Published on
The Telegraph/UK

America Slides Deeper Into Depression as Wall Street Revels

December was the worst month for US unemployment since the Great Recession began.

Ambrose Evans-Pritchard

In this Feb. 23, 2009 file photo, a home is seen in San Antonio, facing imminent foreclosure without assistance. (AP Photo/Eric Gay, file)

The labour force contracted by 661,000. This did not show up in the headline
jobless rate because so many Americans dropped out of the system. The broad
U6 category of unemployment rose to 17.3pc. That is the one that matters. 

Wall Street rallied. Bulls hope that weak jobs data will postpone monetary
tightening: a silver lining in every catastrophe, or perhaps a further
exhibit of market infantilism.

The home foreclosure guillotine usually drops a year or so after people lose
their job, and exhaust their savings. The local sheriff will escort them out
of the door, often with some sympathy –– just like the police in 1932,
mostly Irish Catholics who tithed 1pc of their pay for soup kitchens.

Realtytrac says defaults and repossessions have been running at over 300,000 a
month since February. One million American families lost their homes in the
fourth quarter. Moody's expects another 2.4m homes to go this
year. Taken together, this looks awfully like Steinbeck's Grapes of Wrath.

Judges are finding ways to block evictions. One magistrate in Minnesota halted
a case calling the creditor "harsh, repugnant, shocking and repulsive".
We are not far from a de facto moratorium in some areas.

This is how it ended between 1932 and 1934, when half the US states declared
moratoria or "Farm Holidays". Such flexibility innoculated
America's democracy against the appeal of Red Unions and Coughlin Fascists.
The home siezures are occurring despite frantic efforts by the Obama
administration to delay the process.

This policy is entirely justified given the scale of the social crisis. But it
also masks the continued rot in the housing market, allows lenders to hide
losses, and stores up an ever larger overhang of unsold properties. It takes
heroic naivety to think the US housing market has turned the corner
(apologies to Goldman Sachs, as always). The fuse has yet to detonate on the
next mortgage bomb, $134bn (£83bn) of "option ARM" contracts
due to reset violently upwards this year and next.

US house prices have eked out five months of gains on the Case-Shiller index,
but momentum stalled in October in half the cities even before the latest
surge of 40 basis points in mortgage rates. Karl Case (of the index) says
prices may sink another 15pc. "If the 2008 and 2009 loans go bad, then
we're back where we were before – in a nightmare."


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David Rosenberg from Gluskin Sheff said it is remarkable how little traction
has been achieved by zero rates and the greatest fiscal blitz of all time.
The US economy grew at a 2.2pc rate in the third quarter (entirely due to
Obama stimulus). This compares to an average of 7.3pc in the first quarter
of every recovery since the Second World War.

Fed hawks are playing with fire by talking up about exit strategies, not for
the first time. This is what they did in June 2008. We know what happened
three months later. For the record, manufacturing capacity use at 67.2pc,
and "auto-buying intentions" are the lowest ever.

The Fed's own Monetary Multiplier crashed to an all-time low of 0.809 in
mid-December. Commercial paper has shrunk by $280bn ($175bn) in since
October. Bank credit has been racing down a hair-raising black run since
June. It has dropped from $10.844 trillion to $9.013 trillion since November
25. The MZM money supply is contracting at a 3pc annual rate. Broad M3 money
is contracting at over 5pc.

Professor Tim Congdon from International Monetary Research said the Fed is
baking deflation into the pie later this year, and perhaps a double-dip
recession. Europe is even worse.

This has not stopped an army of commentators is trying to bounce the Fed into
early rate rises. They accuse Ben Bernanke of repeating the error of 2004
when the Fed waited too long. Sometimes you just want to scream. In 2004
there was no housing collapse, unemployment was 5.5pc, banks were in rude
good health, and the Fed Multiplier was 1.73.

How anybody can see imminent inflation in the dying embers of core PCE, just
0.1pc in November, is beyond me.

Mr Rosenberg is asked by clients why Wall Street does not seem to agree with
his grim analysis.

His answer is that this is the same Mr Market that bought stocks in October
1987 when they were 25pc overvalued on Shiller "10-year normalized
earnings basis" – exactly as they are today – and bought them at even
more overvalued prices in 2007, long after the property crash had begun,
Bear Stearns funds had imploded, and credit had its August heart attack. The
stock market has become a lagging indicator. Tear up the textbooks.

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