Category: Economy

Bankruptcy Updates

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The Department Store Chain Gottschalks twill be filing for liquidation, and mall developer General Growth Properties has managed to put off bankruptcy, for a while at least.

I think that it is likely that GGP will go chapter 11, at which point, Thomas Friedman, whose wife is a Bucksbaum, the family that owns the developer, may have to downsize his lifestyle….I’m so sad for him (not).

Finally, the Sun-Times Media Group has filed for bankruptcy, and before you start wringing your hands over how these are dark days for newspapers, note that Conrad Black and His Evil Minions™, most notably David Radler, looted the company, and have gone to jail for doing so.

In a way, it’s a microcosm of what is wrong with the news business: Bankers take over from journalists, generate fantastic profit margins by destroying journalism at these institutions through draconian cuts, and then they walk away, leaving bleached bones.

Economics Update

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Note: Red denotes contraction, and yes, this is scary.

I guess that the lede is that the consumer confidence numbers are out, and that they remain near record lows, at 26, just one point above the all time low reported in February.

If that were not enough, we now have a survey indicating that consumer spending may fall by $1 trillion after the recession is over (by way of perspective, the US total GDP is about $14 trillion) according to the AlixPartners Long-Range Economic Outlook Survey.

That’s a 7% haircut on GDP, exclusive of the secondary effects, closed stores, warehouses, etc., once the economy recovers…..Great googly moogly!

In the meantime, I don’t think that a whole bunch of people will be tapping their home equity, as the Case-Shiller home price indices show a 19% drop in home prices, though it appears that defaults are abating, as private mortgage insurers saw defaults, and claims, fall in February, the first decrease since June, 2008.

Additionally, 2nd home sales fell in 2008, down to 30% of total home sales, from 40% in 2005, and more of these buyers are paying cash, which implies that a lot of the contraction in this market is an inability to find mortgages.

In terms of the general state of the economy, the Restaurant Peformance Index is showing the 16th straight month of contraction (h/t Calculated Risk), and the Philadelphia Fed State Coincident indices have shown a decline in all 50 states (pdf), for both the past month and the past three months (again h/t Calculated Risk).

Meanwhile, we have an indication that the Bank of England is looking at significant inflation, they have adjusted their pension investments to account for it, so I think that they expect the £ Sterling to fall, and inflation to increase in the UK.

In any case, we now have the chief economist for the OECD suggesting that the Federal Reserve would take aggressive action against a precipitous fall in the dollar, and work to maintain its position as a reserve currency.

I think that this is more an attempt to talk up the dollar than anything else, because protecting the dollar would, over the long term at least, require higher interest rates, which would have the economy collapsing like overcooked broccoli.

In any case, the dollar was down today, largely because the flight to safety yesterday following Obama’s announcement that GM and Chrysler were on notice is now over.

Oil was up too, though it’s still a bit under $50/bbl.

Economics Update

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I’ll be going into the automotive news elsewhere, so this is pretty short.

First the Celtic Tiger Kitten has been taken to the vets to be neutered, as S&P lowers Ireland’s rating from AAA to AA+.

Ireland played the “cheap labor with good access to markets” game, and lost to former eastern bloc nations, and played the real estate and building game, which everyone lost.

In the housing market, we have defaults on FHA insured mortgages rising with 7.46% of the loans being 90+ days overdue, in foreclosure, or bankruptcy, up from 6.16% at this time last year.

This means that there is still a lot of inventory out there that has yet to hit the market.

In energy, the concerns over the US auto manufacturers has driven oil below $50/bbl, because nothing says short oil supply like house sized SUV, and the same concerns about the economy have driven the dollar up as traders head for safety.

Economics Update

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So, we have some mixed news on the state of consumers, consumer sentiment improved slightly, though it is still near historic lows, and incomes have fallen.

Since consumers are generally deleveraging, I would place more importance on the latter, case in point, is February automobile sales continuing to drop, with the replacement for the US auto fleet, fleet size divided by monthly sales, hitting 27 years.

Obviously, this is not a sustainable number, and I would expect car sales to improve at some point, though whether this in time for the Big 3 (Big 2½) is anyone’s guess.

In any case, it apperas that Japan is heading back toward a deflationary situation, with their January CPI figures showing no change.

In energy and currency, the dollar is up and oil and other commodities are down.

Economics Update

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So, the US economy contracted at a revised 6.3% annual rate in the 4th quarter of 2008 and initial jobless claims rose to 652,000 from 640,000 last week, with continuing claims jumped to 5.56 million, another record.

Additionally, we saw New York City’s jobless rate jump by 1.2% in February, from 6.9% to 8.1%.

On the other hand, truck tonnage rose in February, which implies that the requirements for goods and services increased, and the 30 year fixed mortgage rates dropped again.

Meanwhile, in energy, retail gasoline broke $2/gal for the first time this year, and oil hit a 4 month high of $54.34/bbl.

In currency, the dollar rose today.

Larry Summers in a Nutshell

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CONGRESS PASSES WIDE-RANGING BILL EASING BANK LAWS, the New York Times, November 5, 1999:

“Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” Treasury Secretary Lawrence H. Summers said. “This historic legislation will better enable American companies to compete in the new economy.”

And folks who got it right:

“I think we will look back in 10 years’ time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930’s is true in 2010,” said Senator Byron L. Dorgan, Democrat of North Dakota. “I wasn’t around during the 1930’s or the debate over Glass-Steagall. But I was here in the early 1980’s when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.”

Senator Paul Wellstone, Democrat of Minnesota, said that Congress had “seemed determined to unlearn the lessons from our past mistakes.”

“Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis,” Mr. Wellstone said. “Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.”

So, I’m so glad that Lawrence Summers’ astonishing brilliance and foresight are at the disposal of the President of the United States of America.

Economics Update

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Well, we have some good news today, with both durable goods orders and new home sales up in February on a monthly basis, though on a year over year basis, durable goods are still down 22%, and home sales are still down 41% year over year, so it may mean nothing, or it may be, to quote paraphrase Churchill, the end of the beginning as opposed to the beginning of the end.

The spike in mortgage applications may reinforce this news, or it may just be a lot of people refinancing their mortgages.

Certainly with California home prices down 41% year over year, this end game is likely to to be ugly anyway.

In the mean time, in the world of government finance, the Fed has started buying US treasuries to further push down interest rates, and across the pond, a U.K. bond auction has failed for the first time in 7 years.

There were not enough buyers there.

In energy, oil was down slightly, and in currency, the dollar was mixed against other major currencies.

OK, I May Be Wrong About Geithner

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Kevin Drum just raised an interesting point about what Geithner has been doing so far

If, several weeks ago, you had charged a task force with figuring out how to successfully nationalize a big bank, what do you think they’d say you had to do? Three things, at least: (1) you have to figure out a widely acceptable way to value the toxic assets on bank balance sheets, (2) you have to set up a fair and consistent test for evaluating bank solvency based on those values, and (3) you need to make sure you have the legal authority to take over a huge, multinational financial conglomerate in an orderly way. Is it just a coincidence that these are precisely the things Tim Geithner has set in motion over the past month? I wonder.

It’s an interesting point, and just today, while testifying before Congress, Geithner called for the power to place large bank holding companies into government receivership, backed up by Ben Bernanke.

So Mr. Drum’s thought that recent activities of Geithner and Bernanke, and by extension President Obama being a ploy is a possibility, though but I’m inclined to agree with Yves Smith the proprietoress of Naked Capitalism, whose beat is economics, and who knows more about economics, and the major players the economic community, than either Drum or me, and she thinks that the Office of Thrift Supervision (OTS)already has the authority to place AIG in receivership, and already answers to him.

Additionally, she notes that his request for additional power does not include any request for a receivership protocol, and concludes that this request is actually an attempt to give him more power to shovel more taxpayer dollars to the financial industry.

I would also note that Geithner, and his mentor, Larry Summers, have a history that stretches back decades, and there is nothing in what they have done, or are doing now, which would indicate that they would be inclined to do this…ever!

So, while Kevin Drum has an interesting wheels within wheels theory, I am more inclined to go with Nobel Prize winning economist Joseph Stiglitz, and simply say that Geithner’s plan is robbing US taxpayers.

But that’s my gut, and my sense that past is prologue.

Economics Update

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So the latest investor confidence survey is down, no big surprise there, things are still not looking good.

Case in point, Fitch ratings is warning on prime grade residential mortgage backed securities (RMBS) created between 2005 and 2007 because so many of the mortgage holders are under water.

In energy, oil fell, though it’s still above $50/bbl, on profit taking from yesterday’s price increase.

In currency, the Dollar rose as people went back to it as a safe haven, and the Yen fell, because yields are so low in Japan.

Economics Update

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Since we’ve already covered the Geithner political suicide pact economic plan, let’s lead off with housing.

Happy, happy, joy, joy, home sales rose 5.1% in February relative to January, seasonally adjusted, though people not so closely attached to the realty industry have noted that it’s
really a pretty modest rise, or note that home sales have fallen year over year, and that about 45% of these sales are distressed in some manner.

I would say that year over year is the only metric to apply, because the so called “seasonal adjustment” if it ever were valid, has become meaningless in the current collapsing market.

Internationally, we have another member of the 0% benchmark club, as the Bank of Israel has cut its benchmark rate to 0.50%.

In currency and commodities, the dollar is down, because people are less concerned about safe havens, so there is less dollar flight to safety, and copper and oil rose.

It appears that these markets like Geithner’s plans, because, they are over paid and over bonused trader types, I guess.

Reality Sets In

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It appears that the economic Calvanism* of the past 3 decades is on the wane.

Michael Hiltzik notes that one of the characteristics of the AIG scandal is the reemergence of the concept of the “undeserving rich” in the public discourse:

That the point is even open for discussion suggests that a sea change is taking place on the American political scene. For decades, the wealthy have been held up as people to be admired, victors in the Darwinian economic struggle by virtue of their personal ingenuity and hard work.

Americans consistently supported fiscal policies that undermined middle- and working-class interests partially because they saw themselves as rich-people-in-waiting: Given time, toil and the magic of compound interest, anyone could retire a millionaire.

That mind-set has all but been eradicated by the damage sustained by the average worker’s nest egg, combined with the spectacle of bankers and financial engineers maintaining their lifestyles with multimillion-dollar bonuses while the submerged 99% struggle for oxygen.

Here’s hoping that this is a generational change, and not a 15 minute fad.

*Traditional Calvanism sees profit, and wealth, as a sign of God’s grace.

Economics Update

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Thursday is new jobless day, and the numbers suck with new claims falling to a still very high 646,000 and continuing claims hitting a new record of 5.47 million, which is a new record….Again.

This implies that people are still unable to find jobs, but, for a while, at least, employers have run out of people to lay off….Delightful.

We also had the Leading Economic Indicators falling, though not as badly as the consensus prediction, and the Philadelphia Fed Business Outlook Survey for March remained awful, from -41.3 in February to -35.0 this month, so we are still seeing a contraction.

In the auto industry, the bailout has been extended to parts suppliers, to the tune of %5 billion.

In real estate, it looks like Moody’s might cut the ratings on some $241 billion of debt for jumbo mortgages, which means that it must suck to live in a high cost real estate area right now.

In the world of the here and now, Moody’s did downgrade insurance company Prudential, and I’m wondering how long before the rest of the insurance industry looks like AIG.

In any case, it appears that the Fed’s decision to start quantitative easing (printing money) is having an effect, with the cost of borrowing falling, with 30-year fixed mortgages falling to 4.98%.

The Fed has also driven the US dollar lower, with the dollar hitting $1.36:€1.00 for the first time since January.

We are also hearing rumors that Citi is considering a reverse stock split, my guess is that this is how they want to address the worry that they might become a penny stock.

In energy, oil broke $50/bbl for the first time this year, on the falling dollar and reports that OPEC members are more-or-less keeping to their quotas.

Economics Update

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So, we saw a
0.4% increase in the consumer price index in February, which is the highest rate since July, even if that is just a 5% rate.

Truth be told, I’m not sure if this is good news, reduced possibility of inflation, or a sign that the dollars that are flooding our economy are creating an inflation spiral.

In either case, we have another indicator that the real estate market is no where near a turn around, the bump in February building permits not withstandint: the Architecture Billings Index remains near a record low, and this is a leading indicator.

The spike in jump in mortgage applications does not really mean much, as it is primarily refi activity driven by low mortgage rates.

Internationally, we have a number of developments:

In energy, oil fell on the pessimistic report from the Federal reserve despite assurances of the House of Saud that OPEC will really follow the quota this time….really…for sure. (I don’t believe it either)

Finally, the news that the Fed is printing about a trillion more dollars pushed the dollar down.

Economics Update

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Credit card defaults have hit a 20 year high, which implies to me that the unemployment numbers when they come out are going to show further contraction.

Housing Starts were up 22% from January in February, though the headline on the link, “U.S. Housing Starts Rebound,” is simply nonsensical, as Barry Ritholtz notes, single family building remained flat, it was people building multi-residential properties, and even with the gain, the number is down 50% year over year.

Calculated Risk’s Credit Crisis Indicators are showing modest improvement, though they all remain at troubling levels.

In energy, oil hit a new high for the year, approaching nearly $50/bbl, and in currency, they dollar was down only marginally.

Economics Update

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Scary production graph courtesy of Calculated Risk

Industrial production has fallen for the 4th straight month, and the year over year decline is the largest since 1975, and the New York Fed’s Empire State Manufacturing Survey fell to a record low, so no one is manufacturing much of anything.

What’s more, the port of Los Angeles import traffic fell 27.3% year over year, so no one is buying imports either. (Note that this number does not include the port of Long Beach)

Also, the Builder Sentiment Index is unchanged, and so it remains near its record low, so real estate is still dead.

At least people are still willing to buy US government debt at reasonably low interest rates.

In energy, OPEC kept production targets unchanged yesterday, and so oil rose today.

In currency, the dollar fell on the poor manufacturing numbers.

Angela Merkel Simultaneously Stupid and Wise

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First, it appears that she continues to buy into Hoovernomics, refusing to implement a new stimulus package, and then, shockingly, she mentions the elephant in the room, noting that the EU expanded too quickly, and needs to get its sh%$ together before adding more countries.

I think that the first opinion comes from two places, her early days as a citizen of the DDR (East Germany) makes her dubious of anything that sounds remotely like socialism, and also the institutional German memory of hyperinflation 1919-23, which afflicts Germans on both sides of what was the Berlin wall.

As to her statement that the EU needs a “consolidation phase” before any new members join, which is both correct, and a significant departure from the conventional wisdom in Europe, this is something that is easy for an outsider to recognize, like Paul Krugman, but not for members of the European equivalent of the “Beltway villagers”.

So props to the Chancellor on getting this right.

Economics Update

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Well, it looks like bank failure Friday is going to be busy, with 200 Federal Deposit Insurance Corp. (FDIC) agents descending on Puerto Rico, and a report that BankUnited has halted attempts to raise capital, which indicates a fair number of bank seizures, or at least serious investigations, and BankUnited is a fairly big bank.

On the brighter side, we had the Consumer Sentiment Index rise in March.

In the meantime, people are still buying very little, so international trade is falling, including the US trade deficit, which fell to a 6 year low.

Part of this is that banks are increasingly unwilling, or charging more, to issue letters of credit to shippers, which makes shipping more difficult and expensive.

This is being mirrored by the tepid response to the Federal Reserve/Treasury program, the TALF, which has pushed back its start date because of the low number of interested parties.

In energy, we have oil falling on weak demand.

In currency, we have the dollar falling on the good consumer confidence numbers, which slows the “flight to safety.”

Jon Stewart: The Best Financial Journalist in America

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Hell, maybe the best journalist in America, or at least the best interviewer. Jon Stewart really gets it.

Jon Stewart interviews Jim Cramer of CNBC (I saw it last night on TV):

Nouriel Roubini Gives Good Rant

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Hoocoodanode? Normally, he is calm and analytical, but when asked about Madoff, he really gives what for:

Here is my answer fleshed out in full:

Americans lived in a Made-off and Ponzi bubble economy for a decade or even longer. Madoff is the mirror of the American economy and of its overleveraged agents: a house of cards of leverage over leverage by households, financial firms and corporations that has now gone bust.

When you put zero down on your home and you thus have no equity in your home your leverage is literally infinite and you are playing a Ponzi game.

And the bank that lent you with zero down, a NINJA (no income, no jobs and assets) liar loan that was interest only for a while with negative amortization and an initial teaser rate was also playing a Ponzi game.

….

Go read the rest.

It’s one answer to how the economy is different from the machinations of Bernie Madoff: it isn’t.

It’s thought provoking.

Economics Update

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Your Scary Pic of the Day, Courtesy of Calculated Risk

So, today is the day for new jobless claims, and U.S. jobless claims rose by 9000 to 654,000, which is not a new record, though the continuing claims number of 5.317 million, which was a new record.

Well, we are seeing more in the way of rate cuts world wide, with the European Central Bank approaching 0% interest rates by stealth, using their deposit rate now at ½%, as opposed to their benchmark rate, now at 1½%, by lending like a madman, and the the Swiss central bank cut its benchmark rate to ¼% in an effort to keep the Franc from appreciating against other currencies, so the zero interest rate contagion is spreading.

And the consumer is still on vacation with retail sales falling by 0.1% in February, and it’s seen as a sign of progress, because the experts were expecting a fall of 0.5%.

It’s no wonder that retail sales are falling, as U.S. household net worth fell at a record pace in 4Q 2008, $5.1 trillion for the quarter and $11.2 trillion for the year, and this was accompanied by the first drop, at a 2% annual rate, in household debt ever.

These numbers are not surprising. With house prices down, and a foreclosures rising 30% year over year, and 6% month to month in February, it just makes sense to economize.

Interestingly enough, even though foreclosures continue to increase, mortgage rates fell this week, largely on the expectation of little in the way of inflationary pressures because of the weak economy.

We also have two bits of WTF today, with yet another bank, this time Bank of America saying that it made a profit in the first two months of the year, while not counting its losses in the big sh&^pile.

Additionally, S&P has downgraded General Electric from AAA to AA+, which, until the last year or so, I always thought was a sign of the economic apocalypse.

In energy, oil is up. largely on the retail sales report.

In currency, the dollar is up, largely on the aforementioned Swiss rate cuts.