Putting an End to No Notice Evictions

May 25, 2009 · Posted in General Economics · Comment

This report shows some disturbing videos about no notice evictions, evictions that take place with as little as 25 minutes notice. The crime here is that often the units are rented out to paying tenants who know nothing about the foreclosure or the upcoming eviction:

I disagree with the term “pro growth policies”. I would rather say that policies of credit expansion are anti-growth. Regarding no notice evictions: Such a practice is theft . tenants are being deprived of housing which they paid for responsibly and are contractually entitled to. And what an incredibly stupid practice from banks’ perspective to vacate occupied units in this market!

Recently President Obama put an end to such theft by signing a Federal law protecting renters after foreclosure:

A new law passed by Congress and signed yesterday by President Obama provides protections for tenants whose landlords fall into foreclosure. Under the Helping Families Save Their Homes Act, tenants have the right to stay in their homes after foreclosure for 90 days or through the term of their lease. The bill also provides similar protections to housing voucher holders. The protections go into effect immediately and expire at the end of 2012.

… a decent move among a lot of insanity.

Tags: evictions, housing market, las vegas, no notice evictions

Delevaraging, Contraction, Imploding Consumer Credit & Increased Saving – The Long Term Outlook

May 25, 2009 · Posted in General Economics · 1 Comment

Asia Times Online makes some good observations in Easy bets with other folks’ cash:

Why then are investors persisting with this course of action that adds risks? Many theories have been propounded, but a clear framing of the future outlook would help to understand the sheer “courage” that is involved in buying such assets now. To make things easier, I have used a modified decision tree wherein the basic trend has been used as the title, with financial market consequences being highlighted below each such possible trend. Such an approach is provided below:

1. Green Shoots of economic recovery are for real (hahahahahaha, but let’s take these bubble-spewers at face value for now; or else read “Truth is too hard to handle”).

a. This could only be due to the US and European consumer spending money on borrowed time; yet again
b. Over the short-term that would argue for buying risky assets such as stocks and high-yield bonds and going short US Treasuries;
c. Inflation will rise inevitably, so buy physical commodities including gold;
d. Go short anything near the government bond curve including US Treasuries and German Bunds, among others.

2. We are into a Great Depression

a. The monetization of the debt cycle would have failed for this outcome to percolate to the masses in Europe and the US;
b. Financial institutions in Group of Eight leading industrialized countries cannot raise any capital from the public;
c. Forget about stocks, high-yield bonds that will fall in price dramatically just as soon you buy them for your retirement account;
d. Buy some government bonds, but only of countries that can service their future debt obligations (that is, avoid the likes of the US and pretty much all of Europe);
e. You will need to have some stuff that has real economic value rather than the worthless IOUs issued by G-8 governments, so buy some gold;
f. This might also be a good cue to buy some weapons and ammunition.

3. We will have a Y-shaped recovery (see How about a Y-shaped recovery, Asia Times Online, February 23, 2008.)

a. The US and Europe are toast, but emerging markets will do well;
b. Financial institutions in G-8 countries cannot raise any capital from the public;
c. Buy emerging market equities and bonds, sell everything else;
d. As most emerging market currencies are quite funky and don’t really fit into your wallets, you will need some gold for your travels.

My comment: I am of the opinion that #2 is the correct assessment of the current situation and that we have a long period of debt consolidation, consumer abstention, and wealth deflation before us. We are repeating the playbook from the Great Depression. Gold and silver should continue to hold the line. Government bonds should do fine throughout this period, see Time for Treasurys. Shorting commercial property ETFs in addition to that is a decent addition to any portfolio.

What the average reader thinks for himself is one thing; what he is being told by the financial media at large (and G-8 financial media in particular) is altogether a different matter. Whilst I would normally lean towards the school of an incipient economic recovery after a couple of years of any economic bust, a number of factors conspire to deny any such notion in my mind at the moment:

1. This is very much a crisis caused by excess leverage in the US (and, less so, in Europe). Until the leverage is washed out, there is no chance of any economic recovery;
2. Governments have engaged in widespread monetization of such leverage, rather than addressing the core event itself. This has the effect of actually making the future even more uncertain. For example, General Motors or Chrysler as private companies would have entered bankruptcy many months ago; but thanks to government intervention now re-emerge as worker-owned companies that couldn’t possibly get bank financing down the road (due to the destruction of creditors’ rights by the Obama administration). Ergo, this is money wasted by the government at great cost to the average US taxpayer: not exactly the recipe for an economic recovery;
3. Then there is the question of bank funding. Most analysts point to a funding gap of around US$20 trillion for the G-8 banking system by 2011, made worse by the reduced velocity of money (that is, a lower money multiplier). This problem has not been addressed, and most likely will not be; unless banks can pledge more useless collateral with their central banks and in effect get “free” funding;
4. Export-driven markets are toast, be it China or Germany or Japan. All these countries will have to reinvest in their domestic markets: some to fruitful results (China) but others to no avail (Japan). Whatever they do, it is clear what they will NOT do – that is, they will not buy more US sovereign and state-guaranteed debt;
5. Many of the weaker emerging market countries are facing funding pressures; particularly those in Eastern Europe. The resulting increase in defaults promises to fell the rest of the European banking system that hasn’t already fallen victim to the US financial collapse. This will also divert more resources from the International Monetary Fund and so on, to the expense of the G-8;
6. Increased strategic risks: think Pakistan’s ongoing fights with the Taliban, Iran’s nuclear weapons program, Russia’s anger with the North Atlantic Treaty Organization over Georgia as just a few examples of what could go wrong in the very, very near future.Based on all this, it is clear to me that the only people who could possibly believe that risky assets such as high-yield bonds and common stocks are a good buy are either the people who currently own them (and therefore will post profits when they rise in price) or those that need to get out of their positions (that is, sell their bond positions or raise new equity).

In most cases, the answer is “both of the above”, namely US and European banks who are loading up on some securities to cause artificial shortages that in turn help to raise prices of the rest of their books. These institutions have the benefit of knowing that a good trade gets them out of jail, but bad trades only result in more government assistance being lavished on them.

They aren’t playing with their own money, but rather with yours. When you are only ever going to lose other people’s money, the rules change and an entirely different “game” takes hold. That is what you are seeing now; until the final blows of economic data help to chase these fake rallies out of the market. When that happens, the biggest losers will be the people who own these risky assets like high-yield corporate bonds in the US (or Europe) and stocks of banks across G-8.

My comment: I marked the most important point in the passage above in bold. There is no end in sight for the current correction of this business cycle so long as the bad debts on balance sheets remain overvalued and uncorrected. For a good estimation of how long this may take, we can take a look at a recent report by the San Francisco Federal Reserve Board, titled U.S. Household Deleveraging and Future Consumption Growth:

How much deleveraging?

Since the start of the U.S. recession in December 2007, household leverage has declined. It currently stands at about 130% of disposable income. How much further will the deleveraging process go? In addition to factors governing the supply and demand for debt, the answer will depend on the future growth trajectory of the U.S. economy. While it’s true that Japanese firms and U.S. households may differ in important ways regarding decisions about paying down debt, the Japanese experience provides a recent example of a significant deleveraging episode that took place in the aftermath of a major real estate bubble and is useful as a benchmark.

The Japanese stock market bubble burst in late 1989, followed soon after by the bursting of the real estate bubble in early 1991. Nearly 20 years later, stock and commercial real estate prices remain more than 70% below their peaks, while residential land prices are more than 40% below their peak.

Figure 3 compares Japan’s nonfinancial corporate sector with the U.S. household sector over 10-year periods before and after the leverage-ratio peaks. In both countries, leverage ratios rose rapidly in the years before the peak.

After Japan’s bubbles burst, private nonfinancial firms undertook a massive deleveraging, reducing their collective debt-to-GDP ratio from 125% in 1991 to 95% in 2001. By reducing spending on investment, the firms changed from being net borrowers to net savers. If U.S. households were to undertake a similar deleveraging, their collective debt-to-income ratio would need to drop to around 100% by year-end 2018, returning to the level that prevailed in 2002.

The report concludes with the following outlook:

Conclusion

More than 20 years ago, economist Hyman Minsky (1986) proposed a “financial instability hypothesis.” He argued that prosperous times can often induce borrowers to accumulate debt beyond their ability to repay out of current income, thus leading to financial crises and severe economic contractions.

Until recently, U.S. households were accumulating debt at a rapid pace, allowing consumption to grow faster than income. An environment of easy credit facilitated this process, fueled further by rising prices of stocks and housing, which provided collateral for even more borrowing. The value of that collateral has since dropped dramatically, leaving many households in a precarious financial position, particularly in light of economic uncertainty that threatens their jobs.

Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the deleveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates. Alternatively, if accomplished through some form of default on existing debt, such as real estate short sales, foreclosures, or bankruptcy, deleveraging could involve significant costs for consumers, including tax liabilities on forgiven debt, legal fees, and lower credit scores. Moreover, this form of deleveraging would simply shift the problem onto banks that hold these loans as assets on their balance sheets. Either way, the process of household deleveraging will not be painless.

My comment: My word exactly. I call it The End of Consumerism:

We need to respond to the reality around us rather than deny it. It is time to cut back and restore sanity and balance. Individuals have realized this and are doing the right thing. The government has not understood this fact at all. It is trying to keep alive failed businesses that should release resources for more demanded projects. It is trying to make up for the “lack of consumption” in the private sector. All these attempts will fail miserably. All they will accomplish is to slow down the corrective phase and turn it into a decade of agony.

Tags: consumer debt, consumer spending, economic outlook, household debt, japan

Prolonged Detention – Change?

May 24, 2009 · Posted in Politics · Comment

We all know that President Obama will not deliver change. Prolonged detention is just another proof…

Tags: president obama, prolonged detention

Ron Paul – Prepare for Revolutionary Changes

May 24, 2009 · Posted in Politics · Comment

Tags: ron paul

California Voters Smack Down Fiscal Nonsense

May 20, 2009 · Posted in Politics · Comment

A few days ago I wrote

Governments in spendthrift states, such as New Jersey and California, have to come to their senses, cut their excessive spending, their lavish pension plans, and unsustainable union wages. It is safe to assume that a major wave of municipal and state bankruptcies is bound to unravel sooner or later.

But until then they will of course continue to bleed the taxpayer for as long as they can. Expect them to introduce more and more “temporary” taxes and fees over the next months and years. (Of course “temporary” in government lingo always equals “permanent”.)

Californians do have the chance to send a message: Vote No on Prop 1A through 1E and Yes on 1F.

I also wrote before that:

…a time will come, when Californians will stand up against these depredations. Let’s make sure it happens rather sooner than later.

Please also consider California – What Has Become of You?

Enough is enough! California, Please Send a Message!

Luckily, Californians did send a message: California voters kill budget measures:

Despite a big advantage in cash and manpower, the campaign failed to gain traction from the start. Polls throughout the race showed all the ballot measures — except Proposition 1F — losing badly, as voters expressed equal parts confusion over the package and disdain for the Sacramento politicians who crafted it.

Californians seemed upset partly by Sacramento’s call for more money at a time when employment was sagging, retirement accounts were plunging and the average resident was struggling. Others expressed irritationat being called back to the polls just months after a presidential election.

Now the ball is in the legislatures court. The mandate is simple: No more taxes, no more borrowing, cut spending to get your lousy budget in order!

Tags: california, california budget, california tax

New Housing Starts & Permits Test Record Lows

May 20, 2009 · Posted in General Economics · Comment

2-4 Unit Housing Starts (60 yr and 5 yr chart respectively):

New Privately Owned Housing Units (60 yr and 5 yr chart respectively)

Housing Permits for Private Housing Units (60 yr and 5 yr chart respectively):

Tags: housing market, housing permits, housing units started

Time for Treasurys

May 16, 2009 · Posted in Business, General Economics · Comment

In November 2008 we started seeing Treasury Yields at Record Lows:

The way toward the 2-2.5% yield is wide open. I expect to see yields at those levels sometime in 2009/2010. The yield curve will flatten out further since there is little room left for Treasury Bill Yields to drop.

Then in mid January, with Treasury Yields in free fall, we saw yields below 2.5%. I wrote then:

It is certainly likely that yields will snap back into the corridor and have a significant short term movement upwards toward the upper end of the range over the next weeks.

This chart summarizes my recent short term predictions:

So what’s next? Well, now we are about to hit that upper end. From a technical point of view, treasury yields could hit it at around 3.3% and then resume its move toward 2%. Fundamentally, there has been a lot of talk recently about an economic recovery. This has helped boost the stock markets up for a while and sparked a sell off in safe Treasury investments.

When it becomes obvious that these hopes have been premature, the flight to safety will surely resume. An ongoing decline on the stock market will then be accompanied by falling Treasury yields from now on toward the end of the year.

A business cycle caused by credit expansion policy needs to go through the recovery phase and this recovery has to come full circle. So far this has not yet happened. There are more inflated sectors ready to implode, in particular consumer credit and commercial real estate. This will continue to affect banks all over the country. Americans, sick and tired of debt, will continue to abstain from consumption and consolidate their finances.

For anyone looking for a safe place to park their cash right now, Treasury Notes are looking pretty attractive at this point.

Tags: treasuries, treasury yields

Ron Paul in 2003 – “The Damage Will Be Catastrophic”

May 16, 2009 · Posted in Politics · Comment

Ron Paul in 2003 to the banking committee:

The special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital that they could not attract under pure market conditions. Like all artificially created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing, the damage will be catastrophic.

Tags: fannie mae, freddie mac, housing market, ron paul

Money Supply Growth – April 2009

May 14, 2009 · Posted in Monetary Economics · Comment

In April 09 the true money supply was $2.14 trillion, or 13.66% higher than April 08.

Tags: true money supply

Sick and Tired of Debt

May 14, 2009 · Posted in General Economics · Comment

I have said it many times. The scourge in the US system is not a lack of credit, “tight credit“, “frozen credit”, or whatever else the Bernankes, Geithners, and Obamas would have us believe. Nor do we need to get “credit flowing again”, “consumers borrowing again” or anything remotely close to it.

We need the opposite: Savings. We got to where we are because of too much debt and credit. People over leveraged themselves into bankruptcy, they are sick and tired of debt. Borrowing has plunged and consumer credit will continue to contract precisely for that reason.

Rarely does anyone stop and ask the question: “Do people actually want to borrow any more money?” Of couse they don’t, why in the world should they?

Kelly Evans writes Worries About Economy Weigh on Loan Demand:

Maria O’Brien, a 27-year-old free-lance writer, and her husband are planning to do something later this year that they would have thought crazy in the past: buy a minivan — with cash.

“It’s worth the sacrifice right now to get out of debt,” Mrs. O’Brien said. “It means living more frugally, but also more freely.”

Banks are under fire for not lending enough and for tightening terms of credit, contributing to a drop in U.S. economic activity. But as the O’Brien family illustrates, the loan market’s shrinkage isn’t just about the supply of credit. It is also about weak demand for credit, a byproduct of households and businesses wary about the economy.

I would actually contend that the sole reason for lack of lending is the weak demand for credit. Banks have been flooded with excess reserves:

Meanwhile consumer credit continues to contract.

She goes on to write:

“Lending money is the bread and butter of banking,” said James Chessen, chief economist for the American Bankers Association. “The money is there, but banks are running smack into a wall of poor loan demand.”

The O’Briens, who live in Front Royal, Va., with their three children, are putting aside at least $500 a month toward the purchase of a used minivan in the $6,000-$8,000 range. They are also imagining a debt-free future.

“Once we get rid of it, we’re never going back,” Mrs. O’Brien said.

As consumer spending contracted last year, growth in household borrowing screeched to a halt in the fourth quarter after growing at a 10% annual clip earlier this decade, according to the Federal Reserve.

“We’re in a recession, and it’s one where households came in highly leveraged,” Fed Chairman Ben Bernanke said recently. Combined with firms “cutting back on their investment,” he expects to see weak demand for loans.

Loan demand began to fall sharply toward the end of last year and continued to weaken in the first three months of this year, according to the Fed’s periodic survey of bank senior loan officers. A pick-up in demand for mortgage loans is a notable exception.

In the latest survey, for instance, 18 banks said demand was moderately or substantially weaker than three months earlier, but only nine said it was moderately stronger. On balance, the Fed said, 60% of U.S. banks reported weaker demand for commercial and industrial loans.

The O’Briens have long dreamed of being debt-free. But they began to pay off loans more aggressively after Jeff O’Brien’s construction work dried up last year, leaving them at times without steady income to support mortgage, car, credit-card and student-loan payments. Mrs. O’Brien took on more free-lance work, while her husband transitioned into a career as an insurance adjuster.

In the meantime, they have scrimped and saved to pay down a third of their $30,000 credit-card and student-loan debt and sold Mr. O’Brien’s beloved Ford truck to eliminate that monthly payment. Aside from the mortgages on their two houses — one they live in, and one they rent out — they are planning to be debt-free by next April.

“Once we do that, we’ll tackle the mortgages,” Mrs. O’Brien said.

They aren’t alone. At Arizona Central Credit Union in Phoenix, which has 70,000 members, loan applications plunged last fall as the financial crisis intensified. The credit union saw more than 3,000 loan applications in September, totaling $13.9 million, a “fairly normal” month according to chief lending officer Patty Aker. That dropped to 2,300 applications in October, just over 1,000 applications in November and 900 in December. Loan applications rose slightly in January, then dropped again in February, to 895, totaling just over $4 million.

“We’ve got money to lend, it’s just that people were so nervous about what was going on in the economy,” Ms. Aker said. “So many people had lost jobs or were afraid they’d buy a car and then GM wouldn’t be around anymore to honor their warranties.”

More than two-thirds of Arizona Central’s $285 million loan portfolio are vehicle loans; the rest is comprised of other types of consumer loans and a small amount — about 10% — are small-business loans.

Across town, the National Bank of Arizona, primarily a business lender, is seeing a similar drop in demand. Business applications for new-equipment leases tumbled 28% in the first four months of this year, compared with the same period in 2008. Loan applications from small businesses are down 11.5%.

“Deal flow just came to a screeching halt” late last year, said Brent Cannon, executive vice president at the bank. He added that because many small businesses use their home equity as collateral, woes in the Phoenix real-estate market threaten to keep a lid on demand.

Lending can’t be forced. This is the End of Consumerism in action. Credit expansion only goes on for as long as the people play along. When they’ve had enough, they’ve had enough.

Tags: consumer credit, credit crunch, lending

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