The government isn't the only one with debt up to their eyeballs.
Household Debt Service Ratio
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...
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.
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
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.
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
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.
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.
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
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:
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).
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.
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.
IV) BANKS FINALLY ABLE TO DELEVER AND MAKE NEW LOANS
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.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"
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.
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
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.
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.
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
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?
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?
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).
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?
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?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.
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.
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
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.''
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.
Due to a rise in the price of oil from less than $110 to $145+, the import portion of the GDP Deflator Inflator raised Real GDP by 4.6% (what is the GDP Deflator? click here). This is more than 2x the level seen at any other point during this decade and the highest amount EVER (we have to go back to Q1 1974 and Q1 1980 for levels even remotely close to that of this past quarter).
Had the contribution of imports on the GDP Deflator Inflator stayed the same as last quarter (which was historically large), GDP goes from the 3.3% as reported by the BEA to 0.9% for Q2. If the deflationary impact of imports were removed completely from the equation, GDP goes to -1.3% and shows GDP contraction for the third straight quarter.
Which sounds more reasonable to you?
Source: BEA
