Alarming Household Wealth Erosion: Short Today and Shop Away

The household wealth statistics for the last quarter may well have been anticipated, and priced in, by the equity markets. But, most certainly, the current level of the major indexes does not incorporate the real possibility that the data for this and the next quarter will show another 10-15% decline in American family balance sheets. In brief, short today and shop away.

The Federal Reserve announced that net worth for households and non-profit groups dropped by $2.81 trillion (to $56.5 trillion) between July and September, the largest downward shift since 1952. Given the shape of the credit, housing and stock markets since September, another $6 trillion-plus decline by early 2009 is a fairly safe conclusion, according to all economic indicators. Blaming the jobless rate, the Fed acknowledged that the fundamentals governing consumer spending will not improve in the near-term. But perhaps more than unemployment, it is the under-employment rate which has been eroding family incomes. At least 10 million Americans will be seeking better, full-time jobs by early-2009.

It is not surprising that real-estate-assets fell by $650 billion in the last quarter. Depending upon which forecast you pick, such assets have already deteriorated by another $600-900 billion thus far, and nobody can tell with precision when the market for residential and commercial real estate will bottom. Declining home values and rising consumer loan (including credit card) delinquencies will not only impact institutions like Citigroup (C) and Bank of America (BAC); the consequential contraction in consumer spending will have a direct impact on food producers, retailers, clothing manufacturers and automakers (GM).

Thursday’s Labor Department report showed that the number of Americans accessing unemployment benefits for the first time surged to a 26-year high, i.e. to 573,000. In view of the fact that this number is conditioned by thousands of holiday-driven part-time jobs, the outlook for January and February is particularly grim. Since the historic declines in family balance sheets is directly influencing overall asset valuations and credit quality, it is not difficult to see why the hundreds of billions of dollars worth of bailout packages are not resulting in money flowing through the economy at large, as opposed to the financial system. In fact, the overwhelming majority of tax-payer dollars are simply circulating amongst central banks, rescued financial institutions, selected investment-grade issuers and insurers, creating havoc, in the process, in the bond yield-pricing arena.

Juxtaposed against the hard facts is the stimulus-related optimism. But the bullish or market-bottom case today stands entirely impaired by the latest batch of data with respect to family incomes, real-estate assets, jobs and loan delinquencies. Certain analysts are now suggesting that the $1 trillion proposed Obama Plan might have to be expanded, to $1.5 or even $2 trillion, for any stimulus to be truly effective; following the irrelevance of the earlier $500 billion rescue budget (proposed by Nancy Pelosi last month), the $1 trillion target has also apparently been overtaken by events on the ground.

Incidentally, before $1 trillion (or more) worth the public works are ever implanted, the total net worth of American households and non-profit groups could well hit a low of $42-45 trillion. While economists figure out the academic merits and demerits of inflation, deflation and stagflation, it is clear that what we are faced with is a real contraction in the size of the consumer segment, domestically and internationally. Short-term trading apart, retain a solid short bias (DIA, QQQQ, SPY) well into the foreseeable future.

Disclosure: Author holds short positions in C, QQQQ, SPY

Comments

[James Wilson:]

Well this crash maybe good after all. All those NON PROFITS paying themslves $100k + salarys to do little if anything going BUST.

I cheer for that.

Too many non porfits compete with business and take away profits and jobs.

2008 Dec 12 03:51 AM

[wondergirl:]

You ain't seen nothing yet. With no auto bailout, wait until that impacts the unemployment figures.

We have money for everything, but nothing for the guy who actually "makes something."

No Santa this year, or for the next several, I'm afraid.
Very afraid.

2008 Dec 12 06:26 AM

[secmaven:]

But to expect that individual stocks will reflect this economic reality is dangerous. KSS reports a 17.5% same store decline in sales for November which will translate into a loss for their fourth and principal profit quarter of the the year and the stock rallies 25%! Forward PE is zero. Buy, buy, buy.

2008 Dec 12 11:46 AM

[Chris B:]

Soon we will see a reversion to the mean in terms of household savings. 0% was never sustainable, and now the soon-to-be retired baby boomers have lost their next eggs. When consumption declines 10%, it won't be good for retailers, manufacturers, China, or stocks.

2008 Dec 12 02:32 PM

[House sitter:]

Even without the auto bailout you willl still have the same impact on unemployment. Get real. Look how well the finance bailout is working. Let them fail. Why should americans reward stupid business people? Lets reward the successful ones!!!!


On Dec 12 06:26 AM wondergirl wrote:

> You ain't seen nothing yet. With no auto bailout, wait until that
> impacts the unemployment figures.
>
> We have money for everything, but nothing for the guy who actually
> "makes something."
>
> No Santa this year, or for the next several, I'm afraid.
> Very afraid.
>

2008 Dec 12 05:02 PM

[jepittman:]

Not an optimistic note to be heard. Nothing but doom and despair. Music to a bull's ears.

2008 Dec 12 07:07 PM

[Ames Tiedeman:]

Too much negativity. We are up 21%. America is not dead..

2008 Dec 13 05:52 PM