Congress vs. Registered Voters

And I thought they were only looking out for their own interests (or maybe they misintepreted what those interests were):

Per ABC News:

With the administration and Congressional leaders saying they'll take up the issue again, 51 percent are confident the government's efforts ultimately will prevent the country's financial situation from getting worse. But nearly as many, 47 percent, lack that confidence. And a mere 6 percent are "very" confident of success.

Nonetheless, as noted, voters divide on the plan itself ¬– using up to $700 billion to shore up failing financial institutions – with 45 percent in favor, 47 percent opposed. (Contrary to the vote pattern in Congress, support is higher among Republicans, 55 percent, than Democrats, 42 percent.) Registered voters narrowly, by a 6-point margin, think the plan would have done too much to help financial institutions that got into trouble, and by much broader margins think it would have done too little to help the economy, and especially, to assist ordinary Americans.

What's important is that:

Eighty-eight percent in this ABC News/Washington Post poll, conducted Monday night, say they're concerned the action in Congress could worsen an economic downturn; 51 percent are "very" concerned about it.

Source: NY Times

You Are Not Alone!

Source Moneyweb

Case Schiller Price Index (July): Deflation Coming?

I previously detailed that CPI may overstate inflation for an individual who:

• does not own a home
• would like to own a home
• will likely soon buy a home

as it does not include how "affordable" housing has become with the recent price collapse for non-homeowners (full details here).

The Case Shiller Price Index (CSPI) has turned positive year over year for the second month in a row with the spike in July's CPI offsetting further deterioration in the housing market, with the Composite 10 dropping over 17.5% year over year. If future CPI prints come down as a result of free-falling commodities, expect CSPI to turn very negative in the coming months.

In looking at the Composite 10's five year returns (annualized), even after the huge downturn in prices, returns over the most recent five year period are still positive at ~3.3% per year and indicates there may still be room for further deterioration.

Lets Hope for a Better Day...

Source: WSJ

"Armageddon" Trades Anyone?

In brainstorming good Armageddon Beta's (stocks that do well, should the civilization screech to a halt), I thought about what I would want and need when the financial world came to an end (maybe I watch too much CNBC, but when the bailout was voted down, they had some convincing arguments. For the record, I personally do think something is needed, actually badly needed, but did anyone really think politics work this smoothly one month before a presidential election?)

My first moves would be to build a bomb shelter, stock up on food (preferably canned), and buy some protection (I'd go with a Taser gun as I would prefer not to actually kill someone). Well, I personally can't think of any pure bomb shelter plays (although the housing index is up over the past three months), but over the past three months; Campbell Soup Co (which also happened to be the ONLY stock in the S&P 500 that was up yesterday) and Taser International are up 16% and 34% respectively. This compares very favorably to the S&P 500, which has struggled and is down 14% over that time frame.

So... question for everyone out there.... what are some other "Armageddon" Beta's?

Swing District Congressmen Doomed Bailout

The people have spoken, but how well they were heard was based on whether the listener was up for re-election. Per FiveThirtyEight.com:

This was predictable, I suppose, but it's remarkable to see how strong a relationship there is between today's failed vote on the bailout and the competitive nature of different House races.

Among 38 incumbent congressmen in races rated as "toss-up" or "lean" by Swing State Project, just 8 voted for the bailout as opposed to 30 against: a batting average of .211.

By comparison, the vote among congressmen who don't have as much to worry about was essentially even: 197 for, 198 against.

It Makes the Bailout Seem "Cheap"...

Source: Barron's

Again we ask... Where's The Stimulus?

The only areas in which the stimulus checks have had a positive impact to date are Personal Income (from the actual stimulus checks) and Savings. Consumption? Not so much.

Source: BEA

Calm Before the Storm...

Updated: With the Dow down an incredible 777 points, the title may seem a little odd (in fact it was the title prior to the market open). However, as we'll detail later in this post, 777 points may just be the tip of an iceberg.

While the failed bailout package did remove some of the stigma associated with selling securities to the taxpayer (bailed out companies would still have a tough time hiring new talent after they use the bailout, but it encouraged current management to do so) AND I was wrong that prices paid by the taxpayer would be remotely near intrinsic valuations - click here for more details, it did mention helping homeowners and perhaps the most important change, it included a clause that allowed the Fed to pay interest on reserves (which should open up the floodgates for further Fed liquidity - for the why, go here).

However, it did have many additional holes (per Professor Roubini via Naked Capitalism):

1. The plan is inefficient (i.e., it doesn't discriminate between who ought to be saved or not, and in fact rewards those who created dud assets)
2. It runs counter to the best models of how to deal with this sort of problem
3. It does not punish current shareholders or management

In other words, we have not learned from policy mistakes made in the past as this bailout seems to help out those that are in the worst shape, the most. Per the NY Times:

The Asian crisis teaches us that it is imperative that U.S. policy makers tell us which financial institutions will survive; and which not. This could possibly involve blanket government guarantees to unfreeze money markets. Until this uncertainty is resolved, financial institutions will be reluctant to deal with each other.

In other words, it probably wouldn't have worked... (per Financial Ninja):

Out of 42 systematic banking crises across 37 countries, despite the implementation of a wide range of policies, all resulted in the re-allocation of wealth AWAY from taxpayers and towards debtors (banks). None avoided recessions and all recessions were SEVERE.

Source: Table 3 IMF Report (Table 3)

Gallup Poll: Obama Back in Charge... Thanks to Palin?

If you haven't seen Sarah Palin's response during her interview with Katie Couric to a question regarding the bailout, I think it's mandatory viewing (especially for those that believe in fiscal conservatism and have traditionally voted Republican).

While I tried to give her (and McCain for selecting Palin) the benefit of the doubt, I've given up and it looks like others have too...


Source: Gallup

Don't Trust the GDP Deflator? Don't Use It

The BEA reported a GDP deflator of 1.1% annualized in the second quarter, while the BLS reported CPI at 7.9% over that same time frame (I understand they are different calculations, but give me a break...) So I thought, ignore it...

The result is of course nominal GDP. In Q2, year over year nominal GDP came in at 2.4% down from 3.0% in Q1. As long as inflation is level (it wasn't), nominal GDP can be used to show growth on a relative basis. However, over the past few years inflation has been rising, thus the nominal GDP figure (although declining) has overstated growth on a relative basis.

Taking the nominal GDP figure and removing year over year CPI, we see a vastly different situation than what the BEA would have you believe. In fact we see a GDP less CPI print at a level (-2.5%) last seen during the recession of the early 1990's.

No Response to a 25% Increase in Fed Liquidity

Ahead of an official bailout, from September 10th through September 24th, the Fed pumped ~$250 Billion of liquidity into the banking system through the Federal Reserve Bank "FRB" credit (the "FRB" credit is how much money the Fed has loaned to the banking system). The FRB credit spiked from $888 Billion to $1,135 Billion. This was an unprecented increase of more than 25% from levels in August and a month over month increase 5x larger than seen after 9/11.

Breaking this down further, we can see the majority of this increase has fallen into "Other Loans".

What are these other loans? According to the Federal Reserve, credit extension to AIG (September 18th), non-recourse loans to U.S. depository institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper from money market mutual funds (September 19th), and credit extension to the U.S. and London based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against all types of collateral that may be pledged at the Federal Reserve's primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility (September 21st).

Unfortunately, credit markets didn't respond, thus the need for additional Treasury balance sheet the bailout will provide. Per the WSJ:

“We have a complete disconnect between monetary policy, low interest rates, and low federal-funds rates and credit and banking conditions,” says Adolfo Laurenti, senior economist at Mesirow Financial in Chicago. “Even if fed rates are at 2% and they’re doing whatever possible to inject liquidity into the system, the transmission mechanism is clogged and you don’t see growth.”

That’s why the Fed has responded lately by going nuts. Helped by money it is borrowing from the U.S. Treasury, in the seven-day period ending Sept. 24, the Fed increased its own credit at its reserve banks by 18% to $1.134 trillion.

The Fed is using its funds to buy asset-backed commercial paper and others types of assets from the nation’s banks, who have remained frozen while money-market funds lose their value and investors retreat to the safety of Treasury notes.

Concentration Risk Among U.S. Deposits

With JP Morgan acquiring WaMu's deposit base, they rocketed above Citigroup as the biggest bank in terms of deposits. This increases concentration among the largest five deposit holders to a massive 45% by market share (assuming $7 Trillion in total deposits), but I'm not so convinced that bigger is better.

And further concentration is likely... per CNNMoney.com:

Wachovia is reportedly mulling a deal with another large bank, including Citigroup and Spain's Banco Santander, according to reports published Friday afternoon.

Should Citi and Wachovia merge, the big 3 (Citi, JP Morgan, and Bank of America) would combine for almost $3 Trillion in total U.S. deposits.

Just another data point as to why additional regulation and oversight is so important...

Source: Infectious Greed

We Have a Bailout.... No More Fear

The Good (a deal was needed):

Top U.S. policy makers emerged from hours of tense negotiations with a clear message just after midnight Sunday morning: A deal to bailout U.S. financial markets has been agreed on and all that remains to be done is to commit the legislation to paper.

The Bad (playing on fear):

No matter how you feel about George Bush's credibility, it is unnerving to watch the president of the United States stare his country in the eye and declare that "we are in the middle of a serious financial crisis" and "our economy is in serious danger."

Hmmm.... we've seen that before (via The Daily Show):




I'll provide my thoughts on the final plan later...

EconomPics of the Week 9/26

Investment Banking Model is Dead
How Things Have Changed....
The Downfall of the Investment Banking Model
Pay for Performance?

Bailout
Game Theory: Why the Bailout Won’t Work
When $25 Billion is Chump Change... Auto's Bailed Out
Is it Possible the Bailout Might be Profitable?
Bailouts + Packages: Twice the Size of the War on Iraq

U.S. Government
McDonalds More Credit-worthy than the U.S.?
China Central Bank Advisor: "Why are we piling up on IOU’s”...

Credit Markets
Two Year Swap Spreads State "WE WANT A BAIL OUT NO...
Berkshire Goldman Preferreds Yield over 17%
Anything Happen While I Was Gone?

Economic Data
Final GDP Print Down .5%, even with Puny 1.1% GDP ...
Late Leading Indicators (August)
Although Harder to File... Bankruptcies are on the Rise
Durable Goods Shipments... Move on... Nothing to See Here

Equities
Goldman Initiates the $7.5B "Buffett Bounce"
Is it Time to "Exchange" Your GS / MS Investment for CME?

Politics
Bush Approval Rating vs. S&P 500

McDonalds More Credit-worthy than the U.S.?

Source: Naked Capitalism

Final GDP Print Down .5%, even with Puny 1.1% GDP Deflator

As the world is ending (Nasdaq futures down ~50), we get a .5% reduced final GDP print (2.8% from 3.3%) that is hugely inflated by a tiny 1.1% increase in the GDP Price Index (details of why this overstates GDP here).

The "inflated" charts:

Game Theory: Why the Bailout Won’t Work

Lets assume for the time being that there are only two banks; Bank A and Bank B.

The media / political pundits would have you believe the likely outcome of the bailout is the top-left box in which both Bank A and B sell risk assets to the Treasury. In this case, the result is a more regulated banking industry, with imposed limits to salary, but importantly markets clear.

Click for larger table:

HOWEVER, it is in BOTH banks interest to deviate from that.

Why? Simple. If Bank A (or B) believe the other is selling their risk assets to the Treasury; they will each be better off holding on to theirs.

Why? If the other bank sells and they hold, markets will still clear (in theory) and the bank that holds onto their risk assets can sell at the new market prices. This results in increased market share as they:

*Can pay more for talent
*Are less regulated
*Don’t have the stigma of selling to the Treasury (think of what selling portrays to the market)

This is even worse in the “real world” as all banks have the incentive to wait for other banks to sell risk assets to the Treasury to clear markets.

The likely result? The bottom right box in which no bank sells voluntarily and markets remain frozen. While there were many problems with the initial plan, at least there was a 100% incentive to sell the assets.

Update: Thanks for the link Yves from Naked Capitalsim. Her take on my post:

Brilliant, except it assumes that assets sold to the Treasury will be lower than the prices they will later fetch. We think that's completely wrong; the intent is to overpay relative to current market prices, and with real estate and the economy headed south, these assets are certain to trade at even lower prices for a very long time. Plus banks will sell the stuff where they think Treasury is overpaying the most, and hang on to those assets that they think have the most upside. But more of this sort of reasoning is badly needed.

I get where she's coming from. My assumption above was that markets clear if the "other" bank were to sell to the Treasury eliminating the need for all banks to sell to the Treasury. For more on Yves opinion that this is in fact a capital injection (i.e. the Treasury plans to intentionally overpay, click here).

While I agree that the Treasury will pay above market prices, it is my opinion that market prices are artificially low due to many technical factors and a lack of global balance sheet for risk assets (i.e. everyone is selling, not buying). I feel expectations of 10-15% returns based on today's marks, even with very conservative assumptions, are reasonable.

In thinking more about it, they would NEED to pay more for them than currently marked. Unless a bank was insolvent, why would they clear assets yielding 10-15% to make room for new loans yielding 8%? (it also doesn't hurt that the Treasury just needs to beat their unbelievably cheap financing rate - currently under 4% for 10 year bonds).

That being said, I think there is still a huge incentive for each bank to wait for others to clear the market at these higher prices (and people tend to do what's best for themselves vs. shareholders). In addition, while this in theory could clear the frozen credit markets, I think any package of this size should also impact the housing problem, which this does not.

Late Leading Indicators (August)

Lets take a look at last week's leading economic indicators in more detail (I was traveling / the world was imploding / you probably missed it).

From the Conference Board:

The leading index decreased again in August, the third decline in the index in the last four months, and it is 2.7 percent below its level one year ago. Building permits, the index of supplier deliveries and initial claims for unemployment insurance (inverted) made large negative contributions to the index this month, more than offsetting positive contributions from the interest rate spread and consumer expectations.

Looking longer term, it looks like the only areas of positive contribution over the previous 12 months were money supply (expect this to increase on a going forward basis) and interest rate spread (expect this to increase as well).

I do however, expect consumer expectations, which were positive the past few months, to snap back rather dramatically. And initial claims, new orders, and workweek? Not so much either...

When $25 Billion is Chump Change... Auto's Bailed Out

This slipped through late yesterday; per U.S. News:

With Congress preoccupied with the massive, $700 billion bailout plan for the financial industry, General Motors, Ford, and Chrysler have finally secured Part One of their own federal rescue plan. A bill set to be passed by Congress and signed by President Bush as early as this weekend--separate from the controversial Wall Street bailout plan--includes $25 billion in loans for the beleaguered Detroit automakers and several of their suppliers.

This next comment makes me want to throw up in my mouth:

"It seemed like a lot when we first started pushing this," says Democratic Sen. Debbie Stabenow of Michigan, one of the bill's sponsors. "Suddenly, it seems so small."

Note this is just "Part One" of a likely $50 Billion package (see my previous "Auto Bailout... What's Another $25 Billion" post for more).

Durable Goods Shipments... Move on... Nothing to See Here

Source: Census

China Central Bank Advisor: "Why are we piling up these IOUs if they may default?"

Naked Capitalism via Bloomberg:

It has been conventional wisdom that China, Japan, and other countries that run trade surpluses with the US, which means they fund our overconsumption by buying assets like US Treauries, would never restrict the flow of credit to us because it would lower their exports and hurt their growth. We've long been leery of the idea that unsustainable trends will have a life eternal, and Brad Setser has a simple reason why this process is self-limiting. Our foreign funding sources aren't just lending us money to buy their goods; they are also providing the funding for interest on the loans extended for past imports. At a certain point, the interest payments become so large relative to the value of the exports that the deal no longer makes sense.

The day of reckoning may be approaching well before Setser's tipping point. And the trigger is much simpler. We look like a lousy risk. The Freddie/Fannie conservatorship, the Lehman bankrutpcy, and the rescue of fallen Asian powerhouse AIG has, not surprisingly, lead to a reassessment of the US's creditworthiness

Just how large is Asian exposure?

Thus, the need for an agreement to prevent panic sales (I wonder if an Asian "T-Bill" bailout fund is next):

Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding...."We are in the same boat, we must cooperate," Yu said in an interview in Beijing on Sept. 23. ``If there's no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.''

Yu said China is helping the U.S. ``in a very big way'' and added that it should get something in return.

Although Harder to File... Bankruptcies are on the Rise

President Bush stated the Bankruptcy Abuse Prevention and Consumer Protection Act (effective October 17, 2005):

Will also allow us to clamp down on bankruptcy mills that make their money by advising abusers on how to game the system.

Ahhh... the eternal hope of small government when things were going well. I guess levering a firm out the ass isn't "gaming" the system when former co-workers will bail you out, but I digress...

Among its many changes to consumer bankruptcy law, BAPCPA enacted a "means test", which was intended to make it more difficult for a significant number of financially distressed individual debtors whose debts are primarily consumer debts to qualify for relief under Chapter 7 of the Bankruptcy Code.

Well, at least when the consequences of our levered economy come crashing down, U.S. taxpayers that financed the bailout will have similar support... or not.

Two Year Swap Spreads State "WE WANT A BAIL OUT NOW"

Per Bloomberg:

The spread between the rate on a two-year interest-rate swap and Treasury yields surged to a record on concern that U.S. lawmakers may delay a Treasury department proposal to bailout the banking system.

The rate charged to exchange fixed for floating interest rate payments for two years above Treasury yields, dubbed the swap spread and viewed as a gauge of credit concerns, climbed to 166.38 basis points from 139.25 yesterday.

Berkshire Goldman Preferreds Yield over 17% at Initiation

Barry points out that Doug Kass thinks Berkshire's effective yield on the Goldman preferred's is ~17%. Here's the calculation to support that:

Berkshire Hathaway will receive warrants to buy $5 billion in common stock at a strike price of $115 a share, which can be used at any time in a five-year period.

Using the good old Black-Scholes model with the pre-"Buffett Bounce" $115 Stock Price, a $115 Strike, 5 Years to Expiration, and 40% Volatility (roughly the level it has been trading) we get an "option" value of $47.89 per share. Berkshire can buy $5 Billion of Goldman stock with these warrants, thus he owns 43,478,261 shares. This amounts to $2.082 Billion. Taking the $5 Billion Berkshire paid less the value of the warrants at initiation equals $2.917 Billion for the Preferreds.

Berkshire will receive $500 Million per Year, which divided by that $2.917 Billion = 17.14% Yield. If Goldman is willing to capitalize at this value, it makes me question how desperate they really are...

Pay for Performance?

Per Barry over at the Big Picture:

With Congress recognizing the public's dismay over this massive taxpayer giveaway, we are starting to see some serious questions about the folks who drove the financial ship of state aground.

Hence, its time to take a closer look at pay and severance packages for CEOs at investment houses, banks and mortgage lenders, who perversely stand to benefit from the public's largesse.

Here's a quick overview:

Is it Possible the Bailout Might be Profitable?

CRS Report via Zubin Jelveh's Odd Numbers:

Depending on the proceeds from the debt and equity considerations, the federal government may very well end up seeing a positive fiscal contribution from the recent interventions, as was the case in some of the past interventions summarized in the tables at the end of this report. The government may also suffer significant losses, as has also occurred in the past.

One thing is certain... uncertainty.

The Downfall of the Investment Banking Model

Niels Jensen and Jan Wilhelmsen, of Absolute Return Partners via Infectious Greed.

What is truly disgraceful is that investment banks could only manage returns on equity of 15-25% with a balance sheet that was often leveraged to the sky.

Using Lehman as an example, below is a quick and dirty explanation as to why investment banks were "only" able to achieve 15-25% return on equity and why it wasn't necessarily "disgraceful" (on an individual bank by bank basis), but rather a function of how these banks functioned in a framework that should not have been allowed. In fact, I argue that these aggressive return targets played an integral role in the downfall of the investment banking model.

Net Income:
While Lehman's net income did in fact rise dramatically from 2003-2007, it pales in comparison to what Lehman Brothers (and others) paid their employees. In 2007, Lehman paid their employees well in excess of $300,000 per year ON AVERAGE. To see how large this was in comparison to the net income of the firm, if salaries in 2007 were at 2003 levels per employee (still $260,000+), return on equity would have been 30% instead of the 20% level reported.


Leverage:
To pay for these increased salaries and still reach their 15-25% return on equity (from a growing equity base), Lehman increasingly turned to leverage (when a firm needs to return almost $4B rather than $2B to reach their target, strategies that previously would have been turned down, are now accepted. These lower returning strategies are then amplified through leverage).

As can be seen below, this is exactly what happened. From 2003-2007 average salaries skyrocketed as banks outbid one another for new talent (more projects requires more employees), leverage increased dramatically as Lehman's went from less than 24x to 31x (and remember this is more leverage off of a larger base number), all the while return on equity wasn't able to keep up with both the increase in salary or leverage.

So do I think 15-25% is "disgraceful"? On an individual bank by bank level, I don't think so. Lehman (and other banks) had to act in this manner to survive as ALL banks acted in this low-risk (for the most part it's not their money) / high-reward environment.

The thing I find "disgraceful" is that this was was allowed to happen, as it was never really beneficial for anyone besides the bankers and was in fact detrimental to our people, economy, and country.

Goldman Initiates the $7.5B "Buffett Bounce"

Per Bloomberg:

Goldman Chief Executive Officer Lloyd Blankfein is turning to Buffett, the billionaire investor and second-wealthiest American, to boost market confidence even though Goldman hasn't reported a quarterly loss since it went public in 1999. The bankruptcy of Lehman Brothers Holdings Inc. and emergency sale of Merrill Lynch & Co. to Bank of America Corp. on Sept. 15 have fueled fears about firms that rely on bond markets for funding.

Expect the "Buffett Bounce" to fall flat. As reader Scott Frew astutely points out in a post by Yves over at Naked Capitalism regarding the $5 billion preferred portion of the capital raise:

$5 billion of 10% preferred--Goldie's been of late on a $7-8 billion annual net income run rate, so this dividend, which is paid in after-tax dollars, is a significant hit. The warrants are $10 in the money at the moment of the deal, $25 a share in the money not much later as the market reacted. This is not cheap capital for Goldman, to put it mildly.

Is it Time to "Exchange" Your GS / MS Investment for CME?

Per Smart Money:

Goldman Sachs and Morgan Stanley may intensify their use of exchange-traded derivatives to recapture leverage lost by their transformation into federally regulated banks, according to a sector analyst.

This has certainly been a benefit to CME Group shareholders, as the stock has returned a stellar 20% since the Fannie / Freddie Bailout, while Goldman and Morgan Stanley are down 30%+ each.

How Things Have Changed....

WSJ:

In the span of about a week, Raymond James leapt from being the fourth-largest investment banking operation to the largest in terms of market capitalization, even though at $4.58 billion, it is dwarfed by the former bulge-bracket firms that have now completed the 75-year-plus journey from commercial bank, to investment bank, to commercial bank again.

New to EconomPic Data? Check out our Greatest Pics

Bush Approval Rating vs. S&P 500

Source: Credit Writedowns

Bailouts + Packages: Twice the Size of the War on Terror

And this DOES NOT include the potential / likely costs of all the new lending facilities / conversion of Morgan Stanley or Goldman...

War on Delever
Feb. 13: Initial Stimulus Package (i.e. rebate checks)

Mar. 17: Bear Stearns Guarantee

Sept. 7: Freddie / Frannie Bailout

Sept. 17: AIG

Sept. 20: Bail-out Proposal

TBD: Potential Auto Bailout

Just how big is this? It's roughly 2x the size of spending to date on BOTH the Afghanistan and Iraq wars to date... Ladies and gentlemen. We have a new financial war in progress....


Cost of the Iraq / Afghanistan Wars to Date

Anything Happen While I Was Gone?

Barry from The Big Picture jokes: "Hey, I took the week off -- what did I miss?"

Well, I am a fool who actually took the week off (in a part of the world with extremely limited Internet / Blackberry access). So what did I miss in poetic form? (note: this is coming directly from 18 hours of return travel so my sense of humor is somewhat completely out of whack)

• Lehman failed, wasn't bailed
• AIG is still alive, a taxpayer credit line of 85
• Morgan Stanley + Wachovia Bank, makes no sense but encouraged by Hank
• A bailout larger than the war with Iraq, a socialist government that has the rich man's back
  

Even with all this, Barry shows equity markets / interest rates barely budged week over week (EconomPic'd below)...

However, looking at the how the markets moved on a daily basis (credit markets shown below), one can see just how wild the ride was.

Vacation! "Greatest" Pics...

I'm finally on some much needed R&R, but first some EconomPic housekeeping....

First of all, it's very humbling to realize that this many people read my blog on a daily basis. I'm guessing it was the readers that motivated me to post 20+ entries per week. Exciting stuff, and very fun, but WAY too time consuming. Going forward, expect more from less (though knowing me that won't last long)...

Anyhow.... for those of you new to the site, take a look at some posts from the past...

June 2008
Why Not Deflation?
Do Oil Futures Impact the Cash Price? YES!!!
Low Supply of Oil: The Effect (not Cause) of Futures Prices

July 2008
Chicken or the Egg?
That 70's Show? PPI vs. CPI
Sell in May, Don't Go Completely Away...
Where's the Equity Premium?
Budget Deficit
Merrill Write-Downs to Date...
Rate Hikes / Cuts Haven't Impacted Inflation

August 2008
Merrill Lynch: 1/4 of All Historical Profits Gone
The FDIC Wants in on the Bailout Action...
Hardest Drinking U.S. Cities... and Housing?
Ener-GM Bail... I Mean Energy Bill
Not Too Fun(d), but Not Too Shabby

September 2008
Nominal vs. Real GDP: Why the GDP Deflator Overstates GDP
Income Growth / Equality by Presidential Party
Bonds Sure Look Cheap...
IN A PERFECT WORLD: BAILOUT = END OF CREDIT CRISIS...
New "Bailout" Liabilities = Existing Publicity Traded U.S. Debt
I Thought it was Democrats that were "Big" Government

CPI August

Biller Miller Redux

We've already visited 'since inception performance' for legendary investor Bill Miller's Legg Mason Value Trust which shows underpeformance vs. the S&P 500. Now comes further questioning as to whether he should lose the "legendary" tag altogether following the funds large holding in Freddie Mac equity (apparently as much as 30mm more shares than we listed here).

From Joe Nocera at Executive Suite:

Back in 2001, when Bill Miller was viewed as one of the world’s greatest investors, I edited a story about him at Fortune magazine. Mr. Miller, of course, is the manager of the Legg Mason Value Trust mutual fund, whose claim to fame is that he beat the Standard & Poor’s 500-stock index for 15 straight years. (It was 10 straight when Fortune published its story.) In the last few years, however, his fund has stumbled badly. Indeed, there are those in the investment community who whisper that Mr. Miller was never really a truly great investor. Rather, he was akin to the guy who flips a coin and it comes up heads 15 straight times — a product, that is, of randomness rather than skill.

Source: Dealbook

$1.7 MILLION DIFFERENCE BETWEEN NATION’S MOST EXPENSIVE AND AFFORDABLE

That $1.7mm difference is almost as large as the gap we see between some of the richest and poorest markets in the world...

Source: Coldwell Bankers HT (Infectious Greed)

Econom-Pics of the Week (9-12-08)

Fannie / Freddie

Fannie / Freddie Portfolios: $250B by 2021

A Picture is Worth 1000 Words... Fannie MBS Edition

IN A PERFECT WORLD: BAILOUT = END OF CREDIT CRISIS...

New "Bailout" Liabilities = Existing Publicity Traded US Debt

Fannie Spreads WAY In...

Cheaper Fannie Financing...

Top Five (Former) Equity Holders of Fannie / Freddie

Entertainment

Most Profitable Superhero Movie Franchises

Hollywood's Most Overpaid Movie Stars

Lehman

One of these Investment Banks is not like the Other

Fuld Will be Just Fine...

Equities

S&P Earnings by Sector

Is the Plunge Protection Team Losing Power?

EconomPic Data

Household Debt

PPI August: Crude Down, Final Goods Flat

Wholesale Trade Sales (July)

Government / Politics

I Thought it was Democrats that were "Big" Government

Other

Corporate / Mortgage Backed Security Spreads

Twenty Highest Paid Towns

Largest 20 Sovereign Wealth Funds

Most Profitable Superhero Movie Franchises

Interesting analysis regarding the most profitable 'Superhero' franchise of all time per Max-Bro.net:

Just how profitable are these superhero films for the Hollywood studios making them?

It’s easy to point to large numbers like the ones TDK generated, but then studios invest hundreds of millions of dollars into making these films. I performed some research into the matter and discovered some interesting finds. Below, in descending order, are the top ten most profitable superhero films starting from 1978 to the present day, with a big surprise at the end.

The most profitable Superhero? Those heroes in a halfshell...

Fuld Will be Just Fine...

Dealbook:

Between 1993 and 2007, Mr. Fuld took home about $466 million in compensation, including base salary, bonuses, long-term incentive plan payouts and the value of stock options he exercised. That’s according to calculations from Equilar, an executive compensation research firm.

PPI August: Crude Down, Final Goods Flat

Household Debt

The government isn't the only one with debt up to their eyeballs.

Household Debt Service Ratio

• An estimate of the ratio of debt payments to disposable personal income.
• Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.

Financial Obligations Ratio

• Adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio.

Source: Federal Reserve

S&P Earnings by Sector

Source: S&P hat tip Barry (I posted the bottom chart yesterday and accidentally deleted... whoops)

Hollywood's Most Overpaid Movie Stars

Per Forbes:

To calculate our payback figures, we took half of each film's worldwide box office (to roughly approximate the studio's cut of each ticket). Then we added the first three months of DVD revenues and subtracted the budget to derive the film's gross income. After that, the actor's total compensation (upfront pay plus any money earned from sharing in the film's profits) was divided into the gross income to get the actor's payback figure for the film. The payback for the last three movies for each actor was averaged to calculate ultimate payback. We deliberately used gross income rather than net income in our analysis because the latter figure is so easily manipulated by studio accountants, with marketing expenses treated differently for almost every film.

I just took their payback figure and inverted it to create a "salary as a percent of gross income". Not Nicole's year...

I Thought it was Democrats that were "Big" Government???

While I knew the budget deficit decreased during Clinton's presidency and did a 180 degree turn under Bush, charting spending / revenues of the U.S. during these times one can see why. What surprised me was that during Clinton's presidency, spending decreased 3.7% from 22.1% to 18.4% of GDP, along with a similar increase in revenues.

On the other hand, the budget deficit under the first 7 years of Bush was caused as much by an increase in spending, as it was from a decrease in revenues. In fact, had interest income not decreased over that time (financing the debt has been done at historically low levels due to historically low Treasury Bill / Note / Bond rates), this number would have been closer to 2.5%.

And this doesn't include the record deficit expected in 2008 BEFORE this weekend's Fannie / Freddie bailout.

Source: CBO

Cheaper Fannie Financing...

Source: Accrued Interest

Largest 20 Sovereign Wealth Funds

A lot of chatter as to which marginal investors (Canadians?) will come bail out / recapitalize U.S. Financials. The hope is Sovereign Wealth Funds will swoop up these risky assets sooner than later. As reader Lutton points out "Wow, maybe that's why McCain picked Palin?" noting Alaska's $30B+ 'Alaska Permanent Fund'.

The largest 20...


Source: Jason Kotter and Ugur Lel's Friends or Foes? The Stock Price Impact of Sovereign Wealth Fund Investments and the Price of Keeping Secrets

New "Bailout" Liabilities = Existing Publicity Traded Debt of U.S.

FT (HT Credit Writedowns):

The two mortgage companies have between them $5,400bn in liabilities, equal to the entire publicly traded debt of the US, alongside mortgage-related assets of about equal value. These will now all be accounted for by the CBO, although public accounting rules mean that its tally of US government debt may not necessarily increase by $5,400bn.

Corporate / Mortgage Backed Security Spreads

High Yield Spreads: out close to their cyclical highs; ~800 bps above Treasuries

Investment Grade Spreads: at their cyclical highs ~300 bps above Treasuries (higher than High Yield spreads just last summer)

MBS Spreads: down a whopping 60 bps and STILL some room to go to reach levels when they were only "implicity" guaranteed by the government

Wholesale Trade Sales (July)

July 2008 sales of merchant wholesalers were $410.6 billion, up 16.5 percent from the July 2007 level. A lot of this growth can be explained by rampant inflation we've seen over the past year.



This has had a profound impact on the wholesale business as the composition of sales have been altered. For example, food and petroleum sales now compose 22% of all sales, up from just 16% a year ago, while automotives have been reduced 1.5% to just 6% of sales.

Fannie / Freddie Portfolios: $250B by 2021

The GSEs’ retained portfolios may not exceed $850 billion through December 31, 2009, after which time they will be reduced by 10% per year until they reach $250 billion.

Currently Fannie and Freddie have about $150B of capacity left between them based on that $850B "hard line". A 10% reduction in that figure per year means it will take until 2021 to reach the $250B goal. That means 3 different presidential terms will need to come and go, with each exercising fiscal restraint to make that happen.

Considering that just 5 years ago we were promised a small, fiscally responsible government and our minds seem to trick us into thinking things have materially changed every 3-5 years, does anyone believe this will happen? Case in point, just a little over two years ago Countrywide (and others) were ready to make Fannie and Freddie a thing of the past... in fact Countrywide's market cap peaked less than 2 years ago and remained well above 20 through last November.

Top Five (Former) Equity Holders of Fannie / Freddie

WSJ (HT Calculated Risk):

Wells Fargo & Co. said ... its perpetual preferred investments in Fannie and Freddie are included in securities available for sale at a cost of $336 million and $144 million, respectively. Those securities now trade at 5% to 10% of their original value.

The F&F confessional is open.

Source: MSN HT Dealbreaker; WSJ

One of these Investment Banks is not like the Others...

Source: Yahoo! Finance

A Picture is Worth 1000 Words... Fannie MBS Edition

Is the Plunge Protection Team Losing Power?

Per The Big Picture:

Another weekend, another bailout, another market reaction:

How many Sunday press releases is it going to take to save the financial system from ruin? If you’re are keeping score at home, this is now the sixth Sunday night/Monday morning press release in 14 months aimed at saving the financial system. Consider the recent history of these weekend rescues:

• Recent Events:
• August 2007, when the credit crunch was officially recognized by the Fed, when they cut the discount rate.
• December 2007, with the announcement of the TAF and other credit facilities
• January 2008 Soc Gen panic, and a 75 bps emergency cut
• March 2008 with the Bear Stearns bailout.
• July 2008 the first Fannie/Freddie rescue attempt
• September 2008 the actual Bailout of Fannie/Freddie

Fannie Spreads WAY In...

Twenty Highest Paid Towns

We previously detailed that household income increased to $50,233 per Household in 2007. Edward at Credit Writedowns points us to an interesting table that shows where the upper echelon of households live (it will be interesting to see how these California towns were impacted by the housing slowdown in 2008).

IN A PERFECT WORLD: BAILOUT = END OF CREDIT CRISIS

Over the past few weeks there has been much criticism over the potential (now actual) Government Sponsored Agency “GSE” bailout due to the potential cost to taxpayers, the moral hazard it would encourage, etc... I do not disagree with most of these criticisms, but the cost of NOT doing anything would be much greater. To show the potential benefits of the bailout on both housing and credit markets, which in turn will benefit the economy, below is how the bailout will unfold in a “best case” scenario. While I do not believe it will solve all of the problems detailed below (or even a fraction of them) in this manner, I do believe it is important to look at the bail-out in terms of a "glass half full" and how it can help alleviate the liquidity problems associated with today’s credit markets.

I) BAILOUT DETAILS
Specific features of the bailout that impact the outcome to the credit market include the Feds new liquidity facility, the goal to increase Fannie and Freddie's mortgage-backed security portfolios through the end of 2009, the right for the Treasury to actively purchase MBS in the open market to reduce spread (and cost to future homeowners), and the future goal to reduce the GSE balance sheet by 10% annually starting in 2010. In the first part of my "perfect world" analysis, I predict that these features (and others – go here for 10 key features) will help put a floor on housing prices.

II) RATES MATTER

Homeowners that already qualify for high quality prime loans will not be as impacted directly by the new moves by the Fed. Why? Agency spreads are near historic wides, but absolute levels are already near historic lows.

HOWEVER, borrowers that do not currently qualify for these low rates should see their rates drop dramatically. Why is this important? If a homeowner that qualified for a 9.5% rate can access a 7% government “subsidized” loan, their buying power increases by almost 25% (all else equal).

These “subsidized” loans will prop up the housing market as the size of the payment made is what truly matters for a homeowner (specifically one that intends to live in that home for the foreseeable future). Importantly, these rates are not “teaser” rates that reset, but more manageable fixed rates for the life of the mortgage.

III) THE IMPORTANCE OF ATTRACTING THE MARGINAL BUYER TO THE MARKET
The goal is to entice the marginal buyer to come to the market / have “bad loans” refinance at more manageable rates. In the past 6-12 months potential homeowners have been sitting on the sideline as prices continue to make new lows (nobody wants to catch a falling knife). With the new “bailout” limited time horizon (increasing balance sheet through 2009), this SHOULD bring a sense of urgency for new homeowners (expect emphasis on the "limited time offer" aspect).

If these low rates do put a floor on home prices sooner than later, this should benefit the owners of subprime / Alt-A securities that have priced down as delinquencies have risen at historic levels. If the market bottoms and these owners are able to refinance at the new lower rates, get who gets off the hook? THE EXISTING MORTGAGE OWNERS who get paid back at PAR for all loans refinanced.

IV) BANKS FINALLY ABLE TO DELEVER AND MAKE NEW LOANS
Banks own a lot of these mortgage securities that have priced down and in response, over the past 6-9 months banks have attempted to delever as their equity has been written down / capital has been so difficult to come by. This system wide delevering only caused these entities to be more levered. How is this possible?

Well, if one bank attempted to delever, they’d be successful. When every bank attempts to do so at the same time, it only makes the problem worse! Let’s take a look…

As these banks all sold off assets at the same time, these assets sold priced down in value as the entire market was selling into a distressed AND illiquid market. This in turn reduced the price of assets remaining at the banks. When that happened, they were forced to write down even more assets / equity, resulting in leverage HIGHER THAN WHEN THEY INITIALLY BEGAN.

If these assets snap back even partially in value, the reverse happens. In fact, I expect a portion (maybe a tiny portion) of the underlying mortgages in securities marked as low as 60 cents on the dollar to repay at PAR when homeowners sell to new owners at the “subsidized” rate or are able to refinance themselves. In addition, liquidity injected into the market through the Treasury’s outright purchase of mortgages should bump up the price. The result will be improved leverage ratios at banks, which will slow the asset selling process we've seen from banks. In fact, expect well funded banks to actively buy securities in the market in the coming weeks / months.

It's also important that the bailout makes banks much more attractive for outside investment (think Sovereign Wealth Funds). Once new capital is injected and their balance sheets are improved, new loans can be made. This should result in improved (lower) rates for non-government mortgages.

V) THE CREDIT CRISIS ENDS?
If this all works out as I detailed in the above best case scenario, a functioning credit market at no cost to taxpayers results. What likely will happen? After everything that has transpired over the past 12+ months, I have no idea though I do expect credit markets to more accurately reflect the actual economy and not the lack of liquidity in markets. The result of which might scare investors just the same...

EconomPics of the Week (9/6/08)

GDP
Q2 Economy vs. "Similar" 3% - 3.5% Quarters...
Nominal vs. Real GDP: Why the GDP Deflator Overstates Inflation
GDP ex Import Inflator: Third Straight Quarter of Negative Growth

Politics
Income Growth / Equality by Presidential Party
Global Equity Performance Through August
Convention Speech Viewership

Asset Class Returns
Global Equity Performance Through August
August Hedge Fund Returns.... Where's the Alpha?
Is this Just a Depiction of Flight to Quality?

Economic Releases
August Unemployment Soars to 6.1%: Less Employed i...
Retail Sales (August)
"Asia-based" Autos Up to Almost 50% of U.S. Market...
Emergency Unemployment Compensation - 8/16
ISM Services (August)

Oil
Global Imports / Exports of Oil
Oil Trades Down Near 4 1/2 Month Low

Other
Bonds Sure Look Cheap...
U.S. vs. U.K.: Relative Use of "Liquidity" Facilities
"Rich Man's Burden"

Convention Speech Viewership

Reuters:

A record 38.9 million U.S. TV viewers watched John McCain accept the Republican nomination for president on Thursday, slightly more than the 38.3 million people who tuned in for Democratic presidential candidate Barack Obama's speech, Nielsen Media Research reported.

Surprising to me, McCain also had more viewers than the highly anticipated Sarah Palin speech seen by 37.2 million on Wednesday.

August Hedge Fund Returns.... Where's the Alpha?

Source: Barclay Hedge Fund Indices

August Unemployment Soars to 6.1%: Less Employed in Total YoY

Source: BLS (Employment Situation), BLS (Birth / Death)

Retail Sales (August)

Many retailers report sluggish August sales:

As merchants announced their August sales results, Wal-Mart Stores Inc., the world's largest retailer, reported a solid gain that beat Wall Street forecasts. But mall-based apparel stores, like teen merchants Wet Seal Inc. and Abercrombie & Fitch Co., remained in the doldrums. And high-end retailers Saks Inc. and Nordstrom Inc. posted weaker results as their affluent customers start to feel pinched.

"Consumers are spending on necessities and looking for value and the lowest price possible. And it's reflective again in the results that we are seeing," said Ken Perkins, president of search company

Emergency Unemployment Compensation - 8/16

The Department of Labor incorrectly states:

States reported 1,394,749 persons claiming EUC (Emergency Unemployment compensation) benefits for the week ending Aug. 16, a decrease of 384,050 from the prior week.

In looking at the data, they meant increase... hey semantics (does anyone read this stuff besides me / how long until they fix it??)

So, what is this EUC?

This new temporary unemployment insurance program provides up to 13 additional weeks of unemployment benefits to certain workers who have exhausted their rights to regular unemployment compensation UC) benefits. The program effectively begins July 6, 2008, and will terminate on March 28, 2009. No EUC benefit will be paid beyond the week ending July 4, 2009.

ISM Services (August)

Source: ISM

Global Imports / Exports of Oil

Well, this explains how a ~40% annualized unit drop in imported oil to the U.S. would (not did)have such a substantial impact on GDP.

Source: BP

Q2 Economy vs. "Similar" 3% - 3.5% Quarters...

The Big Picture with help from Mike Panzner compares the recent 3.3% GDP quarter to similar in size economic expansions:

Our question: Does this 3.3% GDP resemble in most economic data points other, similar economic expansions? Or, is this GDP data, as we have argued, merely the result of a modeling flaw?

With the help of Mike Panzner (Financial Armageddon), we looked at other periods of time when GDP was similar to the Q2 3.3% -- we used any quarter where GDP was between 3.0 - 3.5% as our range. Going back to 1959 (that's all the data available) there were 12 quarters (6.1% of the total) where GDP was greater than 3.0% and less than 3.5%. We then looked at the median Unemployment Rate, NFP (trailing 12 month change), ISM Manufacturing, CPI, PPI, Industrial Production, New Housing Starts, and Consumer Confidence.

What were the results?

Housing starts, payrolls, manufacturing, consumer confidence, industrial production below the median level; CPI, PPI, unemployment above the median level. All the more reason why it likely didn't pass my initial "smell test"...

Source: The Big Picture

"Asia-based" Autos Up to Almost 50% of U.S. Market Share

Per Bloomberg:

Honda Motor Co. passed Chrysler LLC in August to grab fourth place in U.S. auto sales this year as cars won market share from trucks amid an industrywide slump. Asia-based brands led by Nissan Motor Co.'s 14 percent gain raised their share of August U.S. sales to 47.3 percent.

With those kind of figures, are they sure $50 billion is enough?

Is this Just a Depiction of Flight to Quality?

Not quite sure how to interpret the charts below....

While the strong correlation between yields and equities surprised me (a lower discount rate for dividends or cash flows should make the equity more valuable... all else equal), the one year chart (below) is what interests me. Specifically, the rally over the past few months in Treasuries without the corresponding sell off in equities... at least thus far.

My initial thoughts... investors aren't rotating further away from equities to Treasuries as they have in past "flight to quality" moments. Rather, they're rotating away from short-term "enhanced cash" instruments that have gotten slaughtered / no longer exist (think ABCP, Agency Notes, and securitized "short-term" floating non-agency mortgages).

Bonds Sure Look Cheap...

The option adjusted spread to Treasuries of the Lehman Aggregate Index is currently at a historic level. Is this a buying opportunity, a view of things to come, or just mispriced options?

U.S. vs. U.K.: Relative Use of "Liquidity" Facilities

The Telegraph points out that use of the U.K.'s liquidity facility may be significantly larger than first thought:

When Bank Governor Mervyn King first unveiled the Special Liquidity Scheme in April he indicated that it might be used for £50bn, while debt specialists forecast a total take-up of £90bn-£100bn by the time the scheme closed on October 20.

Alastair Ryan, UBS banks analyst, has calculated that "the take-up could be £200bn or more".

Just how large is that?

Yves over at Naked Capitalism puts it into context:

The UK's GDP is roughly $2.8 trillion. The US economy is a bit under $14 trillion, or nearly 5 times bigger (note that on a purchasing power parity basis, the size difference is even greater, over six times). If you use an exchange rate of $1.8 = £1, that £200 billion is equal to $360 billion. The support to the banking system is roughly 75% of the size of the usage made of the Fed's facilities (remember, some like the PCDF, vary a lot over time, while the TAF seems to be fully subscribed) for an economy 20% as large.

Well, that would certainly explain a portion of the recent Pound sell-off.

"Rich Man's Burden"

Interesting Op-Ed in the NY Times yesterday by Dalton Conley, titled "Rich Man's Burden":

At one time we worked hard so that someday we (or our children) wouldn’t have to. Today, the more we earn, the more we work, since the opportunity cost of not working is all the greater (and since the higher we go, the more relatively deprived we feel).

In other words, when we get a raise, instead of using that hard-won money to buy “the good life,” we feel even more pressure to work since the shadow costs of not working are all the greater.

He continues:

But it turns out that the growing disparity is really between the middle and the top. If we divided the American population in half, we would find that those in the lower half have been pretty stable over the last few decades in terms of their incomes relative to one another. However, the top half has been stretching out like taffy. In fact, as we move up the ladder the rungs get spaced farther and farther apart.

The result of this high and rising inequality is what I call an “economic red shift.” Like the shift in the light spectrum caused by the galaxies rushing away, those Americans who are in the top half of the income distribution experience a sensation that, while they may be pulling away from the bottom half, they are also being left further and further behind by those just above them.

Income Growth / Equality by Presidential Party

And now for a post that is sure to anger 50% of the U.S. population...

NY Times: Is History Siding With Obama’s Economic Plan?

When Democrats were in the White House, lower-income families experienced slightly faster income growth than higher-income families — which means that incomes were equalizing...

The table also shows that families at the 95th percentile fared almost as well under Republican presidents as under Democrats (1.90 percent growth per year, versus 2.12 percent), giving them little stake, economically, in election outcomes. But the stakes were enormous for the less well-to-do. Families at the 20th percentile fared much worse under Republicans than under Democrats (0.43 percent versus 2.64 percent). Eight years of growth at an annual rate of 0.43 percent increases a family’s income by just 3.5 percent, while eight years of growth at 2.64 percent raises it by 23.2 percent.

Hat Tip: Naked Capitalism

Global Equity Performance Through August

Source: Investment Postcards

Oil Trades Down Near 4 1/2 Month Low

Per Bloomberg:

Crude oil traded near a four-month low after Hurricane Gustav weakened before striking the Louisiana coast, easing concern of major damage to rigs and refineries.

``Gustav hasn't even passed and the worst of the fears have been calmed,'' said David Moore, commodity strategist at Commonwealth Bank of Australia Ltd. in Sydney. ``The fact that prices are so quickly reverting back to these levels shows that maybe the underlying bearishness in the market is still there.''

Nominal vs. Real GDP: Why the GDP Deflator Overstates GDP

To better illustrate the impact of the Import GDP Deflator on Real GDP, the chart below shows Real vs. Nominal GDP by component.

First, a refresher... the greater the size of net exports, the greater the GDP. Net exports = exports less imports, thus an increase in imports negatively impacts GDP all else equal.

So what do we find? Nominal imports increased in Q2 by 18.8% annualized. Real imports DECREASED in Q2 by 7.5% annualized. In other words, even though we paid 18.8% more out of our pockets, we received 7.5% less units of these imports. Why? The Import GDP Deflator decreased imports by more than 25%.

Is paying more for less beneficial to our economy? No... but it is good for GDP. As detailed here, this 25% contribution by the import portion of the GDP Deflator increased Real GDP by a positive 4.6% (Imports make up roughly ~1/6 of GDP). Had we paid the same price level quarter over quarter for our imports, and thus received more given the level of nominal GDP, real GDP would have been -1.3% (I understand this WOULD NOT necessarily be a more accurate version of GDP, but it illustrates the size of the impact / just how odd this calculation is).

Ignoring the odd calculation, does this make sense to me? It doesn't. For this to make sense, it must be reasonable that we imported 39.2% less petroleum products during the quarter (in real terms) on an annualized basis. If the U.S. was able to drop its dependence by that much in just one quarter, I guess the U.S. isn't nearly as dependent on the Middle East as we thought. More important, it implies that the U.S. economy is stronger because we paid more in aggregate for our imports, but received less units as more was consumed from non-imports.

Want to hear something more likely? The impact of import inflation on the GDP Deflator is too high and GDP is overstated.