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As the last languorous days
of summer slip from our grasp, the kids are all off to school again, and the leaves slowly begin to blanch and fade, there is something deep in the national soul that realizes “Stick Season” is just around the corner. There were places that lived a life style that seemed to belie the existence of winter—perhaps because they had only one unvarying season. Places like California, Vegas in Nevada, Phoenix in Arizona, Florida, were all the major hot spots of the housing boom. Folks there never worried much about winter. There was always plenty of sunshine and clear blue skies—a mentality that was mirrored in the over bloated, overpriced housing markets in those states. But the rest of the nation knew that autumn is followed by the barren cold of winter—and now Stick Season is nigh at hand, even in the sunshine state of California.
I first heard that term in North Carolina, where the city I lived in had so many trees that when the leaves fell the entire place was a tangle of bare branches and fallen sticks of wood. “Stick Season” is winter, and even though all the mainstream media are still touting green shoots and preaching recovery, I see instead a deepening autumn and winter ahead for the economy.
Let’s take a brief look
at where we are before all this misplaced talk of spring and recovery inspires too many false hopes. (There’s nothing wrong with hope, of course, but false hope is just a form of denial.) Economists relying on jury rigged government statistics are all too quick to announce the end of the recession because they limit their view to simple GDP growth percentage numbers--often pumped up by clever accounting tricks. The latest claim is that the nation will turn in a GDP of plus 1%, which technically means the recession has ended. What they fail to consider is that most of the spending that drove that GDP number was paid for by Uncle Sam, who begged, borrowed and simply printed up the cash to try and “stimulate” an otherwise dead economy. Without it we would be deep in negative territory on GDP. But assessing this economy as alive and well after all this government stimulus is a bit like calling the reflexive jerk of a corpse a sign of new life after massive electro-shock. This Frankenstein mentality has polluted our mainstream media with happy talk about recovery and an end of the recession, and the spring market rally has been buoyant with hope. Strange how a business that was always associated with headlining bad news (if it bleeds, it leads) has now become a collection of corporate cheerleaders, embracing phony data, accepting manipulated bank “profits” without question, refusing to see the real implications of the massive debt that exists at every level of our society.
The extent to which the Federal Government has propped up the falling mine shaft of our economy is most clearly seen in the housing market. When the two great mortgage landfills, Fannie
Mae and Freddie Mac went bottoms up last year, Uncle Sam came to the rescue with an 80% buyout stake in those companies. In effect, the Federal Government now owns 80% of the $5.1 trillion dollar mortgage portfolios
of Fannie and Freddie. In spite of this massive government and Fed support, many banks remain technically insolvent, including the Big Boyz. And they have learned nothing from their grievous mistakes.
Case in point: banks are so addicted to the securities game that after the death of Fannie and Freddie they have taken TARP and TALF money intended to stimulate lending and used it
to buy Ginnie Mae and FHA backed securities instead! Why? They get any profits, the taxpayers get any losses. And since they deem these securities “risk free” they don’t have to hold prudent
reserves against potential losses--the same pattern as with Fannie and Freddie.. Now the banks have simply turned to the FHA and Ginnie Mae to foist off their securities bets. The FHA is underwriting an astounding
80% of current mortgage traffic, over another trillion in mortgage paper now owned by Uncle Sam. The demise of Fannie & Freddie seems to have made no impression on banks except that if things fall down the
government and taxpayer will foot the bill. It’s as if the concept of just making good loans that do not require government backing is an anathema to them now. All they want is a risk-free security so they can
keep playing the game.
So after massive TARP and TALF programs, titanic bank bailouts, unprecedented intervention in the mortgage industry, wholesale ownership of 80% of all mortgages, cash for clunkers and
first time home buyers, and a paltry $300 check for the rest of us, the Government has managed to nudge the GDP number one percent into positive territory—but this is no reflection of what the real economy is
doing behind the rosy headlines bandied about these days. And consider what the reality would be without this massive government support--cash printed from thin air, mind you. The government itself is flat broke,
and running a $1.1 trillion dollar annual deficit. None of this money actually came from taxes. It was just created--and along with it we also created this false illusion of “stability.”
That’s the point “economists” and news pundits always seem to miss. To really determine what the economy on the street is doing you have to focus your attention on what
is happening there absent this massive government intervention, where unemployment continues its relentless march, racking up more numbers than the much feared H1N1 pandemic each month. Joblessness is the real
threat to the nation now, not a seven to ten day bout of the flu. We’ve been hemorrhaging jobs for over 20 consecutive months, with half a million new initial claims for unemployment insurance each week. In
California, the world’s 8th largest economy, 40% of all working age people are jobless according to a newly released study that compared census data on the number of employment age workers to actual jobs being
worked. (The BLS pegs the jobless number at only 11.9% in the Golden State, but they don’t count millions of “discouraged” workers who have been out of a job for many months, even years. It would
be best to just take the “L” out of their acronym, and then you end up with a good abbreviation for the work their statisticians actually do: BS.
Here are some real numbers:
Consumer debt is now $14.5 trillion, or 34% greater than total consumer income each year. With the housing market crash, home equity fell from a high of $13 trillion in 2006 to just $8
trillion today. Consider where it would be without the massive government intervention and 80% ownership stake in US mortgages! Then consider that nearly 10% of all these government owned mortgages are in default,
and 23% of the current FHA portfolio is already in default! In the last year 2.6 million Americans slipped from a tenuous position in the Middle Class into the ranks of the impoverished. Another million joined the
ranks of those without health insurance--an astounding 46 million now. Another 1.3 million will lose unemployment benefits by year’s end. According to the Gallup daily tracking poll, job creation is down 35%
over last year, so don’t expect a lot of new hiring. Teen unemployment is now 25.5%. A third of all workers under 35 are now living with their parents to make ends meet. USA Today reports that national
bankruptcy filings are up 22% over 2008. More than 35 million Americans now rely on food stamps to feed themselves. Consequently consumer spending is now down a remarkable 33% over the previous year.
Recovery?
Marketwatch reported on Sept 9: “Employers' hiring plans for the upcoming fourth quarter dropped to their lowest level in the history of Manpower's Employment Outlook Survey, which
started in 1962.” US Job openings fell to a record low in July this year. An article by G. Washington for Naked Capitalism painted the real picture: “Projections of former International Monetary Fund
Chief Economist and Harvard University Economics Professor Kenneth Rogoff and University of Maryland Economics Professor Carmen Reinhart, U-6 unemployment could rise to 22% within the next 4 years or so.”
And since Depression era numbers were also overstated, because those accepting government created jobs were still counted as unemployed, what we are really looking at is a present jobless
rate equal to the 1930s levels at their worst. In actual fact, our unemployment is tracking well ahead of the numbers reported in the early 1930s after the 1929 crash. During the Great Depression it took much longer
to reach unemployment levels we are suffering with now. I have also shown in numerous articles that our present economy is actually faring worse than the Depression era in many key metrics—manufacturing, shipping, trade levels, deficits, debt load, unemployment.
So it’s very simple. People without jobs do not spend, and consumer spending is 70% of the economy, and also largely responsible for driving the other 30% in business spending. Not to worry says Bank of America. The top 10% account for 42% of consumer spending, so they think the “haves” will make up for what the “have nots” don’t buy. Under this ludicrous logic, 58% of consumer buying power would flatline while the rich shop the blue light specials in K-Mart and keep Wal-Mart floating in black ink? I don’t think so.
So what we are seeing in the GDP number is simply a reflection of rising government spending, which is just the accumulation of more debt. The GDP is not showing us what the real economy is doing. Blogger Karl Denninger says it very well here: “The consumer is not coming back any time soon. Spending power doesn't come from a government statistic, it comes from a paycheck in the hand, and those who give up looking because the job situation is so horrible its a waste of time have no paycheck. The government can no more replace consumer spending on a durable basis than I can fly.”
Yet economists dismiss the severity of our unemployment situation by simply calling it a “lagging indicator,” yet as long as it lags the economy will never have real recovery. People without jobs are being sustained by insurance benefits for the time being, but eventually this will run out. It is only a matter of time before these millions of unemployed people have no income whatsoever—and forget the credit card as a means of driving their spending. Consumer credit contracted by $21.6 billion, so credit issuance is plummeting at record breaking levels as banks tighten their purse strings—purses so lavishly filled with taxpayer money to the tune of some $13 trillion over the last year. Here is a chart showing a staggering decline in consumer credit, some twenty percentage points since the last spike in mid 2007.
Meanwhile, enormous over leveraged mounds of bad debt still remain hidden on bank balance sheets or explained away by accounting rules changes. All this is being done to
make it appear as if the banks have acceptable capital ratios—but they do not. The truth of the matter is that all these gimmicks have not faced or fixed the fundamental crisis of
insolvency. “The System” has simply chosen to ignore what has happened to it, and the bankers, aided by the Fed, have all made a quiet “gentlemen’s agreement” that they are
just fine and dandy. But the math is never wrong. The big banks, and thousands of smaller ones, remain mired in toxic asset debt, and are therefore insolvent. Don’t expect
massive lending from these institutions, which means the velocity of money and credit will continue to remain constricted, perhaps for many years to come.
Meanwhile foreclosures held in abeyance are building up like water behind a leaking dam. Reuters reported on Sept 10: “Only 12 percent of U.S. homeowners eligible for loan
modifications under the Obama administration's housing rescue plan have had their mortgages reworked, and millions more foreclosures are coming, the Treasury
Department said on Wednesday.” Add to this the fact that the re-default rate on mortgages that have been modified is now over 50%, and millions more option ARM
loans are scheduled to reset in the next few years to higher payments that will likely force many more defaults. These conditions lead analyst Meredith Whitney to estimate
housing prices may fall another 25% before they finally hit bottom. People going about with “it’s a great time to buy” on their lips are sadly mistaken. It will be a great time to
buy when the bottom is finally in. Until then, save your cash for the 20% down payment you’ll need. Better yet, forget buying and stay a renter. It has been well proven by
popular bogging sites like Patrick.net that renting is the wiser strategy for the foreseeable future.
James Quinn of the Market Oracle hit the nub of the problem with this recent
commentary: “It has taken Americans three decades of overspending and under-saving to get into this pickle. As you may notice, consumer credit debt is $2.5 trillion and has
barely budged downward. The pundits and economists predicting a strong economic recovery are blind to the truths of consumer debt. With actual unemployment exceeding
16.8%, (over 20% by other analysts), 9 million people forced to work part-time wanting to work full-time, the work week at all time lows, and banks shutting down credit lines,
consumers will be reducing or defaulting on their debt for years. With 70% of the economy dependent on consumer spending, there is absolutely no chance of a strong
recovery. Disposable income is plunging as people without jobs don’t have anything to dispose of. A paradigm shift is occurring and the mainstream media, mainstream
economists, and clueless politicians running this country do not understand the implications. Three decades of debt accumulation is not resolved in two years. It will
take decades of reduced spending, paying down debt, and writing off debt.”
And that massive debt is the dark heart of the matter, on every level from the Federal
government, to states, cities, corporations, banks, families and individuals. The buy now pay later paradigm has failed—it’s later. It’s time to pay up, and people look into their
wallets and realize the cash is just not there. This debt must either be paid off, serviced, or defaulted on. The US government cannot even service its own debt, and must borrow
billions each day to do so. By the same token, Average Joe and Jane can no longer service their fee bloated debt at 30% interest either. Default rates at every level of the
residential and now commercial real estate market, along with rising defaults in credit cards, are the final truth of the matter. When you can’t pay you eventually have no other
choice but default. Banks never seem to get the plain truth that their reflexive punishing policies are the cause of many defaults. They jack up interest rates, slap on fees, raise
minimum payments, slash credit lines. Then they wonder why consumers falter and fail in the effort to service their debt. Default is the only sane option when faced with these
banking tactics. Just as the leaves must fall from the tree, it is Stick Season in the land of nothing down and low easy payments. It’s cash and carry now.
The bottom line is that we allowed the banks and financial gurus to leverage up to very risky levels, and when their game went bust with the sub-prime defaults triggering the
collapse of real estate loans as a viable “asset,” we continue to allow the banks to hide their losses instead of writing them down and facing reality. Reality, in this case is
insolvency and default, and the large banks have been deemed “too big to fail.” The result has been a policy where trillions of dollars that could have been spent to put millions of
Americans to work on our aging infrastructure went to the black hole of bad debt on the banks’ balance sheets instead, and simply vanished. Yet those trillions must be repaid
as well. The math never lies, even if the bankers do.
Yet, in spite of these harsh facts, the prevailing mainstream line from media and
government is that we have pulled the economy back from the edge of the abyss, and the recession has ended. Frankly, it’s a bit like saying the crisis is over right after the
first tower collapsed on 9/11. The second tower is still on fire, but standing proud and tall. Recovery!
The result of this misallocation of funds and rampant denial at all levels will be a greater
and greater risk of collapse—which is probably why the Government is now retraining a division of its tough Iraq war veterans for domestic deployment should the wheels come
off in a future chemical, biological, radiological, nuclear and high-yield explosive “incident.” Included in this list is a dire economic emergency. So the Army is building what the
Army Times now calls the ‘Consequence Management Response Force.’ Comforting thought, eh? This is still 9/11 mentality thinking, a worrisome fear of the next big terror
attack in this country. What is so myopic about this is that the real terror has already been carried out, and continues as an ongoing operation behind stately institutions who
use words like “security” to describe over leveraged profit making and risk avoidance schemes that have all resulted in massive losses instead. The bankers have done more
harm to the nation than a thousand Osama Bin Ladins ever could. So the consequences the Army is worrying about managing will more likely result from disgruntled Americans
taking their anger to the streets, and not a big terror incident.
Good luck boys. You couldn’t manage the “consequences” in Iraq, where a population of
about 26 million did exactly what they pleased in spite of you and another 300,000 fellow soldiers and Marines. What in the world makes you think that a division of 20,000 men
here in a nation of 300 million will prevent angry, impoverished and increasingly desperate Americans from doing exactly what they please as well?
The oddest thing about what lies ahead as autumn leads us to winter is that it is a time when the retail world loads up for a big anticipated bonanza in consumer spending. I
walked into a Hallmark in August and already found row upon row of Halloween cards. (Since when has anyone ever sent out cards on Halloween?) By Late September we
should already be seeing decorations for Thanksgiving and Christmas arriving at the malls and markets. At a time when the pain of this Great Recession/Depression will be
most keenly felt, the retailers will be standing behind their cash registers with their fingers crossed in hopes of another “Black Friday.”
But this year the stores may not be replete with consumer goods--or with consumers out to buy them. A huge chunk of the world’s commercial shipping fleets is now sitting idle
in a massive 500 ship “ghost Fleet” off Singapore. You can actually see the live data feed on these derelict ships in web sites like vessel track. Simon Parry of the UK Mail Online
broke the story: “Here, on a sleepy stretch of shoreline at the far end of Asia, is surely the biggest and most secretive gathering of ships in maritime history. Their numbers are
equivalent to the entire British and American navies combined; their tonnage is far greater. Container ships, bulk carriers, oil tankers - all should be steaming fully laden
between China, Britain, Europe and the US, stocking camera shops, PC Worlds and Argos depots ahead of the retail pandemonium of 2009....The size of the idle fleet
becomes more palpable when the ships' lights are switched on after sunset. From the small fishing villages that dot the coastline, a seemingly endless blaze of light stretches
from one end of the horizon to another.” These are all ships that would normally be carrying everything destined to land under Christmas Trees in the Western world. But not
this year.” And look around at some other major ports on vessel track--you will see similar ‘ghost fleets’ at anchor.
Will the shoppers spend some of the hard earned cash they’ve been trying to save all
year come Black Friday? It would be typical of the American mindset if this were to happen this year. Savings rates are finally positive, after decades in negative territory.
Will Americans throw what little cash they’ve managed to scrape together at one last buying binge before the leaves finally fall?
Stick Season will follow whether they do or not. And I predict that there will be many who wished they had the money spent on a 40” TV available for food next year…because the
real green shoots of economic recovery aren’t happening now, nor will they be happening next March. In fact, a real recovery may be years away. Between now and then, it’s
Stick Season, one long winter of real economic hardship for Main Street, and I hope you are ready.
Article by:
John Schettler
Sept 2009
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