Category: Markets, Business, and the Economy

Giddyap, li’l economists!

Let’s start with government manipulation of data.  Remember when I said that manipulation of inflation data allowed for instant manipulation of Gross Domestic Product data?  A smarter economist has gone much farther than I could to outline the ways that GDP is manipulated.  In short, if you look at the big picture without the rosy glasses, we’ve been in a recession most of the last 3 years!

The New York Times is a little slow on this one, saying that More Arrows Seen Pointing to Recession.  Analysts start to theorize that the angry mob of unemployed and underemployed people who can barely gas up their cars to go buy groceries aren’t there out of sheer laziness, film at 11.

And about those groceries, store brands are appearing in more and more of our carts.  So much for consumer staples being recession proof!

Locally, a lot of school supplies are coming from Dollar Tree and a lot of school clothes are from Goodwill, where they offer a student and teacher discount with ID.

Minyanville has a nice piece on how the latest minimum wage increase still leaves workers behind where they were 11 years ago.

Speaking of inflation, Alternet goes out there to point out full-on stagflation when you look at real employment rates and actual price increases of things average people buy. “Let them eat pizza” indeed.

Citizen Carrie is right on when it comes to labor issues.

In closing: updating the Kosher rules for the modern global economy; Toyota’s Segway alternative (maybe they’ll toss one in if you buy a large SUV); too fit to be President??; and why is Wal-Mart afraid of a Democratic win in the fall.

Yes, I know it’s supposed to be pronounced wah-KOH-vee-ah.

I have been viewing the mortgage crisis and the resultant banking crisis through a different lens than most people. Sure, I try to send snapshots of what I am seeing, but it’s probably not what you are seeing. I have explained mortgage-backed securities at some length here, Wikipedia has a more in depth article here, and if this is a foreign term to you, reading those might cause the rest of this to make more sense.

In a nutshell, the house of cards started to come down when some investors realized that all mortgage-backed securities were not created equal: the ones Fannie and Freddie were buying up had much lower risk than the ones John Q Hedge Fund was buying. This made it more difficult to sell these securities; and if they could not be sold, the originator of the loan could not make new loans; and if those mortgage companies couldn’t make new loans, people might not be able to buy houses; and for a variety of social, political, and economic reasons, we couldn’t allow that! The obvious solution was to let Fannie and Freddie buy subprime paper. This would both revive the market for the stuff, and free up the Good Stuff for other investors (since Fannie and Freddie have a limited amount of money).

So by this time last year, Fannie had almost $50 Billion in subprime notes, and Freddie about $120 Billion. Spread the risk. I mean, love. Spread the love. Also by this time last year, the subprime crisis had caused its first corporate bankruptcy. If you only understand one thing out of all this, it should be this: All of us have a vested interest in this thing unwinding in as prompt and orderly a fashion as possible. Most housing is purchased using a mortgage; even rented housing usually has a mortgage.

Because I work in real estate, I deal with mortgage companies on a daily basis. I’m calling mortgage brokers; I’m trying to get pre-approval letters for clients; I’m trying to get short-sale approval; I’m trying to help clients purchase foreclosed homes. This being said, there were clear warning signs that IndyMac was in trouble. It was hard to read the situation, because the same signs were hanging in a lot of places, and still are.

Barring future disaster, Wachovia will survive in my opinion, because they are making sensible cuts now. You may have heard they are getting out of the mortgage business? It turns out “will no longer offer mortgages through brokers” effective Friday. You can still walk into a branch and ask to speak to a loan officer on Monday. That’s not a panic, but an orderly shutdown.

A lot of people are worried about WaMu and I can’t blame them. Wall Street has been worried for some time. Just yesterday they, like Wachovia, announced “billions in mortgage losses” for the last quarter.  Getting them to approve short sales is like pulling teeth — apparently they want to foreclose and have thousands of REO homes to get rid of!  People complain about their mortgage division’s practices. Not a month goes by that I don’t have at least 2 visitors to ShortWoman looking for some variant on “talk to a human at WaMu“. Things look bad for WaMu, yet it’s not the same warning signs as IndyMac.

And then there’s Wells Fargo.  Jim Cramer has been telling us things are wonderful at Wells for a year now. Just today he reiterated that.  Now, on one hand, Jim is a smart guy who has made a lot of money scrutinizing the balance sheets of banks and investing accordingly.  He is looking at the situation from the top.  I am seeing it from the bottom, and the sign is easier to read from down here. It’s the sign I saw at Countrywide (whose takeover by Bank of America is cruising towards completion).  It’s the sign I saw at IndyMac.

Wells Fargo owns a lot of foreclosed homes. By my count they have about 500 listed for sale in my metropolitan area alone.  And if you want to purchase one of them?  You have to be approved by a Wells Fargo mortgage consultant.  Your offer won’t even be sent in without a pre-approval letter from them!  They will of course try to sell you a mortgage while they are at it.  For a company that needs to sell property pronto, they are going out of their way to make it difficult to buy.

In closing: sometimes “equality” isn’t quite as good as everyone might like; when the budget gets too tight, even potentially life-saving medical care is optional spending; short version of the economic differences between Senator McCain and Senator Obama; the view from the bottom of our economy is pretty sad; and the iDiet (not an endorsement in any way shape or form).

Today we learned that in June, our economy lost roughly 62,000 jobs according to the Bureau of Labor Statistics. Along with this, we learned that even more jobs were lost in May than initially thought. The unemployment rate is remaining stable at 5.5% — this has to do with the very narrow BLS definition of “unemployed” (you had a full time job, you lost it, you aren’t working at all, and you are actively looking for work). Keep in mind, May and June are a time when our new high school and college grads are looking for their first “real” job.

CNN furthermore points out that June was the 6th straight month of job losses, initial jobless claims are up, total unemployment claims are at the highest level since Katrina, and wages aren’t keeping pace with inflation — that’s inflation as [under]measured by the government.

Robert Reich did a very nice wrap-up of the problem, pointing out “Total job losses since the first of the year are now 438,000. That’s a loss of 73,000 a month. The economy needs to CREATE 125,000 jobs a month just to keep up with population growth.” That’s about all that needs to be said.

Cross-posted at The Moderate Voice.

In closing: Edward Kennedy — who you will recall is recovering from a brain tumor — is laying the groundwork for a true universal health care plan (not one of those mandatory plans that most politicians keep trying to sell us); How to Leave Iraq; and a follow-up, this guy managed to get 110 mpg and 400 horsepower out of an ’87 Mustang. Hey Detroit, we don’t believe you can’t give us both efficient and powerful any more! Maybe that’s why Toyota is kicking your butt!

Let’s imagine a nice little community of 400 homes. It’s a perfectly average American community, and it could be anywhere: in town, in the ‘burbs, in the countryside.

Thanks to the often-cited statistic that 68% of Americans own their homes, we can deduce that perhaps as many as 32% are rental homes, or 128. However, we are going to assume there is an apartment complex down the road, and that only a third of that number are in fact rental homes. We’ll round down to 42.

Because it is a perfectly average community, roughly 5% are currently available. Most of them are for sale or lease. A few have sales/leases pending — the sign is still up, but only because the deal hasn’t actually closed yet. Another few are being prepped for sale/lease, but frankly if you made the owner an offer out of the blue he or she would likely take it.. That’s 20 homes. A lot of these homes are currently not occupied.

Right now, 2 of them are in foreclosure, like one out of every 194 homes nationwide — more than double last year’s figure. Once the bank takes them back, they will be added to the list of homes currently available.

In addition, since 6.8% of American homes are currently financed at least in part with a ARM sub-prime mortgage, there’s 27 homeowners that don’t know what their payment will be next year. Since there are 75.1 million home owning Americans and “over 7.5 million first-lien subprime mortgages outstanding”, you can see that one out of every 10 homes in this average community are involved in the subprime mess in one way or another. That’s 40 homes. There is reason to suspect that a disproportionate number of these homes are currently rented, because a lot of investors had to resort to subprime lending. Suddenly, Hope Now’s efforts seem quixotic.

So let’s take a look at how this could play out in the next few months. Those two foreclosures alone will drive our available homes figure to 22, an increase of 10%. This doesn’t seem like a big deal in one community of 400 homes, but multiplied out across a metropolitan area, it can be huge. The bank does not particularly want to own this property, and in many cases is willing to sell at a loss. This drives down prices across our community: why would buyers pay more to a private owner, when they can get a comparable bank-owned home for less?

This in turn creates another problem for our homeowners with subprime and ARM mortgages. Some of those people would like to refinance, but can’t. Some now owe more than the current market price; that combined with whatever personal financial issues resulted in them having this mortgage in the first place prevent them from getting affordable refinancing. Some of these people are going to have to sell their homes, if not simply walk away. If as few as 2 of them do so, we have raised available housing by a total of 20% across the community.

We haven’t even discussed the impact of a major lender going out of business. While the mortgages owned by such a lender would be sold off — they are assets, after all — that would reduce the pool of available lenders, and available funds with which to make mortgages for honest, bill-paying homeowners. It obviously also reduces the money available to people trying to refinance. In a nutshell, that is why the government has to “bail out” some lenders: not because we are rewarding their bad behavior, but because of the impact on the public.

Most of the currently discussed legislative solutions focus on owner-occupied homes. The reasoning is that investors should have known better and it’s only fair that they sleep in the bed they made. This reasoning fails to account for the decent, rent-paying residents of our community. If these homes are foreclosed upon, the leases are generally terminated, leaving the resident to scramble for a new home through no fault of his or her own. Does that seem fair to you? Furthermore, by leaving these homes out of the “solution”, we have the potential of adding dozens of homes to a real estate market that normally only has 20 available units. The law of supply and demand suggests that is a recipe for plunging prices, a problem which already exists.

Problem exacerbated by the solution.

But what if our community isn’t perfectly average? According to the latest foreclosure data:

In the first quarter, 1 of every 54 homes in Nevada received some type of foreclosure filing – more than any other state. Its largest city, Las Vegas, had 1 out of every 44 homes go into foreclosure.

Stockton, Calif., had the highest foreclosure rate out of any U.S. metro area, with 1 out of every 30 homes receiving a notice – nearly seven times higher than the national average. The Riverside/San Bernardino region had the second highest rate in the quarter, with one of every 38 homes in default.

Only two metro areas in the ranks of the 20 hardest hit were outside the Sunbelt – Detroit, which ranked sixth in the nation with 1 in every 68 households in default, and Cleveland which saw 1 in every 105 homes go into foreclosure.

That means that if our typical community is in Nevada, there’s 7 homes in foreclosure; if it’s in Las Vegas, there’s 9; Stockton, there’s 13; Detroit, there’s 5 or 6; Cleveland, there’s 3 or 4. Multiply all the problems above accordingly. And keep in mind that these problems are currently impacting the economy in a negative way.

Any real legislative solution to these issues must take into account all parts of the problem: lenders, homeowners, real estate investors, renters, even home builders and investors who purchased mortgage backed securities. To implement half a solution is worse than no solution at all.

Cross-posted on The Moderate Voice and Bridget Magnus.

Oh yes, I watched way too much television as a child. And one fond memory is Detective Columbo conducting his interview: he would ask a series of obvious, softball questions and come off as slightly bumbling; he would thank the person and turn to go; then almost without fail he would turn back and say “Oh! And one more thing!”. Then he would ask the one important question that would unravel the case.

And that brings us to Bear Stearns. It was 9 months ago that they were forced to shut down a couple of divisions that were in over their heads on sub-prime mortgage backed securities. Merrill Lynch had to bail them out of that, and sell the assets for whatever they could get. Everyone heaved a sigh of relief, thinking problem solved, disaster averted, now everything can get back to normal.

By the beginning of August, Citibank admitted that they, too, had problems. But — CEO Charles Prince swore to investor Prince Alwaleed bin Talal — this is it and there will be no surprises. By November he had to confess this was not true. His resignation was demanded and received.

Sandwiched in this mess, we have Countrywide, who declared their “first loss in 25 years” but swore that they would be profitable the next quarter. They weren’t. By that time they were in the process of being bailed out bought by Bank of America.

And here we are, another shoe drops, another “one more thing”, Bear Stearns is actually so bad off they might be forced out of business. JP Morgan Chase and the Federal Reserve are having to prevent total collapse after what is described as significant deterioration of liquidity in the past 24 hours. I am having a tough time imagining what could go so horribly wrong in a day: were they short gold? Somebody knew there was trouble afoot, and that somebody sold a whole lot of options yesterday.

Despite the President’s tough talk at the Economic Club of New York — he has just finished speaking as I write — there will be no stability for our economy as long as we are in Columbo Economy mode, waiting for more centipede shoes to fall from our financial institutions. Bad enough we have stagnant wages, hints of stagflation, a sinking dollar with no sign of imminent stabilization, financial websites telling us about investing strategies for a recession, oil prices that have hit $110 a barrel (oh the nostalgia for mere $60 per barrel a mere year ago!) propelled on world demand and a weak dollar, gold prices over $1000 per ounce, and that same weak dollar causing a rise in prices of food commodities like wheat and corn and soy; there’s quite enough going wrong without help from Wall Street.

Cross-posted at The Moderate Voice.

In closing: Got Chemicals?; How and why the Feds might be monitoring your bank account; and a summary of Bush Administration Horrors.

Once again Tim Ionono has some of the better economics-for-Joe-Average commentary going on anywhere, complete with lots of colorful charts. Today he talks about the today’s GDP numbers. For those of you who are perhaps a little fuzzy on GDP — Gross Domestic Product — you can learn a bit about it here, and why it’s important here. The Short version is that “it’s a summary of how the economy is doing, based on who is spending what and whether the money stays here or is spent on imported goods.”

Even though we managed to pull out a positive number for this report — 0.6% — Forbes quotes various economists as saying there were unpleasant surprises, and “There is no real positive news to cull from this report.” Even before the report came out, the Chief Economist of the National Association of Home Builders was quoted as saying we have an even chance of sliding into an economic “red zone”, with “further deterioration of labor market conditions”, “substantial reductions in home sales”, and “turmoil” in the stock markets and the credit markets. Credit markets would be shorthand for bonds, loans, and mortgages. Even the FDIC is starting to plan ahead for bank closure strike teams. Excuse me while I bite back a comment about them not getting the memo from the Bush Administration that everything is fine, as long as we mail everybody a check.

Add to this the gold markets appearing to anticipate stagflation, American households cutting spending because of rising gas costs — consumer spending is more than 2/3 of GDP — and the Dollar being near a record low against the Euro, and you can see where there might be a problem. Or in econospeak: “There are concerns going forward.”

But back to Tim Iocono. His graphs are telling, particularly the second one where it is clear that spending is off on all levels and private domestic investment tanked. Of course anyone who has been seeking a business loan could have told you that. Despite the fact that the official definition of a recession is ” A period of general economic decline; specifically, a decline in GDP for two or more consecutive quarters,” Tim ends with this sentence:

It is widely believed that the economy has already entered a recession.

Could it be that I am not the only one who thinks that GDP has been manipulated? Anybody who buys things knows that prices have gone up in ways that are not accounted for in the official inflation numbers: perhaps GDP is kept artificially high transparently through the manipulation of inflation data?

It makes you wonder.

Cross-posted at The Moderate Voice.

Last week, when President Bush outlined his proposed stimulus package, someone asked me what I thought. My reply:

First, it will raise the national debt and deficit during “wartime”. FDR was more fiscally conservative.

Second, as it sits 40% of people won’t get the whole “rebate” because they didn’t pay enough taxes. Those 40% of people are the same people most likely to have a really good way to spend $800-1600. Like the rent or mortgage.

Third, as if sending a bunch of checks in *June* (at best) is going to fix the recession we have *now*. A check in June doesn’t help Joe Average find a job in February.

Well, now we have a “compromise” in the works, and just like Solomon proposing to cut the baby in half, this one isn’t really good for anybody.

The International Times Herald notes that the Fed may have already done all they can do, and tells us that the compromise reduces the “rebate” to $300 for individuals and up to $1200 for families. Oh, and some vague business tax incentives and homeowner relief measures. To round things out, here’s coverage from the Associated Press and CNN. If you’d like to get more into the details, please check out TheStreet.com‘s coverage.

They’d better shake a leg, because the Christian Science Monitor points out that the “Economic Outlook Dims Sharply.” Japan’s Mainichi Shinbun (or, “Daily Newspaper”) points out that this emergency relief would cause the deficit to balloon further. If you think the deficit has anything to do with our current financial woes, then you must think this would be bad.

Onward to the opinions of actual economists! Paul Krugman is inclined to cautiously agree that maybe the Fed has run out of ammo unless they haven’t, and furthermore the compromise stimulus bill will be a disappointment. Stephen Dubner of Freakonomics shares my insight that stimulus 5 months from now hardly helps us today. EconoSpeak calls it “Little Bang for the Buck“. The Economic Policy Institute says it is “Missing the Target” on multiple levels.

He’s no economist, but Jim Cramer has some opinions about how this package may effect the markets. And in the interest of fairness, I conclude with several other opinions: Dave Johnson of Seeing the Forest notes that normally conservatives are all for “cutting spending” — although he does not point out that this package is in fact more spending; John Aravosis of AmericaBlog accuses Congressional Democrats of “giv[ing] away your stimulus check”; and the ArchCrone of The Crone Speaks points out that the people who could most use a few hundred bucks probably won’t get a darn thing.

So my opinions from last week are more-or-less confirmed by both experts and other commentators: a big nothing that will cost a lot of money.

cross-posted at TheModerateVoice

I have written before on some of the ways that the official inflation numbers are manipulated, and even hinted at some of the reasons why. I linked to this article back in 2004 which outlines some of the ways the numbers are gamed, and wrote this summary of Bill Fleckenstein’s analysis in 2006. For review:

• They adjust price increases of anything “new” or “improved” (including cars and computers and even hand soap and cereal).
• They don’t make the same sort of adjustments if the quality of a good or service declines.
• They arbitrarily decide that food and energy “don’t count” when calculating the so-called “core” rate.
• They assume homeowners pay themselves rent.
• They use an artificial basket of goods, and feel free to “substitute a cheaper equivalent” if a price gets out of line (because you’re totally willing to buy hamburger when you want a roast, right?).

And truly, that’s just a short list. These little games allow the government to say that inflation is “nominal”, the economy is fine, there’s no need to raise interest rates, and — most importantly — we don’t have to give a big cost-of-living-adjustment to all those people on Social Security.

But wait, there’s more.

It also allows transparent manipulation of Gross Domestic Product, or GDP.

Here’s how: Let’s say Joe and Jane Average used to spend $300 per week (that’s roughly the take home pay of someone earning $7.50 per hour) 5 years ago. They buy things like groceries and clothing and gasoline and cable TV. They set money aside for the car payment and the rent/mortgage. According to the official low, low inflation numbers, they should be spending something like $335 every week ($300 x 1.02%, compounded annually over 5 years is $331.22). However, you and I both know that’s way low: gas prices were as low as $1.639 in 2003 (personal data, I can even tell you where I bought it); groceries cost more; don’t even get started on housing prices; almost anything that had to be transported has higher costs — and that would be just about everything.

We both know Joe and Jane Average aren’t spending $335 per week, they’re spending more like $375 or even $400. But that number is too high to be accounted for by the official inflation number, so Joe and Jane must be buying more goods and services in the eyes of the economists. And, since personal spending represents more than half of GDP, that bloated number artificially inflates Real GDP Growth too.

So now what? It is clear that inflation is on the rise, even using the official government figures. It is officially on the rise at levels not seen in 16 years, and some of these inflation hiding tools weren’t in use then. And — even though this number is not adjusted for inflation, real or stated — retail sales are down. Add to that the fact that unemployment is on the rise and we have good old fashioned Stagflation. It should be no shock that the middle class is being hit hardest; they have — had — the most to lose. In short, nobody can slather enough lipstick on this pig. This comic put it well. GDP growth is clearly at risk. Since negative GDP growth means a recession, I will outright shocked if this combination of factors does not officially put us in recession.

In closing: Expert Ezra spells out exactly why mandatory health insurance won’t result in universal coverage; the Justice Department is trying to figure out exactly what “immunity” the State Department gave to Blackwater (but not necessarily how the State Department came to have the authority to give legal immunity to anybody); battery life could improve tenfold; urban schools aim to send all students to college, completely devaluing not only their own diplomas, but also some college degrees (don’t get me wrong, I’m glad they have high expectations for their students, but this is ridiculous); Peace Ambassador binLaden?; and 5 things not to do in the Emergency Room.

How long have I been saying things like “If the economy is so wonderful, then how come we have pathetic job growth/oil prices are at a record high/gold prices are rising/Joe Average has it so tough?” Suddenly people agree with me.

First, Merrill Lynch said we entered a recession last quarter. Then Goldman Sachs said we aren’t there yet, but recession is coming. They noticed some disturbing trends in the employment and job creation numbers. Finally. Goldman Sachs is where people like Robert Rubin and Jim Cramer learned to play the game; they didn’t survive this long by not knowing what they are talking about. If you prefer lots of charts and analysis, here’s Menzie Chinn at Econbrowser. Non-economist Barbara Ehrenreich replied to the whole brouhaha with a resounding “Duh.”

In fact, the UN thinks a worldwide recession is on the way, and the Christian Science Monitor reports that the “credit crunch” might could indeed be bad for the economy all around the world.

Of course not everyone agrees. Some Wall Street economists still think everything is great (as long as, please, you don’t look at the financial sector). President Bush thinks everything is great, and we need to make sure of it by implementing more tax cuts.

Speaking of that pesky financial sector, it looks like Bank of America may rescue Countrywide by acquiring it. May we live in interesting times.

In closing: telecoms cut off FBI’s [warrantless] wiretaps for non-payment of bills not anything important like, say, the Fourth and Fifth Amendments; Blackwater needs lobbyists; how are the new Congressmen doing?; a Kindergarten security risk; most Americans don’t like globalization; trading tips from the BondDad; and finally, Neko City.