Debt Takes No Holiday

Grinding debt payments seem to be taking their toll on the good citizens of the United Kingdom. In 2005, bankruptcies shot up 45 percent from the previous year to a new record of nearly 68,000, and analysts have already predicted that the total for 2006 could exceed 100,000.

These are bubble-like growth rates.

The number of foreclosures for the year topped 10,000, an increase of 70 percent from 2004, and household debt exceeded $2 trillion. While accounting for fewer than 15 percent of the total European Union population, the British account for two-thirds of EU credit card debt.

The British are very much like we Americans.

They are one of only a handful of nations with both a trade deficit and a budget deficit, and while avoiding the disgrace of a negative number like the U.S., their savings rate has recently been in the low single digits.

Observers have often stated that the U.K. housing market is nine months to a year ahead of the U.S. housing market. If this is true, it appears that the timing of last October's new bankruptcy rules here in the States was near perfect.

The Left Coast

Out here in California, foreclosure notices are beginning to rise briskly. Nearly 15,000 default notices were sent to California homeowners in the fourth quarter of 2005, up 20 percent from the previous quarter and up 15 percent year-over-year.

These rates are still very low by historical measures. A decade ago, at the bottom of the last real estate cycle, a record 60,000 notices were mailed during a single three-month period in 1996.

Throughout the 1990s, the number of notices averaged over 100,000 per year, almost double the annualized rate from the last quarter of 2005.

With home equity typically in the hundreds of thousands of dollars after the last five years of soaring housing prices, and with willing lenders eager to do business, it's a wonder how 15,000 households fell behind on their payments last quarter.

Maybe they were too busy out spending their home equity to remember to send in their mortgage payment.

There are noticeable signs of distress however. If you're interested in just how much distress is already working its way through the system, you might consider a free one-week trial offered by foreclosure.com. You can take a look at your neighborhood, or any neighborhood for that matter, and see how the homeowners in your area are faring.

It is probably way too early to think about buying distressed property, but this exercise does give a good indication of how people have managed their finances in recent years.

Here's a chart listing some of the preforeclosed properties in our area (this information has gone a long way in helping me explain to my sometimes skeptical wife how so many people around us appear to be so wealthy).


The term preforeclosure refers to the period of time beginning with a lender notifying a borrower that their loan payments are behind, also known as a default notice. Most people (like two of our neighbors) probably don't realize it, but when this happens, certain key information about their finances becomes public knowledge.

Oops!

Given the way that Proposition 13 works in California, much can be learned from the chart above. As in most areas, the assessed value is initially determined by the sale price of the home. Proposition 13 then restricts the rise in assessed value for homeowners who stay put.

So, for example, the last preforeclosure listed, where the market value is over two and a half times the assessed value, indicates that the owner has been there for quite a while and originally paid very little compared to the current market value of the property.

In this case, a reasonable guess would be that the home was purchased twenty years ago for a price somewhere in the low $100,000 range.

This owner has parlayed that original investment into a total outstanding debt of over three times the original loan amount, but is now having difficulty making payments.

What a country!

The outstanding debt is still well below the market value, so there is still an "equity cushion", as Alan Greenspan used to refer to it, however, the cushion appears too inflexible, in this case, to avoid falling behind on the debt repayment schedule which was previously arranged.

While the $10 per week fee charged by foreclosure.com is a bit steep, for housing bubble watchers it may be money well spent.

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A Year of Transition

The mix of advertisers during the Super Bowl can go a long way in describing the major trends occurring in the United States for any particular year. Fetching $2.5 million for a 30 second spot yesterday, advertisers reached well over 100 million viewers with their messages.

The advertising rate this year is the same or only slightly higher than last (depending which news report you look at), however, it has increased an average of eight percent per year in the last ten years. Rates actually declined for two years after the $2.2 million per spot demanded for the 2000 Super Bowl, often referred to as the dot.com bowl or the Bubble Bowl.

There was such demand during that time that rates increased by $300,000 from 1998 to 1999, then by $600,000 from 1999 to 2000.

In addition to regulars Budweiser, Pepsi, and FedEx, there were some pretty off-beat commercials five years ago.

The internet boom was at its peak, the Y2K scare had just passed and 30-seconds spots for Pets.com, Epidemic.com, and OurBeginning.com graced the airwaves as the Rams beat the Titans by a score of 23-16.

About.com provides a c0mplete set of links for most recent Super Bowl advertisements, many of them hosted at IFILM.com, which should be pretty busy about the time that you read this, but you can try anyway.

Last year, sub prime lender and recent class-action defendant Ameriquest Mortgage hosted the halftime show and provided a memorable horror movie spoof in one of their 30 second spots.

An unsuspecting girlfriend, it seemed, had entered her boyfriend's apartment only to find him momentarily distracted from preparing dinner - about to clean up a can of tomato sauce spilled by an adorable kitty.

Houston-based Cosentino USA, a distributor of quartz countertops was an advertiser last year as well. This was their first TV spot ever. Between production costs and airtime they spent nearly $3.5 million - double their advertising budget for the entire year prior.

That's a lot of countertops.

Ameriquest Mortgage appeared again this year with the slogan, "Don't judge too quickly. We won't". The judge and jury didn't get to judge, quickly or otherwise, as a $60 million settlement was reached last spring on behalf of borrowers whose loan terms differed from what was initially promised.

There are more lawsuits pending.

In the fall they laid off ten percent of their work force, but apparently still had enough cash in the till to fund two spots during Super Bowl XL for the tidy sum of $5 million.

Changing Times

This year seemed to be a year of transition with regulars Budweiser, Pepsi, and Fedex joined by Burger King, Toyota, and others - no real theme, other than perhaps a little more emphasis on consumer spending in general.

Sprint sponsored the halftime show. It seems kind of silly that we as a nation have become so enamored with ring tone, music, and now movie downloads for cell phones. Should we be proud of this? At least back in 2000, there was still the great potential for the internet and broadband communication changing the way people lived and communicated.

But, ring tones and movie downloads? That's progress?

There were ads for more fuel efficient automobiles - the new Toyota Camry hybrid and Ford Escape hybrid. There were also ads for redesigned vehicles that waste a little less fuel than the previous model - the new Cadillac Escalade and the Hummer H3.

The Hummer H3 commercial was probably the most disturbing commercial of the entire lot, as a giant robot mated with a Godzilla-like creature, ultimately giving birth to a cute little Hummer H3. Hummer owners and admirers probably enjoyed it.

The Gillette Fusion five blade razor was without a doubt the stupidest commercial (it actually has a sixth blade on the opposite side of the razor where the first five are housed).

The Onion's take on this marvel of American ingenuity is a classic.

A close runner up for this honor was a spot for Emerald Nuts - Eagle-eyed Machete Enthusiasts Recognize A Little Druid Networking Under The Stairs.

That must have been an interesting meeting when the green light was given allowing this to move from concept to production.

Ironically, there were a few public service spots mixed in with all the frivolity. One spot (United Way?) dealt with victims of the hurricanes in the Gulf Coast and another for the Dove Self Esteem Foundation for young women.

Apparently the Dove commercial was intended to address the quantity or quality of attention paid to little girls by their Super Bowl watching fathers - let's hope it had an impact. Both of these seemed out of place in a weird sort of way, as in, don't remind us of our problems on a day like Super Bowl Sunday.

GoDaddy.com, CareerBuilder.com, and Overstock.com were the only holdovers from an era not too long ago.

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More on Commodity Bubbles

The New York Times today asked Have Commodities Become the New Tech Stocks?
Of particular interest here are the very different outlooks for commodities in general and precious metals. On commodities as a whole, there seems to be some consensus that as growth slows, commodity prices will moderate.

A widely followed benchmark of commodity prices, the Commodity Research Bureau index, reached a record high recently after nearly doubling since late 2001. Shares of companies that supply these materials — gas pipeline operators, miners of industrial and precious metals, forest products concerns — have followed a similar trajectory, but some analysts contend that prices have risen too far, too fast.

"There are probably some areas that offer better prospects" for investors "because commodity price expectations are very high," said Stuart Schweitzer, global markets strategist at J. P. Morgan Asset Management. "I would be surprised if the commodity-type stocks are a top-performing group in 2006."

In much of the rest of the world, however, gold's enduring reputation as "world's best money" makes its prospects a bit brighter.

"Gold remains a form of money, and in much of the emerging world where they don't trust what comes out of the A.T.M. machine, people may buy an extra gold bangle and store it as money," Mr. Sturm said. He said, too, that energy producers in the Middle East and elsewhere were prone to buying gold with surplus cash, of which they have plenty these days.

His bet on precious metals is also a hedge against unforeseen negative events. "Gold is the best form of insurance when you're not sure what you're insuring against," he explained. Among the miners of precious metals in his portfolios are Buenaventura in Peru and Impala Platinum in South Africa.

John Hill, an analyst at Citigroup, says he also thinks that the rally in gold has further to go. He has told clients that prices have continued to climb against an economic backdrop often associated with weakness for the metal, including rising interest rates, controlled inflation and a stronger dollar.

"We continue to be positive on gold," he wrote, citing "healthy underlying supply-demand fundamentals in the form of Indian fabrication, Chinese retail investment and recycled Middle Eastern petrodollar flows."

Yes, good insurance for when you're not sure what you're insuring against - that sums it up nicely. With rising rates, benign inflation, and a strong dollar, why is everyone buying gold these days?

It seems kind of silly.

On a related topic, here's a great ROB-TV interview with John Ing of Maison Placements in Toronto on the outlook for gold and the Cheuvreux report that was discussed here in Friday's post. Mr. Ing's interview appears as the ninth segment, marked:

11:13 AM ET
Business Morning with Jim O'Connell
Gold Glitters

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Silver and Gold

A quick search turned up this site containing lyrics for the U2 song with the same name as today's post. From the 1990 Rattle and Hum CD/film, the following words may apply in some way to today's musing:

No sun in the daylight
Looks like it's chained to the ground
Chained to the ground
The warden said
The exit is sold
If you want a way out
Silver and gold

Maybe the sun is the metaphorical America that Benjamin Franklin pondered during the signing of the Constitution and the exit is retirement in the 21st century.

And, maybe not.

Commodity Bubbles

Three times in the last week the phrase "commodity bubble" has been seen or heard in the mainstream financial news media. In all cases, the reference occurred when the discussion turned to where money might flow, if equities fail to deliver in the coming months and real estate continues to cool.

Hmmm...

What has been building for six years is going mainstream and seems to be gathering pace.

Jim Cramer should certainly help the cause when it comes to silver. His loony, Mad Money CNBC gig seems to have a pretty devoted following of after-hours traders and perhaps an equal number of rubber necking channel surfers.

His recommendation for Pan American silver on Monday caused a seven percent spike at the open on Tuesday, with more follow through yesterday.


Having missed this episode (and every other one, for that matter), it is left to the imagination what it may have looked and sounded like as he uttered, "We can't crucify our portfolios on a cross of gold".

This is a reference to William Jennings Bryan's Cross of Gold speech delivered during a bid for the Democratic nomination for President in 1896, when the nation was torn between the gold standard and bimetallism. Backing the currency with inflationary silver favored farmers in repayment of their debt, whereas Republicans preferred deflationary gold.

Ironically, 29 years later William Jennings Bryan was one of the principals in the Scopes Monkey Trial, defending the prohibition against teaching theories in conflict with the Biblical story of the Divine Creation.

It's funny how a hundred years later, Bryan is relevant again on two subjects that most would have thought long since settled.

Silver has been rising nicely in anticipation of a silver ETF that is set to launch in the coming weeks. It looks like $10 an ounce, still a historically low price, is only a matter of time.


As you'll recall the announcement and launch of two gold ETFs over a year ago had a big impact on gold prices - the response to the silver ETF may prove to be even more pronounced for two reasons.

First, historically, silver is much more volatile than gold - it's a smaller market and is subject to much wider and dramatic swings.

Secondly, a silver ETF completely solves the storage problem, which as anyone who has ever purchased physical silver already knows, is a bit problematic.

Silver at $10 with the convenience of a mouse click should attract lots of buyers.

"Remonetisation of Gold: Start Hoarding"

That's the title of a new report (PDF) from Cheuvreux, the equity brokerage for Credit Agricole, a large French bank. This report has received lots of attention in the last day or two, particularly because it has endorsed many of the findings of GATA, the Gold Anti-Trust Action Committee.

Gold had been looking pretty good lately before this report came out.


The price action is really something to behold - not just the general trend but how, after brief sell-offs, buyers appear with little delay. Since November, when Ben Bernanke was nominated to replace Alan Greenspan and the announcement was made that reporting of the M3 monetary aggregate would cease in March, gold has risen almost 25 percent.

The Cheuvreux report is notable for many reasons, most importantly the first two major findings in the executive summary, though all these findings are pretty significant:

• We are raising our mid-cycle gold price estimate to USD900/oz from USD750/oz and see the possibility of a spike to USD2,000, or higher. Covert selling (via central bank lending) has artificially depressed the price for a decade.
  
  
• Central banks have 10–15k tonnes of gold less than their officially reported reserves of 31k. This gold has been lent to bullion banks and their counterparties and has already been sold for jewellery, etc. Non-gold producers account for most and may be unable to cover shorts without causing a spike in the gold price.
  
  
• There is a supply deficit in the gold market of around 1,300 tonnes p.a. before any central bank selling and perhaps 700 tonnes p.a. after "official" sales, but before covert selling. This compares with world gold mine output of only 2,500 tonnes p.a.. Some central banks, notably Russia, are starting to buy gold.
  
  
• Gold acts as an early warning of potential crisis such as rising inflationary/deflationary pressures and general confidence in paper currency, especially the USD. A strongly rising gold price could have severe consequences for US monetary policy and the USD. History suggests that gold always wins against an inflating paper currency (i.e. one subject to excessive supply growth).
  
  
• Gold and gold mining stocks are poised for an unprecedented rise in prices and profile. Investors in UK/European equities need to assess the implications for their portfolios. Global/hedge funds may be better placed to respond. Anglo American is the only large cap gold/precious metals play domiciled in Europe.

It's a long report, which has not been read carefully yet here, however, the following chart was hard to ignore, as it contains the M3 money supply plotted against the most widely used measure of inflation , the Consumer Price Index.

It's not clear what the timescale is, but that's probably not that important anyway.


Resource Investor, normally a GATA critic, has this story on the Cheuvreux findings and Mover Mike has a few comments as well, including some previous posts on activities on the Japanese commodity market (TOCOM) and the massive short positions of Goldman Sachs at the COMEX.

One thing is clear - momentum is building for commodities of all types and silver and gold seem to be getting a lot of attention lately.

Maybe too much attention actually, and perhaps from the wrong people if there is any truth to this story about Homeland Security and Safe Deposit boxes. Note the comments section where blogger Randy discussed the issue with the folks at his bank.

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Spending, Growth, and Debt

When listening to the mainstream news media report on economic growth, the indifference with which correspondents discuss the economy's dependence on consumer spending never ceases to amaze.

Consumer spending is the largest component of GDP (Gross Domestic Product- see here and here for previous thoughts on this subject). It accounts for 70 percent of GDP in the U.S., as compared to, say, China where it contributes about 40 percent - a big difference.

What's China got more of than we do? Investment.

The change to GDP is the measure by which economic health is judged and last Friday's Q4-2005 advanced estimate of 1.1 percent annualized growth in GDP had many analysts wondering anew whether the economy needed a check-up.


Business reporters said, "The all important consumer shows signs of cutting back", or "Consumer spending, critical to economic growth, weakened last quarter..."

In and of itself, consumer spending is not bad. Consumer spending is a necessary and good thing. Only when consumer spending is too much or too little should there be concern.

How can there be too much consumer spending?

When consumer spending is enabled by too much credit and debt.

Like today. Like, when the savings rate is negative. As in the difference between income and spending - a negative number.

Where does that debt come from? That's another bit of reporting that is near and dear.

Treated with the same nonchalance as the level of consumer spending in the economic growth statistic, the financial scribblers say, "Consumers have extracted equity from their homes, enabling them to spend more than they earn", or "Taking advantage of soaring house prices, consumers have been tapping their equity and spending freely..."

Ho hum.

We're in debt up to our eyeballs, but we still have another hundred grand of equity, so what's the big deal? Very casual, not much ado, people are just "tapping equity", which by now many Americans must think is a birthright.

It's as if this is just the way things work - spending exceeds income through increased debt, and the result? A robust economy - just ask anyone in the executive branch of government, most of Congress, or nearly any economist working on Wall Street.

But, be careful who you ask on Main Street, because they're starting to grumble.

The naysayers reply, household wealth is at an all-time high - Americans are wealthier than ever before.

Yes, assets less liabilities. We've seen before how these two ebb and flow - sometimes they get out of sync.

Before stepping down, Alan Greenspan more than once commented that things are OK because so many homeowners have a significant "equity cushion". While at the same time surprised at the amount that homeowners were borrowing against their houses to fund spending, he too was largely unconcerned about the recent trend of debt-fueled consumption powering economic growth.

In fact he marveled at what he wrought.

To anyone who looks at the math, and it is nearly all addition and subtraction so it really shouldn't be that difficult, how can this be a good thing?

And, why aren't more in the news media questioning the quality of the economic growth instead of just mentioning it in passing with one eye-brow half raised?

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The Stage is Set

The Greenspan Era came to a close yesterday as the Federal Reserve raised short-term interest rates for the 14th straight time, from 4.25 percent to 4.5 percent, and said goodbye to Alan Greenspan.

In the statement accompanying the release, the word "measured" was finally removed and the wording now seems to be almost completely neutral, allowing Mr. Bernanke a free hand to formulate policy and put his stamp on the official rate setting communique when he presides over his first rate setting meeting in March.

Comparing the December statement with yesterday's, this was clearly the most "womb-like" of all baby steps that the Fed has taken in quite a while.


Absent significant developments between now and the next FOMC meeting, it is likely that Mr. Bernanke will raise rates by another quarter point to show his inflation fighting mettle, then all bets are off.

These were the photos in the Wall Street Journal write-up ($) for the policy announcement. Can you tell who's coming and who's going? Maybe the cover from The Economist a few weeks back can explain the grin and the grimace.




Knowing what The Economist thinks, what do other economists think about where monetary policy stands with the transition from one Fed Chief to another now complete? From this story($) in yesterday's Wall Street Journal, these opinions are offered:

The Greenspan legacy came to an end this afternoon with a resounding yawn. … We do not believe the omission of the "measured" reference is significant. The minutes from the December meeting revealed that there was considerable discussion regarding this phrase and it was retained at that time simply in order to avoid any confusion regarding the magnitude of future rate hikes. Since rate hikes are no longer guaranteed, there was no need to describe the size of the rate hike.
-- David Greenlaw, Morgan Stanley

Greenspan will depart the Federal Reserve having completed (or very nearly so) his final task of restoring a "neutral" monetary policy. Ben Bernanke, confirmed today as his successor, will inherit a policy that will likely require little if any "fine tuning." His first task, however, will be to explain to Congress the actions his predecessor has taken in the waning months of his tenure. Undoubtedly, many will be keenly interested in his take on why the FOMC found this last move to be necessary in the wake of the slowest advance in real GDP in three years.
-- David Resler, Nomura Securities International

The risk suddenly increases that the U.S. may experience a less than graceful soft landing this year. That's because the weakest link in the economy right now is the consumer. Americans have been spending far more than they earned the last five years, borrowing an additional $3.8 trillion during this time and bringing total household debt to a record $10.7 trillion. That may be manageable when borrowing costs were low, but with rates now 3.5 percentage points higher than just a year and a half ago, the burden to service much of that debt becomes more difficult. With household finances already under considerable stress, one has to wonder if another round of rate hikes will lead to a more severe cutback in consumer spending in the months ahead.
-- Bernard Baumohl, The Economic Outlook Group

We would not read much in the elimination of the now famed word "measured." Indeed, the December FOMC minutes were quite clear that it would be a misinterpretation to believe its elimination would be a signal of potentially larger policy adjustment increments in the near future. Back then, the Fed already thought that the number of additional firming steps required would not be large. … For now, we still believe that recent changes in financial regulation and tighter supervision for mortgage lending limit the need for a further usage of the overnight rate as a policy tool.
-- Paul-Andre Pinsonnault, National Bank Financial

They are generally an optimistic and care-free lot on this side of the pond.

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