Friday, February 27, 2009

Historical GDP: "It Was Nice Knowing You U.S. Consumer" Edition

A snapshot at fourth quarter GDP prints going back to 1998. Even in the last recession, consumption added to GDP... not this time. The only real positive... a decline in imports (a positive for net exports), due to you guessed it... the possible death of the U.S. consumer.

Source: BEA

Financial Bonds Spiking

Across the Curve indicates financial are in across the board. Just in time... there is almost a 2% difference in the yield of financial bonds and their investment grade brethren.

GDP Breakout: Revised Down to 6.2%

WSJ reports:

The U.S. recession deepened a lot more in late 2008 than first reported, according to government data showing a big revision down because businesses cut supplies to adjust for shriveling demand.

Gross domestic product decreased at a seasonally adjusted 6.2% annual rate October through December, the Commerce Department said Friday in a new, revised estimate of fourth-quarter GDP.

The 6.2% decline meant the worst quarterly showing for GDP since a 6.4% decrease in first-quarter 1982 GDP.

In its original estimate, issued a month ago, the government had reported fourth-quarter 2008 GDP fell 3.8%. The sharply lower revision to a decline of 6.2% reflected adjustments downward of inventory investment, exports and consumer spending.

Source: BEA

Russia-China Oil Deal

EconomPic got an anonymous post that I've been meaning to reply to:

Anyone see this yet? China loans $25B to Russia for ~2.2B barrels of oil...that's less than $12 per barrel. Peak oil? Hmmmmm....
Further details of the transaction per Reuters:

Transneft and China National Petroleum Company (CNPC) agreed in October to build a spur to carry 15 million tonnes a year, or 300,000 barrels per day, between the countries' trunk pipelines.

Over 20 years, this adds up to 300 million tonnes, worth almost $90 billion at current prices, and enough to meet around four percent of China's current oil needs.

That last part is key... over 20 years. This is the equivalent of giving Russia a 20 year loan and expecting it to be paid back over the next 20 years. Solving for the payment size given a $25 billion present value, 365 * 20 periods, and whatever interest rate you want to assume you get the following:

Assuming a 10-12% interest rate (that of the Russian sovereign debt) over the 20 year "investment", then the price is more like $25-$30 per barrel. Looks like it could be a nice deal, but $12 it isn't.

"Tax Rates of the Rich and Poor"

Greg Mankiw shows the effective tax rates for 2005 by income level and declared:

That is, even before the Obama tax hikes, the rich face average tax rates more than twice those of the middle class, and about seven times those of the lowest quintile. These data do not tell you the optimal degree of tax progressivity, but they do describe the starting point from which policy is working.
While I have no problem with him stating these are the "starting point" rates, let me put them into a little more context... i.e. compared to when rates really were alarmingly high.

While this next comment may not make much sense to some as someone well off, I have absolutely no problem paying higher effective taxes than someone who happens to have a lower income (though I do have major problems with bailouts of speculators). The difference are the rules are straight forward and most of all logical (the cost of living as a percent of income is substantially higher for low income individuals). As someone who did not grow up with a silver spoon in my mouth, rather than be angered at paying more taxes because I happened to be more financially successful than others, I just hope these higher taxes open up all the opportunities for someone born into a low income family that were handed to 90% of my business school classmates and co-workers.

Source: CBO

GDP... How was It?

Traveling today with some posts to be delivered... wondering how much GDP was revised downward.

FDIC Insured Institutions: System Wide Loss

Interest Rate Roundup reports:

Every quarter, the FDIC releases a document called the Quarterly Banking Profile. It provides a wealth of data about banking industry losses, loan performance, failed banks, and more. The latest report (PDF Link) just hit the tape, and here are some of the details:

The banking industry as a whole lost $26.2 billion. That was a large swing from the year-ago profit of $575 million that the industry generated. It was also the first time since Q4 1990 that U.S. banks, in the aggregate, lost money.

And that -$26.5 billion would have been 50% worse had it not been for the $13.6 billion credit for income taxes (coming from those losses). If they can ever take them is another story.

includes Source: FDIC

Thursday, February 26, 2009

Durable Goods (January)

Bespoke reports:

If January's Durable Goods report is any indication, 2009 didn't start off on a good economic note. As shown in the chart below, durable goods orders for the month declined by 23.3% on a year/year basis, which is the steepest decline in the history of the indicator (since 1960). If we strip out the transportation component of this series, orders for durable goods declined by a more "modest" 17.4%, which is the lowest level since 1975.

Source: Census

Bailout the Shelter. Not the Investment.

What is a Speculative Investment?

In addition to the reduced interest rate subsidies announced last week, the Chicago Tribune reports:

Congress is poised to give bankruptcy judges more power to modify primary home mortgages in an attempt to halt the foreclosure crisis, a move Democrats and housing advocates have been pushing for two years in the face of stiff opposition from Republicans and the mortgage industry.
So even if the contract of the loan states the bank can take over the home if the buyer doesn't pay (i.e. THEY ARE COLLATERALIZED LOANS), a judge can cram down the loan to an "affordable" level not necessary based on market price.

Besides a HUGE transfer of wealth from those taxpayers / investors that will fund this to those receiving the benefit, who else does it help? The NY Times reports Obama's view:
Mr. Obama said pointedly that it would not help “speculators who took risky bets” or “dishonest lenders who acted irresponsibly” or “folks who bought homes they knew from the beginning they would never be able to afford.”
I couldn't possibly disagree more.

Definition #1 for speculator:
To engage in a course of reasoning often based on inconclusive evidence.
Definition #2 for speculator:
To buy securities or property in the hope of selling them at a profit
Combining definition #1 and #2 we get definition #3 for a speculator:
Engaging in the purchase of property, with the inconclusive evidence that it can be sold at a profit
Or in an EconomPic form, we get the speculative investor "circle of life".

Real Life Mortgage "Moral Hazard" Plan

Not surprising, the AP reports real life sentiments as predicted by the Mortgage "Moral Hazard" Plan Matrix below:

Click for larger image

A quote by someone from the bottom right quadrant:
"I feel like I'm doing the right thing paying my mortgage, and now apparently I have to pay my neighbor's mortgage, too. People are really angry," said Kim Guymon, a stay-at-home mom who bought a three-bedroom home with her husband in suburban Seattle in 2001 and has watched it drop $150,000 in value since last summer.
And the top left:
"It's just rewarding crooks," said the 38-year-old single mother, who said she turned down a bank's $100,000 mortgage offer five years ago because she knew she couldn't afford it.
Personally, I'm in the bottom left quadrant. I was able to purchase a home that I could afford, but it would have been a significantly smaller place, in a less ideal location, and more expensive than what I was able to rent, thus it didn't seem like a good investment. I don't think many people would argue with this statement that a home is an investment; purchasing a home with an expectation that it will increase in value turns a house from just shelter (i.e. renting) into an investment. Furthermore, if someone buys a home and is not able to make monthly mortgage payments based upon the initial value of the home, then the home is not only an investment, it is a speculative investment (i.e. the buyer could only afford the home based on speculating that the value of the home would rise).

To get a better idea of someone in the top right quadrant of the matrix, lets go back to the AP article:
Rosa Valdez, a resident of Coachella, Calif., hopes it's not too late for her family to be helped. The native of Mexico saved enough to buy a new $380,000 home in 2006 in the Lennar development of La Morada, where foreclosures are rampant. She fears her home could be next without federal help.
While the current price of a home is related to willingness of the owner to pay, it has nothing to do with the ability to make those payments unless that home was purchased as a speculative investment and in need of appreciation to make due. Lets use Rosa's $380,000 home purchase as an example (a price that was almost twice the 2006 national median home value at the time). Just three years after the home was purchased, she and her family can no longer afford to make the monthly payments without federal help. Thus, at initiation there were two distinct possibilities:
  • Home prices rise = Rosa would have sold the home for a profit or refinanced the home to tap into the new equity to make monthly payments
  • Home prices fall = Rosa defaults and walks away
In other words, paying the mortgage down for life was never a possible outcome, which means the entire transaction was pure speculation...

If the government wants to help individuals stay in their homes... fine, but please give the taxpayer ownership of those assets if it involves taxpayer money.

But, Will the Plan Work?

It better for the cost of the plan. Unfortunately, I only see the benefit as being 'on the margin' and we need more than an 'on the margin' benefit for the size of the bailout, which is huge when broken down. The basic details of the plan are as follows:

The mortgage plan is hoping to help 9 million individuals at a cost of $275 billion. This comes out to $30,000 PER BAILOUT or 20% of the current value of the median home PER BAILOUT! While I don't question the government's ability to spend $275 billion, I do question the 9 million figure based upon my hypothesis that home prices NEED to eventually reach their natural price level (use the chart below to determine the cost per bailout based upon whatever estimate you want to use).

The question I've asked myself (as a non-homeowner who is looking to purchase); would I be willing to pay $200,000 for something I believe is worth $150,000, even if my monthly payments are the same due to subsidized financing? Of course not! What if I want to move in the next 5, 10, or even 15 years? In that case the house gets marked to market and I lose my $50,000 relative excess. Thus, my theory is that regardless of this plan, home prices still have room to fall.

It is clear the administration believes that solving the housing problem is more important than the moral hazard being introduced. If that's the case, here is my alternative... reduce the principal owed on these mortgages IF they are already taxpayer owned (i.e. a Fannie / Freddie mortgage - leave private loans out of taxpayers hands). If they want to blow $275 billion for 9 million people, then reduce the principal by that 20% per bailout amount.

In other words, if prices are going to fall anyway, why prevent the inevitable? Renowned investor Wilbur Ross seems to echo these sentiments (Housing Wire via Naked Capitalism):
“The price of housing needs to be cleaned out. The Obama administration could right-size every underwater home and reduce principal to fit the current market value of the home. If they are going to deal with it they have to deal with it in a severe way,” Ross told HousingWire. “They also really need to consider all borrowers who are underwater, and not just the ones that have gone into default.”

The Homeowner Affordability and Stability Plan does some of that, but doesn’t go far enough, Ross suggested. “The have to reduce the principal amount of loans, not just nonperforming loans, but also performing ones,” he told CNBC. “Why should a guy who’s not paying benefit, while some poor citizen who’s struggling to make the payments gets stuck with the mortgage?”

Petroleum Supplies

This was supposed to post yesterday... whoops.

Reuters reports:

Oil rose to over $42 a barrel after the U.S. Energy Information Administration said gasoline supplies declined by 3.4 million barrels, or more than the expected drop of 100,000 barrels in the week to Feb. 20.

"Demand is coming back," said Tom Bentz, analyst at BNP Paribas Commodity Futures in New York.

Seems like an awful large amount of optimsim for another bull market for oil after the beating it has already taken, especially when the longer trend still points to an increased supply for both oil and gas since last Fall.

Source: EIA

Good News Alert! Australia May Show Positive GDP

We had to travel around the world for some good economic news, but here it is. Business Day reports:

Companies ramped up plans for spending in the final months of last year, providing enough momentum for the economy to trigger a fresh look at 2008 growth estimates.
Business spending expectations for the three months to the end of December skyrocketed 6%, to $24.8 billion, seasonally adjusted, from an upwardly revised 1.6% rise in the September quarter, the Australian Bureau of Statistics said.

''This will provide vital support to fourth quarter GDP growth,'' said ANZ economist Katie Dean. ''Australia may well avert a negative read.''

''Today's data will prompt forecasters to rush to upgrade expectations for fourth quarter GDP growth,'' she said.


Wednesday, February 25, 2009

Japanese Exports Almost Halved in 12 Months

Bloomberg via Naked Capitalism:

Japan’s exports plunged 45.7 percent in January, resulting in a record trade deficit, as recessions in the U.S. and Europe smothered demand for the country’s cars and electronics...

Gross domestic product shrank at an annual 12.7 percent pace last quarter, the most since the 1974 oil shock, and economists predict the slump will drag into this quarter. Toyota Motor Corp., Sony Corp. and Hitachi Ltd. -- all of which forecast losses -- are firing thousands of workers, heightening the risk the recession will deepen.

“The drop in exports is unbelievably bad,” said Yasuhide Yajima, a senior economist at NLI Research Institute in Tokyo. “The pressure on companies to cut jobs and investment is rising and that will make the recession deep and protracted."

Loan Modifications for Dummies

Ahead of what is sure to be an ugly existing homes release, lets see how loan modifications can work (albeit in a highly simplified world without securitized loans and continually falling home prices). For both the homeowner, who gets to keep the house / retain a portion of equity, and the lender, that does take a haircut, but gets paid back more than after a distressed sale of the collateral in a foreclosure, it can be a win-win.

How? Lets take a look:

In December, 2008 the median home price in the western region of the U.S. went for $213k, down more than 30% from a year earlier. This wiped out all the equity of the homeowner if they put down 20% one year prior. At this point it appears the homeowner eats most of the loss, but the problem is the homeowner is likely to "walk away", leaving the outcome to the lender's foreclosure process. Assuming a 30% haircut selling in this distressed market, the lender ends up eating a huge portion of their original loan.

While that story is now well known, the lender does have the opportunity to modify that loan amount. Assuming a $55,000 reduction in the loan to put the homeowner $10,000 back in black (of which a portion is from losses the lender expects simply from the market downturn), the homeowner has the incentive to stay and the lender isn't force to sell the asset in a distressed market. This in turn creates more value for the existing owner of the loan.

Again, if only life were so simple...

What a Difference a Day Makes... Financial Firms Rocket

Bloomberg reports:

Federal Reserve Chairman Ben S. Bernanke rejected the idea that officials plan to use reviews of banks’ balance sheets as a pretext for government takeovers of the nation’s largest lenders.

The Treasury will buy convertible preferred stock in the 19 largest U.S. banks if stress tests determine they need more capital to weather a deeper-than-forecast recession, Bernanke told lawmakers in Washington today. The shares would be converted to common equity stakes only as extraordinary losses materialize, he said.

“I don’t see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just isn’t necessary,” Bernanke said at the Senate Banking Committee hearing.
And financials roared....

Source: Yahoo

Tuesday, February 24, 2009

Consumer Confidence Plunge

Eastern Europe at a Tipping Point

I was just about to release the following post when I saw FT's Alphaville reports Latvia has been downgraded to "junk" by S&P. Here is the background I planned to release...

The Financial Ninja details:

"Latvia’s four-party coalition government, facing the steepest economic decline in the European Union and plunging public opinion ratings, resigned after two parties called for Prime Minister Ivars Godmanis to step down.

East Europe has been battered by the global financial crisis, which is curbing demand for their exports while shutting off credit and investment. Gross domestic product in Latvia, which has had 14 governments since breaking from Soviet rule in 1991, contracted 10.5 percent in the fourth quarter. The country followed Ukraine, Serbia and Hungary in seeking international aid when it lined up 7.5 billion euros ($9.5 billion) in loans from a group led by the IMF in December."

For those in the economic blogosphere, this isn't a surprise. John Hempton at Bronte Capital posted Hookers that Cost Too Much last summer, detailing the struggles Latvia was going to face, based on (you guessed it) the price of hookers:
When travel to Latvia opened up it was eye-popping for an awful lot of British lads. Here was a country where the women were Baltic Beauties – and poor. To the London lads this was bucks party heaven. It became more so when Ryan Air put on a Friday evening flight from London to Riga. Ryan Air even tried a Riga-Shannon route to service the Irish lads. The locals even got to classifying all Brits as Ryanair sex tourists as this club review shows.

Well due the crazy exchange rate the bucks parties got too expensive. I am not going to lead your round the internet to stories about over-priced hookers – but the bucks parties are moving to Prague. The Shannon-Riga flight has been cancelled. Ryan Air has recently announced a Friday night Birmingham to Prague flight.
This was just one example showing that the Latvian currency was too strong, but it allowed John to realize Latvia (and Eastern Europe in general) had all the makings for a severe recession:

Eastern Europe is full of vulnerable currencies. Most of the countries have fixed their exchange rate to the Euro (hoping I guess for Euro membership at some stage) and have massive current account deficits.

Latvia is particularly bad. The exchange rate is pegged (as per this page from the central bank of Latvia). The current account is enormous, almost 25% of GDP. There is no doubt whatsoever this exchange rate is not sustainable. Not close.

With a currency too strong, exports get crushed, but as of now they have been unable to devalue their currency due to pressure from European banks who have made huge amounts of Euro denominated loans to these eastern European countries (hence the widening of CDS spreads). A devaluation of their currency would mean the value of the loans skyrocket in local currencies, removing almost any possibility that they will be repaid. It seems we are now at the tipping point... that point when internal pressures become too strong, which is exactly what is happening now in Latvia. Back to the Financial Ninja:

Street violence is just street violence... until it isn't. This occurs when the people finally coalesce around a new leader and a new ideal. Then they unceremoniously overturn in it's entirety the old order... with all the chaos and violence that that entails.

"The deepening economic crisis has sparked the worst street violence since independence, when hundreds rioted in Riga’s old city, smashing windows and battling police after a peaceful anti- government demonstration of about 10,000 people on Jan. 13 had dissolved."

Case Shiller Price Index (December)

For more information on what the Case Shiller Price Index is and why it may be an important measure, check out this old post.

The Case-Shiller Price Index (an adjustment to CPI) turned severely negative year over year, down 5% from December 2007 as home prices, a global slowdown, and the reversal in energy prices severely impacted price levels.

While, here is a graph of the difference...

Source: BLS / S&P

Where's the Equity Premium? Part III

I've previously compared the S&P to the Barclay's Aggregate Index going back 19 years and before that to the BCAG over the previous 12 years. Now, we have the S&P vs. the Barclay's Government Index over the past 20 years....

Source: Barclay's

Monday, February 23, 2009

Stairway to....

Source: Yahoo

Equities vs. Housing... A Function of the Baby Boomers?

In response to my post Help Jake Understand: Home Prices in Terms of Equity (chart below) there were a lot of great explanations.

My personal favorite was by 'anonymous' poster:

It's not a reemergence of housing, but a death of equities, which can only get worse as the baby boomers age. A cohort reaching retirement age in bubble-level numbers is going to flee equities with a passion.

This started a little earlier than it was supposed to because of the collapse of the housing bubble, but the trend is written in the demographics.
In other words the chart shows equities beginning their outperformance in the mid to late 1960's (when baby boomers were reaching the investment stage of their life) and housing beginning to outperform when these baby boomers were began to leave the equity market in large numbers to invest in less risky fixed income and home #2 (the demand for fixed income may have contributed to the cheap levels of financing as demand for fixed income lowers required rates and home #2 and/or #3 were vacation homes for these boomers). While all of this is highly theoretically, very big picture, and all a guess, it makes sense to me...

This would explain why even with the recent mortgage bust, equities are still underperforming relative to the housing market... equities are the much more liquid of the two and you only sell what you can. He or she goes further:
Take an idealized version of the baby boom: a pimple curve with a baseline of 1, a start point of 1945 and an end point 20 years later at 1965. Slide this curve forward by about 20 years: an age where the first boomers really need houses. That puts the start of the pimple at 1965, ending at 1985. Slide another version of the curve forward by 45 years: an age when the boomers have real money to invest in the market. That puts the start of the pimple at 1990, ending at 2010. Let the two curves represent demand: the first for houses, the second for equities.
I took that idea and created the chart below. The blue line shows the ratio between stocks and housing from 1968-1988, while the red line shows the same ratio with the x-axis (i.e. the inverse of the ratio... in other words housing over equities) from 1988-2008.

Interesting stuff...

Top Ten Banks.... Then and Now

Top ten banks by market cap; then (October 31st, 2007) vs. now (February 20th, 2009):

By Rank

Maintaining Same Color

And this is AFTER the billions of dollars in government "investments".

Source: WSJ

Friday, February 20, 2009

EconomPics of the Week (2/20/09)

Bottomless Money Pit
Mortgage "Moral Hazard" Plan
How Much is a $2.5 Trillion Deficit?
Help Jake Understand: Home Prices in Terms of Equity
$500 Billion Sinkhole
GM Bailout... Another Sinkhole
Federal Obligations > Annual Global Economy

Economic Data
CPI (January)
Philly Fed Index... "It Can't Get Worse" Edition
Leading Economic Indicators (January)
PPI January: Up Month over Month; Down Year over Year
The Case for an Auto Bailout
Industrial Production / Capacity Utilization Freefall
When Will the Economy Hit Bottom?
Empire Manufacturing Survey
Japanese Economy Crumbling

Bank Leverage Ratios... GE Boomin'
What Taxpayers Got for $45 Billion

Wealth / Asset Prices
Oil / Gas Divergence
Median Family Net Worth Down ~1/3
Import / Export Prices

High Yield "Time Bomb"

FT reports:

The amount of speculative-grade debt maturities will increase in the next three years, Moodys said, from $26bn in 2009, to $44bn in 2010, and $120bn in 2011.

How Much is a $2.5 Trillion Deficit?

James Quinn at Financial Sense.

The annual deficit for 2009 is now estimated at between $2 trillion and $3 trillion give or take a few hundred billion. These figures seem incomprehensible to the average person on the street. Some perspective is in order. If we use $2.5 trillion as the estimated deficit that means:

*We’re adding $6.85 billion per day to the National Debt
*We’re adding $285 million per hour to the National Debt
*We’re adding $475,000 per minute to the National Debt

Have a great $14 Billion weekend everyone!

Source: Financial Sense via Infectious Greed

Help Jake Understand: Home Prices in Terms of Equity

The last time I posted a "Help Jake" I got a TON of great replies (I'll admit that topic had more of a global economic appeal), but lets see what you all have to say?

First, what is it? It's the median home price in terms of the number of S&P 500 shares required to buy it, going back to 1968...

Explain away...

Source: S&P / NY Times

CPI (January)


On a seasonally adjusted basis, the CPI-U increased 0.3 percent in January after declining in each of the three previous months. The energy index climbed 1.7 percent in January, its first increase in six months, but it was still 31.4 percent below its July 2008 peak level. Within energy, the gasoline index rose 6.0 percent in January after a 19.3 percent decline in December. However, some energy components continued to decline; the fuel oil index fell 3.7 percent in January and the index for natural gas declined 3.6 percent.

Note: BLS claims 0% CPI year over year, but using their figures and weights, it comes out to 0.4% (used above)... thanks for the great data BLS! And housing up year over year? Give me a break...

Philly Fed Index... "It Can't Get Worse" Edition

Interest Rate Roundup reported:
The Philadelphia Fed index plunged to -41.3 in February from -24.3 in January. That was far worse than the average forecast for a reading of -25 and the lowest reading since October 1990 (-48.2). Subindices tracking new orders, employment, and shipments all fell sharply.

Though in a bit of a silver lining, the index measuring expectations about the next six months rose to 15.9 from 7.4 a month earlier. That's the highest level since September.

Thursday, February 19, 2009

Leading Economic Indicators (January)

RTT News reports:

Thursday morning, the Conference Board released its report on leading economic indicators in the month of January, showing that its leading indicators index unexpectedly showed a notable increase compared to the previous month. The report showed that the leading indicators index rose 0.4 percent in January following a revised 0.2 percent increase in the previous month. Economists had expected the index to come in unchanged compared to the 0.3 percent increase originally reported for December.

While the leading indicators index rose for the second consecutive month, the Conference Board noted that the November and December values were revised down as new data for manufacturers' new orders became available.

The bigger than expected increase by the index in January reflected positive contributions from real money supply, the interest rate spread, consumer expectations, manufacturers' new orders for non-defense capital goods, and manufacturers' new orders for consumer goods and materials.

What Taxpayers Got for $45 Billion

By the fourth quarter of 2008, only Citigroup's Global Wealth Management Group was making any money (though those $29mm in earnings are too small to even see in the chart below).

PPI January: Up Month over Month; Down Year over Year

BLS reports:

The Producer Price Index for Finished Goods rose 0.8 percent in January, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This increase followed declines of 1.9 percent in December and 2.5 percent in November. At the earlier stages of processing, the decrease in prices for intermediate materials slowed to 0.7 percent from 4.2 percent in the prior month, and the index for crude materials declined 2.9 percent after dropping 5.3 percent in December.

Year over Year

Month over Month

Source: BLS

The Case for an Auto Bailout

In taking a closer look at yesterday's industrial production release, I pulled all the data, and sorted those industries showing the largest drop in production over the past 7 months (7 months is the furthest back the Federal Reserve details at this level).

Not surprising, the largest drop in production was within the auto industry. What did surprise me (it shouldn't have) was how sharp the decline was.

While I am not saying a bailout is the answer, I am not sure how any business would be able to survive when production goes down this much, this fast.

Source: Federal Reserve

Industrial Production / Capacity Utilization Freefall

Details of the state of U.S. industrial production was released yesterday and it wasn't pretty. Bloomberg reports:

U.S. industrial production fell in January for the sixth time in seven months and more than forecast as companies reduced manufacturing amid a worldwide slowdown in demand.

Output at factories, mines and utilities dropped 1.8 percent, after a revised decrease of 2.4 percent in December that was more than previously reported, the Federal Reserve said today in Washington. Car and truck assemblies fell to a record.

More bothersome to me were the figures detailing capacity utilization as compared to recessions and peaks of the past 20 or so years, as well as average over the 1972-2008 time frame (unfortunately they didn't include figures for recessions of the 1970's or 1980's).

The Federal Reserve release did share this frightening tidbit:
The factory operating rate moved down 1.7 percentage points, to 68.0 percent, the lowest rate of utilization since this series began in 1948.
While Bloomberg detailed:
Capacity utilization, or the proportion of plants in use, fell to 72 percent, the lowest since February 1983, from 73.3 percent in December.
Seems awfully deflationary to me (i.e. NO DEMAND). We'll see what this morning's PPI release shows there...

Source: Federal Reserve

Wednesday, February 18, 2009

Mortgage "Moral Hazard" Plan

Click for larger table

GM Bailout... Another Sinkhole

Yves titled her post on the latest and greatest GM bailout 'Black Hole Alert', which reminded me of this chart I posted back in August.

Looks like I'll need to update and extend the chart...

Bank Leverage Ratios... GE Boomin'

Option ARMageddon via Infectious Greed reports:

As you can see, Morgan Stanley and Goldman have cut their leverage significantly. Citi is in worse shape. BofA and Chase are treading water. GE is the scary one.

December 30th’s was the first balance sheet the banks have published since they received TARP capital. Common shareholders are still in a first-loss position relative to the government, however, because TARP investments were in the form of preferred shares. So I have backed these out in order to arrive at the tangible leverage ratios above.

One BIG caveat with this calculation is that these companies carry “other assets” on the balance sheet, some of which might be intangible in nature. Also, each has significant risk exposure via off-balance sheet entities. The point is, even though these leverage calculations seem high, they actually understate the risks facing common shareholders…

Import / Export Prices

The latest BLS release for U.S. Import and Export prices shows a rebound from the deflationary pressures we've seen since the turmoil began in early Fall:


Import prices fell 1.1 percent in January and 23.4 percent over the past six months. For the sixth consecutive month, petroleum prices and nonpetroleum prices decreased, falling 2.4 percent and 0.8 percent, respectively, in January. However, prices for both overall imports and petroleum decreased at a smaller rate in January than in each of the previous five months since prices last rose in July.

Export prices rose 0.5 percent in January after declining in each of the previous five months. The increase was driven by a 6.2 percent rise in agricultural prices as nonagricultural prices were unchanged. The rise in agricultural prices followed decreases in four of the previous five months. Higher prices for corn, soybeans, and wheat accounted for the increase in January. Despite the January increase, agricultural prices fell 9.7 percent over the past 12 months. Nonagricultural prices recorded no change in January after falling in each of the previous five months.

When Will the Economy Hit Bottom?

The average recession dating back to the 1850's has been 17 months in length. With the current recession already at 14 months in length and growing, bottom callers (i.e. the average economist) are predicting things will turn around by Q3 2009. If this occurs, then this recession is... just "average" (hard for me to believe).

On the other hand, the five worst recessions since 1850 have averaged 40 months in length. If this recession plays out in a manner more consistent with one of the worst five since 1850, look for the economy to bottom in late 2010 or early 2011.

So which is it... Q3 2009 or Q1 2011? In general, it is just one big guessing game. As the WSJ details, only one "top economist" in their 2008 survey predicted GDP would contract in 2008, so how can we expect them (or anyone) to know exactly when the economy will turn.

The bulk of prognosticators were pessimistic going into 2008, but they weren't pessimistic enough. The economy would slow, they thought, but only Mr. Hatzius thought it would contract. He also foresaw a steep increase in the unemployment rate, moderate inflation and a Federal Reserve that would be busy cutting rates.
Source: NBER

Tuesday, February 17, 2009

Oil / Gas Divergence

The price of oil has come crashing down in recent weeks, but the price of gas hasn't followed (great chart of this is over at Bespoke).

Why? According to AP Energy Writer John Porrettoe:

The price of gas is indeed tied to oil. It's just a matter of which oil.

The benchmark for crude oil prices is West Texas Intermediate, drilled exactly where you would imagine. That's the price, set at the New York Mercantile Exchange, that you see quoted on business channels and in the morning paper.

Right now, in an unusual market trend, West Texas crude is selling for much less than inferior grades of crude from other places around the world. A severe economic downturn has left U.S. storage facilities brimming with it, sending prices for the premium crude to five-year lows.

But it is the overseas crude that goes into most of the gas made in the United States. So prices at the pump will probably keep going up no matter what happens to the benchmark price of crude oil.
Hey, at least we're back to the longer term mean.

Source: EIA

Empire Manufacturing Survey

Bloomberg reports:

Manufacturing in New York contracted in February at the fastest pace on record, signaling the recession that began more than a year ago is intensifying.

The Federal Reserve Bank of New York’s general economic index fell to minus 34.7, the lowest level since records began in 2001, from minus 22.2 percent in January, the bank said today. Readings below zero for the Empire State index signal manufacturing activity is shrinking.

Source: New York Fed

Median Family Net Worth Down ~1/3

Using data from the Survey of Consumer Finances, Baseline Scenario attempts to compute a "composite picture of the median family":

For each asset or liability, I include it if more than 50% of the families in the middle income quintile have it; in that case, I record the median amount held by families who hold that asset. This isn’t the median family, but we might call it a “typical” family.
Click for larger image

What this information shows is:
The weakening of household balance sheets (fewer assets, same liabilities, less net worth, more anxiety) has likely had a significant effect in depressing consumption, which has been the single largest factor in our recent decline in GDP.

Monday, February 16, 2009

$500 Billion Sinkhole

Paul Krugman jumps on the nationalization train (similar thinking as my post The Case for Nationalization). First he takes a look at expected future losses, which according to Dealbook adds another $520 billion in estimated losses from just six banks:

The future losses for some banks are staggering by CreditSights’ estimates: Wells Fargo, $119 billion; BofA, $99 billion; JPMorgan, $124 billion; Citi, $101 billion; Goldman Sachs: $47 billion; Morgan Stanley, $34 billion.

Then Paul jumps into his argument:
Given these numbers, it’s extremely hard to rescue these banks without either (a) giving a HUGE handout to current stockholders or (b) effectively taking ownership on the part of we, the people. Of these, (a) would be politically unacceptable as well as bad policy — but the Obama administration isn’t ready to go for (b), because it’s not in our “culture”.

Hence the perplexity of policy. Our best hope right now is that the “stress test” will make (b) inevitable — that Treasury will declare itself shocked, shocked to find that the banks are in such bad financial shape, leaving government receivership unavoidable.
Paul focuses just on the big four "money centers" (leaving off Goldman and Morgan Stanley). I would argue these "formerly known as Investment Bank" entities have a similar need for capital. As Yves points out in a post at Naked Capitalism:
Now that Goldman and Morgan Stanley are bank holding companies, they are wildly out of compliance with regulatory capital requirements (investment bank, under SEC jurisdiction, were permitted much higher levels of gearing).

Federal Obligations > Annual Global Economy

Worldnetdaily reports:

The real 2008 federal budget deficit was $5.1 trillion, not the $455 billion previously reported by the Congressional Budget Office, according to the "2008 Financial Report of the United States Government" as released by the U.S. Department of Treasury.

The difference between the $455 billion "official" budget deficit numbers and the $5.1 trillion budget deficit cited by "2008 Financial Report of the United States Government" is that the official budget deficit is calculated on a cash basis, where all tax receipts, including Social Security tax receipts, are used to pay government liabilities as they occur.
I believe I correctly backed into that $5.1 Trillion number below (drop me a comment if anyone interpreted this differently).

Click for larger chart

More frightening, the article details the growing federal obligations as calculated by John Williams at Shadowstats:
Calculations from the "2008 Financial Report of the United States Government" also show that the GAAP negative net worth of the federal government has increased to $59.3 trillion while the total federal obligations under GAAP accounting now total $65.5 trillion.

How large a figure is this? More than the size of the global economy, estimated at $54 Trillion for 2007.

Source: ShadowStats / Department of Treasury