Consumer Spending Contracts as the Great Recession Rolls on

Let's take a look at the consumer data we got from the Fed today:

"WASHINGTON (MarketWatch) -U.S. consumers shed some of their debt for the fourth month in a row in May, the Federal Reserve reported Thursday. Total seasonally adjusted consumer debt fell $9.15 billion, or a 4.5% annualized rate, in May to $2.42 trillion. Economists expected a decline. The series is very volatile. April consumer credit was revised sharply lower to a decline of $14.86 billion compared with the initial estimate of a gain of $1 billion. The decline in May was led by revolving credit-card debt, which fell $7.32 billion or 10.5%. This is the 20th straight monthly decline in credit card balances. Non-revolving debt such as auto loans, personal loans and student loans, fell $1.82 billion or 1.4%. Since the collapse of Lehman Brothers in September 2008, consumer credit has declined in 18 out of 20 months."

My Take:

Wow this is one incredible recovery we are seeing!(sarcasm off).  Folks, we are a consumer driven economy which means if we aren't spending then the economy isn't growing.

Without the countries credit card we would be back in a recession right now.  The only way we are avoiding a double dip is because The Fed is throwing money out of helicopters.

Of course, it's only a matter of time before the GDP numbers go negative again which will then officially give us our double dip.  This is inevitable because no country has a credit card that doesn't have a spending limit. 

We are rapidly reaching the point where our national credit card "maxes out" and starts getting declined. 

The consumer has already maxed out their own personal credit cards.  We have seen 20 straight months of declining credit card balances.  This is a highly deflationary signal.  It's also a good thing.  I believe people are beginning to get tired of being debt slaves.

Of course as this change in spending behaviour continues it's only going to increase the risk of a deflationary death spiral.  Americans are famous for spending like drunken sailors.  Nothing lasts forever though folks and times have changed as seen above.

Our consumer is now  either tapped out or is starting to hoard cash as the economy continues to fall off a cliff. 

How do the talking heads in Washington DC believe we are seeing economic growth when the consumer is in the process of contracting like this?

The spin machine in our capitol is now obviously in full gear.  Look at the credit revisions for April.  Credit was revised to minus 14.86 billion versus an expected gain of $1 billion.

How on earth can you be that far off on your initial estimates?  The answer in my book is you can't be unless you are trying to hide something.  I can't wait to see what the May revisions look like.

The Bottom Line

The whole economic recovery story is nothing but pure spin.  The numbers coming out of Washington are a complete joke and cannot be trusted until you see the revisions or are able to weed through their spin.

Take the unemployment numbers for example: 

How in the heck do you tell the people in this country that the unemployment rate dropped to 9.5% when 600,000 people lost their benefits and have essentially disappeared off of the labor statistics.

This spin process drives me nuts!

When are we going to start hearing the truth?  The economic reports have turned into nothing but a bag of lies.

The fact that the market rose on a day after reports like this is really amazing when you think about it.  I am not surprised because I was expecting a rally since we are still oversold.

One thing is clear:  The market has it's head in the sand.  It doesn't wanna hear the truth.  It doesn't want to trade off of fundamentals.  IMO it's morphed into a speculative casino that's gamed by day traders and the large trading desks on Wall St.

How anyone trusts their life savings in stocks is beyond me.  You have been slaughtered if you bought and held since 1999.  S&P now sits at 1067 after sitting at close to 1500 back in 2000 as seen below:

It doesn't take a math teacher to figure out the math in terms of performance over the last 10 years. 

You also don't need to be a technical chartist when you look at the chart above to see where the market is now headed following the furious rally that was triggered by the  "government spending bubble".

I plan on using this bounce to sell a few longs that I have owned for a long time because I think we are going to see a nasty plunge as the government teet begins to run dry. 

Let's get real here before I finish up:

The data above tells you that the private sector has not only not recovered...It's contracting and so is the real economy IMO.

The politicians in DC need to start stashing some money into their pockets while they can still borrow from the world so they have the ability to take care of the masses when this borrowing game ends.  The situation is rapidly becoming hopeless based on the most recent set of numbers that are coming out of Washington.

Let's hope the last bailout is for the people instead of Wall St.

Disclosure:  No new positions at the time of publication.


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Delinquncies Soar as the Housing Tax Credit Expires

We finally got that well overdue bounce today.  I was happy to see it.  The Financial Apocalypse that we will all be experiencing in the near future is not going to be enjoyable so an "escape from reality" bounce is fine by me.

I see this as nothing more than just another bear market rally.  I wouldn't be surprised to see a ride up to 1100 or so over the next several days.  If we manage to get there it will create a fantastic opportunity to get short.

LPS came out with their latest delinquency data today and it's not pretty:

"LPS' May Mortgage Monitor Report: Increase in Rate of New Delinquencies; Decline in Number of Delinquent Loans Becoming Current


JACKSONVILLE, Fla., July 6 /PRNewswire-FirstCall/ -- The May Mortgage Monitor report released today by Lender Processing Services, Inc. (NYSE: LPS), a leading provider of mortgage performance data and analytics, shows a 2.3 percent month-over-month increase in the nation's home loan delinquency rate to 9.2 percent in May 2010, and that early-stage delinquencies are increasing as normal seasonal improvements taper off. This report includes data as of May 31, 2010.

According to the Mortgage Monitor report, the percentage of mortgage loans in default beyond 90 days increased slightly, while both delinquency and foreclosure rates continue to remain relatively stable at historically high levels. There are currently more than 7.3 million loans currently in some stage of delinquency or REO.

The report also shows that the average number of days for a loan to move from 30-days delinquent to foreclosure sale continues to increase, and is now at an all-time high of 449 days, resulting in an increase in "shadow" foreclosure inventory.

After a two-month decline, deterioration ratios increased, with 2.5 loans rolling to a "worse" status for every one that has improved. The number of delinquent loans that "cured" to a current status declined for every stage of delinquency, except in the "greater than six months delinquent" category. This improvement was likely the result of trial modifications made through the Home Affordable Modification Program (HAMP) that transitioned into permanent status.

Other key results from LPS' latest Mortgage Monitor report include:

Total U.S. loan delinquency rate:

9.20 percent

Total U.S. foreclosure inventory rate:

3.18

States with most non-current* loans:
Florida, Nevada, Mississippi, Georgia, Arizona, California, Illinois, New Jersey, Ohio and Indiana

States with the fewest non-current* loans:

North Dakota, South Dakota, Wyoming, Alaska, Montana, Nebraska, Vermont, Colorado, Iowa and Minnesota"

Quick Take:

The data above is very ugly.  We now have close to a 10% delinquency rate on home loans.   Unbelievable isn't it?

Banks on average are holding homes for 449 days(and rising) before foreclosing on them.  God only knows how large the shadow inventories are now.  The banks are holding onto the houses in order to try and prop up prices and avoid taking the loss on the foreclosure.

All this is going to do is delay the pain.  Housing prices are a still way overvalued because only a fraction of what's really available for sale are actually on the market.  The rest sit in the wasteland we like to call "shadow inventories".

As a result,  real price discovery has not been established.

The only price discovery we are seeing is nothing but a mirage because it's being done by the naive buyers that get suckered into overpaying for a propped up asset using cheap money which will not be available in the very near future.

The smart buyers understand this and are sitting patiently on the sidelines or are offering ridiculously low bids. 

Now this doesn't mean that there aren't some markets that are priced properly.  Many rural areas of the country never got overheated in the first place and are therefore reasonably priced as a result.

Another key data point from this report is the large increase in "new" delinquencies.  This sudden rise in new foreclosures is likely being triggered by the end of the tax credit in April. 

Sellers continued to pay their bloated mortgages through April hoping that they could dump the house onto a buyer using the tax credit.

Once the tax credit disappeared they pretty much gave up and walked away.

That's it for tonight.  Avoid the housing market at all costs because there is plenty more pain to come.  Ren rent rent folks because prices are going to continue to fall especially without the tax credit.

Disclosure:  No new positions at the time of publication

Rise in Treasuries Overwhelms the Market Rally

What a roller coaster today today.  We saw an initial 171 point pump job on the DOW before giving up most of the gains by the end of the day.  The 10 year bond dominated the trade today although you would never know it if you watched "Bubblevision".

 Let's take a look at the 10 year bond(TNX) trade over the past few months:

As you can see it's pretty much fallen off a cliff since May and it was down pretty sharply again today despite the rally. 

So is the bond market pricing in deflation?  That and more in my view(more on this later).

The bottom line here is this chart on the 10 year is flat out frightening for anyone that is involved involved in the credit markets. 

Let's put this move into perspective by looking at the TNX trade back in 2008 versus today:

My Take:

As you can see by the trendline above, we are now seeing lower yields on the 10 year than we did during the crash of 2008. 

This is pretty remarkable when you consider that all of Wall St thought the whole financial system was about to collapse back then.  The fear was 10 fold what it is today and yet the 10 year yield is now lower today then it was back then.

The all time recent lows on TNX of course were as a result of the Fed's infamous QE announcement in 2009.

So are the credit markets more afraid today then they were in 2008?  I believe so because the recent economic data is rapidly looking like it did in 2008(possibly worse).

Folks, there will be no significant stock rally with the 10 year reaching new lows on an almost daily basis.  Bonds must begin selling off in order for stocks to move higher.  This is why the rally failed today.

I mean think about it:  We had every reason to see stocks soar this morning.  We were deeply oversold,  Europe has strongly rallied as we opened, and the futures had bounced back up to +17 on the S&P right before the open after being as low as -10 last night.  This was a very powerful reversal that should have set the table for a strong rally.

The market instead ended up laying a pretty rotten egg.

Within an hour after the markets opened I knew the rally was going to fade because I noticed the 10 year was still moving higher.

Strong rallies typically need solid outflows from bonds in order to be sustained.  Without the bond market participating it forces the rest of the market to lose confidence.

I am sure traders expected the 10 year bond to sell off hard after the impressive 170 point rise seen shortly after the open.  They figured the risk trade was on for the day and the 10 year would act accordingly and move down especially considering how badly oversold the bond was. 

Just look at the chart above folks:  The 10 year had been literally selling off almost everyday for the last couple weeks.  When the 10 year went the other way on the strong opening the traders immediately took notice.

The lack of participation by the bond market told traders that there is a lot of big money that's very afraid right now.  Stocks then started to roll over as a result.

So why the flight into bonds?

I believe the answer is multifaceted: 

1)  The economy stinks and investors are afraid of weaker than expected 2nd half corporate earnings which is sending many to the sidelines via treasuries.

2)  The European sovereign debt crisis.

3)  The risk of deflation appears to be very real.  If this scenario plays out the 10 year will be under 2% in no time.  This will not be good though folks because it means the economy is in shambles.

4)  The bond market is attempting to front run the Fed's QE2.

Let me talk about #4 a bit.  Bernanke's 2002 thesis on fighting deflation involves a "last resort" response where the Fed begins buying the long end of the bond curve in order to peg rates to ridiculously low levels. 

In theory this would lower rates and make it easier for this country to service our debt.  It would also theoretically potentially stimulate lending which would help turn the economy around and stop deflation in it's tracks according to helicopter Ben.

 John Mauldin had an excellent piece on Ben's 2002 thesis last night on Seeking Alpha.

The Bottom Line

Personally I believe that Ben is smoking a crack pipe if he believes this thesis will work.  People do not have any desire to go out and buy $600,000 McMansions anymore.  Most Americans don't even know if they will be working two years from now.

Why on earth would Ben believe that we want to take on more risk via Ponzi financing under such unstable economic conditions. 

Additionally, the unintended consequences of doing another QE blitz are numerous:

The bond market could potentially panic and take rates in the other direction if they begin to agonize over even more deficit spending and the threat of default.

Also, with below rates below say 2% on a QE 2, how does a house ever appreciate in value? 

You know rates down the road would only have one way to go from 1-2% rates that we would see on the long bond rates post QE Part 2(that is if the bond market behaved).. 

The value of these houses that would be bought at 1-2% rates would drop because borrowing would inevitably become more expensive as rates rose once the economy began to recover because we would have to protect ourselves from inflation in a growing economy.

Buying a houses in this type of low rateenvironment would leave you with an asset that is guaranteed to lose value over time. 

I am sure there are other unintended consequences of such actions.  The markets could potentially panic on a QE2 announcement because the perception would be that the Fed thinks the country is about to get smacked by deflation.

All of this being said:  I am not sure such a move by the Fed would ever be allowed by Congress. The Republicans and some of the Democrats would be strongly against more deficit spending.

Ben could possibly pull a Hank Paulson and tell Congress that the world is going to end if he doesn't get his way.  I am not sure this would work this time.

Let's hope this country finds the political will to stop all of the bailout/QE nonsense by the Fed and it's bankers.  Deflation is coming and there is no way for the Fed to stop it.

Disclosure:  No new positions taken at the time of publication.

Paul Krugman vs Niall Ferguson: You Decide

Here is a great debate that was on CNN that featured Princeton's Paul "Keynesian" Krugman versus Harvard's Niall Ferguson.

There are basically two options that Congress has when it comes to fighting our own version of The Great Depression.

The first one is the "Keynesian" approach where we continue to throw money out of helicopters hoping that it will somehow stimulate the economy.

The second option is the "austerity" approach that Niall Ferguson so brilliantly explains below.  This option includes massive spending cuts combined with tax reform that will help stimulate businesses to start hiring again.

We have seen 3 years of the Keynesian approach and it's become clearly evident that the stimulus approach been a catastrophic failure.  As Ferguson explains:  We tried this Keynesian approaching the 1970's and we ended up with a lost decade. 

Niall also worries that continued "Keynesian" spending will force the world to demand higher interest rates on their treasury holdings. 

When risk rises(in treasuries the risk would be a US default) you are forced to pay buyers a premium for taking the risk.  This is how markets work.  This is why many risky corporate bonds pay 8% interest rates.

Ferguson had an excellent analogy on the "safe haven" status of US Treasuries.  He explains that treasuries are a safe haven just like Pearl Harbor was in WWII meaning things are safe until something changes. 

Greece and Spain were safe until one day the bond market decided that their soaring deficits made them unsafe.  This change in perception happened practically overnight.  Pearl Harbors "safe haven" status was destroyed in a matter of hours.

There is no reason to think "it's different here".  Realtors told us the same thing about real estate and we all know how that worked out. 

If we continue to increase our deficits buyers of our treasuries will demand higher rates to hold them.  This is a fact if we continue down our bailout path.

Paul argues that the $800 billion bailout was too small and calls for another one before we give up on the Keynesian approach.

Hey Paul you know what?  I am tired of bailouts and cheap money: 

I am tired of making 0% on CD's. 

I am tired of watching my tax dollars get used to bailout billionaire bankers. 

I am tired of worrying that the banking system is going to fail because we are spending too much.

I am tired of worrying about how much my taxes will rise next year in order to pay for this Keynesian mess.

In fact, I am just plain tired of all of it!

Remember Albert Einstein's famous quote: "Doing the same thing over and over again and expecting different results is the definition of insanity."

Maybe it's time for Krugman to check himself into an insane asylum. 

Enjoy the video:

The Depression of 1920

I suggest everyone takes a look at this excellent piece that was done on the 1920-1921 depression by the The Market Oracle.

History rarely talks about the horrific depression that we had right before the roaring 1920's.  Unemployment rose to 12% and GDP contracted by 17% during this time.

The period preceding the 1920 financial crisis was filled with high government spending during WWI which of course was accompanied with cheap money.   Gee...Does this sound familiar?

In response to the 1920 financial meltdown, President Warren Harding cut government spending by 50% and lowered taxes which stimulated business growth.

The results of this "austerity" policy were nothing short of spectacular.  The deficit was reduced by 30% as a result of these actions.  The economy recovered within a couple years, and it helped trigger one of the most prosperous booms that this country has ever experienced. 

The speech below was given by our then President Warren Harding.  

"We will attempt intelligent and courageous deflation, and strike at government borrowing which enlarges the evil, and we will attack high cost of government with every energy and facility which attend Republican capacity. We promise that relief which will attend the halting of waste and extravagance, and the renewal of the practice of public economy, not alone because it will relieve tax burdens but because it will be an example to stimulate thrift and economy in private life.
Let us call to all the people for thrift and economy, for denial and sacrifice if need be, for a nationwide drive against extravagance and luxury, to a recommittal to simplicity of living, to that prudent and normal plan of life which is the health of the republic. There hasn't been a recovery from the waste and abnormalities of war since the story of mankind was first written, except through work and saving, through industry and denial, while needless spending and heedless extravagance have marked every decay in the history of nations.

We must face the grim necessity, with full knowledge that the task is to be solved, and we must proceed with a full realization that no statute enacted by man can repeal the inexorable laws of nature. Our most dangerous tendency is to expect too much of government, and at the same time do for it too little. We contemplate the immediate task of putting our public household in order. We need a rigid and yet sane economy, combined with fiscal justice, and it must be attended by individual prudence and thrift, which are so essential to this trying hour and reassuring for the future.…

The economic mechanism is intricate and its parts interdependent, and has suffered the shocks and jars incident to abnormal demands, credit inflations, and price upheavals. The normal balances have been impaired, the channels of distribution have been clogged, the relations of labor and management have been strained. We must seek the readjustment with care and courage.… All the penalties will not be light, nor evenly distributed. There is no way of making them so. There is no instant step from disorder to order. We must face a condition of grim reality, charge off our losses and start afresh. It is the oldest lesson of civilization. I would like government to do all it can to mitigate; then, in understanding, in mutuality of interest, in concern for the common good, our tasks will be solved. No altered system will work a miracle. Any wild experiment will only add to the confusion. Our best assurance lies in efficient administration of our proven system."

The Bottom Line

Hear Hear President Harding!

As you can see above, the problems we face today are no different than before.  The answer is simple: Cut Spending!  The problem we face today is our government is much more corrupted by money and lobbyists.

Interestingly enough, the Fed back then actually stayed on the sidelines during this crisis. 

What's also interesting is the legacy of President Harding:

He is regarded as being a terrible president.  Perhaps the ivory towers had to paint a false portrait of a guy who wasn't bought and paid for by the financiers of his generation.

Let's hope we find another President Harding soon before the oligarchs destroy this country.