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Monday, November 05, 2007

The McMansion Special

The McMansion Special is coming to a bank near you. It consists of a Crispy Credit Crunch with fries and an Alt-A writedown wrap, along with the toppings of your choice. Senior Loan Officer Opinion Survey:
In the October survey, about one-fifth of domestic institutions, on balance, reported that they had tightened their lending standards on C&I loans to large and middle-market firms over the past three months relative to the previous three months. While the net fraction of domestic respondents reporting tighter lending standards over the survey period was only somewhat higher than in the July survey, the fraction of domestic institutions that increased spreads of loan rates over their cost of funds increased sharply in the October survey, to about one-third. Domestic respondents also reported having tightened several other price-related terms on C&I loans to large and middle-market firms over the survey period: Significant net fractions of banks indicated that they had increased the cost of credit lines and premiums charged on loans to riskier borrowers. Regarding non-price-related terms, about one-fifth of domestic banks, on net, reported more stringent covenants on loans to large and middle-market firms.
Commercial Paper Back Up?
According to the October survey, both domestic and to an even greater extent foreign institutions tightened, on net, their lending standards and terms for providing backup lines of credit for commercial paper programs over the past three months.2 About half of the domestic and three-fourths of the foreign respondents reported a tightening of lending standards and terms on backup credit lines for single-seller, multi-seller, and other types of asset-backed commercial paper programs.
The net fraction of domestic banks that reported having tightened their lending standards for commercial real estate loans over the past three months increased notably, to 50 percent, relative to the July survey.
Residential Mortgages?
About 40 percent of respondents indicated that they had tightened their lending standards on prime mortgages, compared with only about 15 percent that reported having done so in the July survey.3 Of the forty banks that originated nontraditional residential loans, 60 percent—up from around 40 percent in the July survey—reported a tightening of their lending standards on such loans over the past three months.4 Finally, five of the nine banks that originated subprime mortgage loans noted that they had tightened their lending standards on such loans—a proportion about as large as in the July survey.5
Other Consumer?
About one-fourth of domestic banks—up from about 10 percent in the July survey—reported that they had tightened their lending standards on consumer loans other than credit card loans over the past three months. Also, moderate net fractions of banks indicated that they had tightened lending terms and conditions on such loans; in particular, they reduced the extent to which such loans were granted to customers who did not meet credit scoring thresholds, and increased minimum credit scores and spreads of loan rates over their cost of funds. A few banks indicated a diminished willingness to make consumer installment loans relative to three months earlier. Lending standards and terms on credit card loans were little changed, on balance, over the past three months, although one-tenth of respondents, on net, reported that they had widened spreads of loan rates over their cost of funds on such loans. About one-fourth of domestic institutions indicated that they had experienced weaker demand for consumer loans of all types, a slightly larger net percentage than in the July survey.
This is basically unprecedented. Note that it is only marginally related to subprime borrowers. This is why the Fed has been easing and will continue to ease. Neither the employment nor GDP releases last week were near as good as they looked on the surface, but it is the credit crunch which is producing rapid recessionary results.

I think there is a really rough correlation developing on other consumer debt and mortgage debts. The bad commercial credit out there is a massive problem.

I'm also really worried about the possibility of intra-company credit tightening. Many industries are experiencing rather tight profit margins due to input cost increases and an inability to pass the costs on to domestic consumers. This means their tolerance for taking their own credit losses is much diminished. NACM's October report looked rather troublesome. Both Services and Manufacturing have turned and are moving down:

Some of the commentary:
“Respondents in the service sector had a lot to say about the economy in October, most of which was not good,” North noted. He also added that the majority of comments predictably focused on the damage done by the housing market decline, but comments came from many other industries:

* Electrical equipment: “We're anticipating a slow down in sales for 2008.”
* Trucking: “Delinquencies are increasing and potential bad debt is on the rise.”
* Plastics: “We have had several companies closed due to their bank not renewing a loan.”
* Food: “It is taking me at least 25% more time to collect the same money.
* Transportation: “Business is getting tougher, collections are much tougher and it looks like it will be this way for some time to come.”
* Finally, from home furnishings came the simple, almost plaintive comment: "Sales are slow."
The squeeze is on, folks!

I finished my calculations last week, and they were rather hair-raising. This week the theory is that we get enough reports to figure out what is raising my hair. Is it real-estate related, or is it consumer debt related?


Got an anecdotal for you - I was talking to a customer (they produce consumer goods and are tied to construction & home remodeling though a bit 'cheap' for the hard core professional market). Think DIY and or 'professional consumable' market... pros who buy the machines for one job, expense them with the house.

We were discussing pricing for 2008 - touchy subject considering input & commodity price increases.

I asked the commodity manager what their forecast looks like for '08 - wondering if there is opportunity for volume discounts. They told me they don't have forecasts yet - the Big Boxes can't tell them anything about their demand 'cause they don't know either. 90 plus percent goes to market through BB stores - Blue, Red and Orange.

Usually by now they have the forecasts done and are deep into budgeting... without a forecast they can't hope to produce an accurate budget.

No one has a clue what the future holds right now...

File under FWIW.
Think there's fear in the finacial markets? Got the memo today that home office wants weekly projections for year end revenue. One down, 7 to go....
Dryfly - sounds like a severe case of "Where are we?"

Certainly not encouraging. The bad results at consumer dealerships are spreading rapidly. Thanks very much for the anecdote.

CF - you've GOT to wonder. This is getting weird just like it was in banking when you'd get one of these slick commercially done proposals, complete with a study about the incredible need for more Miami condos, so the tired and downtrodden would be able to get off the streets. Some of them would almost bring tears to your eyes, unless you'd taken a drive around Miami and looked at the building sites. There was a definite schizophrenic feel to it for a while. Or maybe one of those science fiction alternate universe things.

To me, the world of finance is in the same mode currently.
Oh - Dryfly - the big corporate consumer electronics guys are going nuts trying to get product out. More weirdness. I'm developing a real nervous twitch.
Electrical machinery slowdown does not surprise me. We've seen the trend over the past 6-8 months. We consumed ALL of Siemens motor output in Mexico for two years and now they have aded capacity and we're slowing down domestically.

We've also wiped out production at ABB's plant in Finland for the past 2 years. That demand is not abating and we're still the largest consumer at that plant. All international business.

The Credit card folks and other consumer loan folks seem to think that bumping interest rates up will protect them from losses.
MC - I like the sound of that international business. Is it mostly Europe? JPM's Global Manufacturing PMI shows a slowdown:
However, the rate of growth slowed to its weakest since July 2003, largely as a result of slight contractions in output in the US (first for nine months) and Japan (third decline in the past four months). Growth eased sharply in the Eurozone and the UK, reaching twenty-six and nine-month lows respectively. Asia-Pacific (excluding Japan) was the only major industrialized region covered by the survey to exhibit any noticeable strength in October, with growth of production at its fastest since April 2004 in China, reaching a near four-year high in Australia, and a survey-record high in India. Output in Brazil also rose at a survey record pace.
Vader, you can only raise rates so high before you start causing your own losses. Over the last year CompuCredit's margin has dropped from 26 to below 19.

I always thought the industry were fools. The practices of recent years have been more backstopped by MEW than anything else, and now I think a lot of these companies are going to take it in the kisser. Deservedly so. The bankruptcy reform bill should never have been passed without interest rate and fee protections for consumers.
Despite Economic Growth, Share of Good Jobs Falls

For Immediate Release: November 6, 2007
Contact: Alan Barber, (202) 293-5380 x115

Washington DC— The number of good jobs --jobs that pay at least $17 an hour, and provide health insurance and a pension -- declined by 3.5 million between 2000 and 2006, according to a new report by the Washington, DC-based Center for Economic and Policy Research.

The report, "The Good, The Bad, and the Ugly: Job Quality in the United States over the Three Most Recent Business Cycles," found that the economy has created fewer good jobs in the 2000s than was the case over comparable periods in the 1980s and 1990s.

The research defined a good job as one that pays $17 an hour, or $34,000 annually, has employer-provided health care and offers a pension. The $17 per hour figure is equal to the inflation-adjusted earnings of the typical male worker in 1979, the first year of data analyzed in the report.

Using this definition, the share of good jobs fell 2.6 percentage points, or about 3.5 million jobs, between 2000 and 2006. This decline was much sharper than what the economy experienced over comparable periods in the two preceding business cycles. Between 1979 and 1985, for example, the share of good jobs fell 0.5 percentage points. Between 1989 and 1995, the drop was just 0.l percentage points.

"Economists have a lot of explaining to do," said John Schmitt, an economist and the author of the report. "We generally expect that as the economy grows, job quality will increase. Over the last thirty years, however, the economy has grown by about 70 percent, yet the share of good jobs has been stagnant. The current business cycle has been particularly disappointing."

While the current business cycle has seen an increase in the share of jobs that pay at least $17 an hour, this gain has been more than offset by a decrease in the share of jobs that offer employer-provided health insurance (down 3.1 percent points) and pension coverage (down 4.9 percentage points).

Over the 2000s, the share of women in good jobs declined 0.2 percentage points, undermining small gains made in the 1980s and 1990s. For men, the picture was worse, with a 4.4 percentage-point decline in the share of good jobs, compared to a 1.9 percentage-point decline in the 1990s and a 3.4 percentage-point drop in the 1980s.

"The Good, The Bad, and the Ugly: Job Quality in the United States over the Three Most Recent Business Cycles" analyzed annual data from the March Current Population Survey for the years 1979 through 2006. The report also analyzed trends in bad jobs over the same period.


favorite quote

In earlier research, we examined long-term changes in the share of good and bad jobs in the United
States.22 That research found a flat and even falling share of good jobs, and a rising share of bad
jobs, in the U.S. economy over the quarter century following the end of the 1970s.23 This
disappointing performance coincided with substantial increases in the educational attainment and
median age of the workforce, as well as an almost 70 percent increase in GDP per capita, raising
important questions about the economy's ability over the long-term to convert economic progress
into improved wages and benefits.
Vader, that is precisely the problem.

The engine that cycled prosperity through the economy has been impaired for several decades, and becomes steadily less functional. The grudge I have against Greenspan is founded on his comments on low wages as being part of a "virtuous cycle". It was a vicious cycle, and even Greenspan resorted to sparking two bubbles (tech and housing) in order to try to pump money through the economy. But you can't make a people rich that way.

What caused the Great Depression was a booming economy in which the rewards of that economy were confined to quite small portion of the population. This sparked two bubbles founded on unbelievably loose credit, and then consumption collapsed. Then as now, the same factors dominated internationally.
The 'good jobs' report is interesting, but I have to say, as someone who just turned 30, that I simply don't expect a job to provide me with a pension to provide for my retirement. That's what a 401(k) is for (and, possibly, a scaled back version of social security). Maybe I've just drunk the kool-aid.

I'm starting to think collections is the growth industry now ;) Had a call last night from a customer who accidently had her debit card entered as an autopay (instead of a one time pay). She was frantic. She'd been charged $144 from her account and she had just been able to do $20 payments. She's a middle school teacher and told me that it left her with about $100 for groceries for the month and that she already wasn't able to pay her rent. When she told me "You have no idea", I cut that one pretty short. Anyway billing reversed the charges, so I guess she'll be able to eat this month.

Mostly what I see so far are dialup customer dropping their internet. I suspect that fast internet connections will be like cable tv, one of the last things people give up. But I'd say that I'm starting to talk to a lot more cranky people these days.
Watching this is like watching a propane truck with 4 bad tires and no brakes make it from the california crest to south lake Tahoe on HWY 50.the driver has been running on speed for a week,and is sipping a beer to even things out while the hooker he picked up in sacramento pays for her ride...
"the big corporate consumer electronics guys are going nuts trying to get product out"..do you mean "get product out" as in making it, or as in selling it?
David - Design to mfr in a few short weeks! It makes me think about Apple's proliferating models.

Dan - does anyone in the private sector expect pensions nowdays? I don't think so.

Teri - people are feeling the pressure, no doubt about it.

Anon - I HOPE that's a bit of an exaggerated metaphor.
I've used the following example of the new capitalism.

Lend money to Prime Customer.
Lend more money to Prime Customer.
Lend yet more money to Prime Customer.

Charge late fees.
Charge fees to restructure debt.

Lend money to formerly Prime Customer
Lend more money to formerly Prime Customer.
Lend too much money to formerly Prime Customer.

Charge late fees.
Charge fees to restructure debt.

Lend money to SubPrime Customer
Lend more money to SubPrime Customer.
Lend too much money to SubPrime Customer.

Charge late fees.
Charge fees to restructure debt.

Make Payday Loans to deadbeat
Make Title Loans to deadbeat.

Charge Debt Counciling fees
Charge Bankruptcy Fees.
Charge Commission to sell house.

The growth occupations that a person without specialized training(Lately you can have a college degree, but with detailed experience in a area, you are sunk) will be able to do are: Sitting the aging baby boomers with money and debt collections. Both pay about $10/hr with no benefits.
vader..."The research defined a good job as one that pays $17 an hour, or $34,000 annually, has employer-provided health care and offers a pension"...methodology here may be questionable. The $17/hr number should be adjusted by a regional cost-of-living index; if not, then demographic shifts could lead to an apparent decline in "good job." Also, the text of the report indicates that "offers a pension" means that if there is a 401K plan, the employee has *elected to participate* in that plan.

What exactly do you consider as a 'bad' wage?

I find it difficult to pay mortgage, utilities, car payments, groceries, health insurance on 40,000 here in Alabama for a family of 3.

I'm starting to think collections is the growth industry now ;)

It is and you have given me yet another reason to be scarcastically optimistic!

21st Century Growth: An Optimist's Perspective
Vader..understandable. It would be a lot more difficult, however, in NYC or DC or LA. My point is not to argue at what level "good wage" should be defined, but rather that it should be defined differently in different places.
I cannot understand very much about this topic, but the bamboo is whishing to be knocked in like a feeka-driven jumbo-jet which is going to cull some gringos.

Sgufala is the right way!

Sguffalo Bill

I Think the guy picked the US median wage and went from there.

You may be interested in this article also:


The author calculates that an income of $8,748 or $104,976 annually is needed for the average family.
I read that article yesterday. I've got diary entries from the 80s where I bought 50 pounds bulk wheat and can compare that to the stuff I bought this year. It's doubled in price. (Wish I'd kept better records. FYI, honey has more than doubled.)Anyone who buys groceries knows that prices are going through the roof. My husband used to do the shopping and is appalled when I tell him how much things cost now. They've gone up that much in two years.
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