Sunday, June 26, 2011

notes on the week ended june 25th

the Fed had a FOMC meeting early this week & bernanke had another press conference immediately thereafter, both of which were accompanied by considerable commentary from the blogoteriat, most of whom are under the illusion that the Fed's mandate is to control inflation & to foster maximum employment, & not to protect & to serve the banks, so there was some consternation that the Fed indicated they would attempt no more monetary stimulus in the face of unemployment which they predicted to remain between 8.6% and 8.9% for the remainder of this year...among their other pronouncements, they further lowered their expectations for growth this year, projecting that the economy will expand at a rate of 2.7% to 2.9% percent, .4% less than they guessed in april, and forecast a growth rate between 3.3% and 3.7% for 2012, off a half percent from what they guessed at their last meeting...since it typically takes a 4% growth rate to get unemployment down 1/2%, their indications are we're gonna still be over 8% unemployment all next year as well...questioned about this during his press conference, bernanke said the economy is “still years away” from what is considered a level of full employment...and if that werent bad enough, as you can see by the adjacent chart, every Fed growth forecast since january 2010 has proven to be excessively optimistic, and their guesses for future growth decreases each subsequent meeting as the future gets closer...

in congress, it appears negotiations on raising the debt limit have broken down....early this past week, after senate minority leader mcconnell suggested he was open to it,  there was speculation that the debt ceiling might be extended for a few months while they work on a more permanent solution...but to get to the targeted 2 trillion in savings over the next ten years would take some kind of tax increases, at a minimum letting the obama-bush tax cuts for the rich expire, so the republican negotiators eric cantor & john kyl walked out of the talks, leaving joe biden talking to himself and boehner with egg on his face...trading in CDSs, or protection against a US default, increased, & the differential between the cost of one year insurance & 5 year insurance on US debt narrowed to a range similar to that of the distressed debt of the PIGS in europe...though the official date for the debt to go over the limit is still august 2, some are now eying august 15th because thats the date when the treasury must make its major quarterly bond interest payouts...strangely enough, one of the loudest voices warning against the insecurity of US treasury bonds, bill gross of the worlds largest bond fund PIMCO, seems to have had an epiphany about proper countercyclical fiscal policy this week; in his monthly letter to investors, he said concern about deficits & spending cuts can wait for a stronger economy, and called for a new stimulus program similar the FDR's WPA...quoting economist hyman minsky, he opined that "government should become the “employer of last resort” in a crisis, offering a job to anyone who wants one – for health care, street cleaning, or slum renovation" and repeated david rosenberg's “I’d have a shovel in the hands of the long-term unemployed from 8am to noon, and from 1pm to 5pm I’d have them studying algebra, physics, and geometry.”

Distressing Gapboth of the monthly home sales reports were out this week; the NAR (National Association of Realtors) reports existing home sales at a seasonally adjusted annual rate of 4.81 million in may, down to a 6 month low from a revised 5.00 million in april, which was also revised down...the weakness was blamed on high gas prices & bad weather in april, and again, foreign cash buyers make up a quarter to a half of the purchasers in some distressed markets...the census bureau reported seasonally adjusted new home sales at an annual rate of 319 million in may, slightly down from a revised 326 thousand in april; the actual sales for may were 30 million, which was higher than last may's all time low of 26 million...bill mcbride produced the adjacent chart which is intended to show the comparative weakness in the housing industry and it shows sales of both new & existing homes in a historical perspective...moody's also reported their commercial real estate price index, which was down 3.7% in april from may to an all-time low (the index was started 11 years ago), and off 49% nominally - not inflation adjusted - from the peak...the losses on commercial real estate are putting more community banks in trouble (the unofficial list of problem banks stands at 1001) and falling real estate prices are also starting to impact municipal tax collections as sales are recorded and properties are reappraised....click on chart to view >>>>

the oil markets seemed to be shocked this week by the announcement from the IEA (International Energy Agency) of a planned release of 2 million barrels a day over the next month as prices took an immediate $6+ / brl hit before stabilizing; the US is to supply half of that 60 million barrel total from the strategic petroleum reserve, & 27 other countries supply the rest from their emergency supplies…the IEA press release indicated that this was to cover the shortfall from lybia as oil prices threatened “undermine the fragile global economic recovery”…but even those who would most benefit, the nation's refiners, said it "makes no sense” and “will do nothing to benefit consumers" as the crude market is already glutted...most analysts felt the move was political on the part of the US & europeans; i've got to say that oil at $100 a barrel hasnt struck me as an emergency warranting this kind of action; what do you do if there's a real emergency, ie, war in the persian gulf?...since energy secretaries & their staffs from 28 different countries were involved, this had to have taken some planning over several weeks, & it couldnt have been entirely secret, so i'd have to guess that oil price weakness over the past several weeks already reflected this pending announcement...at any rate, this year's "summer driving season" will be saved, & let's hope we dont have a real emergency during the winter heating season...

after pulling back from the edge of the abyss last week and seemingly coming to an agreement to release the next tranche of funds to greece, the european finance ministers went back to playing carrot & stick with the greeks, making the loan contingent on a vote of confidence for their prime minister Papandreou and parliamentary approval of a package of negotiated budget cuts...greece is still expected to put up for sale their ports, railways, airlines & telecom company, as well as prime mediterranean real estate, the proceeds of which would eventually go towards paying of the loans; essentially, its a foreign takeover of greece in essence not much different than a wartime occupation; certainly the greek people can see this coming and continue to shut down the country in protest...so although the headlines announce agreements made by the politicians, it still seems questionable whether any of them will work at street level...if greece should default, the biggest immediate losers are the ECB, & the french & german banks; but an unknown amount of that debt is insured by CDS issued by american banks so our exposure is unclear; furthermore, fitch reports that our money market funds have about half their assets in european bank securities...

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...

Monday, June 20, 2011

notes on the week ended june 18th

the generally weak reports we've seen in previous weeks continued this week, although the decline in retail sales, driven mostly by lower car sales, of only .2%, was less than expected; the reuters/UofM consumer confidence index declined from 74.3 in may to 71.8 this month, a couple regional Fed surveys indicated contraction, and small business sentiment and hiring plans also declined...with most of the 2nd quarter economic activity now pretty apparent, goldman sachs cut its forecast for 2nd quarter GDP from 3% to 2%, macroadvisors lowered their 2nd qtr forecast to 1.9% from 3.5%, and the IMF cited slowdowns in the US and Japan in revising their forecast for global growth downward...the IMF now expects our growth to come in at 2.5% for this year and 2.7% in 2012, which does not bode well for bringing the unemployment rate down...although the WSJ econ blog imagined to gain some special insight from the fact that google searches for "double-dip" recession had spiked last week, i havent seen much use of that terminology in the econoblogosphere; by far the most common expression i've noticed has been to refer to current conditions as a "soft patch", which sounds like something you might want to jump into to take a nap...which may be the course we're on: we know there will no stimulus coming from a gridlocked deficit obsessed congress, & the Fed's purchase of Treasury debt will be ending on june 30th...and since core inflation, the measure with food and energy stripped out & that the Fed uses, rose 0.3% from april to may, the most in one month since 2006, it has now become even more unlikely that further monetary stimulus will be in the offing...there is a perversity in that core measure, however; the housing component is 42% of it, but in 1983 it was changed to reflect rental equivalent housing; so despite the fact that home prices are falling, rents are rising, as rental units are in short supply, driving that core inflation rate up...but if there's one thing we know about the Fed, its that they stick by their rules, no matter how obtuse they may be...

as i mentioned, our congresscritters continue to be gridlocked in wrangling over the debt ceiling extension...most reports have medicare and social security off the table, but medicaid, the federal-state program that provides medical care for the poor, disabled and indigent, may be the bargaining chip they can agree on, as both parties are in favor of screwing the poor...so we might expect to see more street people showing up at hospital emergency rooms if that's what gets cut...and in what had to be a senile moment for the AARP board, they advised the WSJ that they realized cuts would have to be made to social security, even though the CBO has indicated the program is fully funded until 2037 and 90% funded thereafter...in light of the congressional gridlock on the debt, banks are moving to cash in order to cut their use of US Treasuries before august, as a precaution against possible market runs that might occur should congress fail to agree by then...and in a sure sign that the markets believe that congress may never come to its senses, by wednesday the cost of CDS to insure US 2 year debt was higher than that of the cost to insure the same for brazil or italy..

the adjacent map is from a very thorough article at joe romm's climate progress which tells us that the U.S. Had Most Extreme Spring on Record for Precipitation; not a surprise to me, or to those who lived through it in the 9 states in dark green which set all time records for rainfall; and it's probably not a surprise to those living in texas that they experienced their driest 3 months in the 117 year record, either, as drought conditions there still persists...you know about the earlier mississippi flooding, but notice the well above average precipitation totals in the northern rockies; much of that fell on a snowpack which was as much as 22 feet deep and the snowmelt & runoff is now contributing to record flooding on the missouri river, which is now threatening the fort calhoun nuclear plant near omaha; as of friday, missouri river water levels at the plant were given at 1005 feet, and the plant is surrounded by a 2,000-foot long berm that takes the protective level to 1,010 feet, or five feet above the current river level; however, the same storm system that spawned the joplin tornado also dumped unprecedented rainfall in eastern montana; in that one storm some areas got over 9 1/2 inches, nearly a year's worth of rainfall, & that was falling on a snowpack which was still 7 feet deep in places...so the upper missouri remains at flood stage, all the dams are filled & forced to spill water downstream, the river is now expected to crest 5 feet higher at the nuclear plant, and this plant, which the operators claimed was built to withstand a "500 year flood", is now being sandbagged...the flood condition on the missouri is expected to persist all summer, and there is concern that any of the aging dams upstream could suffer degradation from the extreme river flow conditions... similar aging infrastructure problems persist around the country, yet unemployment among construction workers remains around 15%, but our political gridlock leaves us no way to put 2 and 2 together...

a surprising study of US life expectancy by county released this week revealed that people in some counties in Appalachia and the deep south lagged the national average considerably, and were likely to die as much 15 years sooner than those in the healthier US counties, and were worse off than those born in honduras or el salvador; overall, the US life expectancy ranked 38th worldwide, now behind countries such as costa rica and martinique, & in some parts of the US, people are dying younger on average than their counterparts in nations such as Syria, Panama and Vietnam, despite our spending more per capita on health care than any other country in the world...the prime cause given for the fall in US life expectancy is obesity...

a potential rare earth shortage was in the news again this week, as prices of many or the metals used in high tech equipment were reported to have doubled over the past two weeks after china further restricted exports; dysprosium oxide, for instance, used in magnets, lasers and nuclear reactors, rose to about $1,470 a kg from about $700, & europium oxide, used in plasma TVs, also doubled in price...so expect the cost of hard drives to rise accordingly...if you recall, china has a virtual monopoly on production of these elements, which are actually common in the earth's crust, but as they take dozens of washings of the ores in acid to extract, they leave the mined areas badly degraded, and other countries have been willing to let china suffer the environmental consequences...

the week in europe began with S&P assigning greek government debt the world's lowest credit rating, and borrowing costs for the PIGS rose almost daily through most of week, with greece's 2 year rate approaching 30%...for a while it looked like i'd be telling you about some kind of greek default or restructuring, as the parties to the negotiations remained at an impasse, greek strikes brought the country to a standstill, & members of the prime minister's party resigned in protest of the bankster troika's imposed austerity measures, but at the last minute the IMF blinked, and then angela merkel agreed to a "voluntary" rollover of greek bonds, so it appears they've succeeded in kicking the can down the road to july, when we get to do it all over again...

there was something else in europe that i was curious about, though, so i followed up...iceland, which by public referendum had last year told the british & dutch banks to stuff it & refused to bail out their banks, floated a five year bond on thursday at 3%...i had thought iceland was supposed to be a pariah, but here they are borrowing at rates comparable to the core of europe...so i ran a quick & dirty google comparison between iceland, which defaulted, and the PIGS, which imposed austerity at the behest of the IMF & the ECB; iceland's unemployment is 7.1%; for greece, it's 15.9%, for ireland, it's 14.8%. for spain, it's 21%, & for portugal, its 12.6%...icelands GDP is expected to grow at 2.3%, while ireland's is .6%, spain's is .7%. greece is negative 3%, and portugal's GDP is expected to fall 1.3%; as ive noted, iceland can borrow at 3%; borrowing costs for greece remain above 28%, for ireland, over 12%, for portugal, 13%, and spain, 5.6%...shows you what austerity will do for a country...

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...

Sunday, June 12, 2011

notes on the week ended june 11th

there werent many important economic reports out last week, so im going to highlight discussion around the blogosphere prompted by an article by Bob Kuttner, Debtors' Prison, which was picked up & expounded on by yves smith and further explained in a series of at least 4 posts by paul krugman…it's particularly enlightening as to how we got into the trap we're in, and more specifically, shows how all efforts by the the Fed, the administration, and the institutional power troika in europe are directed only to protecting the interest of the "rentier class", ie, those who's income comes solely from extracting "rents" from the rest of us in terms of interest payments, and not towards solving the underlying problems of the economies they're charged with running...as all the articles are relatively short & clearly written, it worth catching the whole set, not so much for solutions, but to understand the problem...
i also want to take on the pervasive idea that our government debt is somehow a bad thing; if the treasury would suddenly stop borrowing, the world would find itself with a dearth of safe assets; without government bonds to invest in, where else could the social security trust fund or state and local pension funds park their savings that would be safe? real estate? the stock market? similarly, those nations that run a trade surplus with us accept treasury notes and bonds as a safe store of value; that's the function of the dollar as a reserve currency...thus short term US government debt has become, at least in part, the worlds money supply; a million dollar Treasury bill is used as money by a sovereign wealth fund in the same sense that you use a ten dollar bill in your wallet...thus, a contraction of the supply of the reserve currency (our treasury debt) would have a negative impact on the world economy in the same manner that a contraction in the domestic money supply would impact our nation's economy...
a lot of cyber ink was spilled over a big speech by ben bernanke at an international monetary conference this week, but all the reiterations of it told us nothing new: unemployment is too high, and the Fed cant or wont do anything about it, growth is too slow, but the Fed cant or wont do anything about it, et al; the one point that he made that is worth repeating was his warning to congress to not make things worse by short term spending cuts, noting that “a sharp fiscal consolidation focused on the very near term could be self-defeating.” ...as much as the word "stimulus" evokes images of misplaced government spending, there is a reason that word was used, and we should be aware that cutting government spending has the opposite, contractionary, effect...with nearly 25 million americans unemployed or looking for full time work, and government borrowing costs at the lowest in history, this is the time we should be spending on investments such as infrastructure, rather than cutting back and laying off even more government employees...
i've been noticing a lot of articles which are including future obligations as part of government debt...this one at USAToday is an example; it implies that because the government will eventually have to pay for social security and medicare for the "baby boomers", our debt is actually $62 trillion...the trouble with the USAToday article is that it counts unknown & imaginary future obligations as "debt", which makes no sense ...for instance, it's possible i might get cancer 20 years hence and will need chemo; could you say that i'm in debt for the cost of that possible chemo today? of course not, that debt will not be incurred until such time as i go in for the treatment...if you can say the US is in debt $61.6 trillion today, then by the same logic you can say our current GDP is $300 trillion...
there was some hope by the oil consuming nations that export quotas would be raised at the quarterly OPEC meeting in vienna this week, but it broke up with no agreement & some apparent belligerence between the saudis, who wanted to raise quotas, and the iranians, who wanted to hold the line...the saudi minister called it "one of the worst meetings we have ever had,"...some analysts suggested that the official announced quotas have usually been ignored anyway, and the market reaction was relatively minor and brief...subsequently, the saudis said they would unilaterally increase production, but as we've discussed in the past, it's not certain they'll be able to add the 10 million barrels a day they said they would; it aint like just turning on a tap...in a related event this week, Exxon announced the discovery of a "massive field" in the gulf of Mexico, with a potential recoverable reserves of 700 million barrels "one of the largest discoveries in the Gulf of Mexico in the last decade"...that was jumped on by the "drain america firsters" in congress as proof that we have abundant domestic oil that we should be drilling for...by my back of the envelope calculations, that massive once in a decade find supplies less that 40 days worth of our daily consumption of 18.7 mbd..indeed, BP reported in its annual Review of World Energy released this week that the global oil industry discovered new reserves of only one fifth of what we consumed last year...

since the links on my blog cover most of the weeks economic, environmental and energy news well (be sure to catch the articles on fukushima) & there isnt anything else i want to comment on, ill just show you a couple maps i ran into this week that i found interesting... below is a  map of the 2335 record high temperatures set during the past week, and the adjacent map is of the unhealthy smoke concentrations from the wildfires in arizona & texas, which have since shifted east…
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 records screenshot
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...

Monday, June 6, 2011

economic reports, week ending jun 4th

if we didnt know this was supposed to be a "recovery", the uniformly dismal economic reports that we've been seeing recently could have easily had us fooled...first, goldman sachs cut their forecast for 2nd quarter growth a 2nd time, to 3%, largely due to supply disruptions from japan; then the chicago purchasing managers index crashed to 56.6 from 67.6, the largest drop since the lehman crash and 2nd largest in history, prompting further downgrades in growth forecasts; also, the consumer confidence reading fell "unexpectedly" from 66 to 60.8, when economists had been expecting a rise to 67; then the case shiller index fell to a new recession low, and the ISM manufacturing index came in at 53.5 in may, down badly from 60.4 in april, & the worst since 2009...finally, we had a pair of dismal unemployment reports for May...

let me start with the popular case-shiller home price index, which has finally confirmed what other home price indexes have been indicating all along, that being that home prices have officially "double dipped", that is to say that all the appreciation of the previous year has been lost, and the average home price in the 20 metro areas that comprise 70% of the US market has now hit a post bubble low...for the three months ending march, the case-shiller composite 20 was down .2% from february's number, and off 31.6% from the home price peak...the national index is down 5.1% YoY...of course, the bubble cities are worse, with las vegas off 58.3%, compared with dallas, off only 7.7%; other cities are in the links on my blog...the CoreLogic index, which is the one the Fed uses, was also out this week, and it showed a .7% increase from march to april; however, that index is not seasonally adjusted...another home price index, the FHFA, was released last week; its based on data provided by fannie & freddie, & it showed a 2.5% decline in prices from the 4th qtr 2010 to the 1st quarter this year, which was the greatest decline in that index since the 4th quarter of 2008...

    the one post on case-shiller that i found interesting this week was on Mish's blog, where a reader supplied him with 4 charts and 2 tables showing home prices adjusted for inflation; in real terms, average prices in some cities are actually now lower that when the case shiller index began in 1987; ive included a copy of that table above, which should enlarge if you click on it…but even those charts & tables still dont compare apples to apples, because the mix of homes is constantly changing...the current figures case-shiller figures include new home resales which did not yet exist in prior years, which gives the index a continuous bias to the those more expensive houses...no one has yet come up with an index which covers the continuing denigration of home values as the older homes deteriorate and some are even eventually bulldozed; & those homes which have been torn down since '87 are not included in any index...

Percent Job Losses During Recessions the other headline report that was out this week was the BLS unemployment stats for may; total nonfarm payroll as reported by the establishment survey increased by 54,000 as a result of 83,000 new private jobs, less the loss of 29,000 local government jobs, of which 18,000 were laid off school teachers...over & above that, added march jobs were revised from 221,000 down to 194,000, and april was revised from 244,000 to 232,000, so the net jobs gain in this report was actually 15,000...remember, we need around 125,000 jobs a month just to keep pace with the growth of the labor force...according to estimates by morgan stanley, about half of the new jobs added in May came as a result of the McDonalds hiring event in April, which occurred after the april survey was taken....a total of 13.9 million americans count as being unemployed, but as a result of more rejoining the workforce the percentage of unemployed ticked up to 9.1%, which the white house opined was "uncomfortably high"…another 8.5 million are working part time for economic reasons ...the 4 million who who have given up dont count in these official govt figures, and according to new research from the Chicago Fed, the expiration of unemployment benefits also “contributed modestly” to the drop in unemployment seen between october 2009, when it peaked at 10.1%, and the beginning of this year...6.2 million of those counted were unemployed for more than 26 weeks, and the average length of unemployment for those who count was 39.7 weeks, which was a new record high...the employment-population ratio remained unchanged at 58.4%...the household survey, from which the headline percentages are calculated, showed quite a disparity from the establishment survey; it showed a gain of 373,000 jobs for the private sector, while government jobs decreased 417,000...with manufacturing weakened by parts shortages, most of the job growth was in the service sector, led by health care & unpaid internships...average wage growth for those working was 6 cents, and thats grown at a rate of 1.8% over the past year...an article in Investors Business Daily showed private sector wage gains over the the ten years starting 2001 were at 4%, far short of any 10 post war year period, which except for the period ending 1983 had always exceeded 25%, & pay growth was even worse than during the great depression, when wages grew 5%...the chart i've included compares job losses in this recession to the other post war recessions; click & you can see this recovery is not like the others...

the number of americans on food stamps also increased in the latest report, hitting a new record; in march, 44.199 million people were receiving an average monthly ration worth $133.24 towards their food purchases; as a result of the recent budget deal, $900 million will be cut from federal nutrition programs, removing about 500,000 women, children and seniors from the programs, which is about the amount of money the bush-obama tax cuts gives to millionaires over an 8 day period...several states are also reducing the number of weeks the unemployed can draw unemployment rations...

 

 

 

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...