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Tuesday, July 31, 2007

I'm Not Really A Pessimist

Really, I'm not. I'm a raving optimist by most people's standards. I'm a cheerful person too. Today I had to deal with the saddest looking, droopiest tech I have ever encountered. By the end I had him laughing. (He's got twins just about to turn one, and it's driving him nuts!) I have had enough tough times in life to appreciate the value of an optimistic outlook.

That's why it bugs me to have to keep writing these pessimistic blurbs about the economy. But what is, is. If you haven't brought in your financial brass monkeys, now is the time to do so.

I finished the walkabout first stage (hint - don't think you can casually wander into your local bank and inquire about CD rates. A horde of determined people will descend to take your money.) Then I swung by my mother's house to take care of some stuff there. I've pretty much been sitting around waiting for people to come while sorting through piles of old papers - you know how that goes. Today the phone company finally came and installed FIOS, so now I'm back online and I'll be blogging pretty regularly.

AHM finally blew its top. Here's a quote from a Bloomberg article gloomily prognosticating a Street meltdown:
Jeremy Grantham, the money manager who oversees $150 billion as chairman of Grantham, Mayo, Van Otterloo & Co. LLC, said credit-market declines may force as many as half of all hedge funds to close in the next five years.
Grantham said investors putting money into private-equity funds will lose most of their money because of the amount of leverage used in deals and profit-sapping fees. An overload of debt will sink at least a couple ``very large'' firms. He didn't say which firms may be imperiled.

``These guys are in a big hole,'' he said. ``Most of the money going into private equity today will be a total loss.''
He's more pessimistic than I am (I only expect about 25-34% of hedge funds to shut down) but one thing is unquestionably true: there is no chance of all this being confined to subprime, nor to just subprime and Alt-A, and a lot of corporate credit is less secure than these subprime loans. Every time some Fed head starts talking about "subprime", mentally change that to "lending", and you'll immediately understand just how ridiculous the statement is. The impact of this should be beginning to propagate through the rest of the economy in September or so, although of course it is happening right now in finance.

One of the things that worried me the most is that in the Northeast, I think the downdraft is now coming from the top AND the bottom. This is not the case in the South yet, so I'm glad I did this.

But be of good cheer. In a few years, money is going to buy a lot more in the domestic economy than it does now for many asset classes. Every cloud really does have a silver lining. Treasury yields are going down because of a flight to safety which is causing their price to rise.

Saturday, July 21, 2007

What's Going On In The Credit Markets

Well, plausible deniability is fading fast. The commercial loan indexes are moving almost in concert with MBS indexes. The bottom line is that the money bag is closing fast, and the long forecast credit contraction is well underway. The week's trading produced broad-based declines in financial stocks because of expected losses.

It seems very likely that non-prime loans written over the last few months will have trouble finding buyers except at a discount. Commercial loans will probably encounter a similar fate, meaning that another wave of bankruptcies in mortgage companies is pending. In effect the game of musical loans has just about stopped; everyone's going to be stuck with what they have, and what happens from here is a function of how irresponsible the originator was. This includes leveraged buyout debt, commercial and industrial loans, commercial mortgages and even those reams of auto loans for 15-20% more than the car securing the loan is worth.

Even the Fed has stopped claiming that the problem is limited to subprime loans. The Fed remains delusional, at least in public, about the effect on the economy though.

This is the list of states reporting increases in initial claims of over 1,000 in the latest weekly unemployment report:
ND +1,156 Layoffs in the manufacturing industry.
WA +1,250 No comment.
PR +1,422 No comment.
MN +1,431 Layoffs in the construction and manufacturing industries.
OK +1,698 No comment.
TN +1,709 Layoffs in the rubber/plastics, industrial machinery, transportation equipment, and fabricated metals industries.
KS +1,725 Layoffs in the manufacturing industry.
AL +1,880 Layoffs in the transportation equipment and service industries.
CA +2,023 Layoffs in the service industry.
OR +2,220 No comment.
AR +2,264 Layoffs in the manufacturing industry.
GA +2,854 Layoffs in the service industry.
MO +3,361 Layoffs in the transportation, warehousing, and manufacturing industries.
IL +3,504 Layoffs in the trade, service, and manufacturing industries.
IA +4,047 Layoffs in the manufacturing industry.
IN +5,855 Layoffs in the automobile industry.
PA +6,721 Layoffs in the food, chemical, leather goods, and fabricated metals industries.
WI +11,835 Layoffs in the construction, service, transportation, warehousing, and manufacturing industries.
NY +12,223 Layoffs in the transportation, service, and public administration industries.
OH +12,830 Layoffs in the automobile industry.
MI +31,282 Layoffs in the automobile industry.
This is the list from the prior week:
CA +1,161 Layoffs in the service industry.
NC +1,170 Layoffs in the transportation equipment and furniture industries.
CT +1,375 No comment.
MI +1,813 Layoffs in the automobile industry.
IN +1,993 Layoffs in the automobile industry.
NJ +2,127 Layoffs in the transportation, warehousing, public administration, construction, trade, and service industries.
KY +2,416 Layoffs in the automobile and manufacturing industries.
NY +3,974 Layoffs in the transportation and service industries.
Poor auto and truck sales are leading to another round of auto layoffs, but what is happening is a wide-spread phenomenon. Spending is tightening up fast for businesses and consumers.

Bloomberg has had some pretty good coverage of events as they unfold.

Defaults on all consumer and business debt will start moving up pretty rapidly.. Younger people should pay a lot of attention to this. Watch what is happening where you live; a credit bust such as this one is pretty rare and a remarkable phenomenon. The effects seem to appear almost overnight, although the causes of those effects always build for years beforehand. These events are very predictable, but so ugly that no one wants to tell the truth about what is going to happen.

Inflation will tend to start dropping now.

The cause of the recession following a bubbly credit expansion is the inevitable credit contraction. The credit contraction occurs because bad debts have to be written off, so the effective supply of free money sharply contracts. The result is that the monetary circulatory system gets blocked at the top (large banks and financial companies). Because the top level institutions are not buying nearly as much debt (they can't monetize it), the mid-level banks and other lenders are forced to become overcautious in lending, and finally, the smaller creditors become desperate for cash and begin to call in pretty good loans. The real beginning of this credit contraction appeared to be just a couple of weeks ago, and it will be in full swing by fall.

I will be out of touch for another week, week and a half. Partly I'm wandering around and talking to people, especially bankers in the smaller banks. I was quite surprised by the signs of recession in the Carolinas, and now I'm in the NJ/PA/NY on walkabout. In general, things seem better in comparison, but there are a lot of houses for sale, many of them advertised as FSBO. The first "For Rent" signs are beginning to crop up too. You can see the cracks beginning to appear.

The amount of total debt (Federal Reserve commercial paper outstanding) is unbelievable; some of this is just pure junk that will never be paid back. Over the next couple of months watch these curves take a drop:

And this is just commercial debt; residential mortgages have ballooned upward too. Mortgage rates continued to rise last week. Treasury yields dropped as T-Bills became more attractive, but it's unlikely that the risks in the mortgage marketplace will allow mortgage rates to follow treasury yields down. Competition for loans is still pushing mortgage rates below what they should be in this environment; they should be about 50 basis points higher in most areas according to the way I calculate it.

Lord only knows what is happening at the GSE's (FNMA, etc). They do handle (and have bought in the past) a lot of subprime and adjustable loans, and prime loans in some areas will probably have increased default rates over the next few years.

Wednesday, July 18, 2007

Still Alive

Brilliantly, I left my medicine at home. So I diverted by the doctor's. Rumors of my impending demise have been much exaggerated, I told the doc. He had to agree.

I wish I had some good economic news, but I don't. The economy really looks to be softening on the East Coast in a major way. I have talked to a few financial types, but you don't even need to do that to see it.

Despite all those bargains hotels are offering, I still can't get their internet to really work. So this is coming from Barnes & Noble. They CHARGE! But it works.

Saturday, July 14, 2007

Leaving On A Jet Plane...

Actually I'm not leaving on a jet plane, instead I am driving. I doubt I'll have internet access, so it's goodbye for four or five days at least.

In the meantime, I leave you to contemplate squirrel spies caught on the Iranian border:
"In recent weeks, intelligence operatives have arrested 14 squirrels within Iran's borders," state-sponsored news agency IRNA reported. "The squirrels were carrying spy gear of foreign agencies, and were stopped before they could act, thanks to the alertness of our intelligence services."

Iranian police commander Esmaeil Ahmadi-Moqadam confirmed the report, saying that a number of squirrels had been caught bearing foreign spy gear within Iran's borders.
The comments on the linked article are rather humorous. Such as:
Rocky the flying squirrel:
Made it to Tehran with the elite squad of Mossad trained squirrels. Just a matter of time before they infiltrate the nuclear power plants. Over and out.
No word on whether the Red Cross has been permitted to visit the detained squirrels.

Nobel peace prize winners are reputed to be organizing a series of protest marches in Europe against the dastardly CIA operatives. Word has it that the German police are seeking more information through diplomatic channels, now suspecting that the recent squirrel attack there was perpetrated by one of these operatives. The motive is reputed to be rage at reading the latest European pacifist's call to hang, draw and quarter Bush. (The squirrels are rumored to be fiercely loyal to the Bush-Cheney cabal. Unfortunately, they are the only contingent still loyal.)

I leave it to the brilliant but paranoid minds out in the blogosphere to determine whether my sudden trip has anything to do with this international crisis. (I could tell you, but then I'd have to kill you.) Believe me, the geese had nothing to do with it!! We are absolutely not releasing giant flocks of bird-flu infected geese on the Iraqi-Iranian border! I swear it!!! (But if you want to be cautious, try and shoot them all down anyway. It couldn't hurt, right?)

"Those who the gods wish to destroy, they first make mad." - Euripedes.

Friday, July 13, 2007

Eye On The Ball: Truck Tonnage May

Trucking isn't seeing a mfrg expansion either:
Costello said one of the primary reasons for the continued year-over-year index contractions is that manufacturing activity by weight, not value, fell again in May. Manufacturing activity declined 1.4 percent when compared with the same month in 2006. This marked the seventh consecutive month that this weight-based manufacturing measure fell.

“The fact that the year-over-year comparison for truck tonnage worsened to a negative 3.6 percent from April’s minus 2.7 percent is troubling,” said Costello. “We fully anticipated a contraction, but the fact that it deteriorated may mean that more volatility is in store. Unfortunately, we won’t have a good feel for the direction of volumes until we see June’s data.”

Trucking serves as a barometer of the U.S. economy because it represents nearly 70 percent of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods.
Rail figures are poor too. Through June:
U.S. freight railroad carload traffic fell 2.7 percent in June 2007 compared with June 2006, while intermodal traffic fell 1.8 percent compared with the same month last year, the Association of American Railroads (AAR) reported today.
In the second quarter of 2007, total U.S. rail carloadings were down 3.3 percent (147,011 carloads) to 4,305,761 carloads, while intermodal traffic, which consists of trailers and containers on flat cars and is not included in carload figures, was down 2.6 percent (81,992 units) to 3,013,336 trailers and containers.
Total volume through the first half of 2007 was estimated at 857.9 billion ton-miles, down 2.8 percent from the first 26 weeks of 2006.
June decline in metals may well mean a manufacturing slowdown, IMO. What we are hoping for, since consumers are not resilient at all, is that the global economy is and that US manufacturing and global industry gradually picks up as we sell more to the rest of the world in order to compensate for poor sales to the consumer side of the economy.

But right now, with reported manufacturing job losses, etc, and declines in measures of real activity, it doesn't really seem to have materialized yet.

June Advance Retail

June's advance retail report kinda looks like consumers got their credit card bills from May. Most categories of spending were down from May.

Seasonally adjusted total retail & food services:
May: 377,287
June: 373,946
NSA figures:
May: 397,784
June: 381,702
On a non-seasonally adjusted basis, the only category which increased was hobby, music, sports. On an SA basis (including adjustments for holiday and trading-day differences), groceries, non-store retailer, hobby-music-sports, health and personal care, and restaurants-bars eked out gains, but motor vehicles-parts, gas stations, general merchandise, electronics, and clothing stores lost.

According to Table 1B, a YoY comparison of the first six months of sales in 2007 to the first six months of 2006 shows that gas sales increased 1.8% (less than inflation) and grocery stores increased 5.8% (less than inflation). Rough.

I'd feel better about all this if crude prices weren't rising so rapidly. Gas prices are now following crude up.

Taking consumer credit and retail sales reports since March, it looks like the pain is spreading. We've got a split in which the people who can spend are (confirmed by chain stores), but probably the bottom 60-65% of the population is in the inflation squeeze. It's all very 70's.

High DTI mortgages, including prime, FHA & MyCommunity, regardless of resets, are now dicey with these spending patterns.

A lot of Americans are going to have to learn to cook at home again!!!

Thursday, July 12, 2007

Slumpy Retail And Slowly Rising Unemployment

The great debate over construction jobs continues, but is slowly being made irrelevant by signs of diffusion such as retail job losses. Continuing claims are moving higher too. More layoffs in transportation, services, etc.

Store chain sales figures are coming in. Industry analysts seem to have stopped blaming everything on cold weather (possibly influenced by the Live Earth concerts), and now strike a sobering note:
Retail sales for the past five months have averaged a gain of about 2.1 percent, compared with 3.9 percent a year earlier, Michael Niemira, chief economist at the ICSC, said July 10. Same-store sales are an industry benchmark because they exclude results from new or closed locations.
``Retailers became even more aggressive at discounting their products,'' Eric Beder, an analyst at Brean Murray Carret & Co. in New York, said July 10. Retailers ``are just trying to minimize their losses.''
Costco and Sam's Club continue to be the big low-end gainers. WalMart reported sames store sales up 2.4%, which sounds good until you realize that the supercenters were only up 1.6% while Sams Club was up 6.9%, and that the big gain in sales for the supercenters was in stuff like groceries with relatively low profit margins and that higher profit margin items like apparel were "weak". Costco rose 6%.

The mall crew (Sears, JC Penneys, Macy's) continued slow sales. By "slow", we mean declining nominal sales. Now is the time to recycle all of that NAR verbiage from last year. There is going to be a retail analyst's bull market in words such as "slow, softening, sliding, soft, and slack".

AFAIK, the real story is that consumer needs inflation is catching up with consumers, and that MEW is no longer helping to defuse the situation as much. Now it's down to the shorter term consumer debt, but that has to be paid back at higher interest rates over a shorter time span, so it is far more painful to finance your living expenses that way. Consumer credit for May. Note the 9.8% annualized increase in revolving (credit card) debt. That won't continue for long!

Real personal disposable income dropped for the last two months reported.

Oh, and oil moving above $75 is not a good sign. Worse yet:
Investors and analysts have cited speculative buying by hedge funds and pension funds as one key factor behind the latest oil rally.

"This (recent) rally is very much fund driven... The entry of long-only hedge funds into the market is a major factor this time around. We wouldn't rule out Brent hitting $80 this summer," said Graham Sharp, director and one of the funding partners at commodities trading group Trafigura.

Tuesday, July 10, 2007

History Is About To Catch Up With Us

Shrinkwrapped gets it, and also see the links to his post.

Europe, as a political entity, does not get it. The more things change the more they remain the same.

S&P Subprime Massacre

Standard & Poors released information putting 612 classes on ratings watch negative with the expectation of downgrading them. Overall these ratings affect 2.13% of the total RMBS outstanding.

The overall effect of this release is to warn a whole lot of suckers that they had better clear their investment-graded paper while it is still investment graded.

Among the juicy details in their releases was that they are now going to be more cautious in leaving the ratings of higher-rated tranches unchanged when they downgrade lower tranches, they expect the overall housing situation to continue to worsen, they are going to review the CDO's containing any of this junk once they get done with the junk itself, and they have increased their expected loss (severity) from 33% to 40%.
In addition, we have modified our approach to reviewing the ratings on senior classes in a transaction in which subordinate classes have been downgraded. Historically, our practice has been to maintain a rating on any class that has passed our stress assumptions and has had at least the same level of outstanding credit enhancement as it had at issuance. Going forward, there will be a higher degree of correlation between the rating actions on classes located sequentially in the capital structure. A class will have to demonstrate a higher level of relative protection to maintain its rating when the class immediately subordinate to it is being downgraded.
They can't tell what's good and what's not from the data:
Data quality is fundamental to our rating analysis. The loan performance associated with the data to date has been anomalous in a way that calls into question the accuracy of some of the initial data provided to us regarding the loan and borrower characteristics. A discriminate analysis was performed to identify the characteristics associated with the group of transactions performing within initial expectations and those performing below initial expectations. The following characteristics associated with each group were analyzed: LTV, CLTV, FICO, debt-to-income (DTI), weighted-average coupon (WAC), margin, payment cap, rate adjustment frequency, periodic rate cap on first adjustment, periodic rate cap subsequent to first adjustment, lifetime max rate, term, and issuer. Our results show no statistically significant differentiation between the two groups of transactions on any of the above characteristics.
So they gave up and just made up a methodology. They are changing their models. But my goodness gracious, these recent vintages are setting new records for losses:
Total aggregate losses on all subprime transactions issued since the fourth quarter of 2005 is 29 basis points, as compared with 7 basis points for similar transactions issued in 2000. Transactions from the 2000 vintage are used as a comparison because they were, up until now, the worst performing vintage of this decade. When recent transactions with the same seasoning are compared on a quarterly basis with similar transactions issued in 2000, we find that both mean losses and standard deviations are running in excess of the 2000 book for the fourth quarter of 2005 through the fourth quarter of 2006.
The figure they are using for overall home devaluation is 8% from 2006 to 2008. They use 22% for B grade tranches but they note that the environment is worsening. Both are too optimistic. Also, both mean little when your LTVs mean little (bogus appraisals).

They also comment that they believe the same risk factors are present in 2007 vintages and they will apply their new methodology to those vintages. They will now concentrate much more on the quality of the originators in rating new issues.

Monday, July 09, 2007

Turkish Delight?

Turkey has worried me for a long while, and the situation isn't getting any better.

The probable AKP gain of the presidency is not leaving the opposition with much in the way of political options.

The NY Times, as normal, has its collective head up its collective butt.

Sunday, July 08, 2007

Congress And FISA

Carl of No Oil For Pacifists wrote an excellent summary, including necessary background, of the NSA case just decided (Anna Diggs Taylor gets her comeuppance). I urge everyone to read it.

There is another unrelated court decision from the Ninth Circuit which also is relevant. SF Chronicle:
Federal agents do not need a search warrant to monitor a suspect's computer use and determine the e-mail addresses and Web pages the suspect is contacting, a federal appeals court ruled Friday.

In a drug case from San Diego County, the Ninth U.S. Circuit Court of Appeals in San Francisco likened computer surveillance to the "pen register" devices that officers use to pinpoint the phone numbers a suspect dials, without listening to the phone calls themselves.

The U.S. Supreme Court upheld the use of pen registers in 1979, saying callers have no right to conceal from the government the numbers they communicate electronically to the phone companies that carry their calls.

Federal law requires court approval for a pen register. But because it is not considered a search, authorities do not need a search warrant, which would require them to show that the surveillance is likely to produce evidence of a crime.

They also do not need a wiretap order, which would require them to show that less intrusive methods of surveillance have failed or would be futile.

In Friday's ruling, the court said computer users should know that they lose privacy protections with e-mail and Web site addresses when they are communicated to the company whose equipment carries the messages.

Likewise, the court said, although the government learns what computer sites someone visited, "it does not find out the contents of the messages or the particular pages on the Web sites the person viewed."

The search is no more intrusive than officers' examination of a list of phone numbers or the outside of a mailed package, neither of which requires a warrant, Judge Raymond Fisher said in the 3-0 ruling.
The situation we are facing is not an easy one. On the one hand, Americans have just suspicion (deeply in tune with the Constitution) that government can run wild with surveillance. On the other hand, the media and the left are misrepresenting the truth of what is actually occurring. Nor can we afford NOT to employ some broadcast surveillance, because the threat of terrorism is very real (and all of that threat does not stem from Islamic fanatics, either - think Korea and the Kim cult).

This is one of the cases in which the public needs to make some decisions on their own. Congress and the President share some powers in the matter of exercising military oversight, and it is Congress which must limit or institute oversight of the constitutional presidential mandate to direct the military and espionage. Congress has refused to deal with the necessities of the current situation, and in doing so, it has thrown a nasty curve ball to the courts. The current FISA statute was really constructed to deal with telephone systems rather than the internet, and land and sea line telephone systems instead of satellite communications. Not only that, but after the pasasage of FISA, Congress funded the systems that allow NSA to intercept and filter modern communications, thus obviously endorsing that effort (especially under the Clinton administration). What made sense for point-to-point communications in 1978 makes no sense for pooled communications, and that is why all of this keeps bouncing around in the court system without much satisfaction for either side.

There are several unreasonable positions emerging:
1) Libertarianish rightists who want no surveillance, but recognize the very real danger of Islamic terrorism. Their solution? Throw out or kill all the Muslims. Needless to say this is as unconstitutional as we can get, and it terrifies me. See the comments to Shrinkwrapped's post, and I think most rational people will agree that this is no solution. It's pretty bad when a courteous, reasonable, humanistic person like Shrinkwrapped keeps getting this sort of response every time he writes about the genuine threat of Islamic fanaticism.
2) Leftish moonbats who believe that Bush and Cheney are the font of all terrorism, and want no surveillance. Their solution? Either ignore the security problem altogether, or deal with it by throwing out Bush and Cheney. See these DU comments on the news of the decision in the NSA ACLU challenge.
3) The average citizen who ignores the issue altogether. I would bet most of us would like allowable parameters for warrantless surveillance laid out. The only way we can get what we want is to get involved and figure out what is acceptable. That's why I suggest that everyone sit down and think about the issue.

The Doctor's Plot makes it clear that the threat of spontaneous organized domestic violence is real. It also strongly suggests that the ability to communicate is necessary to organize a group large enough to commit serious violence. The internet is a great way to organize such plots. Nor is the distinction between foreign/domestic communications meaningful in context of the internet. For example, there is nothing to stop an Al-Qaeda group in Pakistan from setting up a website on a server located in the US.

Should it be legal for the US government to monitor an Islamist site discussing terrorism that is located in the Cayman Islands, but illegal to monitor the same site that is located in LA? My answer is no; monitor both sites. If any action is taken from information gained by monitoring and it is targeted toward a domestic user, I am generally okay with requiring a warrant for domestic phone tapping of a suspect, providing the definition of "probable cause" isn't set too high. But I want the government to find such suspects. (There is no question that it is legal for the government to monitor a foreign suspect's phone calls.)

Suppose the US government monitors such a website and discovers that a particular foreign person is responding to requests for contact and aid from wannabe splodey dopes. The current law is that the government needs no warrant to tap a foreign phone account if it does so overseas, even if it turns out that the foreigner is calling and receiving calls from within the US. I have no problem with that. Do you?

The ACLU appears to have a major problem with it, which I think would make the average citizen wonder just who composes the ACLU and what in the heck they are doing calling terrorists. I know darned well that none of my communications are going to be chilled by an NSA monitoring program, and I shrewdly suspect that the same is true for the entire population of my home county, Pakistani immigrants included. I understand perfectly why Greenpeace was a party to the original lawsuit, because some of those whackos do indeed believe in explosive tactics, and I think there probably is a chilling effect on their global communications. I doubt, however, that the average American citizen considers that a bad thing. Remember, the tapping of international communications if those communications had a domestic side was the point at issue in the NSA challenge. This is how the most esteemed Anna Diggs Taylor phrases it:
This is a challenge to the legality of a secret program (hereinafter “TSP”) undisputedly inaugurated by the National Security Agency (hereinafter “NSA”) at least by 2002 and continuing today, which intercepts without benefit of warrant or other judicial approval, prior or subsequent, the international telephone and internet communications of numerous persons and organizations within this country.
That's the issue. Not listening in on a call that one Greenpeace organizer makes from one point within the US to another point within the US, but rather the possibility that a call that comes from a foreign phone to a US Greenpeace organizer is monitored. N

ow let's come down to the issue of probable cause for a case in which the FBI wants to monitor the phone calls of a US resident who has been contributing to such a terrorism-linked site. What is the adequate definition of probable cause? If it is set too low, anyone who happened to wander into such a site could be wiretapped. If it is set too high, a person who has spent the last two years praising bomb plots and splodey dopes and asking wistfully for advice about effective bomb-making on this website might not be monitored. Clearly there is some middle ground, but that is why it is important to read the original opinion of The Supreme Tigress in Defense of the Constitution, Anna Diggs Taylor. It is not always the case that any given judge's definition of "reasonable" would accord with the average person's or indeed the average judge's definition. Remember, our Anna of Apoplectic Arrogance managed to get from tapping of international telephone and internet communications to proceed as follows:
Many of their communications are and have been with persons in the Middle East. Each Plaintiff has alleged a “well founded belief” that he, she, or it, has been subjected to Defendants’ interceptions, and that the TSP not only injures them specifically and directly, but that the TSP substantially chills and impairs their constitutionally protected communications. Persons abroad who before the program spoke with them by telephone or internet will no longer do so.
I wonder why? Oddly enough, I don't know any people who have experienced their foreign contacts hanging up on them because they fear NSA. But maybe it is different for Greenpeace, the ACLU, CAIR, etc. Just to make sure we are all on the same page, the desire of the plaintiffs in this case is that if NSA is monitoring a foreign number or email address because they have flagged it as possibly in use by terrorists, the NSA should cease to monitor the number or email address pronto if a call or message is originated to or from the United States. I am pretty doubtful that the average American citizen would consider this a reasonable procedure. The average American citizen doesn't care all that much about preventing terrorism in other countries, but cares a lot that their local courthouse or airport doesn't detonate unexpectedly. So maybe you are not seeing the injury, but that's because you have not read the original decision by our esteemed Taylor. By page 18 we are getting down to the meat of it:
Plaintiffs here contend that the TSP has interfered with their ability to carry out their professional responsibilities in a variety of ways, including that the TSP has had a significant impact on their ability to talk with sources, locate witnesses, conduct scholarship, engage in advocacy and communicate with persons who are outside of the United States, including in the Middle East and Asia. Plaintiffs have submitted several declarations to that effect. For example, scholars and journalists such as plaintiffs Tara McKelvey, Larry Diamond, and Barnett Rubin indicate that they must conduct extensive research in the Middle East, Africa, and Asia, and must communicate with individuals abroad whom the United States government believes to be terrorist suspects or to be associated with terrorist organizations.12 In addition, attorneys Nancy Hollander, William Swor, Joshua Dratel, Mohammed Abdrabboh, and Nabih Ayad indicate that they must also communicate with individuals abroad whom the United States government believes to be terrorist suspects or to be associated with terrorist organizations,13 and must discuss confidential information over the phone and email with their international clients.14 All of the Plaintiffs contend that the TSP has caused clients, witnesses and sources to discontinue their communications with plaintiffs out of fear that their communications will be intercepted.15 They also allege injury based on the increased financial burden they incur in having to travel substantial distances to meet personally with their clients and others relevant to their cases.16

The ability to communicate confidentially is an indispensable part of the attorney-client relationship.
So there's the injury. It is making it more expensive to defend accused terrorists. Again, I am pretty sure I could ask every person in my home county about this pressing and most serious problem without finding one person who believes that it is more important to ensure that the lawyer defending the person who is accused of plotting to blow up the local courthouse incurs no additional travel expenses than to prevent the courthouse from being blown up. In all honesty, I think I would get a 100% agreement on the reversal of these priorities.

After citing case law on page 19 that utterly blows away the "chill" argument, our Amicable Anna purports to explain it away on the basis of this terrifying and incredibly concrete injury, and is still darkly brooding about this same injury on page 21:
Plaintiffs would be able to continue using the telephone and email in the execution of their professional responsibilities if the Defendants were not undisputedly and admittedly conducting warrantless wiretaps of conversations.
We are still, btw, discussing the subject of standing. By page 24 we have the admission that there have been no requests for search warrants, no prosecutions and no investigations, but this, it is darkly alleged, is precisely the problem that causes the injury. At this point the average citizen of my home county (which, for reasons of confidentiality, we shall refer to as Patriotic Podunk) would be thinking hey, if the government isn't chasing you why the heck are you complaining? It goes on, but this gets too long.

I want to encourage everyone on both sides of the issue to step back and think for themselves. There is no question that American citizens want the powers of the US government to be constrained. Allowing extremists of any ilk to dominate the decision-making process will not get us where we want to go, however.

The question of whether FISA can prevent the President from listening to a conversation originating from the continental United States while monitoring a foreign source with domestic resources is still open. The claims that it does are not going to succeed in the abstract, because by that contention it would have been illegal for the United States government to have listened in on a call to Saddam Hussein's private line during 2003 (war) if such a call had stemmed from Patriotic Podunk County, Georgia, unless, that is, a warrant was obtained through the FISA court. Indeed, if one accepts Taylor's opinion at face value (which ends in bare assertions untrammelled by case law), that would be the effect and meaning of FISA.

But such an effect and scope is clearly a violation of the Constitution assignment of powers to the Executive as explicated by the US Supreme Court. Under our Constitution, even Congress doesn't get to modify Presidential powers as enumerated in the Constitution unless it does so by amending the Constitution. Therefore that cannot be the effect of FISA. It must somehow be more limited.

There are obviously lesser circumstances in which Congress does have the power to modify the acceptable range of the Executive under the US Constitution by explication through legislation - but Congress has refused to address what would be doable and realistic given modern communication systems. Its failure to update FISA is what is making us insecure. This is a situation which Congress should address, but I note with great interest that the Democratically controlled Congress somehow has wandered away from this pressing issue in a fit of abstraction. Clearly they do not want to take the heat on this issue, and it is just as clear that if this is an injury to the body politic, Congress has the constitutional right and duty to act by legislation.

I believe that spinsters and extremists like this particular situation. I do not believe that the average American finds it comfortable. It is time for us all to sit down and figure out what we believe and then discuss the current situation with our Congressional Critters. If this is done as the Constitution is set up to allow, then when circumstances change the law can change. If we leave it in the hands of the federal courts, not only the courts but the citizens are unlikely to like the results. Most justices are considerably more trammelled by the law than Anna Diggs Taylor, and so they are aware of the possible scope of their rulings. They will thus try to create a workable set of guidelines for what FISA can constitutionally mean and do. Those guidelines may not be what the average American wants FISA to mean and do.

Congress wrote FISA. Congress can update it. Congress should update it. Congress won't unless the American people fry Congress on an electoral griddle. Congress is wimpy in the extreme, and wants to spin problems rather than solving them.

Friday, July 06, 2007


I looked at the employment release, and I'll post some comments on it tomorrow. I have a hunch that the employment report is now understating manufacturing employment even while it's overstating construction employment. The B/D model distortions could easily be working in opposite directions. Until then, Calculated Risk has a post up with excellent comments debating the situation.

Consumer credit G.19 might be out later today (at three). Alfred (Archival Federal Reserve Data) is really good, if you are developing an interest in such things.

The 6th Circuit knocked down the somewhat hysterical decision about wiretap surveillance by The Most Honorable Defender of the Innocent, Upholder of the Righteous, Supreme Recognizer of the Essence of the Law, The Most Supremely Just Anna Diggs Taylor by ruling that the suing parties lacked standing due to the minor technical difficulty that not one of them actually had any evidence of having been monitored. It was 2-1, and everyone thinks it's going back for another round. Volokh. I am hoping Carl will post on this one later. Ann Althouse did post, and has links to her earlier comments. The Circuit's opinion is here (pdf, 65 pgs). No word on what Taylor is thinking now, but here is her original opinion.

I wonder if the usual sides are going to adjust their positions on this one? After all, the doctor's plot makes it clear why monitoring internet and other communications networks is effective and necessary. Right now the program is being run under the auspices of the special FISA court. I do not think they will be turning down many requests.

Thursday, July 05, 2007

Riddle Me TWIP

TWIP = This Week In Petroleum. A zippy weekly read, I can assure you.

If anyone can explain this seeming violation of the laws of supply and demand, please do.

Future prices on crude oil continue to rise, while in the US, at least, crude oil stocks are signficantly above their five year averages:

But gasoline prices are dropping nationwide, even though gasoline stocks dropped this week and are nearly 10% below (-9.8) last year's stock. Darned if I can make any sense out of this one!!!

Diesel is beginning to inch up.

Employment - Pick Your Preferred Numbers

ADP releases a monthly employment report for private employment. As quoted by Bloomberg, the June report seems very, very strong indeed:
The 150,000 increase, the biggest in seven months, followed a revised gain of 98,000 in May, ADP Employer Services said.
Today's report showed a gain of 163,000 jobs among service industries. Employment at goods-producing companies, which include manufacturers and construction firms, dropped 13,000.

Payrolls at companies employing more than 499 workers fell by 4,000 last month. Medium-sized businesses, with 50 to 499 employees, added 63,000 jobs and small companies increased payrolls by 91,000.
These ADP numbers are in line with the ISM reports, so they have some backup (although ISM generally shows manufacturing to be adding employees, and this and other employment reports show manufacturing shedding employees). The answer to that is likely to be that the largest companies are shedding while smaller companies are hiring, but the losses at larger companies (which dominate manufacturing) are overshadowing growth at smaller firms. Alternatively, you could speculate that smaller companies are adding employees but that these employees are not being counted due to survey design. Either explanation could be true.

Today's initial claims report did not look good. Initial claims moved higher and the four-week running average moved higher. But at 318,000 (SA) initial claims do not look bad. However, both SA and NSA continuing claims moved sharply higher, and both of these numbers are approximately 100,000 above last year's numbers at this time. The insured unemployment rate SA and NSA both moved higher as well.

Initial claims have not been volatile lately. What does seem to be happening is that those finding themselves unemployed are having a somewhat tougher time finding another job. If the current trend continues for a few more weeks, it will be highly significant. I actually do believe that the weekly employment reports are capturing a real trend, because I wrote before of early warning signs in the monthly employment reports. Those included weakness in teen and older employment and a significant increase in involuntary part-time employment.

My guess (and it is a guess!!!) is that we are seeing weakness in retail and perhaps restaurant employment in the continuing claims report. The bulk of construction workers are contract, and do not show up in the unemployment reports.

You Da Bomb

Bloomberg article:
Goldman Sachs Group Inc., the world's biggest securities firm, yesterday said the value of its collateralized debt obligations, securities backed by bonds and loans, dropped $1.56 billion, or 29 percent, to $3.79 billion in the second quarter. Goldman's fixed-income revenue fell 24 percent because of home loan delinquencies, the New York-based firm bank said in its quarterly filing with the Securities and Exchange Commission.
Money comes, money goes, money ebbs and flows....

I'm going to have a busy day after an encounter with a rattlesnake on the doorstep last night so posting will be light. For entertainment, how about this mortgage broker? He advertises for Nevada lenders who do "stupid, dangerous loans" and gets several hopeful responses.

Wednesday, July 04, 2007

The Fourth Of July

Update: Read the article below first, and then read this "made" American's post, and you'll understand how true the column is.
Via Truegrit, via American By Choice, what it means to be an American:
Our family's story was like so many of the refugees from communism, complete with relatives arrested, property seized, and a nighttime dash to freedom. The decision to escape was an easy one to make (although not so easy to execute), but the question I had--the one I distinctly recall asking my father--was "where are we going." We could have stayed in Europe--and indeed, the Germans would have welcomed us as Volk deutsche because of our German surname--but this was not my father's plan. "We are going to America," he said. "Why America?" I prodded. "Because, son. We were born Americans, but in the wrong place."
Because America is more than just a place, being an American citizen is different than being the citizen of any other country on earth. We Americans do not look to the ties of common blood and history for connection as people the way the citizens of other countries do. Rather, our common bond is a shared principle. This is what Lincoln meant when he referred to the "electric cord" in the Declaration of Independence that links all of us together, as though we were "blood of the blood, and flesh of the flesh, of the men who wrote that Declaration."

Because ours is a bond of principle and not of blood, true American citizens are made and not born. This is why, odd as it may seem, we must all learn--those who are born here, and those who come here by choice--what it means to be an American.
May America always be independent, and always remember why we are American.

Tuesday, July 03, 2007

No Good News

Pending sales report for May came out and it was a dud. The really depressing thing is that the interest rate rise mostly affects June, so this makes already poor June projections look overly optimistic. The bottom line for May's report is that both non-seasonally adjusted and seasonally adjusted pending sales dropped from April and from May a year ago. Needless to say, the drop from April is an extremely bad sign. From the beginning of the year the seasonally adjusted numbers go as follows:
Jan: 108.5
Feb: 109.7
Mar: 104.8
Apr: 101.2
May: 97.7
For the pending sales report, 100 is equivalent to sales in 2001. The annual pending indexes for the last three years run as follows:
2004: 120.9
2005: 124.4
2006: 111.9
We will not get anywhere close to 2006 numbers. The best it looks like we can possibly do is around 100. This report pretty much burnt the housing toast for 2007. It is practically impossible to see a sales recovery by the end of this year. It's looking increasingly unlikely to see a recovery in 2008. Since prices continue to fall for at least a year after sales begin to recover, it looks set in stone to have several more years of falling prices.

NSA numbers have also fallen for the second month. I could go on and on about how terrible this pending report is, but I won't. Let this suffice - the seasonally adjusted May figures show only one region exceeding 2001 sales, and that region is the south. Sounds great? Not really, because the south took the worst YoY drop. It is also likely that sales in the south will be affected the most by the FNMA subprime tightening, which has yet to show in these figures. Calculated Risk comments on just how addled Paulson at the Treasury is on housing.

We also got the updated May (preliminary) Mfr's Shipments, Inventories & Orders. It's not very different than the advance report. There was a slight upward revision for new orders; durables only decreased 2.4%, while non-durables increased 1.6%. Shipments of durables increased .5%, while shipments of non-durables increased overall 1.6%, mostly due to petroleum and coal shipments which increased 5.4%. Inventories were up again, leading me to suspect that we are either seeing inflation in inventory valuation or that new orders have or are close to peaking. Most of the real activity is in energy. If we all decide to turn out the lights and turn the thermostats up this summer, industrial production could be badly impacted.

As of this report (download the "highlights" release you can get on the left of the link above):
There is a nice summary on page 6 of the pdf. Spookily, the consumer goods inventory values are up 2.3% - very close to "core" inflation. Anyone who sits down and actually reads these reports has to realize that we are not seeing a whole lot of growth based in economic activity. I believe, based on rail figures, that things looked up in June. However, it doesn't seem as if there is a big surge underway.

Monday, July 02, 2007

Quell Your Unreasonable Joy

I very much appreciate your consideration, but I do not need another set of emailed references to the "Subprime Foreclosure Possums Stalking Through Georgia" Bloomberg article.

Do not further provoke the Georgians. We are in a somewhat sullen mood anyway, what with our Kia plant being held hostage by global financial markets. If you continue on in this vein we will be forced to send Jimmy Carter to NYC to assist the financial companies to negotiate the real values of the CDOs and CMOs. Need I say more? Given Jimmy's track record in diplomacy, global financial war would probably follow shortly thereafter.

Those living in glass houses should not throw possum heads. Very funny, and they romp in the comments.

Smaller Commercial Lending Going Splat

Dear friends, we have a major anti-liquidity event going on. Commercial lending development loans are going the way of subprime. It is not just RE development either. It's developed in less than a week, and it appears to be moving with frightening speed. Probably Bear Stearn's problems triggered it, but the underlying problems have been there for a while.

This is the third horseman of the liquidity apocalypse: The first was the residential mortgage tightening. The second was the linkage of stocks prices to commodity prices, etc; I have been watching that very carefully. Once the small commercial loan market goes belly-up, which it is in the process of doing, the dollar value of the delinquencies and foreclosures escalate and the banks must scramble for cover. It is not the leveraged buyout market that matters, but now the ground level, the screaming and shouting of high finance abruptly gets transmitted to the ground-level economy.

If you have money at risk now's the time to move. The exit doors are closing fast. There's been good discussion on Calculated Risk on more than just housing. You can read any financial news outlet and see article after article about the problems with "complex structured financial vehicles", i.e., there's tons of paper out there carried on the books at far more than it is actually worth. The real on-the-ground action is just starting now, as suddenly the money spigot starts emitting a cautious trickle of water instead of a healthy flow.

Btw, in the early stages of the ground-level yank it can look like conditions are improving. There are fire-sales on land, lots, developed houses, etc. This gives a bit of a boost to reported numbers. Desperate deals are made, and for a period of about six to nine weeks pundits may be able to look at the national figures and pretend good things are happening.

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