Econ 2009

[ewmayer]

No Recovery for Real Estate as Speculators Dominate Increase in Purchases: As the U.S. housing recession enters its fourth year, there’s no sign of a recovery because speculators account for most of the rise in sales.

While the purchases are trimming the inventory of unsold properties, most of those bought by speculators will likely return to the market when prices rise again, hampering any recovery, said Nobel laureate economist Joseph Stiglitz and Yale University Professor Robert Shiller in interviews.

“We’re creating a shadow inventory of homes that will be right back on the market as soon as the economy and the housing market begin to improve,” said Stiglitz, a Columbia University professor of economics. “We could see a double-dip in the housing recession if that happens.”

My Comment: The other potential scenario, also leading to a second, much-deeper dip, is if the speculators turn out to have called the bottom too early, home prices continue to fall through 2009, and the speculators - especially any that took advantage of current rock-bottom interest rates to leverage up - are forced to cut their losses and dump their inventory back on the market at a loss. Given that prices in most of the country still would need to fall another 20-30% to get back anywhere close to long-term historical means (e.g. Case-Shiller), that scenario is not at all far-fetched.

There were an average 3,100 foreclosures per day in the U.S. in November, according to RealtyTrac Inc., an Irvine, California real estate data company. That’s triple the 1,000 per day average in 1933, the worst year of the Great Depression, according to the Federal Reserve Bank of St. Louis. The repossessed properties offer opportunities for investors, who typically buy homes at auction and rent them out until prices increase and they can sell.

‘Flippers’ Rule

“You don’t have it in strong hands, you have flippers,” said [Yale economics professor Robert] Shiller, who helped create the S&P/Case Shiller real estate price indexes. “These speculators are preventing the market from crashing now, and when they get out it could fall again.”

U.S. real estate prices and sales may begin to stabilize in 2010, said Stiglitz. A worsening economy and growing speculation will delay the recovery further, he said.

“Assuming we don’t overshoot, we could be back at equilibrium in 12 to 18 months, but there are reasons to believe we might overshoot,” Stiglitz said.

My Comment: Wouldn`t that be "undershoot"?

Dario Moscoso of San Diego tracks notices of default and negotiates directly with banks if a home doesn’t sell at auction. He bought a three-bedroom foreclosed house in San Diego three weeks ago for $490,000, half of what it would have fetched a year ago. He’s renting it for $2,500 a month and plans to sell when prices rebound.

“We hope to put it back on the market in about a year,” Moscoso, 52, said in an interview. “We’ll gauge the market and see how it goes.”

The “speculative fervor” blamed by former Federal Reserve Chairman Alan Greenspan in July, 2005, for causing a price bubble is returning at the bottom of the property market in part because investors have the edge in buying foreclosures, said Dean Baker, co-director of the Center for Economic and Policy Research.

Baker said he considered buying a Washington home at a foreclosure auction last year until he learned the terms of the sale. Winning bidders had to complete the deal within 30 days, half the time of a standard home purchase, or lose their deposits. It was a risk he didn’t want to take.

No Competition

“Regular homebuyers are excluded from the foreclosure market because the rules favor professional investors and that lack of competition is driving down prices,” Baker said. “This is a place where the government could step in and stop housing’s downward spiral by encouraging a more user-friendly process.”

My Comment: Oh, puhleeeze, spare us the now-completely-discredited Keynesian "Government needs to step in and help keep the speculative bubble inflated" nonsense. You think those same houses being bought by the RE investors would magically appreciate in value if they stayed on the market, or that easing the purchase-time rules would lead to a price war among the smaller retail investors? In the current climate, only complete idiots would let themselves get sucked into a bidding war for property X, when they know that it`s highly likely that there`s an as-good-or-better deal to be had a couple doors down, or a few months down the road. Also, having to complete the dela within 30 days doesn`t exclude the non-RE-investors, it only excludes the wafflers, weak-credit types and those who don`t have the cash for a reasonable down payment - in other words, the same kinds of folks who, during the RE bubble, were having money flung at them by the banks if they could fog a mirror, even if they had no prayer of being able to servive the loan in the absence of a doubling or tripling of their income.


Madoff Swindle Hits Hard in Boston, Home to Victim Shapiro, Ponzi Himself: Carl Shapiro’s name is chiseled into Boston’s largest academic and medical centers, testament to the roughly $80 million that he showered on the city in the past decade. Now it comes with a Bernard Madoff-sized asterisk.

Jan. 8 (Bloomberg) -- Carl Shapiro’s name is chiseled into Boston’s largest academic and medical centers, testament to the roughly $80 million that he showered on the city in the past decade. Now it comes with a Bernard Madoff-sized asterisk.

Shapiro, a 95-year-old philanthropist, lost $545 million to Madoff, ranking him among the biggest individual victims of the world’s largest Ponzi scheme, data compiled by Bloomberg show. Now Boston, Carlo Ponzi’s adopted hometown, is bracing for the financial fallout.

“As a percentage of the population and significance of the charities involved, Boston was hardest-hit,” said Mark T. Williams, a professor at Boston University School of Management and a former Federal Reserve bank examiner. Shapiro “is Mr. Boston,” Williams said. “If Mr. Boston is hit, what do you think that does to Boston?”

Just as in Madoff’s base of New York, the alleged swindler targeted Boston’s wealthy Jewish families. Shapiro was atop the list. His 47-year-old namesake foundation, at 75 Park Plaza, lost $145 million because of Madoff. Shapiro and his wife, Ruth, are personally on the hook for about $400 million.

My Comment: Long list of Boston-area hospitals and colleges listed in that article which will be feeling the financial fallout from the fraud. And speaking of multibillion-dollar frauds:


Satyam Chairman's Falsified Reports Threaten Software Developer He Created: Ramalinga Raju built Satyam Computer Services Ltd. into India’s fourth-biggest software maker over two decades. He undermined the company’s future with revelations that he overstated profit and falsified assets for years, triggering a scandal that’s being compared to Enron Corp.

Satyam fell 78 percent yesterday after Raju told the Hyderabad-based company’s board that 50.4 billion rupees ($1.03 billion) of the 53.61 billion rupees of cash and bank balances the company reported on Sept. 30 were non-existent, according to a letter delivered to the Bombay Stock Exchange.

“There is a clear danger of customers deserting Satyam if rapid steps aren’t taken,” said Apurva Shah, head of research at Mumbai-based brokerage Prabhudas Lilladher Pvt. “That may put the viability of the company in question.”

The scandal shook confidence in India’s stock market, sending the Sensex index down 7.3 percent yesterday, its biggest drop in more than 10 weeks. Securities & Exchange Board of India Chairman C.B. Bhave said the disclosure was of “horrifying magnitude,” and the markets regulator ordered a probe into trading of Satyam shares.

...

The fall of the 54-year-old entrepreneur, a pioneer of India’s software industry, began three weeks ago when Satyam proposed paying $1.6 billion for two companies connected to Raju. The plan was scrapped 12 hours later, after investors called it a “woeful misuse of cash.” Yesterday, Raju said the sale was designed to plug the hole in Satyam’s balance sheet.

Golden Peacock

As recently as September, the London-based World Council for Corporate Governance gave Satyam its Golden Peacock Award. The council yesterday withdrew the prize because [b]Satyam, which means truth in Sanskrit[/u], had withheld material facts. Raju received CNBC’s Corporate Citizen of the Year award in Asia in 2002 and was named Ernst & Young Entrepreneur of the Year in 2007, according to Satyam’s Web site.

My Comment: I wonder if his parents are planning to "withdraw the name we gave him"...

China Update:

China Exports Probably Fell Most in a Decade as Global Recession Deepened: China’s exports probably fell the most in a decade in December amid a deepening global recession, making it more likely extra measures will be implemented to stimulate growth.

Lenovo Forecasts First Loss Since 2006, Will Cut 2,500 Jobs; Shares Plunge: Lenovo Group Ltd. forecast its first loss in three years and will cut 11 percent of employees as the global recession reduces demand for computers, prompting the stock’s steepest decline since 1998.

My Comment: The increasingly-dire news coming out of China and the rest of Asia makes the recent sucker`s rally in the Asisa indices even more inexplicable than the ones in the U.S. and Europe - but it also makes the rally highly shortable. That's what I`m doing, anyway - my one set of long trades late last year wiped out all my hard-won gains of the first 9 months on the short side - I don`t intend to repeat that mistake. However, most of my favorite short-ETF plays were brutalized even more than my long bet in the last 2 months of 2008, so I probably lost less by going long than I would have by continuing the short strategy that worked so well [note you should only dabble in this if your heart can stand the stress - the price fluctuations can be absolutely insane] for most of the year.

[garo]

India's Ken Lay or Skilling but not India's Madoff, at least not yet.

[ewmayer]

Worst year for jobs since '45: Annual loss biggest since end of World War II. Unemployment rate rises to 7.2%.

The hemorrhaging of American jobs accelerated at a record pace at the end of 2008, bringing the year's total job losses to 2.6 million or the highest level in more than six decades.

A sobering U.S. Labor Department jobs report Friday showed the economy lost 524,000 jobs in December and 1.9 million in the year's final four months, after the credit crisis began in September.

The unemployment rate rose to 7.2% last month from 6.7% in November - its highest rate since January 1993.

The steep annual drop in jobs marked the highest yearly job-loss total since 1945, the year in which World War II ended.

"We're seeing a complete unraveling of the labor market and are on track for getting beyond 10% unemployment," said Lawrence Mishel, president of the Economic Policy Institute.

The total number of unemployed Americans rose by 632,000 to 11.1 million.

November, in which 584,000 jobs were lost, and December marked the first time in the 70-year history of the report in which the economy lost more than 500,000 jobs in consecutive months.

"We have a bigger economy now, but even on a proportional basis, the last months have been the worst since [1945]," said Kurt Karl, head of economic research at Swiss Re. "It's just an enormous acceleration of job losses."

My Comment: As has been common the past year, the numbers reported by the BLS, bad as they are, are likely wildly optimistic. I predict we could see total "official" job losses as high as 4-5 million in the U.S. in 2009.


Consumers borrow less than expected: The Federal Reserve says borrowing by consumers fell by $8 billion in November, falling at a much faster rate than economists had expected.

Consumer borrowing decreased sharply in November as the weak economy continued to weigh on household budgets.

The Federal Reserve said Thursday that consumer borrowing fell by $8 billion in November to $2.571 trillion from an upwardly revised $2.579 trillion in October.

The annual rate of consumer borrowing fell by 3.7% in the month. In October, the annual rate fell by only 1.3%.

Credit card borrowing, or revolving debt, declined at an annual rate of 3.4%. Non-revolving borrowing, including student and auto loans, fell $5.2 billion, or 2.1% on an annual basis.

My Comment: Pay down your debts ... the only long-term way out of this crisis. Meanwhile, the one place where no such sane fiscal restraint is being contemplated is the U.S. government, which under the incoming administration is busily preparing to crank government spending - all of it necessarily borrowed (or failing that newly printed) money - up to utterly unprecedented levels. "Excess spending ... to cure the ails resulting from decades of excess spending". Sheer insanity. On the "failing that" point, there are signs that foreign governments, most of which have fiscal problems of their own these days, are beginning to question the wisdom of investing most of their national wealth in (currently record-low-yielding) IOUs from Uncle Sam:


London's Boom Time Bill Comes Due, Forcing Bankers to Buy Coffee on Credit: Jane Casulli has been selling coffee and sandwiches in London’s financial district for 10 years and survived the dot-com bust. She says this meltdown is different.

Sales at her cafe, a two-minute walk from the local offices of Swiss investment bank UBS AG, plunged 50 percent in the last two months of 2008, and some regulars are requesting monthly tabs to cover their morning lattes.

“Customers are now asking how much things cost and bringing sandwiches from home,” she says. “People aren’t leaving their offices. Every day looks like a Sunday.”

The U.K. economy may shrink more than those of the U.S., Japan and euro region in 2009 after rising house prices and easy credit led Britons to run up 1.44 trillion pounds ($2.18 trillion) of debt, making them among the world’s biggest borrowers. The country’s gross domestic product may contract by 2.9 percent this year, with as many as 2 million people claiming unemployment benefits, the Centre for Economics and Business Research, a London-based study group, said.

[ewmayer]

I watch the broadcasts of Deutsche Welle and Russia Today on the International Channel at least several times a week - 2 nights ago RT had an interesting interview with Peter Schiff, founder of Euro Pacific Capital, and one of the better-known "housing market doom and gloomers" who were proven right in spades last year. Now note that RT often spins thing in order to get a juicy anti-American angle [around the time Obama won the democratic party nomination, they sent an intrepid reporter to most redneck set of saloons in the Texas outback they could find in order to get the alleged "man on the street" perspective - they forgot to ask the various "men on street" how long they had been grand wizards in the KKK], but this interview is of the kind one wishes more of the American mainstream financial media would carry. Found a link to it on Lew Rockwell`s site:

Russia Today Interviews Peter Schiff

[ewmayer]

Capitalism Freezes in Winter of Discontent From China to Russia to Nigeria: As capitalism staggers through its first globalized economic crisis, the costs won’t be measured only in dollars and cents.

Jan. 12 (Bloomberg) -- As capitalism staggers through its first globalized economic crisis, the costs won’t be measured only in dollars and cents.

From newly rich Russia to eternally impoverished sub- Saharan Africa, social strains are threatening the established political order, putting some countries’ very survival at risk.

In the past month, Nigerian rebels threatened renewed warfare against foreign oil producers, Russia sent riot police from Moscow to quell an anti-tax protest in Siberia and China’s communist leadership warned of social agitation as the 20th anniversary of the Tiananmen Square massacre looms.

The disillusionment and spillover effects of the global recession “are not only likely to spark existing conflicts in the world and fuel terrorism, but also jeopardize global security in general,” says Louis Michel, 61, the European Union’s development aid commissioner in Brussels.

Somewhere in the wreckage may lurk an unexpected test for U.S. President-elect Barack Obama, 47, one that upstages his international agenda just as Afghanistan’s backwardness and radicalism led to the Sept. 11 attacks that defined the era of George W. Bush only eight months into his term.

Among the possible outcomes: instability in Pakistan, a more aggressive if economically stricken Iran, a collapsing Somalia, civil disorder in copper-dependent Zambia, a strengthened, drug-financed insurgency in Colombia and a more warlike North Korea.

My Comment: They forgot to mention "potential loss of U.S. global pre-eminence". Or perhaps that is covered by the "unexpected test" bit.


Obama: Give Me the Money: A top aide to the president-elect tells Congress it's urgent that $350 billion in remaining bailout funds be put to work.

How the new administration plans to spend the second half of the TARP funding has emerged as a major issue on Capitol Hill.

Lawmakers on both sides of the aisle have expressed unhappiness with the way Treasury Secretary Henry Paulson has used the first $350 billion. They object to how Treasury made direct investments in banks with few strings attached and no process for tracking how the banks are using the money.

My Comment: That`s right, "We have far better pet pork-barrel projects of our to waste the money on."


Economy could lose 2M jobs in '09 - report: Conference Board says there's no sign that labor market will improve any time soon.

Wachovia chief economist John Silvia says that nothing has really changed in this month's report.

"I know that this is frustrating for a lot of people because they would like to see a change in the trend," Silvia said. "But what we're seeing is the same as before."

However, Silvia also said that the worst may be behind us and that 2 million more jobs seems a bit aggressive an assessment.

"A lot of companies have already cleared the decks in 2008," Silvia said. "Given that we've already claimed a loss of 2.6 million jobs, we can probably expect to see another million and a half."

My Comment: Dream on, dude - we lost most of the 2.6M jobs in the last quarter of 2008, a whole more companies are going to be "clearing the decks" this year (just look for the coming wave of bankruptcies in the retail sector), millions of housing-bubble-created jobs aren`t going to be coming back, and last but not least, every single such "worst is behind us", "things should pick up in [throw a dart at a calendar]" prediction I`ve heard in the past year and a half has been abjectly wrong, perhaps because every single one of them completely ignored fundamentals and instead simply used past recessions as a predictor or current trends. You can actually get paid for that? Wow.


Wal-Mart CEO: Spending less has upside: Scott speaks of 'fundamental change' in consumers' behavior, says retailers will feel more pain in 2009.

Outgoing Wal-Mart CEO Lee Scott said the recession may have caused a "fundamental change" in the incessant shopping habits of Americans - which will hurt retailers but will benefit society as a whole.

Scott, citing his recent meeting with young shoppers, said many had given up eating out, going to the movies and shopping.

"Everyone has given up something and said how good they felt about it," he said. "I think in some ways it is healthy [for society], even though for us retailers it's not good."

My Comment: Impressive - a corporate CEO (albeit an outgoing one) putting the good of society ahead of short-term profit concerns. Note, however, that discount retailers like Wal-Mart have been far less affected by the ongoing consumer retrenchment than high-end retailers, whose pin has been the discounter`s gain. So one should perhaps take Mr. Scott`s comments with a proverbial grain of NaCl.

[cheesehead]

Originally Posted by ewmayer

They forgot to mention "potential loss of U.S. global pre-eminence".

From http://www.npr.org/templates/story/s...oryId=99156039

"Army Training Turns To Tackling Counterinsurgency"

The first of a four-part series

Originally Posted by NPR

"...

Obviously we can't go back to the extreme we were in 2003 where the force knew nothing about counterinsurgency," says Maj. Neal Smith, the operations officer of the Army and Marine Corps Counterinsurgency Center. He teaches people how to fight the kind of wars we're in now in Iraq and Afghanistan. "But we also can't go to a force where if a tank division is needed someday — no one knows how to move, defend, attack or move to contact anymore."

But even he worries about what today's soldiers are being taught: — how to fight a classic ground war.

"The risk we run as a force is that we have a generation of officers [who] have spent 5-6 years [at war] that never have done their conventional competency," Neal Smith says. "And if we were expected on short notice to fulfill that conventional competency, we would struggle very hard to do it as well as we did in 2003 during the attack to Baghdad."

The problem is there simply isn't enough time to teach people how to fight both conventional and unconventional wars — the soldiers are simply at war too much and troops now have only about 12 months between deployments.

Originally Posted by ewmayer

Or perhaps that is covered by the "unexpected test" bit.

Originally Posted by NPR

"The reality is we really only have enough time to prepare soldiers for the next mission they're going to face," says Lt. Gen. William Caldwell, who runs the Combined Arms Center for the Army. He oversees 18 different schools and training centers, including the National Training Center. "Then as time permits, we'll operate across the whole continuum of intensity of ops."

The Army says they won't even be able to really begin training for all kinds of warfare until 2010 at the earliest, so for now, the focus is on hearts and minds, not tanks and artillery.

And ya know, if there's an "unexpected test" that requires tanks and artillery, Republicans will blame Obama for any missing training or resources, not Dubya. Just like they griped about Clinton's supposed downsizing of the army even though the downsizing was started by Reagan, continued by Bush the Elder, and by the time Clinton took office all the downsizing was in progress or had already occurred.

Conservatives talk a good game about responsibility, but don't have the gumption to apply that to their elected leaders.

[ewmayer]

Richard, this can also be used as part of the "case against the Federal Reserve" argument in the Reduce Your Debt!! thread in the Lounge:

The meddlers can't tame the market: Trying to rescue the banks or the automakers from the risks of capitalism is a doomed enterprise. That's because, as we're all suddenly learning, the market is a savage place.

Capitalism, free enterprise and free markets have all been given a bad name. Not because they are inherently bad but because of the people who have meddled with them.

When government knuckleheads interfere with capitalism, you can bet the law of unintended consequences will be quick to rear its head.

Interfering with the markets was a function of the Federal Reserve during Alan Greenspan`s reign. That meddling was a major contributor to the tremendous edifice of debt and speculation that had built up over the past 20 years.

Now it has come toppling down, most recently on more than 50,000 Citigroup employees -- casualties of Citi`s appetite for risky investments.

I`m sure some of these newly and soon-to-be jobless would like to know just what Citigroup director (and former Treasury chief) Bob Rubin was doing to receive his huge compensation package, since he obviously didn`t stop management from acting like fools.

Meanwhile, Gov. Mark Sanford of South Carolina recently noted two successful examples of capitalism unimpeded by outside interference: the vibrant auto industry in his state and the steel industry in Alabama. Had the latter industry been bailed out in Pittsburgh, the good steel-producing jobs in Alabama would not exist.

Now Congress is debating the bailout of General Motors (GM, news, msgs) et al. But without a radical restructuring, a bailout would be a waste of money.

Equally flawed is the call for more regulation. What helped get us into this mess was not a lack of regulation but the failure to enforce the laws already in place.

Had the Fed, the Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Office of Thrift Supervision done their jobs, there`s no way all the financial institutions could have become so badly impaired, and consumers would never have been allowed to borrow so much money.

...

We have just come through a decade-plus in which the Fed intervened "successfully" enough so that folks came to look upon the stock market (and then the real-estate market) as pet kittens that spit out hundred-thousand-dollar bills. Markets are not like that at all. They are more like savage beasts looking to rip your head off.

The era of "pet markets" that effortlessly make people rich is definitely behind us.

My Comment: Government bailouts of the U.S. automakers similarly aren`t going to keep large numbers of car dealers who can`t sell enough cars at enough of a profit to keep operating in business, either.

[cheesehead]

Yes, Greenspan didn't steer the Fed correctly.

But Volcker did, when stopping inflation three decades ago.

It's not the institution's fault; it's the leaders thereof.

[ewmayer]

Originally Posted by cheesehead

Yes, Greenspan didn't steer the Fed correctly.

But Volcker did, when stopping inflation three decades ago.

It's not the institution's fault; it's the leaders thereof.

Fed opponents would argue that giving any institution the powers of the Fed is an invitation to abuse and governmental meddling, which will necessarily interfere with the functioning of the (formerly) free markets. Would the inflation you mention Volcker as heroically having arrested ever have existed in the absence of the Fed and under a gold standard? It would not. Another example of the Fed "fixing" a problem it helped create. Just like it's now trying to "fix" the effects of the collapsing housing bubble, all while arrogating ever more power unto itself. I cite corollary 2 of Mish's Fed Uncertainty principle:

"The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing."

[cheesehead]

Very well; there needs to be something better than the Fed. (But I want to see evidence better than has been presented so far in the Reduce Your Debt!! thread.)

Are there any leading-candidate ideas for a replacement? (Simply going straight back to the gold standard isn't practical AFAIK; there need to be some intermediate steps.)

[ewmayer]

Morgan Stanley Sees 25% Gain for Asia Stocks Excluding Japan on Rate Cuts: Morgan Stanley predicts Asian stocks excluding Japan may gain at least 25 percent this year, spurred by interest-rate cuts in countries such as China.

Jan. 12 (Bloomberg) -- Morgan Stanley predicts Asian stocks excluding Japan may gain at least 25 percent this year, spurred by interest-rate cuts in countries such as China.

The MSCI Asia-Pacific excluding Japan Index may reach 315 in 2009, the bank said. That represents a 27 percent gain from the Jan. 9 level of 247.43. Morgan Stanley expects the MSCI Emerging Markets Index to reach 810 in 2009, representing a 42 percent advance from the Dec. 9 close of 571.25.

“Policy is being aggressively eased in Asia, with far more to come given collapsing inflation disappears and weak near-term growth,” Morgan Stanley Asia-Pacific strategist Malcolm Wood wrote in a 2009 outlook note.

My Comment: So a vague fell-good "policy easement" trumps good old fundamental "export economy grinds to a halt"? I think not. (And yes, I have put my money where my mouth is - loaded up on FXP and EEV starting at the end of last year, after dumping my underwater long positions for tax-loss purposes.)