Thursday, January 31, 2008
The Perils Of Seasonal Adjustments
So really, it doesn't look too bad. The employment situation continues to worsen, but slowly. Since January 5th we have cleared about 250,000 people from continuing claims. I would hope that at least 170,000 of those found jobs rather than running out their unemployment benefits. Of course there is always early retirement, and at this point some of the older workers may choose to run out their benefits and then do that.
Personal Income for December was neither good nor bad. In terms of chained 2000 dollars, disposable personal income rose 0.2 in December after falling 0.1 and 0.2 in October and November. PCE stated in chained 2000 dollars was flat at 0.0. I don't have a lot of confidence in these numbers. They are extrapolations, and figures from earlier in the year were restated significantly recently.
What I am watching most is non-farm proprietors' incomes:
Nonfarm proprietors' income decreased $2.8 billion, in contrast to an increase of $8.6 billionPCE was revised downward for October and November. It looks like Q4 preliminary GDP might be revised downward from the advance. Of course, PCE is just one piece of it.
Wednesday, January 30, 2008
Like Everybody Else
You can get it here. I think the hands of the ratings firms and the regulators have just been forced. This is some major kerosene on the flames, kiddos. Because if the firms have these exposures as the model suggests, then a whole bunch of organizations worldwide will have additional large amounts. I am glad that someone is willing to publicly state that losses on a lot of these Alt-A securities have the potential to be worse than for most subprimes. Finally, the truth.
This will be the final event, although it will take a while for the impact to register.
Cause He's Got A Way With Words
I've still got the dogs up here in the frozen northern wastes. See, he's got to go back to the doctor every month for a while, and I figured that if I stayed, he'd be back for, ah, conjugal privileges. Plus, I was sick as a dog myself, and I really didn't think either one of us was in shape to drive back with the dogs at that point.
He's supposed to come back tomorrow, but the phone is out again, and I got nervous because I couldn't call him. So I sent him this eloquent email consisting of the title line "You better be coming" and in the body "Because the dogs say they will hate you forever if you do not. The phone's not working."
And he clearly realized that I was pacing the floor, because he replied with:
I just finished doing some laundry, and putting away some things around the house.Now I have said nothing about any of those extraneous and petty matters except for bringing his cell phone. So I am sending back this sterliing advice:
The cab will pick me up at 0930 hours, but just in case the Honda car is all filled up with gas if I needed to head out to the Airport after waiting for the ride.
Yes, I will be disconnecting the PC, I'll have the phone with me and the Tickets, ID and some treats for the kids.
Nothing for you dear, because the endless nagging should not entitle you to much of anything.
See, you're handling the nagging problem all wrong. The Islamic recommendation is to refuse to sleep with her to teach her a lesson.He'll have a good while hanging in airports tomorrow to think up an appropriate reply. I expect it to be pithy.
Q4 GDP - Better Than It Sounds
I have tried to explain several times that high inflation rates can mask a recession for a while. BEA tries to compensate for them, but IMO they don't do a very good job. Anyway, Q3's GDP, which is reported at 4.9%, was increased by a very low government economist calculated inflation rate, and also increased by a big build in private inventories. The reason why Q4's GDP looks so low is that inflation reality caught up a bit in the government numbers, and that private inventories were sold off.
It is true that the economy continues on its long slow decline, and I also believe that the rate of decline is accelerating. But it isn't accelerating hugely - really, all my data tells me it isn't. And here's some other data to support my view - ADP reports a January increase in employment of 130,000, which is quite good. ADP uses their payroll data to generate this number.
If you want to look at the underlying trends in the economy, gross private domestic investment will tell you the most, especially if you adjust that for the increase or decrease in non-farm private inventory (PI). Looking at Table 3 "real" figures, this has been the recent trend (and remember that the Q4 data will be revised):
Q4 2006: 1856.2, PI: 13.6, net 1842.6Gross private domestic investment is basically split into two categories - change in private inventories and fixed investment. Fixed investment is compounded from residential and nonresidential, and nonresidential is compounded from structures, info equipment, industrial equipment, transportation equipment, and other equipment. Over the course of 2007, the trends in transportation and other equipment were negative, but there isn't any indication that those have abruptly worsened and the decline may be moderating. The trend change and the concern is that in Q4 industrial equipment investment fell off. When the weaker dollar kicks in, we hope to see that category start growing again.
Q1 2007: 1816.9, PI: -5.8, net 1822.7, QoQ -19.9
Q2 2007: 1837.4, PI: 1.3, net 1836.1, QoQ +13.4
Q3 2007: 1859.9, PI: 26.0, net 1833.9, QoQ -2.2
Q4 2007: 1810.5, PI: -6.9, net 1817.4, QoQ -16.5, YoY -1.4
In general, gross private domestic investment would only fall on an annual basis during recessions, and in 2007 it did. See Table 7 to illustrate. The difference between a mid-cycle slowdown and a recession is that gross private domestic investment declines during a recession whereas it just slows during a low growth period in the economy. Actually, the declines in gross private domestic investment drive the economy, jobs, and therefore consumer spending. After 1991, there have been only three years in which gross private domestic investment was negative, and those years were 2001(-7.9%), 2002(-2.6%) and 2007(-4.6%). That is what I mean when I write that by classic standards, we entered recession in 2007.
Another marker of recession periods is that government spending becomes a relatively bigger contributor to economic growth. 2007 was the third year in which government spending increased as a relative contributor to GDP. We seem to be in a very slowly developing recession which has inexorable qualities, and indeed, if you look at producer price increases compared to end sale increases, it is clear that price sensitivity is preventing costs from being passed along, which is another marker of recession.
I know that many are dreadfully upset by the Fed's recent interest rate cuts, but honestly, they should have begun them earlier - way earlier. The Fed is going to have to go very low now, because the Fed waited until too late and the effect of declining gross private domestic investment is likely to be amplified by the real and growing credit crunch.
In 2008, securitizations for bad CC and auto debt are going to start busting along with commercial mortgages, bad commercial debt and of course the continued weakness in residential mortgages. It is not a pretty picture. We cannot expect credit to improve for some time.
However, the encouraging thing about Q4 2007 is that it doesn't show a sharp break to a faster decline, although industrial equipment is discouraging. In about another 3 weeks rail data will tell us where we really are. There's a limit to how low the Fed can go with interest rates in this environment. If it goes too low, rates will go negative (below real inflation rates), which will have the effect of withdrawing money from investment. The Fed cannot risk that, because real negative rates at this juncture would cause a depression or something close to it. So the Fed is walking a fine line here.
Monday, January 28, 2008
WHE The Enemy
Anyway, the WHE of whom I speak (actually a would-be WHE who shall remain nameless out of Christian charity) was claiming that home prices wouldn't fall because interest rates were falling. I laughed pretty hard for a while, but then I sobered up and wondered if a new generation of bank presidents wasn't at risk. The reality is that when bank presidents go bad, your pension funds have a tendency to sour likewise.
So let me be the Big Bird for a new generation of Bagholders and Bank Presidents, and possibly even would-be homebuyers.
So let's start with an economic axiom:
Price(P) is a function of the relationship between Supply(S) and Demand(D). Generally, if Supply is rising at the same rate as Demand, Price will remain stable in real terms; if Supply is rising faster than Demand, Price will fall, and if Demand is rising faster than Supply, Price will rise.
And continue with another economic axiom:
Demand is dependent on Price to some extent under almost all circumstances. I'm not going to buy a Twinky for $20, unless I haven't eaten for two or maybe three days AND I can't find anything else to eat AND I have $20. But then, I hate Twinkies. However, if I were hungry and there was nothing but Twinkies to be had, but they were offered at $1, I probably would buy one after 10 or 12 hours.
Supply will often be dependent on Price and Demand. When Demand rises, it will generally trigger a rise in Price, which will create a strong incentive to increase Supply.
As a result of those axioms, it can be seen that economies don't work as straight line equations of the sort that WHE's(TM) propose. For that matter, no pricing relationships do. That is why CR spends so much time and detail analyzing various aspects of the situation, and why his forecasts are so good. You actually solve for any of these variables by iterating against current economic circumstances with expected movements of the underlying constants that affect the three variables for the commodity in question. This is not precise, but it is a whole lot more authoritative than the hilarious forecasts of WHEs.
Taking residential real estate prices in particular, they are somewhat complex. During most periods of our history, there has been an entry cost (downpayment, closing costs, and/or other reserves). Entry cost acted as a gatekeeper. If you could get through the gate, then the question was whether you could afford a P&I monthly payment, plus monthly carrying costs (taxes, property insurance, HOA, etc).
Therefore effective prices for homes are usually combination of a step function (how much of the population can come up with the entry cost at any given time) and a relatively smooth function of monthly P&I plus carrying costs. For an amortizing loan, the monthly P&I varies based on loan principal and interest. Property taxes vary somewhat based on price, but also according to local factors. Property insurance varies mostly on experience, and it so happened that we were in a period that had had an abnormally low rate of disasters on the coasts.
What happened in 2002 was that several trends coincided. First, interest rates were drastically lowered. Second, the trend for some years had been toward lowering the entry costs in relationship to price and indeed those had dropped more than 50% on average. To some extent, the entry cost barrier had been shifted to FICO score.
The combination of lower entry costs with low rates was that demand was sharply boosted in the short term, which created an environment in which price rose. Because prices were rising, the relative risk of lowering entry costs genuinely did reduce for a time, and entry costs basically dropped to an effective zero for at least half the population of would be buyers. Indeed, the previous financial entry cost was substantially replaced with a FICO gatekeeping function.
However, entry costs were related to price, whereas FICO had very littler relation to price. That removed a price-related drag on demand and tended to boost prices. Naturally this increased Supply. This cycle iterated a few times, with the more conservative lenders steadily losing market share. Eventually, they responded by loosening their credit terms, which caused those operating on the higher risk margins to reduce their credit underwriting standards again.
By 2005, virtually all potential demand had been consumed, and by the end of the cycle (2007) the only way to sustain demand was to steadily knock factors out of the Price equation given above, which was
- Entry Cost (Boolean Yes/NO) and
- P&I plus carrying costs.
- FICO (Boolean, but steadily decreasing so that at the end it hardly acted as a gatekeeper at all), and
- No principal payment, about 3.5% initial interest on principal, and no verification of ability to pay long term carrying costs plus even the long-term interest rate on the loan. These are known as funny-money loans, because they are granted on the theory that the Borrower will default to someone else, which will be funny.
- There was further awesome iteration at some institutions, at which they connived at faking appraisals for loans for their own portfolio, wrote loans which required less than the accrued interest on principal to be paid for a period as long as three to five years, and paid themselves big bonuses. These are Institutional Suicide Loans, which are not funny at all and cause a pronounced rise in early retirements among bank executives and the like, as well as vastly increased payments from financial companies to politicians.
There were good reasons for the earlier version of pricing: A downpayment has been traditionally required because it spreads the cost of default to both buyer and lender. This limits walkaways. Demanding payment of the true cost of interest on the loan amount supports cash flow in the absence of a Stupider Lender(TM), and it is foul and unpleasant to find yourself paying the property taxes and insurance on the collateral for your loan in order to protect yourself from total loss, even while your expected net loss on sale is rising. This causes great grief in the hearts of Bagholders and an abiding aversion to funny-money loans.
So in view of the fact that we are rapidly restoring the Entry Cost equation of 5-10% of purchase price, plus verification of ability to repay at least carrying costs plus the interest on the mortgage amount, a change in interest rates has very little effect on the Price equation. Real mortgage interest rates are not going to fall below the 3.5% average teaser for entry-level. They just won't. Therefore, the Demand portion of the equation has been constricted suddenly and will continue to constrict for some time. Since Supply must rise, and Demand must fall, Price must also fall.
The Tragedy And Sorrow Of New Home Sales
On a YoY basis, new home sales dropped 40.7%. The 90% confidence interval on that is 7.8%, so that is statistically significant and very negatively so. For all of 2007 compared to all of 2006, sales dropped 26.4%, so you can see that the rate of decline has accelerated sharply since late summer.
The reason this report upsets me is the following: Prime rates had dropped pretty sharply by December, and with the very high inventory of completed new homes and the extreme discounts available, it seemed possible to me that individuals would buy at the end of the year for tax reasons. The fact that they didn't is ominous. And jumbo loans are easy to get, and they are actually quite cheap if you have a downpayment. What is getting costly is the high CLTV jumbos. No one wants to get blindsided by jinglemail jumbos, and the only way to protect against that risk is either higher interest rates or significant downpayments.
Another disturbing aspect of this report is that completed homes in inventory keep rising, which mean that total new home inventory is still rising.
About the inventory of new homes:
Census tracks homes from authorization (permit) to first signed sales contract. Over the last few years, cancellations of those contracts have run wildly above historical standards. Therefore, the new home inventory as reported is quite understated. One cannot expect the beginnings of a rebound until about 12 months after inventory first begins to drop, so this is a very important leading economic indicator.
Instead of using the inventory reported on the new home sales report, we now have to use the inventory of completed homes available for sale at the end of the period. The reason for this is that completed new homes for sale compete with cancelled and no longer reported completed new homes for sale, and Census-tracked completed new homes and Census-dropped completed new homes should diminish at no less than the same rate. If anything, one would expect the older homes to be sold at bargain prices and thus move a bit quicker than the newer completions.
The cancellations largely occur when a home is completed but the putative owner refuses to or cannot close, so when the total of completed new homes available for sale drops over a period of a few months, we'll be pretty safe in claiming that we have reached the trough on inventory, and that within a period of 9-16 months (depending on the total level when we reach that point) residential home construction can be expected to rebound.
Here are the non-SA numbers of completed new homes available for sale:
Dec 06: 174,000
Jan 07: 177,000
Feb 07: 180,000
Mar 07: 181,000
Apr 07: 181,000
May 07: 182,000
Jun 07: 181,000
Jul 07: 181,000
Aug 07: 187,000
Sep 07: 191,000
Oct 07: 192,000
Nov 07: 193,000
Dec 07: 195,000
So on a YoY basis completed new homes for sale have risen about 12%. This is way outside of the uncertainty range. You can clearly see the impact of the credit crunch hitting in July, and the impact it had on new home sales. And you can clearly see that the situation is not improving. Even with diminishing building, the supply of completed homes for sale keeps rising. 7.8% of the rise in inventory occurred after July.
The median months for sale keeps rising, and that is another indicator of rising inventory. As for pricing, both median and averages are now plummeting.
So for the economy, we can pretty safely say that residential construction could not start to pick up again until late in 2009, at the earliest. There are now 11.9 months of supply on a non-SA basis, which probably equates to about 17 months of supply including the cancellations on an NSA basis, or over a year's worth of supply on an SA basis.
For finance, we can say that a lot of builders are fated to go bankrupt, and the regional banks are going to take a nasty hit from their loans related to residential construction.
In terms of existing home prices, the situation in the coastal bubble markets cannot improve until the aggregate of foreclosure/forced sale activity plus excess supply of new homes begins to reduce, and that would now seem to be pushed back until 2010 at the earliest in the western and southern bubble markets, and until after 2012 in the NE markets. Therefore prices of existing homes in the previously "hot" markets are doomed to drop at a faster rate in 2008 than they did in 2007.
For CRE, the small retail (think strip malls, etc) market is slated to go down for several more years, which will also have a disproportionately negative impact on a lot of regional banks. There is no bright aspect of this report.
We are looking at an absolute sea of red ink here. CR of Calculated Risk usually does a nice rich analysis of this release.
Friday, January 25, 2008
Are Voters STOOOPID?
Both Fannie and FHA will go to DTIs of over 60% in some cases. Especially refis. Try this thread on FHA. If only I had saved down the 100 odd links or so I've run into over the last year about how brokers were getting loans that the subprime companies refused (who have since defaulted) through under FNMA!!! The reason they did it as a last resort was only because FNMA paid less for the loan. FNMA is already going to run into huge problems because of the slopover into their portfolio in the interim between most of the subprime lenders going down and FNMA's meaningful tightening of lending standards. So FNMA already faces years of worsening financial trouble without any new risks. Why does OFHEO oppose this? Hmmmm?
You can get information on Fannie's loan types at efanniemae.com. Believe me, they do high LTV, hybrids, 40 year etc. This page will show you information about Fannie's ARM products. Take a look. Take a good look. You want a 100% interest-only? They got it!! In fact, they'll take downpayment assistance, and go up to 105% with special programs. Chortle! Ya want interest-only ARM hybrids with DAP? Sure. BRING IT ON, cries Fannie. Simultaneous seconds? Sure 'nuff!!! (By the way, this is the escape from the refusal of the MI companies to play.)
The bottom line is that every risk afflicting Alt-A lenders in high-cost areas can afflict Fannie and really has. It's just that no one is paying attention. The Streamlined Refinance (applying currently only to Fannie or other GSE mortgages) alone should make your hair stand on end and you sell FNMA stock if you have any. You can roll these over with 1.5% of the qualifying payment with no verification of income, job, etc. Sound familiar? It's lending practices that matter, not who practices lending.
And FHA? It will either largely refuse to participate or it will go bust. FNMA can easily go bust too. It probably will. I assure you that Pelosi does not care either way. A huge number of the Congress Critters don't care.
This is for only one purpose, and that's to bail out some large banks and some large developers. Don't think that the developers won't immediately set up Beazer-style captive mortgage groups or affiliate with an outfit like CW to unload their inventory. Don't think that the developers won't offer their own downpayment assistance programs (DAP) just like Beazer did. Don't think the results won't be just as bad!!!
Nothing's been fixed, guys. The only thing that has occurred to date is that the market noticed that these loans were defaulting at scary rates, so now the theory is that we can shove all this off to the government-guaranteed entities because private business won't do it any more. Now it will be the taxpayers' problem. This is crazier than anything I have ever heard of.
See Tanta here, here and here.
Thursday, January 24, 2008
Congress Is STOOOPID
There is only one thing this can accomplish, and that's for a bunch of banks to unload crap loans with faked appraisals onto GSEs, and hence the taxpayers. This will not help people who haven't bought yet in the high-cost areas, because a return of accountability is rapidly pushing entry-level prices down to below conforming levels just about everywhere.
It would be wonderful for WaMu, which is stuck with a lot of junk, and for Countrywide, which is stuck with a lot of junk, and for Bank of America, which is stuck with Countrywide. But if you are a taxpayer, it's going to be very expensive. And if you are a person who would like to buy in CA, it's the worst possible thing for you, because it will support prices which will kill your financial future if you succumb to the "pride of bankruptcy" NAR meme.
I repeat - Congress is either really, really stupid, or really, really corrupt. I suppose it could be a blend - some of them are honest but stupid, while others are intelligent but corrupt. I think there's a good possibility that some are both stupid and corrupt, and don't understand why they are getting promised so much money for this vote.
In the annals of insane proposals, this takes high, high billing. Loans do not become more payable because they go into the GSE bucket.
It would be way cheaper to just directly give money to Bank of America, Countrywide, WaMu and a few others. It would also be more honest. If that's what we want to do, then let's do it. But let's not destroy the country while bailing out these banks.
Countrywide wants to be able to take its loans that the market won't accept and refi them under FHA or FNMA. That's what this is all about. Don't forget that.
It's not about homeownership. Let's look at the latest 25th percentile (starter homes) list prices for a range of CA cities, compared to the price in January 2007:
LA: $365,000/ $429,920What you see above is great news for all the people who would like to buy homes without going bankrupt a few years down the line. It's VERY bad news for banks and financial companies that made the original bad loans without bothering to check whether the borrowers could pay the danged loan. You figure out who this country should reward - responsible aspiring home owners or stupid banks.
OC: $414,900/ $499,000
Riverside: $259,900/ $335,000
Sacramento: $229,900/ $316,477
San Diego: $325,000/ $392,279
San Francisco: $380,000/ $468,376
San Jose: $489,950/ $580,589
Santa Cruz: $489,000/ $577,400
Then call your Congress Critter and tell him or her what you think. This is not an ambiguous situation. There is no problem here to be fixed that the market won't fix more cheaply. If we need to bail out a few big banks and servicers, then let's do it honestly, and let's let the wealthiest individuals pay the highest part of the cost. The bad loans will default wherever they end up, and if they end up on the books of FHA and FNMA, it's going to be the pensions and the would-be rational borrowers who pay for it.
This is why I'm waiting to close my FNMA/FHA forecast. The possibility of legislative stupidity like this makes the range of predictable outcomes vary wildly. The reason why these Alt-A loans are going bad is that the principal balances are too high in relation to the borrower's incomes, and if you grab one of these funky loans before it detonates and dump it into FNMA, it will detonate just the same.
If you go to the FEC database, you can find out who is giving what to whom. I suggest that you contact your Congress Critters to find out their positions on this proposal. If you don't like the answer, use the FEC database to look up the bank/finance contributions they have received, then email your Congress Critter with that infoamtion and a copy and paste of the data above. The combination of that and the FEC data should scare the corrupt and enlighten the stupid.
Of course, you realize that McCain-Feingold tries to make it impossible for citizens to join together and publish such information in connection with a candidate's name during the actual campaign. You might want to mention that too.
Alternatively, you could preemptively drop your pants and clutch your ankles.
Wednesday, January 23, 2008
A Rough Day Ahead
Oil, grains, copper, etc are all down.
The US indices could have some huge downward movements today. It's not a certainty, but it is a good possibility.
Tuesday, January 22, 2008
The General Importance Of Logic
The study was on Danes, and it claims that for each activity level, not drinking puts you at a higher risk of heart disease. Okay, obviously, people who have problems with alcohol are way more likely to live longer by not drinking. But in that case, you'd better exercise moderatey, ESPECIALLY IF YOU ARE A WOMAN. Here's two tables from this thing:
|Fatal IHD (men)
|Fatal IHD (women)
|All-cause mortality (men)
|All-cause mortality (women)
|Fatal IHD (men)
|Fatal IHD (women)
|All-cause mortality (men)
|All-cause mortality (women)
I'm saving this down for use with Baptists. I like Baptists. Most of them I have known have been fine people with good senses of humor, and surprisingly tolerant in daily life, but some Baptist ministers have a poor sense of logic. This is an exact argument I heard from one Baptist:
- Scripture is inerrant and .literally authoritative.
- Jesus was God. He could not sin, or aid sin. He came to deliver man from sin.
- Drinking is sinful.
- If Jesus had turned water into wine at the Cana wedding, he would have been aiding sin.
- Therefore, Jesus did not turn water into wine at the Cana wedding. He turned it into GRAPE JUICE. There's just a mistake in the translation when it says wine. They meant new wine, or grape juice.
Now let's talk inerrancy and BLS, which publishes employment statistics. There are those who insist upon the inerrancy of BLS, but I have a wee problem with that.
The reason is FUT or FUTA. FUT= Federal Unemployment Tax (IRS 940) which applies on the first $7,000 paid in wages to each employee in the calendar year. You have to pay FUT on any employee to whom you pay at least $1,500 in a quarter. Therefore total FUT receipts to the Treasury are correlated largely with numbers of employees, unlike income and employment withholding, which is highly correlated with wage levels. Governments do not pay FUT. Farmers do pay FUT, construction firms would pay FUT, and so would most seasonal employers.
There should be a good correlation between FUT and BLS private employment figures. After all, no one's going to start feeling generous and send in extra FUT to help the government out. Nor is this tax one it pays to cheat on. Not only that, but employers get credits for state UI paid and also for a good state experience rating, so this is quite a stable tax except for actual employment changes. FUT is, however, very sensitive to changes in employment. It can rise sharply when temporary employment is rising at the beginning of an up cycle (because if an employee is moving from temp job to temp job, he may be counted several times compared to a permanent employee), and it will show the first drops in employment. You often cut temps and seasonals in downturns first, so the change can be amplified.
FUT taxes can be obtained from Treasury Daily Statements on a timely basis. I do not actually pull statements about the loss of so and so many jobs out of my butt, or from staring at a crystal ball. A few years ago I became concerned about the reality that rapidly increasing employment of illegal aliens was totally FUBARing BLS data, so I compiled FUT and other data from the Treasury Daily Statements and now I use that instead of BLS data. Here are some graphs for you:
As you can see, there is a pretty definite change from the end of 2005 through the end of 2007. Here is a second graph which correlates BLS total private employment for December of each year with FUT:
According to BLS, total private employment is still rising. It's just rising more slowly.
Now if anyone can convince me that total employment is still rising when FUT has dropped with such an amplitude (without using Baptist logic, i.e., BLS must be correct, therefore FUT is wrong), you would indeed be a miracle worker. Have at it, if you dare.
In this graph you see the answer to the puzzle of CR of Calculated Risk's missing construction employment losses. BLS is not picking up the recent immigrants who concentrated in construction in the household survey. They didn't have them at any time in the household survey, but they did pick quite a few of them up in the establishment survey. The other thing wildly off is the Birth/Death adjustment. The reason I picked figures at this time of year is that it minimizes the total construction impact, and it does appear that BLS is off by more than just construction jobs. The other problem with BLS data is probably cell phones. Cell phone usage is concentrated among the young and the recent immigrant population, which is also the group most likely to work temporary jobs.
The next BLS B/D adjustment will be based on an analysis of data from state unemployment tax filings through March 2007. Therefore it isn't going to pick up much of the 2007 trend. We probably will not get an accurate idea of 2007 employment until 2009, which should give everyone pause to ponder.
In fact NBER does not always rely on current GDP estimates, as you can see in this 2003 explanation.
From the Fed's POV, they'd be better off paying attention to significant FUT changes than GDP than BLS releases. The Fed cannot afford to wait 2 years or so for "real" employment and GDP figures to inject stimulus to correct dropping growth patterns.
In Case You Missed It, FOMC Minutes Posted On CR
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PS: So far, Bovespa futures are up. That's very good. My guess is that we can use Bovespa as a proxy for countries like Turkey.
Monday, January 21, 2008
When Bankers Go Bad
Company Last Chg Chg % Volume
Bank Of China Ltd H Shs 3.08 -0.29 -8.61 530,268,576
Bank of Communications Co Ltd H Shr 8.10 -0.99 -10.89 83,695,944
Bank of East Asia Ltd 41.75 -3.40 -7.53 5,675,241
BOC Hong Kong Hldgs Ltd 18.22 -1.50 -7.61 21,619,220
Cathay Pacific Airways Ltd 17.00 -1.12 -6.18 7,700,000
Cheung Kong Holdings Ltd 115.90 -7.90 -6.38 8,758,814
Cheung Kong Infrastructure Holdings 27.20 -0.35 -1.27 579,029
China Construction Bank Corp H Shs 5.03 -0.62 -10.97 482,901,824
China Life Insurance Co Ltd H Shs 28.00 -4.85 -14.76 182,718,592
China Merchants Hldgs Intl Co Ltd 31.60 -4.05 -11.36 8,153,836
China Mobile Ltd 110.10 -7.60 -6.46 51,706,404
China Netcom Group Corp HK Ltd 19.98 -3.47 -14.80 13,668,500
China Overseas Land and Investment 11.74 -1.22 -9.41 22,721,748
China Petroleum & Chemical Corp H sh 7.70 -0.69 -8.22 184,932,560
China Resources Enterprise Ltd 25.00 -2.50 -9.09 6,548,746
China Shenhua Energy Co Ltd H Shr 37.60 -4.40 -10.48 40,636,600
China Unicom Ltd 14.92 -1.60 -9.69 13,410,000
CITIC Pacific Ltd 33.05 -2.25 -6.37 5,549,341
CLP Holdings Ltd 57.85 -2.50 -4.14 9,824,746
CNOOC Ltd 9.76 -1.30 -11.75 142,683,024
And so forth..
Ping An might have started this:
Ping An Insurance (Group) Co, China's number two life insurer, said Monday it planned what could become the largest-ever domestic share sale by an already-listed company.The thing is they just sold shares last year. I had that article saved in my Meltdown2008 folder because it struck me at the time as extremely odd.
I don't know why people bungee jump. It's way more fun to get your thrills by investing in EMs.
PS: I am watching Bovespa to get an idea of what the real damage is. It went down yesterday - we'll see if it can recover a bit today, or at least stabilize above 49,000.
People seem to be expecting the US government to fix it somehow. That shows you how bad things really are.
A Rough Ride To Be Sure
One of the most facile and erroneous arguments advanced in the run up to what is rapidly becoming a global credit crisis was that the US economy could decouple from the rest of the world, i.e., we could slump and the rest of the world would continue to grow. It's worth noting that this idea was heavily pushed by economists in the US.
The problem for world growth is that most of the money was being invested in energy, food, distribution networks, or countries which have a low level of personal consumption - in other words, in which the mass of the people are poor. Unfortunately countries which are non-democratic in structure tend to have wealth concentrations in a very narrow band of the population. It's a battle even for democratically structured countries to keep wealth circulating, frankly.
Poor people spend larger amounts of their income for food and fuel. Therefore, the ability of world consumers to consume was rapidly being eroded. This left wealthier countries bearing more and more of a share of the world's discretionary consumption. Rising personal debt levels in the EU, the UK, the US and so on dictated that as soon as credit stopped expanding, discretionary consumption would tend to crash, and when it did, China's, India's and SA's emergiing ability to sustain discretionary consumer consumption would also crash, setting up a self-reinforcing cycle. We are still in the very early stages of that cycle, but it is now in force.
ICICI Bank in India is considering lowering its mortgage rates. A number of the large international banks are reserving heavily for growing loan losses in countries like Mexico and Indonesia. For the next few years, countries will be in a battle to attract investment as the great unwind continues to develop. So why is the ability of the US to attract such investment worrying people?
I view the EU as being one of the most worrisome areas financially. A large percentage of recent growth has been generated by loose lending in the Soviet bloc escapees, and many of those economies have not reached maturity yet, if maturity is defined as the ability of a country to generate growth in economic activity within its domestic economy. These countries do not have the heritage of a regulated banking system that operates to filter money into the ground-level economy in an effective manner, and so they suffer the most comparatively in cycles of credit contraction following excessive credit expansions.
China, for example, is now reacting by cutting its export subsidies for food, trying to rein in excessive lending, cutting its subsidies for many businesses, and the like. Chinese bureaucrats have also stated recently that they have to find a way to distribute income back down into the general population. That is easier said then done.
For what it's worth, my belief is that the likely stabilization level of the Dow is between 11,200 and 11,800. That doesn't mean that it won't go below that for a time, perhaps six months. But that is about where currently foreseeable trends seem to put it for me. The big wild card is the behavior of other governments and central banks, especially the ECB which controls the Eurozone. If they do not act soon, Europe will enter a very rough cycle internally which would tend to slow US business growth and would indicate Dow moving down to possibly below 10,000. That is the big worry for some of the US companies.
We are entering a worldwide cycle of asset deflation and overcapacity for some types of production. It will take careful management to sustain not only growth but the reasonable capacity for future world growth over the next three years.
I am trying to figure out how to maintain anonymity and also publish the basics of the type of analysis I do each year on this blog. Perhaps I need to find a way to publish it on the internet in another context. The basics of the current cycle the US and the world has entered are due to poor financial regulation and oversight, and it is important somehow to get that across to people. Strong regulation creates strong capitalistic economies and sustainable growth, and weak regulation creates financial crashes and malinvestment.
But the form of a government does not change basic economic laws. China, for example, has entered its Robber Baron cycle exactly as the US did in the 1800's. The difference between governments and their effect on local economies is often not even the intent. It is the effectiveness of structures which determine success or failure. The lack of a strong banking system cannot be corrected by a government of genuinely benign intentions, because an effective banking structure redistributes economic decision making to a very low level across a huge number of individuals. Those individuals have a high degree of accountability for the results of the decisions they make, and they also have a high degree of knowledge (or can obtain it as a condition of offering credit) about the entities to which they lend and the circumstances which control those entities.
I will be very busy and not posting that much for about another week. I am in the final stages of writing up my stuff, and that involves generating a lot of graphs, and I hate graphics. Therefore I'm bad at them and slow with this part of the process.
I would like to leave everyone with some food for thought, however. The stimulus package Bush has proposed is supposedly a tax refund of $800 per person or $1,600 per household. That sounds good, but I would like to point out that predatory or mismanaged lending can easily cost the average person far more than that a year, and that if Congress would curb some of the usurious lending practices now prevalent, the net stimulus to the economy would be far more. Also, your taxes would not be used to pay for it.
Take the example of my Verizon tech who was given a 28% loan for a medical procedure. The loan was for $5,500. 28/12 is 2.34, so the initial monthly interest on that loan was at least $128.30 (actually a bit more, because consumer loans are usually figured Act/360). If he had been given the loan at 18%, the initial monthly interest would be 1.5 * $5,500 or $82.50.
Multiply that one case by the millions of consumers who are being charged very high credit card rates, dinged with huge late fees, charged for paying over the phone to ensure that the account is paid on time.... Congress could achieve far more economic good by sitting down and doing what it failed to do when it passed the bankruptcy bill that took effect in 2005, and that is to impose some reasonable constraints upon consumer lending practices.
I want to stress that millions of Americans who have never defaulted on credit card payments are being bent over a barrel because these big financial companies CAN, and because they are trying to make up for their own bad lending practices by extracting blood from the reliable payers. When regulation imposes constraints upon credit practices, it really enforces more reasonable credit decisions up front. In a reasonable financial system, a person with relatively good credit history and payment history for this type of credit should not find him- or herself in the situation of paying up someone else's bad debt, and that is what is occurring now. The reality is that my innocent Verizon tech found himself paying the bills of someone like Casey Serin, and that is an economic travesty.
Friday, January 18, 2008
I Love Logic Puzzles
There are two daughters, a mother, two sons, a father, a policeman and a prisoner on one side of a river. They need to get across. There is a ferry which will transport only two people at one time across the river, but:
- The father cannot be with either daughter without their mother,
- The mother cannot be with either son without their father,
- The prisoner cannot be with any member of the family (sons, daughters, mother, father) without the policeman.
- Only the father, mother and the policeman can run the ferry.
Crunching Moves Into High Gear
The Rockefeller Institute published its third quarter 2007 state tax data. The summary is here. It looks like we moved into the cycle of reinforcing negatives between second quarter and early third quarter. It explains a lot, and it does compare pretty closely with what I already had.
I was surpised by just how crummy the state tax receipts really were. Inflation-adjusted, personal and corporate income plus sales taxes shrank in the third quarter. That normally will not happen until we are a little ways into a recession, because income taxes lag, i.e., are paid on previous income rather than current income.
FWIW, the inflation adjustment Rockefeller uses is the state and local government expenditures index, which is definitely closer to reality than CPI.
Thursday, January 17, 2008
Boob Power In Action
Video of Bernanke's testimony is here, but the Q&A is not included. His statement in text is here.
A couple of quick notes:
The headline number on the weekly initial claims report is very misleading. The headline number is the SA number, and the seasonal adjustment gets a bit funky around this time of year. NSA claims were still rising. But what really has an impact is the ever-rising continuing claims, which seem to be indicating that people are getting off unemployment at a much lower rate than even this summer. It does not look good at all. Even using NSA iniitial claims, the continuing claims are rising way too fast, indicating a sharply slowing job market. The level of insured unemployment seems to point to about a 5.2% unemployment rate in January. Another interesting piece of data is that the overall employment level rose much less in the last few months than in recent years, also indicating a sharp slowing in the job market.
Philly Fed. The decline here gave the markets the twitch. Calculated Risk has a great post up about it. Nice graph.
CPI/PPI. I will try to get a post up about this next week, but the bottom line is that producer prices are rising at a much faster rate than CPI, indicating recessionary types of pressures at the retail and wholesale level. Therefore, the Fed has little incentive not to cut rates. The anti-inflationary pressures are already evident. Jobs, tax receipts and other data show that the Fed should be more concerned about collapsing growth along with a decline in profits. The rise in base prices is really evident only for must-have items, and central banks cannot control those types of price increases with monetary policy very well.
My guess is that the Fed will cut 75 bps. They are running out of time to make a real difference. If they do 50 they'll have to come back and do another 50 very quickly, and the market wouldn't be shocked by 75.
Collapsing second liens are the driving force for the collapse in home financing, which has produced the collapse in home sales, which is producing the collapse in construction and in home prices. The Fed can alter the likely outcome for marginal second liens by cutting rates sharply. This will allow the hapless servicers more room to knock rates down to a workable level to avoid defaults. Some of the purchase seconds are IO varying on prime. The other extremely direct effect this has is on HELOCs. A big majority of these are variable based on WSJ prime, which is generally 3% (300 bps) above bank prime. Therefore the Fed would be directly injecting purchasing power into the economy by cutting, and since the main driving force in the economy is the decline of consumer purchasing power, it should take this opportunity.
PS: This has an antic humor to it. An individual appraiser is suing Washington Mutual, basically alleging that WaMu did to her exactly what NY's lawsuit alleges WaMu did. I'm wondering to myself whether Countrywide's fake but accurate docs and its 300 PA bankruptcy cases or WaMu's position is harder to defend. Where is Johnny Cochran when the banks need him?
Tuesday, January 15, 2008
Retail Sales - Where $$ Went
|Table 1B Dec + Nov
|Total Retail & Food
|Autos & Parts
|Auto Dealer Only
|Food & Beverage Stores **
|Grocery Stores Only
|Health&Personal Care Stores
|Food Svcs & Bars **
|** Gas & Food Categories
|Gas & Food % of Total
The above figures come from the Table 1B of the Advance Retail Sales report. The problem is that food and gas are eating up more income. The relative trend sales for other categories were achieved with massive sales, so retail profits are suffering.
For what it's worth, Daily Treasury statements show fiscal year to date 2007 WIET (withheld income & employment taxes) and fiscal year to date 2008 WIET as of Jan 11th in both years to be 491,638 and 523,797 respectively, for an increase of 6.5%. Given inflation in other categories (and deflation in SS), this matches well with the trend overall increase. However, the YoY trends in employment tax receipts are falling, so the expectations for retailers in 2008 are somewhat grim.
Jan to date:Note that the years listed above are fiscal years. These figures show a pretty rapid drop in the rate of YoY increase. This summer YoY trend was running around 7% YoY increase. If I remember correctly in the spring it was somewhere around 8%?
2008: 378954 +5.10%
WIET lags. FUT (federal unemployment tax) leads. FUT is sharply negative YoY so the expectation is that WIET will continue trend down in a YoY comparison. You can find Treasury Daily Statements here.
The fact that FUT is so negative YoY indicates that the real number of jobs is probably declining.
I bring the Treasury data up because someone sent me a very delusional recent piece of commentary from some bank financial analysts who should, quite frankly, have known better. They were basically claiming the opposite of what the data actually shows.
What I'm doing, if anyone cares, is trying to figure out the relative strength of the housing and inflation inputs to the general economy. Both are, at this point, negative inputs. However the forecast for housing really depends on the general economic forecast. Housing will not improve this year at all, but the question is how much it will degrade.
This is a chicken and egg problem, and the reason for the periods of silence on this blog is that I am crunching numbers like a fiend possessed. One thing I am sure of - the federal employment numbers, and hence income, and hence GDP for the last six months will be substantially revised downwards. But that process won't be finished until 2009-2010!
People (even analysts who work for banks) mostly do not understand how unreliable much of the economic data can be in trend turns. There are a lot of extrapolations and interpolations involved.
Calculated Risk, however, does understand the limits of current data. The newsletter only costs $60 annually, and is a good buy. I hope he and Tanta expand it.
Sunday, January 13, 2008
Free Societies Are Offensive Societies
Since anyone with a modicum of life experience realizes that government bureaucrats quickly develop the thinnest of skins, it's obvious that freedom of speech cannot be subjected to tests devised by the tender sensibilities of government bureaucrats if speech is to remain free.But in Canada, it is.
Ezra Levant published the Danish cartoons of Muhammed that caused the riots across numerous Muslim countries in his magazine, and now he is being brought before the Alberta Human Rights Commission for it.
This post has segments of video from the hearing itself published. I urge everyone to watch them. Start with the last one. He had me cheering. "It is disgusting to me that I would have to explain my reasoning to the government." "I do not seek to convince you, because to do so would grant you moral authority." He says that he has and will talk directly to the radical Muslims, because he knows he is a free man, but he will not argue to the government. "I don't grant you at all the right to sit in judgment of whether or not I am reasonable."
Here is a man for our times. In the second video Ezra points out with considerable vigor that what is causing animus against Muslims are actions such as the one brought against him here. And he's right. "The last house of worship torched in Edmonton was my synagogue. And, you know, it's not these cartoons that create hatred. It's radical Muslims who blow things up, who torch my synagogue, who file nuisance suits. They're the ones that make people hate Muslims." Then he points out that the radical Muslims are the ones creating the problem. "Everyone came to Canada for our freedoms and to have a better life. ... When these radicals try to import their values ... that's what makes people hate Muslims."
The individual who brought the complaint is Syed Soharwardy who works for IBM and is an Imam and a relatively prominent figure in Canadian Muslim circles. The scan of the complaint is here, published by Ezra Levant. The complaint includes these sentence "Publishing T(sic?) cartoons in the Western Standards (sic) is, in fact, spreading hate against me. I am openly the follower and related to the Prophet Muhummed (peace be upon him). Western Standards (sic) to have published (sic?) cartoons depicting Prophet Muhammed as terrorist (sic). It means he had defamed me and my family because we follow and related (sic) to Prophet Muhammed (peace be upon him)."
Good luck to Mr. Levant. If he were prepared to concede the authority of the Human Rights Commission, he would have plenty of complaint fodder against Mr. Soharwardy at hand. Here, for example
A Canadian instrumental in designing the Human Rights Commissions has protested against their misuse against free speech. Here Marvin Katz argues the other side. One of the ironies of this whole situation is that many Jewish groups in Canada originally lobbied for the passage of laws against slandering peoples, for obvious historic reasons.
The reality, however, is that such a complaint forces the person accused to spend money and time defending his- or herself. This can be used as a means of intimidation and coercion. Coercion and intimidation is exactly Mr. Soharwardy's aim. He tried to get Mr. Levant arrested by contacting the police, and his demands are cited here:
Syed Soharwardy of the Islamic Supreme Council of Canada said publishers of the cartoons should apologize and added that they are abusing freedom of the press.Not likely.
"They have to apologize in the newspaper, and they have to condemn their action, and they have to come to our centre and apologize to our congregation, too," he said.
Friday, January 11, 2008
Signs Of The Times
Update: Canada loses 18,700 jobs in December. Over 2007 in total Canada gained about 370,000 jobs.
Canadian premiers will press Prime Minister Stephen Harper today for more federal government assistance as a weakening U.S. economy and strong Canadian dollar hurt regional growth.Georgia, USA:
The meeting will seek to build on Harper's announcement yesterday of a C$1 billion ($980 million) aid package for ``single-industry'' towns facing job losses. The money, to be placed in a trust fund, will help communities shift workers into other industries.
Harper's ability to give the provinces more aid may be limited by a decline in tax revenue as the economy slows and growth in the U.S., Canada's biggest trading partner, erodes faster. In the five U.S. recessions going back to 1973, Canada's gross domestic product also contracted for at least one quarter.
For the fourth consecutive day, people waited in long lines Thursday for a shot at a job at a new Wal-Mart in DeKalb County, pushing the total number of applicants beyond 10,000.Ouch. That smarts. Hat tip to Lance, who sent that one to me. I think the veil of complacency is about to be punctured.
Beginning Monday, after virtually no advertising or any signs, the throngs of hopeful applicants continued to pour into a church converted into a job processing center — all vying for only 350 to 400 available jobs, according to Wal-Mart officials.
Exhaustion Has Set In
In the meantime, Calculated Risk and this little tidbit about Tiffany's:
Total sales from Nov. 1 to Dec. 31 rose 8 percent, Tiffany said today in a statement.Eventually, it turns out that if the peons don't eat their Lordships find their profits decreasing as a result. They seem to be right on the curve. If anyone's interested, comparing corporate income tax receipts YoY for rolling two month periods since last April will give you a very accurate picture about what the economy's really doing. You can get the Treasury daily statements here. For year-ago data use the sidebar link to the DTS archive.
Total holiday sales rose 15 percent in 2006.
Sales at U.S. stores open at least a year declined 5 percent in December after gaining 7 percent in November, spokesman Mark Aaron said on the conference call.
More about Countrywide's Pennsylvania Pickle in this article.
Thursday, January 10, 2008
Employment And Retail
The SA and NSA insured unemployment rates are now both .2% over last year's numbers. The four-week moving average this week is 341,000, which is not statistically different than the previous. The revisions each week are now upwards, which is a further indicator of a negative trend.
These are the states with increases of more than 1,000 in initial claims for the week ending 12/29:
|Layoffs in the automobile, transportation, construction, service, and manufacturing industries.
|Layoffs in the manufacturing industry.
|Layoffs in the construction, service, and transportation industries.
|Layoffs in the construction, lumber/wood, rubber/plastics, transportation equipment, textile, electrical equipment, and electronic equipment industries.
|Layoffs in the construction and service industries.
|Layoffs in the manufacturing industry.
|Layoffs in the construction and manufacturing industries, and agriculture.
|Layoffs in the transportation, warehousing, service, public administration, and manufacturing industries.
|Layoffs in the industrial machinery, electrical equipment, transportation, and food industries.
|Layoffs in the construction, trade, service, transportation, warehousing, and manufacturing industries.
|Layoffs in the automobile industry.
Wisconsin has been having a bad time of it lately, but PA is the one I am watching the most closely. For jobs, at least, the economy is weakening across a broad spectrum of states and areas. It's kind of like grass fungus. First you get a few brown spots, and the next thing you know, the brown has taken over half your lawn.
I'll give it another few weeks, but it's getting harder and harder to believe that manufacturing employment overall will be a positive until late in 2008, which is unfortunate.
Retail sales are low enough that many of the big chains will continue to cut back on their expansion plans. Starbucks, for example, announced that it is going to slow expansion and close some stores this week. Casual dining showed weakness all last year and most of the chains are continuing that trend. So we can project with reasonable certainty that overall retail employment will be slow to negative. This will hurt commercial real estate prices, slow building, and it will also negatively impact employment.
Rising delinquencies in many auto and CC portfolios are not consistent with the belief that consumer spending will continue at the current pace. Early trends in Treasury receipts show a YoY slowing in growth of withheld income and employment taxes, and an outright drop in federal unemployment tax receipts. This is highly consistent with the other data.
So I would say that the data shows with considerable robustness that we have entered into the situation of weaknesses reinforcing weaknesses that characterizes a recession. How deep and prolonged that recession may be really depends on factors that don't originate in our economy. I'll try to collect my thoughts and organize some data and post tomorrow on that.
Wednesday, January 09, 2008
Countrywide Gets Caught At It
Memo to all: when "recreating" documents you are going to present in court to support your claim against a homeowner, make certain that you backdate addresses, etc:
The documents — three letters from Countrywide addressed to the homeowner — claimed that the borrower owed the company $4,700 because of discrepancies in escrow deductions. Countrywide’s local counsel described the letters to the court as “recreated,” raising concern from the federal bankruptcy judge overseeing the case, Thomas P. Agresti.The homeowner says she never got letters informing her of a change in escrow, and others support her claim:
But Mr. Steidl told the court he had never received the letters. Furthermore, he noticed that his address on the first Countrywide letter was not the location of his office at the time, but an address he moved to later. Neither did the Chapter 13 trustee’s office have any record of receiving the letters, court records show.And when cornered, Countrywide said it "recreated" the letters.
Ms. Hill’s matter is one of 300 bankruptcy cases involving Countrywide that have come under scrutiny by Ms. Winnecour, the Chapter 13 trustee in Pittsburgh. On Oct. 9, she asked the court to sanction Countrywide, contending that the company had lost or destroyed more than $500,000 in checks paid by homeowners in bankruptcy from December 2005 to April 2007.You've got to read this entire story. The judge sounds truly astounded. I'm not.
This, by the way, is the best argument anyone could possibly make for judicial foreclosures in which a court action must be filed. Pennsylvania has some of the most rigorous laws in this regard. Is it a coincidence that this is coming up in Pennsylvania?
Hat tip Dr. Strangemoney over at Calculated Risk
Tuesday, January 08, 2008
AT&T Inc., the biggest U.S. phone company, faces ``softness'' in its consumer business because of slowing economic growth, Chief Executive Officer Randall Stephenson said.This caused the shareholders great suffering; the stock has dropped over 4% today. Perhaps it was the comment that management hoped for increased sales to small businesses that did it.
The shares dropped the most in more than five years after Stephenson said AT&T is disconnecting more home-phone and high- speed Internet customers for failing to pay their bills.
Consumer credit G.19 for November was released today. As of November, revolving credit had already increased more than 41 billion from the ending point of 2006. Revolving credit is one area in which you can really see the effect of the housing bust. During the boom revolving credit didn't grow much because everyone was cashing out. Here's how it looks so far (I am using NSA numbers):
2002-2003 +22.7For several years the Nov/Dec increase has always been an NSA 20 billion plus, so I am expecting the 2006-2007 total change to reach at least 58 billion. In 2004, the Nov/Dec increase in revolving credit was more than 30 billion. It is not that consumers are charging more on credit cards that is making the revolving credit total increase faster; it is that they are less able to pay the balance off through refis.
2005-2006 +52.3 (note that 2006 started the initial problems with subprime)
2006-2007 (Nov) +40.7
When consumers get the Christmas CC bills I don't think AT&T's payments are going to start coming in any faster!