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Wednesday, December 08, 2010


food stamps

with SNAP enrollees as a ratio of the total population, expressed as a percentage of the forty-year mean ratio. we're clearly in uncharted waters, particularly when you consider that food stamp enrollments were subject to welfare reforms and the secular trend in enrollment was probably down going into the financial crisis.

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Please contact at your soonest convenience to discuss the possibility of your joining our family of elite financial bloggers at Seeking Alpha.

Rebecca Barnett
Seeking Alpha Editor

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News from March: they've started another war.

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the graphs stats on 2009 consumer use of food stamps is simply frightening!

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we miss you out here on the internet.

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folks i've know that were receiving food stamps were concernced for this reason.

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In 2009 as part of the Recovery Act, President Obama increased the benefits that SNAP enrollees are eligible for.

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the hidden message of the consumer credit statistical release

yesterday saw the federal reserve's g.19 statistical release on consumer credit. some have noted the rebound in consumer credit off the worst months of 2009 with a measure of hope regarding consumer balance sheets. and indeed yesterday's headline showed further improvement, making for a positive three-month average change in overall consumer credit outstanding.

but there's a fly in the ointment, it would seem. one of the sticking points of the release to me was the massive growth in "student loans" -- running at over 80% year-on-year, an expansion of a very material $120bn. this is a stock, not a flow, and the idea that the amount of outstanding sallie mae loans had nearly doubled in a year is silly. so the question became what was driving the anomaly?

with the help of @Alea_ i managed to track down the difference. via firedoglake:

The Federal Family Education Loan program (FFEL) allows private financial institutions to provide students with loans, but the government assumes the risk of default, and pays the financial fees while the student attends college. This amounts to privatized gains combined with socialized loans. The CBO found that compared to the William D. Ford Federal Direct Loan program, an alternative system in which the government just directly provides students with loans, FFEL loans cost the government 10 to 20 percent more (PDF). Eliminating the unjustified subsidies and government financial backing for the FFEL program by expanding the existing direct loan program is projected to save $67 billion over the next decade.

Under the FFEL program, financial institutions like Sallie Mae, Bank of America, National Education Loan Network (NELNET) JPMorgan Chase, Wachovia, and Wells Fargo would originate these FFEL loans with students, and then sell them on the secondary credit market. In 2008, the credit market dried up, and the private lenders had nowhere to sell these government guaranteed loans. So, the government stepped in to buy up these loans and protect a program that was already a massively wasteful corporate boondoggle.

The bailout was authorized with HR 5715 Ensuring Continued Access to Student Loans Act (ECASLA). The bill allowed for the Department of Eduction to produce three different programs, the Loan Purchase Commitment Program, the Loan Participation Purchase Program, and a buyer-of-last-resort Asset-Backed Commercial Paper Conduit.

this purchase program -- which amounted to the department of education buying privately-originated student loans that were intended to be securitized but now could not be -- was radically expanded in 2009 and 2010, with a purchase amount target of about (you guessed it) $120bn. (the reporting of the actual purchases is here.)

in other words, what is being included in the g.19 as an expansion of student loans (and thereby consumer credit) is really in fact a bailout of several large banks and finance companies stuck with immovable loans.

so what does the picture of consumer credit look like with the influence of these asset purchases removed? as you can see, there's been very little letup in the pace of consumer deleveraging. the blue columns show the YoY change of unadjusted consumer credit as reported -- obviously a big collapse, but more recently an attenuated contraction that resembles recovery. the red columns show the same less the line items including student loans; clearly, there's not only no attenuation but year-on-year contraction in still picking up pace.

also of interest i think is the monthly sequential version of this same chart. we can easily see the seasonal waves of consumer credit expansion leading up to the holidays and contraction in the winter months. looking at the blue as-reported columns, late 2008 was extraordinary for its lack of holiday credit expansion, which of course shows up as the massive year-on-year contraction is was in the previous chart. ever since there's been contraction for the most part, but (as noted) attenuating through to the recent months which have shown three months of actual sequential consumer credit growth.

what's also apparent in the red columns, however, is how the ECASLA loan repurchase program has in 2010 completely distorted the true picture of consumer credit.

i've previously noted here the softening of leading economic indicators since april of 2010. i've also highlighted how the employment ratio derived of the household survey of the employment report has deteriorated markedly over roughly the same period (along with other LEI, such as CFNAI and the philly fed ADS). now we can also see that consumer debt deleveraging, after dissipating through the middle of 2009, has begun to reintensify powerfully in the last few months despite being "hidden from view" by the ECASLA bailout.

meanwhile, via paper economy (h/t @merrillmatter), we've also seen what appears to be a reintensification of deleveraging in the commercial paper market. and we're seeing evidence of renewed downturns in both commercial real estate pricing and residential house prices.

i've mentioned many times before steve keen and his three-party stock-flow model for banking economies (demonstrated here), one of the conclusions of which is that the change in aggregate demand flow is equal to the sum of the change in GDP flow plus the second derivative (or acceleration) in debt -- this is also known as the "credit impulse" formulation of aggregate demand. what the g.19 is giving evidence of is a renewed deceleration in consumer debt levels (that is, faster deleveraging) which should negatively impact aggregate demand. and that impact is, i expect, going hand-in-hand with contracting LEI and deterioration in EMRATIO.

it is also, i must imagine, behind the recent government move to initiate a second round of quantitative easing and an attempted extension of some economic stimulus measures. the administration must know as well as anyone that the rolloff of stimulus measures will be subtracting from GDP in coming quarters if they are not sustained; and that, if that rolloff is paired with a renewed deleveraging impulse, a powerful recession is all too likely. from a starting point economy that, as measured by per capita real final sales, hasn't really recovered at all, such an outcome could be politically, economically and spiritually devastating.

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Hi GM,

Nice to see you blogging again! (I don't do twitter).

Thanks for delving into this, I've been wondering about the 'federal government' line growth for a few G.19 releases also.

But how sure are you that ECASLA is actually boosting the top line non-revolving credit numbers versus just shifting the composition of its components? Looking at nonrevolving credit totals in the G.19 report it seems like there is an ongoing shift from finance companies (and to a lesser extent commercial banks) to federal government. That would show a noisy but roughly flat trend in total non-revolving credit (still a shift from the pre-2008 rapid growth).

By subtracting the portion held by government you are assuming that its increase came from "elsewhere", i.e., numbers that weren't previously accounted for in the G.19. That might be true but on my quick reading of all this isn't immediately obvious to me. (Let me know if I missed something).

But either way, a shift to direct government lending could enable a decision to lower lending standards and boost borrowing (and spending) activity. That may be partially sustained for as long as the government wants it that way, but would partially change the deleveraging story if true (at least if people take on that debt with the intent to service it vs planned abuse/defaults).

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right, hbl (hello!) and i'm not certain. my presumption is that these were loans originated for distribution and so never found their way onto finance company balance sheets -- that is, they were shadow banking assets. when they couldn't be pushed into a conduit thanks to the collapse of the commercial paper and securitization markets, the government got involved and brought them on.

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Ah, thanks for clarifying your thinking, that seems like a logical possibility and may have been implied in a way that I missed. I guess there's probably no simple way to answer for sure.

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Friday, December 03, 2010


EMRATIO back to recession low

following up on last month's analysis, this morning's non-farm payrolls release did little to assuage me on the household survey data.

on an absolute level, the EMRATIO is back down to its recession low point from december 2009 at 58.2% as household data continues to be frighteningly bad. more importantly than the absolute level, however, is the continuing steep reversion from the april high point. as was highlighted last month, EMRATIO hasn't backed off a local high to this extent without the US economy entering recession since the 1960s, a period characterized by a much higher share of manufacturing employment and therefore generally more volatile overall employment dynamics. current FRED page here, employment situation data index here.

downturns in EMRATIO tend to lead -- on the way down -- aggregate weekly hours worked, civilian employment and total nonfarm payrolls by a handful of months -- which is why and how i used it in september 2007 to help call the recession that began in december of that year.

no one, and i mean almost literally NO ONE, in the financial world is looking for the united states to return to recession now, only a few months after double dip fears ran rampant. a shot of quantitative easing and massive expansion of the ZIRP-funded, dollar-based risk carry trade wiped away many of those fears, along with relatively strong manufacturing data as production has caught up with restocking following inventory drawdowns incurred in 2008 and early 2009. but i think we're now seeing the onset of exactly that.

it's becoming clearer now that japan is well on its way into a double dip, with new orders, PMI and net exports heading south rapidly under a strengthening yen. the euro periphery and PIIGS have seen what can only be called a bond market crash in recent days, an event likely to catapult the lot, weak and stagnating economies all, into a severe double dip. with important sources of global demand like these contracting, it is hard to see how a soft US economy will not be impacted at least marginally.

but i think the bigger story is soft domestic demand, as households continue to delever rather than borrow, as government deficits succumb at the margin to first the deceleration and then contraction of stimulus spending as well as nascent austerity measures (such as the refusal of emboldened house republicans to extent unemployment benefits, an imminent shutoff of $80bn annual systemic income spigot). the framework established by richard koo would see even mild reductions in government deficit spending support of systemic income as both deflationary and recessionary, and i expect some of both. pictured here are real final sales as denominated by civilian employment (in red) and by total population (in blue). while sales have picked up from the low point of the recession, that expansion has only really kept pace with population growth off the low. meanwhile, the income recovery driving real final sales (as reported in the BEA's personal income report) have clearly been dependent on a massive expansion of transfer payments as well, which helps explain what looks like a large jump in spending per employed person. with congress now refusing extensions that would maintain this expansion and with an eye on transfer payments of all kinds, we need payroll and compensation growth to sustain income. (for context, transfers are have jumped from about 22% to 29% of the size of compensation received during the recession. PCTR is also up over 18% of personal income from 14%. cutting off extended unemployment benefits probably step-change reduces the flow of personal income in the area of 1%.)

as mentioned earlier, manufacturing has been restocking drawn-down warehouses throughout the economy after 2008's "sudden stop" in production, but that catch-up is now all but over. i think soft demand is now feeding through the manufacturing chain, showing up in some fattening inventories and softening new orders. we're already seeing examples, such as DRAM pricing, of supply simply exceeding demand after the restocking jolt ended.

This decrease has all happened in the wake of the PC industry suffering right after it experienced explosive shipment growth mid-year. Back in September, Samsung, the world’s number one manufacturer of memory, was one of the first to say that hubris off the back of midyear shipments growth will likely lead to supply far exceeding demand, leading to a steady decline in DRAM prices. True to their predictions, this has happened, with DRAMeXchange simply confirming this.

just this morning the census bureau's factory orders figure came in disappointing, though within the range of the uptrend. this is another metric normally led by EMRATIO to the downside, though orders usually lead EMRATIO in recovery.

which metric we're being led by at the moment is not altogether certain, and depends very much on whether a consumer-demand expansion is in the cards. i tend to think continuing disappointment in hiring in response to a lack of end demand alongside reductions in government transfer payments will exacerbate the "non-recovery" in per capita real final sales, increase the private sector's balance sheet remediation prerogative and weaken orders as recession returns.

EDIT: doug short via business insider is following the ECRI weekly leading index and wondering if it isn't also signaling recession. It had fallen below (-10), and has since recovered to (-2.4).

The question, has been whether the latest WLI decline that began the the Q4 of 2009 is a leading indicator of a recession or a false negative. The published index has never dropped to the current level without the onset of a recession. The deepest decline without a near-term recession was in the Crash of 1987, when the index slipped to (-6.8).

short also looks at the philly fed ADS business conditions index and CFNAI from the chicago fed, neither of which rebounded as strongly as did ECRI WLI (probably because they do not have monetary policy components, as the ECRI black box likely does) and both of which are behaving quite poorly in their latest readings.

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from perrone: aw, I love having ya back, gm. and nah, I don't do twitter. call me antique, call me a philistine.

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Glad to see you back and posting. I always enjoy your posts. Michael(?) Dueker who used to post on econbrowser now posts his index here:

He seems to be optimistic about recession chances.

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Thursday, December 02, 2010


the per capita recovery in real final sales

as measured by those who work (in red), we're buying more than ever, as those with jobs support those without.

as measured by those who simply are (in blue), there's been virtually no recovery in spending at all.

FRED page here.

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tobin's Q update

doug short posts a series of long term charts of tobin's Q, calculated today from the federal reserve's z.1 release.

this chart is of absolutely no use to traders. however, for longer-term investors, i think there may be no other more useful context.

and the message is unambiguous -- since 1995, it has been an excessively risky time to be in or get into the stock market. and of course it has since been a rather wild ride, in which you would have been far better off to have been in government bonds.

of course, that hasn't been true of every cyclical iteration of tobin's Q -- see 1966-1982, for example. but it is nevertheless food for thought.

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