Sunday, August 28, 2011

notes on the week ended august 27th

obviously, the east coast hurricane has been the big news of the week, but the focus all week in both the financial MSM and the econoblogs was speculation about what bernanke might have to say at the annual central banker shindig in jackson hole wyoming, as it was at that meeting last year that he announced QE2...with the economy again showing weakness, and it being actually weaker than it was last year at this time, consensus seemed to be that another $500 trillion of easing would be in the offing; in that respect, bernanke's speech, which offered nothing specific, disappointed those who believe quantative easing could help, although having already seen two larger rounds of it peter out, we could question how much good it would do us (if you recall, the originally stated objective of QE2 was to lower interest rates across the benchmark treasury curve and thereby encourage business & housing borrowing, with the end target of reducing unemployment; when rates rose immediately after QE2 started, bernanke changed his tune to target to the stock market, insinuating that the wealth effect would trickle down on us)...it's hard to imagine how much good any more easing can do now; the 2 year treasury is already down to a record low .22%; this week's 5 year note auction went at a yield of 1.0279%, ten year interest rates are around 2%, and mortgage rates remain at record lows across the board...banks are already complaining that they're saddled with too much money they cant put to use; a high level of deposits increases their FDIC insurance and will eventually contribute to their need for more capital...

at any rate, bernanke did suggest that there might be some action forthcoming from the Fed at their next FOMC meeting in september - to that end, he announced that another day would be addded to that scheduled meeting; he also took the opportunity to admonish congress for having created conditions that put the economy on hold while the country faced default during the debt ceiling debate...retrospectives on the speech as well as those blog posts suggesting what the Fed might do differently are right near the beginning of this weeks blog post...

based on my correspondence, there was quite a bit of interest in warren buffett's $5 billion purchase of BankofAmerica preferred; to my mind, with their heavy investment in RMBS (bundled mortgages), BofA has always bordered on insolvent, even though their liquidity & slight of hand accounting has kept that disguised from the market...this recent spate of trouble, however, seems to have had its origins in the foreclosure fraud investigations & the lawsuits by the NY Fed, Pimco, & Blackrock and the more recent suit by AIG over misrepresentations of MBS that BofA had sold to them…about 3 weeks ago yves smith at naked capitalism started a “Bank of America Death Watch” & had been updating it periodically with exposes' of their liabilities & financial statements, & the death watch had also been picked up elsewhere in the blogosphere...the foreclosure fraud settlement with the state attorney generals for a paltry $20B, which the administration had been pushing, included a "get out of liability free" clause, so 4 attorney generals, Schneiderman of NY, Beau BIden of delaware, Coakley of massachesetts, and kamela harris of california balked at signing on...early this week the administration pushed back against schneiderman, apparently taking him to be the ringleader, to settle with the banks; that corruption was in turn exposed by the NYTimes, who editorialized against the settlement…with the "get out of liability free" settlement thus stalled, BofA started sinking fast, and there was even talk of it failing & precipitating another financial crisis…so by midweek the bailout rumors were flying, & there was ever a rumor that geithner was discussing a BofA takeover by JP Morgan with Jamie Dimon, & it even got so bad that the Financial Times reported that BofA had moved to counter more blog rumours; it seems it finally came to to a head after henry blodget at business insider editorializd that BofA must raise more capital rather than try to sell assets; then, shortly after obama was reported to be consulting with buffett, the deal was announced...buffett gets 6% in perpetuity, and more than likely a bailout if anything should go wrong later...and it aint over till its over; shortly after the BofA/Bufffett deal closed, Charles Schwab, the nations biggest broker, sued banks, including BofA, for manipulating Libor rates, a claim which may be tripled under antitrust law...

MBA in Foreclosure by Statethere were also more mundane reports regarding the ongoing mortgage crisis, as the MBA released their 2nd quarter mortgage delinquency report, showing that total delinquencies increased to 12.87% of mortgages; ie, more than one in 8 homeowners have missed one or more house payments…bill mcbride at calculated risk broke that report out in a series of posts with graphs which explain what has been going on better than words can; first, the overview on the MBA report, then “Comments and State Data”. then Mortgage Delinquencies by Loan Type, and finally Delinquencies by State: Range and Current…i found his graphs by state most interesting, because they show how the foreclosures and delinquencies are heavily concentrated in a few states; the first one here is just foreclosures, with the red bars judicial states and clearly showing florida as the outlier with over 14% of the homes there in foreclosure; the second graph below adds the lengths of time loans are delinquent to arrive at the total homes in trouble in each state...you should be able to click on either graph to have it open in a new window...
MBA Delinquency by Period
the FHFA (housing finance agency) introduced a new home price index this week; previously their index only included prices for govt agencies such as fannie & freddie; theyre now including state prices and census divisions in their national report, which showed a home price decline of 5.9% for the 2nd quarter in their initial expanded index...we also had the monthly new home sales for july released this past week, and they declined to a 5 month low at 298,000 after june’s sales were revised downward to 300,000…at the rate they’re now being sold, this is shaping up to be the the worst for new-home sales on record, dating back at least 50 years, when obviously the number of households was significantly smaller...new home construction, though a small part of the economy, is important because its said that each home built creates an average of three jobs and generates $90,000 in taxes...the administration did float another housing proposal(s) this week, which has been variously reported as applying to homeowners with government backed mortgages or something more general whereby homeowners could their loans at today's lower interest rates; obviously, with a lower rate, homeowners could pay off their loans easier and free up household cash for other uses...but nothing is cast in concrete yet; as reported, it's still "they were weighing a range of proposals"..so dont hold your breath... 

as everyone anticipated, GDP for the second quarter was revised downward to an annual growth rate of 1.0% this week, which is better than guestimates i'd seen earlier but still lousy; we knew the surprisingly high trade deficit would be a drag; also contributing was a greater shrinking of the government sector than originally estimated; in fact, the decline in government spending now practically matches the rise in personal consumption spending, and essentially the growth in the economy is coming from business investment alone, which cant go on by itself indefinitely...with the .4% rate for the first quarter unchanged, cumulative growth for the first half was at 0.7%, where a growth rate of 2.5% to 3% is needed to put a dent in unemployment...and ominously, there's already a forecast (from Nomura) that the economy lost jobs in August...first time claims for unemployment also came in at a higher than expected 417,000, so our brief flirtation with the 400K level seems to be over...

we have another political debate over taxes shaping up, with the parties switching their positions; this time is the republicans who want to let the payroll tax cut expire at the end of the year, & the administration wants to extend it; if you recall, this tax cut — which reduces workers’ contributions to social security from 6.2% to 4.2%, was part of the mcconnell-obama tax deal which i panned last december, & its said to put an average of $1000 extra annually in to worker’s paychecks…i dont have a strong feeling about this expiration, as i’ve become increasing skeptical of the stimulative value of tax cuts, and leaving it in place undermines the ongoing contributions to the social security trust fund, which will likely come back & bite us on that safety net later…

a few other notes of interest; the S&P Board fired the CEO responsible for the US downgrade & replaced him with an exec from citigroup, and said the downgrade had nothing to do with it...power plants in texas, which are dependent on fresh water, may be forced to curtail operations or shut down completely if the state’s severe drought continues into the fall; the keystone XL pipeline from the alberta tar sands, from the same conglomerate responsible for recent spills, seems set for approval, as the state department believes it will have minimal environmental impact even though it crosses the ogallala aquifer, the primary source of water for states in the middle third of the country, and the Japanese government is preparing to declare a large zone around the Fukushima plant uninhabitable, probably for decades, due to radioactive contamination at unsafe levels...

it also looks like the greek bailout is unraveling, even though the feared contagion to italy & spain has been contained by the ECB buying of their debt; finland has insisted on collateral for their participation, moody's warned that would cause a greek default, and greek interest rates subsequently hit new highs, with their 10 year bonds over 18% and two year debt hitting 46%...the finnish deal would need eurozone approval, and if they get it, then austria, slovenia, slovakia & the netherlands want the same...a greek trade group reports that the imposed austerity will force the closure of 100,000 small businesses by the end of the year, and as much as twice that many by next year...meanwhile, it's reported that cutbacks stemming from the austerity imposed in italy will likely make their deficit worse instead of better, so france is going to try the same tactic..

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, August 21, 2011

notes on the week ended Aug 20th

the already bleak economic outlook deteriorated even more this week; i dont think ive ever seen so many downward forecast revisions in such a short period as ive seen over the past few weeks; they started, of course, with the Fed's pronouncement last week that conditions had gone downhill so much that they decided to commit to keeping the fed funds rate near zero "at least through mid-2013."; this week, the litany of revisions started with moody's analytics reducing their forecast for this year's growth from 3.5% down to 2%, and similarly reducing their 2012 forecast to 3%; then morgan stanley weighed in on the global economy, reducing their global growth forecasts to 3.9% in 2011 and 3.8% in 2012, from the previous forecasts of 4.2% and 4.5%; then on friday, after a dismal philly Fed report, it got even worse, with wells fargo, goldman sachs, jpmorgan & citigroup all revising their outlooks for the remainder of this year & next, all to below a 2.1% growth rate; jpmorgan was on the low end of those with a prognosis of only 1% growth for this year & only 0.5% growth even extending into the first quarter next year...less than 6 months ago they all thought growth would reach 4% or more by the 3rd or 4th quarter of this year...in general, all also forecast unemployment to remain high or get worse...the Philly Fed index, a gauge of manufacturing activity in the mid-atlantic region, had been expected to continue to show a modest rebound (ex the japanese supply chain weakeness); instead, it showed a contraction at -30.7 for august, the lowest in 2 1/2 years...coupled with the empire state index, released earlier from the NY Fed, which also showed slowing, the two are generally indicative of coming weaker national numbers when the ISM report is released later...these reports, coupled with the record low consumer sentiment and surprisingly high trade deficit numbers we got last week, paint the overall gloomy picture...

while the volatility in the stock market has been making the daily headlines, the real action continued to be in the market for treasury bonds; recall how they rose to new highs in defiance of the S&P downgrade last week; this week interest rates on the 10 year Treasury slipped below 2% for the first time in 70 years, and 5 & 7 year bond yields were at historic lows...part of this is the so-called "flight to safety"; ie, investors getting out of volatile european and equity markets to park funds in secure treasuries...but what else does this buying of ten year bonds yielding 2% imply? that those controlling trillions of funds worldwide dont expect anything to do better than return 2% over ten years? understand, that if you're holding one of those bonds and rates rise, the marketable price of the bond declines; if the economy improves & rates rise anytime in that ten year period, someone is going to take fairly big losses; all i can figure is they must be expecting that to be better than no return at all from stocks, or complete dissolution of the euro-zone....anyhow, i did find a 200 year bond rate chart from Société Générale, originally published in march of this year, at which time rates were obviously higher (the black horizontal line) to give you a picture of how unprecedented rates this low really are…click it for a larger chart…

chart

what interest rates on Treasury debt this low should also tell you is that we dont have a debt problem, despite all the rhetoric from bankster funded politicians on both side of the aisle; if anything, there is a worldwide shortage of safe assets...a better measure of our debt situation is the cost of funding it, which is now at historic lows as a percentage of government outlays (see chart) or as a percentage of GDP...with the cost of servicing our debt at an all time low we should be borrowing even more now & investing in the future of this country, and making good use of all the nearly free money the rest of the world is giving us...someday in the future, when this country's infrastructure has deteriorated, we're going to look back at this time and ask how they could have been so myopically stupid as to have let this once in a lifetime opportunity of an idle workforce & lows funding rates slip by...

 

obviously, with rates on the benchmark treasuries this low, other long term interest rates throughout the economy have also continued to fall; freddie mac reported fixed rate mortgage rates are now at the lowest in over 50 years, with the 30 year mortgage at 4.15% and the 15 year mortgage at 3.36%; 1 year adjustable rate mortgages at 2.86% are the lowest they've ever been since that type of mortgage was offered...even so, the two housing metrics that were reported this week declined: new housing starts were at 604 thousand in July, down 1.5% from the seasonably adjusted June rate of 613 thousand, and existing home sales declined 3.5% from last month, with a high cancellation rate again depressing sales...

there have been a few reports out on the intense lobbying of the dozen members of the "super-congress" who will be deciding by thanksgiving what areas of the federal budget to cut 1.5 trillion dollars from; unsurprisingly, of the millions in contributions that those twelve have received, the lions share comes from wall street, with defense, real estate & insurance industries also well represented; as far as i know, there arent any campaign contributions representing those on food stamps or on the women's, infants & children programs, so we can guess what kinds of expenditures will get the ax first...

there have always been a number of posts around the econoblogosphere which attempt to push back against one or another proposal of some politician, but what i found personally depressing this week was the large number relating to candidates who will be running in 2012; i guess rick perry of texas announced about a week ago, & i must have seen 4 dozen posts relating to his economic policy in texas, his environmental opinions, and his threat against ben bernanke ("we would treat him pretty ugly down in Texas") ie, if ben should decide to use monetary stimulus before the election (here's the video) …before the week was through, i had included a bunch of links to them in this week's blog, both in the Fed coverage near the top and in my state budget coverage section; but politics aint why im out here, and i’m going to try to curtail including such links in the future...it is depressing enough already recording the country backsliding economically when the obvious solutions are at hand, without recording all the ad hominem attacks occurring in the political arena while the conditions in the rest of the country are being ignored...

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, August 15, 2011

notes on the week ended Aug 13th

One-Year Chart for US Generic Govt TII 10 Year (USGGT10Y:IND)except for the stock market gyrations, which i normally dont follow, it was a relatively slow week as far as hard economic news goes...and with the S&P downgrade occurring so late last week, the econoblogosphere was still fixated on that for the first part of the week, so not much else was discussed... most objections to the downgrade seemed to come from those econobloggers on the left, accusing S&P of acting politically, which leads me to believe they hadnt really read the SP statement (pdf), which seemed to put most of the blame for the downgrade on the republican's anti tax stance; quoting from p4: "We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act." and as if that werent convincing enough, a S&P director further clarified the problem on thursday, saying our credibility was undermined by the fact that people in the political arena were even talking about a potential default,” "That a country even has such voices, albeit a minority, is something notable,” “This kind of rhetoric is not common amongst AAA sovereigns.

i cant say if the S&P downgrade had much to do with the stOne-Year Chart for US Generic Govt 10 Year Yield (USGG10YR:IND)ock market selloff; if any market should have been influenced by S&P's action, it should have been the market for US treasury debt, but that market turned in its best run-up of the year, with our long bonds rising all week...last friday, before the downgrade was made public, the interest rate on US 10-year bonds was 2.56%, by this friday, it was 2.24% (adjacent graph), and the yield on inflation-protected bonds actually went negative (top graph right)...(in contrast, borrowing costs for France, which is still rated AAA, went up last week)...and after all the handwringing over the weekend & early in the week that the downgrade would cause interest rates throughout the economy to skyrocket, and after Fannie, Freddie, & FHLB debt issues were also downgraded, mortgage rates still hit new record lows, with a 15 year fixed rate mortgage averaging 3 1/2%, with a one year ARM at 2.98%...even the 30 year fixed mortgage fell to 4.32%, slightly higher than the all time low of last november...

so at the end of the day, the S&P downgrade of the US will probably be a non-event, just as the downgrade of Japan was 9 years ago...although japan has twice the debt that we do compared to the size of their economy, their borrowing has never been impaired and their interest rates remain among the lowest in the world...and S&P will likely face a congressional investigation for their mischief, and well an insider trading inquiry from the SEC (yves smith related that certain hedge funds knew of the coming downgrade as early as the tuesday before & that others were briefed before the treasury) so we probably havent heard the last of it...

the FOMC (Fed Open Market Committee) meeting and following statement on tuesday set the tone for the rest of the week; some, noting the market weakness, were expecting another round of quantitative easing, but as that monetary policy bullet has probably been overused, they opted to change their statement to indicate that since the economy was much weaker than expected & not expected to improve soon, they would keep the fed funds rate between 0% & 1/4% for another two years...most opinion on this is that it was awful weak medicine (links on commentary are near the top of this week's blogpost), but as i've pointed out before, the Fed acts to protect & serve the banks; everything else is secondary, and the zero interest policy has one primary purpose, to allow the banks to recapitalize by borrowing at 0% & lending back to the Treasury & elsewhere at higher rates - despite the fact that the banks appear profitable, they are still carrying loads of bundled mortgages & commercial loans which are carried on their books at original value, and quirky accounting allows them to continue to pretend all is well...(more details in this old post: banks insolvent? extend and pretend…)

U.S. Trade Deficiton thursday we got another report which will likely cause some serious revisions to previously reported 2nd quarter GDP numbers; the trade deficit for June widened to $53.1B, up from $50.8B in May and quite a bit above expectations of around $48 billion; june's trade deficit was the largest since Oct 2008, the height of the financial crisis…for the purpose of illustrating this, i’m going to steal another one of bill mcbride’s graphs from his post on the trade deficit at calculated risk; he shows the trade deficit in blue (if you click on it, you’ll see the top of the graph is zero & all lines are negative), the oil trade deficit in black, and the trade deficit ex-petroleum in red…our trade deficit with China increased to $26.7 billion of the total, so it’s pretty obvious that chinese imports & oil make up the majority of our imbalance…

Consumer Sentiment

another dismal number we got this week was consumer sentiment; on friday, the thomson reuters/UofM survey indicated "consumers" were more negative than any time in the last 30 years; the index fell to 54.9, far below the median forecast of 63.0 and significantly off July’s reading 63.7; also reported on friday was that retail sales for july were up a half percent over june's, which was considered strong, so there was some confusion in the media as to how consumer sentiment could be at a 30 year low with retail sales up 5%...its a point ive made before; our bottom 90% of the population can go to hell, but the top 10%, controlling 93% of the wealth, will keep the gross aggregate numbers rising all by themselves...the rest of us are just economic baggage; we are no longer needed or wanted as consumers....nor as workers or voters, for that matter...

there were several posts on housing inventory this week; most were pretty routine reports on real estate owned by Fannie, Freddie, FHA & others, but there were also a couple that indicated those government agencies were looking for ways to either sell or lease the approximately 250,000 properties that they own; although one post indicated a rental proposal was already on the table, the others clearly stated that the FHFA, HUD, and the Treasury were jointly requesting ideas for sales or partnership ventures...another post, by yves smith, discovered that there are a large number of vacant foreclosed properties in new york state (where the delay in foreclosures is already over 2 years) which have title problems stemming from the way the banks handled the transfers of paperwork during the boom, which makes those properties virtually unsalable; she suggests this could be a problem nationwide, as we first surmised when the robosigning & foreclosure fraud scandals broke...and im sure you'll all be pleased to hear that we (as being liable for Fannie Mae) also took a portfolio of troubled mortgages off the hands of Bank of America this week, in something of a back door TARP...

i should also mention that the 12 members of the supercongress, who will be charged with finding $1.5 trillion in budget cuts between now and thanksgiving, have been selected, and although they're still officially on vacation, they've put their staffs to work on coming up with a compromise; the 12 were selected 3 each by harry reid, nancy pelosi, mitch mcconnell, and john boehner & are said to be loyal to each of them, so i'm guessing that those 4 have the ultimate power...rather than name them, i'll just point to the post that includes photos and backgrounds of this dirty dozen who may hold the future of this country in their hands...remember, that if they dont come up with a solution, $1.2 trillion in cuts spending cuts written into the new budget deal are automatically triggered, which include cuts to medicare and defense...and we also got a good indication on how our coming fiscal austerity might work from greece, where austerity has been imposed for over a year; their unemployment jumped to 16.6%, up from 12% a year earlier, and their economy shrank 6.9 percent in the second quarter of 2011 from the same period a year earlier...obviously, instead of having their deficit situation improve, the cutbacks there are making it worse...

in the area of jobs, the post office has announced plans for a major restructuring which will include elimination of 220,000 positions by 2015; they've also asked congress to remove the collective bargaining restrictions so the layoffs can proceed unhindered...and they're also asking congress to change legislation that requires postal workers to get federal health care and retirement benefits...there was also a report out that wall street was planning to eliminate another 101,000 jobs...being that its the banks, maybe they'll get more government aid to reverse the cuts...

i guess its not too much of a surprise to anyone that july set the record for the most weather extremes the US has ever seen in one month, led by warm minimums, record highs, & extremes in wetness & drought...but it was a surprise for me to hear that fires in russia had consumed more woodland than last years fires there; the difference this year was that most were in the unpopulated regions of the east and north, including siberia, so they really didnt make the news that last years fires near moscow did...

the last thing i want to leave you with is the adjacent chart, which comes from a recent report on the State of America’s Children; not only is it sad & and an embarrassment, its stupid; indicative of our short term thinking & unwillingness to invest in the future...those kids in poverty, malnourished & uneducated now will be the ones who will have to support the rest of us in 20 years...

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

Wednesday, August 10, 2011

how fucked are we?

Christina Romer, former chair of the White House Council of Economic Advisers, provides the answer..

Tuesday, August 9, 2011

notes on the week ended Aug 6th

what a crazy week...there's been so much in motion it's been hard to keep track of it all...at the beginning of the week a last minute long term spending cuts deal was cobbled together out of the elements of the senate plan, the boehner plan, the gang of six plan, & various catfood commission suggestions, and it passed & was signed a few hours before the government would have allegedly turned into a pumpkin on Aug 2; while that was happening european markets were going into cardiac arrest when it became obvious that there was no plan to save spain & italy as their borrowing costs hit new records; by thursday the market panic spread to asia & the US & markets worldwide ended the week with losses of more than 5%; on friday we got a "better than expected" but nonetheless lousy employment report to follow on the heels of a week of other lousy economic reports, then to top the week off, S&P cut the US AAA credit rating to AA+ after the markets closed friday night...

the essential specs of the debt ceiling deal, aka "the budget control act" start with a debt limit increase of $2.1 trillion and $917 billion in spending cuts over 10 years to discretionary programs - that means initially medicare, medicaid & social security, & the defense budget wont be touched, so that amount will come out of education, energy, environment. infrastructure, housing & other domestic spending...the act then sets up a yet to be appointed "supercongress" with 6 members from each party who will be charged with finding $1.5 trillion in additional spending cuts before thanksgiving; if seven members of that supercongress can agree on a package, that package must then approved by a straight up or down vote, without amendments, by christmas, and the president must sign it by new years...if this supercongress package fails, or doesnt materialize, $1.2 trillion in cuts spending cuts written into the law are automatically triggered, which include cuts to medicare and defense...the debt ceiling increases themselves come in 3 tranches of $400B immediately, with $500B & the remainder to be voted on later, giving the president the right to veto any part of the increase not approved by congress (this provision is only so the tea party can continue to vote against ceiling increases)...amount of the last tranche of debt limit increase depends on what happens with the supercongress and a balanced budget amendment which also must be voted on by both houses on congress...and according to mitch mcconnell, it doesnt end here; the country will once again be held hostage when the debt ceiling comes up again in late 2012 or early 2013...

the true irony of all these spending cuts is that when all is said & done, they may not reduce the deficit at all...the level of the deficit is determined by the difference between government revenues and outlays, and if the job & spending cuts (which are inherently contractionary) push the country back into a deeper recession, government revenues may fall far enough that the deficits may actually increase; that's not just my opinion; the economic policy institute estimates that the debt deal signed this week will end up costing the economy 1.8 million jobs by 2012, and even j.p.morgan estimates that "federal fiscal policy will subtract around 1.5%-points from GDP growth in 2012"; considering our recent GDP reports came in at 0.4% & 1.3%, a 1.5% hit to our current GDP growth rate would indeed put us into another official recession...the only real way to eliminate deficits and our long term debt is to get the country back on a growth path, so that in the long term GDP grows enough annually that the debt remaining is trivial by comparison (ie, we never paid off the debts from WWII, but the country grew fast enough in the 50s & 60s that that debt, a greater % of GDP than we have now, gradually diminished as a percentage of the economy)...despite the rhetoric from both parties, we still really dont have a debt problem now; our cost of servicing our debt is low historically...in 2010, interest payments on the debt were 5.7 percent of total government spending; the average for that ratio between 1950 and 2010 was 9.8%...if we had leaders who believed that the country has a future, they would be borrowing even more at a time when they can sell 10 year bonds at 2.4%, and investing the proceeds in the country's infrastructure and it's young people...instead, we have leaders who are owned by the plutocracy who's only interest is to sell the rest of us into an austere debt slavery...the plutocracy well understands the planet's resources are limited and having a large middle class will consume too much of what's left...all the pharaohs really want is a slave class to build pyramids for them.....

and of course, it was also agents at S&P acting on behalf of that plutocracy who downgraded the credit rating of US long term debt from AAA to AA+; unable to get the kind of deficit cutting package they wanted ($4 trillion), they are attempting to apply market pressure...but its not just their interpretation of the US fiscal outlook they gave as a reason; they are clearly concerned about our government's ability to run the country; you can read for yourself from their statement  (PDF): "The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently....It appears that for now, new revenues have dropped down on the menu of policy options....Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a ‘AAA’ rating and with ‘AAA’ rated sovereign peers"...there's nothing in there that says we cant pay on our bonds; it's clearly an indictment of our dysfunctional gridlocked government...

i cant predict what interest rates will do in response to this downgrade; the Fed, the FDIC, the OCC & NCUA put out a joint press release that Treasury debt should be treated as before by the banks & the financial markets; i cant imagine that china and the other holders of US treasury bonds are going to dump them in favor of Liechtensteiner bonds or those from the handful of countries that are still AAA, either...likely US agency debt, such as Fannie, Freddie, Sallie, et al will all receive the same AA+ rating, as will any states and municipalities that were previously rated AAA by virtue of a federal guarantee...since the market has consistently judged US debt to be safe (last week US interest rates went negative in a treasury buying frenzy after the bank of NY Mellon started charging large customers a fee to deposit funds) stories in the media about credit card & home mortgage rates going up would seem to be made up out of whole cloth...

i cant tell you why the market sold off on thursday, either, but i can provide a litany of reasons that i'd been seen in the previous week that could have contributed to the weakness, foremost among them the revisions in GDP we saw last week; that was followed by notes from such as goldman sachs, PIMCO, blackrock & others that recession risks were rising; then even 5 out of 9 economists on the business cycle dating committee of NBER, the official arbiter of recessions, warned of the same...then, after the debt deal was detailed, there were also several downward revisions for GDP growth for 2012 and 2013…during the week we also got reports that consumer spending was down for the first time in 20 months after incomes grow by the least amount in 9 months, and the ISM manufacturing index fell to a two-year low, just barely above contraction; other signals of a slowdown were weakness in container shipping and rail traffic; July saw the biggest YoY decline in U.S. rail carloads in 16 months

on friday, we also had the release of the BLS unemployment report for the month of july, from household & establishment surveys taken the week of the 12th; this report was widely reported as better than expected; the establishment survey estimated that 117,000 jobs were created in july, with a growth of 154,000 private sector jobs offset by 37,000 losses of government jobs…still, at the rate of job growth that we've seen over the past 3 months, we'll never bring unemployment down, because it doesnt cover for the new young people entering the workforce....the household survey reported the percentage unemployed fell from 9.2%  to 9.1% because 193,000 people dropped out of the labor force and weren't counted; by that survey, the number of employed actually fell by 38,000, and the number of unemployed rose by 156,000…the number of workers only able to find part time jobs declined to 8.396 million in July from 8.552 million in june, so the alternative U-6 unemployment rate declined to 16.1%….if you get past the optimistic headlines, though, we saw new records in the numbers that really matter: the labor force participation rate declined to 63.9%, and the employment-population ratio declined to 58.1%, both the lowest since before reagan busted the unions & forced women into the workforce, and the average length of unemployment set a new record of 40.4 weeks...i have FRED charts for both of those records embedded below, so you can see what they look like, sans the positive media spin…44.4% of those unemployed have been out of work for six months or more, & this at a time when several states are cutting their unemployment rations to less than 26 weeks...15% or 45.8 million americans are now on food stamps, this depression’s version of the 30s breadlines, a number which is up 34% from two years ago; to qualify for that program, which is at risk of being cut, one’s income cant exceed $1174 a month…

there is much else i'd normally write about at length if this had been a slower week; for instance, LPS was out with its monthly mortgage performance data; 8.15% of mortgages were delinquent in june, and 4.12% were in foreclosure, a slight increase...most notable from this report is that the average loan in foreclosure has been delinquent without making a housepayment for a record 587 days; & as long as two years or longer in judicial states such as florida and new york...there's also separate action being taken by several state attorney generals with regards to the BofA foreclosure fraud settlement, and relevant rulings in other courts in a couple of other fraud & MERS cases...there were also at least two releases of deadly radioactive gas at fukushima reported as "highest yet" that were too high for the on site instruments to read (both surpassed 10 sieverts) and other indications of continuing troubles in japan...manufacturing indexes in asia, europe and australia also weakened...and as is always the case, you can find the complete european play-by-play at the end of this week's blog post...

\FRED GraphGraph of Average (Mean) Duration of Unemployment

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, August 1, 2011

notes on the week ended July 30th

as we've discussed previously, this tuesday, april 2nd, is the date when the government allegedly runs out of money to pay its bills, because it's constricted from borrowing for legislated spending by an arbitrary debt limit set by congress, and as of this writing we are no closer to anything that looks like an agreement in congress; & personally, i'm experiencing some degree of burn out from tracking the developments, as i've probably covered a couple hundred articles on it this week, and watching our dysfunctional government function up close can lead one to despair, but i'll try to give you a brief summary anyhow...whether aug 2 is the absolute drop dead date or not is still has been disputed by several analysts,  but it does seem certain that if its not the 2nd, we certainly run into a wall on the 15th, when the quarterly treasury refunding & interest payments are due...

as the week started, there were two plans being discussed; one was from boehner in the house, the other was from harry reid in the senate...the boehner plan, as it was scored by the CBO, would reduce discretionary spending by $756 billion over 10 years, which, with an interest saving of $156 billion, would cut the deficit by $917B...on the contrived basis of one dollar of cuts for every dollar of debt ceiling extension, his plan wouldve allowed for a $900B extension of the debt limit, assuring that another go-round would be needed next year before the election...the reid plan, reported to be a $2.7 trilion plan, as scored by the CBO, would cut discretionary spending by a similar $751 billion over 10 years, but would have also capped outlays for iraq and afghanistan to score a deficit reduction of $2.2 trillion over 10 years, and allow for an increase in the debt ceiling of $2.4 trillion...since both plans came in smaller than originally proposed after the CBO score, moody's indicated that neither would suffice to keep them from putting US debt on a negative credit watch...

now, it was boehner's intention to have his plan passed on wednesday, but due to a revolt from his right, it was postponed twice until it was finally voted on & passed on friday...to get support of the tea party, he had to add a provision whereby both the house & senate would have to pass a balanced budget amendment to the constitution in order for the debt limit to be allowed to rise again in 2012.; even so, 22 members of his party still opposed it, & it barely passed the house...of course, when this went to the democratically controlled senate friday night, it was defeated on a straight party line vote...and to return the disfavor, on saturday the house defeated the reid plan, which had been passed earlier by the senate, by a vote of 246 to 173...as there are no other plans being discussed, it appears they're gonna have to pull a rabbit out of a yet to be conceived hat sometime between now & tuesday, and then turn that rabbit into legislation....

...even so, most analysts dont expect we'll get out of this without a credit downgrade...citigroup’s chief economist Willem Buiter, for instance, gives the US only a 1% chance of preserving its AAA credit rating at the end of this debacle...the specter of a US downgrade is having worldwide repercussions in markets that depend on good as cash AAA Treasury securities as well, since nearly 60% of the world's AAA rated sovereign debt is US Treasuries; eg, banks fear a multiple notch downgrade may require them to raise more capital...overall, the congressional circus is clearly impacting economic activity; everyone from money market funds to large corporations such as GE and Ford are moving to cash, some commercial real estate contracts are reportedly on hold, california borrowed $5 billion to bridge themselves over the crisis, and other states (which are all dependent on federal payments for everything from Medicaid to unemployment compensation) are making contingency plans to idle all but their essential workers...

Us_vintages

in other matters, there were several important economic reports out this week, probably none more important than the first look at 2nd quarter GDP, and the annual revisions to GDP from the BEA (Bureau of Economic Analysis); what we found out was that the recession we've been through was worse than first reported, and that the economy, as measured by the gross domestic product, is still below its pre-recession peak...the first guestimate for growth in the 2nd quarter came in at an annual rate of 1.3%, but the real shock was that first quarter growth was revised down to 0.4% from the earlier report of 1.9%, annualized...although supply disruptions due to the japanese disaster were expected to cut into the second quarter growth rate, it was still  weaker than most had expected, and no one had seen the hit to the 1st quarter coming….i’ll dispense with reiterating the component details today, and just include the adjacent chart of the revisions back to the 1st qtr of '07, which graphically shows what the recession looked like last week, before the revision, and how much worse it looked after it was revised this week (click chart to enlarge)

another report that was out this week that i typically cover was the case-shiller house price index; this report covered the 3 months ending May, and it was virtually unchanged from the previous report, with the 10 city index up slightly & the 20 city index down .05% over april's report...on a year over year basis, the 20 city index is down 4.5%, again the largest YoY loss since Nov 09, & both indexes remain off 31.8% from the peak...of the 20 cities, only washington DC has experienced a YoY increase in home prices...

another report i'll cover this week is orders for US durable goods, not so much because they were down 2.1% in June when surveyed economists expected them to rise like they did in May, but because Mish published the adjacent chart from doug short which provides a historical picture of what durable goods orders look like without purchases by the dept of defense (there's also a very similar chart for durables ex transport orders at the link) what these charts show is that durable goods orders have been driven entirely by transport & defense, and that orders for household durables, such as appliances, TVs, and furniture are in a long term decline, especially after adjusting for inflation...

although the cutbacks in employment at the state & local level, and especially in the school systems, have been ongoing throughout the past year & a half, this week has been the first week since the depths of the recession where i saw several reports of mass layoffs in the private sector; cisco systems and lockheed have both announced layoffs of over 6500 each; borders books is shuttering all of their stores, which will cost another 11,000 jobs, blackberry phone maker Research-In-Motion is cutting 10.5% of their workers, and drug company merck is cutting another 13,000...on top of those, this week the Post Office announced a major consolidation in which they may shutter as many as 3,700 post offices; note that none of those job losses will show up in the unemployment report that will be out next week, although this weeks first time claims at 398,000 fell below 400K for the first time in 16 weeks...a new report out this week from the National Employment Law Project showed the bulk of new jobs created since the economic recovery began are in lower-wage occupations, paying $13.52 or less an hour; with the US median wage at $26,261, ongoing predictions of a recovery in new home & new car purchases would seem to be made up out of whole cloth...

after a few days of calm markets, the crisis is back in europe, with borrowing costs for spain & italy rising again, and there's also a report out that italy may not be able to keep its commitment to the EFSF (euro stabilzation fund) for the greek bailout, so in the race to the bottom of the earth, europe may still implode before us..

just a few footnotes on the week: with congress tied up in the debt ceiling debate, they neglected to renew the airline ticket tax to fund the FAA, so its now in a partial shutdown, with 4000 employees cut; the airlines are still charging the same for tickets, but they'll keep the difference...and even though the post office is closing as many as 12% of its facilities, congress still found ten minutes on friday to vote to designate the facility of the USPS in Iuka, Mississippi, as the "Sergeant Jason W. Vaughn Post Office"

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