Living Rent Free

Trader Mark from fundmymutualfund.com had a great post about the apparent disconnect between income and spending -- it's not adding up.  I had my own suspicions about this but TraderMark does a much better job skewering several sacred cows so I'll defer to his rapier and wit:

I was looking through the avalanche of economic data today, and it struck me how once again Americans are spending well over their income growth.  

I've written about this in the past in conceptual terms but never put it into an analysis. The true stealth stimulus plan in America is letting so many of its people live "rent free" as they sit in defaulted homes not making a mortgage payment. This "cost savings" allows them to shop and spend, and otherwise support the American consumption society.

From anecdotal stories (many of them) it is now taking at minimum 9-12 months to get evicted, and that's in states without super high foreclosure rates. I read the other day some Florida locations are 2+ years now. So 9, 12, 15, 18 months of not having to make a $1200, $1500, $1800 payment. And it can go longer now if you enroll in the trial modifications offered by government, then redefault. If you are really good at playing the system you might be able to go through two whole default cycles with the trial modification in the middle. 3 years of rent free living? Nirvana.

Further, with the new accounting rules that were the nexus of the market rally in March 2009, the banks no longer had to mark value of assets on their balance sheet to market... so they can now mark to what they see fit. Hence this system works for them too. All these foreclosures they should be closing on are things they are in no hurry to do... because doing so would mean they need to stop pretending about the true valuation of these defaulting mortgages and start admitting reality. Don't you love what 1 change in accounting rules can do for a country? ;)

My suspicion is the banks decide how much of a loss they want to take on home loans each quarter and then foreclose enough homes to make that quarter.  (The easiest number for a bank to hit for the next several years!)  The Feds are turning a blind eye as they are terrified of another drop in home prices and want to keep the banks 'solvent'  All the mortgage modification programs give cover to the banks to delay foreclosures and regulate the supply of homes hitting the market. 

How does that saying go??? Owe the bank $10,000 and they own you, owe the bank $50 million and you own the bank.  In America we can do it better:  Own a trillion in mortgages and you own the US Government.

Inflation update

Inflation numbers came out a little while ago and it continues to show a decline in overall inflation rates excepting the volatile food and energy segment.   All the data shown is year over year, non seasonally adjusted.  

Core CPI inflation (line in Red) continues a slow decline.  CPI Housing (line in Green) remains stuck at below zero and will most likely remain there for a while.  The Wall Street Journal has some more detail on the data.

For all of you looking for inflation, where is it?  Money supply is falling (I'll post about that soon(tm) ), credit is contracting, the dollar is getting stronger, and inflation is falling.  Longer term I concede it is possible but over the next 12 months I don't see it.

Hugh Hendry on China's chronic overcapacity and what it means.

Hugh Hendry once again nails it (in my opinion) as to what China's conversion into the workshop of the world really means.

This appetite for cheap Chinese exports, which had at one point seemed insatiable, means that we in the West have come to owe our largest Asian trading partner quite a hefty sum of money. China has become the world's biggest creditor, after amassing nearly $2.3 trillion of foreign exchange claims on us. However, the spectre of a creditor nation running persistent trade surpluses has ominous historical portents. It has happened only twice before, with the US economy in the Twenties and with the Japanese economy in the Eighties.

Read the entire article, it is not long.

Consumer credit keeps contracting faster

Consumer credit data came out about 2 weeks ago and the numbers are not getting any better.  Unlike my previous entries showing the very long term I thought I'd zoom in a little to show you how this recession is unlike anything we've seen in the last 40 years.  Consumer credit keeps going down and the rate of declining is increasing.  Call this an anti-'green shoot'.

The economy will not properly recover and the Federal Reserve will most likely not raise interest rates too much (if at all) until consumer credit and bank lending start rising.  Until then, get used to very low short term rates.

Bank lending continues falling -- Are buying US Treasuries instead

Bank lending continues to fall on a year over year basis.  Compared to the previous two recessions in which bank lending stabilized and then renewed growing this time overall bank lending is down and is continuing to decline.

As you can see from the first graph they are instead following the pattern from the last two recessions and are increasing the US Government securities portfolios while cutting lending to the private sector.   Unlike private bank loans Treasuries are very liquid and can be sold immediately if cash is needed.   Capital requirements for Treasuries are also much lower compared to a private bank loan.  Considering the capital positions of most banks in America (I'll have a post on this soon)  are tenuous they need the liquidity and 'safety' of Treasuries.

The year over year change in bank's holdings of US Government securities does not show the full extent of the bank Treasury purchases. As you can see from the second graph the banks continue to load up and the slope is definately upwards.

Inventory bounce is pretty much over with

The Inventory / Sales ratio is pretty much back to 'normal'.  As such the inventory bounce contribution to GDP is over.  A lot of other blogs have the details but here's one picture that says it all. 

The quick and easy fixes to GDP growth have already occured.  It's going to be tough sledding now.

North Korea from another perspective

Ever since my previous posts on North Korea I have been on the lookout for more articles.  The pathology of how the the authorities are able to completely twist and warp the nations reality is fascinating to me.  Slate.com ran a recent article:

A Nation of Racist Dwarfs:  Kim Jong-il's regime is even weirder and more despicable than you thought.

Consider: Even in the days of communism, there were reports from Eastern Bloc and Cuban diplomats about the paranoid character of the system (which had no concept of deterrence and told its own people that it had signed the Non-Proliferation Treaty in bad faith) and also about its intense hatred of foreigners. A black Cuban diplomat was almost lynched when he tried to show his family the sights of Pyongyang.

Interesting reading . . .