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Monday, December 31, 2012

Law School Professors

Exist to make the rest of us grateful that we are not so stupid:
As someone who has taught constitutional law for almost 40 years, (and then finally experienced the revelatory mind-expansion of medical marijuana)
 I am ashamed it took me so long to see how bizarre all this is. (Many of your peers achieved this illumination with LSD decades ago - where were you?)
Imagine that after careful study a government official — say, the president or one of the party leaders in Congress — reaches a considered judgment that a particular course of action is best for the country. (Imagine all the people, living foooor toooodaaayyyy. More appositely, is there not a sane citizen in the country who doesn't just cringe at the thought that either the president or one of the party leaders in Congress should be entitled to implement one or more of their great ideas with no legal impediment?)
Suddenly, someone bursts into the room with new information: a group of white propertied men who have been dead for two centuries, knew nothing of our present situation, acted illegally under existing law and thought it was fine to own slaves might have disagreed with this course of action. (oooh. They were white. They owned property. They revolted against their divinely appointed leadership, and even had the NERVE to speak their S_n_t_rs names in a critical context during election season. How evil! They were everything we hate.) 
Is it even remotely rational that the official should change his or her mind because of this divination?  (Well, no. But it is remotely rational that the official should then have the burden of convincing other elected officials of the correctness of his reasoning, and if said course of action requires a change in the Constitution, also of the need to change the Constitution. It's not like we've never amended this document, now is it?)
 Professor Mind-Expanding-Drugs (Indian name Give-Me-The-Bong) is not arguing for the lack of a Constitution, but for the lack of rule of law. If we have no Constitution, we have no legal framework that tells us what laws can't be passed by whoever wants to pass them. If there's something about our current Constitution that we don't like, we can change the Constitution. 

While the professor appropriately observes that some countries don't have Constitutions, he forgets that they do have a similarly restrictive basis in Common Law and similarly restrictive legal review of branches of government. Many countries have constitutions and ignore them, and other countries have constitutions that would quite frankly give Prof Give-Me-The-Bong a bad case of the vapors. 

It's not the Constitution or the common law - it's what's in it, and whether what's in it serves as a real constraint upon the brilliant ideas of the governing class. Since we are country of immigrants, there is nothing to provide a common foundation for rule of law except the set of laws we have adopted, and the first and foremost of those was the Constitution. 

For much tighter, more reasoned and objective analysis of our current social plight, I refer you to Dave Barry.

Happy New Year! Whatever your current situation, you can spare a moment for a prayer of thanks that fate did not turn you into a Georgetown law professor.

Friday, December 28, 2012

Chicago PMI

Oooh. That's a shocker. The headline is okay at 51.6, with new orders helping, but backlogs are still contracting (fifth month), inventories fell less (giving less hope for future), and the employment index fell a startling 9+ points.

The employment index fall is so huge that my first impulse is to just call it wrong, but on further reflection I think it unsafe. This thing has been in recessionary territory for months, it seems as if GM has to pull back on truck production in the first half of 2013, backlogs just keep declining, Obamacare charges pend, and lastly, the fiscal cliff might be giving employers an additional case of the yim-yams. Indeed, it is hard to see how it would not be doing so.

It does point out that one should ignore the next couple of weeks of claims data. Hopefully we'll get a pleasant surprise on Jan 10th, but it would be a surprise.

We always knew we would have significant negative policy changes in 2013 to contend with, so forecasting at this point is impossible. Instead I have tried to figure a base case so I can rapidly adjust from there once we discover what policy would be.

Up until this point, my base case without any policy changes (moderate inventory cycle recession unwinding next year without unemployment increases) had been pretty strongly supported by data. The functional cause was low consumer incomes with a slow offset in increased retirement incomes, which limited the damage, plus constriction of business profits (low pricing power with increased input costs). To that I add problems with credit (for example, the increased delinquency rates for residential mortgages and the growing student loan drag), the practical end of the auto impetus in 2013 (partly driven by credit limitations), and locked in policy changes for 2013 (Obamacare prep plus Dodd-Frank on mortgages plus higher mortgage premiums, implied and overt). 

With some reluctance but a lrelatively high degree of confidence I had Sandy's impact shifting to a near-term positive by March, making the case that absent any of the policy changes that simply must occur, any recession would be of short duration. 

Now I just don't know. Under the best of circumstances (pretending the fiscal cliff and debt limit would cause no changes except for the expiration of the payroll tax cut), Ding of 2013 was never gonna be at all pretty. 

The first notification from the reality G_d that I might have a bit of rosiness tinting my specs came in the form of CFNAI diffusion passing the -.3 mark, and now my other buttock bears the Chicago PMI employment index bootmark. I feel ... discomfort. 

If my base case is truly wrong, then we are in a very deep pickle.

Thursday, December 27, 2012

A-Cliffing We Will Go

High-ho O Merry-O, A-cliffing we will go....

I think the widespread propaganda over the Bush tax cuts has completely confused people and many analysts as to what the loss of the current tax provisions would mean for lower and middle-class families. 

To the impact of the income tax provisions, we have to add the 2% payroll tax increase. For a person making 20K that is $400, for a family making 50K it is $1,000, and for a family making 100K it is $2,000. That alone would be a significant drag on the economy, although a necessary one. 

To that, we have to add things like the expiration of the doubled child tax credit, which will cost families $500 more in taxes per kid. So a family making 50K with two kids would pay $2,000 more in federal taxes. But then there is the increase in tax rates, which adds to that. Altogether it will be close to $3,000 in extra taxes.

Some of the worst hit are heads of households - EITC cuts, child tax credit cut, higher payroll taxes, higher marginal rates. Some will get  tax increases of 20% of earned income or even more.

Don't believe me? Notice this bit of propaganda put out on the Whitehouse.gov site - they are trying to pretend that Obama put in these tax cuts in the first place and direct it toward Hispanics, but the numbers are right:

There are a number of other changes, most of which are listed here. Some would cost families sending kids to college a lot of money, and some would cost those paying off higher ed loans a lot of money.

Of course, given these numbers, why would the GOP have more of an incentive than Obama to bend? Won't it be something of an education if these tax increases go into effect and people suddenly find out that the Bush era tax cuts weren't nearly as good for the rich as for average families?

Of course, if you are banker dealing with mortgages or a landlord, this sort of thing makes you sweat. Anything that would pull two months of mortgage or rent payments out of the earnings of so many families is going to show up in the form of defaults and unpaid rents. 

Still, I don't see any basis for compromise looming on the horizon. The Democrats cannot afford to cut bennies, and the GOP has no reason to take the blame for all the bad without doing anything to actually improve our fiscal situation. 

It could well be March or April before a compromise is reached that will avert some of this. 

The Romney 47% problem wasn't created by Obama - it was created by the GOP and Bush - but they didn't get the electoral credit for it. What on earth do they have to lose now, politically speaking? A no deal is by far and away the best outcome for them.

Any possible deal will doom a lot of Democratic incumbents to severe reelection challenges, so until the whole thing comes tumbling down they are afraid to deal.

Tuesday, December 25, 2012

Spendingpulse Holiday Sales

Bloomberg article:
Retail sales grew by 0.7 percent from Oct. 28 through Dec. 24, the Purchase, New York, research firm said today, without providing a dollar figure in the billions. Sales grew at a 2 percent pace in the same period a year ago. SpendingPulse tracks total U.S. sales at stores and online via all payment forms.
Not a very positive sign. All the rest of the retail talking heads still have to weigh in this week. They all count differently, so totals will be different. 


Monday, December 24, 2012

I told you so

The Fed is wondering why, oh why, does the mortgage spread not respond to their MBS buying efforts? 

For an answer, look at Q3 chargeoffs & delinquencies. Chargeoffs, all banks SA. Delinquencies, all banks SA.

Let's see - US residential mortgage delinquencies at 10.77%, which is the highest since 2010, Q3. It's been increasing for four quarters, and the reason is mostly declining real incomes, plus retirements, plus the end of the funnymoney loans.

Chargeoffs at 1.74% increased from 1.19% the previous quarter, and are the highest in a year and a half (2011 Q1). This increase was so huge that it drove the total loans and leases chargeoff rate up by 4 bps to 1.21% for the first increase in years.

Now chargeoffs follow delinquencies, but some of the chargeoff increase is being forced by sales of REO which force recording of higher losses than previously estimated. Nonetheless, you cannot dismiss this as a oneoff because of the steep continued rise in delinquencies, which will inevitably force a rise in chargeoffs.

But really, the largest banks control most of the mortgage market, so we'll look at chargeoffs and delinquencies for the 100 largest banks. Residential mortgage chargeoffs at 1.99% (+64 bps in one quarter) plus delinquencies at 12.13%, the highest since Q3 2010. In fact, throughout the late great unpleasantness, residential delinquencies at the 100 largest banks have only been higher for three quarters.

If the Fed is still wandering wailing in the wilderness wondering why "policy transmission" doesn't work, it would do well to study these figures. Net Interest Margins at US Banks are quite low:

And we have reached, unsurprisingly, the end to the dizzying rise and fall of the loan loss/total loan ratio:

This means that banks have now to be planning to raise reserves on new lending or tighten lending standards, regardless of whether the Dodd-Frank rules go into effect or are carefully interpreted away. Raising reserves means you have to raise margins.


I have the flu. Thus I am in bed, groaning, and consequently not posting.

Merry Christmas to you all!

Thursday, December 13, 2012

Breaking Her Stunned And Traumatized Silence

Quick roundup - US initial claims continue to bounce around frenetically, but that is because of seasonal adjustment. Actual claims, allowing for the Thanksgiving delay in processing, are pretty steady. They are not very different from the prior year's. This is the current release, and with it I grumpily concede that claims are in the 380s rather than the 370s where I wanted them to be. While not dire, this is an unfavorable development.

All-important inventories to sales ratios - Total business remains where it has been cycling, which obscures the unhappy fact that the reason we are seeing the slow down in production-type PMIs is that it is cycling - businesses are notching down employment in order to keep it cycling. The forward impetus you get by looking at wholesalers, and there we get news of another downward notch. Again, not dire, but again, unfavorable.

Wholesalers adjust their buys so that inventory doesn't accumulate too much, which then passes through to manufacturers.

Retail sales for November were okay, but not if you were a department store or a grocery chain operator. There is an obvious slowing in YoY gains for retail sales. Table 2 gives you rolling three month comparisons YoY and for the previous 3 months. The YoY is now 4.3%, but the previous 3 months is 2%. This data is not price-adjusted, of course. There is a relatively high current error in this report for each month's data, but the three-month totals should have much less variance. Grocery store sales dropped in November in comparison to October, which is a sign that consumers aren't that flush. Food spending dropped in Q4 last year as well; consumers cut their food expenditures to pay for other spending. 

This, btw, is the biggest single indicator that we are in a recession, and it is truly an amazing one, due to the continued expansion of the SNAP (food stamp) program. It is Table 2.3.6, real-dollar food and beverages purchased for off-premises consumption, and since Q2 2011 it has not moved. But the population has increased and our subsidy for food has increased. SNAP expenditures continue to rise by month, and they are roughly equivalent to a 1.5% payroll tax cut.

In fiscal year 2012, we spent 74.6 billion on SNAP, which is 9% of the total annualized BEA reported off-premises food consumption. (Table 2.3.5). In comparison, in fiscal year 2008 we spent 34.6 billion versus 740 billion total, or 4.7%. If this doesn't scare you witless, nothing will. Your mind is gone. You have exited the reality highway. You have achieved the nirvana of total mental drift, and you are floating in a warm sea of disassociation.

There is also WIC, which at 4.8 billion in FY 2012 gets us to more like 9.5% of  basic food expenditures.

All this money, and the increasing population is buying less food per capita? This is Japanese-style deflation. The following BEA-generated chart shows CURRENT-dollar food trends:
It might be time to stop importing immigrants that need government subsidies to feed themselves. All we are doing is crushing the working-class population into the ground. 

In this context, it's easy to see why the Fed is launching a Treasury bond-buying program, which at an annual total of 540 billion, would amount to funding close to half the fiscal year 2012 federal deficit. But the reality is that any measure which does not restore the ability of the general population to buy food at at least a continuous per-capita level is doomed to fail as an economic stimulus. 

I do have one favorable thing to say of MMT versus current more mainstream economics - the MMTers generally do seem to really get that a theoretical increase in the money supply does not equate to an actual increase in the money supply. You can dump "money" into the system all day long, but without a circulating mechanism, the "money" does not exist in fact.

Another aspect of our current future expectations is that GASB is gradually tightening up the standards for government pensions. The current change in standards will fully take effect in 2014, and it will force higher contribution levels for government pensions, which will further cramp a lot of state and local governmental budgets. Of course there is a loophole which would allow and indeed force marginally funded plans to use a higher discount rate for the first-pass calculation in order to avoid the forced low-end discount rate. But some plans don't have this option, and this should be an adventure in fiscal reality.

Well, I could write more, but I think I have come to the conclusion that the best way to proceed is to focus on real money supply in the context of theory and evidence. We can discuss what I think is happening to it, what MMT thinks it is, and what the Fed thinks it is doing to it! 

Tuesday, December 11, 2012

Wells Fargo Confirmed, And It Is OVER

This is why you should not fantasize - it hurts too much when you have to stop.

Wells Fargo Small Business showed a massive drop, and NFIB confirms:
This is now back to late 2008 levels, i.e., CRASH. The narrative on this one is interesting, but don't even think about the narrative - look instead at actual earnings trends for the last three months:
Rather than the big drop in future expectations being the result of disappointment with the election (an emotional reaction), what really happened is that future expectations had not responded to the dizzying fall in earnings earlier, because business owners firmly expected a change in political regime. When they didn't get it, the result of experience abruptly showed up as a massive decline in future expectations. 

This distinction is important, because a fall in confidence based on what one thinks will happen in the future is quite different from a fall in confidence based on what has already happened and removal of hope for the future. Rhetoric can salve the first but cannot redress the second. 

Earnings now are also back to where they were in later 2008.

We are facing a more serious recession than I had ever planned for even if the fiscal cliff issue for 2013 is resolved favorably for this contingent.  

PS: Post really requires a soundtrack, which you may find here

 Neil's question: There was a degeneration of over 14 points in earnings after April, but yet future outlook did not follow the trend. Now it has abruptly "snapped" into correlation.

Wednesday, December 05, 2012

About That Recession Call

Update: At Small Dead Animals, the ATA graph was posted, and elicited this comment by Trent:
This is very bad. I have been trucking for 20 years and operating independently for the past 11 years. Freight volumes ALWAYS pick up in the fall of the year for the Christmas consumer rush. All those color tv's and Barbie dolls arrive at the store by truck. The graph displays an increase in tonnage in the fall of every year except this year. Additionally hurricanes and natural disasters ALWAYS create an enormous increase in trucking. Construction equipment, construction materials, relief supplies, FEMA trailers, generators, food and fuel are being trucked from all over North America to the East coast. In 2006 US DOT gave out special permits to trucks supplying FEMA after Hurricane Katrina excepting them from hours of service regulations in an effort to get more supplies and materials. The demand for supply trucks was that great. For there to be a slow down in trucking at this time is not a good sign.  
To be fair about it, a lot of the increased demand for trucking would occur after the storm, in November. Yet if you look at the graph, there was a downslope for all of 2012 before the storm, so those trying to attribute all of this to Sandy are clearly ignoring something real. Nor is this an isolated trend - rail has shown a slow weakening pattern and inland water also. End update

ATA truck tonnage index for October -3.8%:
October’s drop was the third consecutive totaling 4.7%. As a result, the SA index equaled 113.7 (2000=100) in October, the lowest level since May 2011. Compared with October 2011, the SA index was off 2.1%, the first year-over-year decrease since November 2009
It's only a flesh wound....  September Surface Trade with Canada/Mexico. Maybe the wound is a bit infected....

Rail continues to weaken. Hmm, let's culture that wound exudate....

The infection appears to be spreading at a rate historically associated with a bad outcome.

Unfortunately, we know that we have a first half downturn in light MV production pending. Culture comes back; we have the dreaded multi-QE resistant GDP-eating bacteria. As noted in the prior link, employment is a lagging indicator of economic inflection points. If the recession call is right, employment will now start to slacken.

It's worth reading the entire ADP report, because Zandi attributes the entire slack to Sandy.I have, however, never seen this combination of negatives without a recession. Maybe this time it is different, but the inflection points all seem to have started before Sandy. 

How about causation trends?

 A close inspection of the longer trends would suggest that growth in real personal disposable incomes YoY has fallen sharply below the rates needed to ensure an expansion, which has been followed by PCE YoY growth rates which have weakened below the historical expansion trend lines. 

Thus, the only thing holding the economy up has been stuff like cutting the payroll tax and growth in manufacturing. Yet manufacturing growth has clearly stalled out, and we are going to raise taxes next year. It appears that at least the payroll tax will be allowed to sunset. 

I'd say it's over, and the only question is the shape of this thing. It's quite likely that the Fed will double down on its QE if it can find enough assets to buy, but doing so will inevitably weaken the US dollar and cut US real disposable incomes for the lower income households and many producers. This, then, amounts to closet 2013 tax increase for over half the US economy, and thus indicates that the expansionary effect will be limited to say the least.

Monday, December 03, 2012

Acute Tendonitis

Basically in the whole right arm now. I went and got a cortisone shot in the shoulder on Sat, and I am taking indomethacin to try to get the inflammation down. This leaves me a one-armed typist, and that doesn't mix with blogging. 

So it will be a while.

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