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By Jeff Harding July 30th, 2010
The Bureau of Economic Analysis (BEA, a part of the Commerce Department) came out with its long awaited report on GDP for the second quarter and the results show a sagging economy. GDP weighed in at a positive 2.4% growth for Q2, but that is against a backdrop of an upwardly revised Q1 of +3.7%. This is something I have been expecting and it appears that more recent data is declining even more.
It has been my premise that (1) fiscal stimulus would only give a temporary boost to GDP without leaving any permanent economic growth, and that (2) the business cycle is stalling out because the government has thwarted the underlying factors necessary for a recovery.
The headline from the mainstream media has been for the most part that the reason GDP declined from Q1 is that exports have dropped and that imports have risen. In calculating the “national account” the BEA nets out imports and exports: imports result in payments to foreign sellers and exports result in payments from foreign buyers. Rising exports have been largely due to the surging value of the dollar in Q4-09 and Q1-10 as troubles in the eurozone caused institutions to dump euros for dollars. Europe’s troubles caused the euro to decline relative to the dollar and this made U.S. exports more expensive U.S. exports fell off. Further, Europe’s problems caused them to cut back on their imports that hurt not only U.S. exporters but also large exporters like China. As you can see, the euro is starting to turn around as the foreign exchange markets believe Europe is solving its problems. This may help exports if European companies recover.
But the decline in exports is not the real story behind GDP. The real story is the fact that the production cycle is stalling out because of a lack of consumer demand. … Continue reading GDP Sags In Q2 2010
By Jeff Harding July 29th, 2010
Banks Don’t Want Your Money
After the fallout from the crash of 2008, banks, especially regional and local banks, are finding they need to adapt to a profit squeeze. Add on top of this new regulations from the financial overhaul bill, and these banks are going to look more like banking utilities than profit centers.
According to a report released by Accenture:
“The subprime segments that drove very high margins prior to the crisis have effectively disappeared,” said the study, which was issued last week. “They are too expensive for many banks to serve now that their risk profile has been fully recognized and priced in.”
Of the 46 banking executives contacted, just under half told Accenture that the profitability of their average customer had dropped 5% to 11% since the crisis began. A further 11% cited a drop in profitability of greater than 15%. And nearly two-thirds of the executives reported an increase in “shopping around” for services, meaning customer-bank relationships are becoming more volatile.
It turns out that customers want more control over their banking activities.
A look at earnings reports show that bank earnings are improving, but:
These small banks continued to get hit with nonperforming loans and chargeoffs, but they did not take as bad of a beating as they did the previous quarter and a year earlier. Median net income rose by 4%-9.6% from the previous quarter depending on the region, according to a report from Sandler O’Neill & Partners LP and SNL Financial LC. At the same time, regional declines in nonperforming loans ranged from 2.3% to 9.5%.
… Continue reading Are Banks Are Becoming Utilities?
By Jeff Harding July 29th, 2010
This was reported today in the Wall Street Journal. I have nothing to add to this except: Yikes!
Some excerpts:
One of the nation’s last sources of no money down financing for home loans appears to be making a comeback: Legislation that restores a Department of Agriculture home-buying program is headed to President Barack Obama’s desk for signature.
The legislation makes the USDA’s Single-Family Housing Guaranteed Loan Program self-sufficient, the National Association of Realtors reports. Borrowers will have to pay a higher “guarantee fee” of 3.5%–essentially upfront mortgage insurance–but the fee can be folded into the mortgage.
Buyers won’t mind paying a bit more in fees, says Sue Botelho, a senior mortgage advisor with Waterstone Mortgage Corp. in Ft. Walton Beach, Fla. “It’s great news,” she said. “It’s a huge part of my business. I am thrilled.” …
… [T]he program, offering no-money-down loans in certain parts of the country for low- and middle-income borrowers, exhausted its $13.1 billion funding earlier this year, leaving some would-be buyers fearful their financing would fall through. USDA loans were particularly popular this year as first-time buyers tapped the government’s federal home buyer tax credit. They have until Sept. 30 to close. …
… The USDA program is considered safer because up to 90% of the purchase amount is guaranteed, meaning the agency will pay should the borrower default.
The USDA has previously said that last fiscal year’s foreclosure rate was 1.72%, well below the Federal Housing Administration’s 3.32%. Borrowers also can’t make more than 115% of a county’s median income, preventing McMansion-sized loans: The average USDA loan is $112,000.
The strong guidelines weed out potentially troublesome borrowers, Ms. Botelho said. “When they approve a loan, it’s a very, very good loan,” she said.
By Jeff Harding July 28th, 2010
The Fed came out with its Beige Book today, a summary of economic activity for June to mid-July in all of its twelve districts. The report overall noted “modest” growth if not slowing growth. According to their report:
Economic activity has continued to increase, on balance, since the previous survey, although the Cleveland and Kansas City Districts reported that the level of economic activity generally held steady. Among those Districts reporting improvements in economic activity, a number of them noted that the increases were modest, and two Districts, Atlanta and Chicago, said that the pace of economic activity had slowed recently.
Of note in their report:
Commercial and industrial real estate markets continued to struggle in all twelve Districts. Overall, vacancy rates were flat to slightly increased and continued to exert downward pressure on rents.
Nearly all Districts reported sluggish housing markets in the months since the homebuyer tax credit expired on April 30.
Reports on retail sales during the early summer months were generally positive, although in most Districts the increases were modest.
Manufacturing activity in most Districts continued to move up since the last report, although the pace of activity slowed or activity leveled off in the New York, Cleveland, Kansas City, Chicago, Atlanta, and Richmond Districts.
Reports on banking conditions were largely mixed across the Districts.
Most Districts reporting on credit standards continued to note that lending standards remain restrictive.
The Fed doesn’t like to sound too negative in its reports, and it won’t indicate a slowing until we are well into it. I have reported that a slowing economy is a trend. Chairman Bernanke said last week: … Continue reading Fed Reports A Sluggish Economy
By Jeff Harding July 28th, 2010
Before I start I wish to say that I highly respect David Rosenberg at Gluskin Sheff, one of the few mainstream economists to call the crash, and whose observations about the markets are always worth reading.
This morning he came out with a long-term analysis of inflation which I don’t think is right. I urge you to read his commentary, below, but in general he sees one to two years of continuing “deflationary” pressure that favors the bond market and he says “inflation” will be at zero. He then see the beginning of “inflation” as the result of war and the need of government to fund it. The result, he says, will be high inflation and perhaps hyperinflation.
While you would think as a fellow doom and gloomer I would hop on his bandwagon, but for the most part I think Rosenberg’s analysis of the forces behind inflation and deflation are wrong. He uses historical analysis to prove his point, but he doesn’t explain the underlying factors that cause inflation or deflation, which, as I have discussed before, have to do with increases and decreases of money supply by the Fed.
He assumes that Boomers will cut back on consumption and increase savings. I agree and I went into detail on that in my Megatrends and other articles. He says that will result in “deflation.” But deflation is a monetary phenomenon, not a savings problem or lack of consumption problem. We will see deflation because money supply is declining, and it has been declining since late last year. … Continue reading The Problem With Rosie On Inflation
By Jeff Harding July 28th, 2010
By Jeff Harding July 27th, 2010
There have been a number of articles lately about the efficacy of Keynesian theory. You see this discussed in the mainstream media because they, for the most part, have no real understanding of other economic theories so they have no larger frame of reference from which to compare Keynes.
Today’s Wall Street Journal has yet another article by reporter Jon Hilsenrath that attempts to raise the central question about whether or not Keynesian fiscal stimulus works. I discussed his last article on deflation in “Economists ‘Don’t Understand Deflation.’”
I suggest you read the Journal article to get an idea of what the controversy is. I have written about Keynesian economics many times and I do not wish to repeat myself again. But the main points are that: it has never been proven to work in any crisis, it fails as a theory under analysis, and it causes long-term harm to the economy. Hilsenrath makes many errors in his analysis. Further he fails to grasp what Keynesian theory is, what Monetarism really is, and he has no understanding of Austrian theory.
Whatever.
I recently read an article entitled, “The Self-Defeat of the Keynesian Cross” by Pedrag Raysic, a Ph.D candidate in economics. It is a devastating critique of Keynesian theory based on testing its internal logic. He concludes that if you take it to its logical conclusion, it is self-defeating. … Continue reading Why Keynesian Economics Is Internally Inconsistent
By Jeff Harding July 27th, 2010
UPDATED
Interesting things have been happening in the real estate markets.
Residential
The home sales index spike from the home buyer tax credit has almost run out. If you didn’t have a deal in escrow by April 30, you didn’t get the credit. The time to close a deal was extended to September 30. The predictions were that we’d see a fall in July activity which is exactly what is occurring.
The reports that are currently coming in don’t yet reflect July sales which will show a drop in sales. For example, the Case-Shiller report came in today for May, 2010, but that report is a three-month average of prices. The report said prices were up 1.2% MoM, and 5.4% YoY. That was the peak of housing credit driven sales. According to S&P which publishes the index:
“While May’s report on its own looks somewhat positive, a broader look at home price levels over the past year” doesn’t show that the housing market “is in any form of sustained recovery,” said David M. Blitzer, chairman of S&P’s index committee. “Since reaching its recent trough in April 2009, the housing market has really only stabilized at this lower level.”
Last week the National Association of Realtors reported that June sales of existing homes declined 5.1% from May but up 9.8% YoY. Sales declined 9.3% in the west. Inventory rose in June:
The supply of homes available for sale in 27 major metropolitan areas at the end of June was up 3.7% from one month earlier, according to figures compiled by ZipRealty Inc., a real-estate brokerage firm based in Emeryville, Calif.
Ivy Zelman of Zelman Associates says for the past 27 years inventories have declined in June by 0.5%.
… Continue reading Is The Real Estate Market Turning Around?
By Jeff Harding July 26th, 2010
I’ve noticed more articles expressing concern about deflation. In addition to this article today from the Wall Street Journal (Deflation Defies Expectations—and Solutions), there was another one today from the L.A. Times. The Journal piece was written by a good reporter, Jon Hilsenrath, but it demonstrates no real understanding of what deflation is. In fact this is the premise of the article that “economists” don’t really understand deflation:
The old bogeyman of deflation has re-emerged as a worry for the U.S. economy. Here’s something else to fret about: After studying more than a decade of deflation in Japan, economists have slowly realized they have no idea how it works. …
Economists don’t have good answers. “We don’t know how deflation works,” says Adam Posen, a member of the Bank of England’s monetary policy committee who has been studying Japan since 1997. “We don’t have a way of rationalizing steady, several-year flat deflation,” he says.
Actually some economists do understand deflation. Keynesian economists don’t understand business cycles in general, inflation or deflation. Inflation and deflation are monetary phenomenon. If money supply increases, that is inflation. The ensuing and inevitable rise in prices is one of the results of inflation, not the cause. Inflation decreases the value of the currency which most people see as rising prices. It does a lot of other bad things as well.
Deflation is the opposite: it is a decline in money supply. The result is that the purchasing power of the currency goes up. In a deflation, creditors are at an advantage as loan payments don’t go down, but the debtor has to pay in dollars that are more valuable, leaving him in a worse position; in inflation debtors are favored because they can pay creditors with cheaper dollars.
Hilsenrath brings up the quandary of the Phillips Curve which says you can’t have inflation with excess industrial capacity: until industrial capacity is near full utilization, manufacturers can’t raise prices. The only problem is that this isn’t true. Stagflation in the 1970s showed that you could have excess capacity and inflation. This is because it doesn’t have anything to do with prices, but rather money supply. … Continue reading Economists ‘Don’t Understand Deflation’
By Jeff Harding July 24th, 2010
Let the Chinese produce inexpensive consumer goods for us. We benefit from it as much as they do.
We export know-how.
Ignore the anti free traders who think we’re being left in the dust. Free trade is a win-win.
This information is from the U.S. Chamber of Commerce’s Chamber Post:
The World Trade Organization (WTO) today issued its World Trade Report 2010, an annual publication that offers definitive statistics on international trade. In recent months, media reports have widely described China as the world’s largest exporter, but today’s report indicates that the United States remained the world’s largest exporter of goods and services through 2009. China has indeed overtaken the United States and Germany to become the world’s largest exporter of merchandise.
| Exports in 2009, billions of U.S. dollars |
|
Merchandise |
Commercial
Services |
Total |
| U.S. |
1,057 |
470 |
1,527 |
| Germany |
1,121 |
215 |
1,336 |
| China |
1,202 |
129 |
1,331 |
Source: WTO, World Trade Report 2010, pp 28-29.
Thanks to Cafe Hayek for this.
By Jeff Harding July 23rd, 2010
Here are the latest bank closings for this week as announced by the FDIC. This puts bank closings at 103 this year.
I wish to remind readers that I intend these announcements to be a positive thing for the economy. By trying to prevent bank closings, needed liquidity is thwarted from reaching the economy. This is one of the major factors hindering a recovery. Thus when you see the FDIC closing a bank, capital is no longer bring wasted and tied up in failing enterprises. It is a sign of a recovering economy.
Home Valley Bank, Grants Pass, OR
SouthwestUSA Bank, Las Vegas, NV
Community Security Bank, New Prague, MN
Thunder Bank, Sylvan Grove, KS
Williamsburg First National Bank, Kingstree, SC
Crescent Bank and Trust Company, Jasper, GA
Sterling Bank, Lantana, FL
By Jeff Harding July 23rd, 2010
The markets behave as if everything is just fine. This week the S&P 500 was up 7.3% for the month (from 1027 to 1102), corporate earnings have been looking good, retail sales inched up last week, the CPI is low, interest rates are low, Dr. Bernanke is ready to pump money into the economy if things go awry, most European banks passed their stress test, and we’ve got a new financial markets regulation bill which will save us from economic collapse.
Yet most folks don’t believe things are getting any better. What’s wrong?
Here’s some data I gathered for the week of economic reports that might shed some light on the topic:
The U of Michigan’s consumer sentiment index crashed: it dropped from the June high of 76 to a mid-July reading of 66.5. About 10 points. This could mean that consumers are pulling back, according to the data.
The latest Conference Board’s Index of Leading Indicators turned negative, down 0.2% in June. In May it was up 0.6%. According to my report, if you take the interest rate spread out of their index, it would have fallen 0.6%. (See Leading Indicators Have Turned South.) … Continue reading If Everything Is So Good, Why Am I Feeling So Bad?
By Jeff Harding July 21st, 2010
The Mandarins have finally spoken and it is law. I’m referring to the just signed financial reform bill. In thinking about how this was accomplished and the nature of Washington’s power, it brought an uncomfortable thought that we are seeing a privileged few make vast decisions for us without the permission of their subjects. It reminded me of China. Ostensibly we have a democracy but it doesn’t always work. Our Constitution was breached almost from the beginning by those who favored a powerful central government. Thus, at this point, there is very little stopping our federal government from doing what it wants.
Representatives and Senators now have tremendous power and influence over our lives. And they are for the most part permanent holders of that power. While political changes occur in the U.S., and I am remaining hopeful yet cynical about the November elections, it almost doesn’t matter any more if they are Republicans or Democrats since they both wish to wield this tremendous power for our “benefit.” Most Republicans I talk to don’t really understand economics, history, or the Constitution. Most Democrats don’t seem to care as long as they achieve their intended goal. … Continue reading The Mandarins Speak
By Jeff Harding July 20th, 2010
Loans Fall; Credit Continues to Contract UPDATE
The megabanks have settled back to earth as they all reported very modest Q2 gains as compared to Q1. Today Goldman Sachs reported that their profit declined 82% in Q2. Previously commercial banks JP Morgan Chase, Citigroup, and BofA all reported declines.
The headline for the group is Goldman because of their (former) stellar reputation. They had $1.15 billion of settlements related to their SEC fraud allegation settlement of $550 million and a tax settlement with the UK regarding the taxation of bonuses. If you strip out the settlements they would have had EPS of $2.75 vs. $4.93. What was really interesting was that their mainline business, trading operations, was off 39%; apparently they bet wrong on market volatility because they didn’t see the euro crisis coming:
Mr. Viniar [ CFO and sometime Montecito resident] said the firm was caught off guard by the market’s volatility. Goldman’s equity derivatives were on the wrong side of bets that stock-market volatility would ease during a quarter when equities had wild swings.
“We didn’t hedge it fast enough, let’s put it that way,” he said. “We were reducing position size and hedging things, but things spiked really dramatically really fast.”
I wonder how they measure risk and I wonder if their risk models have changed, post-crash.
Enough of Goldman, what is significant in looking at the economy is that the commercial banks were down. Almost every one of them.
Let’s start with the better news. This morning, Wells Fargo reported earnings were up 20% QoQ, and up 3% YoY. They did well in most areas and reported overall gains in lending. But, digging a bit deeper, you will see that total loans declined 7.5% YoY and 3.2% from Q1. They said they saw improving loan conditions in the last 30 days and their charge offs are declining, a 16% QoQ improvement. “On the commercial side, for the first time this year, we saw an increase in lending activity and line usage.” … Continue reading Banks Still Aren’t Lending; Credit Crunch Continues
By Jeff Harding July 19th, 2010
I have been following leading indicators for a while and today David Rosenberg ran some forecasts from his favorite leading indicator measure, the Economic Cycle Research Institutes’s (ECRI) Weekly Leading Index (WLI). Their chief economist, Lakshman Achuthan, is frequently seen on CNBC’s programs. His WLI is turning down and has been for a while.
Rosenberg said:
The growth rate on the ECRI leading index did it again! It sank further into negative terrain, now at -9.8% during the week ending July 9, down from -9.1% the prior week. This was the tenth deterioration in a row and the growth index is now negative for six straight weeks. We have never failed to have a recession with the ECRI at current levels but there is also inherent volatility in the index that requires acknowledgment. Our reckoning is that in the past few weeks, the index has gone from pricing in even-odds of a double-dip to two-in-three odds. It may take a while, but Mr. Market will figure it out before long.
I’ve been forecasting a downturn for some time but for different, more fundamental reasons, but the data seem to be bearing me out. … Continue reading Leading Indicators Have Turned South
By Jeff Harding July 16th, 2010
Here are the latest bank closings for this week as announced by the FDIC.
I wish to remind readers that I intend these announcements to be a positive thing for the economy. By trying to prevent bank closings, needed liquidity is thwarted from reaching the economy. This is one of the major factors hindering a recovery. Thus when you see the FDIC closing a bank, capital is no longer bring wasted and tied up in failing enterprises. It is a sign of a recovering economy.
Mainstreet Savings Bank, Hastings, MI
Olde Cypress Community Bank, Clewiston, FL
Turnberry Bank, Aventura, FL
Metro Bank of Dade County, Miami, FL
First National Bank of the South, Spartanburg, SC
Woodlands Bank, Bluffton, SC
By Jeff Harding July 15th, 2010
President Obama is off pitching his stimulus plan today in Michigan:
The trip, part of a campaign dubbed “Recovery Summer” by the White House, is intended to reassure Americans the U.S. economy is returning to a sound footing in advance of the fall elections. …
On Wednesday, the White House released new data saying a surge in Recovery Act funding had raised economic growth in the second quarter of 2010 by as much as 3.2% and boosted employment by as many as 3.6 million jobs, compared to estimated levels in the absence of the stimulus. http://dailycapitalist.com/2010/07/14/how-to-start-an-economic-recovery/
I wonder if President Obama reads the same data as I do? Aside from the fact that the numbers the White House presented are false, the data are revealing the beginning of an economic slowdown which are clearly contra to the Administration’s claims that the economy is growing. The Fed is clearly worried as shown below in the minutes of its June meeting. In fact they expect years of slow growth. I wonder if Mrs. Romer talked to Chairman Bernanke before she boasted about her fake numbers?
Here is an overview of data that came in just this week that reveals a slowing economy:
… Continue reading Obama Says It’s The “Recovery Summer” But The Fed Says It Will Take 5 or 6 Years
By Jeff Harding July 15th, 2010
I am always amused when Bloomberg or The Wall Street Journal has headlines like this:
“Economists Express More Optimism Than General Public,” or “Economists Split Over Financial Overhaul Bill.”
Are we to expect that economists agree on everything? Are economists any better at assessing the economy than the people who are the economy? Why do they even write these useless headlines?
These headlines are almost as amusing as the ones that say, “Economists Surprised at Data,” or “Data Unexpected By Economists.”
By Jeff Harding July 14th, 2010
UPDATED
Regular readers of The Daily Capitalist know I think we are headed for a decline in economic growth in 2010 and that the data is starting to show this.
Why isn’t our economy recovering? I ask that question often and have written about it many times. Perhaps a better question is: what needs to happen in order to make our economy grow? I offer some solutions.
There are many problems seen as hindering recovery. Here are the common ones I wish to examine:
- Too much debt encumbering consumers;
- The lack of consumer demand to fuel growth;
- Too much debt encumbering banks; and
- The government’s interference in the economy.
There are a host of other issues that are also important but let me focus on these points and show what can be done to fuel a recovery.
Numbers 1 and 2 (debt/demand) are related.
Our economy is consumer driven and we are reminded over and over again that consumer consumption is 70% of our economy. To put this in perspective, for Germany it is about 57% of GDP.
Our economy is built on consumption which is fine as long as it is supported by real savings, productivity growth, and wage growth. The data reveal that most of the consumption binge of the boom phase of this current cycle was financed directly or indirectly by debt related to rising home values. Personal savings declined to almost zero. Now savings are back up to 4%.
Here is why this is seen as a problem for recovery: PCE will decline as consumers pay down debt and increase savings. Spending drives the economy and the economy will decline.
Is this really a problem?
Saving is a process necessary for a recovery. Consumers are acting rationally to uncertainty and they will give us the signal when they are ready to spend again. About $10 trillion in household net worth was wiped out during the bust. Until consumers see unemployment decrease, wages go up, and their debt go down, they aren’t going to spend anyway.
But savings is never bad for an economy. Economists often fail to look at the other side of savings which is an increase in capital necessary to fuel future growth. In a normal cycle, increased savings reduces interest rates, which sends a signal to producers of capital goods that consumers don’t want to buy consumer goods right now, and that there is opportunity for them to increase production of durable goods such as machines, homes, and basic equipment. They use the loan funds to pay workers who will spend which, as this capital works its way through the economy, will create new and real economic activity.
While manufacturers have been increasing production in response to normal business cycle activity (inventory recovery; weak dollar advantages), they are just utilizing current capacity. If they wanted to expand, unless they are a large company with access to money center capital, they now report they are having trouble getting a bank loan.
What does this mean? It means they can’t expand and hire new workers whose spending will take up the slack from consumers who save. The government and the Fed have confused our ability to make economic decisions because they are artificially lowering interest rates.
What can we do to fix this? Savings is the fix. There is nothing that should be done to prevent this from occurring. In the longer term it will prepare the economy for new growth. See No. 4 for why flogging a dead horse is harmful to recovery.
The question is: why can’t we get loans?
… Continue reading How To Start An Economic Recovery
By Jeff Harding July 11th, 2010
Last weekend I attended Freedom Fest, a libertarian-ish convention in Las Vegas. You know, from Steve Forbes to Peter Schiff. I was there for a one day session with the Mises Institute but also wandered in and out of other lectures, perused the vendor section, and cruised the floors of Bally’s and Bellagio. Here are a couple economics vignettes of things that interested me about Las Vegas.
Tale No. 1 Las Vegas
Because I wasn’t staying at Freedom Fest’s venue, Bally’s, but rather at a friend’s place, I managed to take about 8 cab trips back and forth (you can’t walk around when it’s 110°) and struck up conversations with my cabbies. All, except for two, were immigrants from Haiti, Ethiopia, Iran, West Indies, Central America, and one who refused to identify his country of origin. Without exception they all said business was slow, tips were down, and they were making far less money than during the boom.
But here’s the saddest tale, and I am told, far from infrequent. My cabbie Tony, 50 years old and born in the USA, was no longer a home owner. He had a home, bought during the boom, maxed out his loan at 90% of value, and watched it go down from the $305,000 he paid to “I don’t know what it’s worth today. I gave it back to the bank.”
As gambling in Vegas was seen as a frivolous pastime, his cab business declined at well–he and his partner had 5 cabs and his employees drove the other cabs in double shifts. He lost those as well when he couldn’t make the bank payments. Oh, and he and his wife got divorced, and then she lost her job as well. “I got nothing, but I love my family,” Tony said. It gets worse.
His father also got into the “game” and bought 3 homes. The last one was at a developer’s “lottery” for about $800,000. When he mentioned that dad was the lucky buyer at a lottery, I knew right where the conversation was going. Dad lost all three homes and is now broke. Without his Social Security check, he’d be living with Tony. … Continue reading Tales of Vegas Part I
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