Signs of Weakening Real Consumption in the U.S.
This blog has been arguing for a while that the saving-less and debt burdened consumer is under strain and that consumption growth – already weak at 1.3% in Q2 – will further slow down in the rest of the year. There are several real and financial headwinds against consumption: falling home prices that are reducing home values, sharply reduced home equity withdrawal, still high oil and gasoline prices, a credit crunch in the mortgage and consumer credit markets, the beginning of a softening in labor markets.
July retail sales – reported yesterday – were better than expected even if in real inflation adjusted terms they were weak (up a mediocre 0.5% on a year over year basis). But many components of consumer spending – especially durables spending – are already weak: new home sales sharply down, auto sales have been falling for over six months, spending on housing related durables is weakening (see the sales and earnings trouble faced by Home Depot and Wal-Mart that were reported today).
The effects of tightening mortgage markets, lower home value and reduced home equity withdrawal take a few quarters to take effect. But there is already evidence that the modest rebound of consumption in July – after falling retail sales in June – may be transitory. Indeed, the early data for August are showing further softening in real private consumption.
First, the International Council of Shopping Centers and UBS Securities reported today the seasonally adjusted weekly data on U.S. chain store retail sales: in the last week ending on August 11th they were down 0.9% relative to the previous week; and in the previous week ending August 4th they were down 0.3% relative to the previous week. So for the first half of August such sales are a negative 1.3% compared to July. On a year over year basis, such sales are up only 2.3%, i.e. given that inflation is higher than 2.3% today real chain store retail sales are down.
Second, the same picture comes from the data on chain store sales provided by the Johnson Redbook Retail Sales Index (this is a sales-weighted index of same-store sales growth in a sample of large U.S. general merchandise retailers including about 9,000 stores). So far in August 2007 such sales are 0.6% below their July 2007 level. On a year over year basis, such sales – as measured by Johnson Redbook – are up a mediocre 2.3%; again this means that chain store retail sales are down in real terms relative to a year ago.
Also, you can now clearly see the subprime carnage spreading to near prime and prime mortgage markets as there is a generalized credit crunch in mortgage markets (more on this in a forthcoming blog). This and the worsening housing recession means greater default rates among homeowners ahead, lower home prices ahead, lower home equity withdrawal and a weakening of an already fragile US consumer. The macro consequences of falling home prices for the first time since the Great Depression have not been fully considered by the consensus soft landing analysts. The severity of this housing recession, its impact on other sectors of the economy and on a weakened consumer, and its financial markets fallout will be much significant than the consensus believes. The risks of a US hard landing are meaningfully rising.
92 Responses to “Signs of Weakening Real Consumption in the U.S.”
Latest from Bill Fleckenstein http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/CreditProblemsAreTooBigForTheFedsToFix.aspx Credit problems are too big for the feds to fix Wall Street is hoping for a bailout of the reckless mortgage sector that violates the whole concept of capitalism. It won’t work, because there’s too much mess to clean up. Gambler Mae The logical extension of that thought process would be: Let’s go buy 100,000 shares of Google (GOOG, news, msgs), and if it doesn’t work, we’ll get Gambler Mae (the new entity created for all losses) to bail us out; or let’s go to Las Vegas and put it all on black; or any other equally absurd examples we could come up with. One of the lingering problems of the Greenspan Fed, besides its legacy of bubble-blowing, is this idea that one should always be bailed out. However, as noted in the past, I believe that the problem is too big to bail out, and therefore it’s not going to happen.
Wal-Mart misses profit view Tue Aug 14, 2007 11:26AM EDT By Nicole Maestri NEW YORK (Reuters) – Wal-Mart Stores Inc. (WMT.N: Quote, Profile, Research) reported a lower-than-expected quarterly profit on Tuesday and cut its full-year earnings forecast on Tuesday, saying “economic pressures” like higher fuel prices have depleted shoppers’ wallets. ”It is no secret that many customers are running out of money toward the end of the month,” said Lee Scott, chief executive of the world’s largest retailer. The company’s shares fell 5.5 percent and helped drag down the overall market. U.S. retail stocks have fallen in recent days as investors fret that turbulence in the housing market and high gasoline prices have curbed consumer spending. Those difficulties appear to be rippling across the globe, and Scott said on a recorded call that higher fuel prices, interest rates, utility costs and “more financial pressure” were hurting sales in markets like Mexico and Canada. Wal-Mart’s earnings rose to $3.1 billion, or 76 cents per share, in the second quarter ended July 31, from $2.08 billion, or 50 cents per share, a year earlier, when the company took a charge for selling its German stores. Earnings per share from continuing operations were 72 cents per share before a gain of 4 cents. Analysts on average were expecting 76 cents, according to Reuters Estimates. Sales rose nearly 9 percent to $91.99 billion. U.S. sales at stores open at least a year, a key retail gauge known as same-store sales, rose 1.9 percent. Same-store sales increased 1.2 percent at Wal-Mart stores and 5.9 percent at the Sam’s Club warehouse division. At international stores, sales were up almost 16 percent at $21.6 billion. In an interview, Chief Financial Officer Tom Schoewe said Wal-Mart expected many of the trends it saw in the second quarter to continue in the current period, but the retailer was still “feeling pretty good” about prospects for the holiday season. SALES STRUGGLES With more than 127 million customers visiting a U.S. Wal-Mart store or Sam’s Club location every week, the company is considered a barometer of the health of the nation’s retail sector. But Wal-Mart has been struggling with slowing U.S. sales growth and announced plans earlier this year to cut the number of U.S. supercenters it will open. It has also returned to emphasizing its low prices after efforts last year to play down its discount roots backfired with its core low-income shoppers. For this back-to-school shopping season, which began in July, it has slashed prices on thousands of items by as much as 50 percent to boost sales at its U.S. stores. The retailer said last week that while the price cuts attracted shoppers, they also hurt margins. ”While we still think Wal-Mart is taking the appropriate steps to ‘right the ship,’ we think the turnaround has been extended and today’s unfavorable macro backdrop is creating a slippery slope for Wal-Mart to climb,” wrote JP Morgan analyst Charles Grom. He downgraded the company’s shares to “neutral” from “overweight.” Schoewe said the back-to-school season had gone “OK,” but more consumers were waiting until closer to the first day of classes to make their purchases. ”We’re pretty encouraged by back-to-school, but surprised by how late it’s coming,” he said. On the recorded call, Eduardo Castro-Wright, CEO of Wal-Mart’s U.S. operations, said the company still faced poor clothing sales and was cutting prices to move out merchandise. He also said strong sales of low-margin items like groceries and weak sales of higher-margin goods like clothes were hurting profit margins. In addition, Schoewe said Wal-Mart was contending with higher levels of “shrink” — inventory that is lost employee theft, shoplifting, errors in paperwork or vendor fraud. ”If you think about the macro environment, where customers are under pressure, there’s generally a correlation between theft and macro economic pressure,” Schoewe said. “Unfortunately, that’s what we’re seeing.”
Dear Sir, my poor opinion is that VERY important Banks, both American & European, are involved in this mess. Someone is trying to fix the situation…probably too late. ciao Daniele from Italy
Credit contagion spreading to money market funds Sentinel Management Seeks to Freeze Redemptions (Update1) By Jenny Strasburg and Katherine Burton Aug. 14 (Bloomberg) — Sentinel Management Group Inc., a Northbrook, Illinois-based money manager, has asked regulators for permission to halt investor withdrawals. The firm contacted the Commodity Futures Trading Commission for approval to halt redemptions “until we can honor them in an orderly fashion,” according to an Aug. 13 letter to clients. The firm managed $1.6 billion as of last month, according to a filing with the U.S. Securities and Exchange Commission. Sentinel’s investments include short-term commercial paper, investment-grade bonds and Treasury notes, according to its Web site. “Investor fear has overtaken reason and has induced a period in which most securities have simply ceased to trade,” according to the client letter, which does not specify which funds are affected. “We are concerned that we cannot meet any significant redemption requests without selling securities at deep discounts to their fair value and therefore causing unnecessary losses to our clients.” Eric Bloom, the firm’s president and chief executive officer, didn’t immediately return a call seeking comment. An assistant who declined to be named said the CFTC hasn’t granted the firm’s request yet.
It’s inexplicable happy PPT hour !
“The risks of a US hard landing are meaningfully rising.” Calling what is likely coming a “hard landing”, is probably being very generous and circumspect.
The global credit crunch claimed a Canadian victim yesterday, as financing company Coventree Inc. reported that it is having trouble finding investors. Coventree reported yesterday that that, “as result of the current unfavourable conditions in the Canadian asset-backed commercial paper (ABCP) market, it has been unable to place new ABCP to fund the repayment of previously issued ABCP maturing today.”
cash injections can bail out the financials? who is going to save the retailers?
i think home price decreases will soon start to bite. just a rough estimate. from 2005 to 2006, 8 million homes were sold(old and new). 2 mn new homes will have sold or profit of minimum 40% equalling 100000 dollars (ie) 200 bn. 6 million homes with 13% home appreciation will create 40000 dollars for old home (ie) some 250bn dollars. thus 450 bn dollars of housing profit were spent from housing profit. initially consumers will turn to credit cards.sooner that will also dry up. But debt of consumers remain, creating consumer recession also
12:35 Hungary’s second-quarter GDP growth is slowest in 11 years
ALright, read this statement VERY CAREFULLY and think about it. If this firm survived all the other market termoil it lists, and could not survive hwat is currently going on, what does that tell you about how bad things really are… Founded in 1979, the firm says on its Web site that it has never lost any money for clients and can be relied upon during times of market turmoil. ”During the volatile years of high interest rates in the early 1980s, the market fall of October 1987, and the collapse of major trading firms like Stotler in 1990 and Barings in 1995, Sentinel has proved its worth by ensuring that client cash is safe and liquid,” the firm said on its Web site.
Dean Baker has an interesting idea that might appeal to Ryskamp. He suggests that homeowners who are about to lose their houses not be thrown out onto the street, but be allowed to stay in the house as long as they pay a fair market rent for it. At least until the storm blows over.
Joseph Stiglitz: A day of reckoning for Americans who lived beyond their means http://www.taipeitimes.com/News/editorials/archives/2007/08/12/2003373835 The pessimists who have long forecast that the US economy was in for trouble finally seem to be coming into their own. Of course, there is no glee in seeing stock prices tumble as a result of soaring mortgage defaults. But it was largely predictable, as are the likely consequences for both the millions of Americans who will be facing financial distress and the global economy. And Greenspan egged them to pile on the risk by encouraging these variable-rate mortgages. On Feb. 23, 2004, he pointed out that “many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade.” Of course, Greenspan’s behavior meant that, under his watch, the economy performed better than it otherwise would have done. But it was only a matter of time before that performance became unsustainable. The housing price bubble eventually broke and, with prices declining, some have discovered that their mortgages are larger than the value of their house. Others found that as interest rates rose, they simply could not make their payments. Too many Americans built no cushion into their budgets, and mortgage companies, focusing on the fees generated by new mortgages, did not encourage them to do so. Just as the collapse of the real estate bubble was predictable, so are its consequences: housing starts and sales of existing homes are down and housing inventories are up. By some reckonings, more than two-thirds of the increase in output and employment over the past six years has been real estate-related, reflecting both new housing and households borrowing against their homes to support a consumption binge.
From Businessweek, Outright Criminal Fraud at Big Mortgage Lenders http://www.businessweek.com/magazine/content/07_34/b4047043.htm?campaign_id=yhoo It was a common and open practice at Ameriquest for account executives to forge or alter borrower information or loan documents. For example, account executives openly engaged in conduct such as altering borrowers’ W-2 Forms or pay stubs, photocopying borrower signatures and copying them onto other, unsigned documents, and similar conduct. The culture at Ameriquest encouraged account executives to engage in any conduct necessary to close the loan, to close the loan as quickly as possible, and to maximize the total loan amount.
For the hard landing/depression/apocalypse prognosticators… I think you’re a bit early. Obviously employment, BLS figures, Bank books, CDO’s Values, etc are all speculative. There are so many inconsistencies in their valuations and models that it makes any prediction nothing more then an educated guess. The ponzi/wall St/Casino will bounce around quite a bit, but a crash ain’t gonna happen yet! Even though there are so many variables that are uncontrolled, the “free market” can still be controlled! (aka Controlled = contained) …and for the j6p, the make the accuracy of all of our prediction (based on quite good knowledge) waaaaaay too inconsitent! If you want something hard and consistent to gauge, look to the only guarantee out there!!! TIME! Tick-tock, tick-tock, tick-tock… It doesn’t slow down and it doesn’t speed up. It’s a guarantee! …and that guarantee allows us to see that people all age at the same rate. …and that’s where we find our hard landing! I’ll say it once, I’ll say it again, this downturn will hurt, but nothing like those first few waves of Baby Boomer retirement! (so if we are in a downturn when that hits, then we see the hard landing!!!) If you really want to take a second to think about our current situation and how “manageable” it is, take a look at the war in Iraq. If things become that dire in the USA, the money allocated to the war could be redirected. (I’ve read estimates of trickle down totals of $2trillion.) Now if we take Jim Cramer’s 14million houses sold and 7million defaults and run a little math… $2,000,000,000,000.00 / 7,000,000 = $285,000 The government could just hand out $285,000 thousand to every defaulting homeowner, that would trickle back through the system. So bailouts aren’t that bad. …but once those first boomers withdraw??? Tic-toc, tic-toc… BOOM! Or should I say my: “Soc-Boom-K-Owed theory” Sleep tight, Rich H
the markets tested 13,100 on the Dow again and of course it held. Looks like the powers that be aint gonna let ‘er drop hard today..Looks like they want a green close today. “Free markets”, yeah, right…..
Rich H — And when will the first boomers start to withdraw? Give us a date for the Boom. I also think that all the economic turmoil we see today will quiet down. We may see some 10% corrections but in an orderly way, no boom. However, I thing that a real turning point for the worse will occur at around 2012. The main reason that makes me say that is that it seems to me that in about every 11 years the world arrives at a turning point which leads to great changes. The last such turning point was in 2001. 1990 before that, etc.
AC, why don’t you double that 10% number…
WOW-is it possible we see a “12″ handle on the Dow at the close of trading today???
US market is moving lower now. Significantly, the 200-day moving average for the S&P 500 (at 1448) has now been violated to the downside. We’re at 1433 right now … still fairly close, but any further momentum downwards could trigger a much bigger selloff. let’s see what happens. Danielle says: “my poor opinion is that VERY important Banks, both American & European, are involved in this mess. “ RESPONSE: Looks like you could be right, Danielle. Take a look at this new article by Ron Kirby on http://www.dollarcollapse.com http://www.financialsense.com/Market/kirby/2007/0813.html Ron has done a pretty good job of digging into the books at Bear Stearns, Citigroup, Bank of America, and JPM. The results indicate that there is the potential for losses, based on derivatives dealings. Could be a headache for Citi right now. This would explain the Fed’s actions over the weekend. Keep in mind that some of these players may have already exchanged some very bad debt – by cashing it in with the Fed. So it’s not necessarily a case of things going bust. Hopefully?? But not good. Pete, CA
China’s Banks to reveal limited US subprime mortgage losses http://www.ft.com/cms/s/00a4caf6-49b3-11dc-9ffe-0000779fd2ac.html Chinese state lenders, including the Bank of China, are expected to announce losses from their exposure to the US subprime lending market when they release their first-half results in the coming weeks. But the exposure of China, both in terms of the government’s hundreds of billions of dollars of US dollar holdings and the overseas investments of its commercial banks, appears relatively limited. If China can contain the fallout from the subprime crisis spreading through financial markets in the west, the government will be able to thank its conservative state investment policies and maintenance of capital controls. For Beijing’s leaders, who have presided over high economic growth through the numerous foreign and domestic crises over the past decade, China’s ability to avoid yet another foreign catastrophe will be a confidence booster. China’s large state banks have increased their foreign investments in recent years, following their restructurings and successful listings overseas. But they have not assumed huge new risks in the process, analysts say. “Chinese banks have traditionally been very cautious in their overseas risk exposure,” said Jing Ulrich, of JPMorgan in Hong Kong, pointing out that they had bought only a small amount of higher-rated collateralised debt obligations, the bundled mortgages at the centre of the crisis. “Any losses should be minimal compared to the banks’ total assets.”
CNBC: ”Inflation Gauge Ticks Up as Trade Gap Narrows The Fed said last week that inflation remained its predominant concern, although it acknowledged that credit conditions had tightened for some households and businesses. U.S. producer prices rose by a more-than-expected 0.6 percent in July, Labor Department data on Tuesday showed, but the gain was driven by energy costs” No cuts … dudes … LOL!!! Greenspan ain´t there anymore.
an E-Z solution to the problem would be to redefine: recession poverty homelessness unemployment inflation …and 55 other concepts…
Countrywide delinquencies soar to multi-year high http://money.cnn.com/2007/08/14/news/companies/bc.countrywide.lending.reut/index.htm?postversion=2007081411 Delinquencies rose to 5.10 percent from 4.11 percent last July, and June’s 4.98 percent. July’s totals are the highest that Calabasas, California-based Countrywide has reported in its monthly data reports since at least March 2002.
California cities fill top 10 foreclosure list http://money.cnn.com/2007/08/14/real_estate/California_cities_lead_foreclosure/index.htm?postversion=2007081411 Stockton, California now leads the nation in foreclosures. Of RealtyTrac’s top 10 metro areas for foreclosures, four are in Central California. Stockton recorded one foreclosure filing for every 27 households during the six months ended June 30, a 256 percent increase compared with the first six months of 2006.
The market is gone now. Unless Zorro shows up before closing time with a black mask and a sword. Lets’see why … looking at latest news from Bloomberg: Citigroup may forfeit a billion dollars in profits. [Could be an understatement!] http://www.bloomberg.com/apps/news?pid=20601087&sid=aMzsFNVEPSxQ&refer=home Coventree in Canada cannot find lenders to cover emergency funding! That would, of course, create a default situation. We’re assuming the Royal Bank of Canada will step in here. Aren’t we?? http://www.bloomberg.com/apps/news?pid=20601087&sid=aMzsFNVEPSxQ&refer=home Pete, CA
HERE COMES ZORRO!!!
SENTINEL: This is the first money market fund to suspend redemptions. Get everything out and put it in a bank account–but no more than the maximum insured in each bank’s account.
This is the 6th time below the 200 dma this month for the s&P500, they will save it again. 1428 ic the crucial line in the sand, they may let that be taken out to suck in some more gullable shorts and then WHAM, they will bitch-slap the shorts again with a whopper rally and burn them once more. If we take out that level on big volume, the PPT may not step in on a falling knife…
Aegis Mortgage is bust. But hey … who cares i guess.
Dean Baker has an interesting idea that might appeal to Ryskamp. He suggests that homeowners who are about to lose their houses not be thrown out onto the street, but be allowed to stay in the house as long as they pay a fair market rent for it. At least until the storm blows over. Written by Guest on 2007-08-14 11:57:56 I’M OPEN TO THIS OR ANY OTHER ARRANGEMENT WHICH KEEPS PEOPLE IN THEIR HOUSING. THE PROBLEM IS GETTING THE FEDERAL GOVERNMENT SIGN OFF ON THIS PROPOSITION, EVEN THOUGH IT WOULD PROVIDE A NEW POINT OF STABILITY AND PREDICTABILITY FOR THE ECONOMY. IT WOULD INVOLVE A MASSIVE REWRITE OF THE TAX CODE, AND THAT’S WHERE THIS HAS TO GO NOW. THERE HAS TO BE SOME OVERT STATEMENT ON THE PART OF THE FEDERAL GOVERNMENT THAT AS A MATTER OF POLICY THERE CAN BE NO INVOLUNTARY DEPRIVATIONS OF HOUSING. THIS IS SIMPLY MUST HAPPEN OR THE ENTIRE ECONOMY WILL COLLAPSE.
We don´t need Zorro. We have John Ryskamp.
The Baby Boom started in 1946, and continued through 1964. The first wave are 61 right now, so depending on when they’ll be entitled for SocSec/401K withdrawels depends on the existing rules at that time. (from what I understand, the Gov’t can change the age SS gets distributed, and who knows what rules will exist for 401k’s. Maybe 401k’s will be able to suspend withdrawels too???) Hope that helps.
Guest on 2007-08-14 14:15:05: > Aegis Mortgage is bust. That’s last week’s news. Check out this pre-press discussion about Aegis on a mortgage broker’s board. Scout around — they have some funny gallows homor about the sorry state of their profession.
CNBC: “Thornburg Mortgage Shares Halted Pending News” Serious? No … all nicely contained.
We don´t need Zorro. We have John Ryskamp. Written by Guest on 2007-08-14 14:20:56 YES, AND I WANT THAT LITTLE FASCIST INSECT GEORGE BUSH TO SIGN OFF ON A HOUSING EVICTION BAN RIGHT AWAY.
Sentinel’s news could also cause trouble in the commodities markets. Commodities investors constantly need to adjust margin levels as the value of their positions rise and fall in the market, and in this market they have been particularly volatile. Sentinel is telling us that, at least right now, it can’t provide its trading clients the money they need to make those margin adjustments. Imagine using an ATM machine, and having it tell you, “Sorry, your money is here, but we can’t let you have it right now because too many others want theirs, too.” According to a report on the cable channel CNBC, the inability to access the cash from Sentinel was causing some disruptions Tuesday on the base-metals markets in Chicago. AND OF COURSE COMMODITIES ARE SKETCHY AS HELL, SO THEY’RE THE NEXT TO GO.
“YES, AND I WANT THAT LITTLE FASCIST INSECT GEORGE BUSH TO SIGN OFF ON A HOUSING EVICTION BAN RIGHT AWAY.” Yeah .. but you heard him. Everything fine in loonyland, no problems, no ban.
“This is the 6th time below the 200 dma this month for the s&P500, they will save it again. 1428 ic the crucial line in the sand, they may let that be taken out to suck in some more gullable shorts and then WHAM, they will bitch-slap the shorts again with a whopper rally and burn them once more. If we take out that level on big volume, the PPT may not step in on a falling knife… Written by Guest on 2007-08-14 14:14:18″ What does “the 1428 ic” mean? I know it’s the S&P, but what’s the IC and how does the bait and lure work??? (I don’t understand shorts well enough.) Rich H
MARKET CLOSE ”HERE COMES ZORRO!!! “ Senor, did you see him? I thought just briefly, around 3 pm, that I saw a man gallop by the market very fast. I tried to snap him with my digital camera – but it doesn’t click when you push the button. Darn!! BTW, if Catherine Zeta-Jones gets down off the horse – please get me her photo and autograph. I always thought she was cute in that show. ”"This is the 6th time below the 200 dma this month for the s&P500, they will save it again. 1428 ic the crucial line in the sand” We crossed that line. S&P500 = 1426.56 Tomorrow is redemption day for the funds. Let’s see what happens now. Pete, CA
“Senor, did you see him? I thought just briefly, around 3 pm, that I saw a man gallop by the market very fast. I tried to snap him with my digital camera – but it doesn’t click when you push the button. Darn!!” It was ZORRO, no … it was a plane … no … it was a train … no it was SUPERMAN! But that damn kryptonite is a real problem!
Wall Street Firms to Set Up Unregistered Securities Market By KEVIN KINGSBURY August 14, 2007 3:32 p.m. A group of Wall Street titans are joining forces to create a rival venue to Goldman Sachs Group Inc.’s private system to trade the stocks of companies that don’t want the scrutiny and regulatory burdens of going public. Separately, Bear Stearns & Co. announced its own private-placement platform for unregistered equity securities. Citigroup Inc., Lehman Brothers Holdings Inc., Merrill Lynch & Co., Morgan Stanley and Bank of New York Mellon Corp. have established the Open Platform for Unregistered Securities. The firms say OPUS-5 “will provide trade reservation, shareholder tracking and transfer management for privately offered equity securities.” Bank of New York Mellon will act as administrator of the system, which is intended to “promote liquidity and efficiency for qualified institutional buyers” who trade unregistered equity securities “and enhance issuers’ capital raising efforts.” The companies added that more securities firms are expected to participate in OPUS-5 over time. The market is slated to launch next month. Isn’t the over the counter, illiquid nature of all of these derivatives blowing up all over the world one of the PRIMARY REASONS the current mess is unraveling ? In this environment they (at least the ones who survive) are going to take stock exchanges private ? This is absolute bull shit and I am so sick and tired of it all.
Nouriel on CNBC with Tom Keene mms://media2.bloomberg.com/cache/v57s3Y2MiI4Q.asf
My mistake. The broadcast is Bloomberg
I believe I mentioned in the previous blog that an eviction ban would change the homebuying marketing ads from “no money down” to “all money down”. I.e., the residential market would practically disappear. Only the very rich would be able to purchase homes (all cash down) and all the rest of the present and future (evicted) homeless would never be able to have their own home, nor their children, or grandchildren unless these, by some ability, become filthy rich (like starting a hedge fund or a private equity corporation). Ernst
This credit crunch is a serious threat to the housing market. Even if Fannie and Freddie are willing to continue with lending, who will buy GSE bonds? China stopped buying them in May. Japan has admitted to being burned on our straw-spun-into-gold junk bonds rated AAA. I think there is a serious question of how mortgages will be financed. As home buyers need to come up with down payment and prove income, house prices have to fall drastically, by 30-50%. http://www.californiahousingforecast.com/
If the GSE’s hold, it will just be a recession. If the GSE’s fall, it will be a depression.
Ms. Berkland, Is the prediction of prices falling 30% for the So. California market only? How much did prices fall in the early 90′s? For the vast “fly-over” country (midwest), prices may just remain flat for a while. I would like to hear from people on the east coast too.
Guest, ”If the GSE’s hold, it will just be a recession. If the GSE’s fall, it will be a depression.” From what I recall it went something like, “If my neighbor loses his job it’s a recession. If I lose mine, it’s a depression.” …but either way works. On a serious note, I was in one of the top NYC restaurants (Craft) last Thursday night. They generally have two seatings there – 6:30pm and 8:30pm. I went in for the 6:30pm seating. For the 6:30pm seating there were easily 8 empty tables. For the 8:30pm seating (we left at around 9pm), there were easily 4 empty tables. And this is a restaurant with around 30 tables max. For those of you who live in NYC, you know how difficult it has been to get reservations at the top restaurants. So, either people are souring to Tom Colicchio’s fare, or there is some belt tightening (of the financial kind) going on among consumers in NYC. Any thoughts??
One scary thought did cross my mind… With the recent financial turmoil the US finds itself in leaves it very vulnerable to further surprises. I shudder to think of a possible repeat of a 9/11 incident in the midst of already being on the brink.
The amount of ARM’s resetting spiked from about $20 B a month to about $45 B a month in May. Three months of that led us to where we are now. The amount of ARM’s resetting will remain above $20 B almost the entire time from now until December of 2012, and sometimes much higher. There is an oversupply of houses on the market, more coming on from foreclosure sales and distressed owners, and tightening loan requirements. Housing and related activity was 6.5 percent of GDP in 2005. This is going to be a very severe recession, depending on quickly house prices fall and GDP is lost. The quicker it happens, though, the fewer people will buy houses at inflated prices, and the better people near retirement can adjust their plans.
@Guest on 2007-08-14 19:19:23: I shudder to think of a possible repeat of a 9/11 incident in the midst of already being on the brink. In any case it would not be desirable for the U.S. government to bring about unwanted changes to the current legal system in a (sorry to say this) Hitlerite fashion. In 1930′s a form of a gov’t rule came to power in the wake of a severe recession; this particular rule solved the economical issues in Germany at that time but caused other problems.
To my understanding (however “illiquid” it might be) the derivatives markets are a zero sum game, with buyers and sellers on both ends. So my question is, who took the “profitable” side of the bets? For every dime being injected into the cash reserve system for liquidity, someone is depositing a dime into their account for keeps. Who’s winning?
Jason B… Please confirm that Housing and related activity was “6.5 percent of GDP in 2005.” I’ve been looking for this number and would love to understand your source. Cheers…
FYI to those in the unknown… GSE’s = government-sponsored enterprises, e.g. Fannie Mae and Freddie Mac.
Welcome to GW Bush’s “Ownership” society. Thank G*d, he did not get his way with Social Security. I am not sure how the USA will ever become solvent. I do know that I will take a “blue dog” Democrat or a Goldwater Republican over GWBush anyday. Vote for either Ron Paul or John Edwards. I would accept either as an Independent.
Q. “What does “the 1428 ic” mean? I know it’s the S&P, but what’s the IC and how does the bait and lure work??? (I don’t understand shorts well enough.)” Rich. Here’s what’s being said … Right now the market is continuing to deteriorate because investors are concerned about the problem with subprime mortages and its impact on credit. Some people have recognized this and taken positions on the New York Stock Exchange (NYSE) that will make a profit if stock values go down. In other words – they have been short selling stocks (investigate this term if you don’t understand). In fact, the short positions on the NYSE have now risen to astronomical levels, exceeding even what was seen before the big market crash in 1987. One of two things can happen. If the short investors hold their ground and don’t cave in, the market is likely to undergo a significant downwards correction soon. Alternatively, if someone had a tremendous amount of cash, they could go out and buy a very large number of stocks (or futures) and try to force values up again. If indeed the market rose quickly, all the people with short positions might become worried that they were the ones who were going to lose money. They would then sell their positions. This would cause the market to soar upwards, just as if a very heavy weight was lifted from the supply/demand process. This scenario is referred to as a “short covering rally”. Clearly, it would be abig rally if it happened. Equally clearly, no-one has the money to force such a move right now – except possibly the US Gov’t itself (i.e. the PPT). So what peopel are doing is speculating that the PPT might make such an “underhanded” move. Personally, my money is with the shorts now. Not literally, because I’m not in the market. But the shorts have shown real conviction in their position over the last few weeks, and jave not caved in despite a few attempts by the market to rise. I suspect that instead of a short covering rally emerging, the opposite may happen. Even more people might pile onto short positions, because they sense fear and hesitation in the market. In that case the PPT may try to do damager control, but I don’t think they could prevent a healthy correction. The fact that the S&P 500 crossed below the 1428 level today is a signal that further selling may be coming i.e. it favors the shorts, and hints towards a bigger selloff. Pete, CA
“Can you explain how the precious metal ETF holders might get caught?” Andy, a quick answer. In the immediate future (short-term) the ETF’s are probably fine. They are a good vehicle for speculating with precious metals. Another alternative is to participate by opening a “pool account” at one of the big bullion dealers like Kitco. Same thing applies … probably an effective investment tool over the short-term. It is not clear what will really happen to the ETF’s or pool accounts if a really big crunch comes in the precious metals market. I am talking about a dramatic upsurge in demand for gold, should a major political and economic crisis occur. It is conceivable that these investment vehicles could freeze up, if the underlying holdings of gold or silver becomes unavailable. Look at what has happened recently with liquidity on Wall St. Everyone thought it was flowing like water – until the day it dried up. There has been speculation that not all the ETF’s are holding 100% of the physical bullion (gold or silver) that supposedly exists. Some of the holdings may actually be futures contracts for the metal – which is speculative paper and not the metal itself. There is also some concern that the people charged with verifying the ETF holdings may not be independent and without a conflict-of-interest. For example, if the verifying organization is in fact a big investment bank on Wall St, are you sure they don’t have stake in getting some of the bullion themselves in a crisis?? It pays to think about what your own personal objectives are. ETF’s and pool accounts are convenient and require less hassle. But if you really want security in a major crisis, you need to own physical gold or silver yourself. That’s the only way to be sure. In the case of gold and silver, it’s ALL about security – so make sure your investments are secure. Just my point of view. Others may disagree. Pete, CA
401K withdrawals can begin at age 59 1/2, so the oldest baby boomers are already able to withdraw without penalty.
the us of a, Now you need to pay!
why asian still hold US bonds?
Meanwhile, on the other side of the night…, the yen is tracking down through 117.26 as I write this. The unwind has been orderly so far, but the risk of a rush for the door is increasing as the pressure builds. Everyone wave goodbye to the cheap money as it walks out the door.
Goldman `Quant’ Fund Cuts Fees to Woo Investors Aug. 15 (Bloomberg) — Goldman Sachs Group Inc. waived the management fee for new investors in its Global Equity Opportunities hedge fund after the stock-market rout wiped out $1.4 billion of assets this month, according to a person with direct knowledge of the terms. LOL… SUCH EXPERT NEEDS TO CUT FEES?
Here in the US we have these greedy, destabilizing power players in the financial sector who want to make a quick buck, way over leveraging (playing with money they don’t have) – waiting for their government bail out at the taxpayer’s expense if they make a wrong move, meanwhile taking humongous payments. What are they really adding to the economy? Can anyone really argue that LBOs are that beneficial? I have friends who fled companies bought out in this manner. They said everyone knew things were going to he**. WTF – is our financial system really better than China’s? I wonder.
Question: IS it legal for the FRB to borrow 600 Billion dollars fron Soverign Hedge funds at the Fed Funds Rate? This instead of cutting interest rates to clean up the mess. Then ultimately increase FED rates to control inflation. Also a fiscal policy (flat tax rate)to absorb the excess liquidity and to reduce Naional debt.
Basis Capital Tells Investors Loss May Exceed 80% Is the same happening in the us of a?
Yen is 117.16 and falling… Expect intervention very soon, but it doesn’t look good Maverick.
One reason exists why consumers have not pulled back more – credit cards. When the credit card companies start tightening up on credit card terms, i.e. reducing limits and actually evaluating risk of lending like the mortgage companies are now doing, consumers will have no where else to turn. With no savings, no home equity loans and no easy credit cards, spending will dry up which will drive this country into a depression.
http://www.ftd.de/boersen_maerkte/marktberichte/:Subprime%20Krise%20Ausverkauf/239492.html ABCP Papermarket is imploding. Size: 1 Trillion $.
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_weil&sid=aOmLOmdkq73k Aug. 15 (Bloomberg) — You think your job is tough? Think about the poor schlimazels from Deloitte & Touche LLP who blessed the books at American Home Mortgage Investment Corp., mere months before it went belly up. The Deloitte accountants faced a crucial decision as they finished their audit work in March. Deloitte could resign and walk away. The firm could qualify its audit opinion by saying there was “substantial doubt” about American Home’s ability to continue as a “going concern” through the end of the year — as many short sellers already had concluded. Or it could give the company a clean opinion, expressing no doubt, which is what Deloitte did. —————– http://globaleconomicanalysis.blogspot.com/2007/07/fitch-discloses-its-fatally-flawed.html Disclaimers S&P: “Any user of the information contained herein should not rely on any credit rating or other opinion contained herein in making any investment decision.” Moody’s: “Moody’s has no obligation to perform, and does not perform, due diligence.” How can it be that an entire system of investment decisions are based on ratings that the ratings companies tell everyone not to use for investment purposes? —————– One would have thought that trust toward U.S. investments would have been restored after the new accounting rules after the Enron clones. But seems like the system itself provides a pathetic ongoing problem. Question is how long after foreign investors start pulling out of the cash strapped U.S. economy?
“Countrywide Cut by Merrill; Bankruptcy Seen Possible” http://www.bloomberg.com/apps/news?pid=20601087&sid=ag3VRy7zYf5k&refer=home ”“We cannot understate the importance of liquidity,” Kenneth Bruce, a Merrill analyst in San Francisco, said in a research note today. “Effective insolvency” would result should Countrywide’s creditors force it to sell assets at depressed prices or investors lose confidence in its ability to raise cash, he wrote. [...] Last week, Countrywide said it had access to about $187 billion in credit. Chief Executive Officer Angelo Mozilo assured investors that the company has enough cash to cope with the market turmoil, and said it may even benefit as competitors are forced out of business.”
Coutrywide has hit the wires as stated above in AFFG’s post which has spooked the mkt. Currently the rumour doing the rounds in the street are that Fortis will halt redemptions in some of it’s funds and that Canadian ABCP conduit situation is getting worse. Crossover index is widening as we speak having been relatively static last few days. Finally, a bid is coming back into US equity futures and European indices so we should see a battle royale today in terms of sentiment.
AFFG ”Last week, Countrywide said it had access to about $187 billion in credit. Chief Executive Officer Angelo Mozilo assured investors that the company has enough cash to cope with the market turmoil, and said it may even benefit as competitors are forced out of business.” I’m hearing that they could be on the chopping block (bankruptcy). Clearly if that’s true then things must have been pretty bad for at least several months. Pete, CA
USD/Yen down to 116.9 EUR/Yen down to 157.6 EUR/USD down to 1.347 Major unwinds of yen carry taking place now. Not a good day for the Dow. Pete, CA
small cap resources are getting smashed on the ASX, many down by 30-40% this month, one of the worst days so far being today. http://www.news.com.au/business/story/0,23636,22250485-31037,00.html and our govt says the subprime crisis will not affect local markets…
Penalty rate? Nooo way! Bonus rate 4 5/8 instead of 5 1/4 Let’s party…
Second Life Stock Exchange Crashes/Banking Crises. http://www.handelsblatt.com/news/Technologie/IT-Trends-Internet/_pv/_p/204016/_t/ft/_b/1309230/default.aspx/bankencrash-im-zweiten-leben.html
The s&p is at a crucial level and if it closes below 1425 today, thing swill get EXTREMELY ugly very fast. They will do everything they can to hold these levels in the markets, count on it.
It doesn’t matter how bad teh news gets today, the markets MUST close green…
CEO confidence at five-year low By Lina Saigol, M&A Correspondent Published: August 14 2007 22:06 | Last updated: August 15 2007 00:34 Confidence among some of the world’s business leaders has slumped to its lowest level since the third quarter of 2002, suffering from concerns about financial market volatility and mixed US economic data, according to an investment bank’s survey. The Goldman Sachs Confidence Index – which was conducted in the last week of July and the first one of August – is based on chief executives’ assessments of business conditions for the coming quarter and regarded as a leading indicator of company sentiment.
9:56 NY Fed gives no details on cancellation of repo 9:56 Fed cancels scheduled overnight repurchase operation
Commercial paper woes could hit banks Tue Aug 14, 2007 3:13PM EDT NEW YORK (Reuters) – Trouble is mounting in the $2.2 trillion commercial paper market, and further deterioration could trigger problems for banks that would rival what they’ve suffered from the subprime crisis. While the problem could still subside, and there are no signs of a full-blown panic, at least five issuers of asset-backed commercial paper have had trouble refinancing that debt when it matured, forcing them to make investors wait before getting repaid. The asset-backed notes now makes up half of all commercial paper. Most recently trustees for a Canadian asset-backed commercial paper issuer on Tuesday said it could not find the funds to repay investors in their outstanding asset-backed commercial paper. Generally, trading in asset-backed commercial paper is choppier than it was before the isolated problems hit, and there is some danger that investors will be less willing to buy the paper, which offers only slightly higher returns than other forms of commercial paper, traders said. If troubles among issuers spread, investors could suffer, but so could banks, which are most likely to be on the hook if issuers cannot sell new asset-backed commercial paper. ”Asset-backed commercial paper problems could be much worse than what we saw in the subprime market,” said Josh Rosner, an analyst at independent research firm Graham Fisher in New York. In some cases, banks may have sold bad loans to commercial paper issuers, which would only magnify trouble in the market, experts said….
DJIA 13,000 is just a number, I’m sure. Insignificant, really … Coincidence, this bounce, keeping the SP500 nominally above water for the year … LOL.
CNBC: ”Fed Says It Will Go Ahead With Adding Funds to Banking System After Technical Problem Forced Delay” Why do I always have the impression that things go wrong when they need to.
Rescue efforts in full swing today, keep an eye on the S&P futures today, you can see th intervention first hand…
”Free” Market: ”Free” to go up or stay flat … ”Free” to go down only on our terms. We’ll “let you know”.
CNBC: “Federal Reserve Adds $7 Billion to Banking System”
11:07 Fed accepts $4.5 billion in mortgage-backed collateral 11:07 Fed lends banks $7 billion in one-day repurchase operation
I think HSBC is in deep shit…
Other than rampaging armies on the move, no institution anywhere has more power than central banks. And no central bank has more of it than the US Federal Reserve unless it’s the secretive, unaccountable Bank of International Settlements (BIS) founded in 1930 and based in Basle, Switzerland. The BIS is central banker to its member banks (a sort of financial boss of bosses) that includes the Federal Reserve. Some savvy financial experts believe the world’s ruling elites control this bank of banks and intend using it to establish a global borderless financial world controlled by them. It’s no hairbrained conclusion with the European Union in place, talk of a similar one in Africa, and a North American Security and Prosperity Partnership arrangement coming to a head that will create a borderless continent headquartered in Washington and likely will aim next to link with the EU for greater global control. So what’s important about the Fed, and why should we care? Despite common belief, the Federal Reserve is not a government agency. It’s a privately owned for profit cartel of powerful banks (including Wall Street ones) protected by law, even though the Federal Reserve Act of 1913 violates the US Constitution. It’s Article I, Section 8 states “The Congress shall have Power To coin Money (and) regulate the Value thereof…” In 1935, the Supreme Court ruled only Congress has this power and cannot constitutionally delegate it to another group or body, and that includes private for profit bankers running the Fed. Simply put, commercial banks in charge of printing and controlling the nation’s money supply constitutes criminal fraud. It’s the reason the Federal Reserve was designed to look like a government agency when, in fact, it isn’t. Being headquartered in Washington in the stately mausoleum-looking Eccles building is just part of the clever subterfuge. But it’s even worse than that. By establishing the Federal Reserve, Congress and President Woodrow Wilson privatized the nation’s money creation system relinquishing the most important power governments have that got famed banker Baron MA Rothschild once to say: “Give me control over a nation’s currency and I care not who makes its laws.” Ever since US private bankers got it, they’ve been empowered to print money in any amount, control its supply and price, and benefit hugely by loaning it out for profit. That includes making government pay interest on its own money it wouldn’t have to do by printing its own. This amounts to no less that government sanctioning the right to counterfeit the national currency for private gain with the Fed and private bankers being world class pirates masquerading as guardians of the public interest. It’s no exaggeration to call this the all-time, greatest ever financial scam, still ongoing, and totally beyond the reach of public or any other type scrutiny. If there were any, it would be learned this institution was created as a scheme to transfer wealth from ordinary people to giant banks and Wall Street. It’s worked like a charm, and few people are the wiser. But there’s more still to the story, and it keeps getting uglier. Supposedly, the Federal Reserve was established to stabilize the economy; smooth out the business cycle; maintain a steady, healthy rate of sustainable growth; create price stability and control inflation; and work for the betterment of everyone. So let’s grade it on its performance. Since 1913, we had economic crashes in 1921, and the major one in 1929 followed by The Great Depression lasting until the outbreak of WW II. Post-war, we then had recessions in 1953, 1957, 1969, 1975, 1981, 1990, 2001, and we’re likely heading for future major trouble resulting from past Fed policy abuses under Alan Greenspan and his successor, Ben Bernanke, carrying on in the same fashion. We also had a serious inflation problem beginning in the 1960s that became crisis-level severe in the 1970s and early 80s. In addition, in the wake of reckless financial market deregulation in the 1980s and lack of government oversight (with the Fed’s blessing), we had a major financial crisis causing more bank failures than ever before or since in our history. Further still, under the Fed, we’ve had - – soaring consumer debt; – record high federal budget and current account deficits; – an off-the-charts national debt, far higher than the fictitious reported number; – a high and rising level of personal bankruptcies and mortgage loan delinquencies and defaults; – an enormous government debt service obligation we’re taxed to pay for; – the systematic loss of manufacturing and other high-paying jobs to low-wage countries; – a secular declining economy, 84% service-based, and mostly comprised of low-wage, low or no-benefit, non-unionized jobs; – an unprecedented wealth gap disparity; – growing rates of poverty in the richest country in the world; – a decline of essential social services; and – a lawless nation devoted to militarism and imperial conquest with the Federal Reserve complicit in supplying all the funds needed to fuel it, and all the while caring not for the public interest it’s supposed to serve. This type record adds up to a clear conclusion. Above all else, the Federal Reserve failed to accomplish what it’s supposed to do revealing instead what’s really going on. The Fed doesn’t serve the public interest. It abuses it because that’s how bankers and all corporate predators make money. In the world of finance, ordinary people lose out because giant banks and Wall Street are allowed to pull off the grandest of grand thefts, their thievery continues unabated, and the stakes keep rising. Some astute financial observers now believe current excesses and resulting turmoil were caused by the intentional engineering of the US housing bubble with the Fed in on the scheme. Insiders made loads of easy money in the process and now stand to cash in big buying troubled assets for a fraction of their value the way they always do in the wake of market meltdowns. It’s called “vulture” investing with shrewd buyers profiting hugely in good and bad times that are all good for them. One analyst calls the subprime mortgage turbulence a global bank run with potential huge yet to emerge consequences. Writer Danny Schechter has another view in his article titled: “Subprime Or Subcrime? Time to Investigate and Prosecute,” and he makes a strong case. He calls the subprime credit squeeze a “sub-crime ponzi scheme (causing) millions of people (to lose) their homes because of criminal and fraudulent tactics used by financial institutions (posing) as respectable players in a highly rigged casino-like market system.” There’s nothing free and open about it. The problem is deep, structural and aided by stripped away regulatory protections giving predatory lenders and Wall Street schemers free reign to target unsuspecting victims. Part of Schechter’s fix is calling for a “jailout,” not a “bailout,” but with friends in high places, don’t bet on it beyond a small fry or two. It’s sad and disturbing because this type behavior is part of the American “ethic” to scheme, defraud and prey on the innocent knowing big players nearly always get away with it, and under George Bush, it’s practically guaranteed. With a clear field ahead and friends in high places, the “Masters of the Universe” are now heading for their perfect kind of buying opportunity if Jeremy Grantham and other worriers are right. Manipulation aside, Grantham’s persuasive evidence suggests we’re watching an unstoppable “very slow motion
train wreck” likely to be pretty ugly on “impact.” By his reckoning, it’s probably too late to undue the enormous damage done no one will escape from. His advice is that to be forewarned is forearmed to prepare as best as possible although for most people it’s practically impossible. It’s a good time to think of the ancient Chinese proverb, that’s, in fact, a curse and not of Chinese origin, but it sounds good saying it is: “May you live in interesting times.” Whoever coined the phrase intended it to be ironic and “interesting” meant dangerous, turbulent or uncertain. That, indeed, is true now but to what degree we’ll only know in the fullness of time. Stephen Lendman lives in Chicago and can be reached at firstname.lastname@example.org. Also visit his blog site at http://www.sjlendman.blogspot.com and listen to The Steve Lendman News and Information Hour on http://www.TheMicroEffect.com Saturdays at noon US central time and now archived for easy listening. Stephen Lendman is a frequent contributor to Global Research. Global Research Articles by Stephen Lendman
90 mins left to go in todays markets S&P 500 is still sitting at a whopping 1427. It closed yesterday at 1426. So if that’s the “rescue effort”, then it isn’t doing much. Wall St and the Fed still aren’t grasping how big a gap they’ve got – between their point of view and the average American family on Main St. However, maybe they are so busy putting out fires right now in the financial system – that this just doesn’t seem high on the priority list. Somebody out there needs to slow down and realize that these problems with risk and debt are symptomatic of a much bigger disconnect in America’s whole system. Pete, CA
Moral Hazard towards Chaos: December 2006 the USA entered into recession. Q1 results of USA GDP growth in April 2007 indicated a 2.7 growth GDP whereas by May 2007 – that figure had diminished to o.7% (Wow) so much for fraud and lagging indicators. US inflation is 10% or more… The DOW will now not rest until it reaches around 8000 or thereabouts after which it will plummet to lower level. My opinion! Risk or computable uncertainty: Risk left the occasion in December 2006 whereby Uncertainty has ruled since. For the past few weeks Uncertainty has given way to Chaos. We are now in the mid-stage of the end-game of the cycle – or, it is all down from here. Australia has gone past correction to about a 14% fall and this has immediately been exacerbated by an interest rate hike of a quarter point: Bad Move but the new head of the RBA is talking another rate hike in face of global instability – real bad news – Australia is finished and has just accelerated its decline (free-fall) which in turn will feed the rest of the global markets (Why didn’t these guys read Minski?) Economic analysis: Useless – as that which can now only be effected is reporting that is, micro-analysis cannot be achieved in a Chaotic Moment. There is now no risk of a Hard Landing – there is no Uncertainty about a hard land either – there is now only a guaranteed (certainty) Hard Landing. Now we shall observe – have observed the human being at home in his cave (plato’s) while the leadership levels and or stratum will display their fine feathers of cowardice, dishonor and fear, a priori: flight! This seals the deal! Jekel become Hyde! A time when cornered rats eat their young… I believe that Volker, Greenspan have both admitted (or warned) that the day would come when the USA could not pay its debts! That day is here, er but(?) Note: … It still could be fixed – but not by current “leadership” and that has always been my point – it will not be fixed – Moral Hazard. peter