Saturday, August 22, 2009

The Evaporation of the Middle Class

Hello All

This is a long video but its well worth watching. Harvard professor Elizabeth Warren does a wonderful job describing how we are slowly becoming a two class system in this country.

The bankers have essentially destroyed the middle class by stuffing them with oodles of debt. Families in this country now need two jobs in order to just survive.

One thing to note in this speech is that the cost of owning a home has risen by 76% versus a generation ago.

Whats interesting is this lecture was given in 2007. Its amazing to see how Dr. Warren's concerns have now become a reality.


Friday, August 21, 2009

Run Forrest Run!

Before I get started I wanted to make an announcement: The Housing Time Bomb was just officially approved to be a contributor on Seeking Alpha. Here is the link to the last article that got published(Yesterday's post). I want to thank Economic Disconnect for getting this ball rolling. I was notified this week by Seeking Alpa's editors that they would be publishing some of my work.

Seeking Alpha has been rated the #1 financial website on the net by a variety of publications. You can click on the "follow me" button over at SA if you want to start reading me over there. They have a rather large comments section. Thanks for everyone's support of the blog, and I look forward to working with Seeking Alpha!

It was another Ponzifest on Wall St today as better than expected home sales took stocks to new highs.

There was also a negative side in this report: Home inventories failed to shrink as more condos were dumped onto the market. This part of the news of course was ignored as Wall St's bubble making machine rolls on!

I find it amazing how the street can tune out all of the bad news and take stocks higher based on one meaningless data point. What the bubble boys need to realize is the housing crisis will continue as long as inventories are bloated.

This home sales bump should have been expected as many buyers took advantage of the $8000 first time home buyer tax credit.

I spoke to a mortgage analyst today who explained to me that this is where the big jump in sales is. Basically this boost is nothing but first time home buyer's buying low end 1-300k houses.

I fail to see why the street is so giddy about this recent bump in sales.

Anyone stuck in a bubble loan at 600k and up is still basically screwed because most buyers are no longer able qualify for mortgages that are needed buy these homes.

The lending products that were used to purchase homes at such high prices are no longer available. This is why inventories at the high end still stand at around 20 months or so.

The analyst I noted above also shared with me that he is extremely concerned about what happens to the housing market after October 1st when this tax credit expires.

The thought of the tax credit disappearing at a time when real estate seasonally slows down anyway probably sends chills down the spines of the Realtors. I can hear the crickets now!

I understand the government's premise behind stimulus deals such as the home tax credit and "cash for clunkers". The problem with such programs is you are stealing future growth away from the economy.

I can't wait to see the car and home sales after these programs vanish. All these programs have done is further burden our consumers with more debt. This is what got us here in the first place!

Is the World running away from our debt?

I don't normally post much from the gold bugs, but I thought this chart was extremely interesting:

My Take:

Some of this article seemed a bit "tinny" to me but the data above is both interesting and frightening.

Other than treasuries, the world is pulling a "Forrest Gump" and sprinting away from our various types of corporate and agency debt.

This is happening because the world isn't stupid. They realize that our market is filled with fraud in the form of asset prices that are nowhere near marked to market.

Banks in this country are allowed to carry loans at "fantasy" prices without any penalty. Our previous accounting standards have been thrown out the window as the fraud on Wall St rolls on.

This reckless behaviour makes the risk of default too high for the rest of the world's taste.

You need to begin to wonder if the Fed might start monetizing the debt if they run out of bidders.

The Fed has claimed that they would never do such a thing. However, based on the graph above, they may not have a choice unless they decide to pull the plug on liquidity which will then trigger a 1930's style collapse. I wouldn't want to be Ben right now: Rock Meet Hard Place!

Its going to be very interesting to see how long the world continues to have an appetite for our treasuries. The Fed announced another $200 billion in treasury auctions this week. We just recently finished up a $250 billion auction week. At this ridiculous pace, we will be selling $5 trillion of treasuries per year! Can you say unsustainable?

The Bottom Line:

At some point, the world is going to say "no mas" as we continue to build trillion dollar deficits. IMO, the Fed continues to arrogantly march this country right into default.

The 10-year was up sharply today as the bond market nervously awaits the results of the next round of massive auctions. You need to be careful in the short term if you are shorting treasuries right now.

A credit trader explained to me that these rises in yield prior to auctions is an "old school" bond game from the '70's. The bond market sells off treasuries heading into the auctions so that the PD's(primary dealers) can buy up whats left of the auctions the following week at a cheaper price.

Then once the auctions get completed, treasuries rise and the PD's turn around and sell the bonds and make a nice profit on the spread.

The bond market is currently extremely profitable for the PD's as long as the appetite for treasuries remains high. If yields start to steadily march higher then they are going to be in a world of hurt. However, so far, the auctions have ran fairly smoothly except for a blip or two.

This has made bonds extremely profitable for the PD's of Wall St.

Remember folks: Never underestimate Wall St's ability to find a game that can make them billions. This is a classic game that's right out of the old playbook.

Shorting treasuries via TBT before the announcement of the auction results at 1:00 PM is a nice play when you see a moonshot in yields leading up to the auctions. This trade looks like its setting up nicely after today's move in the 10-year.

Long term however, this action in bonds is not sustainable as the world prepares to pull a Forrest Gump and runs for the hills.

Disclosure: Short treasuries via TBT in long term accounts.

Thursday, August 20, 2009

Prime Borrower's Roll Over as the Housing Crisis Deepens

All I can say about the most recent housing data is YUCK!

The Mortgage Bankers Association announced today that 13% of all home loans are now delinquent or in foreclosure:

"WASHINGTON — More than 13% of U.S. homeowners with a mortgage are either behind on their payments or in foreclosure as the recession throws more people out of work, the Mortgage Bankers Association said Thursday.

The record numbers in the report are being driven by borrowers with traditional fixed-rate mortgages, rather than the shady subprime loans with adjustable rates that kicked off the mortgage crisis. As of June, more than 4% of borrowers were in foreclosure and about 9% had missed at least one payment.

One in three new foreclosures between April and June was from a prime, fixed-rate loan, up from one in five a year earlier. Last year, subprime adjustable-rate loans caused the largest share of foreclosures."

My Take:

There are no "green shoots" in this report. The numbers here are staggering. Whats most concerning to me is the fact that prime borrower's are now starting to drop like flies. 33% of new foreclosures are prime borrowers versus only 20% a year earlier.

Folks, prime borrowers are not supposed to fail! The default rate on prime borrowers historically has always been under 1%. This is an extremely disturbing trend and it's one that bears watching.

What's most concerning here is the fact that these foreclosures were fixed rate loans. This means there was no adjustment that raised the monthly payment. What this tells you is these prime borrowers flat out COULDN'T AFFORD THE HOUSE!

Its becoming clearly evident that pretty much all of America bought homes that they couldn't afford during the housing bubble.

Most of these loans that are delinquent will eventually get foreclosed on. This will dump even more inventory into the already bloated housing market which will then put even further pressure on prices.

Housing clearly isn't anywhere near the bottom. If the prime borrowers continue to fold like tents it will have a catastrophic effect on the housing market and our economy.

Another Consumer Beatdown

The noose around the consumers neck just got a little tighter as the banks continue to slash credit availability:

"Credit card issuers slashed credit for an estimated 24 million borrowers who paid their bills on time, and a third of those consumers saw some drop in their credit scores during a six-month period, a new study says.

The study, to be released Thursday by Fair Isaac— the creator of the widely used FICO credit score — shows that 8.5 million consumers' scores fell from the end of October 2008 through April 2009 after they had their available credit reduced by an average of $5,100. These consumers had no risk triggers such as a late payment. The typical score drop was "well under 20 points," according to Fair Isaac, with about 500,000 consumers experiencing drops of 40 or more points.

The problem with this analysis, according to John Ulzheimer, president of consumer education for, an information site, is that it "minimizes" the impact of lenders' actions on consumers. When lenders lower credit lines or close accounts, it could affect consumers' utilization ratio — which measures borrowers' debt to available credit — potentially lowering the score.

If a consumer has a credit score of 800, a drop of 20 points would still likely qualify the person for the best rate, experts say. But this same drop for consumers in lower score bands could have a significant impact on what interest rates they get, if they can even qualify for a loan.

"The fact that 8.5 million consumers have seen their scores reduced because of no fault of their own over the past six months is problematic," says Ulzheimer, "especially when you take into account that these people could have seen their limits reduced prior to the study and might see" limits cut further.

The effect of lenders' overall actions, he adds, "is going to be much more than 20 points."

My Take:

How are we supposed to spend ourselves back into prosperity without any credit?

Folks, the fact that banks are hurting your credit score even if you pay your bills on time is a big problem. Maybe we should all say the hell with it and just stop paying our bills if our credit score is going to drop regardless!(sarcasm off).

You gotta wonder:

Are the banks going to have any FICO score qualified borrowers by the time they are done penalizing us for their greedy mistake of lending out too much money?

The Bottom Line

Folks, this whole thing is insane. The Fed's answer to our economic crisis was to provide the banks with liquidity so that they could lend out money and jump start the consumer.

Great idea guys! How's that working so far? Let me answer that Alex: IT"S NOT!.

Because the banks are so deep in debt, all they have done is hoard the bailout money in an attempt to dig themselves out of insolvency. Meanwhile, as the pigmen sit and count their money, Rome continues to burn as the the American people increasingly suffer.

As long as the money flows into the banks instead of to the people, this economy is going to continue and tank. The numbers speak for themselves: 13% delinquency rates on mortgages, 9.4% unemployment, and 576,000 new jobless claims as of today(which was above expectations).

This country is going to see a revolution if things continue down this path.

I am amazed at how the market continues to climb the wall of worry and move higher. Pretty soon they are going to realize that this wall is as tall as the Hoover Dam! Look out below when the market comes to this conclusion.

I bought a few PUTS on the SPY at the close today after seeing today's data. Today's move higher looks tired and the news just keeps getting worse.

Disclosure: Short the S&P via SPY PUTS.

Wednesday, August 19, 2009

Stealth Inflation?

Itulip had a very interesting update yesterday. I wanted to start with a few comments on the markets before I get into it:

First of all, I apologize for not discussing the markets too much this week. At this point in time I see no sense in doing so. The recent moves both up and down have been pretty much meaningless because there is no volume behind them. This lack of confirmation means that you must take them with a grain of salt.

The market is basically flat for the week after today. I haven't seen much T&A that has been particularly helpful in the last few weeks. Technical analysis without volume is a very dangerous game to play in a market like this.

The way I see it: The bears and bulls are both frustrated at this point. The bulls want a pullback because the entry points at these elevated levels are too pricey for even their expensive tastes. The bears also want a pullback because they are bears!

The light volume as both sides wait for a pullback has resulted in a market that is about as exciting as watching paint dry.

Stealth Inflation

Lets get back to the Itulip data. Eric made some great points around inflation over there. Is the deflation we all believe we are seeing actually a mirage? Stealth inflation is the idea that you make products of lower quality and sell them at the same price as previous higher quality products.


Could it be that we are slowly sinking into third world living conditions as the quality of our products deteriorate in order to make them affordable for our battered consumer?

Are the 12oz steaks that we enjoyed last year slowly being replaced by 10 oz steaks at the same price? Or will the quality of beef eventually deteriorate without the consumer knowing it as prices remain the same. I have been hearing rumors that certian so called "Prime Steakhouses" are now buying choice beef and pricing it slightly below prime without telling their patrons.

Another question around inflation:

Will a dramatic drop in supply as factories go BK actually force prices higher as products become more scarce?

These are all excellent questions, and stealth inflation in the form of cheaper made knockoffs and smaller portions may be a serious part of the equation.

I have to believe that the fight between the deflationist's and the inflationist's will end up ending somewhere in the middle.

I compare this situation to politics. Each side makes great points but neither side is always right. The far left Democrats and the far right Republicans are both a bunch of loons. As a result, most bills that get done in Washington end up somewhere in the middle.

Here are a few graphs that support the idea that we are in a period of disinflation versus deflation(similiar to periods of the '70's):

Here is the CPI during deflation of the 1930's:

Here is the CPI in our current collapse:

My Take:

The way I see it, four months is not a long enough period for the inflationist's to declare victory. To their credit, the Fed has not let them down yet as they create trillions of dollars in order to keep this bubble afloat. However, if they cannot sustain these shenanigans, will we see the collapse like the one seen above from the '30's?

One thing is certianly becoming more and more clear to me. Our living standards will steadily drop in either scenario. If we cannot afford price inflation, then we will likely see inflation via cheaper goods replacing superior goods at the same price.

I am seeing signs of the new third world America right now. Outback now has a 6oz steak for $9.99. Five years ago, America would have laughed at them if they tried to call this a "steak dinner". Today, its a reality.

The inflation/deflation debate will rage on long after I finish this post. However, I thought that Itulip made some great points today around a potential lack of supply as well as the quality of supply.

The falling dollar, a deflation obsessed Fed, and changes in quantity as well as the quality of supply are all compelling reasons to see the inflationary side of this equation.

On the flip side, bankers always lose in severe inflation because all of those dollars they own become worthless. As a result, the bankers and the Fed want some inflation but not TOO much inflation. They may decide that deflation is the only exit where they remain rich because the dollar would rise in such a scenario.

Its a tough argument folks! This is why a well diversified portfolio should be prepared for either scenario.

Tuesday, August 18, 2009

Extra! Extra! Read All About It!

Is it 1934 or 2009?

All I could say was WOW when I read this. This gave me chills. The similarities here are simply breathtaking. The cartoon below was published in the Chicago Tribune in 1934.

History repeats itself folks. You hear me say it on here all the time. Any bulltard that tells you "but its different this time" when this crisis is compared to The Great Depression is kidding themselves.

You can through that line right in the same trash can as these other famous quotes over the last few years:

"Real estate always goes up!"
"Subprime is contained!"
"There is no housing bubble!"
"The recession is over!"

Substitute the names with our current group of clueless leaders and you could have published the same cartoon in this week's Chicago Tribune and no one would have batted an eye.

I was hoping that we would have learned from our mistakes. Apparently Not:

Is Deflation Winning the War?

This remains one of the hottest topics among the pundits.

We saw another little bullgasm in the markets today as the DOW rallied closing up 83 points.

Futures are down after HP's earnings which met expectations. Despite today's little rally, I still believe that sentiment is slowly changing back to doom and gloom. Investors are tired of hearing about earnings beats that were basically achieved as a result of companies slashing costs. Investors now want real growth!

Less bad is no longer cutting it anymore because the markets have moved up 50% from the lows. In order for the markets to continue and rally, earnings and top line revenue growth must start growing. If they don't, stocks are going to start to look highly overvalued because they got way ahead of themselves after a 50% relief rally based on nothing.

Lets get real here: We all know there is ZERO chance for sustainable growth because the consumer remains suffocated in debt. There is no reason to believe that an economic recovery is coming anytime soon.

Signs of economic destruction are everywhere. Commercial real estate, job losses, housing foreclosures, underfunded pensions, massive state deficits, massive USA deficits...Need I go on?

Whats been startling to me lately is the price destruction that's starting to pop up everywhere around me. I see it in restaurants, housing, and consumer products(I still can't believe I paid $360 for a computer the other day).

What I am starting to wonder is this: Is the government starting to lose its battle versus deflation?

The chart below says yes:

My Take:

As you can see above, we are seeing the largest bout of deflation in our economy since WWII. Seeing inflation below zero is a rare occurrence in the history of this nation folks.

What we need to be concerned about given the most recent data is a Japanese style deflationary collapse.

I have discussed this subject many times before. The powerful deflationary forces that we are currently witnessing have to make you wonder if the Fed might be starting to lose the war with deflation.

My biggest fear here is how the Fed reacts to the obvious signs that deflation is beginning to overwhelm the economy. Do they react by doing something reckless like devalue the dollar in a desperate attempt to inflate their way out of this? Let's hope they aren't that stupid.

As you can see in the chart above, the last deflationary death spiral seen in the US was The Great Depression. It was a long and painful 10 years before WWII came along and pulled us out of it. If the war hadn't created millions of new jobs who knows how long this could have lasted.

Japan STILL hasn't recovered from their deflationary death spiral and that began about 30 years ago! Their stock market peaked at around 38,000. It now sits at 10,000 today.

The Bottom Line:

The Fed is praying for inflation but so far its not happening folks. If these trends continue, your investment strategy should be refocused on shorts and hoarding as many US dollars as you can.

I still plan on holding my metals because I am worried that the Fed might be stupid enough to destroy our currency in an attempt to stave off deflation.

The jury is still out, but a deflationary depression could very well be in the cards.

Monday, August 17, 2009

It's All About Housing

Whoa! That was a pretty damn ugly wasn't it?

This move down kinda came out of nowhere. It all started in Asia last night. All of the major indices plunged substantially as Japan's GDP#'s came in a little light.

China's market has now dropped 12% from their recent highs. I think the longs are starting to realize that if China can't continue to grow then who in the hell can? We know the US and Europe will be dead for several years.

China and their large reserves are the only hope for world growth. The question now becomes this: Was the recent spending binge by China on commodities growth/demand oriented? Or is this stuff just sitting in a giant storage bin collecting dust?

If I had to guess I would choose option two. I mean lets face it: China only grows if the world consumes. The recent consumer data in the US basically told us that the consumer is on life support.

I doubt China can continue to have robust growth if their factories are shut down as as our consumer binges come to a complete standstill.

In The US: It's All About Housing

Calculated Risk had a great chart today on the disturbing default rates in real estate:

My Take:

I am sure this chart keeps a lot of bank CEO's up late at night. I can't even begin to explain how ugly this is. As you can see, the default rates are absolutely parabolic in both commercial and residential real estate.

Here is the default data from the Fed today and how it compares historically:

"WASHINGTON (MarketWatch) -- Delinquency rates for loans and leases at U.S. banks increased to a record 6.49% in the second quarter from 5.58% in the first quarter, the Federal Reserve announced Monday. The Fed began collecting the data in 1985. The charge-off rate rose from a record 2.03% to a record 2.65%. Before this recession, the highest charge-off rate had been 1.70%. Delinquency rates for real estate loans rose from 7.10% to 8.27%, the highest since the data began in 1987. Delinquency rates for commercial and industrial loans rose from 3.12% to 3.73%, while delinquencies for consumer loans rose to from 4.69% to 4.92%, also a 22-year high."

Continued Take:

I think I need a drink after reading this. Folks, the reality here is default rates are at record highs and show ZERO signs of slowing down. In fact, the moves look totally parabolic! Anyone thinking that housing prices won't continue to collapse afterr seeing this needs their head examined.

Peter Schiff said on Fast Money today that he believes that housing could still drop an additional 50% as credit worthy buyers continue to disappear.

I mean who in the hell is going to be able to qualify to buy a house as default rates soar, unemployment rises, and lending standards continue to tighten?

Speaking of lending standards, take a look at this from Bloomberg:

"Aug. 17 (Bloomberg) -- U.S. banks tightened standards on all types of loans in the second quarter and said they expect to maintain strict criteria on lending until at least the second half of 2010, a Federal Reserve Report showed today.“Domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households,” the Fed said in its quarterly Senior Loan Officer survey. “The net percentages of banks that tightened declined compared with the April survey.”The report suggests that lenders and borrowers are wary of taking on more risk until the U.S. economy shows clear signs of growth.

Most banks expected standards across all loan categories“would remain tighter than their average levels over the past decade until at least the second half of 2010,” the report said."

My Take Continued:

I thought the recession was over and the banks were going to start lending again?HA! They are such lying fools! Guys, this collapse is so obvious now that I believe the spin coming out of Wall St is no longer going to be effective. This could be an important pschological shift by investors in terms of how the market reacts to news.

Perhaps the market will begin selling off when the news is bad versus going up based on nothing but a hope and a prayer.

I mean lets face it: The bulltards credibility is rapidly falling apart as they scream RECOVERY everyday in the face of worsening data.

The Bottom Line

As long as housing remains in a tailspin there will be no recovery. The only way housing recovers is if prices collapse back to affordable levels.

Unfortunately, if this adjustment occurs, the banking system collapses as a result of the losses that they will be forced to take on all of those bubble loans.

Folks, what can I say? This isn't going to end pretty. Was today the beginning of a huge correction or just a pullback? Too soon to tell.

What I do know is the data is not getting any better and housing is collapsing at a much faster pace than I anticipated.

Playing the short side might not be a bad idea here. I feel a deflationary storm on the horizon in the near term.

Sunday, August 16, 2009

The New American Consumer

The tech ticker is really starting to grow on me. Take a listen to this great discussion around the changes in our consumer behaviour.

The US consumers ability to spend is dramatically shrinking as their access to credit continues to shrink. The shrinking consumer is also being pummeled by massive job losses and increased mortgage payments as a result of overspending on a McMansion during the housing bubble.

The housing ATM of course has also been cut off as housing values continue to fall at a record pace.

Its pretty tough to have a "V shaped" recovery when 3/4 of our economy is based on consumer growth.

Deflationary Forces Strengthen

Lets take a look at prices today via the last week's CPI:

My Take:

Although I still believe that inflation is the longer term risk down the road, the threat of deflation in the near term is starting to rise substantially.

The drop in CPI in June versus a year ago was the largest drop in prices in more in 60 years!

Anecdotally, I was out at a nice prime steakhouse last evening and they told me they are dropping their prices nationally. Many other restaurants are doing the same. Go check out an Applebees or Outback and take a look at a menu and you will see the same thing: Lower prices and fewer patrons.

I am seeing signs of a crashing consumer everywhere.

Baltimore was eerily quiet last night. It was restaurant week which is a week here in the city where all the restaurants in Baltimore run huge dinner specials for 7 days.

Every restaurant is usually packed as a result. Not this week! Every place I went into was dead as a doornail last night. Usually on a Saturday during restaurant week you can barely get inside restaurants as people take advantage on the incredible deals.

Even thehe cabby's were telling me how dead its been. The city had a depressionary feel it it. It was pretty spooky.

I saw further examples of this at Best Buy yesterday when I was forced to go out and buy a computer after my Dell blew up yesterday morning. I went in thinking that a new desktop would run me $700 or so. I was shocked to see how much computer prices have dropped. I was able to buy an Acer with AMD's fastest chip, speakers, and a keyboard for $360! This was a pleasant surprise but shocking nonetheless.

Prices are dropping because companies are realizing that they need to adjust to this new world where the consumer is pretty much dead.

They will die themselves if they don't drop prices. This deflation can get really ugly because as companies drop prices, consumers tend to hold out thinking that prices will continue to drop.

This is called a negative feedback loop and it can devastate an economy because no one consumes anything thinking a bigger bargain is right around the corner. This is why the Fed is obsessed with trying to prevent deflation!

Here is an example of how a negative feedback loop can develop:

I was speaking to a mortgage analyst about the tax credit for first time home buyers. The housing industry is trying to raise the credit from $8000 up to $16,000. The 8k rebate ends on October 1st. The housing industry is trying to use the cash for clunkers success as a way to increase the rebate.

This sounds great in theory, but it can also backfire. Let me explain:

The first tax credit last year before this year's 8k rebate was $7500 but you had to pay it back at the rate of $500 a year until it was paid off.

As housing continued to suffer, the government decided to sweeten the deal for '09. They decided to make the tax credit $8000 that didn't need to be paid back at all.

Great news right? Well for most people that is: How do you think the people that got in on the first tax credit felt after seeing the second tax credit a year later that never needed to be paid back.

If the government once again attempts to raise the stakes and rolls out a $16,000 tax credit next year, how are the $8k'ers from this year gonna feel about that? Ummm..Let me answer that nicely. They will feel like they got totally screwed!

This stimulative effect is very effective in the beginning, however if you keep upping the ante, it can have the opposite effect because people will start to believe that they will get a better deal next year if they hold out.

Before you know it, a nasty feedback loop is created where consumers permanantly sit on the sidelines thinking that a better deal is right around the corner.

The Bottom Line:

I am starting to get concerned about deflation in the short term. What scares me even more is how the Fed will react if deflation begins to really take hold.

What might they do to fight it? They could start devaluing the dollar in an attempt to inflate out of it. This will not end well as prices will soar on everything which will further pressure the consumer.

Both inflation and deflation are a risk at this point. If deflation takes hold, shorting stocks and holding US dollars will be your best bets. Metals could take a beating in this scenario as prices drop on everything including commodities.

If the dollar begins to plunge once again, you need to be concerned about inflation. Once this deflationary period ends I still believe that inflation will be the long term problem because our Fed is acting so reckless when it comes to monetary policy.

That being said, the data for now is saying that the Fed is losing its battle with deflation. Hedging your metals positions by buying PUTS on metal ETF's might not be a bad play here.