The Economy: Bill Bonner, "A Red October?"

"A Red October?"

by Bill Bonner

"The economic news was mixed, as usual…with nothing to make us think that our basic outlook is wrong. On the optimistic, bullish side…consumer spending rose in August. Pending homes sales went up too. But on the pessimistic, bearish side… “September auto sales plunge,” says a Reuters headline. Yes, auto sales drove off a cliff last month – just like we said they would. GM reported a 47% drop.

What happened? The clunkers program was an economic fraud. Like all attempts to boost consumption, it merely shifted sales from the future to the present (now the past). Which is a big reason why August consumer spending looked good too. But wait a few weeks for the September consumer spending numbers. Especially if the stock market continues to fall… Then we’ll find out how sustainable those retail sales numbers really are.

As you know, here at The Daily Reckoning headquarters…in the building with the gold balls on the south side of the Thames…we are often accused of ‘pessimism.’ We deny it. We’re optimistic about the fate of mankind. But we are pessimistic about many of his current pretensions – such as health food, enlightened central banking, contemporary art, mass education, global climate control and progressive democratic government. But maybe we are wrong to be optimists. Pessimists always have the last laugh – when the optimists die. “I told you so,” they say, under their last breath.

Meanwhile, from Phoenix comes news that a new wave of defaults is about to slam into the mortgage industry. Commercial properties, retail space, office complexes, apartment buildings are hard to rent. You can see why. In 2007, America was already outfitted with far more retail space than it actually needed. Americans had gone on a shopping spree for the previous ten years…prompting builders to add more and more space. By 2006, the United States had 10 times as much retail space per person as France. This was the bubble phase of a boom in consumer credit that began in 1945.

When you get to the bubble phase, few people stop to ask questions. Instead, everyone assumes that the trends in place will remain…and even intensify. So even into 2008, in Phoenix as well as other growing areas – principally in the sand states – the building continued. And now it is 2009. Where are the shoppers? Where are the renters? Alas, they are thinner on the ground than anticipated…and the developers are having trouble paying their mortgages. Commercial mortgage backed securities are carrying 5 times the unpaid balances they had in June ’08, says Bloomberg.

Imagine how disappointed lenders will be when these loans default. And then, imagine how American investors will feel when a new wave of mortgage defaults and foreclosures hits the commercial property market.

A new wave of foreclosures and falling house prices may be approaching the housing market too. Alan Abelson, in this week’s Barron’s, reports on the outlook as described by Amherst Securities. The research group estimates an overhang of ‘hidden inventory’ of some 7 million units. These are properties owners would like to sell – if and when the market strengthens. Trouble is, the market may not strengthen soon enough. Then, many of these hidden properties could come right out in the open, as mortgages are reset, marriages break up, and people move on. Amherst says these people are in the “delinquency pipeline” which eventually flushes out the market. And it calculates that another 300,000 properties enter the pipe every month.

Falling prices have reduced ‘owners’ equity’ – the part of the house the homeowner owns free and clear of a mortgage – to only about 43%. This number includes people who have no mortgage at all – more than 50 million of them. Abelson speculates that the actual equity in the hands of the ‘owners’ of mortgaged houses must be substantially less. Pushed by joblessness…not to many life’s other, normal hazards…many of these people are surely going to default. Of those in the “delinquent pipeline,” nearly 10% haven’t made a payment in more than two years. Sooner or later, the banks and mortgage holders will be forced to take action…and more houses will come onto the distressed property market.

More and more people get something from government. Fewer and fewer are net taxpayers. This is the basic formula that bankrupts democracies. The political system becomes skewed towards spending; then, there’s no stopping it. Once the majority of voters and special interests has an interest in increasing spending – even by borrowing – rather than in limiting taxes and debt, the game is practically over.

USA Today reports on the number of children whose lunches are furnished partly at taxpayer expense. The figure rose from 24 million in 1990 to 31 million today. That is, the welfare program increased by a third during the biggest boom in history. Think what will happen during the bust."

- Bill Bonner, http://dailyreckoning.com/red-october/

Share this post