"The Consumer Federation of America estimates that credit card debt held by consumers is about $850 billion, some four times what it was in 1990. The group says the average debt for those 58 percent of card-holding households that do not pay their balance in full every month is about $17,000."We also know from a study done by Fitch that 30% of all credit cards are exhibiting patterns of use and payment that show high risk of default. Since we can assume that none of the 42% of the people who pay off monthly are at risk of default (for obvious reasons) this means that about half of the people carrying balances are currently at high risk of default on their credit card bills.
There's no middle ground, and S&P can't figure out which is which . That puts a nail in the coffin formed in the belief that you can simply look at FICOs or other forms of consumer "behavior" to figure out who's going to default and who's not.
"The downgrades last month left all of the securities with ratings of BBB or lower, compared with 20 percent before the action. BBB is S&P's second-lowest investment grade. About 96 percent dropped to non-investment-grade, or junk, assessments.
'The problem with seconds is it's either good, or it's zero,'' said Brad Golding, a managing director at Christofferson Rob & Co., a New York-based money manager."
Bullish for the markets? Specifically, additional issue is likely to lead to materially higher interest rates, and we know how good that is for things like the housing market, right? $500 billion in deficits before the end of the fiscal year in September?
"Expectations for economic growth in the first half of 2008 have continued to fall and a number of primary dealers judge the economy currently to be in recession.
A recent survey of primary dealers estimates that the deficit for the 2008 fiscal year ending in September will exceed $400 billion with some economists expecting a deficit of more than $500 billion--a significant deterioration from fiscal 2007's deficit of $163 billion. Economic stimulus measures will complement the forces widening the budget deficit. This year's shortfall may surpass fiscal year 2004 as the largest on record in nominal dollars.
Housing remains a notable drag through a variety of channels and that weakness now is being augmented by a more cautious approach to spending by businesses and consumers.
There was also universal agreement on the Committee that the Treasury needs to prepare for additional financing needs over a more intermediate term. In fact, several members argued that the current deterioration in the fiscal outlook might be more than temporary and that the risk of further deterioration outweighs the risk of a surprise improvement in the deficit.
Furthermore, additional members again reiterated their concern that this latest "cyclical" deterioration in the fiscal outlook is particularly troublesome as the longer term "secular" forces of entitlement spending and the aging of the baby boom generation and their effect on the budget deficit are no longer that distant in the future.
The majority of members believe that the addition of the year bill combined with increases to the size and frequency of existing coupon debt over coming quarters will still not be sufficient to satisfy the increased financing needs of the Treasury over the intermediate and longer term.
Committee members were in agreement that the problems in the housing market were significant, and many were concerned that without intervention the problems would grow worse. In fact, housing price data from S&P/Case-Shiller was released hours before our meeting and highlighted that the decline in housing prices is not over but that prices are actually accelerating to the downside. For example, while year-over-year prices were reported to be down almost 13%, prices on a 6-month, 3-month and 1-month basis have declined 21%, 25% and 28% annualized, respectively."
You forgot the word "illegal" Mr. Poole.
"There is 'a potential crisis in the student-loan market' requiring 'similar bold action,' Chairman Christopher Dodd of Connecticut and six other Democrats wrote Bernanke. They want the Fed to swap Treasury notes for bonds backed by student loans. In a separate letter, Pennsylvania Democratic Representative Paul Kanjorski and 31 House members said they want Bernanke to channel money directly to education-finance firms.
Student loans are just the start. Former Fed officials and other Fed-watchers say that Bernanke's actions in saving Bear Stearns will expose the central bank to continuing pressure to use its $889 billion balance sheet to prop up companies or entire industries deemed important by politicians. The Fed satisfied Dodd's request today, expanding the swaps to include securities backed by student debt.
'It is appalling where we are right now,' former St. Louis Fed President William Poole, who retired in March, said in an interview. The Fed has introduced 'a backstop for the entire financial system.'"
May continue to undermine consumer spending?
"The drop in the U.S. unemployment rate in April partly reflected a jump in part-time workers, raising concern businesses are still scaling back, economists said.
The number of Americans saying they worked part-time last month due to economic reasons -- either because their hours were cut or they couldn't find full-time work -- jumped to 5.22 million from 4.91 million in March, the Labor Department reported today. That helped the jobless rate unexpectedly fall to 5 percent from 5.1 percent.
The 19 percent increase over the last six months in the number of people not working a full day because of slack business conditions is the biggest in six years. Fewer hours and smaller pay increases, just as food and fuel prices surge, may continue to undermine consumer spending."
"Indeed, we ought to consider what role the federal government has played in creating this mess. By stimulating home ownership while failing to account for the reasons home ownership is valuable to society, Washington has simply sought to buy our votes with our own debt. As the subprime crisis accelerates and threatens to spread through prime and near-prime markets, policymakers face a watershed moment. To keep us from an economic nightmare, they need to replace the dream of home ownership with policies that actually increase wealth -- not just the illusion of it."Oh my God, the truth! And from the mainstream media.
Now read the above Treasury paper quotes as well.
"JPMorgan Chase & Co does not expect the U.S. financial crisis to end soon and will remain very cautious, its top executive said in comments published by a German weekly on Saturday.
"But we are not done with the crisis for a long time," Dimon said, adding that it was not the company's job to make bets on the future.
"Imagine we would need to walk up to our shareholders one day and say, sorry but the recession in the USA is so bad, we're broke. We need to be able to rule out at all times that it will not come to that," Dimon said.
"The CDOs covered by S&P's revision are at least 40 percent invested in some U.S. home-loan bonds created since Sept. 30, 2005 or pieces of other CDOs with such holdings, according to a statement today. The most-senior bonds from the CDOs originally rated AAA should recover 60 percent of principal owed, while securities rated A or lower will get nothing, S&P said.
Investors should recover 35 percent of principal after defaults on securities from the CDOs junior to their so-called super-senior classes but also originally rated AAA, S&P said today. Originally AA classes should recover 5 percent, it said."
Let that sink in for a while folks - if you have "Senior Tranches" of CDOs that are "AAA" rated, you are going to take a 40% loss. If you have ordinary "AAA" rated CDO tranches rated "AAA", you're going to take a 65% loss.
Remember folks, these pieces of the CDO tranche process are the ones that are sitting on the bank's balance sheets and, now, are also the ones that are sitting at The Fed!
Absolutely NONE of these writedowns have been taken.
How does all this end?
If you want to know how badly, read that Treasury Report and think about it long and hard.
I'm surprised they published it, to be frank.
No, my friends, our capital markets problem and the consumer issues are not over.
We have roughly $1 trillion worth of 2nd Line/HELOC spending from the last few years that has been withdrawn. It will not, and cannot, return - that money is gone, leaving the debt behind.
Housing prices will correct to at least their long-term trendlines, and likely beyond. This is a mathematical certainty.
Lending will return to sound standards simply due to self-defense by the banks, not from desire. This means 20% down will become the norm once again to get a mortgage, along with a fixed-rate, 15 or 30 year loan. The world of "HELOC" and "Cash Out" refinances is essentially gone on a permanent basis.
We have recognized $300 billion of losses but it has all been derivative loss. The $2.5-$3 trillion in credit loss from housing is still to come, plus all the credit card and other debt that cannot be paid down, likely a couple hundred billion more - at best.
The capitalization of the banks is nowhere near adequate as of yet to clear that bad debt. Financial institutions need to raise tremendous amounts of capital beyond what they have raised thus far in order to survive.
Bernanke's games will not solve this, as providing the banks with more "vig" to make this possible just sucks the money out of your pocket anyway (where do you think it comes from, ultimately?) either via direct monetary inflation if he does something stupid, or via taxes and direct payments if not.
Either way the check is now on the table and must be paid.
We're nowhere near done with this mess.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
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