 | | The Daily Reckoning | Monday, September 20, 2010 |
- The road to recovery: "only" $12 trillion left to go!
- Using the recent stock market pop to give your equities the big drop,
- Plus, Bill Bonner shares his thoughts on not buying stocks, looking busy and Voltaire's principle error...
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|  | | Foreclosure Kitchen Has More Food to Cook
| How the housing recovery affects household wealth recovery
| |  | | Eric Fry |
Reporting from Laguna Beach, California...
Last Friday, the Dow Jones Industrial Average tacked on 13 points, boosting its gains for the week to 145 points...and its gains for the last three weeks to more than 600 points.
This modest rebound is a welcome relief, but we Americans are going to need a lot more weeks like these - a LOT more - if we are to recover the trillions of dollars we lost during the crisis of 2008-9.
According to calculations from the Federal Reserve, household wealth tumbled a whopping $17 trillion during the crisis - or about 27%. Since the depths of the crisis, however, Americans have recovered about $5 trillion of household wealth. Only $12 trillion to go!
For perspective, $12 trillion is nearly equal to one year's US GDP. It's not easy recovering that much wealth...especially not when the recovery operation relies heavily upon the housing market. Residential real estate accounts for 32 percent of household net worth; stocks account for a much smaller percentage. So household wealth can't do a whole lot of recovering without a recovery in housing...and that's not happening yet.
To the contrary, lenders repossessed a record 95,000 homes in August and issued 339,000 notices of default or other foreclosure-related warning. More than 2.3 million homes have been repossessed by lenders since the recession began in December 2007, according to RealtyTrac, while more than one million American households are likely to lose their homes to foreclosure this year.
Despite these daunting - and tragic - numbers, the folks who sip from the glass-half-full (of dreams and delusions) point out that notices of foreclosures "dipped" last month compared to one year earlier. This dip, they say is promising because it signals a drop in future foreclosures.
The only problem with this perspective is that it is false. The "dip" in foreclosure filings was no dip at all. Although filings declined year-over-year, they jumped 4% from July to August. That month-over- month increase is much more timely and relevant than the year-over-year decrease. The month-over-month number is the one that tells us about the trends that are now unfolding in the housing market.
Furthermore, it is important to remember that notices of default are like a five-course meal. They arrive in stages. Very few lending institutions possess the balance sheet strength to choke down their bad loans all at once. So instead, most banks take a few nibbles from their heaping plate of bad loans, pause to digest the losses, then they nibble again.
"It appears that lenders are allowing delinquencies to go on longer before they issue notices of default," says RealtyTrac spokesman, Rick Sharga.
But these "delay and pray" tactics won't make the future delinquencies go away. To the contrary, the foreclosure "kitchen" has many more courses to prepare before arriving out of ingredients.
"An incredible 14% of the nearly 54 million first liens in the country are now either delinquent or in default" the Real Estate Channel's Keith Jurow, observes. "To come up with a total for the shadow inventory, let's first add the total number of loans in default to those delinquent 90 days or more since we know that these loans are headed for foreclosure or a short sale. That comes to 4.5 million properties. Based on the cure rate for loans delinquent at least 60 days, we will add 95% of those 60-day delinquencies. That is an additional 723,000 residences. For the same reason, we will add 70% of those delinquent for at least 30 days - 1.25 million properties.
"And, of course, let's not forget the REOs that have not yet been placed on MLS listings by the bank servicers," Jurow continues. "We'll be conservative and estimate them at 500,000.
"Adding all of these together, we come up with a total of roughly 6.97 million residences which are almost certainly going to be thrown onto the resale market as distressed properties at some point in the not- too-distant future. This massive number of homes will put enormous downward pressure on sale prices. To believe that prices are firming now is to completely ignore this shadow inventory. Ignore it at your own risk."
Apparently, the "stimulus" measures coming out of the Obama Administration and the Federal Reserve aren't doing as much stimulating as hoped. Apparently, if we may volunteer a simplistic deduction, sustainable economic growth derive from the private sector's investment and production, not from the public sector's bailouts and "make work" programs.
In other words, we Americans should not expect to recover our lost $12 trillion anytime soon, much less to increase our wealth beyond that figure. In the column below, our resident macroeconomist, Rob Parenteau offers a fascinating indictment of Chairman Bernanke's monetary policy...
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| The Daily Reckoning Presents
| Bernanke Drops the Ball Again
| |  | | Rob Parenteau |
From Fed Chairman Ben Bernanke's remarks to the Economic Symposium in Jackson Hole, Wyoming:
Notwithstanding some important steps forward, however, as we return once again to Jackson Hole I think we would all agree that, for much of the world, the task of economic recovery and repair remains far from complete... Central bankers alone cannot solve the world's economic problems.
Had the chairman stopped right there, not just for dramatic pause, but for good, and dramatically stepped down from the podium, boldly walking off stage in front of his brethren from the world's monetary policy elite, he would have qualified for a Cuban cigar, a Nobel Prize and an early all-expense-paid retirement. Not necessarily in that order, but you get the picture.
No such luck - the truth could not be told, at least not this year at the Jackson Hole confab of the global monetary policy cabal. But never one to disappoint, the chairman did open up yet another opportunity to clarify the situation when he noted:
At best, though, fiscal impetus and the inventory cycle can drive recovery only temporarily. For a sustained expansion to take hold, growth in private final demand - notably, consumer spending and business fixed investment - must ultimately take the lead. On the whole, in the United States, that critical handoff appears to be under way.
Now much of this statement strikes us as backward or just plain wrong. Of course, final demand is important, it is the actions of innovators, entrepreneurs and managers responding to either existing profit signals, or anticipated or perceived profit opportunities, that set the wheels of commerce and income-generation in motion. Without the income from the jobs created by businesses, households have nothing but past savings or credit in order to express their final demand.
But our real bone to pick with the chairman has more to do with his last sentence, about the passing of the torch. Quite simply, the torch isn't going anywhere. Uncle Sam is still holding it and the private sector is still refusing to take it.
The torch is visibly sputtering and dimming, at least if you are paying attention to the most recent economic data flowing out of the United States. Most noticeably, the pace of advance in the monthly US private payrolls has dropped below 100,000 per month, which is about where we were in 2007, on the way into the last recession.
US growth measures are decelerating and 2011 recession probabilities are rising. Bernanke acknowledges this fact with his actions, if not with his words. In the closing paragraphs of the chairman's Jackson Hole speech:
Notwithstanding the fact that the policy rate is near its zero lower bound, the Federal Reserve retains a number of tools and strategies for providing additional stimulus. I will focus here on three that have been part of recent staff analyses and discussion at FOMC meetings: (1) conducting additional purchases of longer-term securities, (2) modifying the Committee's communication, and (3) reducing the interest paid on excess reserves. I will also comment on a fourth strategy, proposed by several economists - namely, that the FOMC increase its inflation goals.
These "policy measures" will be ineffective. First off, Bernanke openly admits in the Jackson Hole speech that the Fed has no idea what the correct size or timing of further quantitative easing measures might be. Not exactly confidence-building. Second, the Fed's communication strategy is about words and shaping perceptions, which has not proven to be Chairman Bernanke's particular forte. Third, the notion that cutting the interest rate on excess reserves from 0.25% to any figure below will create even a dimple of change in the real economy is truly beyond absurd.
The chairman has been clear that quantitative easing works primarily through its effect on interest rates and asset prices - he might as well make the manipulation explicit and get on with it. Then he might have a small chance of creating the "wealth effects" required to get private-sector economic activity back on an accelerating track. Clearly, his original action checklist leaves much to be desired.
At the same time, we must recognize US investors have probably overplayed the double-dip card, judging by various measures of investor sentiment and by various tools of technical analysis. The pop now under way in equity prices is likely to continue as investors recognize a double dip does not mean an imminent recession - it only means a deceleration in the rate of growth, which was subpar to begin with. But we would not expect the stock market's pop to last very long. So if you have not done so already, we would use the bounce to lighten up on equity and risk asset exposures.
US economic growth is clearly decelerating, and Chairman Bernanke has very few rabbits left in his top hats. Sustainable economic growth will not begin until the chairman's magic show ends and meaningful private- sector investment begins.
Rob Parentau,
for The Daily Reckoning
Joel's Note: Rob Parenteau edits The Richebächer Letter, founded by the late Dr. Kurt Richebächer. Each issue provides an examination of the world's currency and credit markets. Previously, he spent 24 years as Chief US Economist and Investment Strategist for RCM Capital Management, an asset management firm. Rob holds a CFA and was appointed a Research Associate at The Levy Economics Institute in 2006. His papers have been presented at the Political Economy Research Institute, the Seventh and Eighth Annual Post Keynesian International Workshop, and the Eastern Economic Association.
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| | | Bill Bonner
| Long-Term Investing: Gold Versus Stocks
| |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
Whew...what a week....! We had a bad cold last week, but we had to keep going.
Half the world's work is done by people who don't feel very good, so we soldiered on... We were very busy.
We don't approve of busy-ness. People who are very busy are usually wasting their time. Or, they are wasting your time. Politicians, for example. They're on the go day and night - especially at election time. Shaking hands. Appearing at rallies and town hall meetings. Giving interviews. Meeting the voters. Meeting with their staff. Go...go...go... gone!
We would all be better off if they stopped...and thought. A little reflection might help us all.
That's true of people in business too. Busy-ness feels productive. It feels effective. It looks dynamic and hard-working. But without solid thinking behind it, it is as empty as a whirlwind.
But what are we talking about? What's this got to do with money?
Well, not much. So let's move on.
What happened on Friday? Not much. Nothing worth comment.
Gold and stocks both up a little. But so what?
Should you buy stocks? Definitely not. Well, not definitely not. Maybe not. US stocks are likely to underperform over the next 10 years. As we keep saying, they still haven't yet fulfilled their rendezvous with bear market destiny. When that happens, stock market investors will wish they had their money somewhere else.
Probably the only exceptions are those who take a very, very long-term outlook. Right now, there are some good US companies available at reasonable prices. Altria. Johnson & Johnson. Diamond Offshore Drilling. Today's price is probably NOT the best price you will ever get. But maybe you don't care. If you take a long enough perspective, you could be very happy with the kind of returns these companies are likely to deliver. They pay good dividends - and they're growing. Many US companies are not only US companies. They're world leaders. With brands that are known all over the globe. Many of these companies are enjoying spectacular growth in their foreign sales.
So, if you're willing to look far enough into the future...maybe some of these US brand-name companies are worth buying.
Well, what about gold? While US stocks have gone nowhere since 1998, gold has gone up every year. This year it's up again - 15%. And last week, gold hit record highs on three days.
So, should you buy gold? Again, it depends on what you're trying to do. Here at The Daily Reckoning, we don't encourage speculation. So if you buy gold in the hope of making a lot of money, you're on your own. We don't recommend it. Gold could go up...or down.
But gold is money. It's the world's more reliable money. You could use it to buy stuff during the reign of Caesar Augustus. You can use it to buy stuff now (after converting to paper currency). What's more, you get about as much stuff per ounce (relatively) now as you did 2,000 years ago.
If you want to save money, save gold. It might go up. It might go down. But it won't go away.
And more thoughts...
Want to meet a dope? Meet Voltaire.
A week ago, a minister in Florida was going to burn the Koran, making a point of some sort.
Meanwhile, Moslems were threatening to kill the man if he burned their holy book.
Which is where Voltaire entered the discussion.
"I disapprove of what you say, but will defend to the death your right to say it," said the French philosopher.
Which just goes to show that philosophy is a fraud and Voltaire was an idiot. Philosophy is supposed to make you think. But what thinking person would defend the Florida Bible thumper with his life? If he wants to do some jackass thing, causing other jackasses to want to kill him, what sensible person would step between them? No one.
*** What's going on in Cuba? Is it abandoning Fidel's communist model, or not? Here's the latest news:
HAVANA (AP) - The big economic changes Cuba's communist leaders have been promising for years appear finally to be happening in earnest - and they will be hard. Cuba on Monday said it is laying off nearly half a million workers, an eye-popping figure in any country, but especially in a nation where the government so totally dominates the economy.
The shift would mean that one-tenth of the island's 5.1 million-strong work force will be looking for jobs in the private sector by April 2011, a drastic change that could mean a radically altered economic outlook, especially for Cubans in their 20s and 30s who have known nothing but a paternalistic communist system ushered in by Fidel Castro in his 1959 revolution.
The changes are the most dramatic yet in a reform program that began when Raul Castro permanently took over the presidency from his brother in 2008 - but which have sputtered in fits and starts since then.
But they were not entirely surprising. Raul Castro has warned for years that the state could no longer afford to subsidize every part of Cuban life, nor pay workers who contribute little. In April, he floated the idea that up to 1 million workers were superfluous and must go.
While Castro has insisted his reforms are in keeping with socialist ideals, he has sternly told Cubans that they must stop expecting too much from the government, which provides free education and health care and heavily subsidizes housing, transportation and basic food.
Monday's announcement also said Cuba will overhaul its labor structure and salary systems to emphasize productivity so that workers are "paid according to results." The labor overhaul comes less than a week after Fidel Castro caused a stir around the globe when he was quoted by visiting American magazine writer Jeffrey Goldberg as saying Cuba's communist economy no longer works.
Castro later said that while he was not misquoted, his words were misinterpreted - and that he meant to say capitalist reforms could never work in Cuba.
Goldberg said Monday he was surprised by Fidel Castro's claim, since he has made similar statements in the past. He said economic reforms such as the one announced Monday prove the Cuban government realizes the need for change.
"Not only has he said things like this before, but the on-the-ground reality is that it is a truism that the Cuban model is not working, and that is why they are starting this large-scale experiment with privatization," Goldberg told reporters. Regards,
Bill Bonner
for The Daily Reckoning |
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