Bankruptcy Filings to Match Divorce Filings in 2009: 1.5 Million. 35.8 Million Americans on Food Stamps - 11 Percent of the Population. The 5 Indicators of the Misery Index.
It is a sobering fact that in 2009, there will be as many people filing for bankruptcy as those filing for a divorce. We are on track to seeing an average of nearly 5,900 bankruptcy filings a day for 2009. While some people use the stock market as their barometer of economic recovery, there are a few other “misery” indicators that show things are still bad for millions of Americans and counter the recovery talks. If you want to track a broader recovery, I would recommend people examine the five indicators of the misery index. Food stamps, bankruptcies, long-term unemployed, foreclosures, and credit card defaults are probably your best gauges to the real economic recovery.
The problem we currently face is even after the global economy was brought to its knees by the current Wall Street banking structure, things still haven’t changed at the core of their mission. The same banks are back taking inordinate amounts of risk with the now explicit backing of the U.S. Taxpayer. It is no surprise then that our U.S. dollar has been pummeled by the policies of the Federal Reserve and U.S. Treasury.
Let us examine each component of the misery index.
Bankruptcies
Source: Credit Slips
It shouldn’t come as a surprise that bankruptcy filings are now approaching their pre-2005 levels. Keep in mind that in 2005, tough bankruptcy legislation came into effect thus spurring a massive wave of bankruptcies from people seeking to avoid the new tougher standards. Even with these new standards in place, there is only so much blood that you can squeeze out of a turnip. Some will be quick to point out that bankruptcy filings hurt big corporate giants mostly. On the contrary, 98.5% of all bankruptcy filings come from individuals at the end of their rope. Most people don’t file for bankruptcy with a smile on their face.
We will see a slowing or moderating pace for the fourth quarter since there is a bit of seasonality with filings. But Q1 of 2010 should give us a better indicator of where things are heading. But one thing is irrefutable, bankruptcy filings are going up. In this category, the recovery is not taking place.
Food Stamps
Over 35,800,000 people are currently receiving food stamps in the U.S. That is 11 percent of our entire population is receiving government assistance through the SNAP program (i.e., food stamps). As the chart above can attest to, the number of people is still booming. Obviously in any economic down turn, this rate will increase but this percentage is one of the highest on record. It is also clear that the growth is currently exponential.
Here is the government expenditure per year on food stamps:
2006: $30.6 billion
2007: $30.3 billion
2008: $34.6 billion
2009: $40 billion (still need August and September data - average out we are approaching $50 billion for 2009)
Just think of how quickly this number is jumping. The problem with the current system is that some people are still governed by the trickle down school of economics. They believe that if Wall Street is up 60 percent (thanks to government bailouts) that somehow crumbs will trickle down to working and middle class Americans. Clearly it isn’t happening right now. The recovery is looking more like a minor depression to many.
Long-term unemployed
It is telling that the biggest category of our currently unemployed population is those classified as long-term unemployed. These are people that have been out of work for 27 weeks or more. Think of how grueling it is to be out of work for half a year in this economic climate. The issue at the core of long-term unemployment is that it reflects potential permanent job losses. That is, many of the 8,000,000 jobs lost since the recession started are never coming back. For every one job opening you have six able bodied workers competing for it.
It is hard to see what industry is going to pick up the slack for these long-term unemployed. Many are now coming to the end of their unemployment insurance and in many cases, in some states this can be as long as 90+ weeks. The long-term unemployment trend tells us that we have yet to see any economic recovery as well. Sure the stock market may be up but what use is that to the average American that pays most of their bills through a job?
Foreclosures
At the root of most of this is the housing market. Take a long and close look at the chart above. Q3 of 2009 was the worst foreclosure quarter on record. Clearly foreclosures are not a sign of economic recovery but here we are, two years into the crisis and foreclosures are still at record levels. Much of this comes from the decade long housing bubble. But keep in mind each additional foreclosure is another home on the market, another family looking for different shelter, and an economic loss to the system. It is hard to see any of the government stop-gap measures fixing this in the short-term. The loan modification programs have yet to yield any significant change.
It is also the case that the government has gotten more risky with tax credits and allowing lax lending standards with FHA insured loans in getting more people to buy. In the short run this may offer the appearance of growth but over the long haul, this will only add to future defaults.
The foreclosure numbers show us a very different picture from the current recovery rhetoric.
Credit Card Defaults
For the first time in data tracking history, has total revolving credit contracted on a year over year basis. At a time when the above data shows that more Americans need more support, the credit card companies are yanking lines of credit. They are also charging higher fees on good standing customers to make up for their rising defaults for years of easy financing. Here is some sobering data:
Credit card direct mail offers:
Q3 of 2006: 2.1 billion
Q3 of 2009: 391 million
Now you know why your daily mail is much lighter. Credit card companies who are giant receivers of taxpayer bailout money are actually closing their doors on the same people who are bailing them out. They are hiking up fees and closing down credit lines unless consumers give in to their onerous ways.
The bottom line is the misery index shows no solid economic recovery. I suppose it depends on what we are looking at if we want to say we are in a recovery. If we are looking at banking profits and Wall Street then yes, the recovery is here. If we are looking at other data like bankruptcies, unemployment or foreclosures then the story is very different.
Plan C as in Commercial Real Estate - FDIC: 115 Bank Failures in 2009. Total Assets of FDIC Insured Banks $13.3 Trillion. $3 Trillion Backed by Shaky Commercial Real Estate.
It is one thing when a few analysts say that commercial real estate, that $3 trillion elephant in the room, is going to experience trouble starting next year. It is another thing when billionaire investor Wilbur Ross comes out and states that commercial real estate is going to crash and burn. We’ve been looking at commercial real estate for sometime and the U.S. Treasury has already had talks regarding a preemptive CRE bailout called “Plan C.”
The commercial real estate sector is even more fragile than residential real estate because commercial space is a direct reflection of the health of the economy. In other words, how much office space do you need without workers? How many strip malls can you fill without shoppers? Not many. Commercial real estate is also financed in a unique way where loans are refinanced typically on five year terms. Many are coming due starting next year. Friday’s multiple bank failures, 9 in one day and a cost of $2.5 billion to the FDIC fund, was the most closures in one day since the recession started. Even with this giant number, most of the assets at FDIC insured banks sit with a few banks:
The FDIC insures over 8,000 banks covering $13.3 trillion in assets. In reality, 100 banks hold over $10 trillion of those assets. The banks that are failing typically do not fall in the top 100. And many of these recent bank failures are starting to show signs of commercial real estate fatigue. Ross summed up the overall scenario well:
“(FT) All of the components of real estate value are going in the wrong direction simultaneously,” said Ross, one of nine money managers participating in a government program to remove toxic assets from bank balance sheets. “Occupancy rates are going down. Rent rates are going down and the capitalization rate - the return that investors are demanding to buy a property - are going up.”
There is some form of twisted irony in the above. The government has tunnel vision focus on residential real estate. The Federal Reserve has bought nearly $1.25 trillion in GSE MBS thus keeping mortgage rates at historical lows. Not enough? What about a nice $8,000 tax credit? Still need more? What about going with FHA insured loans that only require 3.5 percent down? In other words, the government has stepped into the vacuum left by the toxic mortgage lenders. So we shouldn’t be surprised when FHA insured loans, Fannie Mae, and Freddie Mac loan portfolios start showing historic amounts of defaults. Yet the consequence of pushing many renters to homeownership, is you speed up the crash in commercial real estate. We should be honest and admit that not everyone can be a homeowner. And this is okay. They can rent. Nothing wrong with that. But now we are seeing enormous apartment vacancy rates because we are temporarily shifting some into homes they cannot afford. They will only default later as we have seen with the current decade long housing bubble.
Commercial real estate is a gigantic line item of the FDIC insured banks:
In fact, if you add up nonfarm residential, construction and equipment, and commercial/industrial loans the number is approximately $3 trillion. Contrast this to the $2 trillion in more conventional residential loans. In other words, this has the potential of being bigger than the residential downturn. Commercial real estate values took longer to fall than residential property values, but not only have they caught up, they have surpassed the percentage amount of declines:
With many of these loans coming due in the next few years, the question will focus on the ability of companies to get the loans refinanced. But who will take on a loan of an empty commercial building? For residential property, the government for better or worse has a big mechanism through Fannie Mae, Freddie Mac, and FHA insured loans to buy up these loans. The government currently backs 95 percent of all residential mortgages. It is the market. Yet with commercial real estate, there really isn’t a government mechanism fortunately (that is, unless the U.S. Treasury plows through with Plan C and starts bailing out this industry).
The FDIC and other agencies are trying to jump out in front of this freight train. Maybe it isn’t call Plan C but something is in the works:
“(AP) WASHINGTON - Banks must accurately identify their potential losses when modifying troubled commercial real estate loans under federal guidelines issued Friday.
Regulators have warned that rising losses on commercial real estate loans pose risks for U.S. banks, with small and mid-size banks especially vulnerable. Nearly $500 billion in commercial real estate loans are expected to come due annually over the next few years.
Agencies including the Federal Deposit Insurance Corp., Federal Reserve and Office of Thrift Supervision released the new guidelines for banks, which emphasize that modifying loans in a prudent fashion is often in the best interest of both the bank and the creditworthy commercial borrower.
Under the guidelines, loans to creditworthy borrowers that have been restructured and are current won’t be classified as high risk by regulators solely because the collateral backing them has declined to an amount less than the loan balance.”
This will be a fascinating challenge here. Jean Paul Getty had it right when he said, “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” And the banks have a gigantic problem. You can expect workouts but what can you workout with a property that is completely vacant? Is there any price point that will work? We are going to find out soon enough.
The commercial real estate debacle is coming in line with the appearance of a stabilization in the residential market. The CRE debacle has the potential to destabilize the market again. Expect to see more banks go under because of horrible CRE loans.
