Economic Reports Indicate U.S.Economy Heading Down

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Default notices on U.S. home mortgages rose 33% in July. Retail sales and food services rose only 0.0% -- adjusted for inflation they were negative. The CPI inflation measure for August came in at 0.4%, almost as high as it was in July.  Weekly jobless claims rose again this week, coming in at 428,000.  All are pointing to an economy in trouble.

The Great Recession began in the housing market after subprime loans started to default in large numbers in 2007. The U.S. economy will continue to have difficulties until all the excesses are ringed out of house prices. Government policy has instead been geared toward stabilizing the market with temporary fixes. The Federal Reserve instituted a number of programs to funnel money into the mortgage markets to protect the banks that had too much exposure to real estate loans and the Obama administration has created programs like HAMP (Home Affordable Mortgage Program) to lower the foreclosure rate. Banks themselves have avoided or delayed foreclosures as long as possible because they don't want the properties on their books. All the government's efforts have certainly slowed down the rate of foreclosures and that may ultimately be all that they accomplish. A 33% increase of foreclosure notices in July indicates a new wave of foreclosures is likely next year.

Meanwhile, U.S. retail sales are declining if you take inflation into account. Retail sales increased strongly with rising home prices in the first years of the 2000s, but after the housing market turned south they have yet to recover. They have been held up by trillion dollar plus annual federal budget deficits, Federal Reserve money printing, and government stimulus programs including the 'Cash for Clunkers' gift to the auto industry. Despite all of these efforts, retail sales and food services were up 0.0% in July (the same 0.0% for jobs created in August). The mainstream media reported 0.1%, but this is only the retail sales component of the report. The report is not adjusted for inflation, so even if retail sales rose 10% a year, but inflation was also 10%, there would be no actual growth (although that is not the story you would get from mainstream news sources).

Retail sales are crucial for the U.S. economy because they make up approximately 70% of GDP. If they don't grow in real terms (after being adjusted for inflation), it is difficult for the economy to grow. To get a quick read on how the retail sales numbers are being impacted by rising prices all that is necessary is to look at the gasoline sales subcomponent. There is no reason to think Americans are using a lot more gasoline from year to year, if anything less is being used. Yet, year over year gasoline sales are up 20.8%. This is caused by inflation. Retail sales and food services overall were up 7.2% year over year. Adjusted for a realistic inflation rate, this number would be somewhat negative. 

That is not to say that the government is reporting an inflation rate that high. The just released CPI for August was 0.4% or 4.8% on an annualized basis. It was 0.5% in July or 6.0% on an annualized basis. Alternative inflation measures from ShadowStats.com indicate actual U.S. inflation is several percentage points higher than the official numbers indicate. ShadowStats.com calculates its inflation numbers the same way the U.S. government did in the 1970s. Since there have been many changes in how U.S. inflation is determined since then, it is not meaningful to compare current numbers to the past ones since doing so is like comparing apples to oranges. The ShadowStats numbers indicate that inflation is much higher now or if you don’t accept that, then you are left with the absurd conclusion that high inflation didn’t exist in the 1970s (you will find that this is the case if you use current methods to recalculate the 1970s inflation numbers).

The other major drag on the U.S. economy -- lack of jobs -- also seems to be getting worse. Weekly claims rose again this week to 428,000. Over 400,000 is considered a recessionary level. With the exception of a few weeks, these have been continually over 400,000 for almost three years now, indicating an ongoing recession (despite all the claims to the contrary of a recovery). The trend is actually worse than it appears however. These numbers should strongly regress toward the mean (move back to the long-term average), but haven't as of yet. As a recession goes on and on eventually everyone that is going to be laid off eventually has been and that should cause this number to decline for statistical reasons even if the economy isn't improving. That it has managed to stay at such high levels for almost three years is truly amazing.

The overall picture provided by U.S. economic reports indicates a flat or declining economy with rising inflation. Little progress seems to have been made in the last three years. The new credit crisis arising in Europe is only going to make matters worse. The U.S. economy was merely weak before Lehman Brothers defaulted, but it fell off a cliff after that.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Foreclosure-Gate Scandal Widens

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


After the Obama administration has failed to take action in the foreclosure crisis, up to forty state's attorney generals are now planning to launch a joint investigation into a massive number of robo-perjuries committed by big U.S. banks. So far, partially government owned GMAC, J.P. Morgan Chase, Bank of America, and Litton Loan Servicing, a division of Goldman Sachs, have been implicated in 150 pre-trial depositions in a Florida court case. In these depositions, bank employees admitted to having provided sworn court testimony about documents they didn't read and wouldn't have understood even if they had read them.

The Florida case involves 3,000 homeowners facing foreclosure. The "foreclosure experts" who signed notarized court documents that were key elements of perhaps hundreds of thousands of foreclosures had formerly been hair stylists, factory workers, and Walmart floor workers. They were provided with no formal training. It seems that many of these "foreclosure experts" knew little about mortgages. Some of them couldn't even define the most basic terms related to their job. One exasperated robo-signer stated, "I don't know the ins and outs of the loan, I just sign documents". The signing being discussed involved notarized documents subject to the perjury statutes and something that most courts in the United States would blindly accept because it was provided by a major financial company. Apparently, some institutions don't feel they need to follow the law and the courts let them get away with it.

There is more than enough reasons to think that the same corrupt practices are taking place in consumer credit card cases throughout the United States.

Up to now, the Obama administration has opposed a national halt to foreclosures even though the epicenter of the scandal seems to be partially government owned GMAC. Federal officials claim that a moratorium would hurt the housing market and using incredibly twisted logic have stated that it would distract lenders from 'helping' borrowers that face foreclosure. The program they are alluding to, HAMP (Home Affordable Mortgage Program), is generally acknowledged to have been a significant failure. It is beyond amazing that something which could turn out to be the biggest organized fraud in the history of the United States doesn't seem to bother Obama and his people. Apparently, the federal government is one of those institutions that doesn't think that it needs to pay attention to the law either.

Other than the obvious political implications, the recent revelations could mean a lot of lawsuits are launched at every level of the home loan process. The holders of bonds consisting of securitized home loans could potentially be at risk with the value of these loans plummeting once again as happened during the Credit Crisis. It will probably be much harder to do another bailout this time around however.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

New Foreclosure Crisis Has Much Broader Implications

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


According to international economist Hernando De Soto, one of the key differences between an undeveloped economy and a developed one is clarity of ownership of real estate. The recently emerging foreclosure crisis in the United States indicates a movement toward the the third world model.

There is still a large overhang of U.S. properties with severe mortgage delinquencies and this problem is likely to continue for several more years. As early as three years ago however, problems with implementing the foreclosure process became evident. During the housing bubble, banks became sloppy and didn't properly transfer ownership papers when loans were securitized into bonds. The current owners of those bonds frequently can't produce the appropriate documents in foreclosures cases in the 23 states that require court action for a foreclosure. This led to the 'show me the note' movement after a federal judge ruled in 2007 that Deutsche Bank lacked standing in 14 foreclosure cases because it could not produce the relevant documents. A number of similar judicial rulings followed.

The banks have gotten around this problem by producing notarized affidavits from 'expert' witnesses who claim they have thoroughly reviewed a packet of documents related to an individual foreclosure and that they are valid and complete. One such 'expert' was Jeffrey Stephan, who has admitted under oath to having signed off on the documents for 10,000 foreclosure cases per month for the last five years. Mr. Stephan not only did this for GMAC (its parent Ally Financial is 56% owned by the U.S. government), but also for J.P. Morgan Chase and numerous other banks. This process is now being called robo-signing. It should be referred to as robo-perjury. While I am not a lawyer, it would seem to me that a number of other possible crimes might also be involved here as well, such as racketeering and criminal conspiracy Whatever criminal activity took place, a majority government owned enterprise participated in it. 

Readers should ask themselves if there is any reason to think that the big banks are acting any differently in their other consumer credit cases, such as defaults on credit cards.

The revelations from GMAC loan officer Stephan have caused a foreclosure moratorium to be put into effect by a number of lenders. The lenders were apparently shocked to find out that one person couldn't actually read and thoroughly review 10,000 legally dense document packets per month. Apparently none of the 'brilliant' members of the U.S. judiciary caught on either. Yes, it would certainly have taken a legal genius of Clarence Darrow's caliber to figure out that something that was impossible just couldn't happen. GMAC was the first to stop foreclosures in the 23 judicial states (those that require court cases for foreclosure). J.P. Morgan Chase followed. On October 8th, Bank of America suspended foreclosure activity in all 50 states.

Interestingly, the current administration is opposed to a foreclosure freeze. According to the Center for Responsive Politics, employees of J.P. Morgan Chase, Citigroup and Goldman Sachs were three of the largest sources of funds for Obama's 2008 presidential bid. Only a cynic would think that this would have something to do with his administration's pro-bank view in the foreclosure crisis. Some might even claim that it looks like everything is being done to further the interests of a economic and political elite, just as happens in a corrupt third world country. If this were true, the banks won't be punished for flagrantly disregarding the rule of law, since it is only the little people that need to worry about such niceties.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

More Evidence for a Double Dip Recession

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The U.S. economy continues to look weaker and serious problems with the financial system are still lurking in Europe. EU countries are trying to outdo each other to see who can increase taxes and cut spending the most. Copper, known as the commodity with a PhD in economics, is in a confirmed sell off.

U.S. Existing Homes Sales were released this morning and they came in well below expectations. This is only one of a number of reports lately where analysts have proven to be much too bullish. Despite the federal government tax credit that was juicing up home sales, they still managed to drop 2.2% (the credit expired on April 30th, but buyers have until June 30th to close and the sales figures are based on closings). The annual sales rate in May was 5.66 million units, compared to over 7 million in 2005. Inventories of homes for sale managed to drop just below 4 million last month. In 2005, they were under 3 million and the year before barely over 2 million. So a lot less homes are being sold now and there are a lot more homes available for sale. A number of sources are claiming that both HUD and the big banks are holding back on foreclosures to prevent the inventory of unsold homes from becoming even worse.

In a separate report, more people have dropped out of the Obama administrations HAMP (Home Affordable Mortgage Program) that have stayed in it. At best, this program is delaying foreclosures and it appears unlikely that it will ultimately prevent very many - all at a huge cost to the American taxpayer of course.

Meanwhile in Europe, the future stall engine for the world economy, the UK announced its plans to eliminate its budget deficit in five years. Higher taxes and big spending cuts are the approach it will be taking. Capital gains taxes will be raised from 18% to 28% (investing capital will flow to countries with lower rates) and the VAT will go up from 17.5% to 20%. Similar moves are taking place throughout the EU.

There seems to be no realization on the other side of the pond that higher taxes are a negative for economic growth. The proposed spending cuts will also have the same impact. Significantly lower economic growth and lower tax receipts are not being projected for the future however by the Europeans. Obviously they are going to be as surprised as they were by the euro crisis. Problems in the region's financial system have not gone away as is.  Fitch today slashed its view on BNP Paribas, the largest bank in the eurozone.

The augurs of a renewed recession can also be found in the ECRI weekly leading indicators, which indicated a growth rate of -5.7% last week (this number shouldn't be interpreted literally) and by looking at the price of copper. It is amusing to see the spokesperson for the ECRI trying to explain away the negative implications of the ECRI's leading indicators after the company has spent decades building up their credibility. It's enough to make one wonder if the company is changing its emphasis to providing economic cheerleading instead of an accurate view of the U.S. economy?

The price behavior of copper is confirming the ECRI data. Copper is more sensitive to economic activity than any other commodity. If you look at a chart of its ETF JJC, you will notice that the 50-day moving average crossed the 200-day on Monday producing a classic technical sell signal. Over time, copper has proven itself to be a lot smarter than the politicians that run the world's economies.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Economy's House of Cards

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Foreclosure stats for February indicate that 308,000 U.S. households received some type of foreclosure related notice during the month. Of all U.S. residential mortgage holders, 15% have either missed some payments or are in foreclosure. Mainstream news outlets reported these depression level numbers as 'good news' because the rate of foreclosure activity was only 6% higher in February than the huge level that had been reached a year earlier.

Housing is at the epicenter of the economy's problems and the situation has consistently gotten worse since the market peak in September 2005. The decline has continued even though there are numerous federal and state programs aimed at shoring up the housing market. Government policy seems to have been highly effective at creating the housing bubble, but impotent in cleaning up the mess. President Obama stated in a speech in Mesa, Arizona in February 2009 that his administration's housing programs would help three to four million homeowners avoid foreclosure through loan modification programs.  More than a year after that speech, the latest figures indicate that 116,300 home mortgages have been modified through federal programs. At that rate, it will take as long as 34.4 years to fulfill Obama's promise.

The abysmal failure of its loan modification efforts seems to have led the administration into new directions. As part of last November's "Home Affordable Modification Program", the federal government will now pay to get people out of their homes by encouraging short sales. A short sale in real estate is when a bank agrees to accept less than the outstanding mortgage owed as payment for a house. The government's plan pays the owner $1500 and the bank $1000 to agree. Real estate agents get much more however. They have to appraise the house (a major arena for corrupt practices during the housing bubble) and get a commission for arranging the sale. Neither homeowners, nor banks are likely to be pleased with this gift to the real estate industry - an industry known for its generous political contributions.

It was noted in news reports by early 2006 that U.S. foreclosure rates were starting to climb and a possible crisis was imminent. After four years, government programs haven't 'fixed' the problem, nor are they likely to in the foreseeable future. Mainstream news outlets are now reporting that U.S. foreclosures this February experienced their lowest rate of increase in four years. Foreclosures are continuing to go up, but at a slower rate. The numbers are not getting better. A casual reader of the news might miss that important point.

The ultimate nightmare ending of a housing collapse in a bad economy can be seen in Detroit today. The mayor of Detroit has just suggested bulldozing up to a quarter of the city. In some areas only one or two buildings are occupied per block. Faced with a $300 million budget shortfall, the cost of maintaining city services for these areas is prohibitive. Youngstown, Ohio and Flint, Michigan already have programs to demolish empty neighborhoods. Kansas City just voted to close down half of its schools and along with a number of Midwestern industrial cities might be implementing such programs in the future. Federal assistance will be needed to help Detroit implement its program. Perhaps this new housing aid program will be called the "Home Bulldozing Modification Program".

Disclosure: None

NEXT:

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Dollar, the Fed, Housing and the Economy

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

The U.S. dollar was in free-fall last night in Asia. The trade-weighted basket fell as low as 75.21 (another new yearly low), well below the significant support level of 76.00 and approaching the next weak support level of 74.00. Some form of intervention took place after European markets opened and the dollar was saved from oblivion (at least for now) and shot straight up. Gold, and silver to an even greater extent, declined sharply on the dollar reversal. The pattern of gold and silver being strong in Asian trading and weakest in the U.S., which has been going on for several days now, continues. Oil remains strong this morning because unlike gold and silver it is difficult to manipulate on a daily basis.

The high price of oil has inflationary implications that will soon be manifested. Expect CPI figures to start jumping up significantly starting at the end of the year. Oil fell as low as $33 last December and it is going to be way above that level this year. Energy prices are the most important swing factor in the inflation numbers. Long-term bond prices are likely to rise on the news. The Fed will still keep short-term rates at zero however and Ben Bernanke will have an increasingly pained look on his face. The Fed released the minutes of its September meeting yesterday and little noticed was a statement that it was reserving the option of continuing any of its current programs. The most important one of those for bond investors is the money printing being used to buy U.S. treasuries. This is supposed to expire on October 31st. It's not likely to happen, at least not for long. The Fed has concentrated these purchases in the 7 to 10 year range of the yield curve, which keeps interest rates for mortgages and other loans down. Foreign governments have moved their buying to even shorter durations. The long end of the curve between 20 and 30 years is being left unsupported. Double short long bond ETF TBT should benefit from this situation.

How can we be so sure that the Fed's money printing extravaganza will continue? Housing, the ground zero of the Credit Crisis, remains troubled for one. Almost one million U.S. properties were involved at some stage of the foreclosure process in the third quarter (the summer). This number has been reached even though there are a number of federal programs to prevent foreclosure (and there have been a number of state programs that have put a moratorium on foreclosures). Anecdotal reports indicate that there are mortgages that haven't been paid for 18 months or more that still haven't entered even the first stage of foreclosure, let alone repossession. Banks don't want these properties on their books and the federal programs (plus a lot of bailout money) lets the banks avoid taking them back. A new wave of mortgage resets to higher interest rates is also just beginning and will last through next year. It will only add to the problem.

The second motivation for more Fed money printing will be the consumer economy. Constant stimulus is needed to keep it going. Retail sales figures were down 1.5% in September and revised down to 2.2% from 2.7% in August. The Cash for Clunkers program caused the August spike, but once it was over retail sales went negative again. Retail sales figures are not adjusted for inflation and this accounts for much of any 'growth' outside of stimulus programs that is being seen in this area. While almost every mainstream U.S. economists thinks the recession is over, they will all admit that unemployment is likely to get worse for at least another 6 months if not a year or longer. Consumer credit is also dropping sharply. So how is the consumer going to spend? More stimulus from the government will be the answer. Don't expect the printing press to be mothballed any time in the near future.

NEXT: Bank Earnings Reveal True State of Economy

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

A Recovery Reminscent of 1990s Japan

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Economists are predicting that the U.S. recession is over or will be soon. A Wall Street Journal survey found that 57% of economists think the recession is already over. Another 23% think it will end this month or next. Their predictions for GDP growth in the third quarter are currently around 3% and range as high as 6%. Nevertheless economists are not predicting that the employment picture will be improving anytime soon or that incomes will rise. They make it clear that the recovery means "things are less bad than they were previously" and "this is definitely a recovery that only a statistician can love". Statistics are indeed one of the few things that will be manufactured while the blossoming 'recovery' takes place.

The big areas of the economy are still not doing well, even in the statistics. Retail sales surprised economists yesterday when they fell 0.1% in July. Economists had predicted they would rise 0.7%. The key to the 'improvement' was the government's cash for clunkers program which is revving up the auto industry (you should ask yourself, what is going to happen to the auto industry when this program stops?). Indeed it did, but not enough to turn retail sales positive. Excluding autos, retail sales were down 0.6%. General merchandise sales were down 0.8% and department store sales down 1.6%. Yeah, consumers are spending again all right. Consumer spending is 70% of the U.S. economy.

CPI was out this morning and prices were supposedly down 2.1% year over year. Responsible for most, if not all of the drop, were energy prices which were down more than 28%. Oil peaked last July at $147 a barrel, then dropped sharply until hitting $33 a barrel in December. Going forward the current oil price compared to last years is going to turn from a huge drop into possibly a big gain. Expect CPI figures to start rising in the fall as a result.

The industrial production figures are out later this morning and after dropping 17 months in a row are expected to be up. While this is hardly surprising, expect the press to claim it indicates recovery. This is like saying a stock that dropped 17 days in a row and then goes up on the 18th day is rallying.

New numbers were released this morning on the real estate market. At the end of the second quarter, 32.2% of all U.S. mortgaged properties were under water. This unbelievable huge number was actually down slightly from the 32.5% at the end of the first quarter. The real estate industry declared that this was "great news". While all of these mortgages are potential future foreclosures, it is currently predicted that the U.S. foreclosure rate will peak at only 4%. If the U.S. government pays off the mortgages for the other 28%, and I wouldn't put it past them, this could happen.

Essentially any good GDP numbers will be the result of government injections into the economy. This is like a company that borrows a million dollars including the million dollars as part of its earnings. Government boosting of GDP on borrowed or printed money should not be included in the figures (don't assume that reform is ever going to be made). In these circumstances, when the programs that boosted the economy end, GDP falls right back down. This is exactly what happened in Japan in the 1990s and early 2000s. The economy stayed in the doldrums for two decades.

NEXT: Japan Climbs Out of Recession ... Again

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Fed's Actions Speak Louder Than Words

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The old adage that 'actions speak louder than words' is something everyone learns as a young child because it is one of the most important things to know. In its press release from its meeting yesterday, the Fed's words were very upbeat and said the recession appears to be ending. However, they then followed this up with they would be keeping interest rates at zero for "an extended period." Zero interest rates are an extreme policy action only justified in the most dire economic circumstances and bear a high risk of causing massive inflation. So if the economy is doing much better why do they need to keep interest rates this low?

The stock market of course rallied on the Fed's positive outlook on the economy, even though the Fed's outlook has been completely wrong for the last two years. The Fed didn't see the Credit Crisis coming even one month before it blew up. Even in the spring of 2008, they were releasing statements that a recession could be prevented, even though a recession had already started in December 2007. This time the Fed has said that "economic activity is leveling out" and conditions in financial markets "have improved further." And what are the signs of the improving economy? They are increased factory activity, homes sales picking up and companies firing less workers. It should be immediately obvious that less firings are not a sign of a growing economy. As for factory activity, it is not adjusted for inflation, so rising prices can make it look better. If you check you will see that petroleum products are at the top of the list and not because there was a huge increase in their use, but because prices went up. Nevertheless, once again the Fed assured us in their statement that there will be no inflation.

As for the improving real estate market, in the last two days we have covered why that's not likely for years to come. News out today had foreclosures up 7% from June to July and 32% year over year. In the month of July, 360,000 U.S. households received a foreclosure notice raising the total for 2009 to 2.3 million. July was the third month out of the last five when foreclosures hit a new record high (that certainly looks like a recovering housing market doesn't it?). The huge rise in foreclosures is taking place even though there are a number of federal and state programs to prevent foreclosures including Obama's housing rescue plan (about as effective as the federal government's post hurricane Katrina rescue plan in New Orleans). Several states have even put moratoriums on foreclosures to temporarily stop them altogether. Foreclosures are still rising at a break neck clip however. Yet the Fed and the media are telling us that real estate is recovering.

The Fed also said it would gradually slow the pace of its program to buy $300 billion worth of Treasury securities and claims it will shut down this program at the end of October, a month later than previously scheduled. Mainstream media reports state that this program is aimed at lowering rates on mortgages and other consumer debt, but admit that some people think that it looks like the Fed is printing money to pay for the exploding federal budget deficit. Who are these people who insist on dealing with reality? Next they'll be claiming that this will be causing massive inflation like it has every other time in history when it's been done. Imagine believing history repeats itself instead of believing Ben Bernanke, who has apparently been wrong in every prediction he has ever made. Fortunately, we have the mainstream media to tell us that words speak louder than actions.

NEXT: A Recovery Reminscent of 1990s Japan

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

More on the Real Estate 'Recovery'

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The bubble in real estate caused the Credit Crisis and cleaning up the mess in real estate is the key to getting the financial system and ultimately the economy back to normal functioning. Articles have appeared in the mainstream press stating that residential real estate has bottomed and prices are headed up. You would have to ignore the overwhelming amount of bad news coming out of the real estate sector in order to believe this.

The Mortgage Banker's Association recent numbers for mortgage applications for home purchases are falling. The four-week moving average is down 0.7%. So demand is down during the heavy buying summer season. So prices are supposedly going up, even though demand is falling. Well that could happen if supply was falling even faster as is the case with oil. Don't hold your breadth though. The worse form of real estate supply is still rising rapidly. Mortgage defaults are expected to come in at 3.85 million this year compared to 2.7 million last year according to Moody's.com.

It is estimated that 14 million (out of a total of 52 million) mortgage holders in the U.S. had negative equity in their homes by the end of the first quarter of this year. Moody's predicts that that number will rise to 17.5 million by the first quarter of 2010. In a recent report, Deutsche bank estimates that nearly half of U.S. mortgage holders will have negative equity in their homes by the first quarter of 2011. By the first quarter of this year, 50% of subprime borrowers were underwater as were 77% of Option-ARM mortgage. Mortgages on homes with negative equity are where defaults and foreclosures come from. There seems to be a potentially unlimited supply of these in the next few years.

Home builder Toll Brothers earnings report today illustrates quite clearly how the mainstream media is handling real estate coverage. The report was described as upbeat. Toll said that signed contracts were up 44% and only 9% of buyers backed out. While the percentages look good, the total number of homes sold were only 792. Toll also stated that demand was so strong that it scaled back on incentives. Revenue was down 44% however because of much lower prices charged for their houses. Slashing prices at that level seems like one giant incentive to me. The market is also so 'good' that Toll is writing down its land and house inventory by $90 to $160 million. The stock of course went up on the upbeat news of collapsing revenue and massive write downs. You should assume that the overall U.S. real estate market is just as 'upbeat' as the Toll Brothers earnings report.

NEXT: Fed's Actions Speak Louder Than Words

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Latest Washington Free Lunches

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The U.S. stock market rally continued yesterday, with metals, steels and other infrastructure plays frequently having double digit rallies from usually extreme oversold conditions. What set off the rally was president-elect Obama's announcement over the weekend of the largest infrastructure-spending package since the 1950s to stimulate the U.S economy. The plan to upgrade America's deteriorating bridges and roads, increase energy efficiency in buildings, computerize health records, and increase use of broadband is certainly laudable and economically constructive unlike the visionless money-wasting programs of the historically incompetent Bush administration. While this lunch may be a lot tastier than what has been dished out in the last 8 years, the bill is still going to have to be paid one way or the other however.

An examination of the federal government's record so far in handling the housing crisis (which I would like to remind you that it helped to create and encourage) indicates that government action in that arena has so far been ineffective. Before the credit crisis U.S. foreclosures were running around a million a year. It looks like they will be about 2.25 million this year even after several government programs were instituted to limit the problem. A study just released by the Comptroller of the Currency indicates that over half of borrowers risk losing their homes again only six months after their loans have been renegotiated to lower monthly payments. Even worse, the government through the FHA is once again encouraging lenders to provide these same type of 'bound to default no matter what' loans. A recent Business Week cover story, "Subprime Wolves are Back" reveals that the FHA is supporting 100% insured loans (the government picks up the tab when they go bad) through mortgage lenders with spotty and even criminal records.

Meanwhile the Auto bailout proceeds in Washington. The current figure being discussed is $15 billion, which should stave off bankruptcy for the big three until sometime in the Spring of 2009. After that of course, another bailout will be needed and probably another and even another as well. The idea of a Car Czar is catching on adding another bureaucratic layer to an industry that is drowning because of its own bureaucratic sludge. Expect the auto bailout figures to rise next year, just as the banking/broker bailouts will. Add these figures to the up to one trillion dollars in the Obama proposed infrastructure spending - or at least that's the initial figure (pick whatever multiple you like to come up with the actual one).

It is my belief that all of these government programs and the ones that follow will indeed save the economy and once again make it robust, at least for awhile. It is not possible to spend almost unlimited amounts of money without causing inflation. When the spending is coming from essentially printing the money being spent, you can add major currency devaluation and the possibility of hyperinflation. Yes, we will get out of the frying pan, but we will wind up in the fire.

NEXT: China's Trade Gap and the Global Economic Future

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The House of Cards Economy

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Housing continues to deteriorate. There are now 12 million homes in the U.S. with mortgages that exceed their value. This pool of houses which is particularly vulnerable to abandonment and foreclosure represents almost a quarter of all mortgaged residential properties . By the end of 2008, it is estimated that there will be a million bank owned properties for sale, which would represent a third of homes on the market. The situation is already much worse in trend leader California, where over 50% of existing home sales were foreclosed properties last month. Median prices there have dropped 34% from the high so far. The rest of the U.S. could follow California, although increased government efforts to prop up the housing market are trying to prevent further erosion.

Last quarter 766,000 U.S. home owners received at least one foreclosure notice. Only six states accounted for a majority of foreclosure activity - Arizona, California, Florida, Michigan, Nevada, and Ohio. The last four of these states are battlegrounds in the presidential election and Arizona would be too if McCain didn't represent it in the senate (nevertheless McCain's lead in the polls there is surprisingly small even though Arizona is one of the states most likely to support a Republican candidate for president). Foreclosures were worse in the beginning of the quarter and the rate even declined by 12% in September. While it looks like the number of foreclosure notices will be lower in the future, this won't be taking place because of improvements in the housing market.

The rate is being lowered by new laws have been enacted in a number of states to delay the repossession process and the FHA is attempting to renegotiate loan terms for a number of mortgage holders at risk. Foreclosure statistics are indeed very much affected by the ease of foreclosure which varies by state and should not be considered as an absolute indication of the strength of a state's housing market. New York for instance currently has a low foreclosure rate because it is necessary to go to court first and this means a foreclosure can take well over a year, longer if the judge doesn't wish to be cooperative. The FDIC is also trying to delay or prevent foreclosures. The first thing they did when they took over IndyMac was to stop all foreclosures and they are continuing to do so.

Delay does not mean preventing the inevitable however, it usually only means it only takes more time to get there. U.S. housing was in a bubble and prices became way extended on the upside. They are going to have to come down at least to the long-term mean - and we still have a long way to go to get there - before a sustainable recovery in real estate is possible. This will be an important precondition to a healthy economy as well. A look at the past suggests this linkage. Housing prices fell approximately 50% nationally in the U.S. between 1930 and 1940. The economy wasn't in such great shape then either.

NEXT: Black Friday Panic Grips World Markets

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Pinnochio's Reflection in Washington's Crystal Ball

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our video related to this posting:

Dire warnings of a bleak economic future for the American economy have been prognosticated by Fed Chair Ben Bernanke, Treasury Secretary Hank Paulson and President Bush in the last few days - unless of course their proposed emergency Wall Street bailout plan is passed immediately by the U.S. congress. These statements represent a complete turnaround of what the three of them have been saying during the last year and as recently as a couple of weeks ago. This immediately raises the question of whether they were lying then or are they lying now? To be fair, it is possible that Bernanke, Paulson and Bush have not purposefully been lying, but they just don't have the slightest idea of what's going on. Regardless of whether their behavior can be explained by dishonesty or incompetence, they have assured us that if we just follow their lead now, everything will be OK.

The consistent message from the economic triumvirate this week has been that a recession will be taking place in the future along with increased unemployment, home foreclosures, and bank failures unless congress gives $700 billion to the big Wall Street banks. In his testimony on Tuesday, Ben Bernanke bluntly warned of this scenario. He followed up with, "the financial markets are in quite fragile condition and I think absent a plan they will get worse". In his testimony, Paulson suggested that the fallout from the credit crisis would hit almost everyone in the pocketbook unless forceful action was taken.

President Bush in his speech on Wednesday night echoed Bernanke and Paulson's concerns and while requesting the biggest corporate bailout in U.S history made the following obviously insincere statements:

1. "I'm a strong believer in free enterprise ..."
2. "I believe companies that make bad decisions should be allowed to go out of business."
3. "This rescue effort is not aimed at preserving any individual, company or industry."

Like Bernanke, Bush was also worried about the stock market going down and specifically stated that without the bailout, "the stock market could drop even more". But he assured the nation there was no need to worry if his recommended actions were taken because "the plan is big enough to solve a serious problem" and "we expect much, if not all, of the tax dollars we invest will be repaid". If you believe that, I have a bridge in Brooklyn that I would like to sell you.

The reality is that $700 billion is not going to be able to deal with an estimated $13 trillion in toxic debt and that only the most worthless of this debt will be transferred to the government in this bailout. There is no chance whatsoever for the taxpayers getting their money back. Furthermore, the U.S. is already in a recession and the government has been jiggling the figures to hide it and that recession is going to get worse along with unemployment, home foreclosures and bank failures regardless of what bailout package is passed by congress. And you may assume that Bernanke, Paulson, and Bush know perfectly well that this is what's going to happen.

NEXT: This Weeks Largest Bank Failure in U.S. History

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Run on the Bank 2008 - Indymac

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our video for this posting can be found at: http://www.youtube.com/watch?v=NqBhR1kkWHY.

Indymac was a large savings and loan that had split off from Countrywide, the largest mortgage provider in the United States, in 1997. Both were heavily involved in granting mortgages in the real estate bubble markets of the southwestern United States. Countrywide itself experienced a run on the bank in August 2007 in the earliest phase of the subprime crisis. Only an emergency cash infusion from Bank America, arranged by the Federal Reserve, kept it afloat. This was only a stopgap measure however and Bank America agreed to take over Countrywide in early 2008. This deal was also apparently secretly arranged by the Fed, although Bank America vehemently denied it despite the fact that it seemed to have the unusual term that Bank America wasn't responsible for Countrywide's debts (so who was?).

Although Indymac may not have been too big to fail like Countrywide, it was quite possible that the Fed would have arranged a bailout for it too, if it had had enough warning. Even though the chairman of the Senate banking committee had written a letter in late June to Indymac about its possible insolvency and the information in this letter inadvertently wound up in public hands, the FDIC seemed to be unaware of the precarious state of the bank. The FDIC is in charge of monitoring the health of the U.S. banking system and keeps a list of troubled banks. Indymac was not on that list at the time of its disastrous failure. This forced the FDIC to back peddle and claim that Indymac had really been on the list, but had only been put on it shortly 'before' its failure and that is why no one else seems to have known about it. This after the fact claim was inevitable since missing a bank failure that required the second biggest bailout in U.S. history would indicate that the FDIC hadn't the slightest idea of what was going on in the American banking system. .

The death blow to Indymac was a run on the bank which included long lines of suffering elderly and angry account holders who got so out of control that the police had to be called in. The similarities to bank runs in 1930s Depression U.S. were quite obvious. Banks failed then just as Indymac did in 2008 because they were insolvent. Contrary to popular belief, a run does not mean a bank will go under. U.S. banking history has numerous cases of banks surviving runs because their finances were in good shape. Insolvency is what destroys a bank, not the visible run that frequently gets the blame. Indymac management tried to take advantage of this mistaken belief to deflect blame for the banks failure by citing the letter from the chairman of the senate banking committee as the cause. Certainly they weren't going to say it was management incompetence that granted huge numbers of mortgages to people who were unlikely to ever pay them back that destroyed Indymac's finances..

One of the first things the FDIC did when it took over Indymac was stop foreclosures on its bad housing loans. Putting more of them on the books would make Indymac's finances look even worse. How this action was going to be paid for wasn't clear. It was already estimated that the Indymac failure would use up between 10% and 18% of the FDIC's $53 billion deposit insurance fund. One bigger bank failure, such as Wachovia or Washington Mutual, or a number of smaller ones, would wipe this fund out completely. Considering that financial rot permeated the U.S. banking system, nothing was more inevitable than the FDIC itself would require a future government bailout because of its own insolvency.

NEXT: Exposing Fannie Mae and Freddie Mac - Origins

Daryl Montgomery

Organizer, New York Investing meetup

http://investing.meetup.com/21

Subprime Freezes Over

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

In December of 2007, the Bush administration proposed freezing the rates on adjustable subprime mortgages for 5 years. This program was 'voluntary'. Indeed the U.S. government had no legal authority to void valid contractual commercial transactions between parties, one of the most fundamental underpinnings of our economy. Nevertheless, presidential candidates Hillary Clinton and John Edwards both immediately criticized the proposal as not doing enough and advocated an even longer freeze on rates.

While the alleged purpose of this program was to help the 'struggling homeowner', an examination of the details indicated otherwise. Homeowners with fixed-rate mortgages got no relief. Homeowners with non-subprime variable-rate mortgages got no relief. Why were just sub-prime adjustable-rate mortgage holders singled out? The answer is simple, these mortgages were defaulting and would be defaulting at the highest rates. Many of these had been granted at the end of the mortgage boom and were for a substantial percentage of the house price at the time of sale (up to and even exceeding 100%). Mortgages for 100% of equity, especially when housing prices are falling, are the last thing banks want to take back and have to write off on their books. These are guaranteed losses for the bank since the foreclosed house would likely sell for much less than the amount of the mortgage. Any bank that had a large number of this type of defaulted mortgages could become technically insolvent fairly quickly. Mortgage bond holders, many of them big banks and brokers, who had bought bonds containing these loans would also lose out. It is a much better deal for banks to foreclose on mortgages that have been substantially paid down, since they make a big profit on these. These homeowners were the most deserving and required the least assistance, so they should have been the centerpiece of any mortgage relief program - but they weren't. Helping them would mean hurting bank profits.

The proposed freezing of sub-prime mortgage rates also represented the first attempt at price controls on the part of the government. Price controls are an almost universal response to inflation by the authorities and prices for necessities are the most likely to be controlled. While the rise in mortgage payments was preplanned and the exact amounts were known in advance (rarely the case with most inflation,) this was no different from any other attempts to dampen rising prices by freezing them. it was not surprising that this took place first in housing either since it is one of the most basic of necessities. Unfortunately, price controls always have negative consequences. In the case of the mortgage freeze, anyone offering loans in the future would have to demand higher rates to compensate for the possibility that rates might be frozen. Or lenders seeing higher risk in the market would simply not offer loans at all. In both these scenarios future mortgage rates will be higher than they would have been. The government could then solve this problem that it created by offering subsidies (a common second response to increased prices for necessities), most likely through Fannie Mae and Freddie Mac. These government supported enterprises would then wind up dominating the mortgage market so much that it would effectively be completely socialized. By the end of 2007, it looked like this was already taking place.

NEXT: The Fed's (long) Term Auction Facility

Daryl Montgomery
Organizer, New York Investing meetup

For more about us, please see our web site: http://investing.meetup.com/21

Subprime Housing Leads to Subprime Financial Institutions

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

The housing reports released in October 2007 which indicated the state of the market in September were even more dismal than those of the prior month. Nationally, foreclosures had doubled year over year and they had gone up as much as 500% to a 1000% in the worst hit bubble areas of the housing market. Existing Home Sales were down 23% nationally. Although also down substantially, New Home Sales were nevertheless reported as increasing (huh?).

The September 2007 New Home Sales report was a classic example of how the financial media frequently reports bad news as good and hopes people only read the headlines and not the fine print. The New Home Sales report originally indicated that there had been 795,000 houses sold in August. The report then indicated 770,000 houses sold in September. This drop of 25,000 was heralded by the media as a increase of 4.8%. This happened because the sales figures for August were revised downward to 735,000 (by almost 8%, an incredible error for a statistical report) and the September figure was above this number, so this indicated that sales were going up! The first thought of any rational person should of course have been, 'if the numbers for August were actually much lower, why shouldn't the ones for September be much lower as well?' Even a casual look inside the September report lent substantial support that this was indeed the case. Sales in the West, probably the worst hit housing area in the U.S., were supposedly up 38% - a completely absurd number and an indication that the September numbers were being overstated just as the August numbers had been.

Despite the complete devastation in housing sales., median house prices were reported up 2.5%. The statistical tricks that led to this impossible outcome were discussed previously in this blog in the posting, "Housing Market Collapses, but the Statistics Hold Up".

House sales were falling off a cliff because mortgage money was disappearing. By October 2007, 183 mortgage lenders had already closed their doors since the previous December. One that didn't was Countrywide, the largest mortgage lender in the United States and therefore presumably too big to fail. What kept Countrywide afloat was a $2 billion capital infusion in August from Bank of America. Barron's reported that there were rumors that this bailout had been secretly arranged by the U.S. federal government. If so, it would only be the first of many bailouts that the Feds would have to arrange to prop up failing American financial institutions. Shortly thereafter, one of the major British mortgage lenders, Northern Rock, experienced a run on the bank - the first in England since the 19th century. Northern Rock had been known for it 125% mortgages and when word got out that it needed an emergency loan from the Bank of England, depositors queued up for blocks desperate to get their money out. While the Bank of England directly provided capital to keep Northern Rock going, this approach would prove to be no more successful than the more circumspect American one. Both Countrywide and Northern Rock would barely survive into 2008.

Next: What Banks and Enron Had Common

Daryl Montgomery
Organizer, New York Investing meetup

For more about us, please go to: http://investing.meetup.com/21

The New York Investing meetup predicts the subprime disaster in July 2007

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.


While Federal Reserve chairman Ben Bernanke was making repeated announcements that the subprime problem was contained and wouldn't have far reaching effects, the New York Investing meetup had other thoughts.

In his now famous June 5, 2007 speech to the International Monetary Conference, Bernanke stated, "... at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or financial system." The New York Investing meetup, which doesn't automatically accept any pronouncements from Washington or Wall Street, quickly came to
the opposite conclusion. Cyberspace was filling up with stories of rapidly rising foreclosures, dropping housing prices, faltering hedge funds, and problems in the debt market. In the July 11, 2007 meeting, the New York Investing meetup warned its membership that the subprime crisis was about to explode and would cause serious damage to the stock market. In less than two weeks, the accuracy of the New York Investing meetup's take on the subprime crises was vindicated. The stock market would fall until mid-August.

Daryl Montgomery

Next: The New York Investing meetup predicts a crash of bear market in August 2007

For more information about the New York Investing meetup, please go to:
http://investing.meetup.com/21