WASHINGTON (AP) - Fears that the economic recovery is fizzling grew Thursday after the government and private sector issued weak reports on a number of fronts.
Unemployment claims are up, home sales are plunging without government incentives and manufacturing growth is slowing.
Meanwhile, 1.3 million people are without federal jobless benefits now that Congress adjourned for a weeklong Independence Day recess without passing an extension. That number could grow to 3.3 million by the end of the month if lawmakers can't resolve the issue when they return.
All of this worries economists. As jobless claims grow and benefits shrink, Americans have less money to spend and the economy can't grow fast enough to create new jobs. Some are revising their forecasts for growth in the third quarter. Others are afraid the country is on the verge of falling back into a recession.
"We find the level and direction in jobless claims somewhat troubling and the increase is likely to feed double-dip fears," said John Ryding, an economist at RDQ Economics in a note to clients.
New claims for benefits jumped by 13,000 to a seasonally adjusted 472,000, the Labor Department said Thursday. The four-week average, which smooths fluctuations, rose to 466,500, its highest level since March.
Claims have remained stuck above 450,000 since the beginning of the year. Requests for unemployment benefits dropped steadily last year after reaching a peak of 651,000 in March 2009. Economists say they will feel more confident about sustained job growth when initial claims fall below 425,000
Adding to that is the growing number of people who stand to lose government support while they search for work.
For the third time in as many weeks, Senate Republicans blocked a bill Wednesday night that would have continued unemployment checks to people who have been laid off for long stretches. The House is slated to vote on a similar measure Thursday, though the Senate's action renders the vote a futile gesture as Congress prepares to depart Washington for its holiday recess.
During the recession, Congress added up to 73 weeks of extra benefits on top of the 26 weeks typically provided by states. Democrats in the House and Senate want them extended through November. Republicans want the $34 billion cost of the bill to be paid for with money remaining from last year's stimulus package. Democrats argue that it is emergency spending and should be added to the deficit.
Some economists say they may revise their forecasts for growth in the third quarter if the benefits are not extended.
"People whose benefits are going to run out will simply not have the spending power necessary to help drive growth," said Dan Greenhaus, chief economic strategist at Miller Tabak.
The housing market is also weighing on the economy. The number of buyers who signed contracts to purchase homes tumbled 30 percent in May, the National Association of Realtors said. And construction spending declined 0.2 percent in May as residential building fell, the Commerce Department said.
Both were affected by the expiration of government incentives to buy homes. Buyers had until April 30 to sign sales contracts and qualify for tax credits.
The tax credit's impact also showed up in the jobless claims report. Greater layoffs by construction firms fueled the increase, a Labor Department analyst said.
Separately, the Institute for Supply Management, an industry trade group, said its manufacturing index slipped in June. But it is still at a level that suggests growth in the industrial sector, which has helped drive the economic recovery.
Surveys released Thursday in China showed a slowdown in factories' growth as exports faltered and analysts worry that cutbacks in government lending will cool the economy's rapid rise. Reports from Markit Economics also indicated that manufacturing sector growth in India, South Korea, Australia and Taiwan was slowing.
The industrial sector's growth also cooled slightly in the 16 countries using the euro and the United Kingdom.
The troubling information on the economy comes a day before the Labor Department is scheduled to release the June jobs report. That is expected to show a modest rebound in private-sector hiring. Overall, employers are expected to cut a net total of 110,000 positions, but that includes the loss of about 240,000 temporary census jobs. Private employers are projected to add 112,000 jobs, according to a survey of economists by Thomson Reuters.
That would be an improvement from May, when businesses added only 41,000 workers. But the economy needs to generate at least 100,000 net new jobs per month to keep up with population growth, and probably twice that number to bring down the jobless rate.
The unemployment rate is expected to edge up to 9.8 percent from 9.7 percent in May.
Layoffs are rising in the public sector, as states and local governments struggle to close persistent budget gaps. New York City approved a budget Tuesday that cuts about $1 billion in spending and would eliminate 5,300 jobs from the city's 300,000-person work force.
Thursday, July 1, 2010
Double Dip Dread!
The Price of Corn
I can't help thinking about the discussions in the movie, "The Magnificent Seven" about the "price of corn is going up"!
Dollar Eviscerated!
This doesn't surprise me! With Europe becoming more fiscally sound that Obama in the United States, the Dollar was due for a hit!
Stock Market Roller Coaster Ride!
Today has turned into a stock market roller coaster ride. I think the market may be somewhat oversold. It needs time to digest the data. I wouldn't be surprised to see a temporary bump before we continue downward. Just after this pic, prices started to drop again.
Bad News = SELL!
even CNBC is joining the bad-wagon today! Note in this pic that both manufacturing and construction spending feel in May also.
Stocks Lose 10% Since May 1
Even More Bad News
WASHINGTON (MarketWatch) -- New sales contracts on existing homes fell sharply in May after a federal subsidy for buyers expired at the end of April, a trade group reported Thursday.
The pending home sales index plunged 30% in May after rising 23% between January and April, the National Association of Realtors reported. The index, which measures signed sales contracts on previously owned homes, was down 15.9% compared with the same month a year ago. The pending home sales index is a leading indicator for sales of existing homes, which are recorded at the time of the closing.
Joblessness Jumps, Dow Dips
The Labor Department said Thursday that new claims for jobless benefits jumped by 13,000 to a seasonally adjusted 472,000. The four-week average, which smooths fluctuations, rose by 3,250 to 466,500, its highest level since March.
WASHINGTON (Reuters) - New claims for state unemployment aid unexpectedly rose last week, heightening fears the U.S. economic recovery is stalling.
Initial claims for state unemployment benefits increased 13,000 to a seasonally adjusted 472,000, the Labor Department said on Thursday.
Analysts polled by Reuters had expected claims to slip to 452,000 from the previously reported 457,000, which was revised slightly up to 459,000 in Thursday's report.
Wednesday, June 30, 2010
CBO Warns of Debt Danger
The national debt will reach 62 percent of gross domestic product (GDP) by the end of this year, the nonpartisan Congressional Budget Office (CBO) said Wednesday.
The budget office said the debt will reach its highest percentage of GDP since the end of World War II. The jump is driven by lower tax revenues and higher federal spending in the recent recession.
And while the national debt would stabilize at 67 percent of GDP over the next decade if current law were maintained, extending tax cuts enacted during the administration of President George W. Bush and keeping growth in appropriations in line with inflation would mean that the debt would reach almost 90 percent of GDP by 2020.
Moody's Warns of Spain Debt Downgrade
from WSJ:
Moody's Investors Service put Spain's Aaa credit rating on review for a possible downgrade because of flagging economic prospects, challenging fiscal targets and rising funding costs.
The move follows Fitch Ratings' downgrade of Spain from the coveted top rating late last month. That one-notch cut added pressure to the euro and stocks.
ADP Much Less Than Forecast, (Yawn) Shows NO Meaningful Job Growth
WASHINGTON (MarketWatch) -- U.S. private-sector firms created 13,000 more jobs in June, according to the ADP employment report released Wednesday. Job growth was "disappointingly weak," said Joel Prakken, chairman of Macroeconomic Advisers, which produces the report from anonymous payroll data supplied by ADP. Private-sector job growth was revised higher in May to 57,000 from 55,000 earlier. Economists are expecting nonfarm payrolls to fall by 130,000 when the government reports its estimates on Friday, including the loss of some 250,000 temporary workers at the Census Bureau. Private-sector employment has increased five months in a row.
Tuesday, June 29, 2010
Fannie/Freddie Pricetag: $1 Trillion
This is what launched the Tea Party movement, when Rick Santelli ranted about being compelled to pay someone else's mortgage. How ironic that Steve Liesman, Rick's colleague and opponent that day, would write this.
from CNBC:
For American taxpayers, now on the hook for some $145 billion in housing losses connected to Fannie Mae and Freddie Mac loans, that amount could be just the tip of the iceberg.
According to the Congressional Budget Office, the losses could balloon to $400 billion. And if housing prices fall further, some experts caution, the cost to the taxpayer could hit as much as $1 trillion.
Two things are clear: Taxpayers don’t want to foot the bill, and Fannie and Freddie, taken over by the government in 2008 to stanch the financial bloodletting, need a major overhaul.
“Some of us who don’t even own homes are paying to support others and their home ownership, and they ask ‘why?’ said Robert J. Shiller, a Yale University economics professor and co-creator of the S&P/Case-Shiller Home Price Indices.
Consumer Confidence Drops, Clobbers Stocks
That's a BIG drop, much more than I was expecting. Perhaps America is awakening to the awful reality that they made the most catastrophic error of a generation in November 2008! Hope doesn't buy much at the grocery store!
WASHINGTON (MarketWatch) -- U.S. consumers are increasingly worried about jobs and the economy, the Conference Board said Tuesday, as it reported that its consumer confidence index plummeted to 52.9 in June - the lowest level since March -- from a downwardly revised 62.7 in May. "Increasing uncertainty and apprehension about the future state of the economy and labor market, no doubt a result of the recent slowdown in job growth, are the primary reasons for the sharp reversal in confidence," said Lynn Franco, director of Conference Board's consumer research center. "Until the pace of job growth picks up, consumer confidence is not likely to pick up." Earlier this month the government reported that nonfarm payrolls grew by a seasonally adjusted 431,000 in May, but most of the new jobs were temporary jobs at the U.S. Census, with very weak private-sector hiring.
Bove: 10 Million Will Lose Banking Services
Bove predicted this morning that this new banking regulation will cause higher fees to consumers and that many will no longer be able to afford to have a bank account.
Monday, June 28, 2010
John Hussman Issues Recession Warning
Based on evidence that has always and only been observed during or immediately prior to U.S. recessions, the U.S. economy appears headed into a second leg of an unusually challenging downturn.
A few weeks ago, I noted that our recession warning composite was on the brink of a signal that has always and only occurred during or immediately prior to U.S. recessions, the last signal being the warning I reported in the November 12, 2007 weekly comment Expecting A Recession. While the set of criteria I noted then would still require a decline in the ISM Purchasing Managers Index to 54 or less to complete a recession warning, what prompts my immediate concern is that the growth rate of the ECRI Weekly Leading Index has now declined to -6.9%. The WLI growth rate has historically demonstrated a strong correlation with the ISM Purchasing Managers Index, with the correlation being highest at a lead time of 13 weeks.
Taking the growth rate of the WLI as a single indicator, the only instance when a level of -6.9% was not associated with an actual recession was a single observation in 1988. But as I've long noted, recession evidence is best taken as a syndrome of multiple conditions, including the behavior of the yield curve, credit spreads, stock prices, and employment growth. Given that the WLI growth rate leads the PMI by about 13 weeks, I substituted the WLI growth rate for the PMI criterion in condition 4 of our recession warning composite. As you can see, the results are nearly identical, and not surprisingly, are slightly more timely than using the PMI. The blue line indicates recession warning signals from the composite of indicators, while the red blocks indicate official U.S. recessions as identified by the National Bureau of Economic Research.
The blue spike at the right of the graph indicates that the U.S. economy is most probably either in, or immediately entering a second phase of contraction. Of course, the evidence could be incorrect in this instance, but the broader economic context provides no strong basis for ignoring the present warning in the hope of a contrary outcome. Indeed, if anything, credit conditions suggest that we should allow for outcomes that are more challenging than we have typically observed in the post-war period.
Unthinkability is Not Evidence
One of the greatest risks to investors here is the temptation to form investment expectations based on the behavior of the U.S. stock market and economy over the past three or four decades. The credit strains and deleveraging risks we currently observe are, from that context, wildly "out of sample." To form valid expectations of how the economic and financial situation is likely to resolve, it's necessary to consider data sets that share similar characteristics. Fortunately, the U.S. has not observed a systemic banking crisis of the recent magnitude since the Great Depression. Unfortunately, that also means that we have to broaden our data set in ways that investors currently don't seem to be contemplating.
On this front, perhaps the best single reference is a somewhat academic book on economic history with the intentionally sardonic title, This Time Is Different, by economists Kenneth Rogoff (Harvard) and Carmen Reinhart (University of Maryland). The book presents lessons from a massive analysis of world economic history, including recent data from industrialized nations, as well as evidence dating to twelfth-century China and medieval Europe. Reinhart and Rogoff observe that the outcomes of systemic credit crises have shown an astonishing similarity both across different countries and across different centuries. These lessons are not available to investors who restrict their attention to the past three or four decades of U.S. data.
Reinhart and Rogoff observe that following systemic banking crises, the duration of housing price declines has averaged roughly six years, while the downturn in equity prices has averaged about 3.4 years. On average, unemployment rises for almost 5 years. If we mark the beginning of this crisis in early 2008 with the collapse of Bear Stearns, it seems rather hopeful to view the March 2009 market low as a durable "V" bottom for the stock market, and to expect a sustained economic expansion to happily pick up where last year's massive dose of "stimulus" spending now trails off. The average adjustment periods following major credit strains would place a stock market low closer to mid-2011, a peak in unemployment near the end of 2012 and a trough in housing perhaps by 2014. Given currently elevated equity valuations, widening credit spreads, deteriorating market internals, and the rapidly increasing risk of fresh economic weakness, there is little in the current data to rule out these extended time frames.
In recent months, I have finessed this issue by encouraging investors to carefully examine their risk exposures. I'm not sure that finesse is helpful any longer. The probabilities are becoming too high to use gentle wording. Though I usually confine my views to statements about probability and "average" behavior, this becomes fruitless when every outcome associated with the data is negative, with no counterexamples. Put bluntly, I believe that the economy is again turning lower, and that there is a reasonable likelihood that the U.S. stock market will ultimately violate its March 2009 lows before the current adjustment cycle is complete. At present, the best argument against this outcome is that it is unthinkable. Unfortunately, once policy makers have squandered public confidence, the market does not care whether the outcomes it produces are unthinkable. Unthinkability is not evidence.
Moreover, from a valuation standpoint, a further market trough would not even be "out of sample" in post-war data. Based on our standard valuation methods, the S&P 500 Index would have to drop to about 500 to match historical post-war points of secular undervaluation, such as June 1950, September 1974, and July 1982. We do not have to contemplate outcomes such as April 1932 (when the S&P 500 dropped to just 2.8 times its pre-Depression earnings peak) to allow for the possibility of further market difficulty in the coming years. Even strictly post-war data is sufficient to establish that the lows we observed in March 2009 did not represent anything close to generational undervaluation. We face real, structural economic problems that will not go away easily, and it is important to avoid the delusion that the average valuations typical of the recent bubble period represent sustainable norms.
Our policy makers have spent their ammunition in the attempt to bail out bondholders and to create an entirely deficit-financed appearance of economic strength. It would be better to allow insolvent, non-sovereign debt to default (including long-term Fannie and Freddie obligations, and obligations to bank bondholders), and to instead use public funds to take receivership of failing institutions and to defend customers and depositors from the effects. Restructuring is probably a more useful word, but in any case, the key element is that those who actually made the loans, not the public, should absorb the loss. Restructuring means simply that the payment terms are rewritten to reflect the lower amount that will delivered over time. I can't emphasize this point often enough - "failure" of a financial institution means only that the bondholders don't receive 100 cents on the dollar plus interest. Failure is only a problem when it requires piecemeal liquidation, as occurred in the case of Lehman. This is not necessary when appropriate regulators can take receivership of insolvent bank and non-bank institutions (as the new financial regulatory bill now provides).
My greatest concern is that these new receivership powers will not be implemented because the Fed and the Treasury are both in bed with major Wall Street and banking institutions. Yet there is no effective alternative. Having squandered trillions in an empty confidence-building exercise, it will be nearly impossible for those same policies to build confidence again in the increasingly likely event that the economy turns lower and defaults pick up again. The best approach will still be to allow bad debt to go bad, let the bondholders lose, and defend the customers by taking whole-bank receivership (as the FDIC does seamlessly nearly every week with failing institutions). Almost undoubtedly, however, our policy makers will choose to defend bondholders again, pushing our government debt to a level that is so untenably high that little recourse will remain but to suppress the real obligation through long-term inflation (though as noted below, the near-term effects of credit crises are almost invariably deflationary at first).
Though Reinhart and Rogoff published This Time is Different in early 2009, extending the analysis they provided in a January 2008 NBER working paper (13761), the book accurately foreshadowed the recent debt crisis in European countries, noting "As of this writing, it remains to be seen whether the global surge in financial sector turbulence will lead to a similar outcome in the sovereign default cycle. The precedent, however, appears discouraging on that score. A sharp rise in sovereign defaults in the current global financial environment would hardly be surprising."
It is interesting that despite the apparent stabilization of the Euro in recent weeks, the stabilization more reflects sudden concerns about the U.S. dollar than improvement of European debt conditions. Notice that relative to the Swiss Franc, for example, the Euro continues to plunge to fresh lows.
Deflation, Inflation
Reinhart and Rogoff observe that "the aftermath of systemic banking crises involves a protracted and pronounced contraction in economic activity and puts significant strains on government resources. Banking crises almost invariably lead to sharp declines in tax revenues as well as significant increases in government spending. On average, government debt rises by 86 percent during the three years following a banking crisis.
"Banking crises in advanced economies significantly drag down world growth. The slowing, or outright contraction, of economic activity tends to hit exports especially hard. Weakening global growth has historically been associated with declining world commodity prices. These reduce the export earnings of primary commodity producers and, accordingly, their ability to service debt."
From an inflation standpoint, is important to recognize the distinction between what occurs during a credit crisis and what occurs afterward. Credit strains typically create a nearly frantic demand for government liabilities that are considered default-free (even if they are subject to inflation risk). This raises the marginal utility of government liabilities relative to the marginal utility of goods and services. That's an economist's way of saying that interest rates drop and deflation pressures take hold. Commodity price declines are also common, which is a word of caution to investors accumulating gold here, who may experience a roller-coaster shortly. Over the short-term, very large quantities of money and government debt can be created with seemingly no ill effects. It's typically several years after the crisis that those liabilities lose value, ultimately at a very rapid pace.
Reinhart and Rogoff continue, "Episodes of treacherously high inflation are another recurrent theme. Indeed, there is a very strong parallel between our proposition that few countries have avoided serial default on external debt and the proposition that few countries have avoided serial bouts of high inflation. Even the United States has a checkered history. Governments can default on domestic debt through high and unanticipated inflation, as the United States and many European countries famously did in the 1970's.
"Early on across the world, the main device for defaulting on government obligations was that of debasing the content of the coinage. Modern currency presses are just a technologically advanced and more efficient approach to achieving the same end. In many important episodes, domestic debt has been a major factor in a government's incentive to allow inflation, if not indeed the dominant one. If a global surge in banking crises indicates a likely rise in sovereign defaults, it may also signal a potential rise in the share of countries experiencing high inflation. Inflation has long been the weapon of choice in sovereign defaults on domestic debt and, where possible, on international debt."
Commenting on why last year's massive interventions may not have addressed global problems, economist David Rosenberg of Gluskin-Sheff aptly observes - "It's about bad short-term decisions over good long-term solutions, which is burying the world. While U.S. banks have recapitalized themselves and written off debt, this cycle has been dominated by governments socializing the losses and taking the bad debts from the private sector and transferring the liabilities to the public sector balance sheets. We now have a global debt problem and in order to deal with it we must understand the magnitude. Even with low interest rates, the massive debt bulge in the U.S. has become so large that interest charges on the public debt are within a decade of absorbing over 30% of the revenue base, which then makes it that much tougher to reverse course. When you add up the entitlement programs, what we have is 65% of total government spending that can't be touched. In the next few years, under status quo policies, this 'mandatory' share of the spending pie goes to 72%."
In short, my concerns about the economy and financial markets are escalating quickly. Given the already vulnerable condition of the U.S. economy, a second phase of weakness would most likely contribute to already troubling levels of mortgage delinquency and foreclosure, and could be expected to push the unemployment rate toward 12%. It is not useful to rule out unfavorable outcomes simply because they seem unpleasant or unthinkable. It is also not useful to place superstitious hope in the Fed and the Treasury to fix the consequences of irresponsible lending without any ill effect. In the coming quarters, remember that every time you hear an incomprehensibly large bailout commitment from government, it will equate to an unconscionably large extraction of public resources, possibly through overt taxation, but more likely through the long-term destruction of purchasing power.
Fannie, Freddie, and the delusion of uniform quality
While the Treasury's quiet extension of 3-year bailout funding for the GSEs was not part of Congressional intent, the word I've received is that representatives believe it was legal, but only because of a loophole that would have required explicit Congressional approval had the Treasury made the same announcement a week later. Fannie Mae and Freddie Mac remain responsible for about 3 out of 4 outstanding U.S. mortgages. The way the bailout money is being used is that, for example, Fannie Mae is purchasing all mortgage loans in its MBS pools that are delinquent by more than four months. It effectively pays off the full mortgage balance on those homes, retires a portion of outstanding mortgage backed securities, and takes ownership of the collateral. Of course, none of those homes can be liquidated at anything close to their outstanding mortgage balances, but that's the deal that Fannie and Freddie made in return for a negligible insurance premium (G-fee), and that Tim Geithner graciously stands behind on behalf of the public. Accordingly, Fannie and Freddie are already sitting on 160,000 foreclosed homes, with losses escalating at public expense. Edward DeMarco, who oversees the government's conservation of Fannie and Freddie, observes "we cannot do this indefinitely."
While our Treasury's magnanimous generosity ensures that Fannie and Freddie obligations maturing through 2012 will be paid in full, if at public expense, it is clear that longer-term GSE obligations should not be viewed as sovereign debt. GSE obligations with maturities beyond 2012 are the obligations of insolvent institutions, not of the U.S. government. As such, the collateral behind these obligations should emphatically not be considered of uniform credit quality. It follows that many of Fannie and Freddie's long-term securities should carry junk status. The disastrously misleading rating of subprime debt pales in comparison to the current practice of rating longer-term GSE debt as investment grade.
In my opinion, Congress should make this distinction clear sooner rather than later, and let the market price this debt accordingly. The problem, of course, is that the Fed also owns $1.5 trillion of these obligations, which is a travesty of judgment and an abuse of public trust. Regardless, to the extent that the Fed takes losses, it will provide useful discipline on the Fed itself, which it profoundly lacks. At this point, the public will take a loss on Fed-held GSE debt in any event, either through direct default or equivalent bailout cost to the Treasury. Actual losses in market value would be more transparent, and might even prompt the appropriate resignation of Ben Bernanke.
If the public has an interest in promoting home ownership, it should not be by slapping cheap insurance on wildly heterogeneous credit risks, with no residual risk to the mortgage originator. It certainly should not be through Fannie Mae and Freddie Mac, both of which have been disastrously managed. This is not a surprise - it has been clear for nearly a decade that these institutions have operated with far too much risk and far too generous assumptions about the impossibility of default and risk mismatches. Even in 2002, the GSEs were producing large duration mismatches that threatened their solvency to a much greater extent that investors understood, which is one of the reasons I noted in January of that year " I don't even understand why Fannie Mae trades at all." Except for a note or two suggesting that my view was preposterous, nobody cared. But one can only play balance sheet roulette for so long. Fannie and Freddie became penny stocks about a week ago as it was announced that they would be delisted.
It may grease the skids of capitalism for investors to treat all GSE securities as homogeneous, and all credit risk as being perfectly described by a letter of the alphabet. The wheels of Wall Street are constantly churning to create credit default swaps and payment guarantees to make investors believe that no thought is required of them other than to hand over their money. But this belief in uniform quality is a delusion. The institutions that provided these guarantees were at far more risk than investors understood, which is why AIG, Fannie Mae and Freddie Mac were the first to go down, and why the U.S. public is paying hundreds of billions to make sure that bondholders get a good deal despite the failure of the underlying collateral.
As Bill Hester notes in his latest research piece The Great Divergence (additional link below), it is also a mistake to view international debt and equity to be of uniform quality. Distinctions and selectivity among investments will most probably be increasingly important as we move through the coming years.
Market Climate
As of last week, the Market Climate for stocks remained characterized by unfavorable valuations and unfavorable market action - a combination that has been unfortunately frequent over the past decade, but has historically occurred only about 25% of the time. A natural consequence of the frequency of this particular Climate over the past decade is that the S&P 500 has delivered a negative total return over this period. This outcome underscores the fact that market outcomes on average do vary with valuations and market action. But it also reflects an economy that has constantly misallocated resources because we have embraced quick fixes, bailouts, speculation, cheap money, and quarterly operating earnings, rather than careful risk assessment and a focus on long-term solvency and properly discounted cash flows. Frankly, if one good thing comes out of the recent (and likely continuing) trouble, it will be revulsion toward "playing" the market as if it is some sort of carnival.
In bonds, the Market Climate last week was characterized by moderately unfavorable yield levels and favorable yield pressures. Credit spreads continue to widen, and we've observed a flattening of the yield curve due to a flight-to-safety in default free instruments. This may seem like an odd outcome, given that the growing issuance of Treasury and Fed liabilities is gradually setting us up for a difficult inflationary period beginning in the second half of this decade, but it is a strong regularity that "default-free" beats "inflation prone" during periods of crisis. For that same reason, we have to be careful about concluding that the growth of government liabilities will quickly translate into continued appreciation in precious metals and other commodities. Again, the historical regularity is for commodities to decline, though with a lag, once credit difficulties emerge. My weekly comments on this front might be less redundant if there were more subtlety to the issue, but it is subtle enough to recognize that the long-term inflationary implications of current monetary and fiscal policies will not necessarily translate into negative short-term outcomes for the Treasury market, nor persistently positive short-term outcomes for commodities.
Economists React to Financial Regulation Overhaul; "A Wasted Opportunity"
from WSJ:
–Many of the provisions in the bill would help to reduce the risk of an identical crisis developing… Unfortunately, as the old gag goes, if you’ve seen one financial crisis you’ve seen one financial crisis… The financial overhaul bill will not prevent the future mispricing of assets nor will it prevent speculators of all types borrowing money. Nevertheless, the bill should help to ensure that in future commercial banks aren’t the ones taking the speculative risks. –Paul Ashworth, Capital Economics
–The legislation does take concrete steps to rein in excessive risk taking by Wall Street firms. It seeks to restrain major financial institutions from over leveraging and works to protect taxpayers so they are never again forced to be in a position to bail out banks from their own folly. The disturbing irony is that these days banks are shunning risks altogether. The pendulum of risk taking by lenders has swung to the side of excessive caution. By dramatically cutting back loans to consumers and small business, financial institutions have hampered the ability of the economy to fully bounce back from the most severe recession since the Great Depression. –Bernard Baumohl, Economic Outlook Group
–Whatever the merits of this bill, it in no way could have prevented the 2008-2009 collapse if its provisions were in place before the fact. It will tend to raise the cost of credit to American consumers and businesses and limit its availability to smaller firms and less credit worthy individuals. Because of the bill’s emphasis on size, it will create something of a bifurcated financial system, with heavily regulated large firms, constrained in what they can do and consequently in their profitability, and more flexible smaller firms. –Milton Ezrati, Lord, Abbett & Co.
–Although the legislation is stronger than I thought it would be, it’s important to note that many of the new rules are written in a way that will depend upon the judgment of regulators and their inclination to crack down, or not, on particular behaviors… All the laws in the world won’t help if they aren’t enforced. I am glad that the new legislation passed, and I think it is a step forward. But I believe that for the most part the rules and regulations that were needed to stop the housing bubble were on the books already. It wasn’t lack of legislation giving regulators the authority they needed that was the problem. –Mark Thoma, University of Oregon
–It is arguable how much this bill will improve financial stability. I am not a big fan of the workout scheme, and I doubt that the various derivatives proposals will in the end lead to dramatically less risk taking, since investors can go overseas and do other things to take risk. There is no question that it could have been worse. The Fed could have lost much more of its independence, and there were some on the left calling for the big banks to be broken apart. And all of the watering down that occurred near the end of the process makes the bill less onerous on several fronts than it might have been. So we can be thankful for that. –Stephen Stanley, Pierpoint Securities
–There are many justified criticisms of the roughly 1500-page bill, but we must not lose sight of how much it accomplishes. I believe that the bill, combined with regulatory changes that are in train, will move us perhaps two-thirds of the way from where we are now on financial regulation to where we should be… There are a number of provisions I do not like, or would like to see done differently, such as the Volcker Rule and Senator Lincoln’s provisions on separating out derivatives activities. However, the net effect of the bill should be to substantially increase the safety of the financial system, and therefore of the economy, at a cost that is reasonable. –Douglas Elliott, Brookings Institution
–The bill will be sold as a never again bill. The bill will make financial crises less frequent and less severe. How much less severe and how much less frequent remains to be seen. –Robert Litan, the Kauffman Foundation
–Business Roundtable member CEOs… are extremely disappointed by the conference committee’s final report, which does not address the causes of the financial crisis. The nearly 2,000-page bill was rushed to conclusion without due consideration of the consequences, intended and unintended, for U.S. global competitiveness, long-term sustainable economic growth and job creation. provisions granting the Commodities Futures Trading Commission authority to impose margin requirements on end-users will increase business risk and substantially raise costs for the more than 12,000 public companies that had nothing to do with the financial crisis — which could cost 100,000-120,000 American jobs. In addition, among the many corporate governance provisions, none of which are related to the financial crisis, the disruptive proxy access provision will stifle American companies’ ability to focus on long-term growth. Business Roundtable recognizes the need for an effective financial regulatory system, but the conference report is simply too much, too broad and, in fact, endangers our entire economy. –John J. Castellani, Business Roundtable
–Without a doubt, the centerpiece of reform is the establishment of the new, independent Consumer Financial Protection Bureau with only one job: protecting consumers who buy financial products at banks and non-bank lenders, from mortgage companies to payday lenders. While the bureau will not regulate predatory car dealer practices, a last minute compromise gives the Federal Trade Commission new authority over car dealers who initiate loans. –Ed Mierzwinski, U.S. Public Interest Research Groups
–The industry is committed to making this bill work. There is a lot to like in this legislation, but ultimately, we have some concerns about the impact to consumers, industry and economy. We are very pleased to have this certainty and closure about how we can continue to move our economy forward. The financial crisis taught all of us many lessons. We needed better, more effective regulation. We needed smarter risk management. And we needed every participant in the financial system — lenders, borrowers, regulators and legislators — to take greater responsibility. We’re moving forward, and concentrating on getting back to the business of financing America. –Steve Bartlett, Financial Services Roundtable
–We see landmark legislation when it comes to consumer protection, offering all of us an independent watchdog on our side. For the first time the $600 trillion derivatives market will be transparent and have to maintain capital to back up its bets - a move that was once inconceivable. The adoption of the Volcker Rule represents a major change of direction, stopping banks from using insured deposits to support speculative activity. We see big steps in the right directions when it comes to hedge funds and private equity, as well as improvements for investors to have a voice. –Heather Booth, Americans for Financial Reform
–Significant improvements have been made to the conference report to minimize the potential negative consequences of adding federal oversight to the state-based insurance regulatory system. However, deep concern remains over the long-term impact of this legislation on U.S. competitiveness for the financial services sector… Duplicative federal oversight threatens to add costs to the insurance marketplace without corresponding benefits to the consumer. It also creates potential conflicts with existing state regulatory protections. –David Sampson, Property Casualty Insurers Association of America
–The bill will be sold as a never again bill. The bill will make financial crises less frequent and less severe. How much less severe and how much less frequent remains to be seen. –Robert Litan, the Kauffman Foundation
–What a wasted opportunity. Much of what we had advocated for on behalf of investors and taxpayers was ignored. –Jim Allen, CFA Institute capital markets policy group
Consumer Spending Increases
U.S. consumers resumed spending at a gradual pace in May thanks to a healthy rise in incomes and continued low prices.
Consumer spending, a key growth engine for the U.S. economy, was up 0.2% last month after a flat reading in April, the Commerce Department said in a report Monday. Incomes rose 0.4% in May, helped by slow improvements in the jobs market, following a 0.5% increase in April.
Fed Preparing Desperate QE Move in Panic Effort
Alas, the latest desperation attempt from the Fed! It amazes me that despite quantitative easing being an abject failure everywhere central bankers have tried it, they keep doing it anyway!
from Ambrose Evans-Pritchard at the UK Telegraph:
Entitled "Deflation: Making Sure It Doesn’t Happen Here", it is a warfare manual for defeating economic slumps by use of extreme monetary stimulus once interest rates have dropped to zero, and implicitly once governments have spent themselves to near bankruptcy.
The speech is best known for its irreverent one-liner: "The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost."
Bernanke began putting the script into action after the credit system seized up in 2008, purchasing $1.75 trillion of Treasuries, mortgage securities, and agency bonds to shore up the US credit system. He stopped far short of the $5 trillion balance sheet quietly pencilled in by the Fed Board as the upper limit for quantitative easing (QE).
Investors basking in Wall Street's V-shaped rally had assumed that this bizarre episode was over. So did the Fed, which has been shutting liquidity spigots one by one. But the latest batch of data is disturbing.
The ECRI leading indicator produced by the Economic Cycle Research Institute plummeted yet again last week to -6.9, pointing to contraction in the US by the end of the year. It is dropping faster that at any time in the post-War era.
The latest data from the CPB Netherlands Bureau shows that world trade slid 1.7pc in May, with the biggest fall in Asia. The Baltic Dry Index measuring freight rates on bulk goods has dropped 40pc in a month. This is a volatile index that can be distorted by the supply of new ships, but those who watch it as an early warning signal for China and commodities are nervous.
Andrew Roberts, credit chief at RBS, is advising clients to read the Bernanke text very closely because the Fed is soon going to have to the pull the lever on "monster" quantitative easing (QE)".
"We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable," he said in a note to investors.
Roberts said the Fed will shift tack, resorting to the 1940s strategy of capping bond yields around 2pc by force majeure said this is the option "which I personally prefer".
A recent paper by the San Francisco Fed argues that interest rates should now be minus 5pc under the bank's "rule of thumb" measure of capacity use and unemployment. The rate is currently minus 2pc when QE is factored in. You could conclude, very crudely, that the Fed must therefore buy another $2 trillion of bonds, and even more if Europe's EMU debacle goes from bad to worse. I suspect that this hints at the Bernanke view, but it is anathema to hardliners at the Kansas, Richmond, Philadephia, and Dallas Feds.
Societe Generale's uber-bear Albert Edwards said the Fed and other central banks will be forced to print more money whatever they now say, given the "stinking fiscal mess" across the developed world. "The response to the coming deflationary maelstrom will be additional money printing that will make the recent QE seem insignificant," he said.
Despite the apparent rift with Europe, the US is arguably tightening fiscal policy just as hard. Congress has cut off benefits for those unemployed beyond six months, leaving 1.3m without support. California has to slash $19bn in spending this year, as much as Greece, Portugal, Ireland, Hungary, and Romania combined. The states together must cut $112bn to comply with state laws.
The Congressional Budget Office said federal stimulus from the Obama package peaked in the first quarter. The effect will turn sharply negative by next year as tax rises automatically kick in, a net swing of 4pc of GDP. This is happening as the US housing market tips into a double-dip. New homes sales crashed 33pc to a record low of 300,000 in May after subsidies expired.
It is sobering that zero rates, QE a l'outrance, and an $800bn fiscal blitz should should have delivered so little. Just as it is sobering that Club Med bond purchases by the European Central Bank and the creation of the EU's €750bn rescue "shield" have failed to stabilize Europe's debt markets. Greek default contracts reached an all-time high of 1,125 on Friday even though the €110bn EU-IMF rescue is up and running. Are investors questioning EU solvency itself, or making a judgment on German willingness to back pledges with real money?
Clearly we are nearing the end of the "Phoney War", that phase of the global crisis when it seemed as if governments could conjure away the Great Debt. The trauma has merely been displaced from banks, auto makers, and homeowners onto the taxpayer, lifting public debt in the OECD bloc from 70pc of GDP to 100pc by next year. As the Bank for International Settlements warns, sovereign debt crises are nearing "boiling point" in half the world economy.
Fiscal largesse had its place last year. It arrested the downward spiral at a crucial moment, but that moment has passed. There is a time to love and a time to hate, a time for war and a time for peace. The Krugman doctrine of perma-deficits is ruinous - and has in fact ruined Japan. The only plausible escape route for the West is a decade of fiscal austerity offset by helicopter drops of printed money, for as long as it takes.
Some say that the Fed's QE policies have failed. I profoundly disagree. The US property market - and therefore the banks - would have imploded if the Fed had not pulled down mortgage rates so aggressively, but you can never prove a counter-factual.
The case for fresh QE is not to inflate away the debt or default on Chinese creditors by stealth devaluation. It is to prevent deflation.
Bernanke warned in that speech eight years ago that "sustained deflation can be highly destructive to a modern economy" because it leads to slow death from a rising real burden of debt.
At the time, the broad money supply war growing at 6pc and the Dallas Fed's `trimmed mean' index of core inflation was 2.2pc.
We are much nearer the tipping today. The M3 money supply has contracted by 5.5pc over the last year, and the pace is accelerating: the 'trimmed mean' index is now 0.6pc on a six-month basis, the lowest ever. America is one twist shy of a debt-deflation trap.
There is no doubt that the Fed has the tools to stop this. "Sufficient injections of money will ultimately always reverse a deflation," said Bernanke. The question is whether he can muster support for such action in the face of massive popular disgust, a Republican Fronde in Congress, and resistance from the liquidationsists at the Kansas, Philadelphia, and Richmond Feds. If he cannot, we are in grave trouble.
Bernanke began putting the script into action after the credit system seized up in 2008, purchasing $1.75 trillion of Treasuries, mortgage securities, and agency bonds to shore up the US credit system. He stopped far short of the $5 trillion balance sheet quietly pencilled in by the Fed Board as the upper limit for quantitative easing (QE).
Investors basking in Wall Street's V-shaped rally had assumed that this bizarre episode was over. So did the Fed, which has been shutting liquidity spigots one by one. But the latest batch of data is disturbing.
The ECRI leading indicator produced by the Economic Cycle Research Institute plummeted yet again last week to -6.9, pointing to contraction in the US by the end of the year. It is dropping faster that at any time in the post-War era.
The latest data from the CPB Netherlands Bureau shows that world trade slid 1.7pc in May, with the biggest fall in Asia. The Baltic Dry Index measuring freight rates on bulk goods has dropped 40pc in a month. This is a volatile index that can be distorted by the supply of new ships, but those who watch it as an early warning signal for China and commodities are nervous.
Andrew Roberts, credit chief at RBS, is advising clients to read the Bernanke text very closely because the Fed is soon going to have to the pull the lever on "monster" quantitative easing (QE)".
"We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable," he said in a note to investors.
Roberts said the Fed will shift tack, resorting to the 1940s strategy of capping bond yields around 2pc by force majeure said this is the option "which I personally prefer".
A recent paper by the San Francisco Fed argues that interest rates should now be minus 5pc under the bank's "rule of thumb" measure of capacity use and unemployment. The rate is currently minus 2pc when QE is factored in. You could conclude, very crudely, that the Fed must therefore buy another $2 trillion of bonds, and even more if Europe's EMU debacle goes from bad to worse. I suspect that this hints at the Bernanke view, but it is anathema to hardliners at the Kansas, Richmond, Philadephia, and Dallas Feds.
Societe Generale's uber-bear Albert Edwards said the Fed and other central banks will be forced to print more money whatever they now say, given the "stinking fiscal mess" across the developed world. "The response to the coming deflationary maelstrom will be additional money printing that will make the recent QE seem insignificant," he said.
Despite the apparent rift with Europe, the US is arguably tightening fiscal policy just as hard. Congress has cut off benefits for those unemployed beyond six months, leaving 1.3m without support. California has to slash $19bn in spending this year, as much as Greece, Portugal, Ireland, Hungary, and Romania combined. The states together must cut $112bn to comply with state laws.
The Congressional Budget Office said federal stimulus from the Obama package peaked in the first quarter. The effect will turn sharply negative by next year as tax rises automatically kick in, a net swing of 4pc of GDP. This is happening as the US housing market tips into a double-dip. New homes sales crashed 33pc to a record low of 300,000 in May after subsidies expired.
It is sobering that zero rates, QE a l'outrance, and an $800bn fiscal blitz should should have delivered so little. Just as it is sobering that Club Med bond purchases by the European Central Bank and the creation of the EU's €750bn rescue "shield" have failed to stabilize Europe's debt markets. Greek default contracts reached an all-time high of 1,125 on Friday even though the €110bn EU-IMF rescue is up and running. Are investors questioning EU solvency itself, or making a judgment on German willingness to back pledges with real money?
Clearly we are nearing the end of the "Phoney War", that phase of the global crisis when it seemed as if governments could conjure away the Great Debt. The trauma has merely been displaced from banks, auto makers, and homeowners onto the taxpayer, lifting public debt in the OECD bloc from 70pc of GDP to 100pc by next year. As the Bank for International Settlements warns, sovereign debt crises are nearing "boiling point" in half the world economy.
Fiscal largesse had its place last year. It arrested the downward spiral at a crucial moment, but that moment has passed. There is a time to love and a time to hate, a time for war and a time for peace. The Krugman doctrine of perma-deficits is ruinous - and has in fact ruined Japan. The only plausible escape route for the West is a decade of fiscal austerity offset by helicopter drops of printed money, for as long as it takes.
Some say that the Fed's QE policies have failed. I profoundly disagree. The US property market - and therefore the banks - would have imploded if the Fed had not pulled down mortgage rates so aggressively, but you can never prove a counter-factual.
The case for fresh QE is not to inflate away the debt or default on Chinese creditors by stealth devaluation. It is to prevent deflation.
Bernanke warned in that speech eight years ago that "sustained deflation can be highly destructive to a modern economy" because it leads to slow death from a rising real burden of debt.
At the time, the broad money supply war growing at 6pc and the Dallas Fed's `trimmed mean' index of core inflation was 2.2pc.
We are much nearer the tipping today. The M3 money supply has contracted by 5.5pc over the last year, and the pace is accelerating: the 'trimmed mean' index is now 0.6pc on a six-month basis, the lowest ever. America is one twist shy of a debt-deflation trap.
There is no doubt that the Fed has the tools to stop this. "Sufficient injections of money will ultimately always reverse a deflation," said Bernanke. The question is whether he can muster support for such action in the face of massive popular disgust, a Republican Fronde in Congress, and resistance from the liquidationsists at the Kansas, Philadelphia, and Richmond Feds. If he cannot, we are in grave trouble.
Krugman: "Long Depression" Is Coming
Paul Krugman today in a NYT editorial:
We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.
To be fair to Krugman, he says that this Depression will be because we haven't spent enough! Hurry, someone, feel his forehead!
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