Friday, September 28, 2007
Less Than Joyous Numbers
We are seeing some positive signs in commercial paper as a result of the Fed cut. For example:
However those saying the "panic" is over are utterly missing the point. The "panic" was caused by retrenchment in credit terms in banks which started before the August crash, as the latest edition of G.20 shows. That sudden July pop in business and real estate credit at finance companies was caused by changes in terms at banks. Thus the August turmoil was a reaction to a structural change in credit, not a cause.
The question is whether much has changed at banks to alter the structure? I see no signs that it has, and I did post on July 2nd that it looked like smaller commercial loans were going splat. So the July pop in finance company debt was a result of changes in June. What were those changes? The realization that more and more loans were going bad and that reserves and terms and risk assessment would all have to be adjusted away from easy credit.
Given all that, it appears quite unlikely that the fundamental trend seen here will alter very much, although the first shock has hit and the rate of change will slow. What will not slow is the rate of risky loans going bad. That will accelerate.
Therefore the Fed is going to cut again within four months.
Personal income August. Sometimes you just have to look at the numbers:
Private wage and salary disbursements increased $12.8 billion in August, compared with an increase of $22.4 billion in July. Goods-producing industries' payrolls increased $0.6 billion, compared with an increase of less than $0.1 billion; manufacturing payrolls decreased $0.6 billion, in contrast to an increase of $0.1 billion. Services-producing industries' payrolls increased $12.3 billion, compared with an increase of $22.2 billion. Government wage and salary disbursements increased $1.6 billion, compared with an increase of $1.4 billion.We should see a rise in these numbers next month, because by then we will have picked up all the effect of schools, colleges and universities coming back into session. We are going to see a remarkable collapse in commercial building which will overcome that quite quickly.
Thursday, September 27, 2007
Something To Get You Thinking
Instead, Sam The Shopplifting Seagull (hat tip Viola of Spiritual Things Matter) reminds you that there are always opportunities out there if you look hard enough. The article. Some Video. According to BBC, Sam only likes cheese Doritos. If the Doritos folks aren't smart enough to make this into an ad, there's no hope left for them. They'll probably be sued by PETA anyway for poisoning wildlife, so they ought to at least try to cover their expenses.
It's important to watch the video.Sam acts casually at first while he's outside the shop, enters with a "just looking" saunter, makes his selection with aplomb, and then turns toward the door with a "let's see, what else" air ("whaddaya mean, of course I was gonna pay for it!"). Once he's out the door and subject to being nabbed by a copper he speeds up. My impression is that this a hardened criminal with nerves of steel. Clearly, this jailbird is feeling no shame.
My guess is that there is going to be big market for shoplifting animals for advertisements soon. Finally, a use for your girlfriend's chihuahua!
Shoplifting animals are actually not that rare. Where I went to college, there was a pair of Newfoundlands who had formed the habit of shopping at the corner store. The clerks kept a clipboard by the cash register, and when the dogs went shopping they would note down the canine purchases and bill the owner.
I found out one day when this huge black dog pushed past me, went down the bread aisle, grabbed a loaf, and marched off. The clerk told me that several times the dogs had taken canned hams. They also sometimes chose oreo cookies. So the trick to making a profit on one of these animals is obviously to teach them to concentrate on ONE BRAND ONLY, because the owners weren't making a penny from those dogs. Quite the contrary.
I bet you could teach a parrot to do it quite easily.
Wednesday, September 26, 2007
This is the passage that struck me:
According to the Bank's survey of lenders, the proportion planning to cut the supply of credit to companies shot up from 20% in mid June to 49% by the middle of September.That's a sharp turn indeed, and most certainly should have effects on the UK expansion. This is of course more current than the latest US lending survey, and I truly wonder where we are? Credit has certainly tightened.
They also said that while defaults on corporate loans had remained steady so far, they were expecting them to rise in the coming months, particularly among medium-sized companies.
Alan Castle, economist at Lehman Brothers, said: 'This raises questions about the health of the corporate sector which had been assumed to be in quite a strong position.'
OUCH! Durable Goods
Nondefense new orders for capital goods in August decreased $10.2 billion or 12.6 percent to $70.9 billion.That's ugly. Inventories did decrease a bit, which generally would be a positive sign for future new orders. In this case, one wonders.
I feel cheated. One good report, and then this? These figures are so volatile month to month that one needs to keep one's head and look at trends.
The full release is available at the above link. On the left, choose the format you like and download the advance. This is a link to the pdf version. If you look at YTDs (2007 YTD/2006 YTD), shipments (Table 1) are running ahead of last year, but inventory (Table 2) is up too, and it's up even more. Note that these are currency measures, so cost increases and decreases do show up in this report and can mask volume changes.
Non-defense aircraft and parts have been the star of this report for quite a while, but a new trend seems to be emerging. Inventory is up 25% YoY YTD, and:
Shipments:We'll see. The recent economic news has tended toward the depressing side, whether it's housing stats, retail sales or confidence/expectation surveys. The Euro news isn't really much better.
GM And UAW Settle?
General Motors Corp. reached a tentative contract agreement with the United Auto Workers, ending a two-day strike and winning a retiree health-care fund that offloads about $50 billion in future obligations.UAW rep says that they did win job protections:
``We got the job security guarantees we were looking for,'' Gettelfinger said. These include a modified version of the ``jobs bank'' program that allows UAW members to receive paychecks even if there was no work for them to do, he said.Here's hoping that it really is a decent settlement.
Gettelfinger predicted that at the end of the four-year contract, the union's membership will be roughly the same as it is today, assuming the company can maintain its current sales volume. The union represented 73,454 active employees at GM when talks began in July.
Tuesday, September 25, 2007
Another 70,000 Years In Purgatory
The difference is between subprime lending and predatory lending. What Fisher is talking about is predatory lending, and if Greenspan really believes that no system of national mortgage regulation is required to deal with it he just doesn't know jack about mortgages. The NY Times article is about predatory lending. The two legal firms trying to get redress for the borrowers deserve a shout-out. They are the Law Foundation for Silicon Valley and Greenberg Traurig, which of course is acting pro bono. The distinctive feature of predatory mortgage lending is that it leaves the borrowers in nothing but their shorts, completely unable to afford legal counsel of their own. Naturally, predatory lenders consider this a benefit rather than a flaw.
I understand very well why the average citizen would not understand the effects of a credit contraction on the general economy and might resort to conspiracy theory as an attempt to make it comprehensible. Judging by history, it's almost the expected result. This Bloomberg article about the effects of commercial paper going blooey upon non-financial paper might explain why and how it happens and how companies that have nothing to do with the world of wacky finance get sideswiped by it. In essence, even if the underlying asset is good, the companies have lost their money until maturity, and now have to resort to emergency financing:
``We have 200 people to keep alive,'' Chief Executive Officer Gordon McCreary said in an interview in Toronto. ``Our lifeline to getting critical materials to the north'' was the C$43.8 million ($43.8 million) invested in commercial paper, he said.The diffusion seen in credit contractions is like a financial tsunami, and it has the highly negative property of hitting functional companies the most seriously, because they are the furthest downstream from the money tap. That is why every government so far hit has had to pump massive infusions of cash into the system to prevent a collapse.
The Canadian cash crunch that started with defaults on subprime mortgages in Southern California and Florida has hurt more than 25 companies that invested in commercial paper, including Sun-Times Media Group Inc. and Canada Post, the nation's mail service. Baffinland has 95 percent of its cash in Canadian commercial paper, debt that is due in 364 days or less.
Monday, September 24, 2007
GM Nationwide Strike!
General Motors Corp.'s U.S. factory employees went on strike nationwide for the first time in 37 years, after the largest U.S. automaker failed to reach a new labor agreement with the United Auto Workers.1970 was the last time. GM stock is rising.
The 11 a.m. walkout, confirmed by Frank Moultrie, bargaining chairman of UAW Local 22 in Hamtramck, Michigan, came 10 days after the union extended the old contract past its expiration while the two sides bargained.
Update - of course that is GM. The dyslexia is showing. The thing is that the economy right now is in no shape to deal with this. For background, here is a 1996 NY Times article about the effects of the brake factory strike:
Government and private economists said today that the 13-day-old strike at two General Motors brake factories here has delivered the worst blow to the Midwest economy since the floods of 1993.Of course, there are many less GM employees involved in 2007, but the rollover to all the parts companies takes the toll way above 73,000 if the strike continues for very long. Overall GM has less of a chunk of GDP than it did then, but overall the economy is weaker now than it was then.
The strike has already reduced the nation's production of goods and services by $5 billion to $7 billion, wiping out a third of the already-weak economic growth in the first quarter, several economic research firms said today.
And the effects of a crippling shortage of brakes continued to ripple across the country today, as G.M. announced that it was temporarily laying off another 25,350 workers, bringing the company's total to 150,050. Even G.M. has not tried to keep track of the layoffs at its 1,600 suppliers, but their job losses also appear to be extremely heavy.
The Real Deal
NEW YORK, Sept. 24 /PRNewswire-FirstCall/ - Fifty-four percent of Americans said they will eat out at restaurants less over the next three months, according to a survey of 1,000 people released today in conjunction with the RBC Capital Markets Annual Consumer Conference, attended by some of the nation's leading restaurant and consumer company executives and investors.Target is considering selling its credit card portfolio, too. That's quite significant.
In fact, the study showed that Americans already have tightened their belts, with two in five acknowledging that they are dining out less frequently today than six months ago. Consumers that cut back tended to fall into one or more of the following demographics: females, Generation Y/Baby Boomers, household incomes under $50,000, unemployed, Northeast and Southern U.S. The 11 percent of consumers that said they increased their frequency were predominantly male, age 18-29, single, and prefer fast food. According to Miller, the concern among Baby Boomers helps explain the relative weakness in casual dining, as they are the core users. The survey findings correlate with the latest RBC CASH (Consumer Attitudes and Spending by Household) Index, a monthly nationwide sample of 1,000 U.S. households. Consumer confidence declined significantly this month as the CASH Index declined to 71.1 in September from 89.3 in August.
Saturday, September 22, 2007
Airbuses And EuroAngst
Airbus, which is controlled by France and Germany, is already in the midst of a radical cost-cutting campaign, forced by heavy losses on its A380 jet. Its voice is the latest in a chorus of complaints from French and Italian leaders that the strong euro could choke off European growth. What concerns economists more, however, is a sharp drop in the monthly survey of purchasing managers in the 13-nation euro zone - evidence that the credit crisis that began in the U.S. mortgage market and infected British and German banks has now seeped into Europe's underlying economy.Etecera. It's worth noting that the Airbus changes were already scheduled to move considerable production essentially out of Europe and the total of the cost cut proposals were due to knock off about 10,000 jobs. The French and the Germans just couldn't agree to shake hands and do it all in Alsace-Lorraine. Oh, no. The A320 subassemblies will be done in China.
In the meantime, Sarkozy's proposed reforms are going to ignite a war with unions (the unions said "war", not me), which will, of course, be fought with the highest principles and on the most enlightened, philosophical plane only. Gurgle. Absolutely no one thinks Sarkozy can win. Eliminate full pensions at 50? Performance reviews for civil servants? Is the man stark, staring mad? Refreshed from their six weeks of vacation, the civil servants of France intend to come back and show him just who's boss.
I wouldn't be too confident about Germany, either. They should do better than France, but that may turn out to be 1.9-2.0 at best? One of the most bizarre indicators yet is the proposed German rule change to make it more difficult for German banks to sell corporate debt, although calls to consolidate German banks were a precursor.
To get an idea of how interconnected this all is, both Commerzbank and Deutsche Bank (Germany's top two) confessed that they would take a hit from the "US subprime crisis", which caused Irish bank shares to fall.
Having hopefully regained my temper and therefore running less risk of incurring another 80,000 years in purgatory, tomorrow I will discuss why this has nothing to do with Zionists. The Zionist accusation, along with a plethora of other suggested villains, has reared its ugly head over at Calculated Risk, a blog which is hardly of the nature to prompt or nurture such blathering. Yet it's there in the most traditional way. Neither Jews nor bicycles have created our problems, and all history should teach us that blaming such matters on Jews, bicycles, Hillary Clinton, or even mosquitoes is self-destructive.
Some traditions just must be discarded; blaming someone else for your own problems just means that your problems will never be solved. It may feel good at the time, but the end result is disastrous for everyone.
Friday, September 21, 2007
The Canadian dollar has reached parity against the US dollar. A very interesting article noting the basic pluses and minuses deriving from this fact.
After throwing everything but the kitchen sink at the situation following Northern Rock, overnight LIBOR is finally falling. Most observers think the kitchen sink is bound to follow; to date the BofE has had to do everything else but the final step of lowering rates. They now have done everything that the Fed did EXCEPT that. They needed to, because if they didn't A&L and Brad & Bing were going to follow in Northern Rock's footsteps.
The probability of an ECB rate cut keeps rising as growth projections slow. Spain's banks have already received some infusions from the ECB.
I experienced mild panic at China's announcement that it was freezing some prices. China already controls prices for some commodities, so it is not as big a move as one would think.
FWIW, the feedback I'm getting is that rates on good mortgages are dropping while rates for risky mortgages continue to rise. This is the desired and expected effect.
Thursday, September 20, 2007
Freight And Employment
It's important to remember the distinction between overall unemployment and insured unemployment, which is less than half of overall unemployment. The relationship varies with changes in the economy (for example, if unemployed workers fall off the rolls, they will no longer show in this report, although they should be reflected in the household survey), casual employment, contract workers, etc. Most construction unemployment is by contract and therefore isn't reflected all that well in these figures. Also, if a worker gets severance, their unemployment coverage doesn't begin until after that runs out, so these numbers are not necessarily as topical as the monthly employment reports.
The mid August through mid September unemployment claims, especially continued claims, are always heavily affected by the elementary, high school and colleges moving back into full swing. Last year from 8/12 to 9/16 (you can get these figures here, choose national and the year ranges you would like), initial SA claims were reported in a very tight range extremely similar to this years', but NSA continuing claims fell from 2,326,364 to 2,062,962, with continuing claims dropping about 90,000 between 9/9 and 9/16.
As for freight, August rail figures are still discouraging:
U.S. railroads originated 1,685,238 carloads of freight in August 2007, down 17,008 carloads (1.0 percent) from August 2006. U.S. railroads also originated 1,195,390 intermodal trailers and containers in August 2007, a decrease of 52,263 units (4.2 percent) from August 2006, the Association of American Railroads (AAR) reported today.Compare that to the YTD:
For the first eight months of 2007, total U.S. rail carloads were down 414,977 carloads (3.5 percent) to 11,367,593 carloads. Year-over-year traffic is down in most commodity categories, including crushed stone, sand, and gravel (down 85,941 carloads, or 10.6 percent); coal (down 76,095 carloads, or 1.6 percent); and motor vehicles and equipment (down 50,384 carloads, or 6.7 percent).Trucking figures come out one month behind rail but represent a much larger percentage of shipping. The latest we have is July:
U.S. intermodal traffic, which consists of trailers and containers on flat cars and is not included in carload figures, was down 154,217 trailers and containers (1.9 percent) for the first eight months of 2007 to 8,061,355 units.
This is not an encouraging graph. On one hand, the recent trend line is better than it was for Sept-Jan of last year, but on the other hand, it is below 06, 05 and most of 04. Volume does matter; most economic measures are reported in currency, but if you look at the graph above you will see that the volume is closely associated with jobs.
Other disturbing trends in recent rail and trucking freight stats are the intermodal and the number of for-hire truckloads, which roughly correspond. Intermodal rail captures a lot of import to store measures, and recently have showed more weakness than in the beginning of the year. For-hire truckloads actually showed a slight increase in July, and that combined with lower tonnage tells us that the point-to-point shipments are dropping in volume. This is going to be highly related to lower actual retail sales and possibly lower manufacturing, although we do not know that yet (however, an Industrial Production report that would have been negative except for utilities and high consumer electricity demand is a hint).
Currency-denominated economic measures can easily miss the initial stages of economic downturns in inflationary circumstances; employment measures, as I have discussed before, are very affected by the circumstances in the prior year, and therefore also often miss the early stages of economic downturns and upturns. CR at Calculated Risk is a very good economist and he has taken great pains to post predictive data and also discuss the inherent uncertainties in these measures, which most people do not grasp.
The reality is that we don't know actual employment for at least a year, and we don't have accurate inflation adjustments on most of our economic reports. Employment is a lagging to coincident indicator anyway, and therefore not predictive. The way household employment is calculated can and does miss substantial changes. Consider the difference, for example, between a construction worker employed on average 2 days a week as opposed to 5 days a week. As far as the household survey is concerned (even after B/D adjustments), that is one job. As far as the effect on the overall economy is concerned, that is one job paying a net of about 45% less (you have to adjust for lower payroll and income taxes).
What is predictive are volume measures like those I am showing you here, and relationship measures, such as those CR has documented for the relationship between equipment and software and fixed investment.
There are aspects of the economy that do not show up in freight measures. Those are jobs like information. But one thing we can confidently predict is that the information sector will be badly hit by the problems in finance and mortgages; a huge part of the boom in information was related to all of those systems for all of those companies, quite a few of which are now out of business. Another predictive aspect is that too much job growth has been deriving from government and education, which are derivations, over time, of growth in private income and jobs. It is the construction worker, the retail clerk, and the trucker who pay the salaries of the teachers and the police, not vice versa. For a number of reasons, we are safe in forecasting that this trend cannot continue for very long, and indeed in August a notable weakness in government employment appeared.
The economic picture one sees if one includes volume and relationship measures is very different than if one just looks at the headline reports. For this reason, I expect overall inflation to be less of a factor than many think it will. The reality is that the economic basis for passing through costs to consumers is weak, and all history tells us that when you see these pressures, inflation is coming under constraint. It would take huge stimulative measures to push it out of control, which have not happened yet. Another factor people need to grasp is that a credit contraction is a deflationary force of no mean proportions. Debt expands the effective money supply; a contraction in debt reduces it.
So inflation (especially inflation on imports related to weaker dollar) is real factor, but it is not the only factor. It's a sad fact that almost all economic reporting to the public concentrates on the least certain and least determinative measures of future performance. It's no wonder that everyone always gets caught by surprise.
Update: Oh, yes, commercial paper outstanding is still dropping. You can see this post for the updated graph (which is a direct link). Why Bloomberg feels this is a surprise is completely beyond my grasp. Total is now 354 billion, and the weekly was 48.7 billion. AA financial is still increasing, and financial's continued decline is a function of crappy fundamentals and higher prices. In short, people's appetite for crappy debt at low yields has not been affected at all by the rate cuts. Why it would, especially in a day and a half's time, is beyond my comprehension. Next week's numbers matter more.
Wednesday, September 19, 2007
If Only The Fat Lady Would Stop Caterwauling
Absolute Capital seems to be saying that you absolutely won't be able to get your capital back for a year:
Absolute Capital Management Holdings Ltd. halted withdrawals from eight hedge funds with $2.1 billion of assets after co-founder Florian Homm quit.In today's environment, that 530 billion, which is about 1/4th of total capital, will be written down at least 20-30%.
The firm will seek to extend a lock-up on redemptions for a year while it restructures the funds, Absolute Capital said in a statement today. Seven of the pools hold over-the-counter U.S. stocks that can't be sold at the prices the firm has on its books, affecting as much as $530 million of assets.
Absolute Capital clients tried to withdraw more than $100 million after Homm quit yesterday in a dispute over pay for the firm's fund managers. Homm, 47, managed three of the funds affected, and oversaw the others as co-chief investment officer. Shares of the company, which has its main offices in Majorca, Spain, slumped 84 percent in the past two days.
I wouldn't go off on a euphoria binge due to yesterday's cuts. Every structural problem that existed yesterday still exists today. On the other hand, the future for genuinely good companies probably got a bit better. The investor beatings related to malinvestment will continue until morale improves. Morale will improve after all the rocks have been turned over and all the bad debt written down, so that is a long way in the future.
As expected, Fannie & Freddie are getting permission to increase their portfolio sizes. Fannie's stock shot up this morning.
Tuesday, September 18, 2007
Fed Cuts 50
I don't often write about other countries, because the one you can usually help or hurt is your own. But check out this column on Japan's public debt:
The idea that the second-biggest economy would default on debt is almost unthinkable. Yet ratings upgrades are rewards for good fiscal deeds, not continued profligacy.In comparison, the US has public debt amounting to less than 70% of GDP (according to the CIA). It may sound odd to American ears, but the most important likely effect of today's rate cut might be to stimulate the Japanese economy. If the world wants to escape real economic misery, it needs at least one of the two to get a grip and forge ahead, and Japan's GDP contracted in the second quarter. The Chinese and Indians are getting there, but are simply not able to consume all that much.
Even though Japan has enjoyed steady growth since 2002, it has made no noticeable progress in reducing public debt. Officially, it hovers at about 150 percent of gross domestic product; observers such as the Organization for Economic Cooperation and Development put it at around 170 percent.
I don't have a crystal ball and no one else does either, but all hopeful theories about decoupling really depend on Japan doing well and the EU doing well, and unfortunately the IMF cut the European 2008 growth rate prediction back to 2.3 when it cut ours to 2.2, and cut Germany's back to 2.2. This is not what anyone wanted to hear, but it is important background for the Penner comments.
Wikipedia has a nice list of country rankings by GDP.
A Spanish Perspective
``To talk about severe adjustments or a meltdown in prices is ridiculous,'' Taguas said in response to reports pointing to an end of the Spanish real estate boom. ``That sort of crisis is unthinkable.''I strongly recommend reading the whole article, not for schadenfreude but for a little insight into our own situation. Here's a Hong Kong paper's take:
The gains in house prices are already slowing and excess supply may lead to a decline, predicted Gonzalo Bernardos, an economics professor at the University of Barcelona, who expects a 20 percent drop by 2009. Home prices rose 5.8 percent in the second quarter from the year-earlier period, the smallest increase in at least three years.
On a street corner in Tetuan, a working-class area of Madrid, handwritten "for sale" notices have faded to yellow as owners hold out months for their asking prices, refusing to believe that a nine-year property boom is over.There are similar bubbles all over the world. Over at Calculated Risk (where the news and commentary is picking up pace and getting even more interesting) a UK commenter posting as UK Renter claimed that the UK housing market was much more unstable than in the US:
Having gained 190 percent since 1998, one of the world's hottest property markets has finally succumbed to high lending rates, oversupply of a million homes in the past four years and prices that are up to 30 percent overvalued.
Real estate agent Angel Velazquez says some homeowners in Tetuan have cut prices by up to 25 percent to try to attract a buyer, while small property agencies have gone under after months without a sale.
the UK is screwed. our bubble has been way bigger than the US, we are just 2-3 years behind you guys in the crash. i have been busy the last few weeks moving all my money from GBP to USD...above 2.00 is crazy, i don't think it will take long for sterling to be below 1.50, and well on its way to 1.00.Maybe instead of doing this "mine's bigger than yours" stuff we'd all better start trying to figure out how to deal with our own messes. Wikipedia's real estate bubble entry has links to many of the areas experiencing them.
the uk housing bust is going to be bigger AND FASTER than anyone can imagine...mortgage rates of ~4% 2 years ago are now resetting at well over 6%...and prices are up, what, maybe 50-100% since then, depending on your area? nuts.
This months' number took the YoY increase for finished goods from 4.0 last month to 2.2 this month. Since April this is the new sequence:
Apr: 3.2You have your choice of whether to believe in some sort of conspiracy theory relating to Jews/Dick Cheney/Baptists/government statisticians or rather to cogitate on the fact that increases of cost of production haven't been fully passed to consumers for durable goods in a while because of reduced demand.
These numbers, if they are accurate, do tend to support the theory that the economy has taken a genuine turn for the worse and is experiencing slackening demand. IMHO these numbers are in line with reality, because I have been covering a lot of geographic territory in the last month and this is what I have seen. Two weeks ago, I think in a dinky little place called Cecil off I-75 in GA, I saw regular for 2.56. The place is too small to be subsidizing gas, so that's the deal they got on the gas.
UK CPI for August also came out very low.
Monday, September 17, 2007
Diffusion, Not Containment
Take a look at this graph from the Fed's Commercial Paper release (these are Friday's figures):
This shows the spread between different categories of debt. Of course asset-backed is worst, but look at A2/P2 non-financial, especially between 30-90 days. A2/P2 is poorer quality debt.
Now we come to the volume statistics. If you will look at this link, you will see that the volume of A2/P2 is now dropping significantly. This means that credit for poorer quality non-financial corporations is being withdrawn, and that they will have to seek other ways to cover it, or repay it. Since these are non-financial businesses, this marks a strong diffusion into the overall economy.
The total volume of A2/P2 non-financial by year, in millions:
2005: 3,311By 2007 monthly average:
Apr: 5,578By 2007 recent weekly average:
08/17: 8,744Volume drops of this magnitude indicate that the problem is significant, and the trajectory shows that it increasing as this wears on. While the volume for A2/P2 is dropping, the volume for AA non-financial appears now to be increasing, indicating that this is not a liquidity problem but a confidence problem. What's going on for these businesses is quite equivalent to the relative price increases for poorer quality mortgages in comparison to prime mortgages, and as with mortgages, it means that the poorest quality businesses are probably being cut off.
I hope this provides some background to these paragraphs in this Bloomberg article:
A Fed report last week showed output at U.S. factories fell for the first time in six months during August, suggesting businesses may be scaling back as consumer spending slows.In general, in such an environment the worst credit gets cut off, and the so-so credit sees higher rates. If you will look at the volume link above and study the monthly for AA non-financial, you will note that it fluctuates quite a bit. This stat is one I use for a manufacturing proxy, but A2/P2 also has some relationship to industrial activity, although more, I believe to services.
The Commerce Department on Sept. 14 said business inventories rose 0.5 in July. That was more than forecast and a sign companies won't need to ramp up production to replenish supplies in coming months, economists said. Retail inventories jumped, led by a surge at auto dealers.
Prospects for slower growth are already taking a toll on manufacturing jobs. A government report on Sept. 7 showed factory payrolls dropped by 46,000 in August, more than economists had forecast and the most since July 2003.
Chief financial officers this quarter are the most pessimistic since at least the last recession, an industry survey showed. Concern over consumer demand, higher labor costs and credit-market turmoil will cause hiring and investment to ``stagnate,'' according to the September Duke University/CFO Magazine Business Outlook, released Sept. 11.
I don't think the moral hazard people seem so worried about exists; the resurgence of risk recognition seems firmly embedded into the financial system. The hazard that exists is rapid diffusion into healthy or relatively healthy business, which would be an economic disaster. I have relatively good anecdotal evidence that this is already occurring to some extent. Sitting around for another six weeks to see how far that will go is probably one of the least safe and sound financial tactics imaginable.
Sunday, September 16, 2007
The Second Event
Update: Bloomberg reports overnight LIBOR way up:
The overnight rate banks charge to lend pounds soared 60 basis points to 6.47 percent today, the highest in more than a month, according to the British Bankers' Association. The three- month rate fell 7 basis points to 6.75 percent, the BBA said.End update.
Northern Rock's collapse in the UK is almost certainly the second event. It is significant for several reasons. The first is that the UK economic growth has been funded in recent years similarly to growth in the US, i.e., high debt and high immigration, combined with stagnating wages for a large cohort of the native population. The second is that in recent years high risk terms on those mortgages that have spawned housing appreciation have been very common. The problem with Northern Rock was not that it securitized mortgages, but that it wrote risky mortgages for lower rates than the market is now willing to absorb. But it is not the only UK bank to do so, merely the most aggressive.
The danger that non-stakeholder immigration poses to an economy is universal. See this 2005 Bear Sterns commentary on the illegal American workers. The study discusses the problem of miscalculating the cost of public services, but ignores another fundamental: non-stakeholder immigration (any immigration which causes the immigrants to be excluded as a class from full rights in the society, whether by legal means or by sub rosa means) inflates some assets, notably rental housing, short-term, but lowers the overall capacity of the population to consume long-term, which eventually causes a cycle of deflation. The problem with immigration in Europe is nearly universal; generally high taxation rates prevent even legal immigrants from accumulating capital.
Compared to the US, most European areas which have experienced high rates of housing inflation have less real basis and more real risk. There has been huge speculation in European housing markets as well. Spain was the first to fall, but the retrenchment in the UK in all areas which have not seen the income booms of the London sector will be punishing. Bankruptcies and foreclosures in the UK are rising and will continue to rise for some time.
The impact on Europe, then, will be more general. Europe has been, for the most part, comfortably enjoying the theory that it is risk in American securitizations which is the problem. Northern Rock had nothing to do with American mortgages; its problems and its stability are entirely due to its own unsustainable mortgages, which are not unique to the UK. Another barrier of plausible deniability has been torn, and the consequences will be far-reaching.
In addition there is an internal carry trade in Europe which has funded many of the emerging mortgage markets:
The chart (below) shows the relationship between the euro and the hitherto “safe” Swiss Franc. So widespread has the carry trade phenomenon become that fully 92% of Hungarian home equity loans and around 70% of Polish housing debt are denominated in Swiss Francs.
The article blabs on about safe havens and the like, but the reason that the yen and the Swiss franc yielded lower interest was that these economies had surpluses of money and not enough places to invest it internally. The cost of money is dominated by the supply/demand equation just as the cost of everything else. The Swiss take money in from rich interests in unstable countries as a safe haven, serving as the bankers, I am sure, for most of the more than 10,000 member Saudi Arabian royal family, not to mention all those who are temporarily at the top of the heap in the unstable societies around the world. (I often wonder how many of the Boeing orders for smaller jets derive from the same source; money in Switzerland and a fueled jet ready to whisk you out of the country within hours' notice are the fundamentals of financial planning for many of these individuals.) Then the Swiss banker has to find a place to put that money, and in recent years a lot of it has been lent to banks which are lending it to other banks, which lend it to other banks, who eventually lend it to the bubble areas for investment in property.
The history of the 1920's has repeated itself with a twist; wheat is now very expensive, but it is the Hungarian and Polish mortgages which are likely to default. The situation is not as severe as it was then, but it is similar in the effect it will probably have on the European banking system - an unwinding that travels through the long chain of lending to bring risk back to its source. There is also a lot of unstable commercial debt out there, some of which has been used to fund acquisitions and investments in the ex-Soviet bloc.
Most of the big financial firms are still forecasting an economic decoupling of the world with the US. I may be wrong, but I believe all of these forecasts are delusional in the extreme. The same problems that are causing drawbacks in the US economy exist globally. The Japanese economy is weakening; European growth has been lacking by US standards and is likely to continue to decline, and worldwide inflation is on the rise, having a fierce impact upon the living standards of the emerging Asian nations.
It cannot be coincidence that Chinese and Indian interests are trying to invest money in the US even while their own economies are booming. In China one would expect the motive to be fear of the government and the peasantry; in India one would expect the motive to be fear of a crashing bubble.
In the meantime, it's worth a note that the Germans have had to slaughter poultry by the thousands this year. H5N1 is widespread in some German districts among wildfowl and is infecting poultry farms.
Thursday, September 13, 2007
Commercial Paper Update
The good news is that non-financial is not tanking. Asset-backed continues to decline, and risk premiums are slowly mounting. The discount rate spread is creeping up toward 100 basis points (1 percent):
Treasuries stabilized somewhat yesterday, but the low yield remains at two years. I am not sure how much of an effect a Fed cut will have on risk premiums and/or liquidity problems related to risk (it will, of course, have a stimulative effect generally, helping to offset the drag on the wider economy from the industries most affected).
We got through that hump of maturing asset-backed commercial paper that was causing such woe. However, given some of the stuff I've heard, the problems might have been deferred and/or swept under the rug rather than resolved.
Weekly unemployment data was not intimidating. Initial claims only rose to 319,000 from last week's initially reported 318,000 (revised down to 315,000 this week). Far more important, the number of continuing claims actually dropped, although they are a week behind initial and next week's continuing claims will be the important number. I would say that the Fed might be rethinking that rate cut based on what they are seeing.
Wednesday, September 12, 2007
Kenneth Fisher Drools In Public
Fisher is best known for his prestigious "Portfolio Strategy" column in Forbes magazine. He has written four major finance books including The Only Three Questions That Count: Investing by Knowing What Others Don't. Ken's theoretical work in the 1970s led to the development of a tool known as the Price-to-Sales Ratio, which is now part of core financial curriculum. He is the Chief Executive Officer and Chief Investment Officer of Fisher Investments, a multi-billion dollar multi-product money management firm serving large corporate and public pension plans, in addition to endowments, foundations and high net-worth individuals.Kind of frightening, this. This man has his paws on pension funds? Here's hoping he's better on other investments than on subprime. When I finish laughing I'll explain why this constitutes drooling in public. I am laughing very hard, so don't hold your breath. Instead, read the article.
Tuesday, September 11, 2007
Gas And Oil
Today OPEC agreed to expand output by 500,000 barrels a day, over, of course, opposition by countries such as Iran and Venezuela. Algeria also opposed the measure.
Gas and fuel pricing has huge implications for inflation. Gas prices also affect consumer confidence and directly change the amount of discretionary income consumers have. Diesel prices function as a type of VAT tax on the economy which gets slapped onto just about every product consumers buy, including, of course, gas itself. Diesel prices have risen over the year, and are offsetting some of the stimulus from gas prices:
Monday, September 10, 2007
OK, Here We Go
1) HSH Trends is a good weekly read. It contains valuable commentary. HSH is a financial services company which is less of a special interest than MBA, and I find their numbers much more reliable. It is updated after each Friday. As the numbers for last week show, mortgage rates for non-exotics (which now include many jumbos) have turned and are heading downward again. This is largely a measure of diffusion of economic weakness; it indicates that the pool of such borrowers is rather limited and that there is pretty intense competition for decent borrowers.
2) Sheila Bair of the FDIC spoke to Congress on 9/5. Her speech is worth a read, both as a summary of what has happened (dumbed down to Congress Critter level), and because of some of the comments in it. However, it should be read with Coast Bank in mind. That was a severe failure of the FDIC's. Also consider Fremont. Both of these organizations were permitted to continue in unsafe and unsound dealings for a very long while. There are others, too. Therefore, you should take Sheila's statements about the health of the banking industry with at least half a shaker of salt. However her statements about how things should work are solid, such as these tidbits:
Although these events have yet to fully play out, they underscore my longstanding view that consumer protection and safe and sound lending are really two sides of the same coin. Failure to uphold uniform high standards in these areas across our increasingly diverse mortgage lending industry has resulted in serious adverse consequences for consumers, lenders, and, potentially, the U.S. economy.Haha! First, that's the front ratio she's discussing, and second, front ratios of 50% are not stable. Here she is setting the bar very high indeed; most mortgages that have front ratios of 50% will default, and such ratios have always been the hallmark of predatory lending. The exceptions to this rule are temporary low income for the borrower, borrowers with high assets, borrowers with very high incomes, and borrowers with high equity. If you are "fixing" the problem with front end ratios of 50%, you are not fixing the problem. This is a rather shocking statement.
Among mortgages packaged in non-agency securitizations, nontraditional mortgages rose from just 3 percent of nonprime originations in 2002 to approximately 50 percent by early 2005.
Subprime and Alt-A loans together stood behind 77 percent of all private ABS outstanding as of May of this year.
The transactional nature of the "originate and sell" model has contributed to lending practices that have damaged the immediate interests of consumers, mortgage lenders and mortgage investors, and now pose a risk to the broader economy. The housing boom has given way to declining home prices in an expanding list of U.S. metropolitan areas. Mortgage delinquencies and foreclosures are on the rise not only in subprime portfolios, but also in Alt-A portfolios, where risk layering is now contributing to credit problems that are no longer being masked by home price appreciation.
Credit concerns now extend more broadly to leveraged commercial lending.
It is equally important that when working with financially stressed residential borrowers, servicers should avoid temporary measures that do not address the borrower's ongoing difficulty with unaffordable payments. Institutions are encouraged to work toward long-term sustainable and affordable payment obligations that will provide stability for servicers and investors as well as borrowers. Clearly, fixed rate obligations provide the best opportunity to long-term stability. In developing a strategy to address payment difficulties, it is essential that servicers, as well as lenders, realistically evaluate the borrower's ability to repay the modified loan. One methodology commonly used by servicers is an analysis of the borrower's resulting debt-to-income (DTI) ratio. The DTI ratio should include the customer's total monthly housing-related payments (i.e., principal, interest, taxes, and insurance) as a percentage of their gross monthly income. In issuing the interagency statement, the FDIC and CSBS noted that, absent mitigating circumstances, resulting DTI ratios exceeding 50 percent will increase the likelihood of future difficulties in repayment and delinquencies or defaults.
3) Commercial credit conditions continued to degenerate last week. Over the week, Treasury yields consistently dropped after having begun a long slow rise in late August. Take a look at the FRB Commercial Paper release; risk premiums had stabilized but then started another upward climb last week:
Also, as I noted last week, Thursday's release documented yet another implosion in outstanding commercial paper, with a troubling extension of that drop into non-financial. Two Bloomberg articles provide more commentary on the situation; another 140 billion in CP is up for grabs, and the big financial corporations are viewed as completely subprime credit risks.
There is rough justice in this situation, but unfortunately the pain is being rapidly transmitted to the innocent bystanders. Loans to smaller businesses are being called in to bolster bank balance sheets. The wicked impact of a significant credit contraction is that you can't call loans to the dicey businesses unless you know that they will be able to repay them, so instead loans to healthy firms are called.
4) On Saturday, Plosser of the Fed gave a speech in Hawaii destined to go down in history as the "Don't Worry, Be Happy" speech (ref to CR). Neither Plosser nor Bair are being realistic about what is happening; the economic impact on small businesses will be quite devastating in some areas. First the bad money drove out the good, and now the bad debt is being covered by calling in good debt. This is not a process of economic rationalization. Heck, even in triage in a war, the effort is to treat those who will survive, instead of tossing out those who would be likely to survive in favor of the terminal cases. But survival, in this case of the institutions who must pull money back in order to survive, is the name of the game. In any case, those smaller businesses account for a hefty chunk of new employment.
5) It's international, stupid. Australia's central bank is allowing banks to use these types of assets as collateral for repo-type loans. Japan's GDP for the second quarter was revised to show a 1.2% annualized decline. The containment is international too, I suppose.
6) The main number that truly, truly matters is not a number that came out last week. It's the ratio of financial corporate profits to non-financial corporate profits as chronicled in years' worth of GDP releases. The number that is the strong predictor in GDP releases is Gross Private Domestic Investment, which has followed the following trajectory of change (see Table 4 at this link):
2004: 3.4It is choppy by quarters, but here is the sequence since 2004 extending into the second quarter of 2007:
2004: 4.1, 4.7, 3.9, 3.9,Table 12 at the above link gives corporate profits. You will note that they are split out betweeen financial and nonfinancial industries (gross numbers, seasonally adjusted and annualized for quarterly data):
2005: 5.2 , 2.8, 4.0, 5.8,
2006: 4.0, 2.5, 1.6, 2.2,
2007: 2.0, -.2
Year, Financial, Non-Financial, Ratio
2004: 356.2; 681.6; 52.3%
2005: 405.5; 749.1; 54.1%
2006: 482.2; 814.3; 59.2%
2007 quarters:Financial profits are now doomed to fall, which is going to have a hefty downward impact on the economy. Real consumer median incomes peaked back in 1999. Consumer spending since then has been increasingly financed by debt, which is a withdrawal of future spending power for consumers. As these numbers show clearly, a shock in the financial sector will have a much bigger impact on the domestic economy that it would have had a few years ago. Profits for non-financial corporations were lower in 2nd quarter 2007 than in 2006! We are facing a crumbling leading edge. Manufacturing is getting some boost from a weakened dollar, but it will take a long time to make up for the shock in consumer and financial spending.
Q1: 468.7; 781.1; 60.0%
Q2: 525.4; 806.4; 65.2%
The financial services industry was a large contributor to the information sector, to commercial building and rentals of commercial office space, and to well-paid employment. The diffusion will be very rapid.
Update: Stagflationary Mark over at Illusions of Prosperity graphed the financial industry profits as a percentage of all corporate profits since 1993, complete with a trend line. I think you'll find it interesting, especially the hump over the last recession. That was when nonfinancial profits slumped, but the debt-fueled economy (consumer spending) stayed strong.
Sunday, September 09, 2007
Sorry About That!
I got hit with some sort of sneaky trojanish thing. About the only symptoms I could find were that Symantec had been subverted, Messenger had been started, and my firewall was getting slammed with intrusion attempts. It looked like a Bagel-variant type attack. They have gotten good. The first download subverts and reconfigures your system, and then deletes itself. Sometimes the first is a downloader which reports to another website, causing a chain of these things. So you have a devil of a time finding out what the deal is. I pulled out all the stops just to make absolutely sure every system was clean. A totally wasted weekend.
After XP, I'm just going to Linux for any computer that accesses the internet. Windows is not and never will be secure IMO. I have to deal with this stuff, because one of things I do is Info Sec. for banks, but man, oh man!
Blogging will resume tomorrow.
Friday, September 07, 2007
Among the hilarities in the employment release was the household survey's disclosure that in August the employed population dropped 316,000 and the unemployed population dropped 24 thousand.
If you actually read the employment report, it's nearly as entertaining as the NAR press releases. Not that the BLS is doing it on purpose - the problem is the B/D model and the nature of a shadow economy. Illegals are invisible for the household survey, and the establishment survey doesn't notice illegals being replaced by legals.
It's worth looking at this state-level breakdown of the MBA's 2nd quarter mortgage delinquency and foreclosure report.
I'll write up the week's numbers this weekend. Some of them are very funny. We need to laugh, because look at Thursday's Commercial Paper graph showing the Outstandings:
Look at the blue line. That's non-financial. At this point, everyone has already mentally written off financial and asset-backed - those will have a long, long recovery time. The non-financial is a good index of diffusion to other parts of the economy. This amounts to a giant margin call and is equivalent to the destruction of money on a grand scale. Week by week the credit contraction ripples spread through the economy.
Thursday, September 06, 2007
Fascinating Numbers on The Latest MBA Report
Adjustable rate loans:
While the seriously delinquent rate for prime fixed loans was essentially unchanged from the first quarter of the year to the second, and the rate actually fell for subprime fixed rate loans, that rate increased 36 basis points for prime ARM loans and 227 basis points for subprime loans.Delinquencies:
The SA delinquency rate increased 15 basis points for prime loans (from 2.58 percent to 2.73 percent) and 105 basis points for subprime loans (from 13.77 percent to 14.82 percent). The delinquency rate increased 43 basis points for FHA loans (from 12.15 percent to 12.58 percent) and decreased 34 basis points for VA loans (from 6.49 percent to 6.15 percent).Serious Delinquencies (90 day plus):
The foreclosure inventory rate increased five basis points for prime loans (from 0.54 percent to 0.59 percent), and increased 42 basis points for subprime loans (from 5.10 percent to 5.52 percent). FHA loans saw a four basis point decrease in foreclosure inventory rate (from 2.19 percent to 2.15 percent), while the foreclosure inventory rate for VA loans decreased three basis points (from 1.05 percent to 1.02 percent).
Wednesday, September 05, 2007
I Went Looking...
On the other hand, politically speaking, Fred Thompson's entry into the R race promises to enliven things quite a bit:
Fred Thompson's Republican rivals made excuses for the presidential candidate's notable absence from Wednesday night's debate in New Hampshire.Snark!!! Let's see, Thompson was born August 19, 1942. McCain was born August 29, 1936. Romney's line was the better, and does anyone believe that these comments weren't prepared beforehand by their campaign teams? The scrapping at debates should be fun, but we need to have Dr. No in there to keep them all focused. It's not a mud-wrestling contest.
"I think that's a decision that Fred should make and maybe we're up past his bed time," said Arizona Sen. John McCain.
"The only question I have: Why the hurry, why not take some more time off?" said Romney. "Maybe January or Febuary might be a better time to make a decision about getting into this race."
The Dems had a chance to run some really strong candidates, but they didn't. Why?
Illusion of Prosperity 1:
Use the link for an explanation of the data he is using before you decide this isn't so. (This means you, Anon.) Also see this post regarding home mortgage debt. Think about what the different slopes on the graphs mean.
On July 2nd I posted regarding commercial lending going splat. The period of plausible deniability having expired, Bloomberg now contemplates the matter:
U.S. commercial real estate prices may fall as much as 15 percent over the next year in the broadest decline since the 2001 recession as rising borrowing costs force property owners to accept less or postpone sales.The reason why CRE has gone splat is the same reason causing the problems in residential real estate. Overbuilt and overborrowed, with irrational expectations of returns. See Calculated Risk also.
Investors in July bought the fewest commercial properties since August 2006 and apartment building acquisitions were down 50 percent from June, data compiled by industry consultants at New York-based Real Capital Analytics Inc. show.
``There are so many deals falling apart,'' said David Lichtenstein, chief executive officer of Lakewood, New Jersey- based Lightstone Group, an owner of more than 20,000 apartments and 30 million square feet of office and retail space. ``People who can get out are getting out.''
Now we turn to S&P's claim that they are in no way to blame and that all of this is just a complete misunderstanding. Start at Calculated Risk's post on the subject, which takes issue with statements such as:
Ratings are designed to be stable. Unlike market prices, they do not fluctuate on the basis of market sentiment.
But they can and do change -- either as a result of fundamental adjustments to the risk profile of a bond or the emergence of new information.New information? Cut me a break. This is pure nonsense. Look at the graph above, and tell me what new information came to light? Suddenly?
When we come to high finance (leveraged buyouts, etc), the picture is not really very different. Again, overleveraged deals based on unrealistic expectations. Again, some of these deals were initially closed on the basis of utterly unrealistic debt levels, that is, the corporate unit carrying the debt did not have the income to support it.
Nor is this solely a US problem. The phenomenon has occurred all over the world, from Asia to Australia, on every continent.
No go read some FOMC statements. Let me just give you this sample from their last released minutes:
Participants thought that consumer expenditures likely would expand at a moderate pace in coming quarters, supported by solid gains in employment and real income. Though growth in consumer spending had slowed in the second quarter, the slowing likely reflected temporary factors in part, including some payback from unusually strong growth in prior quarters and the surge in gasoline prices. Several participants noted the risks that house prices could decline significantly and that credit standards for home equity loans could be tightened substantially as factors that could weigh on consumer spending. However, the sizable upward revision--from negative to positive--in estimates of the personal saving rate during the past three years suggested somewhat less need for households to rebuild their savings.There are no adults standing around, my friends. The will to believe has overcome contact with reality, and nobody, but nobody, who was in charge of any part of this is ever going to stand up and admit the truth about it.
The failure to admit what happened and how is very likely to create a toxic social and political environment. As we speak, the financing for smaller businesses is starting to dry up. How bad it will be depends on just how bad the previous lending has been, so the effect isn't fully quantifiable yet. This will be a shocking event to those affected, and a broad range of individuals will be affected. The aftermaths of bubbles always leave the survivors dazed, confused and harboring a sense of injustice. Those who bought into the bubble claim it is everyone else's fault, and those who acted responsibly and suddenly get caught in the undertow created by all the irresponsibility know it is not their fault. Everyone will be looking for the culprit.
Historically speaking, such events are associated with social and political instability and nasty turns in mass psychology. Pogroms, for example. Persecutions. Ejections of minorities.
Democracies have the ability to deal with these events differently, but only if accurate information is disseminated through the society.
Tuesday, September 04, 2007
Funniest And Saddest Article
``While there is no basis for predicting a recession right now, the risks have surely gone up,'' says former Treasury Secretary Lawrence Summers, now a professor at Harvard University in Cambridge, Massachusetts. ``The combination of softness in the housing sector, contractions in credit, increased uncertainty and volatility, and losses in wealth make the chances significantly greater now.''Schizophrenic economic articles are probably the best indicator of recession. The strangest thing in the article is the emphasis placed on consumer confidence. This passage:
``We're taking the pulse of the economy a little more frequently,'' says Jonathan Basile, an economist at Credit Suisse Holdings in New York. ``If the spillover from the credit crunch gets into autos, it would be the second major sector to fall and would solidify a lot of the fear in the markets.''
The pace of car and truck sales in the U.S. has dropped for seven consecutive months, the biggest string of declines in at least 31 years, according to data compiled by Bloomberg.
A sudden drop in consumer confidence at the end of 2000, coupled with a contraction in manufacturing and a two-year-low in motor-vehicle sales, helped set the stage for the last recession, which began in March 2001.The 2001 recession wasn't caused by consumer retraction, but by a business retraction. This belief that the American consumer is a gentle woodlands creature, easily frightened back into the woods and away from the malls by negative economic news, is entirely unfounded. People stop spending based on what is happening in their lives, rather than on the basis of forecasts and prognostications by economists. They either don't have the money to spend or are afraid of losing their jobs, as they were in 2000.
Saturday, September 01, 2007
It Ain't Over 'Til The Country Music Says It Is
And confidential investor communications via Calculated Risk. Longorshortcapital.com has the ambition to keep you laughing as your asset valuation drops and your liabilities increase.