Home Equity

No wonder one third of Americans are obese. The crap we are shoveling into our bodies is on par with the misinformation, propaganda and lies that are being programmed into our minds by government bureaucrats, corrupt politicians, corporate media gurus, and central banker puppets. Chief Clinton propaganda mouthpiece, James Carville, famously remarked during the 1992 presidential campaign that, “It’s the economy, stupid”. Clinton was able to successfully convince the American voters that George Bush’s handling of the economy caused the 1991 recession. In retrospect, it was revealed the economy had been recovering for months prior to the election. No one could ever accuse the American people of being perceptive, realistic or critical thinking when it comes to economics, math, history or distinguishing between truth or lies. Our government controlled public school system has successfully dumbed down the populace to a level where they enjoy their slavery and prefer conscious ignorance to critical thought.

Every day (for the past 3 years) we hear countless fairy tales why housing has bottomed and will improve any minute now. Just consider the latest kneeslapper from that endlessly amusing Larry Yun of the NAR, uttered just today: "pent-up  demand could burst forth from the improving economy." Uh, right. Here's the truth - it won't and here is why, in 5 charts from Bank of America, so simple even an economist will get it.

Bank of America reported results earlier, which were somewhat amusing: reported earnings were $653 million or $0.03 per share. Yet the number that the market is fascinated by is the one arising from "negative valuation adjustments" of $4.8 billion, which included $1.5 billion in DVA "resulting from the narrowing of the company's credit spread", and resulted in a $0.28 per share addition. This is the same number that we were told to ignore when it did not help the bottom line. We will be told to ignore it again next quarter when spreads once again balloon, but for now it leads the market to see a $0.31 adjusted EPS number. In other words, one time items are to be ignored when negative, and praised when providing a "one-time benefit." These also included $0.8 billion in litigation expenses, which are also supposed to be excluded, even though the bank has now been sued by virtually everyone due to its Countrywide legacy portfolio. Yet all of this is accountant fudge heaven: there are only three things that matter. 1) The approaching refi cliff, in terms of tens of billions in maturities, including FDIC-funded TLGP, which are as follows: "$34B of parent company maturities in 2Q12 including the remaining $24B related to the Temporary Liquidity Guarantee Program" 2) sliding sales and trading revenues which dropped from Q1 by $546 million from a year ago to $2.844 billion in FICC, and by $332 million in Equity income to $907 million; and finally 3) and reserve release gimmicks: specifically BAC took a $1.6 billion reserve release even as the net chargeoff percentage increased. Specifically look at the first chart below showing the $1.8 billion surge surge in junior-lien Non-Performing Home Equity Loans due to regulations finally catching up to reality. Also, the bank charged off more in Reps and Warranties than it reserved, even as everyone is now suing the bank for precisely this issue. And this is the environment in which the firm books profits from reserve releases?

Last night, Goldman entered into unchartered territory with its first observations of the student loan bubble in a piece titled "Are Student Loans Driving Consumer Credit Growth?" Most of the observations are nothing new, although author Alec Phillips does bring up one amusing implication of what the soaring student debt may mean in macro terms. Specifically, to Goldman the rise in debt is merely "A more important source of countercyclical credit. Since federal student lending standards are looser than most other forms of credit, they now rely mainly on Treasury borrowing for financing, and demand for them appears stronger when the labor market weakens, it seems likely that education-related debt will grow fastest at times when the economy slows and other lenders are pulling back." In other words, the rate of change in student debt is inversely proportional to the improvement in the US economy, or directly proportional to its deterioration. So since the student debt chart is, for lack of a better word, parabolic, what does that mean for the broader economy?

Now that the world is covered in at least $707 trillion in assorted unregulated Over the Counter derivatives (as of June 30, the most recent number is easily tens of trillions greater) and with at least one JPMorgan prop|non-prop trader exposed to having a ~$100 billion notional position in some IG-related index trade, pundits, always eager to score political brownie points, are starting to ruminate over ways to put the half alive/half dead cat back into the box. Unfortunately they are about 20 years too late: with the world literally covered in various levered bets all of which demand hundreds of billions in variation margin on a daily basis, the second the one bank at the nexus of the derivative bubble (ahem JPMorgan) starts keeling over, it will once again be "the end of the world as we know it" unless said bank is immediately bailed out. Again.

Nothing is going on this morning that did not already happen at 8:30:01 am on Friday. As a result, the three robots who are the sole churners of stocks this AM will keep risk where it was just after NFP, because that is part of the new regime, one in which USD weakness is now stock weakness, and one where stocks have a ways to drop before NEW QE is greenlighted. Also with Europe offline all day, the robots won't even be able to frontrun the European close. Bank of America summarizes the lack of events shaping the market this morning.

Seasonal adjustments are not forever. 

Housing remains a mess and recovery continues to be something found best in Disneyland at fantasy land (although not in Disney's movie-making business). The sector is showing only feeble growth as the American nightmare continues to chip away at the American dream. Or If every man's home is his castle, what am I doing in the moat,and why won't my banker lower the drawbridge?

The most profitable business of the future will be producing Space Available and For Lease signs. Betting on the intelligence of the American consumer has been a losing bet for decades. They will continue to swipe that credit card at the local 7-11 to buy those Funions, jalapeno cheese stuffed pretzels with a side of cheese dipping sauce, cartons of smokes, and 32 ounce Big Gulps of Mountain Dew until the message on the credit card machine comes back DENIED.  There will be crescendo of consequences as these stores are closed down. The rotting hulks of thousands of Sears and Kmarts will slowly decay; blighting the suburban landscape and beckoning criminals and the homeless. Retailers will be forced to lay-off hundreds of thousands of workers. Property taxes paid to local governments will dry up, resulting in worsening budget deficits. Sales taxes paid to state governments will plummet, forcing more government cutbacks and higher taxes. Mall owners and real estate developers will see their rental income dissipate. They will then proceed to default on their loans. Bankers will be stuck with billions in loan losses, at least until they are able to shift them to the American taxpayer – again.

"Emotions exceeding known parameters cause extreme events, such as stock market booms and busts. They are self-reinforcing spirals upward and especially downward that, once established, keep diverging from equilibrium until the driving forces fade or stronger counter forces reverse them. Ever-increasing desires for accumulating ever greater wealth faster and faster ignited a credit bubble that spiralled upwards until it burst in 2007 from a lack of new borrowers. The multi decade credit bubble and its bursting were extreme events. No model recognized the credit bubble or its collapse and no model is giving any indication of the plethora of problems now brewing in Europe."

The latest quarterly report out of CoreLogic is as usual full of curious insights about the state of US housing. Key among them is the finding that "negative equity and near-negative equity mortgages accounted for 27.8 percent of all residential properties with a mortgage nationwide in the fourth quarter, up from 27.1 in the previous quarter. Nationally, the total mortgage debt outstanding on properties in negative equity increased from $2.7 trillion in the third quarter to $2.8 trillion in the fourth quarter." In other words, courtesy of no Mark To Market, there is at least $2.8 trillion in debt held by investors (read banks and GSEs) that is marked at par and should be impaired. And one wonders why Fannie lost $16.9 billion in 2011 (up from $14.0 billion in 2010), and needed another taxpayer injection of $4.6 billion in Q4: it is so banks can pretend reality exists, and in the process avoid evicting tenants who live in these underwater homes, and who can pretend they don't have to pay their bills, but can spend money on iGadgets instead. Yet the scariest data point is that if one is currently in Nevada and looks at three houses right this second, two of them are underwater, or said otherwise, have negative or near-negative equity.

Americans participating in a recent Gallup poll showed the highest level of confidence in an economic recovery in a year.  Sounds great, but you can’t ignore the nearly 13 million unemployed, the 46 million people on food stamps and the roughly 29% of the country’s homeowners whose mortgages are under water. They would find it hard to subscribe to the poll’s sunny conclusion. On the other hand, there’s no getting away from a bevy of seemingly increasingly favorable economic data, which, more recently, includes falling weekly jobless claims, four consecutive monthly gains in the leading economic indicators, somewhat perkier retail sales and a pickup in housing starts and business permits. Pounding home this cheerful view is the media’s growing drumbeat of increased economic vigor....Confused? How can you not be?

It was a bad week for freedom loving people, but I believe there are enough patriots left in this country to change our course. We are being buried under a blizzard of lies on a daily basis. We have a choice. We can support the existing corrupt crony capitalist establishment (Obama & Romney) or we can declare war on lies, deceit and misinformation by rallying behind the only person who would truly attempt to reverse decades of corruption, sleaze, incompetence, bloat, debt accumulation, and a warped version of free market capitalism – Ron Paul. He is the only public figure willing to level with the American people and tell them the truth. Will we let the concept of truth fade out of the world? The choice is ours. 

“In our age there is no such thing as ‘keeping out of politics.’ All issues are political issues, and politics itself is a mass of lies, evasions, folly, hatred and schizophrenia. The very concept of objective truth is fading out of the world. Lies will pass into history.” –   George Orwell

A number of readers kindly forwarded additional data sources to me as followup on last week's entry describing sharply lower deliveries of gasoline. The basic thesis here is that petroleum consumption is a key proxy of economic activity. In periods of economic expansion, energy consumption rises. In periods of contraction, consumption levels off or declines. This common sense correlation calls into question the Status Quo's insistence that the U.S. economy has decoupled from the global ecoomy and is still growing. This growth will create more jobs, the story goes, and expand corporate profits which will power the stock market ever higher.... Here are links and charts of petroleum consumption, imports/exports, and electricity consumption. Let's start with a chart of total petroleum products, which includes all products derived from petroleum (distillates, fuels, etc.) provided by Bob C. The chart shows the U.S. consumed about 21 million barrels a day (MBD) at the recent peak of economic activity 2005-07; from that peak, "product supplied" has fallen to 18 MBD. The current decline is very steep and has not bottomed.

If you leverage $100 per month in surplus capital in a household into a $100,000 home equity loan that is squandered on luxury cruises, a new kitchen, boats and dining out, then that explosion of spending boosts "growth" like a shot of cocaine. But then what happens when the borrowed money has all been spent? What happens when the borrower defaults? The underlying assets--the boat, home, etc.--can all be auctioned off, but a massive loss remains to be swallowed by the lender. Needless to say, the bankrupt borrower will be unable to borrow another $100,000 any time soon, even if interest rates are lowered to near-zero. That's what happens when you try to fool Mother Nature by substituting debt expansion for increases in meaningful productivity. Eventually the surplus that is being leveraged into debt reaches the point where it cannot leverage any more debt, and the over-leveraged borrower defaults at the first financial bump. An economy that is dependent on constant massive increases in debt to fund its "growth" is not sustainable. In a very real sense, the U.S. has been fooling Mother Nature for 30 years. Now we've overleveraged the nation's shrinking pool of surplus capital and assets, and the last rabbit has been pulled from the magician's hat. Mother Nature (i.e. reality in the form of a transparent, marked to market balance sheet) is about to take her revenge on all those who reckoned she could be fooled forever by ever-expanding debt.