INTRO
IMHO, over the past few days, there's a set of realities that have come into focus that are now painting a clear(er) picture as to where this country's headed, economically, over the next few years. It's not pretty. Frankly, I've been somewhat struggling with all of this over the course of the past week, at least with regard to my efforts to clearly spell it out for relatively easy consumption. But, during the past 24 hours, Yves Smith and Edward Harrison, over at Naked Capitalism (and Credit Writedowns), have done much of this work for me.
Yves does an especially compelling job of tying together her frustration with our economy and our government's failure to build a legislative consensus with regard to passage of a public option.
We've heard a lot of talk about a so-called imminent, technical, jobless, revenue-less, credit-less "recovery." Edward Harrison refers to it as a "balance sheet recovery," in: "
Weak Consumer Spending Will Last For Years." But, even that is now being trumped by many harsh realities that are pointing to the truth that most of the near-term recovery that will occur anytime
soon--
if at all--will primarily benefit Wall Street, our large corporations, and the status quo (i.e. the top one percent of our society that's been reaping record wealth throughout this period, all along). Some would concur with my observation that the talk of a "recovery" is really not about a recovery as 99% of this country would anticipate it, at all.
To a great extent, this actually parallels the Progressive dialogue about nationalized healthcare for all, with or without a public option, too. (Some, with whom I'd agree, would also say that nationalized healthcare without a public option is not nationalized healthcare, at all.)
##
NAKED CAPITALISM'S YVES SMITH SAYS IT TODAY
Yves Smith, who is, arguably, one of the more calm, evenhanded and liberal Wall Street pundits in the blogosphere has let loose today, in: "Is This the Start of the Big One?" If you read her Naked Capitalism blog frequently, you'll realize this is quite out of character for her.
There are some statements she makes here with which I'm not in full agreement--for instance, the Federal Reserve and the Plunge Protection Team, a/k/a "The President's Working Group On Capital Markets," simply will pull out all the stops to prevent a market crash as they have in the past--but there is much of what she says today with which I now concur.
At the very least, it's a provocative piece, and certain to spark lots of comment (I hope). (Many here who are in legitimate fits of rant, themselves, right now will most likely applaud her words about what's happened with the direction of this nation's healthcare legislation over the past few days. IMHO, and saying this again, she's saying some things that really do need to be said, even if I do not fully agree with everything she's saying.)
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THE MARKETS AND WALL STREET
However, there are overriding concepts which Yves does cover here (and, to a lesser extent, Edward Harrison, as well) with which I am in total agreement. (And, it does provide this diarist with a concise framework relating to something I was going to post, prior to opting for this approach, instead.) So, using a combination of article citations and her commentary, let's start with her thoughts about the stock market and the current state of the U.S. banking sector...
Is This the Start of the Big One?
Naked Capitalism
Yves Smith
Monday, August 17, 2009
I don't believe in market calls, and trying to time turns is a perilous game. But most savvy people I know have been skeptical of this rally, beyond the initial strong bounce off the bottom. It has not had the characteristics of a bull market. Volumes have been underwhelming, no new leadership group has emerged, and as greybeards like to point out, comparatively short, large amplitude rallies are a bear market speciality.
In addition, this one has had some troubling features. Most notable has been the almost insistent media cheerleading, particularly from atypical venues for that sort of thing, like Bloomberg. Investors who are not at all the conspiracy-minded sort wonder if there has been an official hand in the "almost nary a bad word will be said" news posture. Tyler Durden has regularly claimed that major trading desks have been actively squeezing shorts. There have been far too many days with suspicious end of session rallies.
The fall in the markets overnight, particularly the 5.8% drop in Shanghai, seems significant in combination with other factors:
More bank woes. We may be two thirds of the way through the losses, but it could also be as little as half. And despite the stress test baloney, the banking system is undercapitalized by a large margin. Even if the remaining writedowns are smaller in absolute terms than what is, past, they dig deeper into depleted equity bases. Colonial Bank, a $25 billion bank taken out last Friday, was deemed well capitalized until recently. We noted its much bigger neighbor, $140 billion Regions Bank, similarly deemed to be well capitalized, has effectively said it is insolvent How many other banks are broke save thanks to overly permissive accounting? And as we have noted before, the IMF in a study of 124 banking crises, found that regulatory forbearance, which is econ speak for letting the halt and lame limp along rather than taking them out, is far more costly, both in terms of lost growth and size of the ultimate bank recapitalization, than earlier action...
(Please NOTE: Yves pretty much concurs with the Progressive economic mantra(s) of folks like Stiglitz and Krugman.)
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CONSUMER SPENDING/CONSUMER CONFIDENCE
Ms. Smith tells us: "Consumers (are) tapped out." IMHO, she is merely stating what may be, perhaps, the most obvious problem with the so-called declarations of our "imminent recovery." The truth is, if consumers aren't spending we're left with a rather empty, so-called recovery. Historically, with consumer spending accounting for approximately 70% of this country's economy, if they're retrenching at deflationary levels, the truth is there will not be a real recovery.
Period.
Virtually every blogger on the economy acknowledges this as a harsh reality of the moment. (Even the ones talking of our imminent recovery!) And, the most recent facts underscore this. Over at Naked Capitalism, yesterday, Harrison told us: "Weak Consumer Spending Will Last For Years."
Weak consumer spending will last for years
Submitted by Edward Harrison of Credit Writedowns
Sunday, August 16, 2009
It has been my thesis for some time that we are seeing a secular change in consumption patterns in the United States. This will have grave implications for a world economy used to seeing the American consumer as an economic growth engine and consumer of first choice. Retail sales in the United States have fallen 10% since peaking in November 2007. Much of this decline represents a permanent fall in consumption by overly indebted American consumers.
--SNIP
The Balance Sheet Recession
Numerous economies seem on there way to recovery: Germany and France, Singapore, and Hong Kong, to name a few, have all posted positive economic growth. China looks likely to hit its 2009 growth target of 8%. But, the U.S., generally assumed to be a leader in recovery, is looking like a laggard. Mind you, there are other laggards like Spain and Ireland too. Why are these countries lagging? The Balance Sheet Recession.
Nomura's Chief Economist Richard Koo wrote a book last year called "The Holy Grail of Macroeconomics" which introduced the concept of a balance sheet recession, which explains economic behaviour in the United States during the Great Depression and Japan during its Lost Decade. He explains the factor connecting those two episodes was a consistent desire of economic agents (in this case, businesses) to reduce debt even in the face of massive monetary accommodation.
When debt levels are enormous, as they are right now in the United States, an economic downturn becomes existential for a great many forcing people to reduce debt. Recession lowers asset prices (think houses and shares) while the debt used to buy those assets remains. Because the debt levels are so high, suddenly everyone is over-indebted. Many are technically insolvent, their assets now worth less than their debts. And the three D's come into play: a downturn leads to debt deflation, deleveraging, and ultimately depression. The D-Process is what truly separates depression from recession and why I have said we are living through a depression with a small `d' right now.
Adding to this recent truth, we're also informed that consumer confidence has started to nosedive, once more, in: "U.S. Economy: Consumer Sentiment Falls, Prices Steady."
U.S. Economy: Consumer Sentiment Falls, Prices Steady
By Courtney Schlisserman and Bob Willis
Aug. 14 (Bloomberg) -- Confidence among U.S. consumers unexpectedly fell in August as concern over jobs and wages grew.
Today's figures, including an unchanged reading in the cost of living, underscore the damage that the biggest drop in gross domestic product in any recession since the 1930s has had on households and retailers. With little sign that $1 trillion of injections into the banking system is feeding through to inflation, Federal Reserve policy makers are forecast to sustain their efforts until a recovery is secured. Stocks tumbled.
"If consumers are lacking confidence, then they will not be able to help us spend our way out of this long, dark recession," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. "Households are still concerned about the jobs outlook, and certainly, Fed policy is also gearing off of the labor markets as no Fed has lifted interest rates while the unemployment rate is rising."
The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 63.2 this month, the lowest since March, from 66 in July. The measure reached a three- decade low of 55.3 in November. The Labor Department said its consumer price index was unchanged from June as forecast, and dropped by 2.1 percent -- the most in six decades -- from July 2008.
Bold type is diarist's emphasis.
The writing is already on the wall for the worst downturn in consumer retailing in a long time (perhaps generations, per Barry Ritholtz over at bigpicture.typepad.com his blog). Here's the NY Times piece from Saturday, "Retailers See Back-to-School Sales Slowing."
Retailers See Back-to-School Sales Slowing
G. Paul Burnett/The New York Times
Halfway through the back-to-school shopping season, retail professionals are predicting the worst performance for stores in more than a decade ...
--SNIP--
Fears about the job market have resulted in sluggish customer traffic over the last few weeks, spurring the gloomy sales projections...
--SNIP--
The National Retail Federation, an industry group, expects the average family with school-age children to spend nearly 8 percent less this year than last. And ShopperTrak, a research company, predicted customer traffic would be down 10 percent from a year ago.
"This is going to be the worst back-to-school season in many, many years," said Craig F. Johnson, president of Customer Growth Partners, a retailing consultant firm. From the National Retail Federation: NRF's 2009 Back-to-School and Back-to-College Surveys
According to the National Retail Federation's 2009 Back to School Consumer Intentions and Actions Survey, conducted by BIGresearch, the average family with students in grades Kindergarten through 12 is expected to spend $548.72 on school merchandise, a decline of 7.7 percent from $594.24 in 2008. ...
According to the survey, the economy is having a major impact on back-to-school spending as four out of five Americans (85%) have made some changes to back-to-school plans this year as a result. Some of those changes impact spending, with 56.2 percent of back-to-school shoppers hunting for sales more often, 49.6 percent planning to spend less overall, 41.7 percent purchasing more store brand/generic products and 40.0 percent are planning to increase their use of coupons. Others say the economy has impacted lifestyle decisions, with 11.4 percent saying children will cut back on extracurricular activities or sports and 5.7 percent saying that the economy is impacting whether their children will attend a private or public school.
"The economy has clearly changed the spending habits of American families, which will likely create a difficult back-to-school season for retailers," said Tracy Mullin, President and CEO of NRF.
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MORTGAGES, FORECLOSURES AND HOUSING
Yves tells us: "Foreclosures (are) set to rise." She reminds us that, contrary to the "happy news," there is no housing bounce; there is so much inventory out there, that a quick review of the history of past severe financial crises in this country dictates a minimum of five years for housing to recover, at least.
Right now, almost one out of three homeowners with mortgages are underwater, owing more on their homes than their current market valuation. Deutschebank has just come out with a study that tells us that 48% of homeowners will be underwater by 2011. (See: "Frank Veneroso on Mortgage Armageddon.") Common sense--and statistical fact--dictates that when homeowners are faced with this reality, they: stop buying discretionary goods; they buy less in general, and/or, they have a higher chance of just walking away from their homes, allowing them to slip into foreclosure. (See: "Home Price Declines Accelerate in Second Quarter.")
Home Price Declines Accelerate in Second Quarter
By Kathleen M. Howley and Brian Louis
Aug. 12 (Bloomberg) -- Home price declines in the U.S. accelerated in the second quarter, dropping by a record 15.6 percent from a year earlier, as foreclosures weighed on values.
The median price of an existing single-family home dropped to $174,100, the most in records dating to 1979, the National Association of Realtors said today. Total sales rose 3.8 percent to a seasonally adjusted annual rate of 4.76 million from the first quarter and fell 2.9 percent from 2008's second quarter.
Prices fell in 129 out of 155 metropolitan areas from a year ago and 39 states experienced sales increases from the first quarter, the Chicago-based realtors group said. Sales in U.S. housing market at the heart of the global recession are beginning to stabilize, said Patrick Newport, an economist for Lexington, Massachusetts-based IHS Global Insight.
"I don't think we're at a bottom yet in home prices," said Scott Anderson, a senior economist at Wells Fargo & Co. in Minneapolis. "There's also a pretty big shadow supply of houses. People are kind of waiting for the bottom but there's a pent-up supply out there."
Home prices are falling even as a survey of economists indicates that the U.S. economy is recovering from the worst recession since the 1930s...
As these and other articles also note, the Summer months are, historically, when the number of real estate transactions increase; and that's happened, even this year. What's different is that demand is for foreclosures, and price pressure in the marketplace is intensively downward (and/or negative), as a result of this.
Combine these facts with the reality that the federal first-time homebuyer tax credit ($8,000) is about to expire (in October, with closings scheduled for folks whose offers are being accepted now), and even demand for foreclosures is anticipated to diminish in coming months.
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SHORT-TERM STRUCTURE OF US FUNDING
Yves Smith continues on to describe the "Fed in a box." She points out that in some ways the government's become nothing more than a massive bank, "borrowing short and lending long." She explains to us that either interest rates are allowed to rise, or we'll end up like the Japanese, in limbo for a decade or more.
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MORE AIG LOSSES
More AIG losses," are coming, per Smith's sources. If publicized--and we can count on that she tells us--it'll certainly harm "the collective mood."
I'd also like to add the following to Smith's "list..."
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THE "NEW NORMAL," GDP, INCREASING UNEMPLOYMENT
As for the other 99% of us on Main Street--those who own small businesses and everyone else who either works in/for a small business or for the status quo--we have been quietly witnessing a decline in our own standard of living during this same period. We're told we'll have to just deal with a "new normal," which is not-so-technical speak for "let them eat cake," or, something akin to that which I just read on this blog, this past Saturday, related to accepting populist, political overtures designed to do little more than placate us, while the status quo goes about "their business," (as Matt Taibbi would probably concur, with the status quo's "business" being primarily focused upon sucking the lifeblood from the other 99% of our society) in: "'Put the Jam on the Bottom Shelf where the Little Man can Reach it' NOW!"
Here's more on the harsh reality of what our "new normal" really means, going forward: "New Normal of 2% GDP Growth Coincides With Bullish Biggs..."
New Normal of 2% GDP Growth Coincides With Bullish Biggs
By Matthew Benjamin
May 26 (Bloomberg) -- Americans may have to get used to unemployment greater than 8 percent for the first time since 1983 and an economy that won't grow much beyond 2 percent as a consequence of the lost confidence in consumer credit that shattered financial markets.
By this time next year, "the market will realize that potential growth for the U.S. is no longer 3 percent, but is 2 percent or under," Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said in an interview with Bloomberg Radio.
"We are transitioning to what we call at Pimco a new normal," El-Erian said. Pimco, in Newport Beach, California, is the biggest bond fund manager with about $756 billion in assets.
The U.S. financial crisis and recession have produced lasting shifts in consumer spending and savings reminiscent of the 1950s that may crimp profits and productivity, said David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto and former chief North American economist at Bank of America Corp.
"This is going to be a new era of frugality," Rosenberg said. "This isn't some flashy two- or three-quarter deal. This is a secular change in household attitudes."
The last time U.S. gross domestic product grew at an annual rate of under 2 percent over a decade was the 1930s, when it expanded at an average 1.3 percent. In the 30 years before the recession that began in December 2007, the average was 2.9 percent. Over the past 15 years, it was 3 percent.
And, here's what our "new normal" means, right now:
Our new normal UNEMPLOYMENT: "Unemployed Workers Starting to Exhaust Extended Benefits."
Unemployed Workers Starting to Exhaust Extended Benefits
Saturday, August 15, 2009
by CalculatedRisk on 8/15/2009 06:50:00 PM
From Jack Katzanek at the Press-Enterprise: Time -- and benefits -- running out for Inland jobless (ht Rob Dawg)
... According to the state Employment Development Department, the number of Inland residents whose benefits already have been exhausted is negligible. Only 121 people -- 67 in San Bernardino County and 54 in Riverside County -- were in that situation at the end of July.
But the number of people facing that predicament could grow exponentially in the coming weeks.
In Riverside County, it is estimated that 12,000 people risk losing their benefits before the end of the year, and 10,500 more in San Bernardino County.
...
A bill to extend unemployment benefits for 13 weeks was introduced in Congress July 30 by Rep. Jim McDermott, D-Wash. It would apply to about 20 states with unemployment rates higher than 9 percent.
...
[Mike DeCesare, McDermott's spokesman's] research indicates that more than 200,000 people will lose their benefits each month starting in September.
emphasis added The Inland Empire could go from 121 workers having exhausted their benefits now to over 21,000 by the end of the year. Ouch.
The National Employment Law Project estimates that half a million workers will have exhausted their extended benefits by the end of September, and a total of 1.5 million by the end of the year. These numbers are about to increase sharply.
A NY Times editorial from last week: "Job Market Blues."
Job Market Blues
Published: August 7, 2009
According to the Labor Department's latest jobs report, employers eliminated 247,000 jobs last month. And that's the good news. Job loss in July was at its lowest level since last August, and it would have been much worse if not for recent federal stimulus spending.
Still, the job market is in serious decline. No one knows when it will hit bottom, but when it does the American work force will find itself in a very deep hole.
As of July, the economy was coming up short by 9.1 million jobs, including 6.7 million jobs that have been axed since the recession began 20 months ago, and 2.4 million jobs that were needed to absorb new workers, but were never created.
And that is not the only sign of labor-market weakness. At 9.4 percent, the jobless rate for July was slightly lower than in June. But the decline doesn't reflect an improving jobs picture. Rather, it is the result of a contraction in the size of the labor pool -- 422,000 people dropped out of the work force altogether last month. That is the second biggest surge of dropouts since the start of the recession.
In a strong economy, dropping out may be a lifestyle choice, like deciding to become a stay-at-home parent. In today's weak economy, it invariably reflects a deep and prolonged lack of job prospects.
Millions of out-of-work Americans need more help...
More reality, from Floyd Norris and Paul Krugman, respectively, underscoring the same thing, also from just the past 10 days: "Job Growth Lacking in the Private Sector," and "Jobs paradox?"
Finally, lest we have any doubt about where Smith's going with all of this, today...
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THE ADMINISTRATION'S LACK OF POLITICAL RESOLVE
From Yves, in closing...
Finally, Lack of political leadership. The health care fiasco is going to be a defining event for Obama, in a negative way. His inability to respond effectively to simply absurd distortions of his plan and of the record of public supported programs overseas (including that many are government funded but still privately run, for instance) may dispel the illusion that he is or can be an effective leader. His banking policy, which is vital to recovery, became hostage to Geithner and Summer's deep loyalty to the industry, and his lack or interest in rocking any boats. All Team Obama has done on the banking front is write a lot of blank checks, hold some bogus "stress tests" in lieu of doing the real thing, and raise a stink on a few symbolic issues to try to paper over the failure to embark on real and badly needed reforms.
--SNIP--
If the economy takes another down leg, it will further confirm his inability to do anything other than compromise and try to spin it as success. The confidence game worked when he was a new President, but nice talk and not much action is already wearing thin. We could use someone at the helm who is willing to plot a course and stick with it, and instead what we have is someone long on charisma and short on resolve.
We're living within a very critical moment of our nation's history.
Bold and decisive action is desperately needed. The time is NOW!