from a financial newsletter,
good read, but sobering/scary.
This week we survey the economic landscape that the new president will inherit. It is a polite understatement to say that he will be getting a serious mess. In reality, the US goes to the polls this next Tuesday to elect a Janitor-in-Chief. He will face a task that rivals that of Hercules in cleaning out the Stygian stables (legendary huge stables that had not been mucked out for ten years). However, there are no convenient rivers at hand for a probable President Obama to redirect that will quickly be able to clean out the mess left in the stables of our economy. This will indeed be an Herculean task and one that will take most of the first term of the next administration. So, let's look at what will face the next president. It should make for an interesting, even if not optimistic, letter.
Electing the Janitor-in-Chief
I normally do not get into politics in this letter, as my beat is economics and investing. But this election has large economic implications. Even though I am a long-time Republican, I can still read polls. And it looks like Obama will be our next president. (I have already paid off my bets made last year, for what it's worth.)
First, let's look at what will be the main problem facing the new president. George Bush came into office with the country already in recession. Over time the economy recovered, albeit somewhat slowly. As I have demonstrated numerous times, the recovery was fueled by Mortgage Equity Withdrawals. Over 2% and sometimes over 3% of GDP growth in 2002-2006 was the result of rising housing prices, allowing consumers to borrow against their homes and spend on whatever they chose.
I have used the chart below on a lot of occasions, but as it is central to today's letter. Let's review it.
The red bars show how the economy would look without that borrowing power. George Bush would most likely have been a one-term president, as the economy would have been in a serious recession for two years, followed by a very slow recovery of less than a 1% growth in GDP in 2003-04. Unemployment would have been dismally high. The slogan would have been "It's the Economy, Stupid" all over again. That was what beat his father in 1992 and would likely have done it to the son in 2004.
But the nation was in fact growing at over 4%, and 9/11 was not so distant a memory. The focus was on the War on Terror, and Bush won a close election.
But that is not the situation today. The economy is in recession. Over one million jobs have been lost in the last 12 months. The preliminary number came out today for third-quarter GDP and it was down by 0.3%, the first negative quarter since the last recession. As it is the preliminary number, and does not really have much data from September, it is likely that future revisions will see the number be even worse. 1% is not out of the question.
The fourth quarter that we are in will again be negative, and even worse than the third quarter. Bush came in with a recession that started in the waning months of the Clinton administration, and he will leave his successor with a much deeper recession and a consumer that is on the ropes.
Let's review this table from a few weeks ago. To understand the real economic problem facing the new administration, you have to understand this table. These are not normal problems that a likely President Obama will be facing. The above chart stopped at 2006. James Kennedy recently updated the data. Notice below how net MEWs have fallen precipitously in 2008, down 95% from three years ago. On this data alone, GDP should be off by 3% this year. No wonder we are in negative economic territory.
In 2005 there was almost $595 billion in mortgage extractions that went into some kind of consumer spending. Remember, according to the graph above, that translated into a 3% rise in GDP. In 2007, MEWs were down to $470 billion, for a boost of 2% to GDP.
The second quarter of 2008 saw an anemic $9.5 billion. At that run rate, we could see a drop-off of well over 90% from 2005! Now, think what the second quarter would have been without the federal stimulus program of $150 billion. It might have looked and felt like this quarter!
In the economic data which came out today, consumer spending was down 3.1%. You have to go back to the intense and deep recession of 1980 to find a worse number. And we are just in the middle innings of what is likely to become a much worse recession.
Can't Borrow on Your Home? Whip out the Credit Card!
So, did American consumers cut back on borrowing? Not if they had a credit card! Total loans from commercial banks to consumers grew by $89 billion for the 12 months ending in September. $61 billion of that was credit card debt, and the amount in recent weeks has exploded. Let's look at this analysis from my favorite slicer and dicer of numbers, data-wizard Greg Weldon (www.weldononline.com). Going with a Halloween theme:
"FAR MORE 'telling' is the LOPSIDED degree to which Credit Card balance growth is 'contributing' to total growth in Consumer Loans, a sign of intensifying 'stress' on consumers, amid accelerating job loss, home price deflation, and equity-market paper wealth devaluation.
"Even the raging Frankenstein stops to note the shockingly UGLY data details:
Commercial Banks, Outstanding Credit Card Balances ... SOARED by an eye-opening + $7.1 billion in the WEEK ending October 15th, representing a +1.9% single-week rate of expansion ... or ... nearly ONE-HUNDRED PERCENT annualized (+98.4%).
"Even more 'telling' is the 'read' acquired by contemplating the following pair of data FACTS:
* Credit Card Loans, 10 months Sep07-thru-Jul-08 ... up + $29.1 billion
* Credit Card Loans, 10 weeks Aug-08-to-mid-Oct-08 ... up + $32.3 billion
"In other words, Commercial Bank 'exposure' via the total amount of Credit Card 'loans' outstanding has risen MORE in the last ten WEEKS, than it did in the previous ten MONTHS COMBINED !!!
"Moreover, the growth in the last ten-weeks, $32.3 billion, or about $600 million per 'shopping day' since the beginning of August ... represents nominal growth of + 9.3% ... or ... + 48.3% annualized over the last ten weeks.
"According to American Express, delinquencies on credit payments rose to 4.1% of all credit outstanding in the 3Q, up from 2.5% in 3Q of 2007, with Bank of America's rate rising even more steeply, to 5.9% in the quarter.
"Moreover, the 'pool' of loans deemed 'uncollectable' rose to a high 6.7% in the 3Q, soaring from 3.6% last September."[Emphasis mine.]
What consumer spending there is has been fueled in part by credit card. Greg notes this uncomfortable piece of data: the second largest "merchant-vendor" for credit card use is now McDonalds. This suggests that many consumers are in serious distress when they need to get their $4 Big Mac and fries with a credit card.
This is the problem facing the economy next year. Credit card growth like we have seen in the last few months has never been sustained at such a level, and is unlikely to be this time either. This is especially true as credit card delinquencies have been rising, as noted above.
The next administration is going to be faced with a retrenching consumer, which will likely push the economy even deeper into recession. This will of course result in higher unemployment. In the first year of the next president's term, he is likely to see another one million people lose their jobs, pushing unemployment to almost 8%.
Peter Bernstein, in his regular letter, notes the rising levels of the DURATION of unemployment. It is now over 9 months, close to 38 weeks. As the recession deepens, this means a lot of people will stop receiving unemployment benefits. Oh, and of course, unemployment is not good for consumer spending. And it will put even more pressure on homeowners behind on their mortgages. And unemployed people do not pay taxes, widening the deficit.
If you thought the recovery under Bush was the "jobless recovery," wait until you see the next version without the benefit of profligate consumer borrowing and spending.
Deficits as High as an Elephant's Eye
Congress, in a sadly bipartisan way, aided and abetted by a Bush administration that simply did not use its veto power, has given the next president deep and growing deficits. Official projections are close to $500 billion. In a recession that will reduce tax revenues and increase costs due to rising unemployment? Can you say $600 billion? $700 billion? Add in the costs of bailing out various entities and it could be much higher. Is a Democratic Congress likely to pass another huge economic stimulus program? Add another $150 billion.
Home prices are likely to continue to slide. Consumers already shell-shocked by falling home values will face even more pain. Already, one in five homeowners owe more than the value of their mortgages. That number will rise. Aging boomers and retirees who thought they would be able to sell their home as part of their retirement plan now have seen that nest egg cut by a considerable amount.
The stock market crash has reduced global wealth by over $16 trillion dollars. A lot of that has been in US retirement accounts. Consumers are going to start to see the need to save once again, which of course reduces consumer spending. There are going to be calls to rescue the consumer and 401k plans.
Think about this. Broad stock indexes are about where they were almost 11 years ago. If you take inflation into account, you have lost considerable buying power. What cost $1,000 in 1997 today costs $1287. Put another
good read, but sobering/scary.
This week we survey the economic landscape that the new president will inherit. It is a polite understatement to say that he will be getting a serious mess. In reality, the US goes to the polls this next Tuesday to elect a Janitor-in-Chief. He will face a task that rivals that of Hercules in cleaning out the Stygian stables (legendary huge stables that had not been mucked out for ten years). However, there are no convenient rivers at hand for a probable President Obama to redirect that will quickly be able to clean out the mess left in the stables of our economy. This will indeed be an Herculean task and one that will take most of the first term of the next administration. So, let's look at what will face the next president. It should make for an interesting, even if not optimistic, letter.
Electing the Janitor-in-Chief
I normally do not get into politics in this letter, as my beat is economics and investing. But this election has large economic implications. Even though I am a long-time Republican, I can still read polls. And it looks like Obama will be our next president. (I have already paid off my bets made last year, for what it's worth.)
First, let's look at what will be the main problem facing the new president. George Bush came into office with the country already in recession. Over time the economy recovered, albeit somewhat slowly. As I have demonstrated numerous times, the recovery was fueled by Mortgage Equity Withdrawals. Over 2% and sometimes over 3% of GDP growth in 2002-2006 was the result of rising housing prices, allowing consumers to borrow against their homes and spend on whatever they chose.
I have used the chart below on a lot of occasions, but as it is central to today's letter. Let's review it.
The red bars show how the economy would look without that borrowing power. George Bush would most likely have been a one-term president, as the economy would have been in a serious recession for two years, followed by a very slow recovery of less than a 1% growth in GDP in 2003-04. Unemployment would have been dismally high. The slogan would have been "It's the Economy, Stupid" all over again. That was what beat his father in 1992 and would likely have done it to the son in 2004.
But the nation was in fact growing at over 4%, and 9/11 was not so distant a memory. The focus was on the War on Terror, and Bush won a close election.
But that is not the situation today. The economy is in recession. Over one million jobs have been lost in the last 12 months. The preliminary number came out today for third-quarter GDP and it was down by 0.3%, the first negative quarter since the last recession. As it is the preliminary number, and does not really have much data from September, it is likely that future revisions will see the number be even worse. 1% is not out of the question.
The fourth quarter that we are in will again be negative, and even worse than the third quarter. Bush came in with a recession that started in the waning months of the Clinton administration, and he will leave his successor with a much deeper recession and a consumer that is on the ropes.
Let's review this table from a few weeks ago. To understand the real economic problem facing the new administration, you have to understand this table. These are not normal problems that a likely President Obama will be facing. The above chart stopped at 2006. James Kennedy recently updated the data. Notice below how net MEWs have fallen precipitously in 2008, down 95% from three years ago. On this data alone, GDP should be off by 3% this year. No wonder we are in negative economic territory.
In 2005 there was almost $595 billion in mortgage extractions that went into some kind of consumer spending. Remember, according to the graph above, that translated into a 3% rise in GDP. In 2007, MEWs were down to $470 billion, for a boost of 2% to GDP.
The second quarter of 2008 saw an anemic $9.5 billion. At that run rate, we could see a drop-off of well over 90% from 2005! Now, think what the second quarter would have been without the federal stimulus program of $150 billion. It might have looked and felt like this quarter!
In the economic data which came out today, consumer spending was down 3.1%. You have to go back to the intense and deep recession of 1980 to find a worse number. And we are just in the middle innings of what is likely to become a much worse recession.
Can't Borrow on Your Home? Whip out the Credit Card!
So, did American consumers cut back on borrowing? Not if they had a credit card! Total loans from commercial banks to consumers grew by $89 billion for the 12 months ending in September. $61 billion of that was credit card debt, and the amount in recent weeks has exploded. Let's look at this analysis from my favorite slicer and dicer of numbers, data-wizard Greg Weldon (www.weldononline.com). Going with a Halloween theme:
"FAR MORE 'telling' is the LOPSIDED degree to which Credit Card balance growth is 'contributing' to total growth in Consumer Loans, a sign of intensifying 'stress' on consumers, amid accelerating job loss, home price deflation, and equity-market paper wealth devaluation.
"Even the raging Frankenstein stops to note the shockingly UGLY data details:
Commercial Banks, Outstanding Credit Card Balances ... SOARED by an eye-opening + $7.1 billion in the WEEK ending October 15th, representing a +1.9% single-week rate of expansion ... or ... nearly ONE-HUNDRED PERCENT annualized (+98.4%).
"Even more 'telling' is the 'read' acquired by contemplating the following pair of data FACTS:
* Credit Card Loans, 10 months Sep07-thru-Jul-08 ... up + $29.1 billion
* Credit Card Loans, 10 weeks Aug-08-to-mid-Oct-08 ... up + $32.3 billion
"In other words, Commercial Bank 'exposure' via the total amount of Credit Card 'loans' outstanding has risen MORE in the last ten WEEKS, than it did in the previous ten MONTHS COMBINED !!!
"Moreover, the growth in the last ten-weeks, $32.3 billion, or about $600 million per 'shopping day' since the beginning of August ... represents nominal growth of + 9.3% ... or ... + 48.3% annualized over the last ten weeks.
"According to American Express, delinquencies on credit payments rose to 4.1% of all credit outstanding in the 3Q, up from 2.5% in 3Q of 2007, with Bank of America's rate rising even more steeply, to 5.9% in the quarter.
"Moreover, the 'pool' of loans deemed 'uncollectable' rose to a high 6.7% in the 3Q, soaring from 3.6% last September."[Emphasis mine.]
What consumer spending there is has been fueled in part by credit card. Greg notes this uncomfortable piece of data: the second largest "merchant-vendor" for credit card use is now McDonalds. This suggests that many consumers are in serious distress when they need to get their $4 Big Mac and fries with a credit card.
This is the problem facing the economy next year. Credit card growth like we have seen in the last few months has never been sustained at such a level, and is unlikely to be this time either. This is especially true as credit card delinquencies have been rising, as noted above.
The next administration is going to be faced with a retrenching consumer, which will likely push the economy even deeper into recession. This will of course result in higher unemployment. In the first year of the next president's term, he is likely to see another one million people lose their jobs, pushing unemployment to almost 8%.
Peter Bernstein, in his regular letter, notes the rising levels of the DURATION of unemployment. It is now over 9 months, close to 38 weeks. As the recession deepens, this means a lot of people will stop receiving unemployment benefits. Oh, and of course, unemployment is not good for consumer spending. And it will put even more pressure on homeowners behind on their mortgages. And unemployed people do not pay taxes, widening the deficit.
If you thought the recovery under Bush was the "jobless recovery," wait until you see the next version without the benefit of profligate consumer borrowing and spending.
Deficits as High as an Elephant's Eye
Congress, in a sadly bipartisan way, aided and abetted by a Bush administration that simply did not use its veto power, has given the next president deep and growing deficits. Official projections are close to $500 billion. In a recession that will reduce tax revenues and increase costs due to rising unemployment? Can you say $600 billion? $700 billion? Add in the costs of bailing out various entities and it could be much higher. Is a Democratic Congress likely to pass another huge economic stimulus program? Add another $150 billion.
Home prices are likely to continue to slide. Consumers already shell-shocked by falling home values will face even more pain. Already, one in five homeowners owe more than the value of their mortgages. That number will rise. Aging boomers and retirees who thought they would be able to sell their home as part of their retirement plan now have seen that nest egg cut by a considerable amount.
The stock market crash has reduced global wealth by over $16 trillion dollars. A lot of that has been in US retirement accounts. Consumers are going to start to see the need to save once again, which of course reduces consumer spending. There are going to be calls to rescue the consumer and 401k plans.
Think about this. Broad stock indexes are about where they were almost 11 years ago. If you take inflation into account, you have lost considerable buying power. What cost $1,000 in 1997 today costs $1287. Put another