Inconsistencies of the Economic '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.

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What created the Credit Crisis and the current 20 month recession (the longest since World War II) was the collapse in price of all the worthless real estate paper the was issued during the bubble years. As this blog mentioned yesterday, this problem has recently gotten 'better' because the accounting rules that determine the value this paper were changed. While playing make-believe is appropriate for five year old children, it's not a good idea for running financial system and just leads to bigger disasters later on.

The support for the real estate 'recovery' is thin to say the least. U.S. house prices supposedly went up during the last three months. This occurred even though home loans are hard to get and U.S. wages and salaries were down 4.7% year over year in June. This was the largest drop since records began in 1960. Employment is also down. As was mentioned last Friday, the unemployment rate dropped by 0.1% because a large number of people left the labor force. No matter how you look at it fewer people have a job. So who are these people who are paying higher prices for houses and what banks are lending them the money? All in all is seems highly unlikely that house prices could actually be going up given such conditions. If not, this set of numbers wouldn't be the only ones that have been altered recently to make them look better.

The other inconsistency in the real estate is getting better is that this was a drag on the big banks and brokers earnings in the second quarter. Many of them were increasing loan loss provisions. Fannie Mae, whose business is purely real estate related, illustrates the current state of affairs quite clearly. Fannie Mae lost $14.8 billion in the second quarter. Provisions for credit losses were $18.8 billion. The company stated in its earnings "We are experiencing increases in delinquency and default rates for our entire guaranty book of business, including on loans with fewer risk layers."In other words, all types of loans are going down the tubes including the prime ones. Total non-performing loans increased to $171 billion in the second quarter. They were up from $149.9 billion in the first quarter of this year and that was up from $119.2 billion in the last quarter of 2008. Well, that certainly looks like a recovery pattern, doesn't it?

Fannie Mae has requested an additional $10.7 billion from the U.S. Treasury to keep afloat. That it can get by this quarter with only an additional $10.7 billion cash infusion from the government seems optimistic. The company is essentially a bottomless pit for bailout funds. Both Fannie Mae and Freddie Mac's criteria for non-performing loans were changed around the beginning of the Credit Crisis to make it more difficult for a loan to be considered non-performing. Even with this fantasy, things still are getting worse. Somehow reality always seems to always get in the way of the government's best plans.

NEXT: More on the Real Estate 'Recovery'

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.

More Collateral Damage from the Fed's First Helicopter Drop

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 impact of the Fed's September 18, 2007 rate cut was not limited to the panic sell off in the dollar and the incipient bubble in gold, silver, oil, and food commodities. The lower rates that were supposed to help the housing market didn't materialize. By the end of the month, mortgage rates were actually higher than they had been before the Fed's action. Instead of helping the beleaguered housing industry and homeowners , the Fed's rate cut was actually ineffective at best and did nothing to decrease costs for those struggling to deal with ballooning mortgage debt.
Of course, in reality it was the big banks and broker-dealers that were stuck with increasingly worthless securities backed by subprime loans that were the real target of the Fed's beneficence. It would prove to be too little too late however. By October, the first of a series of multi-billion dollar quarterly write offs would start - $5.5 billion for Merrill Lynch, $3.4 billion for UBS, $3.3 billion for Citibank, and $3.1 billion for Deutsche Bank. As bad as these write offs looked at the time, they were not nearly as bad as what was to come.

The Fed cuts also gave the Wall Street Pollyannas ammunition to game up the market, since Fed cuts were traditionally bullish for stocks. The financial media had wall to wall coverage of talking heads urging viewers to buy stocks now because they were at fantastic bargain prices (of course at a real bottom no one appearing in the media urges viewers to buy stocks). Any experienced trader looking at the market rally that ensued knew something was terribly wrong however. While the market had sold off in heavy volume in late July and the first half of August, it rallied on light volume and then hit new highs on even lighter volume. Trends on low volume are usually soon reversed and the September rally would prove to be no exception.

Next: The U.S. Government Goes from Lying with Statistics to Just Lying

Daryl Montgomery
Organizer, New York Investing meetup

For more about us, please see our web site: 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