Chuck Schumer (D-NY) is looking at a $500-700 billion package, and he wants it on Obama’s desk for inaugeration day.
Category: Economy
Economics Update
I think that we have to start with the fact that U.S. Treasury Credit Default Swaps risk premiums just hit record levels.
If that sounds arcane and obscure, that’s because it is, because the brokers like it that way, but here is a slightly clearer statement, returns on insurance against a defaults on US Treasuries hit a new high….Meaning that investors are pricing in the possibility of a US government default.
This means that a Lot of people are betting that the full faith and credit of the United States of America means nothing.
The US defaulting is the Stay-Puft Marshmallow man moment of US society, and an increasingly large segment of the investing world is betting on it.
At its core, the problem is that this bubble is something that people cannot walk away from, housing and shelter, and the realtor-pimps are now saying that existing home sales are softening, though the staid New York Times is saying that home prices are plunging.
Existing home sales down over 3.1%, and prices down 11.3% year over year.
In the mean time, the Citi bailout is pushing on both currency and energy, with
the dollar falling, because people realize that the printing presses are running non-stop.
That being said, the falling dollar is not helping the ruble, where the Russian central bank has reduced support for the currency for the 2nd time in as many weeks.
It also drove oil up about a fin spot, though retail gasoline prices fell for 68th straight day.
It’s not going to get better any time soon, because MasterCard is reporting falling retail sales.
Meanwhile, Calculated Risk’s Credit Crisis Indicators are slightly worse today.
The Newest Action Figure
Well, This is One Way to Get Out of Debt
It appears that the Ecuadorian debt audit commission has found serious and pervasive irregularities in the debts that it owes.
This is not surprising, foreign debt to third world nations is typically geared toward maximizing the shafting of the recipient countries, and not the niceties of western accounting:
Ecuador’s debt audit commission said it uncovered “illegality and illegitimacy” in the country’s foreign obligations, findings that may give President Rafael Correa the legal basis he’s sought to halt bond payments.
The commission said in a 172-page report that the global bonds due in 2012 and 2030 “show serious signs of illegality,” including issuance without proper government authorization. Correa, who last week withheld a $30 million interest payment on the 2012 bonds while he awaited the audit, said today that the country’s bonds due in 2015 also are marred by irregularities. He called the audit results “truly disastrous” and “conclusive.”
It appears that they are looking at filing criminal charges.
It’s likely true that the audit committee’s review is accurate. The question is whether the western banking interests can get him to knuckle under, and if not, what happens when other 3rd world nations follow Ecuador’s example look at their debt deals closely.
Switzerland?????
According to Crooked Timber, it’s Switzerland that is the next western nation to be hit by the credit crisis:
Not only major institutions but whole national economies are up for grabs now. The national bankruptcy of Iceland seems likely to followed by something similar for Switzerland. As Citi itself points out, UBS and Credit Suisse are bigger, relative to the Swiss economy, than Kaupthing was for Iceland. Felix Salmon (also predicting doom for Citi, has been all over this).
Go read the whole article, whose main thesis is that the financial markets are heading toward either very aggressive regulation, or government ownership, or both.
But still, what hit me in the gut was the Swiss possibly being broke….That’s amazing.
I gotta go short Swiss chocolate futures.
Economics Update
Well, let’s start with where I got it really wrong, energy, where oil closed below $50/bbl, and retail gasoline prices fall below $2.00/gallon.
I was completely wrong on both counts about my predictions.
In the meantime, the credit crunch is savaging an industry highly dependent on venture capital, biotech.
In the long run, that may be a good thing, because when they aren’t making money, they aren’t lobbying Congress, which makes health care reform, at least for prescription drugs, that much easier.
In terms of the overall credit crisis, things still stink, though Calculated Risk’s Credit Crisis Indicators are neutral in terms of spreads, there has been an incredible flight to US Treasuries, driving rates down to record lows.
Of course, we could be in Europe, where both manufacturing and services are dropping like a stone, and the Euro bank Prez is telegraphing another rate cut
That Economic Data is Worse than It Looks
One of the common things that I’ve noticed since I’ve started following government economic data is that the preliminary data comes in better than the final data.
When you compare month to month, you are comparing preliminary data to the prior month’s final data, so the delta, which is what the press covers, looks much better than what it is in reality.
Well, Dean Baker just caught a doozy on October industrial production data.
In bullet points:
- September hurricanes artificially depressed that month’s stats.
- September data was then revised down.
- October preliminary data, which showed a “rise” is flat when comparing preliminary to preliminary.
- If you look at just manufacturing data, which strips out the noisier utility and mining segments, that number is down from September manufacturing data.
Scary Picture
Really scary picture
Calculated Risk did a graph of stock indices during the most severe market meltdowns since 1929:
My only complaint with the picture is that the stock market does not equal the economy.
Economics Update
Well, the obvious lede is the unemployment numbers, with the weekly new unemployment claims, which are a very noisy metric, and continuing claims, which are not, beinb positively ghastly.
Weekly numbers rose to 542,000, whichn is the highest since mid 1992, and well above the estimate of 502,000 and continuing unemployment claims hit 4,012,000, up 109,000, the highest level since 1982.
Therefore, it is no surprise that the index of leading economic indicators fell in October, as die the Philadelphia Federal Reserve’s business activity index, to an 18 year low, and the Architecture Billings Index, an indicator of future construction activity, fell to an all time low.
Meanwhile in the bond market, so many people are fleeing to US treasuries that rates have been driven to historic, and near historic lows, while the costs of insuring private bonds has returned to the stratosphere.
For what it’s worth, we have some good news for a bond insurer, specifically Ambac, which has managed to negotiate a cancellation of $3.5 billion in insurance contracts, which is obviously a serious reduction in liabilities.
In energy, oil briefly fell under $50/bbl, and retail gasoline prices seem to be heading below $2/gallon.
In currency, the dollar is mixed.
Krugman Pwn35* Amity Shlaes
Though I would have to say that Pwn463† of Ms. Shlaes is like shooting fish in a barrel:
When you hear claims that the New Deal made the depression worse, they often come directly or indirectly from the work of Amity Shlaes, whose misleading statistics have been widely disseminated on the right.
…
Krugman then goes to show that Shlaes is suggesting that actions based on Keynes theories failed to contain unemployment in the 1960s.
Yes, I was unaware of the historically high unemployment rates in the 1960s too.
Just go read… A few hundred words, and he destroys her.
*Owns.
†Ownage.
Economics Update
Well, it looks like the deflationary trap may be here, with the CPI down 1% last month, and core CPI falling 0.1%, the first drop since 1982.
The fact that housing starts and requests for building permits are falling off reinforces the idea that we are heading towards a major downturn.
Of course, it’s not just residential real estate. We are now seeing that mortgage backed securities for commercial properties are seeing increasing insurance costs and delinquencies.
In the larger world of the credit crunch, Calculated Risk’s Credit Crisis Indicators are largely unchanged.
BTW, S&P has downgraded monoliner bond insurer Ambac again.
In energy, oil fell again, on high inventory reports.
In currency, the dollar fell in response to continued news of a recession.
Let’s see…Anything else??? Oh…Yeah, the Dow closed below 8,000 for the first time in 5 years, 7,997.28.
Foreclosures in So Cal Break 50%
In addition, home prices are down 41% over the past 18 months.
Average house prices are down to $300,000, a level not seen since 2003, and I would note, as Rich Toscano does, that in a down market, expensive houses shift the average upwards, so the number to look at would be $/square foot, which is probably down even further.
Even if the square foot price is not down, this is Argentina meltdown lower.
Economics Update
Well, I’ll be referencing some mora alarming economic data in another post, but let’s have at the routine stuff, shall we?
First, the U.S. Producer Prices Index fell by 2.8%, the most on record. Note: this is not a, “low inflation, hurray,” thing. This is a, “prices are falling off a cliff like they were in 1932,” thing.
Part of this, of course is falling oil prices, so it’s no surprise that oil hit 21-month low today.
Not unsurprisingly, we also see the home builders’ sentiment index falling to a 9 month low.
Honestly, if I were surveying home builder sentiment, my worry would be them tossing themselves out of windows.
Out of force of habit, because the fundamentals of the U.S. economy do not merit it any more, people continue to flee to the dollar in times of uncertainty, so the dollar strengthened today.
Oh, and if you follow stock prices, Fannie Mae is facing delisting from the New York Stock Exchange.
Economics Update
Well, in a case of stating the blatantly obvious, the Philadelphia Fed;s Survey of Professional Forecasters says that we are in a recession, and have been since Spring, though the Conference Board has not yet chimed in on this, so it’s not yet “official”.
In any case, Japan is officially in recession. I guess that they have better record keeping than we do.
In the mean time Calculated Risk’s Credit Crisis Indicator interest rate metrics are basically unchanged.
We also have some mixed numbers in industry, with post hurricane industrial production, but the New York Fed’s Empire State index of hitting its lowest level ever.
In the UK, they are seeing an explosion in jingle mail, where mortgage holders mail their keys back to the bank, either figuratively or literally.
In the US, pending sales are down from September to October, but up against last October, which Barry Ritholtz catches, it’s really a net up, who wants to buy a house in October, but the National Association of Realtors does not get.
In currency, then dollar is down on recession worries, though my guess is also that the G20 meeting being hosted by a drooling idiot did not help.
In energy, oil is at a 21-month low, and retail gasoline prices fell for 61st straight day, which does not surprise me, as I filled up for $1.979/gallon yesterday.
Great, Now I’m Agreeing With A German Politician
Former German Finance minister Oskar Lafontaine, now a member of the Left Party, is calling for an 80% income tax for people earning more than €600,000 a year.
While a maximum marginal income tax rate of 91%, which persisted through much of the Eisenhower administration, and was lowered to 77% under Kennedy, is probably excessive, the explosion in executive pay, and the falling real wages for the rest of us , largely correspond with the maximum tax rate falling to 50% in 1980, and below 40% from 1987 on (link).
Higher marginal tax rates, with greater limits in deductions would go a long way to fixing much of what is wrong with the US economy.
Well, This Sucks
American Research Group has a survey on 2008 Holiday Shopping, and it has the predicting a 50% drop in sales vs 2007.
| Year | Average Spending | Percent Change |
| 2008 | $431 | – 50% |
| 2007 | $859 | – 5% |
| 2006 | $907 | – 4% |
| 2005 | $942 | – 6% |
| 2004 | $1,004 | + 3% |
| 2003 | $976 | – 6% |
| 2002 | $1,037 | -1% |
| 2001 | $1,052 | + 9% |
| 2000 | $968 | + 3% |
| 1999 | $939 | + 1% |
| 1998 | $928 | + 34% |
Considering the fact that 70% of the US economy is consumer driven, this is mind boggling.
Economics Update
Retail sales are imploding Down 2.8% from September, and down 4.1% year over year,
Here is a historical data, courtesy of Calculated Risk, just so you know how bad these numbers look.
Of course, the financial press always has to find a silver lining, so they make note of the fact that consumer confidence rose from to 57.9 from 57.6, the article attributes this to falling gas prices, but I ascribe it to three words, “Buh Bye Bush.” With the election, they realize that Bush will soon be gone, and so the number goes, though the number still reflects major suckage.
In the overseas economy, yesterday, it was Germany, well today, it’s been confirmed that it’s actually the whole Euro Zone that is in recession.
Also, we have automotive news from that side of the pond, with the three major credit insurers in Europe pulling insurance coverage to suppliers of Ford and GM. Basically this means that if either of the auto makers default, the suppliers are on their own.
They have basically decided that the risk of a default is too much for them to cover.
And in domestic bad news cast as good news, we make note of the fact that banks and bank like institutions borrowed less from the Fed this week. Only an average daily borrowing rate of 95.4 billion, down from $110 billion.
Down to an average of 95.4 average daily borrowing list week. Let’s run the numbers 95.4 billion/business days * 250 days a year = 28.85 trillion…$23,850,000,000,000.00…By comparison, the US GDP in 2006 was 13.6 trillion.
We also have Freddie Mac tapping a $100 billion bailout fund that was not counted in the above.
As Calculated Risk notes, “Remember Fannie and Freddie have much lower default rates than the loans packaged by Wall Street. If conditions worsened dramatically for Freddie and Fannie, imagine how bad it is for Wall Street MBS and loans held by lenders like Wachovia (Wells Fargo) and WaMu (JPMorgan Chase).”
As to energy, oil is down on demand concerns, and and retail gasoline is down almost $2/gallon from peak.
There is a part of me that wonders if the swing in oil/gas was some sort of electioneering, but it clearly did not work.
In currency, the dollar rose, because when people are frightened, they still flee to the dollar for safety…for a while at least.
The End of Wall Street’s Boom
Go read the whole thing, it’s an inventory of how corruption, self dealing, stupidity, and lack of moral created the Wall Street debacle.
Upton Sinclair put it best when he said, “It is difficult to get a man to understand something when his salary depends upon his not understanding it, though in the case of Wall Street, it is more the year end bonuses than the straight salary.
Here is a typical quote:
That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with sh$#ty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”
People should be going to jail.
Lots and lots of people should be gong to jail.
What Happens When Shipping Collapses?
So the Baltic Dry Index, a measure of the costs of shipping bulk cargo, have have dropped to 826 points on November 5, down from its high of 11793 in May:
Put simply, the cost of shipping has dropped through the floor. Sending a tonne of iron ore from Brazil to China in early June would have set you back more than $100 (£62) per tonne, or around $15m per voyage. But freight rates have now dropped to only slightly over $10 per tonne, or just $1.5m for the 70-90 day journey.
As if that wasn’t dramatic enough, the drop in daily charter rates is even sharper. At the peak of the market, a 170,000-tonne Capesize bulk carrier was hired out at the eye-watering daily rate of $234,000. At the beginning of this week, it was $5,611 – a fall of nearly 98 per cent.
Obviously, shipping has not fallen 90%, but the world has gone from serious shortage of shipping capacity to serious surfeit of shipping in about 6 months.
While that is concerning as an indicator of economic activity, what might be more concerning is the likelihood that a significant portion of world shipping, may simply shut down completely, because they are unable to get letters of credit from financial institutions.
Letters of credit are essentially guarantees that once cargo goes out to sea, that the value of the cargo will be delivered to the purchaser, and like other forms of insurance, it’s becoming increasingly hard to get, and so there is unshipped cargo sitting on docks for want of a letter.
Economics Update
Weekly initial unemployment claims are at 516,000, up from 484,000, well above the estimate of 479,000, and the highest number since 2 weeks after the 911 attacks.
With the caveat that weekly unemployment figures have a lot of noise, I would like to segue to a much noisier indicator, the Dow Jones Industrial Average, when fell below 8,000, though it rallied and ended up for the day.
Yean, I know, stock gyrations are really completely noise, but crossing 8K is a big deal for the markets, even if the Dow ended the day up 500+ points.
A better indicator of what is going on in the world is the fact that Germany is now officially in a recession, having experience two consecutive quarters of negative growth.
Calculated Risk’s regular post of credit crisis indicators, a very useful collection of interest rates and interest rate spreads really did not do much today.
That being days, CR does have a nice chart of spreads between 30 Year corporate bonds and treasuries, and it is not pretty: 
Of course if you want to be scared, the fact that foreclosures are up 25% year over year, and that Ranieri’s Franklin Bank has filed chapter 7 (liquidation).
They are the 3rd largest lender to fail this year.
Speaking of failures, there is already General Motors, and Goldman Sachs has suspended its rating of the auto maker, which is a polite way of saying, “Absent a bailout, it’s done.”
In the meantime, oil rose at the end of the day, along with the rising Dow, which indicates that oil traders are complete morons who trade on chicken entrails and other spooky omens.
The dollar was mixed today.