MaxedOutMama
Friday, January 30, 2009
Infallible Cure For Depression
Okay, okay, not an economic depression, but try this if you are feeling blue.
Paul Hunt on balance beam.
Paul Hunt floor exercise.
Paul Hunt uneven bars.
Paul Hunt on balance beam.
Paul Hunt floor exercise.
Paul Hunt uneven bars.
GDP Day
Waiting, waiting, waiting.
Real GDP was reported as -0.5% (annualized) in Q3. Q4 coming up....
-3.8! My guess was -4.1%, so I was wrong. Full release.
Most interesting thing about this is Gross Private Domestic Investment (Q3 0.4%, Q4 -12.3%). Equipment and software -27.8%. From a 1.0% increase in Q4 07, this segment of GDP has followed a declining trajectory:
PCE (Personal Consumption Expenditures) -3.5, compared to -3.8 in Q3. State and local government consumption and investment goes negative at -0.5, down from 1.3 in Q3.
More tomorrow - I have a runaround day ahead.
Real GDP was reported as -0.5% (annualized) in Q3. Q4 coming up....
-3.8! My guess was -4.1%, so I was wrong. Full release.
Most interesting thing about this is Gross Private Domestic Investment (Q3 0.4%, Q4 -12.3%). Equipment and software -27.8%. From a 1.0% increase in Q4 07, this segment of GDP has followed a declining trajectory:
-.6 -5.0 -7.5 -27.8That is most related to business spending. Nonresidential structures also tipped negative in Q4 at -1.8%.
PCE (Personal Consumption Expenditures) -3.5, compared to -3.8 in Q3. State and local government consumption and investment goes negative at -0.5, down from 1.3 in Q3.
More tomorrow - I have a runaround day ahead.
Wednesday, January 28, 2009
Snow, Snow, Snow
More shoveling. Ice. More grumbling.
I think CA is making its problems worse by halting tax refunds. Everyone's going to cut down on their withholding to avoid the problem, so cash flow is going to get worse!
US crude inventories: Compared to a year ago, crude oil stocks are up 15.5%, gasoline stocks are down 3.3% (which is less than the drop in demand), and distillate (diesel and heating oil) stocks are up 10.1%. Total of all products ex SPR is up 6.7% from a year ago. Oil prices keep trending up and then dropping when the inventories are released.
An interesting article about one take on the world economic situation:
I think CA is making its problems worse by halting tax refunds. Everyone's going to cut down on their withholding to avoid the problem, so cash flow is going to get worse!
US crude inventories: Compared to a year ago, crude oil stocks are up 15.5%, gasoline stocks are down 3.3% (which is less than the drop in demand), and distillate (diesel and heating oil) stocks are up 10.1%. Total of all products ex SPR is up 6.7% from a year ago. Oil prices keep trending up and then dropping when the inventories are released.
An interesting article about one take on the world economic situation:
The Institute of International Finance, the global organisation of major banks, predicted an almost unprecedented collapse in world economic growth and capital flows.More of their predictions:
It became the first major global institution to forecast a full-scale global contraction in 2009, predicting that the economy would shrink by 1.1pc.
- Capital flows into emerging European countries are more than halved this year and then halved again next year,
- Which causes current account defiicits to more than triple,
- Asia's experience will be worse than that of the currency crisis in the late 1990s,
- They're very worried about protectionist trends.
Tuesday, January 27, 2009
Before This Gets Even Sillier
The US citizenry might want to stop and think about what is being proposed with this latest stimulus. Mind you, the stimulus bill is on top of additional TARP spending and major recent Treasury buys of securitized debt, so we are already tossing a lot of money into the barrel. Too much? Maybe, because increasing signs of commodity interest are in evidence, such as companies spending money to keep tankers full of oil floating around. My hunch is that we will see most hard commodities run up in the next few months. That takes money.
But there is no doubt that the US economy is hard-hit, as the latest regional unemployment figures for December show. The US unemployment rate was 7.2% in December. (Percents in parentheses are the population percentage of the state as of 2008.)
States with unemployment in the 10s:
States with unemployment in the 8s:
There are ten states with unemployment below 5%, but these are mostly small states:
Thus, I don't know that anyone would disagree that stimulus is warranted. Unemployment at levels of 8% or above produces overall income drops, and then a secondary wave of employment drops from retail industry, which sets up a rather nasty feedback effect.
However we need to spend our stimulus dollars carefully, because we are going to be paying interest on it forever. Before I proceed on to a discussion of the current stimulus, I would like to give you some peg for comparison. In December 08, total US Treasury tax receipts were 225.4 billion. Total WIET (includes withheld income and SS/Medicare) was 167.6 billion. Corporate income taxes were 51.4 billion.
Thus, if we wanted to borrow 825 billion at 4% and pay it back over 30 years, it would cost us 3.9 billion a month, or 7.6% of monthly corporate income tax in December. Paying only the interest on it would cost us 2.75 billion a month. Do this very much and raising corporate income taxes 10% produces absolutely no extra net revenue. Remember, we already added about 1.2 trillion to the overall deficit last year. At 4%, just the interest on 2 trillion is 6.6 billion a month, or 12.8% of December's corporate income taxes. To pay that 2 trillion at 4% back over 30 years would cost us 9.5 billion a month, or 18.4% of December's corporate income tax revenue, and 4% is an unrealistically low rate. So we're not going to pay it back. We're just going to pay the interest through your and my lifetimes.
The second factor to remember is that as soon as the panic dies, our overall interest rate on the public debt is going to shoot up. (For more background, please see this post.) If we add 800 billion to the deficit this year, we begin next year with publicly held debt over 7 trillion. At 4%, that's 23.3 billion a month, or 45% of December's corporate income tax. At 5% (more the long term average), it's 29.1 billion a month, or 53.7% of December's corporate income tax revenue. We can't cover the difference from corporate taxation - we'd move lots of jobs out of the country and wind up dropping corporate income tax revenue. So we are going to cover the difference in excise taxes and individual income taxes.
This is what the citizens of America have to get through their thick heads quickly. When the politicians are giving you stuff, you are going to wind up paying for it. Year after year after year.
Any of this money that isn't spent quickly will probably turn into a net drag on the economy over a few years, so let's think twice.
Washington Post published a piece on the latest CBO analysis, which pointed out that most of the infrastructure program wasn't going to be spent when it was needed:
Cutting payroll taxes this year would cost less and do more. The food stamp allotments and unemployment benefits will stimulate immediately.
Please, think it over.
But there is no doubt that the US economy is hard-hit, as the latest regional unemployment figures for December show. The US unemployment rate was 7.2% in December. (Percents in parentheses are the population percentage of the state as of 2008.)
States with unemployment in the 10s:
- Michigan: 10.6% (3.29%)
- Rhode Island: 10.0% (0.35%)
- California: 9.3% (11.95%)
- Nevada: 9.1% (0.84%)
- Oregon: 9.0% (1.23%)
- South Carolina: 9.5% (1.44%)
States with unemployment in the 8s:
- DC: 8.8% (0.19%)
- Florida: 8.1% (5.97%)
- Georgia: 8.1% (3.12%)
- Indiana: 8.2% (2.07%)
- North Carolina: 8.7% (3.08%)
There are ten states with unemployment below 5%, but these are mostly small states:
- Iowa: 4.6% (0.98%)
- Nebraska: 4.0% (0.58%)
- New Hampshire: 4.6% (0.43%)
- New Mexico: 4.9% (0.64%)
- North Dakota: 3.5% (0.21%)
- Oklahoma: 4.9% (1.18%)
- South Dakota: 3.9% (0.26%)
- Utah: 4.3% (0.87%)
- West Virginia: 4.9% (0.59%)
- Wyoming: 3.4% (0.17%)
Thus, I don't know that anyone would disagree that stimulus is warranted. Unemployment at levels of 8% or above produces overall income drops, and then a secondary wave of employment drops from retail industry, which sets up a rather nasty feedback effect.
However we need to spend our stimulus dollars carefully, because we are going to be paying interest on it forever. Before I proceed on to a discussion of the current stimulus, I would like to give you some peg for comparison. In December 08, total US Treasury tax receipts were 225.4 billion. Total WIET (includes withheld income and SS/Medicare) was 167.6 billion. Corporate income taxes were 51.4 billion.
Thus, if we wanted to borrow 825 billion at 4% and pay it back over 30 years, it would cost us 3.9 billion a month, or 7.6% of monthly corporate income tax in December. Paying only the interest on it would cost us 2.75 billion a month. Do this very much and raising corporate income taxes 10% produces absolutely no extra net revenue. Remember, we already added about 1.2 trillion to the overall deficit last year. At 4%, just the interest on 2 trillion is 6.6 billion a month, or 12.8% of December's corporate income taxes. To pay that 2 trillion at 4% back over 30 years would cost us 9.5 billion a month, or 18.4% of December's corporate income tax revenue, and 4% is an unrealistically low rate. So we're not going to pay it back. We're just going to pay the interest through your and my lifetimes.
The second factor to remember is that as soon as the panic dies, our overall interest rate on the public debt is going to shoot up. (For more background, please see this post.) If we add 800 billion to the deficit this year, we begin next year with publicly held debt over 7 trillion. At 4%, that's 23.3 billion a month, or 45% of December's corporate income tax. At 5% (more the long term average), it's 29.1 billion a month, or 53.7% of December's corporate income tax revenue. We can't cover the difference from corporate taxation - we'd move lots of jobs out of the country and wind up dropping corporate income tax revenue. So we are going to cover the difference in excise taxes and individual income taxes.
This is what the citizens of America have to get through their thick heads quickly. When the politicians are giving you stuff, you are going to wind up paying for it. Year after year after year.
Any of this money that isn't spent quickly will probably turn into a net drag on the economy over a few years, so let's think twice.
Washington Post published a piece on the latest CBO analysis, which pointed out that most of the infrastructure program wasn't going to be spent when it was needed:
The total package -- including tax cuts and direct aid to the poor and unemployed -- won significantly better marks for speed than the portion of the package devoted to highways, schools and other infrastructure projects, which are among the Democrats' top priorities. The CBO report predicts that only about 40 percent of the $356 billion dedicated to those projects would be spent by the end of 2010.That's only 40% spent of the infrastructure portion in two years, and much less spent this year. In light of our overall debt, how will this prove to be a stimulus? Remember, the increased retirement benefits paid will be a strong stimulus to support overall incomes by 2010, and that too is money spent from tax revenues. Aren't we larding this up with stuff that will do little to address the current situation? How is this justifiable?
Cutting payroll taxes this year would cost less and do more. The food stamp allotments and unemployment benefits will stimulate immediately.
Please, think it over.
Monday, January 26, 2009
Update To The Cockleburrs
(But please read this post and see if you have any helpful advice for the individual.)
In the cockleburr post I noted:
On the existing home sales, the price drop shows that reality is returning to the marketplace, and mortgage rates are really very low for qualified buyers. Therefore I do expect a generally improving trend with some ups and downs. Markets that have held out well so far will probably decline considerably this year, but some markets are close to bottoming or have bottomed. A bottom occurs when you can buy it and rent it for an amount that will pay the mortgage, costs, and a reasonable set-aside for repairs and maintenance. Not before then.
New Homes also show a heading-to-bottom pattern. permits have finally fallen to a realistic level. Permits were at 363,000, starts were at 550,000, and completions were at 1,015,000. Thus there is more of a drop off in building activity to come (liberating more workers), but we are beginning to get to the inventory workoff point.
In November, median months for sale for new homes was still rising to 9.3 from October's 9.1. Months of supply was at 13.2. Nothing but a huge slowdown in completions could reverse this trend, and we aren't quite there yet.
Note: when foreclosed houses are sold to investors (and in some markets, that is most of the current activity) there tends to be an upsurge in pickup construction/rehab work.
There is an intangible for which I can't put forth numbers, but small, conservative banks are generally picking up some decent loan business (see Bloomberg article), and in general, the more conservative financial ops are picking up speed and seeing some opportunities even as the headlines detail one depressing loss after another.
In the cockleburr post I noted:
Bad as the economic news is, all this number crunching I am doing shows stabilization ensuing from the P-Nat shift showing widening margins that I mentioned a while ago. The first blobs of evidence are in US FUT, German confidence surveys and retail.To those first blobs of evidence we will add Existing Home sales (and inventory) (see CR posts here and here), plus leading indicators. I am not a huge fan of leading indicators (I think the index is too recursive), and I believe it is more of a coincident than a leading indicator. Nonetheless, it did increase. I expect some more drops in that baby!
On the existing home sales, the price drop shows that reality is returning to the marketplace, and mortgage rates are really very low for qualified buyers. Therefore I do expect a generally improving trend with some ups and downs. Markets that have held out well so far will probably decline considerably this year, but some markets are close to bottoming or have bottomed. A bottom occurs when you can buy it and rent it for an amount that will pay the mortgage, costs, and a reasonable set-aside for repairs and maintenance. Not before then.
New Homes also show a heading-to-bottom pattern. permits have finally fallen to a realistic level. Permits were at 363,000, starts were at 550,000, and completions were at 1,015,000. Thus there is more of a drop off in building activity to come (liberating more workers), but we are beginning to get to the inventory workoff point.
In November, median months for sale for new homes was still rising to 9.3 from October's 9.1. Months of supply was at 13.2. Nothing but a huge slowdown in completions could reverse this trend, and we aren't quite there yet.
Note: when foreclosed houses are sold to investors (and in some markets, that is most of the current activity) there tends to be an upsurge in pickup construction/rehab work.
There is an intangible for which I can't put forth numbers, but small, conservative banks are generally picking up some decent loan business (see Bloomberg article), and in general, the more conservative financial ops are picking up speed and seeing some opportunities even as the headlines detail one depressing loss after another.
An Appeal From A Reader
This is a first for me, but this gentleman asked for advice from the readers here. I do have his name, but for blogging purposes let us call him "Worried Son". His problem in his own words:
The first goal has got to be to put a floor under the losses. The second is to try to preserve as much financial margin as possible. Maintaining constant liquidity will be important since a significant draw on assets could come at any time.
I do have more questions for this gentleman. Is his mother now in a managed care setting or at home with a caregiver? Does she have any other health problems? How long ago was she diagnosed with Alzheimer's?
In the US, the expected years of life for an 80 year old female are 9, which gives you a reasonable tail of 3 years on either side. So 6 to 12 years of additional life for which to provide. Depending on her current overall health, level of function and age at diagnosis, that range might be shortened by 2 1/2 to 5 years. Here is an article which describes some of the factors affecting life expectancy. Quality of care in the mid stages of disease has a huge effect on life expectancy.
My mother is 80 years old and has Alzheimers, I now have full legal responsibility for her financial affairs. She has some assets saved over a lifetime of frugal living, we are the archetypal "working class" family. We live in Canada, but are originally from England. Despite what your politicians expound about public health care, the reality is not great, we have so far avoided it by using her resources, but to continue to do so is going to cost some serious money and extra caution in how her resources are managed.He adds:
Here is the question, my mother has a bank account in England to which her pension money is deposited, over time the account has accumulated 60,000 pounds sterling this is being depleted gradually, I am very concerned about sterlings trajectory in relation to other currencies.
Where and in what currency(ies) or assets (in your readers opinion) should we deposit this money? The goal is to preserve the value of the asset against Canadian dollars. In the last few months the pound has dropped in value from approx Can$2 to the pound to Can $1.75 to the pound (so we have already lost 12% of the savings we cannot afford to continue this).
I understand that your blog is not intended for giving financial advice, nevertheless I have a money-related problem that I would like to put before you and your very smart readership, in the hope that I could find some guidance in how to proceed. I am an adult and understand that should you extend that courtesy I am fully responsible for whatever decision I finally make.What's your best advice? His (mother's) exposure to the British pound will continue through the pension (see currency comparison here) but the accumulated savings need to be protected as far as possible. I do have some thoughts on this one, but my first thoughts may not be right.
...
I only have one chance to do this right and would very much appreciate the opportunity to tap your readers experience.
The first goal has got to be to put a floor under the losses. The second is to try to preserve as much financial margin as possible. Maintaining constant liquidity will be important since a significant draw on assets could come at any time.
I do have more questions for this gentleman. Is his mother now in a managed care setting or at home with a caregiver? Does she have any other health problems? How long ago was she diagnosed with Alzheimer's?
In the US, the expected years of life for an 80 year old female are 9, which gives you a reasonable tail of 3 years on either side. So 6 to 12 years of additional life for which to provide. Depending on her current overall health, level of function and age at diagnosis, that range might be shortened by 2 1/2 to 5 years. Here is an article which describes some of the factors affecting life expectancy. Quality of care in the mid stages of disease has a huge effect on life expectancy.
Saturday, January 24, 2009
Cockleburr Enemas For Everyone
Sorry for the absence, but I have been extremely busy for the last few days with RL issues and crunching numbers. I got about six hours sleep total Wednesday and Thursday, and just got some real sack time last night.
If you are not a nerd or a dork, just skip straight to the picture of the cockleburr below and read from there.
But, to be honest, some of my lack of sleep is due to the fact that I had so many numbers to crunch in such a short time that I decided the quickest way to do it was write another translation program. Which worked well, and did save time, until I decided that it would be so convenient to just use some of those APIs I had lying around for a spare moment to incorporate some analysis and graphing right into that little program. Which worked well, and did save time, until I snapped and started to play with this new numeric analysis program that one of my brothers dropped off at Christmas. (A deed equivalent to hanging around the exits of drug treatment centers and handing out free samples of cocaine and heroine to the departing patients. It's not my fault - I think I showed great character in waiting three weeks to indulge.) The manual is 264 pages, and when I was too tired to sleep, I started reading it.
I'm having too much fun to feel as embarrassed as I should. (Only another programming addict could really understand this paragraph, and if any such person reads this, that person will be nodding and thinking "That could happen to absolutely anyone!" There are, let's face it, only two types of people in this regard. For one type, a two hundred page manual for a number crunching program is a superb sophorific, and for the second type, it's like drinking six cups of coffee because your mind gets totally engaged. My buzz lasted for two days.) The manual is well written, and GREAT for teaching. You can get it free here! I only wish that some of these principles had been applied in recent years. For instance, I think several of the NRSRO executives should have this passage tattooed in large letters on their chests:
Wrenching my mind away from my obsession, we come to cockleburrs. What's a cockleburr? Here's a picture:
That is the rough cockleburr.
Bad as the economic news is, all this number crunching I am doing shows stabilization ensuing from the P-Nat shift showing widening margins that I mentioned a while ago. The first blobs of evidence are in US FUT, German confidence surveys and retail.
We have one more unavoidable global shock coming, and that is the Eurobank disaster. It will be very large and require massive Eurozone bailouts and stimulus.
Nonetheless, spendable incomes are beginning to recover, and consumer-related businesses are getting nearer to the low point, after which they stop slashing and begin to build again. After that point, unemployment and bad debt figures still rise for quite a while. Economies have their own rhythms which can't be easily changed.
So the cockleburrs involve dealing with the self-inflicted reality of an economic downturn with some legs, generated largely by the hangover of lunatic lending. In the middle of this thing is the fried egg of the energy crunch produced by the egg white (overbuilding of production capacity combined with energy subsidies in Asia) and the yolk (lack of financial regulation leading to a speculative boom in prices, which created an ensuing bust). Put another way, the lunatic lending produced a strong correlation across financial assets, once positive and now negative, and in the positive phase of that correlation, speculation produced by lunatic lending produced a strong correlation on energy prices, which then pretty much wound all correlations together and shifted into the negative spiral. We are in the last fourth of that negative spiral (mostly through the egg yolk).
Visually:
Shades of green mark growth intervals (the darker the green, the stronger the growth), and red shades mark contracting intervals. That red circle is the egg yolk of the energy run-up, which correlated and produced the current sharp contraction in world trade.
The thick dark line is the current trajectory. We aren't all the way through to the dark arrow, but the conditions are set so that line can't be changed, and we are almost there.
Extrapolating from current circumstances, the next two fainter lines describe the arc of possibilities for heading out of the downturn, into the next part of the credit crisis, and through the trough into recovery without further (unknown) shocks and changes in public policy. The difference between those is mostly the unknown portion of the Eurobank crisis.
That bent line that veers through the lighter purple, across a very faint part of the recovery, and into a flatter growth cycle is the likeliest trajectory if the US follows the Dem's "green" policy. Under the circumstances, it's more of a "red" policy.
The reason why that trajectory is so odd and unfavorable is that such a policy correlates back to energy, raises PPI, and cuts real growth and global competitiveness. The end of that (faint arrow) is approximately 3 years out, further past I cannot see. The total time frame on the strong line (stuff that has already mostly happened) is about 4 years.
I have dutifully read up on the 825 stimulus package and as much of Obama's direction as I can decode from the rather vague rhetoric, and I am upgrading my forecast to 83-84% chance of depression-like event for the US, because the Dems aren't spending much of that stimulus on anything quickly, and they are spending an awful lot of money, which is going to be a drag as soon as we get through the bounceback this year. It's the craziest economic agenda I have seen in a long time, but they did win the election and I assume they are going to execute their plans. The contributions to politicians will be high, and the corresponding cost to the US taxpayer will be higher.
The upshot is that the rest of the US is going to follow CA, which is an ugly prospect. CA's unemployment in December was over 9%, and sales and use tax receipts in November (latest data) were only 81% of November 07's. (2078/2557). Intimidating, and the lesson is that too much welfare renders you unable to spend on welfare. Pelosi is in control, and Pelosi is a CA Democrat, so eventually the US will find itself defaulting on assistance to those who most need it. Grim.
If you are not a nerd or a dork, just skip straight to the picture of the cockleburr below and read from there.
But, to be honest, some of my lack of sleep is due to the fact that I had so many numbers to crunch in such a short time that I decided the quickest way to do it was write another translation program. Which worked well, and did save time, until I decided that it would be so convenient to just use some of those APIs I had lying around for a spare moment to incorporate some analysis and graphing right into that little program. Which worked well, and did save time, until I snapped and started to play with this new numeric analysis program that one of my brothers dropped off at Christmas. (A deed equivalent to hanging around the exits of drug treatment centers and handing out free samples of cocaine and heroine to the departing patients. It's not my fault - I think I showed great character in waiting three weeks to indulge.) The manual is 264 pages, and when I was too tired to sleep, I started reading it.
I'm having too much fun to feel as embarrassed as I should. (Only another programming addict could really understand this paragraph, and if any such person reads this, that person will be nodding and thinking "That could happen to absolutely anyone!" There are, let's face it, only two types of people in this regard. For one type, a two hundred page manual for a number crunching program is a superb sophorific, and for the second type, it's like drinking six cups of coffee because your mind gets totally engaged. My buzz lasted for two days.) The manual is well written, and GREAT for teaching. You can get it free here! I only wish that some of these principles had been applied in recent years. For instance, I think several of the NRSRO executives should have this passage tattooed in large letters on their chests:
The problem explicitly takes into account the fact that overall risk is not just the sum of the riskiness of the individual assets, as their future performances are highly likely to be correlated: shares tend to go up and down together, and shares in a particular sector tend to be highly correlated.You can call this thing from a command line. Since the major financial asset risks are now shifting away from the exceptional "plague" model I have been applying, and into the more traditional modes, I couldn't resist just a quickie tie into this baby from that there little quickie time-saving thingamabob I finished. If you download the manual, don't blame the ensuing carnage on me. I gave you full warning. The full software package is very expensive, but you can get a free student version if you are a student. You can get a java wrapper for this.
Wrenching my mind away from my obsession, we come to cockleburrs. What's a cockleburr? Here's a picture:
That is the rough cockleburr.
Bad as the economic news is, all this number crunching I am doing shows stabilization ensuing from the P-Nat shift showing widening margins that I mentioned a while ago. The first blobs of evidence are in US FUT, German confidence surveys and retail.
We have one more unavoidable global shock coming, and that is the Eurobank disaster. It will be very large and require massive Eurozone bailouts and stimulus.
Nonetheless, spendable incomes are beginning to recover, and consumer-related businesses are getting nearer to the low point, after which they stop slashing and begin to build again. After that point, unemployment and bad debt figures still rise for quite a while. Economies have their own rhythms which can't be easily changed.
So the cockleburrs involve dealing with the self-inflicted reality of an economic downturn with some legs, generated largely by the hangover of lunatic lending. In the middle of this thing is the fried egg of the energy crunch produced by the egg white (overbuilding of production capacity combined with energy subsidies in Asia) and the yolk (lack of financial regulation leading to a speculative boom in prices, which created an ensuing bust). Put another way, the lunatic lending produced a strong correlation across financial assets, once positive and now negative, and in the positive phase of that correlation, speculation produced by lunatic lending produced a strong correlation on energy prices, which then pretty much wound all correlations together and shifted into the negative spiral. We are in the last fourth of that negative spiral (mostly through the egg yolk).
Visually:
Shades of green mark growth intervals (the darker the green, the stronger the growth), and red shades mark contracting intervals. That red circle is the egg yolk of the energy run-up, which correlated and produced the current sharp contraction in world trade.The thick dark line is the current trajectory. We aren't all the way through to the dark arrow, but the conditions are set so that line can't be changed, and we are almost there.
Extrapolating from current circumstances, the next two fainter lines describe the arc of possibilities for heading out of the downturn, into the next part of the credit crisis, and through the trough into recovery without further (unknown) shocks and changes in public policy. The difference between those is mostly the unknown portion of the Eurobank crisis.
That bent line that veers through the lighter purple, across a very faint part of the recovery, and into a flatter growth cycle is the likeliest trajectory if the US follows the Dem's "green" policy. Under the circumstances, it's more of a "red" policy.
The reason why that trajectory is so odd and unfavorable is that such a policy correlates back to energy, raises PPI, and cuts real growth and global competitiveness. The end of that (faint arrow) is approximately 3 years out, further past I cannot see. The total time frame on the strong line (stuff that has already mostly happened) is about 4 years.
I have dutifully read up on the 825 stimulus package and as much of Obama's direction as I can decode from the rather vague rhetoric, and I am upgrading my forecast to 83-84% chance of depression-like event for the US, because the Dems aren't spending much of that stimulus on anything quickly, and they are spending an awful lot of money, which is going to be a drag as soon as we get through the bounceback this year. It's the craziest economic agenda I have seen in a long time, but they did win the election and I assume they are going to execute their plans. The contributions to politicians will be high, and the corresponding cost to the US taxpayer will be higher.
The upshot is that the rest of the US is going to follow CA, which is an ugly prospect. CA's unemployment in December was over 9%, and sales and use tax receipts in November (latest data) were only 81% of November 07's. (2078/2557). Intimidating, and the lesson is that too much welfare renders you unable to spend on welfare. Pelosi is in control, and Pelosi is a CA Democrat, so eventually the US will find itself defaulting on assistance to those who most need it. Grim.
Wednesday, January 21, 2009
Economic Fantasies Can Be Very Expensive
Remember just a year ago when everyone was talking about the credit crisis in terms of "subprime"? Tanta pointed out, quite rightly, that choice of language was going to create some very bad decision making, and indeed it did.
Now we keep reading that "credit is tight", as in this article about new record lows in the homebuilder survey:
You want proof, but don't want to go through the hassle of a mortgage application? Try Fannie Mae, which is basically setting industry standards right now. Look at their 12/18/08 guidelines for credit scores, DTIs etc, which can be found on this page. These draconian requirements include
Do want seller DP (seller contributes 3% for downpayment) ARM Interest Only 40 year 97% loans? Get 'em here! Max CLTV 105% MyCommunity (low to moderate income borrower can get up to 105% of appraised funds with Community Seconds, no borrower funds required), interest rate buydowns, nontraditional credit okay with credit counseling - why sure! 40 year loans w/ 10 year I/O period? Of course! Go ahead and look at these products - this is hardly tight lending.
There are some tighter requirements for the High Balance portfolio (what used to be jumbo conforming) with a 90% CLTV for one unit principal residences. There are also loan level pricing adjustments for higher risk transactions and adverse market delivery charges (see the current LLPA/AMDC matrix here). So, for example, after April 1st, my 90% ARM is going to cost me 25 bps, and my credit score of 675 is going to cost me another 125 bps, and my IO feature is going to cost me another 50 bps, total additional cost of 200 bps or 2% more.
Of course, I could knock that down to 1.25% more by improving my credit score to 680, and frankly, if you were shopping for a mortgage, I'd make you do that first! Because if you are so uncontrolled that you can't jack your credit score up 10 points in six months, you are not ready to buy a home IMO, and believe, there are plenty of homes out there which will be available when you do manage to do it.
Credit truly is tighter for investment properties, but it always had been before the late insanity. The reason is that investors walk away when it makes sense to do so. So Fannie wants you to put 20% down, and if you only want to put 10 or 15% down, they'll make you the loan but charge you extra for their additional risk, depending on your credit score.
All the rhetoric is generated by lobbying arms of various special interest groups, and never checked by reporters. Policies serving the interests of builders (among other goodies, they are asking for a 22K tax credit for purchases) are going to cost the taxpayer a lot of money and generate more bad loans. There's nothing wrong with the credit options available to would-be purchasers. There's still a lot wrong with pricing in many areas, and most of the people who wanted to buy already did buy, so there is a relative paucity of buyers. That is temporary and will pass. How much more can lenders do? After a period of extremely loose credit, there will be a few years in which new entrants into the housing market are restricted simply because anyone who would normally have qualified under reasonable terms already qualified during the period of no-fear lending.
**Explanation of non-arms length mortgages: These were one of the most transparent builder scams out there. Note that what has been changed is that investors can no longer get these, but principal residence buyers can.
What builders used to do is build up a few houses in a new subdivision, get them professionally decorated and throw in all the options. These were their "models" used for sales tours. But the builders wanted to establish high appraisal values for their subdivisions, which in many cases were larger homes placed very near to existing homes (usually smaller and older) that were selling for 40% less at least than the builder's desired price-point. In order to do this, they sold the model homes to investors or invesmtment groups for high prices, and leased them back for 18 months or 2 years at a very high monthly rate which more than paid the mortgage. This set the original appraisal value for the subdivision, and the investors got to hold the homes for free and profit off the appreciation. That worked great in bubble markets, but once the bubble started to deflate, the investors defaulted when the proceeds from any possible sale were less than the mortgage balance.
Another scam was that employees or associates of the builder would "buy" a second home from the builder in the early stages of the development for the builder's inflated price. Needless to say, those employees or associates got paid for the mortgage somehow - through bonuses, etc. Nice work if you can get it, huh?
Now we keep reading that "credit is tight", as in this article about new record lows in the homebuilder survey:
The National Association of Home Builders/Wells Fargo index of builder confidence dropped to 8, lower than forecast, from 9 in December, the Washington-based association said today. A reading below 50 means most respondents view conditions as poor.This is not true. Credit is not tight by any reasonable standards.
Builders’ attempts to reduce the property glut by slashing construction have been hampered by a jump in foreclosures that’s returning homes to the market. Prices and sales are likely to slide further as banks stay reluctant to lend and job losses discourage buyers.
“Builders have completely thrown in the towel,” Ellen Zentner, a senior U.S. economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said before the report. “They have their finger on the pulse of the credit market and they know credit is tight.”
You want proof, but don't want to go through the hassle of a mortgage application? Try Fannie Mae, which is basically setting industry standards right now. Look at their 12/18/08 guidelines for credit scores, DTIs etc, which can be found on this page. These draconian requirements include
- Minimum credit score of 580 (but not for manual underwriting or for bailout streamlined refis),
- Maximum 45% DTI (Debt/Income ratio) for manually underwritten loans (standard Desktop Underwriters apply for the rest),
- Allowing non-arms length purchase money mortgages as long as it is for the primary residence.**see explanation below.
Do want seller DP (seller contributes 3% for downpayment) ARM Interest Only 40 year 97% loans? Get 'em here! Max CLTV 105% MyCommunity (low to moderate income borrower can get up to 105% of appraised funds with Community Seconds, no borrower funds required), interest rate buydowns, nontraditional credit okay with credit counseling - why sure! 40 year loans w/ 10 year I/O period? Of course! Go ahead and look at these products - this is hardly tight lending.
There are some tighter requirements for the High Balance portfolio (what used to be jumbo conforming) with a 90% CLTV for one unit principal residences. There are also loan level pricing adjustments for higher risk transactions and adverse market delivery charges (see the current LLPA/AMDC matrix here). So, for example, after April 1st, my 90% ARM is going to cost me 25 bps, and my credit score of 675 is going to cost me another 125 bps, and my IO feature is going to cost me another 50 bps, total additional cost of 200 bps or 2% more.
Of course, I could knock that down to 1.25% more by improving my credit score to 680, and frankly, if you were shopping for a mortgage, I'd make you do that first! Because if you are so uncontrolled that you can't jack your credit score up 10 points in six months, you are not ready to buy a home IMO, and believe, there are plenty of homes out there which will be available when you do manage to do it.
Credit truly is tighter for investment properties, but it always had been before the late insanity. The reason is that investors walk away when it makes sense to do so. So Fannie wants you to put 20% down, and if you only want to put 10 or 15% down, they'll make you the loan but charge you extra for their additional risk, depending on your credit score.
All the rhetoric is generated by lobbying arms of various special interest groups, and never checked by reporters. Policies serving the interests of builders (among other goodies, they are asking for a 22K tax credit for purchases) are going to cost the taxpayer a lot of money and generate more bad loans. There's nothing wrong with the credit options available to would-be purchasers. There's still a lot wrong with pricing in many areas, and most of the people who wanted to buy already did buy, so there is a relative paucity of buyers. That is temporary and will pass. How much more can lenders do? After a period of extremely loose credit, there will be a few years in which new entrants into the housing market are restricted simply because anyone who would normally have qualified under reasonable terms already qualified during the period of no-fear lending.
**Explanation of non-arms length mortgages: These were one of the most transparent builder scams out there. Note that what has been changed is that investors can no longer get these, but principal residence buyers can.
What builders used to do is build up a few houses in a new subdivision, get them professionally decorated and throw in all the options. These were their "models" used for sales tours. But the builders wanted to establish high appraisal values for their subdivisions, which in many cases were larger homes placed very near to existing homes (usually smaller and older) that were selling for 40% less at least than the builder's desired price-point. In order to do this, they sold the model homes to investors or invesmtment groups for high prices, and leased them back for 18 months or 2 years at a very high monthly rate which more than paid the mortgage. This set the original appraisal value for the subdivision, and the investors got to hold the homes for free and profit off the appreciation. That worked great in bubble markets, but once the bubble started to deflate, the investors defaulted when the proceeds from any possible sale were less than the mortgage balance.
Another scam was that employees or associates of the builder would "buy" a second home from the builder in the early stages of the development for the builder's inflated price. Needless to say, those employees or associates got paid for the mortgage somehow - through bonuses, etc. Nice work if you can get it, huh?
Sunday, January 18, 2009
If I Could Only Get Hold Of James Hansen
I'd hand him a snow shovel and tell him to get to work on the global warming. Really?
I just did the two driveways again. The third time this week. I think I'm getting too old for this.
PS: That's it. It's snowing again. I'm going to go to bed and whimper. What with being out in this exceptional cold (oops, I'm sorry, global warming) this week for all these hours, the left side of my face is trying to go into Bell's palsy. I'm not going to let it. I got food for the old lady's cats, food for her (not that she asked for any), and groceries for our dogs and the Chief. I will let tonight take care of itself, and tomorrow I will be back to fight the catastrophic global warming. I did get the old lady laughing today when I pointed out to her that global warming appeared to be what we used to call "a bad winter". Lord how I wanted to be in GA this week, but it is even cold there. One of my brothers spent the week at Fort Benning training, and he was bitching about the cold.
Update: It's about 200 square yards that I am shoveling each time. I just finished again this morning, but it appears to be snowing again. That is my excuse for not answering your comments, most of which are very good.
I just did the two driveways again. The third time this week. I think I'm getting too old for this.
PS: That's it. It's snowing again. I'm going to go to bed and whimper. What with being out in this exceptional cold (oops, I'm sorry, global warming) this week for all these hours, the left side of my face is trying to go into Bell's palsy. I'm not going to let it. I got food for the old lady's cats, food for her (not that she asked for any), and groceries for our dogs and the Chief. I will let tonight take care of itself, and tomorrow I will be back to fight the catastrophic global warming. I did get the old lady laughing today when I pointed out to her that global warming appeared to be what we used to call "a bad winter". Lord how I wanted to be in GA this week, but it is even cold there. One of my brothers spent the week at Fort Benning training, and he was bitching about the cold.
Update: It's about 200 square yards that I am shoveling each time. I just finished again this morning, but it appears to be snowing again. That is my excuse for not answering your comments, most of which are very good.
Saturday, January 17, 2009
Social Security Trust Fund
There is so much misinformation about this issue. It is causing a lot of anger and confusion, as in this DU thread. However, the confusion over the issue has been fed by loopy idiots like Paul Krugman, as in this interview, and politicians like Pelosi, who apparently believes that the trust fund has assets in the same way she believes that natural gas is not a fossil fuel and that the Supreme Court is just like God.
There isn't a Social Security trust fund in the form of any assets other than year by year taxation of US persons. There is a "trust fund" that serves as a bookkeeping device for how much money we "owe" to future retirees, but there are no independent assets in there. So as soon as Social Security current receipts stop exceeding benefits paid out, the general fund (i.e. corporate and personal income taxes, excise taxes and the like) will have to be used to pay benefits.
The way Social Security works is that current workers pay in taxes every year, and those funds are used to send checks to current retirees. That's all. It's a pass-through program. The surplus is moved over to the general fund and is used for other purposes.
The last time the surplus ran out (in the early 1980s), the current system was put in place. Since then there have been minor revisions, but basically Social Security taxes have been used to defray other taxes.
The 2008 Social Security Trustees report (which covers operations in 2007) shows what is happening. In 2007, the 12.40% of wages (up to the max) amounted to 560.9 billion. The total cost of the benefits program was 494.5 billion, leaving a 66.4 billion dollar surplus. That money was given to the general fund (the rest of the government).
The total cost of the benefits program is composed of benefits paid out (489.1 billion), administrative costs (3.1 billion) and the railroad benefits exchange (3.6 billion).
Because the surplus is given to the general fund, the bookkeeping entry for interest and taxation of benefits means nothing. The bottom line is that when the cost of the benefits program exceeds the revenues paid in, we are either going to have to borrow money to pay benefits (and pay the interest on that borrowed money virtually to infinity) or we must raise other taxes or the SS payroll tax to pay for benefits.
What really matters for SS are only two things - the ratio of wages taxed to benefits, and the ratio of workers to beneficiaries. If Congress passed a law wiping out the "trust fund", absolutely nothing would change about the funding of Social Security. Nothing.
If you look at the table at the link, you can tell that the surplus was rising quickly through 2007. (In 2003, for example, it was about 50 billion.) That helped to offset other budget problems.
In 2008, the surplus appears to have stopped rising, and from here on in, the surplus will start decreasing. How do I know that? Well,
Again, referring to the table in the '08 SS Trustees report, the year in which benefit cost was projected to be about equal to taxes paid in was 2015, and in 2016 a deficit of about 18 billion dollars was projected.
Because of the fact that the surplus has been used to finance general operations of the US government, the effects of a declining surplus are going to start to hurt before 2015. And due to our current unemployment situation and demographics, we are going to see people retiring earlier than expected. Early retirees receive less monthly, but will receive it for longer. An early retiree may be working, but will be working at a part-time job paying much less in employment taxes.
The demographics (taken from 2007 ACS):
US age distribution of population in 2007:
The majority of the 60-64 bracket in 2007 will be eligible for retirement of some sort by the end of 2009, and the rest will be eligible in 2010. Because of the economy, we will see them retiring more quickly than expected, and we will see the wage base declining more quickly than expected. So the break-even point is probably more along the lines of 2013.
But, as I noted before, the effects for the federal budget will be felt long before 2013. For example, let's assume that the surplus is halved by the end of 2010, which appears pretty likely. Thus, instead of Social Security taxes supporting the general fund to the tune of 66 billion dollars as it did in 2007, let's assume that the general fund only gets 33 billion dollars in 2010.
The effect this has on the ability to borrow is quite massive. At 5%, borrowing a trillion dollars costs the treasury about 50 billion a year, so 33 billion dollars less means 600 billion less borrowed. And then, of course, receipts from personal income taxes and corporate taxes are also falling right now, so we aren't going to be bailed out by other taxes.
By the way, one of the arguments used by "economists" who claim that Social Security and Medicare won't required raising taxes until the "trust funds" are exhausted is that we won't be increasing public debt. Whenever you see or hear the argument that taxes won't have to be raised until the trust funds run out, it stems from one of three causes: either the source is too dumb to pour fluids out of a boot when the directions are written on the heel (ID 10 T error), the source is parroting something said by someone they trust (a trusting dolt), or the the source is engaging in sophistry (Krugman 96 vs Krugman 04).
In a sense it is true that until the trust funds are exhausted, we won't be creating "new debt" to pay for them, because these mythical trust funds are included currently as part of the government debt figures. But it is a truth that obscures reality, because the general fund gets back all monies "paid" to these trust funds. Thus, we are not paying interest on debt. As a bunch of Alt-A negative amortization lenders have discovered in the last year, there is a massive difference in performance when the terms of the loan abruptly change and demand that the borrower now pay interest on the loan. In their current form, the trust funds are negative amortization obligations.
You can use this Treasury Direct site to view information about government debt and the percentages held by the public versus the government. Over the last year, debt held by the public has increased about 1.2 trillion dollars. Impressive, isn't it? We can't continue it forever.
Medicare is a more complicated question. There are "trust funds" for part of Medicare, but other parts are paid from the general fund anyway. Taking the two together, there are going to be major cuts and major increases in payments attributable to these services:
There are already changes in Medicare funding along the means-testing lines. Beginning in 2007, Medicare part B premiums rose for higher income couples and singles. These are the 2009 premiums that are deducted from the Social Security benefit check for single income brackets (double the MAGI figures for married filing jointly)
MAGI <= $85,000 individual: $96.40
MAGI <= $107,000 individual: $134.90
MAGI <= $160,000 individual: $192.70
MAGI <= $213,000 individual: $250.50
MAGI > $213,000 individual: $308.30
You can retire early on Social Security, but you aren't eligible for Medicare until 65. So the big bulge for Medicare is shifted back a few years. When it hits, you will see these brackets shift sharply downward. MAGI includes tax exempt interest income, so in effect those no AMT bonds won't be tax free any more for some retirees!
There isn't a Social Security trust fund in the form of any assets other than year by year taxation of US persons. There is a "trust fund" that serves as a bookkeeping device for how much money we "owe" to future retirees, but there are no independent assets in there. So as soon as Social Security current receipts stop exceeding benefits paid out, the general fund (i.e. corporate and personal income taxes, excise taxes and the like) will have to be used to pay benefits.
The way Social Security works is that current workers pay in taxes every year, and those funds are used to send checks to current retirees. That's all. It's a pass-through program. The surplus is moved over to the general fund and is used for other purposes.
The last time the surplus ran out (in the early 1980s), the current system was put in place. Since then there have been minor revisions, but basically Social Security taxes have been used to defray other taxes.
The 2008 Social Security Trustees report (which covers operations in 2007) shows what is happening. In 2007, the 12.40% of wages (up to the max) amounted to 560.9 billion. The total cost of the benefits program was 494.5 billion, leaving a 66.4 billion dollar surplus. That money was given to the general fund (the rest of the government).
The total cost of the benefits program is composed of benefits paid out (489.1 billion), administrative costs (3.1 billion) and the railroad benefits exchange (3.6 billion).
Because the surplus is given to the general fund, the bookkeeping entry for interest and taxation of benefits means nothing. The bottom line is that when the cost of the benefits program exceeds the revenues paid in, we are either going to have to borrow money to pay benefits (and pay the interest on that borrowed money virtually to infinity) or we must raise other taxes or the SS payroll tax to pay for benefits.
What really matters for SS are only two things - the ratio of wages taxed to benefits, and the ratio of workers to beneficiaries. If Congress passed a law wiping out the "trust fund", absolutely nothing would change about the funding of Social Security. Nothing.
If you look at the table at the link, you can tell that the surplus was rising quickly through 2007. (In 2003, for example, it was about 50 billion.) That helped to offset other budget problems.
In 2008, the surplus appears to have stopped rising, and from here on in, the surplus will start decreasing. How do I know that? Well,
- The employee/population ratio dropped from 62.8% in December 07 to 61.0% in December 08, which means that fewer people are working in comparison to retirees, and
- WIET Treasury receipts, which include Social Security and Medicare withholding, have begun to fall below their year-ago levels over the last few months.
Again, referring to the table in the '08 SS Trustees report, the year in which benefit cost was projected to be about equal to taxes paid in was 2015, and in 2016 a deficit of about 18 billion dollars was projected.
Because of the fact that the surplus has been used to finance general operations of the US government, the effects of a declining surplus are going to start to hurt before 2015. And due to our current unemployment situation and demographics, we are going to see people retiring earlier than expected. Early retirees receive less monthly, but will receive it for longer. An early retiree may be working, but will be working at a part-time job paying much less in employment taxes.
The demographics (taken from 2007 ACS):
US age distribution of population in 2007:
55-59: 6.0%So although even in an Obama administration people will not be immortal, the percent of the population exiting retirement feet first from the last three brackets will be much less than the percentage of the population entiring retirement for years to come. The peak distribution bracket in 2007 was 45-49, which composed 7.6% of the population.
60-64: 4.8%
65-69: 3.6%
70-74: 2.9%
75-79: 2.5%
80-84: 1.9%
85 > : 1.7%
The majority of the 60-64 bracket in 2007 will be eligible for retirement of some sort by the end of 2009, and the rest will be eligible in 2010. Because of the economy, we will see them retiring more quickly than expected, and we will see the wage base declining more quickly than expected. So the break-even point is probably more along the lines of 2013.
But, as I noted before, the effects for the federal budget will be felt long before 2013. For example, let's assume that the surplus is halved by the end of 2010, which appears pretty likely. Thus, instead of Social Security taxes supporting the general fund to the tune of 66 billion dollars as it did in 2007, let's assume that the general fund only gets 33 billion dollars in 2010.
The effect this has on the ability to borrow is quite massive. At 5%, borrowing a trillion dollars costs the treasury about 50 billion a year, so 33 billion dollars less means 600 billion less borrowed. And then, of course, receipts from personal income taxes and corporate taxes are also falling right now, so we aren't going to be bailed out by other taxes.
By the way, one of the arguments used by "economists" who claim that Social Security and Medicare won't required raising taxes until the "trust funds" are exhausted is that we won't be increasing public debt. Whenever you see or hear the argument that taxes won't have to be raised until the trust funds run out, it stems from one of three causes: either the source is too dumb to pour fluids out of a boot when the directions are written on the heel (ID 10 T error), the source is parroting something said by someone they trust (a trusting dolt), or the the source is engaging in sophistry (Krugman 96 vs Krugman 04).
In a sense it is true that until the trust funds are exhausted, we won't be creating "new debt" to pay for them, because these mythical trust funds are included currently as part of the government debt figures. But it is a truth that obscures reality, because the general fund gets back all monies "paid" to these trust funds. Thus, we are not paying interest on debt. As a bunch of Alt-A negative amortization lenders have discovered in the last year, there is a massive difference in performance when the terms of the loan abruptly change and demand that the borrower now pay interest on the loan. In their current form, the trust funds are negative amortization obligations.
You can use this Treasury Direct site to view information about government debt and the percentages held by the public versus the government. Over the last year, debt held by the public has increased about 1.2 trillion dollars. Impressive, isn't it? We can't continue it forever.
Medicare is a more complicated question. There are "trust funds" for part of Medicare, but other parts are paid from the general fund anyway. Taking the two together, there are going to be major cuts and major increases in payments attributable to these services:
There are already changes in Medicare funding along the means-testing lines. Beginning in 2007, Medicare part B premiums rose for higher income couples and singles. These are the 2009 premiums that are deducted from the Social Security benefit check for single income brackets (double the MAGI figures for married filing jointly)
MAGI <= $85,000 individual: $96.40
MAGI <= $107,000 individual: $134.90
MAGI <= $160,000 individual: $192.70
MAGI <= $213,000 individual: $250.50
MAGI > $213,000 individual: $308.30
You can retire early on Social Security, but you aren't eligible for Medicare until 65. So the big bulge for Medicare is shifted back a few years. When it hits, you will see these brackets shift sharply downward. MAGI includes tax exempt interest income, so in effect those no AMT bonds won't be tax free any more for some retirees!
Friday, January 16, 2009
It Wuz Always 'Bout Tha Numbahs
With apologies to Herbert Kornfeld for the robbed title.
I'm really busy, but the bottom line is that we are beginning to see some positive signs. Call it the first third of the recovery process. That's for the US, but there are some relative positives indicating a bottom elsewhere in parts of Asia on certain industries.
So the forward edge trajectory has shifted into a leveling pattern, aside from the bad debt issue. That is a big issue indeed.
But for the US, FUT, survey, real incomes all forecast spending uptick in second quarter. This was a trickle-up recession and it will be a trickle-up recovery. Slooooow.
There is still a huge shake-out in industry coming, especially in parts of Asia. And there's still a lot of bad debt to be dealt with over the next few years. And then there is the looming Eurobank bomb, which is going to start really causing problems in 09.
The bad part is that if the US launches a "green" energy program, we blow it all out. Then incomes reverse again, and lala, US depression. The bad debt is just the bad debt. There's nothing you can do to fix it. You just have to go down with it or work it out.
A lot of more traditional US adjustable mortgages are adjusting lower, so add that to real income recovery, and you've got consumer recovery. First pulse shows up this spring, and then it slowly builds (under current conditions) through another year, at which point you have a net stimulus of approximately 250 billion. Many people will be paying a few hundred less a month on their mortgages. And those foreclosures are not all bad either; many individuals will be renting for far less. Freddie Mac is negotiating with individuals to stay in their foreclosed homes and pay market rent. Not a bad idea at all.
True, the higher unemployment is a drag, and that drag will build. Nonetheless, this is where demographics starts helping. There will be more income stability due to retirement funding (public, SS & the like) over the next sixteen months than we have seen in the last few recessions.
US credit is still pretty easy by anything but recent norms, and the recent moves by the Fed to buy consumer debt securitizations have further helped. So now it is a matter of time, which will mitigate matters, and stupidity, which may cause the US to stage yet another remake of the Titanic.
I'm really busy, but the bottom line is that we are beginning to see some positive signs. Call it the first third of the recovery process. That's for the US, but there are some relative positives indicating a bottom elsewhere in parts of Asia on certain industries.
So the forward edge trajectory has shifted into a leveling pattern, aside from the bad debt issue. That is a big issue indeed.
But for the US, FUT, survey, real incomes all forecast spending uptick in second quarter. This was a trickle-up recession and it will be a trickle-up recovery. Slooooow.
There is still a huge shake-out in industry coming, especially in parts of Asia. And there's still a lot of bad debt to be dealt with over the next few years. And then there is the looming Eurobank bomb, which is going to start really causing problems in 09.
The bad part is that if the US launches a "green" energy program, we blow it all out. Then incomes reverse again, and lala, US depression. The bad debt is just the bad debt. There's nothing you can do to fix it. You just have to go down with it or work it out.
A lot of more traditional US adjustable mortgages are adjusting lower, so add that to real income recovery, and you've got consumer recovery. First pulse shows up this spring, and then it slowly builds (under current conditions) through another year, at which point you have a net stimulus of approximately 250 billion. Many people will be paying a few hundred less a month on their mortgages. And those foreclosures are not all bad either; many individuals will be renting for far less. Freddie Mac is negotiating with individuals to stay in their foreclosed homes and pay market rent. Not a bad idea at all.
True, the higher unemployment is a drag, and that drag will build. Nonetheless, this is where demographics starts helping. There will be more income stability due to retirement funding (public, SS & the like) over the next sixteen months than we have seen in the last few recessions.
US credit is still pretty easy by anything but recent norms, and the recent moves by the Fed to buy consumer debt securitizations have further helped. So now it is a matter of time, which will mitigate matters, and stupidity, which may cause the US to stage yet another remake of the Titanic.
Wednesday, January 14, 2009
US Figures
Retail sales for December are out. This report is notable in several respects (although it is advance, and it will be revised next month). The first is that retail sales for all of 2008 are slightly under retail sales for all of 2007, having dropped 0.1%. The second is that December 08 retail sales dropped 9.8% compared to December 07 retail sales.
Other eye-catching stuff: Comparing Dec 07 to Dec 08 (adjusted for trading day differences) the only categories of retail spending which increased were groceries & beverages (up 1.3%) and health & personal care (includes medicines), which was up 5.2%.
Groceries alone only increased 1.1%. That is a striking number, because food costs over the year increased far more than that, and in theory the US population increased. I don't think it did, but if you take this at face value using census extrapolations, real grocery spending declined about 7% per capita, which would indicate a truly immense economic problem.
Final rail figures for 2008 were published. For all of 2008 compared to 2007, carloads dropped 2.2%, and intermodal dropped 4.2%. Total volume rolled back to 2004 (coming in lower than 05, 06 and 07). For all of December, carloads were down 14.2%, and intermodal was down 13.7%. Intermodal dropped earlier, so that is why it looks relatively better.
Trade balance November: -40.4 billion, having dropped from a revised -56.7 billion in October, almost 29%. Exports dropped 5.7% on the month; imports dropped 12%. Over the year, November exports dropped 1.7%, and imports dropped 10.6%. The unit price of petroleum imports dropped over the year from 79.87 to 66.72 (16.5%), so that accounts for a lot of the change. (see exhibit 17). Foreign trade main page.
For the week ending January 9th, crude inventories were up 13.1% compared to the same week in the prior year, and supply of all product was up 5.6% excluding SPR. Distallate supplies were up 8.6% compared to a year ago. US diesel prices have dropped about 50% from their height last year.
Monthly Treasury Statements can be found here. If you look at Table 3, you see that personal income taxes have fallen 6.7%, corporate income taxes have fallen 45.5%, and unemployment taxes have fallen 7.6% in the first quarter of the 08-09 fiscal year (Oct, Nov, Dec). Total receipts fell 9.7%. (See Table 3 for this information; the figures given are in millions.)
Total receipts (in millions) for the first quarter of the FY were 547,439. Total outlays were 1,032,638, for a net deficit of 485,198. There is a rounding difference of 1 million here. Because of the way taxes are paid, deficits aren't evenly spread by month and quarter through the year. Nonetheless, the fact that the deficit for the equivalent period in FY 07-08 was 106,816 ought to give us all pause.
You might want to know how your money is being spent. Expressed as a percent of total outlays for the first quarter, here they are ranked from top to bottom as a percent of total outlays:
Click on this to get a larger image.
Now there are a few points I'd like to make. First, we cannot keep spending money on "stimulus" at this rate. Eventually it won't be a stimulus, but a drag.
Even even though we got a temporary bonus in the form of lower treasury rates, that isn't going to last forever, and then we are going to get a double whammy on our interest outlays a few years down the line. As it is, if you chop out the stimulus, about half ur outlays went to social spending. Then we are spending another 17.5% on interest on our debt. Together, that totals 2/3rds of spending. Even if you cut one quarter of military spending (and Obama's plans for Afghanistan make that quite unlikely), you haven't improved the overall picture very much.
The top items in the full year budget estimate are:
Health & Human Services - 739,241
Social Security Admin. - 699,976
DoD Military spending - 656,722
Int on Treasury Debt - 449,070
Total of these four is - 2,545,009
That's 2.5 trillion dollars out of the 3.1 trillion total budget.
The annual cost of borrowing another trillion dollars if interest rates average (1 trillion = 1,000,000,000,000)
3%: $30,000,000,000 (30 billion)
4%: $40,000,000,000 (40 billion)
5%: $50,000,000,000 (50 billion)
There is a Treasury Direct site which allows you to see our ballooning debt held by the public (the number which really matters). As of 1/9/09 it was 6,290,327,140,825.48, or 6.3 trillion. If we add another 1.2 trillion this year, it will be 7.5 trillion next year. Another feature of the current situation is that Social Security payments are rising more rapidly than expected, and with income dropping, receipts are less than expected. If you look at the 2008 Trustees report (which covers 2007 operations) and look at the projections there, correlated with the trends above, it appears that shortly the SS surplus will be gone, and the general fund will begin having to actually pay interest to social security to cover benefits. From the first quarter of 08, compared to the first quarter of 09, Social Security outlays increased 7,651 million, whereas receipts increased only 2,263 million, so the quarterly surplus dropped 5.38 billion.
We are near the point at which we are going to have to cut non-entitlement social spending sharply, so we might as well get that into our heads. You can only raise taxes so far; after that, you encounter diminishing returns. We still have room to raise income taxes somewhat (5-10% on upper brackets). We will do that very shortly.
After that, it's game over for the spending party, because you can't raise US marginal corporate taxation much further. You could eliminate some of the tax breaks and cut the marginal rates of corporate taxation. If you went low enough - 20-25% top bracket - you'd get more insourcing of business and higher corporate tax receipts over time. Remember, we are competing with flat rate corporate taxation in places like Ireland and some of the eastern European countries. However it takes years to get the benefit of that, so if that is the strategy we are going to follow it's one that must be implemented within a few years.
Other eye-catching stuff: Comparing Dec 07 to Dec 08 (adjusted for trading day differences) the only categories of retail spending which increased were groceries & beverages (up 1.3%) and health & personal care (includes medicines), which was up 5.2%.
Groceries alone only increased 1.1%. That is a striking number, because food costs over the year increased far more than that, and in theory the US population increased. I don't think it did, but if you take this at face value using census extrapolations, real grocery spending declined about 7% per capita, which would indicate a truly immense economic problem.
Final rail figures for 2008 were published. For all of 2008 compared to 2007, carloads dropped 2.2%, and intermodal dropped 4.2%. Total volume rolled back to 2004 (coming in lower than 05, 06 and 07). For all of December, carloads were down 14.2%, and intermodal was down 13.7%. Intermodal dropped earlier, so that is why it looks relatively better.
Trade balance November: -40.4 billion, having dropped from a revised -56.7 billion in October, almost 29%. Exports dropped 5.7% on the month; imports dropped 12%. Over the year, November exports dropped 1.7%, and imports dropped 10.6%. The unit price of petroleum imports dropped over the year from 79.87 to 66.72 (16.5%), so that accounts for a lot of the change. (see exhibit 17). Foreign trade main page.
For the week ending January 9th, crude inventories were up 13.1% compared to the same week in the prior year, and supply of all product was up 5.6% excluding SPR. Distallate supplies were up 8.6% compared to a year ago. US diesel prices have dropped about 50% from their height last year.
Monthly Treasury Statements can be found here. If you look at Table 3, you see that personal income taxes have fallen 6.7%, corporate income taxes have fallen 45.5%, and unemployment taxes have fallen 7.6% in the first quarter of the 08-09 fiscal year (Oct, Nov, Dec). Total receipts fell 9.7%. (See Table 3 for this information; the figures given are in millions.)
Total receipts (in millions) for the first quarter of the FY were 547,439. Total outlays were 1,032,638, for a net deficit of 485,198. There is a rounding difference of 1 million here. Because of the way taxes are paid, deficits aren't evenly spread by month and quarter through the year. Nonetheless, the fact that the deficit for the equivalent period in FY 07-08 was 106,816 ought to give us all pause.
You might want to know how your money is being spent. Expressed as a percent of total outlays for the first quarter, here they are ranked from top to bottom as a percent of total outlays:
Click on this to get a larger image.
Now there are a few points I'd like to make. First, we cannot keep spending money on "stimulus" at this rate. Eventually it won't be a stimulus, but a drag.
Even even though we got a temporary bonus in the form of lower treasury rates, that isn't going to last forever, and then we are going to get a double whammy on our interest outlays a few years down the line. As it is, if you chop out the stimulus, about half ur outlays went to social spending. Then we are spending another 17.5% on interest on our debt. Together, that totals 2/3rds of spending. Even if you cut one quarter of military spending (and Obama's plans for Afghanistan make that quite unlikely), you haven't improved the overall picture very much.
The top items in the full year budget estimate are:
Health & Human Services - 739,241
Social Security Admin. - 699,976
DoD Military spending - 656,722
Int on Treasury Debt - 449,070
Total of these four is - 2,545,009
That's 2.5 trillion dollars out of the 3.1 trillion total budget.
The annual cost of borrowing another trillion dollars if interest rates average (1 trillion = 1,000,000,000,000)
3%: $30,000,000,000 (30 billion)
4%: $40,000,000,000 (40 billion)
5%: $50,000,000,000 (50 billion)
There is a Treasury Direct site which allows you to see our ballooning debt held by the public (the number which really matters). As of 1/9/09 it was 6,290,327,140,825.48, or 6.3 trillion. If we add another 1.2 trillion this year, it will be 7.5 trillion next year. Another feature of the current situation is that Social Security payments are rising more rapidly than expected, and with income dropping, receipts are less than expected. If you look at the 2008 Trustees report (which covers 2007 operations) and look at the projections there, correlated with the trends above, it appears that shortly the SS surplus will be gone, and the general fund will begin having to actually pay interest to social security to cover benefits. From the first quarter of 08, compared to the first quarter of 09, Social Security outlays increased 7,651 million, whereas receipts increased only 2,263 million, so the quarterly surplus dropped 5.38 billion.
We are near the point at which we are going to have to cut non-entitlement social spending sharply, so we might as well get that into our heads. You can only raise taxes so far; after that, you encounter diminishing returns. We still have room to raise income taxes somewhat (5-10% on upper brackets). We will do that very shortly.
After that, it's game over for the spending party, because you can't raise US marginal corporate taxation much further. You could eliminate some of the tax breaks and cut the marginal rates of corporate taxation. If you went low enough - 20-25% top bracket - you'd get more insourcing of business and higher corporate tax receipts over time. Remember, we are competing with flat rate corporate taxation in places like Ireland and some of the eastern European countries. However it takes years to get the benefit of that, so if that is the strategy we are going to follow it's one that must be implemented within a few years.
Monday, January 12, 2009
That's It For Today
It snowed up here this last weekend, and not only did I have to chip ice off my driveway, I just couldn't get comfortable until I did one old neighbor's. Both of the driveways are long and very steep. I'm completely tired.
I'm glad I did the neighbor's, though, because her brother died this morning. The hospital called in the wee hours of the morning, and she was able to get out to be with her brother one last time. They are (were) twins, in their late 80s.
But I'm packing it in and going back to bed. There is nothing worse than spending 3 1/2 hours chipping ice in cold temperatures when you are trying to get over the flu. By the time I was done I was staggering, and I'm not over it yet.
I'm glad I did the neighbor's, though, because her brother died this morning. The hospital called in the wee hours of the morning, and she was able to get out to be with her brother one last time. They are (were) twins, in their late 80s.
But I'm packing it in and going back to bed. There is nothing worse than spending 3 1/2 hours chipping ice in cold temperatures when you are trying to get over the flu. By the time I was done I was staggering, and I'm not over it yet.
Sunday, January 11, 2009
Obama, A Class Traitor
The mood on DU is distinctly unpleasant.
For example, this thread on the interview in which Obama says we are all going to have to sacrifice is almost entirely negative, including stuff like:
These are more typical comments:
Nor is it just the economic issues. For example, this Gitmo thread, which started with an interview in which Obama was cited as saying:
And then there are those who fear the coming theocracy. No, I am not making this up. Look at this thread on the latest Newdow inaugural lawsuit:
For example, this thread on the interview in which Obama says we are all going to have to sacrifice is almost entirely negative, including stuff like:
89. Unexamined Cult of PersonalityThe above is not typical, although the part about the cadres in the media is pretty much dead on.
Comrades
During the election, Comrade Obama distanced himself from his progressive collectivist roots and denied that he was a true socialist.
Instead his handlers built a cult of personality and his managed speeches were only platitudes where we heard what we wanted to hear. It should have been an indicator when the only time Comrade Obama spoke truthfully about the reactionary forces in fascist Amerikkka was in front of a secret meeting with billionaires and industrialists on "Nob Hill".
The cadres in the media sold themselves to this flashy cult of personality and failed to examine why a committed progressive socialist denied his mentors - revolutionary heroes like Comrades Frank Davis; Bill Ayers; and Bernadine Dohrn - and his roots as a enemy of the plutocrats in order to curry favor with class enemies like the Wall Street blood suckers Jim Johnson and Franklin Raines.
Consider that Comrade Obama rejected public financing and his handlers deliberately set up his web site to allow fictitious donations. Who bought the election? Who bought our HOPE so they could derail CHANGE and make sure it was MORE OF THE SAME.
We have been sold a Stalin where we believed in a Lenin, comrades.
International financiers like Soros are manipulating the progressive popular front to ensure that the working classes are kept in slavery to the plutocrats. Obama is a class traitor.
These are more typical comments:
76. Sorry, no diceHere's another thread in which people have conniptions over Social Security/Medicare. One goes so far as to demand that Obama be impeached on January 20th.
Our family has already "given" it's jobs, retirement fund, savings and health insurance so that a shitty Wall Street holding company could add a penny to it's stock price.
There is nothing left for us to give.
How about raising the capital gains tax on John Paulson?
The hedge fund guy who made $10 million a day (every day) in 2007 by shorting mortgage securities.
Let him pay.
We're done.
...
63. So is Obama going to raise taxes on the rich? Because he wasn't going to a month or so ago.
Of course, the rich aren't like everybody else, so they don't have to give diddly squat or have any "skin" in the game. :eyes:
They got their BILLION No, TRILLION dollar bailout, now didn't they? So it's ALL good. :grr:
...
44. But the promise we got is that 95% of working Americans would get a tax cut.
So what skin will be required from 95% of working Americans if "everyone is going to have to give?"
By the way, "giving" is something nobody "has" to do, "giving" is voluntary. If this is, as I suspect, going back on the tax cut promise and actually increasing taxes on most Americans with jobs, I REALLY want him to stop using the word "give."
44. Uh, Obama, can I have my vote back now?It goes on and on. Some want Obama impeached unless he impeaches Bush. If this were a honeymoon, a quick divorce with mutual restraining orders would be the next logical step. I kind of wonder if the habit of screaming about everything hasn't become so embedded for some of these folks that they just can't stop.
IMPEACH Obama on January 20, I say!
We are being Shock Doctrined into reductions long wanted by the right and by Obama's appointed economic team. Social Security is solvent and requires no change. Instead, what we have is a general budget in crisis. How dare any Democrat, never mind someone from the cabal of blood-sucking Republithugs, try to solve the general budget crisis on the backs of everyday Americans, Americans that were forced to pay an elevated regressive tax since Greenspan's 1983 Social Security fix. I guess in reality that "fix" was meant to disguise the extraordinary tax largess given to our upper class these last 28 years. It is a shell game, a swindle, and a theft from the American people. ---
Nor is it just the economic issues. For example, this Gitmo thread, which started with an interview in which Obama was cited as saying:
President-elect Barack Obama said this weekend that he does not expect to close Guantanamo Bay in his first 100 days in office.Well, that is one heck of a problem, especially when a lot of them can't be returned to their countries of origin. One person's response.
...
"It is more difficult than I think a lot of people realize," the president-elect explained. "Part of the challenge that you have is that you have a bunch of folks that have been detained, many of whom may be very dangerous who have not been put on trial or have not gone through some adjudication. And some of the evidence against them may be tainted even though it's true. And so how to balance creating a process that adheres to rule of law, habeas corpus, basic principles of Anglo-American legal system, by doing it in a way that doesn't result in releasing people who are intent on blowing us up."
30. Here's how I would do itBig problem, that last. I guess this poster feels that if they get to blow up Gitmo they'll get it out of their systems. It is true that Obama promised to shut it down in 100 days, to be fair. But the fine print was that he was just going to move them somewhere else.
Step One is to quit taking new detainees into the facility. President Obama can make that happen in his inaugural address. "Quit sending new people to Gitmo. I'll get you paperwork as soon as I get inside. For now, if you've got detainees on an airplane headed for Gitmo, divert to Fort Leavenworth."
I would next improve the quality of these people's living conditions. The torture stops, and I'd get rid of the torture chambers too...train some of the prisoners to use bulldozers so they can knock it down, then get Marine Corps engineers to blow up the rubble with explosives.
On the second day, we start separating the people who really need to be in jail from the al-Hatfields and al-McCoys, the multitudes who are in there because Bushler decided to pay bounties for "terrorists" without investigating any of them, leading to the jailing of people who did the heinous crime of parking on their neighbors' lawn. Give the al-Hatfields and al-McCoys some money for a home and a Toyota Hilux pickup (the Middle East's favorite vehicle), food and new clothes for their families and a nice Koran, take them home and apologize profusely for ruining their lives. The people who need to be in there can be tried, then jailed in a proper penitentiary.
The last dozen people to be repatriated from Camp X-Ray get to blow it up. Marines will set the explosive charges, the detainees will get to push buttons to set them off.
I think this will take at least a year to complete.
The only problem is, if we blow up Gitmo, where will we put Bush, Cheney, Condi, Rummy and Rove?
And then there are those who fear the coming theocracy. No, I am not making this up. Look at this thread on the latest Newdow inaugural lawsuit:
54. HE has the right to say it, but the Chief Justice DOES NOT HAVE THE RIGHT TO SAY ITThis is so weird. It's as if all the ranting of the last 8 years is now ingrained in people's psyches. This would hardly be the first time the Chief Justice said those words, although it is the choice of the person being sworn in. The theocracy nutcases under Bush are now extending their neurosis to Obama.
Is that clear? The Chief Justice has a duty to administer the oath as it is written in the Constitution, period. If the president wants to add his beatific little flourish, he's perfectly welcome to it, and that's apparently been enough for the last 43 of them. Apparently, it's not enough for Barack Obama; apparently he wants to bring the rest of us to heel and rub our nose in the reminder that this country is wholly owned by Religion Incorporated, and fuck anyone who dares to disagree.
What's the problem here? Why is Barack Obama so hell-bent to make this a theocracy? Don't we have enough encroachment by the gods-on-earth of sanctified religion? They pay no taxes. We endorse their guess on our currency. We pay them salaries in Congress and the Military. We dump untold dollars into their coffers under the guise of Faith-Based Charities.
The question is not about what Obama says, the question is what the Chief Justice, representing the pinnacle of our law, is saying. If he's willing to OBVIOUSLY violate the law because of his fealty to a "higher power", then he should be impeached immediately for traitorously undermining the very office he's invited to uphold.
Fuck this privilege shit. Religion is not, by nature, "good", and those who demand us to turn a blind eye toward its excesses and imperial domination are commiting a crime against the Constitution of the United States. I don't just mean the hard-and-fast letter of the law, but the spirit of the whole enterprise. Got it?
Friday, January 09, 2009
Once In A Blue Moon
China: 70 city home price index declines slightly over 2008, with half the decline occurring in the last month. Big surprise. Biggest losers - Shenzhen (-18.1%) & Guangzhou (-9.4%). It's kind of the same old, same old, happening in a different alphabet. Here is a very good Christian Science Monitor article on general aspects of the current Chinese economy, if you are interested. The average American thinks Communism = all these social benefits, but in fact China's economy is hypercapitalism for the average peon. Industries get a lot of state support. In recent years the Chinese have tried to implement more worker protection measures (companies must pay back wages), but they are now backing off some of those because of the slump.
Recent suggestions and efforts to improve the Chinese economy have included:
Germany: Surprise to the downside on industrial output in November. -3.1% on the month, -10% on the year. I could go through a bunch of other countries in Europe, but why bother? Spain's fell about 15% over the year.
Remember, Japan's industrial output dropped 8.1% for November, and if I recall correctly, that made for about a 16% drop over the year. Brazil's industrial output dropped 5.2% for November, which makes a 6.2% decline for the year. The Brazilian auto mfrg numbers are already out, and are so poor that December's industrial output is sure to decline again sharply.
And the blue moon is shining in the sky. According to the January release of US consumer credit, which covers consumer credit through November, the impossible has happened. Real - not SA - outstanding non-revolving credit has dropped. Much of that is auto loans. From September, outstanding non-revolving credit dropped about 13 billion. Only about 90 billion to go before we can expect some recovery in autos!!! We'd hit that sometime in the third quarter. It can't come soon enough for Brazil.
Recent suggestions and efforts to improve the Chinese economy have included:
- introducing REITs,
- introducing margin trading,
- encouraging buying consumer durables on credit,
- lower downpayments for homes,
- etc.
Output at factories and utilities fell 2.4 percent from the previous month, Insee, the Paris-based statistics office, said today. Economists expected a drop of 0.8 percent, according to the median of 17 forecasts in a Bloomberg News survey. Manufacturing slumped 3.1 percent after a revised decline of 4.4 percent, the biggest since May 1997.Year over year, industrial production dropped 9%, and manufacturing 11%. That's considerably worse than US numbers for November, and it makes me worry about what US numbers will look like in January.
“Everyone expects the fourth quarter to be just about the worst in memory,” Jean-Louis Mourier, economist at Aurel Leven in Paris said on Bloomberg Television. “These numbers confirm that industrial activity really contracted after mid- September.”
Germany: Surprise to the downside on industrial output in November. -3.1% on the month, -10% on the year. I could go through a bunch of other countries in Europe, but why bother? Spain's fell about 15% over the year.
Remember, Japan's industrial output dropped 8.1% for November, and if I recall correctly, that made for about a 16% drop over the year. Brazil's industrial output dropped 5.2% for November, which makes a 6.2% decline for the year. The Brazilian auto mfrg numbers are already out, and are so poor that December's industrial output is sure to decline again sharply.
And the blue moon is shining in the sky. According to the January release of US consumer credit, which covers consumer credit through November, the impossible has happened. Real - not SA - outstanding non-revolving credit has dropped. Much of that is auto loans. From September, outstanding non-revolving credit dropped about 13 billion. Only about 90 billion to go before we can expect some recovery in autos!!! We'd hit that sometime in the third quarter. It can't come soon enough for Brazil.
It's Friiiiidaaaaaay
For many, that means little, because according to BLS they are now unemployed. Weekends are a whole lot more fun when you have a job.
Monthly employment release here. It is bad, and it is real, because of the striking correlations with other stats, such as Treasury Daily Statements and rail traffic.
The household survey showed that employment dropped by 806,000, while the workforce dropped by 173,000. We are expecting more retirees due to demographics, so all of the workforce drop isn't discouraged workers. The rolls of the officially unemployed grew by 632,000 in December, an increase of 0.4%. Total unemployment is now 7.2%. That is an increase of 1.2% from the third quarter's 6.0%. We're going over 9% most certainly. (CR was wrong on this, but his domestic analysis was good. The difference in his forecast and reality is due to the problems with bank lending globally and the fuel shock.)
Because we are seeing a sharp break in trend, the establishment survey is not very reliable at this time. For example, the establishment survey shows that total private average weekly earnings were still higher in December than the third quarter average. This is not true - not even remotely true. ( I know this because of the Treasury receipts and other data. ) So earnings and PCE for this quarter will be exaggerated and sharply revised down later. Not that they are going to look good, but they will get a lot worse in future revisions.
I have begun to see some signs of the interim stabilization. For instance, marginal construction employment is picking up in some areas (these are salvage jobs). Also convenience stores have picked up in some areas and staffing there has picked up to boot.
A while back Michael Adams wrote a comment that summarized his family's brush with the oil patch bust and the recovery. It was classic, including a bunch of part-time jobs, a return to school, etc. During the next few years, the primary difference between that period and this one is that more people will shift to drawing Social Security due to age demographics. Some will have the chance to take early retirement with private or government pensions. The 2007 ACS breakdown of population by age shows why:
This is 2007 data, so by the end of this year (2009) virtually all of the 4.8% of the population aged 60-64 in 2007 will have begun drawing retirement funds or shortly be able to do so.
By 2010, about 1/3rd of the 6% of the population in the 55-59 bracket will be moving into the early retirement stage. In a bad economy, more of these people get laid off, and less of them can secure jobs. One of the results will be that many older people will "retire" early, and get part-time jobs as available to supplement very mediocre retirement benefits. A lot more state and local workers will retire on the theory that the benefits they are offered now are the best they are likely to get. Thus by 2011 I expect 6% - 7% of the US population to have moved into the retirement stage. This represents a huge government economic stimulus package in and of itself.
(The real crisis in medical insurance relates to the older workers who lose medical coverage and will not be able to secure new jobs with medical coverage. Instead of trying to do some wholesale rework of the medical insurance system, the best thing to do would be help these people with large insurance pools, tax credits, and assistance for employers. Many of these people have excellent skills that would be of use to smaller businesses, but smaller businesses will not be able to employ and insure them given the very high costs.)
I am very skeptical of the idea that we need to launch any more significant economic stimulus than these retirements in order to prevent a depression. One of the differences between the current economy and that of the 1930s are precisely these stats, and the much higher income stability that they represent.
I am completely confused as to why all the great brains in government and the economic recovery team don't discuss this fact. Currently we are discussing retirements only as a negative. However they are also a stimulus.
Monthly employment release here. It is bad, and it is real, because of the striking correlations with other stats, such as Treasury Daily Statements and rail traffic.
The household survey showed that employment dropped by 806,000, while the workforce dropped by 173,000. We are expecting more retirees due to demographics, so all of the workforce drop isn't discouraged workers. The rolls of the officially unemployed grew by 632,000 in December, an increase of 0.4%. Total unemployment is now 7.2%. That is an increase of 1.2% from the third quarter's 6.0%. We're going over 9% most certainly. (CR was wrong on this, but his domestic analysis was good. The difference in his forecast and reality is due to the problems with bank lending globally and the fuel shock.)
Because we are seeing a sharp break in trend, the establishment survey is not very reliable at this time. For example, the establishment survey shows that total private average weekly earnings were still higher in December than the third quarter average. This is not true - not even remotely true. ( I know this because of the Treasury receipts and other data. ) So earnings and PCE for this quarter will be exaggerated and sharply revised down later. Not that they are going to look good, but they will get a lot worse in future revisions.
I have begun to see some signs of the interim stabilization. For instance, marginal construction employment is picking up in some areas (these are salvage jobs). Also convenience stores have picked up in some areas and staffing there has picked up to boot.
A while back Michael Adams wrote a comment that summarized his family's brush with the oil patch bust and the recovery. It was classic, including a bunch of part-time jobs, a return to school, etc. During the next few years, the primary difference between that period and this one is that more people will shift to drawing Social Security due to age demographics. Some will have the chance to take early retirement with private or government pensions. The 2007 ACS breakdown of population by age shows why:
This is 2007 data, so by the end of this year (2009) virtually all of the 4.8% of the population aged 60-64 in 2007 will have begun drawing retirement funds or shortly be able to do so.
By 2010, about 1/3rd of the 6% of the population in the 55-59 bracket will be moving into the early retirement stage. In a bad economy, more of these people get laid off, and less of them can secure jobs. One of the results will be that many older people will "retire" early, and get part-time jobs as available to supplement very mediocre retirement benefits. A lot more state and local workers will retire on the theory that the benefits they are offered now are the best they are likely to get. Thus by 2011 I expect 6% - 7% of the US population to have moved into the retirement stage. This represents a huge government economic stimulus package in and of itself.
(The real crisis in medical insurance relates to the older workers who lose medical coverage and will not be able to secure new jobs with medical coverage. Instead of trying to do some wholesale rework of the medical insurance system, the best thing to do would be help these people with large insurance pools, tax credits, and assistance for employers. Many of these people have excellent skills that would be of use to smaller businesses, but smaller businesses will not be able to employ and insure them given the very high costs.)
I am very skeptical of the idea that we need to launch any more significant economic stimulus than these retirements in order to prevent a depression. One of the differences between the current economy and that of the 1930s are precisely these stats, and the much higher income stability that they represent.
I am completely confused as to why all the great brains in government and the economic recovery team don't discuss this fact. Currently we are discussing retirements only as a negative. However they are also a stimulus.
Thursday, January 08, 2009
A Piece Of History
Bloomberg's article on the Bank of England rate cut. At 1.5%:
The benchmark rate has never been this low since King William III founded the central bank to fund a war against Louis XIV’s France. The rate began at 6 percent and fell no lower than 4 percent throughout the 18th century.The lowest since 1694.
Rate History
It touched 2 percent several times in the second half of the 19th century. The central bank held it at that level throughout World War II until 1951.
Employment And Other
NSA continuing claims for the week ended December 27th clocked in just over 2 million higher than in the year ago. This is not good news, but it is news. Release here. NSA claims increased from 3,273,400 in 2007 to 5,316,124 in 2008, an increase of 61.5%.
Initial SA claims went down a bit in the first week of January.
Last week Wisconsin attained the dubious honor of the highest increases in initial claims per state - over 16,000. Since Wisconsin is about 20th in population, they had to meet and exceed all reasonable expectations to attain this honor. The scrappy, innovative and progressive state pulled out all the stops to get there, assembling a package of "Layoffs in the construction, trade, service, transportation, and warehousing industries" in order to make it to the top of the list. Well done, Wisconsin!
However the field is competitive, with many bright states jostling for top positions:
November's BLS release of unemployment by states will show you about where in the cycle some of the states are. When you see California, with a state unemployment rate of 8.3%, but a major metro rate of 8.7%, you know that they are further along in the cycle than say, Illinois or Florida, both of which states have major metro areas with lower unemployment than statewide.
Florida's switch over the year is impressive. In November 07 unemployment was 4.3%; in November 08 it was 7.3%. North Carolina, the state of bankerdom, managed to move from 4.6% to 7.8%.
November NSA unemployment rates in the (old) top ten states by population, with increase over the prior ten months:
Wikipedia has a list as of July 1, 2008, in which North Carolina edges out NJ, and the positions are somewhat moved around (TX over NY, for instance). Therefore I have added NC to the above list. Because of the pronounced effect of illegals leaving, I doubt that list. The list above certainly represents more than 53% of the US population.
There are reports of swamped unemployment telephone lines and online application services in various states including Illinois and Ohio, so we are well on our way to another gut-busting list. It will be very interesting to see tomorrows federal employment release.
Before I end this post, a couple of notes:
One: David Foster of Chicago Boyz and Photon Courier had posted about the new federal law to require lead testing for children's products, noting that the law's effective date of February 10th, 2009 is being referred to as "National Bankruptcy Day". See his post for why.
In yet another knock-on effect, Goodwill and other salvage stores are concerned that they will have to stop selling second-hand children's clothing and items such as car seats. In this economic environment, this will be extremely painful for many lower-income families. It would be best if the law were drasticallyt amended before the effective date.
Two: Claims that Americans are driving more because gas prices have dropped are certainly somewhat exaggerated. It is more likely that many of those who are driving more are doing so because persons out of the workforce have secured parttime jobs, or because full time workers have shifted to multiple jobs due to loss of hours or full time employment, or because workers have had to secure jobs further from home due to loss of local employment. It is a truism regarding the American economy that gas usage rises as unemployment escalates for these reasons. What is quite surprising is that overall gas usage has declined so much. That is the effect of fleet replacement, which takes a long time and cannot be sped up significantly during times such as these.
Since many workers are losing jobs or income, a substantial increase in the gas tax at this point would be a very, very bad economic idea. There are a lot of lower-wage workers who must drive to secure work, and the marginal effect becomes significant in conditions such as these. Because of the rural effect (unemployment still highest in rural areas in many states), enhancing economic flexibility should be a major goal of whatever short-term measures are taken.
Three: Because Americans are facing a policy debate on economic stimulus, I would strongly recommend reading Alice Cook's UK Bubble blog. Sometimes it is really helpful to see a parallel situation in order to gain perspective on one's own. The blog is an excellent economic blog covering the UK primarily, and the UK problem of household debt and public debt is similar to ours. Also, Alice is a very good, entertaining blogger. Recently, when contemplating a UK property pushing TV program, she responded to a bit of housing propaganda:
If the US tries to run multiple trillion dollar deficits for years in order to pass major social programs, the end result will be that the US pulls a South American gambit of basically seizing retirement savings and rolling them into treasuries with long forward dates. That is the fundamental that has already been recommended to the US Congress. The result would be dire. True, because of the non-payment of interest now, we would make things currently look a lot worse. But we'd ensure bankruptcy later on.
We are just going to have to get with the program and deal with our problems honestly. Otherwise, you will see capital flight out of the US on a south American scale in about 5-7 years. And I'll be one of them. I'm not paying the price for other people's delusions of fiscal grandeur.
Four: I have been reading Democratic Underground nearly every day for several years. Threads about taxation and Social Security are starting to pop up. Many of these could be threads on FreeRepublic. There is a political firestorm in the works because no real economic issues were debated in the last election, partly due to the candidates, and partly due to the coordinated press drive for Democrats which stifled any discussion of reality.
Obama promised stuff that cannot be delivered, and in doing so he set up a very bad political situation which placed an additional burden upon a strikingly dysfunctional US Congress to negotiate economic reality. Watch what happens over the next two years..
Initial SA claims went down a bit in the first week of January.
Last week Wisconsin attained the dubious honor of the highest increases in initial claims per state - over 16,000. Since Wisconsin is about 20th in population, they had to meet and exceed all reasonable expectations to attain this honor. The scrappy, innovative and progressive state pulled out all the stops to get there, assembling a package of "Layoffs in the construction, trade, service, transportation, and warehousing industries" in order to make it to the top of the list. Well done, Wisconsin!
However the field is competitive, with many bright states jostling for top positions:
The highest insured unemployment rates in the week ending Dec. 20 were in Oregon (6.1 percent), Idaho (5.3), Michigan (5.2), Nevada (5.1), Puerto Rico (5.0), Pennsylvania (4.7), Wisconsin (4.7), South Carolina (4.4), Arkansas (4.3), Indiana (4.2), New Jersey (4.2), and Washington (4.2).Wisconsin's banner performance this week may be enough to move it up in the top insured unemployment list next week, but Oregon will be hard to catch. The east coast progressive states are beginning to rouse themselves and join the fight now. New Jersey and Massachusetts don't want to be left in the dust.
The largest increases in initial claims for the week ending Dec. 27 were in Wisconsin (+16,081), Michigan (+10,524), Kansas (+10,485), Massachusetts (+10,265), and New Jersey (+7,330), while the largest decreases were in Texas (-13,232), California (-9,702), Florida (-8,566), Virginia (-5,943), and South Carolina (-4,678).
November's BLS release of unemployment by states will show you about where in the cycle some of the states are. When you see California, with a state unemployment rate of 8.3%, but a major metro rate of 8.7%, you know that they are further along in the cycle than say, Illinois or Florida, both of which states have major metro areas with lower unemployment than statewide.
Florida's switch over the year is impressive. In November 07 unemployment was 4.3%; in November 08 it was 7.3%. North Carolina, the state of bankerdom, managed to move from 4.6% to 7.8%.
November NSA unemployment rates in the (old) top ten states by population, with increase over the prior ten months:
01: CA: 8.3%; 48%Of course I would like to point out that my home state is the clear, outstanding winner in the unemployment sweepstakes. When you combine rate and yearly increase (really 71.4%), we shine like a star of federal grant applications.
02: TX: 5.6%; 33%
03: NY: 5.9%; 34%
04: FL: 7.3%; 70%
05: IL: 6.9%; 44%
06: PA: 5.9%; 44%
07: OH: 7.0%; 32%
08: MI: 9.1%; 34%
09: GA: 7.2%; 71%
10: NJ: 5.8%; 49%
11: NC: 7.8%; 70%
Wikipedia has a list as of July 1, 2008, in which North Carolina edges out NJ, and the positions are somewhat moved around (TX over NY, for instance). Therefore I have added NC to the above list. Because of the pronounced effect of illegals leaving, I doubt that list. The list above certainly represents more than 53% of the US population.
There are reports of swamped unemployment telephone lines and online application services in various states including Illinois and Ohio, so we are well on our way to another gut-busting list. It will be very interesting to see tomorrows federal employment release.
Before I end this post, a couple of notes:
One: David Foster of Chicago Boyz and Photon Courier had posted about the new federal law to require lead testing for children's products, noting that the law's effective date of February 10th, 2009 is being referred to as "National Bankruptcy Day". See his post for why.
In yet another knock-on effect, Goodwill and other salvage stores are concerned that they will have to stop selling second-hand children's clothing and items such as car seats. In this economic environment, this will be extremely painful for many lower-income families. It would be best if the law were drasticallyt amended before the effective date.
Two: Claims that Americans are driving more because gas prices have dropped are certainly somewhat exaggerated. It is more likely that many of those who are driving more are doing so because persons out of the workforce have secured parttime jobs, or because full time workers have shifted to multiple jobs due to loss of hours or full time employment, or because workers have had to secure jobs further from home due to loss of local employment. It is a truism regarding the American economy that gas usage rises as unemployment escalates for these reasons. What is quite surprising is that overall gas usage has declined so much. That is the effect of fleet replacement, which takes a long time and cannot be sped up significantly during times such as these.
Since many workers are losing jobs or income, a substantial increase in the gas tax at this point would be a very, very bad economic idea. There are a lot of lower-wage workers who must drive to secure work, and the marginal effect becomes significant in conditions such as these. Because of the rural effect (unemployment still highest in rural areas in many states), enhancing economic flexibility should be a major goal of whatever short-term measures are taken.
Three: Because Americans are facing a policy debate on economic stimulus, I would strongly recommend reading Alice Cook's UK Bubble blog. Sometimes it is really helpful to see a parallel situation in order to gain perspective on one's own. The blog is an excellent economic blog covering the UK primarily, and the UK problem of household debt and public debt is similar to ours. Also, Alice is a very good, entertaining blogger. Recently, when contemplating a UK property pushing TV program, she responded to a bit of housing propaganda:
I had to laugh at Kirsty’s “cold hard look at the housing market numbers.” She studiously avoided any mention of the double digit declines. Instead, she looked for the remaining housing hotspots. Hartlepool is leading the charge with a five percent house appreciation over the last year.One of the greatest blog put downs ever! This sort of asperity is combined with a lot of in-depth data. Take a look at her post on the German bond auctions, the prospect for UK gilts (equivalent to US treasuries), and the implications. Do US citizens really believe that we can rack up trillion dollar deficits for years on end? We have to pay the interest on that debt even if we can sell the junk.
Well, Hartlepool is the town where a shipwrecked monkey was once mistaken for French spy and hanged. We shouldn’t be to(o) surprised if the same town now mistakes a housing crash for a bubble.
If the US tries to run multiple trillion dollar deficits for years in order to pass major social programs, the end result will be that the US pulls a South American gambit of basically seizing retirement savings and rolling them into treasuries with long forward dates. That is the fundamental that has already been recommended to the US Congress. The result would be dire. True, because of the non-payment of interest now, we would make things currently look a lot worse. But we'd ensure bankruptcy later on.
We are just going to have to get with the program and deal with our problems honestly. Otherwise, you will see capital flight out of the US on a south American scale in about 5-7 years. And I'll be one of them. I'm not paying the price for other people's delusions of fiscal grandeur.
Four: I have been reading Democratic Underground nearly every day for several years. Threads about taxation and Social Security are starting to pop up. Many of these could be threads on FreeRepublic. There is a political firestorm in the works because no real economic issues were debated in the last election, partly due to the candidates, and partly due to the coordinated press drive for Democrats which stifled any discussion of reality.
Obama promised stuff that cannot be delivered, and in doing so he set up a very bad political situation which placed an additional burden upon a strikingly dysfunctional US Congress to negotiate economic reality. Watch what happens over the next two years..
Wednesday, January 07, 2009
Major Stories
Twitch, shudder. Taiwan's December exports are reported as having dropped 41.9%. Exports are more than 65% of their economy (accounting for decline). Exports to China dropped 57.1%, more than twice the drop in exports to the US. Draw your own conclusions.
You may wish to read this article on China's prospects in 2009. There's an exodus going on of Koreans, and some of the foreign countries that have located factories in China are pulling out and going to places like Indonesia.
Deutsche Bank is expanding into China in a joint venture with Shanxi. Bank of America is cashing in on a hefty chunk of its stake in China Construction Bank, and this Hong Kong mogul wants to sell a couple billion shares in Bank of China. I wonder. I truly wonder. True, buy low, sell high is a good move. Still, when DB is playing these sorts of games with regulatory capital, I'd expect more caution. Maybe they are trying to hedge currencies with that Shanxi move.
The Satyam blowup is having substantial repercussions. This is another story that's been brewing for months, really. It's too complicated to review in detail, but it ended with the CEOs resignation and admission that some of the accounts reported were fictions. Start with the link and see the related stories at the bottom of the article. Satyam is listed on multiple exchanges and it is the fourth largest IT outsourcing firm in India. It employs more than 52,000 persons.
You may wish to read this article on China's prospects in 2009. There's an exodus going on of Koreans, and some of the foreign countries that have located factories in China are pulling out and going to places like Indonesia.
Deutsche Bank is expanding into China in a joint venture with Shanxi. Bank of America is cashing in on a hefty chunk of its stake in China Construction Bank, and this Hong Kong mogul wants to sell a couple billion shares in Bank of China. I wonder. I truly wonder. True, buy low, sell high is a good move. Still, when DB is playing these sorts of games with regulatory capital, I'd expect more caution. Maybe they are trying to hedge currencies with that Shanxi move.
The Satyam blowup is having substantial repercussions. This is another story that's been brewing for months, really. It's too complicated to review in detail, but it ended with the CEOs resignation and admission that some of the accounts reported were fictions. Start with the link and see the related stories at the bottom of the article. Satyam is listed on multiple exchanges and it is the fourth largest IT outsourcing firm in India. It employs more than 52,000 persons.
Tuesday, January 06, 2009
We'll See How This Works Out
This may be an exercise in hubris, because according to two thermometers, I have a temperature of over 104. Still, I really feel better than earlier, and as soon as I recover I have a bunch of stuff to do and will have limited time for blogging. But if this post seems incoherent, it's due to the feverish maniac who wrote it, and I apologize. In that case, come back later, because the problem is temporary. And I do apologize.
First news item: Bloomberg on Obama's prediction of trillion dollar deficits for "years to come":
Second news item: Bloomberg carries an opinion article Obama’s Billions Could Render Furnaces Obsolete: Kevin Hassett:
Third news item: Bloomberg covers Alan Blinder's complaints about bank lending:
Banking is a business. Ya gotta make money at it or you go out of business, and when you do, it generally costs the taxpayers money. The way you make money is by keeping up your NIM (Net Interest Margin). You can't lend below the sum of Cost of Funds + Cost of Reserves + Cost of Servicing + necessary Interest Margin. Just like any other business, the marginal interest pays for buildings, utilities, marketing, compliance, payroll, and all the other costs.
Needless to say, cost of Servicing goes up as defaults rise. Cost of Reserves does also. The only thing the Fed has accomplished is to push down Cost of Funds.
Let's look at Credit Card lending. Go to the Chargeoffs and Delinquency report by the FRB. While the delinquency rate has only risen slightly in a year (from 3rd quarter 07 to 3rd quarter 08) rising from 4.45% to 4.90%, the chargeoff rate has risen from 4.05% to 5.62%. Nor is it going to go down or stabilize anytime soon given rising unemployment. It will probably rise for a while and remain elevated for two to three years to come.
Given that increase, one can confidently predict that the cost of servicing one's credit card portfolio has risen considerably over the last year. For some it may have increased over 1.00% annually, but I would think hardly anyone is getting away with less than .5% annually. The percentage of income allocated to reserves must also rise. If you want to add costs of servicing 1.00% + 1.57%, you know that real returns on interest rates have dropped by more than 2.57%. Thus if cost of funds had not dropped, one would expect CC rates to be running around 17.5%.
Chargeoffs are writeoffs reported as an annualized percent of portfolio, and thus are exactly equivalent to interest rates. All other things being equal, you get the same return from a portfolio with face interest rate of 9.5 and chargeoffs of 0.5% as from a portfolio with face interest rate of 17% and chargeoffs of 8%. (Actually, all other things are never equal, and you will get a lower return on the second portfolio.)
Naturally, credit card issuers are trying to hold down their chargeoffs by tightening credit limits to riskier customers, raising rates and rejecting riskier customers. They do this so they can offer lower interest rates overall. If you demand that credit card issuers continue the same lending policies they had in place recently, you will force the credit card issuers to raise rates to cover necessary reserves.
Stop and think about this for a while. If I am lending at 14.50%, and I am writing off 5.50% each year, my return before reserve allocations and costs of servicing is 9.5%. Costs of servicing probably push that down to 7.5%. If I have to increase reserves to allocate for expected future losses, I may really need to put by 2-3% extra annually. Credit card margins have mostly tightened.
Credit card margins for those specializing in "subprime" CC and auto debt are at the bust level. Here is a bit from Compucredit's third quarter 2008 results:
Now let's turn to mortgages and HELOCs for consumers. Chargeoff rates for consumer RE lending had increased to 1.45% in the third quarter of 2008 from 0.25% in the third quarter of 2007. In tandem, I can assure you that costs of servicing have sharply increased. For some institutions they have only gone up about a quarter of a percent (0.25 > 0.50), but for others they have increased by as much as 75 basis points. Thus a drop in cost of funds of 2% would equate to the same interest rates overall. That, however, does not cover the need to greatly increase reserve allocations.
The only way to lend at reasonable rates is to tighten credit standards. Mind you, in this environment if you have a bad loan you are probably stuck with working it out yourself. It is getting harder and harder to roll it over on FNMA, for example.
Therefore it is not that banks are paralyzed with terror. They are simply rolling with the punches. Before we are done credit card chargeoffs will go over 6% annually even with considerable tightening, and lord only knows how high consumer RE chargeoffs will go.
We have records since 1991 of consumer RE bank chargeoffs. Before the last year, the highest rate ever reported was 0.45% in third quarter 2001, and that only lasted for one quarter. It was a shock at the time. In fourth quarter 2007 the consumer RE lending chargeoff rate moved to 0.47%, and it has been rising steadily. No institution had the reserves to deal with this, and so now they have to cover the old bad loans from the proceeds of the new, hopefully better loans.
This is, by the way, because of lax lending standards, most especially low downpayment loans and/or piggyback loans. Delinquencies have risen much less in comparison to past downturns than chargeoffs have risen in comparison. Loss severity is stunningly high, but that's the problem with writing mortgages as they were written. The See No Evil, Hear No Evil, Speak No Evil School of Underwriting did not work out, and therefore, inevitably, banks must tighten lending standards. Therefore, the Even Blinder School of Stimulus is doomed to fail as well.
Alan Blinder is pretty blind to basic reality. Banks will all go bust unless they tighten new lending standards to a sustainable level. The commercial RE chargeoffs are soaring as well. In the the third quarter, we were just a touch away from exceeding the all time chargeoff rate for RE lending. We should have met and exceeded that level without any trouble in the fourth.
If Alan Blinder were to spend a month with a bunch of bank examiners, he might have a little more of a real-world perspective. As it is, he's a well-paid, prestigious idiot, and when I read this stuff I have trouble believing I'm not having neurological trouble. One would think that the reporter would at least call a bank or something. Why not call a bank examiner?
The two esteemed experts quoted above want to know what the public is getting out of this. Well, if the Fed had not pushed down cost of Funds, interest rates would be sharply higher for consumer lending than they are now.
The other factor in consumer lending, especially, is that people who didn't indulge in the debt orgy are mostly the financial conservatives. The thing about financial conservatives is that they are risk-averse. As these people stare at their diminishing portfolios and 401Ks, plus get notices about pay and benefit cuts at work, they are not that likely to start spending now even if rates are favorable.
Banks do not go out and abduct creditworthy customers. If they could, they probably would at this juncture, but thank heavens it is still illegal for press gangs of loan officers to roam the streets abducting prospects. It came close enough to that in the heyday of the boom, what with brokers hanging out at flea markets.
First news item: Bloomberg on Obama's prediction of trillion dollar deficits for "years to come":
President-elect Barack Obama said he expects to inherit a $1 trillion budget deficit and that similar shortfalls are in store “for years to come” as the government grapples with a recession and other spending demands.This suggests to me that the government had better be darned careful about all those promises, such as universal health care, etc. In the comments on the previous post, Ron was arguing for investment in alternative energy. My reply is that we have very limited spare cash to play with, so we'd better be demanding one heck of a bang for our bucks.
Second news item: Bloomberg carries an opinion article Obama’s Billions Could Render Furnaces Obsolete: Kevin Hassett:
President-elect Barack Obama has pledged to commit billions of dollars to providing America with a greener future. A big part of that agenda will be an effort to reduce the amount of energy that is consumed heating and cooling our houses.If this doofus honestly believes we can afford to raze the housing we've got now and rebuild it, he's running a higher fever than I am. Kevin Hassett is the chump who said before the election that Obama would have the EPA declare CO2 a HAP. I hope he's not right. If he is, the US will enter a depression. There appears to be no end to people pushing unachievable agendas right now, and looking longingly at the federal government as a means.
Public policy generally proceeds in two steps. First, identify the objective. Then, craft policies to achieve it.
In the sphere of green building, the first step is easy. German engineers have identified and produced successful models of energy Nirvana. The question for policy makers is, how can we bring Nirvana to Newark? Given Obama’s strong commitment to a greener future, I expect we will see an answer soon.
Energy Nirvana is what Germans call the Passivhaus, or passive house. It accomplishes the almost unthinkable: During cold months, it maintains an acceptable temperature without relying on a traditional furnace. During hot months, it cools itself without relying on air conditioning.
Third news item: Bloomberg covers Alan Blinder's complaints about bank lending:
While inter-bank lending rates have fallen since Congress approved the $700 billion Troubled Asset Relief Program on Oct. 3, most bank lending to consumers remains tight and interest rates high. The average credit-card rate was 14.33 percent on Dec. 16, according to IndexCreditCards.com in Cleveland, almost unchanged from 14.41 percent in October 2007.I laughed out loud at this. This comes back to David Foster's post on Chicago Boyz about the perils of pure theory, to which post I linked in this post.
...
That’s prompted criticism from Alan S. Blinder, a professor of economics at Princeton University in New Jersey and a former Federal Reserve vice chairman, who says the government should take a more active role as a stakeholder in the nation’s banks.
“With the banks in a state of catatonic fear now, they’re just sitting on the capital,” Blinder said in an interview. “I don’t fault the banks one bit, since this shows Wall Street they’re safer, but then this doesn’t get you much improvement. If you’re taking money from the public purse, we should get something in return, and we’re really not.”
Jeffrey Garten, a professor of international trade and finance at the Yale School of Management in New Haven, Connecticut, and a Commerce Department undersecretary during the Clinton administration, says banks should be forced to increase their lending or risk having taxpayer money taken away.
Banking is a business. Ya gotta make money at it or you go out of business, and when you do, it generally costs the taxpayers money. The way you make money is by keeping up your NIM (Net Interest Margin). You can't lend below the sum of Cost of Funds + Cost of Reserves + Cost of Servicing + necessary Interest Margin. Just like any other business, the marginal interest pays for buildings, utilities, marketing, compliance, payroll, and all the other costs.
Needless to say, cost of Servicing goes up as defaults rise. Cost of Reserves does also. The only thing the Fed has accomplished is to push down Cost of Funds.
Let's look at Credit Card lending. Go to the Chargeoffs and Delinquency report by the FRB. While the delinquency rate has only risen slightly in a year (from 3rd quarter 07 to 3rd quarter 08) rising from 4.45% to 4.90%, the chargeoff rate has risen from 4.05% to 5.62%. Nor is it going to go down or stabilize anytime soon given rising unemployment. It will probably rise for a while and remain elevated for two to three years to come.
Given that increase, one can confidently predict that the cost of servicing one's credit card portfolio has risen considerably over the last year. For some it may have increased over 1.00% annually, but I would think hardly anyone is getting away with less than .5% annually. The percentage of income allocated to reserves must also rise. If you want to add costs of servicing 1.00% + 1.57%, you know that real returns on interest rates have dropped by more than 2.57%. Thus if cost of funds had not dropped, one would expect CC rates to be running around 17.5%.
Chargeoffs are writeoffs reported as an annualized percent of portfolio, and thus are exactly equivalent to interest rates. All other things being equal, you get the same return from a portfolio with face interest rate of 9.5 and chargeoffs of 0.5% as from a portfolio with face interest rate of 17% and chargeoffs of 8%. (Actually, all other things are never equal, and you will get a lower return on the second portfolio.)
Naturally, credit card issuers are trying to hold down their chargeoffs by tightening credit limits to riskier customers, raising rates and rejecting riskier customers. They do this so they can offer lower interest rates overall. If you demand that credit card issuers continue the same lending policies they had in place recently, you will force the credit card issuers to raise rates to cover necessary reserves.
Stop and think about this for a while. If I am lending at 14.50%, and I am writing off 5.50% each year, my return before reserve allocations and costs of servicing is 9.5%. Costs of servicing probably push that down to 7.5%. If I have to increase reserves to allocate for expected future losses, I may really need to put by 2-3% extra annually. Credit card margins have mostly tightened.
Credit card margins for those specializing in "subprime" CC and auto debt are at the bust level. Here is a bit from Compucredit's third quarter 2008 results:
CompuCredit's net interest margin was 15.1 percent in the third quarter of 2008, as compared to 18.7 percent for the third quarter of 2007 and 12.9 percent in the previous quarter, and its adjusted charge-off rate was 14.2 percent in the third quarter of 2008, as compared to 10.0 percent for the third quarter of 2007 and 19.2 percent in the previous quarter.Needless to say these folks are running at a loss currently.
Now let's turn to mortgages and HELOCs for consumers. Chargeoff rates for consumer RE lending had increased to 1.45% in the third quarter of 2008 from 0.25% in the third quarter of 2007. In tandem, I can assure you that costs of servicing have sharply increased. For some institutions they have only gone up about a quarter of a percent (0.25 > 0.50), but for others they have increased by as much as 75 basis points. Thus a drop in cost of funds of 2% would equate to the same interest rates overall. That, however, does not cover the need to greatly increase reserve allocations.
The only way to lend at reasonable rates is to tighten credit standards. Mind you, in this environment if you have a bad loan you are probably stuck with working it out yourself. It is getting harder and harder to roll it over on FNMA, for example.
Therefore it is not that banks are paralyzed with terror. They are simply rolling with the punches. Before we are done credit card chargeoffs will go over 6% annually even with considerable tightening, and lord only knows how high consumer RE chargeoffs will go.
We have records since 1991 of consumer RE bank chargeoffs. Before the last year, the highest rate ever reported was 0.45% in third quarter 2001, and that only lasted for one quarter. It was a shock at the time. In fourth quarter 2007 the consumer RE lending chargeoff rate moved to 0.47%, and it has been rising steadily. No institution had the reserves to deal with this, and so now they have to cover the old bad loans from the proceeds of the new, hopefully better loans.
This is, by the way, because of lax lending standards, most especially low downpayment loans and/or piggyback loans. Delinquencies have risen much less in comparison to past downturns than chargeoffs have risen in comparison. Loss severity is stunningly high, but that's the problem with writing mortgages as they were written. The See No Evil, Hear No Evil, Speak No Evil School of Underwriting did not work out, and therefore, inevitably, banks must tighten lending standards. Therefore, the Even Blinder School of Stimulus is doomed to fail as well.
Alan Blinder is pretty blind to basic reality. Banks will all go bust unless they tighten new lending standards to a sustainable level. The commercial RE chargeoffs are soaring as well. In the the third quarter, we were just a touch away from exceeding the all time chargeoff rate for RE lending. We should have met and exceeded that level without any trouble in the fourth.
If Alan Blinder were to spend a month with a bunch of bank examiners, he might have a little more of a real-world perspective. As it is, he's a well-paid, prestigious idiot, and when I read this stuff I have trouble believing I'm not having neurological trouble. One would think that the reporter would at least call a bank or something. Why not call a bank examiner?
The two esteemed experts quoted above want to know what the public is getting out of this. Well, if the Fed had not pushed down cost of Funds, interest rates would be sharply higher for consumer lending than they are now.
The other factor in consumer lending, especially, is that people who didn't indulge in the debt orgy are mostly the financial conservatives. The thing about financial conservatives is that they are risk-averse. As these people stare at their diminishing portfolios and 401Ks, plus get notices about pay and benefit cuts at work, they are not that likely to start spending now even if rates are favorable.
Banks do not go out and abduct creditworthy customers. If they could, they probably would at this juncture, but thank heavens it is still illegal for press gangs of loan officers to roam the streets abducting prospects. It came close enough to that in the heyday of the boom, what with brokers hanging out at flea markets.
