Stick Season

SUBHEAD: In California 40% of working age are jobless. After the fall will come the winter for the US economy. By John Schettler on 11 September 2009 in The Writing Shop As the last languorous days of summer slip from our grasp, the kids are all off to school again, and the leaves slowly begin to blanch and fade, there is something deep in the national soul that realizes “stick season” is just around the corner. There were places that lived a life style that seemed to belie the existence of winter—perhaps because they had only one unvarying season. image above: From Places like California, Vegas in Nevada, Phoenix in Arizona, Florida, were all the major hot spots of the housing boom. Folks there never worried much about winter. There was always plenty of sunshine and clear blue skies—a mentality that was mirrored in the over bloated, overpriced housing markets in those states. But the rest of then nation knew that autumn is followed by the barren cold of winter—and now Stick Season is nigh at hand, even in the sunshine state of California.

I first heard that term in North Carolina, where the city I lived in had so many trees that when the leaves fell the entire place was a tangle of bare branches and fallen sticks of wood. “Stick Season” is winter, and even though all the mainstream media are still touting green shoots and preaching recovery, I see instead a deepening autumn and winter ahead for the economy. Let’s take a brief look at where we are before all this misplaced talk of spring and recovery inspires too many false hopes. (There’s nothing wrong with hope, of course, but false hope is just a form of denial.) Economists relying on jury rigged government statistics are all too quick to announce the end of the recession because they limit their view to simple GDP growth percentage numbers.

The latest claim is that the nation will turn in a GDP of plus 1%, which technically means the recession has ended. What they fail to consider is that most of the spending that drove that GDP number was paid for by Uncle Sam, who begged, borrowed and simply printed up the cash to try and “stimulate” an otherwise dead economy. Without it we would be deep in negative territory on GDP. But assessing this economy as alive and well after all this government stimulus is a bit like calling the reflexive jerk of a corpse a sign of new life after massive electro-shock.

This Frankenstein mentality has polluted our mainstream media with happy talk about recovery and an end of the recession. Strange how a business that was always associated with headlining bad news (if it bleeds, it leads) has now become a collection of corporate cheerleaders, embracing phony data, accepting manipulated bank “profits” without question, refusing to see the real implications of the massive debt that exists at every level of our society. So after massive TARP and TALF programs, titanic bank bailouts, cash for clunkers and first time home buyers, and a paltry $300 check for the rest of us, the Government has managed to nudge the GDP number into positive territory—but this is no reflection of what the real economy is doing behind the headline numbers bandied about these days. That’s the point “economists” and news pundits always seem to miss.

To really determine what the economy on the street is doing you have to focus your attention there, where unemployment continues its relentless march, racking up more numbers than the much feared H1N1 pandemic each month. Joblessness is the real threat to the nation now, not a seven to ten day bout of the flu. We’ve been hemorrhaging jobs for over 20 consecutive months.

In California, the world’s 8th largest economy, 40% of all working age people are jobless according to a newly released study that compared census data to actual jobs being worked. (The BLS pegs the jobless number at only 11.9% in the Golden State, but they don’t count millions of “discouraged” workers who have been out of a job for many months, even years. It would be best to just take the “L” out of their acronym, and then you end up with a good abbreviation for the work their statisticians actually do: BS. Here are some real numbers: In the last year 2.6 million Americans slipped from a tenuous position in the Middle Class into the ranks of the impoverished. Another million joined the ranks of those without health insurance--an astounding 46 million now. Another 1.3 million will lose unemployment benefits by year’s end. According to the Gallup daily tracking poll, job creation is down 35% over last year, so don’t expect a lot of new hiring.

Teen unemployment is now 25.5%. A third of all workers under 35 are now living with their parents to make ends meet. USA Today reports that national bankruptcy filings are up 22% over 2008. More than 35 million Americans now rely on food stamps to feed themselves. Consequently consumer spending is now down a remarkable 33% over the previous year. Recovery? Marketwatch reported on September 9th: “Employers' hiring plans for the upcoming fourth quarter dropped to their lowest level in the history of Manpower's Employment Outlook Survey, which started in 1962.” US Job openings fell to a record low in July this year.

An article by G. Washington for Naked Capitalism painted the real picture: “Projections of former International Monetary Fund Chief Economist and Harvard University Economics Professor Kenneth Rogoff and University of Maryland Economics Professor Carmen Reinhart, U-6 unemployment could rise to 22% within the next 4 years or so.”

And since Depression era numbers were also overstated, because those accepting government created jobs were still counted as unemployed, what we are really looking at is a present jobless rate equal to the 1930s levels at their worst. In actual fact, our unemployment is actually tracking well ahead of the numbers reported in the early 1930s after the 1929 crash. During the Great Depression it took much longer to reach unemployment levels we are suffering with now. I have also shown in numerous articles that our present economy is actually faring worse than the Depression era in many key metrics—manufacturing, shipping, trade levels, deficits, debt load, unemployment. So it’s very simple. People without jobs do not spend, and consumer spending is 70% of the economy, and also largely responsible for driving the other 30% in business spending. Not to worry says Bank of America. The top 10% account for 42% of consumer spending, so they think the “haves” will make up for what the “have nots” don’t buy. Under this ludicrous logic, 58% of consumer buying power would flatline while the rich shop the blue light specials in K-Mart and keep Wal-Mart floating in black ink? I don’t think so. So what we are seeing in the GDP number is simply a reflection of rising government spending, which is just the accumulation of more debt. The GDP is not showing us what the real economy is doing. Blogger Karl Denninger says it very well here:

“The consumer is not coming back any time soon. Spending power doesn't come from a government statistic, it comes from a paycheck in the hand, and those who give up looking because the job situation is so horrible its a waste of time have no paycheck. The government can no more replace consumer spending on a durable basis than I can fly.” Yet economists dismiss the severity of our unemployment situation by simply calling it a “lagging indicator,” yet as long as it lags the economy will never have real recovery. People without jobs are being sustained by insurance benefits for the time being, but eventually this will run out. It is only a matter of time before these millions of unemployed people have no income whatsoever—and forget the credit card as a means of driving their spending. Consumer credit contracted by $21.6 billion, so credit issuance is plummeting at record breaking levels as banks tighten their purse strings—purses so lavishly filled with taxpayer money to the tune of some $13 trillion over the last year. Here is a chart showing a staggering decline in consumer credit, some twenty percentage points since the last spike in mid 2007. In spite of massive government and Fed support, many banks remain technically insolvent, including the big boyz. And they have learned nothing from their grievous mistakes. Case in point: banks are so addicted to the securities game that after the death of Fannie and Freddie they have taken TARP and TALF money intended to stimulate lending and used it to buy Ginnie Mae and FHA backed securities instead! Why? They get any profits, the taxpayers get any losses.

And since they deem these securities “risk free” they don’t have to hold prudent reserves against potential losses. The demise of Fannie & Freddie seems to have made no impression on them except that if things fall down the government and taxpayer will foot the bill. It’s as if the concept of just making good loans that do not require government backing is an anathema to them now. All they want is a risk-free security so they can keep playing the game. Meanwhile, enormous overleveraged mounds of bad debt still remain hidden on their balance sheets or explained away by accounting rules changes. All this is being done to make it appear as if the banks have acceptable capital ratios—but they do not. The truth of the matter is that all these gimmicks have not faced or fixed the fundamental crisis of insolvency. “The System” has simply chosen to ignore what has happened to it, and the bankers, aided by the Fed, have all made a quiet “gentlemen’s agreement” that they are just fine and dandy. But the math is never wrong. The big banks, and thousands of smaller ones, remain mired in toxic asset debt, and are therefore insolvent. Don’t expect massive lending from these institutions, which means the velocity of money and credit will continue to remain constricted, perhaps for many years to come. Meanwhile foreclosures held in abeyance are building up like water behind a leaking dam. Reuters reported on Sept 10: “Only 12 percent of U.S. homeowners eligible for loan modifications under the Obama administration's housing rescue plan have had their mortgages reworked, and millions more foreclosures are coming, the Treasury Department said on Wednesday.” Add to this the fact that the re-default rate on mortgages that have been modified is now over 50%, and millions more option ARM loans are scheduled to reset in the next few years to higher payments that will likely force many more defaults.

These conditions lead analyst Meredith Whitney to estimate housing prices may fall another 25% before they finally hit bottom. People going about with “it’s a great time to buy” on their lips are sadly mistaken. It will be a great time to buy when the bottom is finally in. Until then, save your cash for the 20% down payment you’ll need. Better yet, forget buying and stay a renter. It has been well proven by popular bogging sites like that renting is the wiser strategy for the foreseeable future. James Quinn of the Market Oracle hit the nub of the problem with this recent commentary: “It has taken Americans three decades of overspending and under -saving to get into this pickle. As you may notice, consumer credit debt is $2.5 trillion and has barely budged downward. The pundits and economists predicting a strong economic recovery are blind to the truths of consumer debt.

With actual unemployment exceeding 16.8%, (over 20% by other analysts), 9 million people forced to work part-time wanting to work full-time, the work week at all time lows, and banks shutting down credit lines, consumers will be reducing or defaulting on their debt for years. With 70% of the economy dependent on consumer spending, there is absolutely no chance of a strong recovery. Disposable income is plunging as people without jobs don’t have anything to dispose of. A paradigm shift is occurring and the mainstream media, mainstream economists, and clueless politicians running this country do not understand the implications. Three decades of debt accumulation is not resolved in two years. It will take decades of reduced spending, paying down debt, and writing off debt.” And that massive debt is the dark heart of the matter, on every level from the Federal government, to states, cities, corporations, banks, families and individuals. The buy now pay later paradigm has failed—it’s later. It’s time to pay up, and people look into their wallets and realize the cash is just not there. This debt must either be paid off, serviced, or defaulted on. The US government cannot even service its own debt, and must borrow billions each day to do so.

By the same token, Average Joe and Jane can no longer service their fee bloated debt at 30% interest either. Default rates at every level of the residential and now commercial real estate market, along with rising defaults in credit cards, are the final truth of the matter. When you can’t pay you eventually have no other choice but default. Banks never seem to get the plain truth that their reflexive punishing policies are the cause of many defaults. They jack up interest rates, slap on fees, raise minimum payments, slash credit lines. Then they wonder why consumers falter and fail in the effort to service their debt. Default is the only sane option when faced with these banking tactics. Just as the leaves must fall from the tree, it is Stick Season in the land of nothing down and low easy payments. It’s cash and carry now. The bottom line is that we allowed the banks and financial gurus to leverage up to very risky levels, and when their game went bust with the sub-prime defaults triggering the collapse of real estate loans as a viable “asset,” we continue to allow the banks to hide their losses instead of writing them down and facing reality. Reality, in this case is insolvency and default, and the large banks have been deemed “too big to fail.” The result has been a policy where trillions of dollars that could have been spent to put millions of Americans to work on our aging infrastructure went to the black hole of bad debt on the banks’ balance sheets instead, and simply vanished. Yet those trillions must be repaid as well. The math never lies, even if the bankers do. Yet, in spite of these harsh facts, the prevailing mainstream line from media and government is that we have pulled the economy back from the edge of the abyss, and the recession has ended. Frankly, it’s a bit like saying the crisis is over right after the first tower collapsed on 9/11. The second tower is still on fire, but standing proud and tall. Recovery! The result of this misallocation of funds and rampant denial at all levels will be a greater and greater risk of collapse—which is probably why the Government is now re-training a division of its tough Iraq war veterans for domestic deployment should the wheels come off in a future chemical, biological, radiological, nuclear and high -yield explosive “incident.” Included in this list is a dire economic emergency. So the Army is building what the Army Times now calls the ‘Consequence Management Response Force.’ Comforting thought, eh? This is still 9/11 mentality thinking, a worrisome fear of the next big terror attack in this country.

What is so myopic about this is that the real terror has already been carried out, and continues as an ongoing operation behind stately institutions who use words like “security” to describe overleveraged profit making and risk avoidance schemes that have all resulted in massive losses instead. The bankers have done more harm to the nation than a thousand Osama Bin Ladins ever could. So the consequences the Army is worrying about managing will more likely result from disgruntled Americans taking their anger to the streets, and not a big terror incident. Good luck boys. You couldn’t manage the “consequences” in Iraq, where a population of about 26 million did exactly what they pleased in spite of you and another 300,000 fellow soldiers and Marines. What in the world makes you think that a division of 20,000 men here in a nation of 300 million will prevent angry, impoverished and increasingly desperate Americans from doing exactly what they please as well? The oddest thing about what lies ahead as autumn leads us to winter is that it is a time when the retail world loads up for a big anticipated bonanza in consumer spending. I walked into a Hallmark in August and already found row upon row of Halloween cards. By Late September we should already be seeing decorations for Thanksgiving and Christmas arriving at the malls and markets.

At a time when the pain of this Great Recession/Depression will be most keenly felt, the retailers will be standing behind their cash registers with their fingers crossed in hopes of another “Black Friday.” Will the shoppers spend some of the hard earned cash they’ve been trying to save all year? It would be typical of the American mindset if this were to happen this year. Savings rates are finally positive, after decades in negative territory. Will Americans throw what little cash they’ve managed to scrape together at one last buying binge before the leaves finally fall? Stick Season will follow whether they do or not. And I predict that there will be many who wished they had the money spent on a 40” TV available for food next year… because the real green shoots of economic recovery aren’t happening now, nor will they be happening next March. In fact, a real recovery may be years away. Between now and then, it’s Stick Season, one long winter of real economic hardship for Main Street, and I hope you are ready.

see also: Ea O Ka Aina: Over 16% Jobless in August 9/18/09

1 comment :

Mauibrad said...

Wow. Outstanding analysis. John Schettler pulls it together like few other writers of recent.

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