Current Economic Outlook: Tough and Realistically Optimistic [View article]
There is absolutely little reason to be optimistic about our prospects when we face continuing deleveraging, an aging population an expanding government footprint, a concentration of personal incomes and unsustainable deficits and debt. These are macro structural constraints on growth; not just headwinds.
Were this not enough, we have a decaying educational system (monopoly) dominated by union workers more concerned with tenure, benefits, not stigmatize failure, rewriting history to conform to progressive ideals and improving our political sensitivity to such matters as global warming and sexual orientation.
Given this, and not surprisingly, our collective skills in reading , math and science are suffering. Among the 30 some countries comprising the OECD, we rank around 17th while China places first. This will limit our ability to extend the reaches of science, limit our ability to harness science to technology and invest in innovation. Without constant innovation we are doomed as our wage scales prevent us from being competitive on a global scale.
Now lets get granular by quoting you: This recovery is not being fueled by dangerous speculation, but rather by accommodative economic policy and stimulus from the U.S. Federal Reserve. This has led to the stabilization of unemployment numbers, foreclosures, and lending, and this relative success should remain even with the absence of stimulus, especially when one considers that the markets have almost surely baked-in the fact that stimulus is about to dry-up.
You are kidding right? None of this is true. If we strip out lending by Student Loan Marketing Association, outstanding consumer credit at the end of 2006 was $2.32 trillion and April of the current year it was $2.05 trillion. Unemployment numbers have been greatly assisted by a decline in the rate of participation in the labor force and in May be we added 54K private sector jobs, well below the 125K needed to accommodate growth in the labor force. To put this in context, we can explore how long it will take to fill the job gap at different rates of job creation. If the economy adds about 208,000 jobs per month, the average monthly rate for the best year of job creation in the 2000s, then it will take 142 months, or about 12 years to restore unemployment where it was before the start of the great recession.
As to housing the picture is mixed. Mortgage delinquencies in the first quarter were down 174 basis points when compared to a year earlier although the percentage of U.S. mortgages in delinquency increased to a rate of 8.32% on a seasonally adjusted basis at March 31, up 7 bps from the end of 2010. Default and foreclosure activity may have improved year over year but higher frequency data suggest it may be on the uptick. And there remains that pesky little problem of 2 million REO homes that have yet to be dumped on the market.
Meanwhile, the central bank released its forecasts for lower economic growth after recent economic data pointed to a weakening economy. Companies boosted payrolls in May at the slowest pace since June 2010, Labor Department figures released June 3 showed. Autos sold last month at the weakest pace since September, retail sales dropped for the first time in 11 months and manufacturing grew at the slowest pace since September 2009. The S&P/Case-Shiller index of property values in 20 cities fell 3.6 percent in March from a year earlier, the biggest year-over-year decline since November 2009. The consumer price index rose 3.6 percent for the 12 months ending in May, the most since October 2008, as food and fuel prices drove the benchmark higher. So- called core CPI, the index excluding food and fuel, rose 1.5 percent during the same period, the most since January 2010. Because of this, real incomes in May of this year fell 1.6% yoy. Commercial real estate prices dropped 3.7% M/M and 13% Y/Y in April, according to a Moody’s index that is now 49% below its Oct. 2007 peak
Closing Car Dealerships: Congress Says 'Not So Fast' [View article]
Further confirmantion that a company owned by the government and unions will not.........or will not be allowed to.........make the decisions to making the enterprise successful.
Once in the hands of the government, people outside of the administration, including members of Congress, want to play with toggle switches of policy.
The Market Needs Strong Economic Data; China's Got Some [View article]
In my view China's growth story is noy fully understood.
In a report published on Monday by the China Banking Regulatory Commission offers one reason for pessimism. According to the CBRC "the country's economy faces growing downward pressure as the global financial crisis has yet to run its course." The regulator added that "the banking industry faces 'serious' credit and market risks as the domestic economy encounters its 'most difficult year in the new century.'"
Exports are still down, electrical power generation is down around 4% YOY and commodity price surges are attributable, in part, to stockpiling.
June 2 (Bloomberg) -- Wall Street banks including JPMorgan Chase & Co., Goldman Sachs Group Inc. and UBS AG will for the first time offer hedge-fund customers protection by backing credit-default swap trades with clearinghouses by December.
Another interesting slant is that an ICE Trust is proposed to be the clearinghouse, while the CME is more established and a more logical choice.
Here's where it get real interesting. ICE would be overseen by the NY Fed and is likely to permit customized products; the CME, on the otherhand, would be overseen by the Commodity Futures Trading Commission.
Clearly, the big banks and IB's want to remain under the warm blanket of the Fed.
After reading the NYT article, which I missed until now, I find it astonishingly arrogant that the big boys who were given free reign in 2000 to create nuclear financial products, which caused much of the current financial tsunami, are the very ones arguing for limited reform.
To this point, we will learn much about Timmy through the reforms passed to regulate CDS and other exotic derivatives.
Thus far he on the side of Wall Street, proposing that trades pass through clearing houses as opposed to exchanges, which provide greater transparency.
Geithner's proposal also allows for "customized" products which would pass completely beneath the radar.
PIMCO's Bill Gross Sees a Bleak Future [View article]
While somewhat troubling, I happen to share his view as it seems most consistent with the facts.
I f you take PIMCO's view and compare it CBO forecasts, it is immediately apparent that the CBO is not buying into the new normal or simply ignoring it; they are forecasting nominal growth of 4.5% a year through 2015.
If PIMCO ir right, which I believe they are, and CBO wrong, it has enormous implications for the budget deficit.........which will only get worse. And this will spill over into tax policy, another piece of the new normal.
With the most optimistic forecasts and creative accounting, the administration is being challenged to balance the budget; Obama and the administration will be forced to raise taxes to balance the budget and will be forced to increase them further to fund healthcare reform.
Obama wants to raise income taxes for high earners, impose new levies on business and tax greenhouse emissions, but those moves would not generate enough cash to cover the cost of health care, much less balance the budget, and they have not been fully embraced by Congress. Lawmakers are considering other ways to pay for health reform, including new taxes on sugary soda, alcohol and employer-provided health insurance.
The latest revenue generating idea is the Value Added Tax, a tax imposed upon the profit generated at every level of manufacturing. Effectively it is a national sales tax cooked into the price of a finished product as opposed to 10% slapped on at the register.
Taken together all of these taxes, assuming they pass through Congress, will drain the live out of what was once a robust and vibrant economy. This will come to characterize our new normal, something the Europeans have been dealing with for some time inside their sluggish and sclerotic economies.
The Case of the Dissident Chrysler Creditors [View article]
Here is a refinement to the basic argument that creditors can make:
[U]nder certain circumstances a debtor may sell all or substantially all of its assets without making the sale part of a plan of reorganization. Where a chapter 11 debtor proposes to sell its assets or business "outside of a plan of reorganization," creditors are entitled to notice of the sale and an opportunity to voice any objections they may have with the court. However, the sale will not be subject to the same creditor disclosure and voting rights attendant to a sale as part of a plan of reorganization. Moreover, the proposed sale will be subject to the less exacting "business judgment" standard of review. For this reason, some courts refuse to approve a proposed sale outside of a plan of reorganization if it appears that the transaction is really a "sub rosa" or "de facto" plan because the terms of the sale will necessarily dictate the provisions of any future plan.
Since this is not prepackaged, I submit it may take longer than 60 days as the battle is fought in court. I don't think the administration wants to yield ultimate authority to the court, but it will take its chances if for no other reason to a send a message to those with interests in GM.
Fed Considers GM Buy-In: Digging a Deeper Hole [View article]
An argument can be made that by the governement taking equity, it would make it easier for GM to force a restructuring plan on all other creditors in a bankruptcy because the Treasury’s secured loans give it a senior status.
Alternatively, the governement is uncertain of a bankruptcy outcome and wants to play a greater role in determining the ultimate outcome.
As the author notes, the idea of a company whose ownership is comprised of a state and a union does little to stir interest or enthusiasm, making the equity stake something less than marketable.
Bank 'Stress Tests' Not So Stressful [View article]
The modifications to M2M may compound some intricacies of conducting stress tests, but in the main I believe the stress tests will reveal that our banks will need to take addtional writedowns and add to Tier1 capital.
Tie1 capital stands at around $ 1.3 trillion and of that there is a certain amount of goodwill which could make the real number closer to $1trillion. Most agree banks will need to writedown another $750 billion or so.........making the system virtually insolvent nothwithstanding profits of Wells Fargo and Goldman.
Don't underestimate the impact of these results which will be released and spun at the end of the month.
Why Obama Was Right to Demand Wagoner's Head [View article]
I am not apologist for Obama but he was running out of options.
Wagoner has continually been behind the curve and has been unable to effect or suggest policies to make GM viable in the long-term. Additionally, he lost credibility with the administration owing from delays or inability in submitting credible restructuring plans. Financial assumptions have been all over the board.
The task force ... said Monday that G.M. had to drastically pare the broadest lineup of products offered by any car company.
“G.M. has retained too many unprofitable nameplates that tarnish its brands, distract the focus of its management team, demand increasingly scarce marketing dollars, and are a lingering drag on consumer perception, market share and margin,” the task force said in its report.
GM has 60 days to force greater concessions out of its debt holders and other parties and to find new ways to deal with its shrinking market share.
Obvious to almost everyone is the need for GM to streamline its product offering while concentrating upon the most profitable unit sales with the highest growth potential. Instead of cutting eight brands down to four in the United States, G.M. may be left with Chevrolet and Cadillac.
Big Debt and Big Returns Could Be Spurring This Rally [View article]
Many of the companies with the highest debt structure are outpacing the market for the simple reason that investors believe Treasury, through CAP and the recently announced PPIP to purchase legacy assets and securities, will improve their debt and capital structure. In the eyes of some, they are not as bad as they look.
I think the problem is larger than money; I think the fundamental problem is that investors do not believe the administration has a viable plan to restore stability to the banking system and systematically deal with the core issues facing the sector.
Under both Bush and Obama, the TARP program has lacked clear goals, has been implemented in piece meal fashion and has suffered from lack of transparency. From the very beginning, the U.S. government made the mistake of addressing each major bank failure differently: aiding the takeover of Bear Sterns by JPMorgan, allowing Lehman Brothers to go bankrupt and then dumping $180 billion into AIG.
Under Geithner, there has been his underwhelming perfromance as a speaker and his inability to inspire confidence by communicating a thoughtful, comprehensive plan. Details of the stress test were slow to materialize and then there were the nagging questions of which capital ratios were to be used in guaging solvency. And there is the suggestion that purchases of preferred shares will be calibrated as losses occur.
Finally, when the government increased its stake in Citi to 36% and infused more capital into AIG, the markets took this to mean the problems are large, never ending and too big to be fixed. TARP has lost credibility with the market.
Current Economic Outlook: Tough and Realistically Optimistic [View article]
Were this not enough, we have a decaying educational system (monopoly) dominated by union workers more concerned with tenure, benefits, not stigmatize failure, rewriting history to conform to progressive ideals and improving our political sensitivity to such matters as global warming and sexual orientation.
Given this, and not surprisingly, our collective skills in reading , math and science are suffering. Among the 30 some countries comprising the OECD, we rank around 17th while China places first. This will limit our ability to extend the reaches of science, limit our ability to harness science to technology and invest in innovation. Without constant innovation we are doomed as our wage scales prevent us from being competitive on a global scale.
Now lets get granular by quoting you: This recovery is not being fueled by dangerous speculation, but rather by accommodative economic policy and stimulus from the U.S. Federal Reserve. This has led to the stabilization of unemployment numbers, foreclosures, and lending, and this relative success should remain even with the absence of stimulus, especially when one considers that the markets have almost surely baked-in the fact that stimulus is about to dry-up.
You are kidding right? None of this is true. If we strip out lending by Student Loan Marketing Association, outstanding consumer credit at the end of 2006 was $2.32 trillion and April of the current year it was $2.05 trillion. Unemployment numbers have been greatly assisted by a decline in the rate of participation in the labor force and in May be we added 54K private sector jobs, well below the 125K needed to accommodate growth in the labor force. To put this in context, we can explore how long it will take to fill the job gap at different rates of job creation. If the economy adds about 208,000 jobs per month, the average monthly rate for the best year of job creation in the 2000s, then it will take 142 months, or about 12 years to restore unemployment where it was before the start of the great recession.
As to housing the picture is mixed. Mortgage delinquencies in the first quarter were down 174 basis points when compared to a year earlier although the percentage of U.S. mortgages in delinquency increased to a rate of 8.32% on a seasonally adjusted basis at March 31, up 7 bps from the end of 2010. Default and foreclosure activity may have improved year over year but higher frequency data suggest it may be on the uptick. And there remains that pesky little problem of 2 million REO homes that have yet to be dumped on the market.
Meanwhile, the central bank released its forecasts for lower economic growth after recent economic data pointed to a weakening economy. Companies boosted payrolls in May at the slowest pace since June 2010, Labor Department figures released June 3 showed. Autos sold last month at the weakest pace since September, retail sales dropped for the first time in 11 months and manufacturing grew at the slowest pace since September 2009. The S&P/Case-Shiller index of property values in 20 cities fell 3.6 percent in March from a year earlier, the biggest year-over-year decline since November 2009. The consumer price index rose 3.6 percent for the 12 months ending in May, the most since October 2008, as food and fuel prices drove the benchmark higher. So- called core CPI, the index excluding food and fuel, rose 1.5 percent during the same period, the most since January 2010. Because of this, real incomes in May of this year fell 1.6% yoy. Commercial real estate prices dropped 3.7% M/M and 13% Y/Y in April, according to a Moody’s index that is now 49% below its Oct. 2007 peak
Closing Car Dealerships: Congress Says 'Not So Fast' [View article]
Once in the hands of the government, people outside of the administration, including members of Congress, want to play with toggle switches of policy.
The Market Needs Strong Economic Data; China's Got Some [View article]
In a report published on Monday by the China Banking Regulatory Commission offers one reason for pessimism. According to the CBRC "the country's economy faces growing downward pressure as the global financial crisis has yet to run its course." The regulator added that "the banking industry faces 'serious' credit and market risks as the domestic economy encounters its 'most difficult year in the new century.'"
Exports are still down, electrical power generation is down around 4% YOY and commodity price surges are attributable, in part, to stockpiling.
General Motors and CDS Leeches [View article]
June 2 (Bloomberg) -- Wall Street banks including JPMorgan Chase & Co., Goldman Sachs Group Inc. and UBS AG will for the first time offer hedge-fund customers protection by backing credit-default swap trades with clearinghouses by December.
Another interesting slant is that an ICE Trust is proposed to be the clearinghouse, while the CME is more established and a more logical choice.
Here's where it get real interesting. ICE would be overseen by the NY Fed and is likely to permit customized products; the CME, on the otherhand, would be overseen by the Commodity Futures Trading Commission.
Clearly, the big banks and IB's want to remain under the warm blanket of the Fed.
General Motors and CDS Leeches [View article]
To this point, we will learn much about Timmy through the reforms passed to regulate CDS and other exotic derivatives.
Thus far he on the side of Wall Street, proposing that trades pass through clearing houses as opposed to exchanges, which provide greater transparency.
Geithner's proposal also allows for "customized" products which would pass completely beneath the radar.
PIMCO's Bill Gross Sees a Bleak Future [View article]
I f you take PIMCO's view and compare it CBO forecasts, it is immediately apparent that the CBO is not buying into the new normal or simply ignoring it; they are forecasting nominal growth of 4.5% a year through 2015.
If PIMCO ir right, which I believe they are, and CBO wrong, it has enormous implications for the budget deficit.........which will only get worse. And this will spill over into tax policy, another piece of the new normal.
With the most optimistic forecasts and creative accounting, the administration is being challenged to balance the budget; Obama and the administration will be forced to raise taxes to balance the budget and will be forced to increase them further to fund healthcare reform.
Obama wants to raise income taxes for high earners, impose new levies on business and tax greenhouse emissions, but those moves would not generate enough cash to cover the cost of health care, much less balance the budget, and they have not been fully embraced by Congress. Lawmakers are considering other ways to pay for health reform, including new taxes on sugary soda, alcohol and employer-provided health insurance.
The latest revenue generating idea is the Value Added Tax, a tax imposed upon the profit generated at every level of manufacturing. Effectively it is a national sales tax cooked into the price of a finished product as opposed to 10% slapped on at the register.
Taken together all of these taxes, assuming they pass through Congress, will drain the live out of what was once a robust and vibrant economy. This will come to characterize our new normal, something the Europeans have been dealing with for some time inside their sluggish and sclerotic economies.
The Case of the Dissident Chrysler Creditors [View article]
[U]nder certain circumstances a debtor may sell all or substantially all of its assets without making the sale part of a plan of reorganization. Where a chapter 11 debtor proposes to sell its assets or business "outside of a plan of reorganization," creditors are entitled to notice of the sale and an opportunity to voice any objections they may have with the court. However, the sale will not be subject to the same creditor disclosure and voting rights attendant to a sale as part of a plan of reorganization. Moreover, the proposed sale will be subject to the less exacting "business judgment" standard of review. For this reason, some courts refuse to approve a proposed sale outside of a plan of reorganization if it appears that the transaction is really a "sub rosa" or "de facto" plan because the terms of the sale will necessarily dictate the provisions of any future plan.
'Surgical' Bankruptcy for Chrysler [View article]
Fed Considers GM Buy-In: Digging a Deeper Hole [View article]
Alternatively, the governement is uncertain of a bankruptcy outcome and wants to play a greater role in determining the ultimate outcome.
As the author notes, the idea of a company whose ownership is comprised of a state and a union does little to stir interest or enthusiasm, making the equity stake something less than marketable.
Let the bankruptcy court make the call.
Bank 'Stress Tests' Not So Stressful [View article]
Tie1 capital stands at around $ 1.3 trillion and of that there is a certain amount of goodwill which could make the real number closer to $1trillion. Most agree banks will need to writedown another $750 billion or so.........making the system virtually insolvent nothwithstanding profits of Wells Fargo and Goldman.
Don't underestimate the impact of these results which will be released and spun at the end of the month.
Why Obama Was Right to Demand Wagoner's Head [View article]
Wagoner has continually been behind the curve and has been unable to effect or suggest policies to make GM viable in the long-term. Additionally, he lost credibility with the administration owing from delays or inability in submitting credible restructuring plans. Financial assumptions have been all over the board.
The task force ... said Monday that G.M. had to drastically pare the broadest lineup of products offered by any car company.
“G.M. has retained too many unprofitable nameplates that tarnish its brands, distract the focus of its management team, demand increasingly scarce marketing dollars, and are a lingering drag on consumer perception, market share and margin,” the task force said in its report.
GM has 60 days to force greater concessions out of its debt holders and other parties and to find new ways to deal with its shrinking market share.
Obvious to almost everyone is the need for GM to streamline its product offering while concentrating upon the most profitable unit sales with the highest growth potential. Instead of cutting eight brands down to four in the United States, G.M. may be left with Chevrolet and Cadillac.
Big Debt and Big Returns Could Be Spurring This Rally [View article]
TARP: Bailout or Money Pit? [View article]
Under both Bush and Obama, the TARP program has lacked clear goals, has been implemented in piece meal fashion and has suffered from lack of transparency. From the very beginning, the U.S. government made the mistake of addressing each major bank failure differently: aiding the takeover of Bear Sterns by JPMorgan, allowing Lehman Brothers to go bankrupt and then dumping $180 billion into AIG.
Under Geithner, there has been his underwhelming perfromance as a speaker and his inability to inspire confidence by communicating a thoughtful, comprehensive plan. Details of the stress test were slow to materialize and then there were the nagging questions of which capital ratios were to be used in guaging solvency. And there is the suggestion that purchases of preferred shares will be calibrated as losses occur.
Finally, when the government increased its stake in Citi to 36% and infused more capital into AIG, the markets took this to mean the problems are large, never ending and too big to be fixed. TARP has lost credibility with the market.