Wednesday, June 30, 2010
Exhibit 1: A DU thread which begins with a proposal to pay full Social Security benefits at 60 and pay for it by extending the Social Security tax ceiling to wages up to $250,000.
Exhibit 2: The financial "reform" bill (which is pretty much an exercise in non-reform) currently includes an epically dumb proposal to reverse HVCC and allow Fannie or Freddie to select any appraisal by an appraiser selected and/or paid by the mortgage originator.
I am too depressed to post. Our Cr_tt_rs (may their sacred names not be taken in vain by the common herd) are going to extend the housing tax credit.
Update: DU is upping the ante. Here's another thread suggesting that we abolish FICA (and in fact all lower/middle income taxes) and make the rich pay for it all. The only problem is that the rich literally don't have enough assets, let alone income, to pay for a 3 trillion of spending a year. You'd run out of money in less than two years after you confiscated all the assets.
Shoot me now.
Right Up Sporkfed's Alley
First, ADP employment: A June increase of 13,000, even with the modest upward revision of May by 2,000, does not foreshadow much joy on Friday. Since Census jobs are going to be diminishing, the expectation is that the June employment report will show a net loss of jobs. If ADP is in the ballpark, June's negative number will be higher than expected. I am thinking -250K or thereabouts.
The MBA weekly mortgage application report showed a continued drop in purchase apps, which are related to home sales, and the drop in home sales is related to construction employment and materials transactions. I believe the Philly Fed's bad performance was related to home sales in part. T-bill yields are extremely favorable for refis, and refi apps continue to climb.
Today we get crude inventories and Chicago PMI. Tomorrow we get unemployment claims, ISM mfrg, NACM, Monster Employment, pending home sales and construction spending. Then on Friday it's the employment report, which I expect to be a kick in the teeth. Factory orders will be somewhat positive (I hope).
Then everyone gets a long weekend to think it all over.
I still see the economy growing the balance of the year, albeit weakly. And I do now have something in the way of evidence aside from freight to offer - so far in June we have pegged out a nice increase in Treasury tax receipts. Personal and corporate income taxes are showing healthy YoY increases, and even FUT has turned and moved to an increase. FUT has a very strong predictive value in the near term, and better yet FUT is not going to be distorted by those Census jobs. FUT is paid quarter by quarter, so the current increase is related to improvement in the private job sector over the last few months. But at least it's there!
Tuesday, June 29, 2010
Today Was A Momentous Day
Judging By The Reaction To Consumer Confidence
Anyway, the rest of the week is going to be rough, because I don't think most of these reports will provide much in the way of bull fodder, and I expect the employment report to be poor.
T-bills are winning again. If you were planning to buy stocks in the second half, it looks like your day is rapidly coming.
Edit: Massive changes on oil/gas.
Japanese household spending was disappointing, and neither Chinese economic news nor the "actions" are helping the mood.
Monday, June 28, 2010
Incorporated, BY GOD
Let banners mourn and moan!
Let e'ry range give training!
Etc. And if you think a lot of people won't be walking around singing praises of the Supreme Court for McDonald v Chicago, you're outa trigger-touch.
Opinion here in pdf, but you may have trouble downloading it until the first rush subsides. The SC incorporated the Second. Alito, Roberts, Scalia, Kennedy and Thomas. (Thomas incorporates under the Fourteenth privileges and immunities.)
Those interested in civil rights should read this opinion; the shameful Cruikshank comes up.
The decision incorporates under Due Process following Heller:
Self-defense is a basic right, recognized by many legal systems from ancient times to the present day,15 and in Heller, we held that individual self-defense is “the central component” of the Second Amendment right. 554 U. S., at ___ (slip op., at 26); see also id., at ___ (slip op., at56) (stating that the “inherent right of self-defense has been central to the Second Amendment right”). Explaining that “the need for defense of self, family, and property is most acute” in the home, ibid., we found that this right applies to handguns because they are “the most preferred firearm in the nation to ‘keep’ and use for protection of one’s home and family,” id., at ___ (slip op., at 57) (someinternal quotation marks omitted); see also id., at ___ (slip op., at 56) (noting that handguns are “overwhelmingly chosen by American society for [the] lawful purpose” ofself-defense); id., at ___ (slip op., at 57) (“[T]he American people have considered the handgun to be the quintessen-tial self-defense weapon”). Thus, we concluded, citizens must be permitted “to use [handguns] for the core lawful purpose of self-defense.” Id., at ___ (slip op., at 58).As in Heller, of course there are reasonable limitations. But it is no longer legal in Chicago to prohibit every citizen except those very few (and politically connected or wealthy) to have a firearm in their home for self-defense. I wonder how much a gun permit cost in Chicago. Probably about 30% of a senator's seat.
Many will never see it, but this is one of the most important civil rights cases in our generation. Widespread gun bans date back to the era of racial unrest in many states.
Today we have finally grown up. It is not Obama's presidency that will make the next MLK day the true marker of our nation's emergence from the sin and stain of racism, but this decision. Today the US stands with the Warsaw uprising and with the marchers in the streets of Tehran protesting a fixed election.
A government which fears the average law-abiding citizen is either a sick government or a government of a sick state, and we are not that yet.
Update: Yes, yeeee, Yeees, YEEEEEEESSSSSS! It's an orgasmatron of a ruling. Someone finally told the truth, and in an SC ruling for heaven's sakes.
Thomas HAS to have provided a lot of this: UPDATE: ALL of this is from his concurrence - he says the right to keep and bear is guaranteed by the Fourteenth. Thomas concurrence begins on page 67 of the linked pdf. God bless him.
Chief Justice Henry Lumpkin’s decision for the GeorgiaSupreme Court in Nunn v. State, 1 Ga. 243 (1846), illus-trates this view. In assessing state power to regulatefirearm possession, Lumpkin wrote that he was “awarethat it has been decided, that [the Second Amendment],like other amendments adopted at the same time, is a restriction upon the government of the United States, anddoes not extend to the individual States.” Id., at 250. But he still considered the right to keep and bear arms as “anunalienable right, which lies at the bottom of every free government,” and thus found the States bound to honor it.and
Certain abolitionist leaders adhered to this view as well. Lysander Spooner championed the popular aboli-tionist argument that slavery was inconsistent with con-stitutional principles, citing as evidence the fact that itdeprived black Americans of the “natural right of all men‘to keep and bear arms’ for their personal defence,” whichhe believed the Constitution “prohibit[ed] both Congressand the State governments from infringing.” L. Spooner,The Unconstitutionality of Slavery 98 (1860).and
These beliefs, combined with the fact that most state constitutions recognized many, if not all, of the individual rights enumerated in the Bill of Rights, madethe need for federal enforcement of constitutional liberties against the States an afterthought. See ante, at 29 (opin-ion of the Court) (noting that, “[i]n 1868, 22 of the 37States in the Union had state constitutional provisionsexplicitly protecting the right to keep and bear arms”). That changed with the national conflict over slavery.and
In the contentious years leading up to the Civil War, those who sought to retain the institution of slavery foundthat to do so, it was necessary to eliminate more and moreof the basic liberties of slaves, free blacks, and white abolitionists. Congressman Tobias Plants explained that slaveholders “could not hold [slaves] safely where dissentwas permitted,” so they decided that “all dissent must besuppressed by the strong hand of power.” 39th Cong. Globe 1013. The measures they used were ruthless, re-pressed virtually every right recognized in the Constitu-tion, and demonstrated that preventing only discrimina-tory state firearms restrictions would have been a hollow assurance for liberty. Public reaction indicates that the American people understood this point.and
The fear generated by these and other rebellions ledSouthern legislatures to take particularly vicious aim at the rights of free blacks and slaves to speak or to keep and bear arms for their defense. Teaching slaves to read (eventhe Bible) was a criminal offense punished severely insome States. See K. Stampp, The Peculiar Institution:Slavery in the Ante-bellum South 208, 211 (1956).and
Many legislatures amended their laws prohibitingslaves from carrying firearms18 to apply the prohibition to free blacks as well.and
Mob violence in many Northern cities presented dangers as well. Cottrol & Diamond, The Second Amendment: Toward an Afro-Americanist Reconsideration, 80 Geo. L. J. 309, 340 (1991) (hereinafter Cottrol) (recounting a July 1834 mob attack against “churches, homes, and businesses of white abolitionists and blacks” in New York that in-volved “upwards of twenty thousand people and required the intervention of the militia to suppress”); ibid. (notingan uprising in Boston nine years later in which a confron-tation between a group of white sailors and four blacks led “a mob of several hundred whites” to “attac[k] and se-verely beat every black they could find”).and
As the Court explains, this fear led to “systematic efforts” in the “old Confederacy” to disarm the more than180,000 freedmen who had served in the Union Army, aswell as other free blacks. See ante, at 23. Some States formally prohibited blacks from possessing firearms.and
The pub-licly circulated Report of the Joint Committee on Recon-struction extensively detailed these abuses, see ante, at 23–24 (collecting examples), and statements by citizensindicate that they looked to the Committee to provide afederal solution to this problem, see, e.g., 39th Cong. Globe337 (remarks of Rep. Sumner) (introducing “a memorial from the colored citizens of the State of South Carolina” asking for, inter alia, “constitutional protection in keeping arms, in holding public assemblies, and in complete libertyof speech and of the press”)and
The problem abolitionists sought to remedy was that, under Dred Scott, blacks were not entitled to the privileges andimmunities of citizens under the Federal Constitution and that, in many States, whatever inalienable rights statelaw recognized did not apply to blacks. See, e.g., Cooper v. Savannah, 4 Ga. 68, 72 (1848) (deciding, just two yearsafter Chief Justice Lumpkin’s opinion in Nunn recognizingthe right to keep and bear arms, see supra, at 39, that “[f]ree persons of color have never been recognized here as citizens; they are not entitled to bear arms”).and
As Frederick Douglass explained before §1’s adoption, “the Legislatures of the South can take from himthe right to keep and bear arms, as they can—they would not allow a negro to walk with a cane where I came from,they would not allow five of them to assemble together.”In What New Skin Will the Old Snake Come Forth? An Address Delivered in New York, New York, May 10, 1865,reprinted in 4 The Frederick Douglass Papers 79, 83–84 (J. Blassingame & J. McKivigan eds., 1991) (footnote omitted). “Notwithstanding the provision in the Constitu-tion of the United States, that the right to keep and bear arms shall not be abridged,” Douglass explained that “the black man has never had the right either to keep or beararms.” Id., at 84. Absent a constitutional amendment to enforce that right against the States, he insisted that “the work of the Abolitionists [wa]s not finished.” Ibid.Clarence Darrow lives. Gun control was always about "those people". Always.
Video with McDonald before the decision. As he says, the work is not yet done.
Final thought: Free Enterprise Fund v Public Company Accounting Board might turn out to be important in health care reform, because a bunch of new boards with extraordinary powers were set up in that legislation. The decision turned on the infringement of the Executive's powers in this case. Here is a link to the whole thing on Scotuswiki.
The attempt in the health care law is basically to make the boards independent of Congress, and I wonder if Free Enterprise won't suggest some legal problems for that part of the legislation.
Sunday, June 27, 2010
He is planning to start working part-time from home on Monday. I hope he takes it slowly, because I am still not back to normal. Last week was a bitch because I am increasing activity levels and transitioning back to my normal medication, which is a bit rough.
Doug also said thank you for the prayers. I'd ask for a few more, including the wisdom and the patience to take it slowly. He is on oral antibiotics, but my guess is that his own body is providing most of the infection-fighting oomph, so it is important that he rest a great deal. So wisdom, patience, and the bodily vigor to get it done. A relapse at this point would be very bad.
I have to be at SuperDoc's at 7:00 AM tomorrow. However the network problem appears finally to be fixed. The problem was the old wireless router according to tests. It is really popping now. SuperDoc is relieved. This relieves me. It is a high priority to keep the medical miracle machine up and running.
In other news, Pelosi caved and the doc fix is passed and signed. For those who don't know, the theoretical Medicare reimbursement plan was to cut doctors' fees by 21.3%. Needless to say, this is not feasible and the cut had to be reversed. Many practices aren't accepting new Medicare patients already.
Friday, June 25, 2010
The Anchoress An Attack Page?
That's the message I get when I try to go to http://www.firstthings.com/blogs/theanchoress/
Here's what Google has to say:
What is the current listing status for firstthings.com?
Site is listed as suspicious - visiting this web site may harm your computer.
Part of this site was listed for suspicious activity 2 time(s) over the past 90 days.
What happened when Google visited this site?
Of the 618 pages we tested on the site over the past 90 days, 118 page(s) resulted in malicious software being downloaded and installed without user consent. The last time Google visited this site was on 2010-06-25, and the last time suspicious content was found on this site was on 2010-06-25.
Malicious software includes 5 exploit(s), 4 trojan(s). Successful infection resulted in an average of 1 new process(es) on the target machine.
Malicious software is hosted on 5 domain(s), including dhfyjrud321.com/, ejdueyhs123.com/, korkonvasiliy.com/.
1 domain(s) appear to be functioning as intermediaries for distributing malware to visitors of this site, including dhfyjrud321.com/.
This site was hosted on 1 network(s) including AS26689 (LIGHTPOINT).
Has this site acted as an intermediary resulting in further distribution of malware?
Over the past 90 days, firstthings.com did not appear to function as an intermediary for the infection of any sites.
Has this site hosted malware?
No, this site has not hosted malicious software over the past 90 days.
How did this happen?
In some cases, third parties can add malicious code to legitimate sites, which would cause us to show the warning message.
* Return to the previous page.
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GDP Third Estimate
The full report in pdf is here.
Headline is +2.7% (annualized).
The underlying numbers after adjustment for inflation/deflation:
- GDP increased 89.1 billion from Q4 2009:
- Personal consumption expenditures increased 69.5 billion.
- Gross Private Domestic Investment increased 62.2 billion
- Net exports fell 25 billion.
- Government spending fell 12.1 billion.
- Personal consumption expenditures rose mostly on goods (more than twice the increase in services). Motor vehicles were slightly negative. This tends to suggest that we wore out some spending impetus.
- The growth in GPDI (Gross Private Domestic Investment) was almost entirely due to private inventory increases. Fixed investment was slightly negative.
- The drop in government spending was solely due to state and local spending declines of 14.9 billion.
- In the first quarter state and local budgets were still receiving considerable help from federal measures. In the second half of this year much of that will be gone, so state and local spending must keep falling until it is more in line with tax revenues.
- Growth in GPDI, which is the main driver of the domestic economy and certainly a huge jobs driver, received some help from business spending on items such as equipment, capital goods such as machinery, computers, and software. However it still was not enough to overcome the decline in housing and commercial building. According to recent reports, computers are wearing out a bit at the end the second, but some life is left in machinery/capital goods. There is a clear downturn in residential, so we can kiss that off.
- Thus, growth in GPDI is going to have to come from growth in private inventories, but growth in private inventories will be chained to final sales (businesses are not just going to build up inventory if a backlog develops). THIS CHAINS PCE growth and GPDI growth TOGETHER IN THE SECOND HALF.
- At this time, inventories are still clearing through, but the latest ISM reports and retail reports suggest that this is slowing a bit.
- In any case, in a low credit environment PCE growth is mostly a function of incomes. But with further state and local job cuts in the offing, the end of the Census cycle, a downturn in home sales, and an increasing number of people losing unemployment benefits without being able to find jobs, income growth isn't going to be very strong.
- Worse, PCE growth and state and local revenues are chained together. Sales tax revenues are mostly dependent on people buying stuff.
- Therefore PCE and GPDI are dependent on jobs, which is dependent on GPDI. Gasp.
Here the BP disaster enters the picture. Because much of increased supply comes from ocean drilling and synthetic oils (such as those produced from the tar sands + natural gas in Canada), costs of acquiring new supply have to be the underlying driver for long term oil costs. And the reality is that costs for ocean drilling probably just incurred a long-term increase. I would say that probability is about 99%, but there may be something I don't know, so take that with a grain of salt. I'm pegging that somewhere around 10%, which would imply that oil's likely base price going forward is somewhere around the low 70s. And that's a structural change which raises transport costs and production costs.
In addition to that, China's manufacturing is clearly going to be pushing some increased costs due to the increased cost of oil and increased wages. Manufacturing wages in China have to grow on inflation (and the monsoon in India has slowed and may produce a higher rate of inflation in India than expected a month ago). Inflation in China and India is fundamental to the world economy.
So here is the nightmare scenario for governments. We have a structural budget gap. If we raise taxes, we reduce PCE, which reduces GDP growth. But with trend growth so low, and PCE growth likely to moderate anyway, we really can't afford to reduce PCE by fiat because we'll produce a second contraction, which will certainly not help government revenues.
For voters, this is also a nightmare scenario, because we have nowhere to run in the current parties. What will work in this environment would be a mix of Republican/Democratic strategies. Right now that mix appears politically unobtainable. All taxation is not the same. In a situation in which growth is dependent upon bolstering investment, certain taxes should be cut and can be compensated for with raising other taxes. But we don' t have a party that is willing to do it.
Right now we are growing and can maintain growth, but only weak growth. As soon as current legislative initiatives start to be felt in the real economy, we'll slip into another contraction.
Thursday, June 24, 2010
They're Starting To Say It Out Loud
Barack Obama is a "one-term president" while the Republicans are likely to take over Congress after this year's elections, according to investor Howard Ruff, editor of the RuffTimes newsletter.If you're surprised, Iowahawk might 'splain it to you. Bottom line, how's he going to raise money?
"He achieved highs no president has ever achieved before and he's plummeting at probably the worst rate of any president I've ever seen in my lifetime, and I've been around a long time," Ruff said. "My personal opinion is he will be a one-term president."
At Best A Hmmm
The really bad part is that we dropped one high week and the moving average didn't budge. May 15th was 474,000, but we just swapped that for 476,000.
There are multiple factors at work. The drop in new home sales is going to have an employment effect, no question. The Gulf oil spill has to be putting some out of work, although it is also employing some in clean up efforts. But I doubt the balance is positive!
And then there is something of an auto slowdown. Looking at advance durable goods for May (pdf full report)...
... a couple of things pop out.
New machinery orders, although always volatile, are still good. They had risen 11% Feb-Mar, then dropped 5.5%, and rose 5.6% in May. So we are hanging in at the elevated level.
However primary metals and fabricated metals orders are slowing. Computers and electronic products had been one of the stronger categories, but now appears to be slowing in new orders. Shipments were down generally in this category in May also. Manufacturing with unfilled orders (a group category) new orders dropped 1.4% in May. The headline number was new orders down 1.1%, new orders ex-defense were down 1.1%, and new orders ex-transportation were up 0.9%.
There was a huge bulge in ex-defense aircraft and parts orders in April, so take all of this with a grain of salt. Defense aircraft and parts shipments and new orders have been down several months running.
It's not awful by any means, but the inventory cycle for consumer goods has clearly run its course, and now the capital goods/ production machinery is going to have to pick up the slack. So expect growth to be much slower.
Wednesday, June 23, 2010
What Einstein Said
National sales down 18.3% YoY for May.
This is due to the end of the housing tax credit. I don't recall any economists not employed by realtor organizations who recommended the housing tax credit as a stimulus, and this is why.
So let's review:
Funny money sales (mythical appraisals combined with speculative loan terms combined with no underwriting) pulled many people who should not have been buying homes into buying, and caused many who should have bought to buy over their heads. This caused prices to rise and affordability to drop, but it also increased individual borrowers' willingness to buy over their heads, because cashing out was extremely easy and extremely profitable. The theory eventually became that the house would pay its own mortgage. Eventually, the mortgages busted and tragedy ensued as lending standards had to tighten and homes bought with bad mortgages flooded back onto the market, causing a rapid downward pricing spiral.
So to fix it, the government issues a housing tax credit and allows people to use it as a downpayment (FHA), thus pulling many people who should not have been buying homes into buying. FHA losses began to skyrocket, and mortgage rates cannot be pushed lower. Prices sort of stabilized in many areas, but now the housing tax credit has expired and the buyers have been pulled forward, plus FHA has raised initial insurance rates once and now will have to raise monthly rates, which will keep the pool of buyers lower going forward.
Any moment now Congress will be putting the housing tax credit back in, which will start a new vicious cycle.
There is only one real consolation here; very few are describing this as "unexpected". Bloomberg:
Sales collapsed a record 33 percent to an annual pace of 300,000 last month from April, less than the median estimate of economists surveyed by Bloomberg News and the fewest in data going back to 1963, figures from the Commerce Department showed today in Washington. Demand in prior months was revised down.I'm sure we'll find a new way to make this worse, but I may need sedation before I can write about it.
I know most people don't sit and think about mortgage pools or how to work your institution out of bad lending, but there are several important fundamentals in trying to recover:
- First, take your losses ASAP. A bad loan is akin to a dead fish - the longer it lays around the worse it smells. Eschew financial air freshener, lest the final stench drive you out of business.
- Recycle your recovered capital less loss into GOOD loans ASAP. These would be loans extended to borrowers who have demonstrated financial responsibility, will have real skin in the game, and will have reasonable Debt-To-Income ratios after the loan closes.
- Resist the temptation to make the new good borrowers pay for your previous sins. If you try to load up their interest rates, you'll take a reasonable pool of loans and induce future adverse sorting as all the good borrowers refi at lower rates, and your bad borrowers stick around to stink up the joint once again. (This is why low interest rate environments can work in your favor - if interest rates rise later, your better borrowers are very unlikely to exit so your net losses on the portfolio or pool will be lower than if the reverse occurs.)
- Lay off your interest rate risk, originate for sale, or sell out substantial portions of your portfolio BEFORE rates rise. Otherwise you'll end up in a bind even if the loans are good, because as rates rise, your cost of funds goes up, and your NIM (Net Interest Margin) collapses - even while you are really still trying to recover your losses from the previous bout of financial recklessness.
This began in the private sector, but as the upward spiral accelerated, the GSEs were pressured to participate. And then, as we peaked and slumped, the GSEs were pressured to basically take the bad loans off the private sector's hands, which they did. And now the net result is that Fannie and FHA are poisoned wells.
The thing about FHA is that it just insures loans, thus separating the risk premium from the rest of the interest rate. And because FHAs insurance pools are longer running, the net premium charged for insurance used to be pretty stable, so that as the external risk environment fluctuated, during the rougher times the borrowers did not have to pay an excess risk premium. Now that is gone - for FHA to stay alive, borrowers are going to have to pay an excessive risk premium, which is really going to hurt their ability buy, and will push prices down somewhat.
We are about at the bottom of the pricing cycle. Real world inflation will now intervene, hopefully in a controlled fashion. Producer prices are going to have to rise, food prices will mostly inch up, and import goods from places like China will rise in pricing. The companies importing products from China will either have to raise pricing to end-users or take margins cuts or a combination.
And oil prices are now necessarily higher - there is a risk premium there that did not exist a few months ago before the BP blowout. So we will all have to grit our teeth and forge onward trying to squeeze out the margins; from here on things get much tougher.
PS: CR has a good post on this with graphs. In particular, please look at this graph and his comment:
The 300 thousand annual sales rate is a new all time record low. The previous record low annual sales rate was 338 thousand in September 1981.This was one of the very real factors in the double-dip recession of the early 80s. As interest rates rose sales dropped, employment dropped, good sales dropped, and lalala, 82 happened.
And regardless of what the FED says about its intentions on interest rates, there are always components of interest rates that central banks do not control. One of those components are risk premiums.
I will be watching freight very carefully! So far so good - for instance, the huge jump in metals is a great sign. And diesel demand continues nicely up (flash Weekly Petroleum)
Tuesday, June 22, 2010
The NY Times Is Lucky The Spider Bit Me
The White House is concerned that health insurers will blame the new law for increases in premiums that are intended to maximize profits rather than covering claims. The administration is also closely watching investigations by a number of states into the actuarial soundness of double-digit rate increases.They gargle on with this nonsense, which surely came straight from the White House:
The new law requires the health secretary to work with states to establish a process for annual reviews of “unreasonable increases in premiums.” Administration officials said Monday that they were still writing regulations to define “unreasonable increases.”So the article then proceeds to discuss state crackdowns on insurance increases:
In Massachusetts, the administration of Gov. Deval Patrick, a Democrat, used long-untapped power to deny 9 of 10 rate increases requested by the state’s insurers, provoking a lawsuit from the industry. A court in Maine recently upheld a smaller rate increase for that state’s largest insurer — 10.9 percent instead of 18.1 percent — that had been ordered by the insurance superintendent.See, this is just out and out misrepresentation. A google would have shown the hapless Sack and Stolberg that the Massachusetts situation is rather obviously political. The court in MA told the insurers to wait for the departmental grievance process to work, even though the MA law explicitly says insurers can't set rates. Everyone knows that the insurance companies will be granted major increases after the elections are over, because, lalala, they are losing money:
The state's four biggest health insurers today posted first-quarter losses totaling more than $150 million, with three of the carriers blaming the bulk of their deficit on the Patrick administration's decision to cap rate increases for individuals and small businesses.Insurance company accounting is rather similar to bank accounting. There are reserves, and the companies are rapidly drawing their reserves down to the point at which the state department of insurance is supposed to ask them to present a plan to bolster their reserves. Actually, according to court documents, at least one of them was already at that point before the first quarter.
Maine is another interesting case (long WSJ article). Kofman, who heads the insurance department there, explicitly denied any profit to Anthem according to her own analysis. That leaves Anthem taking a loss on its individual policies. The court allowed it. Many of these companies will have to quit doing business if this continues, and insurance insiders are looking for a way out. In Maine, either Anthem will shift costs from individual policies to group policies, or it will slowly end up becoming unviable as an insurance company.
Now so far so good, but if the estimable reporting team of journalists operating under the names Kevin Sack and Sheryl Gay Stolberg had been able to spare the time to google, they might have discovered that Maine posts operating reports by medical insurance company by year on its state insurance department website. And that website is here.
Had they dared to click the line for 2009 Anthem results, they would have discovered the following from pages 1 and 2:
- Anthem earned individual premiums of 64,365,540 in 2009.
- Anthem paid claims on individuals amounting to 60,428,948, which meant it needed to throw into reserves since it had an operating loss (under insurance guidelines), so it threw in about 10% or 6,347,696.
- It had other direct costs not including general overhead (such as wages) of nearly 1.8 million, which means that its direct losses even if the rest of the company were to subsidize this business line were over 4 million dollars.
- If you're wondering, no, the rest of this company really shouldn't be subsidizing this business line,
- Thus Anthem's underwriting loss for 2009 on individual insurance was 9,385,984.00, and a premium increase of about 6.5 million wasn't going to cover it.
Anyway, if you wanted to know more about insurance accounting, the most important thing is that for each period of insurance, there is a lag of claims and claims paid. You reserve extra for the unpaid (and also unsubmitted claims) for the insured period. This is particularly important when claims are rising so much faster than premiums. Calculating a risk-based reserve is done according to each state's regulations.
This pdf is short summary of the 2009 recommendation for risk-based capital treatment from NAIC, and it includes health insurers. Note the risk-based capital levels, formulas, and actions recommended.
And this pdf is the Affidavit of Kevin Beagan of the MA Division of Insurance in the court case that gets such short shrift in the NY Pez Dispenser. Read it, and you will note at least some of the companies were in trouble. And note that he is claiming that 128% RBC ratios are like, no problem, man, even though RBC below 200% is a trouble sign. Just because the Division of Insurance doesn't have to seize the company until RBC hits 70% doesn't mean the insurance company is safe!
Below 200% the company is supposed to submit a plan to the regulator identifying how it got there and what it is going to do to fix it. For RBC ratios 100-150%, the company submits a plan and the regulator goes in to audit, then tells the company what to do to get back up to a respectable ratio. MA wasn't letting companies raise rates even when they should have been requiring the companies to submit plans to up their capital levels followed by a Division of Insurance audit and corrective orders - because that would require raising premiums.
I coulda been a great journalist except I like the facts, which just mess up the narrative.
And in conclusion, just because it gives me a warm little thrill (sorta, ya know, a little tingle up the leg) to think that Google will forever associate these words, because hey, this blog has a high Google position generally:
Sheryl Gay Stolberg
Incompetent journalists who regurgitate White House press releases instead of doing a little research of their own.
I think the Shrink thinks that the current administration is a bunch of incompetent boobs anyway, which means that we have incompetent boobs regurgitating White House press releases written by incompetent boobs. And btw, the Maine insurance guru Kofman is a DC insider and spent a lot of time as - you guessed it - a university professor.
And just because, hey, a twelve year old might read this post and wind up knowing more about insurance premiums and trends than all the experts, here is a GAO report from 2003 which explains how small businesses could obtain affordable coverage. The fact that none of this made it into the health care reform bill is why NFIB is so furious about this legislation.
Monday, June 21, 2010
BP Statistical Review Of World Energy 2010
World oil consumption dropped 1.7% in 2009, which is the record since 1982. That is a measure of how severe the trade contraction was.
Natural gas consumption fell by 2.1%. That's the largest drop ever. Coal consumption was flat. Coal is overall the cheapest and the most used (as well as the most polluting). This gives an overall primary energy consumption drop of 1.1% for the world in 2009.
Every year I download the whole report in pdf format, but you can get just the oil portion in pdf. Either version is available in the oil box on this page. The oil segment is only 17 pages in pdf.
In this cycle, US oil consumption peaked at 20,802 THOUSAND (or 20,802,000) barrels per day in 2005, and dropped each year thereafter. In 2008 we used 19,498 THOUSAND bbd, and in 2009 18,686. I am expecting US consumption to rise at least 2.5% this year in total on a better economy for total consumption of in the range of 19150-19250 THOUSAND barrels per day.
China's oil usage last year increased 6.7%, although some of that was used to fill the strategic reserve. The US used about 21.7% of total world consumption, and China used about 10.4%.
Fun facts you probably did not know:
- Canada is using more oil per capita than the US. Its share of world consumption is about 2.5%, but its population is about 11% of the US population. This is because Canada is a big natural resources producer as well as a strong manufacturer.
- Both Mexican and Canadian oil consumption dropped less expressed as a percentage compared to the US. Those three countries make up the "North American" region, which last year consumed 26.4% of the world's oil.
- Asia-Pacific (including China, Japan and India) consumed 31.1% of the world's oil in 2009. Total consumption in this region grew by 1%, and would have grown by much more if it had not been for Japan's staggering 10.7% drop in consumption. This year the region's oil usage will grow by 4-5%.
- Reserves/Production ratios have been rising for the last few years. We'll see if this holds during the recovery and improved production.
- South and Central America is second only to the Middle East in proved reserves.
- World oil production fell by 2 million bbd. But OPEC production fell by 2.5 million barrels, and US production rose by 460,000 bbd. Non-OPEC production rose by less than that (450,000 bbd), so the US increase was the source of the increase. Another way of looking at this is that US oil production increased by 7% last year.
- Chinese oil production dropped by 2.8% last year.
- Production in both Canada (-1%) and Mexico (-6.2%) dropped last year.
- China is moving toward a deep oil hole. The US produced 7,195 thousand bbd and consumed less than 19,000. We are producing more than 1/3rd of our own needs, and Canada is by far the biggest single supplier of our imports. China produced 3,790 bbd, and consumed 8,625. With 1.3 billion people to feed, clothe and move, China is not going to be able to cut consumption the way we can. In 2005, China consumed 6,894 bbd and produced 3,627. China has to find reliable sources of affordable supply.
Usually one can get a better estimate from the weekly reports by comparing cumulative totals, but I am currently confused. The old text format isn't available any more. Anyway, look at last week's report - cumulative YoY supply is negative in every category except other oils, but other oils have risen over 47% this year cumulatively, so total supply is up over 6%. Other oils include motor oils, industrial greases, etc, and also feed stock for plastics and chemicals. In the last few months, diesel consumption seems to have risen substantially, which is one reason I do not agree with the economic doomsters. But gasoline consumption (look at four week totals) is still down YoY, although diesel and other is taking up the slack.
Full US weekly petroleum reports are available by segment here. There is at this point an ethanol glut of impressive proportions and stocks of gasoline are very impressive. I believe gasoline consumption trends will continue to be flat to declining on demographics and fleet replacement. Net imports have been dropping:
More than half of US petroleum consumption is consumed for uses other than personal vehicle transport. Farms consume quite a bit, as does construction (less now than in recent years), mining, freight transport, mass transport, and air transport. Older data, but this shows some of the split:
Transport is by the far the largest sector by consumption. You can get an inkling of the transportation split here. While personal transport is not static, it is far persistent than industrial usage. You can see how much industrial usage has dropped over the last two recession years just by looking at the gasoline/diesel swing from 2004-2009. But in normal times, less than 50% is gasoline usage, and a considerable proportion of that is still production associated. Residual fuel oil is used mostly for ships.
Sunday, June 20, 2010
My Brain Blew Up
But it's the concept behind all this that so worries me:
Only one of the seven commissioners, the dean of Harvard's engineering and applied sciences school, has a prominent engineering background — but it's in optics and physics. Another is an environmental scientist with expertise in coastal areas and the after-effects of oil spills. Both are praised by other scientists.The White House is arguing that the panel will hear testimony from people who actually know something about petroleum drilling:
The five other commissioners are experts in policy and management.
The oil spill commission will not be at a loss for technical help, White House spokesman Ben LaBolt said.That's precisely what doesn't make sense. So there will be testimony, and so the "official" findings will draw on other determinations. Without technical expertise, the "experts" on the panel won't know what weight to give all that. What destroyed a few of my brain cells was the idea that the regulatory and organization framework was somehow a separate issue from the technical details.
For one, he said the panel will draw on a technical analysis that the National Association of Engineering is performing. Also, members will "consult the best minds and subject matter experts in the Gulf, in the private sector, in think tanks and in the federal government as they conduct their research."
That makes sense, said John Marburger, who was science adviser to President George W. Bush.
"It's not really a technical commission," Marburger said. "It's a commission that's more oriented to understanding the regulatory and organizational framework, which clearly has a major bearing on the incident."
Any appropriate regulatory framework has to be based on the technical issues. A regulatory setup that doesn't address those issues won't work over the long haul.
The article is disturbing. It does seem as if the policy prescription emerging from the panel is probably predetermined, but the reason we don't have a workable energy policy is that we keep ignoring the facts. We are dependent on fossil fuels. We have no way off fossil fuels. We ought to be searching for a minimal risk way of getting the fuel we need. Conservation can help a lot, but it doesn't change our fundamental dependence.
Are the land-based drilling bans shifting us into higher-risk endeavors? I know that the shale oil recoveries are considered to be environmentally damaging, but are they more environmentally damaging than the new fracture process for natural gas recovery? There has been relatively severe groundwater contamination from at least several of those.
It seems that we keep refusing to deal with realities we don't like. We don't have an alternative to fossil fuels so reducing our dependence is the only workable strategy currently. I realize the political benefit in setting up a commission that will determine that the drilling is just too dangerous, thereby diverting attention away from regulatory failures. And it may well be that some types of deep sea wells are inherently unsafe - but all of that must be weighed against the alternatives.
All risk management is an exercise in weighing different options. That's what we are not doing. The East Timor spill last year, combined with this one, makes me wonder whether deep sea drilling is going to prove to be too risky overall. Since the report on that was first delayed, and then delivered last week but has not been released publicly, we get no help from that direction.
Saturday, June 19, 2010
The people who put in the cable part of the network were supposed to have done it, but they haven't managed to in about a year, so.... I bet they were afraid to mess with it just like I was. There's so much hodgepodge from so many generations of junk.
Anyway, when I left it was all working although I did have to manually configure it, and this will take the number of network-wide routers down from three to two. Besides that there is the cable modem, and two more direct access routers that handle links to labs.
Something is failing in the system, but I have not been able to figure out what, so I am down to randomly switching stuff around and watching to see what happens. I don't like to start spending a ton of money just replacing stuff that might be fine, but this really needed to be done for security reasons. One piece of this was overlaid on the cable guys original stuff by a prescribing system which we converted out of this spring, so I had the chance to straighten out some of the kinks I couldn't before.
I have set the router for high security and on the wireless portion the only access is enumerated MAC addresses, so even if someone finds the passwords and keys, they still won't be able to log on. Wireless networks worry me in public access areas.
I have not been able to figure out why the internet piece keeps dropping out, but this week the cable modem was dead one morning, and just a couple of weeks ago the main router crashed and would not come up, so I think something is shorting out somewhere. The benefit of making this wireless router the primary (controls DHCP) is that if the old router is dying, this one has a few access ports so I could set up a mini-network to run a few machines in about 15 minutes. That would get him by for a day or two until he could get a new router.
The intermittents are driving me crazy. There is no rhyme or reason to it. I installed a new UPS and then segregated routers on two different UPS units, but it still kept happening. It looks like a power problem, but it's not coming from outside, so my hunch is that it's a short.
Friday, June 18, 2010
A Brief Incoherent Joyful Pause
I'm asking for prayers for Doug, who is suffering from a bad spider bite in CA. He was in the hospital for days, and was sent home without that much improvement. The bad part is that his regular doctor doesn't seem too satisfactory - so, if you would, pray for healing for Doug and that he can get a better primary doctor, and guidance for that doctor. Also support and guidance for his advocate, who is trying to do everything she can to get him better medical care. I have been praying for them for a while, but I don't get hugely encouraging feedback on this, and you guys have a good record.
I got called in to SuperDoc's this morning on an emergency, which is now dealt with.
After I got his system up, SuperDoc gave me the Chief's latest blood panel. And that's why I am too happy (joyful? exuberant? overjoyed? overcome?) to write about economics today. I alternate between crying a bit and running in circles. Everything's okay. For the first time ever. The Chief had multiple fliers on his kidneys, liver, and thyroid, and now everything is in perfect range.
The thing is, the Chief was in deep this winter. We still do not know the etiology, but I am guessing he had a systemic novel H1N1 infection that reached his kidneys and other organs. I am also guessing that the seeming TIA was actually an immune system rebound that rebuffed a mild viral encephalitis, because although they did see the low blood flow in his brain, they could not find any blockages at all at the time. It was as if he had narrowing of the blood vessels throughout his brain.
At the time the likely diagnoses all centered on various forms of cancer which can cause the wild swings he was experiencing. And we had ruled out just about everything treatable, so the remaining known cause was carcinoid tumor syndrome, which was a dead match but probably untreatable, because SuperDoc couldn't find a primary tumor, and by the time you see the effect the cancer has mostly spread anyway. But this is now very unlikely due to the fact that the Chief's condition is normalizing.
The Chief did not know, so I could not give an update about his condition before, because I do not lie on this blog. I make mistakes, but I don't deliberately lie.
Thank you all for your prayers. It was a hideous ordeal, and I am overwhelmed with gratitude to see my Chief recovering so well. And please, your prayers for Doug who has been very ill indeed and is not receiving the type of medical care I got for the Chief ONLY because I knew SuperDoc.
The thing that stalks me in the midst of my joy is that without SuperDoc's care and expertise, the Chief would not have made it. How many other people are needlessly dying because they really don't have access to good primary care? In the midst of all of our reform efforts, I am afraid we have focused on the wrong things. SuperDoc was not reimbursed for all the care he gave the Chief, because the Chief is now on Medicare and you can't escape that. I wanted to pay SuperDoc but he won't let me. I know SuperDoc is treating a lot of his patients at a loss, and I am haunted by this reality. If we won't pay for it the doctors won't be able to deliver it.
Also, to add to my lunatic happiness, one of my brothers is having male identical twins. So far so good in the pregnancy, and she is early in the second trimester. They wanted three children, and this will be three. She was told in 2007 that she could never have children, and that if she ever got pregnant she would never carry to term.... There is lunatic happiness and uncontrollable joy just bonking around in my family's hearts and minds.
Update on Doug: They don't know what the infection is, which is hardly encouraging. He has a referral to an infectious disease unit at UCSF, and is waiting for their call. Pray they call quickly!
Thursday, June 17, 2010
Employment decreased slightly. Shipments declined slightly, and inventories tended to move a bit higher. Not surprising that work hours dropped slightly. Six month expectations were still good, though. Capital expenditures were barely positive at 3.0.
In recent years I have noticed that Philly Fed seems somewhat linked to home construction, so I expect this one to be worse than the others for a while. Housing starts are in the basement, and I can't see them going anywhere else very quickly:
The bend in the long T-bill yields vs shorts appears to be getting unkinked today.
Unemployment Claims And Wages
Only deflating consumer prices (-0.2% for May) is injecting enough into the economy to prevent that double dip, but consumer prices are going to start rising now.
And if wages and salaries don't rise, it's all up.
This is from the Monthly Treasury Statements, which can be found here:
May 2010You can compare that to the April progression in this post. The one-year YoY drop has declined, but the two-year YoY drop has increased marginally. The one-year comparison keeps getting easier and easier as we get further into the phase of declining incomes. As in April, we have to go back to 2007 to pretty much break even, and we only rack up an increase over 2006. Because I did not include 2006 figures for April, here they are:
HI Tax: 13,641
HI Tax: 13,946
Total: 14,224 (-2.2%)
HI Tax: 14,314
Total: 14,592 (-4.6%)
HI Tax: 13,708
Total: 13,968 (-0.04%)
HI Tax: 13,010
Total: 13,251 (+5.0%)
April 2006The bad news is that April's 2010/2006 change was a percentage point higher than May's. I think we are about to start seeing a better trend in wages and salaries. So far in June we have continued a YoY rise in WIET receipts.
HI Tax: 13,529
Total: 18,542 (+6.0%)
The implications are pretty profound, because these are nominal, aggregate figures. The population has increased since 2006, and when you account for the increase in the cost of services and items such as property taxes, total real aggregate wages and salaries have dropped since even 2006. Further, the higher-end incomes are the ones that have generally increased (there is no limit on HI tax), so the average wage earner is earning substantially less than four years ago on a real basis.
The fiscal position is not going to improve until we see wages and salaries rising again. One of the major issues are retirement benefits (SS, federal, state and local). As the wave of retirements increases, either salaries have to increase or average levels of taxation have to increase. There's no other way. The end result is going to be that we are going to have to boost taxation on retirement income, because there's no other way to balance the books.
Wednesday, June 16, 2010
So I hazard that's why the bailout is under discussion, because the ECB doesn't want all those Spanish bonds. Supposedly the Fed is going to be on the hook for some of this. Doesn't that just make the American taxpayer see red, white and blue stars! But never mind, the EU is "firmly"denying the reports. It does not appear that anyone believes the denial, perhaps because of stuff like this.
Obviously this will be some sort of special purpose vehicle (SPV) deal. So the big question is whether the countries participating will carry their guarantees on their Euro balance sheets or not. One guesses not, but that surely makes the Maastricht rules about deficits somewhat ridiculous.
As if it weren't ridiculous anyway that countries with debt larger than GDP are allowed to rack up 3% deficits under the rubric of "financial responsibility". The only way that would be financially responsible would be if trend growth were at 3% or above. This isn't happening in any of those economies. Germany can get by with 3% deficits (probably, as long as it limits its default guarantees), but don't tell me Italy and France can. This is not really about Portugal, Spain and Greece at all, although Spain's relative size and its recent disproportionate contribution to European growth does make Spain more of an issue.
We're not admitting this publicly. because it is so awful. Even Ackermann of DB was forced to come out and state that he had profound confidence that Greece would not default. I guess they threatened him with whatever happened to the German finance minister in the EuroFin Struggle meeting. This is reminding me more and more of the Cultural Revolution in China. Bankers are paraded onto the stage and forced to say whatever the crowd wants. It is true that instead of students in Mao suits the crowd consists of European politicians, but that's really not much of a difference.
US industrial production is very good, as was the last European IP reported. But that did not overcome the extremely bad US housing data. Also FedEx's profit statement is not helping US stocks.
Other matters not inducing optimism are:
- The situation in Japan. Kan is claiming they are going to stabilize Japan's funding needs, and the first estimates of what would be required to do so are coming in. There was a good Japanese services report, but the thought of such a large tax increase kind of offsets the good news. Nevertheless, the yen is rising for the same reason Treasuries are.
- A Nomura analyst announced that he sees the Chinese property bubble popping oh, right about now. In further Chinese news, Henderson was apparently faking some of its Hong Kong property sales, and has been forced to recant - or at least that's my interpretation. And yes, CICC is probably right about the jobs picture in China once the huge stimulus effect is gone. China has a plan, though. It is trying to build immense amounts of "affordable housing", which will both employ workers and ease the stress for locked-out would-be home buyers. We'll see.
- Italy has tried desperately to hold the line on its borrowing during this downturn, and is still trying to cut further. One of the proposals is to cut solar power incentives, but now Italian banks are claiming this would hurt them. Ooh, I feel interbank rates rising....
- German bankers DO NOT WANT the results of stress tests publicized. They fear "misinterpretation".Oooh, I feel interbank rates rising....
- Sarkozy is still struggling along trying to force fiscal responsibility on France. The latest proposal is to raise the retirement age to 62. I will be watching to see the French reaction, but if they burn enough cars it might be a net positive for Germany's auto manufacturers.
- European inflation is rising due mostly to higher import costs. Currency drops, prices on ex-Euro goods must increase.
- There's been little talk of this, but Canada is quietly experiencing a housing decline on its own. Canada's government finances are quite solvent, but this has been achieved by high taxation. One of the results is that Canadian household debt is quite high for an OECD country - reported at 145% debt-to-income - and late payments are rising in most consumer debt. According to the article, a recent survey found that 66% of Canadian households in the 18-34 range would get into trouble if they missed a paycheck for one week. In any case, Canadian savings rates were rising in 2009. So it is very important for the Canadian economy that the US economy stay in a growth cycle. I do not write about it much, but I do follow Canadian banking and NBFI news. Things like this have been a growing concern, as has the shift into riskier and less-qualified mortgage avenues. I am thinking that 2011 and 2012 will be bad years for Canadian housing. The effect of rising mortgage rates, high household debt income, and a spate of recent buying on variable rates indicate some rougher patches ahead for the Canadian economy as some households see their income fall due to higher debt repayments.
- The White House cleanup crew issued a statement saying that the president didn't really mean it about BP last night - perhaps because of stuff like this.
- Oh yeah - the Indian developments I was commenting on recently are getting wider notice. Inflation is up, there is a cash crunch due to the government frantically raising money, and the argument over rates continues. Tight money leads to higher market rates.
Tuesday, June 15, 2010
The Altar Call
I'm easily amused, I guess, but Ann Althouse's review of Obama's speech got me giggling. It's the vagueness. To date, no economy has shown the job-creation potential of "green energy", and the pres doesn't seem to know precisely what he wants to do, only that he wants to do it with great passion and conviction.
The Anchoress said "huh?" also. I don't watch TV, but it would appear in this video that journalists were no more impressed than my acquaintance. All of a sudden Mr. Tingles is talking about "meritocracy" and wants to hear no more of Nobel prizes. I almost expected to see them start waving teabags on air. They seemed more than a bit incredulous over the "we'll get there even if we don't know where we're going" bit.
This is the transcript, and it really does read as if the poor guy is suffering from a delirium induced by a Hopium overdose:
...what has defined us as a nation since our founding is the capacity to shape our destiny, our determination to fight for the America we want for our children. Even if we're unsure exactly what that looks like, even if we don't yet precisely know how we're going to get there, we know we'll get there.What does this mean? That we're adrift on a Sea named Hope? It makes me want to write a parody of Hemingway's "The Old Man and the Sea".
It's a faith in the future that sustains us as a people. It is that same faith that sustains our neighbors in the Gulf right now.
It's fine to say this, but BP doesn't have the money, and the President doesn't have the authority to mandate it goes in an escrow fund run by a third party:
Tomorrow, I will meet with the chairman of BP and inform him that he is to set aside whatever resources are required to compensate the workers and business owners who have been harmed as a result of his company's recklessness.So I guess that's why the call to the altar at the end of the speech, which is a little too weird for me to quote - the lack of detail in this speech implies that there is no plan, and I guess that's why we need to pray.
DU isn't impressed either. Drivel, I just heard a lot of it.
But that is pretty much what happened. Theoretically GDP is supposed to measure national income. It does so by assessing expenditures. In practice, that hasn't worked too well. GDI measures incomes, and the two are often different in practice. GDI is adjusted by national tax data, and is only accurate retrospectively. It's also very variable.
Jeffrey Nalewaik. who is an economist at the FRB, presented a paper at Brookings regarding the "other" measure of national income - GDI. The paper is short, but I think important.
In any case, maybe I'm bragging or maybe I'm just trying to point out that using GDP does not explain our current problems well, but here is the GDI progression in so far as it was then available:
This graph of GDI as measured by BEA (it shows the preliminary vs the revised) explains a lot more about the current state of our economy.
Regardless of your opinion on GDI/GDP, from a banking/business POV, it is incomes and not expenditures that matter over the longer term. If your borrower is borrowing to pay the interest on his loans, the Day Of Default Doom is just deferred a bit, and if you are rolling his loans and essentially advancing him income to pay the interest, you are just playing Russian Roulette with your portfolio, and you've loaded five of six chambers.
But for the national economy the same is true. Racking up debts at one point will allow you to raise your expenditures currently, but it only does so at the cost of future growth. Debt repayments effectively lower incomes, and thus future expenditures.
The paper argues for presenting an average of the two measures as our official economic measurement. That would be wise.
What I do is attempt to forecast changes in incomes more than a year into the future as a way of projecting future risk for the purpose of keeping banks running. It takes a while to build reserves and cut risk in anticipation of such events.
And maybe I'm bragging, which would be stupid, because all economic forecasting is an exercise in humility, but I think I'm trying to point out that my method has its strengths in forecasting events in the real world, and that there is an obvious reason why, and that therefore this is an important distinction.
The above graph appears on page 40 of the paper, and on page 39 appears a similar graph showing GDP over time. And if you compare the two, you'll see that whereas the GDI progression shows the 2006 downturn very clearly, the GDP graph does not. This is important because the 2006 downturn almost fostered the crash, as the gathering forces of speculation were fueled by the drop in other activity. Something similar appears to have happened in China last year, and is one of the reasons I am so worried about China.
The second factor is that we were not really into a growth cycle early this year. I think we have entered one now, but it will also be a squeaker - a growth cycle in income will be difficult to sustain and won't be rapid.
Here I would like to address a recent comment by Craig:
That is what puts the lie to the Keynesian notion that saving is bad for the "aggregate" economy. For most people, the simple decision to buy so much as a new refrigerator requires some saving. Saving does not harm the economy -- it can only help it.This is not necessarily true; scale matters. It is borrowing relative to future income that matters. In other words, if borrowing to buy a refrigerator would impose a very small change in future income less debt repayment, go ahead and borrow.
The fact remains that what is good for the family unit is good for the national unit. They are the same thing.
But this does not obviate Craig's point - if a family with moderate income has no resources and has to borrow for every unexpected expenditure (car repairs, appliances, medical, etc), that family is racking up a debt burden which will suck up more than the family's expected income gains over a few years to come. That is the point at which a financially responsible unit will sit down and try to figure some way to build current savings plus maintain debt payments (such a family really cannot afford to default, because the family may face a catastrophic loss in income without the ability to borrow for, say, transportation to a job).
So the issue is whether we have borrowed nationally to the point at which we have compromised future income gains. My answer is that we have reached the point at which we have to sit down and reevaluate our net spending, because we are almost at the danger point. Shifting debt onto the government is only productive insofar as the government can consistently maintain lower debt payments than private borrowing would supply. The debt has not gone away - instead it has been mostly written off on private balance sheets only to appear magically on the government balance sheet.
Another comment I have is about predicting GDI. One of the things I watch very carefully are production/sales margins. If margins drop below expected inflation for an extended period of time, it is sure that incomes will follow, because expenditures will drop as companies try to maintain net incomes, which implies job losses. So the drop in some of the commodity pricing was an important factor in my forecast change from a second half drop to a sustained growth cycle through the end of the year.
It follows logically that raising taxes on necessary expenditures (such as energy) will cut profit margins at businesses. We don't have the ability to sustain much in the way of narrowed business profit margins at this time, nor is it at all likely that incomes will grow to the point at which we will be able to sustain it next year. So we are in a very tight cycle. Because DC concentrates on GDP, I do not think policy makers realize our very slim margins.
I strongly suspect that we will raise taxes next year to the point at which we will precipitate another downturn, at which we will achieve a true depression cycle by 2013. We'll get to double digit income declines.
Empire State Manufacturing Survey
I read all these very month, but don't usually comment. But this one seems to show where we are so precisely! (Let's see if Philly Fed on Thursday agrees.)
There's an interactive version of the graph at the link. Note that current and general business conditions have generally been leveling out over the last few months. That's the end of the inventory replenishment cycle.
As with Chicago PMI, the details of the report show that manufacturers have been very restrained in inventory builds, which should mean that there is growth left. They did not overshoot.
This report was not wonderful, but was generally positive - while gains in employment were lower, employment was still rising and the average workweek was rising.
Of particular note, the special question was about 2010 capital spending plans:
In the current survey, nearly twice as many responding firms reported increases (46 percent) as reductions (25 percent) in overall capital spending in 2010—a marked contrast with the results of an identical survey conducted last June, which showed far more respondents reporting decreases (56 percent) than increases (20 percent). As for specific categories of investment, respondents, on balance, plan to raise spending on software, computers (hardware), and non-computer equipment, but to cut spending on structures.Recoveries can only go as fast as they can go. This one has to be production-led.
Retail is showing a moderation, but higher levels of B2B activity will slowly boost jobs, incomes and increase economic activity. Tax receipts so far in June show nice YoY gains. I think this should be the peak period for Census-related WIET, but continued corporate gains imply that we have moderate growth left.
It is very difficult to quantify the impact of the Gulf spill - except that it is negative. For some local areas, it is strongly negative. But it is also true that a lot of money will be injected into the area in the form of indemnity and in clean-up efforts.
That is, it will if the administration doesn't overdo it and drive BP straight into bankruptcy. In that case, the flow of money would be deeply impaired. Bad as things are, taking an axe to BP will generate a much worse outcome.
Monday, June 14, 2010
Huge Results on The 3-Mo
We'll give it a few days and see if the bend in the longer yields unkinks a bit.
Here's the main page - the quarterly review was just released. There is quite an interesting article on China's savings rate.
At the end of May BIS released a working paper about assessing global risk. This is worth while, because it discusses some of what we didn't know: There is a heavy focus on currency swaps and maturity mismatches. On page 14 there are some very interesting currency position graphs.
Another useful tool is the joint project to build a database of total external debt positions. You can select the country at top and hit Go, and you'll see not just government debt but monetary authority, banks and other sector external debt. Not all countries report data.
PS: All of which is highly relevant because of the Eurobank position. Unless a bank has a very unobfuscated balance sheet and relatively low leverage, any non-CB/non-government funding they get is going to be short-term, which magnifies duration risks. This is not a pretty picture. Also see this CR post on bank exposure to the current default risks.
Friday, June 11, 2010
Retail Sales Report Wasn't Bad, Really
And very definitely not when you look at H.8 Bank Assets and Liabilities. Other deposits rose (SA) 9.2% annualized in May, which was much higher than April's 3.3% or March's 1.9%. In dollars, they rose about 47 billion.
I don't think analysts have come to terms with the reality that most people will have to save and budget for things like clothing purchases, holidays, appliances and car repair. And the reality is that many people will need a hefty downpayment on a car.
And then, there is the issue of the unfortunates who are losing unemployment benefits and being very cautious.
Taking these two reports together gives a very different picture of May's economy. Consumers were just being responsible, and are also probably saving for vacations. The rise in banked money indicates that there is room for future growth in retail. Some of it may have been due to Census, but I am expecting more impact in June from that, because there's a delay in the paychecks.
There is one very interesting thing about H.8. There is a continuing substantial drop in large time deposits (jumbo CDs). It is very significant. Because of its continuous nature, I am guessing that a lot of older people are draining retirement savings to live, probably as a result of having lost a job. From May 2009 to May 2010, large time deposits dropped about 125 billion. Corporations and associations also have money in jumbo CDs, and some may have pulled out tax money. So I waited to see May before commenting. In May, the annualized rate of decline was 37.8%.
I had also thought about home purchases - many persons who wanted the housing tax credit may have pulled money they were saving. Here's the 2010 trajectory:
Feb: -2.1%It will be interesting to see how this runs out. Because these deposits are mostly insured, corporations were tucking money into them, and many people with substantial financial assets were, in one way or another, moving money from money market funds to bank accounts even if they did it through a brokerage arrangement. The extra insurance is dying out, and on the whole most people are more confident about putting their money in non-insured accounts.
I assumed that the major drop in 2010 was due to a mix of factors, but tax payments, housing deposits and cash movements due to lower risk should all have dropped significantly in May. So at this point I would say this is a reading on the financial health of older Americans and perhaps companies. Companies may be withdrawing cash reserves to spend more since the economy has improved a bit. But if older Americans who have lost their jobs are pulling large sums of money out of their retirement kitties, it will be a future problem. I'm sure that represents a lot of this.
In dollar terms (NSA), large time deposits peaked at 1.9 trillion last December, and by May had fallen to 1.75 trillion.