Being Heroically Naive
If you aren’t a regular reader of Ambrose Evans-Pritchard, you should be. He’s one of the best financial journalists around and has done a sensational job of exposing the Europe’s financial disasters to the rest of the world.
Now, he’s turned his attention to the United States…and he’s pulling no punches.
From the Telegraph America slides deeper into depression as Wall Street revels
December was the worst month for US unemployment since the Great Recession began.
The labour force contracted by 661,000. This did not show up in the headline jobless rate because so many Americans dropped out of the system. The broad U6 category of unemployment rose to 17.3pc. That is the one that matters.
Patrick here: click HERE for the employment report with the U3 and U6 numbers. Oh, and yes…he just said “depression.”
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The home foreclosure guillotine usually drops a year or so after people lose their job, and exhaust their savings. The local sheriff will escort them out of the door, often with some sympathy –– just like the police in 1932, mostly Irish Catholics who tithed 1pc of their pay for soup kitchens.
Realtytrac says defaults and repossessions have been running at over 300,000 a month since February. One million American families lost their homes in the fourth quarter. Moody’s Economy.com expects another 2.4m homes to go this year. Taken together, this looks awfully like Steinbeck’s Grapes of Wrath.
Patrick here: We haven’t really even seen foreclosures from job losses yet. Foreclosure moratoriums started in August of 2008, about the time that job losses were starting to pick up steam. Considering that most homeowners probably don’t stop paying they day they lose their job, and the fact that the process is easily taking 12-18 months (or longer), it is likely that foreclosures from job losses won’t start to hit until sometime in 2010.
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US house prices have eked out five months of gains on the Case-Shiller index, but momentum stalled in October in half the cities even before the latest surge of 40 basis points in mortgage rates. Karl Case (of the index) says prices may sink another 15pc. “If the 2008 and 2009 loans go bad, then we’re back where we were before – in a nightmare.”
David Rosenberg from Gluskin Sheff said it is remarkable how little traction has been achieved by zero rates and the greatest fiscal blitz of all time. The US economy grew at a 2.2pc rate in the third quarter (entirely due to Obama stimulus). This compares to an average of 7.3pc in the first quarter of every recovery since the Second World War.
Patrick again: It is also worth noting that, despite all of the “extend and pretend” housing stimulus’, none of the housing’s fundamental problems have been fixed. We still have a huge pipeline of foreclosures. We still have homes that are overpriced relative to incomes and historical norms.
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Professor Tim Congdon from International Monetary Research said the Fed is baking deflation into the pie later this year, and perhaps a double-dip recession. Europe is even worse.
Patrick: We are in deflation…and that isn’t a bad thing for most of us. Actually, it’s a wonderful thing for just about everyone except bankers.
This has not stopped an army of commentators is trying to bounce the Fed into early rate rises. They accuse Ben Bernanke of repeating the error of 2004 when the Fed waited too long. Sometimes you just want to scream. In 2004 there was no housing collapse, unemployment was 5.5pc, banks were in rude good health, and the Fed Multiplier was 1.73.
How anybody can see imminent inflation in the dying embers of core PCE, just 0.1pc in November, is beyond me.
There is another great section of the article that discusses the Obama administration’s attempts to delay the foreclosure process:
This policy is entirely justified given the scale of the social crisis. But it also masks the continued rot in the housing market, allows lenders to hide losses, and stores up an ever larger overhang of unsold properties. It takes heroic naivety to think the US housing market has turned the corner (apologies to Goldman Sachs, as always). The fuse has yet to detonate on the next mortgage bomb, $134bn (£83bn) of “option ARM” contracts due to reset violently upwards this year and next.
Given that all of the recent strength in housing has been artificially-induced, how naive must we be to think that we are turning the corner?
