Alan Moore Commentary 7-1-2011; alanmoorecommentary.blogspot.com
With Europe and China weakening and Congress fiddling with a pile of debt, the Federal Reserve Bank is all we got left to deal with the soft patch; or are we already in a double dip? Bernanke said on June 22nd that he didn’t know why the economy isn’t doing better and has no set policy for post QE2, but the debt ceiling will be raised $2 trillion by the deadline and the market will rally briefly. What we know for semi-sure is that QE-2 left some dangerous leverage in the stock market as indicated by the rise in margin debt, which is at an all time high at $320B. What Bernanke didn’t say was that the Fed’s easy money has been ploughed straight into speculation (Uncle Walter’s advice to sell in May and go away seems on target). With the awful job reports in June/July and the relentless decline in housing prices, people are realizing that the recession never left in the metaphysical sense. Statistics tell it like it is, not like it will be: consumers are working off debt and nothing the government does will stimulate the economy---------ergo, I think we are at the mercy of an allusive housing bottom. When housing prices get so low that multiple offers come from the mountain of cash parked on the sidelines, we will have a sustained uptick in job growth, because every existing house sold results in half a private sector job created. Every new home constructed supports one and half new jobs in the real estate/construction industry; decent paying jobs that can’t be exported to Asia. Therefore, don’t feel sorry for the people in foreclosure, they need to get on with their lives without a house holding them down----- feel sorry because the process takes so long, and because the banks aren’t liquidating their REO inventory faster. Despite a reluctance to reduce home prices to the selling point, turnover is where realtors make their money and anything cheap is being scooped up by investors. I attended a massive home auction at the Palm Beach auditorium and actually got a house on a low bid, only to be told a few days later the bank-owner rejected it. The house was re-auctioned a month later and didn’t sell, because buyers really can’t get a good deal at an auction because they aren’t “absolute”; and the banks won’t approve a price under the market established by comparable sales----their rejection rate is 50%. Those advertised, extremely low “beginning-bid prices” in the auction brochures are just teasers to suck you in. Nevertheless, housing remains the key to GDP Growth and employment. In that regard, existing home sales in May were down 19% in the 100k to 500k price range and up 6% in the under 100k bracket, which is where most of the foreclosures are. The economic stagnation won’t be over until home prices shoot up 10% nationwide and convinces the public that the economy is on the upswing. The national debt is another story for another “great recession” ten years down the road, when our credit rating is “Greeced”.
So far this year, the biggest stimulus supporting consumer spending has not come from QE-2, nor wage increases or tax rebates, it has come from homeowners headed toward foreclosure; because, as they sit waiting to be kicked out, their mortgages aren’t being paid. They live rent-free and spend the extra cash. Of the two million mortgages in arrears, $50 billion a month that formally went to mortgage payments is being spent in the economy. This is direct stimulus that counts in GDP, not so for the fictitious money created by QE-2 or the $830B government stimulus bill three years ago. In other words, we have not gained an economic benefit from city, state and Federal government deficits; albeit, we suffer from the resulting budget cuts as government workers continue to be laid off due to the implosion of housing prices, which represents a decline in property taxes collected. Therefore, in more ways than one, the recovery is really dependent on the real estate industry and we need to hit bottom there fast. The fear is that another 20% drop in housing will erode bank capital and the big banks will need to be bailed out again. Yes, that is certainly true because the average equity level in banks (shareholders’ money) is 4.5%, and the average bank has 29% of their assets tied to real estate loans. However, if there is another deflationary crisis, I would let the bad banks go down but guarantee money market funds and bank deposits to protect the innocent. Not all deflation is bad if it restores confidence in sustainable asset values and creates consumer spending power. In Orlando for example, an average income can now buy the average house and equilibrium has been technically restored by a 50% price drop over the past three years, but that region faces a possible overshoot on the downside because of the inventory overhang created by the slowness of banks to liquidate. At the Fed, “Too big to fail” should be replaced with too big to bail. Their policy should be: liquidate the bad banks, liquidate delinquent real estate and liquidate non performing debt. Even if the Fed stays with “easy money”, because consumers continue to liquidate, it is impossible to balance the current budget without going into a depression. It is only important that we gradually contract government spending over the next decade while holding the line on taxes; but don’t count on Congress to do what’s right.
Although the government doesn’t get it, at the grass-roots level, people are saving again and paying down debt. The credit card delinquency rate has fallen from 11% in 2009 to 7.2% today, which is far above the 3.7% rate that existed before the recession began; still, it is headed in the right direction. As I related two years ago the story about my Great-Uncle Walter, I learned the lesson early on that if you can’t pay cash for something, you can’t afford it. That lesson is worth sharing again because we are headed back to the past.
My Uncle Walter died about 40 years ago at age 87. He never married and rented a room in a boarding house in Richmond, Virginia, until he keeled over with a heart attack one day while fishing on the Chickahominy River, which is what he did every day the last half of his life. He fished from dawn to dusk and he loved it. In his earlier life, Walter was a very successful businessman until he retired at age 47. He drove a ten-year-old Chevy, ate breakfast at the same two-bit restaurant every morning and never ordered any drink except water just to save a dime. He never left a tip either, but the waitresses treated him like royalty, because he always told them a joke when they brought him a meal and made them laugh. Walter appeared to have everything except money; at least that is the way I saw it, when he took me fishing on my tenth birthday. When he picked me up at my grandmother’s house in central Richmond, early in the morning, I thought it odd that he walked the block to his car along the edge of the street gutter, looking down the whole time. Curiously, I looked with him and had to ask what we were looking for, and he said: “Change, I found a quarter over on Broad Street yesterday, people don’t know how to hold on to money; it falls out of their pockets when they get out of the car and into the gutter.” His simple strategy of frugality struck home that day, as I often looked down while walking when I was a teenager; people thought I was just shy, but appearances didn’t bother me, looking down put a jingle in my pocket. Its significance was driven home when Walter died; and settling his estate we found out he was a millionaire. Walter knew how to mother a dollar and be happy at the same time and that ability has been lost in our society today, which lives by the creed: Money is not everything, the people that appear to have it are; and so, the trappings of wealth became the American dream. That dream is now in foreclosure because appearances really aren’t worth a second glance. Today, consumers are trying to put a jingle in their pockets again and that phenomenon is leaving a lot of trappings looking for a buyer. Uncle Walter would have said good riddance, despite the ego deflation.
Just when you think the economy can make it out of the hole, the politicians dig it deeper, tooled with ideology jingles that have proven to be dead wrong. First, the Republican mantra to cut taxes to increase employment simply does not work does. The Rich don’t go out and hire people when their taxes are slashed; if that were true George Bush would have been a hero with his giant tax cut in 2002. The capital gains tax was reduced to 15% and big business summarily expanded production into China and India, not in the USA. Remember, George W was voted out of office because his recovery from the recession of 2001 was called the “jobless recovery.” Tooting the answer to jobs in 2009, the Democrats launched the record stimulus package and deficits supported by Quantitative Easing only to achieve another jobless recovery with very little GDP growth to boot; because we are in a consumer debt liquidation phase that will take five to seven years to work off, which began in 2009 when credit card and mortgage debt began to fall. Here is Bill Gross’s (of Pimco) opinion on what we should do to increase employment: “Temporarily, government needs to take a larger role — not a smaller one — in the economy. America simply doesn’t have the workforce trained to compete in today’s global economy, he argues. Instead of workers skilled in technology, math and science, we have too many people trained in finance and the liberal arts, or simply not trained at all. Our human capital is invested in the wrong skills, and our physical capital is deteriorating. The contrast with China couldn’t be sharper.”
As the deadwood debt is being cut away in the private sector, our educational system is steadily sinking. The politicians look at the polls to see what direction the people are going in and then rush to lead them there, not looking at the future but at the next election. I have to come to the conclusion that the stock market goes up and down based on what was posted on the internet 10 minutes ago. There is no such thing as a secure, long-term investment in this environment.
High Taxes aren’t the problem; that doesn’t mean raising them and giving the money to Congress is right either. These are facts put out by the IRS: 50% of Americans pay no income tax at all. The effective rate of taxes actually paid by the top 1% of incomes in America is 19% of gross income, despite the top tax bracket being listed at 35%---the rich really aren’t over taxed, they are CPA-ed-up and protected. As far as high taxes holding back investment is concerned, General Electric Corporation paid taxes equaling 1.4% of revenue last year; Exxon paid 4.5%; none of the top ten companies in the country paid over 7% of revenues in taxes----and less than 10% of the taxes collected by the IRS come from the corporate tax anyway. Tim Pawlenty, a Republican candidate for President, recently spouted out his tax proposal; he would reduce the top corporate tax rate to 15% and do away with all the special preferences. Individuals with incomes up to $50,000 would pay 10%, and those with incomes above $100,000 would pay 25%. What he doesn’t realize is that his plan would be a tax increase versus what people are actually paying now. Republicans continually over estimate the impact of taxes on business and Democrats over estimate the benefit of government spending on GDP and job creation. Both parties refuse to bend and we have ideological gridlock between trickle-down economics and trickle-up welfare. When the budget deal finally comes down this month, it will be based on an Obama-GDP projection averaging 4.3% growth over the next three years, with interest rates on the national debt held constant at 3% in the model. Using the “Moore” dynamic model, the so-called cuts are all on paper and in the future, never to be seen in the real economy.
Despite our failed tax system, this time, the “soft patch” can’t be fixed by Fed intervention or another stimulus package------ it is up to consumers to start spending and they are rightfully cautious. The Republicans will summarily block any notion of another bank bailout or emergency spending bill. The Fed will lose credibility if it announces a third quantitative easing so soon after ending QE-2. Therefore, government economic support is over for the rest of 2011 and Congress can only hope to sweep the debt ceiling under the rug for the time being. We are left with a housing market that hasn’t bottomed and a stock market that is over owned. For once in history, consumers now have more equity in stocks and 401k plans than they have in their homes. That will be ok as long as the Dow holds up above 11,000, because the other legs supporting household income have been decimated. If we are lucky, the economy will continue to muddle along at 2% growth and the market will remain in a trading range the rest of 2011, which requires buying at the bottom of the range and selling at the top to make money: If I only knew where the top and bottom was.
Since May stocks have tanked and bonds have rallied with the Greece bailout-2 and I reduced the bond short to 2% of my portfolio in early June to dodge the flight to safety; I am still 4% short stocks with the VXX fund and own RWE (the German utility) which is down from what I paid for it, but it paid me a full 8.2% annual dividend in April and I plan on sticking with it—Germany has the only solid economy in the western world. In any case, I am currently not investing anywhere except in foreclosed real estate. In parts of Florida, I can get a 10% net-return renting a house, using no leverage, and that isn’t such a bad thing. The key to success is finding a renter with a high Fico Score and a job and that’s not so easy. Our whole economy can be summarized by looking at the average consumer’s Fico Score. When the average gets to 750, GDP will be off and running again; I hate to tell you what it is now. Over the next decade, the destiny of most Americans will be determined by their Fico score.
I will summarize why I am not a bull: Greece, Portugal and Spain will continue to face prospects of some type of default or haircut, and the European banks may collapse again, which will spill over to US Banks and the stock market. Fifty percent of the paper assets in US money market funds contain European bank notes and repurchase agreements; that is a major risk to our economy if those funds break a-buck-a-share…………. and a Greek default could do that—the quasi bailout by the EU this week won’t last, it buys them another 3 months.
Although it is impossible to predict the month that a European default may actually occur, I don’t want to invest in anything except utility stocks and foreclosed real estate until there is closure. Those investments offer the highest yield, even if their price may fluctuate wildly in a panic. Also, in Asia, a slowdown is occurring and there will be less demand for imports and commodities. China is facing inflation and a property crash, Japan is already in a recession and India is dealing with wage increases and rising food prices. Hanging over the whole world is the possible disruption of the flow of oil due to the “Arab Spring”; however, the flower of democracy blooming in the Middle East will not result in governments that favor the United States. All these points don’t consider that America may already be in a double dip recession, and it will take several more months to answer that question.
Focusing on a broke Greece: American companies typically sell to them using Letters of Credit... but not lately; now it is cash on the barrel-head in advance. Protesting Greeks have no idea what they are in for if they get their wish and return to the Drachma: per capital income will plunge from Euro 35,000 to under Euro 10,000------the same thing happened to neighbor Bulgaria in 1996, which is why Greece wanted to join the EU in the first place, to prevent the Drachma from following the fate of the Bulgarian currency. I have predicted for a long time that Greece will default and drop out of the EU to avoid the austerity measures which are politically unsustainable. The bottom will become evident during a Pericles nightmare when Greece sells the Acropolis to Donald Trump who turns it into a casino. Bailing out Greece again is like giving a sinner a glass of water on the way down to hell; it isn’t going to do him any good. The moral of the metaphor is, beware of Greece coming to a city near you.
Despite my affection for Ronald Reagan, and despite the entire Republican Party worshipping the man, the facts don’t support his mythical popularity and effectiveness as President. Under Reagan, government spending increased 25%, the national debt doubled, and he raised taxes eleven times and still never came close to balancing the budget. Reagan's popularity rating continued down to a low of 42 percent and Republicans lost 26 seats in the House of Representatives after two years of the Reagan presidency, which mirrors Obama’s situation today. However, Obama is faced with two wars that can’t be won and a worse recession than in the Reagan era, not to mention that unemployment in the second year of Reagan’s administration was 10%. I bought a house in Santa Barbara, California in 1983 and took out a 12%-rate mortgage; so housing wasn’t in such good shape then either. All and all, Republicans don’t know squat about Ronald Reagan and Democrats think Roosevelt got us out of the 1930s Depression; they are both full of crap. Reagan's net tax cuts were a drop in the bucket and not responsible for the big job growth back then---- the fall in interest rates was. Paul Volker, the Fed Chairman, started the recession and ended it only after inflation was defeated; an unleashing of consumer spending drove the economy upward as borrowing costs plummeted. Consumers do not have the borrowing capacity to do that today; their fico scores say so.
