305 Problem Banks, 150 'Past Point of No Return'

FN: As these banks and more fail, and cash strapped FDIC is going to have to tap that $500 billion line of credit it setup with the Treasury. The question is, can the Treasury raise that kind of money when the time comes? Already serious signs of stress are evident in each bond auction as it becomes increasingly difficult to find enough buyers of US sovereign debt.

The KBW Regional Banking Index (KRX) is a good proxy for these troubled banks because it doesn't include the mega banks like Bank of America (BAC) and Citigroup (C) that tend to be treated especially favorably by the government.

Toxic Loans Topping 5% May Push 150 Banks to Point of No Return: "More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.

The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3 percent or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full.

The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10 percent, the biggest in the 50 U.S. states was Michigan’s Flagstar Bancorp. All said in second- quarter filings they’re “well-capitalized” by regulatory standards, which means they’re considered financially sound.

“At a 3 percent level, I’d be concerned that there’s some underlying issue, and if they’re at 5 percent, chances are regulators have them classified as being in unsafe and unsound condition,” said Walter Mix, former commissioner of the California Department of Financial Institutions, and now a managing director of consulting firm LECG in Los Angeles. He wasn’t commenting on any specific banks.

Missed payments by consumers, builders and small businesses pushed 72 lenders into failure this year, the most since 1992. More collapses may lie ahead as the recession causes increased defaults and swells the confidential U.S. list of “problem banks,” which stood at 305 in the first quarter."

Emergency Unemployment Compensation

FN: Of the 14.462 million people that officially count as unemployed (UNEMPLOY) 4.965 or 34% have been unemployed for more than 27 weeks (UEMP27OV).

The previous record of about 2.900 million unemployed for more than 27 weeks was reached in the early 1980's during a nasty economic period of stagflation.

The reason being unemployed for 27 weeks is so important is because normal unemployment benefits last 26 weeks (United States Department of Labor). After 26 weeks, the benefits stop.

As more and more people approached the cut off, the government implemented an Extended Benefits program, adding 13 additional weeks that can be topped off by individual states with an additional 7. (United States Department of Labor - Extended Benefits)

The unemployment data released today, showed a 'surprise' increase in Initial Claims from last week to 558 000. While initial claims are still trending in the wrong direction, more important is the number of unemployed on Extended Benefits and those claiming Emergency Unemployment Compensation:

"States reported 2,785,372 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending July 25, an increase of 30,981 from the prior week. There were 747,707 claimants in the comparable week in 2008. EUC weekly claims include both first and second tier activity."

So it would appear that of the 4.965 million who have been unemployed for longer than 27 weeks, only 2.785 million have been able to qualify for EUC extended benefits, or 56%. That leaves 2.18 million with absolutely ZERO income of any kind from anywhere.

Unemployment Duration, Baby Boomers: The System is Broken

FN: The economy has been weak for far longer than you might think. Things went wrong a quite a long time ago and nobody really noticed. The Average Duration of Unemployment (UEMPMEAN) was a quiet, unseen warning beacon that all was not well.

From the 1950's through to the 1970's, it could take you as little as 7.5 weeks to find a new job during the 'boom' periods of an economic cycle. Then something snapped somewhere in the system. From the 1970's onwards it began to take longer and longer to find a new job and a new rising trend was put in place. From recession to recession (grey bars) life became quite a bit tougher.

Between the first (1) and second (2) recessions in the 1970's the time it took to find a job increased a serious 33% from 7.5 weeks to 10 weeks during the BEST OF TIMES. By the time the first recession in the 1980's (3) hit, the average duration of unemployment had jumped about 10% from 10 weeks to about 11 weeks. Here the amplitude of each cycle high and low exploded, maxing out at an astonishing 20 weeks. Almost 10 years later, just prior to the 1990's recession (4) it took about 12 weeks to find a job, a 9% increase. Then by the time the Tech Bubble finally burst in early 2000, it took over 12.5 weeks to find a job.

However, the worst was yet to come.

During the credit and real estate bubble years that followed it took about 17.5 weeks to find a job during the best of times (6), a massive increase of 40%.

When the easy credit bubble finally burst the 20 week average duration that had held for 30 years was breached and a new record high was set of at least 25 weeks.

Now in a jobless world expecting a jobless recovery, new records in unemployment duration will be set even from these levels.

The economy was structurally unsound long before the financial crisis hit. The warning signs were papered over with easy money by the Federal Reserve Bank under Alan "The Maestro" Greenspan and a complicit Wallstreet that extended cheap credit in amounts that grew exponentially.

The credit bubble has irrevocably burst and that is bad enough. Worse still is the timing. A veritable demographic tsunami is rapidly approaching the economic shore. Over leveraged and aging Baby Boomers are just about to realize they've gambled away their entire retirements in a high stakes game of consumer consumption and real estate leverage.

Each crisis on its own is a serious enough challenge to the system. Together, simultaneously like this, there is no feasible solution but time... and a long long time it will be. Almost certainly several lost decades.

I've argued this before in Age Wave Theory: Expect a Long Economic Winter.

China, Baltic Dry and the V-Shaped Recovery

“What was a V-shaped recovery now seems to be experiencing a little gravitational pull.” -Stephen Green, Standard Charted Bank in Shanghai

FN: The sneaking suspicion out there is that China has pretty much completed their commodity re-stocking. The Baltic Dry Index (BDI) has been down nine of the last ten trading days and has now breached the rising trendline from the December 2008 low of 663. The price is now also below the 20, 50 and 200 day EMAs (blue, red and green lines).

In the post Baltic Dry, Chinese Hoarding, Commodities and the Fake Recovery I highlighted:

"As the global economy continues to falter and Chinese exports plummet, there is growing concern that the stockpiling may soon come to a halt, leading to further, painful drops in commodity prices."

Asian Stocks Drop as Weaker Earnings Fuel Valuation Concerns: "Asian stocks fell for the first time in three days and Chinese shares entered a so-called correction, amid concern a rally in equities had outpaced earnings prospects.

China May Delay Tightening as Exports, New Loans Drop (Update1): "The People’s Bank of China may delay tightening monetary policy until the fourth quarter after exports dropped in July, lending declined and investment growth slowed, economists said.

Exports fell 23 percent from a year earlier, the government said yesterday. Urban fixed-asset investment rose a less-than- estimated 32.9 percent in the first seven months from a year earlier. New loans plunged to 355.9 billion yuan ($52 billion), less than a quarter of advances in June.

China’s economy, which avoided following the U.S. and Europe into recession, is yet to cement a recovery as factories have too much capacity and shipments abroad are weakening, officials said this month. The nation’s $4 trillion yuan ($585 billion) stimulus package can’t completely offset slumping export demand, the commerce ministry said in Beijing today."

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