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Thursday, June 16, 2011

Well, It Has Come

The stunning collapse in the 2/3 year treasury yields shows that we have a longer term mess on our hands.

Look at where we started the year, and then look at where March ended. Mid January we were at 60/100 basis points, and over the last week we've rolled around 40/72, but we are probably going lower. The action in the 5 year is epic. Ain't we got fun. The peaks were in February, before the market realized that we weren't actually going to see the growth rates promised.

A lot of this is stemming from the Euro flap. Ireland's entry into the verbal fray isn't going to help, but is it really surprising?

RBI raised the repurchase rate again to 7.50%. Not much else they could do, with wholesale inflation over 9%, but the credit-dependent domestic sectors are screaming.

Initial claims for unemployment benefits came in at 414,000. Before anyone gets too excited, the previous week's claims were revised up to 430,000. This means that last week's initially reported 4 week moving average of 424,000 actually increased to 424,750 this week. Still it is infinitely better than a slap in the face. Claims at these levels are consistent with increasing unemployment, but a lot depends on how many new jobs are created.

As for housing starts, do the exact stats even matter?


We're just scraping along the bottom. Here is the report if you want to read it. Let's see - authorizations (permits) are up, but solely on multi-unit projects. Those are up YoY 190/127, as opposed to single family which is down 405/435. YTD percent change on authorizations is still down -8.7%.

Authorized but not yet started are down a tiny bit month over month, -7.5% over the year. We're getting close to stabilization on the starts, which are only down 3.4% YoY, which is within the confidence level (they could actually have increased a touch YoY). YTD starts have fallen 9.7% from 2010, so this is an improvement.

The ugliness comes in when we look at under construction (ongoing pace of housing investment). For the current economy, this is the most important number and it is still down (play Bill the Cat audio) 12.4% YoY. Not only that, but the multi-unit projects are still falling (-3.7%, above confidence level). These are important for pace because they are larger projects.

I figure that we see signs of stabilization, but that there is no chance that housing will contribute to the economy this year. CR disagrees - I hope he is right, but I don't think he is. Nominally, because of epic inflation in inputs and operational costs, spending is probably rising. Inflation of 20-25% may make the nominal figures look good, but it doesn't help the economy in a real sense.

Completions, needless to say, are way down YoY - total has fallen 22.5%, multi-unit down 40%. We do look to be close to stabilization, though. There is some construction pickup in power plants the like, so that helps a bit to offset this decline.

There are pretty high error bars on all this stuff, so you have to take the numbers with half a shaker of salt. I know contractors are getting beaten to a pulp on margins in a lot of places, so I am assuming that a somewhat negative view is supportable.

Philly Fed is up at
. 10:00 That DID prove interesting. -7.7%, significantly lower than the low end of the forecast range. How does one say "oops" in Yalese? Very similar to Empire State, actually. Look at that drop!


HOW COULD I FORGET? H.8 - Bank lending and deposits! The May numbers are out. These are worth reading right through. Lending overall is up, but it is up on C&I. Here the epic inflation in costs is probably playing a strong role - businesses need more working capital to process the same volume of business. RE lending is dropping, and so is commercial RE lending, which is a good clue that we haven't yet quite hit bottom on construction.

The nail in our coffin is other deposits. In May, other deposits grew an annualized OMG 12.4%, after April's rather impressive 7%. This is a good clue to the pace of money flowing through the economy, and it is not a favorable clue. At the beginning of downturns you do see money start to pool in bank deposits as people stock cash. When you do, you know they are worried about the future and spending will be constrained, and you also know that in the aggregate, consumer lending won't be doing well. So the three month progression is 2.9% March, 7.0% April, 12.4% May. This is the reason why I decided we have no hope of avoiding a downturn.

The Fed has the nice little graphing utility set up, so my lazy self ran a few.

Commercial Real Estate lending. Before we actually rebound off bottom, this sucker must bend up a bit. We're close, but it hasn't happened yet.








Other Deposits:



This is where households who have bank accounts suddenly get worried about their ability to cover future expenses and stop spending, thus you see arcs up when we are entering downturns.

If you look back, you can see where households stopped conserving cash in mid 2009 as the recession was ending.





It's even clearer when you look at Total Deposits:
The first little highlighted bend was the beginning of the Great Recession, which actually started in summer of 2007. Cash flowing through the economy started to slow, largely because off inflation and lack of ability to cover inflation by continued withdrawals from household equity.

The second is the ensuing Big Bang credit shock in October 2008.

The third is where we now are, and this contraction will not be nearly as deep because we don't have overlending problem built up. Unfortunately, the Euro flap appears to be likely to saddle us with a second event, which does not bode well.

Comments:
Kotoba mo nai wa.
 
Mark, have you been up all night watching the carnage?
 
Oh, yeah, Dr. McCoy just said "This economy is dead, Jim!"
 
But the nice thing is, many players in the market are about to get total consciousness.
 
Live short and prosper. Sigh.

I'm still up. Saw one too many Greek riot photos.

Word verification: subsia

Subsidize Asia? We keep sending paper dollars their way. Hope it works out for them. Sigh.
 
Mark - times like these can make you wish you had a lower IQ. It's more comfortable for the moment.
 
...a lot depends on how many new jobs are created.

Heh. You a funny, funny lady.

Not sure I'd be taking any comfort in the bliss of a low IQ, though. Even the oblivious around me seem to have a sense of impending doom. Having an imagination allows one to see through to the other side of awful...
 
Neil - even in the depths of a very bad recession, new jobs are still being created in quite large numbers. It's just that the balance shifts to net job destruction, but it normally doesn't shift until you are into the downturn a bit. You lose your growth edge, the new job creation slows, and then the undertow takes over as service businesses contract a bit.

BED survey Table 1

Our first negative quarter for the Great Recession 1.0 was September 2007. Our last was March 2010.

The clock is ticking on Great Recession 2.0.

That survey is so behind hand that it does not predict - by the time you get the data it can all be over.

The double dip pattern for the 2001 recession shows what really happened. Jobs went negative in Q1 2001 and did not go positive until Q3 2003.

The B.E.D. survey is the basis for the establishment survey's birth/death adjustment, which is why it can be so off in the short term during times of economic change.

It's worth looking at that table. The problems in this economy are of long standing. Job creation fell off in 2000 and never came back. In a service economy, things continue to contract for a long, long while after a contraction. Manufacturing economies see hard drops and then quick rebounds, but in service economies, you get a mild recession but a sustained period of slow growth produced by service economy adjustments.

What we have managed to create is a combination of the two - a hard manufacturing drop plus a service economy sustained period of slow growth, aka a depression. That's why I think this is structurally a depression and not a recession.
 
"Having an imagination allows one to see through to the other side of awful..."

That might work for some people but my favorite author is H.P. Lovecraft, lol.

"I recall that the people went about with pale and worried faces, and whispered warnings and prophecies which no one dared consciously repeat or acknowledge to himself that he had heard. A sense of monstrous guilt was upon the land, and out of the abysses between the stars swept chill currents that made men shiver in dark and lonely places." - H.P. Lovecraft

That quote exactly represents how I feel right now and rarely did H.P. Lovecraft offer happy endings.
 
Well, there you go. I always hated Lovecraft. Cthulhu, Schmoolthu.

I'm more of a "hack the Kobayashi Maru" kind of guy.
 
Neil,

Hack that no-win situation. Hack it!

Meanwhile, I'll be sittin' in the bunker, lol. ;)
 
So, does this mean QE 2 is working as intended?
 
I would have to say no. Treasury yields rose as it was initiated, and are falling now on risk.

The Fed will not admit it, but the bulk of QE2 ended up in commodities, and commodity hikes have cut the flow of money through a wide range of channels in multiple economies.

Thus we end QE2 in worse shape than when we went in, with a wave of inflation still to breast.

It will take quite a fall in commodities before most households in the west retrieve their position, and unfortunately many businesses have been affected as well.
 
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