Business surveys likely to show further falls in February

Next week will see the release of the first business surveys for February in the US
(Empire State and Philly Fed) and in Europe (PMIs). Our team expects to see
continuing signs of extreme weakness on both sides of the Atlantic.
The sharp decline in global economic activity will be highlighted by Japan’s real
GDP figures for Q4, which we expect to show an 11% drop at an annualised rate.
Consistent with this week’s worse-than-expected Euro area GDP data, the
Japanese figures are likely to confirm that, as the global economy entered a
synchronous recession in the second half of 2008, export oriented economies
suffered relatively larger falls more than the US, where the crisis originated.
However, the US housing data should once again highlight the still-depressed
conditions of the sector where the crisis began, with starts and permits expected
to plumb new post-war lows, in a dramatic reversal of the longest expansion on
record.
Against this dismal backdrop, central banks appear to be running out of
ammunition. The FOMC Minutes may contain clues as to whether the Fed is
getting closer to outright purchases of Treasuries. The Bank of England Minutes
will be watched for signals concerning the March decision (a 50bp cut, we think)
and prospects for quantitative easing. Meanwhile, we expect the Bank of Japan to
leave its policy rate unchanged at 0.10% on Thursday.

Ron Paul

Before the US House of Representatives, February 4, 2009, introducing the The Federal Reserve Board Abolition Act, H.R. 833.

Madame Speaker, I rise to introduce legislation to restore financial stability to America’s economy by abolishing the Federal Reserve. Since the creation of the Federal Reserve, middle and working-class Americans have been victimized by a boom-and-bust monetary policy. In addition, most Americans have suffered a steadily eroding purchasing power because of the Federal Reserve’s inflationary policies. This represents a real, if hidden, tax imposed on the American people.

From the Great Depression, to the stagflation of the seventies, to the current economic crisis caused by the housing bubble, every economic downturn suffered by this country over the past century can be traced to Federal Reserve policy. The Fed has followed a consistent policy of flooding the economy with easy money, leading to a misallocation of resources and an artificial “boom” followed by a recession or depression when the Fed-created bubble bursts.

With a stable currency, American exporters will no longer be held hostage to an erratic monetary policy. Stabilizing the currency will also give Americans new incentives to save as they will no longer have to fear inflation eroding their savings. Those members concerned about increasing America’s exports or the low rate of savings should be enthusiastic supporters of this legislation.

Though the Federal Reserve policy harms the average American, it benefits those in a position to take advantage of the cycles in monetary policy. The main beneficiaries are those who receive access to artificially inflated money and/or credit before the inflationary effects of the policy impact the entire economy. Federal Reserve policies also benefit big spending politicians who use the inflated currency created by the Fed to hide the true costs of the welfare-warfare state. It is time for Congress to put the interests of the American people ahead of special interests and their own appetite for big government.

Abolishing the Federal Reserve will allow Congress to reassert its constitutional authority over monetary policy. The United States Constitution grants to Congress the authority to coin money and regulate the value of the currency. The Constitution does not give Congress the authority to delegate control over monetary policy to a central bank. Furthermore, the Constitution certainly does not empower the federal government to erode the American standard of living via an inflationary monetary policy.

In fact, Congress’ constitutional mandate regarding monetary policy should only permit currency backed by stable commodities such as silver and gold to be used as legal tender. Therefore, abolishing the Federal Reserve and returning to a constitutional system will enable America to return to the type of monetary system envisioned by our nation’s founders: one where the value of money is consistent because it is tied to a commodity such as gold. Such a monetary system is the basis of a true free-market economy.

In conclusion, Mr. Speaker, I urge my colleagues to stand up for working Americans by putting an end to the manipulation of the money supply which erodes Americans’ standard of living, enlarges big government, and enriches well-connected elites, by cosponsoring my legislation to abolish the Federal Reserve.

The future financial health of the agency is hard to forecast.

Pension Benefit Guaranty Corporation

awgee - 16 February 2009 06:26 PM

The future financial health of the agency is hard to forecast.

Pension Benefit Guaranty Corporation

Actually the future financial health is easy to forecast.  The forecast may not be pleasant, but it is easy to make…

“Truthfully,” Williams pointed out, “there is no Social Security ‘lock-box.’ There are no funds held in reserve today for Social Security and Medicare obligations that are earned each year. It’s only a matter of time until the public realizes that the government is truly bankrupt and no taxes are being held in reserve to pay in the future the Social Security and Medicare benefits taxpayers are earning today.”

The real 2008 federal budget deficit was $5.1 trillion, not the $455 billion previously reported by the Congressional Budget Office, according to the “2008 Financial Report of the United States Government” as released by the U.S. Department of Treasury.

The real deficit

Still no good news….

Job conditions still deteriorating
Mass layoffs (more than 50 people at a time) nearly doubled in 4Q from 3Q to
3,140 – the highest since the records began in 1995. The construction and
manufacturing sectors took the biggest hit.

Hotel industry outlook very clouded
See “What if Nobody Comes” on page B6 of the NYT. According to a survey
jointly conducted between Amex and an industry trade group, 7% of business
meetings nationwide have been cancelled this year and the ones that have not
been cancelled are expected to see attendance decline 5% this year.

The fiscal bill is about to see the light of day
The House passed a $787 billion package and it looks like the Senate will do the
same – a 1,073 page bill that includes a $500 billion in spending and $287 billion
in tax relief (amazingly, the ‘Buy American’ provision is still there – see “Hire
American Measures Raise Protectionism Concerns” on page 2 of the weekend
FT; and “G7 Targets Spectre of Economic Nationalism” in the Saturday Globe and
Mail.) The banks have agreed to hold off on new foreclosures until March 6th as
the government unveils its new $50 billion loan modification plan. Not only that,
but the bill (which not one House Republican voted for – neither did 7 Democrats
– since the Republican party has said it does not feel it will bring anything
remotely close to sustained growth for an incentive-based as opposed to welfarebased
economy) contains provisions that sharply curtail executive compensation
in the financial services sector.
A stimulus bill that gives tax credits to people who pay no tax but restricts
executive pay going forward because of mistakes made by a relative few, is, shall
we say, just about as populist as it gets. And it is a fiscal plan that has more of a
welfare feel to it, in our view, than anything incentive-based that will actually
encourage people to change their spending and investing patterns. To be sure,
the budget plan is better than nothing, but it is not enough, in our view, and
adequately dubbed “sprawling and incoherent” in the weekend FT’s editorial page
(page 6 – “A Plan That is Ugly But Necessary”). If there is a good plan out there,
it is the plan being espoused on the front cover of Barron’s, in our opinion, touting
a move that would provide the banks with $200 billion of TARP money on the
condition that the funds be used to cut the principal amount of the $850 billion of
the nation’s subprime mortgages by 25%. Good idea, but what about the Alt-A
and prime mortgage borrowers too, because their delinquency rates have also
soared to record highs.

Consumer Sentiment Slides
The U of M consumer sentiment index fell a larger-than-expected 5 points in
February to 56.2 – perilously close to the November lows. In fact, the
‘expectations’ component dropped to its lowest level since 1980 (49.1). The 1-
year inflation outlook hit a cycle-low of 1.6% versus 5.1%.

Mortgage rates surge
The 30-year fixed rate jumbo is now 7.08% versus 6.92% a month ago. The 5/1
year jumbo ARM is up to 5.99% as well from 5.80%.

Household net worth down 20% from 2007 peak
A Fed survey just came out and indicated that household net worth has
contracted 20% from the 2007 peak and that people between 55 and 64 have
taken the biggest hit: But the belief system on the part of the younger generation
has also been shattered in terms of their future expectations of income and
wealth – have a good hard look at “The Legacy of a Crisis: A Risk-Shy
Generation”. Even so, for people under the age of 40, half of those surveyed
have their money in the equity market. Going forward, “the majority would put
less than half in stocks” (as per a Desalles University poll). The article also cites
a Charles Schwab official saying that 401(k) participants “are not making many
big investment moves … there is a sense at least some younger investors may
divert 401(k) contributions to other uses … one sensible way to reduce overall
risk is to pay down high-interest debt, like credit cards or private student loans”.
Pay down debt or buy bonds – it’s all about saving on or capturing future cash
flows.

Dimishing Returns….

Number of vehicles on the road is declining
Auto sales have been 10.5 million units or lower (annual rate) for four months
running, a string of weak data not seen since 1982. Replacement demand is
estimated at around 12 million units so this is truly unprecedented – four straight
months in which the number of light trucks and cars on the road has declined.
And it may well be that replacement demand itself may be in secular demand,
which in turn means that we could well see vehicle sales touch even newer lows
in coming months, quarters and perhaps years. The reason – in this frivolity-turnfrugality
future, people are learning to drive their cars longer. In other words,
consumers are no longer just rolling over the leases every year or two or trading
in their cars after the first sign of engine trouble. This could be a backstop for the
local garage or even the parts makers, but what it means is that the average age
of the auto fleet, already up to a record of 8 years, is on a secular uptrend. Our
auto analysts see a move to 10 years before too long.(see attached chart)

Sharp downturn in homebuilding continues unabated
The National Association of Homebuilders (NAHB) housing market index rose
slightly from a record low of 8 in January to 9 in February. Recall that this is a
diffusion index where readings above 50 represent optimism about homebuilding
activity and anything below represents deteriorating conditions – the last time 50
or higher was reported was April 2006. Results were in line with consensus
forecasts and a tick higher than BAS-ML. Potential homebuyer traffic rose 3
points over the month, but at 11 still reflects very weak activity. The present sales
index only rose 1 point, indicating that any improved traffic is not translating into
higher sales. So far this month, mortgage applications for purchases are down
21.3% versus the January average, clearly reflecting that the downturn in sales
activity continues apace. Despite the small rise in traffic and present sales,
homebuilders were decidedly more pessimistic about future sales, as that index
dropped to a new low of 15. Regionally, marginal gains were seen everywhere
except the Northeast; all were still at levels consistent with sharp declines in
activity. Looking ahead, record inventories of new homes, precipitous declines in
demand and the competing stock of distressed properties all point to further
cutbacks in building before this market can begin to stabilize. While there was a
huge increase in the volatile mortgage application series last week (+45.7%, led
by a 64.3% surge in refinancings), the ‘new purchase’ index rose 9.1%, which did
not even reverse the 9.8% slide the week before and it is still down 29% YoY.

Another soft housing statistic just came out
The architectural firm billing index for January: it rang in at a new record-low of
33.1 from 34.1 in December, 34.2 in November, 37 in October and 41.2 in
September. Detect a pattern here? And note that the deflation has spread from
residential to commercial, where nationwide property values are down 20% YoY
and by as much as 50% in NYC – see “After the Boom, a Hard Fall” on page B6
of the NYT).

BondTrader, thanks again for these posts.  I really enjoy reading them.

Let me get this straight. The Treasury has no actual treasure. So, it is authorized by a Congress to borrow what it needs (that is because Congress has already spent all the tax revenue) and the Treasury will then issue $100 billion in Treasury instruments of some sort that supposedly qualify as ‘capital’. Then that ‘capital’ will be transformed into $1 trillion in new currency. Congress is not raising taxes in order to provide a revenue stream.  So where does this money come from?  How does this magic work. 

- Richard K. Brawn

Further proof that America is corrupt just like any other corrupt nation. 
Wouldn’t it be funny if the Madoff ponzi scheme of 50B is just a drop in the pond.  Wait till we one day read about how America robbed you and me. 

Either get rid of corruption or create more so I can participate in it too.

Foreclosure prevention plan shares the pain

Yesterday, President Obama announced his foreclosure prevention plan that will
begin on March 4. The cost of the Homeowner Affordability and Stability Plan is
estimated at $75 billion and includes three key approaches:

􀂄 First, the plan will allow the GSEs to refinance homes up to 105% of their
appraised value.

􀂄 Second, lenders who reduce mortgage rates to borrowers will be partially
compensated by the government. Borrowers will accrue a $5,000 incentive
mortgage debt reduction (over five years) if they make timely payments on
their modified mortgages.

􀂄 Finally, they are boosting their commitments to the GSEs.

Keeping supply off market

Even marginal reductions in the number of foreclosed properties will help the
supply-demand imbalance in housing that is driving home prices lower. The latest
data on housing starts and completions (more on this below) suggest that the
imbalance continues to persist as homes that were begun months ago are still
being completed at a pace well above the rate of sales. Although this new plan is
not likely to be a panacea, we believe that adding a smaller number of foreclosed
homes to a falling number of new homes entering the market will be a positive for
the housing market and the economy more broadly. For now we continue to
expect home price declines.

Housing starts sink to new record low
Housing starts plummeted 16.8% M/M in January to an annualized rate of 466K
units, well below consensus (530K) and BAS-ML (525K) estimates. Our
estimates for 1Q real GDP remain unchanged at -5.8%, as we have factored in
substantial weakness for residential investment. A correction unfolded in both
multi-family units (down 28% M/M to a 16-year low at 119K) and single-family
starts (down 12% M/M to a new historic low of 347K). This marks the third straight
month of new lows in single-family construction, reflecting some progress by
homebuilders to pare back building. While building in this segment is now
running below underlying demand (we estimate a pace around 500K/month), we
continue to see a significant inventory overhang of over 1M units that will likely
bring further declines in construction. Until home sales activity picks up from the
330K annualized pace at end-2008, prices for new homes should continue to
head lower. These figures point to no improvement in months’ supply for new
homes, which is expected to remain close to record highs at 13 months in
January. Prospects for any improvement in demand remain subdued given
tighter lending standards in a rising unemployment environment.

(deleted)

BlackVault CM - 19 February 2009 08:46 AM

Further proof that America is corrupt just like any other corrupt nation. 
Wouldn’t it be funny if the Madoff ponzi scheme of 50B is just a drop in the pond.  Wait till we one day read about how America robbed you and me. 

Either get rid of corruption or create more so I can participate in it too.

What are fractional reserve banking and the social security system if not ponzi schemes?  Are they not ponzi schemes because they are sponsored by the government?

BlackVault CM - 19 February 2009 08:46 AM

Further proof that America is corrupt just like any other corrupt nation. 
Wouldn’t it be funny if the Madoff ponzi scheme of 50B is just a drop in the pond.  Wait till we one day read about how America robbed you and me. 

Either get rid of corruption or create more so I can participate in it too.

More and more of these scams are coming to light.
R. Allen Stanford is now on the run after bilking investors for $8 Billion

BondTrader, thanks for the posts. I like to think I’m up to date on the latest news and economic information, but you have definitely shown me a lot of information I wasn’t aware of. Are there any websites or news feeds you can recommend that have similar information?

BondTrader, simply clicking the THANKS link to the right of your name doesn’t seem like enough.  Like others in the thread, I’d like to mention how much I appreciate the information you are sharing with us.

Most of the stuff I posted were from my reading off bloomberg and research reports/economic commentaries written by economists from major banks on the street. I usually takes 45mins in the morning and sometime during lunch to quickly go through some of those emails (impossible to read all of them) and post whatever I believe will be interesting to readers here. I’m glad you guys enjoy reading all the bad news I put out there,

BondTrader - 19 February 2009 11:01 AM

Most of the stuff I posted were from my reading off bloomberg and research reports/economic commentaries written by economists from major banks on the street. I usually takes 45mins in the morning and sometime during lunch to quickly go through some of those emails (impossible to read all of them) and post whatever I believe will be interesting to readers here. I’m glad you guys enjoy reading all the bad news I put out there,

It’s fantastic.  I have live streaming news through Ameritrade, that covers everything you mention.  The only disadvantage is I get more news that I care to read, so its’ hard to follow.  I don’t care that Alan Greenspan attended a b-day party for his little grandchild.

You give quick summary snapshots of current events.  Thank you for doing this.

calculated risk has much of the information too.  it is a relatively quick read if you ignore the comments (which are often the best part, though)

In the final chapter of this home price deflation
That 245K level of single-family starts in January compares to the new home
sales rate of 330K in December. In other words, builders have managed to pull
the growth rate of new housing supply below the prevailing growth in new
demand. So, we can now say with a reasonably high level of comfort that we are
hopefully entering a new and final chapter of this unprecedented decline in
residential real estate prices.

It will still be a very long chapter
But make no mistake – it is going to be a very long chapter. The builders waited
far too long to embark on this process of taking supply off the market, and as a
result, we still have a near-record 2.3 million homes that are unoccupied and have
a ‘For Sale’ sign on the front lawn. The ‘frictional’ level is closer to 1.2 million
(where the long-run normalized level is), which means that the ‘excess’ supply
overhanging the market is around 1.1 million units. Again, that is close to an alltime
high, and while we would now expect to start seeing this backlog of vacant
homes for sale decline, it will take years before it reverts to the mean.

Will take years to revert to the mean
For example, if the builders simply kept the level of starts at their current
depressed levels, and under the proviso that new home sales stay where they
are, it would take thirteen years for the inventory problem to disappear. If the
builders were to cut single-family housing starts in half from their already recordlow
levels, it would still take three years to eliminate the excess housing
inventory. In fact, the homebuilders can slice starts all the way to zero – declare
a moratorium – and it would take two years to bring the unsold inventory down to
levels that will allow home prices to stabilize!

We do not expect a sharp pickup in sales
Of course, if demand was to revive, new home sales would have to surge 300% –
quadruple, in other words – to near all-time highs of 1.35 million to soak up the
excess. With employment declining, credit hard to come by and attitudes towards
homeownership undergoing a secular change, we are not willing to assume that
the problem of massive home inventories is going to be solved via a sharp pickup
in sales. That said, it may not be unreasonable to expect that home sales
recover at some point from what can only be described as depression-like levels.
The current level of demand at 330K units compares to underlying demographic
demand of around 520K units at an annual rate.

Still have another 15% downside to home prices
In any event, if there is one part of the forecast we are extremely confident in at
this point, it is that we still have at least 15% more downside to average home
prices nationwide. This comes on top of the record 25% decline so far in this
down-cycle. That additional 15% decline, as an aside, would be enough to wipe
out the remaining capital at the large banks and would double the number of
people who are upside-down on their mortgage from 13 million to 25 million. This
means that half of the 51 million households with a mortgage would then be in a
negative net equity position, so the process of fiscal stimulus, government
incursion into the banking sector and loan modifications didn’t end in this latest
go-around of government policy initiatives.

Bailouts everywhere
See “US Eyes Large Stake in Citi” on the front page of the WSJ. How greater
government involvement in major banks, with the prospect of future share
dilution, is bullish is truly beyond us. The incremental and reactionary nature of
policymaking in dealing with the financial crisis remains very disturbing to us and
much more Japan-like than Sweden-like. And the government incursion is
increasingly global too – see “Dubai Gets $10 Billion Bailout to Ease Debt: on the
front page of the WSJ as well; “Crisis Spurs Call for Bigger Bailouts” on page A6
(all about which European leaders are calling on the IMF to fund a $500 bln war
chest for the eastern periphery which is in financial and economic disarray); and
“France Seeks to Increase Bank Control” on page A10. Also see “Carmakers
Seek Canada Aid” on page 15 of the FT. At least we may be getting closer to
Chapter 11 filings for the auto companies, which would actually allow them to
shed their unsustainable legacy costs (see “Bankruptcy Funding Solicited for Car
Makers”) on page C1 of today’s WSJ (and while it is still deemed that several
banks are too big to fail, we see that in actuality, bankruptcy in general is not the
end of the world – see the rays of hope in “There is Life After Bankruptcy for
Some Companies” on page C1of the WSJ. Finally, the global financial turmoil is
also now pitting one country’s rules against another, as the US government is
demanding that UBS hand over the identity of some 52,000 private account
holders (see article on page A6 of the WSJ).

Shortcomings of the federal fiscal stimulus
Below we highlight some of the shortcomings we see to the federal fiscal stimulus
package – the emphasis on tax credits and not tax rates; the fact that the
spending is back-loaded to the out years; that we think it will be next to
impossible to meet the employment goals (which could never be verified in any
event – how can anyone prove that a job was “saved’?) since much of the
spending is aimed at products that are imported into the USA. And now we see
that some of the state Governors are balking at accepting some of the funds
associated with welfare, education, health and especially unemployment
insurance because the federal assistance lasts two years and the local levels of
government have little capacity to fund these programs thereafter – see
“Governors v. Congress”, which is the lead editorial on page A14 of today’s WSJ.

On the corporate front
On the corporate front, we see a report in today’s WSJ that AIG is preparing to
report an expected $60 bln quarterly loss, possibly forcing the government to
expand its bailout package that already has grown to $150 bln. Lots of chatter as
well in today’s morning papers over the potential “quasi-nationalization” of Citi
(the third injection being discussed, which would reportedly involve a switch from
preferred to common stock, could have Uncle Sam owning 40% of the bank). On
the policy side, we are rather amazed that the President is now talking about
having to shrink the deficit down the road (shades of 1937-38?) – isn’t it a tad
early to be talking about fiscal restraint (see “Obama Tries to Address Worries
About Widening Deficit” on page A3 of the WSJ).

Bottom will likely be in 550-650 range
As an aside, we have penned in $46 for operating EPS for this year, so on our
estimates the market is basically operating with a 16x multiple. Call us when we
get down to a classic recession trough multiple of 12x – we are at $54 for 2010E
and at one point we will start to discount next year’s earnings stream – which, on
our estimates, means the bottom will likely be in a 550-650 range.

Problems ahead in corporate credit?
S&P reported that 75 companies (with debt outstanding of $175 bln) are potential
“fallen angels” according to Bloomberg News (these are investment-grade
companies at risk of being taken down to junk) – this is the highest number of
candidates in 18 years. Credit default swaps on the Markit CDX North America
Investment-Grade index stand at an uncomfortably high 217 bps. Note as well
that the Libor-OAS spread is back above 100 bps and the Market LCDX index of
default swaps on 100 U.S. leveraged loans has collapsed back to 73% from 82%
a month ago – the lowest levels since last December. The WSJ (page C12) also
reports that spreads on nearly all tranches of the CMBX index (tracks default
swaps on 25 U.S. commercial mortgage-backed securities) have widened back to
record levels after a brief respite in January. As for how bonds in the banking
sector are trading – don’t ask (if you really must know, have a peek at
“Uncertainty Mounts Over Outstanding Bank Bonds” on page 29 of the FT). So if
anything, the credit crunch has actually intensified, and financial conditions in
general have tightened, since the Fed cut the funds rate to 0%.