CPI November (All About Transportation)

BLS:

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 1.9 percent in November, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The November level of 212.425 (1982-84=100) was 1.1 percent higher than in November 2007.

Muni Market Whacked

Great recap of the Muni market and its anomalies over at The Bond Tangent. One story he posts to from The Bond Buyer:

discusses some anomalies that have emerged since institutional investors largely exited the market and munis became less liquid, including 1) prerefunded bonds yielding higher rates than the Treasuries they are backed by, 2) corporate-backed munis trading cheaper than the corporation's taxable debt, and 3) insured bonds trading cheaper than bonds of the same underlying credit quality.

Muni's historically have been quoted in terms of a ratio to Treasuries (non-taxables historically trading in the 80-90 range vs. Treasuries). Given current conditions, it may be time to start quoting Muni's in terms of spread.

Stimulus Needed to Fill Under-Utilized Capacity

Source: Federal Reserve

Industrial Production

WSJ:

Production by U.S. industries retreated in November, with a range of sectors suffering declines in output.

Industrial production decreased 0.6% compared with the month before, the Federal Reserve said Monday. Production rose an upwardly revised 1.5% in October; originally, October output was seen up 1.3%. September output was revised to a 4.1% decline as opposed to an earlier estimated 3.7% decline.

"The drop in output in September was revised down and the rebound in October was revised up, in large part because both the decrease due to the September hurricanes and the subsequent partial recovery in October were larger than previously reported," the Fed said. The storms, Gustav and Ike, disrupted oil and gas production in the Gulf of Mexico.

Source: Federal Reserve

FT's Madoff-o-Meter

For a good Madoff conspiracy story, check out The Big Picture, but it the meanwhile we're up to $24.1B and counting of Madoff related losses.



Source: FT

EconomPics of the Week 12-12

Scam

Mets Owner Scammed for $300mm

$50 Billion Ponzi Scheme... We've Hit a New Low

Economic Data

Inventory to Sales Ratio on the Rise

What Inflation?

International Trade Slows in October

Still a Nation of Debt... For the Time Being

California Unemployment Soars

Export / Dollar Worries Not as Bad as You Think

Retail Goods

Retail Sales November: Hey, You Gotta Eat! Edition...

Auto Bailout Back on Track... Not

Bailout Nation

Everyone's Delevering... Well, Almost Everyone

Capitalism is Dead

Consumer Credit Drying Up

Multiplier Math: Is U.S. Protectionism on the Way?...

$15 Billion Auto Bail Out

Asset Returns / Data

Real Yield of Treasuries vs. Corporates

T-Bills: 2396 Years to Make Up YTD Equity Loss

Redefaults Looking like Original Defaults

Mets Owner Scammed for $300mm

Apparently Fred Wilpon, owner of MY New York Mets, was involved in the Madoff scam. According to Dealbook (hat tip Dom):

Sterling Equities, the investment firm led by Fred Wilpon that owns the New York Mets baseball team, said Friday that it had accounts at Bernard L. Madoff Investment Securities and was “shocked” by his fraud confession.

Sterling Equities may have had as much as $300 million with Madoff, CNBC reported.

Ouch... well at least Forbes shows his investment in the Mets has proven to be more valuable.



And to think... just a few days after the Yankees' owner was ripped off for a little more than $160 million.

Inventory to Sales Ratio on the Rise

Although inventories are in some cases down year to year, the 'Inventory to Sales' ratio has increased rather dramatically in recent months across retail outlets.



What does this mean for the economy? Nothing good... while consumption has been down in recent months, production facilities have been running, which is good for the economy. Pretty soon those inventory orders will not need to be replenished, putting another strain on the economy.

Source: Census

Still a Nation of Debt... For the Time Being

The recent prints in the chart below are from the quarter ending September. Things have deteriorated significantly in the credit markets since then, so expect Q4 results to show a massive drop in debt in both homes and business.


Source: Federal Reserve

Retail Sales November: Hey, You Gotta Eat! Edition

Source: Census

What Inflation?

Source: BLS

$50 Billion Ponzi Scheme... We've Hit a New Low

The financial community has hit a new low. WSJ reports:

The SEC's complaint, filed in federal court in Manhattan, alleges that Madoff yesterday informed two senior employees that his investment advisory business was a fraud. Madoff told these employees that he was "finished," that he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme." The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion.

Yikes...

According to regulatory filings, the Madoff firm had more than $17 billion in assets under management as of the beginning of 2008. It appears that virtually all assets of the advisory business are missing.

Auto Bailout Back on Track... Not

UPDATE... "pre-mature" reporting on my part (hat tip Naked Capitalism). Apparently there will be no deal:

From the Washington Post:

An eleventh-hour effort to salvage a proposed $14 billion rescue plan for the auto industry collapsed tonight as Republicans and Democrats failed to agree on the timing of deep wage cuts for union workers, killing the legislative plan and threatening America's carmakers with bankruptcy.

"We're not going to get to the finish. That's just the way it is. There too much difference between the two sides," Senate Majority Leader Harry M. Reid (D-Nev.) announced after 10 p.m., concluding a marathon negotiating session that ended in gridlock. Reid warned that markets could plummet when trading begins this morning.

According to Bloomberg:

Senate Democratic and Republican negotiators have a tentative compromise on a $14 billion automaker bailout plan that may be voted on tonight, Majority Leader Harry Reid said.


Negotiators are briefing their colleagues on the substance of the tentative accord, Reid said.


“I’m hopeful that we can finish this matter tonight,” Reid said on that chamber’s floor. “We should know soon” whether the agreement has enough support, he said.

Some positive auto news (if they make it through this period... hello TARP?)... while the autos can't depend on U.S. demand anytime in the near future, international demand (specifically from emerging markets) may be their savior. One limited data point... auto exports have held up surprisingly well (with the caveat that auto exports are still significantly smaller than imports).



Source: Census

International Trade Slows in October

The BEA reported:

In October, the goods deficit increased $0.3 billion from September to $69.8 billion, and the services surplus decreased $0.4 billion to $12.6 billion. Exports of goods decreased $3.0 billion to $104.8 billion, and imports of goods decreased $2.7 billion to $174.6 billion. Exports of services decreased $0.3 billion to $46.9 billion, and imports of services were virtually unchanged at $34.3 billion.

In October 2008, the goods and services deficit increased $0.9 billion from October 2007. Exports were up $7.6 billion, or 5.3 percent, and imports were up $8.5 billion, or 4.2 percent.

Everyone's Delevering... Well, Almost Everyone

MarketWatch reports:

The U.S. federal government deficit soared again in November to $164.4 billion, the Treasury Department reported Wednesday. This is a record shortfall for the month of November. The deficit is $6.7 billion below the November deficit estimated earlier this month by the Congressional Budget Office. The deficit in November 2007 was $98.2 billion. For the first two months of the fiscal year, Treasury reported a record deficit of $401.6 billion. The government spent $99.6 billion in November in various bank bailout programs.

Source: Treasury

Out of Office

I am / will be traveling and likely unable to post more than here or there the next few days...

California Unemployment Soars

California has seen unemployment rocket to 8%+ in recent months as the state was the center of the housing boom and current bust. The wide dispersion in the state is rather remarkable. As NWAnews.com reports:

The highest metropolitan unemployment rate was 27. 6 percent in El Centro, Calif., followed by 19. 5 percent in nearby Yuma, Ariz.

El Centro (birthplace of Cher) has seen unemployment soar to that 27.6% clip, up about 6% from last year, and according to Forbes is one of the 10 Spots 'Where U.S. Homeowners Are Losing Value Fastest', ranking at #5.

Otuside of El Centro, California has an assortment of cities with unemployment over 10%. No wonder the Governator has declared a fiscal emergency.

Source: BLS

Capitalism is Dead

Across the Curve details investors PAID THE GOVERNMENT TO BORROW FROM THEM, again investors PAID THE GOVERNMENT TO BORROW FROM THEM. New Econompic equation:



That's right. You lend the government $1000.10 and 3 months later they will pay you back $1000. Why?

the money raised by financial institutions via the FDIC bonds is exacerbating the situation. The borrowers do not need that money now. They are defeasing maturities which will arise in 2009. So that money will sit in the short market until it is needed next year.

In the bill market one has to venture out to the three month bill before he can locate a positive yield and at the moment that yield is just a meager single basis point. The three month bill has traded with a yield of negative one basis point, too.

When will the madness end?

Consumer Credit Drying Up

A delayed data point from last week. Bloomberg reported:

The pace of borrowing by U.S. consumers dropped in October for the second time in three months, led by a decline in financing for automobile purchases.

Consumer credit fell by $3.5 billion, or 1.6 percent at an annual rate, to $2.578 trillion, according to a Federal Reserve report released today in Washington. In September, credit increased by $6.7 billion, less than initially estimated.

Non-revolving debt, including auto loans and mobile home loans, decreased by $3.4 billion in October, according to the Fed’s statistics. Revolving debt, such as credit cards, dropped by $182 million.

Source: Federal Reserve

Real Yield of Treasuries vs. Corporates

T-Bills practically yield nothing and moving out along the curve we see a similar flight to the quality of Treasuries. However, real yields tell a different story (real as in removed the inflation within 5 year inflation swaps). While corporates look awfully cheap if you don't expect the Great Recession, the 2% real yield over five years of Treasuries is the highest figure we've seen in a year and a half.

T-Bills: 2396 Years to Make Up YTD Equity Loss

0.005% on T-Bills is low. How low? So low that the WSJ tries to grasp just how low, but reports a return figure that is incorrect by a factor of ~25:

It isn’t easy to savor a stock-market rally of this type when over in the credit markets, the Treasury Department held a three-month auction and was able to sell what it wanted at the ridiculous yield of 0.005%, down from 0.15% two weeks ago. (If you invest $1,000 in three-month bills, you get an extra $5 after one year of doing this. There are mattresses on the market that do actually yield more than this.)

This is wrong on two levels:

• Math; 0.005% is 5 cents per $1000
• Bond math; T-Bill yields are calculated on a coupon yield basis (more detail here), so it is closer to a 20 cents per $1000 (4 quarters of receiving 5 cents), not $5.

While this is not exactly 0.02% annualized, lets assume it is to make my EXTREME example easier to calculate.

EXTREME EXAMPLE

If you just pulled an investment from the S&P 500 (down 38.4% YTD), put it in T-Bills, nothing changed EVER (i.e. rates stay for eternity at 0.005%), and you rolled your investment for eternity, it would take 2396 years to make up the S&P 500's current YTD loss (year 4403 is right around the corner!). Now that is EXTREME.

Redefaults Looking like Original Defaults

Naked Capitalism reports:

We have long advocated mortgage modifications as a remedy that banks used fairly freely in the stone ages when they held the paper. While we have also been told that the mods being offered these days are often too shallow to give the homeowners sufficient relief (ie, the bank could offer a reduction in principal, rather than the more common, and lower effective reduction of merely providing interest rate relief, and still come out ahead compared to a foreclosure). However, the latest report from the Office of the Comptroller of the Currency may put a dent in efforts to find ways to offer viable borrowers sufficient changes in terms.

The report shows redefaults occuring in more than 50% of those modified loans.

I fully expect the chart above to look more like Pacman in the near future (i.e. redefaults even higher as home prices have continued to fall). I guess an analogy for the ghosts is personal wealth?

Export / Dollar Worries Not as Bad as You Think

A lot has been discussed of late as to type of impact the global slowdown will have on both exports and the dollar. The thought is that the slowdown will decrease our exports (true) and that will decrease demand for dollars, which pay for said exports.

Of course there is another side of the story, imports. In a slowing U.S. economy, we will be importing significantly less from abroad. Items we will be importing less of are commodities (which have also priced significantly lower) and consumer goods (which are under severe pressure as the U.S. consumer delevers).

What have we seen? While service (non-manufacturing) exports are indeed falling faster than imports, the 12 month average is still positive. On the other hand, the manufacturers index actually shows the reverse (i.e. imports falling faster, likely due to the crash in commodity prices).


Given all of this and the economic problems associated with global markets, I am not a dollar bear. I definitely feel there will be weakening in the absolute value of a dollar (i.e. inflation) at some point due to the oversupply, but I expect this to happen across all currencies. Thus, the relative weakness of the dollar (which matters for exchange rates) won't be nearly as problematic. HOWEVER, I do think some / a lot of the move we've seen over the past few months was largely due to the deleveraging of global investments, and I do expect that to reverse in the coming months.

Source: ISM

Multiplier Math: Is U.S. Protectionism on the Way?

We detailed in a prior post how large a stimulus package would need to be based on certain assumptions in unemployment and the multiplier (a summary chart of that discussion is as follows):



As can be seen above, if unemployment were to rise above current 8.5% estimates, the multiplier becomes increasingly important in determining an appropriate size for a stimulus package. Thus, an important question is how large will the multiplier be?

Fortunately, Dani Rodrick's recent post dives into the math behind the multiplier and he isn't fond of what it tells him.

First, the multiplier:



In other words, the three ways to increase the multiplier is to:

• Increase the rate of consumption (hence the public works projects, rather than rebate checks which went right to savings first pass)
• Decrease the tax rate (for this reason, I expect the Obama administration to put tax hikes on hold)
• Decrease imports (thus, more production within the U.S. is needed to satisfy any given level of demand)
  

Dani seems to believe the third (i.e. decreasing imports) would be rather easy. In an example he calculates a multiplier of 1.8 based on MPC of .8, MTR of .2, and MPI of .2, which is increased more than 50% in his example through the raising of import tariffs:

It is pretty easy to increase the multiplier; just raise import tariffs by enough so that the marginal propensity to import out of income is reduced substantially (to zero if you want the multiplier to go all the way to 2.8). Yes, yes, import protection is inefficient and not a very neighborly thing to do--but should we really care if the alternative is significantly lower growth and higher unemployment? More to the point, will Obama and his advisers care?

With unemployment at 10%, a difference in the marginal propensity of imports can mean the difference of hundreds of billions of dollars in stimulus. In other words:

unless we come up with a solution to the credit constraints in the developing world, we are going to either endanger the effectiveness of Keynesian policies in the U.S. and other advanced nations, or risk a sharp increase in protectionism. Not a pleasant choice.

$15 Billion Auto Bail Out

Per Bloomberg:

Lawmakers are putting together a $15 billion plan intended to help keep GM and Chrysler afloat and negotiations are underway between congressional Democrats and the Bush administration over what conditions for restructuring will be required. The House and Senate are returning this week specifically to consider the measure.

It is still up in the air as to whether the votes will be there when the legislation is finished. What is known is that the size of the bailout (currently $15 billion) is larger than the equity value of the three firms (market cap for GM and Ford below, Chrysler in privately held) and that the $15 Billion is a drop in the bucket as to what these firms need to survive.

EconomPics of the Week (12/5/08)

Opinion
Pension Plans, the Equity Market, and Irrational Behavior
Why 'Expected Deflation' Can Be a Good Thing

Economic Data
Jobs:
Job Creation: Last Two Presidencies
Broader Unemployment to 12.5%
Change in Non-Farm Payroll by Industry (November)
Birth Death Model at it Again: Employment Worse than 6.7%
Employment Crumbles (November)

Other:
Manufacturers Shipments
Same Store Sales (November)
Defined: Unsustainability
Services: Bad to Worse
November Auto Sales... Where's the Bailout?
Manufacturing: Bad to Worse
What a Recession Looks Like (Q3 Productivity)

Asset Performance
Hedge Funds: Bad, but But Better than S&P
January Gas Futures Below $1
Harvard Endowment Down $8 Billion in 4 Months
2008 Volatility Like No Other
High Yield: On Pace for the Worst Year on Record
Treasuries and Equities Rally

Banks
Then and Now: Banks 1999 vs. 2008
Global Rates Slashed

Bailout
Pledges to Date Redux
Curve: Swaps vs. Treasuries
Fed has Option to Buy Treasuries on Open Market

In Memory
Rest in Peace Doris “Tanta” Dungey

Hedge Funds: Bad, but But Better than S&P

Source: BarCap

January Gas Futures Below $1

Finally, some good news (although good, for the wrong reason --- no demand). Per the AP (bold mine):

The unprecedented decline in energy prices has provided some relief to consumers and businesses, it has occurred as the nation dips into recession.

Fewer people have jobs to drive to. Gasoline futures for January delivery closed below a dollar, with optimism about the nation's economic health in serious decline.

It was the first close below $1 since 2006, when gasoline began trading in the current format. When gasoline included the additive MTBE, it last crossed the $1 barrier in February 2004.

Consolidated Employment Posts

I received a few requests asking that I consolidate the employment posts. Here you go:

Job Creation: Last Two Presidencies
Broader Unemployment to 12.5%
Change in Non-Farm Payroll by Industry (November)
Birth Death Model at it Again: Employment Worse than 6.7%
Employment Crumbles (November)

Job Creation: Last Two Presidencies

As John writes in the comments:

Economic cycles do not begin and end merely because a president (or prime minister or king or dictator or poobah) takes office. Correlation is not necessarily due to cause.

I agree that this may overstate things, but I do believe the correlation between Bush and job growth is negative and that value has significance.

Source: Colin Peterson

Broader Unemployment to 12.5%

Source: BLS

Change in Non-Farm Payroll by Industry (November)

Source: BLS

Birth Death Model at it Again: Employment Worse than 6.7%

The Birth Death Model once again overstates employment. In other words, things are a lot worse than the 6.7% rate presented to us. Per The Big Picture:

Since 2003, the B/D adjustment has been part and parcel to BLS' Current Eployment Statistics (CES) program, the official measure of US employment. In brief, the Birth Death adjustment imagines (hypothesizes) how many jobs were created by companies too new and/or too small to participate or be found by CES. The model attempts to create what is perceived as a BLS error at the start of any recovery, when many new jobs are created but missed by BLS.

Does anyone think small businesses have really added 52,000 jobs to the financial sector over the past 12 months (and 5000 last month)?

Source: BLS

Employment Crumbles (November)

Nonfarm payroll employment fell sharply (-533,000) in November, andthe unemployment rate rose from 6.5 to 6.7 percent, the Bureau of LaborStatistics of the U.S. Department of Labor reported today. November'sdrop in payroll employment followed declines of 403,000 in September and320,000 in October, as revised. Job losses were large and widespreadacross the major industry sectors in November.



Source: BLS

Then and Now: Banks 1999 vs. 2008

Source: Josh Reviews Everything

Manufacturers Shipments

Source: Census

Same Store Sales (November)

Apparently moving "higher-end" to Walmart hasn't paid off in recent months for Target.

Source: WSJ

Defined: Unsustainability

Source: BEA

Global Rates Slashed

England cut rates a full 100 bps. According to the Bank of England this was done

The Bank of England’s Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 1.0 percentage points to 2.0%.

In the United Kingdom, business surveys have weakened further and suggest that the downturn has gathered pace. Consumer spending and business investment have stalled, while residential investment has continued to fall. Activity indicators in the rest of the world have also weakened, though the further depreciation in sterling should moderate the impact of weaker global growth on the United Kingdom.

The ECB followed suit, slashing rates 75 bps.

Pledges to Date Redux

JJStein asks for it, JJStein gets it... WWII's inflation adjusted cost added to the 'Chart of the Week':



For a breakdown of those pledges, go here.

Source: Ritholtz.com

Harvard Endowment Down $8 Billion in 4 Months

And it may get worse (The Harvard Crimson):

The estimate of 22 percent may not fully capture the actual losses from this period, Forst said in an interview yesterday, as some of Harvard’s money is invested with external managers that have yet to report their latest figures. Faust and Forst wrote in yesterday’s letter that the University should plan for a 30 percent drop-off in endowment value for the year ending June 30, 2009.

The endowment is now at a level last seen around 2005-06 (not long ago, but 2-3 years of outsized returns gone in four months). In addition, while nobody wants to be a forced seller in this environment, Harvard may have no choice:

Multiple media outlets recently reported that Harvard was also seeking to shore up endowment holdings by selling $1.5 billion of its private equity portfolio at a drastically reduced price, but Forst declined to address those reports yesterday.

Services: Bad to Worse

We already looked at the awful number from the manufacturing survey earlier in the week, now we look at services... and it ain't pretty (per ISM):

"The NMI (Non-Manufacturing Index) registered 37.3 percent in November, 7.1 percentage points lower than the 44.4 percent registered in October, indicating contraction in the non-manufacturing sector for the second consecutive month. The Non-Manufacturing Business Activity Index decreased 11.2 percentage points to 33 percent. The New Orders Index decreased 8.6 percentage points to 35.4 percent, and the Employment Index decreased 10.2 percentage points to 31.3 percent. These are the lowest levels for each of these indexes since they were first reported in 1997.

Don't confuse Inventory Sentiment levels above 50 as a good thing:

The ISM Non-Manufacturing Inventory Sentiment Index decreased 2.5 percentage points to 65 percent in November, indicating that respondents still believe their inventories are too high at this time.

2008 Volatility Like No Other

Interesting post over at Dr. Housing Bubble about the Dow, California budget, economy, and housing market (quite a post!). I'll stick to this tidbit he points out about the Dow.

Dr. HB took a look at the 20 largest daily percent declines in the Dow's history and found:

Out of the top 20 percent declines on the Dow, 2008 is the winner which should give you a perspective on the volatility we have been witnessing on the market.