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Minyan Mailbag - Breaking the Bank



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Personal bankruptcy filings in 2Q 2004 were the second highest in history, exceeded only by 2Q 2003. PB filings rose from 200,000 in 1995 to 350,000 in 1998, fell to 300,000 in 2000 but have averaged over 400,000 in 2003 and 2004.

Low interest rates have obviously not done much to help aid household solvency during the largest period of monetary and fiscal accommodation ever. In fact, all we have produced with this record stimulus is an enormous housing bubble along with increased debt at every level: personal, state, and federal. Now that the FED is acting to "normalize" rates right as the economy is slowing, with business tax credits about to expire, with real wages negative over the last 3 years, and with rising oil and medical expenses, does that bode well for the "soft patch" economic theory that says consumer spending is about ready to pick up? I think not.

In addition, inventories are rising and businesses are reluctant to hire (perhaps they learned their lesson about overexpansion in 2000). Refis have plunged and are not recovering even as the yield on the 10 yr has collapsed since June. Mergers in the financial industry in conjunction with falling refis have led to a very soft job market in banks and financial institutions. Housing has stalled in some of the hotter areas of the country such as Orange County, California, Las Vegas, Nevada, and Florida. Finally, we are still losing tech jobs to India and manufacturing jobs to China. Does any of that bode well for the "soft patch" theory?

Given the massive amount of consumer debt, the decline in real wages, rising interest rates, and a jobless "recovery" that could be on its last legs, is there any doubt where bankruptcy stats are headed?

The next recession will be a consumer led recession. The faster and more aggressive Greenspan hikes, the faster and further downhill our economy will slide. Once again Greenspan will be left dealing with the aftermath of a credit expansion bubble of his creation. This one will be a lot harder to deal with.

The bond market seems to have picked up on all of this even though the economic cheerleaders have not.

Minyan Mike Shedlock


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