Headlines from the Real Economy

US Job Seekers Exceed Openings by Record Ratio

[U]nemployed Americans now confront a job market that is bleaker than ever in the current recession, and employment prospects are still getting worse.

Job seekers now outnumber openings six to one, the worst ratio since the government began tracking open positions in 2000. According to the Labor Department’s latest numbers, from July, only 2.4 million full-time permanent jobs were open, with 14.5 million people officially unemployed.

14.5 million unemployed does not count the long-term unemployed or those who have given up because there are no jobs in their area. The real ratio of unemployed to available jobs might be closer to 10 to 1.


35 Million Americans on Food Stamps

The raw data shows us that a stunning 12 percent of our entire population is receiving some form of food stamp assistance.... This is the highest percentage of Americans receiving food stamps since records started being kept back in 1969.

A Surge in Homeless Children Strains Schools

Charity [Crowell] is one child in a national surge of homeless schoolchildren that is driven by relentless unemployment and foreclosures. The rise, to more than one million students without stable housing by last spring, has tested budget-battered school districts as they try to carry out their responsibilities — and the federal mandate — to salvage education for children whose lives are filled with insecurity and turmoil....

While current national data are not available, the number of schoolchildren in homeless families appears to have risen by 75 percent to 100 percent in many districts over the last two years....

With schools just returning to session, initial reports point to further rises. In San Antonio, for example, the district has enrolled 1,000 homeless students in the first two weeks of school, twice as many as at the same point last year [emphasis mine].

Housing Crash to Resume on 7 Million [New] Foreclosures

The crash in U.S. home prices will probably resume because about 7 million properties that are likely to be seized by lenders have yet to hit the market.....

The "huge shadow inventory," reflecting mortgages already being foreclosed upon or now delinquent and likely to be, compares with 1.27 million in 2005.....

Assuming no other homes are on the market, it would take 1.35 years to sell the properties based on the current pace of existing-home sales....

Meanwhile, in La-La Land, we have headlines like this:

Bernanke: Recession "Likely Over"

Federal Reserve Chairman Ben Bernanke said Tuesday that the recession was "very likely over," as consumers showed some of the first tangible signs of spending again.

These "tangible signs of spending," which apparently prompted Bernanke to pronounce the end of the recession, were based on August retail sales figures. That is, August sales looked better than July sales. Of course, as usual with government statistics, it was all the sheerest nonsense. Let's take a look at this August data:




So we sold more cars. Yeah, no kidding! That was part of a little thing called Cash for Clunkers. (Notice, however, that even with Cash for Clunkers we still sold slightly fewer cars than in August 2008.) And we sold more gasoline too, although notice that compared to August 2008, gas stations sold 27% less (wow!!). And, continuing down the chart, 6 of the next 7 "better than July" categories were also down compared to the same month in 2008.

Econo-bloggers have started to comment on this trend of looking only at month-to-month changes, which sometimes show small improvements, rather than the usual year-over-year changes. Because of simple variability and certain seasonal trends, there's usually some economic statistic somewhere which showed a slight improvement since last month. It's the year-over-year figures that show we've not had any real recovery.

Back to the chart-- the remaining improved category of restaurant and bar sales, which actually was up even on a y-o-y basis, was surely not enough to outweigh the drops in building materials, garden supplies, furniture, and furnishings.

Basically we're hanging our "recession is over!" hats on a measly 0.3% increase in fast food purchases and bar tabs from July to August. Or, to be fair, a 0.7% increase compared to August 2008.

Damn slim data on which to come out publicly and declare the end of the recession. Mr. Bernanke needs to take his egghead out of the ivory tower and go spend a weekend in a place like Gary, Indiana or Flint, Michigan.

[T]here are indications that the severest phase of the recession is over.
-- Harvard Economic Society, January 18, 1930

Overpriced stocks

One measure of whether stocks are over- or under-valued at current prices is the P/E or price-to-earnings ratio. If a stock costs $10/share, and the company is earning $2/share, then the P/E is 10/2 or 5. This would usually mean that stock is priced pretty cheap. If the ratio is more like 40 then the price would typically be considered too high, based on what the company is earning.

Bearing that in mind, take a look at these hideous graphs (click to enlarge), from a long report titled Economic and Financial System Train Wreck Dead Ahead:



It's not that stock prices have gone up astronomically. The Dow and S&P (which are aggregate price measures) are still far below the highs they reached in 2007. What's happened, of course, is that earnings have plunged precipitously:



Check out the x-axis. This chart goes back 75 years. Nothing even remotely like this has happened since the Great Depression.

So why have stocks kept up these price levels? If earnings are down 98% since the 2007 highs, why are stocks down only around a third? Is this why Congressman Grayson asked the Fed whether they manipulate stock markets?

Stocks have not been rallying because there is any sort of recovery underway. Numbers may tack up or down a little bit, they may vary from one month to the next, they may appear to improve temporarily because of bailouts or foreclosure moratoriums or Cash for Clunkers. But there is no recovery. Eventually stocks will have to "correct" to reflect reality.

Workers running out of unemployment benefits

Once again I have to thank Zero Hedge for bring this bit of bad news to people's attention:

According to the BLS, the exhaustion rate, or the number of people who have used up their benefits, and will no longer be receiving unemployment checks, has hit an all time high of 52.40% for August.

In other words, over half of those who lose their jobs cannot find a new job before their benefits expire. What they do then is anyone's guess. I suppose they move to tent cities or become hobos (on the railcars that are still moving, that is).

This is a staggering number, and whats worse it was grown in practically a linear fashion with not even a hope of a second (third or fourth) derivative green shoot in sight. In fact, the deterioration in "employability" is accelerating. And yet assorted "pundits" claim the employment picture is improving.

They talk about a "jobless recovery" and the "post-industrialist economy," so the natural next step is the phrase "jobless economy." You'll hear it on CNBC first!

Ghost railcars

The other day I blogged about "ghost ships" -- empty, unused cargo ships sitting anchored in various parts of the world. Well, there are "ghost railcars" as well, parked in locations around the United States.




The above line of rail cars is 2 miles long and has divided New Castle, Indiana for many months. They used to transport autos, back when this used to be a Chrysler town.




The above is a line of hundreds of railcars in Montana, parked (helpfully) near a popular tourist fishing locale. Has anyone considered what effect a huge iron wall might have on moose, elk, or deer?




The above is in Colorado....




And taking the prize, the above railcars (built to haul lumber) lie in a thirty mile stretch through Oregon's otherwise beautiful wilderness. Quoting from the article where I found this image:

The situation is a snapshot of a national picture. The economic slump has idled about 70,000 Union Pacific railcars, now sidetracked wherever space can be found, said Zoe Richmond, a Union Pacific spokeswoman in Roseville, Calif. The railroad has also furloughed 5,000 of its 48,000 workers. Other railroads are in the same predicament, she said.

Back to back, Union Pacific's idled railcars would reach from Seattle to Albuquerque, N.M.

"We don't have 2,000 miles of track anywhere in our system to put them," Richmond said. "Unfortunately, the stored cars are really just a big visual reminder of our current economic situation."

Uh, yeah. Not too good.

Zero Hedge did a post on how railcar traffic has fallen since 2008. It's fallen so much, in fact, that we've gone all the way back to 1993 railcar volumes.

Specifically, in the first 36 weeks of 2009, we've shipped 22% fewer carloads of grain, 23% fewer carloads of farm products other than grain, and 13% less "food and kindred products" than we did in the same 36 weeks of 2008. Now, I think we shipped a little less grain because we shipped less corn bound for ethanol-fuel plants. And, partly, the temporarily stronger dollar made our exported grain more expensive for other countries, so perhaps we exported less, which meant we shipped less. Even so, these statistics seem to imply that somebody, somewhere, has cut back on the food they're eating.

We've shipped 9% less coal this year. Perhaps that was because it was cool (meaning less AC, so less electricity required). But I tend to think of dark, empty shops and houses when I see that coal shipping has fallen 9%. Energy is the lifeblood of any economy, and our electricity usage has clearly fallen off... so what does that say?

Railcars of lumber were down 37%, and cars of "crushed stone, sand, and gravel" were down 22%. Casualties of the disaster in real estate.

Pulp and paper shipments were down 21%. Fewer operating offices, I presume.

Metals & metal products were down 53% (!!), which has to mean that manufacturing is way off. And I mean way off, not "GDP declined by 1%" or similar bullshit, but way off. Even after considering the steel and iron that did not go into construction, that can't account for a 53% decline. This is a hideous number.

Putting aside the government's lies, damned lies, and statistics, things do not look good. As they say: It's the real economy, stupid.

The economy is a lie

James Howard Kunstler has called it the "hallucinated economy," but Paul Craig Roberts simply calls it a lie:

Americans cannot get any truth out of their government about anything, the economy included. Americans are being driven into the ground economically, with one million school children now homeless, while Federal Reserve chairman Ben Bernanke announces that the recession is over.

You've heard of a "jobless recovery"? This is the "recoveryless recovery."

The spin that masquerades as news is becoming more delusional. Consumer spending is 70% of the US economy. It is the driving force, and it has been shut down. Except for the super rich, there has been no growth in consumer incomes in the 21st century. Statistician John Williams of shadowstats.com reports that real household income has never recovered its pre-2001 peak.

Instead of using income to make purchases, Americans began relying on home equity, credit cards, and ever-larger student loans. Every kind of debt we had access to, we took on... not that, you know, we could actually pay it back. (I'm not necessarily blaming consumers here, because many of them were told by knowledgeable-sounding suits that these debts were acceptable and nothing to worry about. Nor have most people received any education about finance or economics, which if you ask me, is by design.)

This debt party is now at an end.

As consumers no longer can expand their indebtedness and their incomes are not rising, there is no basis for a growing consumer economy. Indeed, statistics indicate that consumers are paying down debt in their efforts to survive financially. In an economy in which the consumer is the driving force, that is bad news.

Later in this piece (please click through-- it's a great essay) Roberts says that he can't see how unemployment is going to get back below 20+%, because the work has been sent overseas. The problem isn't idled factories, waiting for a pick-up in the general economy (or easier financing) so they can get back to work. The problem is a lack of factories.

Sometimes I'd like to wring the neck of whatever smug economist coined the term "post-industrialist economy." What kind of bozo thinks you can have an economy without producing anything? We might as well talk about the post-food diet.

I doubt that the US could turn to older methods of job creation, such as massive-scale works projects or tariffs and protectionism. We cannot risk further debasing the dollar by taking on massive debts to fund the next Tennessee Valley Authority. Nor can we withdraw from the WTO and piss everyone off with protectionist measures. We're far too dependent on the rest of the world to take our dollars, and to sell us oil in return for dollars.

There's a third way jobs can be created... eventually. But we aren't going to like it. A failing dollar would drive up the cost of imports, forcing us to turn back to domestic production and the rebuilding of a manufacturing sector. If we have the very best of luck, the dollar will lose half its value in an orderly manner. If we have bad luck, the dollar will plunge in value in a disorderly manner until it is worth nothing, leaving utter chaos, riots, and hungry people in its wake. I presume that if the worst happens, the next American currency will be pegged to the gold-backed yuan. Once that's settled, we'll go back to making and growing things again.

It would be nice to avoid the worst of all outcomes (total destruction of the currency), but as everyone in Washington seems to believe their own lies about the economy, I'm not too sanguine.

More warnings on stocks

Quoting Mish, from a post he put up last week:

[T]he opinion that the market can and will continue to rise is becoming ever more widespread, and ironically the bulls ALL say the same thing, namely "everybody else is bearish".

Mutual fund (MuFu) managers are not bearish, that much is certain. At 4.2%, the the MuFu cash-to-assets ratio is one of the lowest in history, in fact lower than at the 2000 top, and only a hair above the 2007 low. Those stats (from a friend) are from July. Given the continued rally, MuFu cash on hand has probably decreased even more in August.

In other words, the professional money managers -- the "big" money -- long ago went back into the market. They've got so many stocks, the amount of cash on hand is at extremely low levels.

Remember that when the stock market rises, the smart money gets in first, probably very close to the bottom. Soon after, the big money goes in-- and apparently, they were mostly "in" by July. That leaves... the dumb money. Us. We don't get in until we're nearly at the top of the market. If history is any guide, we proles have been buying stocks just in the past few weeks. Just as the "smart" money was fleeing like rats from a sinking ship. And now the market is about to turn, and we proles will get fleeced again. More Mish:

The Dow's dividend yield is now at the level of the the 1968 top and the September 1929 top. Good luck with that!

The dumb money knows none of this, because the mantra in the media is all about green shoots, recovery, the recession is over, we averted disaster, Hallelujah! The goofballs on CNBC will cost many Americans a hefty chunk of their life savings. I don't know how they can sleep at night.

Counterfeiting money to pay our bills

Zero Hedge is reporting that in Q2 (April, May, & June), about half of the Treasuries we sold to fund our deficit were purchased by the Federal Reserve. That is, about half the money we had to borrow (by selling bonds and promising to return the money later) was loaned to us by the Fed. But the Fed, of course, got this money by simply inventing it. They ran the metaphorical printing press. Quote:

The degree of intermediation [buying] by the Federal Reserve in the issuance of US Treasuries [UST] hit a record in Q2, accounting for just under 50% of all net UST issuance absorption. This is a startling number.... In fact, the Fed was a greater factor in UST demand than all three traditional players combined: Foreigners, Households and Primary Dealers [major US banks]....

Translation: People are tired of buying Treasuries. Many people are done with lending us money, so the Fed has to make up the slack. If they didn't, the US government could not pay its bills. So it's imperative (if we're to preserve the status quo) that the Fed buy up whatever US investors, US banks, and foreigners refuse to buy.

But remember-- the Fed is using brand new money.

The hundreds of billions of new dollars will eventually dilute (erode) the value of the existing dollars. Were we not in a tremendous economic slowdown, we would be seeing rising prices because of the degraded value of the dollar. But because we are in a tremendous slowdown, which would typically mean falling wages and prices, this is masking the erosion of the dollar. To see that the dollar is sinking, we can look at how many dollars are required to buy an ounce of gold or silver, and sure enough, those prices have been rising. But even here, gold and silver prices are suppressed by various methods by major governments and their central banks. They go to great lengths to disguise the depreciation of the dollar.

Back to Zero Hedge:

This dramatic imbalance puts a lot of question marks over how the upcoming hundreds of billions in incremental Treasury purchases will be soaked up, now that QE only has $15 billion of capacity for USTs....

QE is short for Quantitative Easing, a fancy academic term for "the Fed giving newly printed money to the US government." The currently planned QE effort is about to come to an end; only $15 billion more is intended for Treasury purchases. That probably amounts to a week or two. And what then???

...with Households lapping up risky assets it is unlikely they will look at Treasuries absent some dramatic downward move in equities [emphasis mine]....

Newsletter writer Bob Chapman predicted months ago that when the time came, "they" (meaning the Fed, the Plunge Protection Team, Goldman Sachs, etc) would crash the stock markets in order to frighten people back into dollars and Treasuries-- thus giving the dollar one last day in the sun. With the low trading volumes in the stock market, stocks are easier to manipulate these days. A crash would be simple for them to arrange.

That such a plan might be discussed among the financial elites is suggested by the very high levels of "insider selling" -- that is, executives selling their own company stocks. If the amount of selling were only 10 or 20 times more than the amount of insider buying, we might say "Well, they're selling because it's the bad time of year," or "Well, they have too many of their own stocks and they're simply diversifying." But when executives are selling 100 or even 300 times more than they're buying, you'd better think "Uh-oh." These guys are the "smart money." They move first... and they're getting out.

Back to Zero Hedge again:

...while Foreign purchasers... have in fact been aggressively lowering their purchases of Treasuries (from $159 billion in Q1 to $101 billion in Q2, an almost 40% decline in appetite!).

Translation: the foreigners are walking away from the table. They're saying "No thanks, we don't want to loan you any more money. We don't care to bet that you can ever repay us."

One thing is certain: in terms of priorities of the Federal Reserve, keeping the equity [stock] market buoyant is a distant second to ensuring successful auction after auction [of Treasuries] well into 2010. After all there is near $9 trillion in budget deficits that need financing over the next 10 years.

Translation: the Fed cares more about successful Treasury sales -- even if they themselves have to buy up the slack -- than about keeping the stock market healthy. The Fed doesn't really care about stocks, and in fact, it might be damned convenient if stocks suddenly tanked.

I've had no formal training nor on-the-job experience in any of this, so take this with a big grain of salt, but I think this next dollar rally (in response to a stocks crash) will be much shorter-lived than it was in late 2008. American currency is not the only safe haven out there, and the Fed's "QE" or counterfeiting program makes the dollar considerably more shaky. The smart money will use a temporarily strong dollar (and temporarily cheap stocks & commodities) to get the hell out of fiat paper and into real things. They'll sell dollars furiously and buy tangible assets such as gold, silver, mining shares, soybeans, and crude oil. They'll be waiting to pounce on that opportunity. The dollar won't rally for long.

A collapse of confidence

Jim Sinclair has said that when a currency enters a catastrophic decline (i.e. "hyperinflation"), this is a psychological event. It's a widespread and rather sudden loss of confidence which causes the currency to fail (or be dramatically devalued). The currency held by foreigners comes rushing back into the country, dumped back onto the market as a bad asset. Furthermore, the citizenry becomes desperate to get rid of this rapidly depreciating paper, and commerce temporarily soars as everyone plays "hot potato" with their failing paper, hoping to convert it into anything and everything of real, tangible value. Just as a stock market may crash because of a change in attitudes, so may a currency.

Lately I've been wondering: Does a collapse of confidence in government predict an imminent loss of confidence in the currency?

During the Bush years, many on the left felt that Bush had not won the 2000 election nor the 2004 re-election, but had stolen both. He was an imposter, a usurper. Today, some on the right wing think Obama cannot legally be the President. Set aside, if you would, any thoughts about whether these folks are correct or incorrect. The point is that a goodly part of the population no longer believes our presidents are legally elected (let alone fairly elected, which everyone knows hasn't been the case for decades).

Meanwhile, Congress is approaching record low approval ratings in both parties. A Pew research poll shows that 63% of those polled feel the news media is frequently inaccurate -- up from 53% only 2 years ago. Homeschooling is on the rise as people abandon public schooling, and alternative medicine is also on the rise as people increasingly distrust mainstream medicine. Again-- whatever your personal thoughts about all this, it points to a loss of faith in authorities and institutions. It points to a growth in distrust, suspicion, and cynicism. And I don't say they're wrong, because when you come to the end of an empire, everything pretty much goes to hell in a handbasket, and that's where we are today.

Moreover, I don't think the "incompetence" defense is working anymore. People are more inclined to believe that their representatives are corrupt through and through, that they have never acted in good faith, that they're "in on it," "one of the boys," "taking a cut." They're increasingly willing to believe that a given disaster was "an inside job." And I don't say they're wrong. At the end of an empire, maximal levels of corruption are reached. Power corrupts not only individuals, but societies.

I would assume that this disillusionment spreads from one area of life to another. Americans who feel disillusioned about government, the media, schools, the military, the FDA, and other institutions are Americans who are angry, cynical, and ready to feel they've been cheated. Such Americans will be ready to believe, in the not-too-distant future, that the ultimate swindle is that piece of green cotton in their wallet. That cotton they worked so hard for, but which is now swiftly losing value, robbing them as surely as a thief. They might soon look at their Federal Reserve Notes and recognize that they are worth nothing of real value, that their only real utility is as kindling. They might be quite ready to make the paradigm shift and realize that they are much better off with sacks of sugar and dried beans than with currency. They might realize, in a panic, that they'd better get out all that green cotton from the bank and convert it into canned food and blankets and shovels and seeds.

And I don't say they're wrong.

Dead in the water

A recent Daily Mail article made a splash with its photographs of a "ghost fleet" of empty, unused cargo ships off the coast of Singapore (please do click on the article and glance at the other amazing photos):



A ghost fleet -- in fact, many ghost fleets anchored in waters all over the world -- are what you get when the global economy tanks and trade slows dramatically.

When I look at that photo I'm reminded of a hideous moment I had just before Christmas a few years ago. I had picked up an ad circular which was advertising a 13-inch-tall, battery-powered, talking Homer Simpson Giant Pez dispenser (you can't make this stuff up). And I suddenly realized that a significant part of both the Chinese and American GDP was based on such totally, utterly, useless crap. Crap I would pay money not to have in my house. (Consider, for instance, the uniformly poor-quality and entirely superfluous junk sold by the Oriental Trading Company -- may they go out of business.)

And there sit the empty ships which used to carry such Pez dispensers and silly straws and amusing plastic eyeglasses. The world has discovered it doesn't need so much pointless junk. The Western middle class simply doesn't have the credit anymore.

The folks at Zero Hedge put up more maps of unchartered / unused ships in various places on the Earth, including this map of some of the most active ports in the US:



The red dots are the unused ships, while the green dots are ships in use. Again, please follow the link and scroll through to see the red dots off the coast of England, China, Dubai, etc.

Meanwhile, the Dow and the S&P were up substantially today, as they have been for 8 of the past 9 business days. Who cares about a collapse in global trade when Bernanke has cheery things to say? Hurrah-- Dow 10K is coming back, baby!!

The "markets" are just a casino now, disconnected from the real world.

The middle class grows poorer

The US Census Bureau has released its report for 2008, and the data show that median household incomes fell from 2007 to 2008 by almost $2,000 per year. The median household income for last year was $50,303, so 50% of American households made less than that and 50% made more.

This means that middle class families are suffering major losses in income. As far as this statistic goes, it doesn't matter what happens to the poor or the rich. The poor are already squarely in the "below" half, whether they lose a job or not. Similarly, it makes no difference whether a banker does or does not get that fat bonus check, because they were always squarely in the "above" half. The only way this median can fall is if many middle class families are losing income. They're the ones who fall from the "above" half to the "below," so that the median must be set lower.

Middle class families, I should point out, are the ones who do the spending. They're the bulk of the consumers on whom 70% of our economy depends.

Mish has a good post on this with some charts showing income over time. Over the past 10 years (1998 to 2008) median income did not rise. This is the first time we had a "lost decade" in incomes since the Great Depression. After adjusting for inflation and putting everything into 2008 dollars, incomes have increased by about $10,000 per household over the past 40 years.

Only... government estimates of inflation are too low. They say "Oh, sure, we know that a 1968 dollar bought a little more than a 2008 dollar." But in fact, a 1968 dollar bought much more than a 2008 dollar, something the government doesn't admit. They keep pretending that the dollar only lost (say) 2% of its value in a given year, when in fact it lost 4% of its value. If we were being honest about inflation, I'd bet that American household incomes have been unchanged for the past 40 years.

That is, it now takes 2 workers to earn the same income that 1 worker earned 40 years ago, for the majority of the middle class. Why should that be, when technological advances should have increased the productivity of individual workers? Aren't workers typically creating more wealth now than they were 40 years ago?

Well, no, because the workers 40 years ago included a heck of a lot more real producers, such as small farmers and manufacturers. We have a great many jobs today that produce nothing, that involve securitizing mortgages or prescribing useless drugs or designing standardized tests. We don't produce as much real wealth, and we are poorer for it.

If you consider households that are now two-income but would have been one-income 40 years ago, you can see that for a large part of the population we are making half what we made in the late 60's. And on top of that we're in debt up to our eyeballs!

Growing income disparity -- in which the poor get poorer and the rich get richer -- is part of the problem. Incomes have not been flat for the highest income households, but have increased substantially over the past 40 years. For the very wealthiest, the top fraction of a percent, incomes have skyrocketed. Money has been sucked out of the middle class and given to the bankers. This disparity has to be corrected, and if the ultra-rich don't wake up to that fact, it will be brought to their attention when they see the pitchforks glinting in the torchlight.

That said, it's also a simple fact that only production is real wealth. For decades, we've been offshoring production and onshoring debt, and I think that grand experiment is coming to an end.

We must produce more if we hope to regain the wealth we had 40 years ago.

The decline of credit cards

Considering that our economy is based on consumer spending, yesterday should have been a terrible day in the markets.

Sept. 8 (Bloomberg) -- U.S. consumer credit plunged more than five times as much as forecast in July as banks restricted lending terms and job losses made Americans reluctant to borrow.

Consumer credit fell by a record $21.6 billion, or 10 percent at an annual rate.... Credit dropped by $15.5 billion in June, more than previously estimated. Credit fell for a sixth month, the longest series of declines since 1991. (source)

So, the consensus among financial analysts was too optimistic by a factor of five. Mind you, these are the people telling us that the economy is recovering. Ha!

Let's look at this in graph form, courtesy Karl Denninger (click to enlarge):



Every source of money available to the middle class is drying up. One in five workers are unemployed or underemployed. Hours worked per week have fallen. Wages are falling in real terms. Home equity is gone. 401k's and IRA's may have rallied, but most are still far below what they were last summer or in 2007. What we've got left is consumer credit, and this is disappearing at a 10%-per-year rate. [Edit: I didn't make this clear, but consumer credit also includes auto loans and other loans for big-ticket items.] How fast, then, is consumer spending going to decline over the next 12 months?

It's true that some part of the decline in credit is because those who are still well-off are reluctant to take on debts. A credit card they might have signed up for 2 years ago holds far less appeal today, when people fear for their jobs and just want to save some money away, if they're able. But for many, their credit is being cut off. As Mish and Karl Denninger have put it, those who could borrow refuse to; those who would borrow cannot.

Meanwhile, today's buzz was over a YouTube video titled Debtors Revolt Begins Now, featuring a woman telling Bank of America that because they raised her credit card interest rate to 30% for no reason, she was not paying them another red cent. In the comments at Zero Hedge the sentiment was mostly of the "Brava!" sort. Apparently this is called "radical default" in the industry-- people who simply will not pay, no matter what they are threatened with, even if they still have some ability to pay. Part of the attitude is: the banks don't give credit to those who need it anyway, so what the hell do we care about credit ratings? If we should ever desperately need credit, by definition we'll be denied!

The hotels and car rental outfits better be thinking about what to do when half their would-be clients haven't got credit cards anymore. Maybe in ten years we'll be telling kids how you used to be able to buy things using a little plastic rectangle, even if you couldn't cough up the money till months or years later.

Betting on death

The other day a friend mentioned to me that Goldman Sachs was thinking of putting together a fund that would go up in value if people began dying earlier. I didn't completely understand this concept, but I have now run across it several more times, and have some thoughts.

The basic idea is this: Suppose an older person has a dire need for cash, and they happen to have a $1 million life insurance policy. A company might come along and offer them $400,000 today in exchange for the policy. This company (or fund) would continue to make the monthly payments, and upon the person's death the fund would collect the entire payout. If the person keels over almost immediately, the fund would have made $600,000. If they live a long time, the fund may end up losing money because the monthly payments add up to more than their profit at the time of the person's death.

Now, if you know how insurance works you can spot the flaw in this idea. The insurance company, naturally, has worked this all out so that they are likely to make a small profit. Otherwise, this insurance company would not be in business, right? So they've done all the math and worked out all the probabilities so that -- in all likelihood -- they will take in more money from the monthly payments than they'll pay out at the time of death. If you don't take in more money than you're paying out, then you don't have a business.

Now, as an individual who's buying life insurance, you don't really care that you might wind up paying out more money, over a long period of time, than your family would ever receive. What you are actually purchasing, in a given month, is peace of mind. You're paying the bill in order to protect your family. Nobody wants to get gouged, but it's the nature of the insurance business that they're probably going to make a profit from you.

Okay, fine. But why in the hell would a disinterested third party want to assume those monthly payments, knowing that these payments will -- probabilistically speaking -- be more than the eventual return?

This is what certain Germans should be asking themselves. The German newspaper Spiegel recently ran the article Investing in Death: Betting on US Life Expectancy Proves Risky:

Deutsche Bank and other financial institutions manage complex funds that buy up Americans' life insurance policies and pay their premiums in return for their payouts. But angry German investors are finding that Americans aren't dying as quickly as expected -- and that only the bankers are making a buck....

The "db Kompass Life" fund buys up life insurance policies of Americans and assumes responsibility for paying their future premiums. When a policyholder dies, the entire payout from the policy goes to the fund. And since everybody dies, it would seem to be a fairly crisis-proof investment.

Actually, it would seem to be not so much crisis-proof as profit-proof, at least during normal times. The only way such a fund would make money is if people started dying, en masse, earlier than predicted. Such a fund would only soar during pandemic, massive warfare, or an economic catastrophe dire enough to kill thousands from cold, heat, and hunger. Meanwhile, a new category of cancer drugs or a new heart medication could cause the fund to tank.

(These funds, by the way, will cause life insurance premiums to rise for everyone. This is because people often cancel a life insurance policy once their kids are grown or the house is paid off or whatever. But once a policy has been bought by a fund, it will not be canceled. The cancellations are a financial boon to the insurance industry, since it never has to make a payout. Without those helpful cancellations, higher premiums will have to be charged in order to make up the difference.)

Wall Street makes a ton of money just packaging things and charging fees and commissions, which is risk-free. They made a slew of money off bundling up risky mortgages and passing them off to the big money and the dumb money. And they'll make huge profits bundling up life insurance policies and securitizing those, too. As reported in the New York Times:

Undeterred, Wall Street is racing ahead for a simple reason: With $26 trillion of life insurance policies in force in the United States, the market could be huge....

But even if a small fraction of policy holders do sell them, some in the industry predict the market could reach $500 billion. That would help Wall Street offset the loss of revenue from the collapse of the United States residential mortgage securities market, to $169 billion so far this year from a peak of $941 billion in 2005, according to Dealogic, a firm that tracks financial data.

The key thing to understand here is that Wall Street doesn't have to fleece the sheep itself. It's more like Wall Street collects a finder's fee for delivering sheep to the shearer; the finder's fee is otherwise known as "fees and commissions." They earn a steady income just by creatively shuffling paper, right up until their Next Big Idea blows up and leaves pension plans, 401k's, and European banks in smithereens. Wall Street's problem, at the moment, is that they're in dire need of a new way to shuffle paper.

Our old friends at Goldman Sachs have gone one better than merely packaging "life funds" (how's that for Orwellian?). Goldman has created a way to gamble on US life expectancies, without the gambler even having to join one of these funds:

Goldman Sachs has developed a tradable index of life settlements, enabling investors to bet on whether people will live longer than expected or die sooner than planned. The index is similar to tradable stock market indices that allow investors to bet on the overall direction of the market without buying stocks.

Boy, that should be an interesting thing to watch. Considering the insider trading that went on just before 9/11, the Goldman Death Index could foretell a very nasty event. Some big player might get wind of a widespread, mutated H1N1 in China and go long the Death Index before the news hits the Western press, which we would see as an inexplicable price spike. Or someone might know about a terrorist event about to occur in a major city, and might buy a slew of call options on the Death Index. As my friend pointed out, a speculator could take a "pro-Reaper" position or short the Reaper. Major pro-Reaper moves would signal something very bad coming down the pike.

I'll leave you with an excerpt from Wall Street Vultures Betting on Death:

The rating agency involved in the ” early death investments,” DBRS, employs a “mathematics whiz” who has created computer models to manage the risk of investing in life-insurance securitizations. The risk being, of course, people living longer than expected.

The math whiz, Jan Buckler, also has a PH.D. in nuclear engineering and she has devised a scheme of packaging the bond instruments based on the type of disease to lower the risk. She recommends bundling policies with a mix of certain diseases such as leukemia, lung cancer, heart disease, breast cancer, diabetes and Alzheimer’s. The theory is, if too many people with breast cancer are in the securitization bundle and a cure is developed, the value of the bond would drop.

Wall Street is betting against a cure for cancer.

Sarah Palin was looking for her death panels in the wrong place.

The Other America

A couple of years ago I was listening to a podcast with Max and Stacy, and she mentioned that a friend had recently gone to the States as a tourist. This friend had intended to start in New York City (I think it was NYC) and travel down the entire East Coast. She only made it as far as -- if I remember rightly -- Virginia, then caught a plane back to Europe because she was so horrified at the poverty. That tale has always stuck in my mind... say, when I'm driving past a tiny rural home with junk in the yard and a sheet tacked over the window.

If you haven't heard of photographer Harvey Finkle, he does some excellent photo journalism on the subject of homelessness, poverty, and advocacy for the poor. The photos in this post are from his gallery on child poverty.

While current national data are not available, the number of schoolchildren in homeless families appears to have risen by 75 percent to 100 percent in many districts over the last two years, according to Barbara Duffield, policy director of the National Association for the Education of Homeless Children and Youth, an advocacy group.

There were 679,000 homeless students reported in 2006-7, a total that surpassed one million by last spring, Ms. Duffield said.

With schools just returning to session, initial reports point to further rises. In San Antonio, for example, the district has enrolled 1,000 homeless students in the first two weeks of school, twice as many as at the same point last year. (source)

So, maybe 2 million homeless students this year. The last time we went to the library, one of the books my daughter checked out was called "How to Steal a Dog." The protagonist is a girl whose family is living out of their car (she wants to steal a dog to return it for the reward money). I guess this is becoming a mainstream reality.

The number of working Americans turning to free government food stamps has surged as their hours and wages erode, in a stark sign that the recession is inflicting pain on the employed as well as the newly jobless.

While the increase in take-up is often attributed to the sharp rise in unemployment... the Financial Times has learnt that some 40 per cent of the families now on food stamps have “earned income”, up from 25 per cent two years ago.

The agriculture department, which runs the programme, attributes this rise to workers having their hours cut back.

“I’m sort of stunned, it seems like a dire warning . . . that even the jobs people are retaining in this recession aren’t at the wage level and hours level that they need to provide for their families,” said Heidi Shierholz, economist at the Economic Policy Institute. (source)

Jobs and wages must increase or there is no economic recovery. Furthermore, those jobs must come from extraction (things like mining, fishing, and forestry) and from production (manufacturing, textiles, refineries, new infrastructure). Put another way: the recovery must come from well-paid blue collar work. A "jobless" recovery is no recovery at all, but merely a sick joke told by the media.

The poverty rate among older Americans could be nearly twice as high as the traditional 10 percent level, according to a revision of a half-century-old formula for calculating medical costs and geographic variations in the cost of living.

The National Academy of Science's formula, which is gaining credibility with public officials including some in the Obama administration, would put the poverty rate for Americans 65 and over at 18.6 percent, or 6.8 million people....

The overall official poverty rate would increase... to 15.3 percent, for a total of 45.7 million people [emphasis mine], according to rough calculations by the Census Bureau.

(source)

In other words, the real number of poor people in the US is approaching 1 in 6.

The National Alliance to End Homelessness (NAEH) estimates that this recession will create 1.5 million new homeless – nearly double the current number. Half of those people will exist outside the shelter system – in cars, tents, campers, or sleeping bags under highway overpasses....

The rise in long-term tenting and camping is a sign that people’s options are running out, says Nan Roman, president of NAEH. (source)

I think these people are invisible to most of those in charge. In their meetings about interest rates and banking liquidity and GDP and SDR's, nobody is talking, say, jobs projects to build rudimentary cottages in areas with high numbers of homeless families. Nobody is talking about the re-opening of textile mills and foundries. Sure, we'll use stimulus money to re-pave some roads, but where do the new blue collar jobs come from? And how do we make sure they are well-paid jobs when workers get slave wages in so much of the world? The only thing I can think of is so taboo, one dare not whisper it in mixed company: tariffs and protectionism.

The pretense of honesty

I had mentioned that the government tells lies about the unemployment rate, "adjusting" the numbers according to this theory or that theory. Mish quotes from an article that addresses some of these jobs numbers [all emphasis is mine]:

What was really key were the details of the Household Survey, which provide a rather alarming picture of what is happening in the labour market.

First, employment in this survey showed a plunge of 392,000, but that number was flattered by a surge in self-employment (whether these newly minted consultants were making any money is another story) as wage & salary workers (the ones that work at companies, big and small) plunged 637,000 — the largest decline since March (when the stock market was testing its lows for the cycle).

Right, so they call people up and they say "Well, I'm self-employed... I'm setting up my own consulting business." And maybe their income from that business, for this month, was negative $500. Doesn't matter. They still count as employed.

As an aside, the Bureau of Labor Statistics also publishes a number from the Household survey that is comparable to the nonfarm survey (dubbed the population and payroll-adjusted Household number), and on this basis, employment sank — brace yourself — by over 1 million, which is unprecedented. We shall see if the nattering nabobs of positivity discuss that particular statistic in their post-payroll assessments; we are not exactly holding our breath.

Wow-- a million jobs lost last month. Seems like that would make the news, no?

In the Dmitry Orlov presentation called Closing the Collapse Gap, in which he talks about the fall of the USSR and its similarity to the coming denouement of the US, he says that the Soviet collapse was harder to predict because of government secrecy. Well, I'm not so sure about that. Everyone acknowledged that the Soviets, having a command economy and an opaque, secretive government, would be dishonest about their fiscal situation. The US government pretends to be transparent, but they sure do play with the numbers. Some of the people watching CNBC don't seem to understand that this is cheerleading and lies, or that the jawboning coming from the Fed and Treasury are more of the same. Most people probably don't believe that the Fed has found ways to buy our own Treasuries without admitting to it (first using Cayman Islands accounts, and then using "swap accounts" or "swaps" with other central banks-- I can't claim to understand all the details). Which is more dangerous-- flat out stonewalling, or the illusion of honesty and transparency while they're lying through their teeth?

All news media outlets reported August job losses of 298,000 216,000, the official number the government likes to use. [Edit: 298,000 was the ADP estimate.] Meanwhile other estimates put the real figure at over 1 million, but few news articles, if any, will mention such a horrifying figure. I think green shoots might prove worse for the average person in the US than secrecy. Secrecy makes citizens suspicious, and rightly so; green shoots give them the warm fuzzies. As it grows harder to maintain confidence in the US dollar, in US stocks, and in Treasuries, the incentive for government to lie becomes stronger and stronger. Before it's all over they might be making up numbers out of whole cloth, yet some folks will still believe they are honest.

So I think Mr. Orlov might be wrong; it might be harder to predict the timing of the demise of the United States.

By the pricking in my thumbs

This summer felt like a waiting period, a hiatus during which everything slowly got a little worse but nothing major happened. Now, however, it's September, and things feel foreboding.

I'm hearing rumors again about banks and hedge funds that are in trouble (Morgan Stanley, Wells Fargo, and Cerberus). This reminds me of last fall, when a slew of banks were teetering. Sub-prime may be old news, but the commercial real estate implosion is just getting going. Mish writes that 1 in 6 construction loans is in trouble.

Unemployment is still ticking up. Officially it's 9.7%, except that doesn't include the long-term unemployed or those who need full-time work but can only find part-time jobs. Including those folks the unemployment rate is 16.8%, but even this is seen as a low-ball estimate because the government plays with the numbers and makes a lot of ridiculous assumptions. Economist John Williams has the real unemployment rate at 21.1%.

Meanwhile, in at least 18 states the money has run out for unemployment benefits, and they are borrowing from the federal government to make payments. California pays out $80 million per day to the unemployed. As Ilargi writes in States of Shock:

At state level, a mountain of trouble is brewing in America....

There are lots of political fights ongoing.... In some cases, parties are rolling over the floor for budget cuts of 2-3-4 percentage points. Whoever is involved in any of those fights is up for a rude sunrise, since in many cases, tax revenues are already off by 10-20%. I haven't seen one state that doesn't admit to at least a few hundred million in budget deficits, with losses predicted to grow rapidly in years to come....

There is no doubt that all states, with perhaps 1 or 2 exceptions, will go into the next fiscal year with a budget that is far too optimistic. This is how politics works. Whatever can be made tomorrow's problem will be. And tomorrow's problems are set to be huge....

We are about to see a huge increase in the issuance of state bonds and other forms of borrowing. Kicking all your cans down all the roads that you can find. Many states are in the process of opening some kind of gambling den or another.

And then down the line will come the tax increases, stealthily at first, more openly later. But raising taxes on a population that is getting poorer fast is a stillborn idea, especially at the lower levels of government, where people know where you live.

To understand the underlying justification for budget cuts that are way too meagre, for not properly tackling problems and for issuing even more debt, you only need to look at the White House and its message of recovery and 3.5%-4% economic growth right around the corner. That message undermines the need for more unpopular measures at the state level, even as revenues are falling much faster than that.

On another note, as I've written about recently, the stock market looks set to have another major fall in the next month or two, which will cause further havoc with pension plans, university endowment funds, and 401k's. Insider buying & selling activity (e.g. if the CEO of a company wants to sell some of his stock in that company) must be reported to the authorities. For most of August the insiders were selling 31 times more than they were buying. In the last week in August this shot up to 62 times. For every $10 worth of stocks they purchased, they sold $620. This is important because major market moves happen in three steps:

1. The smart money buys (sells).
2. The big money buys (sells).
3. The dumb money buys (sells).

The dumb money is the public. We're just here to buy at the top, sell at the bottom, and generally get fleeced by the big boys.

Currently, the "smart" money (insiders) and some of the "big" money (funds, money managers) are getting out. When stock prices are going up it's usually on slow, low-volume days. When they go down, though, they go down on busy, high-volume days. This is indicative of the big guys starting their exodus.

I do think the dollar will be okay for the next little while, because most people don't know about gold and silver, and when stocks fall and they panic, they run straight back into Treasuries and dollars in the bank. That makes dollars and Treasuries in hot demand and supports their value. But somewhere out there, and quite possibly just a few months away, we could see one of these "black swan" events and the dollar could tank. Most dollars in existence are not in the United States. Once the rest of the world decides they don't want our dollars, there is nothing the Fed or the government can do to keep the dollar from losing much of its value.

I increasingly find that people are very cynical and tired of the government / Goldman manipulation of markets, commodities, and currencies. People still trade in the markets, but it's partly based on their understanding of what the government / Goldman gang will do, e.g. "They always shove stocks up starting at 3:30 on Fridays" or "They always smash gold when the market opens in New York." Wall Street is becoming a bit of a joke. Too much more corruption and our foreign friends will pack up and go home, taking their investment money with them.

Should be an interesting fall.

Wages must increase

I was over at Karl Denninger's Market Ticker yesterday, and saw this amazing graph:


This graph shows the growth in the US population since 1970 (about a 50% rise), as well as the growth in consumer credit (close to a 20-fold increase). As Denninger points out, this doesn't even include mortgage debt. Or corporate debt. Or government debt.

Why this gigantic increase in debt?

In real terms, if you properly adjust for inflation, wages have been falling during the entirety of the above graph. Note that government statistics about inflation, particularly after about 1980, are lies. The government understates inflation in order to reduce Social Security payments, which increase along with inflation.

The American standard of living doesn't seem to have fallen much, though. Particularly not if you watch a lot of TV, where fictional characters are mostly wealthy and the mainstream news pretends that everyone is upper middle class at minimum. But even here in the real world, considering that wages have been falling for 40 years, it's amazing that we've kept this standard of living. (Again, I'm saying they're falling in real terms, in terms of what you could actually buy with your paycheck.)

Partly this is explained by the prevalence of two-income households, which are now usual. But clearly, much of the gap left by falling wages has been made up by credit cards, home equity loans, student loans, and so on.

However, that credit is now drying up and going away. Home equity lines have been canceled, credit card limits have been slashed. And yet 70% of the economy is based on consumer spending, so if you take away Americans' credit cards, their reduced spending also reduces the whole GDP.

Meanwhile, income disparity has been rising. We all know about the bonuses given to bankers who are complete failures, bankers making many hundreds of times what the bottom quartile of Americans earns.

The solution here really ought to be obvious: wages must rise. That hasn't happened, perhaps, because of globalization, but thankfully that is now coming to an end. Protectionism, tariffs, wars, and expensive crude oil will spell doom for the globalized economy. As this happens, workers need to demand better wages. It's not selfishness-- it's what's needed to restore some semblance of an economy.

The Mogambo Guru on derivatives

If you're not familiar with The Mogambo, he's quite funny and his column makes reading the economic news a bit easier. Here he is talking about "derivatives" -- essentially, a bunch of bets that banks have placed with each other, and which will eventually raze large parts of the financial world:

And when combined with all the other hundreds of trillions of dollars in other derivatives around the world, we are talking about more than a quadrillion dollars in various bets and hedges, a figure that I figure must be more than the total value of everything in the whole world because even $1 quadrillion comes out to, for each of the Earth’s six billion inhabitants, $166,667 each! Gaaahhh!

The worst part is that the real, in-your-face nominal total of global derivatives may actually be several quadrillion, or even the hundreds of quadrillions of dollars, as has been previously estimated, I forget where, but you can trust me on this one because you don’t forget a thing like learning of a $225 quadrillion estimate for total global derivatives outstanding, which is 4,500 times as large as the world’s $50 trillion GDP, which is so bizarre that I can hardly imagine it, and have drunk many, many shots of various alcoholic beverages trying to get to the “zone” where I can even vaguely comprehend such a figure, which seems to be that narrow “window of opportunity” right before I pass out after raising my head up off the floor and loudly declaring “$166,667? Sure! Why not?”

A lot of these derivatives cancel out-- JP Morgan Chase owes a billion to Goldman Sachs, but Goldman owes a billion to Chase on some other contract, so it comes out even. But we don't know who's got what. Nobody really knows which banks might be left standing and which will be mere smoldering ruins, once these contracts start getting triggered. Certain banks will never be allowed to go under, and the Fed will print new money to give to them to plug the holes in their balance sheets, even if it means decimating the dollar.

The fact that gold has no counter-party risk will be a big part of its appeal, in the not-distant future.