Sunday, February 12, 2006

Economic sign of the times; what will our future hold?

I think many of us are keenly aware of the fact that consumer spending and the US housing industry have been responsible for 90% of GDP growth over the last 4 years, and over two-fifths of all private-sector jobs created since 2001 have been in the housing-related sectors, such as construction, real estate and mortgage broking.

Understanding these facts, what happens when consumer spending slows or the housing market cools off. Well, I believe we'll find out soon enough, as cracks are already beginning to appear in the economic fa├žade.

Some of the issues coming to light:

Negative Consumer Savings
Credit Card Delinquencies
Personal Bankruptcies
Mortgage Delinquencies
Consumer Borrowing Slowdown
Home Loan Applications Fall
Rising Home Inventories
Inverted Yield Curve

Consumer Savings is at its lowest level since The Great Depression

Americans are spending everything they're making and more, pushing the national savings rate to the lowest point since the Great Depression.

The Commerce Department reported Monday that Americans' personal savings fell into negative territory at minus 0.5 percent last year. That means that people not only spent all of their after-tax income last year, but also had to dip into previous savings or increase borrowing.

The savings rate has been negative for an entire year only twice before — in 1932 and 1933 — two years when Americans had to deplete savings to cope with the massive job layoffs and business failures caused by the Great Depression.

Credit Card Delinquencies are At All-Time High (this occurred before minimum payments were doubled)

The American Banking Association reports that credit card delinquencies were at an all-time high in the second quarter of last year, which ended in June. The report showed that delinquencies were 4.81 percent. In the fall, delinquencies came down a bit to 4.74 percent. The ABA said that high interest rates and high gas prices have contributed to so many people falling behind. More delinquencies usually mean more bankruptcies.

Bankruptcies At All-Time High

Consumer Bankruptcies hit a new record in 2005—over two million people filed for bankruptcy--up 32% from 2004

2001: 1,452,030
2002: 1,539,111
2003: 1,625,208
2004: 1,552,967
2005: 2,043,535

Mortgage Delinquencies on the rise in California (a catalyst for Nation-wide trend?)

The number of default notices sent to the state's homeowners is up 15.6% in 2005's last quarter from a year earlier.

Lenders sent 14,999 default notices to California homeowners from October through December, according to DataQuick Information Systems. All areas of the state saw a rise in delinquency notices. The counties with the largest annual percentage increase in default notices were Napa, San Luis Obispo, San Francisco, Riverside, Orange and San Diego. The fourth-quarter total represents a 19% increase over the 12,606 notices sent out in the third quarter and a 15.6% hike over the 12,978 notices sent in the same period in 2004, the La Jolla-based firm said.

Consumer borrowing slows to a 13-year low

Consumers, weighed down by high debt loads and low savings rates, increased borrowing last year by the smallest amount in 13 years, the Federal Reserve reported Tuesday. The government said that borrowing on credit cards, auto loans and other forms of consumer debt rose by 3 percent in 2005, down from rates above 4 percent in the previous three years and a 7.7 percent surge in 2001. It was the smallest increase since a 1 percent rise in 1992.

Home Loan Applications Fall 2nd straight week

U.S. mortgage applications fell for a second consecutive week, led by a decline in home purchase loans, as interest rates hit their highest levels since early December, an industry trade group said on Wednesday.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.25 percent, up 0.05 percentage point from the previous week‘s 6.20 percent, marking their second consecutive weekly increase. Rates were at their highest levels since the week ended December 9, when they reached 6.28 percent.

Refinancings also decreased as a percentage of all mortgage applications, falling to 42.1 percent from 43 percent, the MBA said.

As mortgage rates started climbing in September, the market began to cool, and recent economic data has pointed to sustained slowing in the sector.

The U.S. housing market will cool this year as rising mortgage rates dampen home buyers‘ demand and lead to lower sales volume, smaller house price gains and a decline in construction, Freddie Mac (NYSE:FRE - news) Chief Economist Frank Nothaft said in an interview on Wednesday.

Home Inventories Rise as Housing Market Cools

With the key spring selling season about to get under way, the inventory of homes on the market is climbing sharply in a number of major cities.

It is the latest sign that the balance of power between buyers and sellers is shifting as the once red-hot housing market continues to cool. The slowdown is affecting both existing homes and new homes. Tuesday, the nation's largest builder of luxury homes, Toll Brothers Inc., reported a 29 percent decline in new orders in its first quarter, which ended Jan. 31. That was below many analysts' expectations and prompted a sharp sell off in Toll Brothers stock.

The Yield Curve has fully inverted

Historically an inverted yield curve has often signaled an economic recession six to 12 months after the yield curve has inverted, though many analysts are skeptical the current inversion is sending ominous signals.


I believe when we add up all these signs, they begin to tell us “all is NOT well”. If we then add in outsourcing, the loss of jobs at Ford, GM, Delphi and others, Union and Bankruptsy issues with the airline industry, our record Trade Deficit (just released), and the current predicament with IRAN and OIL, the picture gets even uglier.

I believe our economic house of cards is starting to show fundimental weakness and will soon begin to fall around us. Three years from now, when our economy is struggling, many will say “How could this happen?” “It was supposed to be different this time?” “Why didn’t we see this?”

What are your thoughts on the issue?


41cadillac said...

The Return of the Long Bond

By: Peter Schiff, Euro Pacific Capital, Inc.

Yesterday, in what amounts to the biggest refinancing in world history, the Federal Government finally began issuing new thirty-year bonds. The return of the long bond comes none too soon, but it may be a day late and a couple of trillion dollars short.

For the past four years, the treasury has been artificially suppressing its interest expenses by borrowing massively at the short end of the yield curve. Like millions of Americans who have made the same mistake (with adjustable rate mortgages), this act of fiscal expedience exacts steep long-term costs. When individuals borrow on the short end, at least they do so with their own money, or at least their lender’s money. But when the Federal government commits this financial sin, the entire nation bears the burden.

By concentrating on the short end of the curve the government has been able to spend more money than would have been possible had it paid the higher interest rates associated with long-term financing. Consumers have been able to follow the same spending policy by financing mortgage debt using ARMs. By keeping interest rates so low for so long, Greenspan enabled both public and private sector borrowers to live beyond their means. However, for those who have been dancing to the maestro’s tune, it’s finally time to pay the piper.

For the Government, refinancing trillions of dollars of t-bills into thirty-year bonds without dramatically increasing interest rates would be a feat of financial wizardly even the Great Harry Houdini couldn’t pull off. As long-term rates ultimately soar, American tax payers will be stuck making excessive interest payments for generations to come, all because some irresponsible politicians wanted to win reelection and an irresponsible Fed chairman wanted to be reappointed.

For financially strapped homeowners living paycheck to paycheck with little or no home equity, the payment shocks associated with ARM resets will be the financial equivalent of a knock-out punch. Even if most savings-short households can somehow manage to swing the higher payments, it will require the complete abandonment of just about any other discretionary spending.

Since better than 70% of America’s bubble economy is comprised of consumer spending, such austerity will result in wide-spread unemployment. If homeowners have trouble making increased mortgage payments while still collecting paychecks, imagine how much harder it will become when they lose their jobs. Further, since the unemployed go from being taxpayers to tax consumers, imagine how much larger the already enormous budget deficit will swell. With cheap short-term financing no longer available and long-term rates spiraling out of control, the additional interest payments required that will also have to be borrowed will be staggering. If you listen very closely, you might just hear the sounds of helicopter blades spinning in the distance.

Don’t wait for the wind to knock you off your feet. Protect your wealth and preserve your purchasing power before it’s too late. Start by downloading my free research report on protecting your wealth in advance of the coming dollar collapse at and subscribe to my free, on-line investment newsletter at

-- Posted Sunday, 12 February 2006

r patrick said...

Lets see, I maxed out my cards, I maxed out my MEW, I maxed out everything and now I can't spend anymore.

Finally the lenders got out the big red stamp with "DENIED" on it

MMAfia said...

What I find extremely interesting is that how the consumer and the fed are BOTH committing 'financial sins', essentially serving as mirror images of each, egging the other on to go even further into Pandora's box.

Of course- and nobody including Alan himself denies this- this 'imbalance' cannot continue forever.

I believe the day of reckoning is coming soon my friends. Soon.


Out at the peak said...

Syria has switched to Euros! "We are talking billions of dollars."

Anonymous said...

You left out "Balance of Trade" although it could be argued that it's the result of the negative savings rate. With all that capital floating around the world, it can't do our economy much good.
I generally follow the political blogs and note one common thread that unites the left and right: Economic blinders! The thought is that we'll be talking about the NSA, Abramoff and coin deals in Ohio during the elections. Maybe so, in 2006 but in 2008 the coming economic storm will be named, Katrina II.

contrarian2day said...

Thanks for the comments guys. I didn't even know anyone had posted up. I believe something is wrong with the Blog updates.

Anyway, I think Peter Schiff summed it up pretty nicely:

As long-term rates ultimately soar, the financially strapped homeowners living paycheck to paycheck with little or no home equity, hit w/payment shocks associated with ARM resets--it will be the financial equivalent of a knock-out punch.

I concur with MMafia, the day of reconing is quite near.

Peak, You sparked my interest with Syria. I'll have to look into it. Thanks for the link

41cadillac said...

Bernanke, in His Congressional Debut, Will Resist Calls for Fed Rate Pause
Feb. 13 (Bloomberg) -- Gentle Ben he won't be.

Ben Bernanke, appearing before Congress this week for the first time since becoming Federal Reserve chairman Feb. 1, is likely to brush aside lawmakers' calls for a pause in the central bank's credit-tightening campaign and vow vigilance against inflation, analysts say.

41cadillac said...

DJ KB Home Says Cancellations Up, Orders Down So Far In '06

By Janet Morrissey

NEW YORK (Dow Jones)--KB Home (KBH) has noticed a surge in cancellations and a drop-off in orders in the first two months of fiscal 2006, and if this trend continues, the company said it likely will have to ratchet down its revenue guidance for the year, according to a 10K filing.

The comments appear to be a sign that the sharp drop-off in orders recently reported by luxury builder Toll Brothers Inc. (TOL) may not be limited to the luxury segment as many market experts presumed.

"There are signs that consumer demand in the United States for residential housing at current prices is softening," KB Home said in its 10K, which was filed with the Securities and Exchange Commission on Friday.

contrarian2day said...

Guess we'll find out Thursday, when January Housing starts are released. Experts are predicting numbers greater than 2M per annum, which equates to roughly 166,700 units in Jan.

Jake said...
This comment has been removed by a blog administrator.

Interesting post on signs.