2009 Review
By Jason Tillberg January 3, 2010
2009 ended with a rather unique divergence in the psyches of Americans. Per the Conference Board Consumer Confidence Index, which surveys 5,000 random American households monthly, the "present situation index" for Americans ended at a 26 year low of 18.2, just shy of the 17.5 reading in February of 1983. This means that the average American feels dire about his or her current situation. Conversely, future expectations are full of hope that labor and business conditions ahead will improve (See chart below).
This optimism and hope may have been the reason behind the massive rebound in stock prices from the lows of major stock market indexes in March. Or, perhaps the rise in the stock markets is the reason for hope.
In the months ahead, we will see if such hope is justly warranted and the present situation of the average American will actually improve. We will also see in the months ahead if the lofty stock prices will hold up. I'm in the camp that they won't.
Before I provide an outlook for 2010, I'd like to provide a framework of what happened in 2009 that warranted such low ratings on the Conference Board survey.
First, let’s look at employment in America. The chart below demonstrates the job market situate since 2001. It shows discharges/layoffs, quits, hires and current job openings.
As we can see, the job market had been very fluid. People lost and changed jobs all the time. The job market was healthy up until around the middle of 2007 when new hires and job openings started to fall off a cliff.
Although there had been some stabilization in the number of job openings at around 2.5 million or so at any given time, job openings in 2009 were very much below previous years and certainly not enough to bring about employment growth. Furthermore, the total number of people unemployed or under employed (working part time but would prefer full time) had exploded. Some 20 million Americans received unemployement benefits in 2009 at one point.
The current total U.S. population is approximately 308 million, and per the Bureau of Labor Stastistics,, the U.S. has a work force of 154 million, of which 138 million are currently employed. This means that there are 16 million people out of work. Unfortunately there only about 2.5 million job openings, making the ratio of unemployed to job opening at about 6 to 1. So there are 6 people out of work for every one job opening. This makes the present situation dire for the unemployed.
If we are to compare this to previous recessions post WWII, we can clearly see the relative devastation, and understand why so many feel 2009 is the worst recession since the Great Depression
Another measure of what I consider to be a more realistic picture of our unemployment situation is what's called the U6 number. This includes people who have been out of work long enough and considered simply to have dropped out of the work force. U6 also includes people who are working part time at, say, Walmart or McDonalds but prefer (or need) a full time job. If we include them, then the real unemployment rate is 17.2%, or a total of 26.5 million unemployed or under employed workers.
Below is a chart of the total U6 Unemployment rate.
To put a number on how many Americans are working part time now but would prefer full time work, it's 9.246 million as of November 2009.
As of November, there are 861,000 Americans who would want a job, but don't feel there are any jobs available and are simply not counted as being unemployed believe it or not! Another reason why the real unemployement rates is over 17% at least.
Why are so many jobs dissappearing? Many companies are simply closing shop and are not coming back. Those include many manufacturing jobs as America has outsourced much of it's manufacturing base. Other industries like housing, hotel, restaurant and the auto industy have shown tremendous contraction in demand, many still are contracting to this day.
The homebuilding industry, which really fell off a cliff in 2007, has stabilized, but not yet shown any signs of coming back up again, new hiring construction workers is still stalled. This is despite massive and expensive government efforts to both bring down mortgage rates and even pay people $8,000 to buy a home.
The hotel industry experienced the worst year since the Great Depression. The number of rooms rented continues to contract as does the prices paid per room. Below is a chart of the monthly occupancy rate for each of the last four years.
The restaurant industy has so far suffered a 26 month contraction. Restaurant owners continue to report declines in traffic and sales.
Finally, let’s review auto industry. The lack of jobs and credit have made purchasing new cars more difficult for Americans. Despite the Cash for Clunkers Plan giving $4,000 to people who traded in old gas guzzlers to buy more gas efficient new cars, auto sales remain mightily depressed. Light vehicle sales averaged around 16 to17 million per year in 2006 and 2007. In 2009, the average was around 10 million new cars sold. That's nearly 6 million less cars built compared to just two years ago.
So, lack of industry means lack of jobs. Many are hopeful that demand will come back, but feel the present situation is dire in the area of employment.
Although the government tried to stifle the job losses through both a $700 billion bank bailout and another $700 billion stimulus program (causing a total of $1.3 trillion budget deficit) these efforts proved to have been weak in the area of job creation.
I have very little faith that the government getting its hands in the economy could provide positive results. The more the government intervention, the more pessimistic I am about the prospect of success and the longer it will take for the economy to recover.
Given all the government and Fed stimulus, house prices have stabilized, as I had suspected they would, but this will again only prolong the process of price normalization. I continue to believe we will see a bottom in house prices probably between 2012 and 2015. Rising interest rates and even tighter lending standards will be the culprit.
Now lets look at housing.
With job losses comes inability to pay mortgages. Delinquency rates continue to rise. Nearly 14% of morgages are at least 30 days delinquent.
Total household equity is now down to just 37.6%. According to the most recent American Community Survey, approximately 31.7% of homeowners have no mortgage. The other 68.3% of homeowners rent from the bank.
The total value of residential real estate in America is $16.5 trillon as September of 2009. This is down from $22.9 trillion in 2006, a drop of 28%.
Total Mortgage debt in 2006 was $9.8 trillion. Today, the total Mortgage debt is $10.3.trillion. Not good when the value of the asset goes down while the debt tied to the asset goes up. These trends have reversed in recent quarters however. Much of the mortgage debt is going because it's being written off as unpayable.
Here is where the math gets scary for the total picture of real estate in America and why I think more pain is yet to come.
If I take 68.3% (portion of the residential real estate that is mortgaged) of the total value of real estate ($16.5 trillion), I get $11.3 trillion. There is $10.4 trillion in total mortgage debt. This means that overall, the homeowner equity just 8.2%.
Below is a chart that shows the percentage of homes with negative equity by state.
New York State has held up well with respect to negative equity. Below is a chart showing total declines in RE prices per the top 20 cities in the U.S.
It's no fun paying a mortgage on a home that is worth less than what is owed. Especially when you can rent the house across the street for less.
The question about the morality of walking away from your mortgage is a debatable one. However, if you look at it strictly from an economic sense standpoint, this is simply a business decision. I expect the "strategic defaulter" to become the norm in the next two years and this will put further pressure on home prices.
When we hear that the big banks, who got tax payers bailout money, are "walking away" on their bad RE investments, it's difficult to find guilt in the person who strategically walks away from their home from the same bank. JPMorgan recently walked away from 7 properties it bought in 2006 worth $53.6 million. They simply handed the keys back to their lender, UBS Real Estate Investors Inc.
I believe that housing problem will shift from the subprime crisis that occurred in 2008 to the prime crisis of 2010, or 2011, or 2012; it's just difficult to time these events. As you can see in the chart below, seriously delinquencies in subprime loans are flat but are rising in prime loans every quarter.
The last item I want to show you is inflation. Per the Consumer Price Index or CPI, the November inflation rate year over year was 1.84%. This is going to jump to close to 3% for December compared to last year. Real inflation is higher. The reason: the government calculates the inflation rate by simply making changes to the components used to calculate the CPI. For example, the CPI may have used steak as a measure of food costs for an average family's food budget. But since the price of steak has risen, the family will have instead chosen a less expansive food and replaced steak with chicken. Now, the CPI no longer includes steak in its index but instead uses chicken.
Economist John Williams calculates real inflation and he comes up with a rate of 5% year over year as of November of 2009. Below is a chart of alternate CPI measures.
I tried to provide a picture of just some of the many difficulties Americans faced in 2009 and why it is so that so many are unsatisfied with their present situation.
The media tells us the recession is over and growth is on the way back up. Less jobs are being lost and there has been stabilization in auto sales and home sales.
Many are hopeful for a V shaped recovery and are counting on it bring back jobs to Americans.
In my outlook for 2010, I will share my research on market valuations to better project where stocks are headed.
Disclosure: This newsletter is not a means to solicit any of the securities mentioned nor does it recommend it for any person before they speak with a licensed professional investment advisor for their own suitability. Investing in Equities bears risk of capital loss. This newsletter is strictly the opinion of Jason Tillberg, President and founder of Tillberg Capital Management, Inc. and shall not be held responsible for investment loss from this newsletter.
