FedUpUSA

Archive for July 1st, 2010

Here is a comment I want to share from someone who posts under the name “Nancy Drew” on this blog. Nancy Drew writes …

Our daughters are 15 and 17. Most of their friends are very concerned about their parents’ financial situations and tell me their parents have too much debt. Whether their parents know it or not, these kids know exactly what is going on and they are scared.

My oldest daughter told me this week that her friend “K”‘s mother is jealous of me. I asked her why, and she said her friend’s mother thinks I never worry about money and seem carefree. I told my daughter that is only because we don’t have debt.

I reminded her of the years when her friend K’s family went on cruises while we were tent camping in a state park. I told her that her dad and I made a decision when we first got married that we weren’t going to buy anything, not even a car, until we had the cash to buy it.

We previously had a mortgage, but we paid it off in 13 years. I told her we just didn’t want the stress. She gave me a hug and walked away without saying anything.

Congratulations Nancy, not only did you make wise decisions you taught your kids well.

Political Will vs. Consumer Psychology

The biggest and most futile fight Bernanke faces is changing attitudes towards debt.

Flashback February 19, 2009: Fiat World Mathematical Model

What happens next depends somewhat on the political will of the central banks and politicians. However, it depends more on the psychology of the borrowers. If consumers and businesses refuse to spend and instead pay back debts (or default on them along with rising unemployment), the picture simply is not inflationary, at least to any significant decree.

The credit bubble that just popped exceeded that preceding the great depression, not just in the US but worldwide. Thus, it is unrealistic to expect the deflationary bust to be anything other than the biggest bust in history. Those looking for hyperinflation or even strong inflation in light of the above, are simply looking at the wrong model.

Flashback June 25, 2008: Peak Credit

Lessons Of The Great Depression Forgotten

The lessons of their great grandfathers who lived in the great depression era were forgotten. Over time, everyone learned to ignore the dangers of debt, risk, and leverage. Belief in the Fed and the government to bail out any problem are ingrained. Bank failures are distant memories.

Peak Credit

Peak credit has been reached. That final wave of consumer recklessness created the exact conditions required for its own destruction. The housing bubble orgy was the last hurrah. It is not coming back and there will be no bigger bubble to replace it. Consumers and banks have both been burnt, and attitudes have changed.

Children whose parents are being destroyed by debt now, will keep those memories for a long time.

For more on attitudes please see:

• Changing Social Attitudes About Debt – February 25, 2008
• Moral Obligations Of Walking Away – February 7, 2008
• Attitudes Lead, The CPI Lags – March 19th, 2008
• A New Phenomenon: Haggling Over Prices - March 23 2008
• Cool to Be Frugal – April 24, 2008
• The Future Is Frugality – August 10, 2008
• The Age Of Frugality – October 19, 2008

Moreover, students fresh out of college, six-figures deep in debt, face decades of debt slavery.

Both parents and students are wondering what went wrong as noted in Subprime Goes to College; Students Buried in Debt; Who is to Blame

Note the bad policy decision (Pell Grants), that helped fuel the problem of rapidly rising costs of education.

Please see College Grads about to Flood Labor Market; Class of 2009 Still Without Jobs in Deep Trouble for still more details on the plight of students.

Attitudes towards education and education costs have certainly started to change with some starting to question the value of an education and what they are willing to pay, even as the Obama administration tries to keep the education bubble alive by throwing more money at it.

Every place you look, be it housing, education, or public unions, attitudes towards debt, lending, and the role of government are changing. It is precisely those changing social attitudes why Bernanke is losing and will lose the battle against deflation.

The sad irony is Japan has proven it is a stupid battle to be fighting in the first place.

Those fretting over base money supply and foolishly screaming hyperinflation (or even inflation), simply do not understand the dynamics of debt deflation, nor do they understand how small the increase in base money is compared to debt that will be written off, nor do they understand the role of changing social attitudes towards spending.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

At times like these, it is hardly going out on a limb to say that we are headed for hard economic times.  In fact, it seems like almost everyone in the financial world is either declaring that a recession is coming or is busy preparing for one.  The truth is that bad economic signs are everywhere.  Consumer confidence is plummeting, big banks are hoarding cash, top financial experts are issuing recession warnings and it seems like almost everyone is trying to accumulate as much gold as possible.  Now that the G20 nations have all pledged to dramatically cut government spending in an effort to get debt under control, worries about a double-dip recession have reached a fever pitch.  So will we see the full-fledged economic collapse that so many analysts are warning of before the end of 2010?  Of course it is possible, but it seems much more likely that  we will just see the beginning of another recession that could certainly deepen into a depression as we head into 2011 and 2012.  There are so many variables and so many moving parts that it is always difficult to predict exactly how things will play out.  What does seem virtually certain, however, is that we are heading into a time of extreme economic stress. 

The following are 25 signs that almost everyone in the financial world is expecting an economic downturn during the second half of 2010….

#1) The Conference Board’s Consumer Confidence Index declined sharply to 52.9 in June.  Most economists had expected that the figure for June would be somewhere around 62.  To get an idea of how bad this is, the index was at 100 back during the baseline year of 1985.

#2) Major banks are being instructed to hoard cash in preparation for the next financial crisis.

#3) French bank Societe Generale is forecasting that gold could reach $1,430 an ounce in the third quarter of this year due to fears of a double-dip recession.

#4) Paul Krugman of the New York Times declared in a recent column that we are about to enter “the third depression”.

#5) According to one recent poll, about eight out of every 10 Americans expect the Gulf of Mexico oil spill to damage the U.S. economy and drive up the cost of gas and food.

#6) Mark Zandi, chief economist of Moody’s Analytics, is not optimistic about the chances of avoiding another recession….

“There’s an uncomfortably high probability that we slip back into recession.”

#7) The U.S. Department of Agriculture is forecasting that the number of Americans on food stamps will increase to 43 million in 2011.

#8) George Soros claims that a European recession in the coming months is “almost inevitable”.

#9) Kevin Giddis, the Managing Director of Fixed Income at Morgan Keegan says that a lot of people are making some really large financial bets that a recession is on the way…. 

“There is big money making big bets that at a minimum we we’ll have a recession if not a depression that could last for years.”

#10) The Center on Budget and Policy Priorities recently said that U.S. states in fiscal 2011 could be facing the worst budget situation that they have experienced since the economic downturn began in 2007.

#11) Federal Reserve Chairman Ben Bernanke is publicly saying that the U.S. unemployment rate is quite likely to remain “high for a while”.

#12) The National League of Cities is warning that large numbers of cities across the U.S. will be facing horrible economic conditions over the next couple of years….

“City budget shortfalls will become more severe over the next two years as tax collections catch up with economic conditions.  These will inevitably result in new rounds of layoffs, service cuts, and canceled projects and contracts.”

#13) According to the Wall Street Journal, debates have already begun inside the Federal Reserve about what to do in the event of a “double-dip” recession.

#14) In May, sales of new homes in the United States dropped to the lowest level ever recorded.  The truth is that the American people know economic hard times are coming and so they aren’t running out and buying expensive new homes that they can’t afford.

#15) Mike Whitney says that without more “stimulus” from the federal government a recession by the end of 2010 is extremely likely….

“Without another boost of stimulus, the economy will lapse back into recession sometime by the end of 2010.”

#16) One recent poll found that 76 percent of Americans believe that the U.S. economy is still in a recession.

#17) Richard Russell, the famous author of the Dow Theory Letters, is not mincing words about what he believes is headed our way….

“Do your friends a favor. Tell them to “batten down the hatches” because there’s a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don’t need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won’t recognize the country. They’ll retort, “How the dickens does Russell know — who told him?” Tell them the stock market told him.”

#18) The Bank of International Settlements said in its annual report that major banks on both sides of the Atlantic Ocean continue to remain “highly leveraged and still appear to be on life support”.

#19) Mish Shedlock recently raised eyebrows by openly proclaiming that “an economic depression is here”.

#20) Bob Chapman of the International Forecaster is very pessimistic about the state of the world economy as we head into the second half of 2010….

“There is still no question in our minds that Greece was a setup to lead to a deflationary collapse later and the Greek people refused to listen. As a result it is now apparent that Greece is even worse off than the elitists imagined. We do not see European bailouts going any further. The result is the US and UK will follow. Financial Europe is history. You should all keep in mind that this is child’s play. Wait until England and the US go down, perhaps before the end of the year.”

#21) An article on Bloomberg’s website says that 46 U.S. states are facing a ”Greek style” financial crisis.

#22) Charles Cooper at Oriel Securities says that worries about the global economy right now are actually very good for the price of gold….

“Debt on government balance sheets and worries that the world could be heading towards a double-dip recession are driving the gold price higher.”

#23) Richard Suttmeier recently wrote an article for Forbes magazine in which he predicted that we are headed for another dramatic decline in housing prices….

Home prices will decline again with risk of another 50% down to get house prices back to levels of 1999 / 2000.

#24) University of Maryland professor Peter Morici is warning that the decision by European governments to slash their budgets makes the prospect of another recession much more likely….

“Europeans cutting their budgets now could thrust the global economy into a double-dip recession.”

#25) John P. Hussman, fund manager of Hussman Strategic Total Return and Hussman Strategic Growth, has issued a full-fledged recession warning: “Based on evidence that has always and only been observed during or immediately prior to U.S. recessions, the U.S. economy appears headed into a second leg of an unusually challenging downturn.”

So in light of all this, what should we all do?

We should all start preparing for difficult times.

Now is a great time to get out of debt, to reduce expenses, to develop additional streams of income and to start storing up food and supplies for when things really fall apart.

After all, you don’t start preparing once the storm has already arrived.  You start preparing the moment that you see the first signs of trouble on the horizon. 

There is no excuse for not getting yourself prepared.  The signs that we are headed towards an economic nightmare are all around us. 

Do what you have to do for youself and for your family.

The Economic Collapse

The massive commercial real estate market is already plaguing the weak balance sheets of banks.  It is the case that each Friday, we are likely to see one U.S. bank fail because due to high levels of commercial real estate (CRE) debt on their books.  This market is likely to cause the failure of hundreds of banks and put the economy down into another real estate funk.  The amount of commercial real estate transactions shows no sign of recovery in this market.  And why would there be any recovery?  This is an area for hotels, strip malls, condos, and other projects that usually reflect a healthy and growing economy.  We do not have that and the problems embedded in CRE are going to stifle any growth for years to come.

First, we should look at the trend in commercial real estate prices:

Source:  MIT

The above chart is extremely helpful in showing how quickly bubbles can grow but also, how fast they can deflate.  It took 7 years for prices to peak and only one year for prices to collapse.  We have seen similar trends in the residential real estate market.  The crash is rather obvious but why did it happen?   The reason prices collapsed so fast was that it was a speculative boom.  Lending became much too easy with the Federal Reserve flooding the system with easy capital trying to find a home.  In more sober times, CRE deals were scrutinized with a due diligence and it was inspected to produce cash flow from day one with sizeable down payments and strong financial reports.  But this is not the case and many of these giant deals ended up going the way of the little to nothing down world of residential real estate.

The market in CRE is enormous.  This market is over $3.5 trillion and is likely to damage the regional banks much more deeply than larger banks that have a taxpayer safety net:

Source:  T2 Partners

The current weakness in the economy is a realization that problems are still deep in the system.  Think of how large the CRE market is.  Roughly $3.5 trillion in debt secured by casinos, strip malls, empty condo projects, and other real estate that likely is underwater.  Keep in mind that at one point this market was over $6 trillion in value.  The CRE market looks to be valued at $3.5 trillion to $3 trillion with the same amount of loans outstanding.  In other words, the market sector is underwater.

The problems with commercial real estate have shown up in prime locations like San Francisco to Chicago.  These CRE debt problems are not a reflection of poor areas as we are at times led to believe.  These were high flying speculative bets that were only successful as long as the pipeline to greater fools was in place.  When that line quickly dried up, so did the system and all the funding that kept the game going.  It was the perfect definition of a bubble.

If we really want to see how quickly things have dried up in this market take a look at the following:

Source:  Real Estate Channel

“At the peak in 2007 $522 billion in sales transactions took place.  In 2009 it collapsed to $52 billion, a drop of 90 percent.”

This is why the CRE market is the next shoe to drop and with so much debt outstanding it is going to put an incredible amount of pressure on already weak balance sheets.  What is even worse is that the U.S. taxpayer is going to be likely on the hook for all these speculative bad bets.  If you haven’t noticed the bailouts don’t do much for the real economy except shoring up the investment banks on Wall Street.

The amount of lending in this market has dried up and so have profits in this arena.  Now the piper needs to be paid but with what money?  How can you service your commercial real estate debt if you don’t have any money coming in?  This is where delinquencies are spiking.  It is also the case that the peak years for CRE debt maturities won’t hit until 2011 and 2012:

Source:  Real Estate Channel

Unless CRE prices miraculously recover the problems are only going to get deeper in this market.  Commercial real estate unlike residential real estate has quicker turnover rates on their loans.  That is, many of the loans need to be rolled over every 5 to 7 years.  Normally on a cash flowing property this is no problem but with trillions of dollars underwater, this is a major issue coming down the road.  The FDIC with a negative deposit insurance fund is taking over banks on a weekly basis and is having a firsthand look at the tremendous amount of bad debt on bank balance sheets.

Banks clearly understand what sits on their balance sheet and if anything, nonperforming loan volume has shot up:

Source:  Bankregdata

Throw in CRE debt, troubled residential mortgages, defaults with credit cards, auto repos, and all other debt instruments and you can understand why the chart above is spiking.  But think of it this way; the credit card market is approximately $850 billion in debt outstanding while CRE debt is up to $3.5 trillion.  What do you think is going to cause bigger pain down the line?

My Budget360

By Karl Denninger

By Karl Denninger

The Russell is now down 24% from it’s peak this year, and is in a Bear Market.

The Nasdaq is within 1/3% of being down 20%.

The S&P 500 is within 1/3% of being down 20%.

The Dow and Transports both broke their significant lows, confirming a Dow Theory SELL signal.

We are now officially (back) in a Bear Market.

A Bear Market that virtually every so-called “expert” and a whole host of prognosticators claimed couldn’t and wouldn’t happen because “Bull Markets last, on average, 42 months.”

The problem with their claim is that we weren’t in a Bull Market.

We are still in the previous Bear Market which began in 2007.

The Government conspired with the banks and mainstream media to suck you into believing in a faux “Pax Americana” recovery that in point of fact never really happened.

You’ve lost 36% of the “gains” – more than a third – you had off the March 2009 lows.  You are now down 30% from the highs – still.  Cramer’s “Getting Back To Even” has now been exposed as a complete load of crap – the correct thing to do for long-term investors was to get the hell out of the market in late 2007 or early 2008 and stay the hell out.

Free market?  What free market?  Borrowing and spending 12% of GDP to try to prevent the market from excising the excesses of intentional fraud is a “free market”?  Allowing “high frequency traders” to step in front of you with various artifices and frauds is a “free market”?  Propping up housing prices to keep you from being able to buy a house at a reasonable price, consigning you to being a debt slave and unable to sell should you need to move for reason, instead of deflating houses to make them more affordable is a “free market”?  Continuing to lie about the sustainability and ability to pay public pensions and salaries – in some cases nearly three quarters of a million dollars for a school superintendent – is a free market?

What are you folks smoking?

The policymakers and crooners are pretty-clearly running out of rope.

Mark my words on this – when the full depths of the coming collapse in stock prices has run its course, and 30 year Treasuries are going at a 2% coupon, you’ll be “offered” to convert your 401k or IRA to them with some of your losses “put back”, with one proviso – you can’t touch it until you’re 65.  At 2% you’ll be getting screwed but 90% of Americans are too stupid to realize it and will take the deal.

That’s the marker on the government’s funding model imploding within the next two to three years, and the market will discount that event long before it actually comes to fruition.

The Market-Ticker