Spooky Consumer Data, Underwater Mortgages, Time to Buy the Bounce? Don’t Vote, and More!

by Addison Wiggin & Ian Mathias

  • Consumer shows spooky signs of weakness… recession now unavoidable?
  • How’s your 401(k)? Some scary stats on the average retirement savings plan
  • Haunting mortgage data… 10 million Americans suffer “negative equity”
  • U.S. finance capitalism dead or dying… Byron King on the new paradigm for global economic power
  • Eric Fry on investing during the post-crash bounce
  • Plus, one “surefire” sector during these frightening times


  We begin today with a Halloween hypothetical: If you’re a mainstream economist or financial journalist, what’s the scariest possible scenario that could arise from an economic crisis?

Answer: That the ephemeral specter of the American consumer, whose purchases now make up over 70% of economic activity in I.O.U.S.A., would stop spending.

  Uh-ho. In the third quarter of 2008, consumers reigned in their spending by the greatest margin in 17 years.

Looking closer at yesterday’s GDP data , we see that the Commerce Dept.’s measure of consumer spending fell by an annual rate of negative 3.1% — the first significant consumer spending pullback since 1991, and the biggest since 1980.

Consumer spending fell 0.3% in September, attests the Personal Income and Spending data released today — itself the first decline in two years and the biggest monthly fall since 2004.

  Unfortunately, it doesn’t look like the consumer put that extra money in savings. According to AARP, one in five “workers” over 45 stopped contributing to retirement savings plans sometime over the last year.

As if to prove the point that these funds are not really “savings” at all, the value of American 401(k)s has fallen more than $2 trillion over the last 16 months. And since mid-2007, the average retirement savings account is down over 20%, says the Congressional Budget Office (CBO). Unfortunately, those numbers don’t reflect the past several weeks of mayhem on Wall Street, either.

  To make your Halloween even more cheery, consider this: Nearly one in five American homeowners are “underwater” in their mortgages, meaning they owe more on their homes than the particle board boxes can bring on the market.

When we began the I.O.U.S.A. project in 2005, it was at the height of the housing boom. Many Americans were taking the equity of their homes and using it to keep up their spending. And why not? House prices were believed, at the time, to go up forever. Today, at least 7.5 million homeowners, according to First American CoreLogic, are wishing they’d not been caught up in the euphoria.

Another 2.1 million homeowners are “on the brink,” says the group, by having less than 5% real home equity. Here are the top 10 scuba users by percentage:

  The housing crisis would normally beget a great opportunity for an enterprising homebuyer, if mortgage rates weren’t still soaring. Despite all the Fed’s rate cuts, all the government bailouts and all the promises from the campaign trail, the average rate on a 30-year fixed mortgage is 6.46%. That’s a full 20 points higher than this time last year.

In fact, all the evidence indicates that the Fed’s recent rate cuts have punished traditional mortgage borrowers. A 30-year fixed went for a still high 6.06% last week, 40 points lower than it is today.

Instead of following the Fed’s target rate, mortgage originators are paying closer attention to the rates on long-term U.S. government debt… which are being pushed up by the relentless onslaught of IOUs being pumped into the market.

  The Bank of Japan, as we’ve been forecasting all week, decided to cut its lending rate today for the first time in seven years. Money there is now essentially free, as the BoJ has cut rates down to 0.3%. If 0.5% hasn’t kept the Japanese out of x recessions in the last six years… is the extra 0.2% really going to help?

Waving a white flag, economists from the BoJ altered their growth forecast for Japan in the current year… to zero.

  “What’s going to be the next model for world trade?” asks Byron King. The global economy is on the cusp of recession. Finance-based “capitalism” — what the late Dr. Richebacher liked to call “late degenerate capitalism” — has melted down. So… what will replace it?

“Maybe places where significant natural resource owners won’t accept the idea of U.S.-style finance capitalism anymore,” ponders Mr. King. “For example, there are the entities like national oil companies (NOCs), which now control nearly 85% of the world’s resources of crude oil. NOCs grudgingly use dollars as a medium of exchange for their tanker loads of crude oil. And where they can get away with it, they don’t use dollars. Iran, for example. Many NOCs derive from cultures in which barter is an ingrained custom. So watch for that.

“Another key resource power in the world, Russia, is using its NOCs to develop a different sort of economic logic, based on the energy trade. The political powers of Russia have figured out that they can use state power through the NOCs to control their vast energy and natural resources. And control over energy and natural resources, in turn, leverages Russian state power. It’s post-Marxist economic thinking, but what else would you expect in the core nation of the former Soviet Union? We should anticipate that the Russians will see how far they can take it.

“But if U.S.-style finance capitalism collapses (or, worse, if it has already collapsed and we have not yet figured it out), then it will drag down most of the economies of other developed nations and emerging markets. The only other major player left on the stage will be Russia and its post-Marxist brand of ‘state power capitalism.’

“I don’t envy the next U.S. president,” says Byron. At least his readers would be well prepared for a new energy-based economy… would you? If you don’t already have it, you can gain access to the Outstanding Investments portfolio, here.

  Barclays announced today it’s received an $11.8 billion bailout from — you guessed it — Middle Eastern investors . Three oil rich investors teamed up to buy almost a third of the legendary bank: the state-controlled Qatar Investment Authority, a separate fund controlled by the Qatar royal family and Sheikh Mansour bin Zayed al Nahyan of the Abu Dhabi royal family.

Barclay’s shares jumped 10% on the news.

  The U.S. stock market enjoyed some modest gains yesterday. A typical, for October at least, last-minute surge pushed the Dow up 2.1%. The S&P and Nasdaq both gained 2.5%.

  The Dow is up 9.6% for the week. Should it hold, that’s the best weekly gain since 1982. In fact, the Dow hasn’t gained that much in an entire year since 2000.

  “Stocks always bounce after a severe sell-off,” remarks Eric Fry. “But post-crash bounces don’t sprout roots and blossom into new bull markets. On the contrary, these illusions of recovery deceive investors into believing that a new bull market is under way.

“Let’s imagine that you bought the Dow Jones Industrial Average in 1929,” Eric entreats, “AFTER it had already fallen 42% from its high. (Why 42%? Because that’s the amount that the modern-day Dow just fell.) How do you think you would have fared? Do you think you would have made money very quickly or very slowly?

“The answer is ‘both’ — you would have enjoyed a quick bounce. But if you did not sell into that bounce, you would have lost 80% of your capital during the next two years. If you had held on, however, you would have recouped your original investment… 22 years later!”

History doesn’t repeat, necessarily, but it very often rhymes. Caveat emptor.

  After its biggest fall in 13 years, the dollar index has staged an impressive bounce. The dollar index is up 3 full points from Thursday’s low, to about 86.
Most currencies are back to levels from earlier this week, but today, we take special pity on the Canadian dollar… the loonie is on track for a 13% crash in October. Barring a sudden comeback tonight, October will mark the worst month for the loonie since at least 1950. Today, you can score a Canadian dollar for only 81 cents

  Why such dismal times for our neighbors to the north? For starters, the U.S. dollar is on a tear. But commodities, the backbone of the Canadian economy, are also on the verge of one their worst months in a long time.
 By the end of the day, commodities will have suffered their worst month since 1972.

  Oil and gold are finishing October true to their recent form. As the dollar rises, gold is getting killed. It’s down $40 from yesterday’s high, to $730 an ounce. Oil is just a bit better, down $2, to $64 a barrel

Hmnn… here’s a fun development commensurate with an economic downturn: Gun sales are up.
So far this year, the FBI has run 8.4 million background checks — up 9% form the same period last year. Annual checks have climbed an average 5% since the FBI’s National Instant Criminal Background Check System began in 1998. 

Praise the lord and pass the ammunition!

Ammunition sales are up to 8-10%. Yeeha!

  “Are you serious?” asks an incredulous reader. “You really do not vote? Is it because you can’t or you won’t?

“As imperfect as our republic is, it’s very easy to criticize it. And I think we do have the right to criticize it. But when a person tells me that he doesn’t even bother to vote, I can’t help but feel that the apathy that represents is part of the problem.

“I think a higher percentage of voting would result in less marginal leadership. The last eight years proves the point.”

  “What do you mean, ‘We don’t vote?’” asks another. “Why not?

“If you did, maybe you guys would stop making your acerbic remarks about how we all deserve what we get. We get what we don’t want with no choice in how this country is governed. Pick your poison!”

The 5: Don’t get us started.

One of the deficits we look at in the film is what David Walker calls “the leadership deficit” — the inability of elected officials to discuss, present, solve or even acknowledge the economic challenges of the country. Most of the voting public thinks the economy and politics are too complicated, so they leave the decisions up to some “expert” in Washington or on Wall Street. They effectively abdicate their responsibility to know the score… and hold public officials accountable. Campaign strategists know this… so they refuse to raise difficult issues during the campaign season.

You can’t get voted in by saying, “Hey, we’re going to have to tighten up the belt a bit. The government simply can’t afford to provide you with every creature comfort and pork barrel project you want to get your greasy mitts on… so we’re not going to promise it.” You can, however, get elected by saying, “We’re going to give every American health care… and jobs… and education… and security… and cheap energy… and drugs…and transportation… and protection from foreign competition… heck, we’ll even lower your taxes, too.”

There used to be this quaint idea in the country that our public officials were “citizen representatives.” You would serve your country or community for a few years out of duty or honor, but you didn’t quit your day job. Not so anymore. These guys consider elected positions as their jobs… and as soon as they get into office, they start running to keep their jobs in the next election.

“Why not vote?” you ask. “Why encourage them?” might be a better question.

Happy Halloween,

Addison Wiggin
The 5 Min. Forecast

P.S. The I.O.U.S.A. DVD and companion book is available with your Capital & Crisis subscription until Election Day. Get ’em here.


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