Sunday, May 22, 2011

notes on the week ended May 21st

as predicted, we hit the federal debt ceiling monday...subsequently everyone from tim geithner to jamie dimon predicted the world would come to an end if the ceiling isnt raised soon, and the other parties in congress put their non-negotiable demands for draconian spending cuts on the table in order for them to pass that; in the face of this apparent impasse, the treasury's 10 year borrowing costs fell to near term lows, and short term rates were near record lows...geithner says he can postpone the day of reckoning till august 2nd by borrowing from federal workers pension funds and other fiscal chicanery...what i thought was supposed to happen as the result of this ceiling being hit would be that, by law, the treasury would quit borrowing; but they just announced $110 billion in new bonds, notes & bills to be issued over the next week; certainly some of that is to replace maturing debt, but according to zero hedge, at least $45 billion of it is over that amount...

at any rate, irregardless of whatever budgetary legerdemain allows the treasury to continue borrowing over the apparent ceiling, if this goes on long enough some of the already budgeted government spending will be curtailed; more than likely they'd start by delaying payment on some bills; ie, not paying a military contractor on time wouldnt seem to be as intolerable as neglecting social security checks or the like, & as the last item on the list would be the interest on the debt, i cant see how a technical default could come about...but nonetheless, a reduction of government spending of any magnitude will have deleterious effects on the economy; according to estimates by the wall street journal, reducing government spending to the level of receipts without borrowing for just 95 days will entirely wipe out this entire year's expected GDP growth...& by my reading of the WSJ analysis, they dont even account for the known multiplier effect of government spending, which most economists agree is north of 1.5X during a downturn...

one area of our economy that was doing better than others has been manufacturing, but it hit an earthquake induced speed bump this past month; manufacturing fell 0.4% after rising for nine consecutive months; this was largely on the back of a decline in auto assemblies from 9 million in march to 7.9 million units in april, resulting from the parts shortage...as a result, total industrial production figures were flat, and capacity utilization fell...march figures were revised downward as well, so both were effectively declines from the previous month...as ive pointed out before, manufacturing jobs once were of the type one could support a family on; $20 / hr was not uncommon even 20 years ago; but now new non-union assembly line jobs reportedly start at just two bits over minimum wage...

    a rutgers study released wednesday highlighted the employment problems of newly minted college graduates, which was written about in an article & a series of columns by NYT economix editor catherine rampell & subsequently picked up by several bloggers...for those who have jobs, starting salaries are down 10% from before the recession (06-08) and just over half are working in a job related to their education; meanwhile, this years graduating class is expect to be the most indentured ever, with an average of nearly $23,000 per capita to work off...as a result, 85% of this years grads are expected to move back in with their parents after graduation...

MBA Delinquency by Periodthe MBA (mortgage bankers assoc) reported total delinquent and foreclosed mortgage loans for the first quarter this week, which came in at 12.84%, and chartmeister bill mcbride at calculated risk produced an interesting series of charts from that report,  so i'll point them out here...this first one ive included here shows the percentage delinquent loans by length of time delinquent and by state (click on it for a larger image)...in the same post, he has a similar chart with the total number of loans thus affected...he followed that post with two more posts with charts, the first one taking the ten worst states, showing the same data before the crisis, at the peak and for the current quarter, then followed it with another for the other 40 states with the same data...worth taking a look at the set if you're at all interested, as its a case where the pictures are certainly worth a thousand words...

in an "if you have a hammer, everything looks like a nail" series of posts, three macroeconomists noticed Google's issuance of $3 billion of long term bonds even tho they were sitting on $37B in short term cash and thought it an unwise interest rate bet; mankiw, delong, & tyler cowen all looked at Google's borrowing in isolation, as if they were betting on interest curve changes...apparently it never occurred to them that they are likely borrowing to have a war chest for acquisitions, not playing the treasury market...mankiw, who was chairman of bush's council of economic advisors, also looked at the obama's asset allocation, and discovered that they only had 10% in stock, which he interpreted as a bet against the future of the economy...

as expected, the morganza spillway in louisiana was opened to save new orleans & baton rouge from the mississippi flooding, choosing instead to flood 300,000 acres of rural towns and farmland...from reports yesterday, i gather that the mississippi has now crested along its length at record heights, and is not expected to rise further, although some areas will remain at flood stage for a month, and the southern stretch may still be flooded when hurricane season arrives...first guestimates of the economic damages are running between $6 and $9 billion, which would make it the most expensive flood in US history, and high on the list of billion dollar weather disasters (see pdf map) ... elsewhere, abnormal weather continues to impact agriculture around the country & the globe, with wheat in the southern plains, europe & china under drought & heat stress, canadian wheat only 3% planted due to cold & wet conditions, & corn & soy plantings in the midwest still well behind schedule; although other parts of the corn belt may be drying out, most of ohio is not yet; my rain gage recorded over 4 inches in the week ending thursday, which is more than is expected in the entire month...

we received our first read on how japan's triple disaster is affecting their economy and it wasnt good; they experienced a 3.7% contraction in the first quarter, which only included 20 post earthquake days; since their 4th quarter was also revised to a negative 3%, they're officially in a recession, with their GDP now approaching a 20 year low; apparently that, combined with the continual tightening in china, has had its first effect on australia's resource driven bubble economy, as their currency weakened as their labor force participation rate fell to 65.6% in april from 65.8% a month earlier; in europe, since the imposed austerity has left greece even less able to meet the terms of the earlier bailout, the EU seems to be trying to find terminology to repackage a new bailout as either a "soft restructuring" or a “re-profiling” of Greek debt, while the ECB is ruling out anything of the kind...solving that internecine dispute will not be any easier with the resignation of IMF managing director Dominique Strauss-Kahn after rape charges were filed against him in new york...finding a replacement of his international stature wont be easy; under a post war agreement between the US & the old colonial powers in europe, they select the head of the IMF, essentially cutting off 93% of the worlds population from the process; although emerging market countries are lobbying for various candidates of their own, french finance minister christine lagarde seems to have the inside track on the position...meanwhile, spanish youth seem to be taking a cue from the egyptians, as they've occupied the central square in madrid all week, with more arriving from the countryside each day, protesting against planned austerity measures...

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