Global Financial Crisis (Was: Subprime Meltdown)

[ewmayer]

Dow Chemical hiking prices 25%: Chemical company cites soaring energy costs for new price boost, following a 20% jump three weeks ago.

Wow - a 50% price rise in under a month. Better go stock up Styrofoam insulation, PVC pipe and plastic-lined diapers before they`re literally "worth their weight in oil".


Consumer confidence tumbles to 16-year low

Both presidential candidates are of course spinning this in ways that suit them best:

An advisor for presumed Republican nominee John McCain weighed in on the report, calling the numbers a point of "concern."

Hello? In an economy which consists 70% of consumer spending, plunging consumer confidence is more than a "point of concern". A decade of record-debt-fueled economic expansion was "robust and fundamentally strong economic fundamentals" [paraphrasing our Dear Leader Dubya], but the inevitable bursting of the credit bubble and resulting cratering of consuming spending is merely "a point of concern?" Pull the other one... but the Obama campaign is little better:

An advisor for presumed Democratic nominee Barack Obama read the report as a call for change.

"The disappointing consumer confidence numbers are yet more evidence that we need a change in our economic policy," the Obama campaign wrote in a statement.

Uh, please do tell us what kind of "economic change" is gonna magically take tens of millions of homedebtors out of being underwater on their bubble-price mortgages, shut out of the previously all-too-easy-to-get HELOC loans, and maxed out on an ever-increasing number of the credit cards? There isn't one, and vapid calls for "change" won't create one. The only long-term remedy involves a painful-but-necessary unwinding of the credit bubble, and the best the government can do is to try to allow this [ultimately healthy] process to occur in as non-catastrophic fashion as possible, and to not make the problem worse by way of meddling in the [allegedly] free markets. Instead, we get bribes like the $150B "fiscal stimulus package" [all deficit spending - alas, the government has no effective limit on their metaphorical credit card], and the pork-laden even bigger housing bailout bill which is now getting close to a congressional vote. False hope is as bad as no hope, Obama spinmeisters.


Home prices post record 15.3% drop: Prices in 20 cities fall for 21st month in a row. One sign of hope: Pace of decline eased in many areas.

NEW YORK (CNNMoney.com) -- U.S. home prices posted record declines in April, extending a painful losing streak for U.S. home prices.

The S&P/Case-Shiller 20-city Home Price Index fell to a record low of 15.3% on a year-over-year basis, and was down 1.4% from March. The 10-city index was down 16.3% year-over-year and 1.6% for the month.

The 20-city index is based on data going back 19 years, while the 10-city index is 21 years old.

There is one sliver of hope. Although every city surveyed posted year-over-year price drops, the month-to-month pace of declines did slow in many cities. And eight metro areas actually posted gains from March to April.
Bright spots

Hard-hit Cleveland was the biggest winner, with prices up 2.9%. Charlotte, N.C. posted a slight gain of 0.2%, up for the second straight month, while Dallas prices were up 1.1% in April, also up for the second month in a row.

So if you were holding out and hoping that your dream home in Cleveland might be even cheaper next year, you missed out! Buy Now! Prices only going up from here!!
[The preceding message was sponsored by the National Association of Realtors.]


Time to kick GM out of the Dow: The struggling automaker's stock came close to hitting a 33-year low this week. Plus: What companies could replace it.

By Paul R. La Monica, CNNMoney.com editor at large
Last Updated: June 24, 2008: 11:33 AM EDT

NEW YORK (CNNMoney.com) -- Why is General Motors still in the Dow?

GM (GM, Fortune 500) may still be the biggest of the Big Three. But it's getting more and more difficult to justify keeping GM in the Dow Jones Industrial Average, an exclusive list of what's supposed to be the 30 leaders in the U.S. markets and economy.

GM confirmed on Monday that it is looking into selling its Hummer brand of monstrously-sized vehicles. And in a major sign of desperation, it also announced that it would offer six-year, zero-percent loans for 2008 models until the end of June in an attempt to clear out inventory.

The stock traded close to a 33-year low on Monday, and the company now has a market value of about $7.5 billion, the lowest in the Dow. The next lowest is Alcoa...and it's still valued at $30.3 billion, more than four times as much.

Heck, even Ford has a bigger market value, at $11.9 billion.

Three years ago, I made a case for GM being kicked out of the Dow, as did my colleague Chris Isidore. But with the stock in even worse shape now, it's time to make that case again.

"It's possible GM could be removed. On the one hand, GM as a stock is not all that relevant," said Chuck Carlson, CEO of Horizon Investment Services, a money management firm that closely monitors the history of the Dow. "But it's still a barometer of the auto industry and that's significant."

I realize that GM still employs a large number of people. And even though its stock has plunged, GM is expected to generate $179 billion in sales this year.

But the Dow can still have an automotive component if the editors at The Wall Street Journal - who decide who's in and out of the Dow - just looked beyond Detroit.

GM is continuing to lose share to Japanese rivals Toyota (TM) and Honda (HMC). While the editors at the Journal have maintained that the DJIA is only for American companies, I think that's a view whose time has passed.

Not so fast, Paulie boy - according to Wikipedia, there's a teensy bit of history here which you simply want to run roughshod over:

The Dow Jones Industrial Average (NYSE: DJI), also called the DJIA, Dow 30, or informally the Dow Jones or The Dow) is one of several stock market indices created by nineteenth century Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. Dow compiled the index as a way to gauge the performance of the industrial component of America's stock markets. It is the second oldest continuing U.S. market index, after the Dow Jones Transportation Average, which Dow also created.

Today, the average consists of 30 of the largest and most widely held public companies in the United States.

Now, admittedly, most of the current DJIA components have global footprints, and "Most Widely held in the United States" could of course be liberally construed as "companies whose *stock* is most widely held", thus allowing foreign-based companies to be eligible, but historically the DJIA has consisted of companies based in the U.S.. In that sense, foreign-based companies Toyota don't qualify, even though they have major manufacturing plants in the U.S.

Also note the great scam that ensues from this periodic rejiggering of the various stock indices to "weed out the weak": A typical "stock markets are the best long-term investment" spiel by a brokerage or mutual fund house involves language like "if your portfolio had tracked the DJIA since [pick a data X, preferably right at depression-era lows], you would have realized a gain of Y since then." Not true, since it ignores the plethora of companies which once were part of the index but fell on hard times and got culled, many of which were eventually acquired for a song or simply went bankrupt. By replacing "cold companies" with "hot ones" every few years, the index is strongly biased and indicates long-term returns far greater than someone actually holding the various stocks in the index would realize over time. If you hold GM from $50 to the present near-$10 value, you are of course also free to sell GM and buy a hot company's stock, but [unlike the market index] you ACTUALLY LOSE MONEY in the deal. Like I said, it's a great scam for luring the Grandma Millies of the world [i.e. the small retail investor] into the great rigged game that is the markets.

[Prime95]

Originally Posted by ewmayer

Also note the great scam that ensues from this periodic rejiggering of the various stock indices to "weed out the weak": A typical "stock markets are the best long-term investment" spiel by a brokerage or mutual fund house involves language like "if your portfolio had tracked the DJIA since [pick a data X, preferably right at depression-era lows], you would have realized a gain of Y since then." Not true, since it ignores the plethora of companies which once were part of the index but fell on hard times and got culled, many of which were eventually acquired for a song or simply went bankrupt...

Ernst, you've got this one wrong. Dow Jones announces in advance when stocks will be replaced in the DJIA. This gives you all the time you need to almost exactly track the performance of the average. In fact, you will outperform the index as you pocket those juicy dividend checks.

You are confusing this with "survivorship bias". Your sleazy broker says, "The average mutual fund today that has a 10-year track record is up 10% per year compared to the S&P which is up only 8% proves how well mutual funds are run." Of course, all the crappy funds were closed, reorganized, merged, etc. because no one buys into the funds that are underperforming.

[cheesehead]

Originally Posted by ewmayer

A typical "stock markets are the best long-term investment" spiel by a brokerage or mutual fund house involves language like "if your portfolio had tracked the DJIA since [pick a data X, preferably right at depression-era lows], you would have realized a gain of Y since then." Not true,

Yes, it is true, because "tracking" the DJIA includes making the same stock substitutions that it made. I.e., they're talking about having managed your portfolio as though it were an index fund.

since it ignores the plethora of companies which once were part of the index but fell on hard times and got culled,

No, the spiel implies (or assumes) that you cull your portfolio's stocks at the same time Dow Jones did.

many of which were eventually acquired for a song or simply went bankrupt. By replacing "cold companies" with "hot ones" every few years, the index is strongly biased and indicates long-term returns far greater than someone actually holding the various stocks in the index would realize over time.

Not if your portfolio actually holds the various stocks in the index at exactly the same times that those stocks actually were in the index!

However, there is the small matter of commissions that do make it impossible to match the index, but this discrepancy can be allowed-for.

[cheesehead]

Originally Posted by Prime95

In fact, you will outperform the index as you pocket those juicy dividend checks.

It is my understanding that dividends are accounted-for in the indexes, either (a) by being treated as though they were immediately reinvested in exactly the same stock that paid them, or (b) by adjusting the index divisor so that the index value remains unchanged across a dividend payment. (Those may be equivalent -- I don't know. If they're not, then b) is the method used, I'm almost sure.) Thus, we do not see an index drop just because one of its components paid a dividend.

[Prime95]

Originally Posted by cheesehead

It is my understanding that dividends are accounted-for in the indexes.

Something odd is going on. My S&P mutual fund tracks the index and is currently yielding 2%.

[ewmayer]

Originally Posted by Prime95

Ernst, you've got this one wrong. Dow Jones announces in advance when stocks will be replaced in the DJIA. This gives you all the time you need to almost exactly track the performance of the average. In fact, you will outperform the index as you pocket those juicy dividend checks.

You are confusing this with "survivorship bias". Your sleazy broker says, "The average mutual fund today that has a 10-year track record is up 10% per year compared to the S&P which is up only 8% proves how well mutual funds are run." Of course, all the crappy funds were closed, reorganized, merged, etc. because no one buys into the funds that are underperforming.

Yep, I blew this one - I was confusing the "if you bought these 30 stocks on Jan 1, 1930 and held them for the next 75 years" scenario with the "if you always owned the same mix of stocks", which is of course what the index funds do. The only downside for a retail investor is the trading cost of rejiggering one's portfolio. which can be mostly negated by instead investing in a low-fee index fund.

Originally Posted by Prime95

Something odd is going on. My S&P mutual fund tracks the index and is currently yielding 2%.

Wow, that's only 8% less the rate of real inflation! Not to mention the juicy losses you're realizing from tracking the index.


Renter Relief Bailout Bill Passed by Senate

By unanimous vote, an emergency economic aid package to stimulate the economy has finally been approved by the U.S. Senate, releasing $300 Billion of funds to aid struggling apartment renters.

Millions of families across the country are in danger of losing their apartment homes through no fault of their own, simply because they’ve stopped making their monthly payments.

For renters who stretched their finances to get into their first luxury apartment, only to be unfairly hurt by a sudden economic downturn that nobody could possibly have foreseen, this bill will bring badly-needed (and well-deserved) relief in three ways.

First, it will forgive all past due rent payments.

Second, it will require landlords to lower monthly rent payments to a level that tenants can comfortably afford.

Third, it will provide tax-free grants of up to $100,000 toward newer, nicer apartments for qualifying individuals (minorities who earn below the median income).

For many tenants on the edge of homelessness, the government action comes just in time.

“I had no idea I’d be charged $3,000 per month,” said Trump Tower Gardens tenant Gimmy Sumdat, who has yet to make a single payment since moving into her penthouse suite overlooking the ocean eight months ago. “I was tricked, by a mean nasty man who made me sign some forms I knew nothing about. This new program is long overdue. Now I’ll be able to pay just $150 per month. I think that’s fair.”

It would merely be hilarious if the irony weren’t so on the mark – just substitute “homedebtor” for “renter”…

[Being a frugal renter myself, I admit I may not be unbiased in this regard.]


Volvo to lay off 1,200 in Sweden: Ford-owned car maker says move is part of initiative to cut $662 million in costs.

Looks like the Detroit-centered U.S. auto industry pain is going global. With steel prices skyrocketing, China and India are also not immune.

[ewmayer]

California budget delayed at a cost: Loans to state would require security on top of interest

By Mike Zapler
Mercury News Sacramento Bureau
Article Launched: 06/25/2008 01:30:12 AM PDT

SACRAMENTO - Could the state of California, a $100 billion-plus enterprise, run short of cash to pay its bills this summer?

The short answer: Yes. In fact, officials are already preparing for the possibility - and it could cost taxpayers dearly.

Triggered by a staggering $15.2 billion deficit, a deteriorating economy, and partisan gridlock in the Legislature, the cash crunch could arrive in late August or September.

If lawmakers can't agree on a budget, it would force the state to take out a high-risk loan of more than $10 billion - and pay a premium of possibly hundreds of millions of dollars as security, money that could otherwise be spent on schools, health care and other needs. Beyond that, the state's credit rating could be downgraded, raising the interest costs of future borrowing.

[Sorry, I just couldn't resist a bit of ribaldry in the title of this one - if you think that's bad, check out the reader comments to the article linked below.]

Inflation, Trade Deficit Cause Worry in Vietnam

Just a few months ago, Vietnam was touted as the new China, with its fast-growing economy drawing billions of dollars in foreign investment. But then came an inflation problem that seems to have gotten out of control. Now the government is wrestling with a slew of problems that threaten to knock the country's economic success off the rails. Matt Steinglass reports from Hanoi.

Vietnam's trade deficit shot up to $14 billion in the first five months of 2008, from $11 billion for all of last year. The influx of foreign currency puts pressure on the Vietnamese dong to strengthen.

But that would make Vietnamese exports more expensive, hurting local industries. So the government held down the exchange rate by buying dollars with dong, which inflated the supply of dong, contributing to inflation.

So the Vietnamese government is in a bit of an, um ... pickle. They need their beloved dong to strengthen in order to choke off runaway price inflation, but their misguided, heavy-handed dong manipulations only led to rampant dong inflation [without any concomitant increase in real liquidity] rather than genuine dong strength or sustainable economic expansion. This would appear to be the economic analog of the "if you experience an erection lasting longer than 4 hours, first call all your friends to brag, then take a picture to document the moment for priapistic posterity ... then see your doctor" warning in the boner-popping-pill ads on TV. [Aside: What's up with the one ad showing the old couple bathing in side-by-side bathtubs in their backyard while watching the sunset, anyway? Is watching a couple of wrinkled old farts having non-sex but heavy-petting-of-soapy-hands supposed to be a turn-on? If so, the ad agency in question owes me the full 4 hours, dammit, because watching that ad certainly leads to neither inflation nor strengthening of my "national currency unit". Maybe it works better when dubbed into Vietnamese?]

Anyway, as Mish notes in his commentary on the dong story, this is one of those times when the last thing one wants to be is long the dong, because that could lead to being a bagholder of a worthless asset. Better a short dong position, and investment in a truly hard currency like gold. But of course the Vietnamese govt has just banned gold imports, in a misguided Rooseveltian attempt to prevent hoarding. While the gold standard would appear to be relic of the past, the Vietnamese govt could still consider, say, a silver currency standard. This would make the dong more attractive to hold once again, and would turn many of those who are short the dong to go long again. A kind of "long dong silver" strategy, if you will. [And even if you won't, I already did, so there.]

[ewmayer]

Not long ago, I noted that with the Greenspan bubble era home-as-ATM credit well now gone dry, strapped consumers were increasingly hitting their credit-of-last-resort, credit cards, to pay for ever-more-costly essentials like food and gasoline, and to expect a dramatic rise in the number of credit card defaults later this year. That wave looks to be approaching shore:

Discover Profit Slides 19% as More Customers Fall Behind on Card Payments: Discover Financial Services, the credit-card company spun off from Morgan Stanley, dropped as much as 4.4 percent after second-quarter profit was affected by customers who fell behind on monthly payments.

The funny thing is that in the immediate aftermath of this March`s Visa IPO, Visa bulls were touting increased credit card usage as a good sign, driving the stock price up by over 60% from its IPO price of $55, at which point the bulls were shouting "Visa to $200 by end of the year!" Sorry, folks, not gonna happen - the short-term rise in CC use driven by last-resort dynamics is by definition not a bullish sign. Visa has one thing working in its favor, namely that [unlike other card brands] it does none of the card lending itself - its affiliated banks take the direct credit risk, Visa makes money as a percentage of each transaction. But reduced consumer spending ultimately means fewer transaction dollars, as consumers max out their cards, and banks are going to be loath to boost credit limits in the current economic environment.


GM Plummets After Goldman Says 'Sell' on Darkening Outlook for Sales, Cash: General Motors Corp., the largest U.S. automaker, fell the most in more than three years after Goldman, Sachs & Co. cut its rating on the shares to ``sell'' because of a worsening sales outlook.

In my opinion, GM is toast - even if their gas-guzzler-profits drying up and them having no "Plan B" weren`t enough, they are bleeding billions in cash from their moribund GMAC financing unit. The only real question is: Does the U.S. government consider GM "too important to fail", and if so, how big is that gargantuan taxpayer-financed bailout going to be?


The WTF-o-meter took some considerable effort to process this next article, due to the massive amount of FedBabble contained therein - however eventually the WTFOM`s proprietary de-obfuscation and blather-removal algorithms managed to make some sense of it, generating the above post headline. for your edification, I've posted some of algorithmic output annotations below, interspersed with the original obfuscated WTFOM input, a Bloomberg.com article:

Fed Sounds Inflation Alarm, Takes `Baby Step' Toward Raising Interest Rate: The Federal Reserve is sounding the alarm on inflation without committing to raise interest rates.

How does one "take baby steps toward raising interest rates" without actually raising interest rates, anyway? You either raise `em or you don`t - everything else is just hot air.

June 26 (Bloomberg) -- The Federal Reserve is sounding the alarm on inflation without committing to raise interest rates.

The Federal Open Market Committee left its benchmark rate at 2 percent yesterday and said ``upside risks'' to prices have picked up. The statement also said consumer spending is ``firming,'' while acknowledging that rising energy prices will curb growth into 2009.

Note that in FedLand, one never speaks of "rising prices" - one speaks of "upside risk", and even then not with crass language like, say, "upside risk exists", but rather "upside risk has 'picked up'." I`m actually rather surprised the FedBabulators didn`t come up with a real gem like "some measures of upside risk expectation have picked up." And, WTF does "firming" mean in an inflationary environment? I suspect that`s again FedBabble for "stuff costs more, so folks have to shell out more to buy it." But I`m not an "economist", so WTF do I know? I should really defer to the Fed experts, as they see all and know all.

The FOMC cited ``the elevated state'' of some measures of inflation expectations and dropped an April forecast of a ``leveling out'' in commodity prices. The officials want to keep their options open on rate changes in case the credit crisis worsens and the economy deteriorates after consumers spend their tax rebates, Fed watchers said.

Again, "inflation" by its ugly raw self is a no-no; the proper phrasing is "inflation expectations". And one doesn't say "our April forecast vis-a-vis commodity prices was complete baloney" - rather, one says "we are keeping our options open ... by `dropping` our earlier forecast." Not that it was "wrong" or anything - it`s just no longer au courant.

The FOMC said employment had weakened and financial markets remained under ``considerable stress,'' even as growth risks ``diminished somewhat.''

Not "people getting laid off left and right" ... rather, "employment has weakened". Not "banks tanking big-time as it gets harder for them to conceal the dire state of their balance sheets" ... instead, "financial markets remain under considerable stress". And WTF does "growth risks have diminished somewhat" mean? Are you treating a tumor on Bernanke's nose here?

Chairman Ben S. Bernanke and his colleagues stopped short of specifying that inflation was a greater concern than growth.

Translation: "We`re completely powerless at this point, since our earlier spate of rate-slashing seems to have had the opposite effect of what our esteemed chairman predicted - and at this point we can`t agree on anything, and Dick Fisher and Ben almost got in a fight yesterday."

They reiterated language from their April meeting that the Fed will ``act as needed'' to promote both economic expansion and stable prices.

Translation: "We`re so completely out of ideas at this point that the best we can up with is to recycle the babble-spew from our previous meeting."


Fannie and Freddie Bailing Themsleves Out Instead of Helping Homeowners

June 24 (Bloomberg) -- Three months after Fannie Mae and Freddie Mac won the freedom to step up home-loan purchases, the government-chartered mortgage-finance companies are doing what critics in the Federal Reserve and Congress had predicted.

Instead of using powers granted by Congress to buy jumbo loans for the first time, Freddie Mac and Fannie Mae are purchasing their own mortgage-backed securities, helping reduce losses, company filings show. The large loans, above $417,000, made up almost a third of the U.S. market last year, according to the Mortgage Bankers Association.

Since the rule change took effect in March, Fannie Mae has packaged $24 million of jumbo loans into securities, while Freddie Mac added $220 million, according to the Inside Mortgage Finance newsletter. In April, the companies spent more than $32.4 billion to buy their own instruments, regulatory filings show.

...

The National Association of Realtors estimated last year that Fannie Mae and Freddie Mac would buy $150 billion of jumbo loans in 2008. UBS AG analysts now say the amount may be $74 billion; the companies' own projections indicate that they may not even reach that figure.

...

The companies' purchases of their own securities are making them riskier because they retain 100 percent of the credit and interest-rate exposure on those assets, said William Poole, president of the St. Louis Federal Reserve until March and now a senior fellow at the Cato Institute.

``Any legislation today that simply expands what they do is going in the wrong direction,'' Poole, 71, said. ``It's potentially digging the taxpayer in deeper.''

What - an NAR "this is great for the housing market!" prediction proves to be way off? Shocking, just shocking. A government regulation change having unintended consequences in the "do the opposite" vein? Equally shocking stuff. [Sorry, no :dripping-with-irony: emoticon available].

[cheesehead]

Originally Posted by Prime95

My S&P mutual fund tracks the index and is currently yielding 2%.

... which is consistent with either of my explanations. You could have, I imagine, arranged to have that 2% reinvested in fund shares, which wouldn't change the share price.

[ewmayer]

One of Mish Shedlock's recent postings puts a new twist on the phrase, "Putting a lien on a property" - or maybe it's really an old twist, reborn in mega-millions Texas style. Anyway, the biblical theme of "Castles built on sand" certainly seems apt here - this being Texas, you'd at least have thought some of the folks behind this lunacy would know their Bible metaphors, even if only in modern-short-attention-spanned "Greatest Hits of the Old and New Testament" fashion. "The Lord is my shepherd ... he, um, leadeth my horse to water and maketh him drink ... he maketh me build my house in green pastures, not shifting sands ... erm, and I shall dwell in the Valley of the Shadow of the 600 forever and ever, and stuff. Amen, and pass the ammo, ya durn varmint!":

The Leaning Tower of Padre

One of the reader comments on this one:

Antonio of Pisa
Monday, June 23, 2008
6:29:02 PM

Nowa da US hava leaning tower and no lika?

You gotta Lemons. You mayka Lemonade.

NYT | Paul Krugman: Home Not-So-Sweet Home

Listening to politicians, you’d think that every family should own its home — in fact, that you’re not a real American unless you’re a homeowner. “If you own something,” Mr. Bush once declared, “you have a vital stake in the future of our country.” Presumably, then, citizens who live in rented housing, and therefore lack that “vital stake,” can’t be properly patriotic. Bring back property qualifications for voting!

Even Democrats seem to share the sense that Americans who don’t own houses are second-class citizens. Early last year, just as the mortgage meltdown was beginning, Austan Goolsbee, a University of Chicago economist who is one of Barack Obama’s top advisers, warned against a crackdown on subprime lending. “For be it ever so humble,” he wrote, “there really is no place like home, even if it does come with a balloon payment mortgage.”

And the belief that you’re nothing if you don’t own a home is reflected in U.S. policy. Because the I.R.S. lets you deduct mortgage interest from your taxable income but doesn’t let you deduct rent, the federal tax system provides an enormous subsidy to owner-occupied housing. On top of that, government-sponsored enterprises — Fannie Mae, Freddie Mac and the Federal Home Loan Banks — provide cheap financing for home buyers; investors who want to provide rental housing are on their own.

In effect, U.S. policy is based on the premise that everyone should be a homeowner. But here’s the thing: There are some real disadvantages to homeownership...
[Full article]

And lastly, this week's MotWee award - early, because I am taking tomorrow off - goes, collectively, to "economists":

Economists should listen to consumers: Experts have a half-glass full outlook for the economy while average Americans are far more pessimistic. Here's why the consumer is probably right.

NEW YORK (CNNMoney.com) -- Consumers and economists strongly disagree about which direction the economy is going.

Many economists are looking for at least a modest rebound in the second half of this year. That's a key part of the reason the Federal Reserve is expected to end its nine-month course of rate cuts and keep rates steady Wednesday.

Ah yes, the "economy will pick up in 2H 2008" fantasy - to which the obvious retort is, "What in the actual economic picture makes you think so?" The only credible reply [in the sense that it appears to be honest - not necessarily logically consistent] to that one seems to be "the past few recessions have mostly been short and shallow", which ignores that the economics driving the current recession [massive expansion of consumer debt during the Greenspan housing and credit bubble] are fundamentally different than those at any time in the past few decades.

But 5,000 consumers surveyed earlier this month by The Conference Board, a well-respected private business research group, gave the bleakest six-month outlook for the economy ever in the nearly 42 year history of the survey.

Consumers expecting business conditions to deteriorate outnumbered those who expected an improvement by more than three-to-one. Those expecting more job losses topped those expecting an improvement in the labor market by more than four-to-one.

So who's right? Even some economists think it's not a good idea to ignore what consumers are saying.

Gosh, how magnanimous - consumerism drives 70% of the modern American economy, but for an economist to actually listen to overwhelmingly one-sided consumer sentiment is seen as a remarkable thing for an economist to do. That explains a lot.

"I would guess that the consumers are going to be right," said Keith Hembre, chief economist First American Funds.

He said the combination of record high energy prices, rising unemployment and job losses, a historically bad housing market and continued tightening of credit gives consumers every reason to expect the economy to get worse.

"Those four headwinds are not fading," Hembre said.

What was that you oh-so-smart economists were saying about a "second-half recovery" again? Is there a magical "tailwind" we all overlooked? Let me guess: economists are all humming an imaginary tune called "They call the wind Bernanke". Well, indeed, our esteemed Fed chairman is putting out a lot of hot air these days [that's "the wind"] and some rude jesters would even say he's blowing smoke out of his nether orifice [the "tail" part of "the tailwind"], but bailing out his Wall street bankster pals [or at least attempting to] does absolutely nothing for Joe Main Street and his underwater mortgage on the ginormous American Dream McMansion he bought a couple years back in a patriotic fervor.

Lynn Franco, director of The Conference Board's Consumer Research Center, suggested that with consumers feeling so grim, they may pull back on plans to make big-ticket purchases. That can slow the economy even further than current experts are forecasting.

In fact, the Conference Board survey showed consumers' intentions to buy just about every type of big-ticket item, from cars to appliances, fell this month. The only thing consumers planned to buy more of was air conditioners. Fewer Americans also planned to take a vacation, according to the survey.

Hembre said consumer spending has stayed remarkably strong in the face of all the economic problems in the past year.

But Bernard Baumohl, executive director of The Economic Outlook Group, said that spending has been helped to this point by the more than $100 billion in tax rebate checks approved earlier this year as part of the federal government's economic stimulus plan.

...Not to mention that a significant part of recent "spending growth" has been nothing more than "rampant inflation" on "non-core goods" like food and fuel - sure, people have to buy them, but economists like to ignore them, because they`re "not core". What does that mean? Why, it means they're stripped out of most economists' forecasting models because they're classified as "volatile". What does that mean? Why, it means they're "shooting through the roof". What does the fact that economists choose to ignore them based on their "volatile" nature mean? Why, it means that "economists are full of shit." A classic Reducto ad merdium for the books there.

My guess is not that economists are literally morons - but rather that they are too steeped in their own projections and computer models to pay much attention to "the real world", or as scientists say, "the data". I believe the colloquial phrase is "drinking their own Kool-aid". Ah yes, here we have it:

And economists agree that if consumer spending, which accounts for nearly three-quarters of the nation's economic activity, actually starts to decline, it is likely to send the economy into a much more pronounced and longer recession than currently expected.

Another reason to believe the consumers' outlook rather than the more optimistic view of many economists is that the consumer's view is far more current, according to Bob Brusca of FAO Economics.

"He who forecasts last forecasts best," said Brusca. He said consumers are making their judgments about the economy because they have to buy gas and food every day and see what's happening to home prices in their neighborhood. So they have a sense of the economy before it starts to show up in the official numbers weighed by economists.

...Not that it ever shows up in the "official numbers" until years and multiple "retroactive adjustments" later - too late to be useful except in a "tell us something we did`t already know" sense. Anyway, why even call them "economic forecasts" if they're so flagrantly ignorant of "current conditions"? Garbage in, garbage out, even assuming the underlying model is realistic - which is also highly suspect in this case, because economics, unlike real sciences, has no quantitatively precise governing equations for any economic activity beyond the "I give you a goose, you give me a handful of copper coins" stuff - just "models" built on hypotheses, assumptions and more "models". That makes economic forecasts dubious even in the presence of accurate initial conditions, and worthless otherwise.

Lastly, more support for the "drinking the same Kool-aid" point of view comes from the tendency of economists to all use the same small set of lame metaphors - here's a sampling from a single news story culled from today's headlines:

"The jury still is out as to whether consumer spending is out of the woods," writes Northern Trust economist Paul Kasriel. "The motor vehicle producers would say 'no.'"

We have "juries still out" on whether consumer spending is "out of the woods" [Newsflash: it's only really getting started on its downward slide].

Another factor that's hard to overlook is the ill health of the big U.S. banks. Citi dropped 6% Thursday after analysts at Goldman Sachs put the stock on their "conviction sell" list, predicting second-quarter asset writedowns of almost $9 billion. Analysts at Sanford C. Bernstein downgraded Merrill Lynch to sell as well, saying the firm should take $3.5 billion in writedowns in the quarter that's about to end. Analysts at both firms indicated they have been too optimistic up till now in forecasting a financial sector recovery.

At this point, I suspect the only kind of "conviction" most investors want to see a Goldman Sachs analyst have is of the criminal variety. But I digress - after all, we were speaking of economists, not their partners in herd-like stupidity, analysts.

"The turnaround in business trends that we had been expecting in the second half of 2008 may not occur as quickly as we should have thought," Goldman Sachs analyst William Tanona said. "We see multiple headwinds."

Question ... if a second-half turnaround doesn't occur "in the second half"... ah, never mind. Here we again have "headwinds", plural - can there really be "headwinds" blowing from multiple directions at once? And do you "see" a headwind, or do you "feel" it? Maybe if the air is full of smoke blown by economists and Wall street analysts, you actually could "see" it. At this point, we need a meteorologist, not an economist.

Headwinds are the least of it, though. As Bernstein analyst Brad Hintz wrote, the problem for big financial companies is that their most profitable businesses, those tied to the fast and furious debt markets of the earlier part of this decade, have essentially ceased to exist. Brokerage firms have shown some ingenuity over the years in exploiting new opportunities in the financial markets, but it will take a while for those to develop.

"We are not recommending investors buy canned goods and bottled water at this point," Hintz writes, adding that low short-term rates and a steeper yield curve will eventually lay the groundwork for a recovery. "But currently the trend lines of Wall Street's high-margin institutional businesses are pointing south."

So, southward-pointing trendlines are bad, then? What if you live in the southern hemisphere? Do the multiple headwinds blow in the opposite direction there, due to the economic Coriolis effect?

Seriously, the bit about "low short-term rates and a steeper yield curve" there illustrates the problem - too many years of too-low short-term rates helped cause the speculative bubble, and only an idiot - or an economist - would think that more of the same will produce the opposite effect. And belief that manipulation of yield curves is somehow a magic producer of economic vitality is either supreme arrogance or some kind of cultish belief in the godlike power of central banks on the part of economists. The groundwork for a genuine economic recovery will rest on fundamentals, namely a return to healthy productive economic activity, not some phony economic "growth" consisting of debt-addicted hordes of consumers buying stuff they don't need using money they don't own, and phony "production" based on Americans selling each other ever-more-price-inflated real estate. The fact that so few economists seem to get that is simply appalling. Morons, the lot of 'em.

[ewmayer]

...then we really are in need of a serious lesson in belt-tightening:

Retirees squeezed as home values, stocks dive

To retired mail carrier Durant Simon, these are the sounds of economic malaise:

Aging pipes creaking from beneath his house.

The bump-and-grind of a 1997 Volvo in need of new shocks.

And the dull roar of number-crunching inside his head.

"I'm digging into my savings to do home repairs left over from the '89 earthquake," says the former Air Force Teletype operator, now 71 and living in East San Jose with his wife of 43 years, Chizuko. "My wall heaters went out long ago and my plumbing needs to be fixed, but at the same time my medical and utility bills keep climbing. If something catastrophic came along, we'd be in real trouble."

Pretty sad stuff ... until you check out the image gallery accompanying the article - our pal Durant sure has a living room filled with suh-weet A/V equipment. So, "something catastrophic" - you mean like the cable company raising the price of their Digital Premier Platinum package? One presumes that those aging pipes beneath the house were already pretty old when you bought that new-looking high-end electronic equipment...and you admit yourself that your wall heaters went out "long ago". Prioritites, priorities.


Countrywide, UK Style

Hadrian's Town Becomes `Slum' as Subprime Infects North England: June 30 (Bloomberg) -- Paul Quinn stands among furniture piled in a second-hand store in Wallsend, a town in northeast England where about half of mortgages are subprime. Demand for the chipped tables and cupboards is accelerating, he says.

Northern Rock Financial - "The Countrywide of the UK." And speaking of our favorite Poster Child of the Subprime Madness:


Bank of America's Countrywide Tab Signed by Taxpayers

June 25 (Bloomberg) — Bank of America Corp.’s $3 billion takeover of Countrywide Financial Corp. will be financed by 138 million tax-paying Americans.

Bank of America, led by Chief Executive Officer Kenneth Lewis, can use tax write-offs to pay for Countrywide, the country’s biggest mortgage lender, said Robert Willens, a former managing director at Lehman Brothers Holdings Inc. who now runs his own accounting firm. Taxpayers may pick up about $5 billion of Countrywide’s losses over 20 years, he said. Countrywide shareholders approved the sale today.

IMF to audit "previously untouchable" U.S. Finances

IMF finally knocks on Uncle Sam's door

Der Spiegel [writes] that the IMF had "informed" Federal Reserve chairman Ben Bernanke of plans that would have been unheard of in the past: a general examination of the US financial system. The IMF's board of directors has ruled that a so-called Financial Sector Assessment Program is to be carried out in the US.

This, Der Spiegel wrote, "is nothing less than an X-ray of the entire US financial system", adding that "no Fed chief in US history has been forced to submit to the kind of humiliation that Ben Bernanke is facing".

The fact that the IMF is knocking on the very doors of its parents and waving legal papers about who lost the house, the car and the kids will, if the past is anything to go by, be buried in the US by pom-pom waving on CNBC telling all what a great time it is to buy.

But the news that the US Fed has now lost its last vestige of credibility did not end with the German report.

The Telegraph from London weighed in, following the Royal Bank of Scotland's statement last week (also lost on the US public) that it was time to head for the crags, and reported Barclays Capital's closely watched Global Outlook analysis that said US headline inflation would hit 5.5% by August and the Fed would have to raise interest rates six times by the end of next year to prevent a wage spiral.

If the Fed hesitates, the bond markets will take matters into their own hands. "This is the first test for central banks in 30 years and they have fluffed it," the report found. "They have zero credibility, and the Fed is negative if that's possible. It has lost all credibility."

Der Spiegel reports that the IMF is threatening to seriously study the accounts of America, something President George Bush is determined to prevent at least while he is in the White House, informing the IMF that it can begin its investigation but cannot complete it until he leaves office.

But the reckoning will come and it will shine a light in places where light has been desperately wanted for all too long.

"As part of the assessment," Der Spiegel said, "the Fed, the Securities and Exchange Commission, the major investment banks, mortgage banks and hedge funds will be asked to hand over confidential documents to the IMF team. They will be required to answer the questions they are asked during interviews. Their databases will be subjected to so-called stress tests — worst-case scenarios designed to simulate the broader effects of failures of other major financial institutions or a continuing decline of the dollar."

Under its by-laws, the IMF is charged with the supervision of the international monetary system. About two-thirds of IMF members — but never the US — have already endured this painful procedure.