 | | The Daily Reckoning | Monday, November 1, 2010 |
- US investors express an optimism born of delusion,
- Why haven't there been more bank failures so far?
- Plus Bill Bonner on the looming retirement disaster and more...
|  | | A Market Full of Cockeyed Optimists
| When Consumer Sentiment Declines in a Consumer-Based Economy
| |  | | Eric Fry |
Reporting from Laguna Beach, California...
Your editor's father passed through town last weekend to share a few moments with his son, and to take a shift at the front door dispensing Halloween candy to trick-or-treaters.
During the course of the visit, your editor's father also dispensed an amusing array of anecdotes and old jokes. One of those old jokes described the difference between an optimist and a pessimist:
"A team of psychologists placed two little boys in two separate rooms. They placed the first boy in a room full of brand new toys and the second boy in a room full of horse manure. The first boy refused to play with all the toys. Instead, he pouted and whined about being stuck in a room by himself.
"'Ah yes, he is certainly a pessimist,' the psychologists remarked. 'Let's check on the optimist.' So they strolled across the hall to the room with the second boy and the horse manure. The boy had a big smile on his face and was furiously shoveling aside the manure.
"'What are you doing?' the bewildered psychologists asked. The boy replied, 'There's gotta be a pony in here somewhere!'"
US investors are exhibiting a similar optimism - the kind that borders on self-delusion.
The Dow Jones Industrial Average is levitating near two-year highs and threatening to move higher. The robust stock market action is justified, say the optimists, because the economy is improving. Curiously, the improving economy never seems to produce much economic improvement.
Last Friday, for example, we learned that US GDP increased 2% in the third quarter. Digging deeper inside this number, we learned that consumer spending contributed fully 90% of the total. Something is wrong with this picture. For starters, consumer spending cannot sustain economic growth. At some point, someone has to build something.
Additionally, even if consumers could sustain the economy all by themselves, they are of no mind to do so. Austerity and caution are still the attitudes of the moment. On the very same day that the Commerce Department credited US consumers for boosting GDP growth, the University of Michigan reported that consumer sentiment fell to 67.7 in October from 68.2 in September - its weakest reading in nearly a year.
So here's our question: If the economy relies on consumer spending, and consumers are losing their appetite to spend, what happens to the economic recovery?
The optimists hope and believe that the economy will begin firing on more than one cylinder. They continue looking for a pony. The rest of us are simply trying to maintain a safe distance from the manure that passes for "recovery."
Your editor is not a pessimist, but the facts are the facts. Jobs are still very hard to find, houses are still very tough to sell and the federal government is still very dedicated to "stimulating" the economy by borrowing money and/or printing dollars.
As long as these conditions persist, there will be no real recovery.
Recovery can only begin when the game-playing and the debt-financed governmental meddling end.
| | | | Did You See The Video About The American Nuke Bomb LOST Under Ancient Ice Fields? |
Way back in 1968, an American B-52 crashed in northwest Greenland...
Unfortunately, the nuclear bombs on board got forever swallowed by an ancient ice sheet...
But there's an unknown penny stock set to rise 2,000% from this sorry situation.
Sound unbelievable? Watch this presentation for proof...
|
| |
| The Daily Reckoning Presents
| Bank Failures in Slow Motion
| |  | | Douglas French |
[Speech given at The Economic Recovery: Washington's Big Lie, the Supporters Summit for the Ludwig von Mises Institute, October 8, 2010.]
Every Friday evening a few more banks are closed - seized by the various state banking regulators and handed over to the Federal Deposit Insurance Corporation (FDIC) for liquidation. This all happens rather quietly, barely making the news. We're told these bank failures are no big deal. No reason to panic. The names of the banks change over the weekend and many customers don't notice the difference.
We've only had 294 failures this cycle, but it is a big deal: adjusted to current dollars, the Depression banking crisis was $100 billion, the S&L crisis was $923 billion, and the current crisis is nearly $8 trillion.
So while FDIC chairwoman Sheila Bair said the current crisis would be "nothing compared with previous cycles, such as the savings-and-loan days," it's actually much bigger, because the financial sector had grown to be nearly half the economy by 2006 - as measured by the earnings of the S&P 500.
But the question is; why haven't there been more bank failures? In 2008, there were 25 failures, last year there were 140, and so far this year 129 have been seized on Friday nights. The greatest real-estate bubble in history has popped - first residential and now commercial - and we only have 294 failures?
It takes easy credit to make a real-estate bubble and it was America's commercial banks that provided most of it. It's estimated that "half the community banks in America remain overleveraged to commercial real estate, and the possible losses that remain are about $1.5 trillion," according to bank-stock analyst Richard Suttmeier.
The Moody's Commercial Property Price Index (CPPI) has fallen 43.2 percent since its peak in October 2007. Raw-land and residential-lot values have fallen even further. Almost 3,000 of the 7,830 banks in the United States are loaded with real-estate loans where the collateral value has fallen over 40 percent, and yet less than 300 banks have failed?
We all know what's happened to the residential-property market, but to illustrate how bad the situation is for the commercial market, over 8 percent of commercial mortgages that have been packaged into bonds are delinquent; more than $51.5 billion of such loans are at least 60 days late on payments compared with $22 billion a year ago.
If anything the commercial property market would seem to be getting worse. Losses on loans packaged into US commercial-mortgage-backed securities totaled $501 million in August - more than double the $245 million in April, and over 10 times the $41 million in losses of a year ago.
Past-due loans and leases at the nation's banks and S&Ls increased 16.2 percent from second quarter 2009 to the second quarter of this year. Restructured loans and leases increased nearly 54 percent.
The delinquency numbers are bad anyway you look at it. So, they must be reflected in bank's profit numbers, right? Well, no. Second-quarter earnings by the nation's banks were the highest in 3 years - nearly $22 billion.
Based on these numbers, FDIC chair Sheila Bair claims, "The banking sector is gaining strength. Earnings have grown, and most asset quality indicators are moving in the right direction, putting banks in a stronger position to lend."
And bankers must figure the coast is clear: they are cutting their provisions for bad debts. Yes, at a time when one out of four Americans has a sub-600 FICO score, a quarter of all homeowners are underwater on their mortgages, and commercial real estate is hitting the ditch, banks are dipping into their loan-loss reserves to report profits.
To illustrate, bankers have cut their ratio of loans to reserve coverage almost in half - that is the amount reserved divided by noncurrent loans (90 days past due or more and loans on nonaccrual). This ratio has declined from 120 percent in March of 2007 to 65.1 percent at June 30 of this year.
Banks added a total of $40.3 billion in provisions to their loan-loss allowances in the second quarter: that is the smallest total since the first quarter of 2008 and is $27.1 billion less than the industry's provisions in the second quarter of 2009.
So, the banking industry made $21.6 billion in Q2 by not putting as much away for loan losses.
By the way, of the $21.6 billion in second-quarter profits, $19.9 billion was earned by the 105 largest banks in the country. The other $1.7 billion in profits was spread between the other 7,725 banks.
So the big banks are backing off on putting money in reserve and booking big profits only months after being rescued by government TARP moneys (by the way, 91 banks are behind on making their TARP payments to the government). More importantly, these banks were the primary beneficiaries of accounting-rule changes in April of 2009 - amendments to FASB rules 157, 115, and 124, allowing banks greater discretion in determining at what price to carry certain types of securities on their balance sheets and recognition of other-than-temporary impairments.
"The new rules were sought by the American Bankers Association, and not surprisingly will allow banks to increase their reported profits and strengthen their balance sheets by allowing them to increase the reported values of their toxic assets," according to James Kwak, coauthor of 13 Bankers: The Wall Street Takeover and the next Financial Meltdown.
So the banks get some accounting breaks and are aggressively reporting profits at the expense of putting money in loan-loss reserves; still, why haven't there been more failures?
Earlier this year, Elizabeth Warren and her Congressional Oversight Panel did a report that indicated 2,988 banks were in trouble because of real-estate concentration in their loan portfolios.
Ms. Warren noted that office vacancies had increased 25 percent since 2006-2007, apartment vacancy was up 35 percent, industrial was up 45 percent, and retail vacancy had increased 70 percent since 2006-2007. The report said the recovery rate for defaulted real-estate loans was 63 percent last year. Land-loan recoveries were only 50 percent. Development-loan recoveries were even worse at 46 percent.
Another banking expert who sounded a warning signal about the banking industry was bank analyst Chris Whalen, who, a year ago, estimated the number of troubled banks to be 1,900. The FDIC itself said there were 829 problem institutions on its top-secret radar by June 30, 2010 - almost exactly double the 416 announced by the FDIC a year ago at midyear.
In other words, problem loans are still causing problems. To be continued tomorrow...
Regards,
Doug French,
for The Daily Reckoning
Joel's Note: Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply. He received his master's degree in economics from the University of Nevada, Las Vegas, under Murray Rothbard with Professor Hans-Hermann Hoppe serving on his thesis committee. French teaches in the Mises Academy. This article originally appeared in the Mises Daily.
| | | Bill Bonner
| US Debt Crisis: What NOT to Do When
Your Country is Broke
| |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
Another month gone by. Another month closer to bankruptcy.
Not you, dear reader.
We're talking about the US government.
But hold that thought...
Let's turn to the markets. Hmmm... Not much action. The Dow rose a piddly 4 points on Friday. Gold went up $15. Not much to talk about there...
Investors are waiting to see what happens next week. They're sitting on the edge of their chairs. Will Ben Bernanke play it cool? Or will he want to do something really big, bold, and bumbling?
We're not as curious as most investors. We doubt that he will want to go too far in either direction. Most likely, he'll do what investors expect...announcing more quantitative easing - money printing, in other words - but being a little cagey about how much, and when.
So, let's turn back to the biggest bankruptcy of all time.
Many are the ways the facts are interpreted, distorted and bearded. But the numbers keep going up.
The red numbers, that is.
The US press barely reports the story. They know Americans aren't interested. In the US, people figure we'll muddle through...we'll work our way out of debt...
Or, hey, maybe there will be a miracle! In the US, we believe in all sorts of things that are miraculous...unbelievable...and preposterous.
Got too much debt? We'll fix it by giving you more debt!
People short of real money? We'll fix that by giving them make-believe money.
Did the authorities miss the biggest financial blow up of all time? Did they fail to stop the biggest Ponzi schemer in history - even after they were tipped off? Did they completely "blow it" when it came to controlling the bubble and the damage it caused?
Yes? Well, let's give them $10 trillion of the taxpayers' cash and credit and see if they can do better the next time!
Fantasies, hallucinations, delusions - and don't forget the "war on terror"...the first war on nobody in particular in history.
But let's get back to who owes what to whom. We're talking about the US government. And Canada's Globe and Mail has the story:
The scary actual US government debt
Boston University economist Laurence Kotlikoff says US government debt is not $13.5-trillion (US), which is 60 per cent of current gross domestic product, as global investors and American taxpayers think, but rather 14-fold higher: $200-trillion - 840 per cent of current GDP. "Let's get real," Prof. Kotlikoff says. "The US is bankrupt."
Writing in the September issue of Finance and Development, a journal of the International Monetary Fund, Prof. Kotlikoff says the IMF itself has quietly confirmed that the US is in terrible fiscal trouble - far worse than the Washington-based lender of last resort has previously acknowledged. "The US fiscal gap is huge," the IMF asserted in a June report. "Closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 per cent of US GDP."
This sum is equal to all current US federal taxes combined. The consequences of the IMF's fiscal fix, a doubling of federal taxes in perpetuity, would be appalling - and possibly worse than appalling.
Prof. Kotlikoff says: "The IMF is saying that, to close this fiscal gap [by taxation], would require an immediate and permanent doubling of our personal income taxes, our corporate taxes and all other federal taxes.
"America's fiscal gap is enormous - so massive that closing it appears impossible without immediate and radical reforms to its health care, tax and Social Security systems - as well as military and other discretionary spending cuts."
He cites earlier calculations by the Congressional Budget Office (CBO) that concluded that the United States would need to increase tax revenue by 12 percentage points of GDP to bring revenue into line with spending commitments. But the CBO calculations assumed that the growth of government programs (including Medicare) would be cut by one-third in the short term and by two-thirds in the long term. This assumption, Prof. Kotlikoff notes, is politically implausible - if not politically impossible.
One way or another, the fiscal gap must be closed. If not, the country's spending will forever exceed its revenue growth, and no one's real debt can increase faster than his real income forever.
Prof. Kotlikoff uses "fiscal gap," not the accumulation of deficits, to define public debt. The fiscal gap is the difference between a government's projected revenue (expressed in today's dollar value) and its projected spending (also expressed in today's dollar value). By this measure, the United States is in worse shape than Greece.
Prof. Kotlikoff is a noted economist. He is a research associate at the US National Bureau of Economic Research. He is a former senior economist with then-president Ronald Reagan's Council of Economic Advisers.
He says the US cannot end its fiscal crisis by increasing taxes. He opposes further stimulus spending because it will simply increase the debt. But he does suggest reforms that would help - most of which would require a significant withering away of the state. He proposes that the government give every person an annual voucher for health care, provided that the total cost not exceed 10 per cent of GDP. (US health care now consumes 16 per cent of GDP.) He suggests the replacement of all current federal taxes with a single consumption tax of 18 per cent. He calls for government-sponsored personal retirement accounts, with the government making contributions only for the poor, the unemployed and people with disabilities.
Without drastic reform, Prof. Kotlikoff says, the only alternative would be a massive printing of money by the US Treasury - and hyperinflation. Wait a minute, says our old friend Jim Davidson. Professor Kotlikoff is wrong. He "unaccountably overstates the solvency of the US," he says.
Jim makes a good point. It's not total GDP output that supports the government. It's just the private sector part. The government part is a cost...not a source of financing. The total fiscal gap - unfunded government obligations - is over $200 trillion. It's about 14 times GDP. But compared to the real output of the private sector, it's 20 times as great.
If this were a more traditional debt burden, it would have to be financed. Interest rates are at a 60-year low. But they could easily be back up at 5% in short order. At that rate, it would take 100% of private sector output just to keep up with it.
Professor Kotlikoff is right. The US is already broke. Busted. Bankrupt. It cannot possibly honor its commitments. One way or another, it must default on them.
But how? That's what we're going to find out.
And more thoughts...
"Retirement Disaster Ahead," says The Wall Street Journal.
Yep. Too many retirees. Too little money.
They're counting on Social Security. But as we see above, government is going to have a hard time honoring its commitments.
The other thing that is happening is that some basic costs - namely food and energy - are going up, even as the consumer price index stays flat.
Why are food and energy becoming more expensive? Because the foreigners are buying food and energy. And there are a lot of them. Foreigners, that is.
And why is that bad news? Where does that leave the typical US retiree? Without increases in the CPI the US government doesn't adjust Social Security payments to the upside. Meanwhile, the real cost of being retired - food, fuel...along with everything else - goes up.
Most likely, the strain of trying to support so many retired people will destroy the modern welfare state model. As in Argentina, old folks will find that they don't get from the government what they were promised. They'll have to figure out how to make do on their own.
Our advice: don't grow old. Don't retire. Don't get sick. Don't trust the feds. And don't sell your gold.
Regards,
Bill Bonner,
for The Daily Reckoning
-------------------------------------------------------
Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
|
| |  |  |  | Tale of Two Cities
In both England and France, the spending cuts on the table so far are too little, too late. A three percent deficit was regarded as such a serious threat to the financial integrity of the European Union that member states who surpassed that level were supposed to lose their right to vote. France runs a budget deficit of nearly 8% of GDP. Its public expenses are about $1.5 trillion per year. Even if the projected savings of $96 billion by 2018 (when the pension cuts kick in) were realized, the amount is trivial.
Why the Value of Paper Money Declines as the Quantity Rises
Snitching in the Name of National Security | Funny Money and the Banks that Make Us Laugh
In my long life, I have learned many things. Important things. One Important Mogambo Lesson (IML) is that “responsibility is a cruel taskmaster,” and that one should accept as little responsibility as possible, especially if it concerns taking responsibility for a wife and family, who...are also so stupid that they cannot be made to understand the Vital Freaking Importance (VFI) of investing every dime into gold, silver and oil when the Federal Reserve is creating so much money that it causes inflation in prices to rise above zero.
Loss of Purchasing Power: The True Inflation-Target Bullseye
Why Creating Money Won’t Shock the Economy Back to Life | The Fed Underwrites Asset Explosion
The Federal Reserve is in disarray. Unsure of whether its QE2 strategy (quantitative easing – second round) should be tabled (see speeches of Thomas Hoenig, president of the Kansas City Federal Reserve Bank) or if it should pump $10 trillion into the economy (the unsolicited advice from economic columnist Paul Krugman), the New York Federal Reserve Bank has now asked bond dealers what it should decide at its upcoming November 3 meeting. Since it is the belief in the integrity and competence of the Fed that backs the dollar, asking Wall Street what it wants is another reason to sell dollars.
US No Longer Cracks Even Top 20 of Least Corrupt Countries
Lexmark Intl (NYSE:LXK) — Revenue Expectation Missed, Stock Slammed | |
| | The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. |  |
|
|
|
|
|
Posts
