Saturday, July 31, 2010

Profits Vs. Data

NEW YORK (MarketWatch) -- The U.S. stock market is likely to continue pulling risk on and off the table in the days ahead, with another heavy round of earnings reports in store, along will a full slate of data on the economy, employment in particular.
"We're getting a sharper rebound in earnings than in the economy," said Jim Dunigan, managing executive of investments at PNC Wealth Management.
Of the 336 S&P 500 companies that have reported second-quarter earnings, 75% exceeded expectations, 10% reported earnings in line with analysts' estimates and 15% missed, according to John Butters at Thomson Reuters.
And, while government-induced spending helped companies generate stellar profits, those bulging bottom lines are doing little to create jobs, notes Jack Ablin, chief investment officer at Harris Bank.
The nation's persistently high unemployment rate, the biggest source of worry for those looking for signs of life in the economic recovery, will have Wall Street fixated on Friday's July jobs report, as well as the government's weekly count of those filing for jobless benefits, with that data released the day before.

ECRI Continues Its Plunge Even Deeper Into Recession Territory

The ECRI Leading Indicator has just moved further into certain recession territory, hitting -10.7 for the most recent week (the previous revised number is -10.5). The market goes green on the news, as the Liberty 33 traders have done their job for the day and are off to the Hamptons. And what is so odd about the market reaction one may ask - bad news are as always priced in, as the apocalypse is nothing that a little money printing can't fix, while minimal upside surprises (soon to be revised far lower) are sufficient to move the market higher by over 100 points intraday. Hopefully the HFT operators unionize and go on strike soon in demanding greater pay, and get the Greek trucker treatment as a result, because this market is not even a joke anymore.

The ECRI's Weekly Leading Indicators (WLI) has now fallen 8 consecutive weeks and has been below -10 for two consecutive weeks.

click on chart for sharper image

Given the July bounce in the stock market, the ever-optimistic me expected some sort of anemic bounce in the WLI as well, but that bounce never came. Of course, it would be helpful to know the makeup of WLI (components and percentages), but unfortunately that information is proprietary.

Nonetheless, we can say there has never been a WLI plunge in history of this depth and duration, nor any dip at all below -10 that has not been associated with a recession.

Obama Transforming America into a Monster

The Internet is a large-scale version of the "Committees of Correspondence" that led to the first American Revolution — and with Washington's failings now so obvious and awful, it may lead to another.
People are asking, "Is the government doing us more harm than good? Should we change what it does and the way it does it?"
Pruning the power of government begins with the imperial presidency.
Too many overreaching laws give the president too much discretion to make too many open-ended rules controlling too many aspects of our lives. There's no end to the harm an out-of-control president can do.
Bill Clinton lowered the culture, moral tone and strength of the nation — and left America vulnerable to attack. When it came, George W. Bush stood up for America, albeit sometimes clumsily.
Barack Obama, however, has pulled off the ultimate switcheroo: He's diminishing America from within — so far, successfully.
He may soon bankrupt us and replace our big merit-based capitalist economy with a small government-directed one of his own design.
He is undermining our constitutional traditions: The rule of law and our Anglo-Saxon concepts of private property hang in the balance. Obama may be the most "consequential" president ever.
The Wall Street Journal's steadfast Dorothy Rabinowitz wrote that Barack Obama is "an alien in the White House."
His bullying and offenses against the economy and job creation are so outrageous that CEOs in the Business Roundtable finally mustered the courage to call him "anti-business." Veteran Democrat Sen. Max Baucus blurted out that Obama is engineering the biggest government-forced "redistribution of income" in history.
Fear and uncertainty stalk the land. Fed Chairman Ben Bernanke says America's financial future is "unusually uncertain."
A Wall Street "fear gauge" based on predicted market volatility is flashing long-term panic. New data on the federal budget confirm that record-setting deficits in the $1.4 trillion range are now endemic.
Obama is building an imperium of public debt and crushing taxes, contrary to George Washington's wise farewell admonition: "cherish public credit ... use it as sparingly as possible ... avoiding likewise the accumulation of debt ... bear in mind, that towards the payment of debts there must be Revenue, that to have Revenue there must be taxes; that no taxes can be devised, which are not ... inconvenient and unpleasant ... ."
Opinion polls suggest that in the November mid-term elections, voters will replace the present Democratic majority in Congress with opposition Republicans — but that will not necessarily stop Obama.
A President Obama intent on achieving his transformative goals despite the disagreement of the American people has powerful weapons within reach. In one hand, he will have a veto pen to stop a new Republican Congress from repealing ObamaCare and the Dodd-Frank takeover of banks.
In the other, he will have a fistful of executive orders, regulations and Obama-made fiats that have the force of law.
Under ObamaCare, he can issue new rules and regulations so insidiously powerful in their effect that higher-priced, lower-quality and rationed health care will quickly become ingrained, leaving a permanent stain.
Under Dodd-Frank, he and his agents will control all credit and financial transactions, rewarding friends and punishing opponents, discriminating on the basis of race, gender and political affiliation. Credit and liquidity may be choked by bureaucracy and politics — and the economy will suffer.
He and the EPA may try to impose by "regulatory" fiats many parts of the cap-and-trade and other climate legislation that failed in the Congress.
And by executive orders and the in terrorem effect of an industrywide "boot on the neck" policy, he can continue to diminish energy production in the United States.
By the trick of letting current-law tax rates "expire," he can impose a $3.5 trillion 10-year tax increase that damages job-creating capital investment in an economy struggling to recover. And by failing to enforce the law and leaving America's borders open, he can continue to repopulate America with unfortunate illegals whose skill and education levels are low and whose political attitudes are often not congenial to American-style democracy.
A wounded rampaging president can do much damage — and, like Caesar, the evil he does will live long after he leaves office, whenever that may be.
The overgrown, un-pruned power of the presidency to reward, punish and intimidate may now be so overwhelming that his re-election in 2012 is already assured — Chicago-style.
• Christian, an attorney, was a deputy assistant secretary of the Treasury in the Ford administration.
• Robbins, an economist, served at the Treasury Department in the Reagan administration.

Friday, July 30, 2010

Even the New York Times Says the Economy is Slowing

There is no more disputing it: the economic recovery in the United States has indeed slowed.
The nation’s economy has been growing for a year, with few new jobs to show for it. Now, with growth at an annual rate of 2.4 percent in the second quarter and federal stimulus measures fading, the jobs outlook appears even more discouraging.
“Given how weak the labor market is, how long we’ve been without real growth, the rest of this year is probably still going to feel like a recession,” said Prajakta Bhide, a research analyst for the United States economy at Roubini Global Economics. “It’s still positive growth — rather than contraction — but it’s going to be very, very protracted.”
A Commerce Department report on Friday showed that the economy had grown at a faster pace earlier in the recovery, expanding at an annual rate of 5 percent at the end of 2009 and 3.7 percent in the first quarter of 2010. Consumer spending, however, was weaker than initially believed.
Many economists are forecasting a further slowdown in the second half of the year, perhaps around an annual rate of 1.5 percent. That is largely because businesses have refilled the stockroom shelves that they had whittled down during the financial crisis, meaning there will not be much need for additional inventory orders.
Fiscal stimulus policies are also expiring, which may further drag on growth. And individual stimulus programs like expanded unemployment benefits have faced huge political battles each time they have come up for extension in Congress.
The approaching midterm elections may further entrench the political stalemate after Congress returns from its August recess. As a result, pressure will probably increase on the Federal Reserve to use its tools to prevent a double-dip recession. Recent reports from Fed officials suggest the central bank has become increasingly worried about where the economy is headed.
American businesses, if not American households, seem to be hanging on.
The crucial driver of growth in the second quarter was nonresidential fixed investment, which covers items like office buildings and purchases of equipment and software. This sector rocketed up at an annual rate of 17 percent in the second quarter, compared with a 7.8 percent increase in the first. The equipment and software category alone grew at an annual rate of 21.9 percent, the fastest pace in 12 years.
“We’re seeing a sort of handover from consumer spending to capital spending,” John Ryding, chief economist at RDQ Economics, said “The consumer also looks to have saved more than we thought before, which means they’re perhaps further on the road to financial adjustment than we thought they were previously.”
Growth in consumer spending, which is usually a leading indicator of a recovery and which accounts for most economic activity in the United States, has been leveling off. It grew at an annual rate of 1.6 percent in the second quarter after an annual increase of 1.9 percent in the previous quarter.
The personal savings rate in the second quarter was estimated to have been 6.2 percent of disposable income, significantly higher than the 4 percent that had been estimated earlier.
A separate report released Friday by the University of Michigan and Reuters showed that consumer sentiment tumbled in July.
The fact that businesses seem to be investing more in equipment than in hiring may be a reason households have been reluctant, or perhaps unable, to pick up the pace of their spending.
“There are limits on the degree to which you can substitute capital for labor,” Mr. Ryding said. “But you can understand that businesses don’t have to pay health care on equipment and software, and these get better tax treatment than you get for hiring people. If you can get away with upgrading capital spending and deferring hiring for a while, that makes economic sense, especially in this uncertain policy environment.”
Data revisions covering the last three years were also released on Friday. These showed that, over all, 2009 and 2008 were slightly worse than previously reported, but that the first quarter of 2010 was better.
As the global economy recovers, America’s trade activity has picked up. But imports once again grew faster than exports last quarter, presenting a drag on growth. Imports spiked at an annual rate of 28.8 percent, the biggest jump in a quarter-century, compared with an annual increase of 10.3 percent in exports.
Government spending shot up more than many anticipated, growing at an annual rate of 4.4 percent after a decline of 1.6 percent in the first quarter. Public spending was broad-based, with even state and local spending increasing for the first time in a year. This may be in part because of federal stimulus money transferred to the states.
“You could see this in the monthly number for state and local construction spending,” said Nigel Gault, chief United States economist at IHS Global Insight. “Construction slows down during winter months, so stimulus may not have been doing as much earlier this year.”
Other policy initiatives, like the expiring homebuyer’s tax credit, also appear to have lifted demand. Residential fixed investment spending on items like new homes grew at an annual pace of 27.9 percent in the second quarter, after falling 12.3 percent the previous period.
“This will almost certainly reverse hard next quarter,” Jay Feldman, director of economics at Credit Suisse Securities, wrote in a note to clients.

Wheat Up 25 Cents Today

I read analysis yesterday that is predicting $10 wheat. We are at $6.50 right now, a 50% increase in a matter of a few weeks!

Obamacare Worst for Small Business

One of the promises of Obamacare was that it would give folks working in small businesses access to affordable care. Unfortunately, like so much else in the law, it doesn’t look like that’s going to work very well.
To solve the problems small firms have with finding affordable health coverage, Obamacare created a small-business tax credit.  But there’s less to this credit than meets the eye.
A recent study by FamiliesUSA shows that only one in four businesses employing 25 or fewer employees will get the full credit—and one in six will receive absolutely nothing.  Moreover, the credit is reduced whenever a firm adds workers or raises wages—so it actually provides as a perverse incentive not to hire or give raises.
The bottom line, according to Dr. Bob Graboyes, senior healthcare advisor for the National Federation of Independent Businesses:  the credit will do little to help small business.
Other provisions will actually harm small firms.  The employer mandate requires non-insuring firms with 50 or more workers to pay a $2,000 penalty per employee.  New insurance requirements will make it more difficult for employers to offer attractive, affordable insurance options.  And the new requirement to file a 1099 form for every vendor paid more than $600 in a year will sink small-business owners even deeper into the morass of nonproductive paperwork.
In short, Obamacare will be make life far more difficult for small firms and their employees.  At a recent NFIB event, entrepreneurs started talking about how Obamacare will affect their day-to-day operations.
There was Scott Womack, owner of 11 IHOPs.  Currently, he offers his 45 managers health insurance. His restaurants run on 4-7 percent profit margins, so providing health insurance for all employees simply isn’t feasible. Indeed, the Obamacare penalties will exceed his profit margins.  To stay in the black, he’ll have to “minimize the number of actual full-time employees…. It’s going to make it harder for us to hire.”
New Jersey business owner Joe Olivo noted that his health care cost increases average 20 percent a year, yet he’s been able to cover all of his employees and 78 percent of their dependents by setting up high deductible plans with health savings accounts for his workers. Obamacare may make this option no longer viable.
Eric Oppenheim manages 20 Burger King restaurants in the D.C. area. Oppenheim said health care costs for his employees would be two times his net cash flow. Obamacare won’t make it possible for Oppenheim to offer care, but it will cause him to reduce work schedules, cut benefits, and pay the penalties for not providing care.
Obamacare will tie the hands of these and other small business owners.  It’s a lousy way to treats America’s job generators—especially in the midst of a recession, when we need all the jobs we can get.
Joshua Wade and John Scot Overbey contributed to this post.

$10 Beans, $4 Corn

Soybeans at $10 today

Corn at $4 today

Consumer Confidence, Chicago PMI Bring Bids

NEW YORK (MarketWatch) -- Treasury prices and the dollar stayed higher on Friday after the Reuters/University of Michigan index of consumer sentiment was revised to 67.8 in July. A separate report showed manufacturing activity in the Chicago region came in better than expected in July.

Moody's: Spain May Lose Debt Rating

GDP Up 2.4% in Q2

Slightly less than expected. Stock futures not happy!

from WSJ:
The U.S. economy slowed in the second quarter of this year and the government said the recession was deeper than earlier believed, adding to concerns over the recovery's strength.
The Commerce Department Friday said U.S. gross domestic product, or the value of all goods and services produced, rose at an annualized seasonally adjusted rate of 2.4% in April to June. In its first estimate of the economy's benchmark indicator, the government report showed growth was lifted by business investments and exports. Consumer spending, a key growth engine for the U.S. economy, made a smaller contribution to growth.

More Deflation Warnings from Fed's Bullard

WASHINGTON (MarketWatch) -- The U.S. is in danger of being pushed into the same price-shrinking economy that has been termed the "lost decade" in Japan, a voting member of the Federal Reserve said Thursday.
"The U.S. is closer to a Japanese-style outcome today than at any time in recent history," said James Bullard, the president of the St. Louis Federal Reserve Bank, in a research paper.
Bullard stressed that the Japan-style deflation was not a done deal. It would take more negative shocks to tip inflation lower.
But the St. Louis Fed president spoke of the risks with more clarity than is customary from Fed officials.
"Bullard touched upon the third rail of economics, that the U.S. is in the vicinity of Japan with respect to the recovery," said Dan Greenhaus, chief economic strategist at Miller Tabak.
In his paper, Bullard argued that the best policy option for the Fed to counter the deflation threat is to buy more Treasurys.
He said the Bank of England's recent policy to buy gilts, or British government bonds, has served to push inflation expectations higher.
The Bank of England has purchased 200 billion pounds, or over $300 billion, of assets, and overwhelmingly those purchases have been gilts. The Fed has purchased over $1.4 trillion in housing-related assets. It bought $300 billion in Treasurys in a program completed last fall.
Bullard argued against another policy option, namely lengthening its existing promise to keep rates low for an extended period.
To respond to the deflation threat with a revised promise to keep rates "low for longer" may be counterproductive because it might simply encourage permanent low interest rates, he said.
Greg Robb is a senior reporter for MarketWatch in Washington.

IMF Says Debt Management Is Challenge for USA

We continue to ignore all the warnings!

SAN FRANCISCO (MarketWatch) -- An economic recovery is "underway" in the United States, but the country's ability to manage its growing public debt has become a major challenge, the International Monetary Fund said Friday.
The report by the IMF's executive board said that "a massive policy response" has enabled the U.S. economy to emerge from a serious financial crisis.
But "setting public debt on a sustainable path is a key macroeconomic challenge," the body said.
The IMF also noted that "economic recovery has been slow by historical standards -- consistent with past experience in the aftermath of housing and financial crises -- and the outlook remains uncertain."
Meanwhile, a separate IMF report on the health of U.S. banks also said that "despite the restoration of stability, pockets of vulnerability linger and difficult challenges remain in implementing financial-sector reforms."
The report said the U.S. economy and financial system "remain vulnerable to an unexpected weakening of demand, credit quality in the commercial real-estate sector, and housing prices."

Thursday, July 29, 2010

Foreclosure Filings Rise in 75% of U.S. Cities

Foreclosure filings climbed in three-quarters of U.S. metropolitan areas in the first half as high unemployment left many homeowners unable to pay their mortgages, according to RealtyTrac Inc.
The number of properties receiving a filing more than doubled from a year earlier in Baltimore, Oklahoma City and Albuquerque, New Mexico, the mortgage-data company said today in a report. Notices of default, auction or bank seizure rose more than 50 percent in areas including Salt Lake City; Savannah, Georgia; and Atlantic City, New Jersey.
“Foreclosures are spreading out from areas that had been hardest hit,” Rick Sharga, senior vice president for marketing at Irvine, California-based RealtyTrac, said in a telephone interview. “We’re dealing with underlying economic weakness as opposed to unsustainable home prices and bad loans.”
Private employers added fewer jobs than economists projected in June and the U.S. unemployment rate fell to 9.5 percent as discouraged job seekers stopped looking for work, the Labor Department said July 2. The Commerce Department last month reduced its estimate for first-quarter economic growth after consumer spending grew less than previously forecast.

Goldman Economist Predicts GDP Collapse in 2011

"The overall impact of fiscal policy (combining all levels of government) is likely to go from an average of +1.3 percentage points between early 2009 and early 2010 to -1.7 percentage points in 2011, a swing of about -3 percentage points. We estimate that the boost to the level of GDP starts to decline in mid-2010, first gently and then more forcefully, setting up a significant negative impact on GDP growth in late 2010 and 2011." Jan Harzius, Chief Economist, Goldman Sachs
Note that Hatzius is predicting not merely a drop in GDP, but a negative effect for 2011. All that debt is beginning to be a real drag -- literally!

Todd Harrison: "the greatest trick the devil ever pulled was convincing the world he didn’t exist"

When I began writing ten years ago, I would offer that the opposite of love wasn’t hate; it was apathy.

I shared that thought after tech stocks dropped 40% in less than two months and then recovered half those losses the next two months. We all know what happened next; the tech sector melted 70% the next few years.

Wash and rinse, Pete and repeat; we’ve seen that sequel again and again and again. From the homebuilders (real estate) to China to crude oil, a “new paradigm” arrived. Every time was different and each offered a fresh set of forward expectations that would finally prove historical precedents need not apply

Click to enlarge

I traded all of those bubbles thinking quite sure they would follow the path of false hope and empty promises paved by their predecessors. That proved true as the real estate market crashed, China imploded under the weight of the world, and crude crumbled just as it seemed ready to stake claim to the new world order. (See: Oil of Oy Vey)

Sisyphus Now!

While those bubbles hit home for many Americans, they’re hardly unprecedented through a historical lens.

There was the tulip mania in 17th century Holland as Dutch collectors hoarded a hierarchy of flowers.

The Mississippi and South Sea bubbles of the 18th century emerged in the wake of Europe’s dire economic condition.

The roaring twenties, fueled by an expansive use of leverage, led to the crash and Great Depression while not necessarily in that order.
And there’s Japan, perhaps the most frequently referenced modern-day parallel of our current course. The land of the rising sun boasted one of the strongest economies on the planet before a prolonged period of deregulation, money supply growth, low interest rates, bad real estate bets, and “zaitech” (financial engineering) creating a virtuous cycle of speculative frenzy that ultimately collapsed the country.

Does any of this strike a chord?

If familiarity breeds contempt, the percolating societal acrimony shouldn’t come as a shocker. Albert Einstein said the definition of insanity is doing the same thing over and over and expecting a different result. That most certainly applies to our financial fate but as with most journeys, the destination we arrive at pales in comparison to the path we take to get there. (See: What In the World is Going On?)

Our Federal Reserve chairman is a student of history and well versed on the passion and plight of financial excess. We’ve witnessed extraordinary stimuli intended to shift the natural course of the business cycle, one that long ago lost its way. While policymakers conceivably “saved” the system, the resulting imbalances pose a fresh set of issues for the global socioeconomic spectrum.

I’ve repeatedly offered that the financial crisis hasn’t disappeared; it simply changed shape. It--for lack of a better analogy--has gone airborne, migrating from the tangible to the amorphous, from Wall Street to Main Street, from a distant coexistence to an emerging class war. It, like most viruses, will arrive in waves and infect those who haven’t been inoculated with a steady stream of financial consciousness.

Gauge your internal reaction to every opinion you read or hear, multiply it by millions and you’ll begin to imagine the magnitude of the shifting social mood. While the recent stock market rally reflects renewed optimism that can conceivably continue the chasm between perception and reality is widening; while the tape can run, we, the people are running out of places to hide.

That’s not to say we should lose hope, quite the contrary. The greatest opportunities are born from the most profound obstacles and this will again prove true. The trick to the trade and a pathway to prosperity won’t be found by those wallowing in the “why,” pointing fingers and placing blame; they’ll be conceived by those proactively positioned, readily prepared and steadfastly aware of what lays in wait.

The leaders coming out of a crisis are rarely the same as those that entered it and the ability to add capacity into a downturn will define the winners on the other side. We must reward those who saved, incentivize those who are motivated and punish those who’ve transgressed. Until there is culpability for wayward decisions, there won’t be motivation to change behavior and rebuild society from the inside out.

Therein lies the rub of our current course; innovation and entrepreneurialism are integral parts of the solution but many of those in a position to effect positive change don’t have access to capital. While credit worthy borrowers may be a rare breed—and lowering those standards were the root of the problem—the obligations of many have muted the aspirations of most.

The Hot Tub Time Machine

I’ve maintained throughout our time together that the mother of all bubbles—debt— would be the final frontier before free market forces shocked asset classes back towards equilibrium. With total debt-to-GDP stretched towards 400%, we reached the zenith of that elasticity in 2008 and the system unwound with great vengeance and furious anger; the gig was up.

It’s hard to say what would have happened if we let the market do what the market was in the process of doing. It could have created a domino effect that toppled corporate America from JPMorgan (JPM) to General Electric (GE) to Target (TGT) to Goldman Sachs (GS) to AT&T (T); the commercial paper market was frozen, payrolls would have halted and citizens may have taken to the streets to feed their families. 

We’re talking potential anarchy here and I’m not prone to hyperbole.

The alternative scenario—the one the created a chasm of discord throughout the land—was the evolution of the last gasp bubble, that of $800 billion here, $1 trillion there, numbers so enormous they seem silly; the reality is they’re anything but. (See: Will the EU Bailout Work?)

While we remain in the eye of the storm—the relative calm between the banking crisis and the cumulative comeuppance—a simple yet scary truth remains. We haven’t cured the disease; we’re simply masking the symptoms. (See: The Eye of the Financial Storm)

I will again remind you that the opposite of love isn’t hate, its apathy. We’ve noted the lower volume during rallies and the higher traffic during the declines—a sign of distribution—but a simpler truth may be emerging, that of burnout. After four—or five, or six—bubbles and bursts, folks are both bitten and shy by the gamesmanship in the marketplace.

Perhaps that’s a function of financial fatigue or maybe it’s an intended consequence of the war on capitalism; to be honest, it’s tough to tell. As the machines take over and the secular bear chews through victims, it’s hard to blame the average American for wanting to walk away. (See: The War on Capitalism)

I’ll simply say this; the greatest trick the devil ever pulled was convincing the world he didn’t exist. While financial markets seem docile or worse, backstopped by the powers that be for the foreseeable future, the time to pay attention, remain engaged and prepare for what’s to come has perhaps never been more acute.

John Taylor Rebuts Zandi's Keynesian Koolaid

John Taylor is a professor of Economics at Stanford Univerrsity, and a Senior Fellow of Economics at Hoover Institution.

from John's blog, Economics One:
Yesterday the New York Times published an article about simulations of the effects of fiscal stimulus packages and financial interventions using an old Keynesian model. The simulations were reported in an unpublished working paper by Alan Blinder and Mark Zandi. I offered a short quote for the article saying simply that the reported results were completely different from my own empirical work on the policy responses to the crisis.

I have now had a chance to read the paper and have more to say. First, I do not think the paper tells us anything about the impact of these policies. It simply runs the policies through a model (Zandi’s model) and reports what the model says would happen. It does not look at what actually happened, and it does not look at other models, only Zandi’s own model. I have explained the defects with this type of exercise many times, most recently in testimony at a July 1, 2010 House Budget Committee hearing where Zandi also appeared. I showed that the results are entirely dependent on the model: old Keynesian models (such as Zandi’s model) show large effects and new Keynesian models show small effects. So there is nothing new in the fiscal stimulus part of this paper.

Second, I looked at how they assessed the impact of the financial market interventions. Again they do not directly assess the interventions. They just simulate the model with and without the interventions. They say that they have equations in the model which include the financial interventions as variables, but they do not report the size or significance of the coefficients or how they obtained them.

Third, the working paper makes no mention of previously published papers in the literature which get different results. It is rather standard in research to provide a literature review and to explain why the results are different from previous published papers. For the record there are different results in papers by John Cogan, Volcker Wieland, Tobias Cwik and me in the Journal of Economic Dynamics and Control, by John Williams and me in the American Economic Journal; Macroeconomics, or by me published by the Bank of Canada or the St. Louis Fed

Finally, when I read the paper I discovered in an appendix that Blinder and Zandi find that policy was not as good as the model shows and was in fact quite poor when one does a more comprehensive evaluation. They say in Appendix A that “Poor policymaking prior to TARP helped turn a serious but seemingly controllable financial crisis into an out-of-control panic. Policymakers’ uneven treatment of troubled institutions (e.g., saving Bear Stearns but letting Lehman fail) created confusion about the rules of the game and uncertainty among shareholders, who dumped their stock, and creditors, who demanded more collateral to provide liquidity to financial institutions.” I completely agree with this statement, but how can one then argue that policy intervnetions worked, when, in fact, viewed in their entirety they caused the problem?

Taleb: The Next Black Swan -- Government Debt!

from Businessweek:
The Black Swan: The Impact of the Highly Improbable is a philosophical treatise on uncertainty that managed both to entertain readers and to predict the financial meltdown of 2008. Nassim Nicholas Taleb—the book's author, who is also a trader and university professor—has reissued his 2007 best seller in a second edition that includes a new 73-page essay, "On Robustness and Fragility." interviewed Taleb in early July about his views on investing and the dangerous Black Swans—i.e. unpredictable events with big consequences—that could lie in wait for financial markets. Edited excerpts from the conversation follow:
Q: The new edition of The Black Swan includes what you call "10 principles for a Black-Swan robust society." One of them is: "Citizens should not depend on financial assets as a repository of value and should not rely on fallible 'expert' advice for their retirement." Can you explain what you mean?
Taleb: The problem is that citizens are being led to invest in securities they don't understand by people who themselves don't quite understand the risks involved. The stock market is probably the best thing in the world, but the true risks of the stock market are vastly greater than the representations. And this leads to extremely strange situations in which, say, someone has a bakery, is extremely paranoid about suppliers, very careful about risks, and protects his business with appropriate insurance. Then, at some point, he puts his $122,000 in savings in a fund that he knows nothing about, based on risk measures he knows nothing about, in companies very few people know much about.
People use "risk measures," but you're really not measuring anything like you measure temperature or distance. You are making a speculative assessment of a future event. That's not measuring, that's estimating. And as we saw with BP (BP), with the banking system, and with Toyota (TM), companies themselves are hiding risks from the security analysts. They're cutting corners. Companies have a tendency to hide risks.
So someone extremely careful and prudent in the management of his own affairs will be completely careless with the half of his savings invested in the stock market. I'm saying: Don't use the stock market as a repository of value. It has vastly more risks than you think.
I was at an investment conference last week with mutual fund managers and financial advisers. There were a surprising number of mentions of the possibility of "Black Swans," and your name came up. Do you think those people understand the concept?
No, they don't get it. My Black Swan idea is very different: There are events that you can't forecast, and you need to be robust to these events. If I think that someone doesn't understand Black Swans, I'm sure that whatever bad news happens to him will be Black Swans for him but "white swans" for me.
What should you do with your savings?
We have this culture of financialization. People think they need to make money with their savings rather with their own business. So you end up with dentists who are more traders than dentists. A dentist should drill teeth and use whatever he does in the stock market for entertainment.
People should have three sources of variation in their income. The first one is their own business that they understand rather well. Focus on that. The second one is their savings. Make sure you preserve them. The third portion is the speculative portion: Whatever you are willing to lose, you can invest in whatever you want.
In the second category—preservation of value—you should have the consciousness that there is something called inflation. You should avoid some classes of investments that are very fragile.
What are are potential sources of fragility or danger that you're keeping an eye on?
The massive one is government deficits. As an analogy: You often have planes landing two hours late. In some cases, when you have volcanos, you can land two or three weeks late. How often have you landed two hours early? Never. It's the same with deficits. The errors tend to go one way rather than the other. When I wrote The Black Swan, I realized there was a huge bias in the way people estimate deficits and make forecasts. Typically things costs more, which is chronic. Governments that try to shoot for a surplus hardly ever reach it.
The problem is getting runaway. It's becoming a pure Ponzi scheme. It's very nonlinear: You need more and more debt just to stay where you are. And what broke [convicted financier Bernard] Madoff is going to break governments. They need to find new suckers all the time. And unfortunately the world has run out of suckers.
You're saying that what is supposed to be the safest place to invest, government debt, is in some ways the most dangerous?
Unless you invest in your own home currency in very short-term Treasury bills. Because governments can print more of their own currency, the risk comes from a rise in interest rates rather than a government default. When you have hyperinflation, deficits, or debt problems, with short-term bills you can catch higher interest rates to compensate you for the inflation or whatever return you've missed.
I think some people get confused about Black Swans and think you're saying that you can't predict what's going to happen. But you can see some big consequential events coming down the road.
A Black Swan for the turkey is not a Black Swan for the butcher. For someone very naïve, some events may be Black Swans. For someone warned, they're not going to be Black Swans if you know they can be possible and you hedge against them.
Do you have any thoughts on the U.S. financial reform package?
I don't like complicated regulation. I think we should not need financial reform. What we need is definancialization. What we need to do is break the financial community's grip on society. And you can do it very easily by transformation of debt into equity. Banks have an interest in building debt, but equity in society is vastly more stable than debt.
So the problems have not been addressed. They're making something that was complicated even more complicated. We need some fundamental reforms rather than a very, very precise guideline on how you should behave.
What are you working on now?
My next [book] is about beliefs, mostly. How we are suckers and how to live in a world we don't understand.

Niall Ferguson: Debt Bubble Could Pop Suddenly

We have been raised to think of the historical process as an essentially cyclical one.

We naturally tend to assume that in our own time, too, history will move cyclically, and slowly.

Yet what if history is not cyclical and slow-moving but arhythmic, at times almost stationary, but also capable of accelerating suddenly, like a sports car? What if collapse does not arrive over a number of centuries but comes suddenly, like a thief in the night?

Great powers and empires are complex systems, which means their construction more resembles a termite hill than an Egyptian pyramid. They operate somewhere between order and disorder, on "the edge of chaos", in the phrase of the computer scientist Christopher Langton.

Such systems can appear to operate quite stably for some time; they seem to be in equilibrium but are, in fact, constantly adapting.

But there comes a moment when complex systems "go critical". A very small trigger can set off a phase transition from a benign equilibrium to a crisis.

Complex systems share certain characteristics. A small input to such a system can produce huge, often unanticipated changes, what scientists call the amplifier effect.

Empires exhibit many of the characteristics of other complex adaptive systems, including the tendency to move from stability to instability quite suddenly. But this fact is rarely recognised because of our addiction to cyclical theories of history. The Bourbon monarchy in France passed from triumph to terror with astonishing rapidity. The sun set on the British Empire almost as suddenly. The Suez crisis in 1956 proved that Britain could not act in defiance of the US in the Middle East, setting the seal on the end of empire.

What are the implications for the US today? The most obvious point is that imperial falls are associated with fiscal crises: sharp imbalances between revenues and expenditures, and the mounting cost of servicing a mountain of public debt.

Think of Spain in the 17th century: already by 1543 nearly two-thirds of ordinary revenue was going on interest on the juros, the loans by which the Habsburg monarchy financed itself.

Or think of France in the 18th century: between 1751 and 1788, the eve of Revolution, interest and amortisation payments rose from just over a quarter of tax revenue to 62 per cent.

Finally, consider Britain in the 20th century. Its real problems came after 1945, when a substantial proportion of its now immense debt burden was in foreign hands. Of the pound stg. 21 billion national debt at the end of the war, about pound stg. 3.4bn was owed to foreign creditors, equivalent to about a third of gross domestic product.

Alarm bells should therefore be ringing very loudly indeed in Washington, as the US contemplates a deficit for 2010 of more than $US1.47 trillion ($1.64 trillion), about 10 per cent of GDP, for the second year running. Since 2001, in the space of just 10 years, the federal debt in public hands has doubled as a share of GDP from 32 per cent to a projected 66 per cent next year. According to the Congressional Budget Office's latest projections, the debt could rise above 90 per cent of GDP by 2020 and reach 146 per cent by 2030 and 344 per cent by 2050.

These sums may sound fantastic. But what is even more terrifying is to consider what ongoing deficit finance could mean for the burden of interest payments as a share of federal revenues.

The CBO projects net interest payments rising from 9 per cent of revenue to 20 per cent in 2020, 36 per cent in 2030, 58 per cent in 2040 and 85 per cent in 2050. As Larry Kotlikoff recently pointed out in the Financial Times, by any meaningful measure, the fiscal position of the US is at present worse than that of Greece.

For now, the world still expects the US to muddle through, eventually confronting its problems when, as Churchill famously said, all the alternatives have been exhausted. With the sovereign debt crisis in Europe combining with growing fears of a deflationary double-dip recession, bond yields are at historic lows.

There is a zero-sum game at the heart of the budgetary process: even if rates stay low, recurrent deficits and debt accumulation mean that interest payments consume a rising proportion of tax revenue. And military expenditure is the item most likely to be squeezed to compensate because, unlike mandatory entitlements (social security, Medicaid and Medicare), defence spending is discretionary.

It is, in other words, a pre-programmed reality of US fiscal policy today that the resources available to the Department of Defense will be reduced in the years to come. Indeed, by my reckoning, it is quite likely that the US could be spending more on interest payments than on defence within the next decade.

And remember: half the federal debt in public hands is in the hands of foreign creditors. Of that, a fifth (22 per cent) is held by the monetary authorities of the People's Republic of China, down from 27 per cent in July last year. It may not have escaped your notice that China now has the second-largest economy in the world and is almost certain to be the US's principal strategic rival in the 21st century, particularly in the Asia-Pacific. Quietly, discreetly, the Chinese are reducing their exposure to US Treasuries. Perhaps they have noticed what the rest of the world's investors pretend not to see: that the US is on a completely unsustainable fiscal course, with no apparent political means of self-correcting. That has profound implications not only for the US but also for all countries that have come to rely on it, directly or indirectly, for their security.

Australia's post-war foreign policy has been, in essence, to be a committed ally of the US.

But what if the sudden waning of American power that I fear brings to an abrupt end the era of US hegemony in the Asia-Pacific region? Are we ready for such a dramatic change in the global balance of power?

Judging by what I have heard here since I arrived last Friday, the answer is no. Australians are simply not thinking about such things.

A favourite phrase of this great country is "No dramas". But dramas lie ahead as the nasty fiscal arithmetic of imperial decline drives yet another great power over the edge of chaos.

Niall Ferguson is professor of history at Harvard University.

Moody's: Get Debt In Order of Risk Credit Rating

the only question I have is: "Why haven't they already downgraded us?"

from Reuters:
July 29 (Reuters) - The U.S. government needs to elaborate a credible plan to address its soaring debt in order to maintain its Aaa credit rating, Moody's Investors Service's told Dow Jones newswire.

If U.S. government budget projections for debt as a percentage of national output and interest payments as a percentage of revenue are realized in coming years, the country's Aaa rating would come under scrutiny, Steve Hess, a senior credit officer in the sovereign risk group at Moody's told Dow Jones Newswires in an interview.

Such a scenario, however, wouldn't lead to an automatic downgrade, Hess said. The analyst said the United States appears to have "no plan" to deal with its fiscal situation and that much will depend on the domestic political reaction to recommendations by President Barack Obama's fiscal responsibility commission in December.

Fed Headed for Deflation Trap

The Federal Reserve’s promise to keep its target interest rate near zero for an “extended period” could have the counterproductive effect of encouraging a Japan-like deflation trap, according to Federal Reserve Bank of St. Louis President James Bullard.

In a provocative paper from the St. Louis Fed, Bullard argued that the best way to avoid this trap is for the Fed to shift away from interest rate policy and instead focus on “quantitative easing” measures to boost inflation expectations if inflation shows signs of ticking lower.

Bullard is currently a voting member of the Fed’s policy-setting Federal Open Market Committee. But in a conference call with journalists to explain his paper, he said it wasn’t a signal that he would dissent at the FOMC’s Aug. 10 meeting if the committee maintains its standard line on rates, but rather was meant to provoke debate on the effectiveness of the current policy stance.

FOMC policy statements have over the past year and half repeated the line that economic conditions are “likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

In his paper, Bullard argued that this statement, coupled with the Fed’s target federal funds rate range of 0-to-0.25%, could backfire in its efforts to bolster expectations that loose monetary conditions will foster inflation and so avoid deflation. Noting core annual inflation of just 0.9% in May 2010, he said that there’s risk that the U.S. economy could end up like Japan’s, where both nominal interest rates and inflation remain stuck at a dangerously low equilibrium level, “an unintended, low nominal interest rate steady state.”

“Promising to remain at zero for a long time is a double-edged sword,” Bullard wrote. “The policy is consistent with the idea that inflation and inflation expectations should rise in response to the promise, and that this will eventually lead the economy back toward the targeted equilibrium of [higher nominal rates and inflation]. But the policy is also consistent with the idea that inflation and inflation expectations will instead fall, and that the economy will settle in the neighborhood of the unintended steady state, as Japan has in recent years.”

Citing the market’s interpretation of the Fed’s policy response to the European sovereign debt crisis, he argued that its “extended period” language had the perverse effect of pushing out even further the expected date on which policy conditions are normalized. This was evident in the way that Treasury Inflation-Protected Securities, or TIPS, have priced in response to the crisis.

“When the European sovereign debt crisis rattled global financial markets during the spring of 2010, it was a negative shock to the global economy, and the private sector perception was certainly that this would delay the date of U.S. policy rate normalization,” he wrote. “One might think that is a more inflationary policy, but TIPS-based measures of inflation expectations over five and 10 years fell about 50 basis points.”

In a technical paper that Bullard conceded was “geeky,” he analyzed various academic studies of how to reach the ideal “steady state.” According to data that plotted actual policy rates and inflation rates from the past decade, that equilibrium has tended to occur when inflation is at 2.3% and the nominal interest rate is at 2.8%.

He then went on to discuss the difficulty in reaching this target amid the so-called “zero bound” dilemma, a state in which interest rates are at zero and can’t physically go any lower even though consumer prices could still turn negative. The Japan experience suggests there’s a risk that economies also have far less desirable “steady state” equilibrium point in which interests are near zero while prices are in a deflationary state.

One problem, he claimed, is that central banks remain “completely committed to interest rate adjustment as the main tool of monetary policy, even long after it ceases to make sense.”

Instead, Bullard argued, the “appropriate tool” for tackling inflation expectations at such times is to expand “quantitative easing,” a policy of buying longer-dated monetary debt. The U.S. and the U.K. both applied variations of this policy amid the recent financial crisis and Japan has tried to do the same at different times.

He said higher inflation data in the U.K. suggests that the Bank of England’s program has been somewhat more effective than the Fed’s at encouraging inflation expectations, while Japan’s efforts have failed because they lack long-term credibility.

In his conference call, Bullard said he didn’t necessarily believe that the Fed should reopen the security purchases program that it concluded in March, but that it should explicitly state its willingness to do so if more extreme deflationary threats arise in the future.

“This is a matter of being ready in case something else hits,” he said in that call. “What if there’s a terrorist attack? What if there is some kind of trouble in the Asian recovery, or something like that?

In his paper, Bullard said that any policy regime shift intended to avoid a deflation trap needs to be “sharp and credible–policy makers have to commit to the new policy and the private sector has to believe the policy maker.”

Stocks Plunge from Grace

This, despite a better than expected unemployment claims report this morning.

Mortgage Losses Continue to Mount

This doesn't surprise me, but it does surprise the stock market!

from WSJ:

NEW YORK—Mortgage insurer PMI Group Inc. reported its 12th consecutive quarterly loss on Thursday, even as the number of defaulting homeowners on its books dropped.
The second-quarter loss of $150.6 million was smaller than a year ago because of falling claims expenses at its U.S. mortgage-insurance unit. But those claims still cost twice as much as PMI collected in premiums as the firm struggled against declining demand for its services.

Wheat Becoming A Scarce Global Commodity

I hope you aren't planning to eat any bread any time soon. If so, you'd better have some serious quantities of wheat in storage, because global supplies are tight. Ukraine, a leading exporter to Europe and the world, just curbed exports within the past few hours. Supplies are tight world-wide, and the hot weather is damaging crops in the American Midwest, known as the bread basket to the world.

It's probably going to get worse, too, over the next few years. Energy legislation already passed by the US House would reduce crop acreage in the US by nearly 14.5%, and the higher cost of energy is going to significantly reduce crop production due to higher diesel and fertilizer prices. During the Depression, FDR promised farmers higher prices, so he cut production of all sorts of farm products, destroying millions of acres of crops and slaughtering millions of head of livestock, thus putting many Americans in food lines. Should we expect anything different from President Obama, who has stated that FDR was his hero?
Even a non-grain trader can read these attached charts and know what they mean. One chart is the overnight price of wheat, rising powerfully through the roof over the past 12 hours. The other chart is the daily one, showing the price of wheat rising steadily through the month of July. Imagine the impact on the price of everything, including meat, as the staples of existence continue rising powerfully!

By the way -- other grains are following suit!

I hope you have plenty of food storage. You are going to need it!

Is American Civilization On the Verge of Collapse?

infowars thinks so:

The first clans organized around local police forces. The conservatives’ war on crime during the late 20th century and the Bush/Obama war on terror during the first decade of the 21st century had resulted in the police becoming militarized and unaccountable.

As society broke down, the police became warlords. The state police broke apart, and the officers were subsumed into the local forces of their communities. The newly formed tribes expanded to encompass the relatives and friends of the police.

The dollar had collapsed as world reserve currency in 2012 when the worsening economic depression made it clear to Washington’s creditors that the federal budget deficit was too large to be financed except by the printing of money.

With the dollar’s demise, import prices skyrocketed. As Americans were unable to afford foreign-made goods, the transnational corporations that were producing offshore for US markets were bankrupted, further eroding the government’s revenue base.

The government was forced to print money in order to pay its bills, causing domestic prices to rise rapidly. Faced with hyperinflation, Washington took recourse in terminating Social Security and Medicare and followed up by confiscating the remnants of private pensions. This provided a one-year respite, but with no more resources to confiscate, money creation and hyperinflation resumed.

Organized food deliveries broke down when the government fought hyperinflation with fixed prices and the mandate that all purchases and sales had to be in US paper currency. Unwilling to trade appreciating goods for depreciating paper, goods disappeared from stores.

Washington responded as Lenin had done during the “war communism” period of Soviet history. The government sent troops to confiscate goods for distribution in kind to the population. This was a temporary stop-gap until existing stocks were depleted, as future production was discouraged. Much of the confiscated stocks became the property of the troops who seized the goods.

Goods reappeared in markets under the protection of local warlords. Transactions were conducted in barter and in gold, silver, and copper coins.

Other clans organized around families and individuals who possessed stocks of food, bullion, guns and ammunition. Uneasy alliances formed to balance differences in clan strengths. Betrayals quickly made loyalty a necessary trait for survival.

Large scale food and other production broke down as local militias taxed distribution as goods moved across local territories. Washington seized domestic oil production and refineries, but much of the government’s gasoline was paid for safe passage across clan territories.

Most of the troops in Washington’s overseas bases were abandoned. As their resource stocks were drawn down, the abandoned soldiers were forced into alliances with those with whom they had been fighting.

Washington found it increasingly difficult to maintain itself. As it lost control over the country, Washington was less able to secure supplies from abroad as tribute from those Washington threatened with nuclear attack. Gradually other nuclear powers realized that the only target in America was Washington. The more astute saw the writing on the wall and slipped away from the former capital city.

When Rome began her empire, Rome’s currency consisted of gold and silver coinage. Rome was well organized with efficient institutions and the ability to supply troops in the field so that campaigns could continue indefinitely, a monopoly in the world of Rome’s time.

When hubris sent America in pursuit of overseas empire, the venture coincided with the offshoring of American manufacturing, industrial, and professional service jobs and the corresponding erosion of the government’s tax base, with the advent of massive budget and trade deficits, with the erosion of the fiat paper currency’s value, and with America’s dependence on foreign creditors and puppet rulers.

The Roman Empire lasted for centuries. The American one collapsed overnight.

Rome’s corruption became the strength of her enemies, and the Western Empire was overrun.

America’s collapse occurred when government ceased to represent the people and became the instrument of a private oligarchy. Decisions were made in behalf of short-term profits for the few at the expense of unmanageable liabilities for the many.

Overwhelmed by liabilities, the government collapsed.

Globalism had run its course. Life reformed on a local basis.

Dollar Getting Drilled

The Dollar has broken through support, the Euro through resistance at 1.30.

Our spending is sending our currency through the floor, and commodities are skyrocketing! Grains, after being in a downtrend, have seen a powerful short-covering rally and prices are at record recent highs.

Hope you food storage is up to date. Your going to need it!


Wednesday, July 28, 2010

5 Reasons for Likely Double Dip

from Inoculated Investor blog:

It has been a little while since I last had the opportunity to post and I thought I would provide a brief update on how my summer is progressing. But first, I want to thank everyone for the overwhelming outpouring of support after I created the post that asked for help in finding a summer internship. I literally received emails from people all over the world offering their assistance and guidance. I really appreciate all of the support and I hope that I can continue to create content and research that is both valuable and informative.

Thanks to my good friend Marcelo Lima, I was able to secure an internship position at West Coast Asset Management (WCAM) in Santa Barbara, CA. WCAM is a long only manager of separate accounts focused on high net worth individuals, institutions and charitable foundations. The firm was founded by Lance Helfert and Kinko’s founder Paul Orfalea. Anyone who attended the 2008 Value Investing Congress sessions in New York or California will probably remember the presentations made by Lance and CIO Atticus Lowe. Furthermore, Atticus was profiled in the April 2007 and May 2008 editions of Value Investor Insight and Lance makes regular appearances on Fox Business News and CNBC. Finally, Lance, Atticus and Paul are co-authors of the book, The Entrepreneurial Investor: The Art, Science and Business of Value Investing which has sold thousands of copies and has recently been translated in Korean.

If you would like to learn more about WCAM, I encourage you to check out the website at Additionally, if you are looking for a manager who is capable of handling both equity and fixed income separately managed accounts feel free to contact me or Andrew Firestone (of The Bachelor fame) at

My role at WCAM is to find new investments for the equity separately managed accounts. So far this summer I have extensively researched a number of companies, including two exchanges, a power transmission company and a couple of data processing and outsourced services firms. We are specifically looking for companies with a market capitalization greater than $1 billion which possess robust moats, resilient business models, strong and recurring cash flow generation and preferably a consistent dividend. If this sounds like a relatively defensive stance, that is precisely because it is. As a team we continue to believe that the US is at risk of falling back into a recession and prefer to be invested in companies that will prosper even in stressed economic circumstances.

It was in this context that I was asked to contribute to the quarterly letter that recently went out to clients. Given our outlook, my goals were to shed some light on the risks that we see brewing in the US economy and explain to clients why we are positioned cautiously. There are clearly a number of people talking about the risks of a double dip recession. However, I decided to highlight those that I thought were most relevant to equity investors and our clients. I hope you enjoy my updated analysis (in Scribd format to maintain the formatting) and will stay tuned for additional posts in the near future.
5 Reasons to Fear a US Double Dip

Weather Influences on Corn Development and Yield

Three weather trends in August will determine whether corn yields bust bins, or just turn out to be a bust this year, according to meteorologist Elwynn Taylor of Iowa State University.

Taylor spoke July 20 to the annual Top Farmer Crop Workshop at Purdue University.

After a warm start to the season that accelerated plant development, more hot weather in August could have plants racing to maturity. That happened in 1995, says Taylor, and it left less time for corn kernels to fill, reducing yields to levels typically seen in drought years. By contrasts, record yields followed the cooler temperatures of 1992 and 1994, when an extended period for filling added weight to the crop.

Click here to play
The direction of temperatures could hinge on the second trend to watch: development of La Nina cooling of the equatorial Pacific. The sooner a La Nina develops in August, the more likely warm, dry weather will be seen that could cut yields.
The final factor are weekly crop ratings put out by USDA. These don’t mean much early in the growing season, says Taylor. But if 50% or more of the crop is rated good to excellent in the third week of August, odds increase for above average yields.
Check out a video of his presentation on this page.

Durable Goods Turns Bad

Demand for U.S. manufactured durable goods slid in June for a second consecutive month in another sign the manufacturing sector expansion is slowing.

Durable-goods orders fell by 1% to a seasonally adjusted $190.5 billion, the Commerce Department said Wednesday. Economists surveyed by Dow Jones Newswires expected a 1.1% gain.

The decline was mixed, with some categories of goods in the report rising and others falling.

Tuesday, July 27, 2010

Local Governments to Cut 500,000 Jobs

Ever wonder why according to the latest economic poll published by Reuters earlier the general public's satisfaction with Obama's handling of the economy is deteriorating faster than any other issue? (not to mention that 46% of Americans believe Obama is not focused enough on job creation, and that 72% of republicans say they are certain to vote at the November congressional elections versus 49% of democrats). A part of the answer comes courtesy of a new study produced by National League of Cities, the U.S. Conference of Mayors and the National Association of Counties titled simply enough: "Local Governments Cutting Jobs and Services: Job losses projected to approach 500,000", showed local governments moved to cut the equivalent of 8.6 percent of their workforces from 2009 to 2011. As a result of local government cutbacks, almost 500,000 people will lose their jobs, and the total will likely rise. The summary of the report attached below, is particularly grim: "Over the next two years, local tax bases will likely suffer from depressed property values, hard-hit household incomes and declining consumer spending. Further, reported state budget shortfalls for 2010 to 2012 exceeding $400 billion will pose a significant threat to funding for local government programs. In this current climate of fiscal distress, local governments are forced to eliminate both jobs and services." If Americans are dissatisfied with Obama's handling of the economy now, just until 2012.
More from Bloomberg:

While a separate report by the National Conference of State Legislatures today said U.S. state revenue is recovering from the drop in tax collections caused by the 2007 recession and the slow pace of job growth since, the greatest blow to local governments will be felt from now through 2012, the local groups said.

They called on Congress to pass a bill that would provide $75 billion in the next two years to local governments and community-based groups to stoke job growth and forestall deeper cuts.

Such a move may face political obstacles. Governors have appealed to Congress to extend additional aid to cover the cost of providing health care under Medicaid, the state-run program for the poor. The proposal stalled in the Senate, where the Republican minority has raised concern about the size of the federal deficit.
Full report that somehow made it through the tractor beam clutches of the propaganda death star.

Muni Losses

All the Volume Is On the Sell Side

In our day and age, when implied correlation is approaching 1 with each passing day, and when nuanced relationships are ignored, as every correlation somehow immediately becomes causation only to be invalidated, chewed out and left for dead, there is one certain and virtually guaranteed statistical relationship left, that not only persists day after day but has now become its own self-fulfilling prophecy. We speak of course of the (inverse) correlation between stock prices and volume: i.e., "volume up, stocks down; volume down, stocks up." Rinse, repeat, over and over and over. Rarely has this correlation been as pronounced (although we have been discussing it for well over a year) as over the past 12 weeks. Behold.

What this means is that any distributions only occur to the downside, and that the second retail gets suckered into stocks once again, for whatever reason, the selling pressure will again materialize as the algo decides to take advantage of the "sidelined" money and be a better seller into every bid.

June Unemployment -- Much Uglier Than the Figures Suggest

from Forbes:
As Congress acts again to extend unemployment benefits to the long-term jobless, it is time to take a careful look at employment and unemployment in America. Democrats are fully in the spin zone on jobs. Despite the spin, there are a number of secrets buried in the jobs numbers that Obama and Congressional Democrats don't want us to focus on as we enter the mid-term election season.
Congressmen are making their re-election pitches that they have won unemployment benefits for jobless constituents in their districts. At the same time, the administration tells us that the June job numbers show that the economy is recovering steadily with unemployment down slightly to 9.5%. Obama made the point that June was the "sixth straight month of private-sector job growth," and assured us that "we are heading in the right direction." Sounds great, doesn't it?
All this spin is supposed to make us respond positively: "Wow! Happy days are here again. The recovery must be really gaining steam." And we are supposed to conclude that maybe we don't need to throw out the Democrats in the mid-term elections after all.
The June jobs numbers show unemployment falling .2% to 9.5%. This may seem like an improvement until you realize that this decrease is almost all caused by an additional 611,000 Americans giving up on finding jobs last month. When people stop looking for work, unemployment percentages go down even though the economy has not improved and may even have gotten worse.
Further, the job numbers also don't tell you that government is virtually the only industry in America that has been recession-proof. Not only is unemployment the lowest in the government sector of all industry sectors in America, federal civilian employees make a stunning 30% to 40% more in total compensation than similarly skilled private workers, according to the Heritage Foundation. Plus, federal workers enjoy almost total job security no matter how poor their performance is. Similarly, state and local government workers had incomes that were on average 34% higher and benefits that were 70% more costly when compared to private-sector workers in 2009. So much for the sacrifices of public service.
Surely, this difference in wages can't be because government workers are so much more productive and efficient than private-sector workers? More likely, it is because government employees are now the most powerful special interest group in America, and they have been very effective at preserving their advantage.
It is important to remember that unlike private-sector workers, government workers don't generally make anything. They don't make the economic pie bigger nor create wealth. Rather, the government just takes a bigger piece of the pie, leaving less for the private sector.
Since the recession began at the end of 2007 the private sector has shed almost 8 million jobs. During the same period, the federal governments' civilian payroll has actually increased by 240,000 to 2.2 million workers, excluding census and postal workers. This leaves a smaller private sector supporting an ever larger public sector. And that can't be good for our recovery.
But what about states and municipalities that must balance their budgets by law? State and local governments employ about 19.7 million workers and actually added an astonishing 110,000 net jobs from the beginning of the recession in December 2007 through July 2009, according to a Rockefeller Institute report. How is it possible, you may ask, to increase state and local payrolls when tax revenues are down? Well, the federal government has been bailing out state and local governments to avoid state and local public-sector job cuts and to temporarily keep unemployment figures from increasing further. Additional "emergency" bailouts to prevent states and local municipalities from cutting their bloated payrolls are now pending.

Increasing the public sector at the expense of the private sector has helped the Obama administration to keep unemployment rates artificially lower, but it can't work forever. Government has been a growth industry for the last few years. But interest payments on our national debt will soon crowd out other spending, and there will have to be cuts to the government payroll and to state and local subsidies. Even the spendthrift Congress is afraid to support new spending because of the growing public focus on the growing national debt. With the national debt looming, continuing to support government growth or even keeping the size of government constant will inevitably lead to a Greek-style financial meltdown.
We need to solve this problem before it bankrupts our nation. Privatizing many federal functions would address this problem quickly by letting the market determine what job functions are essential and set salaries and benefits.
And so, for the sake of our nation, future job creation will have to come from the private sector--even as that sector struggles with higher taxes, increased health care costs and other anti-business policies brought by the Congress and the Obama administration. We need to ignore the "noise" of rosy job numbers and focus on what really counts: "right-sizing" the public sector so that we can grow as a nation again.
Mallory Factor is a member of the Council of Foreign Relations, chair of the Joint Chiefs of Staff Economic Roundtable and cofounder of The Monday Meeting, an influential meeting of economic conservatives, journalists and corporate leaders in New York City. He can be reached at

Consumer Confidence Drops in July, Sinking Stock Gains

WASHINGTON (MarketWatch) -- Consumer confidence fell in July on concerns about jobs and business conditions, following a sharp decline in June, the Conference Board reported Tuesday. July's consumer confidence index fell to 50.4 - the lowest level since February -- from an upwardly revised 54.3 in June. "Concerns about business conditions and the labor market are casting a dark cloud over consumers that is not likely to lift until the job market improves," said Lynn Franco, director of Conference Board's consumer research center, in a statement. "Given consumers' heightened level of anxiety, along with their pessimistic income outlook and lackluster job growth, retailers are very likely to face a challenging back-to-school season." Earlier this month the government reported that nonfarm payrolls fell 125,000 in June, with weak private-sector hiring.

U.S. consumer confidence fell in July to the lowest level since February, weighed mostly by worries about the job market, according to a private sector report released Tuesday.
The Conference Board, an industry group, said its index of consumer attitudes fell to 50.4 in July from a revised 54.3 in June. The June reading was revised up from an original 52.9.
The median of forecasts from analysts polled by Reuters had been for a July reading of 51.0. Forecasts ranged from 46.0 to 55.5.

Monday, July 26, 2010

Taxpayer Bailouts Continue Rising, Reach $1 Trillion

from Fox Business:

With little fanfare, the U.S. government has rapidly become the nation’s top backer of mortgages that require little or no money down, with taxpayer guarantees on them surpassing $1 trillion earlier this year, a FOX Business analysis shows.  
“Zero down” mortgages as high as $1 million have been backed by the Department of Veterans Affairs, which by law offers most of its loans with no down payment required. Such “no money down” jumbo loans were approved in higher-cost housing markets, VA officials said. The average VA loan is $207,000.
The Federal Housing Administration alone has expanded loan guarantees to $865 billion in June, including some refinancings of existing loans – almost double the 2007 level -- according to an agency report.
Such low- or no-down-payment loans, along with falling interest rates, have helped millions of low- and moderate-income homebuyers who might otherwise not have gotten a loan. But some housing-finance experts warn “affordable” mortgage programs at the VA, FHA and Department of Agriculture could be laying the groundwork for another housing crisis -- and additional taxpayer bailouts.
“You could have any number of things that trigger high default rates, and the risk on those loans is entirely with the federal government,” said Edward Pinto, a housing consultant and former Fannie Mae executive. “It's inevitable that government insurance programs are going to hit the wall at some point.” 
The Treasury Department has already pumped $145 billion into failed mortgage giants Fannie Mae and Freddie Mac, which generally have insured traditional “prime” loans requiring a 20% down payment and which themselves own or guarantee about $5 trillion in mortgages. 
Hundreds of thousands of the low/no-down-payment mortgages are already in default or foreclosure, most of them at the FHA, which is scrambling to avoid a bailout. 
And though officials insist that, to protect taxpayers, lending standards are tighter than ever, government auditors in September reported slack loan underwriting at the USDA’s “no money down” mortgage program that aids rural homebuyers. 
Regardless, Congress and the White House, under both the Bush and Obama administrations, have supported significant expansions of the FHA, VA and USDA programs. Officials say they’re necessary to provide mortgage financing in tight credit markets and to help bolster the shaky housing sector. 
“Home prices were in a free-fall” a year ago, FHA Commissioner David Stevens said. “Our ability to step in, in a counter-cyclical way, has been absolutely fundamental to stabilizing home values.” 
Collectively, the FHA, VA and USDA now insure about eight million home loans. They were underwritten by commercial banks and other lenders; the agencies pay them principal and interest when a homeowner doesn’t. The agencies charge homebuyers upfront fees of 2% or so to help finance their programs.
The FHA also usually requires a minimum down payment of 3.5% and, unlike the other programs, adds a premium of about 0.5% to homeowners’ monthly payments to also cover costs. 
Borrowers in all three programs must meet certain income, credit and debt standards to qualify. FHA and VA loans limits are higher – maxing out at $1.1 million in a handful of isolated high-cost counties – while USDA loan limits are lower. 
Historically, the programs’ guarantees have expanded and contracted with recessions and recoveries, depending on how active private lenders are in mortgage markets. 
During the recent housing bubble, banks, mortgage lenders and investors made sure homebuyers got plenty of easy loans – with the now-infamous, non-traditional “subprime,” “Alt-A” and “Option ARM” loans, to name a few.  
But when the bubble popped, stunned private lenders, facing big losses, pulled back. Anxious politicians stepped in, expanding the FHA, VA and USDA programs to new highs, so constituents could keep buying homes and the housing industry could keep workers working. Policymakers also raised loan limits, to allow the agencies to insure bigger mortgages and expand their portfolios even more.  
Real estate brokers, homebuilders and mortgage lenders have consistently lobbied for the moves.  
The FHA program is the largest of the three. VA guarantees outstanding have been steady at about $200 billion annually, even during the housing bubble. But the Administration projects they will hit $293 billion by next year.   
“We’ve seen a dramatic increase in originations,” said Mike Frueh, a VA mortgage program official. He added that VA loans are for “young men and women who have served their country.”  
USDA loan guarantees outstanding have nearly tripled, to $47 billion currently, from $17.1 billion in 2007, according to a department official. The VA also operates a $10 billion-plus program that makes direct loans to lower-income rural buyers with interest rates subsidized to as low as 1%. 
“We are pretty much the only game in town” for rural homeowners seeking mortgages now, said the USDA official, who agreed to discuss his department’s program on the condition he not be identified. 
In the first quarter of 2010, the FHA and VA alone insured $56 billion in new “low/no money down” home loans, according to Inside Mortgage Finance. They accounted for nearly half of all new mortgages underwritten by lenders in the quarter, including those requiring traditional 20% down payments. That’s up from less than 10% of all new loans before the housing bubble popped in 2007. 
The Obama Administration projects loan guarantees at the FHA, VA and USDA will grow by another $182 billion in fiscal 2011. 
Between Fannie, Freddie and the agencies, the federal government is now guaranteeing about 95% of all new mortgages, including refinanced loans, according to Inside Mortgage Finance. 
“At today’s very low 30-year mortgage rates, banks bear too much interest-rate risk” to assure loans are profitable for lenders long-term, said Bob Davis, executive vice president at the American Bankers Association. “The choice is either to make no loans, or make loans guaranteed (by) Fannie, Freddie, FHA, VA or USDA programs.” 
As with Fannie and Freddie, defaults and foreclosures in the agency programs have been rising, mainly due to continued high unemployment, generating growing loan losses. 
The Mortgage Bankers Association reports that for the FHA, “seriously delinquent” home loans – those more than 90 days past due or in foreclosure – rose to 9.1% in the first quarter of 2010, up from 5.3% in the first quarter of 2007. Seriously delinquent VA loans doubled to 5.3% over the same period.  
The association doesn’t break out USDA loans, but a USDA presentation obtained by Fox Business shows foreclosures in its guarantee program rose to about 4% in April, from about 3% in early 2007.
By comparison, seriously delinquent “prime” mortgages with standard 20% down payments hit 7.1% in the first quarter of the year, up from about 1% three years ago, according to the MBA. For “subprime” loans—generally mortgages with lower down payments at higher interest rates and fees made to borrowers with poorer credit histories -- the rate was 30.2%, up from 8.3% in 2007. 
Of the three programs, the FHA faces the most serious financial challenges because of its size and underwriting history. It insured piles of dicey loans in 2005, 2006, 2007 and 2008 that have been going bad. Last year, an independent auditor found a $12.8 billion shortfall in the FHA’s Congressionally-mandated capital reserve fund. 
The agency insists its finances are sound, at least for now. To help it avoid a taxpayer bailout, it has raised upfront loan fees, tightened standards for borrowers and lenders, and has asked Congress for the authority to raise premiums in homeowners’ monthly payments. 
“At this point…there’s no taxpayer bailout,” FHA’s Stevens said. “We'll do an actuarial (analysis) at the end of the year…We’ll see how the fund is looking at that time. I can tell you factually, right now, that our portfolio reserves are growing. They were forecasted to be dropping, but they are actually increasing.” 
But Stevens acknowledged FHA’s financial future depends on housing prices, which have dropped about 30% since the housing bubble popped, according to the S&P/Case-Shiller Home Price Index. 
“If we stabilize the markets and begin to recover, that (FHA) portfolio can begin to look a lot better,” he said. “If the markets don't recover as quickly, then there's additional loss risk to FHA. But at this point, all forecasts say no.” 
Pinto, the former Fannie Mae executive, believes the FHA faces “tens of billions” in losses within several years. “They’ve bought themselves some time,” he said, with recent operating changes as well as low interest rates and expansion of its portfolio, which generates income.   
VA officials attributed the lower default and foreclosure rates in their program to adherence to strict lending standards and appraisal requirements, homeowner counseling programs and mortgage modifications, when appropriate. VA officials said they make 30,000 “contacts” each month -- phone calls, emails and more -- to help financially struggling veterans. 
Since 1992, when the department began tracking its financing, the program has been operating without requiring extra funding over its regular annual appropriation, which is budgeted at $191 million in fiscal 2011, officials said.  
The USDA official made similar comments about his department’s program. But the department projects $193 million in losses this year, three times the losses it reported in 2007. 
Also, government auditors last year criticized a $10.5 billion expansion of the USDA program included in the Administration’s stimulus package.  
The auditors’ comments echoed criticisms of some mortgage lending practices during the housing bubble: Among other things, they found that the agency failed to require lenders to submit “documentation to support borrower loan eligibility,” “noncompliance” by field staff and lenders with program debt requirements, and “insufficient lender oversight” of mortgage brokers participating in the program. 
The department “generally agreed” with the findings, the audit report said, and proposed “corrective actions” to fix the problems.   
Stevens says that he thinks that at “the end of the day, taxpayers were at risk one way or the other,” with potential losses in expanding FHA, VA and USDA guarantee programs--or more losses in home values absent the aggressive government intervention in the housing market. 
“Had the Administration not stepped in fundamentally…the outcome would have been far worse, without question,” Stevens said. 
Stevens also said the Administration will contract his and the other programs, as well as reform Fannie and Freddie, once housing markets heal. 
“This administration is completely committed…to having a balanced financial services market where private capital re-emerges,” he said. “We’re doing a lot of things to try to head in that direction.” 
Pinto is skeptical. 
“Are they really going to back off on this? They say they are--Dave Stevens says he will, and he means that,” Pinto said. “But will Congress let him? Will the homebuyers let him? Will the Realtors let him? Because at the end of the day, the homebuilders and the Realtors like leverage—they like low down payment loans. And they’re going to be loath to give them up.”