The propagandistic exhortation that we all need to need to learn to love or at least accept the crappy economy known as “the new normal” is starting to wear a bit thin. One of the things that has allowed the punditocracy to pretend that “the new normal” really isn’t all that bad are various myths that they get investors and sometimes the broader public to believe in succession or better yet simultaneously:
1. We are in a recovery. The more candid in the economist classes will admit this is a “statistical” recovery, weak enough on enough dimensions so as to strain the definition
2. Everything is cyclical, this too shall pass. Not much comfort, say, in Rome in 476 AD. A subset is “Housing will bottom in 2012, and things will get much better then.”
3. Corporate earnings are strong, the Fed has your back, so as long as the stock market is OK, the economy really can’t be that bad
I don’t want to overdo what I call “mother in law research” which is basing your opinions on observations in your immediate environment, but the flip side is storied investor Peter Lynch was a great fan of precisely that sort of not-very-public intelligence. I’ve had two sightings in the last week that suggest the economy is trending downward more strongly than most experts believe.
Airlines are canaries in the coal mine. They are chronically so close to bankruptcy that they have to do what they can to preserve profits. And their price structure promotes forward bookings.
I don’t fly all that much. I do go pretty frequently to Birmingham, Alabama, on a nonstop on Delta. It used to run three times a day. They eliminated it briefly during the worst of the crisis, then restored it ex Saturday. It had the old schedules as of Columbus Day weekend.
I went looking for flights around Thanksgiving, and they’ve virtually eliminated the nonstops. It doesn’t run at all most days and when they offer it, it is only once or twice a day.
Similarly, on October 2, I booked a flight to Austin on American for early November. There was a nonstop once a day each way, and the time worked for me on the outbound. I learned yesterday that they’ve eliminated those flights and rerouted me via Dallas Fort Worth.
One incident like that might be route specific, but two on two different airlines suggests a meaningful cutback in travel is underway.
My admittedly idiosyncratic datapoints align with other stories today. I’ve been skeptical of the view that consumer credit stress was on the mend, given how high unemployment is and how many firms have announced cutbacks (and that’s before you get to state and local budget, and therefore job, cuts). As we’ve indicated, many consumers are so close to the edge that any glitch in their household income or unexpected expense will put them in a crisis. As we indicated in a recent post, 35% of American would miss their next month mortgage or rent payment if they lost their job. And the people who indicated they had no emergency reserves weren’t lower income; they were spread across all income cohorts.
So I was not surprised by the Financial Times lead story today, “Fear Over US Mortgage Delinquencies.” Not only does it describe an increase in missed mortgage payments, but it also says some banks are seeing deterioration in payments on other types of consumer credit:
The banks’ third-quarter results were hit by expected declines in investment banking, reflecting turbulence in global markets. But the reports also revealed weakness in the consumer side of their businesses – with mortgage delinquency numbers suggesting that record low mortgage rates and government loan modification programmes are failing to help a large swathe of homeowners.
Anyone who thought “government loan modification programs” were doing much has not been paying attention. The mods are too few and too shallow to have much impact. But if you listen only to Administration PR, you might be fooled for a short while. Back to the article:
Wells said delinquencies of more than 90 days in its main portfolio of consumer loans – including mortgages and credit cards – rose 4 per cent to $1.5bn, the first increase since 2009. Early stage delinquencies in its retail business remained flat at 6.13 per cent after falling for three quarters. The bank increased its provision for consumer-banking losses for the first time in two years…
Citi said the percentage of mortgages that were 90 days delinquent rose for the first time in almost two years – from 3.87 per cent in the second quarter to 3.88 per cent in the third.
John Gerspach, chief financial officer, said the bank was seeing “re-defaults” on mortgages that had been modified to make them more affordable. “We could begin to see increased delinquencies and net credit losses,” he said.
Citi cut bad loan reserves, but said that was due to improvement on credit cards rather than mortgages. “We haven’t been releasing reserves against the US residential mortgage portfolio,” said Mr Gerspach. “I would look at that as still being the most significant risk that any US bank currently faces.”
JPMorgan last week increased its provision for losses on consumer loans to $2.3bn from $1.9bn in the previous quarter. JPMorgan said delinquencies on goverment-insured mortgages hit $9.5bn, up from $9.1bn in the second quarter and $9.2bn a year ago.
“The residential mortgage problems are unprecedented,” said Gerard Cassidy, analyst at RBC Capital…He said the problems were no longer in “subprime” but “prime” mortgages.
Capital One, among the top six US card issuers, reported rising 30-day delinquencies in June and July. “Defaults on credit card debt are certain to rise from here,” said James Friedman at Susquehanna Capital Group.
Note that Capital One is generally seen as a particularly shrewd manager of credit risk.
China posted worse than expected growth results overnight, which led to declines in all Asian indexes, with the Hang Seng off 4.2%. Again, if you’ve been paying attention, even though September US retail sales were good, retailers have been battening down the hatches and ordering modestly for Christmas. Shipping volumes are down, which has to affect the Chinese economy, as has its interest rate tightening. Alert readers will recall we’ve cross posted some sightings from MacroBusiness on how the usually busy Golden Week real estate sales season was a bust in many markets.
And the mood in Asian markets was not helped by visible signs of disagreement between France and Germany. Eurozone leaders have promise Yet Another Big Plan to Fix The Eurozone Mess Once and For All as of the next G20 meeting in early November. The deadline for unveiling the plan was first November 2, then October 31, and has for a bit been October 23. Per Bloomberg:
Europe’s options for overcoming the debt crisis narrowed as Germany doused expectations of a breakthrough at this weekend’s summit and central bankers balked at extended bond purchases.
European stocks fell for a second day after German Chancellor Angela Merkel’s office knocked down what it called “dreams” that the Oct. 23 summit will be the last word in taming the crisis. Christian Noyer, head of France’s central bank, ruled out a ramping up of the European Central Bank’s bond-buying program as part of a multi-pronged strategy to shield countries like Italy.
This is not pretty. It isn’t just that the Germans were nixing the this weekend deadline; they are managing down expectations when Mr. Market wants more, not less. And German leaders are not even on the same page, which is even more disconcerting. Schauble is touting bold action while Merkel is decidedly cautious. And pouring cold water on the one way to finesse the political obstacles, of having the ECB monetize the debt (which is what the endgame is almost certain to be unless the officialdom refuses to stop the train wreck in motion) raises the ugly question of what if anything they propose to do instead.
And in the background, we have the Thanksgiving time debt ceiling drama scheduled to come to a head, since the two parties seem hopelessly far apart.
As I often say, it would be better if I were proven wrong, but I recommend against betting on it.
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