Monday, August 31, 2009

Eurozone CPI

Finance Markets reports:

Eurostat has revealed that the CPI in the euro zone declined in August by an annual rate of 0.2% and followed the record 0.7% fall in July.

Analysts were encouraged by the slower rate of decline in consumer prices and Nick Kounis of Fortis commented: “We think that the negative impact of energy prices is starting to unwind. This process has much further to go and it is likely to push inflation back into positive territory in the final months of this year.”

“The report supports the ECB in its view that the recent period of negative annual inflation rates will prove to be a short-lived phenomenon that has no implications for monetary policy,” added Mr Kounis.

Lower energy and food prices have driven inflation down but a risk of deflation is highly unlikely according to many analysts.

Source: Eurostat

Chicago PMI Poised to Show Growth in September

Marketwatch details:

Manufacturing activity improved for the third straight month in the Chicago region in August. The Chicago purchasing managers index rose to 50% in August from 43.4 in July, according to a survey of corporate purchasing managers released Monday. This is just on the threshold of growth and the highest reading since last summer. Readings over 50% indicate overall business expansion.

The Chicago PMI is considered a leading indicator to the national Institute for Supply Management manufacturers' survey to be released on Tuesday. The median forecast for ISM manufacturing composite is for an increase to 50.5 from a July reading of 48.9. The ISM index has not been above 50 since January 2008 at the beginning of the recession.

Source: LSE

The Nikkei (in USD) vs the S&P 500 (not in USD)

There is a chart floating around the blogosphere (Zerohedge, Infectious Greed, Felix Salmon, Henry Blodget, to name a few) from Bloomberg, which shows why the 'S&P 500 May Surge 40% in Duplication of Japan'. Before we dive in, lets first take a look at a chart of the Nikkei since 1984, and the S&P 500 since 1994 (i.e. the 10 years delayed aspect we'll detail later).

Nothing special. No fit, thus no way (yet) to claim the S&P 500 is ready to jump another 40%. So how do we convert this into a chart showing a 40% rally is on the way. Felix Salmon details:

So it seems that the BofA analysts who came up with this chart first converted the Nikkei to dollars, only to then convert the S&P 500, which was in dollars all along, out of dollars. Hm.

If the intention was to strip out the local currency, then why did they convert the Nikkei to dollars, rather than the same basket of currencies they converted the S&P 500 to? Probably because the relationship would have been non-existent. But doing so makes for the chart seen here:

And the details:
The Nikkei doubled between October 1998 and April 2000 in dollar terms, as the chart illustrates. The S&P 500 has risen 34 percent since March when the Dollar Index, a measure of the dollar against currencies in six major U.S. trading partners, is factored in.

A “melt-up” rally in the U.S. may be triggered by central bankers keeping interest rates near record lows, an economic recovery or an undervalued dollar, Bank of America strategists wrote in an Aug. 26 report.
The analysts claim (via Henry Blodget) that:
The consensus is usually wrong and that it is always smart to consider the alternatives. And this is certainly one of them.
Good point. Alternatives should be considered, but those alternatives should be fully understood. But, in analyzing why the relationship between the Nikkei (in USD) following the Asian crisis / during the Internet Bubble TO the S&P 500 (in a broad currency basket) following the subprime / financial / systemic crisis is strong, these same analysts made the following statement:
We do not know precisely why this relationship has worked.
Which is fine if "precisely" didn't mean "at all". But, what hasn't been mentioned regarding the Nikkei within five years (in both USD or Yen) of this supposed 40% rally... new lows.

Job Destruction isn't the Problem

Andy Harless (hat tip Credit Writedowns) with details of the latest BLS Employment Dynamics Summary:

Overall (at least during the first four quarters of the recession, up through the end of 2008, for which we have the relevant data), there weren’t an unusually large number of total jobs being destroyed.

But...but...but...haven’t we been hearing about large numbers of job losses month after month since the recession began? Sort of. We’ve been hearing about large numbers of net job losses. That is, the number of jobs that have been lost has been a lot more than the number that have been created. And a lot of job losers have ended up collecting unemployment insurance for a long time, sending the figures for continuing claims up to records, instead of getting new jobs. But the gross number of jobs being destroyed has not been unusually large. In fact, relative to the overall level of employment, job destruction was happening at a faster rate during the boom of the late 1990s than it was during the last quarter of 2008.
As can be seen below, job contraction and closings are both at levels seen throughout the 1990's, but openings and expansion are both substantially below levels of that same time period.

Back to Andy with the tidy conclusion:
If you lost a job in 1999, you weren’t actually all that atypical, but it wasn’t a big problem, because typically, you could find a new job fairly easily. If you lost a job in 2008, you were (typically) out of luck.
Source: BLS

Sunday, August 30, 2009

Regime Change in Japan

Bloomberg details the massive victory of the Democratic Party of Japan:

Hatoyama, 62, led the DPJ to win 308 seats yesterday in the 480-seat lower house, public broadcaster NHK said, ousting the party that ruled Japan for all but 10 months since 1955. The DPJ gained control of the upper house two years ago.
And the reason for the change:
Voters have given Hatoyama a mandate to switch priorities from aiding the companies that built Japan’s $4.9 trillion economy to helping families cope in a society where almost a quarter of the population will be over 65 by 2014. To encourage people to have children, the DPJ says it will increase child support and lower education costs, paying for this by slashing outlays on roads, bridges and public works.

“The whole idea of people rather than concrete, and, ‘Let’s be nicer to the Japanese population,’ could be immensely positive in the long term,” said Philip Whittome, who manages Japanese stocks at Investec Asset Management in London. “The election might lead to some changes in how Japan is run in ways that are underappreciated by the foreign investment community.”
While that may indeed have positive economic implications in the long run, I'm not sure how this will transform the Japanese economy in the short-run. An economy that according to this morning's sales report shows that wholesale sales dropped 30% year over year in July (greater than June's 28.7% year over year change).

In other words, Yukio Hatoyama's honeymoon may be short:
Economic reports indicate the expansion that began last quarter may already be in danger: the jobless rate rose to a record 5.7 percent in July, factory output growth slowed and household spending dropped the most in five months. That leaves Japan “more dependent on exports that it’s ever been,” said Hugh Patrick, a professor at Columbia University in New York.
Source: METI

Friday, August 28, 2009

EconomPics of the Week (8/28/09)

Vix and More fans that have been directed here... check out the latest EconomPics of the Week (i.e. not last weeks news) here:

Economic Data

Domestic (US)
Where's the Investment?
Another Jobless Recovery, Even with a Deficit Spike
Home Prices Continue Rebound
North Dakota or Bust
The Wage Freefall
Michigan Consumer Confidence Stalls
New Home Sales in Perspective
It's Good to Work for the Government
The Futures So Bright...
European New Orders Above Forecast
Durable Goods Jumps
Q2 GDP Remains at 1%... Breakdown Shifts

Japan Struggling
The German GDP Recovery

Almost 1/3 of Banks Rated F
The Mass Layoff Non-Seasonal Disconnect

Top Holders of Commercial Real Estate Loans
Since the Market Bottomed...

D.C. Hates Cash for Clunkers Tarantino Scores Big

Chicago Fed National Activity = Gettin' There

Marginal Thoughts (a Chicago Fed based blog by Cindy Ivanac-Lillig) explains:

The CFNAI is a weighted average of 85 indicators of national economic activity. The CFNAI measures how far above, or how far below, our historical long-term growth rate we are performing. It has an impressive track record of correlating to quarterly real GDP growth (which makes it something of a coincident indicator-- an indicator that shows the current temperature of the economy).
Indeed. The chart below shows the three month rolling average of the Chicago Fed National Activity Index vs. the QoQ change in GDP.

And while Reuters reports that:
The Chicago Fed targets a level of 0.20 in the three-month average to suggest a recession is over.
a much lower figure than 0.20 appears necessary to show "growth" on a quarter over quarter basis (what the chart indicates it that the average quarter over quarter growth over the past 40'ish years is 1% quarter over quarter or ~4% annually).

If one were to expect real growth in the 2-3% per year (0.50-0.75% QoQ) on a forward looking basis, expect the Chicago Fed National Index to remain negative for some time to come. That said, based on July's "jump" in the CFNA, expect GDP growth a rebound above 0.00% in Q3.

Source: Chicago Fed

The Wage Freefall

Tom Lindmark commented (in response to my post on private and government wages):

I thought the chart on total compensation was even more interesting.

I agree. This is not only more interesting, but unfortunately also more frightening.

Source: BEA


Reader Dan Buckstaff makes the keen observations that:
This appears to be some kind of nominal number, rather than real wages. There's no way that real wages gained that much per year in the 1970s. And the annual gain since 1980 reflects decreasing inflation.

Nonetheless, the recent plummet is alarming, especially relative to an indebted consumer.
And he is absolutely correct (and I should have made that more clear). We have seen real declines of similar magnitude during the 1970's, but never in nominal terms. Below is a chart real wages over that same time frame.

The good news is that in real per capita terms, it doesn't look as bad. The bad news is that in a nation as indebted as the U.S., nominal is important. Not in terms of earnings power for new purchases, but to service existing debt loads.

Michigan Consumer Confidence Stalls

ABC News reports:

U.S. consumer confidence fell to its lowest in four months in August on worries over high unemployment and dismal personal finances, though the mood managed to improve from earlier this month, a survey showed on Friday.

The Reuters/University of Michigan Surveys of Consumers said its final index of confidence for August fell to 65.7 from 66.0 in July. That was the lowest since 65.1 in April but above economists' expectations for 64.5 and also higher than this month's preliminary reading of 63.2

"Confidence rebounded in late August as consumers increasingly expected improved conditions in the national economy even as they reported the worst assessments of their finances since the surveys began in 1946," the report said.

It's Good to Work for the Government

Cato at Liberty with the details:

In 2000, the average compensation (wages and benefits) of federal workers was 66 percent higher than the average compensation in the U.S. private sector. The new data show that average federal compensation is now more than double the average in the private sector.

In 2008, the average wage for 1.9 million federal civilian workers was $79,197, which compared to an average $49,935 for the nation’s 108 million private sector workers (measured in full-time equivalents). The figure shows that the federal pay advantage (the gap between the lines) is steadily increasing.

And with much less volatility (which should make the case that government workers should be paid less).

As the chart above indicates, the gap between the two should explode when 2009 figures are released.

Source: BEA

Thursday, August 27, 2009

Japan Struggling

Bloomberg reports:

Japan’s unemployment rate rose to a record 5.7 percent in July and deflation worsened, dealing a blow to Prime Minister Taro Aso on the eve of an election that polls indicate his ruling Liberal Democratic Party will lose.

The jobless rate surpassed the previous worst of 5.5 percent last seen in April 2003, the statistics bureau said today in Tokyo. Economists surveyed by Bloomberg predicted an increase to 5.5 percent from 5.4 percent in June. Consumer prices dropped an unprecedented 2.2 percent from a year earlier.
Unprecedented is right. Japan is experiencing full blown deflation with prices of 9 of the 10 major groups down year over year.

And here's the jobless rate. As can be seen, the 5.7% record jobless rate is hiding the relative struggles of the younger demographic.

Which may cause profound leadership changes. Back to Bloomberg:
Yukio Hatoyama’s Democratic Party of Japan may end the LDP’s 54-year grip on power as jobs vanish in the wake of the country’s worst postwar recession. Household spending slid 2 percent last month, indicating Aso’s cash handouts as part of a 25 trillion yen ($267 billion) stimulus plan are failing to spur demand among consumers whose wages are falling.
Source: Stat.Go.JP

Where's the Investment?

I have heard from a number of readers that the lack of consumption in the current environment is not as troubling as one might expect. The thought is that rather than consume, individuals are increasing their level of savings, which is just a form of future consumption (and the opportunity to consume MORE later outweighs the benefit of consuming LESS now).

Which makes sense, except the data does not support this theory. Looking at the data, we see a HUGE decline in investment (and thus a HUGE decline in savings if you assume I = S). How large? Investment is down massively from its 2005 peak across the board and is now below the level of investment seen in Q2 1997.

Twelve years of growth in investment gone? What is happening? Well, the savings that has been reported is not occurring as the numbers imply. Savings is calculated as the difference between income and consumption. What is missing is interest payment / debt repayment. As described by reader Angry Saver in a previous post:

The C+I... formula is simplistic and rests on flawed assumptions. It is an accounting identity that does not always reflect the facts in the real world. End demand by consumers is the key. When end demand shrinks, so does the pie. When future income shrinks, so does the pie. Adding gov't debt will create false demand and may keep the debt system from imploding, but it will also limit future end demand.

(We've) spent too much based on misperceptions of future wealth (wall street lies). Much of the so-called investment/savings were borrowed from abroad and were actually malinvestments as they exceeded ability to pay and were not based on end demand. The bills for all that excess/mis-spending are now due. A rude awakening. Debt repayments and debt defaults at the household level will accelerate.

Despite propaganda to the contrary, U.S. consumers are now realizing that their future incomes will be less than previously thought. Lower savings/investment is to be expected as our economic future will be smaller than previously assumed.

Source: BEA

Q2 GDP Remains at 1%... Breakdown Shifts

Consumption, Government Spending, and Net Exports were better than first reported, but was offset by a larger decline in Investment. Marketwatch reports:

The economy contracted four quarters in a row for the first time since the Great Depression of the 1930s. Compared with a year ago, real GDP is down 3.9%. The revisions to second-quarter GDP released on Thursday offset each other. The negative 1% growth rate was identical to the government's first estimate released a month ago. The government revises the data as it gets more complete and accurate information.

Economists surveyed by MarketWatch were expecting GDP to be revised to negative 1.5% annualized.

Source: BEA

Wednesday, August 26, 2009

D.C. Hates Cash for Clunkers

Floyd Norris reports:

Where were all those clunkers that the government paid to get rid of?

A disproportionate number were in New England. The South seems to have not had its share.

The government released the state-by-state figures today for the clunker rebates. Using the latest population estimates from the Census Department, I calculated the per capita dollars sent out by this program to residents of each state.

Leading the pack is New Hampshire, which stands to receive $17.51 a person. Vermont is second at $15.90. Rounding out the top 10 are Minnesota, North Dakota, Maryland, Michigan, South Dakota, Delaware, Virginia and Maine.

The least money went to residents of the District of Columbia, at 11 cents each. That means the average New Hampshire resident received 159 times as much money as the average District denizen. D.C. residents filed for just $67,500 in all. Since the clunker rebates were as much as $4,500 a car, that could translate into just 15 cars.
Click for ginormous chart

Source: DOT

New Home Sales in Perspective

Stabilization? Yes.

But, I'm surprised by the surprise. By that I mean did the market think new home sales would keep declining at that torrid pace? If so, that would have meant negative sales at some point in the near future... not exactly possible.

We're still at levels last seen in 1979. A time at which the U.S. population was roughly 80 million people smaller.

So... good news? Yes, but I wouldn't argue that this means the worst in overall housing is definitely behind us.

Source: Census

Almost 1/3 of Banks Rated F

Chris Whalen (via The Big Picture) provides an update of Institutional Risk Analytics latest bank stress test results. Before we dive in, here is a breakdown of what defines an A+ and an F bank (a full description of all ratings can be found here):

  • A+ Overall: Banks with this grade tend to exhibit strong metrics across the board
  • F: At this degree of stress, one or more of the key elements of the business model has reached failure mode. What concerns exist are probably already public

That comes out to 1.6 A+ banks for every F bank, up from 11:1 just three years back.

Source: The Big Picture

Durable Goods Jumps

WSJ reports:

Manufacturers' orders for durable goods jumped 4.9% last month to a seasonally adjusted $168.43 billion, the Commerce Department said Wednesday. That was the largest increase since 5.4% in July 2007.

Economists surveyed by Dow Jones Newswires had projected a 3% gain in July orders. Overall durable goods orders for June were revised up, estimated to have declined 1.3% instead of the 2.2% drop previously reported.

As can be seen above, the huge jump came from transportation equipment. Cash for clunkers? Nope. Back to the WSJ:
Transportation-related durables climbed 18.4% in July, the biggest gain since September 2006. Orders for commercial planes soared 107.2%, following a 30% drop the previous month.

Source: Census

Another Jobless Recovery, Even with a Deficit Spike

The Office of Management and Budget just came out with their revised Mid-Session Review budget of the U.S. Paul Krugman commented:

What everyone should be focused on is the sheer awfulness of the economic projections. OMB has unemployment still at 9.7% at the end of 2010; still at 8% at the end of 2011. These numbers cry out for a more aggressive economic policy. If that’s politically impossible, we’re really in terrible shape.
True, the projections are for a "recovery" with a 9.7% unemployment rate in 2010 and 8.6% in 2011 (not sure how much of a recovery it will feel like).

But, how much more aggressive should the government be? While Krugman may be right that it isn't enough, it is a solid $2 Trillion more than was previously budgeted. Politico details:
The White House Office of Management and Budget’s Mid-Session Review, an annual update between budgets, put the 10-year deficit estimate at $9.051 trillion, up from the previously projected $7 trillion. The administration had leaked the figure over the weekend.

How large is $9 trillion? Well, it is about $3 trillion more than the cumulative deficit from 1980-2009 (ignores inflation, but a sizable chunk of change none-the-less).


Tuesday, August 25, 2009

The Futures So Bright...

Marketwatch reports:

U.S. consumers' mood brightened considerably in August, as their expectations about the near future were the most optimistic since the recession began, the Conference Board reported Tuesday. The consumer confidence index rose to 54.1 in August from 47.4 in July. Economists surveyed by MarketWatch expected the index to rise to 48.0. Consumer confidence "appears to be back on the mend," said Lynn Franco, head of the consumer research center at the Conference Board. Consumers were a bit more upbeat than they were in July about current economic conditions, but were markedly sunnier about the economy and their own financial situation over the next six months.

Home Prices Continue Rebound

Marketwatch reports:

The prices of single-family homes in 20 major cities rose a seasonally adjusted 1.4% in June and were down 15.4% in the past year, according to the Case-Shiller home price index released Tuesday by Standard & Poor's. Home prices have risen two months in a row in 20 selected cities. Prices rose in 18 of the 20 cities. For the second quarter, the national Case-Shiller index rose 2.9%, the first time in three years that prices have risen.

Source: S&P


Peter Boockvar (via The Big Picture) details why this data may not be as bullish as it first appears.

To highlight the seasonality of housing and its impact on pricing where the spring is the busiest of the year, the S&P/Case Shiller Index, which does not seasonally adjust its m/o/m pricing, has shown its best performance in Q2 in every year except one going back to ‘01. ‘09 is of course not complete but Q2 saw a gain of 1.3% after a drop of 7% in Q1. On the downside in ‘07 and ‘08, Q2 saw the smallest decline and in the boom years in ‘04, ‘05 and ‘06, Q2 saw the biggest rise.

In ‘03, Q3 price gains barely exceeded the Q2 rise while in ‘01 and ‘02, Q2 had the best price increases. The price data seen is welcome relief but it’s that time of the year and the $8000 tax credit and slowing foreclosure rate had its impact. Add to this the still punk Present Situations component in Confidence and it helps to explain again, the lack of belief in the sustainability of recovery that the bond market has relative to stocks.

Top Holders of Commercial Real Estate Loans

As an investor, would you want to be leveraged to loans taken out on this asset? Just saying.

Plenty of additional exposures to pounce on here.

North Dakota or Bust

Daily Vidette reports:

Students who have recently graduated, or are planning to graduate soon, may find relief from the current recession in an unlikely place: North Dakota. Despite the recession, North Dakota has vacant job postings as well as a state budget surplus and has one of the nation’s lowest unemployment rates.

Compared to other states, North Dakota has the lowest unemployment rate in the country, at just 4.2 percent. It also has a $1.2 billion budget surplus, according to an MSNBC article.

The state, which boasts more than 9,000 unfilled jobs, held a series of job fairs in other states that have been decimated by the recession, and even hired a talent recruiter to create an inviting Web site to bring in those looking for work.
According to a report by the U.S. Bureau of Economic Analysis, North Dakota’s Gross Domestic Product grew 7.3 percent since 2007.

Here are all the unemployment rates by state (had to break them up to made them legible). Notice North Dakota ALL the way at the bottom. I don't think I could live there after seeing this though.

Top 25

Bottom 26

Source: BLS

The German GDP Recovery

Bloomberg details:

Government spending lifted Germany out of its worst recession since World War II, a breakdown of second-quarter gross domestic product shows.

Government spending rose 0.4 percent from the first quarter and helped to boost private consumption, which gained 0.7 percent, the Federal Statistics Office in Wiesbaden said today. Construction investment increased 1.4 percent. GDP advanced a seasonally adjusted 0.3 percent, the office said, confirming an initial estimate from Aug. 13. The unexpected return to growth in Europe’s largest economy followed four quarters of contraction.

While consumption and government spending did grow at 0.7% and 0.4% respectively, as we can see below, they are such a small part of German GDP that they really were not the driver of economic growth. The real impact came from an increase in net exports (exports declined, but by a smaller -1.2% QoQ drop than the -5.1% drop in imports).

In other words, it may have been government spending that helped Germany out of recession, but possibly not theirs.

Source: Destatis

Monday, August 24, 2009

The Mass Layoff Non-Seasonal Disconnect

The BLS considers a mass layoff event to be a condition where there are at least fifty initial claims for unemployment insurance originating from a single employer over a period of five consecutive weeks.

The recent (released on Friday) report showed a sizable "drop" on a seasonally adjusted basis. NPR's Matthew Katz' initial reaction was similar to mine:

The decline may just be because we've had so many mass layoffs already that we've exhausted them. Still, there's something about the nosedive that chart is taking that makes me happy. Let's hope it continues.
But looking at the data, it may be just another odd seasonal adjustment that was the cause of the goods news.

As can be seen above, the difference between the seasonal and non-seasonal adjusted figure was a whopping 130,000 jobs. According to the BLS:

Seasonal adjustment is the process of estimating and removing the effect on time series data of regularly recurring seasonal events such as changes in the weather, holidays, and the beginning and ending of the school year. The use of seasonal adjustment makes it easier to observe fundamental changes in time series, particularly those associated with general economic expansions and contractions.

Thus, most seasonally adjustments smooth out month over month changes, while year over year figures of seasonal and non-seasonal data tend to be closely aligned. Not so much the case here. The chart below shows year over year changes of both the seasonal and non-seasonal data. We see the large drop in seasonal data (the "good news" reported), but non-seasonal adjusted data shows year over year mass layoffs at a six-month high.

Source: BLS

Since the Market Bottomed...

A lot of investors have been caught on the sidelines since the March 9th S&P 500 bottom. Forbes details:

Caught flat-footed when U.S. equities rebounded off their March lows, many investors and asset managers prescribed a cautious strategy and waited for a correction to provide another entry point. But now it's more than five months later and the market has had only a few minor stumbles, leaving many on the sidelines with a dwindling amount of time to pretty up their portfolios by year's end.

The good news? As long as that money wasn't sitting in cash (or Treasuries), they probably did pretty well anyhow. The chart below shows returns since that March 9th date for the S&P, a number of fixed income indices, and commodities.

Source: Barclays

Tarantino Scores Big

CNN with the details:

Score a personal best at the box office for Quentin Tarantino this weekend.

"Inglourious Basterds," his revisionist take on WWII starring Brad Pitt, grossed an estimated $37.6 million, besting the reigning box office champ "District 9," and giving beleaguered studio The Weinstein Co. a little financial relief. "Basterds'" opening far surpasses Tarantino's previous best opener, "Kill Bill Vol. 2," which brought in $25 million in April 2004.

More broadly, this is the second largest opening weekend ever for a World War II film (I'm surprised this genre hasn't done better).

European New Orders Above Forecast

RTT News reports:

Eurozone industrial new orders increased 3.1% month-on-month in June, after falling 0.5% in May, the Eurostat said on Monday. The new orders in May was revised from 0.2% fall reported initially. Economists were looking for an increase of 1.7%.

On an annual basis, industrial new orders dipped 25.1% in June, compared with a 30.3 fall in the previous month, revised from 30.1% decline estimated initially. In EU27, industrial new orders dropped 24% annually in June, and it was down 0.4% compared to the preceding month.

Source: Eurostat

Friday, August 21, 2009

EconomPics of the Week (8/21/09)

Asset Prices
Commercial Real Estate: There Goes the (Entire) Bubble
What Goes Down, Must Go Up
Oil Price vs. Reserves
Money Market Funds Yielding Nada... (i.e. ‘Solid’ Returns)
Record Treasury Demand

Economic Data
Household Debt to Net Worth Ratio Spiking
Producer Prices Cliff Dive in July
Credit Continues to Ratchet Tighter
Japan's Odd Q2 Positive GDP Print
Continued Stabilization in Existing Home Sales
Leading Indicators Point to Economic Rebound
Initial Claims No Longer Falling
Empire Manufacturing Index Turns Positive
Good News... Housing Starts Down
German Confidence Jumps
Banks and the Beauty of Cheap Deposits

Putting the Credit Crisis in Perspective

Banks and the Beauty of Cheap Deposits

The WSJ reports:

Domestic U.S. deposits grew nearly $500 billion to a record $7.5 trillion during the year ended in March, according to the Federal Deposit Insurance Corp. And they appear to have kept growing since.
While this is obviously a massive amount of money and a $500 billion increase is nothing to sleep on, the rest of the article makes it feel like this was an outlier event. But as the chart below shows, while overall growth over the past 10 years has been astounding, last year's growth was no outlier.

What this is missing is all the off-balance sheet "cash-equivalent" destruction that took place during 2007-2008. How many individuals were invested in what they thought were highly liquid instruments (ABS ABCP, ARS, etc...) that blew up in the crisis? My guess is that overall "cash-equivalent" securities (which includes these securities, as well as deposits) showed much stronger growth in the 2003-2007 time frame and potentially outright destruction since.

But this part of the article truly confused me...
Crowds of investors sold assets for cash last year as markets tumbled. More recently, a renewed focus on savings has helped swell deposits further.

But overflowing deposits don't necessarily lead to big profits, since big banks have to cover hefty fixed costs for buildings, computers and layers of full-time staff.

In fact, grabbing "wallet share" -- or bankers' speak for winning more of a customer's business -- is so important to profits that banks actually track their progress through various gauges.
Read that second paragraph again:
But overflowing deposits don't necessarily lead to big profits, since big banks have to cover hefty fixed costs for buildings, computers and layers of full-time staff.
Felix Salmon comments:
This makes very little sense. Deposits, to a first order of approximation, are free money. The more free money they have to lend out, the more profits they make. And $7.5 trillion, lent out at an average of say 7%, throws off more than $500 billion per year. It’s hard to spend that kind of money on buildings and computers.
My thoughts exactly. "Buildings", "staff", and "computers"? The expensive bank staff is not fixed, its for the most part variable (the "fixed" staff that performs basic functions doesn't get paid a heck of a lot) and MOST non-financial businesses have these exact same costs. If anything banks have LESS fixed costs relative to any industrial or utility company. Yet these corporations do not have the ability to finance their operations for free (by free I mean 'have you looked at the rate you get on your checking account recently?').

So, I obviously have issues with the article (and I am having a bad day and needed to vent), but the important aspect is $7.5 trillion is a TON of money "sitting" on the sidelines. But like the liquidity sloshing through the financial system, it only matters if / when that cash is put to use. And based on the run up we've seen in deposits over the past decade and desire to maintain a certain amount of wealth in liquid form after the last downturn, I am not so sure we'll see that happen anytime soon.

In which case the ability for banks to finance operations at extremely attractive levels is likely to persist for some time to come.

Source: FDIC

Continued Stabilization in Existing Home Sales

Reuters details:

Sales of previously owned U.S. homes in July notched their fastest pace in nearly two years, an industry survey showed on Friday, the strongest sign yet that housing was pulling out of a three-year slump.

The National Association of Realtors said that sales jumped 7.2 percent to an annual rate of 5.24 million units, the highest since August 2007, beating market expectations for a 5 million unit pace. Sales were at a 4.89 million pace in June.

July's percentage increase was the largest monthly gain since the series started in 1999 and marked the fourth straight monthly advance. The last time sales rose for four consecutive months was in June 2004, the NAR said.


Oil Price vs. Reserves

Reuters details on the reason for Wednesday's jump in oil:

U.S. stocks rebounded and oil closed above $72 a barrel on Wednesday after data suggested a recovery in U.S. oil demand, a surprise for investors who earlier were fretting over a sharp slide in Chinese equities.

A U.S. government inventory report showed a huge drop in crude supplies last week, boosting oil futures by more than $3 a barrel and lifting Wall Street sentiment that had turned dour after a 4.3 percent a drop in the Shanghai Composite Index .SSEC.

But oil reversed early losses after the U.S. Energy Information Administration (EIA) said crude stocks fell by 8.4 million barrels last week, confounding analysts' expectations for a rise of 1.3 million barrels.

"I think these (demand) changes are reflective of an improving economy, but one must be cautious because these changes are versus year-ago weak numbers," said API chief economist John Felmy.
Now, a little perspective. A large decline? Yes. But reserves are still up dramatically year over year.

The relevance? The relationship between the change in these reserves (shown inversely below) and the price has been rather strong going back 4+ years. That is until the global financial markets began their rebound in March.

But where is all that demand coming from? Back to Reuters:
The decline in crude stocks was caused by rising production in refineries but also by a sharp drop in oil imports, with traders holding more inventories in tankers offshore as they await higher prices.
So is it increased end user-demand (which combined with a weak dollar makes a great story as to why oil could/should rise) OR is it just a technical reaction to traders hoarding oil? The answer to that question goes a long way in determining the future directoin of oil.

Source: EIA

Thursday, August 20, 2009


The NY Times has an article titled Woman's Crusade, which makes the case that:

In a large slice of the world, girls are uneducated and women marginalized, and it's not an accident that those same countries are disproportionately mired in poverty and riven by fundamentalism and chaos. There's a growing recognition among everyone from the World Bank to the U.S. Military's Joint Chief of Staffs to aid organizations like CARE that focusing on women and girls is the most effective way to fight poverty and extremism.
And you may think of woman being marginalized as being paid less than their male counter-parts, but in other parts of the world it is much more extreme.
Sen noted that in normal circumstances, women live longer than men, and so there are more females than males in much of the world. Yet in places where girls have a deeply unequal status, they vanish. China has 107 males for every 100 females in its overall population (and an even greater disproportion among newborns), and India has 108. The implication of the sex ratios, Sen later found, is that about 107 million females are missing from the globe today.
The global statistics on the abuse of girls are numbing. It appears that more girls and women are now missing from the planet, precisely because they are female, than men were killed on the battlefield in all the wars of the 20th century. The number of victims of this routine “gendercide” far exceeds the number of people who were slaughtered in all the genocides of the 20th century.

Source: Scaruffi

Leading Indicators Point to Economic Rebound

Marketwatch reports:

An economic recovery may begin soon, and the recession is bottoming out, the Conference Board said Thursday. For its fourth consecutive monthly gain, the index of leading economic indicators rose in 0.6% in July, following an upwardly revised increase of 0.8% in June. Economists polled by MarketWatch were looking for a gain of 0.7% in July.

The interest rate spread was the largest positive contributor, while a reading on consumer expectations was the largest negative contributor. Overall, six of the 10 indicators were positive contributors, three were negative, and one was steady. The six-month growth rate for the overall index hit its highest level since mid-2004, according to the Conference Board.

Initial Claims No Longer Falling

Bloomberg details:

More Americans unexpectedly filed claims for jobless benefits last week, indicating companies are trying to cut costs further even as the economy stabilizes.

Applications rose to 576,000 in the week ended Aug. 15 from a revised 561,000 the week before, the Labor Department said today in Washington. The number of people collecting unemployment benefits the week earlier was little changed at 6.24 million.

Companies may keep paring staff in coming months, albeit at a slower pace, and hiring linked to the government’s recovery effort may not gain speed until 2010. While the unemployment rate dipped last month, economists project it will reach 10 percent by early next year, restraining consumer spending.

“We still have a long way to go,” James O’Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut, said before the report. “We need the labor market to pick up for consumer spending to continue to improve.”

The fact that this figure is not falling is worrisome. My guess (not verified) is that most companies have already laid off the "low hanging fruit", thus this likely reflects laying off individuals that companies were attempting to hang on to (OR businesses failing altogether).

Source: DOL

Record Treasury Demand

Been meaning to get to this...

The worry has been that record issuance would not be met with record demand. Lets put away that concern for the time being. AHN with the detailed:

More long-term U.S. financial assets were in demand by foreigners in June, indicating continued interest in the country's bonds, an official report said Monday.

The Treasury Department report released in Washington showed that net foreign purchases of long-term securities were $90.7 billion, compared to net sales of $19.4 billion in May.

The Treasury International Capital data noted that total foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $71.3 billion.

Total purchases of U.S. government notes and bonds amounted to $100.5 billion, the highest on records since the data collection started in 1977, compared to total selling of $22.6 billion the prior month.
And as the chart below shows, there was very strong demand for Treasuries from foreign buyers in June. There is some short-term noise (i.e. China cut their holdings of Treasuries in June), but much of this can apparently be explained by the unbelievably strong demand coming from the U.K. Of the $48.6 billion in Treasury purchases by European nations, $45.7 billion of that was made by the U.K. (yes, more than 94%!).

But why? According to Standard Charter (hat tip FT Alphaville):
The official TICS data underestimates China’s holdings, partly because China purchases debt through intermediaries - most notably through brokers in London. These do not show up in the TICS data under China’s name, but are instead classified under the UK. This ‘error’ in the monthly survey is made clear in the annual survey, which usually ends up reallocating most of the UK purchases during the previous year to China.
So while China's purchases of Treasuries has been relatively flat since the Spring, the U.K. spike may likely be those purchases.

And the long run trend shows that demand (in overall dollar terms) continues to come from China, regardless of how the purchases are being accounted for.

Top Ten Holders of Treasuries

Source: Treasury: Long Term Securities / Treasuries

Wednesday, August 19, 2009

Commercial Real Estate: There Goes the (Entire) Bubble

Bloomberg reports:

Commercial real estate values in the U.S. fell 27 percent in the year through June and rents for offices, shops and warehouse space may continue to drop through 2010 as the recession saps jobs and consumer spending.

The Moody’s/REAL Commercial Property Price Indices fell 1 percent in June and are down 36 percent from their October 2007 peak, Moody’s Investors Service said in a report today. A rebound isn’t likely until the second half of next year, the National Association of Realtors forecast in a separate report.
Calculated Risk notes:
Beware of the "Real" in the title - this index is not inflation adjusted - that is the name of the company (an unfortunate choice for a price index). Moody's CRE price index is a repeat sales index like Case-Shiller.
Which of course gave me the idea to show the index in both nominal and real (backing out inflation using CPI) terms.

Talk about full circle... BUT, it is likely far from over. Back to Bloomberg.
Unemployment of 9.4 percent, falling industrial production and a drop in consumer spending curbed property demand, NAR said. Falling rental income and scarce credit are hurting both landlords and investors in securities backed by commercial property loans. Defaults and late payments on commercial mortgage-backed securities may surpass 7 percent by year-end, according to research firm Reis Inc.

“It’s too soon to call the bottom,” said Connie Petruzziello, a Moody’s analyst and co-author of the commercial property price report.
Source: MIT

Putting the Credit Crisis in Perspective

While I am still relatively bearish with regards to a further economic / market recovery, I am amazed at how fast a recovery we have had in credit markets. We were on the verge of a Great Depression type crisis until just ~6 months ago (so soon we forget), but have rebounded with unreal zeal.

How unreal? Lets compare the recent ongoings in the credit market with that of the Big D to put the crisis (and recovery) in perspective. While they never blew out to the level seen in the 1930's, the spread between AAA corporates and BBB corporates are now within 100 bps of the levels at the start of the crisis, just 2 years after the blowout began. That is 3x faster than seen in the Great Depression.

My question (which may be getting old) is... have we come "too far, too fast"? My view is a resounding yes, thus tread carefully.

What Goes Down, Must Go Up

Source: Investment Postcards

Tuesday, August 18, 2009

Good News... Housing Starts Down

Money CNN details:

Initial construction of U.S. homes edged lower in July following a surge in the previous month, according to government figures released Tuesday. The report had some modest indications of stabilization. "A mixed bag this time around," said Mike Larson, real estate and interest rate analyst at Weiss Research, in a research note.

Housing starts fell to a seasonally adjusted annual rate of 581,000, down 1% from a revised 587,000 in June, the Commerce Department said. Economists were expecting housing starts to increase to an annual rate of 599,000 units, according to a consensus estimate gathered by

THIS IS A GOOD THING.... Why? Let's go to David Rosenberg.
With every 1 in 8 Americans with a mortgage either in arrears or in the foreclosure process; 1 in 4 homeowners “upside down” on their mortgage; 1 in 6 either unemployed or underemployed; and 1 in every 7 housing unit in the United States sitting vacant right now, it will be interesting to see exactly what sort of recovery we end up with. These numbers we just cited are straight out of the twilight zone.
In other words, why build something we don't need? The lower the level of housing starts, the faster we work off this excess inventory.

Source: Census

Producer Prices Cliff Dive in July

Bloomberg reports:

Wholesale prices in the U.S. fell more than forecast in July as energy costs receded, capping the biggest 12-month drop on record and showing inflation will not be an immediate concern for Federal Reserve policy makers.

The 0.9 percent decrease in prices paid to factories, farmers and other producers followed a 1.8 percent gain in June, the Labor Department said today in Washington. Excluding food and fuel, so-called core prices unexpectedly fell 0.1 percent.

A record amount of excess capacity will prevent production bottlenecks from developing, indicating wholesale prices will be slow to recover even as the economy improves. A lack of inflation was one reason Fed policy makers last week reiterated a pledge to keep the benchmark interest low for an “extended period.”

“If you have an environment where excess stock remains large and inflation continues to be slow, the Fed will want to keep monetary policy easing,” Michelle Meyer, an economist at Barclays Capital Inc. in New York, said before the report. “The fact you have so much slack in the economy puts downward pressure on prices.”

Source: BLS

German Confidence Jumps

Bloomberg details:

German investor confidence jumped to its highest level in more than three years in August after government stimulus and rising exports pulled Europe’s largest economy out of recession.

The ZEW Center for European Economic Research said its index of investor and analyst expectations rose to 56.1 from 39.5 in July. Economists predicted a gain to 45, according to the median of 35 forecasts in a Bloomberg News survey. That’s the highest since April 2006. The survey aims to predict economic developments six months in advance.

“The German economy is out of recession, but not out of the woods,” said Carsten Brzeski, an economist at ING Groep NV in Brussels. “In all the enthusiasm about the recent numbers and the near-term outlook, there are still some impediments to a real recovery, the most pressing one being the worsening labor market.”

ZEW’s gauge of the current economic situation rose to minus 77.2 from minus 89.3 in July, an improvement that the Mannheim, Germany-based institute said was helped by last week’s GDP figures. A survey of 19 economists expected a reading of minus 85. The Economy Ministry has said its forecast for a 6 percent economic contraction this year may now be too pessimistic.
Economic Sentiment vs. Economic Situation

The following chart is just an average of the current sentiment and outlook (how important is the view that things will improve if current levels are awful). Again, much improvement.