By removing several zeros from the Government's figures and rephrasing the official terminology, one can place the debt situation in terms we all can understand - that of a family’s income and expenses.
A family taking in an annual income of $21,700 but spends $38,200 will soon be in dire straights.
The large outstanding balance of $142,710 on the credit card only exacerbates the situation.
Clearly, spending cuts need to be made, but eliminating only $385 from the family’s budget would be a drop in the bucket.
Either a substantially higher amount of income needs to be made, or the family will have to learn to live with less.
Clearly, this "family's" credit status is beyond alarming. The parents must accept the responsibility that has led up to their predicament and avoid shunting the repayments to the kids.
It's not all hopeless... in the household context, by all means start paying down the credit card debt and start managing the card company's expectations by committing to repaying an affordable amount each month. Alongside this, the long road to redemption must also start with initiating some nominal savings to weather the inevitable storms that will appear. Assets like precious metals eg silver should act as a store of value in the long term. Currently priced at around US$30 an ounce, they are worth accumulating.
The English language has some delightfully anthropomorphous collective nouns for the various groups of animals.
We are all familiar with a herd of cows, a flock of chickens, a school of fish and a gaggle of geese.
However, less widely known is:
- a pride of lions,
- a murder of crows (as well as their cousins the rooks and ravens…recall the 1963 Alfred Hitchcock film "The Birds"?)
- an exaltation of larks and,
- presumably because they look so wise, a parliament of owls.
Now consider a group of baboons. They are the loudest, most dangerous, most obnoxious, most viciously aggressive and least intelligent of all primates. Ironically, what is the proper collective noun for a group of baboons? Believe it or not... a congress!
Dedicated to the politicians of the world…especially to those on both sides of the Atlantic responsible for the current global economic woes and specifically, to that collective crew in Washington DC who literally personify this noun.
Against this backdrop, with the scope for fiscal and monetary policy ammunition running desparately short and stimulus all but exhausted, politicos might be expected to grasp the nettle, overcome their squeamishness about confronting vested interests opposed to change and push through reforms to improve the supply side of the economy; policies such as making it easier to hire and fire, promoting greater competition and investing more in training.
How about the people deserving a keen "convocation of eagles" in these national legislatures...
Ahead of the US Labour Day holiday weekend, the Labour Department's latest employment non-farm payrolls report for August, issued yesterday, makes for grim reading showing zero job growth with unemployment transfixed at 9.1% (14 million people).
President Obama has convened an "emergency" jobs speech before a joint session of Congress on 8 September.
Recent sagging consumer confidence and skittish businesses' reluctance to hire underscore the severity of the United States situation. The impact is also felt abroad right now by Asia exporters hurt by declining trade volumes. Consumer spending represents around 70% of US GDP (about US$ 14.7 trillion in 2010).
The tremendous stockmarket rallies triggered from March 2009 as company profits recovered have not translated into additional new jobs in the US.
What the chart above (made by Calculated Risk) shows is the trajectory of job losses and gains over time, after employment peaked, during this recession(red line), compared to previous recessions.
So as you can see, the depth of the decline was much worse than any other recession. Furthermore, the pace of the recovery is much weaker than in previous ones. Over a year it was looking as though the recovery might be kind of V-shaped (a really big, wide V), but now it's clear that the comeback won't look anything like the decline. Now the comeback is basically flatlining. It's turning into a tilted "L".
Ironically, the only time in history that portrayed a much worse and protracted decline than the current one came about during the 1930s and 1940's Great Depression.
With current sovereign debt crises unresolved, both in the US and Europe, there is a danger of panic solutions being deployed by governments that may portend unintended consequences (eg. implementing QE3, Eurobonds) and exacerbate the uncertainty over further new job creation.
There is one possible solution which can foster job creation back in the US. Consider the current S&P500 companies' balance sheets hold cash of US$500+ billion. Unfortunately, a significant chunk of this cash is held in their overseas subsidiaries bank accounts which cannot be repatriated back to US shores, otherwise they would be immediately subject to US business tax of 35% (the 2nd highest in the world after Japan's 39.5%). Scrap this inane tax rule. Let these companies bring their hard-earned money back tax-free.
Let's do a rule of thumb calculation. Say, 40% of this cash, valued at US$200 billion, is held abroad. Repatriate this to the US and assuming dividend and share buy-back policies remain unchanged, it's all re-invested in high value IT and biotech industries, within key R&D, software / hardware manufacturing processes, where the US still retains a solid competitive advantage. That should generate 2 million critical US$100,000 jobs...and these intrinsically satisfying roles stimulate increased consumer spending (including derived demand for Asia exports), pep up family units and generate local taxes paid...
Surely it makes commercial sense to also consider relocating some of these overseas positions back to the United States than end up with incessant verbal spats over high-technology transfer agreements, patent thefts and infringements with some local partners in those testy countries...like China.
It was the biggest open secret in Washington DC the failure to satisfactorily tackle the USA debt ceiling debate was going to trigger an urgent ratings review which had been signaled by S&P earlier this year.
It's now happened. S&P announced the downgrade on Friday night around 8.30pm EST, Saturday morning 8.30am Asia. It was a monumental moment in the history of America.
The Federal Reserve had bet the farm QE2 last August and it has lost. The worst move here would be to double-down on QE3, because if it failed to rouse global markets in a sustained fashion, then the Fed's remaining credibility and "magic" would vanish in a puff of smoke.
Would you pull out your super bazooka American Express card now to patch over the last 3 years juggling act using the Mastercard to pay off the Visa debt balance?
The perception has now changed. Interest rates around the world are going to edge up over the next 6 months as the reference price of "risk-free" rates long revered in US Treasury bills are redefined. Should central banks decide not to move interest rates up in order to manage their fragile economies, then expect a degree of foreign exchange rate volatilty.
The impact for the next 6 months will be:
The wealth effect will start to diminish as asset values become more "costly" to own and service. Will corporates and consumers continue to "pay more" and chase assets?
Stock markets will have to rapidly adjust for and reflect the extra interest expenses within companies as debt (re)financing becomes more expensive. These are headwinds for those large leveraged companies and small businesses reliant on their bankers.
Bonds prices trend downwards as investors rethink pricing in the context of a rising interest rate environment
What are the range of options and next steps available to ordinary consumers:
Pare down stock market portfolios to eliminate as much market risk as possible, so long as financial markets remain vulnerable, and politicians lack real impetus to resolve sovereign debt concerns. Stay with boring stable companies eg utilities that generate dependable cashflows.
Retain a strong cash component in portfolios to take advantage of potential fire-sale opportunities. Financial markets can over-react emotioally to the downside eg Oct. 2008 & Mar. 2009 as fundamentals get tossed out of the window in panicked dashes to the exits.
Property investors (the above-water, positive-equity universe) should consider locking in their capital gains and take a breather.
Assess the alternative of owning precious metals...gold and silver. Historically these have provided a store of value and risk/uncertainty hedge in volatile financial climates.
The US dollar's reserve status held since 1945 is waning. Over the last four weeks, the world has watched aghast as the internet era threw open the incessant bickering within the highest echelons of American government. The mantle of trust and faith in the creditworthiness of the USA, gingerly built up throughout the 20th century, is eroding. Asia is well positioned, but not guaranteed, to assume the economic vitality that has served America so well in the past.
QE3 will not be a panacea...more like Ben Bernanke riding to the rescue on a lame horse. Stay nimble and let the game come to you.
On March 6th 2009, the United States Standard & Poors 500 (S&P 500) index made an intraday low of 666. Gold on that day was $965. Thus, the S&P 500 bought .69 ounces of gold.
Today, at the intraday high of gold and the low of the S&P 500, the index bought .73 ounces.
Therefore, in gold terms and/or in REAL terms as opposed to NOMINAL money terms, today’s action in the S&P 500 has propelled us basically back to the March ’09 low.
What this means is gold closing at US$1,648 today is not expensive / overvalued.
Given the choice to invest in a broad index fund or purchase gold bullion (government mint coins, private mint rounds, bars etc), albeit these do not pay interest and dividends, you can sleep peacefully without contending with all the financial markets' volatility and USA and Eurozone sovereign debt crisises.
Going forward, gold is in a bull market, it is a store of value, it's real money. The financial markets still are still rivetted with risk. I encourage you to research this and consider buying the physical stuff or a financial ETF (NYSE: GLD).
The news broke this week on foreclosure-gate. It has been evident for a while the U.S. banks are drowning in foreclosures and this current crisis is just going to make things a lot worse. Back in 2005, there were approximately 100,000 home repossessions in the United States. In 2009, there were approximately 1 million home repossessions in the U.S. and RealtyTrac is now projecting that there will be an all-time record of 1.2 million home repossessions in the United States this year.
Vast numbers of foreclosures across the United States could be invalid because the securitization process has muddied the chain of ownership. In fact, an increasing number of judges have ruled that the "owners" of the mortgage have no right to foreclose on a property because they lack clear title. This has giving rise to a "Show me the Doc" (document for tile deed) movement to help householders restrain the banks' actions.
8 Investment Implications: House Buyers
Foreclosure bargains currently on the market may not be the bargains they appear if legal title is not clear.
How will this affect the middle-upper of the property market with recent social trends to "trading-up"?
Americans that have recently purchased foreclosed homes may now be facing some serious problems themselves enduring the uncertainty of where legal title actually resides. Managing household budgets will be thrown awry.
House Sellers
Millions of Americans may now "own" homes that they do not have clear title for. When it comes times to sell those homes, many Americans may find themselves unable to do so, thereby restricting labour mobility.
Householders with Foreclosure Notices Served
For a typical under-water US householder, there may be an incentive to just stay in one's property until a bank or "someone" turns up with the full and proper paperwork to evict. The "Show-me-the-doc" movement is now gaining traction as survival instincts are triggered with social mores thrown out.
By not paying the mortgage, a householder may gain a "temporary reprieve" to transfer mortgage spending elsewhere.
Banks
It will make it much more difficult for the banks to sell the massive backlog of foreclosed properties they have accumulated.
Under current FASB accounting regulations, such loans (assets) should be marked to zero if there is no eligible legal title or in the absence of market validity. Massive write-offs could be looming. It distracts management attention from running the core business.
How will this affect the ability for banks to sell mortgage-backed-securities (MBS) into the market?
Will banks continue to hoard money and not lend as they consider all conservative means at their disposal to shore up their capital base?
Should another raising of capital arise to boost their Tier 1 and 2 reserve ratios, this will cause dilution to existing shareholders.
Ratings Agencies
Do they have any credibility left? What checks did they do to validate any of the paperwork before they issued their ratings on the mortgage-backed securities (MBS)?
Warren Buffett has sold down a large proportion of his holdings in Moodys over the last 18 months.
Government
Another test of the big banks are too big to fail may not be far off depending on the size of write-offs and how market confidence is affected.
Is there political appetite for another bailout?
The Federal Reserve is holding US$ trillions of MBS on its balance sheet when it bailed out these banks. One day, it has to divest itself of these. Who will want to buy them and at what yields?
FDIC reserves may not be enough to absorb a wave of smaller bank failures that result from foreclosure inertia. This may necessitate more federal spending to boost their reserves and so further increase the growing fiscal deficit.
Lawyers
Attorneys general in 50 states will be working together on a joint investigation into this foreclosure crisis. It is going to become much harder to get a mortgage. It is going to become much harder to buy a home. It is going to become much harder to sell a home.
For a bank, this must be a nightmare. Loans on the books are backed by inadequate documentation. Employing low paid back-end staff to sign off mortgage approvals and which were subsequently "re-packaged" without thoroughly questioning any of the paperwork or ensuring completeness of due legal process. At best it's carelessness, at worst negligence. Defective documentation has created millions of blighted titles that could plague the nation for the next decade. Lawyers smell blood!
Economic
This probably explains why the recent consumer spending indicators have not been worse in the downturn. Is it possible what some foreclosed householders don't pay in mortgages has been "transferred" to other items eg Walmart, iPads etc
Over time, if this is not quickly resolved, the U.S. housing industry is likely to suffer a significant downturn due to all of this uncertainty. Consumers consume. Housing expenditures and their flow-through to related support industries (eg furniture and furnishings) transmit to the general economy.
To assess if consumers hold back, Thanks-giving and christmas spending over the next two months will be key indicators to watch.
In a litigious society like the U.S., lawyers will have a field day. 2008 subprime could now morph into subprime 2 making tobacco litigation seem like a picnic.
A healthy property market is pivotal for any economy. It promotes labour mobility, greases social development and drives a steadfast flow of consumer spending.
Shorting the US banking sector (symbol:XLF, Financial Select Sector SPDR) seems a reasonable bet until clarity is achieved with this tangle of legal spaghetti. Imagine the financial equivalent of BP having many many small wells gushing oil out into the Gulf all at once and getting confused as to which ones to plug immediately. We know what happened to BP's share price in the first two months of that saga.
The word "trillion" used to be the preserve of an elite group of physicists working on the Large Hadron Collider (atom smasher) project at CERN in Swizerland. Even the hallowed bods at NASA did not need to cope with this number. Its mission frontier, Mars, was a mere 55 - 401 million km from Earth depending on where these planets were in their orbit around the sun. It's 2008 budget was earmarked for only US$17.3 billion. A billion we can visually relate to - one thousand million; the sum a Columbian Medellin drug lord can be worth if he is lucky enough to evade the US DEA (Drug Enforcement Agency).
The world was formally introduced (some would say saturation-bombed) to the "trillion" in October 2008. That was after Fannie Mae, Freddie Mac, Lehman Brothers and AIG collapsed in quick succession and new soundbites were quickly required for the US news networks after editorial staff found it too "lengthy" to utter the "thousands of billions" when tallying up the total losses and bailouts.
First, to understand the severity of this financial debacle, one can take a peek at the graphic below. It gives a perspective of the financial problems confronting the US today, measured in comprehensible billions. In proportion, the bigger the square the bigger the number.
A little known report from the goverment's Office of the Comptroller of Currency (OCC) is published each quarter on the total value of derivatives. This little needle in the digital haystack highlights: - a US$ 203 trillion notional (face-value) derivatives' position in the US banking system. 97% of this is held by five US banks (JP Morgan Chase, Goldman Sachs, Bank of America, Citibank and Wells Fargo). HSBC North Americas is ranked number 6. - Net Current Credit Exposure(NCCE) is US$555bn; this is the net amount owed to banks if all contracts were immediately liquidated today. - Potential future exposure (PFE) is US$ 670bn; an estimate of what the current credit exposure (CCE) could be over time, based upon a supervisory formula in the agencies’ risk-based capital rules. - Total Credit Exposure (TCE) of US$1.2tn (1,225 bn); the sum of NCCE and PFE. Wasn't it in March that HSBC alerted worldwide markets to its £12.5bn (US$20bn) rights issue? Can the HSBC boardroom sleep soundly with US$3 trillion derivatives' on its books? Using a TCE/Notional-Value risk ratio of 0.62% calculated from the above figures, HSBC's exposure is approximately US$19.5bn, assumimg conditions do not worsen. Just blaming it on unpopular sub-prime mortgages is not the whole story.
The OCC report does not get coverage in the major US news networks. GE owns CNBC and NBC. Time-Warner owns CNN. Disney owns ABC. Westinghouse owns CBS. News Corporation owns Fox Networks. It's in everyone's interests to both manage the news and the share price.
What follows below is an interview with Janet Tavakoli, one of the foremost experts on structured finance with over twenty years Wall Street experience. She has written a book "Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street". She states the derivatives mess is not over and the meltdown risk is now even higher than in 2007. That was not a typo.
Imagine what NASA would do with a trillion dollars? We really could be on another planet. For HSBC stock earthlings...how they exit North America will be just as critical as beaming their Scotty CEO up to Hong Kong.
