Category: Economy

Economics Update

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First-time jobless claims skyrocket to 375 thousand. Last week was 306 thousand, so it’s about a 20% increase, and well over the consensus estimate of 320 thousand first time claims, though week to week data points are always noisy.

That being said, Consumer spending slowing in December, up only 0.2% from November is a lot less noisy, and at least as scary. First, 0.2% is a drop in real dollars, and second, this was December, the height of greed and excess season.

And in the “another day, another downgrade department”, S&P is looking at downgrading about $500 billion more in mortgage related securities.

We are not near the bottom.

Signs of the Apocalypse: Jim Cramer Trashes “Laissez Fair”

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Yes, this is the Cramer of “Mad Money”, and yes, he is generally to the right of Atilla the Hun, he supported Alan Keyes in 2008, and at a speech at Bucknell University, he condemned laissez fair politics:

“Do not be fooled by the sirens of laissez faire,” he told a packed audience at Bucknell University’s Weis Center for the Performing Arts in the continuing national speakers series, “The Bucknell Forum: The Citizen & Politics in America.”

“Ever since the (President) Reagan era, our nation has been regressing and repealing years and years worth of safety net and equal economic justice in the name of discrediting and dismantling the federal government’s missions to help solve our nation’s collective domestic woes,” he said. “We call it deregulation … a covert attempt to eliminate the federal government’s domestic responsibilities.”

When Jim Cramer is forced to come to his senses, you know something is whack.

Economics Update

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The Fed cuts rates by 50 basis points.
The discount rate is now at or below the inflation rate, well below the inflation rate using real world inflation.

There are no longer any monetary tools to use that will work, it has to be fiscal (spending), because any lower, and the Fed is paying people to borrow money.

Still, it makes sense, as GDP growth in the 4th quarter was only at a .6% rate annual rate. When you consider the fact that inflation is (at least) 3%, this means that real GDP is falling at more than a 2% rate.

The dollar has fallen currently at $1.4761:€1.0000, and $1.0003:$1.0000 CDN, so the Canadian dollar is above unity again.

And the credit crunch is spreading all over the world, the Swiss bank UBS AG has reported its biggest loss ever, in US real-estate related issues.

We also have Morgan Stanley using some serious weasel words to not call its write downs a loss, when it, “reclassified $7 billion of funded assets and $279 million in unfunded assets from Level 2 to Level 3.”

Of course, the fact that the FBI has dropped some subpoenas on their asses isn’t good news eithr.

Lever 3 assets are ones in which buyers are not easy to find, and it’s rapidly getting to the point where the buyers are getting harder to find than straight Republicans.

It looks like the bond insurers will be downgraded below AAA, which in addition to closing off a lot of their business, and making it harder to raise capital, will likely force investment banks towrite down $70 billion more.

Economics Update

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Economic schizophrenia, Consumer Confidence Falls, But Durable Orders Jump. Mr. Benanke is not sleeping well tonight.

Home ownership rate has biggest drop ever. A 1.1% drop in the percentage of occupied homes.

Everyone’s favorite not-so-whiz kid, Jerome Kerviel, is claiming that his superiors at French Bank Societe Generale knew of his activities, but took no action because it pumped up its profit numbers.

The First Bank Failure of 2008, the Douglass National Bank of Kansas City, Missouri.

The FBI has initiated investigations of 14 firms regarding subprime irregularities. Kind of makes the FBI sound like Metamucil.

They did not identify the companies. But the probes reached across the industry to include developers, subprime lenders, companies that securitized loans and investment banks that held them, said Neil Power, head of the FBI’s economic crimes unit.

Contrywide: $422 million Q4, and 1/3 of its sub-prime mortgages are delinquent. Well I got this prediction right.

Bankrupt Your Company, Get a Better Paying Job Somewhere Else

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The Times has a story that has got me thinking that all of Wall Street is one giant criminal conspiracy.

People keep falling up.

High (low) points cut and pasted from the article:

  • UNDER the stewardship of Dow Kim and Thomas G. Maheras, Merrill Lynch and Citigroup built positions in subprime-related securities that led to $34 billion in write-downs last year. The debacle cost chief executives their jobs and brought two of the world’s premier financial institutions to their knees.
  • Mr. Maheras, who left his job as co-president of Citigroup’s investment bank … has had serious discussions with several investment banks, including Bear Stearns, about taking on a top management position, people who have been briefed on the situation said. And he has also been approached by investment firms willing to back him to the tune of $1 billion or more if he decides to start his own hedge fund, these people said.
  • Mr. Kim, who until this spring was a co-president at Merrill Lynch with oversight of the firm’s trading and market operations, has been crisscrossing the globe in recent months raising money for his new hedge fund, Diamond Lake Capital.
  • Zoe Cruz, the Morgan Stanley co-president who was forced to leave her job after $10.8 billion in subprime losses, has been approached by investment banks, hedge funds and private equity funds about a senior management role.
  • John Meriwether. Ousted from Salomon Brothers in 1991 for his role in a bond trading scandal, he became a co-founder of Long Term Capital Management, the hedge fund that nearly collapsed in 1998, rattling markets worldwide. He has since founded a second fund, JWM Partners, with assets of around $3 billion.
    • So he was fired for corruption, and then he went on to found LTCM, which the Federal Reserve had to structure a bail out for, and he’s got another hedged fund?
  • More recently, Brian Hunter, the energy trader at Amaranth Advisors whose disastrous bets led to the disintegration of that $9 billion hedge fund, is now advising a private equity fund called Peak Ridge on starting a hedge fund. Howard A. Rubin, a trader at Merrill Lynch, who lost $377 million in 1987, quickly landed a job at Bear Stearns, where he had a successful career.

I used to think that somehow or other, GW Bush’s history of failing upwards was the exception. It’s not. It’s the rule. Our financial markets are irredeemably corrupt.

Economics Update

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New home sales plummet. New home sales were down 26% from 2006, the biggest drop ever, surpassing the 23% decline posted of 1980.

Regulators opposes oppose increasing the GSE’s lending limit, with the director of OFHEO, James Lockhart saying, “We are very disappointed in the proposal to increase the conforming loan limit as we believe it is a mistake to do so in the absence of comprehensive GSE regulatory reform.”

I agree, the solution to too many people hanging themselves is not more rope.

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CBS News reporter Steve Croft has an interesting report on the mess on 60 minutes (click to view, but there is a 30 second ad at the beginning). Too narrow in scope, the big sh$%pile is about more than subprime.

European hedge funds are suspending redemptions.

Senate Democrats Mull Adding Retirees to Rebate Plan, Extending Jobless Benefits

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Senate Democrats are looking about, “giving retirees tax rebates, extending unemployment benefits, boosting heating subsidies for the poor and temporarily increasing food stamp payments.”

This is great politics!!!, and here’s why:

  • Republican or Democrat, the Senate is smarting at having not been involved in the negociations, and there is a bipartisan consensus, in fact a near unanimous consensus that the Senate’s prerogatives should be respected in that body.
  • Getting more money to retirees is a politically powerful thing, because senior citizens vote.
  • There is widespread political support for extending unemployment benefits in the real (i.e. outside of DC) world.
  • Increasing food stamp payments will be seen as being good for American farmers, who figure prominently in a number of red states.
  • Heating subsidies for the poor is also very popular nationwide.

On a policy level, if they were to strike the business tax credits, which will take months to have any effect, and are very inefficient, that would be a good thing.

Economics Update

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Profits are still tanking, we now have Commerce Bank and Harley Davidson way down, and I see Harley as a real bellwether of a recession.

When middle aged guys don’t feel secure enough to buy their toys, it’s game over.

And we have another insurance downgrade, this time Security Capital is downgraded by Fitch.

And we have Nobel winning economist Joseph Stiglitz warning that we may sliding into a 1930s type ‘liquidity trap’.

One of the Joys of the Internet: Finding People Smarter Than Me

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I don’t know his name, but the person known as “the Scanner” is one of them.

He has an ingenious proposal for dealing with the issue of bailing out financial institutions that are drowning in the “Big Sh%$pile”.

Here’s my proposal. I offer it at no charge to any member of Congress, presidential candidate or editorial writer willing to bear the calvary of getting the stink-eye next time at Harry Cipriani. If it becomes necessary to bail out the monoliners to prevent a depression, there will be terms. For once, the highly-paid beneficiaries of a taxpayer-financed bailout will not get off scot-free.

Congress shall specify that no bailout will take place unless and until (a) every bailed out monoliner and (b) every financial institution holding a bailed-out policy certifies that its employees have voluntarily agreed to accept a 25% federal income tax surcharge on every dollar earned above $200,000 for a period of 5 years. A young hotshot earning $300,000 would see $25,000 added to his tax bill. An elder pulling down $1 million would owe an extra $200,000. Since some of the biggest Wall Street multinationals are policyholders, and since this would apply to every one of their employees over $200,000, we could be talking about a lot of people and a lot of money. It could even go some way towards making the bailout pay for itself.

Politically, it’s a winner. Fiscally, it’s sound. It’s extraordinarily well-targeted to precisely the assholes who got us into this mess in the first place. John Edwards: Have your staff contact me through the comments box.

My only difference would be that I would go for a higher surcharge, perhaps something like 50%.

ECB Eschews Rate Cut

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The European Central Bank (ECB) has decided not to cut interest rates, but instead fucus on minimizing Euro zone inflation (here and here)

Given the different financial situations in Europe and the US, the Euro Zone is not having a housing collapse, this is not surprising. Additionally, the ECB does not have a portfolio is just controlling inflation, unemployment is not a part of its mission.

This does, however, limit the Fed, as it places yet more downward pressure on the US Dollar.

Deal Reached on Tax Rebates for Stimulus – washingtonpost.com

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Deal Reached on Tax Rebates for Stimulus – washingtonpost.com

High points:

  • 1200 Per couple for the middle class

  • $300 credit for children.

  • Limits of $75K/150K for single/family

Low Points:

  • No unemployment or food stamp spending, the BEST way to stimulate the economy.
  • Only $300 for the working poor.
  • Completely bogus tax giveaways to businesses that will take months if not years to show effect, and generate less economic activity
  • An increase from $417,000 to as much as $700,000 for “jumbo” mortgages bought by Fannie Mae and Freddie Mac. Like we need to involve the government in bad mortgages for rich people. It’s a bailout of the rich, and it’s bad policy.

If the Democrats had any guts, they would have held out for better, but I guess that guts is just ,”not on the table”.

I won’t do the Pelosi pic again.

Economics Update

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It appears that the the markets are expecting another 75 basis point rate cut by the Fed at their regular meeting next week. The futures market on the Fed rate cut puts the chance at 81%.

I have no clue what sh$# they are smoking, but I wants some. It’s gotta be some seriously good stuff.

Could someone please explain to me how this is not making book over the telephone and internet, and hence illegal?

Then we have George Soros warning that he is seeing a possibility of “systemic failure” in the markets. He expects that at the end of the US Dollar as the sole world reserve currency, which has been obvious for years, and that the era of “superleverage” is over, and that, “”I question how far the Fed can go, given the reluctance of people to hold dollars”, and, “We need a new sheriff, not Washington consensus.”

Basically, he’s saying that we are in 1930, and we need the restoration of FDR market regulations. I agree, but, of course, I didn’t break the Bank of England because I understood world currency markets better than the English Ministry of the Exchequer, and he has, so his opinion carries more weight.

In real estate, we have Credit Suisse predicting losses of $16 billion for Fannie Mae and Freddie Mac, and we have a year over year price drop of 6% in the US, and that median sale prices in 2007 was 1.3% lower than 2006, the first yearly drop ever.

And in employment and automotive, Ford is reported to be offering buyouts to all of its 54,000 hourly employees.

Every salesman, every buyer, every secretary, every engineer, etc.

Robert J. “I Hate Poor People” Samuelson Comes Out Against Corporate Excess

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This guy has been infesting the Washington Post for years, and if you know the topic, you generally don’t have to read him.

His standard schtick is something like, “Social Security and Medicare? They are bad, they make you stupid. You should be an overpaid pundit like me,” so you could have knocked me over with an adolescent tuna when I came across Mr. Samuelson railing against excess salaries and lack of accountability:

Here are estimates for 2007:

  • Investment banker: $2.1 million, consisting of $275,000 in base pay plus $1.2 million in cash bonus and $625,000 in long-term bonus. (An investment banker helps firms raise capital by selling new stocks and bonds and also advises on mergers and acquisitions.)
  • Bond trader: $1.5 million, with $240,000 in base pay, $975,000 in cash bonus and $310,000 in long-term bonus.
  • Hedge fund manager: $1.8 million, split between a salary of $265,000 and $1.5 million bonus.

    • Just why investment bankers and traders out-earn, say, doctors or computer engineers is a question I’ve never heard convincingly answered. Are they smarter? Unlikely. Do they contribute more to the economy? Questionable. True, Wall Street often performs a vital function. It channels savings into productive investments. It helps provide access to capital and credit. In 2006, U.S. companies raised nearly $4 trillion through new stocks and bonds. Many financial innovations, including mortgage-backed securities, have benefited individuals and companies.

    But Wall Street also frequently misallocates capital and credit. The “tech bubble” of the late 1990s was one episode. Now we have subprime mortgages. Why? Well, the herd mentality of financial crazes has a long history. But compensation practices skewed so heavily toward bonuses based on annual profits make matters worse.

    You know, these lessons are not only the same ones that were used to change public policy (Glass-Steagal anyone?) following the Great Depression, but they are actually predicted by free market theory.

    If I can make a million or so dollars, and and do not lose this money when the crash comes, why the hell should I care about long term consequences?

    One hopes that the current crisis will lead to a re-evaluation of the slavish devotion to the unregulated market as a solver of all problems.

    Pelosi Caves to Republicans….AGAIN

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    Yes, Nancy Pelosi, in discussions with Republicansgave up more in food food stamps and an extension to unemployment benefits to get tax rebates for the working poor.

    She also gave in on tax breaks for business.

    I heard on the radio that 1$ in unemployment benefits generates about $1.60 in economic activity, and $1.70 for the food stamps, while the business tax cuts generate about 25¢ for every dollar.

    The unemployment and food stamps also hit the economy in weeks, as opposed to about 6 months for business tax breaks.

    Thank you for knuckling under and screwing the economy to give tax breaks to Bush’s buddies.

    Yes, Nancy Pelosi, good old Ms.
    NOT ON THE TABLE! NOT ON THE TABLE!

    Economics Update

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    According to “reliable sources”, Ben Bernanke thinks that the downturn will be very severe, and that’s why there was the very large, unscheduled rate cuts.

    Additionally, as reported by Calculated risk the market is expecting another 50 basis point rate cut at the regular meeting next week.

    This would leave the Fed at a 3% discount rate, and I think that beyond that point, they are pushing on a string. Monetary controls of the economy are pretty much at their limits now.

    In the real estate world, Merrill Lynch is saying that nationwide U.S. home prices could decline 25% to 30% over the next three years.

    I think that they are optimistic.

    Then we have student loan giant Sallie Mae reporting a $1.6 billion quarterly loss, which raises the obvious question, “How the hell do you lose money on GSLs?” These are government guaranteed loans, and the fact that borrowing costs have shot up so much that they cannot profit on them is …ominous.

    There are indications that Bank of America’s deal to buy Countrywide may be getting into trouble. At least that what the market is saying, literally. BoA is offering the equivalent of $7.1058, but Countrywide is trading at $5.54.

    This spread is a measure of the market’s opinion that the deal won’t actually be consummated, this spread implies that “there is roughly a 77.9 percent consensus among Wall Street’s risk arb desks and their hedge fund brethren that the deal goes through at the agreed upon terms. That also means that more than 22 percent of risk arbitrageurs don’t think the deal will go through”.

    You also have Capital One taking a major earnings hit, both from the closing of its GreenPoint Mortgage arm, and from higher credit card losses.

    Finally, you have talks between New York Insurance Superintendent Eric Dinallo and major US banks about a bailout of bond insurers. There is an implication that there will be some sort of government involvement, if not outright government sponsorship of such a bailout.

    Nobel Prize Winning Advice on Stimulus

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    From Nobel Prize winner, Joseph Stiglitz:

    • Improving unemployment, which Pelosi has already bargained away.
    • Provide assistance to state and local governments who will be hit with tax shortfalls, particularly in property taxes.
    • More spending on education.
    • Find a way to help victims of predatory lenders without bailing out the perps.

    On Bush’s ideas for tax cuts, he says:

    The Bush administration has long taken the view that tax cuts (especially permanent tax cuts for the rich) are the solution to every problem. This is wrong. Tax cuts in general perpetuate the excessive consumption that has marked the American economy. But middle- and lower-income Americans have been suffering for the last seven years — median family income is lower today than it was in 2000. A tax rebate aimed at lower- and middle-income households makes sense, especially since it would be fast-acting.

    Economics Update: OMFG Edition

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    First, of course, the Fed cut it’s Federal Funds Rate by 75 basis points, the biggest cut since 1984, and it did so a week before its regular meeting, which it hasn’t done since 911.

    The US markets recovered after the rate cut, but still they were down by over 1% for the day.

    I think that Paul Krugman’s analysis of this is accurate, Bernanke used to be the head of his department at Princeton, so I would assume that he knows him pretty well.

    Basically, Bernanke is concerned about the Japanese slow down of the 1990s, when monetary tools simply stopped working:

    What was so disturbing about Japan was the way monetary policy became ineffective; by the later 1990s the short-term interest rate was up against the ZLB — the “zero lower bound.” This is alternatively known as the “liquidity trap.” And once you’re there, conventional monetary policy can do no more, because interest rates can’t go below zero.

    There was a lot of discussion of various unconventional monetary things you could do. But the best answer was not to get there in the first place. A 2004 paper co-authored by Bernanke argued that the ZLB could and should be avoided by “maintaining a sufficient inflation buffer and easing preemptively as necessary”.

    In terms of corporate profits, Bank of America took a major hit, with profits dropping 95% as a result of $5 billion dollar writedown, and its, “tier 1 capital ratio – a key measure of its ability to absorb losses – stood at 6.87 percent at the end of the year, down from 8.22 percent in the previous quarter, due to its purchase of LaSalle Bank and lower net income during the second half of last year.”

    Wachovia took an 89% hit on profits, “due to a $1.7 billion reduction in the value of certain portfolios and $1.5 billion set aside to cover bad loans”.

    More real estate and derivatives.

    And while we are on the topic of real estate and derivatives, bond insurer Ambac is looking for a buyer. If they take monopoly money, I’m game, but only if it’s less than one whole game.

    Otherwise, the deal just does not make financial sense.

    Of course, the one thing that we can be sure of is that if George W. Bush speaks, the market will tank, so, of course, they are talking again, and saying that they are looking at increasing the stimulus package beyond the $150 billion originally proposed.

    My guess is that there is a “Bush Ranger” out there who wants a special tax break just for him.

    Of course, we are already beginning to see the allocation of blame, aka “blamestorming”, with EU Economic and Monetary Affairs Commissioner Joaquin Almunia saying that this problem is a result of excessive US trade deficit…..Ummmm…Well Duh!!!!…Though that whole deregulation of markets thing isn’t working either.

    And on the housing front, California loan defaults reach have reached a 15-year high in Q4 2007, up 114% from the same time in 2006. Foreclosures are up 421.2% from 2006.