Monday, December 29, 2008
Fair or not?
Our (former?) capitalist system thrives (thrived?) on the principle that you benefit from your good decisions and suffer from your bad ones. This creates a kind of economic darwinism: survival of the smartest/best. When economic agents (people, corporations banks etc) are shielded from the bad consequences this sort of mechanism is short-circuited. If people can make mistakes and not suffer the consequences-so the argument goes - then they are not discouraged from making such bad decisions and may even be encouraged to continue making bad decisions of the same sort into the future.
And the same is true of banks that are rescued or bailed out.
But banks are being bailed out because of the public interest bound up in their operation. If large banks failed the repercussion could be severe for the economy. If you default on your mortgage the same is NOT true. 'You' are one person and you do not 'clear transactions for the economy through your home. But if enough people default, then banks may been to be rescued again... and again.
For agents that are bailed out the risk is for the future and it is called moral hazard. If you get bailed out you might not mend your ways knowing you could be bailed out again if you did the same thing again. And since most bailed out banks/firms have not been forced to have management changes, and losses have not been inflicted on shareholders, and bond holders, there is little to dissuade them or to force change in their actions... in the future.
On another point, comparing banks and individuals it is reasonable to assume that banks knew better of the risk in housing. There are some exceptions to this, such as if a borrower mis-declared income to get a mortgage. But even there, any bank that did not require proof of income must have suspected that something was not entirely kosher with any number of the income declarations they were getting. Banks have a long history or forcing compliance to lending rules; when you lend with a wink and a nod you know you are accepting extra risk. Banks bet too heavily on house prices going up forever. They bet on refi dollars always being there regardless of the economic fundamentals of the home and its owner. They bet on securitization to protect them along with it mortgage security ratings that there were pure fantasy.
Punishment does not fit the crime
Banking and house financing is a world that the bankers know and know it much better than home owners (or prospective home owners). Despite the fact that bankers 'knew the risks better' than the run of the mill home buyer, it is banks that are being helped more than the homeowners whose lot has been worsened by these banking practices that were roads to perdition.
By eroding the standards for lending, bankers put the value of every house at risk. But this did not happen until they ran all those those home values up by qualifying many more people for house purchases than had ever been able to be qualified before. That created a boom in home building and of homes in fancy price brackets since bankers would lend for amounts heretofore unallowed. The man in the street is less likely to understand anything except that house prices are rising and wanting to get in on it. That was the boom phase. But once you get homeownership up over 66% it is hard to find new buyers. Moreover, homebuilders built homes to the new financing standards and once the boom unwound and price backsliding set in the stock of homes for sale was no longer suitable for the income distribution at hand. Homebuilders had 'bought' the 'new model' of home lending hook line and sinker and set their polices to profit the most from it, by building more expensive homes that people were then being approved to buy.
So now banks are in trouble and getting bailed out. Home builders are under a lot of pressure. People - a lot of them- are being foreclosed on, or are delinquent or simply have mortgages that cost more than the house is worth. There are few programs to help these people out but banks they are getting assitance.
The road map out of this mess is not a clear. So far the path has been to put banks first. This is despite the fact that as lending professionals they are the entities that should have known better. No one (few in fact) want to help homeowners. There is a lot of lip serves here about helping YOU with your MORTGAGE. But little in the way of helpful initiatives. In fact rules are much more concerned with making sure that someone who lied about income and got an expensive house for the wrong reason is not helped while bankers that did exactly the same sort of thing thing are being 'saved.'
Some would have the government do nothing. But with the full dimension of this recession showing itself it should be clear that the intercession was necessary to avoid something much worse. Even that does not make the decision any easier or the choice for the road ahead..
But more effort to help homeowners is needed and warranted.
Friday, December 26, 2008
It's not so merry if you are a retailer... Or is it happy if you are British (Happy Christmas!)
Retailers have had such a hard time they want some tax free days to pedal their goods, now.
At one now famous-Christmas party Santa showed up and starting shooting people then torched the house.
It's been that kind of year.
Housing starts are weak home sales are pathetic and existing sales are very weak. Foreclosures are as high as an elephant's eye... hmmm not a Chirstmas song, sorry.
There is little chance of the economy getting stronger sooner than expected. The consumer is pulling back. The auto sector is likely suffering a more sustained form of damage. Lower gas prices are not just goging to re-start SUV sales.
And...things are not always what they seem. I'm in Seattle (WA) where the city 'fathers' saw global warming coming and sold their snow removal equipment.
More like or not. Or too smart by half... Seattle is hilly city. And although I grew up in Detroit where snow is common, the worst winter roads I ever have seen have been in Seattle, since the city 'fathers' got it all wrong. It's humid here. Puget sound is here. Mountains are here. All sorts of snow creating conditions. And when it snows and snow is not cleared Fuuugetabboudddit. Or stay home.
The US eocnomy is like that.
Best laid plans gone awry.
Everybody must get stoned...or buy a house. We chose the latter. Maybe Bob Dylan's advice on the former would have been preferred. Or maybe the bankers were stoned: no downpayment? No proof of income? Negative amortization? Woo Hoo! Eddie Murphy's dud song: 'All I want to do is party all the time' turns to "All I want to do is potty all the time.'
Bankers are mad about having no bonus. The rest of us have no more house. No job. No income. And then there is the Benrie Madoff story. God help us if there are more of those out there.
The end of the year is closing in. And we should be happy - happy that it is ending.
2009 will be more of the same. It will be a slow recovery. There is more pain in transit. Unemployment will go up much more. And we have sowed the seeds of moral hazard in banking a big way. The structure of banking will have to change a lot to blunt that.
After-Christmas sales are like things I have never before seen, 70% off and 90% off.
Look forward to 2009, but be careful what you wish for.
Friday, December 19, 2008
The President is caught between dissenting views. The 5 Benedict Arnold Southern Senators (5BASS) and likely Dick Cheney pressured the President into putting very difficult stipulations on the auto companies' receipt of funds from the government.
Stipulations Vs facts
While some of these changes will have to be implemented before 2009, others give the automakers until March 2009. That will mean a new President, a new Congress, and a Congress with a very different partisan composition, will be monitoring and enforcing this deal. GM amd Chrysler have been given access to funds. Ford is left out since it only sought a credit line (just in case). Ford is better off because it had pre-secured money by borrowing in anticipation of a worsening economy. GM and Chrysler did not do so; they are caught in the full blown crisis like the rest of the world's automakers. YOOHOO.Washington. THE AUTO COMPANY PROBLEMS ARE GLOBAL!! Mazda has exited Grand Prix racing and Toyota is cutting back output deeply, just to name two. Saab and Volvo are getting help in Sweden, to name two more... France is considering aid... The CBI in the UK has recommend aid to the INDUSTRY there, calling it a vital industry...and so on. But its not vital to our 5 large mouth (pea brain?) BASS.
The LEVERAGE of bankruptcy without bankruptcy...
The idea of using the provisions of these monies to force the unions to change work rules, to cut salaries and benefits and to get concessions from suppliers and dealers is a good idea. I have long maintained that you have to get change in some key respects before you lend any money to the automakers. My position has been to use the THREAT of bankruptcy to get the same concessions you could only get in bankruptcy by making it clear that either you get these concessions or you will get them in bankruptcy where the automakers survival is not assured. That approach will resonate with many, but not all auto creditors, since some have lent secured by assets. So some exceptions may have to be made when the creditor is impervious to such threats. This deal does not acknowledge that reality...
Unintended Fallout: Congress makes mischief
Some of the recent lenders to the auto companies lent against assets precisely because they had credit worries. Now the President, urged by these five idiot Senators and others wants them to abandon that security and become shareholders for a portion of their debt. That is a STUPID requirement: to make a lender with foresight and turn him into an unwilling at risk borrower as a condition for the auto company to get a loan. Such a provision could suckerpunch the corporate debt market.
Salving the hand that feeds you...
Since suppliers and the UAW have vested interests in GM/Chrysler survival it makes sense for them take the medicine now and suffer the side effects. They will have to give up something in return for GM's and Chrysler's survival. As a science teacher once said to me:
Limits on bargaining and contracts-AKA: Legal obligations
It is a poor parasite that destroys its host
The suppliers and UAW are not parasites but they do have a symbiosis with GM and Chrysler. That is the key to understanding their bargaining position. SURVIVAL is in everyone's best interests - even the government's, given the potential dislocations and the costs failure would imply for social welfare programs. In a world with free trade the UAW cannot procure above market wages and compensation for its workers. As trade has gotten freer and as cheaper wage countries have joined in the world trading system, the UAW's 'franchise' also has lost value. With foreign 'transplants' operating in the same country in 'right-to-work states' the UAW cannot use market power to raise wages unless it is by ripping any brand-specific or excess profits GM or Chrysler would have made. That the brands are worth anything of that sort anymore is highly doubtful. Cars still have their differentiation. That has held in autos more than in electronics where names increasingly mean less (even Sony is having a hard time selling its stuff at a premium).
Problems with the deal
The main problem with this deal is trying to cram down too much change too soon. In some sense the automakers must welcome the mandate to do some of the things they have not been able to achieve themselves in collective bargaining. The government backing for paring down previously agreed to deals and the very public nature of the process will help GM. The simple fact is that the collective bargaining and the pattern bargaining tactics that unions have implemented have given them too much power because it has led to a situation where the auto firms have agreed to wages and work rules and benefits that are now bankrupting them. Why did they do that? To survive in the short run. To avoid debilitatiing strikes... to bargain another day.
Hard to swallow
One interesting thing that GM retirees won't like is the idea that the VEBA agreement must accept GM shares for half of the payoff. That sounds risky but in truth it is not.
..but good for digestion?
Every employee that gets benefits paid by a company in retirement is in jeopardy to the survival of the firm that has agreed to provide those benefits. If GM goes bankrupt, guys your bennies go bye bye, except of course if they are in a funded pension system or are 401k benefits. So if putting stock in the VEBA helps GM survive, it is a good thing. Another aspect of this it that might turn out to be a very big favor. GM is still a very successful company by many metrics. Once the recession passes and GM survives due to the 'good graces' of government, it should emerge as a much more profitable company. Its share values will rise and the VEBA will get a BONANAZA from that. So the UAW should not squawk too much over that provision.
Humor as insight...
While the President's heart seemed to be in the right place from the start this President always has lacked backbone. His policies have been run by his advisers who have very strong views - the SNL skit where 'he' explains the role of VP to 'Sarah Palin" is very telling --funny -- but probably all too true. (see clip below)
Lessons: teach your children well
There are economics and political science lessons here about what policy can do. There is a lesson about what collective bargaining can and cannot do as well as what it can reach and maybe be able to grasp but may not be able to sustain a hold on. There is a lesson to firms about paying benefits and wages that they cannot afford. There is a lesson about North/South US politics. There is a lesson about Republican/Democrat US politics. Is there also is a warning shot across the Obama administration's bow from the 5Bass?
Why is 'Auto' a four-letter word but not 'Bank'?
Banks were given help on short notice but not the automakers. Why? Well banks are the conduit of commerce and they can't be allowed to fail. OK, I buy that. But beyond that bankers have put financial products into the market that simply don't work. Banks have done things that make no sense. Bank management has made terrible decisions in an industry where judgment is everything. And I speak of BANKS up and down the line - not just a few. Meanwhile management at these banks largely has not been removed. The auto companies, in contrast, have been selling products of very improved quality. They continue to have some of the best brands in their respective auto/truck class. While bank management is largely being left in place, everyone wants the scalps of the automakers who have improved their products. Curious development isn't it? Autos have been suckerpunched by a severe recession and have had their capital leeched from them by banks that would not lend to customers (auto buyers) who suddenly were not creditworthy enough. House loan with no proof of income? Sure! House loan with no down payment Yea baby! Auto loan with poor credit score? NO WAY! And if you can't borrow you can't buy a car. Automakers were also sucker punched by oil prices, rising to nearly $150/bbl. Nice help with policy on that one Washington! Once again, someone else's bumbling torpedoes Detroit.
2 B Fixed
Now automakers do have a bad product mix and other issues with contracts that must be modified for their survival, but these are things that can be fixed. GM has some bad contracts it has not been able to expunge, as discussed above. But all these auto companies do know how to make cars and trucks and good ones at that. In contrast, the bankers that Congress bailed out wouldn't know a good investment if it came up and bit them on the bottom --as many many bad loans actually did and are still doing..
Republicans may be seeing their clout diminished but they were sure to strike a blow below the belt before they left office. A more charitable view of this is that they were afraid to set a precedent for helping an industrial company. But that is a bogus excuse. This move was help to an industry, not a company. The last time US industries came under so much pressure it was Steel and Autos and 'orderly market agreements' stemmed the flood of imports to help buy time. That was the move that brought the transplant factories to the US. In the trade act of 1974 the cut in tariffs protecting footwear and textiles were slashed but the bill provided for adjustment assistance and training and money for affected firms to adjust- not bankruptcy as an option. Bankrupting a key industry is hardly a plan for success. This time the foreign auto makers are under the door and over the transom with plants in the South and they have domestic advocates - the Benedict Arnold Senators in the South who would ravage the North the way the North ravaged Atlanta in what is now the auto civil war. Payback is a bit**.
Thursday, December 18, 2008
The auto industry thought - THOUGHT - it was waiting for the President to a approve a loan
possibly a bridge loan to get through its cash crunch and have time to formulate longer lasting plans to reorganize...now, maybe not. Chrysler already took the safest route and went into all out hibernation, closing all 30 of its production plants for a month. At today's press conference the President's spokeswoman said that the President is against a disorderly bankruptcy - which is something different from approving a bridge loan. It is not clear how much the lobbying by those five Southern senators is taking the President down a new road..possibly down a new road without a car or without one made by a US company.
But it's not just autos in trouble...
GE's outlook was downgraded to negative from stable today by S&P. So was the outlook for GE capital. Corporate earnings across the markets have been coming in on the light side., another sign of trouble brewing. Fed Ex announced it would be cutting salaries and for white-collar non union employees it is stopping contributions to retirement accounts. This is serious stuff. Fed ex is even being helped by plunging fuel prices that are cutting it more slack. It's still not enough.
Meanwhile OPEC, after cutting output more than expected, by 2.2mbd, sees oil still plummeting, with the oil price down 10% on the day and down 20% over the last five days. OPEC does not seem to be able to get a hold on oil prices even with deep output cuts.
On the good news side...
There is some good news on the housing front as 30-Yr fixed rate mortgages are at a 37 year low. Still, housing prices are falling and the sector remains troubled. There is no panacea.
Although we are in the holiday period, markets remain restless. A lot of capital has been pulled from active duty in markets, still some volatility will be possible though year end. The GE downgrade and Fed-Ex news on the day is an eye opener about how much damage is being done to companies-and not just financial companies although GE has its exposure with GE Capital. The President's procrastination in helping the auto companies is a reflection of a split in the Republican party about who to help and why. This is is partisanism gone amok. If this is an example of the sort of bipartisan cooperation that will greet Obama when he is seated, then he is in for a very rough four years.
Wednesday, December 17, 2008
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Comment on article below and sort of reply
Thanks for the interesting blog. But could someone answer me:
1)Why the world should
be so obsessed and affected with what 300 mn Americans have done or not done?
2)What is the real loss in asset values worldwide?
3)At the cost of some free market freedom, can not regulators look at topping out of maximum values that any equities/ financial products can fetch in the marketplace based on certain fundamental ratios - limit the reward - limit the risk- at least the present generation cannot squander away the opportunities of future generation and leave them in utter penury.
4) I think this is the best time people would listen to the bad words like responsibility , discipline and austerity.
(1) The US has the lions share of world GDP and large trade deficit implying that the rest of the world has suckled off its growth. A downturn in the US spreads, as those who thought de-coupling was an idea found out..it was an idea, a bad one.
(2) I'm not going to to tote it up for you sorry. But European stocks are down by more than 40% from year end, Japan's Nikkei is off nearly 48%, Russia by 73%...and so on. Housing losses quite apart from securities losses are huge, on the order of 20% in the US and UK and headed for perhaps 30%. It's another large number.
(3) The Fed has taken the Freddie Prince approach to asset market regulation to date (It's not my job!). But the sense is that that is changing. When you believe in your GOD (THE MARKETS) you do whatever he says. Only after you have ceased to become a TRUE BELIEVER do you second guess him. The Fed is there now. Markets no longer are worshipped as they once were but theyare still revered. That's why banks are not nationalized after all they have done and even after capital injections no one is treally telling them what to do... We'll have to wait to see what the Fed does. Do not expect any pat rules.
(4) Good joke. Responsibility, discipline and austerity... Those are for other people right? John Thain was still looking for a bonus after Merrill's near collaspe. John Mack (Morgan Stanley) says it would 'look bad' to get a bonus this year. No John. It would be WRONG!. It wouldn't just look bad. What Wall Street CEOs fail to face up to is that it's not just this year when the chickens came home to roost that is a problem for them. They should be held accountable for the past few years in which they were paid obscenely for creating the paper that has destroyed our way of life. Instead, they got HUGE bonuses...and they still want more. They still don't see why they should not get paid for doing that. Wall Street's bonuses have become ENTITLEMENTS. They are de-linked from performance. GIMME GIMME GIMME Goldman's bonuses were down 45% from last year: average comp there was just short of $400K. Really bad year eh? NO. No one is ready to hear those words. And after cranking all that money into banks the Treasury capital injections do smack of some favorable treatment so hasn't moral hazard been nurtured here? Who is at risk other than those who have lost money as investors? Not CEOs. Few were sent packing (OK Fuld). Fannie and Freddie bosses were sent way with money in their pockets. They even came back to testify as did Franklin RAINES the old Fannie Mae boss under Clinton ...after all his scandals. He came back to testify as a wise man.
Austerity...austerity, now there's a good one...
Tuesday, December 16, 2008
The Fed is lowering its official rates to under 1%, to under 0.25%! WOW! But why do it? Isn't that one of the the things that got us into this mess- rates that were too low? Why use that as a solution? Indeed, from that standpoint, this policy is a oxymoron: its a policy that is internally inconsistent. It's a solution that is, in reality, another problem waiting to happen.
But look at the markets. People can't get these low rates. Fixed 30-Yr mortgage rates are still very high and have not been responsive to Fed rate cuts. ARMS (adjustable rate mortgages) similarly have been stuck above the 5% mark with no correlation to the dropping Fed funds rates. So how if rates are falling are we to be helped if we can't borrow at them? That is a conundrum.
Oxymoron in action
But does the Fed really want us to borrow at these rates? Everyone warns about the inflation consequences of what the Fed is doing. They say, well, if you cut rates this low and keep them there for a while, when it's time to hike rates you will have a lot of liquidity to pull back. So if people do manage to borrow at these low rates aren't they taking just the risk that put us in trouble in the last cycle- at least if they borrow at low variable rates? The Fed does not want us to do that. That is the oxymoron.
So who are the low rates really for? Is this just another way to increase bank profitability?
Does it solve THE BIG PROBLEM? No...
Notice that one of the bigger issues right now is how to stabilize housing and halt the deterioration in mortgage values. One way to achieve that end is lower mortgage rates. Every 50bp reduction in mortgage rates increases house prices by about 6%. Well, not literally but what it does is if you assume that people put one-third of their income into house payments each month, a 50bp drop in mortgage rates would allow the borrower to buy a house that is about 6% more expensive. So cutting rates does help to make higher house prices affordable. House prices have fallen by about 20% from their peak; some say they have another 10% to fall. One way to blunt that would be through a 1% point cut in mortgage rates. But the Fed's rate cuts don't do that. They seem to have no impact on mortgage rates.
This is another action that does not seem to get at what ails us- the housing market. Maybe it will work, but with a delay. So far we have no hint that it will.
The Fed rate cut policy is the oxymoron that tastes like a conundrum. Let's hope that the other aspects of the Fed's approach work better than the rate cut.
The chart below shows the ever widening gap between the Fed funds rate (a rate exclusive to banks) and mortgage rates. Here we look at fixed 30-Yr and adjustable (1-Yr ARMs) rates.
In January of 2008 the Fed funds rate cuts stopping having any impact on mortgage rates. From that time on Fed rate cuts only widened the spread between the banks costs of funds and what the banks earned on funds lent (e.g. mortgages). Right now the SPREAD between a one-year ARM and the Fed funds rate is near FIVE PERCENTAGE POINTS.
This is adding to bank profitability. So rate cutting is another way to help banks, not the economy -or at least, not the housing market.
THE FED DECISION
The Fed's decision today cuts the funds rate to a range of zero to 25bp. It cuts the discount rate by 75bp, underlining the message that this is essentially a 75bp rate cut.
The Fed says in its announcement that it expects to keep the rate down here for a long time, trying in effect to encourage long rates to drop.
The ten year note price rose on this announcement pushing the yield to 2.44%. Stocks popped after the announcement.
The Fed said this:
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.
Rate cuts, yes- but so much more
With this statement the Fed embarks on a no-holds barred posture to help the economy. The rate cut is the least of what the Fed is doing. Its statement about the expansion of its balance sheet is essentially a statement on 'quantitative easing.' This is a massive money and reserve creation move intended to help stimulate the economy. The challenge for the Fed will be the way it brings this program to an end. The problem with the Fed pushing rates so low and keeping them there is that once the program becomes effective rates will have to shoot up sharply. For the time being there is little evidence that rates this low with all their attendant risks are helping anything. It's a lot of risk to take to cut rates in a way that the public does not seem to be sharing in the reduction as much as the banks. Of course if the 'public' does not share in receiving these low rates there is less risk for 'the public'.
The DANGER here is that anyone that manages to borrow at these low rates will find once the economy turns around, rates will rise sharply. So be careful of borrowing at these low rates - if any bank will share them with you.
NOTICE of PRUDENCE
Notice that in the Fed's announcement it says the resumption of sustained growth and preserving price stability are its main focus. It has not forgotten about price stability, despite the risks here.
Sunday, December 14, 2008
DON'T DO IT BENNY!!!
Fed to cut... Fed to cut...Not?
Everyone (except me!) is looking for the Fed to cut rates and maybe even eventually take them down to ZERO (zero, as in zero, zilch, nada - that zero). This is to be an example of how the Fed will go to any length to help the economy...Yeah, OK, I get it, but, is it a good idea? Is it like eating your young to stay alive or is it some other more acceptable 'demonstration' effect that shows your toughness? I'm not so sure of the signal here - that's my point. I think it's wrong to assume that the message will be 'Fed resolve to do whatever it takes.' Cutting rates is the EASIEST thing the Fed can do. Moreover, it carries with it dangers. Rate cutting loses its punch at some point. The closer you get to zero with the funds rate - and we're at 1% -- the less 'bang you get for the buck (or for the baisis point).' Perversity can set in and spoil your plans: at some point, rate cuts can deter you from your objective.
No one seems to want to make this argument so let me flesh it out...
Perpetual Vacancies at the Roach Motels
- Rate cuts adversely impact those on fixed incomes like retirees.
- Right now instead of cutting rates, affecting SPREADS would be a more effective thing to do to help the economy. Spreads are wide while rates are low.
- A lowering in short term rates usually just steepens the yield curve and THAT is not a way lower long term rates such as mortgage rates. Presumably we do NOT want to spur a NEW wave of mortgage refis into variable rate products, but further rate cuts certainly will make that road seem attractive. So this draconian rate-cutting is a mixed message. The Fed wants banks to lend to the housing industry but not lend via more of those risky ARMS when rates are so low that we know rates are going to rise (like from 1% or from ZERO- duh!). We don't want people 'barely qualified as buyers' or for refis' on rates too low to stand the test of time. Yet, here we are again! Or maybe this is the Fed's closet relief plan for besieged mortgage holders?
- Banks borrow short and lend long. So cutting the Fed funds rate will lower the banks' cost of money and increase their returns and profitability. It is yet another step to help banks, the new roach motels of the financial markets (rate cuts go in...and they don't come out!).
When the Fed cuts rates it impacts market rates two ways (1) the level of official rates is reduced, putting downward pressure on market-determined rates, and (2) expectations for future rates usually encompass expectations for future cuts adding more pressure to reduce market rates...unless the Fed is at the end of the line for rate cuts.
Signal for the end of the line... One if by land, two if by sea?
The signal for the end of the line is not some clear message from the tower of the old North Church. It largely comes after the fact and so is less a signal that warns than it is a diagnostic that tattles, saying 'you went too far.' The message is given when the Fed cuts the FF rate and longer term market-determined rates rise instead of falling. Uh, oh... Already in this cycle despite all the economic weakness you have monetary base accelerating sharply and some are concerned about the 'eventual' impact on inflation. Uh, oh... Bond yields may have 'MAY HAVE' hit their lows, already in this cycle on the perception of economic duress. Those lowest rates have not held in place. Uh, oh.... That would leave this rate cut by the Fed sending nasty market signals down the line. (The Fed THINKS rates should be lower but the markets disagree...uh, oh...). Now some will argue that a whiff of inflation is just what we need. Some will, I won't. Since rates can't go below zero, the Fed has to be prepared somewhere along here for backlash. And if that happens the Fed will have lost control. And that is really scary. The real trick is to STOP BEFORE THAT HAPPENS. STOP NOW!
More rate cuts??? PLEASE FED DON'T GO THERE! The dollar already is slipping. Gold has stabilized. There are signs that financial market participants are no longer drinking the central bank's Kool-Aid. Yet, in the real sector, no manufacturer believes it has pricing power, or will it anytime soon. The consumer has been decimated. His asset holdings are trashed as the recent Fed-release on flow-of-funds shows us. It's as though markets are now fearing a pure monetary induced inflation not a demand-pull inflation. A rate cut could put the FED in the worst of 'both worlds' where cut's don't do you any good but instead tear down central bank credibility. It's like being in the Middle Ages and believing -really believing - in BLOODLETTING - it hasn't worked? What? Hey! Let's do SOME MORE!!! DONT' GO THERE, BEN!!
The monetary horror story
Yes, this tale is worse that Freddie, Jason, zombies or vampires - or even the return of Brittany! Worse, because it is a real possibility and a real threat. The horror story is that you spook financial markets about inflation before you convince real sector players that inflation is coming. In that case you get all the financial distress with none of the real sector push. Financial sector distress that appears in response to fears of inflation would occur because the Fed lost control over rates. Fed rate cuts would no longer bring market rates lower; indeed market rates might rise all the more sharply, fearing MORE inflation in the period ahead as the Fed gets to be 'too accommodative.' Already the dollar has stopped rising. Gold has stopped dropping and instead has been firming... Even OPEC is trying to cut production to prop up oil prices. But in the real economy no one fears inflation or thinks they will have 'pricing power' anytime soon. So there is no kick to the real sector. This is the WORST OF BOTH WORLDS. Please Fed DON'T GO THERE!!
So do things change at extreme points? What happens to water when it gets really, really cold? Ever heard of ice? ...Or when it ges really hot? Steam? Then there is the story about the Lone Ranger and Tonto to consider:
From Kimosabe to Chemotherapy...
The Lone Ranger was always referred to as Kimosabe (roughly, 'he who knows') by his wise native American sidekick... but what if Tonto ('tonto,' a name suspiciously like the Spanish word for 'stupid') were to be less like a a trusted friend and more like, well, a cancer? Could it happen?
The Lone Ranger and Tonto at the boundary: The Lone Ranger and Tonto were pinned down at the edge of cliff by a band of hostile 'Indians'. Try as they might they could not punch a hole in the perimeter and escape. Eventually they ran low on ammo. When the Lone Ranger got down to his last silver bullet, he turned to Tonto and said, "My old friend and faithful sidekick, we have been through a lot together and I guess this is the end of the line, for us. I guess we will have to finally admit defeat." Tonto, turned to the Lone Ranger and replied, " What do you mean 'We', White Man?"
Sometimes 'at the boundaries,' things change.
Thursday, December 11, 2008
The Senate Republicans are snorting their own past. Mainlining hate. Yep. Diminished in the election and now limping ducks that they are they are preparing to deal a lethal blow to democrats in Detroit who have been funding national democratic candidates that turned Republicans back to the streets. Forget a woman scorned. Hell hath no fury like a politician turned out of office...or his colleagues.
What goes around comes around
Yes the failure to help Detroit is a lot about politics. The workers there are UAW members and the UAW money has gone nearly 100% to fund democrats. So the good republicans want to say 'Thank' you in their own inimitable way. Only the first word isn't 'thank' the second word is 'you'.
Shelby a former democrat is now the ring-leader of the anti-Detroit republicans. His flag is part Confederate, part Japanese, part German and at least 50% a picture of HIMSELF. Shelby of Alabama has his metaphors mixed calling the financing 'a bridge loan' to nowhere but its for companies that make cars that run on that bridge And these are carmakers that have come a long way. It is the international car market that is under pressure. Why adjust it by making sure bankruptcy occurs in America, senator pea-brain? But Shelby has Japanese and German automakers in his state. He knows which side of his sushi they spread the wasabi on or where to stick sauerbratten.
You helped so I say Fiddle dee dee to you!
A story in the Detroit Free Press (link below) chronicles the help the big three automakers gave to Louisiana when the hurricane devastated it. Now its senator, too, wants to vote against help for Detroit. At least the auto companies did not build plants on flood plain below the water line. I wonder if the PEOPLE of LOUISIANA, knowing the facts, would want to say thank you to Detroit? Is Louisiana's Vitter really doing the people's bidding?
Ask not what you can do for your country...
Yes, Alabama's Shelby and Louisiana's Vitter are great senators. Mitch McConnell of Kentucky and Bob Corker of Tennessee are others with Japanese automakers in their state and venom for Detroit in their heart. Alabama is home to plants for Mercedes-Benz, Honda, Hyundai and Toyota. Tennessee is getting a new Volkswagen plant; it is home to Nissan's North American headquarters and other manufacturing facilities. Georgetown, Ky., in McConnell's home state, is the site of Toyota's biggest plant outside Japan. These boys are connected. Corker wants Detroit wages cut back to the level paid in the South as a condition for giving the loan. These are the thoughts and demands and understandings of fine statesmen at work. They really think of the needs of nation when they make policy. Everything for me and mine and nothing for you. Oh you helped me when I was down? Thanks, good bye or give me a plan, a detailed plan...
Sweden, a modern day France
And while America fiddles under this great leadership, Sweden is pouring $3.4blillion (equivalent) into helping Volvo and Saab, its local impacted automakers owned by GM and Ford. Apparently Sweden does not have the same reservations as the US Senate in helping US companies.
What's still very wrong in AMERICA
I will use this once again as an excuse to push for an abolition of the Electoral College. That electoral arrangement is the source of strength for this fully corrupted two-party system. The system is ruining America. Shelby is a modern-day economic Benedict Arnold. Shelby, a former democrat turned republican, and with his own auto plants in his backyard to support, wants to punish and degrade the democrats in Michigan. Who needs competition from YOU Detroit? Shelby is a poster child for what's wrong with American politics.
Wednesday, December 10, 2008
It’s kind of like my young daughter getting ‘her own’ credit card…
her credit card helps me, yes, and she is responsible but it's a black hole in my debt outstanding...
Conclusion preview: I don’t like it.
Apart from the issues mentioned in the WSJ article I wonder what would happen if the Fed issued debt and it began to trade at an increasing spread to treasury paper? Do we really want the market to put an additional risk rating on our central bank? This is a VERY BAD idea. Better for the Fed to ‘live off of’ the treasury’s own debt rating than to slot a new one into the mix – especially given what is going on with ITS balance sheet lately. Once bond ratings go south they go south fast.
Does the Fed really want private sector analysts looking at its balance sheet and assessing the value of its bonds and other assets? Or does the Fed assume 100% backing by treasury to keep its rate equal to that of T-bonds and notes?
Its not nice to fool CONGRESS...
If so, the move is a literal end-run around the debt ceiling. Congress WOULD NOT LIKE THAT. The debt ceiling is crap but it is law and Congress uses it for its owe (tawdry) political purposes. Congress would not want the Fed to circumvent it.
Possible or just fantasy?
A second order of business is does the Fed have the authority? Whatever the answer to this question – I do not like the prospect.
Other steps could work better
I Agree with Wrightson’s Crandall (see WSJ story) that the Fed would do better to stimulate the economy using vehicles that essentially dis -intermediate if banks continue to refuse to lend.
I do not like this at all
Seuss Meets Joyce to make a point…
I do not like it
Ben I don’t
I do not like it
… and I won’t
I do not like it on a boat
I do not like your bonds to float
I do not like it no not me
Not bond issues or equity
I do not like the Fed to leverage
Private sectors’ bloody hemorrhage
I do not like it here or there
I do not like it anywhere
Only God can make a tree
And debt was meant for Treasury
Move Presents Challenges: 'Very Close Cousins to Existing Treasury Bills'
See link below for full WSJ story…
Tuesday, December 9, 2008
What you will read below is about the stinkers on both sides of the aisle...and the pot calling the kettle black. It's about the total demise of our two-party system. Because in the end it's just one great big immoral party, isn't it? Pay me! pay me! I want to be RICH! Pay me! Pay me!
Both Sides Now
We are not here because of republican errors there were errors on both sides of the aisle...
This is an attempt to provide balanced coverage after the way democrats blamed every conceivable ill on the republicans in the last election. One thing I will never forgive Obama for is not running against McCain. Instead he said McCain is just like George Bush. But nothing could be farther from the truth. Whatever statistical exercise produced McCain as agreeing with the President 80% of the time it surely misrepresented many other aspects of the man. McCain is and was a War Hero and man who has served MANY YEARS in the Senate with distinction and few embarrassments (the Keating 5 episode being the notable exception, such as it was). McCain would not have done what George Bush did. After-the-fact support of his policies is different from making the decision yourself. Obama knows better but his willingness to play it that way makes me more skeptical of him. He has not yet opted for the high ground, despite his love of soaring rhetoric.
Oversight or an oversight?
Moreover, democrats have headed the key House and Senate 'banking' committees over the past four years. They have had the platform and ability to oversee the financial markets (as overseers of the overseers). They did not do well. And democrats have been defenders of Fannie Mae when republicans had sought to reign it in. Fannie Mae got huge and had its accounting irregularities emerge under Franklin Raines' rule; he was a Clinton appointee, not a republican protege.
For sale, for sale Oops- off the market
But most interesting and proof of my point that the two parties are not different from one-another is the report that is running as a headline everywhere: that the Governor of the great state of Illinois was trying to SELL the senate seat vacated by Obama when he quit to prepare to become the President of the United Sates of America. Sell it. Yo Senate seat for sale. Yo, check it out on eBay...real Senate seat.
Love for sale...or a Senate seat
To the governor goes the ability to appoint a successor when a senator leaves in the middle of his term and this governor decided that it was a plumb assignment that he could squeeze some juice out of. Isn't that special? While you can hate republicans if you want for whatever your special reason may be, there is no scope for condoning this act by a democrat. The FBI stepped right in and arrested him. This really stinks and in the Land of Lincoln, to boot- its like sacrilege. This certiainly one-ups the NY State governor's ouster for his use of a private call girl. Elliot Spitzer, ousted, from his job in NY, has had no charges filed against him. He was embarrassed and threatened with charges but in the end he was just forced out of office by the public revelation of his tawdry act. Who was behind that? Ever wonder? And what of Stevens, Senator in Alaska? Mr Stevens, 84, is the longest-serving Republican senator in history and officially the highest-ranking senator. But he was found guilty on seven federal felony charges for failing to properly report gifts worth more than $250,000. What was that about? The party doesn't matter. The nuttiness does. Spitzer may be a victim. but the others are real problems. And Spitzer is no example of what a leader should be or how he should act - even if he tried to keep it 'private.'
The age of ethical lapses
So when you look up and down Wall Street at everything that has happened -- are you surprised? Bailout funds went into AIG and one of management's first acts was to payout early deferred compensation to protect management's own funds in the event of bankruptcy. Unlike pensions and 401Ks, deferred comp is at risk in a bankruptcy were that to occur. AIG's top guys thought of themselves first, after everything they have done. AIG is under the gun again for paying 'retention monies' to key staffers and some in Congress wonder if it isn't just a bonus in disguise. Hard to imagine that these AIG guys are in strong demand given what they have done and given the state of The Street... But this last week distinguished itself with two more acts of selfishness. John Thain, once a hero for saving Merrill Lynch by proposing a combination with Bank of America, despoiled his own legacy by asking for a $10million bonus. That request, of course, comes in a year so bad the company sold itself looking for safety. John Mack of Morgan Stanley publicly refused to take a bonus. That was one of the nails in the coffin for Thain's request/suggestion. Thain later 'pulled' the 'request or 'proposal' himself. But the damage was done. Mack said a bonus would look bad...
A bonus would LOOK BAD??? What's the POINT of a bonus anyway?
Mack said it would look bad to take a bonus in such times and he is right. But that in and of itself it is a strange remark. Look bad? Duh? Sure it would look bad. But it would also BE WRONG! You ran a firm into the ground and so it would look bad? Wall Street CEOS did nothing to earn bonuses last year- that's the point, Mr Mack. It's not that it would 'look bad' but that it would be WRONG. Wall Street has clearly lost its ethical moorings. Compensation is out of control. And no one seems to know what you pay people or why. Pay is apparently a birthright or a right of office, regardless of performance. In the case of Thain, he actually had been given a 'bonus' payment on the way in, largely because Merrill wanted him and knew that it might take a while to right the ship. He was the highest paid Wall Street exec in 2007... So he wanted 'another $10mln in 2008. Some hero.
Did Robin Hood skim when he took from the rich to give to the poor?
Leader of the pack or just a bunch of overpaid followers?
Where will our ethical leaders come from? With all this Federal money getting into banks the bankers still seem to think they continue to deserve big pay days. I don't see why. They did not avoid the financial mess. They did not do anything different from anyone else. So they have showed no management skill what-so-ever yet they want to be paid as if they saw it coming and ducked. In truth they did not see it coming and were loaded to the gills, like everyone else, with all the wrong stuff. They drank their own Kool-aid. Do we really give bonuses for that? In the movie 'All that Jazz' the character played by Roy Schieder says 'Don't bullshit a bullshitter'. I think that applies here, don't you?
Sunday, December 7, 2008
Where the bridge goes depends on how you build it.
Just loaning money to the automakers is the dumbest thing to do.
Henry Ford once said you can have any color car you want as long as it's black. Congress has changed the color to Green. The problem is that so-called 'green' cars are not sold for a profit these days. So it's a curious mandate from Congress to a money-losing industry Congress is trying to 'help'. Thanks for nothin'.
Overall mileage standards (CAFE?) need to be imposed and kept. Congress needs to use the threat of bankruptcy to get the change that can only be had in bankruptcy. GM needs to have a number of it contracts modified- only bankruptcy can do that or negotiation if bankruptcy is really feared. To date auto execs have not had the leverage to deal with their dealers or the UAW.
Just as only a die-hard anti-commie like Nixon could 'open China' maybe only democrats can play hardball with the UAW.
The problem is less of GM and the auto companies than that of it laboring under the old industrial rules. Free trade has undermined their post-war model. Unions, once the champions of improved living standards and with vision of global union alliances have been broken by more-or-less free trade. Only the Teamsters and AFSME (municipal workers union) really have power. Truck drivers have unique monopoly power as do longshoreman. Autoworkers do not - trade undermines it and the right to work shops in the South do too. So when counterparties won't negotiate why do we blame management?
Congress needs to take a step up the learning curve and become a bit more sophisticated. The auto execs are not poster boys for the 'save my industry foundation,' that's true. But they have been laboring under constraints and the legal system and collective bargaining agreements have had them hamstrung. Those are the tables that need to be turned as much as the execs need to be lectured.
But the problem is not just in autos... If this were China we could send those 'lost' CEOs to re-education camps. But we don't do that. Nonetheless you see the actions of the execs at AIG: they got money and immediately paid off early their deferred compensation TO THEIR EXECUTIVES - making sure those monies were not at risk to any bankruptcy proceeding that might arise. Now AIG wants up to 1/2 million dollars in retention bonuses for key staff not a pool of $500Gs, $500Gs apiece for 'key staff'. Why? Where would they go? Moreover, how good are they if they lost so much money? Where is the humility among people who have failed so badly?
The road to nowhere is in ethics. These are not the kind of captains that would go down with their ship. They'd be the first in the life boats. They would not lead the charge up the hill into hostile enemy fire. I blame business schools. It's as if each one has come up with a new theory explaining why the captains of industry should paid like Kings. Why? They are only managers. When Times are bad they reveal their true selves to us... they can't take the blame because they don't see how they did anything wrong. Everybody did it, they say. So if they did what everyone else did, what were they getting the BIG BUCKS for? Playing follow the leader?
What a joke. Automakers, bankers, insurance - industries for morons not for the sophisticates as we thought. Of the three the autos guys actually have done the better job. But because its the only industry anyone in Congress can come close to understanding it is the one where the executives are being hounded in public. Sweet, eh?
Those Congressmen and Congresswomen. Those are our boys/girls. Kind of makes you proud? No? Kind of makes you want to toss your cookies.
Saturday, December 6, 2008
Jobs? What are jobs?
It's not exactly like remembering where you were the day the 9/11 attacks occurred or on Pearl Harbor day but to economists the Friday massacre will be remembered. There is a good lesson here about data revision out of the BLUE. We now have three months of job losses at -403K, -320K and at -533K. Who would have forecast -500K jobs on Friday without the revisions in hand? Houdini? or maybe Gary Schilling.
Job losses in this recession at the 12month mark are now greater than in any recession since 1960. Even the proportionate drop in jobs is severe. The proportionate drop in the services sector is also a record. MFG jobs have held up better that in most recessions (all but one) but that series is now taking a serious dive lower. The slope is slippery and we are on it. No telling how long this lasts...
The SILVER LINING
It is said that every cloud has a silver lining. But I guess whoever said that never heard of thermonuclear warfare. Fortunately this was only a jobs report. Its silver lining is essentially clarity. The economy is now in recession, it look like it's in recession, and the NBER says it is in recession. So we can now compare it to past recessions. That does not mean that we are limited to that experience, but that we can learn from it. The past long post-war recessions in 1973 and 1981 last 16-months. This one is already 13 months (12 months of job data). That does not mean it can only last three months more, but it suggests that maybe since it is already long there is not that much of it left. The severity of the jobs losses suggests that too. And the good news is that STOCKS tend to rise before the recession ends. Stocks often rise in the midst of the gloom - out of the ashes of pessimism, and in the face of horrific corporate earnings. Does this description of reality sound familiar? That's the silver lining.
SEVERE job losses - a good sign?
The jobs numbers are seriously negative. Indeed this THREE MONTH stretch of job losses is the worst in absolute terms except for two of the three the final months of the extremely severe 1973-75 recession. But as a percentage of job levels at the start of the recession this three month stretch ranks as the THIRD WORST since 1960 - still bad enough. The job losses at the end of the 1973 recession were worse in proportionate terms and so were those at the very end of the 198o recessionette. But in three month loss terms 2007-2008 at its worst is still worse that the worst of 1981-82. What is interesting that the worst of the job losses tends to come at or near the ends of recessions not at the start or at the middle. Of course since this one is not over we can't yet call these the worst losses of the recession. But episodes of losses this severe have not persisted for long in past recessions. So we have some reason either to be very happy or very disturbed with this recent news. Stocks have chosen to take heart, pushing aside the bad news of the moment looking ahead to the grandeur of recovery that lies ahead. Are they premature...again?
SEVERE job losses: the end of the world?
Of course, if you are prone to pessimism the numbers are not only worse but extremely bad. The banks are in trouble. The Fed is pumping in reserves like a drunk downing drinks on dollar night and yet nothing is happening. Stocks are still chaotic and bond yields are lower than the criminal slime in a "B' movie. Surely more bad news lies ahead? Housing, the root of all that is evil, is still crashing with prices lower and activity slower than a factory assembly line in the old USSR where the commies pretended to pay the workers and workers pretended to work.
A Choice: The biggest guessing game in town
Friday, December 5, 2008
While other countries have jumped to help their auto industries Congress has dragged its feet and played coy with the possibility of help. In the end the automakers have no real plan and neither does Congress beyond making a public spectacle of the automakers and their dilemma.
More bad advice
I especially like automakers being urged by Congress to make more 'green' cars. When Ford started it all founder Henry Ford said you can have any color car you want as long as its black. Now the mandated color is green. But the kicker is that environmentally friendly cars are more expensive and they are currently being sold at a loss. So Congress wants them to make more of those..Oh that will save them, won't it?
The reason we are here...
This is unfortunate. The automakers have improved their product. Their current dilemma is the result of a spike in oil prices that came so quickly there was no rolling with that punch, but then oil prices fell back. And just as fast a financial tsunami swept across the land - all lands- and that has left potential auto purchasers without credit resulting in a sharp drop in the demand for cars. Congress treats the automakers like all this was all their fault. The Detroit guys are not perfect. They have made mistakes and they have had help making some of them - like when CONGRESS rolled back the CAFE mileage standards for them.
The real issue
The automakers are not stupid. But they are caught in a sort of time-space warp. They are locked up in industrial agreements from years ago in an age when others are not so encumbered. They are at a disadvantage and they have not been able to negotiate their way out. GM is burdened by legacy health care costs, dealer agreements it cannot unilaterally break and a still expensive and restrictive union contract. These are among the arrangements the US automakers need to renegotiate. By declaring bankruptcy they could be unilaterally get relief from a bankruptcy court judge. But the automakers say that the bankruptcy route is too dangerous. So why not have the government offer MONETARY help only if the automakers can restructure their various arrangements with dealers and with the unions. Force them to streamline by reducing the number of nameplates- that will involve a new deal with their dealers. If these things are not done then throwing money at the automakers does not solve their longer term problem. So tell them to make these changes OR IT WILL BE BANKRUPTCY. And maker Chrysler's 80% cash rich owner Cerberus kick in some more money before it gets ANY taxpayer funds at all. Everybody needs to get real.
Time is of the essence so Congress may have to give the automakers some money upfront without strings. But to get what they say they really need, any further dispersal of funds would require changes of the sort mentioned above.
The point is that the automakers are not a group of naughty boys. They deserve funds more than the banks that have gotten some despite making clear missteps that WERE their fault. Auto are suffering form the fallout of the banks' mistakes and getting blamed for it. This is farce. The auto industrial is important and it has been making strides. Describing the automakers as dealing with the legal framework in an environment where its counterparties have milked it for all they can and continue to dig their heels in expecting a public bail outs for political reasons gives a very different view of GM's and the other automakers' plight. It's time to empower the auto companies with a real ticking time bomb. Cut deals or go bankrupt. Don't just give them money.
Do the right thing.
Monday, December 1, 2008
It may have been more than markets could digest.
- The MFG ISM drops to its eleventh lowest level since 1950.
- The NBER finally does call it a recession and says it began in December 2007. So we have just found out its a recession and already its long - 13 months.
- Bernanke spoke and said the economic weakness would not go away soon...
The Fed Chairman in his speech talked of all the measures the Fed has implemented and said the Fed could buy long term bonds to try and reduce long terms rates. On this news- something that has been mentioned in the past - the bond market went nuts and drove 10-Yr note prices up by about 1 1/2 points and the 10-Yr yield down to 2.7%.
Bernanke's suggestion has been mentioned before but having the Fed Chairman say this in a speech gives it more credence. Also Bernanke has had a habit of doing some unusual things. But within the economics profession, this is not a tact that is well respected. In the early 1960s the Government tried to do something to impact long term rates and change the shape the yield curve. The attempt was called Operation Twist. It failed. In fact it failed miserably. It produced the exact opposite result from the one desired. So among economists the idea of messing with the yield curve is not something that is well regarded.
Operation Twist and Shout
Before the US MFG ISM was reported out, a highly similar e-Zone measure showed a sharp drop. Over the past year the EMU drop has been more severe than the drop in the US and most of that is the pace of the decline in just the past few months. Europeans are still stunned at the onset of weakness. Just today German Chancellor Merkel was talking disdainfully about other countries being in the competition for having the largest stimulus plan. The ECB and Germans in particular have been wrong. The ECB was worried about inflation far too long even with the strong euro. The Germans simply have been in denial about the weakness their economy is suffering. Those that thought China would be spared- were dead wrong. China is an exporting economy! How could severe weakness in its key export markets not hurt it? Goldman had an investment strategy based on the notion of buying US firms with weighted international sales on just this same idea that foreign growth would not slow as much. The strategy was pulled only relatively recently. Yes, even the best of the best of the best got it wrong. We are all connected. Trade has expanded greatly. Capital flows are an international staple of existence. Economies need it the same way that bodies need calories. Connectedness has its costs and tighter linkages is one of them.