Jim Cramer finally came around to my line of thinking this morning... an aha moment as the virtual light bulb went on over his head. How can retailers be doing pretty darn good... credit cards stabilizing... and even car buying jumping a bit, even as unemployment rages. He has PART of the picture - the house ATM has been replaced by the govenrment ATM. [Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929]
But over and above that, as I advanced in November 2009 piece [America's Stealth Stimulus Plan; Allowing It's Home Owners to be Deadbeats] we now have a permanent stimulus happening as great swathes of Americans are sitting in homes not making a payment.
I was looking through the avalanche of economic data today, and it struck me how once again Americans are spending well over their income growth.
I've written about this in the past in conceptual terms but never put it into an analysis. The true stealth stimulus plan in America is letting so many of its people live rent free as they sit in defaulted homes not making a mortgage payment. This cost savings allows them to shop and spend, and otherwise support the American consumption society. While it is hard to keep track of all the stimuli, try to think back to the Bush spring 2008 stimulus. (that was about 37 stimuli ago) That goosed GDP quite well for two quarters. But we now have a quasi permanent stimulus plan that goes on quarter, after quarter, year after year.... and its equivalent to have a permanent Bush level stimulus (using VERY conservative figures).
Now obviously in a 6-24 month period it is not the same people who enjoy this stimulus. Some finally are kicked out of their homes, while other new 30+, 90+, 120+ day late borrowers take their place. So it's a rolling stimulus if you will, relatively stable in terms of absolute dollars but rolling from 1 household to another as they go through the stages of default.
From anecdotal stories (many of them) it is now taking at minimum 9-12 months to get evicted, and that's in states without super high foreclosure rates. I read the other day some Florida locations are 2+ years now. So 9, 12, 15, 18 months of not having to make a $1200, $1500, $1800 payment. And it can go longer now if you enroll in the trial modifications offered by government, then redefault. If you are really good at playing the system you might be able to go through two whole cycles with the trial modification in the middle. With the new accounting rules that were the nexus of the market rally in March 2009, the banks no longer had to mark value of assets on their balance sheet to market... so they can now mark to what they see fit. Hence all these foreclosures they should be closing on are things they are in no hurry to do... because doing so would mean they need to stop pretending and start admitting reality. Don't you love what 1 change in accounting rules can do for a country? ;)
In that November piece I laid out some math to show this stimulus to be about $160B a year - one can quibble with my assumptions but I thought they were very conservative. If its $125B or $200B ... the point is the consumption figure of our economy is now in full on subsidization mode by so many Americans living without a mortgage payment they honor. Of course there are hard luck stories of people who simply got caught up in layoffs and are trying to survive. But for every one of those we have a few like our gentleman in this story I posted a few months ago [Dec 13, 2009: WSJ - American Dream 2: Default, then Rent] - you remember the guy... our fireman from California who is happy to not make his payment on his house, so he can make sure to keep his BMW. Because trading down to a shoddy car so he could fulfill his obligations would not be cool. These are the new rules of moral hazard in Americana.
With an income of about $8,300 a month and a rent of $2,200, Mr. Fernandez says he now has the wherewithal to do things he couldn't when he was stretching to pay the mortgage. He recently went to concerts by Rob Thomas and Mat Kearney. He also kept his black BMW 6 Series coupe, which has payments of about $700 a month.
Cramer finally figured it out today - welcome to the Banana Republic Jim, where debts are just a piece of paper and debt is not our fault - it's the system that tricked us. And trust me Jim, if so many Americans were not living paycheck to paycheck, the credit cards would be defaulting at a much higher level as people sent jingle mail to their credit card issuers. But a person needs his cards to live the life he so rightly deserves.
Since this is a subscriber service I'll just cut a few blurbs, full subscribers can follow the link here. I am just so happy to see others coming to my viewpoint... as always, we're early.
- You need to have an answer why the expensive shops and goods are doing well and yet unemployment is high. You need to figure out how foreclosures can be mounting and yet people are still going out to dinner at the nicer places such as Red Lobster or Olive Garden .... You have to have an answer for how Coach can consistently deliver actual breakout numbers and why Tiffany's numbers keep going higher.
- And I think I have got one. Today the employment claims went up, to a level that's uncomfortable and a precursor to more bad news on the larger jobless front. We know foreclosures aren't tapering off...
- So what's my theory? What two key metrics are actually going the right way at the banks despite unemployment and foreclosures? Credit cards and auto loans. Defaults have tapered off remarkably month after month in both areas. You know what I think is happening? People aren't paying their mortgages in record droves -- as much as 15% of them are in trouble or just being defaulted on -- but they are keeping the cards and keeping the cars so that they can go out, lead their lives and shop like the old days.
- So, we have consumer spending doing well even as the consumer's troubled by mortgage payments. In a bizarre way, the banks are subsidizing the consumer by not foreclosing, and we get robust numbers from the retailers and the goods they sell.
- Bizarre. Different from any other time and positive for all but the companies that do the lending! No wonder consumer spending, two-thirds of the American economy, keeps expanding; there's excess capital that should have gone to the home that instead goes to buy goods, not mortgages!
Congrats on your theory Jim...
The full ponzi economy continues ... if we can all borrow to our hearts content and not bother to pay back the money (the banks are too big to fail, and can sit and make up their losses with nearly free money from the Federal Reserve), just imagine how great this economy can be in the next 10-20 years. A magical place we live...old school rules no longer apply here.