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For Those Who Think The Bottom Is In

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Economic Bottom Calls: Willful Ignorance

For my weekend missive I would like to present some charts that should make clear exactly what sort of storm we're facing in this country, and why the mess cannot be over.

We will start with the most basic of known facts: Consumption is 70% of the economy, the government is the other 30%.

This is the chart that everyone should be focused on as their "first level" analysis; updated yesterday, it is The Federal Reserve's G.19 data on consumer credit, presented in year-over-year percentage change.

G-19-Big.serendipityThumb.png

Note a few things about this data:

In most cases during recessions consumer credit growth has not gone negative. Notable exceptions are the 1991/92 recession, the immediate post-war "hangover" and, of course, this one. The 1991/92 recession is particularly interesting in that revolving credit did not stop growing, but non-revolving (specifically, automobiles and other "durable credit-financed purchases") did, as is shown in the detail chart here:

consumercredit90-present.serendipityThumb.png

The Fed did not track revolving and non-revolving credit (mostly because there was no material revolving credit) prior to 1968.

I want to focus on the detail chart, and then re-state it a bit. See, our population is growing about 1% annually, but this chart states rate-of-change in gross dollars. That of course ignores the true state of the world in a "per-capita" view, which isn't accurate. Subtract 1% off the current rates to get there.

The more-frightening aspect of this, however, is the fact that the rate of positive growth is clearly constrained - that is, each bounce has been weaker, and it appears that we have now "hit the wall" for the consumer.

The Stock Market has responded mightily, but to what? That answer is simple - the source, historically, is right here:

Debt-vs-market.serendipityThumb.png

With the breakdown it becomes more clear: it is the turn in revolving - that is, credit-card - debt that has led the market up in the modern era. In 80-81 it was nearly two full years before the market turned. In 1987 the turn-up in revolving debt led the market upward. In the early 90s we never really had a meaningful pullback in the market, but again, the turn was not led by non-revolving (primarily durable) debt, but rather by revolving, and when it turned it sparked the 1990s market boom. In 2000-03, again, revolving credit turned upward in the early part of 2002, and a year later the final market bottom was reached.

This is particularly ominous because where we are now looks a lot like 2000-03 in this chart. In particular, "cash for clunkers" will spike non-revolving debt, just like "Drive America" did in 2001, but that did not mark the bottom. Indeed, consumer credit spiked upward in the early part of the 00-03 downturn just like it did this time, as consumers desperately tried to hold onto their standard of living via credit cards.

In 2000-03, it "worked" - we avoided the meltdown, even though the stock market posted a 30% decline.

But in 2008/09 the attempt to shift consumption to credit has failed - credit demand has now gone negative in the consumer sector for both durable and consumptive purposes.

History says you must watch revolving credit y/o/y change, and expect the turn in that demand to lead the stock market bottom by up to a year or even more.

Note that in 00/03 when we hit the bottom on consumer revolving credit (mid 2001) we still had another, confirmatory, move down. The first big rally in 2001 off the 9/11 lows in fact occurred into a declining consumer credit environment - just as it is now. As the violence of the first move downward was greater in this case, thus the reaction rally should be expected to be greater, and it has been.

But CAN we spur people to borrow? The data says no, and you better believe that both Bernanke and The Federal Government know it. Thus, charts that look like this:

DebtGrowth.serendipityThumb.png

Notice some important facts from the past, most-specifically that the market did not begin a durable rise until we had plateaued and were about to decline in government debt growth, with consumer debt growth taking the baton back from the government's "stimulus."

You can clearly see where in early 2001 the policy response began with government "printing" of credit (Fed-sponsored, of course), but the recovery occurred when that ceased. It ceased because private activity took over and credit once again expanded in the private sector, leaving government free to draw back.

But the policy response this time was much more massive than previous and in fact during the last "recovery" we never managed to get below a 5% annualized rate. Now we're at four times that and current projections are that we will continue next fiscal year to run a deficit of about $2 trillion dollars - close to today's rate. Historically, until this rate of change begins to subside and the consumer is able to once again pick up borrowing activity there is no recovery.

The Federal Government is in effect trying to paper over these problems:

CIVPART_Max_630_378.serendipityThumb.png

Civilian participation in the economy - that is, the number of people working as a percentage of the population, is back to where it was in the late 1980s, and in fact has declined since the beginning of the 00-03 downturn. Despite the claims of a "booming economy" during the 03-07 time frame labor participation did not rise; we instead borrowed the money to "create" that boom, we did not earn it!

UEMPMEAN_Max_630_378.serendipityThumb.png

Note that since 1970, when you lose your job you tend to lose it for greater and greater periods of time. This of course depresses consumer earnings which in turn has driven the reliance on credit. Worse, duration of unemployment continues to rise dramatically until well after the recession is over - in fact, this has NEVER, EVER FAILED TO BE THE CASE.

This chart alone should make your blood run cold if you are a banker - or trading on the belief that the banking system has hit bottom and credit-related losses are anywhere near "complete." Job loss and unemployment are the most-reliable trend indicators for the direction of credit losses, both via foreclosure and consumer credit defaults.

In all recessions since WWII up until this one the recession itself was not triggered by defaults - that is, excessive credit in the system. It was instead triggered by excess production capacity. As such we entered the recession with a good-sized "cushion" between credit defaults and unemployment.

This recession was entered because of the overhang of credit. The cushion was in fact zero, which is why we are now continuing to see ramping foreclosure rates. In fact, according to RealtyTrac:

According to the report, Las Vegas has the country’s highest foreclosure rate for cities with a population of more than 200,000; the city saw 7.45% of its housing units, or one in every 13 homes foreclosed upon in the first six months of 2009. That’s a 22% increase from the previous 6 month period, according to RealtyTrac.

The Cape Coral-Fort Myers metro area in Florida had the second-highest foreclosure rate, with 7.2% of its homes foreclosed upon in the first half of this year.

Some cities saw foreclosure rates decline during the first six months of 2009, including Stockton, Calif., which saw its rate fall nearly 4% from the previous six-month period. Detroit’s foreclosure rate also fell 8% when compared to the rate during the last six months of 2008. Foreclosures in Cleveland also declined by 11%, compared to the previous 6 months, according to the report.

Stockton and Detroit are seeing a decrease because virtually all of the housing stock that CAN be foreclosed HAS BEEN ALREADY!

Of course the numerical rate has gone down - the better question is "of those homes LEFT that can be foreclosed upon, what's the rate?" Don't ask that question.

Bernanke and The Federal Government have in fact "bet the farm" on the idea that they can "stimulate" the economy with federal borrowing. You've heard it yourself - stimulus programs and TARP'd money to "make more loans available to consumers."

Yet in fact consumer credit is still contracting, not expanding, despite $700 billion of raw cash - the fuel for seven trillion in new borrowing - being injected into the banks. We are now almost a full year into the massive policy response from The Fed and Government and yet borrowing among consumers continues to decline!

The gambit from last fall in fact has failed to turn around consumer credit - not because there is no credit supply, but because there is no demand from credit-worthy borrowers - the pool of Americans able and willing to take on new financial term obligations continues to contract. The issue is not willingness - it is ability.

When this was detected this spring The Federal Government engaged in one last pumping effort - it cranked up its own printing press and threw - literally - $630 billion dollars into the economy between the first and second quarters. That cranked up the y/o/y Federal Debt growth numbers dramatically and produced a rocket ride in the stock market as a good part of that went directly from the big banks into speculation in that market, along with a short-term move in GDP.

The intent was to produce a dramatic increase in consumer confidence and thus restart the "consumption engine" that drives our economy.

We now have the results on that: it produced only a fleeting change in confidence that is now (again) rolling over, and worse, it has done nothing to change the present situation and most importantly the labor indices:

chart_cci.gif

Says Lynn Franco, Director of The Conference Board Consumer Research Center: "Consumer confidence, which had rebounded strongly in late spring, has faded in the last two months. The decline in the Present Situation Index was caused primarily by a worsening job market, as the percent of consumers claiming jobs are hard to get rose sharply. The decline in the Expectations Index was more the result of an increase in the proportion of consumers expecting no change in business and labor market conditions, as opposed to an increase in the percent of consumers expecting conditions to deteriorate further. However, more consumers are pessimistic about their income expectations, which does not bode well for spending in the months ahead."

Consumers continued to rate current conditions unfavorably in July. Those saying business conditions are "bad" increased to 46.3 percent from 45.3 percent, however, those saying conditions are "good" increased to 9.1 percent from 8.1 percent. Consumers' assessment of the labor market deteriorated further. Those claiming jobs are "hard to get" increased to 48.1 percent from 44.8 percent, while those claiming jobs are "plentiful" decreased to 3.6 percent from 4.5 percent.

In short, the response "to date" from government has been the same response it has (with success) employed in previous recessions:

Pump government spending in an attempt to get consumers to once again take on more debt, thereby pulling forward yet more demand and lifting the economy.

The problem is that we are in this recession because of excessive consumer debt in the first place.

The reservoir of available-but-untapped credit is dry among consumers as a whole; we have, over the previous 20 years, drained the labor participation rate, we have drained equity in homes, we have drained savings and instead consumed far beyond our means. Since there is no cushion upon which the consumer may draw, and in fact credit lines are being slashed at a furious rate to comport with diminished earnings power among the consumer, the government's attempt to "prime the pump" was doomed to failure from the outset.

There is only one way to produce a durable economic recovery that does not involve massive contraction in GDP - we must find a way to boost actual personal incomes dramatically so as to free up additional spending power. This means dramatically expanding the labor participation rate, which in turn means bringing jobs home rather than offshoring them. In short, we must increase PRODUCTION, not paper-pushing.

That, unfortunately, would require protectionist measures last seen in the 1930s, and have a dramatic and horrifying short-term impact around the world.

Absent that the only durable solution available is to accept that our economy must contract to a level we can sustain via personal earnings, not credit, and to either pay down or default the excess credit in the system. This in turn will significantly "reset" our standard of living to a lower level, as we will be paying more in cash and less in credit for what we consume.

Attempts to further shift consumption to the government balance sheet will be short-lived - eventually you have to pay that debt, and this sort of "solution" means dramatically higher taxes (which ALSO kills consumption.[/b

The math simply prohibits further "pulling forward" on a durable basis; short-term stimulus measures intended to turn confidence will in fact prove fleeting, as the consumer, at this point, has barely de-leveraged his or her balance sheet at all - in fact, we are only back to where we were, in terms of outstanding credit, in the middle of 2007:

2009-08-07Credit1.serendipityThumb.png

We have a long way to go folks, and further attempts out of the government to "pump" the economy and markets, while certainly making the stock market feel good in the short term, are unlikely to be able to turn around the credit demand picture, which is in fact the backbone of our economic engine.

Absent that turn-around the only paths forward are to either dramatically increase taxes (which will hammer consumption and thus stocks) or force repatriation of labor so we produce more (which will lead to nasty tariff wars ala The Great Depression.) Attempting more and more fiscal stimulus to prop up a consumer with no more true borrowing or production capacity is a path that will produce "feel good" response only for the duration of the spending, the ability of the government to continue down that path is not indefinite in duration

http://market-ticker.org/archives/1313-Eco...-Ignorance.html

Edited by MOP

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<super-snip>

Attempting more and more fiscal stimulus to prop up a consumer with no more true borrowing or production capacity is a path that will produce "feel good" response only for the duration of the spending, the ability of the government to continue down that path is not indefinite in duration.

But it's not proping up consumers is it?

It's propping up the banks and allowing them to avoid collapse / deal with tighter requirements.

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But it's not proping up consumers is it?

It's propping up the banks and allowing them to avoid collapse / deal with tighter requirements.

I assumed he was talking about stuff like "cash for clunkers" there? I would consider that to be propping up the consumer end of things. He is saying that these schemes only work once after which demand is exhausted.

The consumer is pretty much the US economy and these signs are showing that the consumer pullback is accelerating.

Edited by MOP

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Economic Bottom Calls: Willful Ignorance

For my weekend missive I would like to present some charts that should make clear exactly what sort of storm we're facing in this country, and why the mess cannot be over.

We will start with the most basic of known facts...

- SNIP -

Flipping heck MOP

Go get yourself a cup of tea and a sit down.. you deserve it! :lol:

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I assumed he was talking about stuff like "cash for clunkers" there? I would consider that to be propping up the consumer end of things. He is saying that these schemes only work once after which demand is exhausted.

The consumer is pretty much the US economy and these signs are showing that the consumer pullback is accelerating.

yep, im pretty suprised at the US trying to prop things up spending more money they dont have for a short term fix that will worsen things in the long run, it makes sense in the UK to make things worse in the long run at the expense of today because there is an election coming up, this clearly doesnt apply to the US

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yep, im pretty suprised at the US trying to prop things up spending more money they dont have for a short term fix that will worsen things in the long run, it makes sense in the UK to make things worse in the long run at the expense of today because there is an election coming up, this clearly doesnt apply to the US

And just watch what happens when this kicks off:

option-ARM-resets.JPG

Edited by MOP

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Flipping heck MOP

Go get yourself a cup of tea and a sit down.. you deserve it! :lol:

I don't think MOP is trying to pass of Denniger's piece as his own, even if his the one pullin the strings! :lol::ph34r::ph34r::ph34r:

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I don't think MOP is trying to pass of Denniger's piece as his own, even if his the one pullin the strings! :lol::ph34r::ph34r::ph34r:

Oops.. I thought it MOP had just pinched the graphs.

Feel silly now

6445032~Embarrassed-Chimpanzee-Posters.jpg

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where did you find the chart MOP

http://www.calculatedriskblog.com/2007/10/...eset-chart.html

This chart from Credit Suisse via the IMF shows the heavy subprime resets in 2008, plus it shows the reset problems with Alt-A and Option ARM loans in later years.

Although many of the homeowners in the 2009 to 2011 reset periods will refinance (if they can), this shows that the problems in housing will linger for several years. What is especially concerning is all these Option ARM resets in 2010 and 2011. Most of these homeowners are selecting the minimum payments (negatively amortizing) and many homeowners will be upside down when the ARM resets.

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Deutsche Bank: Commercial Real Estate Loans Going Bad At Frightening Rate

Aug. 3, 2009, 6:57

Richard Parkus of Deutsche Bank has updated his Commercial Real Estate outlook with Q2 data. Check out how much the situation has deteriorated since the end of Q1.

First, here's where things stood at the end of Q1. The lines on the chart are the percentage of loans that are delinquent, measured by length of delinquency (the black line is the average). Deutsche Bank was looking for 3.5% average delinquency by the end of the year.

chart_1.jpg

And here's where they were at June 30. Deutsche Bank is now looking for 6%-7% delinquency by the end of the year.

chart_2.jpg

Note that these problems have nothing to do with "liquidity." (Remember earlier this year, when Tim Geithner was blaming everything on a "lack of liquidity"?) These loans are going bad because the real estate companies can't make their interest payments--because the tenants can't pay their rent.

Richard summarizes the situation:

Loan Performance Deteriorating Precipitously

Speed of deterioration in loan performance is unprecedented, even relative to the early

1990s

Total delinquency rate reached 4.1% in June, 2.2 times its March level and 3.5 times

that in December

Delinquency rates are likely to soar higher over next 24+ months on billions of dollars of pro forma loans that never stabilized and resetting partial IO loans

With 2,158 delinquent fixed rate loans ($27.9 billion) special servicers may soon be under pressure

DB CMBS Research projects term losses will reach 4.3-6.3% for the outstanding CMBS

universe ($31.3-$46.4 billion), and 8.4-12.1% for the 2007 vintage

http://www.businessinsider.com/henry-blodg...ing-rate-2009-8

post-16847-1249834106_thumb.jpg

post-16847-1249834159_thumb.jpg

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The insiders (CEOs, directors, etc) can't have been watching much of the mainstream financial media of late because the ratio of sells to buys is at its highest since late 2007. Mind, they just could know more about what's really transpiring than all those pundits with their cheesy grins.

http://www.zerohedge.com/article/las-weeks...sells-1-billion

Last Week's Insiders Transactions: 5 Buys For $13.4 Million, 145 Sells For Over $1 Billion

Submitted by Tyler Durden on 08/07/2009 10:35 -0500

Courtesy of Finviz, the ratio of insider buying to selling transactions is 5 to 145. Total transaction value: Buys: $13.4 million; Sells: $1,042 million. At least insiders are feeling (or its dyslexic equivalent, fleeing) the new bull market...

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About half of U.S. mortgages seen underwater by 2011

Wed Aug 5, 2009 5:12pm EDT

NEW YORK (Reuters) - The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.

"We project the next phase of the housing decline will have a far greater impact on prime borrowers," Deutsche analysts Karen Weaver and Ying Shen said in the report.

Of prime conforming loans, 41 percent will be "underwater" by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties' value, up from 29 percent, it said.

"The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding," the analysts said. Prime jumbo loans make up 13 percent of the total market.

Deutsche's dire assessment comes amid a bolt of evidence in recent months that point to stabilization in the U.S. housing market after three years of price drops. This week, the National Association of Realtors said pending home sales rose for a fifth straight month in June. A widely watched index released in July showed home prices in May rose for the first time since 2006.

Covering 100 U.S. metropolitan areas, Deutsche Bank in June forecast home prices would fall 14 percent through the first quarter of 2011, for a total drop of 41.7 percent.

The drop in home prices is fueling a vicious cycle of foreclosures as it eliminates homeowner equity and gives borrowers an incentive to walk away from their mortgages. The more severe the negative equity, the more likely are defaults, since many borrowers believe prices will not recover enough.

Homeowners with the riskiest mortgages taken out during the housing boom have seen the greatest erosion in equity, in part because they were "affordability products" originated at the housing peak, Deutsche said. They include subprime loans, of which 69 percent will be underwater in 2011, up from 50 percent in March, Deutsche said,

Of option adjustable-rate mortgages -- which cut payments by allowing principal balances to rise -- 89 percent will be underwater in 2011, up from 77 percent, the report said.

Regions suffering the worst negative equity are areas in California, Florida, Arizona, Nevada, Ohio, Michigan, Illinois, Wisconsin, Massachusetts and West Virginia. Las Vegas and parts of Florida and California will see 90 percent or more of their loans underwater by 2011, it added.

"For many, the home has morphed from piggy bank to albatross," the analysts said.

http://www.reuters.com/article/newsOne/idUSTRE5745JP20090805

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Pne problem with insider transactions is you don't know what they're doing with the cash. They may be buying call options for instance.

If nothing else, you have to admire Denninger's tenacity and determination to try and understand what's going on and report on it. He's a one man publishing empire!

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yep, im pretty suprised at the US trying to prop things up spending more money they dont have for a short term fix that will worsen things in the long run, it makes sense in the UK to make things worse in the long run at the expense of today because there is an election coming up, this clearly doesnt apply to the US

Ergo - there is something else going on :unsure:

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I assumed he was talking about stuff like "cash for clunkers" there? I would consider that to be propping up the consumer end of things. He is saying that these schemes only work once after which demand is exhausted.

The consumer is pretty much the US economy and these signs are showing that the consumer pullback is accelerating.

You're right. I stand by what I said, but here and now was not the right place and time to say it.

:mellow:

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You're right. I stand by what I said, but here and now was not the right place and time to say it.

:mellow:

I'm not even sure the propping up of the banks is working. Why do we need another 50 billion QE?

I reckon the balance sheet black hole is even bigger than they originally thought. Will another 50 billion even be enough I wonder?

:ph34r:

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Good post, MOP

consumercredit90-present.serendipityThumb.png

Repaying dent, is actually part of the SOLUTION

...and it is precisely because repayment of debt is becoming a lot more difficult to do that the problem is going to get much much worse a long time before we come anywhere near close to that solution Doc.

The liquidity trap has long since been sprung and any hopes of near term recovery are misguided in the extreme. The bottom of the barrel has nowhere near been scraped as yet and the sheer drudgery of stagnation is likely to drag on for several quarters yet...if we are lucky!

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For my weekend missive I would like to present some charts that should make clear exactly what sort of storm we're facing in this country, and why the mess cannot be over.

>>> super big snip<<<

Last time I looked Britain had not joined the USA (which is where all the data from your cut'n'paste is applicable to).

Edited by expatowner

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Last time I looked Britain had not joined the USA (which is where all the data from your cut'n'paste is applicable to).

Stripping out all the US data, can you tell me which of the below is not also relevant to the UK at this point in time? M4 growth is still slowing in spite of QE-we are just as much up sh1tcreek and fresh out of paddles wouldnt you agree?

Economic Bottom Calls: Willful Ignorance

But in 2008/09 the attempt to shift consumption to credit has failed - credit demand has now gone negative in the consumer sector for both durable and consumptive purposes.

But CAN we spur people to borrow? The data says no, and you better believe that both Bernanke and The Federal Government know it.

Yet in fact consumer credit is still contracting, not expanding, despite $700 billion of raw cash - the fuel for seven trillion in new borrowing - being injected into the banks. We are now almost a full year into the massive policy response from The Fed and Government and yet borrowing among consumers continues to decline!

The intent was to produce a dramatic increase in consumer confidence and thus restart the "consumption engine" that drives our economy.

The reservoir of available-but-untapped credit is dry among consumers as a whole; we have, over the previous 20 years, drained the labor participation rate, we have drained equity in homes, we have drained savings and instead consumed far beyond our means. Since there is no cushion upon which the consumer may draw, and in fact credit lines are being slashed at a furious rate to comport with diminished earnings power among the consumer, the government's attempt to "prime the pump" was doomed to failure from the outset.

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Stripping out all the US data, can you tell me which of the below is not also relevant to the UK at this point in time? M4 growth is still slowing in spite of QE-we are just as much up sh1tcreek and fresh out of paddles wouldnt you agree?

What this says to me is that money is still available for housing but buyers are electing to wait to see if prices drop further. On the flip side sellers are hoping "the bottom is in" and that prices will rise from here (they ar ereluctant to take offers).

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