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Friday, May 29, 2009


the limitations of fat spreads

timely and sophisticated piece from minyan peter on the forces countervailing what many presume to be a money machine for banks.

To rewind the tape, a major contributor to our current banking crisis is exactly what TV pundits are now encouraging banks to repeat - what's known in the industry as "the carry trade." ... And what did we and the banking regulators all learn from this? Liquidity matters. And now more than ever.

So at a time when banks would really like to reload the carry trade in size, bank regulators are demanding more and more bank-investment holdings to be in cash or cash equivalents - the absolute other end of the yield curve.

Worse, the regulators are trying to wean banks ... off the FDIC-insured debt-issuance program, demanding -- as a precondition to TARP repayment -- that banks demonstrate that they can issue large volumes of long-term uninsured debt. (And in this regard, I'd highlight Goldman Sachs' (GS) $1.0 billion reopening of its 10-year bond at 337.5 bps over the 10-year - or 7.50%. To these eyes, this is arguably a far worse reverse carry trade; borrow long at high spreads and do what with it profitably without taking either extreme credit or market risk?)

Finally, with bank transaction deposits yielding nothing, the average consumer is moving into CDs, trying to take advantage of that same yield curve that the pundits are suggesting banks exploit going the other direction.

The net of all of this is that there are any number of countervailing forces at work, making it all but impossible for banks to capture the opportunity at hand. And as yesterday's FDIC Quarterly Banking Profile highlights, even with all of the government's help to date driving the short end of the curve to zero, bank net-interest margins aren't expanding.

And in the case of smaller banks, they're continuing to shrink

and from the march 2009 QBP:

For the sixth consecutive quarter, falling interest rates caused declines in both average funding costs and average asset yields. The industry’s average funding cost fell by more than its average asset yield in the quarter, and the quarterly net interest margin (NIM) improved from fourth quarter 2008 and first quarter 2008 levels. The average NIM in the first quarter was 3.39 percent, compared to 3.34 percent in the fourth quarter of 2008 and 3.33 percent in the first quarter of 2008. This is the highest level for the industry NIM since the second quarter of 2006.

However, most of the improvement was concentrated among larger institutions; more than half of all institutions (55.4 percent) reported lower NIMs compared to a year earlier, and almost two thirds (66.0 percent) had lower NIMs than in the fourth quarter of 2008. The average NIM at institutions with less than $1 billion in assets fell from 3.66 percent in the fourth quarter to 3.56 percent, a 21-year low.

that is stunning clarity, and contrary to just about everything one is led to believe about steep yield curves promoting bank recapitalization and economic recovery. one can more easily see now why banks are salivating over the the chance to gobble up heavily discounted securitized assets -- they need to improve their earnings profile in order to recapitalize, and net interest margin isn't doing the trick in spite of a massively steep yield curve!

more nuggets -- the banking system is delevering...

Total assets declined by $301.7 billion (2.2 percent) during the quarter, as a few large banks reduced their loan portfolios and trading accounts. This is the largest percentage decline in industry assets in a single quarter in the 25 years for which quarterly data are available. Eight large institutions accounted for the entire decline in industry assets; most insured institutions (67.3 percent) reported increased assets during the quarter, although only 47 percent had increases in their loan balances. The decline in industry assets consisted primarily of a $159.6-billion (2.1-percent) reduction in loans and leases, a $144.5-billion (14.9-percent) decline in assets in trading accounts, and a $91.7-billion (12.7-percent) drop in Fed funds sold and securities purchased under resale agreements.

... and being weaned off wholesale funding in spite of incipient deflation evident in deposits...

The decline in industry assets and the increase in equity capital meant a reduced need for funding during the quarter. Total deposits declined by $81.3 billion (0.9 percent), while nondeposit liabilities fell by $320.2 billion (9.1 percent). Deposits in domestic offices increased modestly ($41.9 billion, or 0.6 percent), with time deposits falling by $72.5 billion (2.6 percent). Deposits in foreign offices declined by $123.2 billion (8.0 percent). Liabilities in trading accounts fell by $116.8 billion (24.6 percent), while Federal Home Loan Bank advances declined for a second consecutive quarter, falling by $91.0 billion (11.6 percent). Deposits funded 66.1 percent of total industry assets at the end of the quarter, up from 65.3 percent at the end of 2008. This is the highest deposit funding share since March 2002.

... though the fact that one-third of all american banking assets are not funded by deposits puts into perspective what a tremendous delevering still lays before us as the united states narrows its current account deficit.

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duy on crosscurrents

tim duy with a less-than-sanguine view of the treasury curve steepening.

Bottom Line: I want to believe that the rapid reversal of Treasury yields is a benign, even positive, event. This is likely the Fed's view; consequently, the will hold steady on policy. Challenging this benign view is that the reversal appears to be lock step with a return to dynamics seen in 2007 and 2008 - exceedingly low US rates encouraging Dollar outflows, stepping up the pace of foreign central bank reserve accumulation and putting upward pressure on key commodity prices. I worry that policymakers have forgotten the external dynamic that was hidden by the crisis induced flight to Dollars last fall. Indeed, capital outflows (indicated by a foreign central bank effort to reverse those flows) would signal that much work still needs to be done to curtail US consumption to bring the global economy back into balance. Policymakers are unprepared for this possibility.

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Thursday, May 28, 2009


housing fallout from curve steepening

following the collapse of the long end of the treasury curve, an excellent missive from field check blog.

Lastly, consider sentiment — this is a real killer. This massive rate spike may have invalidated hundreds of billions spent to control the mortgage market literally overnight. This leaves the mortgage and housing market very vulnerable. ...

Press surrounding this event will be the talk of Main Street immediately and cast a serious doubt over the housing recovery story that has been the common theme for months. An overnight housing market sentiment killer wildcard is something that nobody was factoring in.

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baltic collapse repercussions

ed harrison passes on what may be an indication from danske bank (following on an earlier note) that the eastern european crisis is reaching a critical stage.

The event risk has risen sharply in the Baltic markets and we advise utmost caution. Yesterday, the Swedish central bank Riksbanken said it will increase its currency reserve by SEK 100 bn through a loan from the Swedish debt agency. Investors seem to believe that this is a buffer to deal with potential problems arising from the Baltic crisis.

edward hugh of fistful of euros:

The krona fell for a third day after the Riksbank announced the loan, and declined more than any of the 16 most-traded currencies against the dollar and the euro. Stefan Ingves, central bank governor, said in the statement that the financial crisis may be “prolonged”. Since the start of the financial crisis, Sweden has spent 100 billion kronor on swap agreements with Iceland, Estonia and Latvia and on dollar injections into Swedend’s financial system.

Swedish banks have claims in Latvia, Lithuania and Estonia amounting to about $75 billion, according to ING Groep NV, with SEB, Swedbank and Nordea accounting for 53 percent of Latvia’s lending market. Sweden’s central bank raised the amount of euros available for the Latvian central bank to swap for lats to 500 million euros ($670 million) at the start of May. Latvia’s central bank first entered the swap agreement with both its Swedish and Danish counterparts to borrow as much as 500 million euros for lats last December. The Riksbank was to provide 375 million euros and the Danish central bank the remainder.

Latvia has already spent over 500 million euros buying lats this year to support the currency.

the economist revisited east europe recently, noting the strident austerity budget now being put in place in the baltic states.

The biggest worry now is the Baltic three, which are seeing the sharpest falls in GDP. Estonia’s first-quarter figures showed a year-on-year decline of 15.6%. The fall in Latvia was a stunning 18% and in Lithuania 12.6%. Monetary policy cannot counteract this, since all three are pegged to the euro. And fiscal policy offers no respite. Politicians are pushing through spending cuts, not only to reassure external lenders, but also to meet the Maastricht deficit target of 3% of GDP so as to adopt the euro soon (by 2011, Estonia hopes).

“The crisis is even good if it makes the state more efficient,” says Andrus Ansip, the Estonian prime minister, who is cutting overall public spending by nearly 12%. He has slashed a fifth of the posts in his own chancellery, he says proudly. “Inefficient” spending will be cut; budgets vital for future growth will be preserved, he insists.

Devaluation is still largely taboo in the Baltics. The national currencies are not just economic symbols of solidity, but political ones too. Instead, they hope to regain competitiveness through wage cuts and greater efficiency. Such an “internal devaluation” is possible in theory, but it is unusual (and painful) in practice. It may work: Latvia now has a current-account surplus as its exports rise. Outsiders are awed by the Balts’ determination, though sceptical that the sacrifice will pay off.

with IMF-mandated regressive "efficient" fiscal policy only adding to the conflagration which is the paradox of thrift enjoined by the public, private and foreign sectors simultaneously, i will be amazed if the baltics can avoid a breakdown of civil order, giving up their euro pegs and abandoning the misconceived limitations of the maastricht treaty. claus vitesen thinks likewise.

... [I]nternational economics 101 tells us, the only way you can correct with a fixed exchange rate and an open external account is through deflation and a very sharp drainage of domestic capacity. And so it has come to pass that particularly in Latvia who has come under the receivership of the IMF the scew has been turned, (and turned and turned) and now the question is how much more can the public and the goverment take. In a recent article in the NYT the situation is well described as the Latvian government scrambles to meet ends on the IMF’s pre-condition to continue funding the bailout programme.

One very significant indication that things are near its breaking point came when Central Bank Governor Ilmars Rimsevics launched the idea that, since the liquidity in Lati is being drained in order to keep the peg and because the cuts needed to abide by the IMF rules are immense, public employees might be submitted to receive their pay in “vouchers” in stead of actual Lati. As Edward points out, this is straight out of the vaults of the Argentian crisis’ annals. This is one of the things you get with a peg maintained too tightly during a deflationary crisis. It deprives you from liquidity. Now, in some sense this all about the next installment of IMF funds of course and whether Latvia will (can) make the needed budget cuts to please the fund to such an extent that they will continue to slip the bailout checks in the mail.

and while depegging might be what they have to do, the result will be a dagger struck at the heart of already-deeply-wounded european banking.

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data revisions still negative

another view to add to a couple recent postings on leading indicators is (via clusterstock) that of john mauldin, following on some commentary by michael panzner discussing revisions to data collected regarding employment insurance claims, durable goods and more.

While the methodology for each series of data is different, they all are more or less trend-following. They take past relationships in the data they can gather and use them to estimate current numbers. And -- this is important -- on average and over longer periods of time, they are pretty accurate.

They will revise the data many times over the coming years, getting closer and closer to the actual numbers. For instance, I can't remember exactly when, but it was several years later that we learned that we were already in a recession in the third quarter of 2000, at the very time most economists were calling for a robust economic future! (Except for your humble analyst, who was predicting a recession, and had been for some time because of the inverted yield curve, but that's another story.)

But in the short run, at economic transitions they are going to get it wrong, because the backward-looking data is mean-reverting. But how else would you do it? One of the keys to economic transitions is to look at the direction of the revisions. Recently, the revisions have all been negative. Things are actually getting worse than the initial data suggested. And during the last recovery the data kept getting revised upward, especially six months and one year later.

and right on cue -- new homes sales data contributes to mauldin's thesis.

As for new homes sales, April saw a modest .3% increased, but the March numbers were revised down from .6% to -3.0%, a huge change. As we noted yesterday, these revisions are significant because they indicate that the current data estimates are behind the curve on how bad things are. Watch for this month's .3% number to be downgraded soon as well.

yesterday saw march existing home sales downwardly revised.

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long-end selloff

the yield curve moved to a record steep configuration as 10- and 30-year treasuries have crashed moved severely. color via ft alphaville:

The key question is how to interpret it:

(1) Is this simply an unwinding of the unsustainable “bubble” that had emerged in US Treasuries during the flight from risk, that is now gradually deflating as risk aversion ebbs. If so, the movement should be fairly limited and could be interpreted as part of the “normalisation” of financial conditions.

(2) Is it the start of a flight away from Treasuries as fears about inflation and record issuance and debt levels trigger a fundamental reassessment — in which case the move could be much larger and far more destabilising.

no one yet knows, but this from john jansen (via nemo at self-evident) did not calm.

Why is the market crashing and why is the curve so steep?

We are drowning under the weight of near term supply for sure but I guess I think something else is afoot here.

Look at the breakeven spread on the 10 year TIPS bond. That spread is currently 185 basis points. I do not believe that we have been that wide since the advent of the financial crisis in 2007. I think that investors are uttering a gigantic and collective nyet regarding the implementation of monetary policy and fiscal policy in the US. That is why the curve is steepening so dramatically.

Foreign central banks continue to intervene, buying dollars and selling their local currencies. The names most mentioned in that endeavor are Russia and Brazil. Sources tell me that the fruits of the intervention are parked in 2 year notes and 3 year notes. There is a dearth of central bank interest in the longer maturities.

Some cite the very strong 2 year note auction today as a sign of the market’s health. I think not. The issue is propped up by the prospect of a very low funds rate for an extened period of time. The carry and ride down the curve profits are seductive.

Central banks bought over 54 percent of the issue. I would submit that while that is great for the 2 year note it is a less than festive sign for the 5 year note and the 7 year note which will auction over the balance of this week, The money in the 2 year note is money that will not be invested in the 5 year note and the 7 year note. The treasury should organize a posse to search for marginal dollars for the 5 year and 7 year. If one wishes to observe bond market panic I think it would develop quickly if the 5 year note or the 7 year note auctioned with long tails as we observed in the Bond auction earlier in May.

A long tail in a bond auction with its attendant risk is one thing. If that were to occur in a shorter maturity in would be a sign that investors are in full retreat from longer dated US assets

Maybe the final climactic event is upon us. Maybe the final bubble to burst is the US Treasury market and maybe we are on the verge of a financial Krakatoa which will realign financial markets.

Whatever the case it feels like the calm before the storm and we are about to embark on another interesting expedition.

as earlier, where some see signs of economic recovery in a steep yield curve, under these exigent circumstances of titanic pace of treasury debt issuance -- well in excess of what can be financed by the combined flows of the capital account surplus, increased household savings and reduced capital investment -- that light at the end of the tunnel may very well be the headlamp of an oncoming train. i'm left to reconsider the potential implications of my earlier observation:

alternatively, they can force the capital markets for corporate bonds and equities to vomit out the requisite funding with an end to the short squeeze and a return of the fear trade. but it seems altogether too reasonable to say that the treasury's funding demands in support of wealth transfers and balance sheet expansion are getting far ahead of the kind of cash flow funding that can be provided by household and corporate deleveraging and saving. the result has been rising rates on the long end that -- with apologies to caroline baum -- may or may not be indicative of a positive yield curve signal.

there's some wondering around the market about ben bernanke and whether we might see a dollop of his quantitative easing elixir here. but one again has to question the wisdom of such a sign of official panic and ask, "what if QE doesn't bring the yields in?" -- a particularly salient quesiton in light of karl denninger's thesis from earlier this year that QE would end with the fed becoming a dump for overpriced treasuries. an announcement of further treasury purchases by the fed into the teeth of this could be seen as one of the highest stakes ever gambled by any american civil servant.

UPDATE: brad setser with more on the inadequacy of foreign demand, particularly post-trade-collapse, to meet this kind of issuance schedule.

Looking at the 12m change actually understates the swing in central bank demand. In the first quarter of 09, the outstanding stock of longer-term Treasuries rose by $278 billion. Central banks – according to the Treasury data – only bought $25 billion of longer-term Treasuries (all in March, and likely mostly short-term notes). China only bought $15 billion (all in March). Over that time period, central banks bought $85 billion in short-term Treasury bills, including $32 billion from China.

Since the first quarter, the scale of long-term issuance has only increased. Central banks aren’t just buying bills anymore, but they still prefer the shorter-maturities.

UPDATE: some more context from john mauldin.

I think the bond market is looking a few years down the road and saying that $1-trillion deficits are simply not capable of being financed. And if the debt is monetized, then inflation is going to become a very serious issue.

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Goldman wants to buy gold .

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If you haven't already, I recommend subscribing to David Rosenberg's daily "Breakfast with Dave" emails via Gluskin Sheff as of a week or two ago (they're free for now). Like me he is still mostly bullish on treasuries despite all the current commotion, and most days offers thoughts on the latest changes. Among his comments today, regarding who will purchase longer duration treasuries:

The banks, that’s who. They are the ones with the cash — over $1 trillion on the balance sheet, which is not only a record but more than triple what was considered a normal level in the past. At the same time, even with private sector borrowing on the decline, the commercial banks have not added anything — nada — to their cache of Treasury securities this year. But, it’s one thing to have the curve at 170bps as it was four months ago and the huge 275bps spread the market is offering today. The banks have never before had so much cash to be put to work in the most attractive carry trade in Treasuries in recorded history.

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Wednesday, May 27, 2009


the korean example

while i was recently out, john hempton posted a couple of really insightful looks at long-wave systemic crises in japan and korea, highlighting the defining difference between the ossifications of the japanese zaibatsu and the korean chaebol as the nature of domestic savings.

Korean banks – unlike their Japanese counterparts – were short funds. Endless funding at zero interest rates was simply not possible. Given that the banks eventually collapsed – with many becoming government property and with the government winding up as the largest shareholder in almost all banks. This was a spectacular crash – as opposed to a slow-burn malaise. Chaebol failed. In some instances their founders were imprisoned. The strongest Chaebol is the one most associated with new industries (Samsung). It survived and prospered – but others did not.

Korea had a much worse recession than Japan. Vastly worse. Japan was just low growth for a very long time. By contrast the Korean economy crashed and burned. But it also recovered very fast and at one point (1999-2000) the Korean Stock market was 1932 Great Depression cheap. It bounced.

It is my contention that the main difference between the Korean and Japanese crashes (and Korea’s case recoveries) was the funding of the banks. In this view Korea’s was so sharp because the banks simply ran out of money – and that caused massive liquidations across the economy – systemic failures.

one might recognize immediately the pertinence of the contrasting examples with reference to an earlier discussion with hempton which drew my focus to the reliance of the united states -- much like the pre-1998 heyday of the korean chaebol -- on wholesale funding drawn from international depositors above and beyond the deposit base to fund the boomtime activities of the private sector.

as such, the united states cannot now quite follow in japanese footsteps. where japan was flooded with deposit funding thanks to a very high savings rate exceeding the funding needs of its private sector as manifested by its national current account surplus, the united states is faced with "running out of money" -- that is, the inability to import sufficient capital from overseas to fund balance sheets -- and forced liquidations as foreign funding dries up and our current account deficit narrows sharply. where japan's banks turned to lend to the government when faced with collapsed private sector loan demand, american banks are faced with having to end their dependency on wholesale funding either by selling lots of assets or gaining lots of deposits. even as government stepped into the breach last september as the wholesale-funded shadow banking system collapsed into a liquidation which is still ongoing, banks are now delevering from those government liquidity provisions to bring their assets into line with their deposit base.

hempton analyzes the situation positively, noting that the sudden stop and capital flight witnessed in korea suffocated not only zombie legacy industries and weak players but even some share of the innovative and healthy, leaving ample room in the aftermath of the banks delevering into a position where deposits exceeded assets for a strong rebound in activity. and he doesn't see the need for that kind of scorched earth:

... [T]he problem with Korea was that the banks became totally illiquid and hence were unable to lend at all. This mattered because not only inefficient Chaebol died – but plenty of good stuff suffered the same fate. A banking system that cannot lend is indiscriminate about who it kills. It will result in the death of dodgy businesses – but will also kill perfectly fine businesses that need cash for short term requirements.

If you want to avoid the really deep malaise that was Korea then keep the banks liquid. Then at least they will lend to the more worthy borrowers – and whilst industry will die banks can be selective about who they kill.

but hempton does seem to shoot a hole in the idea that the united states can suffer as little economic volatility as japan did in its long malaise of corporate delevering from 1990 to 2005. america has in the initial stage of the depression addressed the attack on its massive wholesale funding/current account deficit complex for a mixture of forced shadow bank systemic delevering and substitution of explicit treasury financing by foreign savings where agency or private-label financing once stood, all augmented by government backstops to prevent destabilizing runs. this has already rendered a deeper recession than any japan then experienced as the current account gap has closed. but a look at the balance of current account indicates that this trend probably could have quite a lot further to run -- and potentially, should treasuries lose the confidence of heretofore mercantilist financiers of the united states, even a sudden-stop capital flight is not out of the question.

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Welcome back!

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Welcome back too, gm. This seems to bring us back again to what we previously discussed -- the currency crisis issue that Koo did not rule out or the "inflation deanchoring" versus "output gap" scenario that Simon Johnson outlined.

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BTW, those were interesting comments in Hempton's post. The Korean scenario described by Apolitico@10:40 PM highlights the need for fiscal spending to not exceed available deposits. But how do you know what is the right amount? It seems to be equivalent to the question of how to engineer a physical system that is critically damped, with just the right amount of spending. Hmm...methinks I should find ways to hedge my bets.

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banks are delevering

via yves smith -- i think one can safely pass over the jeremiad of john taylor to the meat of the observation passed on by the wall street examiner: the banks, lacking access to borrowers, are delevering wholesale. this being so, smith noted that the massive treasury auctions of recent days are countering massive private sector deflationary contractions in money and credit outstanding.

[T]here is a big assumption [in Taylor's preceding concerns], namely, that the Federal government leverage is in addition to Fed/private sector borrowings. If the economy is deleveraging, and the government borrowing is offsetting that effect, it could be salutary (I'd vote for the objective being to dampen the deleveraging, not to try to counter it fully).

The Wall Street Examiner argues that, contrary to popular opinion, serious deleveraging is happening now, and is also showing up in the Fed's special facilities (no online source):

There was little news of substance in the Fed’s balance sheet data last week. It shrank a bit, as the Fed’s direct buying of GSE and Agency paper wasn’t enough to offset the shrinkage in Alphabet Soup programs. The problem seems to be an unwillingness of market participants to borrow and take on risk. No amount of Fed pumping will fix that problem. Zero interest rates at the short end aren’t helping as both individuals and institutions are forced to dip into principal, or in the case of corporations and governments, sell more debt or equity, to pay the bills. I don’t see how the Fed will be able to reverse this trend. Furthermore, we are rapidly approaching the point where the market can no longer oblige those who would raise money to pay their expenses. The Fed can’t keep everybody afloat. ...

The PDs [Primary Dealers] receive the full benefit of the Fed’s Treasury and Agency purchases since those transactions are directly between the Fed and PDs, while the MBS trades generally are not. They clearly did not use that money to support prices in the Treasury market....

The Fed’s buying was enough to keep a bid under the stock market, but not enough to keep propping Treasuries.

Fed credit outstanding virtually collapsed in the week ended April 29, with reductions in alphabet soup programs outpacing direct Fed purchase of securities by nearly 8 to 1. The biggest reductions were in the major programs, TAF, CPR, PDCF, and currency swaps with FCBs. Banks’ deposits at the Fed were commensurately reduced. The Fed’s lending programs appear to be collapsing because the banks are deleveraging furiously.

The CP market has also shown big declines in outstanding credit. Since this also impacted the Fed’s CPR program, it’s apparent that companies have little interest in borrowing. The Fed is pushing on the proverbial string, but as long as the Fed is pumping cash directly into the veins of the Primary Dealers, there’s a good chance that the stock market will continue to get a bid for the time being. However, I expect that to change as the supply pressure on the Treasury market builds, and as Big Finance and Big Business continue to attempt to raise equity capital and sell junk debt. Under the circumstances if the Fed is unable to prevent the shrinkage of its balance sheet, crisis conditions will return.

Ironically, the media pundits have been worried about exactly the opposite problem — inflation as a result of the Fed not having a plan to reduce its balance sheet when the economy begins to improve. If the Fed’s current bout of shrinkage continues, inflation will be the least of our worries, and we can forget about an economic recovery any time soon.....

The Fed is still pouring cash into the coffers of the PDs, and they are using some of it to buy stocks, hooking a new round of suckers in the process. We need to be vigilant, and be ready to jump off the train at the first sign that it is about to go
back into reverse.

The one bit in the reasoning that isn't clear to me is how further debt and equity sales, which will entice buyers away from Treasuries, is consistent with deleveraging (unless the missing bit in the logic chain is that even with those actions, the net effect is serious deleveraging).

yves is a bit late to pick up this report from WSE, and since the april 29 h.4 federal reserve bank credit outstanding has again topped up to previous high levels. but the graph shown here outlines the basic analysis being forwarded. even as total reserve bank credit (blue line) rises, we can see all manner of the fed's 'alphabet soup' liquidity facilities declining in use -- that is, the banks and firms utilizing them are reducing their dependence, ostensibly through a rapid deleveraging. this was resulting, from december 2008 to february, in a shrinking of the fed's balance sheet. to counterbalance the decline in the alphabet soup and the fed's balance sheet size, the fed is accelerated purchases of securities, increasing its portfolio size (red) particularly by soaking up agency debt (red dotted).

the ostensible purpose of maintaining the large fed balance sheet is seen in comparing reserve credit to reserve balances with federal reserve banks -- fed asset purchases are maintaining the excess reserves of the banking system and (it must be hoped by ben bernanke and others) facilitating the potential for credit creation, preventing a contraction in high-powered (though currently idle) money supply.

some banks are also gamely pursuing their profitability through the PPIP, driving up illiquid but high-yielding securitized assets as noted by david goldman, lobbying for rule changes to allow them to gobble up what they can while passing any potential negative consequences on to the taxpayer. this paints a picture of big banks seeking high profitability rents while the system in general unwinds its leverage onto the government.

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Wednesday, May 20, 2009


indiana tosses a wrench into chrysler's engine

via zero hedge -- not everyone who objects to trampling over the absolute priority rule is a nasty old hedge fund fit for intimidation.

In several motions with the Chrysler docket earlier, the Indiana State Teachers Retirement Fund, Indiana State Police Pension Trust, and Indiana Major Movers Construction Fund, fiduciaries for "approximately 100,000 civil servants, including police officers, school teachers and their families" have objected to the 363 sale, and demand Judge Gonzalez should block the sale, claiming "the plan is illegal and tramples their rights."

Among other things, the Indiana Pensioners seek to appoint both a trustee and an examiner in the case (an examiner was eventually retained in the Lehman bankruptcy), claiming that the company "has ceded control over their business and their restructuring efforts to the United States Treasury Department" which is using the Chapter 11 process to reward creditors that the "government deems politically important."

Not only that, but lawyers added that "the Treasury Department has taken constructive possession of Chrysler and is requiring it to adopt a sale plan in bankruptcy that violates the most fundamental principles of credit rights."

so much for the sixty-day bankruptcy.

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revised recast/reset chart

via calculated risk thanks to credit suisse.

foreclosure pressure will remain high through 2012.

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LEI constituents

i earlier commented on the potential signal of the four-week average of weekly claims for unemployment insurance in conjunction with the yield curve and consumer confidence differential in calling a possible turn in the economy (but not the stock market, as CXO makes clear). in truth, though, yield spreads and weekly claims are already constituent members of the conference board leading economic indicators, which is related to (by virtue of sharing the same developer) the ECRI weekly leading indicators (WLI). the LEI also tracks consumer confidence, though not the differential measure i look at.

  • Average number of initial applications for unemployment insurance
  • Number of manufacturers' new orders for consumer goods and materials
  • Speed of delivery of new merchandise to vendors from suppliers
  • Amount of new orders for capital goods unrelated to defense
  • Amount of new building permits for residential buildings
  • The S&P 500 stock index
  • Inflation-adjusted money supply (M2)
  • Spread between long and short interest rates (the yield curve)
  • Consumer sentiment
  • Average weekly hours worked by manufacturing workers

caroline baum again got me thinking about how the LEI components, tested and adopted in large part in normal recessions, might vary in reliability in a balance sheet recession.

The April LEI, due tomorrow, is expected to show a 0.8 percent increase, according to the average forecast of 56 economists surveyed by Bloomberg News. That would be the first increase since June, with stock prices, the spread between the federal funds rate and 10-year Treasury note yield, and consumer expectations contributing to the expected increase.

One month does not make a trend. Nor does it reverse the gloomy message reflected in the six-month annualized change in the LEI and the six-month diffusion index, measures preferred by Conference Board economists to the monthly change. Then there’s the possibility historical revisions will change the leaders’ outlook: January’s 0.4 percent initial increase became a 0.2 percent decline with subsequent revisions.

For the moment, the financial, or intangible, indicators -- the interest-rate spread, the stock market and real M2, which probably didn’t show an April increase but has soared since September -- are showing hopeful signs. And they typically lead more concrete measures, such as jobless claims, building permits and orders for capital goods.

Raw materials prices are sending a similar message. The CRB Spot Raw Industrial Price Index, which excludes oil, bottomed in December and went nowhere for three months before heading higher.

it's these "intangible" leaders that i want to examine. i've already discussed the yield curve.

“If you think monetary policy matters, you should care about the spread,” says Jim Glassman, senior economist at JPMorgan Chase & Co.

glassman is exactly right, but the contraction of loan demand means precisely that monetary policy has lost its efficacy. while a steep curve and the resulting fat spreads are fine for recapitalizing banks, if banks aren't expanding lending -- or, more importantly, can't lend for an aggregate lack of borrowers -- it means precious little for credit growth and economic activity.

the change in m2 is mostly a function of the change in m1, which is a function of excess reserves being deadheaded on the fed's balance sheet. this may represent potential inflation, but it does represent a current inability to lend out funds. while contributing to the upturn in LEI, this isn't a real economic positive unless loan demand is healthy. and loan demand isn't.

the S&P has rather a mixed record of leading the end of recession, particularly out of deep recessions that tend to shell-shock investors. what's more, much of what we've seen to date may best be characterized as a massive short squeeze that many styled 'the dash for trash'. given further stumbling earnings for the S&P, it seems likely that at minimum a retest of the march lows is in our future -- and thereby the optimism that the S&P conveys to the LEI may be somewhat discounted.

of the real economy leaders, i've already discussed the tenuous optimism of weekly claims. what of the others?

if you can paint a positive picture out of this lot, you're doing better than me.

furthermore -- to return to the conference board's page for a moment -- note the standardization factors of the various indicators. these are nominally employed to adjust for the volatility of the series so that the scale of changes in one do not wash out the signal of others, so the size of the factor should be inversely related to the standard deviation of the series in relation to that for all the series. the heaviest signal weighting is for m2 -- and m2 has of course experienced an unprecedented period of volatility as a result of federal reserve machinations in comparison to the sample period fo 1984-2007 used to calculate the factors.

this is to say that not only is the linkage between m2 and economic growth likely broken by the nature of a balance sheet recession -- it also is disproportionately skewing the LEI to the upside thanks to the fed's suddenly expanding balance sheet and the volatility thereby recently introduced. this is best seen in the march report addendum showing the adjusted contributions of each indicator (table 2).

in march, the LEI was reported as 98.1, down (-0.3). the combined contributions of the yield curve and m2 were +0.6; the sum of the other eight indications was (-0.91).

if the yield curve and money supply indications are rendered null thanks to the collapse of loan demand inherent in a balance sheet recession, what is the LEI really saying about economic conditions?

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Kasriel has in the past used the LEI to construct his Kasriel Recession warning indicator (KRWI). He continues to speak positively about the growth in real M2 for the economy while also making allowance for the government filling in for the demand destruction.

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I correct myself. He used his KRWI based on the yield curve and real M2 in parallel with the LEI .

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This is excellent analysis, GM, and one which is overdue--have conditions changed so much that the old measurements (or charms) simply will not work anymore. This "magic" LEI catagories smacked of curve-fitting and not causation, with a bit of circular reasoning thrown in. But given the decline in US manufacturing, and the Fed manipulation of both the long and short ends of the yield curve, do the corresponding parts of the LEI reflect a measurement of the economy or simply irrelevant numbers?

Of course, I also worry that I (for one) want to talk myself into my investment stance--not a good thing.

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Tuesday, May 19, 2009


the dash for trash cash

via clusterstock and the pragmatic capitalist, the newly domiciled david rosenberg.

UPDATE: tyler durden reliably with the whole letter.

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cut 'em up

via calculated risk and the new york times:

Credit cards have long been a very good deal for people who pay their bills on time and in full. Even as card companies imposed punitive fees and penalties on those late with their payments, the best customers racked up cash-back rewards, frequent-flier miles and other perks in recent years.

Now Congress is moving to limit the penalties on riskier borrowers, who have become a prime source of billions of dollars in fee revenue for the industry. And to make up for lost income, the card companies are going after those people with sterling credit.

Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.

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Cut 'em up? That's exactly what the banks want you to do, if you are paying your balance 100% every month. A credit card is not a debit card, you are using the bank's money free for a month.

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it is, and they're finally providing good incentive to do it.

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fuck, i guess my credit card days are over.

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Monday, May 18, 2009


more on tax revenues

following on earlier comments -- via zero hedge, an assessment of federal government receipts by david galland of casey research.

Here’s what’s going on:

  • In 2007 and 2008, government tax revenues averaged about $633.15 billion per quarter. For the first quarter of 2009, however, the numbers just in tell us that tax receipts totaled only about $442.39 billion -- a decline of 30%.
  • Looking to confirm the trend, we compared the data for April – the big kahuna of tax collection months – to the 2007-2008 average, and found that individual income taxes this year were down more than 40%. The situation is even worse for corporate income taxes, which were down a stunning 67%!
  • When you add in all revenue from all sources (including Social Security revenue, government fees, etc.), the fiscal year-to-date – October through April – revenue shortfall comes to 19%, vs. the 14.6% projected in Obama’s budget. If, however, the accelerating shortfall apparent year-to-date, and in April in particular, continues, the spread between projected and actual tax receipts will widen considerably.

... What are the implications of this tanking tax revenue?

For starters, it means the federal government deficit is going be as bad or worse than the $2.5 trillion Bud Conrad, chief economist of Casey Research, projected it to be last year.

If the shortfall in individual and corporate tax revenue persists -- and we expect it will -- then the deep hole the government is already digging for itself will be that much deeper. ...

Yet, the real fly in the ointment is that the actual borrowing by the Treasury is likely to be at least half a trillion dollars more than the deficit.

That’s because the Treasury is buying toxic paper (mortgage, credit card loans, etc.) and putting them on the books with a higher value than the market is willing to assign. While that makes the budget deficit appear smaller, it doesn’t negate the fact that the government still must borrow the money needed to buy the toxic paper in the first place. The additional revenue shortfall means they have to raise that much more money. Based on the struggle they had pushing the $14 billion in long-term notes at the latest auction, it becomes increasingly apparent that when push comes to shove, the only way the government is going to come up with the money needed to meet its aggressive spending is to print it up.

alternatively, they can force the capital markets for corporate bonds and equities to vomit out the requisite funding with an end to the short squeeze and a return of the fear trade. but it seems altogether too reasonable to say that the treasury's funding demands in support of wealth transfers and balance sheet expansion are getting far ahead of the kind of cash flow funding that can be provided by household and corporate deleveraging and saving. the result has been rising rates on the long end that -- with apologies to caroline baum -- may or may not be indicative of a positive yield curve signal.

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Based on the tax returns I prepared, admittedly a small sample, and comparing them to last year, it would not surprise me if individual tax receipts for the Feds were down 10-15% from last year and corporate receipts at least 20%.

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I suppose a meaningful chunk of tax revenue in prior years was likely directly attributable to ponzi-economy earnings and unsustainable capital gains from illusionary wealth. And the increased savings rate won't be able to fund this chunk at any point, so that is a bearish factor for treasuries.

Still, with only 3% of big money investors bullish on treasuries and the S&P P/E ratio at 25-122 depending on how you measure it, a return to the "fear trade" seems like it has room for a pretty violent move, depending on where stock dividends are headed...

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Don't forget the dwindling State coffers. The only place they will find as a source of new supply is the FED printing press.

They already have plans to backstop municipal bonds. That is no different than Fannie or Freddie direct purchases.

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I thought the chart of revenues posted with the ZeroHedge article was particularly enlightening. Also, at Matt Trivisono publishes a daily comparison of actual withholding tax receipts (data is put out by the Treasury, if you want to go to the source). Both of these show the same result--tax revenue is collapsing. The problem lies in understanding how it will ever begin to increase in any meaningful way--wages are not rising nor are likely to, and the number of people employed is not likely to increase in any significant way in the next ten years, given the demographic hurdle of the aging population. I suppose taxes could be increased, but even a 10% hike wouldn't do much more than slightly narrow the gap, and it would destroy consumption.

As far as I can tell, the only other time the government ran a deficit of 50% (took in only half of the money it spent) was in WWII, and we came out of that war with pent-up demand and most of the world's manufacturing base, not to mention a population explosion--and defense spending was cut back sharply after the war. So how, pray tell, are we to narrow the budget gap now when spending cannot be cut (in any meaningful way)?

I guess we just sit around and wait for the devaluation of the dollar--although that is inevitable, it certainly does not need to be immanent. The catalyst, when it comes, will be unforeseen, and its timing cannot be predicted--kind of like the Rapture, for those who believe in such things.

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hbl, i personally think they'll have less trouble than we imagine. a lot of the short-squeeze rocket fuel for the equity rally seems to be expended.

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I suppose taxes could be increased, but even a 10% hike wouldn't do much more than slightly narrow the gap

that's the most amazing aspect. of the many people who argue that the government should be balancing its books right now, i wonder how many have actually looked at the mathematics of what they're talking about. what would have to be done would precipitate a surefire economic armageddon.

that said -- we cannot save it all. a lot of government efforts have been feeble in relation to the scope and scale of the disaster (thinking particularly about the death of shadow banking and securitization) and there's plenty of scope for continuing economic contraction even if government does everything it responsibly can with its balance sheet.

and if it proceeds irresponsibly? i continue to think that there is a non-trivial risk of a capital flight disaster, in spite of the pronounced deflationary dynamics. i have richard duncan's book on my shelf at home from 2003 or so -- it's high time to reread it, i think.

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i see today john hussman has some comments on the necessity of the continuing fear trade.

The second fact is that as a result of more than a trillion dollars of new issuance of Treasury securities with relatively short durations, it is a tautology that there is a mountain of what is mistakenly viewed as “cash on the sidelines” invested in these securities. This mountain of “sideline cash” exists and must continue to exist as long as these additional government securities remain outstanding. It is an error to view outstanding debt securities as if they are “liquidity” poised to “flow back into the stock market.” The faith in that myth may very well spur some speculation in stocks, but it is a belief that is utterly detached from reality.

one of hussman's key points is that the fed will have difficulty soaking up funds in the event of a spate of credit creation because, having recharacterized the balance sheet of the major banks by swapping junk assets for short-term treasury paper at near-par, it will end up only being able exchanging money for something very money-like thanks to repo.

that credit creation event is not nearby, imo, but this could be a big issue eventually.

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davidowitz on retail

via jesse's cafe americain with exemplary color of his own to offer -- this most recent update on the devastation overtaking the american retail sector by howard davidowitz thanks to aaron task and tech ticker.

"We're in a complete mess and the consumer is smart enough to know it," says Davidowitz, whose firm does consulting for the retail industry. "If the consumer isn't petrified, he or she is a damn fool."

Davidowitz, who is nothing if not opinionated (and colorful), paints a very grim picture: "The worst is yet to come with consumers and banks," he says. "This country is going into a 10-year decline. Living standards will never be the same." ...

As for all the hullabaloo about the stress tests, he says they were a sham and part of a "con game to get private money to finance these institutions because [Treasury] can't get more money from Congress. It's the ‘greater fool' theory."

"We're now in Barack Obama's world where money goes into the most inefficient parts of the economy and we're bailing everyone out," says Daviowitz, who opposes bailouts for financials and automakers alike. "The bailout money is in the sewer and gone."

you're not going to find a sharper opinion on wall street. my heart sinks listening to davidowitz because deep down i suspect he's absolutely right -- a massive liquidation in the real economy awaits, and regardless of government fiscal stimulus we are unlikely to transition seamlessly to our new demand-management economy.

moreover, if government goes too far down the bailout hole and abuses the treasury to repair balance sheets directly rather than borrowing to spend and maintain cash flows as a vehicle to a slower private sector deleveraging, there exists a non-trivial chance of out-and-out collapse.

UPDATE: a nice addition from paul kedrosky.

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His comment on percapita retail space is something I have been harping about forever.

US average is 22 sq/ft per person. He hopes we can manage to keep 12 sq/ft per person. The average in Europe is 2.2!!!!!

Granted the wastefulness of the suburbs requires a higher number, but I really don't need to have choose from 30 places in a 5 mile radius to buy a TV much less need for a hundred plus stores to buy a can of energy drink or bottled water.

Let's split the diff and call it 6 sq.ft.

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it's also lumpily distributed, potus. urban areas not infrequently have in excess of 50 ft^2/capita. future ghost towns, imo.

check tables 7 and 8 as well as figure 9 in this assessment of retail trends in suffolk county, new york. (this includes the hamptons, a quintessential boom area.) in breaking down by community, one can see the dispersion of growth -- but across virtually all communities retail space per capita has doubled, trebled or more since 1970.

the potential for liquidation in a long-term regearing of the american economy to the thriftier model that was prevalent in the 1970s is absolutely terrifying. has any society ever been so malinvested for such a shift?

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This FRB study is very interesting -- particularly the chart about the delevering consumer.

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Friday, May 15, 2009


the fruits of maastricht

lex in the financial times commenting on the data out today indicating GDP in germany fell (-3.8%) QoQ -- a stunning rate of collapse three times what we're seeing in the united states.

This has to be the worst of it. If it is not, then the eurozone’s prospects are grim indeed. The German economy shrank by 4 per cent in the first quarter compared with the last three months of 2008. That is far from the astonishing 11 per cent shrinkage suffered by Slovakia during the same period. But it was still the lousiest performance of any big eurozone country, by far. If the German economy continues to shrink at this rate, it will be a fifth smaller by the end of the year, entirely reversing the decade and a half of growth since unification.

That has worrying implications for government revenues, which will fall as the recession bites. Even the hairshirts in Berlin forecast a budget deficit of more than 4.2 per cent of gross domestic product next year. At €90bn, it will also be Germany’s biggest, in absolute terms, since the second world war. Further tax rises and spending cuts required to return the deficit to within the 3 per cent limit stipulated by stability pact rules will only slow growth further. All eurozone countries, but especially those with proportionately bigger deficits, such as Italy and Spain, face the same challenge. That being the case, the credit quality of European sovereigns can only get worse.

of course the difference is not all down to government deficit spending. but it is undoubtable that the american reaction to the crisis has been much more aggressive than the german, and it is at least in part showing up in economic performance.

more important will be the forward outcome. now faced with tax revenues that will collapse even more precipitously than in the united states, the german government has an extremely hard row to hoe to fulfill its eurozone obligation, encoded in the maastricht treaty, of a budget shortfall no greater than 3% of GDP. i'm frankly not sure they can while being more or less certain that they shouldn't try.

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The German economy declining at a quicker clip than the U.S. economy because they were less aggressive just means they are getting to where the U.S. is going faster. U.S. actions delay the inevitable.

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george, i would say that the future is not written. the outcomes in every country will be dependent on both past actions and things beyond their control, to be sure. but it will also be heavily dependent on the measures they take to mitigate their situation. we are not helpless.

i can easily forsee a situation where germany -- vulnerable due to the nature of its export model anyway -- experiences a vastly worse outcome than the united states. germans would undoubtedly consider this unfair, as they've been a surplus nation and a savings nation, and the prejudice is for that to be considered "good" -- and therefore punishment unmerited.

that goes to the heart of the deep human bias to see the crisis is mythological/moral terms. this misses the reality entirely, imo. there is no easy moral bias to national surplus or deficit accounts.

the US is, i think, in a good position to ride this crisis out with a minimum of damage, much as britain did the great depression. they are the repository of excess demand; they have a relatively low government debt balance as a percentage of GDP; there is considerable natural room for currency devaluation. but the government and people have to have the intelligence and courage to proceed in spite of the moralizing bias of many citizens and politicians.

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>they are the repository of excess demand;

By this I assume you mean (please correct me if I’m wrong) the U.S. can supply where international demand is in excess. I don't know that we any longer have the burgeoning industry that would allow for this - let alone the signs that our policy direction would support a reemergence.

>they have a relatively low government debt balance as a percentage of GDP;

Our debt balance as a percentage of GDP is already quite high and climbing. A declining or slower growing GDP, our unprecedented deficits, and the accelerated approach to the day of reckoning for Social Security and Medicare will make our debt load unsustainable.

>there is considerable natural room for currency devaluation.

I would greatly appreciate the information/data that back up this statement. Also, what do you believe is the maximum level of currency devaluation that would be tolerable, and why?

I think the U.S. economy is positioned for a long decline and possible collapse somewhere along the way – the near-term not ruled out. The specific reasoning for this I will be posting on my own website in the near future. The hope in intelligence and courage of which you speak I believe lies in realizing the errors of the U.S.’s past and current economic approach and allowing the natural (and painful) economic correction to take place. I fear that doing anything else is setting us up for additional, unwarranted pain.

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By this I assume you mean (please correct me if I’m wrong) the U.S. can supply where international demand is in excess.

i actually mean that US is a country where demand, even post-debt-collapse, is significantly higher as a ratio of domestic production supply. in other words, we're an import-model to counter the export-model of germany, japan and china. this is a far better place to be in a depression and trade collapse -- a much easier adjustment. the character of the situation in export-model countries is much, much different than for the US.

Our debt balance as a percentage of GDP is already quite high and climbing.

the float is actually one of the lowest among developed nations at under 50% of GDP -- though few americans would believe that, given the many years of obsessing and indoctrinating over the national debt. many people are sidetracked by the $4tn accounting ruse of social security (or worse its net present value); it's a non-debt, likely to be "paid" out of social insurance cost controls/cuts not only in our country but most every other. the real problem w/r/t social insurance is not the debt but how we will pay for senior care with less spending.

what do you believe is the maximum level of currency devaluation that would be tolerable, and why?

all i mean to say is that we still have a quite large current account deficit, which implies an impetus for currency devaluation to encourage export development and discourage imports. i see this in conjunction with the US excess demand position -- the easier adjustment will be a cheaper currency and corresponding relative decline in imports fuelling domestic capacity building. vastly harder is the opposite, which was what we were tasked with in 1930 -- more expensive currency, relative decline in exports fuelling domestic capacity collapse. this is why countries like germany and japan are being hit very hard. that's also the lesson of past global crises.

to be sure, much must change in the US. but that's true around the globe in places that either took the same side (UK, spain) or the other end (japan, germany, china) of american imbalances. relative to others, i'm actually encouraged by the american position. that is NOT, obviously, to say this will be pleasant.

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I agree we can accommodate Social Security debt by offering its beneficiaries less and devalued money, but that certainly isn’t a net positive for the economy. Additionally, Medicare is the much larger mounting debt problem, and an attempt to ease the blow through Obama’s health reform is likely to backfire with higher costs. Even if it works according to plan over the next decade, the resulting savings growth is negligible relative to the size of the shortfall.

I agree that the import-to-export transition is an easier adjustment all else held constant, but the currency devaluation needed to service our social programs, existing debt , and tremendous budget deficits is likely to ignite a currency crisis and/or bring interest rates to unbearable levels for the already crippled economy (and likely to become more crippled before this transpires). This, coupled with U.S. policy direction and inevitable tax increases (both counter to domestic economic growth) tells me there is no clear path, let alone a path at all, toward improved international competitiveness that would support U.S. export development.

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The problem with the Germans is that they insist on pandering to the mass delusion that 2 plus 2 to equal 4.

George W learned by his fathers mistake that being rational about debt and deficits gets you nowhere.

Deficits don't matter as long as tax collections cover the interest payments.

If you did an apples to apples accounting of German and US GDP you would most likely find the US fall to be greater. but 2+2=16 in this hemisphere.

When US tax receipts fall below interest costs then we have a prisoners dilemma. If Japan/China/Arabs pull out they will have nothing to show for it.

So the US gets to ride the slow train to the bottom. I doubt anybody will let us get on the gravy train back up to Prosperity Town but who is going to say no to someone packing 6,000 nukes.

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social insurance fallout of depression

the quite wise david merkel on the recent update on the finances of medicare and social security.

I’ve always felt that Social Security and Medicare have had optimistic economic assumptions. It does not surprise me that the year that Social Security revenues are exceeded by expenses has moved in by one year, from 2017 to 2016. Medicare, we are already exceeding revenues in 2008 and now.

Given that these social insurance programs invest only in US government debt, on an accounting basis, it makes sense to unify their balance sheets with that of the US government. Once we unify the balance sheets, it is easy to realize that the negative consequences will come when expenses exceed revenues, not when the funds go to zero. When expenses exceed revenues, the US government will either need to tax or borrow more in order to make ends meet. [or cut services, as merkel then outlines. -- gm] ...

If the Federal Social Insurance schemes (Social Security, Medicare, Veterans Pensions, Old Federal Employee Pensions) and most State Pensions and Elderly Medical Care are going to pay off, taxes will have to be raised significantly. That will be one nasty political fight, which might result in the death of certain sacrosanct laws governing the inviolability of pension promises to state employees, and perhaps Federal employees. Also note, you can raise tax rates, but if it harms the economy, you will get less taxes.

The Federal Government will try to borrow its way out of the problem, until foreign creditors finally rebel, realizing they are throwing good money after bad. After that, taxes will have to be raised, or promises abandoned/reduced.

For underfunded private defined benefit and retiree healthcare plans, they will likely be terminated, and lesser benefits paid. All three of the legs of the modern retirement tripod (social insurance, savings, and pensions) are under threat as the era of debt deflation progresses.

A year can teach us a lot. 2008 showed us the limitations of our economy. Future years will show us the limitations of the power of our governments. Conditions for prosperity can be created, but prosperity can never created by governments. That is up to the culture of those governed.

as alea pointed out earlier this week, federal government receipts are down 34% from a year ago. several states -- notably including california, which applied for access to TARP rescue funds this week -- are already on the brink of fiscal collapse and awaiting federal largesse. the treasury is also attempting to support $700bn in capital transfers to the banking sector; as well as staking the seriously undercapitalized FDIC against the oncoming wave of bank failures and whatever exposure it faces as a result of the PPIP; and -- its most important duty of all -- sustaining aggregate demand by fiscal stimulus to prevent a much greater crash in monetary aggregates, cash flows, deposits, GDP and assets that would significantly increase the absolute size of all its other obligations. have i left anything out? yes, as it turns out -- merkel highlights that medicare has gone cash-flow-negative, though social security will follow only at a distance of some years.

UPDATE: follow up from merkel.

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There's no reason for Social Security to be impacted by this crisis, and as numerous articles have pointed out, it's in fine shape for the forseeable future. A small gap in payouts vs. revenue-40 years from now-can easily be overcome by raising the ceiling on income brackets liable for Social Security taxation.

Medicare is in very real trouble, as is the entire health care system, and single payer or a robust public option is the remedy for that ill.

The Revolt of the Elites-in sacrificing the programs that build middle class prosperity, so they can prop up their neo-liberal religon for a few more years-will not be tolerated.

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anon, i think we're going to find that -- with tax receipts in a hole with little prospect for sudden recovery -- both SSA and medicare move with surprising speed toward greater difficulty.

i agree with you about the relative position of the two, but both aspects of social insurance will be revisited. my hope is that SSA is better funded by congress, as a significant number of people are simply not disciplined enough to provide for their own long-term well-being. i further suspect the reality of medicare is that either a european-style single-payer universal system must emerge or congress will have to implement explicit price controls on medical products and services. either one will involve taking on some very powerful special interests, but the insurers at least are increasingly falling under the control of the govenrment.

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investment, consumption demand have 'dried up'

via RGE monitor -- a synopsis of a public panel put on by the new york review of books which included nouriel roubini, george soros and paul krugman among others. krugman's comments were notably summarized by submitted to a candid world thusly:

Krugman reiterated the vicious cycle we are currently in: (1) There is a surplus of desired savings globally that should be moved into investments. (2) Investment demand has dried up, fueled in large part by the housing bust. (3) Even businesses that have capital to invest are delaying it because of the drop in consumer demand. And this is happening all over the world, which does tamp the flames of Ferguson’s claim the world is destined to look upon the U.S. government as insolvent.

it does indeed put to bunk a lot of what niall ferguson and many others (tending to but not uniquely on the republican side in the united states) have publicly extolled about the crisis -- but it is confirmation of the reality of the balance sheet recession. to avoid a disastrous collapse in incomes, deposits and GDP we must have massive deficit spending from the only other spoke in the CIGM wheel -- government.

And while Ferguson tried to underscore the contradiction between monetarist and Keynesian strategies, Soros really nailed the contradiction we need to understand: The short-term reaction the crisis requires is almost exactly the opposite of the long-term reaction for economic health.

also interesting and valid from my point of view are the comments of robin wells on the structural origins of the crisis -- particularly the distorting and masking effects of large international capital flows.

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The government is spending... itself in to bankruptcy. Perhaps the whole country could get behind the spending if it wasn't all focused on 1) bailing out Wall St, who should have lost their shirts and good riddance, 2) unproductive portions of the economy (paying people not to work, propping up politically powerful segments like he UAW, and 3) plowing subsidies in to fairy tale "green energy" projects.

You trash the republicans for not wanting to spend, I commend the republicans for not wanting to waste money. As it is, Obama and the dems ARE deficit spending and the only thing it will do is bankrupt the country.

Talk about PRODUCTION. Figure out how the country can produce, or better effect production, and then worry about deficit spending. Maybe you will get more takers.

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i wish those were the options, anon. we can get back to a place where they are if we're careful.

the fact is we've ended a long period where consumption was debt-financed with a massive asset collapse.

the resulting facts are that

1) we have too much production. production in the boom was built to satisfy debt-augmented demand. more indebtedness is no longer an option. production MUST contract some, not expand.

2) debt binge + asset collapse = massive equity destruction. households and businesses have found they are much poorer and ill-equipped for the future than they believed. as a result, they MUST save.

3) the combination of 1) and 2) mean that business investment and household consumption are both going into the tank for a good long while. these are two of the three primary components of GDP.

4) those flows will instead be redirected to debt paydown -- creating a paradox of thrift likely to (left unchecked) precipitate a collapse in money supply and outright depression.

5) the only means of avoiding 3) and 4) is for the only other major factor in GDP -- government spending -- to replace demand and maintain cash flows.

this is all straightforward and i don't think anyone denies it. but here's the part that matters:

6) government is capable of financing the kind of deficit spending that consumers and businesses won't be doing by taking the cash flow they are directing to debt repayment and borrowing it out of the banks for fiscal stimulus.that's where the money comes from. that's why the government should not have to worry about where the money will come from -- it's flowing into the banks right now. the result would be a national refinancing -- from private balance sheets to public. when completed, government and the private sector can reverse roles. in the meantime, collapse and depression will be avoided.

it won't mean growth, and it won't be optimal allocation -- but those kind of happy outcomes are simply not possible from this situation. the choices are a fighting stagnation or a deep depression.

we can transfer the massive pile of private debt slowly over to government and make good on our obligations as a society, and in so doing save ourselves from a very bleak future.

but for that to happen, anon, most republican politicians and a good many democratic pols as well will have to have either the courage to save the country or the humility to get the hell out of the way while some smarter people do the lifting.

i'm not trashing the republicans for thrift; thrift is an admirable reflex. (i sincerely wish they'd demonstrated even a single iota of it between 2000 and 2008.)

i am, however, calling them out for not understanding the crisis, how it works and therefore how we can minimize the damage. though admirable for the sum of our society and certainly our long run salvation (as increased productivity is used to retire debts slowly), thrift can be extremely dangerous when business, households AND government all practice it together. this cannot be allowed to happen, or -- mark my words -- men, women and children will starve in the united states. most people don't think that can happen. it can, and it would if we refuse to use the government balance sheet to its useful potential.

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that said -- we agree, anon, to the extent that further capital transfers to wall street, insurers, banks and so forth may jeopardize the economy by taking cash flows once directed at investment and consumption and wasting them on bank balance sheets where they won't flow anyplace.

they allocated $700bn for TARP. that's enough. let them now run back to solvency on earnings.

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insurers gain access to TARP

following through on earlier rumors -- via bloomberg.

Prudential Financial Inc. and Hartford Financial Services Group Inc. are among six insurers granted access to U.S. aid as the government moves to shore up an industry battered by investment losses.

Hartford won preliminary approval for $3.4 billion in capital from the Treasury’s Troubled Asset Relief Program, the Connecticut-based insurer said yesterday in a statement. Prudential, Allstate Corp., Principal Financial Group Inc. and Ameriprise Financial Inc. also are eligible for funds, said Andrew Williams, a spokesman for the Treasury. Lincoln National Corp. said it may receive $2.5 billion.

Life insurers have clamored for six months to get into a program that the nation’s biggest banks are trying to flee to avoid government restrictions. Insurers need the money to quell doubts about whether they can pay claims and retirement stipends after falling stock and bond markets depleted capital.

If you had some of these companies, the bigger ones like Hartford, go into a spiral, that would just cause another round of panic,” said Robert Haines, a New York-based analyst at CreditSights Inc. “I don’t like the idea of the government getting involved with these companies. You’re making to an extent a deal with the devil, but your options are really limited at this point.”

Credit-rating downgrades and stock drops across the industry eroded client confidence and made it harder to raise money from private investors. The dwindling funds available to the industry also contributed to the credit market freeze as life insurers, which hold about $1 trillion in corporate debt, had to scale back on purchases of new bonds.

this merely reinforces the impossibility of forcing large writedowns onto bank creditors, of whom insurers are some of the largest. either bail out the banks -- or bail out what's left of the banks, the insurers, the pensions and whatever might be left of the american economy in the post-apocalyptic aftermath.

UPDATE: more from david goldman.

There is a lot less reason to hold the financials now than before Chrysler. I advocated taking profits when BAC traded above $14 and Citigroup traded above $4. The distressed investing (”Zombie”) scenario I projected to keep them profitable is much less certain given the administration’s penchant for breaking glass in the credit markets.

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I just wanted to say that you have been on fire the last few days. Thanks for all of the good insight!!

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thanks, bwdik!

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Thursday, May 14, 2009


the condensed richard koo

from april, a 15-minute interview with the globe and mail. koo's comments on the policy receptiveness in china toward the end are also quite encouraging.

it is particularly important, i think, to reiterate koo's points as loudly as possible -- particularly considering that there are loud voices with considerable influence who apparently misunderstand the crisis, perhaps quite profoundly.

It is of course sensible to use fiscal stimulus to offset a fall in private demand, and to some extent this can be effective – with a lag. But if you lose control over public spending and borrow too heavily (helped by the fact people like to hold your currency), it ends badly.

From the beginning, we’ve expressed concern here that the entire Summers Plan was overweight fiscal, i.e., not enough resources for recapitalizing banks and addressing housing directly (for the context of this assessment, see our full baseline view). Back in December/January, this was a strategic choice worth arguing about; now it’s a done deal and following the (very) limited recapitalization outcome of the bank stress tests, it seems likely that household and firm spending will remain sluggish. If that is the case, the Administration’s logic implies throwing another big fiscal stimulus into the mix – and the Summers’ team is already preparing the groundwork.

The IMF is now warning against the risks of this approach, albeit using carefully worded language.

In a 20 minute presentation at the Carnegie Endowment on April 30th, Olivier Blanchard made statements that are striking coming from the IMF’s chief economist (webcast; slides; fan chart for growth forecast).

i'm unlikely to teach either simon johnson or olivier blanchard much about economics, and i've certainly entertained johnson's points on multiple occasions. nevertheless, the presumption that repairing the banking system through a monster series of writedowns will resolve the economic downturn does not seem to me to have much if any foundation, as it presumes the will to borrow remains intact in the aftermath. moreover, the notion that government fiscal deficit spending must be problematic beyond some arbitrary level does not seem to rigorously analyze the nature of that borrowing in a useful way. (though it may be problematic nevertheless.)

the potential of a national government to finance stimulative spending to replace demand lost to debt reduction is one of koo's critical policy insights, and it does not seem that either johnson or the IMF employ it. johnson is not a fan of larry summers, but as i've earlier commented johnson himself seems to be at a loss for practical and credible ideas beyond bank recapitalization and voiding by fiat a significant part of the country's $11tn mortgage debt, all delivered with a rather liquidationist tint which extends to banks in spite of some semantic obfuscation wherein we are asked to believe that gutting the creditors is not in fact nationalization simply because the government would not operate the banks.

to be sure, some failures will and must occur. but i daresay such steps as johnson has advocated may run the risk of not only not fixing the problem, but potentially decapitalizing the american insurance and pension superstructure with the likely undesirable effect of plunging the world into depression. i don't wish to impugn motives, but this does strike me not as a real plan so much as a concession to mythic fantasy which satisfies an ancient human desire for punishment -- a natural desire that johnson clearly feels strongly to judge by the writings which brought him to my attention in the first place.

UPDATE: nor should i single out simon johnson, obviously. nouriel roubini gives what i find to be a wholly unsatisfactory explanation of how bank losses can be foisted onto the insurance and pension sectors, forcing the government subsequently to come to their rescue as well.

UPDATE: i fear, as regards the insurers, barry ritholtz may similarly be allowing a very natural anger overrule a proper analysis of the problem. this is obviously good company to keep, but i do think they're collectively quite wrong.

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Thanks I will check out this video later.

You might be interested to read Steve Keen's comments (below the post itself) here. While he's said in the past he's "not keen on bailouts", he does seem in these comments to be supportive of monetization of government deficit spending in special circumstances like this crisis. And the reason he believes we cannot avoid a depression no matter what the government does appears to be because we have nothing to replace the loss of income from the collapsing FIRE sector of the economy. (The comments apply to Australia mostly but US by extension I think). While I'm not certain I fully grasp all the theory yet, this also seems related to the problem of specialization of labor thwarting keynesian stimulus spending. I wonder what Koo thinks about that. I know he emphasized that the most unproductive work is actually the best place for government spending during a balance sheet recession as it will not crowd out the private sector, but I dread the thought of what thousands of financial sector specialists etc being paid to stack paperclips would do for fulfillment/happiness of the population. Perhaps that's one reason why the Japanese have such high levels of depression?

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"the potential of a national government to finance stimulative spending to replace demand lost to debt reduction is one of koo's critical policy insights."

Actually, I think that belongs to Keynes.

Johnson's piece was good for one reason, I thought, and I might add something Gaius Marius, might be familiar with in the Roman republic's final decade, that is, the grabbing of power by a tiny oligarchy. Otherwise, Johnson's prescriptions are pretty standard IMF.

I find KOO's piece interesting. I think he underplays coming to terms with the problems of the banks. Also there's large differences between the US and Japan, first and foremost much of the debt in the Japanese system was carried by the corporations, which in Japan the banks hold great chunks of, making it the banks problems. The corporations retrenched in Japan, more so than the banks, here we have the banks retrenching. So, the banks tightening credit ends up with a similar end of no one wanting to borrow in Japan, though here we have banks, corporations, and consumers tightening up.

I do agree with him about fiscal stimulus and in fact that will be where the growth comes from for some time. However, I'm much less convinced of the argument to give the banks time, in the sense that we then end up like Japan, but that may very well be the best we can hope for.

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sorry, joec -- my misphrasing -- koo articulates (i think) how countries can do so without concern for interest rate difficulties, giving a mechanism for state demand support. he also explains why such keynesian stimulus does not similarly work outside the auspices of a balance sheet recession.

you touch on one of the big differences between 1990 japan and 2008 america -- japanese corporations didn't have non-recourse loans, for example.

but although US banks landed in a credit crunch much sooner than japan's banks did (not until 1997), i suspect the ultimate dynamic will be very similar as the private sector delevers longer term. the problems of the banks' balance sheets will (if things are well handled) eventually be seen as something of, if not a footnote, then perhaps a sidelight of the crisis in the academic treatment. it's the drying up of loan demand that will be the main storyline instead.

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singapore harbor

of the many facets of this disaster, for me one of the most fascinating is the unbelievable collapse in global trade. the world that is now passing (at least for the moment) was one dominated by the idea of globalization, founded on the precepts of cheap transport across all boundaries. most people changed, i think, their perception of the planet radically during this time -- it seemed, as it sometimes does in fits of hubris, as though the world were small.

but it is not small. nor are these boats, a now-idled lane of the superhighway of intercontinental trade.

the new york times depicts the world from what is for most americans the unusual vantage point of singapore.

One of the largest fleets of ships ever gathered idles here just outside one of the world’s busiest ports, marooned by the receding tide of global trade. There may be tentative signs of economic recovery in spots around the globe, but few here.

Hundreds of cargo ships — some up to 300,000 tons, with many weighing more than the entire 130-ship Spanish Armada — seem to perch on top of the water rather than in it, their red rudders and bulbous noses, submerged when the vessels are loaded, sticking a dozen feet out of the water.

So many ships have congregated here — 735, according to AIS Live ship tracking service of Lloyd’s Register-Fairplay in Redhill, Britain — that shipping lines are becoming concerned about near misses and collisions in one of the world’s most congested waterways, the straits that separate Malaysia and Singapore from Indonesia. ...

More worrisome, despite some positive signs like a Wall Street rally and slower job losses in the United States, is that the current level of trade does not suggest a recovery soon, many in the shipping business say.

“A lot of the orders for the retail season are being placed now, and compared to recent years, they are weak,” said Chris Woodward, the vice president for container services at Ryder System, the big logistics company. ...

So badly battered is the shipping industry that the daily rate to charter a large bulk freighter suitable for carrying, say, iron ore, plummeted from close to $300,000 last summer to a low of $10,000 early this year, according to H. Clarkson & Company, a London ship brokerage.

The rate has rebounded to nearly $25,000 in the last several weeks, and some bulk carriers have left Singapore. But ship owners say this recovery may be short-lived because it mostly reflects a rush by Chinese steel makers to import iron ore before a possible price increase next month.

on that, see ft alphaville today -- an anomalous event and not indicative of any upturn in china, apparently.

Container shipping is also showing faint signs of revival, but remains deeply depressed. And more empty tankers are showing up here.

The cost of shipping a 40-foot steel container full of merchandise from southern China to northern Europe tumbled from $1,400 plus fuel charges a year ago to as little as $150 early this year, before rebounding to around $300, which is still below the cost of providing the service, said Neil Dekker, a container industry forecaster at Drewry Shipping Consultants in London. ...

These vessels total more than 41 million tons, according to the AIS Live tracking service. That is nearly equal to the entire world’s merchant fleet at the end of World War I, and represents almost 4 percent of the world’s fleet today.

Ships are anchoring at other ports around the world, too. There were 150 vessels in and around the Straits of Gibraltar on Monday, and 300 around Rotterdam, the Netherlands, according to the AIS Live tracking service.

But Singapore, close to Asian markets, has attracted far more.

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the real credit crunch


U.S. commercial paper outstanding fell $81.1 billion to $1.298 trillion for the week ended May 13, ABCP fell to $ 598 billion.

with all the discussion of banks, it's easy to forget that commercial banks intermediated the minority share of credit creation in the boom. securitization was responsible for the majority, and it is continuing to collapse in breathtaking fashion as particularly illustrated by the fall of both financial and asset-backed commercial paper outstanding.

this is a massive suction of deleveraging pulling down our credit-based economy, amounting to $292bn since the end of october across all types. the rate of decline noticably picked up since the start of april as well, though the data is lumpy, with a $154bn reduction in april and $124bn in just the first two weeks of may.

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On the topic of deleveraging, there has been a lot of anecdotal talk about how much the financial sector has already deleveraged. Yet as of the end of Q4 2008 the aggregate numbers in the Fed flow of funds data show only household debt contracting so far (at a 2% annualized rate), with business and financial sector debt still expanding!

Do you think aggregate private sector deleveraging is much further along in the last 4 months? A $292 billion drop in commercial paper is only 0.5% of total debt outstanding, and other debt could still be expanding.

If this crisis is ultimately going to shrink private debt-to-GDP back to historically sustainable levels, that implies the real economic crisis (versus financial sector crisis) and deflation have barely even started... Yikes.

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anecdotally, many firms have been said to be drawing on prearranged revolving lines with the banks. some of that, i'm sure, is being used to refi CP and other hazardous short-term lending. so there's a picture that hangs together a bit -- corporate and (forcibly) bank debt slowly growing, capital market leverage collapsing faster, with households cutting debt.

but fwiw, i think your conclusion is right -- "barely even started". this will be a process taking years, and i imagine the pace will pick up.

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weekly claims

via calculated risk.

In the week ending May 9, the advance figure for seasonally adjusted initial claims was 637,000, an increase of 32,000 from the previous week's revised figure of 605,000. The 4-week moving average was 630,500, an increase of 6,000 from the previous week's revised average of 624,500.
The advance number for seasonally adjusted insured unemployment during the week ending May 2 was 6,560,000, an increase of 202,000 from the preceding week's revised level of 6,358,000. The 4-week moving average was 6,337,250, an increase of 128,750 from the preceding week's revised average of 6,208,500.

i commented yesterday on using the yield curve, confidence differential and ECRI WLI to gauge the possibility of any economic turnaround. add to that weekly claims. per CR:

Typically the four-week average [of initial unemployment claims] peaks near the end of a recession.

The four-week average increased this week by 6,000, and is now 28,250 below the peak. There is a reasonable chance that claims have peaked for this cycle, but it is still too early to be sure, and if so, continued claims should peak soon.

the trouble is sorting through the headfakes. i overlayed markers over some of the past false signals in the four-week average to highlight the fact that this (like almost everything else in life) doesn't move in a straight line. it will take a four-week sustained upturn in claims averaging 659,000 -- and that is unfortunately far from impossible in this environment, even given the benefits of government backstops in the financial system and modest fiscal stimulus.

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indefinite detention

read 'em and weep.

President Barack Obama's "administration is weighing plans to detain some terror suspects on US soil -- indefinitely and without trial -- as part of a plan to retool military commission trials that were conducted for prisoners held in Guantanamo Bay," The Wall Street Journal said.

The proposal, which is part of the administration's internal deliberations on how to deal with the prisoners ahead of a planned closure of the controversial US military prison next year, is being shared with some lawmakers, it added.

White House officials contacted by AFP had no immediate comment on the detainee deliberations.

Republican Senator Lindsey Graham, who met with White House Counsel Greg Craig this week about the Guantanamo plans, told the Journal that the administration was namely seeking authority for indefinite detentions granted by a national security court.

"This is a difficult question. How do you hold someone in prison without a trial indefinitely?" asked Graham, who, along with former Republican presidential nominee Senator John McCain, has pressed for reinstating the military commissions to try Guantanamo detainees.

the rule of law means little to any president, it seems, beyond an annoyance to their almighty prerogative of power.

while some on the left side of center apparently still foolishly dream that there's some possibility of prosecuting members of the past administration for war crimes, the current administration is remodeling the security state to its own liking. such a state within a state is a requirement for any serious economic and military empire, and the aspiration to empire has done anything but go away with the election of a new emperor. over time, what were once the rules have been completely rewritten to fit the exegencies of rising imperial ambition. and they will continue to be rewritten as empire -- which to an extent that probably escapes almost all americans has become in important and material ways the focal point of a reconstructed american state -- turns inevitably inward and vents its frustrations in its decline on its young and dissident.

i'd wager that, within fifty years, a national security court or its descendent has authorized the detention of domestic political enemies of the ruling administration.

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Wednesday, May 13, 2009


end of the short squeeze

via ft alphaville cites sharon bell of goldman sachs.

In addition, the amount on loan has fallen significantly suggesting many shorts have now been taken off. On average 2.9% of stock was borrowed in April a drop compared with recent months and a low vs. the last 5 years.

perhaps waiting a bit for today's opening gap to fill to reopen short positions (i was stopped out from this trade) would be prudent.

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thoughts on the yield curve

bloomberg's caroline baum yesterday penned a good column on the yield curve, a topic near and dear to me from the "interwar" period of 2004-2007. it looked like a bold recession predictor to me as housing really began to deteriorate -- though it came with a massive lead time -- and baum apparently thought as much as well. her comments on the curve now:

The steepening yield curve is not going to nip the recovery in the bud. (These warnings are sure to follow.) To the contrary, it’s a sign that things are improving.

The yield curve was almost vertical in the early 1990s, another period where bank balance sheets were impaired. It took a steep curve for a long time to heal the banks, which borrow short and lend long when they aren’t getting into trouble with newfangled products.

If the Fed wants to worry about something, it should forget long-term interest rates. They will take care of themselves.

Policy makers have much bigger concerns, namely the ability, and political wherewithal, to shrink the Fed’s $2 trillion balance sheet when the time comes.

And when will that be? The yield curve will provide valuable input, assuming anyone is listening.

this interesting quote was included in baum's article.

“If you think monetary policy matters, you should care about the spread,” says Jim Glassman, senior economist at JPMorgan Chase & Co. With the Fed’s “ability to anchor short- term rates at artificial levels, the spread is a way of looking at the stance of monetary policy.”

that's likley to be a proper framing, and the open question is really whether monetary policy is effective in what is shaping up to be a balance sheet recession. if loan demand is broken, does the yield curve matter?

to be sure, baum warns outright against people explaining why "things are different this time" and this isn't a "green shoot". it is a green shoot. but...

revisiting these old yield curve posts is interesting for me for lots of reasons, and not only to verify yet again how wrong i can be at times. in advance of the recession that began in late 2007 i watched a combination of the yield curve, the consumer confidence differential between future expectations and present situation, and the ECRI leading indicators. the curve and confidence metrics triggered very early -- with the curve initially inverting in december 2005 (more definitively in february 2006) and the confidence differential blowing through (-20) in march 2005 on its way to (-50) in march 2007, they're clearly more table settings than timing signals. (though they were among the best motivators for my wife and i to sell our house and start renting.) ECRI (which now maintains a recession watch page) didn't see their weekly leading index go negative growth until september 2007. the peak in the S&P 500 subsequently came in october and recession was eventually antedated to december.

can it all work in reverse? maybe. the confidence differential has turned into a positive indication. the yield curve is now steep by historical standards (400 bps separate the ten-year and the t-bill). but these two indications also led the onset of recession by 18 months or more -- table setting and all that. meanwhile, ECRI's leading indicator (pictured here in green) is still deep in the negative at (-16.1), though less so than it was in november.

it's worth reiterating that, in past cycles, ECRI's WLI growth has tended to go positive before the economy and quite early in the subsequent bull market move in stocks. in the last recession, WLI went significantly (+3.0 or more) positive in january 2002, double-dipped in late 2002 and started up for good in may 2003. it did likewise following negative spells in april 1999, april 1991, october 1988, february 1985, november 1982, november 1980, june 1975 and january 1971. there are worse buy points than these.

stockcharts' dynamic yield curve is, as always, here.

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greenspan on housing

oh dear. via bloomberg:

Former Federal Reserve Chairman Alan Greenspan said that the decline in the U.S. housing market may be bottoming and it’s “very easy to see” financial markets continuing to improve.

“We are finally beginning to see the seeds of a bottoming” in the housing industry, Greenspan said today during a conference of the National Association of Realtors in Washington. The U.S. is “at the edge of a major liquidation” in the stock of unsold properties, which may help to stabilize prices, Greenspan said.

Home-sales figures in recent weeks have shown a slower pace of decline, and the slide in property prices has eased, according to gauges including the S&P/Case-Shiller index.

The former Fed chief, who was among the first prominent economists to warn about the risk of a recession in 2007, said housing prices could fall another 5 percent without putting too much strain on the economy.

“We run into trouble if it’s very significantly more than that
,” Greenspan said. Housing prices remain “the critical Achilles’ heel” of the economy.

i've no idea what the former fed chief's methodology is, but i hope he's aware that house prices are likely to cover the next 5% down in about three or four months and keep right on going regardless of anything that's likely to happen in either inventories or sales. he's more or less saying that greater trouble for the economy is inevitable.

UPDATE: calculated risk highlights a new high in foreclosures -- product of the flood of delayed foreclosures in the pipe now bursting forth.

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ooops, I meant for this to go up here:

is the administration paying people to go out and spread the 'good news' of the economy?

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maybe this was part of the stimulus plan. we'll hire people like buffet, greenspan and diane sawyer to say everything is getting better. this is nothing more than cheerleading at this point.

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the best part, ccd, is that you can contrast greenspan with the ECRI's leading home price index, which was in february at a low point for this cycle and still falling. this should turn up fairly sharply at least several months before actual house prices do.

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ECRI's Lakshman hasn't exactly been scintillating in his call for a home price bottom in the past . At one forum, he even mentioned advising his brother to buy a home around 2007. My own analysis, for the LA/Orange County area, points to a bottom for our parts another 25%-ish lower from current levels if we hit valuation measures similar to the mid-nineties. Beacon Economics (of Thornberg fame) had similar results while calling for a bottom in Q3 2011 for this particular MSA.

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right rb -- i think you can see the blip on their leader that apparently provoked lakshman into that insanity. contextualize your indicator!

i picked out a chart from t2's presentation a while back regarding california house prices -- not sure you've seen it.

fwiw, from what i can tell anecdotally prices in my neighborhood -- 75th percentile suburban chicago -- have to come off another 20% nominal to even begin to make any sense vis-a-vis what i'm paying to rent. and with rents now trending down under vacancy and economic prressures, there are some scary scenarios for house prices.

as i recently emailed a friend:

the math around here doesn't work yet, and it will before this is over. when i can buy my house with a monthly payment of 80% of my rent, THEN i'll be shopping. (and even then there will be downside risk for us.) my rent is $2000 -- and for that payment, even with a 5% 30-year, putting down enough to avoid PMI, net of $7000/yr taxes, we could finance a $300,000 purchase price. houses on my block still list over $370k (down from $430k when we moved in a year ago). no dice!

even if mortgage rates fall to 3%, that would still only boost purchasing power to $330k or so. so prices have to come down significantly here regardless of what the government does on mortgage rates. and given the healthy number of old for-sale signs in the neighborhood (and small but growing number of unshoveled-driveway/unmowed-lawn foreclosures) they likely will. and if they go to 7%, we could similarly finance $260k.

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by "scary scenarios" i mostly mean john templeton's 2003 call. if government fiscal efforts at cash flow maintenance fail or are derailed, it's not impossible to imagine house prices down 90% in the bubble markets. t2's california chart looks like it's beelining for it -- and one has to remind oneself that that would be another 75% down for CA house prices, as a 90% drop is really two 70% drops compounded.

i think a lot of good folks believe that housing is so bad now that you really can't get hurt by buying in and waiting. something about catching a falling knife....

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Apparently good credit scores are hard these days and we therefore managed to get a 10% reduction in rent for a new lease -- in Irvine, that's $2200 rent for a 1700 sq feet SFR in a neighborhood selling currently at $350 per square feet. Using this calculator,
I arrived at ~ 25% further drop assuming a 5% mortgage rate and 20% downpayment -- which is also in the ballpark of prior trough price-to-income multiples and Beacon's forecast (you could sort of get rental parity at our originally listed price if you zero out maintenance costs). By my estimate on the Case-Shiller, I'd put the national at 10-15% lower from current levels. Persistent deflation of course takes all of these forecasts off the table.

I have seen your T2 chart, I've seen Templeton's forecast but I too hope that he turns out to be wrong!

BTW, Lakshman has in the past on the inflation/deflation debate frequently stated that deflation is not likely unless you have frequent recessions. He has recently softened his tone on that regard and admitted that it would be a possibility if we have another recession in an environment where growth has been consistently weakening for many years.

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april retail sales

via bloomberg:

Retail sales in the U.S. unexpectedly dropped in April for a second month, indicating that rising unemployment is prompting consumers to boost their savings.

The 0.4 percent decrease followed a revised 1.3 percent drop in March that was larger than previously estimated, the Commerce Department said today in Washington. Excluding auto dealers, sales fell 0.5 percent. ...

Economists had forecast retail sales would be unchanged, according to the median of 67 projections in a Bloomberg News survey, after a previously reported 1.2 percent drop in March. Estimates ranged from a 0.8 percent decline to an increase of 1.1 percent.

Excluding autos, sales were projected to rise 0.2 percent after a 1 percent decrease a month earlier, according to a Bloomberg survey.

The decline in sales was led by falling demand at electronics, furniture, clothing and grocery stores.

Receipts at service stations also fell in April, even as fuel prices climbed, indicating Americans may be cutting back on driving to save money.

as predicted by david rosenberg. another dent in the green shoots argument, it would seem. it looks more likely that the freefall of the last two quarters has been replaced by a slower grind lower with the help of massive government support. recall that direct fiscal stimulus -- not reductions in tax collections, which probably facilitate deleveraging and accelerate contractions of monetary aggregates more than anything else, but actual forced spending by the government -- has only just begun and will remain small in comparison to the probable decline in economic activity at least through the remainder of 2009 and probably through 2011 unless more stimulus wends its way through congress.

UPDATE: charts from calculated risk.

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is the administration paying people to go out and spread the 'good news' of the economy?

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