Economic Gravity Still Exists

Posted: May 23, 2020 in Uncategorized

One of the things about the current crisis that is so fascinating is that a significant portion of mainstream America seems to think everything is going to be okay with regards to the economy.

Some act like the economy is just a light switch, and if we all just huddle up in our houses everything will be fine. We’ll just flip the switch back on in a year or two when we come out to play with one another again.

I’ve always enjoyed reminding people of uncomfortable truths, so this one is for the shutter-downers who thought we could just turn the light switch off on the economy.

Mortgage delinquencies in April shot up to 1.6 million delinquencies. This is the largest one month jump in history. That’s a long time. Total mortgage delinquencies are now 6.5% of all residential mortgages. Add to that 8.8% of mortgages that are in forbearance.

Want some historical perspective?

The April increase is 3x larger than any one month increase during the Great Financial Crisis (2008). It took 18 months to get to 1.6 million delinquencies during the GFC.

I repeat, we did that in one month…

One month!

If you add the forbearance number to the delinquency number you get 15.3% of all mortgages are not being paid. The peak of the GFC saw that number at 11.5%.

The current unemployment rate is 20.6% (9.7% in Missouri). If you look at the chart of the last five weeks you’ll see that we’re probably not done adding new unemployment numbers. It’s going to get worse.

The thing about the forbearance programs one should keep in mind is that they usually last 6 months. Survey after survey has shown somewhere around 50% of the US population doesn’t have enough savings for anywhere between 1-3 months.

So in 6 months a good portion of these people who didn’t save any money to begin with and might have lost a job are suddenly going to have to start making their mortgage payments again. I bet the economy just rips in October!

Wait, it gets worse…

Much of the data on small businesses has shown that around 50% of small businesses don’t have 2 months cash reserves. While many of you were flattening the curve, you also were flattening the savings of small business owners.

And worse…

The unemployment insurance that Congress passed in the CARES Act ends in July.

Here’s the most important thing you can understand about employment: You don’t have jobs if you don’t have cash flow. You don’t have cash flow if you keep Americans locked up in their homes or terrified to leave them.

No jobs, no savings, and no income means a whole bunch of people can’t pay for much of anything.

Economic gravity still exists, people that can’t make payments won’t. And if you think all the stimulus checks and unemployment is working right now, then ask yourself why do we still have 15% of mortgages not being paid with all that stimulus?

Good luck with your light switch, I’d tell you to call an electrician to fix it, but he or she probably lost their job while you were flattening the curve.

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