The only man with cojones to call the depression a depression, David Rosenberg, of what is now Bank of Countrywide Lynch, is reading behind the BS that was this morning's highly suspect GDP number, and expects the current quarter's annualized GDP decline to hit -6.3%! The two items that attract his attention are consumer and capital spending, declining 3.5% and 27.8%, respectively. So where did the fudging occur to result in the upside surprise: inventories. While consensus was expecting a $100 billion reduction in inventories, the number was in fact an addition of $6.2 billion. Ironically, despite all the massive inventory liquidation efforts at domestic businesses, shelves are still stocked to the brim, and that $1,000 Barney's suede jacket is still on the shelf, now selling for $29.95.
David's conclusion: the first and fourth quarters have changed places, and more relevantly, "the Obama team's fiscal stimulus package, when it does start to percolate by the spring, is going to be launched from a much deeper hole in the overall level of economic activity."
Another interesting point that David makes is that despite the fake bounce from the 6.5% existing home sales number in December (which is attributed to foreclosure auctions and turnover: a good example being person x selling his car to person y, while buying a used car from person z, which does not drive output, employment or income), it will take over a year for housing supply and demand to come into balance. Unsold homes supply rose to a record 12.9 months in December from 12.5 months in November. And here is a very startling point:
Not until we get this inventory-to-sales ratio below 8 months' supply can we expect this three-year deflation episode in residential real estate fully play out. At the current pace, and assuming the builders remain aggressive in curbing production and sales don't go and make even new record lows, it will take a good year for supply and demand to come back into balance. Until that happens, we are likely to see another 15% downside to nationwide home prices, on top of the unprecedented 25% slide already incurred by the Case-Shiller index.
This is an amount significant enough to not only wipe out the remaining capital base of the large banks, but also double the number of mortgage borrowers who are currently in a negative equity position (ie, to 25 million out of a universe of 51 million; we can thank Gary Shilling for those statistics). This would only reinforce the severe trauma that has already hit the US household balance sheet – a $13 trillion loss of net worth since the third quarter of 2007. And if our assessment of where asset values are going is correct, then that cumulative loss will approach $20 trillion by the end of 2009.
And the conclusion is a doozy. No commentary necessary:
With the lags, such a hit to wealth would imply more than a $300 billion or 3% annual decline in real consumer spending annually for the next three years as the savings rate climbs back to its pre-bubble normalized level of around 10%. This is what the TARP(s), the fiscal package and the Fed's repeated liquidity backstops are up against. So far, the battle between the expansion of the Federal government's balance sheet and the contraction in the private sector balance sheet is being won by the private sector. Total credit creation in the economy, even in the face of a near trillion dollar fiscal deficit (and growing), has slowed from 9% to just 6% as the consumer deleverages (a record $29.3 billion of household debt was paid down in 3Q and the monthly data show a repeat in 4Q) bumps against the Federal government largesse.
Now if only the U.S. government could understand even 1% of the above...
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3 comments:
$20 Trillion? Let's see 80 million houses divided into 20 trillion =
- $250,000 per house. In 2007, the average NEW house was only $313,000, so each house will lose 79% of it's value?
Call me skeptical.
you are assuming household net worth is only based on house value. there are many other components
US debt to GDP is at least 350%. Although credit growth has slowed down,it is still positive while GDP is shrinking, thereby increasing the ratio. This ratio is already much higher than it was going into the Great Depression, and without the positive demographics. As a country, we passed the point a while back where GDP growth depended on ever increasing amounts of debt growth. Name your scenario for how we will bring the ratios back to a sustainable level, but it ain't going to be pretty. The debt is also increasingly short term in nature, which creates additional issues.
Very high quality content on this blog, BTW.
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