The Return of 'W'

Calm down! The former U.S. President is not returning to the White House!

When I say 'W' I'm speaking of a double-dip recession, not George W. Bush back in D.C. A double-dip recession is like two scoops of chocolate ice cream compared to hearing another Bush speech.

Still, the economy faces a 'W' rather than 'V', 'U' or 'L'-shaped recessions. Some people are calling for a square-root recession and you might just be hearing that term more often.

In the The Outlook for Recovery in the U.S. Economy, Janet Yellen, president and CEO of the San Francisco Federal Reserve Bank said she envisions a 'U-shaped' recession.

There is a key difference between politics and economics. Politics are philosophical and somewhat subjective. We grow up with certain values that factor into our politics.

But economics can be like a mathematic equation. For example, complex, interest-only loans plus unsophisticated borrowers equals destruction of the residential mortgage industry. Add structured investment vehicles, derivatives and credit default swaps to mortgages and that equals global economic collapse. See how it works?

How about this one--100 percent income minus 36 percent debt equals 64 percent income. I use 36 percent because if you have a house, that's the maximum debt-to-income ratio allowed under a Fannie Mae/Freddie Mac prime loan. It would be 41 percent under an FHA loan.

And now--33 percent income minus 36 percent debt equals absolutely no way that anyone is spending because there is more debt than income. Why do I use this equation?

Because, if I'm not mistaken, unemployment insurance--at least in Maryland--reflects a weekly maximum benefit amount of $380 per week. That would be about $20,000 per year or about 33 percent, of someone who makes $60,000 per year. If you made more money, too bad--it's $380 per week max.

Now, my guess is that unemployed persons plus debt (i.e. mortgage and/or rent, bills, insurance, etc.) equals very little discretionary income. Also, factor in a 10.2 percent unemployment rate by the middle of 2010, which most economists believe will be the peak before it falls.

Under this scenario, I expect very little spending between now and the middle of 2010. Why some economists use this "pent-up demand" scenario, I have no idea. Because, again, this is not politics--it's not philosophical or subjective. It's the facts--no money, no debt, no credit, no spend. That simple.

Now, that's just the unemployed. That said, how much debt builds when unemployed--if you even have credit? How much interest increases on those credit card bills? Remember, this all happens from now--September--to next June 2010 under conservative estimates.

Then, even if unemployment falls to 9 percent by 2011, that's still alot of unemployment--not to mention a large percentage of part-time workers, people who are frustrated and want full-time jobs, etc., which is up to 16.8 percent right now.

"Consumer spending? Who said anything about consumer spending?" Former Saints coach Jim Mora might scream. And yet, retail sales looked better in the month of August. Oh, goody...back-to-school sales picked up, we has the "cash-for-clunkers" program take off, people went on vacation, kids spent money with their lifeguard jobs and so we all had a little fun.

So, when spending suddenly drops precipitously in September through November with a sudden surge of 2 percent in December, we'll all say the economy is back on track because we wanted to buy our children some gifts for Christmas, Hannukah or Kwanzaa day.

Get real. Math doesn't lie, and economists wearing rose-colored glasses--the same economists that wanted to say there was no housing bubble--cannot really see the facts and expect consumer spending to pick up into a 'V-shaped' recovery.

Have we seen a recovery at all? Yes. For that reason, we do not have an 'L-shaped' recovery.

Now, is this a sustainable recovery? Will it be a 'U-shaped' recovery. Martin Bailey, who is on the White House Economic Council of Advisors, said a sustainable recovery is "questionable." He said it today on Bloomberg. If there is any sign of a sustainable recovery, he says "Yes." But he couldn't say it. He said it's questionable. That's like a public relations person saying he or she can't answer the question. That's a "yes" to the question--otherwise, they'd answer no. For Bailey, it's a "no," or he would have said yes. Therefore, no 'U-shaped' recovery.

That leaves us with the 'W' or 'square-root' recovery. I vote for a 'w' because banks have assets that have values that--for the reasons given above--are not coming back anytime soon.

The mathematical equation--100 percent values of housing and commercial real estate minus 30 percent of those values equals 70 percent of value. That's a conservative estimate. Okay, so banks have assets at 70 percent of value and they're holding these crappy assets. Residential foreclosures continue and commercial real estate delinquencies and defaults are just beginning.

So banks cannot lend until they build up enough capital to cover Tier One risk. Banks not lending equals businesses not hiring which approximates lower job growth. That means less consumer spending, less money for retailers and more defunct retail properties.

For example, Blockbuster Video said today it could close 960 stores in the next year to 18 months. How many jobs does that slash and how many strip malls will that affect? It's all tied together.

With fewer purchases--Best Buy reported profit losses today--less industrial output results and that leads to more defunct industrial properties. As companies struggle, more office vacancies come to fruition, including more bank branches closing down with crappy commercial real estate assets on their books.

Less discretionary spending includes more hotel deterioration. Less younger people getting jobs and multifamily vacancies increase. More crappy, lower-valued assets.

Now, the government provides capital to the banks so maybe one day they can lend even though "toxic" asset growth builds. Neil Barofsky said that capital can be $24.7 trillion at maximum. Let's be conservative and say it's one-quarter of that amount--$6 trillion provided by the Federal Government for banks to lend. We get back $1 trillion from the banks so we really spend $5 trillion.

Smaller banks hold nearly $1 trillion of commercial real estate and, including commercial mortgage-backed securities, it all totals $3.5 trillion. Residential real estate represents $11 trillion. That's not including credit card debt in default and corporate debt in default.

What's this mean? Small-to-large banks with bad assets plus CMBS defaults plus trillions lost in credit default swaps and derivatives plus ? given by the Fed in "printed" money plus trillions of dollars in Federal debt equals little debt for businesses.

How much does that leave for the average $60,000 per year worker with a couple kids who is still employed? This is someone getting paid, still pays his or her mortgage and has the usual water and electric bills. They'll push the limit for some holiday spending in addition to usual expenditures--clothes to replace the ones with holes in them, shoes, tennis shoes and, of course, food which we need to live in.

"We're very bullish on the global economy," a dumbass on Bloomberg just said. Sure. Talk is cheap, but he's hoping to get even more stupid investors to put their money with his fund.

Consumer spending? Try consumers saving...if they're even able to do that.

That's the math...don't expect consumers to bring us out of this recession (it's really a depression, but nobody's allowed to say that). Don't expect prices to drop as speculative investors invest in commodities--like corn. Don't expect business to pick up for China or other countries that want to import in the U.S. The consumer is not buying.

Don't expect those businesses, if business does not pick up, to be getting any bailouts from the banks because they're holding onto their precious capital with the amount of risk they have. Do the math. No money equals no spending equals no business equals more layoffs. More layoffs, less spending...less spending, weaker economy. Weaker economy--deflation.

And, yes, it will come back to unclogging the banks of "toxic" assets, which should have been top priority when this economic crisis started in the first place. That's not a political opinion.

From Hank Paulson--in a Republican regime--to Timothy Geithner in a Democrat regime--the math does not add up. $? capital plus -$assets +/- new tax rules = 0 liquidity.

How much capital and how much are the bad assets--we don't know for sure. We do know that financial institutions no longer need to account for those bad assets based on current market value. Why? Because if they wanted us to know, it would be good news. It's obviously not good news. Financial institutions would report major losses if they had to do mark-to-market accounting. That's a fact. And, yes, someday in a U.S. society with very little spending and debt for years to come, those property values will increase. It might take 10-15 years for 2007 values, but that's a 10-15-year recession--sometimes up, sometimes down--like a 'W'.

Even then, not all of those values will return to 100 percent.

Also, if Bernanke wanted us to know how much these "clearinghouse" financial institutions received, and continue to receive, from the infamous Treasury discount window, he would tells us because we would not be concerned about it. It would be good news. Therefore, it's not good news.

We should be concerned that he wants to keep it a secret from Bloomberg. We should be concerned that at least 500 banks are insolvent and the FDIC will have to close them in the next year. How much will that cost?

The country has huge debt and consumers have huge debt. If we as consumers save money, it still doesn't explain how to keep electricity, water and other utility prices from rising. It doesn't explain how to make insolvent banks more solvent. It doesn't explain how spending will increase.
Match the actions and a calculated gamble for consumers to spend more in this country--bringing us all out of a deep recession, and we have a bad mathematical calculation. You would expect better from the Fed Chairman and Treasury Secretary--but they're really politicians, not economists.