To understand commercial real estate, we first have to see the actual damage.  In 2007, commercial real estate values came in at approximately $6.5 trillion backed by $3.5 trillion in loans.  Today, the $3.5 trillion in loans are still on the books, but the values have fallen to about $3.575 trillion.  This is how it looks:

We should spend some time examining the chart above because $3 trillion in supposed equity has vanished.  As we now know, banks had questionable valuations on properties during the peak bubble years.  Most realize that if they had to mark to market the properties, they would yield 40 to 50 percent less if they are lucky.  Banks would like to play this game that all is fine but if all is fine, why don’t they liquidate the properties?  They won’t because they would have to realize the loss.  So instead, the U.S. Treasury and the Federal Reserve are monetizing this excessive debt and are going to destroy the U.S. dollar.  This is the bet.  They think, that at some point values will once again reach those peak valuations.  How will that happen?  Ideally through controlled inflation.  But this isn’t a guarantee.  If we face true demographic shifts in our nation and the baby boomer wave is one, then we may never see those peak valuations again.  What will happen is the average American is going to see a weaker currency and wonder why their once stronger dollar is so weak.  The reason for this is the Fed and U.S. Treasury have decide to bailout the entire banking industry on the backs of the average American with no benefit to them.

Walk through the logic however.  The pretense of all the bailouts has been that financial Armageddon would hit if the banks didn’t get exactly what they wanted and no loans would be made.  The actual destruction was really just with the banks because our economy is still hurting but apparently banks are back to record profits.  Banks got their money yet loans are still hard to find for average Americans.  Banks are holding back enormous reserves because in the reality based economy, they know that commercial real estate is imploding internally on their balance sheet.  Take a look at the excess reserves at banks:

Banks are now holding roughly $1 trillion in excess reserves.  This is up from $724 billion in March since the “recovery” has started.  Do banks know something we don’t?  Of course.  They know that many of the commercial real estate borrowers are now insolvent.  In many cases, banks are simply rolling over loans and giving six month extensions playing kick the can down the road.  Why?  Because banks can still claim high valuations even though the current borrower is basically a non-payer.  This is the kind of game we are currently in.  Commercial real estate is imploding on the balance sheet of banks.  Banks and Wall Street have completely disconnected from economic reality that even SNL is cracking jokes about this.

In a recent Deutsche Bank presentation, the delinquency rate on commercial loans is at 4 percent.  Deutsche Bank expects 70 percent of CRE loans to not qualify for refinancing.  That comes out to about $2 trillion in commercial real estate that will mature from now until 2013.

The Fed through TALF has tried to take some of this debt out of the system but now their books are over burdened.  Also, many of the commercial real estate loans are junior and don’t even qualify for TALF and these are the real problems.  Either way, the reality of the situation is many of these commercial loans are now imploding and many banks are failing on Friday’s like flies running into the light.  Unlike the residential real estate bubble, most commercial real estate loans are backed by shorter term financing that is based on 5 to 7 year terms.  If prices have fallen by 40 to 45 percent, refinancing becomes impossible:

If we look at the above, some of the more distressed properties are down by a stunning 56 percent.  In other words, banks are insolvent.  Unlike the average American, they have Wall Street and the proxy of Wall Street, the U.S. government as their life line.  While most Americans deal with the realities of a crashing economy via unemployment or disappearing wages, these banks are playing games with their balance sheet and claiming to put out wicked profits quarter after quarter.  Where are these profits coming from?  Well if you can claim that you have $6.5 trillion in CRE values when in reality, it is closer to $3.5 trillion then you are embellishing the books by $3 trillion.  To be more concise, the banking sector is largely insolvent if it had to reflect reality.  Instead, it is preparing for clandestine bailouts that will be shouldered by the American public.

The commercial real estate disaster reflects a deeper problem in our economy.  The strip mall and perma-growth world.  People started believing that we could basically cut each other’s hair and flip houses to one another and this was somehow a good diversified economy.  As it turns out, we do need to make things.  If you look at the recent CPI, rents have fallen by over 1 percent but food and other necessities have gone up.  Imported items have also increased.  Expect this to happen over and over.

The Fed is vigorously fighting any audit because we are going to see empty strip malls and failed condo projects on their books.  Lender of last resort was probably not designed to bailout late night infomercial tanned gurus that bombed out on their dream of everyone owning a Florida condo.  Is this really what our central bank has become?

And to highlight how good the economy is, foreclosures keep growing:

“(Yahoo!) About 4 million homeowners were either in foreclosure or at least three months behind on their mortgage payments as of September, according to the mortgage bankers group. Even if a quarter of those borrowers are able to stay in their homes, “there’s a lot of potential inventory coming into the market next year,” said Jay Brinkmann, chief economist with the Mortgage Bankers Association.”

Homeowners that can’t even pay their mortgage or find work are not going to be spending money.  Condos, hotels, and reality based businesses are already seeing this play out but don’t look to Wall Street for what is really happening in our economy.  That $3 trillion in CRE values is long gone like smoke in the wind.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

ShareThis

It is hard to believe in this recovery because the bailout has gone to the financial sector and is reflected in hyper-inflated equity prices.  As obvious as it seems, some people don’t make the connection that an unemployed American is a weaker consumer.  Consumption as we all know is two-thirds of our economy.  Therefore you would assume that investors would make this connection but that is not the case.  The banks being the few with any sort of heavy government money, instead of lending to Americans, are once again gambling in the stock market casino.  What a sad testimony to our crony capitalistic system that banks instead of believing in the average American, are deciding to double down on Wall Street and trying to recoup their 2008 losses.  This on the pretense that banks needed money to get lending going again.

One thing that is clear is the employment situation is in a major funk.  10 states now have underemployment rates of over 20 percent.  We are talking about Great Depression statistics here:

The above data is pulled from the Bureau of Labor and Statistics and is an average from the fourth quarter of 2008 to the end of the third quarter in 2009.  In other words, the data above is optimistic and doesn’t use the latest data that is even higher.  For example, California recently reported their U-6 rate is now up to 22 percent.  Michigan?  Their U-6 is now closer to 25 percent.  There is nothing remotely close to a recovery in the data above.

This recovery is unlike your daddy’s recovery because multinational companies can leverage cheap labor and a pathetically weak dollar to increase business overseas.  In past recessions when we actually had a manufacturing base, once the recession started ebbing you started to see domestic production pick up thus bringing people back to work:

The pattern is unmistakable.  After every recession since the 1940s, manufacturing jobs contracted throughout the recession only to pickup after the recession ended.  This trend started getting weaker in the 1970s.  Even in the early 1990s recession, manufacturing jobs picked up slightly throughout the decade.  Now, in the 2001 recession manufacturing has been plummeting and has completely broken the trend.  In fact, we now have the same number of people working in manufacturing as we did back in 1940.  One slight difference.  The U.S. had 132 million people in 1940 and now we have 307 million.  We have nearly 2.5 times the population and the same amount of people working in manufacturing.

The U.S. Treasury and Federal Reserve would want to convince you that a declining dollar is good for you.  This might be the case if you weren’t paid in U.S. dollars and most Americans buy imported goods that will become more expensive eventually.  After all, it isn’t like we are making the stuff anymore as the above charts show.  It is a myth that the Fed tries to sell.  If a weak currency is a good thing, Zimbabwe would be the world financial center.  Or consider the fact that we import most of our oil.  There isn’t much we can do about that.  Even with demand waning domestically, oil is now approaching $80 a barrel.  We can thank our central bankers for attempting to destroy the U.S. dollar.

And forget about employment growth.  We have lost 8 million jobs since the recession started in December of 2007, 22 months ago.  We have lost an average of 360,000 jobs per month since the recession started.  Where are these jobs going to come from?  What is troubling is how many of these jobs are gone for good:

Long-term unemployment is now at a record high.  Many of these jobs are likely never coming back.  For example, think of the tens of thousands who worked in the housing industry as mortgage brokers, bankers, and construction workers that now are going to need to adjust to a new economy.  Or if you want a specific example, think of Winnebago:

Here is a company that manufactured the consumer happy motorist dream of RVs.  Yet it was built on the idea of cheap oil.  At one point, at the March low, this company was trading 90 percent off its recent highs.  The stock is still off by 65 percent even with the current stock market casino rally.  Do you think this demand is every coming back?  The average American is now looking for cheaper goods and sadly, much of that is imported.  Instead of traveling the roads on $1 a gallon oil many are looking to make food last until the end of the month.

The government is in cahoots with Wall Street and maybe they don’t care what the average American is going through.  Clearly on the jobs front little of the bailout money is making its way down.  If we consider 79.9 percent interest rates on credit cards as helping the consumer then we really have things backwards.
Welcome to the new kind of recovery where jobs are lost and incomes get sucked into a vortex.  But at least you can still afford cable and see that wonderful CNBC ticker go up as those on Wall Street gamble the bailout money away.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

ShareThis

In fact, let us put this on a graph.  Be warned, this is a financially scary graph but get used to it, since this is the future:

What a coincidence that in the 1970s when President Nixon took us off the gold standard, we suddenly started having epic swings in surplus and deficit spending.  Without any standard, the fiat money world allowed our government to spend as much as the world would allow us and gave incredible power to the U.S. Treasury and Federal Reserve to print money out of thin air.  The government is arrogant at best if it thinks it can print money and at same time, allow revenues to decline.  Any company operating like this would be bankrupt in a short time.  In our case, foreigners are starting to worry and are exiting dollar trades and pushing up commodities like gold.

I’m not a gold bug and I won’t recommend you go 100 percent in to gold.  But make no mistake, gold is a trade against the stability of the U.S. dollar and the trust people have in the U.S. Treasury and ultimately our government.  There is good reason to believe this is going to go on given the massive budget deficits we are now operating under.  Now we are hearing whispers of stimulus version 2.0 and the Treasury has already talked about secretly bailing out the commercial real estate market.

States unlike the federal government, have to balance their budgets.  And many states are facing epic problems:

Source:  Pew Center, Zero Hedge

The sizes of the budget gaps are simply incredible.  It is a basic arithmetic problem.  The recession has caused record unemployment and profits to fall in the real world.  Sure, Wall Street is seeing markets up by 60 percent but this is casino like profits.  In the real world, unemployment is up to 10.2 percent and in states like California, the underemployment rate is up to 22 percent.  This is depression like statistics.

Take a look at the chart above.  7 states have budget gaps of over 20 percent.  9 out of the 10 states researched by the Pew Center study have seen revenues fall by over 10 percent.  These are reflections of the Great Recession.  States like California, Arizona, Florida, and Nevada built entire economies on the decade long housing bubble.  Short of seeing another housing bubble, these states are going to be in an economic funk for over a decade.  Where is the revenue going to come from?  So far, the federal government has demonstrated that all they care about is protecting the profits of Wall Street.  Did your paycheck go up by 60 percent?  Is healthcare 60 percent cheaper?  Is education 60 percent more affordable?  The 60 percent rally is a joke.  It is based on hot money and as you might have noticed, the only folks pushing out record profits are the banks.  Other bread and butter companies are showing profits because of firing workers and restocking inventory.  Is that really something to jump in the air for?

Just run the score card.  Let us see how things have changed over a one year timeframe:

Every measure seems to be worse except the stock market.  The unemployment rate nearly doubled in the year, 7 million more Americans are on food stamps, and foreclosures are higher.  But things are getting better supposedly.

And the foreclosure rate isn’t abating:

From 1999 to 2007, the U.S. foreclosure rate was much higher than that of California.  But after that, California’s housing market completely imploded.  This wasn’t any accident.  Much of this was brought on by toxic mortgages like option ARMs that were nothing more than financial time bombs.  The chart above is troubling on many fronts because it shows no abatement to the ongoing foreclosure disaster.  Most can understand that until foreclosures trend lower, any talk of a real recovery is rather mute.
States, like average American households, are dealing with the realities of a shrinking balance sheet.  Or to be more precise, the revenue side of the equation is quickly shrinking while debts are still elevated to bubble levels.  That is why some $12 trillion has evaporated from the net worth of U.S. households.

The October federal budget deficit is troubling.  Last October the government brought in $164 billion compared to $135 billion this October.   A 17 percent drop in revenues.  The federal government makes the state budget deficits look like child’s play.  At some point, the government is going to need to adjust the revenue side of the equation.  You can either raise revenues (taxes) or cut spending.  Since they are choosing to do none of the previous options, they are opting to devalue the U.S. dollar and putting all their faith in Wall Street and the banks to save us.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

ShareThis

At a recent Alliance for Family Entertainment of the Association of National Advertisers, Wal-Mart gave a sobering look at the current economy:

“(NY Times) There are families not eating at the end of the month,” said Stephen Quinn, executive vice president and chief marketing officer at Wal-Mart Stores, and “literally lining up at midnight” at Wal-Mart stores waiting to buy food when paychecks or government checks land in their accounts.”

Now this is important since Wal-Mart is in every corner of every American metro area:

The fact that you have people lining up at midnight just waiting to have their paychecks or government checks clear for food is probably something you are not going to see on CNBC but it is happening.  This recession is really creating a split and is also flaming the fires of class warfare.  Average Americans and working class Americans are still dealing with what is known as the Great Recession.

Wal-Mart is looking to meet the new market reality by offering items that meet the new austerity demanded by millions of American families:

“Among the steps Wal-Mart is taking to address the changes in shopping habits, Mr. Quinn listed an overhaul of the retailer’s private-label brand, Great Value, which is promoted in commercials describing how families can fix dinners with Great Value products “for less than $2 a serving.”

For less than $2 a serving means millions of families are now needing to stretch their dollar.  So as you might have guessed, having the U.S. Treasury and Federal Reserve go on a path of dollar weakness actually hurts those at the bottom and middle class the most.  Yet they are concerned more about the financial sector and the chips may fall where they may for the remaining group of Americans.

Punishing the Prudent Saver

Those that save and are cautious with their money, are now being forced to make difficult decisions.  Even holding on to U.S. dollars is not a good move with the way the Fed is systematically devaluing the dollar. The Fed is artificially keeping rates at record lows so putting your money in a savings account amounts to stuffing it into your mattress.  Take a look at three of the too big to fail (TBTF) banks and their savings rates:

All you are doing is giving them your money to hold.  That is it.  A 0.1 or 0.05 annual interest rate is laughable.  Even if we have 0 percent inflation, the U.S. dollar is now down by nearly 20 percent since the March levels.  You have lost money.  Unless, you placed your money into the casino known as Wall Street.  The stock markets are now up by 60 percent since the March lows even though P/E ratios are at historic levels and unemployment is now up to 17.5 percent using the U-6 rate.  Most of the recent gains are based on cost cutting (aka layoffs) and restocking of inventory.  Basically we are seeing companies slim down and using one time gains to capitalize in the current marketplace.

If you doubt this, just take a look at the stunning 9.5 percent growth in worker productivity in Q3:

The above can be summarized as doing more with less.  Yet this is somehow good news for the average American?  Those that are prudent are left with very few places to protect their money.  Do they invest in the stock market even though earnings do not justify current lofty prices?  Do they put their money in the bank and allow the devaluation of the U.S. dollar eat their purchasing power away?  There are few places to go.

But even with these pathetically low rates at banks, deposit accounts are the only sector that has seen steady growth in the last few years:

Every other major asset class from real estate, equities, to pension reserves has fallen.  Yet savings deposits have steadily increased.  A largely unspoken trend is out there and many people are basically protecting their money at all cost and believe cash is king, even if the cash is slowly being devalued by the U.S. Treasury and Federal Reserve.

There is little reason to believe that the dollar is going to spike significantly over the long run.  We simply have too much debt:

Add up the above and you arrive at $52 trillion in debt.  Home mortgages are $10.3 trillion of this amount.  State and local governments struggling with tax revenues have $2.3 trillion in debt.  Add in unfunded Social Security and Medicare liabilities and you can see why we are entering a perfect storm.

Summary

The financially prudent have taken it on the chin with the current bailouts.  The working and middle class Americans are largely caught bailing out the wealthy financial class while confronting the realities that the bailouts were largely designed to protect the banking sector.  Corporate equities and mutual funds have taken major hits in this crisis but the wealthier bond holders have faced minimal cuts.  Examples like AIG paying out to Goldman Sachs only reinforce this horrendous transfer of wealth.  Until the majority of Americans demand action and take to the streets, this pseudo-recovery is going to go on for years until finally Americans wake up and realize that they have given all their wealth to the banks.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

ShareThis

At the height of the bubble in 2006, residential real estate in the United States had a value of $24.25 trillion according to the Federal Reserve Flow of Funds report.  Mortgage debt stood at approximately $10.54 trillion.

Fast forward to the second quarter in 2009 and look at the new values:

Real estate value (household and nonprofit):                  $20 trillion

Home mortgage debt:                                                   $10.4 trillion

We can chart this out:

American households have seen real estate values plummet by at least $4.2 trillion but mortgage debt has only fallen by $140 billion.  This is the large predicament we now find ourselves in.  Much of this is being corrected through the foreclosure process.  Residential property values have fallen and either consumers live in an asset that is no longer worth a peak price, or lose the home so it is liquidated at a new market value.

$4.2 trillion has disappeared and needs to be reconciled.  Many of the bailouts and the haphazard measures to prop up housing prices fail to acknowledge that there can be a significant probability that trillions of dollars were merely a mirage.  That value is now being reflected without the special bubble lenses.  However, the debt is still out there and reflecting optimistic valuations on the books of many banks.  The FDIC is realizing this through the weekly failure of banks.

Household balance sheets are adjusting to the harsh new reality.  The unemployment rate is officially at 10.2 percent, a spot that hasn’t been seen since the early 1980s when Disco was merely going out of fashion.  Household income has also been declining:

Americans are now faced with a new form of austerity.  Credit card offers are looking like a thing of the past.  Forget about those home equity line home renovations or vacations.  Many are dealing with this new reality not by choice, but by force.  It is interesting to look at the Dow now over the 10,000 mark, a spot we hit over a decade ago.  Think of a simple investment made in November 10, 1999:

$10,000 invested

Dow:               10,700

Gold:               $300

Dividends excluded, your $10,000 invested in the Dow after 10 years has basically moved no where.  At the spot price in 1999, $10,000 bought you 33.33 ounces of gold.  Today that amounts to $36,663 for basically holding on to an old store of value.  This out played an index of 30 of the biggest industrial powers, many now replaced like AIG.  Am I saying go out and put all your money in gold?  Of course not.  But the truth of the matter is gold has gone up more in response to the massive spending and debt the U.S. has accumulated.

The unfortunate reality is the U.S. Treasury and Federal Reserve have figured out how to tax Americans without calling it a tax.  Even though on a nominal level, Americans earn the same they did a decade ago, with the erosion of purchasing power the standard of living has fallen drastically.  Gold is merely reflecting this new reality.  The stock market is up because the sea is draining and our boat merely looks bigger given the current context.  In reality, we are in the midst of an enormous tempest.

The $4.2 trillion in lost real estate value is a new reality.  This for the most part is a large reason for the massive amount of foreclosures.  Negative equity brought on by years of dubious lending.  At the moment, there is painful reconciliation of the balance sheet.  Americans are doing their part yet Wall Street isn’t.  In fact, they are on path to having another record breaking year with more rounds of epic bonus paydays as they exploit the imbalances in the system.  This is courtesy of the U.S. taxpayer since many of the firms would be obsolete if it weren’t for the historical bailouts.  No one has bailed out the average American although the pretext to the Wall Street bailouts was to help the average person.

If we combine equities, businesses, and other forms of wealth Americans have seen some $12.2 trillion in net worth disappear since the peak in 2007:

The Fed is trying to inflate the nation out of the trillions in debt that is weighing on it like an albatross tightly affixed to the neck.  Will it work?  It is doubtful that the average American will feel it like a stunning success.  Wall Street can leverage the weak dollar to sell abroad and also, use carry trades to their advantage.  Yet the vast majority of Americans don’t play the foreign exchange markets and thus will benefit little by this move in the long-term.  In the end, we will need to reckon with the balance sheet in some shape or form.  The only way this will happen is if we get our financial system restored to some form of integrity.  Otherwise, you can expect to see other “firsts” like gold hitting $1,100 an ounce.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

ShareThis

All job cuts are not equal.  If we had to sum it up, paper pushing jobs in the financial sector seem more immune than good producing jobs.  Let us look at how the real employment situation is panning out:

government jobs

Since the start of the recession 22 months ago in December of 2007, the government has added 78,000 jobs employing some 22.44 million people.  It is interesting to look at local and state taxes that are being pummeled yet this sector is still up.  It would be one thing to create new jobs but looking at the chart above, jobs were never cut.  What did the government actually do?  States like California implemented furloughs and raised taxes in many cases.  Of course, the major issue in many states is the bloated pension system that puts an unsupportable burden on those who are actually still working.  I can understand that someone needs to live and support themselves in retirement.  But in California for example, you have many people receiving $100,000+ pensions and many only worked until their early 50s.  What is clear from the above is the government did not cut any jobs on a net basis.  So we can scratch this sector when looking at where the jobs were lost.

The next sector is the FIRE economy:

fire employment

Given the 8 million jobs officially lost in this recession, a mere 600,000 came from the finance, insurance, and real estate industries.  This is the sector that is largely responsible for the housing bubble and the entire finance mess yet it is not taking a major cut as it should.  Why?  The bailouts are targeted in protecting many of these Wall Street paper pushers.  In fact, you can see that in the last month it actually added jobs.  The 6.6 percent drop does not reflect the actual overall fall in employment.  Again, this sector is being supported by the trillions in taxpayer money.  So where are the job cuts really coming from?

Construction employment has taken it on the chin:

Construction employment is down by a stunning 20 percent since the start of the recession.  It is interesting that from the start of the recession, construction and the FIRE sector had roughly the same number of employees benefiting from the housing bubble but where the FIRE sector lost 600,000 jobs, the construction sector has seen 1,557,000 jobs cut, nearly 3 times the rate of the FIRE sector.  Apparently building a home is less valuable than writing a toxic mortgage.  Again, the government bailouts are protecting an over employed FIRE sector while throwing other sectors of the economy to the wolves. Keep in mind both of these sectors used the same underlying asset (real estate) to expand.  The housing bubble is now the U.S. Treasury and Federal Reserve bailout of the FIRE economy.

Durable goods manufacturing has also been slammed:

manufacturing jobs

Durable good manufacturing has fallen a stunning 18 percent since the recession started.  If we look at construction and durable goods, both sectors are experiencing depressions while the FIRE sector is experiencing a tiny recession.  And take this data point as a reference:

Durable goods and manufacturing:

December 2007 jobs:               8.728 million jobs

October 2009 jobs:                  7.121 million jobs

FIRE sector:

December 2007 jobs:               8.242 million jobs

October 2009 jobs:                  7.697 million jobs

This should tell you what is happening to many average Americans.  Only two years ago, the durable goods and manufacturing sector had 486,000 more jobs than the FIRE sector.  Now, the FIRE economy has done a role reversal and has 576,000 more jobs than the durable goods manufacturing sector!  Who are we really bailing out here?

Conclusion

Simply taking the employment report at face value is meaningless.  What is happening is the bailout structure is designed to prop up the primary industries that created the housing bubble.  Many of the FIRE jobs are over compensated Wall Street cronies who are using taxpayer dollars to gamble.  The real fact is many sectors of the American economy are in deep recession.  Unless you work for the government or the FIRE sector, chances are your industry is in a deep recession.  Then again, why else would the stock market be up by 60 percent since March?  It is easy to make money when you eliminate the biggest line item (employees) for short-term bottom line gains for those in the FIRE economy since your job is subsidized by the taxpayer.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

ShareThis

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?

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

ShareThis

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.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

ShareThis

The commercial real estate sector is even more fragile than residential real estate because commercial space is a direct reflection of the health of the economy.  In other words, how much office space do you need without workers?  How many strip malls can you fill without shoppers?  Not many.  Commercial real estate is also financed in a unique way where loans are refinanced typically on five year terms.  Many are coming due starting next year.  Friday’s multiple bank failures, 9 in one day and a cost of $2.5 billion to the FDIC fund, was the most closures in one day since the recession started.  Even with this giant number, most of the assets at FDIC insured banks sit with a few banks:

The FDIC insures over 8,000 banks covering $13.3 trillion in assets.  In reality, 100 banks hold over $10 trillion of those assets.  The banks that are failing typically do not fall in the top 100.  And many of these recent bank failures are starting to show signs of commercial real estate fatigue.  Ross summed up the overall scenario well:

“(FT) All of the components of real estate value are going in the wrong direction simultaneously,” said Ross, one of nine money managers participating in a government program to remove toxic assets from bank balance sheets. “Occupancy rates are going down. Rent rates are going down and the capitalization rate - the return that investors are demanding to buy a property - are going up.”

There is some form of twisted irony in the above.  The government has tunnel vision focus on residential real estate.  The Federal Reserve has bought nearly $1.25 trillion in GSE MBS thus keeping mortgage rates at historical lows.  Not enough?  What about a nice $8,000 tax credit?  Still need more?  What about going with FHA insured loans that only require 3.5 percent down?  In other words, the government has stepped into the vacuum left by the toxic mortgage lenders.  So we shouldn’t be surprised when FHA insured loans, Fannie Mae, and Freddie Mac loan portfolios start showing historic amounts of defaults.  Yet the consequence of pushing many renters to homeownership, is you speed up the crash in commercial real estate.  We should be honest and admit that not everyone can be a homeowner.  And this is okay.  They can rent.  Nothing wrong with that.  But now we are seeing enormous apartment vacancy rates because we are temporarily shifting some into homes they cannot afford.  They will only default later as we have seen with the current decade long housing bubble.

Commercial real estate is a gigantic line item of the FDIC insured banks:

In fact, if you add up nonfarm residential, construction and equipment, and commercial/industrial loans the number is approximately $3 trillion.  Contrast this to the $2 trillion in more conventional residential loans.  In other words, this has the potential of being bigger than the residential downturn.  Commercial real estate values took longer to fall than residential property values, but not only have they caught up, they have surpassed the percentage amount of declines:

With many of these loans coming due in the next few years, the question will focus on the ability of companies to get the loans refinanced.  But who will take on a loan of an empty commercial building?  For residential property, the government for better or worse has a big mechanism through Fannie Mae, Freddie Mac, and FHA insured loans to buy up these loans.  The government currently backs 95 percent of all residential mortgages.  It is the market.  Yet with commercial real estate, there really isn’t a government mechanism fortunately (that is, unless the U.S. Treasury plows through with Plan C and starts bailing out this industry).

The FDIC and other agencies are trying to jump out in front of this freight train.  Maybe it isn’t call Plan C but something is in the works:

“(AP) WASHINGTON - Banks must accurately identify their potential losses when modifying troubled commercial real estate loans under federal guidelines issued Friday.

Regulators have warned that rising losses on commercial real estate loans pose risks for U.S. banks, with small and mid-size banks especially vulnerable. Nearly $500 billion in commercial real estate loans are expected to come due annually over the next few years.

Agencies including the Federal Deposit Insurance Corp., Federal Reserve and Office of Thrift Supervision released the new guidelines for banks, which emphasize that modifying loans in a prudent fashion is often in the best interest of both the bank and the creditworthy commercial borrower.

Under the guidelines, loans to creditworthy borrowers that have been restructured and are current won’t be classified as high risk by regulators solely because the collateral backing them has declined to an amount less than the loan balance.”

This will be a fascinating challenge here.  Jean Paul Getty had it right when he said, “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”  And the banks have a gigantic problem.  You can expect workouts but what can you workout with a property that is completely vacant?  Is there any price point that will work?  We are going to find out soon enough.

The commercial real estate debacle is coming in line with the appearance of a stabilization in the residential market.  The CRE debacle has the potential to destabilize the market again.  Expect to see more banks go under because of horrible CRE loans.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

ShareThis

Let us first take a look at the biggest down days for the Dow since the rally started in early March:

This was the biggest drop since April of 2009.  That is significant.  It took us nearly six months to have a down day of over 249 points.  And if you really think about it, the news wasn’t all that bad.  In fact, the GDP numbers should have kept things going.  But again, the reality is setting in that there will be no V-shaped recovery and 27 million unemployed and underemployed Americans benefit little from the current stock market rally. Most don’t get their monthly money from the stock market but an actual W-2 job.

This rally has also seen a significant number of up days:

Since the rally, we have yet to see a 300 point down day.  We have seen a nearly 500 point gain right after the low point was reached in early March and a 379 point rally the next day.  So nearly 900 points were made up in two days off the low bounce.

The Dow peaked in this rally at 10,081 and we currently stand at 9,712.  It will be interesting to see what happens next week with the BLS job report coming out.  The market expects a 9.9 percent official rate but there is a strong possibility of going over 10 percent.  You can expect a 10 percent unemployment rate to psychologically change the feel of the market.  Hard to believe in a rally when the unemployment rate (official) is at 10 percent.  Yet even now, we hear more and more people using the U-6 rate in official figures and that is already at 17 percent.

What we saw on Friday is a real true test of this rally.  Is this for real or simply a juicing of the markets by Wall Street and the government?  The figures coming out on Friday are starting to believe this rally is simply based on fumes.  An adrenaline shot from the government and Wall Street won’t sustain an economy since many average Americans are already tapped out on spending.

Notice how you are receiving less and less of those credit card offers in the mail?  There is a reason for this:

Source:  Paul Kedrosky

Direct mail credit card offers peaked in Q3 of 2006 with approximately 2.1 billion being sent out.  In Q3 of 2009 only 391 million have been sent out.  In other words, credit card companies definitely don’t believe in the recovery and they certainly don’t believe in the American consumer.  On top of this drop, credit card companies are now jacking up fees on good standing customers, adding annual fees for inactivity, and basically acting like your local loan shark.  At times they are even charging 79.99 percent interest rates that would make Tony Soprano blush.  If we really look at the data, the economy is doing anything but recovering.  Actually, it is recovering but for those on Wall Street and the banks.  The average American is merely subsidizing their party.  By the way, the banks are largely the reason for the decade long housing bubble.

If you really want to see how much insiders believe in this rally, let us look at some details from last week.  Insiders for the week with data from Thomson Reuters bought 8.2 million dollars worth of stock during last week.  How much was sold?  184 million dollars.  This pattern has been occurring the entire rally.  Now wouldn’t you think insiders would have a better sense of the true nature of this economic recovery?

Next week will be important and the jobs report number may go over 10 percent because many people hearing this good news, are now back looking for work but very few jobs are out there.  In other words, they will move from the shadows of the 2 million workers that have given up into the actual official pool.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

ShareThis