Tuesday, December 6, 2011

notes on the week ending Dec 3rd

ok, its been a busy week, & not just with the unemployment & housing reports that came out, but a lot of other news as well...even though im already running late, i'm going to try to point out & comment on as much of it as i can, but may not get to all i'd like to, so if there's a week you should check my other blog for whatever i miss or mention briefly here, this would be it...

let's start with the news wednesday that the Fed coordinated with 5 other central banks (BofJ, BofE, Swiss, Canadian & ECB) to lower the price of dollar denominated currency swaps in order to ease worldwide bank funding strains that had developed in light of the euro mess, because that's been widely misunderstood as meaning "the Fed just bailed out europe"...so we should start by noting that this isnt costing the taxpayers anything, and the action the Fed has taken is actually closer to a temporary loan rather than anything close to a gratis bailout...and the Fed doesnt really give a damn about the euro or the governments of europe, either; the Fed is only interested in saving the banking system, everything & everyone else is secondary...lets start by explaining what they're doing; ie, lowering the cost of swaps from 1% + the overnight index swap rate to a half percent; for any given swap, a central bank sells a given amount of its currency to the Fed in exchange for dollars; the swap agreement specifies that the swap will be reversed at a specified future date at the same exchange rate, so essentially the entire action is unwound at that time, and there is no risk when dealing with other central banks...this is not unprecedented, the same thing was done after the Lehman collapse, & after 9-11...so why did they need to do this now? well, by virtue of the current high interest rates on sovereign debt issued by the peripheral european states, bonds in those countries that were purchased earlier by european banks have gone down in value considerably; hence, most of the european banks had grown suspicious of the solvency of the others, and they either stopped lending to each other, or charged ever higher premiums for their interbank loans; the same became true of their transactions with banks in the US & elsewhere around the world...as suspicion & apprehension mounted, their only alternative became to borrow from the ECB & deposit funds overnight at the ECB; normal interbank transactions started freezing up...by temporarily providing safe dollars cheaply to the ECB which they could lend to the euro-zone banks, the Fed is delaying their day of reckoning, when those banks, unable to rollover their funds, would be forced to sell their bonds in the peripheral countries at loss, likely causing cascading bank failures...but most of those who've followed the european situation closely think its still far from being out of the woods, because of continued intransigence by the Germans & the ECB...if the ECB would announce a commitment to buy as much spanish & italian debt as would be necessary to drive their interest rates to say 3%, the crisis would be over tomorrow; but they wont "print money"; their bond purchases have been sterilized because the germans still have their historical, deep seated fear of inflation, even though the underlying trends in europe are now contractionary...

more details about the Fed's involvement in the bailout of the banking system during the crisis in 2008 were revealed last week as a result of a bloomberg FOIA lawsuit & ongoing investigation, and compared to the $700 billion treasury TARP bailout that we knew about, the Fed bailout at $7.7 trillion was 11 times as large, including $1.2 trillion on one day alone; and what did the banks do with this money? nothing for us; they sat on it & collected $13 billion in interest before paying it back...former treasury economist brad delong took a look at the details & opined that "without the Fed and the Treasury, the shareholders of every single money-center bank and shadow bank in the United States would have gone bust"…links to around 2 dozen on these Fed related stories are included right at the beginning of this week's blog post, if you want more details, opinions & analysis...

we havent seen much progress from congress this week on the extension of unemployment rations and the payroll tax cut which expire at year end; for the unemployment extension, most of the news was was that the parties were far apart & still debating how long, what size, and what strings should be attached to an extension; both parties have introduced bills to extend them; the democrats continue most of the provisions currently in effect; while the republicans would tie the extension to repealing some "job killing" regulations, possibly even taking away the presidents authority to rule on projects such as the keystone XL pipeline...the news on the payroll tax cut was on again, off again all week until friday when two bills, one introduced by each party, both failed to pass in the senate; the democrat plan proposed to "pay for" the tax cuts by a surtax on those making over a million; the republicans planned to "pay for" the tax cut with a federal staff reduction & a pay freeze for federal workers; surprisingly, more even republicans voted against the republican plan than voted for it, which suggests it will be hard to get them on board on any compromise...economist karl smith suggested an interesting way to "pay for" it; issue 10 year TIPS at their current 0.2% percent real interest rate; after 10 years the $119 billion cost would have risen to $120.4 billion, but that could be paid for then off what should be a much bigger tax base; & if the economy hadnt grown by that time, TIPS rates would likely be negative reflecting deflation, so the can could be kicked further down the road by issuing more TIPS at a profit...


on friday, the labor department released results of the 2 surveys making up the november unemployment report; from the broader based establishment survey, they estimated that 120,000 jobs were added on a seasonally adjusted basis, just about enough to keep up with the growth of the population; even better, we again got positive revisions to the previous two reports; september was revised from +158,000 to +210,000, and october was revised from +80,000 to +100,000; while these kinds of numbers aint spectacular, they at least go some way in alleviating the fear of sliding backwards into a recession that the weaker midsummer reports brought on…the lions share of the jobs added this month were in retail, restaurants and bars, obviously not the highest paying; accordingly, average hourly earnings for the month declined 2 cents, to $23.18, from october’s average…the average workweek for all employees was unchanged at 33.4 hours, although it fell a tenth of an hour to 33.6 for the grunt laborers…from the much smaller household survey, from which the headline number is calculated, BLS estimated a gain of 278,000 jobs, but also showed a decline in the labor force  as 487,000 dropped out, eliminating those former workers who no longer met the requirements to be counted; as a result of that higher numerator and lower denominator, the ratio of employed to unemployed rose, resulting in a reported decline of the unemployment rate to 8.6% from last months 9.0%; were it not for the declines in the labor force, the unemployment rate would be well over 11%…for the same reason, the U-6 unemployment rate, which includes those only working part time or intermittently when they want full time work decreased to 15.6% from the reported 16.2% in october; gallup, which does an unadjusted survey of unemployed workers, showed the percentage working part time but wanting full-time work to be 18.1%paul krugman took a brief look at the BLS report and said “meh” (with feeling); producing the chart above right, showing that in terms of the normal working age population, we really havent gained anything since the recession officially “ended” almost 2 & a half years ago…and we did hit a couple of new records we dont want to brag about, too; the labor force participation rate fell 0.2% to 64.0%, the lowest since the early 80s, before women had to join the labor force en-masse, and the average duration of unemployment also set a new record at 41.1 weeks, as show by the above left chart…

there were also a number of housing & mortgage related reports out this week; census reported seasonally adjusted new home sales for october at 307,000, up slightly from the october number of 303,000, which was revised down from the first reported 313,000; the average new home price was reported at $242,300, the lowest since 2003; last week the existing home sales for october were reported at a 4.97 million annual rate, up 1.4% from the annual rate reported in september, and according to the NAR (National Association of Realtors), the median home price was 4.7% lower than a year ago…this week case shiller reported it’s 20 city index of home prices for july, august & sept as .6% lower than the previous 3 month report ending august, and 3.59% lower than a year ago; their national index, reported for the 3rd quarter, was down 3.9% from a year ago…another index, the national home sales index from DataQuick for the current 30 day period, showed home prices 7.8% lower than a year ago, based on reports from 98 of their hundred covered markets…despite a new record low rate for new ARM mortgages, mortgage applications plunged 11.7% this week from the week before…CoreLogic also released a negative equity report for the 3rd quarter, showing that 10.7 million, or 22.1 percent, of all home were underwater at the end of the quarter, a slight improvement from the second quarter; an additional 2.4 million homeowners had less than 5 percent equity at the end of september…

Foreclosure Inventory LPS (lender processing services) also reported this week on mortgages delinquent & in foreclosure in october; although delinquencies were down nearly 30% from a year ago, homes in the foreclosure process were at an all-time high; of those homeowners delinquent, 2.33 million loans were less than 90 days delinquent, and 1.76 million loans were over 90 days delinquent...a record 2.21 million homes, or 4.29% of all mortgages, were in the foreclosure process, up from 4.18% in september, and the average number of days that homes in foreclosure had gone without making a house payment also set a new record of 631 days…they also report foreclosure rates in non-judicial states as being 4 to 5 times higher than in judicial states, where the banks have to “show the note” in court, likely indicative of the mess that MERS made of home titles during the slicing & dicing of mortgages into bundles for security sales…the adjacent chart from LPS (click to view) shows this difference, showing non-judicial foreclosure home percentages stuck in foreclosure less than half that of judicial states…at least for the judicial states, this probably bodes well for christmas sales, as almost 7% of homeowners arent making house payments, so they’ll have that much more to spend on toys from china…

there was also an important foreclosure fraud lawsuit brought this week massachusetts attorney general Martha Coakley against the 5 biggest mortgage services, MERS and the shell corporation MERSCorp which is owned by the banks; charges include deceptive foreclosure practices by conducting foreclosures when the defendants lacked the right to do so, producing false documentation practices to initiate foreclosures, failure to comply with Massachusetts’ registration statutes, failure to pay local recording fees, and more; there was also mention in the suit of the damage to massachusetts land & title records, similar to the charges in the lawsuit initiated earlier by geauga county on behalf of ohio…this is the first major lawsuit by a state attorney general for the same charges that that the administration & the so-called 50 states attorneys general are attempting to settle with the banks and heads off their attempt to grant the banks immunity from prosecution for the aforementioned and any other mortgage related crimes they may have committed…

all in all, the economic data this past week continued to indicate that we'd likely avoid the double dip recession that we feared this past summer...the conference board reported their index of consumer confidence rose to 56 in november from 40.9 in october; accordingly, black friday sales were up nearly 7%, to the highest nominal sales ever for that day, although slow sales in the early part of the month reduced the monthly gain to 3.2%; november car sales at an adjusted annual rate of 13.6 million units were the highest since august 2009, and except for the "cash for clunkers" driven sales blip, the highest since june 2008; further more, the chicago PMI (purchasing managers index) rose to 62.6% in november from 58.4% in october, a 7 month high, and the ISM (Institute for Supply Management) PMI was at 52.7% in november, up from 50.8% in october; so while europe may be heading into a recession, it looks as if we've avoided that fate for the time being...

the above is my weekly commentary that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me

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