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Wednesday, November 18, 2009

 

keen on the depression


via rolfe winkler -- at the per capita policy exchange conference, october 2009. abandon all hope ye who enter here.

UPDATE: keen himself links to the same talk.

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One guy that gets it and proof that Summer, Geithner, Bennie and Romer et al are utter and absolute morons

 
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Off-topic, but this is a great transcript of Bob Toll

 
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It's odd that he traces the symptoms back to debt:GDP, but chooses to stop there. Why does he accept that as a root cause? He seems to be looking for a justification of debt regulation, so he settles on the conclusion that demonstrates that debtors are children that must be protected from themselves by regulators. In the U.S. at least, there is compelling evidence that regulation and other government intervention caused much if not all of the rise in debt. Of course, what caused that government behavior...?

 
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doesn't matter much, anon. the causation argument is circular -- everyone is at fault when the zeitgeist drives events.

the truth is that debtors are frequently like children and do need to be protected by regulators. regulators too are sometimes like children -- witness the petulant randian alan greenspan. historically there is LOADS AND LOADS of evidence that only strong proscription helps prevent debt bubbles -- beginning with highlining usury as sin in the major religions -- the debacle that began with garn-st germain and ended with the alternative net minimum capital rule for broker-dealers is just the most recent iteration. but every few generations the idiots who have forgotten will dominate the zeitgeist and repeal all the suidice-prevention rules and give the shoelaces and razors back to the banks -- even actively help them string themselves up. that's a fact of human systems i guess.

 
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dude,

your constant harping on the transgressions of the republican party; and your apparent tendency to steer readers of this blog to those pundits who apparently share your view on these and related subjects call into question your objectivity on the subject. I think we all get that perhaps loyal lockstep in allegiance with ayn rand and greenspan may have been misguided. However, that does not automatically absolve all the other dogmatism that seems to exist in the realm.

But then, no one can make a name for themself in the chattering world without an enemy I suppose; and there's no doubt that there are multitudes deserving of animosity so belay my last I suppose.

 
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anon, where in the above do i write the word 'republican'?

to get a mess this big, it takes both parties. garn-st germain was a bargain struck between reagan and tip o'neill. i think the GOP was probably the philosophical leader in the move to lawlessness, but both parties are deeply coopted to the ideology. robert rubin. larry summers. lloyd blankfein. it is the zeitgeist -- not a party, not wall street, not the government, but all of the above -- that drove this thing.

it's my opinion that the GOP is the current party of crazy -- but that has, can and will change. neither one seems to long hold a corner on nuts. that's got nothing to do with the fact that america -- not the republicans, not the democrats, but america -- has spent the last 30 years gutting the defenses it erected in the aftermath of the depression and is now suffering the consequences thereof.

 
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Fair enough, but 30 years ago was the end of the 70's. Not exactly a decade many people would want to revisit.

But I suppose that at least back then, the Fed had some balls. Now it appears that they're just a wholly owned subsidiary of the treasury.

 
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http://www.cnbc.com/id/34210760

 
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In my opinion Steve Keen is one of the smartest economists around. I know he's helped Mike "Mish" Shedlock a lot in formulating his deflation thesis, and he seems to make many insightful and logical arguments on why the Fed cannot prevent deflation from occurring.

Nonetheless, the Fed's appear hell bent on trying to avoid deflation at all costs. It has engaged in many reckless easy monetary policies that it supposedly feels will halt the decline in asset markets. I recently read several good articles on these topics at http://www.goldalert.com which further discuss the Fed and how its actions may affect the gold price and the dollar. I think they are very helpful for investors to check out to get a better understanding of the fragile economic situation we are in. There are many serious long term consequences of all the money printing that have yet to be felt but will most likely appear in due time.

 
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Friday, November 13, 2009

 

obama to move away from deficit spending in 2010


politico scoops the news, which comes in light of jon corzine's loss of the governorship of solid blue state new jersey.

The president's plan, which the officials said was under discussion before this month’s Democratic election setbacks, represents both a practical and a political calculation by this White House.

On the practical side, Obama has spent more money on new programs in nine months than Bill Clinton did in eight years, pushing the annual deficit to $1.4 trillion. This leaves little room for big spending initiatives.

On the political side, Obama can help moderate Democrats avoid some tough votes in an election year and, perhaps more importantly, calm the nerves of independent voters who are voicing big concerns with the big spending and deficits. ...

“Democrats have to reassure voters we are not being reckless,” said a Democratic official involved in the planning. “The White House knows this and that's why we'll be hearing a lot about reducing the deficit early next year. Democrats owned this issue for the past four years and cannot afford to cede it to Republicans now."

... [M]any moderate Democrats are deeply troubled by two recent signs of serious discontent among independent voters. The first was how badly Democrats lost among independent voters in the New Jersey and Virginia gubernatorial races. The second was a Gallup poll released this week that showed Republicans winning the independent vote by 22 points in generic matchups for House and Senate races. That same poll had the parties tied among independents in July.


edward harrison caught the news and interpreted it with typical incisiveness.

I am now moving from multi-year recovery to a double dip baseline.


there's nothing in harrison's post i disagree with. this is the nightmare scenario -- paul krugman must be gasping for air on the floor of his office right now. in my view the question isn't about the directional economic consequences of such a move to reduce deficit spending in 2010. indeed i think the only question will be just how disastrous a collapse awaits.

i would argue from the following premise:

when the united states raised taxes and cut spending in appeasement of deficit hawks following the election of 1936 and roosevelt's politically unpopular aggressive challenges of the supreme court in 1937, after four years of GDP growth on the back of the new deal from the liquidation low in 1933, the balance sheet recession of the 1930s was nearly eight years old -- and four of those years had been spent in a titanic default cycle which washed away an incredible nominal amount of american private sector debt (and with it a third of GDP). as real debt levels (eg, as measured in comparison to GDP and incomes) had returned only to late-1920s levels, however, americans were broadly engaged in continuing balance sheet repair. the extent to which that was true was revealed in the crash of 1937-38.

when japan committed politically to reducing deficits following the election of the hashimoto government in 1996, it was already some seven years distant from its equity market crash and five years past the real estate peak. during that time banks had been, much as here today, turned into quasi-GSEs and loaded with liquidity. the corporate sector at the heart of the debt collapse had been turning income toward debt reduction rather modestly during the intervening period, and began in earnest only following the liquidity crisis and cyclical recession of 1997. but even at that point, japanese GDP had with the aid of fiscal stimulus been slowly expanding with very low inflation for some time, helping to lower real debt levels.

where the united states of 1937 and the japan of 1997 were a number of years removed from their bubble bursts when first their respective governments attempted to reduce deficits, the united states of 2009 remains just over a year into its period of balance sheet repair. virtually nothing has yet been done to lower household debt burdens -- in fact, in relation to incomes and GDP, private sector debt burdens are quite possibly higher now than at the outset. this implies that we are a more highly leveraged society than either of our antecedents -- and will potentially as a result experience any second dip with a more exquisite acuity than either of our antecedents were forced to bear.

that said, there is hope: political duplicity.

The big question for Obama – and the country – is whether the sudden concern about deficits will be more rhetoric than reality once his first State of the Union address concludes.

... The Wall Street Journal reported Thursday the White House is considering applying some money from the $700 billion financial bailout bill to deficit reduction, and that Cabinet agencies have been asked to submit two budget plans for next year, one that freezes spending at existing levels and one that trims spending by 5 percent. Congress has long history of taking those requests and piling on money for programs it favors.


continuing on plus some lard is perhaps a modestly-negative-growth scenario given the effects of slowing stimulus spending. a 5% cut is something altogether more disastrous. but what seems clear from this statement of intent following the gubernatorial races of last week is that the federal government will not be passing a comprehensive stimulus package which replaces the diminishing effect of its first effort. and that means we are approaching the double dip.

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That part about applying some of the money from the $700 billion bailout to deficit reduction is both funny and sad--funny to think that anyone could consider not spending money they didn't have on an "emergency" that turned out not to exist to be deficit reduction, and sad because the MSM presumably reported it without a hint of irony.

 
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gm, what do you make of Buffett calling for Obama to cut back on deficit spending as well?

 
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GM, you completely missed the sleight of hand here. This whole fiscal responsibility 'scoop' from Politico is an intentional deception created to help get the debt ceiling raised. Also, it is pitiful that your only concern is the possible loss of continued and increased massive stimulus. Don't you understand that the moral hazard of it has brought this country to it's death?

 
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rb, i haven't heard the totality of buffett's argument, but on first blush i disagree with him. let me also try to address anon's point.

tax revenues will naturally rise with economic activity (if it rises), but the private sector is still holding ~300% of GDP in debt. there's only two mechanisms for delevering it without a colossal deflation -- run massive current account surpluses for many years, or run massive public sector deficits for years.

there's a third alternative, which the government is trying -- which is to reinflate asset prices to reverse the minksy shock of 2007-8 which created this huge balance sheet impairment. this is the greenspan playbook. but this is difficult -- a minsky moment has much to do with social mood, and going back to status quo does not delever the economy or move us to greater stability -- again, see greenspan. it would also involve, given that securitization is gone and not coming back, government financing a lot of private loans by reinvigorating the GSEs at terms as ridiculous as those seen in 2005. and it would also have to support incomes (ie counter unemployment) anyway through the inflation so that the capacity to service debt minimally remains. i doubt its possible, and current attempts are only mitigation.

worse, running massive current account deficits is also highly unlikely. it wound require a large discount of the trade value of the dollar to turn the US into a net exporter, and a structural change to the physical economy. critically, the US does not control the trade value of its currency -- other exporting nations maintain pegs against it for mercantile purposes, and their reaction to the crisis has largely been to reinforce those pegs. that these pegs were really the genesis of the global leverage cycle and subsequent instability seems to be nowhere in anyone's concern. i think everyone agrees that the trade balance must at least narrow, but it will take years to effect that change. and in theory, isn't the point of avoiding government deficits preserving the value of the dollar on some level?

in any case, though some help is already arriving in trade deficit reduction and asset reinflation, it seems clear that the majority of the adjustment will come either in large and persistent government deficits OR in a fairly dramatic reversal of reinflation. that is really the choice, it seems to me.

so if buffett wants to narrow the government deficit at this early juncture, with balance sheet damage still severe and private sector leverage still so high, i think he's (perhaps unwittingly, perhaps not) calling for deflation. perhaps he thinks we're in an ordinary recession and not a balance sheet recession. perhaps he thinks government stimulus is overwhelming the propensity to save and overstimulating, so that scope for some reduction in the deficit without impeding balance sheet repair is possible. i can't say.

as to moral hazard, i have to question whether it is more or less moral for the government to increase the funding duration of the society by refinancing private sector debt -- or instead to engage deliberately in policiies which will impoverish the country and quite probably lead to malnutrition and even starvation on a significant scale in this country if not globally. people are already going hungry at 10% unemployment. what would this country look like at 20%? how about 30%? believe me, if i thought the stakes were anything less, my disposition would be to let failures fail. but the size of the debt is such that engaging in deflation out of "moral" concerns or any others will i think tear the country to pieces. that's not an option.

 
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"there is hope: political duplicity."...

I'd say there's more than hope. What better example of duplicitousness do you need than the last line of the politico article:

“We've got to show people that we are responsible stewards for their taxpayer dollars..."

 
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Metaquestion:
GM, Does a Politico article make policy ?
At the same time some people from Goldman talk about 250 bn 2010 stimulus.

I am not from the US, so it is hard to figure out if this is real. What are the reasons that this article might indicate real White House strategy for 2010 and not some trial balloon or Red Herring or whatever?
Why do you give it full weight ? How sure are you in percentage terms that this is real?

I only question because I acknoledge the implicit importance of it all .....

 
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hubert -- it's not that politico makes policy, as it clearly doesn't. but the obama adminstration is at minimum making quite a show of it. calling for executive budgets to present either flat or (-5%) is no joke.

blinkered republicans screaming about obama surprises no one. but one shouldn't discount the populist ire afoot among swing voters in the US -- the democrats just got done with a terrible election on november 3 in which vacillating independents forced two democratic governors out of key swing state virginia and solidly-democratic new jersey. that must have the democrats and the obama administration terrified. rightly or wrongly, they take these developments as evidence that the swing voters agree with some of the republican arguments -- and anecdotally, my experience corroborates that view. so look for the administration -- which has been far from leftist anyway -- to move further to the right in an effort to limit the political damage among swing voters ahead of the congressional elections in 2010.

i suspect that will backfire by sparking a double dip, another acceleration of unemployment and even deeper economic resentment as republicans portray obama and a heavily democratic congress as having utterly failed with incorrect ideas (when in fact it will at least in part amount to for a lack of conviction in the correct ideas).

 
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gm, fear not. This whole article is simple subterfuge; the looting of the treasury will continue with your precious "stimulus" dollars continuing to line the pocket of rich bankers and wall streeters. Do you think this gangster administration is going to let a little setback like losing two governor elections stop it from it's looting mission? Hah!

Draw a glass of brandy, sit in your easy chair with your laptop, and peruse Recovery.gov, and tell yourself as you read that great piece of fiction: "See! This is doing great things for the country!"

 
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"peruse Recovery.gov, and tell yourself as you read that great piece of fiction"

I think you're wrong. There is no fiction there. read the list of grants. 50k here... 100k there... it's money shot from a fire hose at marginally productive businesses across the country. It's keynesian.

Whether it succeeds though is another matter. It's not hard to find folks who are enthusiastic about shooting government money at pet projects, or on a higher more abstract level "increasing aggregate demand". It's another matter entirely when Uncle sam shows up at their door step 2, 5, 10 years down the road, hat in hand telling them it was all borrowed from the future and the future's here.

but what's the alternative? Whether you or gaius marius agree with the above, surely it must be aknowledged that extreme poverty on a national scale could lead to scenarios we'd all rather avoid. But then, if it's true that keynes is sleepwalking us to totalitariansim, presumably we should want to avoid that as well....

Dammit.. where's that brandy you promised?

 
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realestate

 
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stealth depression of small business


ed harrison highlights david rosenberg's morning note on future revisions to GDP data.

Translation: small businesses are suffering disproportionately because of a credit crunch. Their pain is not adequately reflected in the numbers because of big company bias in real-time data. GDP growth is probably much lower than we realize.

This view is consistent with the dichotomy in the BLS (Bureau of Labor Statistics) household survey used to calculate the unemployment rate and the establishment survey used to calculate non-farm payrolls. ...

That shows employment levels dropping off a cliff over the last three months in the household survey. While I question the magnitude of the fall given the weekly jobless claims data, these numbers are much worse than the job losses seen in Non-farm payrolls. Directionally, this has to be right, meaning the 530,000 weekly claims was probably translating into something more like 300,000 job losses than the 200,000 reported. Again, underreporting of small business distress explains the difference.


this was also a topic addressed by david goldman.

With commercial and industrial lending by American banks down 13% since September 2008, and most banks continuing to “tighten lending standards” in the Fed’s official poll, this is not surprising. Wal-Mart will make it through a recession; not the tea-cozy shop down the mall corridor, much less the real-estate agency in the half-abandoned exurb. The global speculative grade default rate, as Moody’s reported this week, has risen to a post-Great Depression high of 12%. Credit lines for small businesses (including home equity, credit cards, and all the other devices entrepreneurs use to fund themselves) will continue to shrink.

Numerous analysts have made the point that in all previous post-war recoveries, it was small business that led job creation. During the 1980s and 1990s large businesses lost employment and small businesses grew. The fact that job losses at small business are evidently far higher than those at large businesses does not make this look like any recovery at all.


indeed, in spite of third quarter statistics indicating a very light recovery which could as easily be called a stagnation around 2007 levels of economic activity, i suspect that the depression is gathering force in the substrata of the economy which are poorly represented in first-guess economic statistics.

previous recessions have been characterized mostly by large enterprises cutting jobs while small business created them. this time, small business has been cutting jobs even faster than the big boys, making hiring very scarce and short circuiting a lot of the logic behind well-intentioned arguments such as those forwarded by new deal democrat at the bonddad blog, positing a straight correlation between initial claims and non-farm payrolls. initial claims are moderating, but hiring continues to decline. the latest JOLTS report out of the BLS illustrates the trend, though again likely understates the perniciousness of the effects in small business.

what likely doesn't is (via the orange county register) the october survey data out of the national federation of independent businesses.

In the past three months, 8% of respondents increased employment but 19% cut jobs, owners told NFIB.

The future looks a little brighter: 9% plan to create jobs and 16% plan cuts.

More bad news for employees: Owners continued to cut compensation at a record pace, the survey found.

Overall, small-business owners continue to be pessimistic about the economy. In the 1980-82 double recession, NFIB’s Index of Small Business Optimism dipped below 90 for one quarter (100 = owners’ optimism level in 1986). In this recession, the index has been below 90 for six quarters.


hires in small business will have to exceed cuts for any material recovery to take hold. but with these businesses cut off from credit and in many cases actively seeking to downscale and reduce debt, that may not be for some time.

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Agreed. The problem is not that an abnormally high number of people are being laid off, but that an abnormally low number of people are being hired.

I think that one of the problems for small businesses (and for the deficit situation in general) is that without price increases it is difficult to envision growth and therefore plan for expansion. I know that the economists don't think this way (they adjust everything into "real" terms) but ordinary people are much more optimistic when they are making more money, even if they're not better off in real terms. I used to work for a company where the chairman (who was crafty and smart despite not being nice person) liked to pat himself on the back for "having grown sales" from $5 million to $10 million over the period from 1980 to 1995. Of course, in real terms this was break even at best, but he sure felt good about it. Businesspeople, even smart ones, think in nominal terms--without an increase (or the prospect of an increase) in nominal sales, they're not going to expand or hire.

If the Feds really want recovery, they are going to have to cause inflation on Main Street. Just letting the leveraged guys drive up asset prices isn't going to cut it.

Somebody needs to get a highly publicized raise--outside of Goldman Sachs.

 
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Tuesday, November 10, 2009

 

IEA accused of masking peak oil


the guardian yesterday reported on a whistleblower asserting that the international energy agency has succumbed to pressure from the united states to misrepresent global oil production and recoverable reserves from new discoveries in an effort to cover up a global peak and decline in oil, broadly known as 'peak oil'. the motive was ostensibly to suppress oil prices.

edward harrison:

Conspiracy theorists will love this one! But, we don’t need a conspiracy theory to see that the end of cheap oil is upon us. To find high quality oil deposits (I am not talking about Oil Sands in Alberta here) is becoming more and more expensive. And one oil field after another is hitting peak. We have seen it in Mexico, Russia, the North Sea, the Alaskan North Slope and elsewhere. The only thing keeping us from realizing the peak is Saudi Arabia, the swing producer in OPEC.


british petroleum provides, via seeking alpha, this chart of oil prices back to 1861. in real terms the price of oil clearly has never been so expensive as recently. it's impossible to divorce the effects of financialization from the asset price, but i suspect it is also reflecting a new era of increasing scarcity. and this is not new news. industry opinion has been moving in this direction for years. we at the behest of vice president and halliburton CEO dick cheney invaded iraq and will remain there to secure oil reserves -- the 2003 invasion was very much another in a long-running series of global resource wars over oil. i'm sure it won't be the last as the US and other nations attempt to overcome the ramifications of the net oil export problem and reach for some sort of energy autarky amid the dearth of new discoveries. even the allegedly-optimistic reports of the IEA have been pointing toward slowing production.

but this revelation very definitely demonstrates that peak oil is a deep and growing concern in the front of the collective mind of the oil industry. if assessments are being tinkered with for political reasons, it is because there are real problems entrained with real consequences for oil-dependent societies -- and there is no more oil dependent society on this earth than the united states, whose entire infrastructure was constructed in the age of cheap oil, whose industrial farming model is predicated on cheap petroleum products.

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deficits, transfers and spending


i've come to harp on the need of the federal government to provide the counterbalance in national accounts needed to offset private sector balance sheet repair if a deflationary collapse is to be at least mitigated, if not avoided.

but it's necessary to note that, while the government is going to run a deficit of about (-12%) of GDP in 2009, not all of that deficit is in fact fiscal stimulus. a significant chunk is not spending at all but rather direct transfers to entities such as the GSEs. to the list which includes FNM and FRE we'll soon add the FHA. via alphaville:

As the Washington Post reported on Tuesday, the FHA’s emergency reserve fund has fallen to a 7-year low, below the 2 per cent threshold of its outstanding loans, which it is required by law to maintain:

The Federal Housing Administration, which has played a crucial role supporting American home buyers after the collapse of the mortgage market, has burned through a huge cash reserve in less than a decade and could soon wind up with what amounts to an automatic taxpayer bailout if the agency’s fortunes don’t improve, according to a review of FHA finances.


To be clear, if the losses continue — and all indications are that they will — the FHA will be granted a line of credit with the Treasury, which would put more pressure on the ballooning US deficit and ultimately, taxpayers.


this wasn't unexpected, and they'll be followed by the regional FHLBs (as bruce krasting via zero hedge reminds today). but i think it's important to separate the transfers of obligations to the federal balance sheet (which prevent liquidation of debt pyramids) from spending which supports incomes. those boosted incomes will be used to retire private sector debt in a general deleveraging -- indeed that's what should be hoped for -- but will help to support aggregate price levels as well.

while its true that shifting obligations to the government can free cash flow for the relieved (akin to a default), many of the relieved will be banks or financial companies who will -- in a net negative loan demand environment -- will in aggregate be unable to employ stronger balance sheets in lending. they may instead boost treasuries by expanding their portfolio, but that's about all.

actual spending, on the other hand, is cash flow and will propagate through the economy on its way toward retiring debt.

so when examining the impact of government deficit spending on economic performance -- which i think will be paramount -- one has i think to be careful to factor out such transfers.

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Friday, November 06, 2009

 

AWHI and its irrelevance


another update with the release of the october jobs report of the aggregate weekly hours index. but i'm frankly not sure why i bother.

the moderation in the decline of AWHI, a traditional precursor of recovery, was noted in june. a month ago, i called into question the nascent recovery implied by AWHI on grounds of diminishing fiscal stimulus.

the employment ratio, or EMRATIO, one of my favorite leading indicators of recession, ticked lower to 58.8% -- a level reminiscent of times before the mass migration of women into the workforce. most disturbingly, in falling over the previous three months from 59.5%, or (-0.7%), the pace of employment contraction is -- almost two years into this contraction -- seen to be accelerating again.

similarly, AWHI has reversed a moderation in its decline and ticked lower to 98.5. total hours (weekly) fell to a new low of 33.0 hours from 33.1. there's quite a bit of noise in the first derivative of AWHI, though there's little doubt that the rate of contraction peaked in march. but this will bear watching over coming months. turns up in AWHI have tended to lead EMRATIO, but if the recent stimulus-aided inventory cycle upswing has run its course further contraction in AWHI is likely.


citing prieur de plessis' reportage on richard koo, ed harrison said:

Get ready because the second dip will occur. It will be nasty: unemployment will be higher and stocks will go lower than in 2009. I am convinced that it is politically unacceptable to have the government propping up the economy as Koo suggests it should. The question now is one of timing: when will the government stop propping up the economy? The more robust the recovery, the quicker the prop ends and the sooner we get a second leg down.


AWHI continues to decline -- ticking a new depression low in october -- but as can be seen here at a much moderated pace. this is consistent with nascent recovery from recession. it is also i think completely irrelevant in a balance sheet recession.

on the basis of the total loans and leases -- updated through the end of september, showing an annualized rate of contraction of (-15%), the worst in a sample dating back to 1947 -- and continuing to gain steam with ever-greater seasonally-adjusted month-over-month contractions -- we can see that private sector credit is being destroyed at an unbelievable rate. i haven't data comparisons to offer from the early 1930s, but would suspect that even then the rate of commercial bank credit contraction rarely if ever grew so formidable. and this is to ignore the annihilation of the commercial paper market and the titanic if ethereal contraction of trade credit, both offset only by the expansion of capital market corporate debt issuance -- much of which has been for financial institution refinancing and facilitated by the TGLP.

and yet we see a positive GDP print in the third quarter. how? the government is running an annualized deficit of 12% of GDP -- that's how. and should it falter from those levels of debt-financed spending while private sector finance remains in full retreat, it will cease to be the necessary counterweight to depression and economic activity will summarily collapse.

in the end, indications like the change in AWHI or the weekly leading economic indicators matter little -- they are about consequence. forecasting big-picture changes in economic activity over the next few years will likely be as easy as monitoring changes in the government deficit in comparison to the rate of private sector balance sheet repair -- that is about cause.

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It seems to me that one of the best indicators of real-time employment is the withholding tax data published by the Treasury--this is not showing any improvement over last year--it is down about 10% Y-O-Y. Some of this is due to the changes made in the "Making Work Pay" legislation, but still it provides a decent comparison of employment activity.

If you are interested in the data I can send it to you.

 
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bwdik, that's a good idea and dataset.

 
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Wednesday, November 04, 2009

 

eye of the housing hurricane


via the daily crux, dan ferris offers the updated mortgage recast chart presented by whitney tilson illustrating all too well the option ARM impulse that looms between today and 2012. though many variable-rate mortgage resets are mitigated by the ultra-low interest rates being bought by the federal reserve, option ARM recasts result in the full amortization of mortgages on which most payers were recapitalizing not only accrued interest but principal.

realtytrac highlights the shift underway.

“Rising unemployment and a new variety of mortgage resets continued to gradually shift the nation’s foreclosure epicenters in the third quarter away from the hot spots of the last two years and toward some metro areas that had avoided the brunt of the first foreclosure wave,” said James J. Saccacio, chief executive officer of RealtyTrac. “While toxic subprime mortgages drove much of that first wave of foreclosures, high unemployment and exotic Alt-A Option ARMs are spreading the foreclosure flood to more metro areas in 2009.”


when do i think buying a house will probably be a good idea? my guess is sometime after that second massive spike in loan recasts -- we're kind of "in the eye" of the housing hurricane at the moment.

the first "subprime" impulse fed created a massive supply-demand imbalance, which manifested as a combination of rapidly declining prices and very long average listing times across many metropolitan areas.

when the second wave of recasts hits, it will fall upon a market already glutted with houses for sale and shadow inventory. it will moreover disproportionately afflict middle- to higher-priced housing, where adjustable rate negative-amortization financing which anticipated little or no refinancing risk and considerable house price appreciation was more prevalent than the classic 'subprime' low-FICO loans which (though certainly present at the higher end) predominated the lower rungs of the housing food chain. given what the reality of negative equity has done to move-up buyers -- that is, virtually eliminating them -- this has the making for gargantuan problems among the suburban 'mcmansion' set. i rather expect that collar-county housing will more or less totally collapse under all the supply and get really, REALLY cheap as we move through 2011 into 2012 or 2013. particularly if there's a strong second leg to the recession -- as i expect there will be, probably starting in 2010, accompanying the decline of fiscal stimulus spending levels from current (-12%) of GDP -- mid-to-high-end house prices might fall shockingly far. there's such a huge supply problem!

many have focused on reversion to the mean in metrics such as price-to-rent, and i agree that the very-long-term forecast has to be exactly that. but what is less commented on is that the mean in price-to-rent becomes the mean only by prices spending as much time and magnitude substantially cheap vis-a-vis rents as they do expensive. given the dynamics of the situation in which we find ourselves today, it is no stretch to forecast an extended period of materially cheap house prices. if that environment is also one of falling rents thanks to very high rental vacancies and declining incomes, house prices could fall stunningly even from today's already-corrected levels.

as with many things in a balance sheet recession, government finances will be a critical determinant. if government deficit spending sustains incomes through a period of private sector balance sheet deflation, rents may correct to account for vacancies but would not be pressured further by declining employment and incomes. if, on the other hand, political pressure builds in favor of deficit hawks and government deficit spending is materially curtailed, it is difficult to provide a rational floor forecast. experience would suggest, on the precedent of 1990s japan and elsewhere, that residential real estate prices could under such conditions ultimately decline peak-to-trough well in excess of (-80%).

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Thanks for the mortgage reset link, the most important piece of data for me personally. Goldman's takedown of Roubini today was a fun read. Unfortunately can't view your freestockcharts links (no Silverlight issues)

 
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Very odd -- Tilson takes the chart, the seasonality in sales .... and forecasts a bottom in mid-2010 on slide 26.

 
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i don't follow tilson there either, rb, except to say that he seems in that timeframe to be predicting a mean reversion without overshoot.

 
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CRE? Residential is 1.5 trillion dollar second wave, CRE is 3.5 trillion.

 
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the other day I saw this very good article on gold and the dollar as a result of the Federal Reserve's continued attempts to debase our currency and continue to try to solve a debt crisis with more debt: Gold Price Headed to $2,300 on Hyperinflation Risk?

here’s a snippet from it: “The gold price, and the price of other hard assets, is rising as more investors across the globe ask themselves how these deficits and debts will be resolved. Furthermore, new congressional initiative aimed at politicizing the Fed would give the Secretary of the Treasury a veto over Section 13(3) governing emergency action by the Federal Reserve – and effectively taking away the independence of the central bank. Setting aside discussion of the power that the Federal Reserve currently has, if politics enters the arena of monetary policy, then the U.S. dollar’s fate is sealed. Political leaders who reflexively seek political refuge in populist pork-barrel and loose fiscal policies during difficult economic times may soon have the same power – and ballot-box pressure – over monetary policy.”

 
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