The Economy: the signs of impending meltdown are getting clearer by the day

I've written on several occasions about our economic situation (see, for example, here, here, here, here, here and here), and the fact that it's going to get a lot worse before it gets better. I know this is out-of-step with many commentators in the mainstream media, who've been desperately trying to portray a rose-colored future: but I've stuck to my guns, and advanced evidence to prove my thesis.

More such evidence is constantly emerging. First, a CNN report today was headlined: 'Insiders Sell Like There's No Tomorrow'. Here's an extract.

Can hundreds of stock-selling insiders be wrong?

The stock market has mounted an historic rally since it hit a low in March. The S&P 500 is up 55%, as U.S. job losses have slowed and credit markets have stabilized.

But against that improving backdrop, one indicator has turned distinctly bearish: Corporate officers and directors have been selling shares at a pace last seen just before the onset of the subprime malaise two years ago.

While a wave of insider selling doesn't necessarily foretell a stock market downturn, it suggests that those with the first read on business trends don't believe current stock prices are justified by economic fundamentals.

"It's not a very complicated story," said Charles Biderman, who runs market research firm Trim Tabs. "Insiders know better than you and me. If prices are too high, they sell."

Biderman, who says there were $31 worth of insider stock sales in August for every $1 of insider buys, isn't the only one who has taken note. Ben Silverman, director of research at the InsiderScore.com web site that tracks trading action, said insiders are selling at their most aggressive clip since the summer of 2007.

. . .

Though the wave of selling by insiders doesn't necessarily predict a pullback in their stocks or the market as a whole, it's hard to put a happy spin on the recent trends.

"The disparity between buyers and sellers right now is vast," said Silverman. "That's the beauty of following insider trading -- these guys are talking with their checkbooks."

There's more at the link.

Do please take note, my friends. Those on the inside in Wall Street, those who have direct, immediate, unfiltered access to the real numbers from their companies and others, are getting out of stocks like it's going out of fashion. It's almost as if they figure it won't be nearly so easy (or so profitable) to do so when others see the numbers they're seeing.

What does this tell you?

If it makes you think of rats deserting a sinking ship . . . yeah. Me, too.




I've no idea who drew that cartoon (I received it in an e-mail without attribution), but it captures the essence of the situation very well, methinks.

Second, the US housing market is neck-deep in the proverbial brown substance, and sinking fast. As Jeff Neilson so cogently observes:

[A few days ago] it was announced that foreclosures had set another all-time record in July, at over 360,000 units (an annualized pace of over 4.3 million units). An additional 80,000 homes were “repossessed” in July (i.e. the owner chose to “walk away”), which works out to nearly 1 million more units when projected over a year.

August's numbers have just been released, and though there was a small improvement the numbers still represent a continuing catastrophe in this sector. Total foreclosures were still above 350,000, and project to an annual total of 4.2 million units. However, that total could easily be surpassed – given that the numbers are still trending higher and we know there are millions more foreclosures looming on the horizon.

As I have reminded people frequently, the U.S. mortgage market is about to begin a two-year spike in mortgage-resets with its infamous ARMs (adjustable rate mortgages) - which already have the highest default/delinquency rates among all U.S. mortgages. There is a very good reason for the appalling rates of delinquencies and defaults on these mortgages.

According to a CNN article, 60% of all “option-ARM” mortgage-holders have only been making minimum payments on these mortgages. This number soars to over 80%, with respect to the option-ARMs issued in 2006 and 2007. As a result, the average increase in monthly mortgage payments when these mortgages reset is over $1060/month. Since most of the people who are making minimum payments cannot possibly afford to pay out an extra $1000/month, most of these mortgages will default the moment they reset.

The Obama “mortgage rescue” plan was supposed to solve these problems because U.S. banks would voluntarily choose to modify all these mortgages to an affordable level. The reality is that this program has been a dismal failure, due to the banks themselves sabotaging the process by “losing” paperwork, denying assistance to eligible mortgage-holders, and even when willing to “modify”, the change in terms which they offer is still often unaffordable – and far above the limits of what this program was supposed to offer borrowers.

The reason for this non-compliance by most U.S. banks is that on a practical basis, they will profit more over the long term by foreclosing rather than forgiving. The idea that these stingy, uncooperative banks will suddenly start making massive modifications for all these resetting mortgages is (to be charitable) nothing but wishful thinking.

. . .

U.S. banks are deliberately holding millions of already-foreclosed/repossessed properties off the market. Despite the fact that total U.S. sales are barely sufficient to cover the number of foreclosures and repossessions, the sales of these units have never exceeded 50% of total sales – meaning that every month since this collapse started U.S. banks have been building up their own “shadow inventory” of homes (conveniently ignored by the U.S. media).

This trend has become much more extreme, with numbers from the last two months indicating that U.S. banks are now on track to sell less than 1/3 of their total foreclosures/repossessions this year – which works out to more than an additional two million units being added to their unsold inventory this year, alone.

Part of the reason why U.S. banks are keeping these homes off the market is so that they don't have to write-down these properties to their real value (which must be done the moment the house is sold). By keeping them off the market, they can maintain their fantasy-valuations on these properties which sit on their “stress-tested” balance sheets.

However, the second, equally-obvious reason why U.S. banks are holding these properties off the market is to try to simulate a “bottom” in this market. It is elementary economics that when you increase the supply of something, you reduce the price; and when you decrease the supply of something you increase the price.

Listing all these properties on the market as the banks take possession would mean millions more unsold units simply sitting on the market – which would mean the same double-digit price-declines which have been reported month after month for the last two years. Conversely, by artificially reducing the supply (by at least 50%), these market-manipulators appear to have caused prices to momentarily stabilize. Obviously, that “stabilization” ends (at the latest) when these banks start dumping their shadow inventory onto the market.

Even if the banks don't attempt to sell these properties, either the continuing collapse in the U.S. job market or the upcoming spike in mortgage-resets (and the millions more foreclosures and repossessions which must result) will quickly result in U.S. house prices again plummeting downward.

With over 20 million empty homes in the U.S., and U.S. apartment vacancies recently hitting a 20-year high (see “Apartment vacancies NEW nightmare in U.S. housing collapse”), there is no possibility of this market reaching any sort of equilibrium – which is what the propagandists supposedly mean when they claim that this market has “bottomed”. In fact, with supply continuing to grossly exceed demand, there is no possibility of any equilibrium in this market for several years.

Again, there's more at the link. Bold print is my emphasis.

Third, the indispensable Karl Denninger again warns that 'The Consumer Credit Game Is OVER'.

We recently got an updated G.19 from The Fed that contained "revised" consumer credit numbers that showed the top in consumer credit (all but mortgages) was in fact in July of 2008, not January of 09 as previously reported.

This morning the US Census released its update with per-capita income numbers for 2008 being released.

Here's the updated "big picture" chart.

(Chart courtesy of Karl Denninger's The Market Ticker)

Let me be crystal-clear so nobody can say later they weren't warned: If any part of your economic thesis going forward requires that consumer borrowing expand in order to foster economic growth you are wrong and everything you believe that depends on that is also wrong. Further, any belief that per-capita income has not SHRUNK from the flat-lined 2006-2008 levels in 2009 is also wrong, although the Census numbers for 2009 will not be out until September 2010.

. . .

There is no more borrowing capacity among consumers as a group. Contraction of this magnitude and rate-of-change is NOT occurring by choice; consumers are being forced to either pay down or default debt they cannot afford to carry. It is no longer possible to expand outstanding consumer credit - that is, we cannot "pull forward demand" any longer, as the consumer's per-capita income, even with short-term interest rates at ZERO, is insufficient to support further credit issuance.

. . .

We have continued to pretend that the above graph does not represent reality. We have shifted borrowing from citizens to the Federal Government in a (futile) attempt to keep the credit-expansion game going. It can't and won't work - the evidence is, at this point, irrefutable that what I laid forth as our destiny in 2007, like it or not, is occurring.

The character of what was attempted in 2000 is obvious from this chart: Boost borrowing against homes and by the government. When the home borrowing scheme failed and started to self-destruct The Federal Government has attempted to pick up that piece as well, a trend that is clear starting in 2007 and has continued since.

There is no way out of the box via this method; we are in fact headed for a sovereign credit, monetary system and thus GOVERNMENT failure if we don't stop! WE MUST accept a contraction to sustainable levels of economic activity and STOP trying to substitute for consumer demand with government borrowing or we WILL witness the collapse of our governing funding model when those who loan the government money realize that the US consumer is INCAPABLE of resuming their former credit-expansionist way of life.

Do not be fooled by the talking heads on TV - the above graph proves what is really going on and what is at stake. It is not possible to "restart" credit demand among consumers as we have failed in our efforts to boost consumer income, the means by which one pays debt. The consumer has hit the wall as ever-increasing demands on income for the necessities of life - the price of which (food, fuel and medical care in particular) has risen much faster than their income and they are trapped.

At the same time the claims of "lower interest rates make it easier to pay debt" have been proved false. Interest rates on consumer debt have gone up, not down, as banks have effectively stolen the lower short-term funding rates to paper over and hide their losses while raising interest rates on consumer borrowing. At the same time the housing bubble was formed during a time when long-term borrowing rates for consumers (mortgages) were at or near all-time lows, and as a consequence there has been no meaningful relief there either - nor can there be.

Finally, the insane ramp in Federal Borrowing has resulted in a precipitous decline in the value of the dollar - a decline that is now threatening to become disorderly.

In other words, policy actions have had and will have no impact on the group that must recover for a durable economic recovery - the consumer - as those lower borrowing costs either can't be or haven't been passed through but instead are being STOLEN to cover up bank insolvencies and are CAUSING upward pressure in the price of necessities.

Nobody in the "mainstream media" is talking about this chart but it is in fact the key to literally everything. The market has been on a tear since March precisely because the banks have been able to cover up their insolvency and are gambling with that Federal "put" to them but in doing so they have further damaged the consumer's balance sheet. Not only have interest rates spiked higher on consumer revolving credit (credit cards) but in addition the banks have plowed money into commodities (oil in particular) doubling its price over the last few months and putting a further twist on the thumbscrew of consumer budgets via gasoline prices!

This is now showing up in the outstanding credit numbers - the consumer's balance sheet and health is deteriorating fast as consumers simply are unable to afford their existing debts, say much less taking on any new ones. There is zero evidence of stabilization in this regard, irrespective of Geithner's claims to the contrary.

Ignore the above graph at your own considerable peril.

There's more at the link. (Bold print is Mr. Denninger's emphasis.)

I agree 100% with Mr. Denninger. Ignore his graph at your financial peril.

Finally, the former head of the Government Accountability Office (GAO), Mr. David Walker, has been sounding the alarm for some time about the implications of US Government deficits for the ordinary man and woman in the street. In an interview in the Wall Street Journal, he waxed eloquent on the dangers of the current situation. An extract:

Mr. Walker, a 57-year-old accountant, didn't set out to be a fiscal truth-teller. He rose to be a partner and global managing director of Arthur Anderson, before being named assistant secretary of labor for pensions and benefits during the Reagan administration. Under the first President Bush, he served as a trustee for Social Security and Medicare, an experience that convinced him both programs are looming train wrecks that could bankrupt the country. In 1998 he was appointed by President Bill Clinton to head the GAO, where he spent the next decade issuing reports trying to stem waste, fraud and abuse in government.

Despite many successes, he was able to make only limited progress in reforming Washington's tangled bookkeeping. When he arrived he was told the Pentagon was nearly a decade away from having a clean audit, or clear evidence that its financial statements were accurate. When he left in 2008, he was told the Pentagon was still a decade away from that goal. "If the federal government was a private corporation, its stock would plummet and shareholders would bring in new management and directors," he said as he retired from the GAO.

Although he found the work fulfilling, Mr. Walker said he decided to leave last year with a third of his 15-year term left because "there are practical limits on what one can—and cannot—do in that job."

. . .

"We have four deficits: a budget deficit, a savings deficit, a value-of-the-dollar deficit and a leadership deficit," he tells one group. "We are treating the symptoms of those deficits, but not the disease."

Mr. Walker identifies the disease as having a basic cause: "Washington is totally out of touch and out of control," he sighs. "There is political courage there, but there is far more political careerism and people dodging real solutions." He identifies entrenched incumbency as a real obstacle to change. "Members of Congress ensure they have gerrymandered seats where they pick the voters rather than the voters picking them and then they pass out money to special interests who then make sure they have so much money that no one can easily challenge them," he laments. He believes gerrymandering should be curbed and term limits imposed if for no other reason than to inject some new blood into the system. On campaign finance, he supports a narrow constitutional amendment that would bar congressional candidates from accepting contributions from people who can't vote for them: "If people can't vote in a district not their own, should we allow them to spend unlimited money on behalf of someone across the country?"

Recognizing those reforms aren't "imminent," Mr. Walker wants Congress to create a "fiscal future commission" that would hold hearings all over America to move towards a consensus on reform. It would then present Congress with a "grand bargain" on entitlement and budget-control reforms. Its recommendations would be guaranteed a vote in Congress and be subject to only limited amendments. I note that critics have called such a commission an end-run around the normal legislative process. He demurred, saying that Congress would still have to approve any recommendations in an up-or-down vote—much like the successful base-closing commission created by GOP Rep. Dick Armey in the 1980s.

. . .

[Walker] says [President Obama's] stimulus bill was sold as something it wasn't: "A number of people had agendas other than stimulus, and they shaped the package."

As for health care, Mr. Walker says he had hopes for comprehensive health-care reform earlier this year and met with most of the major players to fashion a compromise. "President Obama got the sequence wrong by advocating expanding coverage before we've proven our ability to control costs," he says. "If we don't get our fiscal house in order, but create new obligations we'll have a Thelma and Louise moment where we go over the cliff." Mr. Walker's preferred solution is a plan that combines universal coverage for all Americans with an overall limit on the federal government's annual health expenditures. His description reminds me of the unicorn — a marvelous creature we all wish existed but is not likely to ever be seen on this earth.

. . .

"Our $56 trillion in unfunded [US Government] obligations amount to $483,000 per household. That's 10 times the median household income—so it's as if everyone had a second or third mortgage on a house equal to 10 times their income but no house they can lay claim to." As for this year's likely deficit of $1.8 trillion, Mr. Walker suggests its size be conveyed thusly: "A deficit that large is $3.4 million a minute, $200 million an hour, $5 billion a day," he says. That does indeed put things into perspective.

Despite an occasional detour into support for government intervention, Mr. Walker remains the Jeffersonian he grew up as in his native Virginia. "I view the Constitution with deep respect," he told me. "My ancestors and those of my wife fought and died in the Revolution, and I care a lot about returning us to the principles of the Founding Fathers."

He notes that today the role of the federal government has grown such that last year less than 40% of it related to the key roles the Founders envisioned for it: defense, foreign policy, the courts and other basic functions. "What happened to the Founders' intent that all roles not expressly reserved to the federal government belong to the states, and ultimately the people?" he asks. "I'm pleased the recent town halls show people are waking up and realizing it's time to pay attention to first principles."

Again, there's more at the link. The paragraph in bold print is my emphasis. The whole interview with Mr. Walker is recommended reading.

Folks, if you aren't paying attention to these authorities; if you aren't actively looking at your financial situation, right now, and deciding what you're going to do to ride out the storm that's bearing down on us (and believe me, we ain't seen nothin' yet, as far as financial storms go!), then you're about to be swimming for your financial life - without a lifebelt.

It's coming, friends, and it's going to get much worse before it gets better. Be prepared.

Peter