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Monday, May 31, 2010

Remembering Our Dead Soldiers

And grimly wondering how many more there might be in years to come. The news does not look good, and surely now is the very last time when we can afford to forget the cost of our current relative security.

Saturday, May 29, 2010

Medicine - When Push Comes To Shove

The alternative title for this post would be "Why You Really Don't Want To Go Greek".

Novo Nordisk is going to stop supplying most diabetes meds to Greece:
Novo Nordisk, a Danish company, objects to a government decree ordering a 25% price cut in all medicines.
A spokesman for the Danish pharmaceutical company said it was withdrawing the product from the Greek market because the price cut would force its business in Greece to run at a loss.

The company was also concerned that the compulsory 25% reduction would have a knock-on effect because other countries use Greece as a key reference point for setting drug prices.
There is much outraged rhetoric talking about brutal capitalists due to this move. Other companies make glucagon, but I guess they were charging more, so Novo Nordisk was the only supplier for Greece according to this forum. So now Novo Nordisk is the bad guy, and some Greek diabetics may be in great difficulties:
The Greek diabetes association was more robust, describing the Danes' actions as "brutal blackmail" and "a violation of corporate social responsibility".
No one ever explains how those brutally blackmailing corporate irresponsibles are supposed to keep producing medications without the cost of production being paid.

Basically, the Greeks are telling everyone else to pay for their medications, but does anyone think that all these other countries with socialized medical buying cooperatives or price-setting schemes are going to pay more so that Greeks can pay less? No, so what it's really down to is that this company should charge Americans more (since we don't have that system), so that the Greeks can get their medicine for what they want to pay. Of course that isn't going to work long term, because other companies make the medicine, and they aren't selling to Greece, so they could undersell Novo Nordisk.

To understand why diabetics are so worried:
Glucagon is another hormone secreted by the pancreas. It is involved in fat metabolism and raising low blood sugar, so it works in tandem with insulin (which lowers blood sugar). Type I diabetics, particularly children, may need this to avoid low-blood sugar comas or correct one. If your pancreas is so impaired that it doesn't produce insulin, it probably can't do the glucagon either:
An injectable form of glucagon is vital first aid in cases of severe hypoglycemia when the victim is unconscious or for other reasons cannot take glucose orally. The dose for an adult is typically 1 milligram, and the glucagon is given by intramuscular, intravenous or subcutaneous injection, and quickly raises blood glucose levels. Glucagon can also be administered intravenously at 0.25 - 0.5 unit.
Is Greece really going to save money on this move? Probably not, good blood sugar control for diabetics lowers net treatment costs, and the rescue injectable can and will prevent many very costly hospital stays. Use of glucagon can prevent brain and organ damage that might be irreversible if one waited for an emergency medical unit to arrive. Also, it can prevent death. Since it is much harder to control blood sugar in children, many parents of diabetic children walk around with this stuff.

(My younger brother had a friend who had juvenile diabetes. He never had good control, and he died in his twenties. The better products and medications we have now, although expensive, save many, many lives.)

Anyway, this is the type of thing that the health care reform bill in the US basically did. Because it capped medicare expenditure increases with a formula relating to the productivity of the economy, but that formula blithely ignored the fact that our population on Medicare is due to rise drastically as a proportion of the economy. So a lot of treatments will have to be cut out to keep to the formula, which means we are planning to cut Medicare coverage dramatically.

I looked various stuff up in some journals, and I already know that one medication that the Chief takes will probably not be covered when the cuts begin to be instituted. We'll pay for it, although it is expensive. But many older people would not be able to pay for it.

In the US, state Medicaid and other aid programs have also begun reducing payments for drugs, and some pharmacies are refusing to take new patients covered by these programs because they can't afford it.

Another move in multiple states is aimed at requiring doctors to take Medicare/Medicaid patients as a condition of getting or keeping their medical licenses. Needless to say, there will be an acute doctor shortage in a few years in such states.

When push comes to shove, you have to cover the economic costs of making a service or product available to keep that service or product available.

BTW, the Massachusetts "universal" coverage program is running into a wall. Rate increases requested by companies who provide the subsidized insurance coverage were refused this year. The companies went to court arguing that they would run up losses and couldn't afford the rates the state regulator wanted. The court refused an injunction in their favor. In the first quarter, they ran up some hefty losses.

So the handwriting is already on the wall, and unfortunately when reality is avoided, the most vulnerable pay the price.

Friday, May 28, 2010

Heh, Reality Chomps Yet Again

Growth in personal consumption expenditures drove most of the GDP growth last quarter. But the problem was that PCE was increasing while personal incomes were still falling.

So, today's s
personal income and outlays report covers April, and Real and Current PCE grew at 0.0%. This will be revised next month. April was rough on the piece of the retail survey that includes grocery stores, but May has been much worse. So I do not think PCE will come in very well for this month.

That will leave us with a much lower proportion of growth in second quarter GDP, especially since inventory replenishment is about over, whereas in the first quarter it was still a decent growth factor.

One red flag that should have alerted everyone to this in the Q1 GDP (second revision text or pdf) was the percentage growth in PCE that was in durables. On a real basis, motor vehicle spending didn't even grow, and again, on a real basis, growth in non-durable goods did not grow. But at the same time, spending was outrunning incomes.

If you look at H.8 (go down to deposits and look at the Other Deposits) you can just see what happened. People got their tax refunds and spent them. In April, growth in Other Deposits ticked back up, which is good considering that a lot of people who owe on their taxes are writing out checks.

From here on in, economic growth is tied to growth in net exports and growth in real personal income. According to tax receipts, there has been a change and the job market and self-employment market is slowly resuming.

The difference between this recession and the previous three is that we are going to get very little growth from consumer lending on net, whereas in the others, once jobs improved we got quite a big bounce. The PCE bounce we have been seeing is from restored confidence - people that had jobs and savings who felt that their own futures were more stable and so resumed spending. But the proportion of the population with steady incomes and significant liquid savings is less than 50%, so it will take quite some time for savings to rebuild and hefty spending growth to resume.

I still maintain that the economy is growing, but it is doing so in a very deflationary way - consumer prices are still slowly sliding down the hill in most categories, and real income growth is concentrated in deploying marginal labor, which is basically the depression emergence pattern.

PS: Trend growth REALLY IS under 2%.

PPS: Q1 bank delinquency and charge-off rates are out. I linked to NSA rates because when you are off the charts like this the seasonal adjustment can be terribly misleading. If you want the SA rates, the page is here.

Residential delinquencies rose to 11.36%, annualized. The heart flutters, the jaw drops, I cringe in awe. Commercial (mortgage) delinquencies rose to 9.10%. Total loans and leases delinquencies rose only marginally from 7.43% to 7.49%. Credit card delinquencies are way down, but that's because a lot of it has been already written off. Charge-off rates dropped significantly, but it appears likely that they will rebound from delinquencies. This is the second wave - the first wave was bad credit, the second is bad credit compounded by income factors. Charge-offs for property loans usually rise for years after a recession ends.

Maybe I should stop reading financial reports and read Georgette Heyer novels or technical books for a while. This is making me nauseous. I really don't think slinging down the Prozac is going to help me any.

Thursday, May 27, 2010

Scrubbing The Woodwork Again

Everyone has their quirks, and I have known other women who alleviate tension by scrubbing. I suppose it's a desperate attempt to tidy up what cannot be tidied up.

What drove me to the 409 and that scrub bucket this time was April's FHA summary. You can get them all at this page. I have a strict reading schedule, and I am almost two weeks behind because I was having problems with my eyes recently.

I suppose one has to be in the business to comprehend just how ugly the FHA situation is, but I'm sure that most of you can grasp that an 8.5% serious delinquency (90 days +) is grim. And perhaps you too would enjoy the dark humor (go to the bottom of page 5 for April) involved in reading that their Oct 09 projection for fiscal 2010 was total claims of 213,000, just slightly higher than their 09 actual total of 207,957. As of April, FYTD actual claims are 153,540. compared to 09's FYTD of 110,085.

Since current serious delinquencies as of April are 527,504, compared to last year's April total of 293,275, let's say we ought to be looking at more like 340,000 claims. I guess last October they were still in an extreme fervor of Hope and Optimism. One feels like suggesting that they go ask Alice what the White Queen said:

Anyone who knows how FHA loans were being written last year can just guess where this is going. But if you want some data, go to page three and look at the April 2010/April 2009 stats for underwriting. Last year nearly 28% of FHA endorsements were manual underwriting (non-AUS), and that's where the really high Debt-To-Income ratios are. This year, less than 10%. So I would say that there is a hefty crop of last year's loans which will fail over the next few years.

And consider the consequences. The private mortgage market has been shot down. FHA claimed to Congress that it could recoup, and it recently raised its upfront fee. But clearly it needs to raise its monthly insurance charge. So basically we just did more of the same, didn't we? We built up a giant mess that future FHA borrowers will have to cover through no fault of their own, which will tend to disrupt the housing market.

And of course, with tighter standards (and broker/bank threats to put the loans back), the number of new loans is falling. In April 2009 there were 162,351 loans insured; this April there were 126,316 loans insured. But even cuter, last year's max claims for the month were 3.1 billion against this April's 1.4 billion - so the loans were much bigger on average in 2009. Shudder. Those jumbos. Those jumbos. Aiiiieeeee.

With regard to the last post:
A) From your comments it would appear that the sense of the average citizen stacks up very well against the sense of our government in the grips of Hope. After reading April's FHA report, I think even JFK would agree that sometimes we need to include Hope in the list of things we should fear.

B) To those who are so worried about social cohesion and justice, this sort of thing is where you should look. This is where the big waste is.

C) I want to explain some things about taxation in general, but the real sense of it lies in the economic concept of pricing, which I wanted to cover in a series of posts about money. I want to follow up on your excellent comments, but I am trying to figure out how to do so by covering the concepts I need to reference. As briefly as possible. Unfortunately, brevity is not my strength.

But first, I need to move on to Fannie data, which will probably have me building an ark and herding the borrowers in two by two. I'm not looking forward to this at all.

PS: Very worthwhile links:
Carl at No Oil For Pacifists writes about state laws that try to control grass-roots lobbying. They ought to be unconstitutional, but as a wild guess, that will depend on the composition of the particular court which hears the next case. Because in effect, this is the same logic controlling McCain-Feingold. Also, I expect further such laws from DC as a result of the federal politicians horror and disgust at the lessening benefit of incumbency.

Mark at Illusions of Prosperity wrote an excellent post about "black swans". The current tendency amongst the chattering class is to describe everything we ought to expect as a black swan. Mark points out the fallacy.

Shrinkwrapped noticed Mark's post and generalized about our current tendency to describe all events that are predictable-but-nasty as wildly unexpected. And I think he is right; to some extent our public culture has substituted what-we-want-reality-to-be for what-reality-really-is. The comments at both blogs are usually really good, but the one I thought the best was Gloria's at SW's:
Black Swan events would become more common if you live within an ideology. Those aspects of reality that are outside of the ideology's parameters would go unnoticed. They would go unnoticed until they became so strong/prevalent that even people thinking within the ideology would be forced to recognize their existence.
That captures it - people are describing predictable events as unpredictable because we have created an ideology that is largely based on ignoring things we do not want to see.

Tuesday, May 25, 2010

Who 'd 'A Thunk?

WTI Cushing Spot below $64. Dow below 10,000. Euro below $1.23.

Reality returns. Some of this is Korea. Some is the Spanish banking mess. Some of it is due to the German talk about banning all naked shorts.
For a nation that is pretty comfortable with nude beaches, they've all of a sudden gotten very censorious about fully clothed trading.

Most of it is just a generalized reconnection with reality; ECB can only buy so many Euros and Eurobonds.

In the US, the news that personal incomes are becoming more and more dependent on government transfers is probably inducing some nausea. There are two major takeaways from the data in that article:
Private wages. A record-low 41.9% of the nation's personal income came from private wages and salaries in the first quarter, down from 44.6% when the recession began in December 2007.
An additional 9.8% of personal income was paid as wages to government employees.
This is a long-term trend because the percentage of retired people is rising as the population rapidly ages. The recession induced a sharp drop in private-sector jobs and wages, which is a mid-term effect. There is a very short-term periodic effect related to Census jobs.

The part of this that can be corrected is that private sector wages can grow if we are careful about adopting policies that allow private industry to be competitive. The part that is utterly insane is that government wages amounted to 9.8% of the total share of income. That's lethal. I was writing about this years ago, and this part of the trend is accelerating. According to BLS:
Total Employment: 140 million
Total Private Jobs:..118.53 million (84.7%)
Total Gov Jobs:.......21.47 million. (15.3%)
Ratio Private/Gov Emp: 5.5

Private Emp/Total PI:: 41.9%
Gov Emp/Total PI:..... 09.8%
Ratio Private/Gov PI:.. 4.2
To assess just how lethal this is, about 50% (51.7%) of personal income (PI) derives from employment. The rest is investment income, capital gains on sales of assets (approximately 30%) or government benefits (17.9%). Assume that the total tax burden is almost all borne by wage earners and private investment income. Government taxation related to government transfer payments is very low!

So now we have 70% of personal income that needs at least to pay for social benefits and government employment for long term stability, which in total costs 27.7% (and will continue to grow as retirement costs escalate). So that means a net tax burden of about 40-45% on personal income in total (it will rise even with an improving economy as retirements rise). Well, does anyone really think the economy can grow with 40% capital gains rates? No way.

But most wage earners in this country have very moderate incomes, and asking them to pay 50% of their wages in taxes pretty much guarantees a very poor standard of living plus that they'll not be able to save much, so they won't be generating much in the form of investment income.

And this is why you have a Tea Party. The entire edifice is unsustainable. Because the private wage earners have to pay about 70% of the government wages and benefits, plus most of the costs of social transfers. So government wages are going to decline in comparison to private wages. The question is whether we'll have to go Greek before that happens, or whether governments will adjust first.

Anyway, this is why I am predicting that net tax rates will rise on previously sheltered investment income such as No AMT bonds and IRA accounts. That is the only way to balance the books even with a much more fiscally conservative government.

As for the April trend in wages and salaries:
April 2007
HI: 14,250, Self: 5,410, Total: 19,660

April 2008
HI: 14,805, Self: 5,784, Total: 20,589

April 2009
HI: 14,440, Self: 5,814, Total: 20,254

April 2010
HI: 14,067, Self: 5,579, Total: 19,646

1 Year YoY Change:
HI: -2.6%, Self: -4%, Total: -3%

2 Year YoY:
HI: -5%, Self: -3.5%, Total: -4.5%

3 year YoY:
HI: -1.3%, Self: +3.1%, Total: -0-
Yup. And that includes Census employment. You have to go back three years to break even on total, but self-employment income has risen from three years ago. It's always the small/self business employment that leads us out. They are dragging a very heavy load this time.

So what's the Social Security Trend?
Social Security Disbursements:
April: 66,775 +11.6%
FYTD: 437,658 +7.7%

April: 59,854 +9.3%
FYTD: 406,364 +7.8%

April: 54,759 +12.1%
FYTD: 376,893 +6.4%

April: 48,849
YTD: 354,329
So the April total of wages, salaries and self-employment income is flat from three years ago, but Social Security outlays rose 36%! Does anyone else think this is why the Social Security and Medicare Trustees reports have been delayed by this administration? Yes, Social Security is running a big deficit, and it will for several years even with healthy growth. Then the real ugly hits in 2015-2016, at which we would have to start cutting benefits.

From Social Security Trustees report (2009) page link:
Contributions plus tax on benefits: = 689 billion
Total Outlays: = 625.1 billion

Contributions were 672.1 in 2008. Wages have fallen but the cap has
risen, so make that - 3.5%; approximately 649 billion in 2010.

The two year rise in benefits by April is 22%, by fiscal year to date
is 16%. Call it 18%, or 2010 outlays of about 737 billion. Taxes on
on Social Security will also have risen; we'll call them 22 billion.

This gives us a 2010 estimate of income/outlays:
Contributions plus tax on benefits: 671 billion
Total Outlays---------------------: 737 billion


We are so in the red. We need to raise wages to compensate. To generate wages we need jobs. Raising taxes on corporations will cut jobs. Ergo, we need to cut welfare for the non-poor AND raise personal taxes PLUS cut government wages and benefits.

I'd bite the bullet and cut corporate taxes 5% this year and 5% next year and then leave them there for 10 years, while raising the Medicare tax 1%. I wouldn't fool with the Social Security tax, but I would make Social Security benefits taxable (for purpose of income tax) the same as wages, phasing that in over three years.

I'd freeze federal government salaries for three years, and freeze the government share of benefits for three years, which would inflict a hefty pay cut on federal government salaries. Then I'd pass a statute capping the increase on government compensation packages to the previous year's GDP gain, with a drawback for negative GDP years. So if total GDP grew three percent in one year, but shrank 1.5% the prior year, the most government workers could get would be the two year increase in GDP, or about 1.5%.

I'd phase out all government student loan programs over 5 years. This would inflict a fearful shock on universities, but they need one. By the magical workings of the market, tuitions would fall sharply.

I'd place an upper limit on net annual tax-sheltered incomes of 10K per person, 20K per couple. That would apply to all investment income, including interest, dividends, capital gains, and revenues from currently tax-free bonds.

In short, I would beat everyone up in the attempt to prevent ourselves from going Greek.

Monday, May 24, 2010

Economically Speaking

Thomas Friedman really is a contemptible son of bitch, isn't he? Just a little closet fascist, right on schedule, searching for his Mussolini or Mao:
MR. FRIEDMAN: Well, David, it's been decimated. It's been decimated by everything from the gerrymandering of political districts to cable television to an Internet where I can create a digital lynch mob against you from the left or right if I don't like where you're going, to the fact that money and politics is so out of control--really our Congress is a forum for legalized bribery. You know, that's really what, what it's come down to. So I don't--I, I--I'm worried about this, it's why I have fantasized--don't get me wrong--but that what if we could just be China for a day? I mean, just, just, just one day. You know, I mean, where we could actually, you know, authorize the right solutions, and I do think there is a sense of that, on, on everything from the economy to environment. I don't want to be China for a second, OK, I want my democracy to work with the same authority, focus and stick-to-itiveness. But right now we have a system that can only produce suboptimal solutions.
China for a day is his fantasy?

Believe me, being China for a day merely gets you mass murder, because that's the only way to escape our "suboptimal solutions" - i.e. Thomas Friedman paying a lot more in taxes to support people that he doesn't like.

Good God Almighty, the day I start fantasizing about "China for a day" I'll report to the SuperDoc for institutionalization on the grounds that I am criminally insane and likely to do damage. I think I'd also yank my own voting privileges.

Authority, focus and stick-to-itiveness:
Yeah, China's running a surplus. But how are they doing it? They still have tens of thousands of people in labor brigades out in Mongolia. Over ten percent of their own citizens are essentially illegals in their own land. They don't have residence permits to be in the districts and cities where the jobs are, so they basically have no legal rights. They get no unemployment. Their kids aren't allowed to enroll in the local school systems. It is way, way better to be an illegal immigrant in the US than to be most citizens in China.

They have massive pollution, and the problem keeps getting worse. Most of their citizens don't have health insurance or jobless benefits, the party officials (and often their families) form a separate favored class that often behaves as if it is above the law, and bribery and corruption are rampant. Reforms to impose a minimum wage and the requirement to actually pay the workers were initiated and then shelved as a result of the 2008 crash.

China is a combination of hyper-capitalism and feudalism; the robber barons abound. This is the path the west rejected. As far as I can tell, many of its local governments are about broke. Efforts to get the truly rich or well-off to pay more (such as a property tax) aren't succeeding.

As for civil rights, China is a country so afraid of its own citizens that it controls the internet and has blocked texting services on mobile phones. The papers are rigidly controlled. Basically all forms of mass communication are controlled. All forms of religion are controlled by the state. Discussion (not dissent) is tolerated only at the higher government levels.

When you live in a free society with open access to information, you have a moral responsibility to use it before you fantasize about such things. And if you don't use that access, you are a contemptible son of a bitch. Further, China's current growth is really shaky, because it's based on a bubble and huge government spending. It's the last gasp of its current system.

The problem for China is that it could sustain very high growth only for the period in which industrialization was moving from other countries to China. Once that growth reached a natural decline, its growth naturally declined. Because China is such a totalitarian state and its real religion is only success (as measured in money) China will have to resort to internal liberalization to create further growth at rates which will continue to improve the lot of its citizens, who have come to expect that life will improve for them. And China hasn't managed to pull that off yet.

As the Shrink writes, reality is breaking out all over. One of the ugliest realities we have to confront is that many in our own country who think they believe in the common good only believe in their own good, and are pretty much prepared to throw anyone to the wolves to maintain their own positions.

The absolutely worst thing about Friedman's fantasy (which is real - this is right in line with his general tack) is that the only way you can improve things by being China for a day is to kill the old people. And that's really what Friedman's recommending - he just wants someone else to take responsibility for it. Then he'll be all horrified and pontificate about it.

Update: I am admonished in comments that Friedman's name (PBUH) may not be posted without a picture of his house so that we can understand why the peasants so disgust him - and of course, there is only one place to go for such useful resources:

But at least he is a uniter and not a divider - the left and right think he's a jerk. But who can blame the man for wanting this to be China - he wouldn't have to pay the property taxes on that place!!

Addendum: It turns out that Ann Althouse watched the show, and she had some comments:
A love of autocracy often lurks beneath the liberal veneer. There's this idea that the right answers are known and the people are just too deluded and distorted to see what they are and to vote for them. And Friedman openly deplores the internet, which decimates moderation because there are people like me who who persecute elite truthbearers like him.
And The Anchoress has a few pithy comments as well. Also very funny videos:
Every murderous totalitarian government of the 20th century began with some insulated group of faux-intellectuals congratulating each other on how smart they are, and fantasizing about how, if they could just install a dictatorship-for-a-day, they could right all the wrongs in the world.

It is the ultimate fantasy of the narcissist. And we’ve got whole generations of them, in control of our media and our government, all intent on “remaking America.”

Friday, May 21, 2010

Always Late

For Draw Muhammed Day:

And if THIS is what you make of him, you're making him a dangerous fool:

Thursday, May 20, 2010

Beat And Starve The Ox

A very funny Bloomberg article about the private-market effect of the political BS in Europe. The politics of envy and malice amount to the economics of poverty:
Company borrowing costs jumped the most in two weeks after Germany’s short-selling ban, wiping out declines triggered by Europe’s $1 trillion aid package that was meant to halt contagion from the sovereign debt crisis.
“What investors need most of all is security and predictability, but they are getting ever less,” said Ciaran O’Hagan, a strategist at Societe Generale SA in Paris. “Instead they are vilified as sharks, wolves or locusts, while governments rack up ever higher debt and contingent liabilities.”
“One thing the markets really don’t like is political interference, and that’s what the German announcement smacked of,” said Tim Barker, head of credit research at Aviva Investors in London. “Investors are trying to come to terms with political uncertainty.”
Higher corporate borrowing costs are an economic drag.

In the meantime, France and especially Italy are quietly working on cleaning up their acts. The first steps (from the UK on ) are to cut high-level government salaries. Italy's finance minister has been trying to manage their situation very tightly, and now unions are saying that their cuts will be much higher:
The Italian government may cut the salaries of public servants by 10 percent and politicians by 15 percent, in a bid to reduce the country’s deficit.
The reports cited unnamed sources who discussed the proposals after a meeting between union officials and finance minister Giulio Tremonti.

Tremonti earlier this month said he aimed to cut the country’s budget deficit by at least 25 billion euros by the end of 2012.
They are also going to cut the federal payments to local and regional governments.

We aren't going to see any acknowledgment of this in DC, but the UK is cutting at least top-level government salaries, and there is much more to come, Spain is cutting government salaries and is reducing welfare payments, Italy is clearly going to get serious, and Sarkozy either will cut or just freeze hiring, which could reduce public payrolls very substantially and eventually might bring the unions to the table after a titular strike or two. This article gives an idea of the sweep, but Spain has also announced that they are going to drop the baby premium next year (2.5K Euros). Spain and Germany are probably going to be cutting a lot of their energy subsidies for that green sustainable stuff which they are finding to be an economic drag. The UK is still debating measures, but it is certain that they will be dismantling portions of their social support measures.

Thus, the irony is that Christie (in NJ) is now following the European model; the liberals in DC who always talk about the benefits of the European approach are sadly out of date. The Tea Bag Party are the Europeanists; DC is just gasping out its last breath in DC Disneyland.

And how crazy is DC Disneyland, fiscally speaking? They keep introducing proposals to pay for everything. Take NoFP's coverage of the "Homeowner's Defense Act":
On April 27th, the House Financial Services Committee approved the Homeowners’ Defense Act of 2009, and sent it to the House floor. The bill, H.R. 2555, would authorize the Secretary of the Treasury to guarantee debt of certain state catastrophic natural disaster insurance. In effect, see Section 202, it's a guarantee for earthquake and hurricane insurance, making the Federal government "the insurer of last resort for nearly every disaster-prone home in the country." Though the bill modestly limits (Section 202) the obligations to $5 billion for earthquakes and $20 billion for all other natural disasters, the legislation would allow the Feds to backstop (see Section 304) an "aggregate potential liability . . . sold in any single year" of up to $200 billion.

If passed, the law would be an "implicit subsidy [making] it practical for developers to build in currently wild or lightly developed coastal areas where conventional private companies won't write policies."
Follow the link for the ugly details. This could be amazingly expensive.

And then, of course, there is the growing drive for the government to assume state government pension liabilities. Snort. We can't even afford to pay Social Security, and now we are going to assume state government pension liabilities? Isn't that a lot like asking Germans to pay for Greek retirements?

Washington is insane - just barking mad. And our press is stupid, except for very few such as Samuelson:
All the mumbo jumbo about stabilizing "debt to GDP" and according special treatment to interest payments are examples of budget-speak. It's the language of "experts," employed to deaden debate and convince people that "something is being done" when little, or nothing, is being done. For example, Obama's target for 2015 would involve a deficit of about $500 billion, despite an assumed full economic recovery (unemployment: 5.1 percent). The commission is also supposed to "propose recommendations that meaningfully improve the long-run fiscal outlook, including changes to address the growth of entitlement spending," a mushy mandate. But balance the budget? There's no mention.
It's all just nonsense. That one sentence in bold summarizes so much about our current government, and that mindset encompasses most of our legislators from BOTH parties. There will have to be a sea change before we begin to address reality.

Wednesday, May 19, 2010


Sorry, I have been ill. And my eyes were inflamed, so I was pretty much off-line and incommunicado. That situation (and the Chief's) now seem under control, but this morning my wondering eyes were pretty dazzled by the spectacle of the Germans trying to restore confidence by instituting trading curbs. If they were trying to drive the Euro lower, they couldn't be doing a more efficient job of it.

What next? Will they burn down the Reichstag and announce that they found a Goldman Sachs executive fleeing the burning building, gasoline in hand? This "kill the messenger" stuff is pretty devastating to investor confidence.

The strangest part is that by the logic so helpfully laid out in the last Bundesbank report, it is wildly obvious that Greece will default. So on the one hand we have the spectacle of politicians and top regulatory officials denouncing "speculation", and on the the other hand we have the sober, thorough functionaries of the Bundesbank documenting why Greece must default, even if they never mentioned Greece. Surreal, but financial surreality is a very unpleasant thing.

Most of this really isn't speculative trading at all - it is an attempt first to cope with busted USD carry trades, and second, an attempt to cope with some inexorable financial realities in certain (not all) European countries.

I had thought the reasonable bottom for the Euro in the near-term was about $1.15 US, but now I don't know. Are the Germans panicking because they know something we don't know about banking positions? Are they panicking because they are just panicking? If they keep panicking, obviously all private investors are going to feel some collateral panic and evacuate to higher ground in the USD or yen.

In any case OPEC is probably now very worried, because they want oil around $75 USD. After oil products held in price pretty well, it appears the latest attempt at stepping up the beating schedule until morale improves (Euro-style) has knocked out the support for gas and diesel products, which of course will tend to work crude down again. There hasn't been enough supply constraint to shore up pricing when you look at pricing critically.

Of course, the German economy is probably going to be helped by this; a lower Euro makes their manufacturers much more competitive in some active markets, like China. And the Bunds are not going to be "infected", because right now Germany's deficits are nothing that would cause any banker to flinch and flee.

So alternatively, one could postulate that the Germans are doing this deliberately - but that doesn't make one want to hang out in the Reichstag or the Euro, does it?

PS: Italy and France now have to get their financial houses in order. The constant harping on current deficits kind of obscurs the reality that overall debt levels count just as much.

Tuesday, May 11, 2010

Sorry, This Day Just Got Away From Me

It was going to be busy anyway, but then last night the Chief was ill and that really threw me off my stride today.

He seems to be better, so hopefully tomorrow....

Trying to hit an encouraging note:
The recent American Academy of Neurology conference included a presentation (brief Medscape article here) showing that moderate exercise combined with computer use (or really any form of mental stimulation) cuts the incidence of moderate cognitive impairment, and this is true even if it's done late in life:
"Moderate physical exercise, such as brisk walking, biking, and swimming, may be beneficial in terms of reducing the risk of MCI, and we also know that mentally stimulating activities also reduce the risk of dementia or cognitive impairment. What our study showed is that when you combine moderate physical exercise and computer use there is an additive beneficial effect," principal investigator Yonas E. Geda, MD, MSc, a neuropsychiatrist and an associate professor of psychiatry and neurology at the Mayo Clinic in Rochester, Minnesota, told Medscape Psychiatry.

A number of studies have shown that exercise reduces the risk for Alzheimer's disease, and a recent study by Dr. Geda and colleagues published in the January 2010 issue of Archives of Neurology (2010;67:80-86) also demonstrated that any frequency of moderate exercise — which includes activities such as brisk walking, swimming, and cycling — performed in middle or late life also reduces the odds of developing MCI.
The study was done on patients 70-90 years of age. Further proof that you just don't have to sit and take it, and if you do, what you have to take might be a heck of a lot worse. Also, overeating hurts your cognitive function.

A lot of people don't know that exercise appears to have a protective effect against Alzheimer's, and even more don't know that patients with early Alzheimer's do seem to benefit from a program of mental stimulation. There is a steadily accumulating body of evidence that shows that even older persons with some sort of progressive neurological disease or brain injury (such as old stroke) do retain a lot of brain plasticity.

Neil had me laughing with his observation that if the economy was improving, it was probably because Americans just decided to go back to work. I think he is absolutely correct, and that people are struggling to adapt and find something they can do. This principle - use it or lose it - tends to show up in multiple aspects of life.

I know a lot of people must be feeling helpless as we all watch the drama. This is just to remind us all that we are seldom as truly helpless as we may believe.

PS: What happens when you have a bored engineer with too much time on his hands - innovation!

This Morning Euro At New Low

Late Sunday and yesterday all the authorities kept stressing the size of the package, writing or saying that it would intimidate "speculators". So this morning the Euro dropped below 1.27. Gold gaining, oil falling....

They can fight this, but no one goes nine rounds against reality. Reality is a big mean dude that feels no pain.

I recommend this Bloomberg opinion piece:
Here is what has scared investors (apart from the riots in Athens): Even if the IMF program were fully implemented, the Greek debt ratio is projected to rise to 150 percent of gross domestic product by 2013. Assuming an interest rate of 5 percent, Greece would pay 7.5 percent of its GDP to bondholders. With more than 80 percent of creditors being foreign by then, the country would transfer at least 6 percent of its GDP abroad.

No Trust

How likely would it be that Greece can generate a structural current account surplus before having to make interest payments of this magnitude? Traders saw little likelihood of this and expected an eventual debt restructuring. And because they didn’t trust the package that the IMF and euro- area governments have offered Greece, they didn’t trust other euro-member countries in fiscal distress to find a viable solution. This, and not a conspiracy of speculators, was the brew that generated contagion.
The authors are European economists.

Or this article:
Germany and France are among top- rated euro-area states that may compromise their AAA grades by standing behind the debts of weaker members with their 750 billion-euro ($955 billion) stabilization fund.

The package is “making debt profiles deteriorate, potentially damaging the ratings of core sovereigns,” said Stefan Kolek, a strategist at UniCredit SpA in Munich. “It’s a kind of Ponzi game at the highest level.”
I think I would describe it as the last possible Ponzi; after this, where could they possibly go?

Monday, May 10, 2010

A Crumble

Looking at Treasuries, and the yen, the Euro and all that jazz, it is clear that no amount of rhetoric is going to convince private parties that those bonds are going to be paid in full.

The Euro gave up most of its gains.

The problem here is that the ECB needs to tell everyone exactly what it is going to do and how much before confidence can be restored (if it can be restored). And that would have to include something about how the bonds will be written down. Otherwise, the losses are still there, and if the ECB plans to overwhelm the losses with money, it is certainly an inflationary event. If the losses are going to be quietly filtered through to other countries, it will drive up their bond rates. If no one knows what's really going to be done, I guess we all just sit in a state of free-floating anxiety and wariness.

The worst part about this is that every Euro authority is hammering the line that this is speculation, when a blind, deal and mute carpenter can tell that it isn't. The worries over repayment are well-founded.

I was going to translate this Spiegel article for you, because the English articles are not nearly so frank. But I have got a bad case of the jitters - this post is really just an anxiety dump.

Some of my anxiety is very well-founded. For instance, what happens to Italy? It's not like Italy can really stand much higher rates, but Italy also has a very high public debt. To control its debt levels, Italy has to grow faster than the interest rates it pays (because its public debt is higher than its GDP). That does not appear possible for the next few years, which means its debt levels will keep growing in relation to GDP, and if Italy's bonds are really a bad investment, then what was this exercise for? And G_d forbid Italy now guarantees Greece's bad debts. Would that make anyone more willing to buy Italian bonds?

And what's the purpose of dumping debt on say, Germany and the Netherlands? Countries that have already imposed relatively austere regimens may be the only ones that can bail the Euro out, but that means they will essentially be taking higher debt margins, and their positions will be worsened.

Now, if the debt were just written down, it is true that some countries would be hit hard, but anyway Spain, Portugal and Greece will be hit hard, and obviously Italy must correct itself. France has been trying to reform anyway. But if this crisis were confronted more honestly, then perhaps the Euro would drop, but some European countries would profit from the drop (it would, for example, make Germany's manufacturers more competitive), and at least the healthier countries could continue on their paths, and hopefully generate some real growth that would help the less fiscally stable countries.

The eerie prospect of getting countries like the Netherlands and Germany loaded down with this stuff isn't really going to be reassuring, is it? The worst of it is that countries which are now stronger don't have the relatively easy options to cut social programs. Thus they don't have the range of options that France and Italy have. If they get too weighed down, their future growth will really suffer. So is the intent here to sacrifice the good to the bad?

The next part of my anxiety (which I worked out for myself over the woodpile) is that this level of delusive rhetoric is something that has always been associated with disaster in my banking experience. The path to correction always involves recognizing your bad debts and writing them down or off, recovering what you can and then putting what's left out in real assets (good loans) that will pay you. The alternative - rolling over bad debts and letting them grow - just magnifies your losses. So if Europe were a bank, right now I'd be getting my money out.

When people don't know how bad debt will be handled, they account for all the possibilities, which almost inevitably means that the effect of the bad debt is magnified.

As for the yen rise, a big hunk of the USD carry trade is busted, isn't it? However a larger split between the Euro and the yen is not good for Japanese manufacturers.

Central Bank Bond Buying Starts

This is what the whole thing is really all about:
Euro-area central banks said they are buying government bonds as part of a program to counter a sovereign debt crisis and defend their common currency.

“We confirm that we are buying today,” said a spokesman for Germany’s Bundesbank in Frankfurt. The Bank of France and Bank of Italy also said they have started purchasing government bonds. The European Central Bank, which announced the unprecedented initiative at 3:15 a.m. this morning, declined to comment.
Until the junk sovereign bonds are mostly off the banks' balance sheets everyone will still be afraid to lend to banks. They are recapitalizing the banks. Obviously, this means that no one believes that the other measures will eventually work, i.e., it seems unlikely that bond issuance for debt-loaded countries will be extremely impaired.

Tomorrow I will post on the SPV and the issues there. I had a whole bunch of links prepared for what I thought was going to be a Triumph of the Nerd post, but now the different FAS and IAS accounting standards abruptly acquire a wider significance.

I have some preliminary thoughts about the long-term impact of this. The first one is that we won't know the short-term effect until we know how much of the bonds have actually been moved off bank balance sheets.

I will reserve my long-term thoughts until tomorrow; I am going to sit and mull this over a bit and maybe scrub some toilets to ensure that I am in the properly humble spirit.

However, I will come out and say that the three-year postponement appears to be an attempt to hide the fundamental imbalance until the US is in worse shape than it now is. This whole thing is a dodge, and because it is a dodge, and because everyone seems to realize that it is a dodge, confidence in European banks won't be restored until those bad bonds are unloaded.

Poor Germany.

Germany just got handed a very large bill. List of countries by public debt (use the CIA 09) Germany was very upset about the projected 80 billion Euro in borrowings for 2010; it just probably picked up another 40 billion of long term debt. At least, but who knows what happens in three years? They could be in the bag for much more - it depends on how much debt must eventually be written off.

The April edition of the Bundesbank's monthly report (English, a mere 130 page pdf) contained a review of Germany's debt position, some of which is below:

Here is an excerpt from the report discussing the projected rise to 82% of GDP in 2013:
This figure was calculated under the assumption of both relatively strong economic growth and the implementation of steps towards consolidation, even though no measures for achieving the latter were cited. In addition, the effects of the further tax cut envisaged in the central government’s coalition agreement and the establishment of new debt relief entities for banks were not factored into the calculation. Consequently, substantial risks remain in this area.
[in other words, "We'll believe it when we see it, you dopes!"]

Bundesbank is probably suffering a collective depression this morning.

They projected a slight drop in German GDP for Q1, followed a resumption in integral, sustained growth later in 2010, followed by a gradual reduction in the state and local funding problems caused by the drop in tax receipts.

Btw, every US citizen should read the "Dynamics of Debt Growth" section of this report beginning on page 18. It's short, it's easy to comprehend, and it is quite applicable to the US. You take trend growth (in the US, now really in the 2% range at best), figure your interest margin, and then from there you can figure out what level you need to stabilize your public debt. Since trend growth in Germany is now hanging around 1%, they grimly observe that they need to be running surpluses.

Sunday, May 09, 2010

They Changed The Timing

Update: Yup, finally. Also ECB is going to buy government bonds. Almost a trillion total - Bloomberg.
Calculated Risk will probably have some good coverage. As predicted, the Fed was tapped. Fed info here:
In response to the re-emergence of strains in U.S. dollar short-term funding markets in Europe, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing the re-establishment of temporary U.S. dollar liquidity swap facilities.
This goes through January of 2011. ECB:
The Governing Council of the ECB decided to reactivate, in coordination with other central banks, the temporary liquidity swap lines with the Federal Reserve, and resume US dollar liquidity-providing operations at terms of 7 and 84 days. These operations will take the form of repurchase operations against ECB-eligible collateral and will be carried out as fixed rate tenders with full allotment. The first operation will be carried out on 11 May 2010.

From the press conference "IMF will provide at least half as much as the member states." So major IMF funding (up to 250 billion Euro according to Salgado). The major chunk - the 400 odd billion Euros - will be in a SPV (special purpose vehicle) guaranteed by the member states. Bloomberg article about ECB operations.
End update.

The EU council link now shows 19:30, which ought to be 3:30 PM EST - unless it's not Brussels time, but I think it is. If all that's in there is what has been reported, they might as well not bother.

Okay, I checked Calculated Risk and a commenter over there posted a link that claimed the German Finance Minister went to the hospital and is being replaced by the German Interior Minister. So that explains the delay.

So I guess the only question remaining is whether the ECB is going to get a credit line from the Fed and do anything? ECB here. Fed here. Me, I'm taking a nap, and it's not the financial or diplomatic flu. It's just a nap. Gotta be fresh for the morning fireworks. [Hey, and let's not leave out the IMF!]

Now showing 22:00.... No, now 23:00.... Now a statement "Exact starting time of the conference is not known."

If this is correct, 60 billion from governments, borrowing 500 billion more on the market. At a guess, the phones are ringing everywhere as they want to announce borrowings at the conference. Also, one must believe that somehow the Fed will be tapped.

Note: This article is speculating 350 billion from Europeans and 150 billion from the IMF, so the US would be anteing up some real money this time. Now we will see US grumpiness, but this would be a significant draw:
Die genaue Aufteilung der Mittel stand zunächst noch nicht fest, im Gespräch war ein Anteil von etwa 350 Milliarden Euro für die Euro-Staaten und von 150 Milliarden Euro für den IWF. Auf die Bundesregierung könnten damit Bürgschaften in Höhe von bis zu 100 Milliarden Euro zukommen.
The exact distribution of the bailout are not yet fixed, but a share of about 350 billion Euro for the Euro states and 150 billion for the IMF was under discussion. The German government might be liable for about 100 billion Euros through [bonds/guarantees].

Playstations And Xboxes And Merkels, Oh My!

Merkel has lost the upper house of the German parliament, the UK is trying to form a government after their split election (hasn't happened for a generation), the EU announced a press conference to start an hour ago, which hasn't started yet (great way to reassure markets), and our president has apparently gone flat nuts and is raving in public:
Obama ... told a class of graduating university students that education was the key to progress.

"You're coming of age in a 24/7 media environment that bombards us with all kinds of content and exposes us to all kinds of arguments, some of which don't always rank all that high on the truth meter," Obama said at Hampton University, Virginia.

"With iPods and iPads and Xboxes and PlayStations, -- none of which I know how to work -- information becomes a distraction, a diversion, a form of entertainment, rather than a tool of empowerment, rather than the means of emancipation," Obama said.
See, there lies the peril of talking about stuff you have never used, because I am almost certain that iPods are for music and Xboxes and PlayStations are for games. The news comes from other devices, like Blackberries. iPads are too new to have had any impact yet.

I think I recognize the symptoms; let's all send a post card to the White House asking our president to start smoking again for the sake of the union and his own sanity. At this stage we cannot have our president wandering around in public babbling inanities like Biden, and we cannot afford to declare him incompetent, because his successor is Biden.

I hope this is nicotine withdrawal and not the horror of realizing that his Euromodel just kinda imploded, along with Newsweek. However, it is definitely not the fault of the iPods.

Like Everybody Else

I'm waiting for the European press conference which is at 6 PM Brussels, or 12 PM US Eastern Standard.

Arab markets are open already, and aren't doing well. We're waiting for Godot. A very anxious weekend.

PS: If the ECB won't buy bonds and if the debt of some of these countries isn't going to be restructured, what good is any of this going to do?

Yeah, the richer governments can establish a fund to do it, but if the money they throw into that fund in the form of loans is going to be used to buy bonds which the private market believes will bust, then they are spreading debt across nations, which logically means that say, the German Bund goes down. And there aren't that many truly solvent European nations in the large economies. Both Italy and France have pretty high debt/GDP ratios.

You have got to believe that these will be rough elections for Merkel. The Germans are distraught, for good reason.

Update: I think this is a link that will show the conference.

Friday, May 07, 2010

Switching My US Forecast To Sustained Recovery

Although the employment report this morning is very good, it has nothing to do with my change. You can ignore the unemployment rate increase - that is a measure of an improving economy.

The reasons for my change are two: Number 1, I expect oil prices to be restrained by the abrupt emergence of European reality, and Number 2, the combined freight/small startups indicators have gone sharply positive. The combination of these two factors indicates a slow but healthy build in incomes which we have not seen for years.

Based on diesel consumption, I would have switched over about three weeks ago except for very deep worries about the impact of state and local fiscal emergencies and poor April FUT proceeds. So I wanted to see April tax receipts and make sure that they weren't weak enough to undercut the private sector activity.

The interesting thing is that the small startups appear to be almost wholly self-financed, so I don't see credit as being an impairing factor at all. Further, they are concentrated not in services but in goods/construction/remodeling. High-skilled labor is very cheap right now, especially your own when you don't have a job. But a significant number of the people who don't have a job do have high skills and some money of their own, and they are beginning to find their way.

There is still going to be a huge swing in total employment - it will jack up very significantly over the next few months and then probably start falling as the Census employment fades and the state and local cuts continue to dribble along. Nonetheless, there are business (mostly small business) opportunities out there and exploitation of those opportunities is on the upswing as people adapt.

Truthfully, the European crisis is not good for the US economy. And this is now a test of my theory that the 2008 crash was not a product of credit, but of energy and cost inflations inflicting an abrupt drop of global incomes. If I am wrong about that, my forecast here is wrong.

I now turn to Europe; about next Tuesday/Wednesday is an important inflection point there. By the end of next week I should have more on that. There are some counter-balancing trends in Europe. For example, the decline of the Euro will actually improve the performance of some foreign-currency loans.

The major risk involved in my forecast (which could certainly be wrong) is that US government action will crimp the turn, curb the income gains and knock us back into a cycle of stagnation, although in GDP it will show up as a seesaw. However I did include some tests as to energy consumption costs, and the growth survived.

A caveat: What I do is basically forecast incomes and disposable incomes. Now theoretically GDP is supposed to be a measure of national income, although it isn't. So while I do forecast something highly related to GDP, it will not correlate to GDP at any quarter, and it is more related to GDP a year to two years in the future.

The US economy is highly dynamic, which usually saves us. However if there is another sharp inflation in energy costs or a very severe Asian crisis, we could see another cycle of contraction next year. I hope India can hold out, because I think China has entered into the last phase of a bubble, in which bubble spending chews out the guts of the economy in the bubble.

Edit: See the latest rail weekly report, and note the increasing trajectory of YoY increases on (now) all types of traffic. Trucking is increasing too.

Thursday, May 06, 2010

Italian Bonds And The Dow

Lalalala. That was quite some ride. Pretty much most financial services hung up there. Bloomberg now has a statement up:
The Dow Jones Industrial Average posted its biggest intraday loss since the market crash of 1987, the euro slid to a 14-month low and yields on Greek, Spanish and Italian bonds surged on concern European leaders aren’t doing enough to stem the region’s debt crisis.
When I say "financial shock" I MEAN financial shock.

As predicted, Trichet's performance is not inspiring confidence. Article on US corporate bonds and the whole shebang:
The ECB seems more concerned about cracks to its credibility than cracks to monetary union,” said Christoph Rieger, co-head of fixed-income strategy at Commerzbank AG in Frankfurt. “This approach can be considered consistent with the ECB’s principles. But it risks that the market will still force the ECB’s hand before long.”
Possibly the ECB should not have said that it hadn't even discussed buying government bonds. That's just a thought, because who believes those Greek bonds the ECB is taking as collateral will return the full value? I can just imagine what interbank lending's going to look like in a bit.

Sooner or later, someone's got to ante up, and pretty obviously the Greeks won't be. I'm figuring -35~40% on those bonds. -10% on Italian bonds? As for Portugal, who cares? I'm going to be 49 this summer, and when I was in high Portugal was a financial basket case. Some things never change.

Anyone got info on what Italian bonds are doing? That's the one to watch. We'll leave the UK out of it for now because they are voting, and they aren't Euro anyway. Oil wasn't doing so hot this morning either; everyone's running for the door. Any door!

Because this represents a huge money loss, we can kind of bet that oil will correct downward further.

Wednesday, May 05, 2010

Up For Air

Treasury yields continued their slide today. Nice if you have 'em. The six-month yield is significantly below its 2009 starting range (the low value of the 2009 start was 28 basis points), and today we closed at 22. The one and two years are right about where they started 2009 although the one year is a bit lower.

Thankfully, there is then a big ramp up at three years. We will not start whimpering and running in circles sticking pins in the Trichet doll unless the three and fives fall out. Right now people are just parking funds, and there is a relative shortage of shorter-term T-bills which is driving prices higher and yields lower. I imagine there is a run on all sorts of debt instruments insulated from the Euro. Such a sharp relative ramp between the 2 and 3 indicates that there is indeed an event horizon here, and everyone should be aware of that fact. Otherwise people would go with the longer terms and think they would sell them.

The Spanish problem is generating some internal political action in the form of bringing the opposition and Zap together, also the merger of a couple of a bad Galician savings banks. I am sorry, I don't have any English links on that. Spain has a much lower cumulative debt load than the other PIIGS - the problem is that the RE boom is busted, and no one quite knows where they go from here. High energy costs really hurt Spain, and unfortunately their ventures into green energy have done quite a bit of damage to their economy, especially manufacturing. Mark took a look at Spain as only Mark's mind could.

After looking at pictures of the riots in Greece, I think they will have a tough time cutting police salaries or positions. If I were a Greek policeman, I think I'd want a raise. The parliament wouldn't go for the plan, except that Greece is completely dependent on borrowing for its current expenditures. So in fact the plan as laid out allows the cuts to happen more slowly than if Greece just were to default on its debts. Thus, the protests are probably utterly futile at best, and people are dying for nothing.

In the meantime, France is talking a blue streak about the terrible, destructive and completely unfair activities of traders and ratings firms with regard to Spain and Greece. This is because France has high public debt itself, and worries that people will start talking about PFIIGS, or perhaps GIIPFS, or that its bond prices will be affected.

Trichet's recent proposal to set up new ratings firms kind of misses the point, and I think he is making things worse rather than better. Greece is going to default no matter what, and any country that builds its debt too high will also. Setting up a ratings unit that pretends differently won't inspire confidence when the debts default, and probably will just spook investors. Unfortunately, the real problem with the ratings firms is that they have not been vigilant enough. They ought to have warned a lot earlier.

The reason usually given for the lack of concern over the debtloaded economies is that at the end of WWII, many countries had huge debts and gradually improved their position nonetheless. And that is true, but the fact is, a one-time burden is very different from a structural, ongoing deficit. The problem for the fiscally reckless western countries is that they have high debtloads AND structural deficits AND an ever-increasing social burden from the demographic shift.

In the meantime, I suppose Argentines ought to be complaining about something, because their bond prices are falling, almost certainly as a consequence of the current European flap.

I think in the end the strongest impact in the US will arise from heightened risk concerns over state and local risks, and consequently higher borrowing costs, and consequently deeper cuts. The jig is kind of up. Once complacency bubbles are busted, they just don't magically reinflate.

I know a lot of Americans are unhappy about the IMF exposure to Greece, but hey, it is less than 20 billion. Every quarter Fannie and Freddie show up with their hands out asking for about 10-15 billion.
And then, of course, there are whatever giveaways a gracious Congress grants the GM, GMACs, etc. The big holes in our economy have nothing to do with Greece.

Tuesday, May 04, 2010

I Have To Recalculate

I mean, I have to totally recalculate. There is not much data yet, but look at Treasury yields for May, and then compare them to the beginning of this year, and the first few months of 2009.

This is a major financial shock. Look at the 5 and 7 year for May versus in January. I figured it was coming, but I was hoping that it would not be this dire. The problem is that no one can really bring themselves to believe that this solves the Greek bond problem, because the debt isn't being modified or restructured. In three years the Greeks will end up with a significantly smaller economy and even more debt.

So really, the theory is that the ECB gets the crappy bonds from the banks as collateral, I suppose, gives them real money, and tries to let them work themselves into a better position over a few years. Well, this is not doing the Euro any favors. And then what of the other countries? Is the ECB going to also take the other bonds? The problem with the bank workout theory is that the banks had those bonds in part because the lending environment was pretty poor, so working it out is going to be quite difficult. So bottom line, everyone looks at this and figures low rate, central bank shoving money out there, etc, and it does not make the Euro look good.

Anyway, there really isn't enough data yet to feed into the modeling program, so I am going to be sitting doing it mentally. It may take a few days. When I'm doing this I'm pretty much like Rainman, and can barely talk, so I may not be posting for a bit.

There is one thing everyone has to realize, and that is that we are seeing not higher real value on Treasuries, but a trading bonus from the expected decline of the Euro. I think it could get worse yet. Also, it is not a good sign when ag banks in China start selling stock or otherwise trying to offload their lovely portfolios.
Ag banks in China have a sorrowful history. We will call this strike two after the attempt to flog all those Chinese developer junk bonds.

You could also get a nice helping of some brand-spanking new BofA credit-card backed bonds. Makes your mouth water, doesn't it? American Express default stats are considerably better than BofA's.

In the meantime, the Indians have been chattering for weeks about a good monsoon this year to bring food inflation down (last I checked, into the mid 20% range). Well, even the Indian bankers realize that counting solely on the weather is not the safest strategy, so they are taking other measures. Asia is not bad yet, but caution signs are clear. However it should overall be a slowing of growth. Singapore is still doing very well. (April Singapore Stats, long pdf).

The shock is going to have a long reach, as this story about Fannie/Freddie spreads discusses. It is likely that risk premiums in the near term will still not outweigh yield trends, though.

PS: Rockefeller Institute on the implications of April tax collections for state finances. "It's all over but the crying".

A Couple Of Things

I was looking at the extremely strong coverage for Treasury auctions this week.

It's not really a surprise, given the wretched situation in Europe. Which will keep giving and giving. For example, the Spanish banks haven't begun to declare their losses yet. Their titular balance sheets have nothing to do with their actual balance sheets. The Austrians are just beginning to work out their problems now. And some of the companies that were bailed out before are going to need a new infusion of cash or guarantees.

Looked at one way, this is helping the US. Looked at another way, it is a fatal snare. It will allow policy makers to pretend that we don't need to correct course for far too long.

In Asia, there are both inflationary pressures and some growth concerns. The most interesting thing about the current Euro crisis is that as the value of the Euro slowly drops, inflation pressures in many European countries may mount, which should constrain demand. So it's not great for Asia either.

If energy prices fall enough, the US could bull through to sustained growth this year, although it wouldn't be fast growth, and it could easily be completely choked off by circumstances and bad government policy.

Italy now becomes of much more importance. Here's a blog for you on the Italian economy!

As the money becomes tighter, it's worth while noting that negotiations are afoot to amend (as in lower) incentive payments for German and Spanish solar. Italy was doing a lot of the same thing, and I am waiting to see what happens in Italy. As the blog notes, Italy does not currently have much structural growth capacity, and it does have very high public debt. They are quietly drifting toward disaster, and the pace may pick up right about now.

In the meantime, Sarkozy's attempts at reform in France are undoubtedly going to be boosted by the situation. It is not clear if the voters will go along with him, though. An interesting article:
But few issues are as sensitive in a region where the right to retire at a decent age, and retire well, is considered almost an inalienable social right. For many here, it's one of the defining elements of their identity as Europeans, part of what they feel makes them different — more reasonable, more humane — from overworked, overstressed Americans.
Well. Germany already ratcheted its retirement age to 67, just like the US. Unfortunately, all these other countries are going to have to modify their programs too. The reason has nothing to do with politics - it's the result of birth control and declining worker/retiree ratios!

Now I realize that reading BIS (Bank of International Settlements) publications is not for everyone, but I did check through my links and pull out this relatively short (26 pages, pdf) BIS working paper on the topic of government debt in the developed countries. If I remember correctly, this paper is from a presentation at a Mumbai conference in February of this year, so give the authors some credit:
Today, interest rates are exceptionally low and the growth outlook for advanced economies is modest at best. This leads us to conclude that the question is when markets will start putting pressure on governments, not if. When, in the absence of fiscal actions, will investors start demanding a much higher compensation for the risk of holding the increasingly large amounts of public debt that authorities are going to issue to finance their extravagant ways?
we note that, in our view, an important part of any fiscal consolidation programme is measures to reduce future liabilities such as an increase in the retirement age.6.
There is a lot of comparative data in this paper, so it's worth reading. I'll be coming back to this one, so don't think you can escape.

Monday, May 03, 2010

Some European Reactions

Some reactions
La Vanguardia put up a poll asking if the Greek crisis would spread to Spain. 77% thought it was a threat. The comments were strikingly pessimistic. Sorry for crappy translations, so I'll list original and rough:
The poll question:
¿Cree que la crisis económica griega puede acabar arrastrando a España?

La crisis griega no va a arrastar a España, España se arrastra sola a su propia crisis.(The Greek crisis isn't going to pull down Spain, Spain will drag itself down with its own crisis.)

No hay duda de que ZP es un personaje que con su ceguera monumental nos va a llevar a la ruina. Se ha vendido a los sindicatos y su propio plan para volver a ganar las elecciones del 2012 y no perder el poder. De todas formas, reconozcamos que hay muchos paises, bancos, empresas y organizaciones mundiales que quieren hundir el Euro. El Euro ha plantado cara al Dolar y a la Libra, por ejemplo, y eso ha sentado fatal a algunos.(Without a doubt ZP is a person who will carry us to run with his monumental blindness. He has sold out to the unions and his own plan to win the 2010 elections and not lose power. In many ways, we realize that there are many countries, banks, companies and world-wide organizations that want to sink the Euro. The Euro has grown expensive compared to the Dollar and the Pound, for example, and that will be fatal to some.)

No, decididamente no. Grecia no arrastra a España a la crisis. España va sola a la bancarrota, no necesita a los Griegos. ZP solo el es capaz de hacerlo.(No, definitely not. Greek won't take down Spain - Spain is heading toward bankruptcy on its own, it does not depend on the Greeks. ZP alone can get it done.)

There are almost 700 pages of responses in the Spiegel discussion "Can German taxpayers save the Greeks?"
Here's a fragment of one long comment:
Die Krise Griechenlands ist eine schwere Existenzkrise der Europäischen Union, die auch Deutschland mit einem finanziellen Makeup für die Hellenen nicht beheben kann. Es wird unausweichlich, das monströse Gebilde grundlegend zu restrukturieren. Nur wenn sich die Verantwortlichen dazu bekennen und einschneidende Konsequenzen ziehen, kann die EU überleben. Im Rückblick geht es nicht um Schuld und Fehler: Utopien sind wichtig, sie bringen die Menschen voran, doch man darf nicht blind an ihnen festhalten, wenn sie zu scheitern drohen. Der Euro sollte der große Katalysator für das Entstehen einer europäischen Solidarität werden, doch nun stellt er sie akut in Frage. Das antizipierte Gemeinschaftsgefühl war mehr an der Profilierung gegenüber den USA ausgerichtet als an den ökonomischen Realitäten. Europa ist noch längst keine stabile wirtschaftliche Gemeinschaft, auf der eine ideelle aufbauen könnte – Europa bleibt ein Versuch.(The Greek crisis is a major existential crisis for the EU, that even Germany can't lift with a financial makeup for the Greeks. It's unavoidable that the monstrous debt must be restructured - but only if the responsible parties own up to it and extract the drastic consequences can the EU survive. In retrospect this doesn't involve guilt and error; utopias are necessary because they advance mankind, but one can't stick blindly to them if they are threatened with failure. The Euro was supposed to be the great catalyst for the development of a European solidarity, but now the [the Euro] is bringing European solidarity acutely in question. The anticipated community feeling was shaped [developed/aligned] more as a contrast [in opposition] to the US than economic realities. Europe is still no stable economic society which can serve as the foundation of an ideal - Europe remains an attempt.}

From page 301:
wie dumm unsere "Eliten" den gleichen Weg gehen
wie immer.
Hartz IV ist zu teuer!
Wir brauchen das Geld für die Banken!
Wir müssen den Gürtel enger schnallen damit die Griechen
/die EU weiter schlemmen können!

Unsere Kinder sitzen in zugigen Schulen auf 30-40
Jahren alten Stühlen und die Bücher sind oft auch
nicht neuer (oder müssen gleich selbst neu gekauft
werden), die Strassen sind voller Schlaglöcher
(schon vor dem Winter!) und für jeden Mist fallen
Gebühren und Zuzahlungen an bei gleichzeitig
stagnierenden Löhnen.

Ich halte nichts von radikalen (egal welchen Randes),
aber manchmal habe ich den Eindruck unsere Politiker
arbeiten Aktiv auf ein 4. Reich oder DDR 2.0 hin.

Anders kann ich mir deren dilettantische Politik
bald nicht mehr erklären.
(How stupidly our elites continue in their ways.
Hartz IV is too expensive! We need the money for the banks!
We have to tighten our belts to bring the Greeks closer into the EU!

Our children sit in antiquated schools on 30 to 40 year old stools,
and the books are often not newer (or must be bought new), the roads
are full of potholes, and for everyone a shit shower - fees and
additional payments on top of stagnating wages.

I don't hold with radicals (of either wing), but often I get the
impression that our politicians are working for the fourth Reich or
East Germany 2.0.

Otherwise I can no longer explain their dilettante politics.)

On page 401 a Greek showed up and apologized, but asked why they were singled out, said that most people in Greece worked hard, that life was much more expensive in Greece, etc. By page 501 Merkel is getting called a whole bunch of names. A whole lot of bitterness toward the banks. They're counting up how much in Greek bonds each countries' banks have. One poster lists short-term and total debts for several countries (including Great Britain, the US and Greece) and then remarks that it is only a matter of weeks or months until another larger country defaults and then the monetary system breaks down.

It's really interesting. There is a lot of chatter about Chinese competition. A proposal for Holland and Germany to adopt a common "mark" currency.

A comic note: one person had asked what measures a currency expert would recommend for the average person to deal with inflation. The reply:
30 % Goldbarren, 30 % Schweizer Franken, 10 % den Weinkeller mit einem guten Tropfen auffüllen, hält sich lange, 10% der Frau ein schönes Geschenk (Schmuck), 10 % Energiegewinnung aufs Dach und den Rest mittels eines schönen Abends versaufen oder zur Bank bringen ist aber dito. wie versaufen.
{30% gold bars, 30% Swiss francs, 10% fill the wine celler with good vinages, 10% a nice present for the wife (jewels), 10% solar on the roof, and the rest drink up in a nice evening or take to the bank, but that's the same thing, as if you drank it up.)

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