It’s frequently noted that the current sovereign problems are a natural result of governments transferring liabilities from the private sector onto the public ones.
But, as Gluskin-Sheff’s David Rosenberg argues, it’s not like the private sector is in such great shape.
While the focus has been on Greece in particular, and the PIGS in general, let’s
not forget that fiscal strains are evident everywhere from the U.K., to Japan, to
the U.S.A. (and several states). The U.S. has a record $2½ trillion of new borrowing
requirements this year (nearly 20% of GDP that has to be financed or rolled over).
Fully 75% of U.S. federal debt ($4.7 trillion) comes due in the next five years and that
number is still rising — the average term to maturity is nearly four years.
The stresses in the private sector, especially the U.S. mortgage market, are still
in place. Another wave of foreclosed units will be hitting the market unleashing
a fresh wave of deflation in residential real estate. In fact, what is particularly
ominous is that 1 in 15 of folks out there who are delinquent on their mortgages
are actually current on their credit cards! Remember all those option-adjustable
rate mortgages issued between 2004 and 2007 ($230 billion worth)? Well, they
come due starting now and through 2012 and it will be interesting to see who
bails these folks out as their interest rate gets reset into the stratosphere.
The sustained erosion in household credit quality is surely one reason why bank
lending continues to implode — down $28 billion last week and $100 billion in
just the past month (in excess of a 12% annualized decline). It’s a good thing
Uncle Sam has his wallet out because without, the economy would still be
contracting according to our models!
With regard to the U.S. housing market, there remains a glaring supply-demand
imbalance that can only mean more deflation ahead. There are 231,000 vacant
newly-built housing units for sale. On top of that, we have 3.29 million existing
owner-occupied housing units listed for sale. Then we have 3.5 million empty
housing units for sale that have been taken off the market for unspecified reasons
(this is the fabled shadow inventory via the foreclosure process). Right there we
have over seven million of supply overhanging the residential real estate market,
and there are 112 million homeownership units, so this classifies as a 6.3% total
vacancy rate. At the same time, we have a competing rental vacancy rate of nearly
11% and the homeownership sector is also battling it out against an apartment
market where median asking rents have come down an average of 3.5% over the
past year and the decline is accelerating. Inflation indeed.
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