Free Markets, Free People

Economy

Economic Statistics for 8 Mar 12

The following statistics were released today on the state of the US economy:

Challenger reports that announced layoffs in February were little changed at 51,728, compared to 53,486 in January and 50,702 a year ago.

Initial claims for unemployment  for the the March 3 week rose 8,000 to 362,000 with the previous week revised 3,000 higher to 354,000. The 4-week moving average rose 1,000 to 355,000.

The Bloomberg Consumer Comfort Index rose to -36.7 in the period ended March 4, the highest since April 2008.

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Dale Franks
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Economic Statistics for 7 Mar 12

The following statistics were released today on the state of the US economy:

The Mortgage Bankers Association reports mortgage applications fell -1.2% last week, with purchase apps up 2.1%, but re-fis down -2.0%.

The ADP Employment Report estimates that February net new jobs in Friday’s Employment Situation report will rise by 216,000.

The final revision for 4Q productivity shows a 0.9% increase in productivity for the quarter, but with a 2.8% increase in unit labor costs. Productivity gains are modest, while labor costs are escalating.  This is not good for continued labor growth.

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Dale Franks
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Oh. This can’t be good…

Via Zero Hedge, I’ve acquired this very interesting little chart, that shows the number of margin calls on its credit-extensions to counterparties. Huh. Now, see, I just wrote that, and I have no idea what it means. It’s just lots of economic gobbledy-gook when you write it out in a single sentence like that.  But, here, let’s take a gander at the chart, then I’ll explain, in human terms, what it tells us.

20120306_ECB

So, the European Central Bank (ECB) had this great idea, which was to implement a European version of Quantitative Easing. They called it the Long-Term Refinancing Operation, or LTRO.

It was actually pretty simple. The banks would go to the ECB and get an LTRO loan by providing collateral of some sort—generally A-rated securities. By which, I mean a security that at least one rating agency has rated as "A". Like, you know, Italian bonds. They don’t actually have to give the collateral to the ECB or anything, just let them know that, "Hey, we’ll just keep it safe, and can hand it over if we really have to." On the strength of those assurances, and the sterling quality of the collateral in question, like Spanish bonds, the ECB then gives the banks a huge hunk of cash. The banks then get to keep the money for up to three years, but are only charged the average overnight rate of interest.

Now, as long as the securities you put up for collateral are good, like Irish bonds, it’s a pretty sweet deal. Alas, if the securities turn out not to be so reliable, the ECB will make a "margin call", that is to say, they will demand the banks come up with additional cash or other assets to cover the collateral.

As you can see from the charts, that is exactly what the ECB is is starting to do. That’s troublesome.  You see, the ECB has a €3 trillion balance sheet. But it only has a bit under €11 billion in actual assets. So the ECB has a leverage ratio of a little under 300:1. So, it really does have to go after better assets from the banks if the initial collateral turns, you know, sucky.

The problem then is, as Tyler at Zero Hedge puts it:

The rapid deterioration in collateral asset quality is extremely worrisome(GGBs? European financial sub debt? Papandreou’s Kebab Shop unsecured 2nd lien notes?) as it forces the banks who took the collateralized loans to come up with more ‘precious’ cash or assets (unwind existing profitable trades such as sovereign carry, delever further by selling assets, or subordinate more of the capital structure via pledging more assets – to cover these collateral shortfalls) or pay-down the loan in part. This could very quickly become a self-fulfilling vicious circle – especially given the leverage in both the ECB and the already-insolvent banks that took LTRO loans that now back the main Italian, Spanish, and Portuguese sovereign bond markets.

Essentially, the LTRO program is beginning to suck higher quality assets out of the banks to meet the margin calls that are issued when the initial collateral’s value starts to go belly up. Sucking those higher-quality assets into the ECB’s LTRO collateral program, mean that they can no longer be used to finance business and consumer credit, and, thus, spending. The banks essentially become bond storage warehouses, that don’t actually do any business.

That slows the economy, of course. Which means that those original A-Rated securities stand e much better chance of defaulting, in which case, they’re worth nothing. As Seeking Alpha explains:

The real menace comes in the event of a further weakening of the Eurozone economy. If the economy were to contract, the collateral that the banks have pledged to the ECB may cease to be "performing" (seemingly the only hard criterion for collateral for the second round of LTRO). The ECB would be at risk–and ultimately so would the banks that pledged the defaulting securities.

Any defaults, be they of collateral or the banks themselves, would be a serious issue for the ECB. The ECB is supporting its EUR 3 trillion balance sheet with EUR 10.76 billion in capital–leverage of nearly 300 to one. With the fiscal situation of European sovereigns already strained to the breaking point, it’s hard to see where the money to cover the defaults could come from. This issue of a ballooning balance sheet, coupled with shaky collateral and the 3-year tenor of the ECB loans, is precisely why Trichet and Weber would not go the Draghi route. They bristled at the risk.

The odds of a calamity of the sort that would endanger the ECB are not great, but nor are they impossibly long.

Well, that huge jump in margin calls may be an indicator that those not "impossibly long" odds are getting shorter and shorter. And I wonder how much exposure US banks have to an LTRO default through credit/FX swaps. Probably…really a lot.

So, we got that goin’ for us.

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Dale Franks
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Economic Statistics for 6 Mar 12

Weekly retail sales are the only thing on the calendar today. Redbook reports sales suffered a -0.4% drop to a 3.0% year-on-year same-store sales rate for the week due to bad weather. ICSC-Goldman, on the other hand, is reporting that, while weekly store sales rose 1.3%, the year-on-year sales rate is only 1.7%, as higher gas prices put more pressure on consumers’ pocketbooks.

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Dale Franks
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Economic Statistics for 5 Mar 12

The following statistics were released today on the state of the US economy:

Factory orders declined by -0.1% in January, led by weakness in durable goods, which fell -3.8%.

The ISM Non-Manufacturing Index rose five-tenths from last month to a better-than-expected 57.3.

That’s all for today, as we kick off a light week of statistics, with the exception of Friday’s Employment Situation.

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Dale Franks
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Fannie Mae and Freddy Mac continue to suck down taxpayer money

Two of the the institutions most responsible for the housing crisis, despite Barney Frank’s claims to the contrary, are still in crisis themselves (a third is the very institution Frank called home – Congress).

Fannie Mae said Wednesday it lost $2.4 billion during the fourth quarter of 2011 and $16.9 billion for the full year.

It has had worse years, remarkably. Fannie lost about $60 billion in 2008 and $72 billion the following year–two of the 10 largest corporate losses ever. Sibling Freddie Mac is responsible for a third, a $51 billion loss in 2008.

These two institutions, both set up by and working at the behest of the federal government, have a very checkered history. 

For those who have always wondered what “Fannie Mae” stands for, it is the Federal National Mortgage Association, begun in freddie_mac_and_fannie_mae1938 during the Great Depression as a part of New Deal.  So those who argue that it is a “private corporation” are simply uninformed.

Both organizations have a single purpose: “to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities (MBS), allowing lenders to reinvest their assets into more lending and in effect increasing the number of lenders in the mortgage market by reducing the reliance on thrifts.”

As it turns out, they got way out on a limb with their purpose, driven by government policy and crony capitalism.

What set off the debacle through which we suffered?  Here’s the short story:

In 1992, President George H.W. Bush signed the Housing and Community Development Act of 1992. The Act amended the charter of Fannie Mae and Freddie Mac to reflect Congress’ view that the GSEs "… have an affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families in a manner consistent with their overall public purposes, while maintaining a strong financial condition and a reasonable economic return;"  For the first time, the GSEs were required to meet "affordable housing goals" set annually by the Department of Housing and Urban Development (HUD) and approved by Congress. The initial annual goal for low-income and moderate-income mortgage purchases for each GSE was 30% of the total number of dwelling units financed by mortgage purchases and increased to 55% by 2007.

In 1999, Fannie Mae came under pressure from the Clinton administration to expand mortgage loans to low and moderate income borrowers by increasing the ratios of their loan portfolios in distressed inner city areas designated in the CRA of 1977.  Additionally, institutions in the primary mortgage market pressed Fannie Mae to ease credit requirements on the mortgages it was willing to purchase, enabling them to make loans to subprime borrowers at interest rates higher than conventional loans.

George H.W. Bush began the slide and Bill Clinton lit the afterburners.  And while the industry attempted to take advantage of the situation it also needed an easing of credit requirements to meet the policy goals of the CRA.  And anyway, the Federal government was guaranteeing this mess.  Crony capitalism at its finest.

The warning signs about the eventual end were everywhere.  And any number of people issued those warnings:

In 1999, The New York Times reported that with the corporation’s move towards the subprime market "Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s."

Also in the New York Times, Alex Berenson reported in 2003 that Fannie Mae’s risk was much larger than is commonly held.

The eventual end to such nonsense was almost precisely foretold:

In his 2006 book, America’s Financial Apocalypse, Mike Stathis also warned about the risk of Fannie Mae helping to trigger the financial crisis: “With close to $2 trillion in debt between Freddie Mac and Fannie Mae alone, as well as several trillion held by commercial banks, failure of just one GSE or related entity could create a huge disaster that would easily eclipse the Savings & Loan Crisis of the late 1980s. This would certainly devastate the stock, bond and real estate markets. Most likely, there would also be an even bigger mess in the derivatives market, leading to a global sell-off in the capital markets. Not only would investors get crushed, but taxpayers would have to bail them out since the GSEs are backed by the government. Everyone would feel the effects. At its bottom, I would estimate a 30 to 35 percent correction for the average home. And in ‘hot spots’ such as Las Vegas, selected areas of Northern and Southern California and Florida, home prices could plummet by 55 to 60 percent from peak values.”

Bingo.

And here we are.

The cost to you for this the mess created and driven by government policy and taken advantage of by lenders?  A lot.

Both Freddie and Fannie are supposedly “for profit” corporations. Profits, however, have been in short supply (but bonuses to top cronies haven’t):

During the three years leading up to the house price peak, Fannie reported annual profits of between $4.1 billion and $6.3 billion, and Freddie, $2.1 billion to $2.9 billion. During the five years since, Fannie lost a cumulative $163 billion, and Freddie, which hasn’t yet reported fourth quarter results for 2011, $91 billion.

Both Fannie and Freddie pay dividends to the Treasury Department as a condition of their government sponsorship, but both have regularly requested larger sums than they have paid. For example, Fannie said Wednesday that it paid $2.6 billion in dividends to the Treasury during its fourth quarter, but that it would soon submit a request for $4.6 billion to offset losses.

Fannie says it requested a total of $116 billion from the Treasury since the fourth quarter of 2008 and paid about $20 billion in dividends. Fannie requested $72 billion and paid $15 billion.

Or, as the article breaks it out in the nation of 309 million, the cost is $1,300 for each American household – owner or renter.

This is what happens when government’s decide they know better than markets.  When they let unsound political policies that create perverse financial incentives rule the day.   When they put financial prudence behind political gain. 

Hopefully we’ll learn something out of this.  But we won’t if each side continues to deny its role in this mess.   It was government who set the perverse policy and industry to took advantage of it. However, what should be clear to anyone is that if there had been no policy, there’d have been nothing of which to take advantage.

As usual, the tax payers is left holding the multi-trillion dollar bag for this monumental screw-up.

~McQ

Twitter: @McQandO

Gallup again points out for all the Republicans out there — It’s the economy, stupid!

I’m not sure how much more plainly it has to be said.  Here, let Gallup try:

More than 9 in 10 U.S. registered voters say the economy is extremely (45%) or very important (47%) to their vote in this year’s presidential election. Unemployment, the federal budget deficit, and the 2010 healthcare law also rank near the top of the list of nine issues tested in a Feb. 16-19 USA Today/Gallup poll. Voters rate social issues such as abortion and gay marriage as the least important.

If making the point graphically will help, here it is:

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The top 5 or 6 are your winners.  Any questions?

And in case that didn’t quite sink in and you still want to argue about it, try this one:

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Are we getting through yet?  Is it starting to get clearer?   Any talk about anything other than the top 5 or 6 topics, and preferably the top 3 or 4, is a distraction, waste of time and will see voters, especially those in the middle column critical to any electoral win, tune you out.

It is the economy, stupid.  That’s what the people are concerned with, what they’re most likely to base their vote on and what they expect you to be talking about.

Take a hint.

~McQ

Twitter: @McQandO

Economic Statistics for 01 Mar 12

The following statistics were released today on the state of the US economy:

Chain stores are reporting sales today, and a large majority are reporting greater rates of year-on-year sales growth in February than in January.

Initial jobless claims were 351,000, down 2,000 from the prior week. The 4-week moving average fell 5,500 to 354,000.

Personal income rose 0.3% in January, up 3.6% for the year. Personal expenditures rose 0.2% for the month, and 3.8% for the year. The Core PCE price index rose 0.2% for the month, and 1.9% for the year.

The Bloomberg Consumer Comfort Index posted at -38.8 for the 26 Feb period. This is almost a 4-year high. I don’t know whether that’s supposed to make me happy at the increase, or sad that the high is still a negative number.

The ISM Index fell to 52.4 this month, from 54.1 last month, indicating a slower rate of manufacturing growth.

Construction spending came in well below expectations of a 1% increase, posting a -0.1% decline for the month, though it’s still 7.1% higher than a year ago.

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Dale Franks
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Economic Statistics for 29 Feb 12

The following statistics were released today on the state of the US Economy:

The Commerce Department revised fourth quarter GDP growth up to 3.0% from the initial estimate of 2.8%. Mainly, the change stemmed from upward revision to nonresidential fixed investment, a downward revision to imports, and an upward revision to personal consumption. Interestingly, inflation, as measured by the GDP price index, was revised upwards to 0.9%. That’s quite a drop from 3Q, where it was measured at 2.6%, despite 3Q growth being significantly slower at 1.8%

The Mortgage Bankers Association reports mortgage applications fell by -0.3% last week as refinance apps dropped -2.2%. Purchase apps jumped 8.3%, though MBA isn’t impressed with that gain.  They note, "Purchase application volume increased over the week, but remains within the narrow and anemic range of activity we have seen since the expiration of the homebuyer tax credit in May 2010."

The Chicago Purchasing Manager’s Index rose sharply to 64 from 60.2 last month. The Production, New Orders, and Employment sub-indexes were all up sharply. The Chicago PMI is widely seen as a predictor of the national ISM Index, which is due out tomorrow.

The Feds "beige book", which compiles anecdotal evidence on economic conditions from each of the 12 Federal Reserve districts, is due out later today. This document generally serves as a guide to Fed policy makers at the regular meetings of the FOMC, which determine the Fed’s monetary policy moves.

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Dale Franks
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Obama’s UAW speech fantasy, Kaus’s auto industry reality

Trying to justify the unjustifiable with a pep-rally like political speech to the UAW, Obama points to what he contends are the favorable results of his decision to intrude into the auto market and rearrange the bankruptcy process to favor his cronies.

I know our bet was a good one because I had seen it pay off firsthand.  But here’s the thing.  You don’t have to take my word for it.  Ask the Chrysler workers near Kokomo — (applause) — who were brought on to make sure the newest high-tech transmissions and fuel-efficient engines are made in America.  Or ask the GM workers in Spring Hill, Tennessee, whose jobs were saved from being sent abroad.  (Applause.)  Ask the Ford workers in Kansas City coming on to make the F-150 — America’s best-selling truck, a more fuel-efficient truck.  (Applause.)  And you ask all the suppliers who are expanding and hiring, and the communities that rely on them, if America’s investment in you was a good bet.  They’ll tell you the right answer. 

Of course Chrysler is now owned by a foreign auto company, courtesy of the Obama administration, Ford took no federal money and, had normal bankruptcy proceeded, taxpayers wouldn’t be out $80 billion dollars (still unpaid despite claims to the contrary) and a leaner, more competitive GM would be in existence.   Those suppliers would still be supplying and after the shakeout a more viable corporation would have come into existence.

uaw-gmInstead, the same GM is in existence boosted by taxpayer money.  As Micky Kaus points out, “You’d be successful in the short run too if the government gave you $80 billion dollars.”

Speaking of those GM workers in Spring Hill, TN, Kaus lays out another reality that the president doesn’t present:

Toyota and Honda are coming back online after the tsunami and Southeast Asia floods crippled production. VW is building roomy American-style cars in Tennessee using $14.50/hour non-union workers instead of $28/hour UAW workers. Hyundai is expanding rapidly. Competition is going to be vicious–it’s widely believed there’s still overcapacity in the industry. A new oil price spike could crimp sales of high-profit trucks. Will GM still be making money in 5 years? Or, I should say, will GM still be making money building cars in the U.S. (as opposed to importing them from China) in 5 years? I’m skeptical. I don’t think deficient corporate cultures change that easily. Normally we rely on the market to simply kill them off.

The two points to be made here are important.   One, GM’s current “success” is a result of huge infusion of taxpayer money.  Its problem was/is its corporate culture and its unions.  Neither problem have been addressed or fixed.  Instead, like Solyndra, they’ve simply been given an extension via the taxpayer that will eventually run out.  Secondly, as competing auto companies  using non-union labor continue to locate in right to work states and pay a competitive wage (but not the high end union wage), they will continue to take market share from GM, who is still stuck with that toxic corporate culture and grasping unions.

But, of course, Obama won’t care because he’ll be out of office.  This is the usual short term vote buying, just on a grander scale than we’ve ever seen it before.  Crony capitalism at its worst.

Long term viability?

Who cares?  Certainly not President Obama.

~McQ

Twitter: @McQandO