Still, I’m left wondering more generally why anyone, including Mr. Buffet, thought a recovery in US housing was either already underway, or coming along in 12 months time. There is certainly nothing in the data to suggest any recovery is underway. (And that’s an understatement). But should it really come as a surprise? Fannie Mae continues to bleed. There is no wage growth either in nominal or real terms. And even the FHA, which admittedly goosed the low-end for about 9 months last year, may now turn out to have created little more than a new class of mortgage defaulters, as they were “helped” into low priced homes with 5% downpayments. Perhaps they call them The 2009 Vintage of defaulters.

Meanwhile, the big states like California, Illinois, Florida, and New York are all getting into position to do their part for the “housing recovery.” They are about to release government workers back into the private sector.Yes, in cities from Chicago to Los Angeles a run of 24 months of falling tax revenues has finally met head-on with a state’s inability to print money. For those of you who tune in to my Sunday night MacroTwits show, you will know that I’ve felt for some time that tensions would eventually arise between the growing ranks of the unemployed, and the protected, pensioned, high-salaried workers of cities, counties, and states. It can’t help that the unemployed are still paying a schedule of state and local taxes and fees, while they watch services deteriorate or disappear altogether. I was pleased therefore to see Joe Mysak at Bloomberg/Business Week latch on to this emerging story last week. | see: Banker Bonus Anger is Shifting to Government Workers.

Given the aforementioned, I think it’s not really necessary that I re-hash the recent data on new home sales, existing home sales, foreclosures, rising vacancy rates, falling rents, and the growth of shadow inventory. Nor, do I need to cite the FED’s intention to stop buying MBS towards the end of March, the coming wave of mortgage rate re-sets starting up again later this year, or that mortgage rates ticked back above 5.00% again. Instead, I want to show you a chart…(this article continues for subscribers through the membership gateway, on the right side of this page)

The idea that large systems contract, starting first with the outer reaches, is an understandable assumption and at first glance is as good a map as any for the future. This is especially true for those who need to hold a map, regardless of whether the map one is holding even covers your target region. (H/T Taleb). And yet, I think it behooves to consider other possibilities.

(this article continues for subscribers through the membership gateway, on the right side of this page)

Photo: Andy Warhol’s Empire, 1964. via MOMA.

Some of the GDP prints during the Great Depression were much stronger than 5.7%. Of course, the country deflated for nearly three full years before FDR stimulus programs kicked in, and alot of the debt and general insolvency had already found resolution by that time. In our case, while it’s true we’ve worked through losses over the past 12 month, there remains the matter of Fannie and Freddie as proxies for national negative equity, the ongoing 50% loss pattern in commercial real estate, all the unsecured credit card debt, and then the town, city, state debt in The States. At best, we have perhaps resolved a third of the private debt, pushed at least another third onto government balance sheets, and we still face the other third. In short, given the pawning off of losses to the government, the country still carries 66% of the problematic debt. And this is being both conservative, and simplistic.

More quietly on Friday however in the wake of the GDP release with its slew of attendant data was a rather important information dump from The Bureau of Labor Statistics,  around 2 o’clock in the afternoon. Each quarter…(this article continues for subscribers through the membership gateway, on the right side of this page)

The result is that the pipeline of capital needed to support gargantuan treasury supply continues to dwindle. This is why a number of analysts have begun to wonder who in fact is buying a large portion of US treasury supply, as it becomes more challenging to explain from where on the planet the capital is emanating. Leaving aside such sleuthing, we knew that not only had foreigners shortened duration last year along the treasury curve, but that starting later in the year they were reducing their participation as well in treasury auctions. This is yet one more reason why, earlier this week..(this article continues for subscribers through the membership gateway, on the right side of this page)

Of particular note is the current employment to population ratio. Now, we already knew that the decade would see the erasure of all jobs created since 2000. We’ve talked about this already on the Sunday Night MacroTwits show (which returns this weekend). But of course the population has grown since 2000. Result? 27 year lows in the employment to population ratio. This was indeed the coup de grace on a week when macro news made headlines: Office vacancies hit 15 year highs. Residential rental vacancies hit all time highs. California declared another budget emergency, and New York’s Governor said the Empire State is broke.

I decided to reach back, therefore, to a key passage I recall writing in my June 2009 newsletter: The Scholarship of Collapse:

In my opinion the United States economy passed its hidden terminus with the bursting of the technology bubble in 2000. All of the power and thrust in the economy since 2000 was provided by nothing more than an expansion of credit via two, typical vehicles: War and Domestic government spending (Guns and Butter), and, artificially low interest rates provided by the central bank. This concept can be extremely difficult to accept among people working in highly innovative, highly productive areas like technology, venture capital, engineering, and other globalized product and service industries. What’s important to understand, however, is that the economy we made in the United States needs to serve 300 million people. If a good portion of that population is living off the housing and automobile economy, unsustainable at high levels, it matters little to the problem of a fundamentally unsound economy that Google, Sunpower, and Honeywell are indeed doing wonderful things in technology, solar energy, and engineering. Moreover, it seems quite likely now that the expansion of credit post 2000 was in many ways a collective attempt to replace the trailing loss of our manufacturing economy. Yes, the US remains a hotbed of the best innovation but the acceleration of the financial and financial product economy was very likely an overshoot, past the hidden terminus in the structure of our system. To use a phrase that was once somewhat unfairly said about California by Gertrude Stein, we have discovered that there was no there, there in the US economy.

The problem the US economy now faces is structural. There is no sector or even group of sectors that could begin to set a normal course for net job creation. The States will probably have to again cut payrolls and spending this year either through reduced hours, reduced wages, or full layoffs. Incredibly, the FED and many mainstream observers believe we are in a post-war recession that can be goosed with cheap money to get the housing and auto sectors going. Oops. Did that already. Ten years ago. And look at the results. Also, I remain baffled as to why anyone would believe there is a recovery in housing. Worse, the the buzz-saw of interest rates has only just started to whir.

The model portfolio is now up 11.36% since inception (01 September 2009). I made a few changes to the portfolio’s composition on Friday of this week. (this article continues for subscribers through the membership gateway, on the right side of this page).