MaxedOutMama
Thursday, July 31, 2008
I Told You So
US revises 2007 Q4 GDP down to -0.2:
The brighter side is that this is a slow, creeping double-dip recession. According to my stats, we spent about 5 months negative, then turned and went weakly positive on an industrial/ag expansion which was just strong enough to boost services, and are now turning down again. However, it looks like we've got enough oomph (counter-cycle) still in the system that this second downturn won't be too deep.
Trough on the second downturn looks to be second quarter 2009, assuming that we don't do anything too stupid. What happens after that depends on government policy.
I won't be blogging for a bit because the new treatment works spectacularly well, but it is causing transitory problems, i.e., severe dyslexia such that I cannot write very well. I'm due to give myself the next shot in about two hours, which will probably make me illiterate for the next two days.
Have fun shrieking in the comments. When I can stop the symphony playing in my head long enough to write I'll continue. The economic paradox we are facing is that we truly need an old-time Dem in office right now. We have got to change our policies enough to put some stimulus into the lower half of the income bracket, and we don't have too many options to do it. We don't have the money to send people checks all the time, and we haven't been saving for retirements so we can't cut taxes much or at all on the bottom two-thirds of the income distribution. Our tax pyramid is sharp enough that we can't afford to raise them too much on the next 20% of the income distribution either, and if you target just the top you are asking for flight. Ronald Reagan did more to raise the incomes of the bottom half of the distribution than the modern Dems, which should tell us all something.
The question is "Can Obama be that Democrat?" It's obvious that Pelosi is the new breed of elitist Democrat that thinks quite differently than the old breed. She seems essentially Greenspan-like in believing that the solution is to crush the lower half of the population into poverty while saving the world, so even if Obama can be what we need, he would require a lot of support from the general population to get Congress to wake up and embrace reality.
What's required from policy makers now are business- (especially manufacturing-) friendly moves which must include an energy policy aimed at stability and much greater domestic production of energy, but those have to be combined with a reduction of business interests which have manipulated policies such as massive immigration which is not free to bargain, either because the immigrants are illegal or they are conditional residence serfs. In recent years we have shown a stunning ability to pick the worst of all possible solutions.
We're not going to get any help from ROW, because here is a list of some of the economies in or sliding into recession:
``We're in a recession,'' Allen Sinai, chief economist at Decision Economics Inc. in New York, said in a Bloomberg Television interview. ``It's going to widen, it's going to deepen.''It's the imputed incomes that really messed much of last year's stats.
...
The largest downward revision was for the last three months of 2007, as the previously reported 2.3 percent gain in consumer spending was reduced by more than half, to 1 percent. Americans cut back on the use of electricity and gas as fuel bills soared.
The brighter side is that this is a slow, creeping double-dip recession. According to my stats, we spent about 5 months negative, then turned and went weakly positive on an industrial/ag expansion which was just strong enough to boost services, and are now turning down again. However, it looks like we've got enough oomph (counter-cycle) still in the system that this second downturn won't be too deep.
Trough on the second downturn looks to be second quarter 2009, assuming that we don't do anything too stupid. What happens after that depends on government policy.
I won't be blogging for a bit because the new treatment works spectacularly well, but it is causing transitory problems, i.e., severe dyslexia such that I cannot write very well. I'm due to give myself the next shot in about two hours, which will probably make me illiterate for the next two days.
Have fun shrieking in the comments. When I can stop the symphony playing in my head long enough to write I'll continue. The economic paradox we are facing is that we truly need an old-time Dem in office right now. We have got to change our policies enough to put some stimulus into the lower half of the income bracket, and we don't have too many options to do it. We don't have the money to send people checks all the time, and we haven't been saving for retirements so we can't cut taxes much or at all on the bottom two-thirds of the income distribution. Our tax pyramid is sharp enough that we can't afford to raise them too much on the next 20% of the income distribution either, and if you target just the top you are asking for flight. Ronald Reagan did more to raise the incomes of the bottom half of the distribution than the modern Dems, which should tell us all something.
The question is "Can Obama be that Democrat?" It's obvious that Pelosi is the new breed of elitist Democrat that thinks quite differently than the old breed. She seems essentially Greenspan-like in believing that the solution is to crush the lower half of the population into poverty while saving the world, so even if Obama can be what we need, he would require a lot of support from the general population to get Congress to wake up and embrace reality.
What's required from policy makers now are business- (especially manufacturing-) friendly moves which must include an energy policy aimed at stability and much greater domestic production of energy, but those have to be combined with a reduction of business interests which have manipulated policies such as massive immigration which is not free to bargain, either because the immigrants are illegal or they are conditional residence serfs. In recent years we have shown a stunning ability to pick the worst of all possible solutions.
We're not going to get any help from ROW, because here is a list of some of the economies in or sliding into recession:
- Iceland, Denmark, Ireland, Spain
- Estonia, Latvia,
- UK, Italy, New Zealand
- Japan,
- Germany,
- France? Maybe their reforms will help enough to prevent it. Their 35 hour week policy has hurt them so much for so long that reversing it should really help to bolster incomes and spending.
- Australia is probably going to be in recession by fourth quarter.
- India is in a situation in which its PPI is exceeding income growth, so it will be a much weaker force of international stimulus.
- Indonesia and Malaysia are in some trouble; Indonesia's going to feel the impact of weak power infrastructure and Japan's weakness, and Malaysia will get a double whammy if growth in China slows significantly.
- With Europe sinking into recessionary territory, China will be hurt. China would be able to weather a US slowdown or a Europeans slowdown, but not dual recessions.
Monday, July 28, 2008
How Far Does Oil Have To Drop?
How far does oil have to drop in order to reverse the current growth-sapping and inflating trend?
This is a startlingly accurate Bloomberg article regarding the mechanics of fuel subsidies in Asia, but the predictions listed don't match the mechanics very well:
Asian manufacturers have mostly been shielded from the energy market, which has in part led to overcapacity:
Nor is it at all reasonable to expect exports to Europe to rise in a situation in which food consumption in developed Europe is stagnant or falling (see Carrefour report). Wages have been generally stagnant in two of Europe's largest economies, France and Germany, and a relatively high percentage of the population of much of old Europe is living on pensions. France is trying to offset the trend by reversing the 35 hour workweek rule, which should enhance productivity and provide a way to boost worker incomes. Germany, not having ever gone quite that far, must depend on generating new jobs. The German consumer too is highly pressured:
Nor is the US unaffected. There is going to be a large follow-on shock as utility costs rise sharply for consumers over the next couple of years due to expiration and renewal of contracts, and due to higher delivery costs which are closely correlated with the price of diesel fuel. In May, coal prices had risen to about the level of aggregate oil import prices per barrel, and continued to rise in relationship:
The continued diversion of consumer income toward the basics now taking place in the highly developed economies will continue to impact Asian countries with high consumer exports for years to come. Evidence suggests that consumer demand will be constrained for years as minor price declines in gas are more than offset by higher utility and space heating costs.
If spot oil were to drop to May aggregate import costs of around $96, the evidence suggests that consumer buying power would still be constricted further on net consumer energy cost increases.
This is a startlingly accurate Bloomberg article regarding the mechanics of fuel subsidies in Asia, but the predictions listed don't match the mechanics very well:
Governments are being forced to choose between two unattractive alternatives: run up bigger deficits by continuing to shield citizens from soaring energy prices, or start to withdraw subsidies, fueling inflation and political backlash.Note that either choice inflicts demand destruction for most of these countries. Higher deficits will induce worry over currencies, and cause capital outflow, which will weaken currencies further. (A la India.) That will boost overall inflation in these countries. Cutting the subsidies significantly inflicts huge pain on the domestic population, which collapses internal demand. The best way to walk the tightrope is to change the subsidies from an economy-wide subsidy (including manufacturers) to a subsidy directly to the poorer people. However such a subsidy is still very costly for the governments, so the cost moved to the companies and wealthier population will have to be significant. That cuts demand and cuts growth.
Asian manufacturers have mostly been shielded from the energy market, which has in part led to overcapacity:
At stake is one of the pillars of the Asian economic miracle of the last decade. Below-market fuel and power costs made it cheaper for manufacturers in export-dependent economies to operate, giving them a competitive advantage over rivals in other markets. Subsidized prices also left consumers with more disposable income, boosting demand for goods and services.Some countries, such as China, have been letting their currency rise. But that strategy is just about at an end for China. As costs rise and the currency rises, it's hard to sustain exports and the Guangdong exodus appears to be picking up speed. China's CPI may be dropping on price controls, but its PPI hit 8.8% in June, perilously close to GDP growth. The Chinese government clearly realizes the danger, and is now trying to reopen a lot of domestic coal mines to alleviate coal shortages. Unless it has rising corporate profits to continue to defray the cost of its subsidies, the entire structure comes tumbling down.
Now, higher costs will erode the export edge. That may lead to more shuttered factories in countries such as China that already have more manufacturing capacity than they need to meet domestic and foreign demand, putting millions of people out of work.
Hong Kong companies may close 20,000 plants in the neighboring Chinese province of Guangdong this year as higher wages and fuel prices raise costs, the Hong Kong Small and Medium Enterprises Association said last month.
Nor is it at all reasonable to expect exports to Europe to rise in a situation in which food consumption in developed Europe is stagnant or falling (see Carrefour report). Wages have been generally stagnant in two of Europe's largest economies, France and Germany, and a relatively high percentage of the population of much of old Europe is living on pensions. France is trying to offset the trend by reversing the 35 hour workweek rule, which should enhance productivity and provide a way to boost worker incomes. Germany, not having ever gone quite that far, must depend on generating new jobs. The German consumer too is highly pressured:
A sub-index measuring income expectations decreased to minus 20 from minus 7.2 and a gauge of consumers' propensity to spend fell to minus 26.2 from minus 23.7. A measure of economic expectations plunged to minus 8 from 7.5.Now back to oil prices. It's important to acknowledge that the runup in oil prices has affected other energy costs by increasing their relative demand. The rise in coal pricing in particular appears to have reached a breaking point for China and India, with China imposing price caps on thermal coal, shutting down some rural power plants and trying to reopen domestic mines, and with India trying to get investors interested in reopening over 20 coal mines which had been abandoned. One only needs to look at this graph to understand how sharp and sudden the change has been:
Praktiker AG, the second-largest home-improvement retailer, in Germany cut its full-year sales growth forecast on July 23 as households curb spending. The Kirkel-based company expects sales to rise at a ``low-single-digit'' pace this year instead of the ``mid-single-digit'' previously projected.
Nor is the US unaffected. There is going to be a large follow-on shock as utility costs rise sharply for consumers over the next couple of years due to expiration and renewal of contracts, and due to higher delivery costs which are closely correlated with the price of diesel fuel. In May, coal prices had risen to about the level of aggregate oil import prices per barrel, and continued to rise in relationship:
Kolton, whose modeling is used by large energy and financial services companies, said history has shown repeatedly that when the cost of oil shoots up, the cost of other energy sources follows. He acknowledged that the increase in coal prices the past year has been extraordinary, even when taking into account the higher oil prices.That's what is controlling the market; the other half of the equation is that when coal prices become unsustainable, the whole energy market is set for declines.
Kolton’s studies show that when the price of crude oil increases 15 percent in a 20-day period while the U.S. dollar is weakening, there’s a 75 percent chance that coal prices will rise 20 percent. There have been three instances in the past two months in which crude-oil prices rose 15 percent and the dollar continued to weaken.
The continued diversion of consumer income toward the basics now taking place in the highly developed economies will continue to impact Asian countries with high consumer exports for years to come. Evidence suggests that consumer demand will be constrained for years as minor price declines in gas are more than offset by higher utility and space heating costs.
If spot oil were to drop to May aggregate import costs of around $96, the evidence suggests that consumer buying power would still be constricted further on net consumer energy cost increases.
Sunday, July 27, 2008
Lights On, Computer Up
Going back to that post in which I commented that I thought Obama was essentially a postmodernist -
First, a little more information on post-modernism. Wikipedia (this definition made me laugh, because it is so true at times):
One of the more hilarious elaborations of post-modernism is feminist epistemology:
If some reader is not familiar with the full-bodied modern explications of post-modernism, the story of the Dartmouth professor who decided to sue her students will serve as an introduction. Here is her version of the problem with her students. Here is an article she wrote about working as a post-doc researcher at Dartmouth Medical School, which may give a hint as to why her students were so, ah, unwilling to assent to her view of the world:
The tight framework of scientific method mandates figuring out what would disprove the theory being tested and then looking for the disproof. The thought process that spawned the scientific revolution was inherently skeptical, which is why disciples of scientific method say that no theory can be definitively and absolutely proved, but only disproved (falsified). Hypotheses are elevated to the status of theories largely as a result of continued failures to disprove the theory and continued conformity of experimentation and observation with the theory, and such efforts should be conducted by diverse parties.
Needless to say postmodernist schools of thought and scientific method are almost polar opposites.
Postmodernism can be highly humanistic in purpose, but in practice it tends toward solipsism, and it overcomes that tendency by building mutual narratives among groups with shared purposes.
The reasons why Obama seems quite postmodernist in his approach to me are:
*On this latest trip, in Israel saying that the banking committee is his committee.
First, a little more information on post-modernism. Wikipedia (this definition made me laugh, because it is so true at times):
Postmodernism is a term originating in art, literature, philosophy, historiography, theology, architecture and culture in general before branching out into a wider range of topics. It literally means 'after the modern'. It has been used in critical theory to refer to a point of departure for works of literature, drama, architecture, and design, as well as in marketing and business and the interpretation of history, law and culture in the late 20th century.There is a school of Marxism, usually called neo-Marxism, which draws on post-modernism. But I don't think Obama is a Marxist.Postmodernism was originally a reaction to modernism. Largely influenced by the Western European disillusionment induced by World War II, postmodernism tends to refer to a cultural, intellectual, or artistic state lacking a clear central hierarchy or organizing principle and embodying extreme complexity, contradiction, ambiguity, diversity, interconnectedness or interreferentiality,[1] in a way that is often indistinguishable from a parody of itself. It has given rise to charges of fraudulence.[2]
One of the more hilarious elaborations of post-modernism is feminist epistemology:
It embodies a skeptical sensibility that questions attempts to transcend our situatedness by appeal to such ideas as universality, necessity, objectivity, rationality, essence, unity, totality, foundations, and ultimate Truth and Reality. It stresses the locality, partiality, contingency, instability, uncertainty, ambiguity and essential contestability of any particular account of the world, the self, and the good. Politically, the postmodernist emphasis on revealing the situatedness and contestability of any particular claim or system of thought is supposed to serve both critical and liberatory functions. It delegitimizes ideas that dominate and exclude by undermining their claims to transcendent justification. And it opens up space for imagining alternative possibilities that were obscured by those claims.Also see critical theory. In general, the later elaborations of post-modernism have stressed the right of classes of persons to "construct" their own visions of the world and versions of events.
Although postmodernist themes are often expressed in an obscure jargon, they can be cast in terms more familiar to analytic philosophers. Postmodernists begin with ideas about language and systems of thought. They claim that (what we think of as) reality is “discursively constructed.” This is the linguistic version of the now inescapable (!) Kantian thought that our minds grasp things not as they are “in themselves” but only through concepts, signified by words. “The linguistic sign acts reflexively, not referentially” in a “discursive field.” This is a version of radical meaning holism: signs get their meaning not from their reference to external things but from their relations to all of the other signs in a system of discourse.
If some reader is not familiar with the full-bodied modern explications of post-modernism, the story of the Dartmouth professor who decided to sue her students will serve as an introduction. Here is her version of the problem with her students. Here is an article she wrote about working as a post-doc researcher at Dartmouth Medical School, which may give a hint as to why her students were so, ah, unwilling to assent to her view of the world:
In graduate school, I was inculcated in the tenets of a field known as science studies, which teaches that scientific knowledge has suspect access to truth and that science is motivated by politics and human interest. This is known as social constructivism and is the reigning mantra in science studies, which considers historical and sociological understandings of science. From the vantage point of social constructivism, scientific facts are not discovered but rather created within a social framework. In other words, scientific facts do not correspond to a natural reality but conform to a social construct.For those of you who cling to scientific method, this is pretty bizarre stuff. But she, and many others, are dead serious about it. If a research finding could harm a class of persons, the theory is that scientists should change the way they talk about that finding. Since scientific method is a way of building a body of knowledge based on skeptical testing, replication, and publication, this is a problem.
Lab: As a practicing scientist, I feel these views need to be qualified in the context of literary inquiry. My mentor, Chris Lowrey, is an extraordinary physician- scientist whose vision of science is pragmatic and positivist. My experience in his lab has shown me that the practice of science is at least partly motivated by the scientific method, though with some qualifications.
...
Through my experience in the laboratory, I have found that postmodernism offers a constructive critique of science in ways that social constructivism cannot, due to postmodernism's emphasis on openly addressing the presupposed moral aims of science. In other words, I find that while an individual ethic of motivation exists, and indeed guides the conduct of laboratory routine, I have also observed that a moral framework—one in which the social implications of science and technology are addressed—is clearly absent in scientific settings. Yet I believe such a framework is necessary. Postmodernism maintains that it is within the rhetorical apparatus of science—how scientists talk about their work—that these moral aims of science may be accomplished.
The tight framework of scientific method mandates figuring out what would disprove the theory being tested and then looking for the disproof. The thought process that spawned the scientific revolution was inherently skeptical, which is why disciples of scientific method say that no theory can be definitively and absolutely proved, but only disproved (falsified). Hypotheses are elevated to the status of theories largely as a result of continued failures to disprove the theory and continued conformity of experimentation and observation with the theory, and such efforts should be conducted by diverse parties.
Needless to say postmodernist schools of thought and scientific method are almost polar opposites.
Postmodernism can be highly humanistic in purpose, but in practice it tends toward solipsism, and it overcomes that tendency by building mutual narratives among groups with shared purposes.
The reasons why Obama seems quite postmodernist in his approach to me are:
- He consistently misstates or misapplies facts when necessary to build a convincing narrative*,
- He seems to believe that the process of building a mutual narrative is important, and that the way to reconcile groups is to reconcile their narratives,
- His own description of the impact Wright had on him was focused on the power of Wright's narrative,
- His unwillingness to disavow Wright's narrative (to post-modernists, disavowing a group or individual narrative is equivalent to attacking the group or individual),
- His actual tactics may have nothing to do with his narrative.
"People began to shout, to rise from their seats and clap and cry out, a forceful wind carrying the reverend's voice up into the rafters....And in that single note - hope! - I heard something else; at the foot of that cross, inside the thousands of churches across the city, I imagined the stories of ordinary black people merging with the stories of David and Goliath, Moses and Pharaoh, the Christians in the lion's den, Ezekiel's field of dry bones. Those stories - of survival, and freedom, and hope - became our story, my story; the blood that had spilled was our blood, the tears our tears; until this black church, on this bright day, seemed once more a vessel carrying the story of a people into future generations and into a larger world. Our trials and triumphs became at once unique and universal, black and more than black; in chronicling our journey, the stories and songs gave us a means to reclaim memories that we didn't need to feel shame about...memories that all people might study and cherish - and with which we could start to rebuild."With Obama, the play's the thing, and he prays for a muse of fire, not in order to correctly depict what has happened on his small stage, but in order to construct a vision which will control the future. He loved the bit about the black Jesus because it worked, not because it was accurate, nor was it even necessary. If you do believe that Jesus is the sinless Son of God, Lord knows there's a difference between him and the rest of us.
*On this latest trip, in Israel saying that the banking committee is his committee.
Well, THAT Drought Is Over
Sorry I've been absent. The modem's been unplugged and I have been working on the computer, when I've been able to work at all, using the battery. I don't ever remember such an onslaught of thunderstorms continuing for so long, but truthfully, we needed it. Everything was brown and the trees were wilting and shedding leaves. That's the bright side. The bad side is that the river is awfully high....
I hope I am not daring fate by plugging everything back up. It was sort of sunny just a moment ago, but now it's dark again and I hear rumbling. I'll post this and then try another post getting back to the previous one.
I hope I am not daring fate by plugging everything back up. It was sort of sunny just a moment ago, but now it's dark again and I hear rumbling. I'll post this and then try another post getting back to the previous one.
Thursday, July 24, 2008
Post-Modernism And Obama
Two very different types of people, The Anchoress and Shrinkwrapped, posted addressing the same aspect of Obama:
Shrinkwrapped (you really have to read the whole thing):
Shrinkwrapped (you really have to read the whole thing):
The Anchoress, who pulls no punches:The world has changed but Barack Obama, emerging as he does from the hallways of academic excellence, sees the world through the eyes of an intellectual and apparently has ingested an unhealthy mix of intellectual arrogance and the over-valuation of language that is part of the academic culture. This may well sabotage his campaign; in the event he is elected President, it bodes poorly for his administration.
When Barack Obama expressly contradicts himself within minutes of making a comment, there are several possible explanations for his facility with the language:
1) It is possible, perhaps likely, that Obama simply does not believe it is wise or necessary for him to admit an error. This is an accusation that has been made about President Bush on a regular basis, and has contributed to the tribulations of the Bush Presidency.
2) Obama may well be able to convince himself, probably post facto, that his words mean just what he wants them to mean, a la Humpty Dumpty, and therefore doesn't consider the contradictions to be significant.
3) He may believe that he still lives in a world dominated by the MSM, that they will continue to cover for him as they have done since the beginning of his campaign, and that there is no need for him to maintain any consistency or explain any contradictions.
4) In the worst case scenario, he may well be an opportunistic sociopath who lies because he thinks he can get away with it.
In most colleges, Communications 101 teaches that in order to give a really memorable and meaningful speech, a speaker should have a genuine issue to speak about, and some relevance to the occasion.I think I disagree with the Shrink. I think Obama believes not that the actual meaning of what he says is important, but rather that the effect his words have on the hearer is important. This is the key to why he could tolerate Wright's church for so long, because it would have sent most traditionally well-educated people out, screaming in frustration. Post-modernists truly do not believe in objective meaning.
...
Senator Barack Obama went to Berlin today, a place to which he had no real connection, to make a speech for no actual reason, on no special occasion, and the speech reflected it. It was a brief speech of many words and a lot of filler.
Our Political Dilemma In A Nutshell
Bob of Liberative posts in wrath and sorrow:
Our dilemma is that we need two viable parties to keep our political system running smoothly, and these ratios suggest that we really don't have two viable parties. We cannot function with this preponderance of representatives who believe controlling language can control reality. Either we roll a substantive portion of such seats back to old-time Democrats, or we are going to have to start a new third party.
Even if you are a die-hard Republican, you have to recognize the reality that a party which just gets elections handed to it won't have the checks and balances needed to keep its own nose to the grindstone. Without meaningful opposition the GOP will become wacky and arrogant.
As Hoekstra commented (source link at CounterTerrorism):
For the other side of the story, here are two of the documents generated about appropriate terminology.
Stuff like (from the second link):
From the first document:
Anyway, if you read many ME sources, there is a real debate going on, and it is not a trivial, ignorant debate. Try Mideast Youth and start with this post about Samir Kuntar, and follow it with this one.
Apparently 3/4 of the Democrats in the House thuink that political correctness is more important than properly describing people and organizations which really, really want to kill as many free people as possible.He goes on to describe the voting on Hoekstra's amendment (via CounterTerrorism):
Hoekstra's amendment condemned efforts by the Department of Homeland Security (DHS), National Counter Terrorism Center (NCTC), and the State Department to recommend a "terror lexicon" that prohibits use of words such as "Jihad," "jihadist," "Islamist," "mujahadeen," "caliphate," etc. In this amendment, Congressman Hoekstra called for the House of Representatives to prohibit the use of intelligence funding in support of such "terror lexicon" efforts.178 Democrats and 2 Republicans wouldn't vote to prevent the bureaucrats from attempting to Brave New World our language, and as Bob notes:
I am beginning to understand the total contempt in which the Left is held by the Right-wing blogosphere. This should have been unanimously approved - and more to the point, should never have been needed in the first place.55 Democrats voted for the amendment so it's not all lost.
Our dilemma is that we need two viable parties to keep our political system running smoothly, and these ratios suggest that we really don't have two viable parties. We cannot function with this preponderance of representatives who believe controlling language can control reality. Either we roll a substantive portion of such seats back to old-time Democrats, or we are going to have to start a new third party.
Even if you are a die-hard Republican, you have to recognize the reality that a party which just gets elections handed to it won't have the checks and balances needed to keep its own nose to the grindstone. Without meaningful opposition the GOP will become wacky and arrogant.
As Hoekstra commented (source link at CounterTerrorism):
"Al Qaeda itself uses these terms to describe its fight against America, our allies, and moderate Muslims around the world. Why then would we prohibit our intelligence professionals from using the same words to accurately describe al Qaeda's stated goals?"The list of all the representatives who voted against the amendment is posted at CounterTerrorism. In that list I found some GA representatives - John Barrow, Sanford Bishop, Henry Johnson, John Lewis, and David Scott.
"Yet that is exactly what some in Washington are attempting to do. I was dismayed to learn that over the past few months, intelligence bureaucrats at the State Department, the National Coun ter ter ror ism Center, and the Department of Homeland Security have issued memos imposing speech codes on how their employees can describe al Qaeda and other radical jihadist groups. They won't even be able to use the words these groups use themselves to describe themselves. These agencies within the intelligence community won't be able to use those words."
"Mr. Chairman, free speech should not be controversial, nor should candid, accurate, and fair discussion of the self-professed goals of the terrorists that attack our homeland and have sworn to kill more Americans."
...
"How will America understand the nature and the character of our enemy if we can’t use the words that they use to describe themselves and we need to come up with a whole new language that is totally out of context with the enemy and the nature of the threat that we face today?"
For the other side of the story, here are two of the documents generated about appropriate terminology.
Stuff like (from the second link):
The same is true of the moniker "Islamist" (or the related "Islamism"), which many have used to refer to individuals who view Islam as a political system in addition to a religion. The experts we consulted did not criticize this usage based on accuracy; indeed, they acknowledged that academics and commentators, including some in the Arab and Muslim Worlds, regularly use "Islamist" to describe people and movements. Nevertheless, they caution that it may not be strategic for USG of£icials to use the term because the general public, including overseas audiences, may not appreciate the academic distinction between Islamism and Islam. In the experts' estimation, this may still be true: albeit to a lesser extent, even if government officials add qualifiers, e.g. "violent Islamists" or "radical Islamism."doesn't seem quite right. What they are really saying is that we'll offend people if we speak accurately, and this seems extremely close to the Danish situation. We should think twice before agreeing to suppress our own culture in order to placate another.
From the first document:
Don't Invoke Islam: Although the al-Qaida network exploits religious sentiments and tries to use religion to justify its actions, we should treat it as an illegitimate political organization, both terrorist and criminal.I think this document comes off as a more legitimate attempt to control imagery in the target audience's mind. However, it begs the question a bit, doesn't it? If we do not address the "Islamic" part of the ideology motivating such organizations, there will be no distinction formed between Muslim schools that differ from these interpretations. Furthermore, this is an exceptionally bad strategy for dealing with domestic Islam, which includes those of both schools. I also feel that this approach is irrationally condescending towards Muslims in all nations, whose thinking and cultures are almost infinitely more varied and multi-faceted than the documents above would suggest. Treating Muslims and Muslim cultures as determined by their lowest common denominator is as stupid as treating the West as if the western cultures are guided solely by the stupidest among these societies.
...
Keep the focus on the Terrorist, not us. Change the discussion from "the West vs. Islam'' or a "Clash of Civilizations" to the fight between civilization as a whole and terrorists. We need to emphasize that terrorists misuse religion as a political tool to harm innocent civilians across the globe.
Anyway, if you read many ME sources, there is a real debate going on, and it is not a trivial, ignorant debate. Try Mideast Youth and start with this post about Samir Kuntar, and follow it with this one.
Thursday
Initial claims were surprisingly good. It looks as if the big bulge in NSA's last week was from school closings. Current NSA initial claims are 414,249. The prior two weeks were 484,305 and 401,672. Continuing claims - both NSA and seasonally adjusted - remain somewhat under the 600,000 plus level from last year.
However I doubt this can last, because the global news is turning much more broadly negative. June Japanese exports fell 1.7% on the year:
It's no surprise that exports to Europe are slowing; European manufacturing and services have been contracting for a couple of months. The third quarter is not going to show much if any growth, and it may well be negative. Italian business confidence has fallen to a 7 year low.
In just a bit we get US existing home sales, which are sure to be depressing.
However I doubt this can last, because the global news is turning much more broadly negative. June Japanese exports fell 1.7% on the year:
Exports to the U.S. slid 15.4 percent, a 10th monthly drop and the biggest since November 2003. Shipments to Europe fell 11.2 percent, the second straight decline.As Chinese exports to the west slow the Chinese contribution to Japanese growth will slow.
...
Exports to Asia rose 1.5 percent, the slowest pace in two years. Growth in shipments to China slowed to 5.1 percent from 12.2 percent in May.
It's no surprise that exports to Europe are slowing; European manufacturing and services have been contracting for a couple of months. The third quarter is not going to show much if any growth, and it may well be negative. Italian business confidence has fallen to a 7 year low.
In just a bit we get US existing home sales, which are sure to be depressing.
Wednesday, July 23, 2008
LOLCongress
If they really think they can control the price of oil....
Congress really can't tell a speculative trade designed to move the market from a legitimate futures trade. It is true that one of these things is not like the others, but does Congress know?
The concept of disclosing what trades are being made isn't bad, or at least disclosing aggregated trades by entity would help, and some more regulation of the ICE trades would be worthwhile. But limiting the number of trades by entity? Dingbat to say the least.
Congress really can't tell a speculative trade designed to move the market from a legitimate futures trade. It is true that one of these things is not like the others, but does Congress know?
The concept of disclosing what trades are being made isn't bad, or at least disclosing aggregated trades by entity would help, and some more regulation of the ICE trades would be worthwhile. But limiting the number of trades by entity? Dingbat to say the least.
Tuesday, July 22, 2008
Hurricane Dancing Fails; Energy Slides To New Lows
A good weather witch could make big bucks in Texas these days. Look at that collapse after energy futures crept higher on hurricane hopes. This is the third horseman of the energy traders' apocalypse.
The only remaining hope is WAR. Perhaps the State Department should try to curtail foreign travel of those with large energy interests for a few months.
The only remaining hope is WAR. Perhaps the State Department should try to curtail foreign travel of those with large energy interests for a few months.
The Problems With On-Grid Wind Power
I'm sure this is all nothing new to the technically astute, but I was completely shocked when I started checking into the various European wind power projects. I have read so much about the great advances that countries such as Denmark and Germany have made.
Electric grids for the technically illiterate: Think of electricity like water flowing in system of channels on which ships transport. If the water level drops in one area, water will naturally flow into it. Alternatively, if water surges in one place, it will go over the banks and make that part of the system unusable. The more variable the water flow and the more points at which water flows into the overall system, the higher the cost of installing locks, dams and breaks to control the flow of water and keep the system operational.
Here's what I found in research. First, E.on is Germany's largest utility company. Here is their 2005 Wind Report in pdf. I would recommend to everyone to read it. Sometimes they can use the wind power and sometimes they can't, and because their effective usage is so low, they have to keep building traditional power plants. In 2004 the average feed-in to the grid varied between about one third and zero percent of the load. Obviously that sort of performance places upper limits on usage. I quote:
The 2007 UK energy report (pdf, 60 some pages) shows a similar trend in the UK, with total waste and renewable usage amounting to 1.8% of all usage, and the "natural" percent of total energy consumption falling over time. See pages 3 and 4 here. More detailed tables are on pgs 11-13, and a detailed look at renewables begins on page 57.
Denmark hasn't had much luck with its wind either - it is getting very little replacement grid power out of all the capacity it has installed.
Here is a paper for dullards like me who didn't understand the implications of trying to hook highly variable wind power into a power grid. The bottom line is that effective usage is low and that actual replacement effect is even lower:
One possible, but grossly inefficient, solution might be to take the wind capacity and divert it to storage somehow off-grid, which storage could then be used by a conventional plant. But the same laws of physics that prevent a perpetual motion machine from being constructed mean losses of efficiency as power is converted from one stage to another.
Jimmy J. left this link in comments to a prior post about alternate energy, and I recommend reading the 2002 USS Clueless post on alternate energy. There appears to be a very close correlation between heavy investments in wind turbines and extremely high utility bills, and after looking at the Danish and German results I can see why. In the end, perhaps offshore wind turbines used to pump more water into tidal pools to produce tidal turbine energy (a somewhat regular source if supplemented by additional pumping) might provide some reasonable on-grid supplement, but it doesn't seem likely to ever amount to that much, and the environmental impact would not be negligible.
By the way, if you are a carbon bug you should not ignore the CO2 from all that concrete poured for those wind turbine footings. Concrete accounts for a significant portion of anthropogenic CO2.
I spent some time going through the ERCOT (Electric Reliability Council of Texas) docs. This pdf shows that they are seeing the same potential problem. They have done extensive planning work, including commissioning data generation for simulations, etc. See for instance minutes of this meeting:
Electric grids for the technically illiterate: Think of electricity like water flowing in system of channels on which ships transport. If the water level drops in one area, water will naturally flow into it. Alternatively, if water surges in one place, it will go over the banks and make that part of the system unusable. The more variable the water flow and the more points at which water flows into the overall system, the higher the cost of installing locks, dams and breaks to control the flow of water and keep the system operational.
Here's what I found in research. First, E.on is Germany's largest utility company. Here is their 2005 Wind Report in pdf. I would recommend to everyone to read it. Sometimes they can use the wind power and sometimes they can't, and because their effective usage is so low, they have to keep building traditional power plants. In 2004 the average feed-in to the grid varied between about one third and zero percent of the load. Obviously that sort of performance places upper limits on usage. I quote:
As wind power capacity rises, the lower availability of the wind farms determines the reliability of the system as a whole to an ever increasing extent. Consequently the greater reliability of traditional power stations becomes increasingly eclipsed.The rest of the report comments on the grid problems and the need for specialized control of wind turbines, plus upgrade of the transmission lines and grid to deal with the pulsing of wind power. They have invested in programs to predict and control it, but they haven't produced much effect. Now they are looking to replace the older turbines with newer, taller ones and to move offshore for more reliable winds. At the end of the report they discuss the potential for grid instability, and cheerfully note that if they are not careful, they may blow up pieces of the Polish, Netherlands and Czech power supply. On page 22 they forecast some improvement of the instability situation through 2010 due to various technical steps, but then:
As a result, the relative contribution of wind power to the guaranteed capacity of our supply system up to the year 2020 will fall continuously to around 4% (FIGURE 7). In concrete terms, this means that in 2020, with a forecast wind power capacity of over 48,000MW (Source: dena grid study), 2,000MW of traditional power production can be replaced by these wind farms.
By the 2010 consistent adherence to and implementation of the grid connection rules is expected to temporarily relieve the situation and to bring a reduction in wind power feed-in failures in the event of grid problems.They seem to be suggesting that a lot of the older installations will have to be dismantled or disconnected. This data explains why as of 2008, work on new coal plants in Germany is proceeding at a rapid rate. See this short blog post for some nice links. Apparently they haven't found a way to mitigate the risk. LA Times article about Europe's and Germany's coal plans.
However, the grid stabilising effect of traditional power stations would be lost as they are shut down for a variety of reasons, such as age or an increase in other forms of generation. At the same time, in ten years time there will still be a large number of older wind farms in Germany feeding into the grid, which do not have the necessary grid supporting features. There is therefore a risk that even simple grid problems will lead to the sudden failure of over 3,000MW of wind power feed-in. In this case, the reserves maintained in the Integrated European Transmission System, in order to cope with problems, would no longer be adequate to safely tackle such failures.
At the present time, it is not known how to confront this risk. Investigations must be made to determine to what extent the situation can be improved by replacing turbines at older wind farms or by introducing additional technical equipment to support the transmission system in the event of faults, or whether additional feed-in restrictions measures will be needed for old plants.
The 2007 UK energy report (pdf, 60 some pages) shows a similar trend in the UK, with total waste and renewable usage amounting to 1.8% of all usage, and the "natural" percent of total energy consumption falling over time. See pages 3 and 4 here. More detailed tables are on pgs 11-13, and a detailed look at renewables begins on page 57.
Denmark hasn't had much luck with its wind either - it is getting very little replacement grid power out of all the capacity it has installed.
Here is a paper for dullards like me who didn't understand the implications of trying to hook highly variable wind power into a power grid. The bottom line is that effective usage is low and that actual replacement effect is even lower:
A power station takes days to start producing electricity from a cold start. Time is needed to boil the water, to superheat the steam, to warm all the components of the power station, and to spin the turbogenerators up to operating speed.So if you are installing a bunch of new coal power plants to handle load, you will really be running them all the time with very little savings of fossil fuels. You can control some of the grid surge by diverting the power production away from the grid when your wind kicks in, but that of course doesn't change fuel consumption very much.
Each power station is designed to provide an output of electricity. It can only provide very little more or very little less than this output (i.e., a power station has a "low turndown ratio").
...
The problem of matching electricity supply to varying demand is overcome by operating power stations in three modes called "base load," "generation," and "spinning standby."
Some power stations operate all the time providing electricity to the grid, and they are said to provide "base load."
Other power stations also operate all the time but do not provide electricity all the time. They burn (or fission) their fuel to boil water and superheat the resulting steam which is fed to the steam turbines that are thus kept hot and spinning all the time. Of course, they emit all the emissions from use of their fuel all the time. But some of this time they dump heat from their cooling towers instead of generating electricity, and they are then said to be operating "spinning standby."
One or more power stations can be instantly switched from spinning standby to provide electricity to match an increase to demand for electricity. It is said to be operating "generation" when it is providing electricity. Power stations are switched between spinning standby and generation as demand for electricity changes.
Thus the grid operator manages the system to match supply with demand for electricity by switching power stations between "generation" and "spinning standby."
One possible, but grossly inefficient, solution might be to take the wind capacity and divert it to storage somehow off-grid, which storage could then be used by a conventional plant. But the same laws of physics that prevent a perpetual motion machine from being constructed mean losses of efficiency as power is converted from one stage to another.
Jimmy J. left this link in comments to a prior post about alternate energy, and I recommend reading the 2002 USS Clueless post on alternate energy. There appears to be a very close correlation between heavy investments in wind turbines and extremely high utility bills, and after looking at the Danish and German results I can see why. In the end, perhaps offshore wind turbines used to pump more water into tidal pools to produce tidal turbine energy (a somewhat regular source if supplemented by additional pumping) might provide some reasonable on-grid supplement, but it doesn't seem likely to ever amount to that much, and the environmental impact would not be negligible.
By the way, if you are a carbon bug you should not ignore the CO2 from all that concrete poured for those wind turbine footings. Concrete accounts for a significant portion of anthropogenic CO2.
I spent some time going through the ERCOT (Electric Reliability Council of Texas) docs. This pdf shows that they are seeing the same potential problem. They have done extensive planning work, including commissioning data generation for simulations, etc. See for instance minutes of this meeting:
Regarding the February 8, 2007 event, participants noted that EECP is triggered when weather fronts cause an increase in Load; that schedule changes are causing deployment of RRS, which is a Schedule Control Error (SCE) problem; and that EECP was enacted and maintained for half and hour, even though the system was already in recovery, in case there was another event.They're already seeing the problem with adding wind power to the grid. There is a 2006 120 page pdf report on some of the issues available online. Here is the summary:
Regarding the February 24, 2007 event, wherein large winds persisted state-wide, participants discussed the problem of wind coming off due to high wind speeds; the necessity of using planned wind output instead of wind capacity in determining Replacement Reserve Service; and the need for a tutorial on how RRS and Adjusted Responsive Reserve (ARR) is calculated.
Regarding the March 8, 2007 event, participants discussed how to treat wind, as it is not a controllable generator. Mr. Bruce opined that SCE must have meaning on a wind plant, and that forecasting seems better closer to real-time; expressed concern about generic forecasts and bad forecast data; and noted a need for unit-specific forecasting, and a willingness from wind generators to own responsibility for forecasting.
Wind Discussion
Mr. Gonzales-Perez presented issues associated with wind forecasting, the questionnaire sent to wind generation operators, Load ramping versus wind over-speed tripping, Day Ahead schedules versus actual wind output and recent lessons learned. Participants discussed the unusual situation encountered on February 24, 2007; where pressure to improve wind forecasting would be most appropriately applied, whether with ERCOT Operations or QSEs; the impact of the AS study, when the study would be available, and if it would be properly scoped to capture variability in wind generation; and what potential changes will be needed in Protocols and Operating Guides to address increased wind generation and the resultant reliability issues. Dan Jones added that if QSE-level forecasts lead to binding requirements, that binding requirements would need to be considered for all Resources.
- There is significant potential for development of wind resources in Texas.My conclusion is that Texas utility bills are going higher.
- There are currently 2,508 Megawatts (MW) of wind generation in-service in ERCOT.
At least 4,850 MW of wind resources are likely to be in-service by the end of 2007,
and around 17,000 MW of wind generation has requested interconnection analysis.
Much of that current wind generation development is in West Texas.
- Studies indicate that the existing transmission network is fully utilized with respect to
wind transfers from West Texas to the remainder of ERCOT. Thus, new bulk
transmission lines are needed to support significant transfers of additional wind
generation from the West Texas area.
- From a transmission planning perspective, there are four general areas of wind
capacity expansion: the Gulf Coast; the McCamey area, central-western Texas, and
the Texas Panhandle. Transmission solutions for each of these areas are described
in this report which provide an incremental plan for each area and form the basis of
transmission solutions to support combinations of wind development between two or
more areas.
- Some common projects will be needed to mitigate the impact of the new CREZrelated
generation on existing wind generation. Even with these projects, existing
wind generation facilities will be more susceptible to curtailment due their generally
higher shift factors on the remaining system constraints.
- This study does not attempt to capture all of the benefits and costs associated with
the designation of CREZs, but focuses primarily on the direct costs and benefits
related to the electric power system.
- The production cost savings per kW of new wind generation varies little between the
different areas.
- The Coastal area has lower annual capacity factor sites than the other areas but the
wind output is somewhat more coincident with the ERCOT electrical load.
- The Panhandle area has more resources with high annual capacity factors.
- The Coastal area requires the least transmission investment per MW of installed new
wind capacity.
- The transmission cost per MW is higher for the Panhandle area; the higher annual
capacity factor of the resources in this area does not offset this higher cost.
- The first level solution for the Central and McCamey areas use the same bulk
transmission addition, so the designation of CREZs and addition of resources in these
areas must be generally considered in conjunction.
- While transmission solutions were generally developed that provided 1,000 MW
incremental steps for each area, the second step for the McCamey level is larger, in
terms of both cost and MW of wind generation supported; although the cost per MW
of supported wind is similar to the other levels for McCamey and Central areas.
- ERCOT will be performing an analysis of the impact of significant additional wind
generation on the level of the different ancillary services that it procures to maintain
system reliability. In addition, further ERCOT analysis of several issues is needed
once a specific set of CREZs is designated by the PUCT and wind generation
developers have indicated specific locations. These additional analyses include
reactive support needs, dynamic stability analyses, optimization of the “on-ramps”
within the CREZs and analysis of the specific projects or operational procedures
needed to mitigate curtailments of existing wind generation.
Monday, July 21, 2008
Covered Mortgage Bonds
Update: It's not just me. Bloomberg has an article detailing the problems with the proposal. This is no sort of a solution at all.
Hahahaahahahahhahaha! Is Paulson dreaming?
Obviously, the prospective buyer still depends on the credit rating of the issuer, although the prospective buyer won't be left flat if the issuer goes bust. Instead, the buyer will claim the mortgage collateral forming the pool. However substantial counterparty risk remains for the prospective buyer, because the issuer is the guarantor. Now you can add credit enhancements and other bond insurance, but we all know that counterparty risk is popping up there too. My theory right now is that any bond insurance company which is prepared to write insurance on a pool like this is desperate and a very bad risk.
If one is not confident that the issuer will remain a going concern, the real security is the pool of mortgages themselves, and mortgages are selling at a discount. The latest in the saga of covered bonds:
The final rule for covered bonds (the only current culprits are WaMu and Bank of America) has various provisions, but this is the main point:
How this is supposed to be a good option escapes me. Here I am truly tempted to assume that the reason Paulson thinks this is such a wonderful idea is that the pool consolidators will be entities like Goldman Sachs and JPM, who are looking for a revenue source to replace all that Asset-Backed Commercial Paper stuffed into those lovely SIVs. No doubt such folks have been making earnest representations of the incredible potential here now that they figured out not to borrow short and lend long. Nope. There's a new plan in town - borrow long and don't lend at all, but collect significant fees from desperate banks.
There is incredible potential - for the intermediary who collects the fees and takes no risk at all. The bondholders could well get beat, and the hapless bank isn't going to gain much liquidity if wary investors demand OC a la FHLB, plus it will be paying a higher interest rate than to an FHL bank. Since the investment banks have proved that they don't understand mortgages, and since the ratings firms have proved that they don't understand mortgages (they now revise their ratings after default), no doubt these bonds will be flogged as "can't lose" vehicles.
Needless to say this is not really a good source of liquidity for new mortgages, but rather a way to move unsaleable paper. Pooled mortgages only truly spread risk if they are FNMA-type pools without the area risk, with relatively uniform guidelines, and with a well-understood default methodology in which the pools aren't being stuffed with bad paper by a bank about to fail. Needless to say, institution-originated pools wouldn't produce a source of liquidity that would allow a bank to offer low rate mortgages. One would have to be truly idiotic not to demand a big premium on these things compared to agency paper. I think the supply of investing idiots is diminishing due to failures, so I wouldn't count on anyone handing money over near agency rates. I'm sure the ratings firms will be willing to rubber-stamp these bouncing newborns ("an infant of such promise!', they will cry while accepting a check), but truthfully, most institutional investors are no longer convinced by the ratings of the ratings firms. Something about the stream of red ink in their portfolios now generates a subliminal sense of unease when "AAA" is juxtaposed with "mortgage".
This is weirdest, wackiest scheme I have seen proposed aside from the bank-written ones a la our dear friend Howard Milstein.
I do have some risk-management proposals:
A. Bonds from these pools should not be sold to any foreign entities in a country which has nukes, for fear of retaliation. That lets out everyone from France to India to China, so the prospects are pretty narrow.
B. Bonds from these pools should not be sold to any foreign entities in Canada or Mexico. It is true that they will not nuke us, but I consider the danger of cross-border retaliatory raids too great for comfort.
C. Bonds from these pools should not be sold to any foreign entities in any countries that export substantial oil, for fear that we'd be forced to pay up regardless.
D. Bonds from such pools should not be sold to hapless fund managers of 401K capital, because we have a public interest in ensuring that our retirees to have money to eat.
E. Bonds from such pools should not be sold to state and local investment pools because they have problems enough already.
Of course, this leaves truly stupid individual investors, stupid banks, and the investment banks to buy. Hmm.
Somehow I don't think the sausage makers will buy the sausage. The supply of stupid banks will shortly be much diminished. Therefore, if someone sidles up to you and offers you a great deal on any investment having anything to do with mortgages, I suggest that you blow a whistle as hard as you can and run toward a lighted area. You might also want to consider martial-arts classes, or move to a locality that has a Right to Carry law. Some of these salesmen can be aggressive and persuasive.
Hahahaahahahahhahaha! Is Paulson dreaming?
Treasury Secretary Henry Paulson, aiming to create a new source of U.S. mortgage financing, wants banks to start issuing covered bonds without waiting for legislation from Congress.This is sidesplittingly hilarious. The basics of a covered mortgage bond are that there is a pool of mortgages or MBS securing the bond payments, but ownership/credit risk of the mortgage pool remains with the lender or consolidator under terms written into the bond agreement. There will usually be an intermediary holding the pool, and loans in the pool can usually be swapped - essentially, the issuer buys back or swaps loans to maintain the required collateralization level.
Regulators can provide the guidance that lenders are asking to be set in law, said a Treasury official working on the issue who declined to be identified. Banks want a standardized definition of a covered bond, which requires the lender to make good on payments if homeowners default, and guidelines on bondholder protections.
Paulson is promoting the debt as an alternative to mortgage-backed bonds, the securities that sparked more than $426 billion in writedowns and credit losses as delinquency rates soared. Covered bonds also offer a way to diminish the role of Fannie Mae and Freddie Mac, the troubled firms behind more than two-thirds of new U.S. mortgages, according to the Treasury.
Obviously, the prospective buyer still depends on the credit rating of the issuer, although the prospective buyer won't be left flat if the issuer goes bust. Instead, the buyer will claim the mortgage collateral forming the pool. However substantial counterparty risk remains for the prospective buyer, because the issuer is the guarantor. Now you can add credit enhancements and other bond insurance, but we all know that counterparty risk is popping up there too. My theory right now is that any bond insurance company which is prepared to write insurance on a pool like this is desperate and a very bad risk.
If one is not confident that the issuer will remain a going concern, the real security is the pool of mortgages themselves, and mortgages are selling at a discount. The latest in the saga of covered bonds:
The Federal Deposit Insurance Corp., rebuffing requests by banks, issued a final rule on covered bonds on July 15 that will allow investors to access their collateral more quickly in the event of a bank failure. The regulations alleviate some of the industry's concern about how regulators will treat covered bonds when a bank goes under.Do you find that reassuring? It's 45-90 days. Now, the issuer could theoretically have substantial overcollateralization in the mortgage pool. FHL had about double collateral value for its loan to IndyMac:
Outstanding advances from the Federal Home Loan Bank of San Francisco to IndyMac Bank total $10.1 billion. These advances remain fully secured pursuant to the Federal Home Loan Bank of San Francisco’s agreements with IndyMac Bank. The Federal Home Loan Bank of San Francisco has a perfected security interest in approximately $21.6 billion in mortgage loans (unpaid principal balance) and mortgage-backed securities (par amount).Personally, I think that says something; for one thing, these FHL boys aren't fools, and as a side note, Chuck Schumer is a chap who should have his butt paddled in public, which fact I have mentioned before - but I feel like dwelling on this particular fact. Don't be surprised if the man's name keeps popping up for a while. I may take to posting pictures of paddles along with his name around election time.
The final rule for covered bonds (the only current culprits are WaMu and Bank of America) has various provisions, but this is the main point:
As conservator or receiver for an IDI, the FDIC has three options in responding to a properly structured covered bond transaction of the IDI: 1) continue to perform on the covered bond transaction under its terms; 2) pay-off the covered bonds in cash up to the value of the pledged collateral; or 3) allow liquidation of the pledged collateral to pay-off the covered bonds. If the FDIC adopts the first option, it would continue to make the covered bond payments as scheduled. The second or third options would be triggered if the FDIC repudiated the transaction or if a monetary default occurred. In both cases, the par value of the covered bonds plus interest accrued to the date of the appointment of the FDIC as conservator or receiver would be paid in full up to the value of the collateral. If the value of the pledged collateral exceeded the total amount of all valid claims held by the secured parties, this excess value or over collateralization would be returned to the FDIC, as conservator or receiver, for distribution as mandated by the FDIA. On the other hand, if there were insufficient collateral pledged to cover all valid claims by the secured parties, the amount of the claims in excess of the pledged collateral would be unsecured claims in the receivership.Without overcollateralization, the bondholders go to the end of the line in the event of bank failure. So here the FDIC is warning the prospective buyers that they only get the value of the bonds "covered" by the collateral. The banks who really might need to do this probably would get lower interest payments from the FHLB system, so one assumes that the theory is that suckers will step up to buy these things with less collateralization than FHLBs want, which means that the bondholders will lose money if the bank collapses. Needless to say, if a big bank collapses and the FDIC has to go shopping a lot of this paper around, the market price for it will fall.
How this is supposed to be a good option escapes me. Here I am truly tempted to assume that the reason Paulson thinks this is such a wonderful idea is that the pool consolidators will be entities like Goldman Sachs and JPM, who are looking for a revenue source to replace all that Asset-Backed Commercial Paper stuffed into those lovely SIVs. No doubt such folks have been making earnest representations of the incredible potential here now that they figured out not to borrow short and lend long. Nope. There's a new plan in town - borrow long and don't lend at all, but collect significant fees from desperate banks.
There is incredible potential - for the intermediary who collects the fees and takes no risk at all. The bondholders could well get beat, and the hapless bank isn't going to gain much liquidity if wary investors demand OC a la FHLB, plus it will be paying a higher interest rate than to an FHL bank. Since the investment banks have proved that they don't understand mortgages, and since the ratings firms have proved that they don't understand mortgages (they now revise their ratings after default), no doubt these bonds will be flogged as "can't lose" vehicles.
Needless to say this is not really a good source of liquidity for new mortgages, but rather a way to move unsaleable paper. Pooled mortgages only truly spread risk if they are FNMA-type pools without the area risk, with relatively uniform guidelines, and with a well-understood default methodology in which the pools aren't being stuffed with bad paper by a bank about to fail. Needless to say, institution-originated pools wouldn't produce a source of liquidity that would allow a bank to offer low rate mortgages. One would have to be truly idiotic not to demand a big premium on these things compared to agency paper. I think the supply of investing idiots is diminishing due to failures, so I wouldn't count on anyone handing money over near agency rates. I'm sure the ratings firms will be willing to rubber-stamp these bouncing newborns ("an infant of such promise!', they will cry while accepting a check), but truthfully, most institutional investors are no longer convinced by the ratings of the ratings firms. Something about the stream of red ink in their portfolios now generates a subliminal sense of unease when "AAA" is juxtaposed with "mortgage".
This is weirdest, wackiest scheme I have seen proposed aside from the bank-written ones a la our dear friend Howard Milstein.
I do have some risk-management proposals:
A. Bonds from these pools should not be sold to any foreign entities in a country which has nukes, for fear of retaliation. That lets out everyone from France to India to China, so the prospects are pretty narrow.
B. Bonds from these pools should not be sold to any foreign entities in Canada or Mexico. It is true that they will not nuke us, but I consider the danger of cross-border retaliatory raids too great for comfort.
C. Bonds from these pools should not be sold to any foreign entities in any countries that export substantial oil, for fear that we'd be forced to pay up regardless.
D. Bonds from such pools should not be sold to hapless fund managers of 401K capital, because we have a public interest in ensuring that our retirees to have money to eat.
E. Bonds from such pools should not be sold to state and local investment pools because they have problems enough already.
Of course, this leaves truly stupid individual investors, stupid banks, and the investment banks to buy. Hmm.
Somehow I don't think the sausage makers will buy the sausage. The supply of stupid banks will shortly be much diminished. Therefore, if someone sidles up to you and offers you a great deal on any investment having anything to do with mortgages, I suggest that you blow a whistle as hard as you can and run toward a lighted area. You might also want to consider martial-arts classes, or move to a locality that has a Right to Carry law. Some of these salesmen can be aggressive and persuasive.
Saturday, July 19, 2008
Who Let The Peons Vote?
Your lawmakers feel your pain. You cheapskate peons are responding to higher gas prices by driving less.
Damn you! Don't you realize that this cuts the flow of funds to your Congressional Overlords?
Up with this, Congress will not put, which is why they want to raise gas and diesel taxes:
Hat tip Liberative
Needless to say this increase would be passed after the November elections. The idea about indexing gas taxes to inflation is really cute. That way, suppose gas prices dropped a dollar over the next year - gas taxes would still rise with CPI. Makes me feel all warm inside. The political calculation is that when gas prices drop, the consumer won't realize that they aren't getting the drop. Not only that, it will leave room for your s_n_t_r to hold more hearings excoriating "Big Oil" for ripping off the consumer, demanding to know why pump prices are so high. Clearly a political win-win situation.
Anyway, here is a group of prospective Cthulhu voters listening to my stump speech, and as you can see, they were really energized by this news:
We do have to raise taxes, but since the current round of inflation is so profoundly regressive, it's a terribly bad policy to pass another regressive tax increase.
Damn you! Don't you realize that this cuts the flow of funds to your Congressional Overlords?
Up with this, Congress will not put, which is why they want to raise gas and diesel taxes:
...lawmakers quietly are talking about raising fuel taxes by a dime from the current 18.4 cents a gallon on gasoline and 24.3 cents on diesel fuel.No special interests at all represented there, thank heaven. The problem with this sort of analysis is that some Americans already can't afford to get to work. Raising diesel taxes immediately boosts inflation, and raising gas taxes will produce a voter surge for the growing new party:
...
The nonpartisan National Surface Transportation Policy and Revenue Study Commission concluded in a report this year that the U.S. needs to spend $225 billion annually over the next 50 years to create a highway and transit system capable of sustaining strong economic growth. Current spending, at federal, state and local levels, is about $90 billion a year.
Among other revenue-raising possibilities, the commission recommended gradually increasing the current federal fuel taxes to 40 cents a gallon.
The American Road & Transportation Builders Association is calling for a 10-cent-a-gallon raise and indexing the tax to inflation.
Hat tip Liberative
Needless to say this increase would be passed after the November elections. The idea about indexing gas taxes to inflation is really cute. That way, suppose gas prices dropped a dollar over the next year - gas taxes would still rise with CPI. Makes me feel all warm inside. The political calculation is that when gas prices drop, the consumer won't realize that they aren't getting the drop. Not only that, it will leave room for your s_n_t_r to hold more hearings excoriating "Big Oil" for ripping off the consumer, demanding to know why pump prices are so high. Clearly a political win-win situation.
Anyway, here is a group of prospective Cthulhu voters listening to my stump speech, and as you can see, they were really energized by this news:
We do have to raise taxes, but since the current round of inflation is so profoundly regressive, it's a terribly bad policy to pass another regressive tax increase.
Natural Gas: Cliffdiving
From Oilenergy:
Here's WTI (crude oil):
The actual "price" for oil - the price at which in a tight demand environment it could conceivably move is probably in the $90-$100 range, so there's further to fall.
It's all very well to talk about China and India expanding, but one must also ask the question "at what price can they afford to buy oil on the world market?" Recent developments have shown that they can't at current prices.
Here's WTI (crude oil):
The actual "price" for oil - the price at which in a tight demand environment it could conceivably move is probably in the $90-$100 range, so there's further to fall.
It's all very well to talk about China and India expanding, but one must also ask the question "at what price can they afford to buy oil on the world market?" Recent developments have shown that they can't at current prices.
MGIC Results - 08 Vintage Worst Yet
Pursuant to some of the commentary and indeed the topic of the last post, let's take a look at the results MGIC is getting on 2008 originations:
And I repeat that the GSEs can't handle jumbos and that pressuring them to come off the ten percent down requirement in declining markets was ridiculous. Home values will continue to decline for years in the erstwhile hot markets. When you are losing 10% of your equity a year, a 5% downpayment is no incentive at all to stick. Also, I think this data calls appraisal quality deeply into question.
What has happened is that the big losers have been frantically rewriting loans to shove them off into the GSE market. But rewritten junk is junk unless the debt has been written down to affordable DTIs, and the guidelines are way too loose. As borrowers begin to recognize grim reality, the defaults will escalate. This number of early defaults is a storm flag. We are barely into third quarter, and MGIC has 2008 delinquencies of 1.11%? The average payments due would be about three, so over 1 in 100 borrowers can't make one of the first three-four payments? Incredible. That performance would have been considered completely unacceptable for subprime pools not that long ago.
Therefore Congress' housing bailout bill is a real money loser for the public, and Stern is really clueless. Apparently he is competing for the Al Gore Prize in Economics, which is granted to the person deemed to have constructed the most compelling model furthest from reality.
Zimmerman countered that thinking, saying “the first quarter will be the least profitable the business will do in ‘08, because you still had an overhang of the ‘07 guidelines that we committed on. As the company and as an industry, I think you will see this in every company and our business.”If you look at the comments on the last post, I think you would get a clue as to why. There is still a lot of speculation rolling out, and I can guarantee you that the main housing bubble lending culprits are rewriting loans more conventionally to get them off their books. But just changing the form of a loan doesn't do much; what has to change is that underwriting standards have to get much tighter.
The numbers appear to be bearing that out, as well. At MGIC, delinquencies increased from .26 percent last quarter to 1.11 percent of 2008 originations by June; it’s early in the game, to be sure, but that’s also a jump of 326 percent in one quarter on originations that were supposed to represent stronger underwriting.
Data on comparative trajectories for previous vintages at MGIC was not available when this story was published, but it’s instructive to note that by September of last year, overall delinquencies on the 2007 vintage (not just those mortgages insured by MGIC) were just below 3 percent. If current trending is any indication, MGIC’s 2008 delinquencies would be above that level in the same time frame.
And I repeat that the GSEs can't handle jumbos and that pressuring them to come off the ten percent down requirement in declining markets was ridiculous. Home values will continue to decline for years in the erstwhile hot markets. When you are losing 10% of your equity a year, a 5% downpayment is no incentive at all to stick. Also, I think this data calls appraisal quality deeply into question.
What has happened is that the big losers have been frantically rewriting loans to shove them off into the GSE market. But rewritten junk is junk unless the debt has been written down to affordable DTIs, and the guidelines are way too loose. As borrowers begin to recognize grim reality, the defaults will escalate. This number of early defaults is a storm flag. We are barely into third quarter, and MGIC has 2008 delinquencies of 1.11%? The average payments due would be about three, so over 1 in 100 borrowers can't make one of the first three-four payments? Incredible. That performance would have been considered completely unacceptable for subprime pools not that long ago.
Therefore Congress' housing bailout bill is a real money loser for the public, and Stern is really clueless. Apparently he is competing for the Al Gore Prize in Economics, which is granted to the person deemed to have constructed the most compelling model furthest from reality.
Friday, July 18, 2008
Why Engineers And Real Estate Don't Mix
I've got a severe case of TGIF.
Engineers, who naturally crunch numbers, and realtors, who naturally make numbers up, just don't mix well.
Engineers, who naturally crunch numbers, and realtors, who naturally make numbers up, just don't mix well.
What You Really Need For Lunch
Gregorian Chant. Et Lux in Tenebris.
Chavez Corners The Market On Irony
You can tell the Bloomberg reporters are having trouble remaining straight-faced on this one:
This is not good news for American progressives, who cheered the new rise of socialism in SA even as they mourned Canada's selection of Harper. Obama might want to think twice about a few of his proposals; the US competes for foreign investment and domestic investment in a world market just as Venezuela does.
In Japanese news, Nippon Oil is changing the way it sets prices, with the implication being that it may have to sell some refinery output overseas. The consequence is that local pricing for end users will rise. The current situation is an extremely difficult one for the Japanese economy due to its status as an island nation which cannot produce enough food for its population and a manufacturing powerhouse that is highly limited in its production of raw materials. It is acutely sensitive to rises in energy costs which boost food and input costs. Bonds rose overnight on previous news that some BoJ board members favored weighting growth, and these BoJ comments are probably aimed at controlling inflation expectations. This is part of the reason that I expect the yen to have a downward trajectory against most major currencies.
The contrast between the relatively healthy position of Japan - a nation which is highly disfavored by current economic circumstances - and the Venezuelans, who have been bent on wresting decline from the jaws of economic success, should give everyone pause. No one can avoid the ups and downs of economics, which sometimes favor one nation over another, but public policy need not throw away the good times and enshrine the bad as the core of the domestic economy.
Energy prices will continue to fall. Japan's economic trajectory in the near term depends on how quickly they do. But when energy prices fall, Venezuela is going to get a massive kick in the teeth.
Venezuelan President Hugo Chavez wore a suit for the occasion, and, grinning at about 300 business leaders he usually calls ``oligarchs,'' asked for help relieving a drought in investment.There is nothing like an economic retractioni to make an aging socialist into a capitalist. Given his behavior as recently as May, I have doubts about the response. In other news, Argentina's legislature rebuffed the ag export taxes that have been causing so much furor there.
``Those of you who have money abroad, bring some home,'' he implored company executives gathered June 11 at the former Caracas Hilton, a hotel taken over by the government last year. ``Let's ally ourselves, let's elevate production as much as we can,'' he said to scattered applause.
After squeezing the private sector for almost a decade with nationalizations and foreign exchange controls, Chavez is holding out the lure of lower taxes and $1 billion of loans to spark growth and combat spiraling inflation that only ramped up production can solve.
This is not good news for American progressives, who cheered the new rise of socialism in SA even as they mourned Canada's selection of Harper. Obama might want to think twice about a few of his proposals; the US competes for foreign investment and domestic investment in a world market just as Venezuela does.
In Japanese news, Nippon Oil is changing the way it sets prices, with the implication being that it may have to sell some refinery output overseas. The consequence is that local pricing for end users will rise. The current situation is an extremely difficult one for the Japanese economy due to its status as an island nation which cannot produce enough food for its population and a manufacturing powerhouse that is highly limited in its production of raw materials. It is acutely sensitive to rises in energy costs which boost food and input costs. Bonds rose overnight on previous news that some BoJ board members favored weighting growth, and these BoJ comments are probably aimed at controlling inflation expectations. This is part of the reason that I expect the yen to have a downward trajectory against most major currencies.
The contrast between the relatively healthy position of Japan - a nation which is highly disfavored by current economic circumstances - and the Venezuelans, who have been bent on wresting decline from the jaws of economic success, should give everyone pause. No one can avoid the ups and downs of economics, which sometimes favor one nation over another, but public policy need not throw away the good times and enshrine the bad as the core of the domestic economy.
Energy prices will continue to fall. Japan's economic trajectory in the near term depends on how quickly they do. But when energy prices fall, Venezuela is going to get a massive kick in the teeth.
Thursday, July 17, 2008
Natural Gas Collapses
No really! Take a look, scroll down to the energy section. -7.5%. Or Reuters.
Heating Oil down below $3.80.
There's no telling how far this can go, because coal, NG & oil all moved up together. No doubt the energy traders will be hoping for volatility on the down side. We'll call this the second horseman of the energy trader's apocalypse.
Heating Oil down below $3.80.
There's no telling how far this can go, because coal, NG & oil all moved up together. No doubt the energy traders will be hoping for volatility on the down side. We'll call this the second horseman of the energy trader's apocalypse.
What's Not The Matter With Kansas
Philly Fed wasn't half-bad either:
I can't tell what's going on with unemployment claims. It's hard to separate autos from the school closing seasonal surge. Maybe next week....
The headline on housing starts and permits is misleading, because NYC changed its building codes July 1st, causing a big surge of authorization activity. But if you look at the regional detail, it really is decent. Authorizations in the south and west were both up on the month, and in the west single-family authorizations rose. What has happened is that building lots are selling for very little in some places, and sometimes you can get improved building lots almost free. Healthier builders can sometimes compete with market inventory. We are bottoming in some areas and still falling in others. Of course, this is bad news for some builders with a lot of land and completions in inventory! Completions rose in May and June.
Freight is still okay in the US. Truckline for May:
Rail traffic has been hard to correlate this spring. There was the auto strike earlier, and the huge midwestern floods probably depressed June's figures. For the second quarter, carloads were down 0.6 YoY and intermodal (more closely aligned with consumer/retail) was down 2.4% YoY. However the huge drop in carloads in June (3.6%) probably pushed carloadings for the quarter into negative territory. As the flooding abated, carloads have risen, and are still slightly positive (0.3%) YTD compared to 2007.
Treasury receipts show decent results for 2008, especially on FUT. FY to date (June 30, 2008 compared to June 29, 2007), FUT shows little change from the previous year, corporate income taxes are stabilizing, and WIET is holding well. FUT is such a strong predictor of employment that I am certain that the US economy would have hit trough and be slightly accelerating if it were not for fuel prices.
As it is, fuel prices will cause consumer spending in retail stores to be very constrained this winter, so the US economy has not hit trough. But there are aspects of the economy that have bottomed out and are resurging, and others that are very close to a bottom under current conditions. This is going to provide some support as the winter heating shock hits. There's some strength on the ground in this economy; the reads I am getting from a lot of small banks are good and business conditions are actually improving in some areas.
I'm guessing US trough 2nd quarter 2009. Bank failures might peak in 2010. Consumer and commercial debt defaults will be rising for some time.
Let's see. An idiotic move to raise taxes on businesses could blow my prediction up. There is some political uncertainty. A hurricane in the gulf would probably just jiggle things around but not make much difference. We really do need to open our public policies to domestic energy generation.
Some areas of heavy industry (look at UT, for example) might take a further hit as the EU recession hits Asia. We will need to replace some Asian exports with internal demand next year.
It will take several years for fuel prices to drop significantly, because the recent round of spot price inflation really hasn't been reflected all that much in consumer price levels.
I can't tell what's going on with unemployment claims. It's hard to separate autos from the school closing seasonal surge. Maybe next week....
The headline on housing starts and permits is misleading, because NYC changed its building codes July 1st, causing a big surge of authorization activity. But if you look at the regional detail, it really is decent. Authorizations in the south and west were both up on the month, and in the west single-family authorizations rose. What has happened is that building lots are selling for very little in some places, and sometimes you can get improved building lots almost free. Healthier builders can sometimes compete with market inventory. We are bottoming in some areas and still falling in others. Of course, this is bad news for some builders with a lot of land and completions in inventory! Completions rose in May and June.
Freight is still okay in the US. Truckline for May:
Rail traffic has been hard to correlate this spring. There was the auto strike earlier, and the huge midwestern floods probably depressed June's figures. For the second quarter, carloads were down 0.6 YoY and intermodal (more closely aligned with consumer/retail) was down 2.4% YoY. However the huge drop in carloads in June (3.6%) probably pushed carloadings for the quarter into negative territory. As the flooding abated, carloads have risen, and are still slightly positive (0.3%) YTD compared to 2007.
Treasury receipts show decent results for 2008, especially on FUT. FY to date (June 30, 2008 compared to June 29, 2007), FUT shows little change from the previous year, corporate income taxes are stabilizing, and WIET is holding well. FUT is such a strong predictor of employment that I am certain that the US economy would have hit trough and be slightly accelerating if it were not for fuel prices.
As it is, fuel prices will cause consumer spending in retail stores to be very constrained this winter, so the US economy has not hit trough. But there are aspects of the economy that have bottomed out and are resurging, and others that are very close to a bottom under current conditions. This is going to provide some support as the winter heating shock hits. There's some strength on the ground in this economy; the reads I am getting from a lot of small banks are good and business conditions are actually improving in some areas.
I'm guessing US trough 2nd quarter 2009. Bank failures might peak in 2010. Consumer and commercial debt defaults will be rising for some time.
Let's see. An idiotic move to raise taxes on businesses could blow my prediction up. There is some political uncertainty. A hurricane in the gulf would probably just jiggle things around but not make much difference. We really do need to open our public policies to domestic energy generation.
Some areas of heavy industry (look at UT, for example) might take a further hit as the EU recession hits Asia. We will need to replace some Asian exports with internal demand next year.
It will take several years for fuel prices to drop significantly, because the recent round of spot price inflation really hasn't been reflected all that much in consumer price levels.
Wednesday, July 16, 2008
Political: Obamassiah Rides Again
I used to think people were being unfair when they used that term, but does this man really think he can rid the world of nukes?
The Anchoress has made a lot of sense to me this election cycle. Yes, Pelosi is incompetent, and the implication is that if a Democrat is to win the presidency, that Democrat needs to have a firm and well thought-out set of policies. .
Update:
Cracking up about a headline link on Dr. M's new blog regarding this article "Neither Will There Be Any More War, Nor Tears OMG! Obama IS the Messiah!"
Two goals of his administration would be to secure all loose nuclear material during his first term and to rid the world of nuclear weapons, Obama told an audience before a roundtable discussion at Purdue University.I wish he would stop talking about foreign policy. He makes me nervous; any moment now I'm expecting him to run out toward Edgy Adji with a daisy in his hand, a spring in his step, and a hopeful smile on his face. Maybe he should call up Sarkozy and suggest that France lead the way? Or perhaps he'll focus on Israel? Yeah, that's the ticket.
Obama said adhering to nonproliferation treaties would put pressure on nations such as North Korea and Iran. North Korea has tested a nuclear weapon and Iran has an energy program the Bush administration warns could be a precursor to nuclear weapon development.
"As long as nuclear weapons exist, we'll retain a strong deterrent. But we will make the goal of eliminating all nuclear weapons a central element in our nuclear policy," Obama said.
The Anchoress has made a lot of sense to me this election cycle. Yes, Pelosi is incompetent, and the implication is that if a Democrat is to win the presidency, that Democrat needs to have a firm and well thought-out set of policies. .
Update:
Cracking up about a headline link on Dr. M's new blog regarding this article "Neither Will There Be Any More War, Nor Tears OMG! Obama IS the Messiah!"
Imagine That
Hamptons RE takes a dive. This is more trickle-UP economics.
Oil prices blew down on the US inventory report which showed 3 million barrels higher - now they are trying to fight back. But the jig is really up. Residual fuel oil stocks are up 4.8% from last year, and distillates are only down 0.1% over the year. Total stocks are down 15.1% over the year, but last year at this time crude stocks were substantially up. Gasoline stocks are 4.5% over last year's levels, but the real increase is all in blending components. Methinks the price of corn is going to go down.
The 192 day average 2008/2007 net imports ratio is -7.0%.
BREAKING POLITICAL NEWS: JibJab's back!
Oil prices blew down on the US inventory report which showed 3 million barrels higher - now they are trying to fight back. But the jig is really up. Residual fuel oil stocks are up 4.8% from last year, and distillates are only down 0.1% over the year. Total stocks are down 15.1% over the year, but last year at this time crude stocks were substantially up. Gasoline stocks are 4.5% over last year's levels, but the real increase is all in blending components. Methinks the price of corn is going to go down.
The 192 day average 2008/2007 net imports ratio is -7.0%.
BREAKING POLITICAL NEWS: JibJab's back!
Hump Day Very Humpy Indeed
The global slide is quite correlated. Oil moved further lower today, but will probably try to move up as the Americans get into it. Out of black gold and into yellow?
One pattern that provides a small grain of hope is the Japanese CP mariket which is rising. On the one hand, it is true (as this article comments) that higher input costs raise short term operating credit needs. On the other hand, rising short-term borrowings are rarely the sign of a slowing heavy industrial economy even with import costs rising this high:
Japan's small currency traders are getting out of the yen.
According to the Canadian Real Estate Association, Canadian existing home prices fell YoY:
The US gets CPI figures today, but I won't believe them. How about Europe?
See, Europe appears to be the key to me. If Europe can keep lumbering along, then Japan won't get in too much trouble. One of the benefits to the world economy is that two very large economies - Japan and Germany - were slowly emerging from a long term cycle of economic weakness. That means there is built-up need for replacement investment in these two economies, especially in the industrial sector. And that can be a powerful countertrend force if the flow of credit is such that these companies can invest in equipment. Furthermore, France has relative insulation from oil shocks because of its high percentage of nuclear power. Lastly, the addition of the enlargement countries now should serve as a resource bank for Europe as a whole. These countries provide some backstop for demand. Sarkozy is making some sense to me; the ECB appears whacked.
I think Greenspan's legacy is such that the role of monetary policy is somewhat overblown in many central banker's minds. When and where inflation is caused by increases in money supply, it can be addressed by decreasing money supply. When inflation is caused by bubbles or pricing differentials, the picture becomes far murkier. The world bubble in emerging stocks is well on its way to bottom, which will have its own healthy effects. What one expects to see is reinvestment in local markets in order to control market share, and that probably will continue to happen, and should even happen in Europe - as long as it is not choked off.
US CPI is reported at 5.0%. I don't think anybody knows what it really is. For one thing, it varies hugely across income levels. For another thing, I see weird price movements in stores as the market tries to adjust to declining purchasing power. I've seen prices drop 30% on some items, meat at half price, etc. With the rise in diesel prices, transport differentials are far more significant so effective price increases on various commodities vary hugely across areas as well.
What will dominate the US economy starting about now and through Jan/Feb will be energy costs that have soared and the onset of winter. The withdrawal of cash to deal with home heating needs is very different by region, but since NG has soared, it will be affecting huge swathes of the country by December. In the NE, the shock hits NOW, as many consumers prepurchase heating oil in July or August. By December, households from about the Tennessee line on up will be reeling from the shock. It's a very, very bad time to be a Chinese shoe manufacturer.
US Industrial Production: A small expansion in June (0.5), really based on utilities and autos. The YoY is .3, which is a nice positive. The annualized drop in IP for the second quarter was 3.1%. Not bad, considering. Capacity utilization stayed below 80 all during the quarter. At 79.9 it is recessionary but mildly so, and capacity growth over the year was 1.8%. The US two-stage recession muddles along in a fashion that would make Stephen Leacock laugh until his eyes teared up. Now US industrial production could turn again if the global situation gets too bad. As it is right now, we have stabilized that and are now gearing up to deal with the consumer collapse.
Conditions on the ground level of the US economy seem to be surprisingly good. There is a wave of investment coming from energy/small business. The focus is shifting from consumer goods, which the US doesn't produce in huge quantities, to fundamental investment running from energy efficient cars to household insulation to wood stoves. I feel an updraft which will never be visible in NYC. Many of the smaller conservative banks have plenty of money to lend and rates are very reasonable. We may be close to the bottom in the short term for auto production.
The US Fed has done a great, great job at preventing credit shocks from blowing up viable business. The investment banks have, on the other hand, produced a poor showing.
US freight volumes still look decent.
Still, US oil consumption will continue to drop for several years. What will happen to the world economy when the energy bubble blows? I cannot get a clear picture.
Tentatively, I'm raising my bottom forecast for US rates to 1.5% in 2009. World events could change that.
One pattern that provides a small grain of hope is the Japanese CP mariket which is rising. On the one hand, it is true (as this article comments) that higher input costs raise short term operating credit needs. On the other hand, rising short-term borrowings are rarely the sign of a slowing heavy industrial economy even with import costs rising this high:
One-month borrowing costs for companies with the highest credit rankings rose to a two-week high of 0.665 percent today, pushing above interbank rates for the second day, Tokyo Tanshi Co. prices show. The amount of debt outstanding in the market rose in June to a five-month high of 22.3 trillion yen ($213 billion), Japan Securities Depository Center data show.Japan matters a lot right now. The consumer side of its economy is weakening further, but overall jobs have held up. With corporate profits generally under pressure, corporate demand for some services is slackening as well:
The balance between the supply of money from investors and demand for funds could ``collapse,'' pushing rates even higher, if companies continue borrowing in such large volumes, said Hiroshi Seki, market economist at Totan Research Co. Import prices for producers rose in June for the fourth month, climbing 17 percent, a July 10 central bank report showed.
Corporate demand was also a drag on the index as higher prices crimped profits and left firms with less to spend. Civil engineering and architectural services fell in May, according to Katsuya Shimura, a spokesman at the trade ministry.I think Japan will feel the impact of the European slowdown. UK unemployment claims are rising and the flood of retail consolidation activity presages tight times. That's always the sign of consumer tightness. European car sales as a whole took a big drop in June - 7.9%. But the total for the entire first half is just a 2% decline, showing how quickly this is moving. Toyota got hit hard, and Honda did too. Car sales in Spain and Italy had been very weak, but the big drop recorded in June came from the faltering of the stalwarts:
Sales growth all but evaporated in Germany and France, which together had supported Western European registrations in the first five months with respective gains of 4.2 percent and 5.2 percent. Germany, Europe's largest car market, grew just 1 percent to 304,036 registrations in June, while France advanced 1.5 percent to 219,753.So it's a widening of the economic pressures. UK June sales fell 6.1%. This isn't good for GM either.
Japan's small currency traders are getting out of the yen.
According to the Canadian Real Estate Association, Canadian existing home prices fell YoY:
Canadian home resale prices fell for the first time in almost a decade in June, as the number of dwellings for sale increased to a record, a realtors' group said.Sounds familiar, doesn't it? The decline in US auto sales is rough on Canada. The UK continues its inexorable slide; the latest is that June retail spending is down.
The average price fell 0.4 percent to C$341,096 ($340,900) in June from a year earlier, the first decline since January 1999, the Canadian Real Estate Association said today.
...
New housing starts fell for the third time in four months in June, and new home prices stalled for a second month in May, according to Statistics Canada figures.
The US gets CPI figures today, but I won't believe them. How about Europe?
Inflation in Europe accelerated to the fastest in more than 16 years in June, led by a 53 percent surge in the cost of heating oil.May was 3.7% and June was 4.0%. No kidding that it's out of their reach! So why try to reach it? The decline in consumer spending power is so significant that it will have plenty of restraining power, and the number of pensioners in the EU's major economies are so huge that even if companies raise wages somewhat, overall purchasing power will keep declining. In general, the aim of effective monetary policy should be to counterbalance underlying economic trends a bit, rather than reinforce them. JUST CUT ENERGY TAXES. That will restrain inflation without suppressing growth more than necessary. According to German estimates, German GDP contracted at least 0.75% in the second quarter. If that is true, the Euro market GDP should have contracted. German industry is extremely dependent on bank lending and bank lending was tightening, so it is very possible.
...
``This all has to do with this oil-price surge and for central bankers, it's a most frustrating source of inflation because it's out of their reach,'' Janwillem Acket, group chief economist at Julius Baer Holding AG in Zurich, said in a Bloomberg Television interview. ``We will probably see in the months ahead growth momentum going lower and then allowing the ECB, probably early next year, to cut rates.''
See, Europe appears to be the key to me. If Europe can keep lumbering along, then Japan won't get in too much trouble. One of the benefits to the world economy is that two very large economies - Japan and Germany - were slowly emerging from a long term cycle of economic weakness. That means there is built-up need for replacement investment in these two economies, especially in the industrial sector. And that can be a powerful countertrend force if the flow of credit is such that these companies can invest in equipment. Furthermore, France has relative insulation from oil shocks because of its high percentage of nuclear power. Lastly, the addition of the enlargement countries now should serve as a resource bank for Europe as a whole. These countries provide some backstop for demand. Sarkozy is making some sense to me; the ECB appears whacked.
I think Greenspan's legacy is such that the role of monetary policy is somewhat overblown in many central banker's minds. When and where inflation is caused by increases in money supply, it can be addressed by decreasing money supply. When inflation is caused by bubbles or pricing differentials, the picture becomes far murkier. The world bubble in emerging stocks is well on its way to bottom, which will have its own healthy effects. What one expects to see is reinvestment in local markets in order to control market share, and that probably will continue to happen, and should even happen in Europe - as long as it is not choked off.
US CPI is reported at 5.0%. I don't think anybody knows what it really is. For one thing, it varies hugely across income levels. For another thing, I see weird price movements in stores as the market tries to adjust to declining purchasing power. I've seen prices drop 30% on some items, meat at half price, etc. With the rise in diesel prices, transport differentials are far more significant so effective price increases on various commodities vary hugely across areas as well.
What will dominate the US economy starting about now and through Jan/Feb will be energy costs that have soared and the onset of winter. The withdrawal of cash to deal with home heating needs is very different by region, but since NG has soared, it will be affecting huge swathes of the country by December. In the NE, the shock hits NOW, as many consumers prepurchase heating oil in July or August. By December, households from about the Tennessee line on up will be reeling from the shock. It's a very, very bad time to be a Chinese shoe manufacturer.
US Industrial Production: A small expansion in June (0.5), really based on utilities and autos. The YoY is .3, which is a nice positive. The annualized drop in IP for the second quarter was 3.1%. Not bad, considering. Capacity utilization stayed below 80 all during the quarter. At 79.9 it is recessionary but mildly so, and capacity growth over the year was 1.8%. The US two-stage recession muddles along in a fashion that would make Stephen Leacock laugh until his eyes teared up. Now US industrial production could turn again if the global situation gets too bad. As it is right now, we have stabilized that and are now gearing up to deal with the consumer collapse.
Conditions on the ground level of the US economy seem to be surprisingly good. There is a wave of investment coming from energy/small business. The focus is shifting from consumer goods, which the US doesn't produce in huge quantities, to fundamental investment running from energy efficient cars to household insulation to wood stoves. I feel an updraft which will never be visible in NYC. Many of the smaller conservative banks have plenty of money to lend and rates are very reasonable. We may be close to the bottom in the short term for auto production.
The US Fed has done a great, great job at preventing credit shocks from blowing up viable business. The investment banks have, on the other hand, produced a poor showing.
US freight volumes still look decent.
Still, US oil consumption will continue to drop for several years. What will happen to the world economy when the energy bubble blows? I cannot get a clear picture.
Tentatively, I'm raising my bottom forecast for US rates to 1.5% in 2009. World events could change that.
