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Source:
Layoffs Spread to More Sectors of the Economy
CATHERINE RAMPELL
NYT, January 26, 2009
http://www.nytimes.com/2009/01/27/business/economy/27layoffs.html
While the idea of the government becoming the de facto bad bank in a system-wide good bank-bad bank solution has some merit, there’s a big problem with the “aggregator bank” idea that’s gaining momentum in Washington D.C., says Lawrence J. White Professor of Economics at New York University’s Stern School of Business.
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Source:
Afraid to Let Big Banks Go Under
Yahoo Tech Ticker Jan 27, 2009 12:39pm EST
http://finance.yahoo.com/tech-ticker/article/164438/Good-Bank-Bad-Bank-or-Banana-Govt.-Afraid-to-Let-Big-Banks-Go-Under?
Jim Welsh of Welsh Money Management has been publishing his monthly investment letter, “The Financial Commentator”, since 1985. His analysis focuses on Federal Reserve monetary policy, and how policy affects the economy and the financial markets.
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GLOBAL / U.S. ECONOMY
It is likely that U.S. GDP will have contracted 5% from its peak in November 2007 and the end of
the first quarter in 2009. This means the majority of industries will experience a meaningful decline
in sales revenue, which will require a reduction in production, in order to keep production in balance
with falling sales. As production is dialed down, capacity usage declines, and excess capacity
develops. Keep in mind that the increase in excess capacity is taking place in many industries all
over the world. Since every major industrial economy is in a serious recession, global trade is
collapsing. This is not only bad for the U.S., Japan, Britain, Germany, and other members of the EU,
it is also painful for the emerging economies (China, India, Brazil, South Korea, etc.) that have
benefited from the very countries that are now sliding deeper into recession. When Japan went
through its version of the ‘troubles’ in the 1990’s, the rest of the world was doing alright. That’s
certainly not the case today. Globalization has caused the synchronization of economic activity between trading partners to increase, which has led the monetary policy of various central banks to more closely follow each other. A year ago investors were being urged to shift more of their
investments to foreign markets, since the rest of world was going to decouple from a slowing U.S.
economy. Didn’t turn out that way. Foreign markets tanked, as economies everywhere hit the skids.
A decline in sales will pressure profits, and many firms around the world will be forced to make
some tough choices on capital investments, willingness to cut prices to garner revenue and protect
market share, and staffing levels. Companies will try to determine how long the current level of
excess capacity will last. The deceleration of the past four months has been breathtaking in its speed
and scope, and there is no proverbial light at the end of the economic tunnel just yet in most
countries. As a result, most companies will err on the side of caution, and decide to reduce or
eliminate budgeted investments in new plant or equipment. When sales are soft or falling, every
dollar of revenue becomes more important, so many companies will increasingly compete on price to
boost revenue. Although this will narrow profit margins in the short run, it will help protect market
share for the long haul. Companies will also move to lower current costs, and millions of workers
around the world will lose their job.
Of course, the decision to play it safe makes sense. But, as millions of company executives, of firms
large and small, decide almost simultaneously to hit the brakes, the world economy will slow down
even more. As global worker income weakens, global demand for goods and services will decline,
which will lead to more job losses. This negative feed back loop will circle back and cause more
losses for banks throughout the world. Social unrest will increase in many countries, as unemployed
workers vent their anger, and demand their political leaders do something. In a few countries,
existing governments will collapse, and be replaced by new governments that won’t have much
success in turning things around either. We are on the doorstep of a darker age that will be pock
marked by more turmoil, violence, and brutality throughout the world.
Today’s WSJ:
“Rising defaults by affluent homeowners are raising the specter of another cloud over banks and investors, which could get stuck with thousands of expensive homes.
About 6.9% of prime “jumbo” loans were at least 90 days delinquent in December, according to LPS Applied Analytics, a mortgage-data research firm. The rate was up sharply from 2.6% a year earlier. In comparison, delinquencies of non-jumbo prime loans that qualify for backing by government agencies climbed to 2.1% from 0.8% in December 2007.
Jumbo mortgages average about $750,000 and can run as high as $5 million or more. More borrowers with such loans are being hit by layoffs that are spreading through practically every sector and pay level of the U.S. economy.”
This is reflective of two things: The abdication of lending standards during the 2002-07 period, and the ongoing economic contraction.
Check out all the jumbo loans going bad in Florida! Much worse than the rest of the nation — what sort of lending standards were going on amongst all of those builder-financed condos along the inter-coastal?
Geez, what junk!
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Source:
Banks and Investors Face ‘Jumbo’ Threat
NICK TIMIRAOS
WSJ, JANUARY 28, 2009
http://online.wsj.com/article/SB123310421416822271.html
On Sunday night, Mike Shedlock lobbed a hand grenade Peter Schiff’s way (here, and mirrored here).
Around late 2008, some PR flacks were circulating a Schiff’s greatest hits — short excerpts of his appearances on major media. It was apparent to me that these heavily edited clips were not coming from random readers, but rather, were part of an organized PR campaign.I do not know if this annoying guerilla marketing approach is what motivated Mish to write his takedown, but it sure made me come close several times.
Regardless of the motivation, in a meticulous, fact-based post, Shedlock highlighted the poor investment returns Schiff has generated in 2008. Through the grapevine, I have heard that Schiff was livid, and is threatening a lawsuit.
Too late: I understand more fireworks are coming, via a major media outlet that picked up the specific details from Mish, and independently verified them. Look for a major story soon (possibly as early as Weds/Thur). As is so often the case these days, a blogger discovered something newsworthy, and the MSM picked up on it afterwards.
~~~
In the past, I defended Schiff against a pretty shoddy piece of hit journalism by Forbes. It was a case of pretty weak investigative reporting — and I expect much better from Forbes. I have also highlighted the works of Blog Spotlight: Mish’s Global Economic Trend Analysis (November 30th, 2006, 7:00PM).
I’m not sure you call me neutral — but I am certainly even handed in this case. However, I simply cannot find anything in Mish’s blog post that is actionable. Besides, who would want to open themselves up to the sort of discovery process slander/libel litigation would entail for the plaintiff. It would make a colonoscopy look pleasant by comparison . . .
Good Evening: Capital markets participants spent most of today positioning themselves for possible policy changes once the two day FOMC meeting breaks up tomorrow. Some expect Bernanke & Co. will decide to buy Treasurys and/or agency MBS, and equity investors seemed content with nibbling a bit ahead of any such announcement. Garnering almost as much attention during this slow-motion day were AIG and Wall Street bonuses. The amount of rationalizing and whining about these payments will only increase the desire of the American public to tell both AIG and Wall Street to pound sand.
After stocks in Japan and Australia were both up smartly, the bourses in Europe and our stock index futures spent most of this morning meandering around levels not too far from unchanged. The major averages survived the earnings reports and another weak Case-Shiller home price index reading to post gains approaching 1% soon after the bell rang. After consumer confidence hit a new all-time low, however, equities sank back to the unchanged mark (see below). From there the major averages drifted unevenly higher in slow trading to post gains of between 0.72% (Dow) and 1.8% (Dow Transports). Treasury securities saw a decent bid in both the long end and for TIPS, perhaps in the hope the FOMC will decide that tomorrow is the time to announce a plan to buy these securities in the open market (see below). The dollar edged lower, and it would be an understatement to say that commodities didn’t benefit from the greenback’s small decline. Crude oil was down 9%, ag futures declined and even gold dropped 1%. Adding it all up, the CRB index lost almost 4% of its value today.
Whether the Fed decides to start buying securities in the open market tomorrow (or ever) is unknowable, but I certainly hope Mr. Bernanke and team decide to support the mortgage market instead of the Treasury market. Those who would directly benefit from Treasury purchases are mostly of the carry-trading variety (banks and hedge funds), but home buyers would be helped if the Fed decided to sit on mortgage rates. I’m not advocating Fed intervention; I’m just stating the case that to do so in the mortgage market would have a bigger impact on a central problem in the credit crisis — the implosion of home prices. It could even hasten the arrival of the “equilibrium” in the housing market foreseen later this year by Karl Case (creator of the Case-Shiller index — see below). The ultimate low in Treasury yields during the 2003 feeding frenzy in government bonds came in anticipation of Fed purchases that never materialized. What happens to yields in public and private markets alike in the wake of whatever the FOMC announces tomorrow will be interesting.
What is also of interest to me, and what represents a source of growing anger among taxpayers, is the level of bonus compensation at AIG and other financial institutions. Many on Wall Street are unhappy that the decimal point on their 2008 checks seems to have moved to the left a notch (see below). After emptying their pockets to fund the TARP, most Americans have zero sympathy for these complaints. Given the choice, I’m sure many taxpayers would join me in support of requiring any financial institution in receipt of government aid set aside at least half of their employee bonus pool in order to purchase troubled assets from their parent company. Round 2 of the TARP could then make matching purchases of the same assets, thus finally aligning the interests of Wall Street employees and the taxpayers who’ve bailed them out.
As for AIG, the “retention bonuses” promised to the derivatives group that ultimately sunk the firm is a pure and simple outrage. I understand the logic behind the payments — AIG does indeed need to retain key employees if it hopes to someday leave Federal protection — but there had better be some pretty serious strings attached (or, better yet, ropes). First and foremost should be a requirement that none of these payments be made in cash. They should all be set aside in a fund that vests after these “key employees” have stuck around for a few years. Second, and just as important, this fund should invest in the very garbage this group foisted upon AIG. 100% of it. Whether the TARP matches or whether the employees get upset and want to leave is of no concern to me or almost anyone else. I would further stipulate that if a “retention bonus-eligible” employee does indeed decide to leave prior to the 3 year time limit, then he or she receives no payment at all. Zip, nada, zilch. If retention bonuses are indeed necessary to keep this crew from bolting, then they should have no problem waiting for it. And, if the drek their bonus pool invests in turns out to be worthless, then tough luck. As far as most of us are concerned, the AIG derivatives group can get a taste of the damage they’ve helped to cause.
– Jack McHugh
U.S. Economy: Confidence and Home Values Sink
Housing to Hit Bottom This Year as Building Stalls, Case Says
Bernanke Risks ‘Very Unstable’ Market as He Weighs Buying Bonds
Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
~~~
There are numerous YouTube videos, articles, and references to Peter Schiff being “right” rapidly circulating the globe. While Schiff was indeed correct about the US imploding, most of the praise heaped on Schiff is simply unwarranted, and I can prove it.
First, let’s start with a look at the claim being made. Peter Schiff concludes many of his articles, books, etc. with the following statement.
Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly.
Highlight in red is mine.
I would like to see some proof of that statement. Specifically I would like to see the average returns posted by EuroPacific clients for 2008.
I have talked with many who claim they have invested with Schiff and are down anywhere from 40% to 70% in 2008. There are many other such claims on the internet. They are entirely believable for the simple reason Schiff’s investment thesis was flat out wrong.
I have an actual portfolio statement from one of Schiff’s clients at the end to discuss, for now let’s discuss the main points of Schiff’s thesis.
Schiff’s Overall Thesis
Schiff was correct about point number 1 above. The US equity markets crashed. That was a very good call. Unfortunately, his investment thesis centered on shorting the dollar in a hyperinflation bet, and buying foreign equities rather than shorting US equities.
Furthermore, Schiff made no allowances for being wrong and had no exit strategy whatsoever.
What happened in 2008 was that foreign equities sold off much harder than US equities, and a strengthening US dollar compounded the situation.
In other words, Schiff failed where it matters most: Peter Schiff did not protect his client’s assets. Let’s take a look how, and more importantly why, starting with charts of various foreign indices.
click on any chart in this post for a sharper image
$SSEC Shanghai Stock Exchange Weekly
$NIKK Tokyo Nikkei Weekly Chart
$TSX – Canada TSX Weekly Chart
$AORD Australia ASX Weekly Chart
$SPX S&P 500 Weekly
2008 Equities Bloodbath
2008 was a global equities bloodbath. Clearly there was no decoupling. The Shanghai index (China), Nikkei (Japan), TSX (Canada), AORD (Australia), and virtually every world equity index collapsed along with the S&P 500, the DOW, and Nasdaq in the US.
Many, if indeed not most, foreign equity markets did worse than the US indices. The Shanghai index fell from 6124 to 1665, a whopping 72.8% decline top to bottom.
Let’s investigate why this happened, starting with the decoupling thesis itself.
Barron’s Mike Santoli explores whether the Dow hovering around 8,000 and the S&P around 800 carries a certain significance and what this could mean.
1/26/2009
The spate of nationwide layoffs continues. Companies announced cuts to more than 40,000 on Monday. Barry Ritholtz, CEO and director of equity research at Fusion IQ who writes about the economy at his blog, The Big Picture, says layoffs are likely to continue for some time to come.
click for audio
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Source:
All Things Considered
NPR, January 26, 2009
http://www.npr.org/templates/story/story.php?storyId=99885676&ft=1&f=1003
"I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." -Thomas Jefferson (letter to John Taylor in 1816)
After 3 quarters in a row that averaged just 1.2%, Q4 GDP grew 2.8%, a touch below expectations of 3.0% BUT Nominal GDP grew well below forecasts. Because the price deflator was up just .4% vs the estimate of 1.9%, Nominal GDP was up 3.2% vs the estimate of 4.9%. Personal Consumption rose 2.0% vs the forecast of 2.4%. Fixed Investment rose 3.3% helped by a 5.2% increase in equipment and software spending and residential construction rose by 10.9%. Trade was a slight drag on GDP growth and government spending was as well led by a 12.5% decline on national...
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