Orwell’s Theorem: The Opposite of Truth Is The Truth

All propaganda is lies, even when one is telling the truth. – George Orwell

A reader commented that the number of corporate lay-offs in America is escalating, yet the unemployment rate seems to keep going lower.  Part of the reason for this is that the 2008 collapse “cleansed” corporate america’s payrolls of a large number of workers who are eligible to file for unemployment benefits.

The Labor Force is derived from the number of people employed + the number of people looking for work.  To continue receiving jobless benefits during the defined period in which fired workers can receive them, they have to demonstrate that they are looking for work.  Ergo, they are considered part of the Labor Force.  Once the jobless benefits expire, they are removed from the Labor Force unless an enterprising Census Bureau pollster happens to get one on the phone and they answer “yes” when asked if they are/were actively looking for work.   Those who do not qualify for jobless benefits more often than not are removed from the Labor Force tally.  This is why, last month for example, over 600,000 people were removed from the Labor Force.

Reducing the Labor Force de facto reduces the unemployment rate.  Thus, there’s an inverse relationship between layoffs and the unemployment rate.  It’s an Orwellian utopia for the elitists.

Today’s stock market is a great example of the “opposite of truth is the truth” theorem.   It was reported by Moody’s that credit card charge-offs have risen at to their highest rate since 2009 – LINK.  This means that defaults are rising at an even faster rate, as finance companies use accounting gimmicks to defer actual charge-offs as long as possible.  A debt that is charged-off has probably been in non-pay status for at least 9-12 months.

The same story has been developing in auto loans. The 60+ day delinquency rate for subprime auto loans is at 4.51%, just 0.18% below the peak level hit in 2008. The 60+ day delinquency rate for prime auto loans is 0.54%, just 0.28% below the 2008 peak. In terms of outright defaults, subprime auto debt is just a shade under 12%, which is about 2.5% below its 2008 peak. Prime loans are defaulting at a 1.52% rate, about 200 basis points (2%) below the 2008 peak. However, judging from the rise in the 60+ day delinquency rate, I would expect the rate of default on prime auto loans to rise quickly this year.

Now here’s the kicker: In Q3 2008 there was $800 billion in auto loans outstanding. Currently there’s $1.2 trillion, or 50% more. In other words, we’re not in crisis mode yet and the delinquency/default rates on subprime auto debt is near the levels at which it peaked in 2008. These numbers are going to get a lot worse this year and the amount of debt involved is 50% greater. But the real problem will be, once again, the derivatives connected to this debt. It would be a mistake to expect that this problem will not begin to show up in the mortgage market.

Amusingly, the narrative pitched by Wall Street and the sock-puppet financial media analysts is that the credit underwriting standards have only recently been “skewed” toward sub-prime. This is an outright fairytale that is accepted as truth (see Orwell’s Theorem). The issuance of credit to the general population has been skewed toward sub-prime since 2008. It’s the underwriting standards that were loosened.

The definition of non-sub-prime was broadened considerably after 2008.  Many borrowers considered sub-prime prior to 2008 were considered “prime” after 2008. The FHA was the first to pounce on this band-wagon, as it’s 3% down-payment mortgage program enabled the FHA to go from a 2% market share 2008 to a 20% market share of the mortgage market.

Capital One is a good proxy for lower quality credit card and auto loan issuance. While Experian reports an overall default of 3.3% on credit cards, COF reported a 5.14% charge-off rate for its domestically issued credit cards. COF’s Q1 2017 charge-off rate is up 48 basis points (0.48%) from Q4 2016 and up 100 basis points (1%) from Q1 2016. The charge-off rate alone increased at an increasing rate at Capital One over the last 4 quarters. This means the true delinquency rates are likely surging at even higher rates. This would explain why COF is down 17% since March 1st despite a 2.1% rise in the S&P 500 during the same time-period.

To circle back to Orwell’s Theorem, today the S&P 500 is hitting a new record high. But rather than the FANGs + APPL driving the move, the push higher is attributable to a jump in the financial sector. This is despite the fact that there were several news reports released in the last 24 hours which should have triggered another sell-off in the financial sector. Because  the stock market has become a primary propaganda tool, it’s likely that the Fed/Plunge Protection Team was in the market pushing the financials higher in order to “communicate” the message that the negative news connected to the sector is good news.  Afer all, look at the performance of the financials today!

Days like today are great opportunities to set-up shorts. Most (not all) of the ideas presented in the Short Seller’s Journal this year have been/are winners.  As an example Sears (SHLD) is down 39% since it was presented on April 2nd.   I’ll present two great short ideas in the financial sector plus a retailer in the next issue.  You can learn more about the Short Seller’s Journal here:  SSJ Info.

7 thoughts on “Orwell’s Theorem: The Opposite of Truth Is The Truth

  1. https://www.wsj.com/articles/fico-recalibrates-its-credit-scores-1407443549

    For instance, as recently reported in the above article, when you run out of eligible borrowers, change the rules, change the meaning of numbers, and before you know it subprime=prime. Then this the shit they bundle up and sell off as good debt to keep the charade going a la housing (the big short).

    Learn how to short the auto bundled backed securities because that is what is next.

    Aut-O = HO me; trying to get the history to rhyme

  2. I live in El Paso, TX, where the poverty rate easily exceeds 20% from the last time I checked years ago. Retail sector and manufacturing are in shambles; it all revolves around Fort Bliss at this point. Yet…it seems as though at least a third of the population is driving $20k+ vehicles whenever I am out with my 04 Grand Am (that I overhauled myself, cat and all). Even when considering military personnel and contractors, I have serious doubts that most can even afford the vehicles they drive.

    Car lots are now almost everywhere I go, with many boasting fairly new models in really defunct neighborhoods. I suspect most of these are used vehicles flooding the market. Just for giggles, I will see what numbers there are to tell of this crappy situation and post if I find anything.

    1. While growing up, I used to play poker with my cousins. We didn’t have any money, so the bet would be whatever we made up. We would start at 10-20 bucks, then up the bit to 40 , 80 and so forth. One time we overdid it and I ended up as the winner of millions! The current housing “market” is a similar game with the government’s shameless support of reckless speculation with 1% down payments, allowing foreigners to buy with cash pricing out locals, with housing prices so out of whack that even double the amount of salary for the average worker would still fall short of the recommended house price should be 3x salary equation. And the media whores cheer this scam/sham as signs of a
      “robust” housing market. Let’s all live in million dollar homes and drive shiny cars with money borrowed against said house. What could go wrong?

    2. Update: Yup, still 20% poverty rate by some estimates after years of Fort Bliss expansion. Some say a slight uptick in the median income per capita from 14k in 2000 to above 20k. Pathetic. However, it gets worse. Median housing has been rising beyond 160k. Then there’s Obamacare. Lastly, traffic is being choked with more vehicles every year*, making me doubt the even the soldiers, beaucrats, and contractors who supposedly can afford all this won’t just downgrade for something cheaper…if not quit driving entirely and just carpool. Or both. If that doesn’t convince them, the car thieves will (and like the highways, I don’t think the police force has kept up).

      Speaking of crime, our city boasts a very low crime rate in all categories compared to the national average by citing the FBI Uniform Crime Report. Of course, we all should already know by now that like the BLS, every agency has an incentive to paint a picture that is rosier than reality. From personal observations and just a cursory glance at the numbers, this is just going to get worse before it gets better.

      *(EP’s registered vehicle count for the past 7 years has increased, on average, by 11k PER YEAR. That’s a hell of a lot more cars on the road for a population of at least 650k. Source: http://www.txdmv.gov/reports-and-data. )

  3. The latest ad that is repeated every 15 minutes on the radio
    is, “JUST $99.00 AND A JOB GETS YOU BEHIND THE WHEEL
    OF A BRAND NEW CAR”. As a matter of fact every other ad is
    for new cars or trucks. I’m forced to listen to this while working
    out for an hour and a half. Monday I’m bringing my headphones.

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