word of the day being used by the media, I thought it would be a good time to take another real look at the market.

One of the pieces of information that the media uses to show the "recovery" in process is the diminishing size of the real estate owned (REO) properties.  This is used to show that the current foreclosure inventory is shrinking in size.

The REO inventory is the final stage of the foreclosure process.  They are homes that are listed for sale on your street and in the spot light.  However, the real problem facing the housing market is not the REO inventory, but the shadow inventory.

The true shadow inventory is broken up into 4 phases:

1. Under 90 days delinquent - 2.48 million
2. Over 90 days delinquent - 1.9 million
3. Foreclosure - 2.16 million
4. REO - 500,000 (graph above)

The following graph shows the flow chart through the foreclosure process:

The REO number touted by the media is a spec of dust in the big picture.

The true inventory is 6.54 million in size, not 500,000.  The reason for this is because when a homeowner enters the phase 1 delinquency stage they almost never exit the 4 part process; like someone trapped in quicksand.

But that is not all.

I'd like to add an additional stage, even though it can't be technically included.  It is the "pre-quel" to the 4 part movie.  This stage is called underwater.

When the price of a home falls under the value of the mortgage, that loan is essentially a dead man walking.  The only thing separating that home owner from becoming part of the under 90 days delinquent (phase 1) is common sense. 

How large is this dead man walking inventory?  Most estimates have it at over 10.1 million mortgages, or about 25% of all mortgages in America.  This number grows by the hour as home prices continue to fall.

One morning a home owner wakes up and decides they are no longer paying.  They then officially move into phase 1.  What happens when a home owner moves into this terrible position?

The most recent LPS statistics show that this American on average will now live in their home payment free for 599 days.  I know, I know, it is truly horrifying. 

Interest rates are currently hitting all time record lows close to 4% with low down payment loans provided exclusively by our government. 

What would happen if interest rates were to rise off rock bottom levels?  What would happen if the government could no longer afford to provide 100% of the mortgages to Americans?  Do you think they will choose social security and medicare payments over new mortgages when our debt crisis comes?

I do.  I look forward to buying my piece of the American dream, but I think I'll wait until the nightmare arrives before calling a realtor.

h/t drhousingbubble

The New Hidden Subprime

Total household debt in America grew at an exponential pace from 1971 to 2008, when it hit a peak and began to turn down. (Government debt took the baton and has exploded higher since the consumer debt peaked)

This was due to Americans paying down debt they already owned, as well as their reluctance to take on additional debt in the form of new mortgages, car loans, credit cards, furniture/best buy credit, etc.

One portion of household debt continued its rapid growth ascent and even picked up the pace right through the current credit crisis: student loan debt.

The major beneficiary of this increased borrowing is not the students (who would pay a lower tuition if their ability to borrow was taken away and have a far lower debt burden leaving school) but the universities who can charge extravagant prices knowing that students can take out (government) loans to attend school.

In addition, many younger students who have recently lost their jobs have decided to go back to school to get their graduate degree (and add additional student loans).

This is a disaster in the making.  Student loans, unlike most other household debt, cannot be erased after a bankruptcy.  You are a prisoner for life.

Student loan growth (red line) vs. the decrease in total household debt (blue line):

A New Living Standard

After losing their jobs and spending a year or two living in their homes for free before the banks finally them back, Americans are now finding new and creative ways to survive.

As unemployment continues to rise with no end in sight and home prices continuing their trend downward, look for "houseboats" to continue to grow in popularity.

Noureil Roubin: Bloomberg TV

Nouriel Roubini, one of the boy wonders who became a household name after his bearish predictions in 2006 and 2007 became a reality in 2008, sits down with Margaret Brennan to discuss his outlook today.

He sees another recession coming and now fears that "the Federal Reserve and other authorities no longer have the ability to provide emergency support."

My bet, however, is that they will go down with guns blazing.

Tuesday, August 30, 2011

Consumer Confidence Gone

The foundation of the American bubble economy over the past few decades has been based on consumers borrowing and spending. (This role has temporarily been shifted to the government borrowing and spending)

Over 70% of our GDP is based on consumption, making the consumer confidence index released this afternoon an extremely important economic indicator to track for future growth projections.

The index fell off a cliff; from 59.2 down to 44.2 month over month.  The confidence index is now now back to the trough seen during April 2009. (When the stock market was about 50% lower)

In simple terms, while the American stock market has been artificially levitated by the Federal Reserve's endless printing, the American consumer has not had the opportunity to join the party.

The following chart shows the consumer sentiment index (green line) with the stocks that rely on consumer spending for growth (blue line). 

The disconnect is massive.  Either consumers are about to turn a massive corner and begin spending like it's 2006, or the shares of these stocks are going to collapse.

My money is on the latter. 

Watching The Credit Markets