Monday Muse

my favorite Ani DiFranco cut

[more at http://www.righteousbabe.com/ani/]

Maine Still Losing Jobs

[click to enlarge]

BLS news release, 11-20-09:

another 1,400 Maine jobs lost in October...
a total of 29,400 since the cycle peak.

[For an eye-catching time-lapse graphic on the rise in unemployment nationwide, go here.]

Mortgage Apps Rolling Over

MBA Purchase Index hits a 12-year low.

Wednesday is "Hump Day" for a reason. That's the day we get our weekly reminder from the Mortgage Bankers Association that, for more and more Americans, the prospect of home ownership is a hill too high to climb. Featured periodically in this column, the MBA's Market Composite Index tracks the volume of loan applications for both new mortgages and the refinancing of existing mortgages. That index was down 2.5% from the week earlier on a seasonally adjusted basis.

Almost three of every four loan applications are for refinancing, not surprising given today's low interest rates. If we look only at applications for newly acquired homes, the figures are a source of concern for those looking for a "bottom" in housing. The MBA's seasonally adjusted Purchase Index (charted above) declined for the sixth straight week and 4.7% from the week earlier, reaching a level not seen since November 1997. The weakness was confirmed by data released this morning by U.S. Commerce Department on new-home construction: building starts tailed off 10.6% in October. It would seem that low interest rates (the average rate on a 30-year fixed-rate loan fell to 4.83% last week) are not stimulating sales to the degree hoped for by government officials.

"Now that the Fed’s program [to buy housing debt] has been extended and the government has extended its [first-time homebuyer's tax credit], I would expect things to improve,” economist Christopher Low told Bloomberg News. “If you don’t see an improvement within the next couple of weeks, that would indicate a problem."

[update 11-19-09:]
Let's turn our attention away from new home loans and examine the ones already outstanding. Today the MBA's chief economist, Jay Brinkmann, reported that 14.41% of all home mortgages in the third quarter were either in foreclosure or at least one payment past due. That's one in seven. Four million mortgages were at least 90 days past due or in foreclosure. These figures point to a huge shadow inventory of houses waiting to hit the market. Perhaps that explains the lull in new purchases. Buyers are waiting for fire-sale prices!

Meltdown Countdown, Part Deux

[Bloomberg]

Liu Mingkang, Chairman of the China Banking Regulatory Commission, November 15, 2009:

The continuous depreciation in the dollar, and the U.S. government’s indication, that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation...[It has] seriously affected global asset prices, fueled speculation in stock and property markets, and created new, real and insurmount- able risks to the recovery of the global economy, especially emerging-market economies.

Get Ready for the Second Wave

First the subprimes, now the option ARMs...

[John Hussman's weekly market comment, November 9, 2009:]

The problem is that these Option ARM and Alt-A structures were specifically designed as “teasers” – allowing loans to be made without documentation of creditworthiness, in return for post-reset interest terms that were generally higher than a documented lender would have paid... Similarly, Option ARM mortgages typically have very permissive payment schedules prior to the reset date, which have allowed homeowners to essentially live in these houses (at least temporarily) with fairly discretionary payments. The data suggest that most of these borrowers have allowed their mortgages to “negatively amortize,” allowing the loan balances to grow larger even as property values have depreciated. Once again, the resets on these are problematic for borrowers with questionable credit- worthiness, who bought the homes largely in anticipation of price appreciation. For these borrowers, the transition from discretionary payments to more demanding terms is unlikely to be smooth.

Investing in the Future? Not.

[analysis from Annaly Capital Management:]

Companies are not reinvesting at a fast enough pace to keep track with depreciation, i.e. they are getting smaller in the face of reduced sales. On bank balance sheets, we’re seeing loans falling as banks lend less (and companies demand less credit), but securities on the balance sheet are rising…the banks are playing the curve by buying up securities, not lending. Unless we see a serious resurgence in end demand, which would mean a serious resurgence in wages, employment and credit availability, you won’t see a GDP boost from capital expenditures...you may indeed see a pick-up in mergers and acquisitions, analogous to banks buying existing loans in the form of securities instead of making new loans.

Instead of investing in new projects and innovation, companies are cutting costs, buying each other, buying their own stock, or just hoarding cash...We cannot shrink ourselves to prosperity.

[update, headlines for November 12: General Electric sells its security business to United Technologies, 3Com sells itself to Hewlitt-Packard]

Twenty Years Ago Today...

...Checkpoint Charlie was opened, Nov. 9, 1989.
So began the dismantling of the 28-year-old Berlin Wall.

Boston Globe Photo Gallery

James Carroll: "the greatest date of our lifetimes"

Rising From the Napalm

...where the green shoots are real.

The Mad Hedge Fund Trader gives a lesson in demographics:

http://madhedgefundtrader.com/November_6__2009.html

Pick-a-Stat

Gone: another 190,000 jobs. So says this morning's press release from the Bureau of Labor Statistics. This number--the one that gets all the headlines--is from the "establishment" survey (CES), and it is plenty bad. Worse, though, is the "population" survey (CPS) number, which comes in three times higher at -589K. BLS tries to reconcile the two figures with the so-called "adjusted household survey." That one falls somewhere in between: -402K.

Does any of these numbers spell "recovery?" I didn't think so.

And now (thanks to Jake at EconomPic) for the number that has governors across the land reaching for their medication: hours worked per week per capita, now at 19.3. This means more dependents in a shrinking economy less able to support them.

TARP Money Goes Up in Smoke

Congress thought it had a better idea. A year ago it allocated $700 billion to a new Troubled Assets Relief Program to prevent a run on some of the nation's biggest banks. The Treasury Department used a good chunk of the $700B to buy preferred shares in those banks (think Bank of America and Citigroup), as well as in insurers (AIG) and other lenders (CIT). Taxpayers were sweet-talked into believing that these were "investments." TARP, it was said, would actually become a profit center for the federal government, with quarterly dividends generating an annual return of 5%. Not bad with real interest rates below zero.

Trouble is, many of the investments are turning sour. Yesterday, while most of the nation was diverted by NFL action, CIT announced that it is seeking bankruptcy protection. The resulting reorganization, once approved by the courts, will mean a 30-percent haircut for bondholders and a virtual wipeout for stockholders. Not only do we taxpayers lose our direct "investment" in CIT of $2.33B (as reported by Bloomberg), but as partial owners of Bank of America we lose another $2.25B in the debt swap. Meanwhile, 33 banks missed their TARP payments in August, up from the 15 who missed their May payments. Think we'll ever see any of that money?

TARP is scheduled to expire at the end of next month, which, as the Wall Street Journal pointed out last week, would be none too soon. Treasury treats TARP as a revolving fund, which means that as money is returned, it gets redirected back out again. It will keep getting "invested" in ever riskier enterprises until it doesn't come back. Congress can lock up the remaining money by doing nothing. But given its propensity to subsidize losers like Cash for Clunkers and Cash for Bunkers, nothing dollarable (as John Muir used to say) is safe.

Bringing the Boys Home--In Boxes

[Reuters]

"Going back to Alexander the Great, no one has ever had success
fighting the locals in Afghanistan."

--David Verdi, Vice President of NBC News

quattrocelli plays Rumford

Muskie Auditorium, October 26, 2009

play Chitarri on StreamPad below

[more selections at quattrocelli's MySpace player here]

Bon Appetit

wheat futures heading up

From the Mad Hedge Fund Trader:

"During the sixties, new dwarf varieties, irrigation, fertilizer, and heavy duty pesticides tripled crop yields, unleashing a green revolution. But guess what? The world population has doubled from 3.5 to 7 billion since then, eating up surpluses, and is expected to rise to 9 billion by 2050. Now we are running out of water in key areas like the American West and Northern India, droughts are hitting Africa and China, soil is exhausted, and global warming is shriveling yields. Water supplies are so polluted with toxic pesticide residues that rural cancer rates are soaring. Food reserves are now at 20 year lows. Rising emerging market standards of living are consuming more and better food, with Chinese pork production rising 45% from 1993 to 2005. The problem is that meat is an incredibly inefficient calorie transmission mechanism, creating demand for five times more grain than just eating the grain alone. I won’t even mention the strain the politically inspired ethanol and biofuel programs have placed on the food supply. It is possible that genetic engineering, sustainable farming, and smart irrigation could lead to a second green revolution, but the burden is on scientists to deliver. The net net of all of this is that food prices are going up, a lot."

Oh, and have a nice day.

The Punch Bowl Gets Taken Away

Home sales in the U.S. have been artificially supported by the First-Time Buyer's Credit, which is due to expire at the end of next month. Because of the time necessary to process new mortgage applications, the window has already effectively closed. Look (above) at what happened to mortgage apps last week. According to survey data released this morning by the Mortgage Bankers Association (MBA), its Market Composite Index, a measure of mortgage loan application volume, decreased 13.7 percent on a seasonally adjusted basis from one week earlier. Without the adjustment for the Columbus Day holiday, the index actually decreased 22.4 percent. Oops.

[update, one week later:]

Realtors, lenders, and builders will undoubtedly point to the latest kink in the data series as proof that the Buyer's Credit should be extended. The $8,000 credit essentially covers the down payment for a cash-strapped purchaser. But Rex Nutting at MarketWatch argues that the subsidy is wasteful. Of the million-plus claims that have been filed so far, as many as two-thirds have been for transactions that would have taken place anyway, with or without the credit. Subtract those out, and the real cost to the government of each additional sale under this program is $43,000. "The last thing we need in this country," says Nutting, "is more houses, or a temporary floor under prices or more government incentives to buy a home without putting any of your own money at risk."

Actually, Rex, the very last thing we need in this country is more fraud. It is bad enough that banks are ripping off taxpayers; now taxpayers are ripping off each other. The $43K figure mentioned above does not capture the costs of weeding out fraudulent claims, which (as reported by the Wall Street Journal here) could be one of every ten. In testimony to Congress, the Treasury Inspector General for Tax Administration recommends that the Internal Revenue Service demand more thorough documentation before granting the credits. No credits before closing, no credits for second homes, no credits for 4-year-olds.

A handout meant to grow green shoots creates red tape instead. I know, hard to believe.

Junior At Eleven Weeks

Worthley Pond, 10-17-09

[compare to one month earlier]

Shrinkage at G.E.

General Electric is a blue-chip "tell" for the U.S. economy as a whole. A more diversified company than 20th-century stalwart General Motors ("what's good for GM is good for the country"), GE has five major divisions, including Energy Infrastructure, Technology Infrastructure, NBC Universal, Capital Finance, and Consumer & Industrial. In 2007 the company pulled in revenues of $173 billion and netted $22.5 billion in profits. If GE is working, so is the U.S.

We now know from GE's third-quarter earnings, posted this morning, that good cheer alone will not turn the economy around. Remember, this was the quarter when GDP growth was supposed to turn positive, officially ending the recession. If that happens, it will be because of increased government spending, not because of recovery in the private sector. Q3 revenues at GE of $37.8 billion were down 20% from a year earlier and 3% from Q2.

The biggest drag came from G.E. Capital Services, the company's lending arm, accounting for one-third of total revenues. In 2007 GECS generated more than half of the company's profits, or roughly $3 billion each quarter. Those days are gone, as CEO Jeffrey Immelt revealed plans to shrink the balance sheet at GECS by 25%. [Memo to President Obama: contracting balance sheets in corporate America spell S-T-A-G-N-A-T-I-O-N.] Last quarter, GECS managed to break even only with the help of a $1 billion tax credit.

This bad news for the U.S. financial sector was compounded by Bank of America's announcement, also this morning, of a $2.2 billion loss in Q3 (after preferred dividends, some to Uncle Sam). (A page from BofA's financial summary documenting the relentless growth in nonperforming assets may be viewed here.) Citigroup yesterday announced a loss of $3.3 billion, despite underfunding its loan-loss reserve. Nonperforming loans are surging there, too.

The financial crisis is not over.

Bloomberg TV interviews Harvard prof Niall Ferguson here.

MBA Index Rolling Over?

The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending September 25, 2009. The Market Composite Index, a measure of mortgage loan application volume, decreased 2.8 percent on a seasonally adjusted basis from one week earlier.

The twin peaks in the graph above are your "green shoots." Since early summer we have been mired in a lending brownfield, which may turn to quicksand with the expiration of the Federal First-Time Buyer's Tax Credit at the end of November. Recovery, anyone?

Echo Bust?

[click to enlarge -- relayed by Mike Mish Shedlock]

Here Come De Judge

Legislators won't do it. Neither will regulators. So how do we proceed with pest control on Wall Street? I'm talking about the investment bankers who have spent the past two decades padding their compensation by peddling risky derivatives to zombie investors. Their financial "engineering" (too good a word, as it implies that they actually made something useful) resulted in a dangerous shortening of time horizons, a dysfunctional allocation of resources, massive job destruction, a generational delay in economic innovation, and a crushing tax burden amortized in perpetuity. Other than that, good job, guys.

Throughout 2008 I held up Merrill Lynch as the arch symbol of this over-the-counter culture. When 2008 expired, so did Merrill Lynch, at least as a stand-alone company. But the culture lives on. By all rights Merrill would have--and should have--failed, just as Lehman Brothers did a year ago. But Bank of America, prodded by an oligarchy anxious to keep the game going, decided to take Merrill over.

The merger almost fell apart when, upon more careful examination, Merrill's assets proved too toxic even for an acquirer the size of BofA. Then came a comical sequence wherein the Three Stooges--Treasury Secretary Henry Paulson, Fed Chair Ben Bernanke, and BofA CEO Ken Lewis--slapped each other silly with threats and counter-threats. Ken-Doll thought about pulling out of the deal before the shareholder vote in December. Take this, said Hammerin' Hank, handing him an envelope stuffed with $25 billion in TARP dough. Not enough, said Lewis. Then we'll up the ante, said Paulson, throwing in another $20 billion in taxpayers' money and a guarantee to cover as much as $118 billion in Merrill assets. Still not enough, repeated Lewis. Look, you good-for-nuttin' empty suit, said Helicopter Ben, just take the money and keep your trap shut, or we'll fire you AND your entire board.

O.K., O.K., that's enough, concluded Lewis. BofA shareholders approved the deal, blissfully unaware that Merrill was ringing up billions in losses and paying billions in executive bonuses. Since then the Securities and Exchange Commission, embarrassed into action by New York's Attorney General, has accused BofA executives of withholding material information from shareholders. Convinced that its work was complete, the SEC then agreed to a settlement whereby BofA would pay the government a fine of $33 million while admitting no wrongdoing.

Here come de judge! (Remember that refrain popularized by comedian Flip Wilson forty years ago?) Last week U.S. District Judge Jed Rakoff threw out the settlement, finding it ridiculous that the victims of the alleged wrongdoing--the shareholders who own the company--would ultimately pay the fine (the judge's dissatisfaction is documented here). Instead, he ordered the case to trial. The SEC, having already blown the Bernie Madoff affair, has no choice but to proceed. It must prove the misconduct and identify the perpetrators, who presumably would then be subject to punishment. Yesterday the SEC pledged to "vigorously pursue" the case against Bank of America.

Pending the trial, Lewis continues to make out like a bandit, thanks to the largesse of the federal government. The various bailout programs enacted by Congress (TARP, TALF, TLGP, etc.) have boosted the stock prices of all the major banks. Lewis has seen his 4.7 million shares of BofA stock more than quintuple in value since March. So confident is he of his firm's recovery that he has arranged to cancel the $118 billion asset guarantee provided by the feds for the Merrill mess. Generous to a fault, Uncle Sam is accepting an exit fee of $425 million, or less than a tenth of the real value of the insurance as originally negotiated.

It will be interesting to see if the discovery process which Judge Rakoff demands finally assigns accountability for the ongoing financial calamity that threatens any meaningful economic recovery.

[update, 09-30-09:]
Lewis announced today that he will retire from Bank of America at the end of the year. He will leave with $135 million in pension benefits, stock, and other compensation. So what if Social Security goes bust!

Young Loon Now a Tween

Loon offspring at seven weeks, Worthley Pond, 09-20-09

Turn-around Ahead?

[click for a larger view]

The S&P 500 stock index oscillates around its 200-day moving average, regularly reverting to the mean. The S&P is now trading at 20 percent above the 200-day MA, typically a level which triggers a turn back down. Fasten your seat belts.

Banks Are Ill-Prepared for the Coming Tsunami

Up, Up, and Away? That's what the stock market seems to be saying, but the line above is pointing in the other direction. ALLL stands for "Allowances for Loan and Lease Losses," and the graph indicates that only 20% of all bank assets reside in banks with sufficient allowances set aside to cover their nonperforming loans. In other words, as more and more loans become delinquent, banks are under-reserving for possible defaults. Instead, they are puffing up their current earnings in hopes of appeasing regulators and attracting investors (and, of course, paying their top executives).

A new wave of defaults will arrive in 2010 as option ARMs (adjustable-rate mortgages) do what they were designed to do: explode. These are teaser loans that start borrowers off at absurdly low monthly payments for the first few years. The payments might be interest-only (leaving the principal untouched) or even less (allowing the balance owed to increase). Then, once the introductory period expires, the payments on principal begin. That's when the rubber finally meets the road.

These products were perfect for speculators flipping properties in an overheated market. Borrowers could sell for a profit before the loans re-set. But option ARMs will prove deadly to homeowners who have suddenly lost their jobs and, thus, the income to cover the higher payments due after the re-set. The U.S. economy has shed jobs for twenty months in a row (a total of 6.9 million) and is expected to continue doing so at least until the middle of 2010. The mortgages, alas, allow no grace periods for unemployed borrowers. [Hours after I posted this, FDIC Chair Sheila Bair revealed in a statement that "the FDIC is urging its loss-share partners to consider the borrower for a temporary forbearance plan, reducing the loan payment to an affordable level for at least six months." The initiative applies to banks that have acquired failed FDIC-insured banks and would offer relief to "unemployed and underemployed" borrowers.]

Almost $100 billion in option ARMs will reset between now and the end of 2010. Mounting foreclosures are inevitable, and hundreds of banks will be forced to close. Surviving banks will be hit by the feds with a double whammy: "special assessments" to help indemnify insured deposits as well as stricter capital-reserve requirements to backstop defaults. Turning a profit will be a tall order (as described here). Lending to entrepreneurial start-ups--and creating jobs--will be out of the question.

But bank CEOs don't mind. They already have theirs.

Photo Retrospective: Ted Kennedy

[click for slide show]

Also, the Boston Globe has a video timeline here.

Where Exactly Is All That TARP money?

Not here. As far as savings go, Americans have gotten religion. We now owe less money collectively than we did a year ago, as the graph above shows. Not only do we want to get out from under; lending institutions are forcing us to submit to tighter discipline. They are making money less freely available now to protect themselves from risky borrowers.

But this is bad news for an economy built on expanding consumer debt. The reduced demand for goods and services has resulted in massive layoffs during the past nineteen months, feeding a vicious cycle of lost incomes and delinquent loans. Policy makers in Washington last fall tried to stanch the bleeding with the infamous TARP, a program designed to force $700 billion through the nation's banks into the hands of tapped-out consumers. It was a frantic attempt to keep the debt addiction going.

A funny thing happened on the way to recovery:

[THERE it is...]

Instead of recycling the money as intended, the banks are sitting on it. Notice (above) how excess bank reserves have soared since September's meltdown in the credit markets. Once burned, banks are now twice shy about building their balance sheets on the backs of distressed consumers. Instead, they are hunkering down until the storm passes.

TARP was supposed to mitigate the pain. It has not done that, nor has it helped to spread the pain evenly. It has selected and protected a privileged group of survivors, a class that, more than made whole, is actually profiting from the crisis. During the Obama relief rally, banks have made money by underwriting each other's stock offerings and trading each other's stock. They have not made it by making new consumer loans or modifying existing ones.

They said that taking TARP money was the patriotic thing to do. They lied.

Population Grows, Workforce Doesn't

For the first time since World War II, the U.S. Gross Domestic Product has shrunk for four straight quarters (and five of the last six). Another post-WW2 first: we are completing a ten-year period with no net new jobs (see chart above). Wages and salaries, which drive recoveries in spending (not to mention tax collections), fell 4.7 percent in the 12 months through June, the biggest drop since records began in 1960. In other words, we have more dependents than ever before in a shrinking economy less able to support them.

Today brings the "good" news from the Bureau of Labor Statistics that "only" 247,000 jobs were lost in July. Numbed by monthly losses twice as large earlier this year, we are coaxed by the media to accept that a quarter-million new pink slips somehow bespeak an imminent recovery. I again remind you that the BLS data are "adjusted," and perhaps this month adjusted more than usual in order to pump up consumer and investor psychology (see Chris Martenson's take here). For now we have an Economy of Hope, but not yet one of results.

[update, September 4: Sure enough, the BLS has revised the July number to 276,000 jobs lost, a number nearly 12% uglier than the preliminary estimate. The final "official" number will not be known for another month.]

Lake Umbagog Slide Show

Begin here
(courtesy Boston Globe)

How To Destroy a Currency

Deficit Spending 101

[Thanks to Jake at EconomPic Data]

70 Years Ago Today...

...Donn Fendler disappeared on Mount Katahdin. Nine days later he emerged from the woods battered and bug-bitten. He has been writing and talking about his ordeal ever since. Today's Bangor Daily News has a retrospective here.

Double Dip?

May flowers bring June showers, according to the latest unemployment data from the Bureau of Labor Statistics. Because "only" 322,000 jobs were lost in May, incurable optimists were persuaded that the worst of the recession was behind us. After all, the hit was at least twice as big for each of the months in the December- March period. But Thursday's press release was grim. 467,000 jobs were lost in June, as the unemployment rate rose to 9.5%. There are fewer people working in the U.S. today than when former President George W. Bush first took office, even though the workforce has grown by 12.5 million since then.

Almost as bad, the average work-week declined another tenth of an hour to 33.0. Big deal, you might say, what's a measly six minutes? Well, six minutes spread across the entire workforce is the wage-equivalent of tens of thousands of jobs. Take it from Uncle Sam, who sees the difference in payroll withholdings that come into the Treasury.

The attenuated work-week bodes ill for a quick job recovery, as there is significant slack capacity building up among the workforce still employed. When business begins to improve, employers will add back hours to the workers on hand before they re-hire laid-off workers. Another damper on job creation will be a ten percent increase in the federal minimum wage scheduled for later this month, from $6.55 to $7.25 an hour. Congress thought it was doing workers a favor when it legislated the increase two years ago, but the intervention instead will have employers calculating twice before expanding payrolls. Bet Congress would like to have that one back.

While unemployment data are traditionally viewed as lagging indicators, this time may be different. Credit is being crunched faster than the Fed can print it, depressing consumption. This de-leveraging will make employers extra cautious about hiring. They'll need to see not just green shoots, but a veritable rain forest before they make the leap. Meanwhile, the shrinking purchasing power of the American consumer perpetuates a vicious cycle, as illustrated below.

Deja Vu

Source: Eichengreen and O'Rourke (2009) and IMF

Another Great Depression? It is still to early to tell, but so far the current decline in global industrial output is closely tracking what took place 80 years ago (see graph above). Here in the U.S., we are running at less than two-thirds capacity. In fact, we are seeing a utilization rate last seen in the 1930s:

There will not be a bunch of new investment in industrial capacity until utilization gets back into the 80s. Meanwhile, employers appear loath to hire back laid-off workers. The average layoff has reached 24.5 weeks, a 60-year high:


Indeed, almost half of all displaced workers now collecting unemployment insurance will exhaust their benefits before returning to work (unless, that is, Congress borrows yet more money to extend the benefit period a second time). As a result, delinquent consumer loans, from credit cards to home mortgages, will likely increase, further pressuring the banks carrying those loans on their balance sheets.

Bank failures are becoming THE story in 2009. On Friday the Federal Deposit Insurance Corporation continued its weekly ritual of Whack-a-Bank, closing five more and bringing the year-to-date total to 45 (complete list here). Despite going on a hiring binge a year ago, the FDIC stills does not have enough bank examiners to keep up with the growing caseload. Thus, the implosion of the banking sector will play out in slow motion for at least the rest of this year--and probably beyond.

[update, July 31: The FDIC announced today the closing of five more banks. The total for 2009 now stands at 69, at least until next Friday.]

All of which makes the odds of an upside divergence in the topmost graph rather remote. [For a more detailed discussion of the headwinds facing the economy, check out John Mauldin's latest weekly newsletter--The End of the Recession?--and scroll down to The New Normal...]

Class of '09 Hits Job Market, Class of '69 There First

Look behind the headlines of May's unemployment figures. The "improvement" in the number of jobs lost was no improvement at all. Sure, the loss of 345,000 jobs in May sounds better than the 504,000 jobs lost in April. But let's get one thing straight: the May number does not replace the April number. It adds to it. Things have gotten worse.

And things have gotten worse, it can be argued, at the same rate. Hours were reduced for many retained jobs, as workers were sent home on unpaid furloughs rather than fired. The shortening of the average work week in May by 0.1 hours, spread over the entire workforce, was the payroll equivalent of 250,000 lost jobs. Add that number to the headline number, and we're back to approximately 600K, the norm for the last six months.

Digging deeper, we find that one part of the workforce is adding jobs: those 55 and older (see chart above). Their retirement nesteggs decimated by back-to-back busts in stock and home values, these folks are highly motivated to remain in or to re-enter the workforce. Their earnings will be used to rebuild net worth, not to consume. Displaced are Generations X, Y, and Z, who collectively lost over 6 million jobs over the past year. They would be the ones more likely to spend their paychecks, increasing the velocity of money and stimulating the economy. But ya can't spend what ya don't earn (and can no longer borrow).

With Baby Boomers cannibalizing the job prospects of younger workers, economic recovery will not come anytime soon.

June 20, 2009
Monterey, MA

May 26, 2009
Peru, ME

Going Parabolic

This is not your usual garden-variety recession. Because total debt in the U.S., public and private, exploded to four times GDP (a once-in-a-lifetime ratio) over the past twenty years, the unwind now underway will be protracted and brutal. As of the end of March, almost 8% of all single-family mortgages were classified as delinquent, up from 3.7% the year before and 1.6 % in March 2006. (Click on the graph above.) The problem? Too many houses--and not enough homeowner equity to justify all that construction.

We began 2009 with 19 million empty homes in the U.S., the most EVER. The vacancy rate stood at 2.9%, the highest since record-keeping began in 1956. Housing starts in April fell to a seasonally adjusted annual rate of 458,000, the lowest since record-keeping began in 1959. Applications for building permits, an indicator of future construction activity, fell to a seasonally adjusted annual rate of 494,000, the lowest since record-keeping began in 1960. In other words, we are seeing numbers NEVER seen before. The overhang is so huge that if all housing starts halted today, it would still take more than two years to work through the inventory at the current pace of sales.

Nationwide, 649,917 homes received at least one foreclosure-related filing in the first three months of this year--more than double the number in the year-earlier period--despite a government-whistled timeout on foreclosure activity at the nation's biggest banks. Now the grace period is up, and banks are racing to liquidate repossessed property before they go belly-up. Largely because of home-mortgage defaults, 33 banks were seized by the FDIC between New Year's Day and yesterday, resulting in a cumulative drawdown of $5.4 billion in the agency's Deposit Insurance Fund (money used to indemnify trapped depositors). Today the 34th failure was announced: BankUnited FSB, with a price tag of $4.9 billion all by itself. That leaves $8.6 billion in the DIF before the hat goes out (again) to the taxpayer.

Can the banks earn their way out of this mess? Not if the economy continues to tank, a likely outcome in light of rising interest rates. The 10-year U.S. Treasury note is fast approaching 3 1/2% (see graph below):


As one would expect in an environment of rising interest rates, applications for home loans have started to decline. According to an index compiled by the Mortgage Bankers Association (MBA), applications this week are down 14% from the week before--and 43% from the April peak. The "green shoots" represented by the refinancing spurts last winter and earlier this spring (graph below) are getting weed-whipped:

[below: updated for week ending June 26, 2009]

Getting back to parabolae, check out the spike (below) in the price-to-earnings ratio of the S&P 500 companies. A reversion to the mean would require either a dramatic increase in earnings or a dramatic decrease in stock prices. Which is more likely? Choose between these two answers: (A) the latter, or (B) definitely the latter.


[update, 05-28-09:]
More data were released today by the MBA in its quarterly National Delinquency Survey, which found that 9.12% of all residential mortgages in the first quarter were delinquent (at least one payment past due), the highest level since the data series began in 1979. Add to that another 3.85% that were somewhere in the foreclosure process, and you've got 1 in 8 loans in trouble. Homes entering the foreclosure process rose from Q4's 1.08% to a record 1.37%.

Headwinds

(click for larger image)

Economic recovery will be delayed and difficult, and here are two reasons why. First (chart above), the personal savings rate among Americans has turned abruptly upward. That means that purchases of discretionary consumer items will likely remain depressed for some time. Second (chart below), interest rates are headed up despite the recession because the U.S. Treasury is flooding the market with long bonds--too much supply, too little demand. And higher rates are a drag on economic growth. The Federal Reserve hopes to counteract that drag by buying up U.S. bonds. Unintended consequence? Inflation.

Shooting Against the Messenger

In the Emperor-has-no-clothes Department (and you thought E.D. stood for erectile dysfunction), financial analyst Meredith Whitney has been opening eyes ever since credit markets went limp in August 2007. Until then, big investment banks ruled. They were posting huge profits by peddling risky derivatives to greedy investors, as well as to unsuspecting state treasurers (that means you, Dave Lemoine) reaching for a few extra basis points of yield on cash reserves. But then skeptics like Madame Whitney began looking closely at (and behind) the banks' balance sheets and said "Hey, guess what, you guys are technically insolvent!" The CEOs at Citigroup and Merrill Lynch soon lost their jobs.

So began a cascade of defaults and bank runs that resulted in the disappearance of some of the biggest names on Wall Street--Bear Stearns, Lehman Brothers, even Mother Merrill. Executives in Brooks Brothers suits began jumping out of windows. Some had parachutes; some hit the pavement. It got so bad that bank operators masquerading as government officials (stand up, Henry Paulson) devised all sorts of taxpayer-funded programs to bail out their brethren. Rarely have acronyms sparked such acrimony: TARP, TALF, and TICKED OFF, to name a few. Congress went along, as it is paid to do.

Is the worst now behind us? Whitney thinks not, despite the fact that bank stocks have pulled out of their nosedive to zero. She believes the recent rally has been cleverly orchestrated by Oligarchy Inc. to provide a brief window of opportunity for teetering banks to issue new stock to smitten investors. Financial statements for the first quarter were massaged, nipped, and tucked to look almost good, earning most banks passing marks in the so-called "stress" tests just concluded by the Treasury Department. Those getting "Incompletes" were given time to raise additional capital. Capital requirements were calculated by extrapolating those puffed-up Q1 earnings.

Whitney insists that those "earnings" are not replicable. She points out that banks are sucking liquidity out of consumers' wallets, cutting credit lines to cardholders by $1 to $2 trillion. And as consumers retrench, sales-tax collections by state governments shrink (never mind the meltdown in income-tax payments caused by nearly 6 million layoffs in the past sixteen months). State and municipal spending accounts for 12% of GDP, so the wind-down becomes self-reinforcing. A V-shaped recovery, in Whitney's view, is highly unlikely. So, for that matter, is an L-shaped recovery.

She is thinking of a shape that is more, um, flaccid. Her pessimism, it must be acknowledged, has begun to grate on some industry cheerleaders. Despite her prescience thus far, she is bound to get it wrong at some future point. It happens to the best of them. But if you're thinking about betting against Whitney and buying into the financial-sector euphoria, you have to ask yourself, "Do I feel lucky today?"

[update, 05-27-09:]
The Federal Deposit Insurance Corporation just released its Quarterly Banking Profile, which shows that the number of "problem banks" in the U.S. increased in the January-March period from 252 to 305, with combined assets at risk approaching a quarter of a trillion dollars. Another 21 banks failed during the same period, the largest number since Q4 1992, shrinking the Deposit Insurance Fund from $17.3 to $13 billion. One bank in five lost money during the quarter. "Noninterest revenue is up at larger banks," pointed out FDIC Chair Sheila Bair, "particularly trading revenues"--meaning that profits were made not by floating a sinking ship, but by rearranging the deck chairs. Even after first-quarter charge-offs of $37.8 billion in bad loans, non-current loans and leases rose by $59.2 billion, or 26%. Of all loans and leases, 3.76% were non-current, the highest level since Q2 1991.

Biennial Budget 2.0: Pathetic

You would think that an elected official, his last campaign behind him, would exhibit some independence and leadership. You would expect a willingness to confront tough issues head-on and to develop long-term solutions. No posturing, no sugar-coating. A termed-out executive has a rare opportunity to concentrate on the job at hand without the distraction of the next election--to do what is right, not just what is politically expedient.

If you think Maine's governor is rising to such an occasion, think again. John Baldacci seems content to go out not with a bang, but with a whimper, the lamest of ducks. Yesterday Baldacci released a do-over of his proposed 2010-11 budget after reviewing new projections that state revenues will likely come up a half-billion dollars short during the biennium. "This budget makes serious and difficult reductions," he insisted, yet in the same press release he observed that "there are no additional layoffs in this proposal." Say what?

Republicans were perplexed. "I was surprised not to see more significant structural changes going forward," said Senate minority leader Kevin Raye. Current economic and demographic trends suggest that we will not soon be able to afford the level of government spending to which we became accustomed during the past decade. If revenues in Fiscal Year 2010 are going to decline by $200 million, then spending needs to be reduced by the same amount. Yet Baldacci's proposed cuts address only 15% of the shortfall. Where will the rest come from?

$68 M of federal stimulus money (originally targeted for new jobs)
$24 M from the "Rainy Day" fund (none left for Baldacci's successor)
$35 M from income- and property-taxpayers
$16 M from more aggressive collection of tax receivables
$9 M from reduced payments to healthcare providers
$7.5 M from phantom savings yet to be identified
$6 M in "shared" revenues from cities and towns

If that looks like smaller government to you, I have a great deal on a bridge that I would like to sell you.

The latest revenue projections, attenuated though they may be, still look unrealistically high. FY2010 is going to be a real house of horrors, as credit-card defaults, commercial real-estate foreclosures (did you see the winning bid on Boston's John Hancock Tower?), and bank failures will wreak considerable havoc in the national economy. All those "green shoots" that the Fed chairman has been talking about are about to get napalmed. There is no way that Maine's general-fund revenues in FY2010 and FY2011 will remain nearly flat with FY2009, as the Governor currently expects.

But that's O.K., a politician's best friend--a New Commission (fanfare, please)--will do the heavy lifting, tasked with "streamlining" state government. Baldacci, a politician to the end, will do the spotting.