Where Did All this Shadow Inventory Come From?

Thursday at last! I get Friday off from the boxing training and thus there will be Friday night Entertainment. Get your requests in, we had quite the mixed bag last week and it was fun.

How You View Things
There has been a flurry of talk about a possible Value Added Tax coming our way. I am going to probably blow some minds right now and maybe generate some nasty comments, but I am actually not against the VAT overall. Now do not get me wrong, I am against taxes in all forms at all times (and I am well versed with all the negative aspects of this tax), but at least this one is going to target everyone that buys stuff, including the 50% of the country that pays zero income taxes. At least I can work with that. Add to this businesses will have to pay at all steps of the process and think how those amazing profits during this V-shaped recovery will be able to handle just that. I say go long tax accountants if it comes true.

That said, how you view things fits here because in it's simplest form the VAT is a subtle, tricky tax that goes unseen for the most part. That is why governments love them. Consider the following:

The Government spends too much and wastes way too much. We cannot expect them to change and we cannot vote them out because the next set of people do the same thing

How you view things puts you into one of two camps (I am simplifying, but in the end this is all there is to it):
A - We need to support various programs and if that comes with the price of the waste and corruption we must lie, beg, steal, and tax to get the money the government needs

B - The only way to get change is to starve the fools into default and we will start over

Where are you?

Where Did All this Shadow Inventory Come From?
Today brought word that retails sales were making a killing and blowing away expectations (who does these estimates anyway?). While rates of change make zero impression upon me (all that matters is what the final numbers are, not the rates of change) all the spending seems at odds with high unemployment and falling wages. From Yahoo Finance we get this dandy of a headline:
Shoppers hand retailers a basket of Easter cash
Poetic, just, and perfect for our times. Even better material in the story:

"There was a lot of talk about the frugality of the American consumer and that the recession taught people to save more," said Sherif Mityas, a partner in the retail practice at management consultant A.T. Kearney. "But U.S. consumers have short-term memories."

Never a more apt description of what ails us.

So where is all this cash, plastic, or whatever coming from? I really have no idea. I would guess unemployment checks that run for all time help, but that does not seem quite right. Home equity extraction? Ha, kidding. Maybe an alternative form of mortgage money extraction? Like, not paying your mortgage:

Are Strategic Defaults Fueling Consumer Spending?
It wasn’t until this past week when a colleague mentioned the term strategic default did I realize what was likely occurring. Many consumers are spending their mortgage payments! It’s beginning to make sense in the most disturbing way. As homeowners face staggering payments on houses that have negative equity, a large number are simply deciding not to pay their mortgage bill, resigned to the fact that eventually they will lose their house.

And what happens with the money that would have been sent to the lenders? Well, an increasing mentality of “eat drink and be merry – for tomorrow we’re evicted” has set in.

There is more in the article.

I have to say I cannot believe that enough people are not paying their monthly mortgage to goose auto/electronics/other retail sales very much. I just do not think the numbers add up. I could be wrong.

And it appears that I might be.

If this story has merit, suddenly the numbers do start to add up:
Bank of America to Increase Foreclosure Rate by 600% in 2010
You did read the title right. How's that for a rate of change you rate of change fetish freeks out there!

From the story:

I attended a local Building Industry Association conference on Friday 26 March 2010. The west coast manager of real estate owned, Senior Vice President Ken Gaitan, stated that Bank of America, which currently forecloses on 7,500 homes a month nationally, will increase that number to 45,000 homes per month by December of 2010.
After his surprising statement, two questioners from the audience asked questions to verify the numbers.

Bank of America is projecting a 600% increase in its already large number of monthly foreclosures.

This isn't unsubstantiated rumor; this comes straight from one of the most powerful men in Bank of America's OREO department (yes, that really is what they call it). It appears they have too many properties already.

Wow, just wow.

Of course there are many that have argued the "shadow inventory" story was way overblown. Try that now.

There are many saying housing has bottomed. How does that look?

I have heard time and again that banks are on the mend and their books are not as bad as I would portray them. OK.

It is obvious that banks have been sitting (squatting?) on homes in foreclosure, without the foreclosure part. The tales of 2 years payment free may well be very true. Could this possibly help things like sales? I could be persuaded at this point!

Along these lines, an example. If you have not been reading the comments section, you are missing plenty. Loyal reader Gawains is an experienced real estate professional that knows the ins and outs of the business. From the last comment thread:

Today was repo day. There were probably, oh I don't know, 500 foreclosure sales on the courthouse steps. So we should be getting a lot of new assignments over the next few days. What fun that will be.

Want to know what I did this afternoon? Well, we got a request for a full interior price opinion and repair addendum on a repossessed home listed with another company. The company is thinking of transferring it to us because it hasn't sold. Current list price, $175,000.

Now, this house happens to be in one the nicer, established neighborhoods in north McAllen. Great location, good schools, easy access to main roads and shopping. 5 bedrooms, 4 baths, 3500+ sf, wood fence, in-ground pool. So I went over there to check it out.

Oh, my God. It's been completely stripped! All the lights, all the interior doors are gone. So are the appliances, the a/c unit and the pool equipment. The granite counters in the kitchen are ripped out, and all the cabinet doors are gone. Same for the built-ins and bathroom vanities. But this is what really gets me. They took all the drawers too.

Drawers? Why would you steal drawers? I mean, it's not like you can just slide them into another cabinet. You'd have to build new cabinets specifically to fit the drawers! It doesn't make any sense.

If there's one thing I hate more than a thief, it's a stupid thief.

So, I'm looking at about $35,000 in repairs at least. A typical homebuyer cannot purchase this house. It's not fit to live in. Only a professional investor with a lot of capital can buy something like this.

Calling all flippers, calling all flippers. Oh, sorry, I was having a flashback.

I cannot believe $35k makes that house whole again, but maybe he gets deals.

This is what is going on folks. You will not see it in CNBC. You will never, ever see Ben Bernanke have to address something like this at one of his dog and pony shows at the Senate. Want a glimpse at how bad things were at the top? Gawains offers:

I see this all the time. Here's how the scam works.

No credit? No problem! You too can buy a house. No down payment? No problem! We can give you a 0% down, interest-only ARM, and roll over the closing costs. It will cost you practically nothing.

Oh, and you'll need furniture. No money? No problem! You can completely furnish your new house with no down payment and no interest for a year.

So what these people do is fill out some paperwork. They can even lie bald faced, since no one really cares. They move into the house and furnish it. They do not make a single payment. What does it cost them? Utilities and food for a few months.
Then, when they get the first default notice, they just rent a moving truck, load up the furniture, strip the house, and disappear.

Great way to renovate and refurnish a house in Mexico, where you cannot be prosecuted since the crime occurred in America.

You guys have no idea what I deal with. And frankly, to tell you the God's honest truth, I'm more than disgusted.

Two years ago I got this assignment on a ranch house out in the middle of nowhere. It had been completely gutted of course, but here's the thing. They left the back door open and the goats got in and shit all over the house!
And I have to walk through this mess, while taking pictures and making notes.

Then I get this phone call from a contractor who wants to get into the business of cleaning repossessed homes. Oh, really? You want to clean a home? I got a home for you to clean.

After he had shovelled all the goat shit out of the house, it was a four-foot mound in the front yard that had to be hauled off.
Needless to say, he never called me for another cleaning again.

Talk about closing the barn door after the goats have left!

Going back to my intro question, where are you now?

Have a good night.

The Gordon Gartrelle Replica Economy

It is Thursday and I had no idea that I have Monday off from work for Martin Luther King Day! Good deal. I noticed today that the Sun was staying up higher in the sky for once as I drove home and not going lower. Spring is right around the corner!

Reader Input
Besides some very kind words from a commenter last night, I also received a request to offer my take on a question. I love questions and encourage all to ask anything in the comments and I will work on it the best I can.

Loyal reader Watchtower asks:

Do you think that in the future the government will negate the benefits of a tax deferred account by changing the tax rules (I'm talking about IRA's)?

This question is actually multi faceted the more I thought about it.

My first reaction is that the small amount able to go into an IRA ($5k/year) would not attract the attention of tax increases. Of course across the entire country across all the accounts this would add up, but allow me to offer another avenue that fits our governments stealth way of taking your money for their own use.

If you have not seen this story from Jesse about 401k's and IRA's it is worth a look. My own take is a bit more sarcastic (of course!) so here goes:

-Any type of tax changes to either 401k/IRA will get people upset and very interested in the issue, thus I do not see the tax status being changed at all. For some reason people fail to see almost everything right in front of them when it comes to finance but they do get bent out of shape about tax changes, especially from "none" to "some amount".

What I envision in the near future instead is this kind of a letter you will get from your holding firm which will read something like this:

Dear XXXXXXX,
In accordance with the new regulations set forth by the Federal Reserve Act of Citizen Retirement Flexibility, 15% of your existing and future contributions will require settling in the Tax Deferred Retirement Protection Fund (TDRPF). This program has been established to offer long term protection for your retirement savings by providing automatic access to risk free financial instruments* at no cost to you. You do not have to do anything; no forms are required and no action is needed. The tax treatment of your investment has not changed. Thanks you for your attention.

*-Denotes 2,7,10 year US Treasury Bonds, FHA/FRE/FNM bonds, and other instruments as needed.

In this way the government would have access to plenty of cash to support debt sales and no tax increases would make the front page. As long as most people see "No tax changes" and more importantly "No action required" most will miss what junk 15% of their portfolio just got stuffed with.

Just my 2 cents. Let me know what you think.

The Gordon Gartrelle Replica Economy
Now for this section to work you are going to have indulge for a minute!

I was a big fan of "The Cosby Show" when I was younger. I was thinking about tonight's section for a while and I suddenly recalled a Cosby episode that summed up how I think about some things.

The season one episode "A Shirt Story" is summed up on Wiki as such:

Theo wants to impress a girl by wearing an expensive shirt by designer Gordon Gartrelle. Since Cliff and Clair will not pay for it, Denise offers to make a copy of the shirt for him. Guest appearance by Kadeem Hardison, who years later would portray Dwayne Wayne on the Cosby Show spinoff, A Different World.
(NOTE: The real Gordon Gartrelle is a writer/producer for The Cosby Show.)

That is the first part of the puzzle.

The second comes from the end of the episode where Theo has to wear the horrible replica of the shirt in front of the girl he was trying to impress and instead of being horrified the girl loves the shirt (see 5:55 mark):

Faced with a ridiculous shirt, the peanut gallery simply says it's awesome and all is well.

So what the heck does that episode have to do with anything? Great question.

You may recall that last week same store retail sales came out and everyone was excited about the "proof" of a turnaround as the numbers looked pretty good. The real proof is in the final aggregate numbers though, and today the December retail sales number was -0.3% (that's NEGATIVE) instead of the +0.5 positive print expected. Another "unexpected" number.

So what happened? Well it seems that in the spirit of the banks, who had never modelled serious home price depreciation as a possible event, it seems the old data points just are not applicable in a downturn like this one. The culprit here: same store sales were skewed by the huge number of store closings which boosted sales at the remaining stores, but there was no boost in aggregate purchases. Great take can be found here:
Here's How The December Retail Data Turned Out To Be Such A Disaster

To be even more frank, gasoline, due to higher prices, also made up most of any gains as can be seen on this EconomPic graph.

Now of course the markets could not be bothered with such information, but that leads me to my point. I swear there is one!

Just like the Gordon Gartrelle replica shirt was accepted by the character as "hot", data today is accepted as great no matter what with no care how it was made.

We have seen this kind of over reaction to all kinds of data since the rally began and many times before then. Items include:
-When mortgage brokers were closing doors by the hundreds, mortgage applications went up as people had to re-apply many places. The broken data point was cheered as a sign of housing recovery.
-Initial Unemployment claims are trending down because really, who is left to fire? This is a far cry from job gains (excluding the census workers to come!) but this data point is heralded as the next bull market instigator.
-Cash for Clunkers added car sales, who would have thought? As GM moved to ramp up production sales went right back to where they were. Another fake data point.

There are many more.

My point is that as long as some data point "beats expectations" or "is getting worse less quick" or "shows gains over last year" it is lauded. No attention is paid to the details. This is hardly a new game but the total reliance on funny numbers is a first.

Data right now is a cheap knock off that was stitched together and passed off a genuine. At first I think this was done for the whole "confidence" thing we hear so much about. Now I believe that being allowed to get away with it has emboldened market participants (see the VIX lately?) to bank on gaming the system in perpetuity.

Anytime players think they can place bets without losing something goes terribly wrong. One would think we would have learned something, anything, over the past 3 years but I guess that is a cheap knock off of an idea as well.

For more on this try "Simulacra and Simulation".

Have a good night.