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by PIM of SPAIN | November 11, 2009 at 11:43 am
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"The Second Wave Begins." is the headline of a report from John Hussman. The substance is that a 'second wave' of foreclosures already may have begun.
The Top 50 metro areas in the US are reporting, "sharp increases in foreclosure activity.”
"Rising unemployment and a new variety of mortgage resets continued to gradually shift the nation's foreclosure epicentres in the third quarter away from the hot spots of the last two years and toward some metro areas that had avoided the brunt of the first foreclosure wave," writes James J. Saccacio, CEO of RealtyTrac. "While toxic subprime mortgages drove much of that first wave of foreclosures, high unemployment and exotic Alt-A and Option ARMs are spreading the foreclosure flood to more metro areas in 2009."
“Financiers have the world's financial system in a ‘doom loop,’” says the Bank of England. “The bankers take money from the government and use it to speculate, not to lend. "Excess" reserves are at a record high as consumer credit continues to decline.”
Most people find it both annoying and absurd to see bankers getting $10 million bonuses while there is over 10% unemployment. Why doesn't Goldman go to an unemployment line and make them an offer?
"Any of you guys want to earn a $5 million bonus?" For sure capable people will be interested. And Goldman would save $5 million/head.
Borrowing from the Fed at 1% and lending it back to the Treasury at 4%, is a trade that quickly can be learned.
Over the last 7 months, there was almost no way ‘fed-financed’ traders could lose money. They borrowed dollars at next to zero interest rate. It didn't matter what they did with it, they could trade it for Japanese Yen, Brazilian Real, buy stocks in Singapore or even gold. Almost everything went up against the dollar.
“Institutional investors - such as those managing money for banks - are judged on how well they do against the benchmarks, the averages, not on how much money they make or how many losses they avoid. If their colleagues are making money, they have no choice. They have to get in the game too.”
In other words they are in a "doom loop," where they continue to bid up asset prices - even at the beginning of a depression.
Meanwhile, back to the real economy, deflation continues. David Rosenberg writes:
"It is like a magic show - the US economy is somehow out of recession with both employment and consumer credit outstanding still in full- fledged contraction mode.”
"In September, total consumer credit fell $14.8bln making it the eighth month in a row of debt repayment - an unprecedented string of declines. Over this period, the amount of consumer credit (not including mortgages) that has come out of the system has totalled $163bln at an annual rate (or -6.3% at an annual rate). Looking at the fact that total household debt still exceeds long-turn norms of 60% by a factor of more than two, we are still in the early stages of a secular credit contraction that could well end up seeing another $5 trillion of debt collapse. This is a highly deflationary process; it will take time; and while we are bullish on gold and commodities strictly on global supply- demand imbalances, bonds remain a very good place because deflationary episodes provide solid real yields to investors."
How long will it take to de-leverage the private sector, in order to calculate how long this depression will last? Assuming a 6% a year debt repayment in the private sector, which has twice as much debt as it should have that will take about 7 years to get down to a more normal debt level.
But it's not that simple. Because as the private sector pays down its debt, the feds try to prevent it, while they leverage up the public sector with even more debt. This will make a real recovery to take even more time.
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Most RecentMost Recommended Comments (22)
at 11:47 on November 11th, 2009
“Financiers have the world's financial system in a ‘doom loop,’” says the Bank of England. “The bankers take money from the government and use it to speculate, not to lend. "Excess" reserves are at a record high as consumer credit continues to decline.”
The problem, or a good bit of it, in a nutshell.
at 11:54 on November 11th, 2009
"How long will it take to de-leverage the private sector, in order to calculate how long this depression will last? Assuming a 6% a year debt repayment in the private sector, which has twice as much debt as it should have that will take about 7 years to get down to a more normal debt level."
The other key point.
at 11:55 on November 11th, 2009
That depends from which angle it is viewed, but yr conclusion is right Roy
at 11:56 on November 11th, 2009
Indeed it will be 7 years, but likely much more as the Fed and Central Banker continue with their stimuli!
at 12:09 on November 11th, 2009
2 years in, 7 to go.
The Great Depression lasted 10, with WWII responsible for keeping it that short.
Should be fun ride.
Will be interesting to see if the liberal thinkers have enough confidence in our leadership to spend their way out of this, no?
Me, i'll hold on to the little i have.
at 11:57 on November 11th, 2009
Err, there is no deflation CPI has increased. Retail sales are up.The latest survey says 1 in 20 Americans intend to buy a house in the next 12 months. Even in China retail sales are up 16%, production is up 16% and capital investment up 30%.
at 12:09 on November 11th, 2009
Sorry rng the recovery is a straight forward fraud, GDP figures are manipulated by the stimuli, don't get the wrong picture, its all boondoggle for the masses, to believe the government spend your tax money in the best way. Certainly I would like to be on yr side and being right about, but the math doesn't add up to do so.
at 12:14 on November 11th, 2009
PIM that is the biggest load o hogwash. Stimuli spending was required to mitigate unemployment as much as possible and to stimulate demand. Month over month you are being proved wrong. Yesterday you wrote retail demand as down - it was up. Today you allege deflation - there is no deflation. You are factually incorrect again and again. Every indice is the opposite of what you state then you just say oh but it is just the stimulus - Of course it is the stimulus it is having the desired effect!~that is exactly why the indice are responding
at 12:28 on November 11th, 2009
I totally agree rng. It however will be fun telling PIM I told you so next year when the markets and economies have recovered. lol
However such doom and gloom gets good readership and also it allows Obama bashing. lol
at 12:36 on November 11th, 2009
It circuitous logic - the indices are up but they lie as its due to the stimulus. Err..yes exactly...that's why it was done.
I don't think it will even be 12 months. I say end of this quarter the impetus will be enough to make the point, by mid-year 2010 even the bashers will have to take a step back into the shadows and find another issue!
There will be a new benchmark and as I said I am gloomy about unskilled/low skilled labor and there are some oddities of badly aligned regional economies- Michigan and Florida - serving as examples. There will be demographic flux in those areas and I would hate to be in property development in those places.However, the rest of it is as predicted
at 12:51 on November 11th, 2009
Whatever we may think about this, time certainly will tell us. Lets have another look at this in 6 month time. For the time being I stay with my mathematics, and not with shiny promises. Debt is money owed and that has got to be paid back in the end. The more debt is created the longer it will take a recovery will occur.
at 12:58 on November 11th, 2009
Maths says - retails sales up. Maths says - CPI increase so no deflation. I trust maths too
at 15:42 on November 11th, 2009
With China saying its going to reach 8% this year and its surprise about exports increasing so much. It looks like PIM needs to check his figures I can not imagine why he is saying deflation does he really mean disinflation?
Source: en.wikipedia.org
at 17:57 on November 11th, 2009
Well, China did it's own Stimulus package. It should be going up. Won't stay up.
Bigger question there, are the factory laborers going back to work?
Next question for China is, what happens when they stop pegging their money to the almighty dollar? And what happens to the greenback when the Chinese stop propping it up - directly or indirectly.
As for the "1 in 20 Americans intend to buy a house in the next 12 months" statement above, if that happens it would be a banner year!!! 5% of 300 million = 15 million homes sold in one year. Banner Year! Prices will shoot through the roof! I certainly can't wait to see that.
I am curious as to where we are going to borrow all the money, to buy all the stuff, that is going to put everyone back to work, to unleash the economy.
Better than 10% unemployed, perhaps another 5% that gave up even looking for work, millions getting by with reduced hours, millions more living in fear of losing their jobs, credit cards cut off, or with much higher interest rates, banks hoarding money, businesses hording money, yet we are all going to go out and spend more?
Why would any sane person do that? If the banks are afraid to, why should they? If businesses are hoarding money, why shouldn't they?
at 18:59 on November 11th, 2009
REI Survey. JGI - one would assume adults. Front page of money section US Today
Look I'll make it easy for you, here's the link even http://www.usatoday.com/money/economy/housing/2009-11-11-home-buying-poll_N.htm
30% increase in capital investment in China in the last few months. Production in China up 16%
Retail sales up in Oct. Demand increased.
You might not like the fact that these are the numbers. They may not fit the way you want to view the world - but that doesn't change them
It just the stimulus? Exactly. It is doing what it was supposed to
There are regional variances. I called out Florida and Michigan as not recovering anytime soon. I don't know about Nebraska - perhaps you are not trending yet there
Now if PIM wants to do a piece on the Spanish economy - that is in free fall and structurally unsound, but he keeps writing about the US using misleading data
at 19:21 on November 11th, 2009
Nebraska has the 2nd lowest unemployment rate in the country, thank you.
Still, the construction industry is in the tank. Housing is way over built. For Sale signs are everywhere. House next door took over 6 months to sell at less than 1/2 the price it sold for 9 years ago - it was repo'd.
Small town manufacturing plants are closing. People get their hours cut back. We get 5-6 times the job applications coming in as compared to a year ago. Can name a dozen people out of work or with reduced hours. An architect friend is working half days. Can't drive anywhere without seeing "For Lease" signs. Friend who's family owns several car dealerships says things are as bad as he has ever seen them, since the Cash for Clunker incentive ended.
Everything is trending up? for who? Bankers? Investors? Brokers? Gold Salesmen?
Know anybody buying anything on credit? Know anybody that hasn't seen a large rate increase on their credit cards?
at 19:31 on November 11th, 2009
Retail sales up in Oct. Demand increased. 1.8% comp increase. Yes, I am seeing people easing up a little and spending some more - not like before, but more than in the recent.
BTW- I said I didn't know about Nebraska. I only make definitive claims when I have the data or some first hand knowledge. The trends are up at a national aggregate- them's the facts. I have business dealings in Floria and Michigan so I can say with some surety what the state of play is. I have only one unit in Nebraska. I have never personally visited it and it is low volume. I can't make any conclusions from that
The counter argument would be can they sustain? I would say yes on a trend analysis Nov numbers will make that assertion stronger
at 23:50 on November 11th, 2009
Trends are computer models that have been proven wrong in the past, otherwise we wouldn't have the financial crisis we are in today. Statistics are massaged to let ordinary people believe that everything is going alright, but unfortunately that's not the truth rng and BF. As said above time will tell us, and history books will explain what has happened and how we have been mislead in our belief, by people in charge that certainly know better, but don't want to lose their job in high places. By continuing on the wrong road to recovery to becoming a disaster road.
- reply
Pedro B. (not verified)at 00:55 on November 12th, 2009
rng: the end result of a maths equation can be two things: right or wrong... it all depends on the procedures followed to arrive at the end result. You most certainly know that if you change numbers during the procedures, the end result will always be different (must have experienced this during maths classes at school). So, what I am saying, how can you be sure that the numbers used (by the government) in the procedures to calculate retail sales and CPI are truly correct? Don't get me wrong, I trust maths as well (we are good friends), but do I trust the government? not sure.... @ BF and rng: I am sure PIM is busy with thorough research (otherwise we would be reading bullcr*p) by digging all the cr*p that is meant for the general public to believe, and getting to the data that is hidden by larger powers. At the end of the day there are always two sides to a picture, the truth and the fake truth... it is up to anyone what they want to believe. My personal opinion? I don't appreciate that governments are having so much power, they are trying to manipulate the economy and its citizens! They should be role models and help (read: not manipulate) the country to go the right direction. Thanks for your attention! and PIM keep up with the excellent work, I am sure many readers appreciate your thinking and openness about a topic that looks to be taboo.
at 01:14 on November 12th, 2009
Pedro very heartening your clear expose about the manipulation with computer models. I'll try to keep up with an objective exposure about what is happening today that later in the history books will be read by our younger generations to understand what went wrong with big government's interventions.
at 06:34 on November 12th, 2009
Here's another trend for you- foreclosure rates show reduction 3rd month in a row. Down another 3% Oct over Sept.
Could be the govt lying except these number don't come from the govt. Nor do retail sales indices. Le Grand Conspiracy would mean all private enterprise was in on it too.
Denial is not just a river in Egypt
at 10:21 on November 12th, 2009
rng I appreciate very much yr conviction, and also do understand that changing yr perception is beyond my ability. Nevertheless my today's essay is dedicated to deal with this aspect more in detail. Hopefully it will help to better understand the possible within the impossibilities. We stay in touch anyhow.