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David McSwain's  Instablog

I am a land broker in southern California. On the weekends, when not in church, I am often seen wearing silly socks while blowing a whistle at small children while they coordinate attacks to score a goal. I believe in nine of the Ten Commandments. On Thursdays, I debate with people half my age... More
My business:
The Hoffman Company
  • Government Expansion- Charts To Blow Your Mind
    There is something everyone seems to forget, or in some cases never considered:
     
    The government doesn’t make anything. 
     
    The economy as a whole is made up of the private and public sector. The private sector consumes and produces. The public sector only consumes and consumes and consumes.  The government takes more from the economy every year and adds little, if anything, back to it.  Government adds nothing to the GDP.  It is private contractors who build our roads and battleships. Creation of wealth only happens in the private sector. 

     
    There are three things concern me most about our government:
    1                    Government give away programs
    2                    Overall government expansion
    3                    Federal Debt Service  
     
     
    This first chart gives us an idea of our governments give away programs to private citizens.  The chart below shows that the Robinhood like behavior of our Federal, State and Local governments currently subsidizes 18% of private incomes.  

     
     
     
    Next up is overall government expansion. In 1940 federal revenue was .56% of the GDP. Today it is 19.88% of the GDP. The dip from 2001 to 2003 is when the economy grew faster than the government. This chart represents the increasing amount of actual dollars coming out of the economy into the black hole of government. If this chart doesn’t blow your mind, what will?
     
     
      
     
    Finally there is debt service. Normally everyone likes to see a ratio of total debt to GDP. This can make a great chart; to give you an idea, in 1940 federal debt was 52.4% of the GDP, in 2008 it was 70.2% and in 2011 federal debt is projected to be 101.1% of the GDP! A chart like that would be a mind blower like the other two charts above but I think that a percentage of income paid as debt service tells a better story. 
     
    Just how much of anyone’s income can be paid out in debt service? 20%?  30%?  40%? At what point do you default? As the chart shows below 27.11% in 1991 was the highest amount of federal income paid to service the public debt. Then with the dot.com boom of the mid and late 1990's we grew our economy and raised federal revenue so that debt payments went back down to the very manageable 16% range. As you can see however, we are on the rise again and this time with a shrinking economy, not an expanding one. With the unparalleled debt run up of our government I am betting we will hit new highs on debt service maintenance costs in the coming years. At what point will the US default?  

    This chart represents only interest paid, not principal:
     
     
     
     
     
    So how far can the government bailout and ongoing subsidies go? How big can government get? How many incoming dollars can be spent to pay debt interest? 

    Where does the decades long expansion end? Does it end? YES! 
    Can you say “Revolution”?

    Disclosure: No positions
    Oct 10 02:12 pm | Link | Comment!
  • Shadow Inventory Chart
    Here is a nifty little chart that gives some insight into the ‘shadow inventory’ that we all have heard of:
     
     
     
    The 7 million homes in this chart are made up of bank owned homes or delinquent loans that will come to the market at some point. 
     
    According to the NAR, here is where annual home sales have been:
     
    2009    -           5,120,000 (current annualized rate)
    2008    -           4,912,000 
    2007    -           5,652,000 
    2006    -           6,480,000
    2005    -           7,075,000
    2004    -           6,779,000
     
    The 7 million ‘overhang’ housing units clearly exceed total annual demand. The all time high in home sales nation wide was in 2005. 
     
    So how long will it take to burn through this inventory? 
     
    Let’s say for arguments sake that we can consistently absorb a full 7 million units per year like we did in 2005 when we were all drinking the Kool-Aide.  That would mean that the market would have to consume just over 36.5% more than the current rate of absorption, 42.5% more than it did in 2008 and 24% more than it did in 2007. Even if the market could do this it would still take about 3.75 years to consume this added inventory.
     
    The reality is however, we will not be able to consume at the 2005 levels of absorption for some time. This ‘overhang’ or shadow inventory will plague the market for at least a decade. With the Fed stimulus money going away, continuing record levels of foreclosure activity and the continuing rise in unemployment we are in a perfect storm that will affect the entire economy for years. Depression 2.0 baby!  It’s here to stay!
    Sep 30 12:45 pm | Link | Comment!
  • Options Arm Recasts - Hype or Not?

    I read a response yesterday to an article here on Seeking Alpha. The article was from Justice Litle, the comment from mrlucky2day.

    The comment was:
    “Regarding Option Arms - This again has been an over hyped number. The fact is that many of the holders of option arms have already refinanced.”
     
    Just for the record, here is a chart that many of us are familiar with that was published in March 2007:
     
     
     
     Now here is the revised chart published in March 2009:
     
     
    I don’t see a lot of change. Have most of the holders of option arms really refinanced? Unless Credit Suisse has their facts wrong I would say there is a boat load of option-arms still out there. I would also say, given the general state of things, that most of the folks with these loans are paying the minimum (negative amortization) option which will force a recasting of the loan. I would further say that when these loans recast that most will not be able to make their new payment or refinance and will ultimately go into delinquency and then foreclosure. 
     
    But I could be wrong, maybe most of those out there with option arms are paying the ‘30 year fixed’ option with all that extra money their making these days. Those people would have no need to refinance or any fear of a recast.  Maybe Credit Suisse doesn't have a clue. Maybe Bernie Madoff is honest and maybe Michael Jackson is just faking it for publicity.       
    Jun 29 07:08 pm | Link | Comment!
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