Queen
I was going to call the title, “another one bites the dust”, but I think the band deserves more credit!
Anyway, I was thinking about the current mortgage situation because a good friend of mine is in the process of closing on a house with his fiance. There is a lot of positive news out there: Ben Bernanke, bottoming housing market, low interest rates, etc. It is all trying to raise the consumer confidence to try and get people spending again. This is due to the beliefs held by Timothy Geithner and Larry Summers (just read the last paragraph of that link if you want the gist) that the main purpose of the average U.S. Citizen is to take on debt.
Taking that into consideration, it appears that the average U.S. Citizen is not being fooled. We have a positive savings rate, negative consumer confidence, and new spending habits that are scaring retailers. Although, a lot of the decrease probably has to do with the fact that unemployment is sky high along with the amount of people who can’t pay their mortgage.
I shouldn’t write much more because it’s going to take forever to go through all those links and watch that video about mosquitoes. I think you see my point though: we’re still in trouble, and it has only just begun.
your Bernanke and you
*sigh* it looks like we are in for another session of the Bernanke. It’s not that I am necessarily upset that he is still the Fed representative to the public. I’m not even sure why people pay so much attention to him. He and his chairmen set monetary policy. I say just let them be an economic indicator, and let it end there.
It’s interesting to me that the market is “upbeat” about this (see the “Bernanke” link above). (People are so interesting to me.) What really seems to be driving the market right now is that “things aren’t as bad as we thought they would be by now, so things aren’t ever going to be worse” thought process. This thought process is optimistic in a time where things still look bleak. In essence, it is “prepare for the worst, hope for the best” that will allow for improvement. Unemployment is still high, house prices are decreasing at a slower pace, and foreclosures are still a HUGE risk for the next few quarters: “Americans fell behind on mortgage payments at a record pace last quarter, the Mortgage Bankers Association reported Aug. 20. The inventory of homes in foreclosure rose to the most in three decades of data” (see the “thought process” link).
I think it would be foolish to have any long positions at this point – unless they are call options or treasuries. For me, I agree with what Peter Schiff said about the “broken window” fallacy of economics, which argues that economic activity can be stimulated by the need to replace something that has been destroyed. He says, “Digging holes just to fill them up does employ workers, but the work offers no benefit to anyone not receiving the wage. Absent government incentives, such a job would create no profit and could only exist as a result of a subsidy from someone else.” Now, he was talking about “cash for clunkers“, but that’s another note for another time.
Ever wonder if we are making progress with the mortgages?
Time for a mortgage crisis update! *lightning flashes and thunder rolls*
Sounds like what I mentioned about consumer confidence (CPI), unemployment, the uptick in construction, and the double dip recession camp I’m currently in is being proven. This article mentions that since government aid is set to run out soon for people purchasing homes, and, therefore, will cause the already high foreclosure rate to increase. So, since the dollar is now backed by toxic assets and the government is cracking down on credit card companies, get ready for another dip in the stock market and for a “frost” to set in on credit.
Foreign Influence
The Dow Jones is up 2.71% (from January 5th to today). For that same time period:
Shanghai’s SSE Composite Index is up 59.91%
Japan’s NIKKEI 225 is up 14.82%
China’s HANG SENG INDEX is up 35.14%
Britain’s FTSE 100 is up 3.72%
the French CAC 40 is up 7.74%
India’s BSE SENSEX is up 55.61%
Now, I know that the U.S. is the richest country, but, generally, I’m starting to wonder why so many other large, developed countries are outperforming us. What that should say to those in authority in the U.S. is that confidence in the U.S.’s “business model” is low. If a company has a decreaing stock value (the dollar), they need to increase confidence by increasing their return on equity or “profit” (adds value) to pay dividends (pay down debt). A company can look at where they can cut costs, but, in politics, this will not happen. Politicians and government in general is too much of a moral compass. Cutting their unnecessary costs means “they don’t care”. The juggling act they have to do is one I am not jealous of. Take the autoworkers union, for example. The government HAD to bail out these companies because of the moral obligation to keep the families of those workers supported. A company should be concerned with its survival, in my opinion – not being concerned with its workers. People should help people.
Bubbles
It seems, recently, the headlines have had 2 different themes about CPI and the housing industry. 1) That CPI is down, people are saving money, and cutting back, and 2) that home construction and building permits are “up”.
Look at consumer credit. The federal reserve’s statistical release (August 7th 2009) for June reported “Revolving credit decreased at an annual rate of 8-1/4 percent, and nonrevolving credit decreased at an annual rate of 3-1/2 percent.” (revolving credit would be like credit cards, nonrevolving credit would be like a mortgage).
So, you have people, on average, NOT taking on new debt, BUT we have increased construction. Let’s look at unemployment. The Bureau of Labor Statistics, on August 7th 2009, released the unemployment rate of 9.4% – noting little change for the past couple months.
We have a pretty historically low CPI, a historically high unemployment rate, shrinking personal debt, and a historically high savings rate. It doesn’t sound like people are ready to start buying homes again. Yet, construction is increasing? Something isn’t adding up. Unless this is a result of the Emergency Economic Stabilization Act of 2008 (TARP). If these numbers are a result of TARP funds being pumped into “the system”, perhaps this will result in an attempt to “re-inflate the bubble”. So, you could say I fall in the “double dip recession” group.
Progress
This year, for the first time in a long time, U.S. citizens, on average, began saving the money they earned at a positive rate. References:
- http://freefrombroke.com/2009/01/savings-rate-finally-turning-upward.html
- http://online.wsj.com/article/SB123120525879656021.html
Why are the citizens of the U.S. saving their money so vigorously? Why is their government spending their citizens’ money so vigorously? It seems they have differences in how to solve our collective “problems”. As Peter Schiff said, “But rather than accepting the market’s medicine, our government is overriding its own citizens’ responsible behavior. To do so, it has put borrowed money into consumers’ pockets, and then conjured various incentives for them to go out and spend it. This process requires more government bureaucracy, more debt, and more regulation at a time when we can’t afford any of it.”
In my opinion, citizens are setting the example for how the government needs to be behaving. It seems the government’s solution is doing the opposite of what I think a good solution is: save money. OK, government, your citizens have started acting more responsible with their money. Your turn.
Peter Blane 