UPDATE FROM CHRISINA
I got a lot of commentary on my “Good is Bad, Bad is Good” article that I republished on Zero Hedge. There was an interesting conversation by “Chrisina” who claimed to have read Mises’s Human Action and Rothbard’s Power and Market, both pretty heavy tomes. Chrisina is rather typical of commentators who claim they have read Austrian theory, but are either lying or didn’t understand it. Her criticisms are rather common ones I see. I thought you would find this interesting. She is a follower of Herman Minsky and Steve Keen. Minsky believed that capitalism was inherently unstable and debt was the cause of the instability. He would be considered to be rather unique in modern economic theory, but not uncommon in the history of economics.
Here are excerpts of the conversation. Lots of rants. Enjoy.
Chrisina:
The only thing Austrians can say is “let it crash” which comforts libertarians and other laissez-faire ideologues. They seem to have no idea how this will end and prefer to ignore the kind of social disruption that will result, that’s why they get no respect.
Austrians and their laissez-faire ideology will only bring complete misery and economic ruin.
The kind of social disruption this bankrupt Ausrian ideology will bring will be million times worse than what we endure today: complete chaos that will result from the kind of revolutions endured by the French and the Russians centuries ago.
Zirb:
Then why are the biggest depressions when the government interferes the most? The depression of 1920-1921 was worse than the great depression in terms of the decline of wholesale prices. The government not only did nothing, it cut its size, and America was back on its feet in 1 year. Previous recessions (often caused by war) also healed themselves.
Chrisina:
Just explain what kind of roadmap Austrians propose?
I’ll explain it for you: let the economy collapse, let unemployed people and the hundred million new poor people starve, then let’s have a civil war between tea baggers and progressives or better a revolution that will kill half the population… That’s what they call “creative destruction”. Then the economy will grow again.
Yeah, great roadmap. Oh, and what “track record” do Austrians have? You must be joking. They have absolutely ZERO track record as politicians have thankfully never ever followed their advice. … Continue reading Battle Between My Disagreeable Readers
We students of Austrian economic theory have an uphill battle convincing people that free market ideas are better than other theories of how the world works. We get it daily from politicians, economists, academicians, the press, our neighbors, and even from various faiths. Almost all politicians support Neo-Keynesian—Neoclassical solutions to the problems they create. Even those who claim to be “free market” champions don’t get it right most of the time.
Today, I saw this cartoon republished in Barry Ritholz’s Big Picture (Why, Barry, why?):
Ha! Ha! Ha! Those damned corporations.
See what I mean?
What is this cartoon is saying:
1. Corporations are greedy and don’t care about people.
2. Corporations are rich and hold on to their profits to the detriment of workers.
3. Corporations have a duty to workers to provide them with jobs and decent wages.
4. Corporations are harming the economy by not spending their profits.
5. Public sector workers, unions, the disabled, and tradespeople are worthier than corporations.
6. The government should do something about this.
Corporations have always been held in low esteem by the media, not just recently, but going way back in American history, before Teddy Roosevelt. We have a long populist tradition in this country, probably inherited from the European continent and transplanted here. So this is nothing new. It is a popular meme in society high and low.
If I were to poll most people about Big Corporations, I would hear about the Robber Barons, BP, and Halliburton and what they did to us. I wouldn’t hear about Ford, Boeing, Microsoft, or Walmart and what business, big and small, have done for us.
This cartoon is just another populist, emotional rant against capitalism and corporations. You know, the system that creates businesses and hires people? … Continue reading The Evils Of … Cartoons?
This is a reprint from Cafe Hayek that gets right to the point of Recovery Act spending and that lies being told by the Obama Administration about its apparent success. You know, like they saved “600,000″ jobs, or “800,000″ jobs, or “2,100,000″ jobs, or, just the other day, “1,400,000 to 3,300,000″ jobs created or saved, or whatever number they have touted. They are lying.
Now, Joe Biden is going around saying that they’ve weatherized 200,000 homes across America, thus creating jobs and saving energy. You can be assured that this is also a lie and that all the benefits claimed are false. I urge anyone interested to visit Recovery.gov to see how the money is being spent.
Here is GMU professor Russ Robert’s take on the subject:
How it sounds vs. how it really works
Here is how it sounds, from Whitehouse.gov:
At an event with homeowners and workers who benefited from the program, today in Manchester, New Hampshire, Vice President Joe Biden announced a major Recovery Act milestone – the weatherizing of 200,000 homes under the Recovery Act. As a result of the Administration’s unprecedented commitment to energy efficiency, more than 200,000 low-income families have been able to save money on their energy bills while saving energy, and thousands of people have been put to work.
“Thanks to the Recovery Act, thousands of construction workers across the country are now on the job making energy-saving home improvements that will save working families hundreds of dollars a year on their utility bills,” said Vice President Biden. “From replacing windows and doors to adding insulation, these are small changes that are making a big difference for American workers, manufacturer and consumers. We’ve hit the accelerator on the weatherization program, making over 200,000 homes more energy-efficient already, and are now full speed ahead to meet our original target of weatherizing 600,000 homes nationwide. ”
“The weatherization program under the Recovery Act – one of our signature programs – is successfully delivering energy and cost savings for hundreds of thousands of American families while creating thousands of clean energy jobs in local communities,” said U.S. Energy Secretary Steven Chu.
How does it sound? Great. Energy efficiency meets job creation. Green jobs helping the environment and saving people money.
Here is how it really works, from an Associated Press story (Drudge): … Continue reading Obama Administration vs. The Facts
Existing Home Sales
Today’s report that existing housing sales plummeted 27% in July should not come as a surprise.
Consider the fact that we are coming off of the greatest boom-bust credit cycle in world history. The focus of that cycle was residential housing which resulted in massive overbuilding of homes. Now we are seeing the inevitable result of the housing boom — the housing bust which requires the liquidation of this malinvestment.
From 2001 to 2006 housing starts jumped 40%, from about 1.6 million units per year to 2.250 million units per year. That period coincided with a massive expansion of the money supply by the Fed. When the cheap money stopped, the ride ended, and projects that, but for the cheap money were unprofitable, went broke.
The liquidation phase is never pretty but it is necessary for recovery. And that is why the government has been unable to prop up the housing market, except temporarily though tax credits. You can’t push a string as they say, and the inevitable process of liquidation is continuing after the tax credits expired in April.
According to the National Association of Realtors report, demand for existing single-family housing dropped to a 15 year low. The 27% drop was the biggest one-month drop since 1968. Sales dropped 29.5% in the Northeast, 22.6% in the South, 25% in the West, and 35% in the Midwest. June sales figures were revised downward to 5.26 million homes from 5.37 million previously reported. … Continue reading Housing and Jobs: The Underlying Problems Are Re-emerging
UPDATED
Part 2 of 2
There are three factors that will hurt bank earnings: weak loan demand, spreads on interest income will narrow because of competition among banks, and it appears that many banks are concealing the true state of their balance sheets because of “extend and pretend” policies.
“Extend and pretend” and “mark-to-make-believe” have been a major factor in dragging out this recession and is a major threat to the economy. This article describes the problem well:
A big push by banks in recent months to modify such loans—by stretching out maturities or allowing below-market interest rates—has slowed a spike in defaults. It also has helped preserve banks’ capital, by keeping some dicey loans classified as “performing” and thus minimizing the amount of cash banks must set aside in reserves for future losses.
Restructurings of nonresidential loans stood at $23.9 billion at the end of the first quarter, more than three times the level a year earlier and seven times the level two years earlier. While not all were for commercial real estate, the total makes clear that large numbers of commercial-property borrowers got some leeway.
But the practice is creating uncertainties about the health of both the commercial-property market and some banks. The concern is that rampant modification of souring loans masks the true scope of the commercial property market weakness, as well as the damage ultimately in store for bank balance sheets. …
More broadly, the failure to get the loans off banks’ books tends to deter new lending to others. It’s a pattern somewhat reminiscent, although on a lesser scale, of the way Japanese banks’ failure to write off souring loans in the 1990s contributed to years of stagnation.
Banks hold some $176 billion of souring commercial-real-estate loans, according to an estimate by research firm Foresight Analytics. About two-thirds of bank commercial real-estate loans maturing between now and 2014 are underwater, meaning the property is worth less than the loan on it, Foresight data show. U.S. commercial-real-estate values remain 42% below their October 2007 peak and only slightly above the low they hit in October 2009, according to Moody’s Investors Service. …
In a large proportion of cases, modifying the terms of loans ultimately isn’t enough to save them. At the end of the first quarter, 44.5% of debt restructurings were 30 days or more delinquent or weren’t accruing interest, up from 28% the first quarter of 2008. …
But here is one positive note. … Continue reading Why Small Banks Are The Key To Recovery-Part 2
I am getting requests for a PDF download of the entire article, “The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Triumph of Crony Capitalism.” I had put a link at the bottom of the final Part 4 piece, but many of you missed it. So, here is where you can download the [...]
The critical factor in our economy right now is a declining money supply which has been the result of the “credit crunch” or what Keynesians call a “liquidity trap.” We have discussed this frequently on this blog. I believe deleveraging is the key to an economic recovery and measures of business. The result of deleveraging is deflation, but instead of seeing deflation as a negative, it is a necessary step for growth.
I look at these issues quite differently from Keynesian and Neo-classical economists. As we have seen the Fed has been unable to stimulate money growth through zero interest rate policy (ZIRP) or through quantitative easing (QE). This is something that their theories not been able to adequately explain, and the outcomes of their policies have led to continued high unemployment, declining growth, declining money supply, and deflation. The policy makers at the Fed and Treasury have run into the same problems that mired Japan’s economy for almost 20 years: sluggish growth amidst deflation.
The reason we are seeing money supply decline is twofold. Banks have (1) tightened lending standards which makes credit less easy to obtain, and (2) banks are finding it difficult to find credit worthy borrowers. While the Money Base has increased dramatically, these funds sit in the Fed as “excess reserves” where banks earn interest on it from the Fed. I will explore this issue in a moment.
But first … … Continue reading Why Small Banks Are The Key To Recovery-Part 1
Until I began to examine the Dodd-Frank financial overhaul bill I had no idea that it would so significantly change the direction of the United States. It’s scope is so vast and pervasive that it is difficult to grasp its totality. I wrote this article to try to explain this and why I believe it is so important for us to understand it. Because of its complexity it was not possible to do this briefly, so I wrote this major “white paper” and divided it into four parts to make it easier to digest. This is the final part of this four part series.
Final, Part 4
Why Regulators Will Always Fail
Why should new regulations work when the old ones failed?:
“We failed completely to understand the complexity of what the impact of the national decline in housing prices would be in the financial system,” said Ms. [Janet] Yellen, currently president of the Federal Reserve Bank of San Francisco [and recently nominated as Vice-Chair of the Fed for financial risk]. “We saw a number of different things, and we failed to connect the dots.”
The problem with this kind of regulation is that new laws are always looking backward in an attempt to prevent the last bust from happening.
While the origins and outcomes of boom-bust cycles behave similarly, as Rogoff and Reinhart point out in their research, the asset classes and mechanics of the boom are different. As the Fed pumps money into the economy, money follows different paths and inflates and distorts different asset classes each time. In the Dot.com boom-bust cycle money flowed into high-tech companies and the stock market. Before that cycle, money flowed into real estate, mainly multi-family housing. The current cycle pushed money into housing, and more importantly, new forms of debt based on housing that hadn’t previously existed.
It is obviously more complicated than this, but the point of this paper is that regulators will never keep up with the next asset class boom and bust because they will be looking backwards. Will they know the “next one” when they see it? I doubt it.
What They Forgot
I discussed in the Part 1 of this article that there is almost nothing in the Act that actually prevents the Fed from creating new boom-bust cycles or that inhibits the federal government’s policies favoring, and thus distorting, the housing market. Here are things that they should have tackled but didn’t. … Continue reading The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Triumph of Crony Capitalism (Final, Part 4)
The big headline today is that David Rosenberg of Gluskin Sheff says we have a better than 50-50 chance to go into negative GDP growth in H2 2010. He says Q3 will be flat and Q4 has the above odds to go into recession. In a video interview he said that this isn’t a recovery, that perhaps the NBER jumped the gun on its announcement that the recession was over, and that this crisis is unprecedented in history.
As he said in his Thursday report:
ECRI [Economic Cycle Research Institute, his favorite forecasters] is pointing to 2-in-3 odds of another contraction in real GDP. Whenever we get three straight declines in Household employment, we are in recession or about to head into one fully 98% of the time.
I urge you read his commentary; as usual he comes up with a lot of historical data to back up his belief that these times perhaps are different than your average cycle. I like Rosenberg and generally agree with him but for different reasons.
I find it more difficult to point to a specific number than does Rosenberg, but I agree that Q3 will be below expectations and Q4 will be worse. I understand that for purposes of measuring things, a negative GDP means “recession,” but these low levels of productivity and sales are bad enough and point to continued if not higher unemployment, so that going negative, at least slightly, doesn’t mean much in the big picture. We need to keep watching the declining money supply which points to deflation, and the status of bank debt and credit. My guess is that they will continue to decline and that will prompt the Fed to do whatever it takes to counteract this through Open Market Operations (quantitative easing).
There have been a lot of data coming out this week and it’s worth looking at.
It is still looking weak, but the results are mixed. … Continue reading Are We Facing a ‘Double-Dip’ Recession?
Until I began to examine the Dodd-Frank financial overhaul bill I had no idea that it would so significantly change the direction of the United States. It’s scope is so vast and pervasive that it is difficult to grasp its totality. I wrote this article to try to explain this and why I believe it is so important for us to understand it. Because of its complexity it was not possible to do this briefly, so I wrote this major “white paper” and divided it into four parts to make it easier to digest. Please stick with me for the next few days; your eyes will be opened.
Part 3
Regulation of Derivatives and ABS
Recall that one of the major themes behind the Act is that the “murky” world of “exotic” instruments such as credit default swaps and asset backed securities (ABS) added unacceptable risk to the financial system. The goal of the Act is to provide “transparency” and “accountability” for those engaged in such instruments.
The SEC and Commodity Futures Trading Commission (CFTC) will regulate derivative markets. The CFTC is involved because they regulate the futures and options markets which are included within definition of “derivatives.”
The new rules:
- Require securitizers of ABS to maintain 5% of the credit risk in assets transferred, sold, or conveyed through the issuance of ABS … The new rules must allocate the risk retention obligation between securitizers and originators. The retained risk may not be hedged. [The “skin in the game” rule.]
- Banks must spin off “riskier” swaps dealing activities but can still conduct such activities through separately capitalized affiliates.
- All standardized swaps must be cleared and exchange-traded.
- End users [i.e., those who use derivatives for actual commercial hedging purposes] are exempt from the clearing requirement …
- The banking regulators, the SEC and the CFTC, will set margin and capital requirements for uncleared swaps.
- Security-based swap dealers and major security-based swap participants will be required to comply with SEC-prescribed business conduct standards. … [They] will have a duty to communicate with counterparties in a fair and balanced manner based on principles of fair dealing and good faith and other standards and requirements prescribed by the SEC. [If you read The Big Short, you might say that this is the “Goldman Sachs Rule.”]
- It imposes new liability on securitizers for the underlying mortgages originated by third parties.
The Wall Street Journal ran an article exploring the world of farmers and futures contracts. Farmers rely on forward contracts to hedge their risks. What was interesting is the conclusion of the article: “There is no real understanding if the Act will exempt, say farmers who use futures as a hedge, or make it more difficult for them to hedge.”
… Continue reading The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Triumph of Crony Capitalism (Part 3)
Until I began to examine the Dodd-Frank financial overhaul bill I had no idea that it would so significantly change the direction of the United States. It’s scope is so vast and pervasive that it is difficult to grasp its totality. I wrote this article to try to explain this and why I believe it is so important for us to understand it. Because of its complexity it was not possible to do this briefly, so I wrote this major “white paper” and divided it into four parts to make it easier to digest. Please stick with me for the next few days; your eyes will be opened.
Part 2
Assumptions Guiding the Act
The Act is guided by several broad concepts:
- Wall Street must be strictly regulated to prevent systemic risk and to promote financial stability.
- Large interconnected international financial companies are inherently risky.
- Excessive leverage leads to systemic risk.
- A lack of transactional transparency impeded necessary regulatory control.
- Investors lacked information to properly understand the nature of complex risky securities.
- Regulators are capable of carrying out the intent of the Act.
Specific blame for the financial collapse is assigned as follows:
Lenders, investment bankers, credit-rating firms, mortgage brokers and others had ample incentive to take risks, often with other people’s money. That led to a bubble in credit: too much borrowing.
The explosion of trading in the shadowy worlds of derivatives and hedge funds hid risks, and perhaps even created new ones, without the transparency essential to well-functioning markets.
Big financial firms lacked sufficient capital cushions to withstand a shock, and assets they could sell quickly to raise needed cash. …
For the inevitable day when another big financial firm gets into trouble, the bill attempts to impose order and punishment—but gives authorities the power to use taxpayer money if they deem it necessary. …
Description of the Act
What is obvious from a review of the Act is that the powers granted are very broad, almost unlimited, ill-defined, and yet to be written. The following descriptions of the Act are intended to give you an idea as to the vast scope of the Act and the powers granted. I have picked out some of the more important powers, but the Act is much more invasive and controlling than what I am describing here. I have gone into some detail because I believe that most people don’t understand how pervasive the Act is. Please bear with me here; it will be eye-opening.
Here is a major law firm’s (Gibson Dunn) overview of the Act:
[The Act] … seeks to increase financial marketplace transparency and stability by establishing a Financial Stability Oversight Council (the “Council”) focused on identifying and monitoring systemic risks posed by financial firms and by financial activities and practices. It establishes a new regulatory and supervisory framework for “large, interconnected” banking organizations and certain nonbank financial companies. By a two-thirds vote, the Council can determine which U.S. and foreign nonbank financial companies that are predominantly engaged in financial activities (together “NBFCs”) are to be subject to enhanced supervision (“Supervised NBFCs”) by the [Fed], based on the perceived risk a company poses to financial stability in the United States. Empowering the Fed to implement this regime substantially enhances its powers and responsibilities.
As you will see, the Act, while it comprises 2,300 pages, speaks mostly of legislative goals, with specific requirements that require fleshing out by rules and regulations that will follow. For the most part, the actual law will be developed by the mandarins. … Continue reading The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Triumph of Crony Capitalism (Part 2)
Until I began to examine the Dodd-Frank financial overhaul bill I had no idea that it would so significantly change the direction of the United States. It’s scope is so vast and pervasive that it is difficult to grasp its totality. I wrote this article to try to explain this and why I believe it is so important for us to understand it. Because of its complexity it was not possible to do this briefly, so I wrote this major “white paper” and divided it into four parts to make it easier to digest. Please stick with me for the next four days; your eyes will be opened.
Part 1
The new financial overhaul bill is the greatest government takeover of the financial sector of the economy since the National Recovery Act of 1933 when Franklin Roosevelt attempted to introduce central planning in America.
More than just a new law, the Dodd-Frank “Wall Street Reform and Consumer Protection Act” (the “Act”) gives government a relatively free hand to set prices and wages, to make business decisions, to promote or eliminate businesses, and to break up businesses. It establishes a large new bureaucracy to enable the government to dictate its wishes to the industry.
A major law firm described the Act as follows:
The Act marks the greatest legislative change to financial supervision since the 1930s. This legislation will affect every financial institution that operates in this country, many that operate from outside this country and will also have a significant effect on commercial companies. As a result, both financial institutions and commercial companies must now begin to deal with the historic shift in U.S. banking, securities, derivatives, executive compensation, consumer protection and corporate governance that will grow out of the general framework established by the Act. While the full weight of the Act falls more heavily on large, complex financial institutions, smaller institutions will also face a more complicated and expensive regulatory framework.
The Act isn’t directed just at the financial sector; because of its vast scope, it is directed against everyone.
Startling as it may seem, the Act does nothing significant to prevent the real causes of this or any future boom-bust cycle. At best one may analogize this as the doctor breaking the thermometer to cure a fevered patient. At worst it is a massive federal power grab which will inhibit financial innovation, increase the cost of money, and open wide the gates to a favored few where politicians, politics, and lobbyists, rather than markets, determine the direction of the financial sector of America’s economy.
While the new law has been signed by the President, it has not yet been written. That task will be the job of federal mandarins, the career lawyers and economists inside and outside of government who live off of government regulation. As such the ultimate consequences of this Act are unknown and will not be fully known until years later after the regulations have been written, agencies are established, and power is distributed among the bureaucrats. In other words, the Act’s advocates have no idea how the new law will impact the economy.
The ‘Failure of Capitalism’
The Act assumes that the economic bust was caused by a failure of capitalism and a failure of government to properly regulate the economy.
Upon signing the Act, President Obama said:
“For years, our financial sector was governed by antiquated and poorly enforced rules that allowed some to game the system and take risks that endangered the entire economy,” Mr. Obama said.
The new law, he said, would better protect consumers, empower investors and bring transparency to dark corners of the financial markets.
“The American people will never again be asked to foot the bill for Wall Street’s mistakes,” Mr. Obama said. “There will be no more taxpayer-funded bailouts. Period.”
… Continue reading The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Triumph of Crony Capitalism (Part 1)
The Wall Street Journal is running a piece tonight (Monday) on a possible shift in Fed policy (Fed Mulls Symbolic Shift) which I don’t believe they would run unless they have some insider tipping them off. The article is authored by Jon Hilsenrath who has been writing about deflation and the efficacy of Keynesian stimulus. As I pointed out, he is a good reporter, but his articles mirror the conventional wisdom which, unfortunately, has been mostly wrong.
However I will assume Mr. Hilsenrath has pretty good connections as a Journal reporter so I will take his piece seriously. Here is the gist of the article:
Federal Reserve officials will consider a modest but symbolically important change in the management of their massive securities portfolio when they meet next week to ponder an economy that seems to be losing momentum.
The issue: Whether to use cash the Fed receives when its mortgage-bond holdings mature to buy new mortgage or Treasury bonds, instead of allowing its portfolio to shrink gradually, as it is expected to do in the months ahead. Any change—only four months after the Fed ended its massive bond-buying program—would signal deepening concern about the economic outlook. If the Fed’s forecast deteriorates significantly, it could also be a precursor to bigger efforts to pump money into the economy.
The article notes the disagreements among the Fed presidents about inflation, deflation, and the direction of the economy. The inflation hawks, chief among them being Thomas Hoenig of the Kansas City Fed, would probably like to increase the Fed Funds rate soon. Charles Plosser (Philadelphia), James Bullard (St. Louis), and my favorite, Richard Fisher (Dallas) have been favorable to quantitative easing by allowing the Fed to continue to buy toxic debt. None of these Fed presidents seem to understand the causes of deflation or inflation as being something that they create through money supply manipulations.
But James Bullard has come up with another twist. … Continue reading Is A Shift In Fed Policy Coming?
Remember when every economist was saying that emerging markets will lead us out of this recession and that prosperity was just around the corner? I do recall because it has been my opinion that, as export based economies, they rely on the U.S. and Europe to lead them out of recession. Now these “emerging” economies, especially Asia, are slowing down. China engaged in massive fiscal stimulus but now finds itself trying to cool down an overheated real estate market. Not necessarily coincidental, the U.S. ISM new manufacturing orders index came out today showing further declines in new orders (see below).
China
Two major Chinese manufacturing indices fell.
The official report:
China’s manufacturing activity expanded at the slowest pace in 17 months in July, an official gauge showed Sunday, reflecting that tightening measures introduced earlier this year and growing uncertainty over global demand continued to weigh on the country’s economic expansion. … China’s official purchasing managers’ index, issued by the China Federation of Logistics and Purchasing and the National Bureau of Statistics, fell to 51.2 in July from 52.1 in June, the third straight month it has declined. The reading also was closer to the expansionary threshold of 50 than it had been in 17 months. A reading above 50 signals expansion.
The PMI data showed that China’s new export orders grew last month from June but the growth slowed, while imports declined in July from June, signaling that exports and imports will continue to post lower annual growth in the coming months.
The new export-orders subindex in the PMI slipped to 51.2 in July from 51.7 in June and the imports subindex dropped to 49.3 from 50.4. …
“The Chinese economy is slowing down due mainly to the ongoing property-tightening measures, but the slowdown is clearly not as dire as some expected. We don’t think the current situation warrants an all-out fight to rescue growth,” said Mr. Lu, [BofA economist].
Then, HSBC reported:
On Monday, another gauge of manufacturing activity, the HSBC China Manufacturing Purchasing Managers’ Index, showed activity fell to 49.4 in July from 50.4 in June, indicating manufacturing activity actually contracted for the first time since China’s economic recovery began.
Here are some excerpts from the HSBC report:
… Continue reading Worldwide Economic Slowdown?
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 Becoming Utilities?
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
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
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?
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
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
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