The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Existing Home Sales in Sept totaled 4.91mm annualized, exactly in line with estimates and Aug was revised up a touch to 5.06mm. Closings of single family homes fell by 3.6% m/o/m while condos/co-op sales were up 1.8%. Even though the absolute amount of homes for sale fell to the lowest since Jan, because of the sluggish sales figure, months supply ticked up to 8.5 from 8.4. The median home price fell 3.5% y/o/y. Distressed sales totaled 30% of sales vs 31% in Aug. Contract failures, defined as “declined mortgage apps, failures in loan underwriting from appraised values coming in below the negotiated price, or other problems including home inspections and employment losses,” totaled 18%, unchanged from Aug but well above 9% one year ago. Outside of the continued issues that are well known with closings, recently the loan limits of mortgages that FNM and FRE can buy or guarantee have been lowered, particularly in more expensive housing markets. This fact also likely pulled closings into the month of Aug as people took advantage before the limits were lowered. Outside of the barriers of a tough labor market, difficult access to credit and accurate appraisals, we have the secular decline in the homeownership rate. As of Q2 it was 65.9%, down from the record high of 69.2% in Q2 ’04 and compares with the record (since record keeping started in Q1 ’65) low of 62.9% in 1965 and the 45 year average of 65.4%.

The Oct Philly Fed mfr’g survey was well above expectations at +8.7 vs the estimate of -9.4 and up from -17.5. After sharply negative readings in Aug and Sept, New Orders rose 19 pts to +7.8 and Backlogs rose by 13 pts to +3.4. Shipments went from -22.8 to +13.6 while Inventories fell to -7.7 from +10.2. Employment was the key drag as it fell to 1.4 from 5.8 but the Avg Workweek rose to +3.1 from -13.7. Prices Paid and Received both fell slightly. The 6 month outlook rose to 27.2 from 21.4 in Sept and 1.4 in Aug. Bottom line, a pleasant surprise in the positive data but comes off sharp declines in Aug and Sept and the figures measure the direction of change rather than the degree. It does follow a poor NY figure on Monday and means that we need to see more regional survey’s and the national ISM number in order to get a more confirmed conclusion on the state of mfr’g.

Quote of the Day:

“Historically, a story about people inside impressive buildings ignoring or even taunting people standing outside shouting at them turns out to be a story with an unhappy ending.”

From “Thirteen Observations made by Lemony Snicket while watching Occupy Wall Street from a Discreet Distance”
-Occupy Writers

Some morning reading goodness for you:

• A long, steep drop for Americans’ standard of living (CS Monitor)
• Foreigners’ Sweetener: Buy House, Get a Visa (WSJ)
• Wall Street Has Worst Quarter Since Crisis (Bloomberg) but see Morgan Stanley’s $2.15 Billion Profit Exceeds Expectations (DealBook)
• SOLD TO YOU: Groupon May Value Itself in I.P.O. at Close to $12 Billion (DealBook) If I could short this pig at $12B valuation, I would.
• Have Regulations Hurt Bank Profits? (NYT) see also Which Bank Is the Worst for America? 5 Behemoths That Hold Our Political System Hostage (AlterNet)
• A Call to Pull Reins on Rapid-Fire Trade (WSJ)
• California reportedly subpoenas BofA over toxic securities (LA Times) see also BofA, JPMorgan Say Refund Demands Mount for Post-Bubble Loans (Bloomberg)
• France and Germany Split on Crisis Solution (Bloomberg)
• Occupy Wall Street Demographic Survey Results Will Surprise You (TPM) see also Demographics Of OWS (Fast Company)
• Fox Memo to Fox Business staff – don’t copy Fox News (Reuters)

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This is likely to be my last Steve Jobs mention for the foreseeable future::

Just as we did too many times in 2008, we are about to enter into a weekend where all eyes are on government officials and their attempt to deal with a major financial problem. All the big European guns are in Frankfurt to settle differences and come to an agreement: Draghi, Trichet, Van Rompuy, Barroso, Schaeuble, Baroin, Juncker, Sarkozy, Merkel, and Lagarde. The French want to turn the EFSF into a bank that can tap ECB funding, the Germans don’t. The Germans want a 50%+ cut in the value of Greek bonds, European banks don’t. Some want to create country credit lines, the Germans don’t. European banks want to improve their capital ratios by shrinking, EU officials want them to raise private capital now irrespective of stockholder dilution. What soup is going to be made out of this? As I’ve said before, the Germans will get what they want at the same time France fights to keep its AAA credit rating. Bottom line, since the EFSF can’t be leveraged thru direct loan guarantees because of legal reasons and the Germans don’t want the ECB involved, the parties are coalescing around a plan to have bond issuing countries borrow money from the EFSF that will then be put into escrow and would cover a % of principal in case of default. So yes, Italy for example would borrow even more money to partially backstop the borrowing of more money. It’s another example of taking on more debt to tackle a problem of too much debt but again, it’s all about buying time. Also, having the EFSF buy bonds of countries directly at auction is being discussed. In the mean time, bond yields in Italy and Spain continue higher. In Asia, the Shanghai index closed at the lowest level since Mar ’09 and helped to drag down the entire region on growth concerns. Brazil last night cut interest rates by 25 bps to 11.5% over concerns with slowing growth.

Over at DShort (and SA), Lance Roberts had a commentary about the Presidential budgets we discussed this past weekend (US Debt Accumulation by President). As did many commenters on the original post, he took issue with the numbers assembled by Spiegel (sourced from the NYT).

Unfortunately, some people seem to be repeating a significant error in assembling this data. It reflects a common misunderstanding of how Presidents execute the Federal budget. Blame the Fiscal Year versus the calendar year for the misunderstanding.

The data was assembled in the original post is not by each President’s first day in office to his last, but rather, by the budgets each President submits to Congress that gets passed. (Congress may change the budget, but rarely appropriates more than what the President requests). I cannot imagine that any fair-minded person would look at this data any other way: The debt each President creates is a function of the budgets each President submits to congress. It is not based upon the literal time they spend in office. Therefore the only objective way to view the data is BY EACH PRESIDENTS BUDGET.

This is not an insignificant point. So, rather than indulge in irrelevant measures that mislead the reader, let’s go to the actual fiscal numbers of each President’s budgets to see what there is to see.

On January 20th, 2001, George W. Bush was sworn into office – but the budget for most of the rest of that year was Bill Clinton’s, passed by the prior Congress. Barack Obama was sworn in on January 20th, 2009 – but the budget for most of that year was that of George W. Bush. Why are these so? Because the Federal government’s fiscal year runs from October 1 (of the previous calendar year) to September 30. Hence, the FY 2001 is Clinton’s and FY 2002 is Bush’s. FY2009 is Bush’s, FY 2010 is Obama’s.

The actual budgets of the Presidents and their deficits — that’s what this is about, right? — are as follows:

George W. Bush is sworn in on January 20^th, but his first budget does not take effect until October 1, 2001:

10/1/2001: Bush starting deficit – $5.8 trillion

9/30/2009: Bush ending deficit – $11.9 trillion

Bush debt contribution: $6.1 trillion

Barack H. Obama is sworn in on January 20^th, but his first budget does not take effect until October 1, 2009:

10/1/2009: Obama starting deficit – $11.9 trillion

9/30/2011: Obama ending deficit – $14.8 trillion

Obama debt contribution: $2.9 trillion

Of the $14.8 trillion in total debt as of September 30, 2011, the Bush budgets generated $6.1 trillion in deficits versus the $2.9 trillion of Obama deficits. That’s 41.2% vs 19.6% by a reasonable methodology of measuring presidential debt.

These are the actual Presidential Budget deficits — not time in office, which is simply an irrelevant measure that no fair minded, mathematically literate person would use. (Thank you to my readers who schooled me in the details of the federal government’s Fiscal Year).

A few other details worth noting:

First, these are nominal numbers, not inflation adjusted. So as time goes on, each previous presidents’ numbers appear to be smaller. (As true for Nixon as it is for Clinton). Feel free to inflation adjust them yourselves.

Second, every president’s share of the deficit goes down once they leave office. As their successors’ add more debt to the total, it makes the predecessor Presidents’ share smaller. Happened with Reagan, is happening with Bush, will happen with Obama.

Third, Obama’s share of the deficit will (obviously) go up over the next few years. An offsetting factor is he inherited an economy in recession (dated to December 2007) and a stock market in collapse.

Fourth, Bush’s total percentage of deficit creation will go down (see item #2). His mitigating factors: He inherited a dotcom collapse; And we cannot hold him responsible for the recession that started a month after he was sworn in. On the other hand, he did inherit a surplus, and made it a policy objective to get rid of that surplus. (Mission accomplished)

All data sourced from Treasury: Debt to the Penny (Daily History Search Application)

The charts below show how that simple change — from each President’s actual submitted budget versus their official term in office — change the outcome of this analysis.

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Here is one chart that may be used in our grandchildren’s economic and political history classes.   The current debt service burden on the national debt (as % of GDP) is as low as it has been in last thirty years.  As one Latin American finance minister used to say, “debt and deficits without tears.”

The chart may surprise many given the huge run up in the U.S. federal debt over the past 10 years.  The data show that the total public debt stock has increased from $5.7 trillion on September 30, 2000 to $14.8 trillion on September 30, 2011.

The net interest cost to service the debt, however, has fallen as percent of GDP due to the sharp drop in the average interest rate paid on the debt, which fell from 6.63% in 2000 to 2.886% on September 30, 2011.  Growth also contributed to the drop and as a rule of thumb if the average interest rate is below the nominal growth rate, the ratio falls.

The danger of massive borrowing at record low interest rates is that it makes the borrower extremely vulnerable to an increase in rates.     This was the case of the housing bubble.   This is the case of Greece.   Furthermore, debt and leverage is rewarded in a declining interest rate environment and punished as rates increase.   A repeat of the 30-year secular decline in interest rates is not likely.

Rising interest rates can also reduce market confidence in a heavily indebted borrower’s ability to service its debt, which in turn reduces market access and increases the rollover risk of maturing debt.   Default, bailout, or, in the case of a country with an autonomous central bank, hyperinflationary monetization of maturing debt becomes the only options.    

What puts the “acute” in an acute sovereign debt crisis is the inability to roll over maturing debt.    No doubt Secretary Geithner understands this and, as the chart illustrates, is trying to extend the average maturity of the public debt.

Borrowing at low interest rates also raises several questions.   What will happen to the U.S. budget deficit if economy picks up and interest rates return to normal?  Will the increase in cyclical tax revenues be offset and increase in interest payments on the national debt?   What are the political implications as debt service crowds out expenditures in the rest of the budget?   Did the Fed enable the borrowing binge by its zero interest rate policy?

Borrowing at low interest rates is the like the analogy of the two frogs in a pot of boiling water.  One is dropped into a pot of boiling of water, feels the pain, and immediately jumps out. The other is put into pot of cold water and as the heat is turned up enjoys itself in the Jacuzzi while boiling to death.   High interest rates are penal, low rates are not, until they begin to increase.

Greece borrowed most of its bond denominated public debt at an average interest rate of around 5.0 percent.  That was some Jacuzzi.

P.S.   If you think the U.S. is vulnerable to an interest rate shock, take a look at Japan.   Yikes!

Why Do American Protesters’ Demands Need to Be More Specific than those of the Egyptian Protesters?

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The Main Demand of the Egyptian Protesters … Throw the Bums Out

The main demand of the Egyptian protesters was that Hosni Mubarak and his cronies leave power.

Why should the demands of the American protesters be held to a higher standard?

As former IMF chief economist Simon Johnson notes, the American finance industry has effectively captured our government in a “quiet coup”, a state of affairs that is at the center of many emerging-market crises, and that recovery will fail unless we break the financial oligarchy that is blocking essential reform.

Inequality in America is worse than in Egypt (or Tunisia, Yemen or most Latin American banana republics).

The U.S. has become a kleptocracy, an oligarchy, a banana republic, a socialist or fascist state … which acts without the consent of the governed. There is a malignant symbiotic relationship between the governmental leaders and their cronies, which makes a handful rich on at the public trough (in the same way that the Mubarak family raked in between U.S. $40 and $70 billion dollars through bribes and cronyism).

Remember, Mubarak pretended that he was going to offer concessions or negotiate several times. But the protesters would have none of it. They demanded Mubarak leave.

The same government despots (Bernanke and the rest of the knuckleheads at the Fed, Geithner, and various other Goldman alums and proteges of Robert Rubin) and the same Wall Street manipulators (Blankfein, Dimon, etc.) are still on their thrones causing mischief. Nothing will change while these guys are still in charge.

Why can’t Americans – like the Egyptians – demand that the bums be thrown out?

While America’s protesters don’t need to give any list of official demands (see this, this and this), breaking up the unholy alliance which is destroying our country and removing vampires from both government and Wall Street who are most responsible for blocking reform is a perfectly good demand all by itself. As Gordon Duff – senior editor at Veterans Today – says, it’s “time for regime change” in the U.S.

The Egyptian Protesters’ Other Demands

The Atlantic provided a translation of the Egyptian protester’s demands in January:

The second demand of the Egyptians was for the cessation of emergency law. This is – believe it or not – applicable to America. We have been in a constant state of national emergency – and perhaps a suspension of the Constitution through “continuity of government” operations – since 9/11.

The third demand was for freedom. Given that Obama is trying to expand spying well beyond the Bush administration’s programs (indeed, the Obama administration is arguing that citizens should never be able to sue the government for illegal spying) and that the U.S. government uses anti-terrorism laws to crush dissent, tortures people it doesn’t like – sometimes even U.S. citizens (see this and this) – and also assassinates people it doesn’t like … even U.S. citizens (update) … we’re not very free.

Justice was the fourth demand. If you think we have justice in modern America, read this, this, this, this, this, this, this, this and this.

The fifth is for a non-military government, which serves the needs of the people. We want the same in America. See this. Americans want our troops brought home, but Obama has implemented plans for war throughout the Middle East crafted by the Neoconservatives a decade (or more) ago, and gotten us into 7 (oops …8) wars. The U.S. itself has also become highly militarized.

The sixth demand was for the constructive administration of all of the country’s resources. In fact, America’s resources are being raped by and for the handful of looters, just like Egypt’s were.

And see this.

These demands – throwing the bums in Washington and Wall Street who caused this mess, ending emergency law, restoring our freedom, justice for all and the enforcement of the rule of law (throw all of the guys who caused this crisis into “pound-me-in-the-ass prison”), a non-militarized government, and the use of the nation’s resources in a way which most benefits the American people – are pretty good for America, as well as Egypt.

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Postscript: The Egyptians are currently struggling against a brutal military who is refusing to hand over power to the civilian leadership. The situation is currently serious, and is not getting much press in the U.S.

Some argue that the military crackdown moots the successful revolution against Mubarak and shows that it didn’t do anything constructive. Others argue that the revolution against Mubarak was successful, and must be judged on its own merits, and that a second revolution is now needed against the Egyptian military. The fifth demand – formation of a non-military government – has not yet occurred. So in reality, the original revolution is still continuing.

Some also argue that the Arab and American protests are part of a destabilization campaign orchestrated by various unsavory groups. I don’t know whether or not there is any truth to such allegations. The Occupy Wall Street organizers I know are good people who are working hard to fight for freedom, justice and economic stability for the American people, and are not the pawns of any group whatsoever.

Visit msnbc.com for breaking news, world news, and news about the economy

Art Cashin of UBS reminds us:

On this day in 1987, the stock market suffered its worst crash of the 20th Century, even worse than 1929. The Dow lost 22% in a single day. Each year as the anniversary of the great ’87 crash approaches, I get requests from what has become a steadily dwindling number of ’87 veterans to repeat my follow-up poem, “The Insurer”. For survivors of October ’87, the memories are seared into our psyches not unlike veterans
of some great battle. For, as in a battle, not all who participated survived (financially). It was an amazing couple of weeks in which the wheels almost did come off the locomotive. Someday, maybe I’ll write a book about it.

Anyway, below we repeat the poem. It was written in the manner of Edgar Allen Poe’s, “The Raven”, though it lacks even a scintilla of his talent and clarity…..somewhat like a stick figure rendering of the Mona Lisa. But…..you do the best you can.

While all of the references will be familiar to veterans of ’87, I have learned some folks who read these “Comments” were in Pampers at that time. So we’ll give a quick one paragraph synopsis of the background to the ’87 crash.

A Brief 1987 Recap – Even if there had been no “October Surprise”, the year 1987 would have been a remarkable one for Wall Street. The Dow started the year below 2000 and ran to 2722 by early Fall. (A gain of nearly 38%.) The rally was breaking all the old rules. A group of guys in Chicago came up with a new rule called Portfolio Insurance ( or Dynamic Hedging) which might be synopsized as buy strength/sell weakness (we’ll explain another day). The U.S. dollar was weak and the subject of controversy. There was some conflict and confrontation in Iran (U.S. bombing Iranian oil platforms). The President’s wife and right hand had gone into the hospital for a rumored cancer operation. And there was a new SEC chairman who was misquoted in the midst of the free-fall suggesting that maybe markets should close. The misquote greased the skids.

Okay, that’s enough background. Now – “The Insurer” (after the jump)

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