Tuesday, July 21, 2009

The economic nightmare is far from over


Friends, this may be one of the most important articles I've ever put up on this blog. The mass media simply are not telling the truth about our current economic crisis - and the evidence to prove that statement is overwhelming.

I'm becoming very angry at the - let's be honest - criminally stupid forecasts of economic improvement being bandied about by officials of our Administration, Congress and the Senate, and various economic 'authorities' (including the Federal Reserve). To put it bluntly, they're either misinformed to the point of abysmal stupidity, or they're lying. Consider the facts - the cold, hard numbers underlying our present position.

First, housing. That's where this whole mess began, with securitized mortgages pumping artificial value into the market - value which has now evaporated. Consider these facts, as documented by the always-honest Mike Shedlock:

The second quarter foreclosure rate was at 889,000. Annualized, that is about 3.5 Million homes foreclosed upon in 2009. The national stats for homeowners in the US in 2007 was about 75 million homes owner occupied. The National Association of Realtors is projecting 5.5 million homes to be sold in 2009.

Additionally, this report highlights that 8.3 million households are now underwater and at risk of "walk aways". 2.2 million more will be underwater if we go down in prices another 5%. Option ARMS are just beginning to be reset and those numbers will peak in August of 2011 and will most likely drive all of these numbers higher with higher mortgage payments. These are all published numbers from non government agencies.

Here is a summary:

• US Households: 75 Million
• 2009 Projected Foreclosures: 3½ Million (1 of every 21 households)
• 2009 Projected Home Sales: 5½ Million
• Inventory of Foreclosures: 2½ years (assuming 25% of home sales are foreclosures)
• Number of Homes Underwater: 8.8 million (1 of every 8½ households)
• Number of Households underwater if prices decline another 5%: 11 Million (1 of every 6.8 households)

The American dream of owning a home has quickly turned into a nightmare of monumental proportions going well beyond almost anyone's wildest and darkest thoughts.


Go read the whole article. It's sobering, but true. I read Mish's blog every day. It's indispensable. To compound Mish's evidence, Karl Denninger points out that the so-called 'good news' of an upswing in housing starts is actually extremely bad news.

How do you sell down the existing inventory, including the hidden inventory of foreclosures, when these fools are still building houses?

. . .

... we have millions of homes that have been foreclosed or will be foreclosed, and we have an insane amount of existing "listed" supply on the market. In the apartment/condo marketplace in some markets there is literally five or more years of supply! Go down to Miami and take a drive around at night - brand new buildings, open, occupied, with four or five lights on at night.

Really.

Building more into this sort of market environment is criminally insane. It is guaranteed to destroy the comparable values due to competition and will absolutely decimate lenders who are holding back foreclosures instead of putting them on the market.

The futures spiked a fair bit on this news release, but you have to wonder why anyone would consider this "bullish" news? Bullish for who? Foreclosure lawyers? Courthouse fees?

It is truly unbelievable that builders would be ramping construction into this market environment. I thought I had seen everything stupid under the sun, but this, among all else, takes the cake, even though these figures are coming off deeply depressed levels.

We need less construction, not more, until we clear the excess inventory - this sort of "build into a severe inventory overhang" is how you go bankrupt - with certainty.

. . .

I smell lots (hundreds) of bank failures about a year down the road out of this when that inventory is unable to be sold and the construction loans default.

I'm stunned - literally.


Again, go read the whole thing. Karl Denninger's Market Watch is also on my daily 'must-read' list.

Apart from housing, there are other areas of economic activity. Consider the following, gathered over just the past week to ten days:


Even the Director of the Congressional Budget Office points out that US government spending is going to rise to a level crippling to the economy:

Under current law, the federal budget is on an unsustainable path, because federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the population will cause federal spending to increase rapidly under any plausible scenario for current law. Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress economic growth in the United States. Over time, accumulating debt would cause substantial harm to the economy.

. . .

CBO estimates that in fiscal years 2009 and 2010, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of those deficits, federal debt held by the public will soar from 41 percent of GDP at the end of fiscal year 2008 to 60 percent at the end of fiscal year 2010. This higher debt results in permanently higher spending to pay interest on that debt.


There's more at the link.

Karl Denninger bluntly states that we're in a severe economic contraction.

Stocks are, at their core, priced on earnings growth, with the most-common ratio used for such metrics being P/E/G, or Price-to-earnings-growth.

But earnings are not growing, they're contracting - dramatically - in percentage terms over year-ago levels. How can it be otherwise? Even with no inefficiencies due to firms having too many employees for the revenue contraction that is occurring, a 30% reduction in business done should lead to a 30% decline in profits earned. Add to that the fact that firms are nearly always behind the curve and you have profit declines that are much larger - in some cases 100% or even going from a profit to a loss.

This is not a circumstance that will reverse in the immediate future; in order for it to do so, revenue must come back up, and in order for revenue to come back to pre-bust levels, we would have to re-inflate the credit bubble - which simply cannot happen.

Multiples are going to continue to contract. Those analysts and market callers who are all over the momentum trade can in fact make a good buck trading the momentum, but that's all they're trading - they sure aren't trading earnings acceleration or even stabilization.

The move in the market off the 666 levels in March has been driven by a false premise, egged on by CNBC and the other "mainstream media" - that this is a typical recession, it is short-lived, and we will soon go back to previous spending and business patterns.

That is not going to happen, yet it is what everyone in the media and analyst community is looking for and basing their valuation and market timing calls on.

I don't know how long we have to continue to put up numbers like this before people wake up, but wake up they eventually will. When Harley Davidson ships 30% fewer motorcycles, when GE sells 17% less "stuff" (including their financial cooking) and when company after company, including Intel, IBM and others come out with revenue numbers that are down double-digit percentages on an annualized basis, there is no possible way you can justify the multiples that these firms are selling at.

When The Port of Long Beach shows container shipments down nearly 30%, when freight carloadings are down nearly 25% year over year, when sales tax receipts are down in the double digits and when income tax collections, both personal and corporate have effectively collapsed there is simply no argument that "the recession is over" or that "trend growth is around the corner."

The fact of the matter is that port, rail and tax receipts are not subject to being "gamed" by government number-crunchers, they do not play "seasonal adjustments" (since they're year-over-year numbers), they do not represent wishes, dreams, or desires.

They represent real-time, high-frequency, "right now and in your face" economic performance metrics and are impossible to argue with.

If you, as an investor, are trying to use the market as a "forward indicator" of economic conditions, you need to look at these numbers to see whether or not what the stock market is telling you can be validated with actual economic performance - not in quarterly reports to be published in a few months (the typical economic lead-time cited for the market) but in the "right here and now" reality of economic activity.

What those high-frequency data sources are telling us, here and now, today, is that we are in the middle of a 25-30% economic contraction - exactly as I predicted would occur in 2007.

The problem with this level of indicated weakness in the economy is that we have shielded firms, especially banks, from taking the losses that should have come last year and in 2007 related to their over-extension of credit. Now those institutions are going to have to live with the reality of a much smaller economy, meaning that they will be forced to turn to dramatically increasing credit costs to customers to avoid drowning (e.g. increasing credit card rates and spreads), which is exactly what they're doing. This in turn will suck even more money out of consumers pockets, dragging consumption down even further and will force even more defaults.

This is a vicious cycle that can only be broken when the defaults that are being hidden behind the curtain of our financial institutions are forced into the open and disposed of. Yes, this will likely cause those firms to go bust. But the economic penalty we are and will continue to pay for allowing The Bezzle to continue in these firms will, if not stopped, soon choke off any hope of recovery, just as it did in 1930, and lead to precisely the same sort of economic result.

. . .

I see exactly nothing in any of the reported numbers thus far this quarter suggesting that we've turned an economic corner or that there will be a recovery this year or even next.

We could be near or at the bottom, but we're not, and it is precisely because we have protected the financial institutions from the consequences of their own folly in preference to the borrower (to a large degree the consumer) that this has happened. I have warned repeatedly that the actions of our regulators and government, on the path they are on, will make durable economic recovery impossible.


Denninger offers his proposals for a solution to the problem - they're worth reading - but they involve taking our medicine, accepting the consequences of past bad decisions, and letting the sinking institutions and companies actually sink. There are no Government bailouts, no lifebelts: just the harsh reality of the truth. For that reason, it's unlikely that our Government will listen to him, or to the others who are telling the truth about the mess we're in right now.

Friends, the next two to five years are going to be a very rough ride, economically speaking. There's no evading or avoiding it. The real numbers - those delivered by actual, current economic data, not those 'massaged' by Government spokesmen and corporate cheerleaders - don't lie.

Brace yourselves.

Peter

2 comments:

Arthur said...

"The mass media simply are not telling the truth about our current economic crisis - and the evidence to prove that statement is overwhelming."

Well, If you're looking for the silver lining - the economy is driven in large part by perception. It would appear that not too many people believe the narrative the MSM is spinning.

Christopher Smith said...

I don't think that it will last five years to this crisis end, but it will stay around for a long time.