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Thursday, February 14, 2008

Don't Think You Can Make Money By Giving It To Crooks And Fools

Things are not as dire as the End of the World crowd would have them, but they aren't exactly bullish, either.

The above graph shows the year over year percentage change for a couple of months. The weekly measurements are the YoY percentage change for four week rolling averages of the non-seasonally adjusted numbers for initial claims and continuing claims.

January was genuinely weak. Some hiring is still going on, though. The rate of initial claims means less than whether initial claims are sticking as continuing claims. In January, the ratios were not positive at all.

The weekly release is here. You can pull history at this page.

January WIET (Withheld Income and Employment Taxes) totalled $163,393, compared to last year's $170,344. These numbers come from Treasury receipts, which you can find here. Treasury receipts can be volatile, but this year's January is roughly comparable calendar-wise to January 2007.

January CIT (Corporate Income Taxes) totalled $10,146 compared to last year's $12,473. The drop in corporate profits is a continuing trend, but it certainly doesn't forecast a free-spending, madly hiring spring.

However, I do have some decent news. FUT (Federal Unemployment Taxes) is generally a good leading indicator, and while FUT for January 2008 was slightly below FUT for January 2007, it was actually better than recent trend. Therefore there is some life out there somewhere.

So far February FUT is running ahead of 2007. Because of the difference in filing and remittance dates, it is likely that weakness in small businesses showed in January, and that strength in some manufacturing is popping up in February. My guess is that we are seeing some strength in manufacturing through insourcing, because I just don't see how retail and services could be doing this. Also the county sample is showing relative strength in the midwest and west.

Placing this in perspective, in 3rd quarter the Rockefeller Institute data showed that real state tax receipts were negative YoY. That was not a surprise, because they had been near the flatline horizon for a year before. Therefore we are at least six months into the diffusion cycle, and by that time you do usually see some of the early corrections showing up. Gross private domestic investment was negative in 2007, and we'll know we're climbing out of this when it turns positive.

The way recessions work is that weakness in some segments persists, eventually pulling down average growth. That produces a diffused set of cost-cutting measures and shifts in investments, which then show up as a recession. But even while the slowdown disseminates, the small adjustments are beginning and you have baseline indicators that begin to inch up. It's funny in a way, but by the time economists decide a recession is here you can often tell that the slump has bottomed. It doesn't look that way to the public, of course. The fiscal corrections reduce earnings and jobs long after the real collapse in growth has stopped.

The issue of insourcing manufacturing is crucial, because Europe is genuinely weak. We are not going to get as much help as we hoped there. The best prospect for a real turnaround is insourcing more manufacturing of parts, etc, back to the states.

I'm hoping to see a better pattern in NACM manufacturing in February or March. We still have a lot of diffusion to go in the general economy. Corporate profits are going to be weak, weak, weak all this year, which means that spending and growth in a lot of business and consumer services is going to be weak, weak, weak.

Manufacturing has one of the strongest driving impetuses in the economy. We have got to get it back. If we can prevent the politicians from wrecking this, we could get a much healthier economy around 2010.

By the way, if you have to choose between manufacturing or banks, choose manufacturing. This BS about bailing out the banks is stupidity squared. Let the banks fail. If private equity to pick up the pieces dries up, then the government can step in and take an equity position for the taxpayers. I mean it too. If the banks want the government to buy their stupid loans, they can darned well give us a piece of the bank in exchange. A hefty one. And seats on the board, too.

The very, very last thing in the world we should be doing is buying bad loans from banks, or insuring bad loans from banks. If bankers don't know how to tell bad loans from good loans, they need to go bankrupt, the top execs need to hit the unemployment lines, and the shareholders need to take the haircut. And if the US government tries to bail these ignoramuses out, the US government will create a depression sometime after 2010. These fools are not going to stop until the market forces them to stop. Frustrate the market and they will manage to destroy another 5 trillion on their way down. Don't think they can't do it! Look at their monumental money-burning achievements in just a few years!

In the 90's, we bought the idea that the federal government had to backstop bad financial decisions by the financial infrastructure. LTCM, the Mexican bond bailout - hell, we didn't let anybody take a real hit. Then the big buckaroos managed to get Glass-Steagall effectively repealed in 1999, although - get this - the investments predicated on its repeal were made a year or two BEFORE. Seven years after the repeal, our innovative banking jubilee year hit, and we had a self-generated financial crisis blossoming in our "innovative" financial system. Was it a coincidence that the laws that had been in effect since the Great Depression were repealed, and we promptly started a new cycle of financial idiocy? I think not.

The era of banking BS sucked investment out of the fundamental economy. If you let these banks fail, yes, RE in NYC is going to depreciate. But RE in many other segments of the country is going to appreciate, because dollars chase returns, and the real returns will end up being found in real businesses.

What I'm trying to say here is that this correction needs to happen. It needs to happen for the sake of our economic future. We need these bankers who believe they can make money without paying attention to economic fundamentals of investments OUT, because they are taking the overall wealth of the country and destroying it. The only way to get them out is to let their institutions fail or survive on their own merits. If they fail to such a degree that the flow of capital to businesses which actually make stuff is impaired, then the federal government can step in with money and take a stake. But not before, please.

PS: If the federal government does have to bail out banks, it needs to do that by advancing cash, sticking Tanta-types on the boards, and taking stock. The proceeds from the stock can be used to create an actual SS/Medicare fund that has, like, assets in it, which the currrent "trust" funds do not. There's always a way.

Well said! The notion that our economy will grind to a halt if banks are impaired is a farce. The top 5 wall street investment banks paid out over 100 billion in bonuses in the last 3 years! If more capital is needed, let the employees save their own jobs by investing in their futures.

The problem is that we have too many banks and way too many bankers. If banks fail and a real need exists, the likes of Berkshire, GE and even Microsoft or Walmart will step in to fill the void.

Several years ago, Walmart announced plans to set up a bank. These plans were crushed by the banking industry and certain politcians. Given the turmoil in the banking sector, Walmart may yet emerge in banking.

Can you imagine the cost cutting and efficiencies this would create?
It's clearly too late even for regulation. We'd need too much regulatory infrastructure, and that takes time. We've got to let the market be the heavy.

As for WalMart, yes, they could produce some efficiencies. However I truly and genuinely doubted that they could handle the procedures related to OFAC and money laundering. If they get into banking, there needs to be a dedicated staff of over 200 examiners heading around the country checking the retail offices on an ongoing basis. Nothing else will convince their management to do what is necessary, and WalMart is too big to let run wild.

But I agree with your basic point. We have money. We just haven't been spending it very well. If we improve on our performance, the effects over time will be quite momentous.
Excellent. Excellent!

I've been reading for a while now, but this post implores me to comment. IMHO you should be co-blogging over at CR. :-) It needs (and you deserve) a wider distribution.

All my best.

200 examiners is a puny hurdle, especially for the largest employer in the U.S. Finance is best when its kept simple. History has proven this over and over. Short term discrepancies are exactly that - short term.

The financial industry is bloated and can only exist in its current state and size in a BOOM environment. Down sizing and streamling is necessary. Walmart could do to banking what Vanguard did to the mutual fund industry.

Bank on it!
Amen. Amen.
A thousand times Amen!.

It's been obvious for decades that the way to make big money in banking is to be able to come up with superficially plausible reasons why it's a good idea to lend money to someone who's unlikely ever to pay it back (esp. because such people will have much less resistance to "agreeing to pay" high interest rates). Of course, it's only the managers who make big money -- the owners and depositors lose.

We need to bring back Glass-Steagell, and force the breakup of banks now "too big to fail" -- and let them fail.
Yes, Agree!

Smart Independent
Will cite an ex. of this rotten to the core economy:

Know of an oldster who made $1M on recent Harrah stock buyout. (undeserving boomer kid will get it)

Buyout Private Equity firm has yet to find the "dumber fool" to unload the pile of debt they loaded the corp. up with!

Smart Independent
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