Category: Economy

Economics Update

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The Leading Economic Indicators have now fallen for the 2nd straight month. It’s down 2.1% year over year, putting it in the 2001 recession category.

In a related matter, it appears that Freddie Mac may be trying to unwind its debt exposure a bit, as we have reports that it will be purchasing less mortgage debt from lenders, making getting a home mortgage more difficult.

Oil is back above $130/bbl, largely on concerns about Iran and Tropical storm Dolly, but gasoline prices continue to fall, it’s now about a nickel down from the record.

The dollar is slightly weaker today, but I think that the delta is more a non-movement than a movement.

For some well predicted hilarity, note that Bank of America profit took a 41% hit, in part because the newest member of their stable, Countrywide Financial, lost $2.3 billion this quarter.

I told you so.

This Won’t Just Scare You, It Will F&$% You Up For Life

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Nouriel Roubini gives his assessment on the path forward for US banking and investment, and it’s, as is his wont, very negative.

He’s been right on everything so far with his predictions, except that reality has been even more bearish than he is.

That would be my assessment of the latest, because, I think that he underestimates the effect of the eventual stampede towards the exits of foreign investors in general and sovereign wealth funds in particular.

RGE – American Un-Beauty: The Crisis of the Suburbian (McMansions and Gas-Guzzling SUVs) Way of Life

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Nouriel Roubini makes a very very good point in his essay American Un-Beauty: The Crisis of the Suburbian (McMansions and Gas-Guzzling SUVs) Way of Life:

The result was that the U.S. invested too much – especially in the last eight years – in building its stock of wasteful larger and larger homes and housing capital and of larger and larger private motor vehicles (whose effect on the productivity of labor is zero) and has not invested enough in the accumulation of productive physical capital (equipment, machinery, etc.) that leads to an increase in the productivity of labor and increases long run economic growth.

Basically, the as a society no longer invests in productivity, it invests in consumption (and I would add arbitrage to the mix), which means that in a world where increasing productivity is the path to greater standards of living, the United States is not even in the game.

Economics Update

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Well, the Europeans, or at least the Germans promise to be in major freak out mode for a while, as producer prices are increasing at 6.7%, and this means that the Germans, the largest economy in Europe, will be screaming for rate hikes, because it was only 80 years ago that you needed a wheelbarrow or marks to buy a loaf of bread.

Unsurprisingly, this drove the dollar down too, though a contributing factor may be a report published in the financial times that sovereign wealth funds are looking to reduce exposure to the dollar.

There is no stampede, but people are tiptoeing toward the exits on the dollar.

I’m not sure how related it is, sovereign wealth funds hold a big chunk of GSE debt, but Freddie Mac has filed with the SEC to sell stock in order to raise new capital.

In energy, dribbled down a bit* to settle at $128.88/bbl, and retail gasoline fell about a penny.

In investment banking, Merrill Lynch lost $4.9 billion, and Citi lost $2.5 billion, though the latter was better than expected, and Citi will continue paying a dividend, which strikes me as foolish.

In real estate, evidence, in Orange County at least, that commercial real estate is comatose. A 91% drop in building, a 62% increase in vacancy, and a 2.5% decrease in rents.

It’s grim in the UK too, with mortgage lending falling 32% year over year, with near certainty of the central bank increasing rates.

The UK is beginning to look like the San Diego of Europe.

*No Apology for the pun.

Economics Update

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Weekly unemployment filings are up 16K from last week, which is not good, but better than forecast, though, as I’ve said before, the weekly data is noisy and not very useful.

On the other hand, the Philadelphia Fed Business Outlook Survey is definitely downbeat, though not as grim as I would have anticipated.

China has problems. While its growth rate slowed to only 10.1% annually(!), inflation remained well above 7%.

Honestly, I think that the fix here is simple, let the Yuan rise some, which would decrease the relative cost of imported energy, and slow exports to cool down the economy, but I do not expect the Chinese central bank to do this.

Housing starts jumped 9.1%, only because of change in NY City building codes, allowing for more multi-residential building. Otherwise it would have been -4%, and construction of single-family homes dropped by 5.3%, hitting a 17 year low.

Seeing as how the Europeans have inflation concerns too, and are talking about ratcheting up rates, it;s not surprising that the dollar fell today.

Oil continues its slide, dropping below $130/bbl for the first time in over a month, though retail gasoline holds at yesterday’s record.

Read Nouriel Roubini

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Specifically, where he relates what he said on a Bloomberg TV Interview, where he says that he expects the worst financial crisis cince the Great Depression and worst U.S. recession in decades.

No surprise to me, or his other regular readers, but if you don’t read RGE Monitor regularly, it’s a must read.

I think he’s right, though he may be too optimistic.

He predicted the housing/credit/insurance bubble collapse, but was actually more optimistic that reality.

Economics Update

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The Consumer Price Index CPI, just
jumped 1.1% in June. For the past 12 months, it’s been 5.5%.

Considering how bogus the CPI stats have become, I’d be inclined to at at least 3% to both numbers, but but I’m an engineer, not an economist, dammit!*

On the other hand, oil is now down about $11 over two days, which would explain why the dollar is holding steady for now, though we are not seeing any good news at the pump, as we hit a new record again.

Industrial production in June was up by 0.05%, which beat expectations, though part of that number was a rebound from the strike at American Axle in May.

Mortgage applications were up 1.7% last week, though I’m not sure how much of this is low rates, and worry about rising rates, and noise.

Let me finish that I will have a separate post on the GSE’s and how their possible reduction/elimination of dividends may have led to the SEC’s restrictions on naked shorting.

*I LOVE IT when I get to go all Doctor McCoy!!!

Economics Update

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Well, we have to open up with inflation in the producer price index, 1.8% for June, and 9.2% year over year, though the 1.8% rate actually comes closer to 22% if annualized.

The Fed ain’t cutting rates any time soon, and apparrently neither is the Japanese central bank, which is holding rates steady at ½%. (Talk about pushing on a string!)

Even so, the dollar hit a new record low against the Euro before settling a bit.

Then we have General motors announcing massive job cuts and that it would suspend its dividend, which it has not done since 1922.

So GM paid a dividend throughout the Great Depression, but will not do so now.

Not surprisingly, Bernanke was rather downbeat about the economy in testimony before the Senate Banking Committee.

On the bright side, the doom and gloom has convinced everyone that the US is headed into a severe recession, reducing our demand for oil, so oil prices fell $6.44/bbl, the largest drop since Jan. 17, 1991, when Poppy Bush pulled oil out of the strategic petroleum reserves.

Unfortunately, this has not yet translated to relief at the pump, with retail gasoline hitting a new record high.

In the world of retail, there was a sales increase of just 0.1%, which, as Barry Ritholtz notes, is a a contraction when you figure in inflation, and even worse when you pull out food and energy.

Fannie and Freddie Update

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First, let’s look at the analysis of the shrill one, Paul Krugman in the New York Times. He notes that they will almost certainly need some level of bailout, as they are simply too large to be allowed to fail, and that most of the post 2000 craziness in the real estate market was as the GSE’s as bystanders, since regulators hold them back.

Atrios disagrees with the idea that thay are too large to fail, and says that they should fail, at least from the perspective of their shareholders, that these organizations can be reconstituted as fully government entities, as Fannie was until the late 1960s.

The support of (re)nationally is the general opinion of the blogosphere cognoscenti turns out to be pro-nationalization too, and, on the Marketplace radio today, I heard wingnut “economist” Amity Shlaes suggest the same thing, only she suggested that the “healthy” parts be re-privatized, leaving the taxpayers holding the bag for the bad parts.

It turns out that there is actually no disagreement, as Krugman endorses nationalization too in this blog post. It just did not make the cut in the limited space in his Times OP/ED.

He also notes that as the housing market inflated, the GSE’s became a smaller part of the market (chart pr0n):

In any case, it’s clear that the statements by the Fed and the Treasury Department have stabilized things, at least for now, as Freddie Mac, clearly the weaker of the two GSEs, just successfully sold $3 billion in short term debt, $2 billion for three-months at 2.309% and $1 billion six-monthsat 2.496%. the company said.

On the other hand, we have a number of investors saying that they are basically insolvent, including George Soros and Jim Rogers, and Goldman Sachs is predicting at least another 35% stock decline.

As a bit of interesting historical information, the Washington Post has a nice article about how the GSE’s built, and used, their lobbying clout to prevent restrictions and capital requirements from being increased.

Well, they got what they wished for, much to their unhappiness.

Noriel Roubini Nails the Core Problem

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While writing on the impending bailouts of the GSEs he notes that:

The reality is that the U.S. has invested too much – especially in the last eight years – in building its stock of wasteful housing capital (whose effect on the productivity of labor is zero) and has not invested enough in the accumulation of productive physical capital (equipment, machinery, etc.) that leads to an increase in the productivity of labor and increases long run economic growth.

This is exactly the problem.

In fact the problem is more general. Our economy is no longer producing goods and service of value as a means of activity. Instead it is moving towards arbitrage, and at some point, there will be too many balls in the air for it to continue.

For all I know, it may already have happened.

Amity Shlaes is an Idiot

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As I have blogged before, Amity Shlaes is a complete pratt, which explains why this was published in the craptacular Washington Post OP/ED pages.

I have no clue as to her basic level of intellect, she could simply be that stupid, or be paid to say these things, but in either case, the effect is the same, that I would not trust her with any implement sharper than a bowling ball.

In this case, she is offering a full throated defense of Phil Gramm’s calling the US a nation of whiners, because people are worrying about the recession.

She offers a number of defenses:

  • That there is no recession because GDP grew in the last quarter measured.

Wrong when inflation is put in the measure, even the bogus core CPI that is used.

  • That Phil Gramm subsequently said that he meant only politicians.

Again, disengenous at best, he said nation of whiners, and Gramm would never miss an opportunity to go after the now Democratic controlled Congress.

  • She claims because people who lost their homes during the depression had only borrowed 10% of their home purchase, while people now borrowed more than 90% of that price.

Again, losing a home is losing a home, and the increased level of leverage is an artifact increases in the price of a home which have been driven upward by policies to “increase home ownership”. Losing your home is losing your home.

  • Claiming that unemployment is still at historic lows when anyone who studies unemployment knows that the U3 numbers has been massaged over the past 30 years to near statistical worthlessness.

Of course, as a wingnut, I would expect her to ignore that many of these problems came from legislation that was proposed by Gramm, so her ignoring the context, that the architect of the policies that created this crisis is complaining that we are “whining” about the economy, is part of her job description.

Economics Update

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Well, it appears that it’s been an unsettled day, likely because of concerns about the GSE(s), which will get its own post, and as a result, oil hit a new intra day high, $47.50/bbl, before settling to $143.84/bbl.

Note that in addition to uncertainty in Iran and Nigeria, there is now a possibility of a strike in Brazil.

Gasoline prices fell though, finishing below $4.10/gal for the first time in a week.

In currency, uncertainty has driven the dollar down, but there is a bit of a bright side to all of this, because the falling dollar is pushing the trade deficit down.

The problem is that once the dollar settles down to a more sustainable level, there will be a high inflation interregnum where imports prices will go up, but there will be no domestic businesses to pick up the slack.

Nothing on US real estate today, but in the UK, their housing crash is the worst since the Great Depression.

Additionally, we have a monetary picture that appears to point toward a vicious deflationary recession spiral.

Chart pr0n:

Economics Update

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The Bank of England has decided to hold interest rates steady. It’s not like they had much of a choice. Inflation is heating up, and they are in the middle of a house bubble collapse that rivals ours, so doing nothing was the only option.

If they raised rates, they make the housing crash even worse, if they lower rates, inflation gets worse.

Their inaction appears to have strengthened the dollar, since it points towards few hikes by the European Central Bank too.

In employment, initial applications for unemployment are down from last week (it’s a noisy measure), but it’s still much worse than last year, and teen summer employment is the worst in 40 years, “If the average holds, total summer hiring in May, June, and July would be about 1.2 million, which would be the smallest gain in teen summer employment since 1958.”

In energy, retail gasoline prices fell a bit, but crude oil spiked above $140 again, because of tensions in Nigeria and the US and Iranian saber rattling.

In real estate, mortgage rates are a bit higher this week.

Is the Credit Crunch Just Corruption, or Are We Acting from Profound Ignorance

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Wolfgang Münchau wonders if this is more than a simple financial crisis, because we’ve already had what seems like our 4th dip into this bathtub, and the financial system is still dirty.

Rather, he posits that the problem is that that the basic structure of our economies have been established by economist whose model of the world is simply wrong.

This is analogous to the Great Depression, where the economists and regulators, following a caricature of Adam Smith’s work, worked for creative destruction, to weed out the weak firms, and so, in the middle of a downward spiral, central banks restricted the money supply to wring out the “weakness”:

….Its principal villains are therefore not bankers, but economists – not in their role as teachers and researchers, but as policy advisers and policymakers.

So who are they? I recall a wonderful episode told by Jagdish Bhagwati in his book In Defense of Globalization when he quoted John Kenneth Galbraith as saying: “Milton’s [Friedman’s] misfortune is that his policies have been tried.” In fact, this is not the worst that could happen. The worst is for economists to try out their own theories themselves. This happened to several highly respected academics who have since become central bankers or finance ministers. If, or rather when, they turn out to be wrong, they risk a double reputational blow – as policymakers and as academics. So do not count on them to change their mind when the facts change.

In fact the collapse of Long Term Capital Management in the 1990s is a classic case of this, where you had world class economists with world class models being poleaxed by reality, which, through the wonders of leverage, caused a near collapse in world financial markets that required a Federal Reserve bailout.

I think that much of the genius of Keynes was that he was willing to adjust his theory when reality proved him wrong, which is rare in anyone, particularly an academic.

Interestingly enough, Münchau suggests that “Neo-Keynsian” model of the economy, where financial markets (which, BTW, would include the housing bubble) play no meaningful roll in the economy, had contributed mightily in the current crisis.

I’m not sure exactly what a “Neo-Keynsian” is. Truth be told, I barely grok what an old Keynsian is, though on hitting “the Wiki” it may be that “Neo-Keynesian” economics is akin to “Keynesian” in the same way that “Neo-Liberal” is to “Liberal”, which is to say “not at all”:

Several of them have been leading proponents of an economic theory known as New Keynesianism. It is, in fact, probably the most influential macroeconomic theory of our time. At the heart of the New Keynesian doctrine stands the so-called dynamic stochastic general equilibrium model, nowadays the main analytical tool of central banks all over the world. In this model, money and credit play no direct role. Nor does a financial market. The model’s technical features ensure that financial markets have no economic consequences in the long run.

This model has significant policy implications. One of them is that central banks can safely ignore monetary aggregates and credit. They should also ignore asset prices and deal only with the economic consequences of an asset price bust. They should also ignore headline inflation. An important aspect of these models is the concept of staggered prices – which says that most goods prices do not adjust continuously but at discrete intervals. This idea lies at the heart of some central bankers’ focus on core inflation – an inflation index that excludes volatile items such as food and oil. There is now a lively debate – to put it mildly – about whether an economic model in denial of a financial market can still be useful in the 21st century.

He is saying that academicians who value the consistency of their theory over reality have been placed in positions of regulatory authority, and that the inevitable regulatory failures are at the core of the credit crunch.

I agree wholeheartedly.

His prescription, creative destruction by allowing, “some defaulting banks to go bust,” is a part of the solution, but I do not believe that it addresses the “whys” of the bubble, it only wrings out the froth, leaving the ground fertile for another bubble.

I believe that the core of the problem is one of governance values, particularly in the US and the UK, that speculative arbitrage purely for profit is it’s own virtue.

Certainly, when Alan “Bubbles” Greenspan lauded financial innovation, this was his core value.

At the level of the regulator, this attitude needs to change. Speculation should not be viewed as a virtue, but rather an unavoidable and frequently toxic byproduct of a functioning financial market, much in the same way that, for example, dioxins are a byproduct of the paper making process.

We need the paper (in both senses of that work) to function as a society, but the toxic emissions (again in both senses of the word) should be kept to as low a level as is practical.

In the case of the financial markets, this means the following:

  • That leverage should be regulated and restricted.
  • That speculation should be discouraged though some mechanism (I favor Dean Baker’s idea of a financial transaction tax as a start)
  • That overly complex financial instruments should be banned.
  • That the means of determining pay and bonuses in the financial services industry needs to be mended somehow, because the current model encourages reckless behavior.

Economics Update

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In a stunning grasp of the obvious, the Fedederal Reserve is now saying that the economic downturn might continue into next year….Well duh!!!

In another example of supposed experts who are late to the glaringly obvious, the hedge fund whiz kids have discovered that they can lose money too. It’s still better than the market as a whole, but I expect that to change as their complex high yield instruments start behaving like the crap that they are.

In energy and currency, the news is neutral with oil and retail gasoline flat, though the dollar is down a bit.

Weekly mortgage application volume is up 7.5%, but I would go with monthly numbers which have less noise in them.