If Incomes are Down, Where is the Economic Spending coming from? Industrial Production Still Lower, Credit Contraction, and Average Work Week at Record Low. Wells Fargo Considering Converting Option ARMs to Interest Only Loans.
With 8 million jobs lost in this great recession, it is rather surprising to see so many people enter into a deep capture mode of believing in a quick and efficient recovery. If we look at data in the misery index, the average American has a hard time swallowing the jagged economic recovery pill. They look at their paychecks and see no recovery. They look at rising healthcare costs and see no recovery. They send their kids to colleges where costs are going up 8,9, or even 10 percent per year. The data simply does not reflect this actual reality. Are things better than say in March? Depends on what we look at. Sure, the stock market is up a record 60 percent but does your life feel 60 percent better? Is your pay up by 60 percent? What about your bottom line? If we look at disposable income for the average American, it has actually fallen. If it follows that two-thirds of our economy is based on spending, then where is this money coming from?
Let us first look at disposable income:
With over 70 years of data, disposable income has only gone negative on a year over year basis one other time and this was in the late 1940s. This is really not a typical occurrence. Yet when we deconstruct the GDP report and 3.5 percent growth, we realize that this equation:
GDP = private consumption + gross investment + government spending + (exports - imports)
A large part of that growth came from government spending. The other growth came largely because of cash for clunkers with the auto sector contributing 1.6 percent of the 3.5 percent growth (typically about 0.1. or 0.2 percent). In other words, there should be little shock that GDP was up. Why not spend $2 trillion and make it go up by 7 percent? Of course, any thoughtful analysis shows the error in this reasoning. It is an adrenaline shot to the chest administered by the bailout syringe. The U.S. Treasury and Federal Reserve are juicing the markets and hoping this recovery sticks. The latest data relies on purely government back stops. If we look at industrial production, things are still looking like a recession:
And much of the bounce is coming from restocking and refilling inventories to meet the current demand. The real question is whether the demand will still be there without government spending. That is yet to be seen. In fact, there is already talks of a second stimulus and the government is still pumping money into the fragile housing sector trying to get Americans to buy homes yet again even though we just went through a decade long housing bubble.
Yet the average American is working less hours and earning less money:
This is a fundamental question here. Most Americans don’t realize this but they are being taxed in numerous ways. For one, the current bailouts and government spending is coming at the cost of a weaker and flailing dollar - you are being paid in a weaker currency:
Source: Jesse’s Cafe
There is a cost for all this additional spending. The only reason we have yet to see the higher cost hit the typical balance sheet is because there has been $12 trillion in household net worth balance sheet destruction. This has occurred through the loss in real estate value and stock market value. This is real wealth destruction. Also, each bankruptcy and foreclosure in essence destroys the face value note and brings to reality a new cost. In other words, a $500,000 mortgage that is now linked to a home that is worth $200,000 and is foreclosed and sold, will only produce a $200,000 mortgage (depending on down the payment). So the system loses that $300,000 even if it was inflated values. There is still unrealistic prices in the system especially in the $3 trillion commercial real estate sector. That is why the Fed is reluctant to allow an audit of their books.
Americans haven’t yet felt the brunt of this but we are in a full-fledged disinflation period. Rents are going down and this is the largest component of the CPI. So those on fixed incomes are going to have to get by with less. Just look at Social Security that suspended the COLA for the time being. Have you looked at saving account interest rates? Close to zero. So the only game in town is basically the stock market (and commodities) if you want anything above 5 percent. The risk-free days are over. Even holding the U.S. dollar is now risky because of the massive spending.
If we look at the balance of trade, things have improved simply because Americans are spending more and our lower dollar has made our products a bit more competitive:
Make no mistake, the improvement above is largely due to less consumption. So what will happen? The U.S. Treasury and Federal Reserve want a systematic devaluation of the US dollar. As the above chart points out, this is their current path. They are satisfied that Wall Street is back to the good old days and the taxpayer is subsidizing their casino at the cost of the US dollar. In their mind’s eye, they are looking for a decade long decline in the dollar followed by moderate to strong inflation. When was the last time that you saw on the mainstream media the U.S. dollar debated? In that way, we essentially inflate ourselves out of this bubble without the masses getting into a frenzy. Even the banks are betting on this.
Wells Fargo is now talking about converting their option ARM loans into interest only loans:
“NEW YORK (Dow Jones)–Wells Fargo & Co.’s (WFC) strategy for modifying its billions in troubled Pick-A-Pay mortgages looks a lot like a game of kick-the-can-down-the-road.
Wells Fargo, the fourth-largest U.S. bank by assets, holds more than $107 billion in debt tied to option-adjustable rate mortgages, a quintessential loan product from the housing boom that allowed borrowers to make small monthly payments in return for increasing their mortgage balance. Now, many Pick-A-Pay borrowers own homes worth far less than they owe in mortgage debt, even as many of them can afford a full monthly payment that pays down principal.
To solve that conundrum, Wells Fargo is taking a gamble: The bank is issuing thousands of interest-only loans that will defer borrowers’ balances for as long as six to 10 years. Wells Fargo is wagering that an eventual rise in housing prices in the country’s worst-hit regions, along with a rise in consumers’ income, will eventually combine to cover the bank’s billions in underwater Pick-A-Pay debt.
“We’re banking on the fact the economy will improve and recover over time,” Michael Heid, co-president of Wells Fargo Home Mortgage, said in an interview.”
Wells Fargo is essentially betting on another housing bubble. Think of an option ARM loan that is at $500,000 on a $250,000 home (58% of these loans are in California). Wells Fargo is betting that the current borrower by 2019 or whatever date will then be in a home valued at $500,000 or more. They are simply betting on another bubble spurred by the U.S. Treasury and Federal Reserve. In Japan, real estate values remain depressed after 20 years. This after trillions into their banking sector and trillions in fiscal stimulus (sound familiar?).
So going back to our initial question, if income is down where is the money coming from? It isn’t coming from credit card companies because they are slashing limits and credit. Right now it is coming from the government. But it comes at the cost of breaking the dollar down. Why else is gold now trading near $1,100? The world won’t finance our spending spree forever. Buying more cars and more homes is not a long lasting solution. I doubt that has any long-term sustainability. But the real question will come in 2010 with the stimulus running low. Will the real economy make up for lost incomes? Of course we need to create jobs and good paying positions for that but that has yet to be seen. Until then, we are spending money we don’t have to buoy the economy. Is that really good news?
Bankruptcy Filings to Match Divorce Filings in 2009: 1.5 Million. 35.8 Million Americans on Food Stamps - 11 Percent of the Population. The 5 Indicators of the Misery Index.
It is a sobering fact that in 2009, there will be as many people filing for bankruptcy as those filing for a divorce. We are on track to seeing an average of nearly 5,900 bankruptcy filings a day for 2009. While some people use the stock market as their barometer of economic recovery, there are a few other “misery” indicators that show things are still bad for millions of Americans and counter the recovery talks. If you want to track a broader recovery, I would recommend people examine the five indicators of the misery index. Food stamps, bankruptcies, long-term unemployed, foreclosures, and credit card defaults are probably your best gauges to the real economic recovery.
The problem we currently face is even after the global economy was brought to its knees by the current Wall Street banking structure, things still haven’t changed at the core of their mission. The same banks are back taking inordinate amounts of risk with the now explicit backing of the U.S. Taxpayer. It is no surprise then that our U.S. dollar has been pummeled by the policies of the Federal Reserve and U.S. Treasury.
Let us examine each component of the misery index.
Bankruptcies
Source: Credit Slips
It shouldn’t come as a surprise that bankruptcy filings are now approaching their pre-2005 levels. Keep in mind that in 2005, tough bankruptcy legislation came into effect thus spurring a massive wave of bankruptcies from people seeking to avoid the new tougher standards. Even with these new standards in place, there is only so much blood that you can squeeze out of a turnip. Some will be quick to point out that bankruptcy filings hurt big corporate giants mostly. On the contrary, 98.5% of all bankruptcy filings come from individuals at the end of their rope. Most people don’t file for bankruptcy with a smile on their face.
We will see a slowing or moderating pace for the fourth quarter since there is a bit of seasonality with filings. But Q1 of 2010 should give us a better indicator of where things are heading. But one thing is irrefutable, bankruptcy filings are going up. In this category, the recovery is not taking place.
Food Stamps
Over 35,800,000 people are currently receiving food stamps in the U.S. That is 11 percent of our entire population is receiving government assistance through the SNAP program (i.e., food stamps). As the chart above can attest to, the number of people is still booming. Obviously in any economic down turn, this rate will increase but this percentage is one of the highest on record. It is also clear that the growth is currently exponential.
Here is the government expenditure per year on food stamps:
2006: $30.6 billion
2007: $30.3 billion
2008: $34.6 billion
2009: $40 billion (still need August and September data - average out we are approaching $50 billion for 2009)
Just think of how quickly this number is jumping. The problem with the current system is that some people are still governed by the trickle down school of economics. They believe that if Wall Street is up 60 percent (thanks to government bailouts) that somehow crumbs will trickle down to working and middle class Americans. Clearly it isn’t happening right now. The recovery is looking more like a minor depression to many.
Long-term unemployed
It is telling that the biggest category of our currently unemployed population is those classified as long-term unemployed. These are people that have been out of work for 27 weeks or more. Think of how grueling it is to be out of work for half a year in this economic climate. The issue at the core of long-term unemployment is that it reflects potential permanent job losses. That is, many of the 8,000,000 jobs lost since the recession started are never coming back. For every one job opening you have six able bodied workers competing for it.
It is hard to see what industry is going to pick up the slack for these long-term unemployed. Many are now coming to the end of their unemployment insurance and in many cases, in some states this can be as long as 90+ weeks. The long-term unemployment trend tells us that we have yet to see any economic recovery as well. Sure the stock market may be up but what use is that to the average American that pays most of their bills through a job?
Foreclosures
At the root of most of this is the housing market. Take a long and close look at the chart above. Q3 of 2009 was the worst foreclosure quarter on record. Clearly foreclosures are not a sign of economic recovery but here we are, two years into the crisis and foreclosures are still at record levels. Much of this comes from the decade long housing bubble. But keep in mind each additional foreclosure is another home on the market, another family looking for different shelter, and an economic loss to the system. It is hard to see any of the government stop-gap measures fixing this in the short-term. The loan modification programs have yet to yield any significant change.
It is also the case that the government has gotten more risky with tax credits and allowing lax lending standards with FHA insured loans in getting more people to buy. In the short run this may offer the appearance of growth but over the long haul, this will only add to future defaults.
The foreclosure numbers show us a very different picture from the current recovery rhetoric.
Credit Card Defaults
For the first time in data tracking history, has total revolving credit contracted on a year over year basis. At a time when the above data shows that more Americans need more support, the credit card companies are yanking lines of credit. They are also charging higher fees on good standing customers to make up for their rising defaults for years of easy financing. Here is some sobering data:
Credit card direct mail offers:
Q3 of 2006: 2.1 billion
Q3 of 2009: 391 million
Now you know why your daily mail is much lighter. Credit card companies who are giant receivers of taxpayer bailout money are actually closing their doors on the same people who are bailing them out. They are hiking up fees and closing down credit lines unless consumers give in to their onerous ways.
The bottom line is the misery index shows no solid economic recovery. I suppose it depends on what we are looking at if we want to say we are in a recovery. If we are looking at banking profits and Wall Street then yes, the recovery is here. If we are looking at other data like bankruptcies, unemployment or foreclosures then the story is very different.
