Digging Into the Unemployment Figures -- It's UGLY For 5 Years!

from John Mauldin:

Unemployment is high and rising. But if the recession is over, won't employment start to rise? The quick answer is no. We look deeper into the Statistical Recovery and find yet more reasons to be concerned about near-term deflation. This week we consider all things unemployment and ponder the need to create at least 15 million jobs in the next five years to return to a full-employment economy - and the implications for both the US and world economies if we don't. Economic is often about what we can clearly see, and yet it is understanding what we can't see that gives us true insight. We start with a collection of facts that we can see and then begin a thought exercise to find the implications.

What We See

First, the unemployment rate is now officially at 9.7%. We are approaching the official high we last saw at the end of the double-dip1982 recession. In the chart below, notice that unemployment rose throughout 1980 and then began to decline, before rising rapidly as the economy entered the second recession within two years. Also notice the rapid drop in unemployment following that recession, as opposed to the recessions of 1991-92 and 2001-02, which have been characterized as jobless recoveries. Unemployment was as low as 3.8% in 2000 and saw a cycle low of 4.4% in early 2007.
(For the record, all this data is available on the Bureau of Labor Statistics website. There is a treasure trove of data. They are quite open about what they do and how they do it. When I call to ask a question, they are quite helpful. How people interpret the data is not their fault.)

This headline unemployment number (9.7%) is what we see when we read the paper. What we typically don't see is the real number of unemployed. For instance, if you have not actively looked for a job in the last four weeks, even if you would like one, you are not counted as unemployed. You are called a "marginally attached" or "discouraged" worker. Often there are very good reasons for this. You could be sick, dealing with a family emergency, going back to school, or not have transportation.
Right now, about one-third of marginally attached workers actively want jobs but have not bothered to look because they believe there are no jobs in their area, at least not for them. If you add that extra 758,000 to the unemployment data, you get what is called U-4 unemployment, which today is 10.2%. If you count all marginally attached workers the unemployment number is 11% (U-5 unemployment).
And if you add those who are employed part-time for economic reasons (i.e., they can't get full-time jobs) the unemployment number rises to 16.8%. (That is called U-6 unemployment.)
Now, stay with me for the next two tables taken directly from the BLS website. The first is the total number of people in the US civilian work force. Notice how each year the number of potential workers rises. In fact, the number of workers has risen by about 15 million over the last ten years. This is from population growth and from immigration. Also notice that the normal rise did not happen last year. That is because the number of discouraged workers has risen rapidly and, as noted above, they are not counted. We will revisit this point later. But for now, there are 154,577,000 people in the available work force.

Next we look at the tables for the actual level of employment. Here we note that we are down almost 8 million jobs sincd the onset of this recession, and that there are almost 15 million people unemployed.

Going back to the part-time workers, there are roughly 9 million people who are working part-time because of business conditions, or those are the only jobs they could find. The average work week is at an all-time low of 33 hours. The chart below is from my friend David Rosenberg.

David wrote in a special report today:
"What does all this mean? It means that when the economy does begin to recover, when we finally get to the other side of the mountain, companies are going to raise their labour input first by lifting the workweek from its record low. Just to get back to the pre-recession level of 33.8 hours would be equivalent to hiring three million workers. And, the record number of people working part-time against their will are going to be pushed back into full-time, which will be great news for them, but not so great news for the 125,000 - 150,000 new entrants into the labour market every month. They won't have it so easy because employers are going to tap their existing under-utilized resources first since that is common sense. Also keep in mind that there are at least four million jobs in retail, financial, construction and manufacturing jobs lost this cycle that are likely not coming back. In fact, the number of unemployed who were let go for permanent reasons as opposed to temporary layoff rose by more than five million this cycle. This compares to the 1.2 million increase in the 2001 tech-led recession and in the 1990-91 housing-led recession (when Ross Perot talked about the sucking sound of jobs into Mexico)."
Then there is the matter of average weekly earnings. If you adjust for inflation, workers are making roughly what they did in 1980. The chart is straight from the BLS website.

And What We Don't See

Those are the facts. Now it's time to look at what we don't see, and what you don't read or hear from the mainstream media.
We saw above that we are adding about 1.5 million workers to the workplace every year. That means over the next five years we are going to need 7.5 million jobs just to maintain that growth, or about 125,000 a month. That is on the low side of what economists normally estimate, which is around 150,000 per month. If we used the 150,000 estimate, it would mean we need 9 million jobs.
There are at least 1 million (and probably more like 2 million) discouraged workers who would take jobs if the economy got better. You can derive that number by going back to early 2007 and seeing the level of discouraged workers. That means, by the end of 2014 we are going to have 163 million people in the work force (see table above).
Today we have 139.6 million jobs, and that number is likely to slip at least another half million (last month the economy lost 216,000 jobs, with a very suspicious birth-death ratio accounting for a lot of job creation). So let's call it 139 million current jobs.
Let's assume that we would like to get back to a 5% unemployment rate. That would not be stellar, but it would certainly be better than where we are today. Five percent unemployment in late 2014 will mean 8.1 million unemployed. To get to 5% unemployment we will have to create 14 million jobs in the five years from 2010-2014. (163 million in labor pool minus 8 million unemployed is 155 million jobs. We now have 139 million jobs, so the difference is roughly 15 million.) Plus the equivalent of 3 million jobs that Rosenberg estimates, just to get back to an average work week. And maybe the extra 1.5 million a year I mentioned above.
But let's ignore those latter jobs and round it off to 15 million. Let's hope that by the beginning of next year we stop losing jobs. That means that to get back to 5% unemployment within five years we need to see, on average, the creation of 250,000 jobs per month. As an AVERAGE!!!!!
Look at the table below. It is the number of jobs added or lost for the last ten years. Do you see a year that averaged 250,000? No.

If you take the best year, which was 2006, you get an average monthly growth of 232,000. If you average the ten years from 1999, you get average monthly job growth of 50,000. If you take the average job growth from 1989 until now, you get an average of 91,000 a month. If you take the best ten years I could find, which would be 1991-2000, the average is still only 150,000. That is a long way from 250,000.
Want to get back to 4%? Add another 25,000 jobs a month to 2006.
Let's jump forward to next September. We will need at least 1.5 million jobs to take into account growth in the population. Plus another half million jobs that we are likely to lose before we start to grow again. What is the likelihood of average job growth of 160,000 a month? Anyone want to take the "overs" bet?
Go back to 2003, the year after the end of the last recession. A few hundred thousand jobs were created. Why so slow? Because employers gave more time to those who were already employed and to part-time workers. Because of the near-certain loss of jobs for the next few months and the slow recovery, it is a very real possibility that unemployment will still be well over 10% a year from now.
Even with robust growth of 200,000 jobs a month thereafter for the next two years, unemployment will still be close to or over 9%. That would only be an additional 1.8 million jobs (making the most optimistic assumptions) over the new jobs needed for population growth.

A Double-Dip Recession?

And that is before this administration makes the economically suicidal move to raise the top tax rate by 10%. The popular image is that those who pay the highest tax rate are Wall Street execs, bankers, and corporate moguls. The reality is that 75% of them are small business owners, and they are responsible for the large majority of new jobs that are going to be needed, not to mention a large part of consumer spending. If you tax them more you are going to get fewer jobs (as they will have less to invest) and less consumer spending.
A tax increase of the size being contemplated, with unemployment at today's level, will guarantee a double-dip recession, which of course means that unemployment will rise, not fall. Go back and look at that chart on unemployment. Notice the very steep rise in the second recession of the early '80s. That is what we could be facing.
Without getting too political, think about elections in 2010 with unemployment levels still rising. And fast-forward to 2012, with deficits (optimistically) projected to be almost $1 trillion and rising. With a tax increase giving us another recession? Will the bond market provide another $4 trillion? My question is, from where?
There has never been a period of serious inflation in the US without wage inflation. But real incomes are falling, and there is little reason to believe we will see wage pressures within the next few years. The opposite is likely to be the case.
Today's Wall Street Journal tells us that 5 million people have been unemployed for over 6 months. And the longer you are unemployed, the harder it is to get a job. That means you have to settle for a job with less income than you had before.
The only group to see a rise in employment? Those over the age of 55, as they have to take a job, any job, so they can save for retirement.

The Statistical Recovery

The economy is in the process of bottoming. The year-over-year comparisons are getting easier. We will find that new level of spending and economic activity and grow from there. But it is going to be awhile before we get back to full employment. While the numbers may say recovery, it is not going to feel like one.
Let's review quickly what I have written about the last four weeks. We have enormous excess capacity - capacity utilization is about 68%. Banks are cutting back on their loans, and consumers and businesses are borrowing less. Housing is likely to be in a funk for at least two years. We are deleveraging, which is causing the velocity of money to slow.
All of this is very deflationary. Will the Fed print enough money to reflate the economy? You better hope so. Will we have to deal with it later? Of course. We have no good choices. We are in for a long five years, at the least. Yes, there will be opportunities, and new industries will be created. But it won't happen overnight.
Welcome to the New Normal.

Manipulated Markets Again

from Mauldin:
Before I hit the send button, a brief comment on a very odd market happening. It appears that recently up to 40% of the volume in the NYSE is in just four low-priced financial stocks. "According to Reuters, four beaten-up financial companies - Bank of America (BAC), Citigroup (C), Fannie Mae (FNM), and Freddie Mac (FRE) - have accounted for upwards of 40 percent of the trading volume on the New York Stock Exchange to begin this week."
The stocks are basically churning in price. Why is this? There are a lot of theories, so let me offer one of my own. I think it has a lot to do with flash trading. As I wrote in a previous letter, with high-frequency program trading hedge funds and sophisticated brokers can make as much as 0.5 cents buying and selling a share of stock at breakeven. Supposedly, the exchanges pay these premiums for adding liquidity. But we are seeing liquidity in stocks where none is needed.
The SEC announced this week that they are going to look into halting these programs. Good. It can't come too soon. Allowing certain funds and brokers to basically front-run the average fund or individual because they have their servers on the actual trading floor is just wrong. This must stop. And if program trading is actually driving the volume in these four names, it needs to be stopped as soon as possible.
Candidly, I have no way of knowing what the true reason for the volume is. Maybe it is something simple and innocent. But I am deeply suspicious. I doubt it's people buying Bank of America, which has seen its volume as high as 238 million shares, or Citi at 973 million shares, in ONE day! This for stocks that are severely financially impaired? Someone needs to be on top of this. As in Monday.

The Black Hole at the FDIC

from John Mauldin:
And speaking of holes, let's look at a huge one that is looming at the FDIC. Institutional Risk Analytics (IRA) is maybe the premier bank-analyst service in the country. They charge over six figures for their flagship service. Good friend and Maine fishing buddy Chris Whalen runs the show and was kind enough to send me some of his new data, which they have not yet released to the public. You get it here first. (www.institutionalriskanalytics.com)
IRA takes the data from the FDIC and crunches it with their own set of risk parameters. While the FDIC has a little over 400 banks on its current "watch" list, IRA gives 2,256 banks an "F." They project that over 1,000 banks will either fold or be taken over during the current cycle. To date in 2009, a total of 92 banks have failed across the country, compared with 25 for all of 2008, according to the FDIC. 900 more to go. Ouch.

How much money are we talking about? The banks rated F have total insured assets of $4.46 trillion. So far in this cycle banks that have been taken over by the FDIC are showing losses of 25%!

Turning to a note from IRA: "An important point in the analysis is that estimated losses for failed bank resolutions by the FDIC are running around a quarter of failed bank assets, a level much higher than between 1980 and 1995, when failures cost an average 11 percent. Our firm's long-held view of the likely loss rate peak for the US banks in this credit cycle is 2x 1990 loss rates or, as noted by the IMF, around 4 percent of total loans. Since total loans and leases held by all FDIC-insured banks was some $7.7 trillion as of Q2 2009, the IMF estimate implies a cumulative loss of over $300 billion.
"If you start with the internal assumptions used by our firm that roughly half of the banks currently rated "F" or some 1,000 banks will fail and/or be merged with another institution and that the loss to the FDIC bank insurance fund will be approximately 20-25% of total assets, then the cost of these resolutions to the FDIC through the full credit downturn could be in excess of $400-500 billion. Keep in mind that in making this alarming estimate we ignore other banks currently in ratings strata above "F" and that some of these institutions may indeed fail as well. Also, our overall "worst case" or maximum probable loss ("MPL") for large US banks above $10 billion in assets is $800 billion through the current credit cycle."
From almost $60 billion last fall, the FDIC's reserves have been drawn down to only about $10 billion today (after set-asides), a 16-year low. A quick look at the FDIC's own data shows us how inadequate those reserves are compared to the deposits they are now insuring. The FDIC only has about two-tenths of one cent for every dollar of assets it covers. Look at this chart from my friends at Casey Research.

The FDIC can borrow $100 billion in an emergency line of credit, and through 2010 it can get another $500 billion. But if and when that money is borrowed, it will have to be paid back. Remember the money that was lost in the savings and loan crisis 20 years ago? The FDIC had to borrow a mere $15 billion. We are still paying that 30-year loan back.
The FDIC has two options to replenish its insurance fund in the short run: it can charge banks higher fees or it can take the more radical step of borrowing from the US Treasury. It has already levied a "special fee" that garnered over $5 billion.
Now, let's hold that thought, as we will come back to it in a minute.
A growing economy requires a growing credit market. If credit is shrinking it signals a receding economy. But banks are having to raise capital, and that means many banks are having to curtail lending. First, let's look at a chart of total bank loans for the last five years. Notice that there was a big jump in late 2008 as commercial paper became hard to obtain and businesses hit their credit lines. Since then banks have been cutting back.

This next chart is again total bank loans but goes back to 1947. Notice that loan growth was relatively smooth with only a few sideways drifts during recessions and never dropping significantly, as it has in the last year. And the data suggests that banks intend to keep reducing their loan exposure as they try to increase their capital (at least the large number of banks that have problems).

Consumer credit-card lending is down. Banks have cut their outstanding and unused bank lines to corporations. I can go on and on, but you get the picture. Remember the money that the Fed used to purchase toxic assets so that banks could lend? They are increasingly using that money to buy Fannie and Freddie loans and banking the interest in an effort to improve their profitability.
Why are they raising capital? Because their loan losses are high and rising. Look at this chart from Northern Trust. What it shows is consumer loan losses rising, and so far there is no sign of those losses topping out. The lines are still going up. The same can be said for real estate loans at commercial banks, which are now running over 9% delinquent. These are loans the banks kept on their books.

Everyone knows that commercial real estate loans are the next shoe to drop, and write-offs may be as large as $400 billion. This will force some banks to go under, but other banks will simply have to absorb the losses.
Now, let's come back to the FDIC. Sheila Bair, who heads the agency, has emphatically said that the FDIC will not ask Congress for a capital infusion. That means, as noted above, that the FDIC will have to either use their credit lines or ask for more "one-time" special-fee contributions.
If the FDIC borrows the money, and it is highly likely they will, they are going to have to raise the rates they charge member banks for the government backing. And to pay back $3-400 billion? Rates will have to be raised quite high, on the very banks struggling to raise capital and make a profit.
This is going to be a huge drain on future profits of US banks for a very long time. It is going to make it even harder for them to increase their capital – and they need to. But it has to happen. Zombie banks, those that are bound to fail, need to be taken out and put into stronger hands so that credit growth can once again start to rise. But this will not happen overnight. It is going to take time.
While I am writing about US banks, this is a problem all over the developed world. Banks that have to raise capital and reduce loans are not growing credit and are a drag on growth. As credit shrinks it is a large deflationary force. And that is not even taking into account the implosion of the shadow banking system.
Yes, we are seeing statistical growth in the economy this quarter and probably the next. But unemployment is rising and wages and incomes are falling. We will go into that next week.
We are in for a very poor, jobless recovery, and the risk of falling into a double-dip recession is quite high. The stock market is pricing in a steep V-shaped recovery in both GDP and corporate profits. I am not convinced.

It's OK to File Frivolous Lawsuits Over Global Warming

NEW YORK—The 2nd U.S. Circuit Court of Appeals in New York has ruled that five of the largest U.S. coal-burning electric utilities can be sued under the federal common law of “nuisance” for their alleged contribution to global warming.
A two-judge panel of the 2nd Circuit held that a lower court erred in dismissing the complaints on political question grounds, that all of the plaintiffs have standing to bring their claims and that the federal nuisance common law governs their claims.
The Monday decision, which overturned and remanded a judgment by the U.S. District Court for the Southern District of New York in State of Connecticut et al. vs. American Electric Power Co. et al., effectively paves the way for other lawsuits against utilities alleging nuisance from carbon dioxide emissions, environmental attorneys say.

Cap and Trade Will Cost Good-Paying Jobs

The cost of a national cap-and-trade system is good paying manufacturing jobs in rural America.  This is according to a recent study from Charles River Associates International (CRA) and The Fertilizer Institute.
The study highlights the estimated economic contributions of the U.S. fertilizer manufacturing industry in 2006.  It also explains how a national cap-and-trade system, as envisioned in the Waxman-Markey bill (H.R. 2454), will jeopardize the domestic fertilizer industry, which is critical for food production, food security, and a healthy U.S. economy. 
Ranking Member Frank Lucas recently visited one fertilizer plant in his Oklahoma district to emphasize the real risk of losing American jobs if the Waxman-Markey bill becomes law.  Koch Nitrogen Company, LLC in Enid Oklahoma employs roughly 100 people plus numerous contractors.  These jobs have an average compensation of $76,000, which is almost 80 percent greater than the U.S. average compensation across all industries.  A national cap-and-trade system could force this plant to close because it would drive up the price of natural gas, which is critical for fertilizer production.
Highlights of the economic contributions of the U.S. fertilizer manufacturing industry:

• The U.S. fertilizer industry directly employs more than 24,800 people to produce $15.1 billion in output.
  
• The total economic contribution of the industry was $57.8 billion.  The total number of jobs provided was 244,500.
  
• These jobs had an average compensation of $76,000, which was almost 80 percent greater than the U.S. average compensation across all industries.
  
• The purchase of materials and services to support fertilizer manufacturing led to an additional 73,000 jobs along the supply chain.

Impact of cap-and-trade system on U.S. fertilizer manufacturing industry:

• Farmers must have fertilizers in order to continue to produce a stable food supply.  Commercial fertilizer nutrients are currently responsible for 40 to 60 percent of the world's food supply.
  
• During the last decade, 26 U.S. ammonia plants have closed primarily due to high natural gas prices.
  
• High natural gas prices have already raised the fertilizer costs for farmers, which has been a major factor in the rapidly rising production costs in agriculture.  
  
• Currently, the U.S. imports approximately 85 percent of potash and 55 percent of the nation's nitrogen needs.  Of these imports, 83 percent comes from countries without a cap and trade regime in place to regulate carbon.
  
• Under H.R. 2454, the price of natural gas is expected to increase dramatically.  Every $3 increase in the price of natural gas adds more than $1 billion to the cost of nitrogen production. 
  
• Such increases in the cost of production will put this American industry at a competitive disadvantage with other countries, which do not have a cap-and-trade system in place. 
  U.S. producers will face the choice of losing market share to imports or moving production overseas.

Large Bank Losses Triple

And this is an increase from 2008 levels? Ouch!

CHARLOTTE, North Carolina (AP) -- U.S. regulators said total losses from large loans at banks and other financial institutions nearly tripled to $53 billion in 2009, due to a deteriorating economic environment and continued weak underwriting standards.

According to an annual report released by the four federal bank-regulatory agencies on Thursday, credit quality deteriorated to record levels this year.
The report said total identified losses of $53.3 billion in 2009 surpassed last year's total of $2.6 billion, and nearly tripled the previous peak in 2002, when losses totaled $19.1 billion.
"While we expected a year-over-year increase in problem assets, given the weak economic environment, declining (commercial real estate) values, and previously weak underwriting, we were surprised by the magnitude of the increase," wrote FBR Capital Markets analyst Scott Valentin in a research note to clients Friday.

"Armageddon" Over Debt

from CNBC:
The US is too dependent on Japan and China buying up the country's debt and could face severe economic problems if that stops, Tiger Management founder and chairman Julian Robertson told CNBC.

"It's almost Armageddon if the Japanese and Chinese don't buy our debt,” Robertson said in an interview. "I don't know where we could get the money. I think we've let ourselves get in a terrible situation and I think we ought to try and get out of it."

Robertson said inflation is a big risk if foreign countries were to stop buying bonds.

“If the Chinese and Japanese stop buying our bonds, we could easily see [inflation] go to 15 to 20 percent,” he said.  “It's not a question of the economy. It's a question of who will lend us the money if they don't. Imagine us getting ourselves in a situation where we're totally dependent on those two countries. It's crazy.”
The only way to avoid the problem, he said, is to "grow and save our way out of it."

"The U.S. has to quit spending, cut back, start saving, and scale backward," Robertson said. "Until that happens, I don't think we're anywhere near out of the woods.”

Academics and Reporters

Academics and reporters can't do anything in the real world, so they hide in their newsrooms or classrooms. Those who can, do. Those who can't, teach -- or report on those who are doing!

Dollar Doom!

from the Telegraph (UK):
"The dollar looks awfully like sterling after the First World War," said David Bloom, the bank's currency chief.
"The whole picture of risk-reward for emerging market currencies has changed. It is not so much that they have risen to our standards, it is that we have fallen to theirs. It used to be that sovereign risk was mainly an emerging market issue but the events of the last year have shown that this is no longer the case. Look at the UK – debt is racing up to 100pc of GDP," he said
Crucially, China and rising Asia have reached the point where they can no longer keep holding down their currencies to boost exports because this is causing mayhem to their own economies, stoking asset bubbles. Asia's "mercantilist mindset" of recent decades is about to be broken by the spectre of an inflation spiral.
The policy headache was already becoming clear in the final phase of the global credit boom but the financial crisis temporarily masked the effect. The pressures will return with a vengeance as these countries roar back to life, leaving the US and other laggards of the old world far behind.
A monetary policy of near zero rates – further juiced by quantitative easing – is completely incompatible with circumstances in most of Asia, the Middle East, Latin America, and Africa. Divorce is inevitable. The US is expected to hold rates near zero through 2010 to tackle its own crisis.
What is occurring is an epochal loss in the relative wealth and economic power of the old G10 bloc of rich countries compared to rising regions of the world. The euro, yen, sterling, Swiss franc and other mature currencies will be relegated along with the dollar in this great process of rebalancing, but the Greenback will bear the brunt.
The Fed's super-loose policy is turning the dollar into the key funding currency for the next phase of the global "carry trade", taking over the role of Japan during its period of emergency stimulus.
Mr Bloom said regional currencies would emerge as the anchor for their smaller trading partners, with China, Brazil, or South Africa substituting the role of the US. Australia is already linking its fortunes to China through commodity ties.

from Yahoo:
PITTSBURGH, Pennsylvania (AFP) – The embattled US dollar is expected to come under scrutiny at a summit of developing and industrialized nations following China-led calls to review its role as a reserve currency.
The dollar issue is bound to surface at the two-day meeting in Pittsburgh as US President Barack Obama and other leaders of the Group of 20 economies debate a new framework for tackling the so called global "economic imbalances" blamed for fuelling the latest financial crisis.

Corn Rises Despite Outside Markets

The Dollar is higher, crude oil is lower, and stocks are in the tank, but corn is stronger this morning despite all this. What is going on? Is the threat of frost damage outweighing all these other considerations?

Crude Breaks Through July Support

Farm Futures' "The Buzz" for 9-23-09

The Buzz, Sept. 23, 2009 from Farm Futures on Vimeo.

Fed Surprises Bond Market With Announcement

The Fed announced that it will continue to buy treasuries for another six months. Treasuries rocketed on the news. The moment of the announcement is obvious on the chart.

Stock Market Rout Following Fed Policy Decision

Credit Card Defaults Reach New Record

from Bloomberg:
Sept. 23 (Bloomberg) -- U.S. credit-card defaults rose to a record in August and more losses may lie ahead as delinquencies climbed for the first time since March, according to Moody’s Investors Service.
Write-offs rose to 11.49 percent from 10.52 percent in July, Moody’s said today in a report. Loans at least 30 days delinquent rose to 5.8 percent from 5.73 percent. “Early- stage” delinquencies, or loans overdue 30 to 59 days, surged to 1.65 percent, from 1.41 percent, signaling higher losses in coming months. Banks typically write off loans after 180 days.
JPMorgan Chase & Co.,Bank of America Corp. and Citigroup Inc., the biggest U.S. credit-card lenders, said in federal filings on Sept. 15 that defaults climbed in August as the unemployment rate jumped to 9.7 percent and the impact of income tax refunds waned. Credit-card defaults typically track the U.S. jobless rate.

FDIC Is Broke, and Fixing It Will Be Both Costly and Painful!

from Yahoo:
WASHINGTON (AP) -- The Federal Deposit Insurance Corp. is weighing several costly -- and never-before-used -- options as it struggles to shore up the dwindling fund that insures bank deposits.
The agency is considering borrowing billions from healthy banks. Alternatively, it may impose a special fee on the banking industry.
Each option carries risk: Drawing money from healthy banks would take dollars out of the private sector, making that money unavailable for investment in the weak economy. But charging the whole industry a fee to replenish the fund could push weaker banks toward failure.
A third option -- borrowing from the Treasury -- is politically unpalatable, since it would resemble another taxpayer-financed bailout.
A fourth option would be to have banks pay their regular insurance premiums early. But this idea wouldn't solve the fund's long-term cash needs.
"The bottom line is, there's no good solution," said Jaret Seiberg, an analyst with the research firm Concept Capital. "This is a fight over which option is least bad."
The FDIC is expected to propose a solution, possibly combining two or more of the options, at a board meeting next week.
Bank failures since the financial crisis struck have drained the fund to its lowest level since 1992, at the peak of the savings-and-loan crisis. The fund insures deposit bank accounts of up to $250,000.
Officials have approached big, healthy banks about making loans to the agency, said two industry officials familiar with the conversations, who requested anonymity because the plans are still evolving. Doing so would help the agency avoid tapping a $100 billion credit line with the Treasury -- something FDIC Chairman Sheila Bair is reluctant to do.
But taking billions from large, healthy banks would remove that money from the private sector and prevent it from being invested. That could slow an economic recovery, analysts said.
Industry and government officials said Tuesday that plan was still on the table. But FDIC spokesman Andrew Gray downplayed its likelihood, saying, "It's an option, but it's not being given serious consideration."
The FDIC also could levy a special emergency fee on the industry. That would allow the healthiest banks to keep more capital for investment. But it could drive shakier banks toward failure -- further depleting the fund. Losses on commercial real estate and other loans are causing multiple bank failures each week.
Banks already have paid one extra fee this year. And Comptroller of the Currency John Dugan, who holds one of the FDIC board's five votes, has cautioned against saddling them with another.
Discussing the option last week, Bair acknowledged, "We don't want to stress the industry too much at this time, when they're still in the process of recovery."
Bair also said then that the agency might collect banks' regular insurance premiums early to infuse the fund with cash. An exemption would likely be provided for banks that are too weak to pay in advance.
This plan would solve the fund's immediate cash needs. But Seiberg called it "a one-time gimmick" that would merely delay another special assessment.
Because the FDIC expects bank failures to cost the fund around $70 billion through 2013, a short-term boost may not be the answer, Seiberg said.
The banking industry and lobbyists oppose another fee. They also want Bair to avoid tapping the Treasury credit line, because it would lead to higher insurance premiums for banks as the FDIC repays the money.
In a letter Monday to Bair, American Bankers Association CEO Ed Yingling endorsed borrowing from the banks or collecting regular premiums early as alternatives to charging another fee.
The special fee imposed earlier this year is hurting banks, already stressed from depressed income and increased loan losses, Yingling said. Another one "may do more harm than good," he said.
One advantage of having big banks lend to the insurance fund would be to give healthy banks a safe harbor for their money and limit their risk-taking, said Daniel Alpert, managing director of the investment bank Westwood Capital LLC in New York.
It also would let the industry's strongest players -- which still rely on FDIC loan guarantees and other emergency subsidies -- help weaker banks avoid paying another fee, he said.
"Lots of banks are going to require more capital, and (Bair is) trying to rob from the rich and give to the poor," said Alpert, who supports the plan as a creative way to avoid another bailout.
Bair's priorities for the industry are different from the Treasury's, analysts said. She is focused on stabilizing the many banks still at risk of failure. Such collapses could further deplete the insurance fund.
Treasury Secretary Timothy Geithner has taken a more hands-off approach to the industry. He wants to wind down government assistance quickly.
Bair and Geithner have sparred on key decisions throughout the financial crisis, including whether to bail out Citigroup Inc. with taxpayer dollars last fall.
In an interview with The Associated Press in December, Bair acknowledged that she and Geithner "have different perspectives frequently," but added, "I think that's a healthy thing."
"You don't want to get everybody in the room nodding," she said.
Ninety-four banks have failed so far this year. Hundreds more are expected to fall in coming years largely because of souring loans for commercial real estate.
The FDIC's fund has slipped to 0.22 percent of insured deposits, below a congressionally mandated minimum of 1.15 percent. The $10.4 billion in the fund at the end of June is down from $13 billion at the end of March, and $45.2 billion in the second quarter of 2008.
Congress in May more than tripled the amount the FDIC could borrow from the Treasury if needed to restore the insurance fund, to $100 billion from $30 billion.
The FDIC then adopted a new system of special fees paid by U.S. financial institutions that shifted more of the burden to bigger banks to help replenish the insurance fund.
That move cut by about two-thirds the amount of special fees to be levied on banks and thrifts compared with an earlier plan. The earlier plan had prompted a wave of protests by small and community banks.
Bair had earlier promised a reduction in fees charged to banks if the Treasury credit line could be expanded.

Series of Grain-Related Tweets

Arlan Suderman, in an online chat through Twitter, is explaining agricultural futures:

Good morning, Nick, and all who are following for this onthefarm chat

I write market analysis for Farm Futures the magazine, FarmFutures.com and daily e-newsletter Farm Futures Daily. 

It used to mean just studying supply and demand fundamentals and seasonal charts, but it's much more now.

This week's markets are a good example. Fundamentals didn't change, but money flow dynamics gave far different results day to day

The grain futures market is designed to be the purest form of supply & demand driving price that there is.

Traders bid for grain or livestock each day in the pit based on what they believe the future value of the commodity will be.

They're traded in standardized futures contracts of 5,000 bushels with a set delivery month for the contract.

Traders are pricing in an expectation/fear of a big increase in yields in USDA's October 9 crop report, like in 2004

Supplies are always largest at harvest, pressuring prices, but fear/emotions play a major role in driving prices day to day.

The focus tends to shift to demand trends once traders have a handle on the size of the crop; usually by mid-October.

Traders are like you & I; trying to make a living. They manage massive amts of $$. Their job rides on being right.

They fear being wrong; particularly newer traders who haven't been through volatile markets before. Greed also plays a role.

Last fall's collapse of the financial system provided another example.

Ordinary Americans w/ $$ invested in funds demanded cash back from the funds, requiring them to liquidate positions in futures.

Greed was a factor, but fear was also a major factor. End users were afraid that Midwest floods has slashed production.

End users are usually slow to panic, but they'll provide the final push in a bull market fearful they won't have enough grain.

Speculative funds are usually sellers before prices hit their peak. They typically recognize when prices are getting too high.


Fund investment of corn, beans Chic & KC wht topped $55 bln in spring '08, several months before market peaked. 


It's difficult to draw conclusions from 1 or 2 data years, but new genetics certainly have helped crops deal with adversity. 


New genetics has given great stability to production agriculture, making traders wary to buy into a weather threat after 2008. 


We haven't had a widespread drought since 1988. Hopefully drought tolerance will be well est. before we do again in genetics.


I think it says a great deal that demand will grow by nearly 1 bln bu. this year and we still have plenty of corn to meet it. 


I follow overall production trends. There's a difference between what happens on the individual farm and across the Corn Belt. 


I closely follow how genetics is impacting overall production trends and ability to withstand adversity.


We then adjust our forecast models accordingly for anticipating yield results. 


Great consistency of production. I use a 20-year trend yield. We've varied from that trend by more than a few bu. 2x in recnt yr


This year will be a great test of genetics. Sunlight is a major limiting factor of yield. The Midwest was quite cloudy this summer


If in fact this is a big crop, it will mean that genetics is re-writing the text book on photosynthesis. 


I should say that corn yield consistency has been excellent. Soybeans have still struggled w/ dryness/adversity late in growth. 


One of the factors that drives me is the money-flow dynamics of the markets. 


Analysts point to yields, demand, etc., but prices often follow DOW & crude tick for tick, inverse of the dollar on currency mkts 


We've seen that happen a lot this fall. Seasonal harvest pressure adds to losses as $$ rallies, but falling $$ supports prices. 


Dollar, equity & energy markets are very intertwined on a daily basis. Dollar is probably most dominant factor this year. 


However, these markets have taken their turns in which leads on a day to day basis. Dollar currently more dominant. 


Big focus today is on Federal Reserve meeting, with policy statement coming out as grain markets close at 1:15 CDT. 


Any change in Fed policy to withdraw stimulus could lead to seasonal correction in equity/energy mkts, pressuring grains. 


That would likely be accompanied by rise in dollar, but I expect Fed to hold the line yet at this time.


Non-ag traders looking 3-5 years out. Fiscal policy argues for cheap dollar leading to inflationary pressure.


Commodities provide hedge against inflation; particularly food- and energy-based commodities. Global stocks of each are snug.


Today is interesting. Grains are divorcing a bit from outside markets.


Underlying chart support held when crude pressured prices early. Traders covering short (sold) positions. Chart-driven. 


Demand is also picking up on price breaks as end users take advantage of cheaper prices. 


Soybeans are the driver short-term, but corn takes a stronger leadership role in 2010 and 2011 as the global economy heals.


Traditionally, wheat is the leader. Domestic stocks need to shrink first. Much of recent rise in global wheat stocks is in China. 


China will be a major driver of grain demand over the next several years. 


That's why we follow China's economic recovery closely. China is buying soybeans at nearly twice the pace of last year's record buying spree.


They had a shorter crop due to drought and they also would rather own hard assets vs our shrinking currency.


China places high priority on having adequate food supplies. It must avoid social unrest. 


It will threaten actions against food imports, but it will be very selective in actually doing so. Food stocks are essential. As such, no actions on soybeans until they have enough.



Demand is so strong that we must have a big bean crop this year. We'll find out Oct. 9 if we do or not. Rationing needed if not.


In other words, the final crop size will determine if we have significant upside potential or not. We're a few weeks from knowing


I'm bullish agriculture. We're in a slump now, but that will turn. The world needs our production capacity.


However, we must be smart about it and maintain equity stability on the farm. Keep debt to a minimum. Manage margins. 


We should mention that the markets are highly regulated already, unlike the picture one gets from the news these days. 


I think we've covered enough to make people think. In summary, I'm bullish US agriculture!

We don't see things as they are, we see them as we are.
Anais Nin

Sign of the Global Economy

Here, on a sleepy stretch of shoreline at the far end of Asia, is surely the biggest and most secretive gathering of ships in maritime history. Their numbers are equivalent to the entire British and American navies combined; their tonnage is far greater. Container ships, bulk carriers, oil tankers - all should be steaming fully laden between China, Britain, Europe and the US, stocking camera shops, PC Worlds and Argos depots ahead of the retail pandemonium of 2009. But their water has been stolen.
They are a powerful and tangible representation of the hurricanes that have been wrought by the global economic crisis; an iron curtain drawn along the coastline of the southern edge of Malaysia's rural Johor state, 50 miles east of Singapore harbour.
Article about shipping business being dead

No Stopping Stocks

New 2009 high for stocks.

Dollar Down, Commodities Up

Dollar

Gold

Grains

Crude Oil

Natural Gas

Teamwork in Trading

from Dr. Steenbarger:

Using trading groups to move to the next level:
One of the most common concerns I hear from traders is difficulty "getting to the next level". Many have a sense that they've made progress, but can't quite take that next step toward consistent, significant profitability.

A tremendous advantage of trading within a firm is that you have multiple potential role models for getting to that next level. Within trading firms, you have colleagues who can discuss ideas with you, help keep you positive and motivated during dry spells, and inspire you to greater accomplishment.

Within a firm, also, you get regular feedback on your performance, assistance with risk management, and recognition for accomplishment.

All of these things are lacking for most independent traders.

I do not trade for a firm, but my work as a trading coach/psychologist brings me in contact with many traders and trading institutions. I cannot tell you how much I've learned simply by being around experienced, skilled traders. In such environments, you cannot help but absorb some of their knowledge and wisdom.

Does one need to actually join a trading organization, however, to benefit from group interactions with other traders? The popularity of chat rooms and Web 2.0 trading communities suggests that independent traders are using the online medium to create "groupness" and some of the advantages of affiliation with other traders.

But why not carry that forward yet another step and create actual virtual trading groups? Certainly the technology is readily available (instant messaging, Twitter, online conferencing) to facilitate interactions between and among traders in real time. If a truly committed band of traders decided to openly share ideas and trades, learning from mutual successes and setbacks, the gains in performance for the whole could be far greater than anything that might be achieved in isolation.

Such virtual trading groups would not require investments of capital or added risk. The only demand would be complete and total openness with trades, trade ideas, and trading results--and a willingness to both learn and facilitate the learning of teammates.

To be sure, such groups would require the right kinds of participants: ones sufficiently experienced to offer value to others, ones sufficiently committed to putting time and effort into learning, and--perhaps most of all--ones sufficiently secure to maintain an open kimono and share all the successes, failures, lessons, and letdowns.

A while ago, I conducted real-time postings of market observations, including my own trade ideas and trades. I then hit upon the idea of offering readers the opportunity to take turns leading these sessions via the blog, so that we could all benefit from multiple role models, myself included. Between 2000 and 3000 unique visitors access TraderFeed daily. How many responses do you think I got to lead even just one trading session by posting real time comments?

One.

Given that result, it's perhaps not so surprising that we don't see more virtual trading groups.

The most painful part of my training as a clinical psychologist was having to play tapes of my sessions for my supervisors. Every mistake, every missed opportunity was laid bare; there was no escape. In group supervision, getting a student to volunteer their tapes was torture. After initial hesitance, I pushed myself to volunteer; the worse the session, the more I forced myself to put it out there for learning.

That's what it took for me to get to the next level as a psychologist.

And that, I suspect, is why so few traders make it to that next level.

RELATED POST:

Performance and Profitability

Isolationism in trading:

A reader poses an excellent question:

What ideas do you have to help traders fight the isolation of trading alone with few outside contacts to discuss this style of making money? Most people are not very interested in discussing. Twitter is okay for news, but to share ideas it is just so so.

I addressed an important aspect of this issue in my post on virtual trading groups a while back; I also tackle this topic in the Trading Coach book. There is no question in my mind that, if I were to start trading full-time--knowing what I know now--I would either join a proprietary trading firm or would form my own "virtual trading group" by connecting online (and in real time) with a handful of like-minded traders.

Frankly, there is no guarantee that joining a prop firm will provide access to fresh perspectives and ideas, but at the good ones, the guys are always talking shop and you can pick up good stuff. My experience is that when you're prepared to give, you're likely to get. I often begin my interactions at prop firms that I work with by sharing my own ideas. It's surprising how often that leads to mutual brainstorming and exchange.

I know from my interactions with readers that there are many who are interested in mutual learning. Indeed, that is why many people responded favorably to my idea of a Chicago summer seminar in which the only "registration fee" was to bring one good, unique trading idea. My hope is that an event such as this could lead to further networking, from which could spring virtual trading groups.

Hint: Check out the most frequent participants in the comments sections of your favorite blogs and online forums. Many times, these will be the individuals most interested in networking and sharing ideas.

Finding trading teams:

In response to the posts on teamwork and performance and creativity and teamwork, several readers have asked how they might connect with others and enjoy the potential fruits of collaboration.

In her comment to the performance post, Michelle B. makes an excellent point. Teamwork cannot substitute for self-development. Before you have something to offer a team, you must first learn to coach yourself and bring the best out in you. Rarely can we offer more to others than we can provide to ourselves. Or, as Ayn Rand put it, one must have an "I" before meaningfully verbalizing "I love you."

This is why, in the Trading Coach book, Lesson 45 (Making the Most of Your Coaching Relationship with yourself) precedes Lesson 46 (Finding Positive Trading Relationships with others). Mastering our own self talk is helpful if we're going to talk constructively with others.

Michelle rightly points out that the Web offers a virtual treasure trove of potential collaborators. Take a look at your favorite websites and those that offer the best comments on those. Take a look at those who are sharing their work in blogs. Put your own comments and work out there. You'll be surprised at how many people you can network with and how many reach out to you.

Consider coaching in the world of athletics: the coach works with players in real time, during practice and during actual performance events. Teaching and coaching are seamlessly intertwined with the act of performing. Much of what makes teamwork powerful is that it occurs in real time, in the actual learning environment.

Real time electronic communications, from Twitter to IM and teleconferencing apps, make collaboration more possible than ever before. It is unfortunate that many of these efforts to date are pursued by performers who hope that teamwork will substitute for independent learning and gurus who desperately seek to profit from them.

You would not believe how many out-and-out frauds there are in the trading education, mentorship, and coaching worlds.

Don't let it get you down. Wherever and however it appears, seek out talent and let others share in your talents. Become your best and search for others who are doing the same. Over time, your team will coalesce.

Past posts have focused on the value of teamwork in trading and ways of finding teamwork in one's trading. The idea is to be part of a virtual trading group, even as one trades independently. This not only overcomes the problems associated with being isolated as a trader; it also creates a potential structure for accelerated learning.

A number of proprietary trading groups are recognizing the value of "groupness" and extending their work to independent traders. Trading RM in Chicago, for example, is offering a free trial of a service that enables traders to receive the actual trades placed by their prop traders, including stock and options trades. As their post points out, the idea is not to simply mimic their trades, but rather to use the information to highlight stocks showing trading promise. By tracking whether the traders are placing more long or short trades, subscribers gain an immediate measure of sentiment for the broad market.

Perhaps less obvious, such openness helps traders as well. Once all your trades become public, you become desensitized to losing. All your worst trades, as well as your best ones, are out there for the world to see. That goes a long way toward helping traders develop a thick skin during periods of slump. It's also harder for traders to lose discipline and "go on tilt" when they know that they're being tracked by colleagues within the firm and outside!  

Stocks Erase Most Losses

Dollar Gains Going

Crude is back to $70, despite what is being recognized as a global oil glut. Who would have ever thought we would see an oil glut again?

Crude Oil

Dollar Gains On Equity Weakness

Commodities are softer this morning because of the firmer dollar.

Global Equity Weakness