Posted by Michael A. Kamperman on April 30, 2009
Yesterday the Federal Reserve Board of Governors decided to stand pat rather than up the pace of quantitative easing. Today we learned the economy has weakened further. Weekly jobless claims remained above 600,000. More troubling was the drop in both personal income and personal spending in the month of March by the consumer. One of the stronger parts of the -6.1 GDP report was consumer spending. This was based on strong spending by the consumer in the month of January. By March the consumer weakened considerably. With unemployment rates continuing to rise and wages beginning to fall it seems unrealistic that the consumer will continue to be able to prop up the economy. Yet many analysts believe the consumer potentially will lead the economy up in the second half of the year. Chrysler has been placed into bankruptcy by the U.S. government and more job losses in the auto industry on the way. It is hard to imagine the U.S. consumer will pick up the pace of spending any time soon.
Additionally, many Mexican nationals shop in the states on the southern border. Mexico is the number two destination in the world for U.S. exports behind Canada. Swine flu has shut all of the schools and many essential government services in Mexico. The usually bustling streets of Mexico are deserted. Even if a pandemic is not declared for swine flu the economic impact on Mexico is devastating. Trips to Mexican tourist destinations are being cancelled left and right. The economic weakness in Mexico will be felt in the U.S.
The reason the U.S. economy remain moribund is the non-government backed asset-backed securities market remains closed. This loss of credit to the economy has not been replaced. The Treasury mistakenly believes these markets are frozen. They are not frozen. They are broken. Until they are fixed, or an alternative source of credit for businesses and consumers emerges, the economy will continue to slide. The Fed’s own internal study says the Fed Funds rate needs to be 5% lower right now and quantitative easing is the only way to achieve this since rates are near zero. Either helicopter Ben has cold feet or he is having trouble bringing along some Fed Governors who are still fighting the economic battles of the 1970’s rather than the economic battles of the 1930’s.
Posted by Michael A. Kamperman on April 28, 2009
Tomorrow the Federal Reserve will report on the results of their meeting. Market expectations are the Fed will stand pat. The Fed has been way behind the curve since their August 2007 meeting. The only reason they have been given a pass is they have been way ahead of the brain-dead European Central Bank and almost every other central bank in the world. But winning a race run against cripples is no reason to celebrate. The Fed needs to step into the big leagues and show real leadership. The Fed should have cut interest rates by 250 basis points in August of 2007, instead they held pat. Tomorrow is no time to stand pat. The Fed needs to announce an additional $2 trillion in quantitative easing (printing money) focused on U.S. Treasury bonds with maturities of 2 to 10 years. This will provide the type of shock and awe the economy, not the stock and bond markets, needs.
Goldman Sachs estimates $1 to $1.6 trillion in quantitative easing is the equivalent of a 1% cut in the Fed Funds rate. Is there any doubt the Fed Funds rate needs to be cut further? Other than the fact it is already near zero there should be no doubt much more stimulus is needed for the Main Street economy. The unemployment rate will soon surpass the worst case estimate for 2009 the Treasury is using as part of its stress tests of the banks. Surely if unemployment surpasses the Treasury’s worst case estimates the need for the Fed to ease should be undisputed.
The so called “green shoots” being touted include the latest news on nationwide home prices. While these prices fell in February the rate of decline is beginning to slow. I don’t know about you but I do not count a slowing rate of decline a sign of improvement when home prices in cities like Phoenix have now officially fallen more than 50%. The TARP is not restoring lending and the stimulus plan is a band aid on a wound that needs surgery. Lending from the shadow banking system remains all but non-existent. The time has come for Ben Bernanke and the rest of the Fed to stand up and be counted.
Posted by Michael A. Kamperman on April 27, 2009
It appears the Obama administration may be heading down the wrong track in its vision of how to restore growth to the U.S. economy. The President has placed an emphasis on more stimulus spending by foreign governments such as France and Germany, increased savings rates by U.S. consumers, and investments that would make the U.S. more competitive is exporting goods to other countries. The WSJ recently reported “Mr. Geithner said the ability of other countries to shore up their economies is critical to the U.S. recovery. ‘Recovery in the U.S. depends significantly … on recovery in those large and previously rapidly growing markets,’ he said.” All of these goals have merit in and of themselves. But global trade will not revive the U.S. economy. For now a swine flu pandemic is only a possibility. Were it to become reality it would make any discussion on the merits of global trade a moot point.
The problem the administration will have with an export strategy as a path to growth is it is already the strategy employed by the next 4 largest economies in the world being, China, Japan, Germany and Great Britain. The reported economic decline in Japan, Germany, and Great Britain is greater than the reported decline in the U.S. It is clear China’s growth has slowed down and China may be in a recession. But “official” Chinese statistics say the country is still growing at a little more than 6% year over year. If the U.S. is not going to be the importer of goods, then who is? Certainly not Japan or Germany as their countries are not culturally wired this way. The U.K. economy is on the brink and they are in no position to begin large scale imports from the U.S. That leaves China. I have a hard time believing that the Chinese government that has consistently used unfair trade practices to grow export market share is all of a sudden going to turn good guy and start importing more from the U.S. than it sells. The U.S. has been the source of final demand in the world for years. There is no other significant economy positioned to take our place except China. However, China’s main strategy at present remains to make as much stuff as it can and sell it to the U.S.
The Obama administration needs to recognize that the rest of the world is not able to rescue us. We need to rescue ourselves. The administration needs to focus like a laser beam on restoring access to affordable credit to businesses and consumers. Right now it is tougher to get a mortgage than it was a few months ago, not easier. The U.S. government controls Fannie Mae and Fannie Mae has recently toughened its standards and raised its fees. The administration should quit worrying about the taxpayer potentially losing money and start worrying about averting a complete collapse of the global economy. At present it seems the world is heading straight towards protectionist policies as the “buy American” and “keep the jobs at home” movements build momentum.
Posted by Michael A. Kamperman on April 25, 2009
The bank stress test devised by the Treasury is meant to measure potential losses based on two perceived scenarios. The first scenario is the baseline scenario for the economy in 2009 and 2010, which is an average of the expected outcomes for the economy forecasted by blue chip economists. The second scenario is a worst case outcome forecasted by the same economists. The problem is the economy has deteriorated much more quickly than the baseline assumptions used in the stress test. The expected forecast for the end of 2009 is for unemployment to reach 8.4%, for the economy to decline 2%, and for home prices to fall 14%. The worst case for the end of 2009 calls for unemployment to reach 8.9%, the economy to decline at 3.3%, and for home prices to fall 22%. Right now unemployment is 8.5% and will increase to close to 8.9% by the end of April. With weekly jobless claims still averaging over 600,000 per week the unemployment level can be expected to rise much higher from here in 2009. Additionally, estimates for first quarter GDP are running at -5%. The only way for the worst case scenario to be avoided at present is for the economy to actually start to grow and add jobs in the second half of 2009.
So the question is why doesn’t the Treasury go back and redo the stress test? My thoughts are the stress test is not really meant to see how much more the government needs to do to shore up the banks. The goal of the stress test appears to be a way to restore confidence in the banking system in the eyes of the public and in the eyes of Wall Street. The Treasury hopes the vast majority of banks will be able to raise large amounts of private capital to cushion further losses in front of further potential government assistance. This has all the shades of FDR’s scheme to close the banks and declare only healthy banks were allowed to reopen. But this is not 1933. We live in an age of instant global communication. Most of FDR’s listeners on the radio didn’t even know he used a wheel chair.
This raises the most troubling question of all. Is the stress test the best plan Treasury Secretary Geithner could come up with because the political will to do what it takes to solve our economic crisis does not exist in Washington? I grow increasingly worried day by day that the only logical answer to the above question is the political will to solve the economic crisis is absent in Washington.
Posted by Michael A. Kamperman on April 23, 2009
This morning the Labor Department reported weekly unemployment claims rose to 640,000. The unemployment rate for April will rise again and job losses will be comparable to the job losses in March. Unemployment is normally considered a lagging indicator as jobs don’t usually come back until the economy already starts to recover. But I think it is different this time. The theory that unemployment is a lagging indicator is built off of the normal business cycle. In the normal post World War II recession supply eventually exceeds demand and a recession is necessary to once again balance demand with supply. As demand begins to recover companies do not hire because they want to work off their inventory. When demand starts to exceed supply companies initially look to press workers for more production and over-time hours begin to pile up. As demand continues to grow companies have no option but to hire more workers to keep up. Hence, economic recovery begins before hiring begins.
However, this is not a normal supply exceeding demand recession where too many cars were built and the fleet needs to age before substantial demand returns. This depression is because of extremely tight credit markets that remain extremely tight. The shadow banking system remains moribund and the Treasury reports bank lending is down. It doesn’t matter if a consumer wants to buy a new car if they cannot get a loan. Demand will not come back until access to affordable credit is restored. So far it has not been restored. Fannie Mae has tightened standards for mortgages and several major banks have tightened their own standards beyond what Fannie Mae is mandating. Over half the country has a subprime credit score and no one is stepping up to increase subprime lending. If demand doesn’t return the unemployed will stay that way for much longer than they anticipated.
Many workers who initially lose a job feel confident they will find work within a few weeks or months. They rely on unemployment benefits and their 401(k) to sustain their living standards. But as time goes by and job prospects remain grim people begin to cut spending and reduce their standard of living. The U.S. economy is just now entering the phase where the huge ramp-up in unemployment that began a few months ago is leading to further reductions in consumer spending. As long as consumer spending continues to slump unemployment will continue to rise. This means further drops in employment from here will become a leading indicator of economic decline rather than a lagging indicator. The only solution is to restore access to affordable credit to businesses and consumers.
Posted by Michael A. Kamperman on April 21, 2009
It seems as though no coherent message is coming from the administration as to what to do about the economy. The latest word from the Whitehouse is President Obama has asked his cabinet to identify $100 million in budget cuts. The media and talk radio are having a field day deriding the paltry sum of $100 million in budget cuts when the country is facing a $1.75 trillion budget deficit in 2009. The comparison being thrown around is this amounts to a family that spends $60,000 per year looking for ways to cut $6 from their annual budget. It’s as though the administration is like Dr. Evil and having awoken from a time warp still thinks millions is real money in Washington.
My concern is that President Obama and his advisors are sending a mixed message, the decidedly wrong message, when they talk about cutting $100 million from the budget. The whole purpose of the stimulus program was to use $786 billion in deficit spending to support a sinking economy. The economy has gotten much worse since President Obama and the Congress passed the stimulus package. So why is the President sending out a message that working towards a balanced budget is moving up his list of priorities? The stimulus bill is already too small and too much of it is spent in 2010 rather than 2009.
There is a place for fiscal responsibility and for balancing the budget, paying down debts, and putting a little money aside for a rainy day. But we are in the middle of a Cat 5 economic hurricane. Does the Whitehouse not get this? I’m left to question if the administration has a thorough understanding of the economic crisis we face and the enormity of the challenge of restoring the economy to health. If the administration does understand the depths of the crisis then the ploy of offering $100 million in budget cuts is nothing more than throwing a bone to its political critics. If this is the case, then one wonders if the political will exists in Washington to make the bold steps necessary to fix the economy. If the political will is not in the Whitehouse, then where is it? It’s certainly not in the Congress. President Obama needs an advisor to tell him that FDR hit the ground running with his famous first 100 days of activity in the middle of the Great Depression in 1933. If President Obama doesn’t step up the economic rescue, and fast, then he will more likely go down in history being compared to our other President that served during the Great Depression, Herbert Hoover.
Posted by Michael A. Kamperman on April 20, 2009
It was and remains a good idea to stress test the banks. It is important to know just what kind of shape each of the large systemically important institutions is in. We already know the assumptions Treasury is using for what the base case is and what the worst case could be are far too rosy. And frankly I do not trust the mathematical models they are using to show just what future credit losses will be. Capital One has reported that the historical ratio of losses between the unemployment rate and credit card charge-offs seems to be breaking to the downside. What other credit losses may break to the downside that is not factored in the models? None of these mathematical models were designed for the debt induced deflationary depression we are now in. Critically, the models do not have the real world facts that access to credit is far tighter than it has been since the Great Depression. What impact will it have on credit losses when those with debts coming due have no way to roll those debts over?
The more serious issue to me is the comedy of errors that is brewing over the release of the stress test data and what to do about it. Why did Treasury announce a plan to stress test the banks if they didn’t know what their end game would be? For example, how could the plan possibly be that those financial institutions that need more capital will have 6 months to raise the capital in the private markets? No one will invest in a financial institution the government claims is under-capitalized based on a rosy stress test. How is it the Treasury doesn’t even know what information it will release about the stress tests? This only raises more questions then it answers.
It appears Treasury may not have a clear understanding of the depth of the problems the economy has and the solutions necessary to fix the credit markets. Or, equally troubling is the possibility Treasury does understand the depth of the problem but it believes the political will to implement the necessary solutions does not exist in Washington. Neither of these possible outcomes is comforting to me. I hope I’m wrong and Treasury knows what the problems are, knows how to fix them, and can gain the political support it needs to implement its plans. Heaven help us if my concerns are justified.
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Posted by Michael A. Kamperman on April 16, 2009
The Treasury’s TARP program is failing to enhance lending to both businesses and consumers. The Wall Street Journal has reported that “in a monthly snapshot of lending by the 21 largest banks receiving Troubled Asset Relief Program funds, the Treasury said credit being offered fell 2.2% across all commercial-lending and consumer-lending categories in February, compared with the prior month.” The purpose of the TARP funds was twofold: to stop the panic that engulfed the stocks and bonds of financial companies and to regenerate access to affordable credit for both businesses and consumers. The TARP has succeeded in buying time and ending the panic. However, it has failed to revive access to affordable credit. This is a serious problem because in recent years the shadow-banking system has supplied up to 75 percent of the credit in the U.S. The shadow-banking system is on life support, and parts of it, like the non-government asset-backed securities market, practically ceases to exist. The hope was that the banks could absorb much of the need for new credit. While that goal is still attainable, it is not attainable through the TARP.
The problem is that the TARP funds have been distributed to two types of banks: healthy banks and zombie banks. The zombie banks simply want to survive, and they are trimming their loan portfolios and raising interest rates and fees on paying customers wherever they can. However, the healthy banks were basically forced to take the TARP funds for the good of the system. Since these banks took the TARP funds, Congress and the White House have sought to impose limits on executive pay, on bonuses, on the use of private jets, and even on travel to conferences at luxury resorts. Basically the country is in a depression, and the message from Washington to healthy institutions is don’t spend any money that might circulate around the rest of the economy. It is understandable that institutions needing taxpayer assistance should not be rewarded with bonuses and perks as though they were profitable on their own. But the healthy institutions that so far don’t need government assistance feel constrained operating under the whims of the President, any of the 100 Senators, and especially any of the 435 Congressman. Today on a conference call Jamie Dimon, the CEO of J.P. Morgan, declared that his company had the cash to pay the TARP back today and desired to do so as soon as possible. He called the TARP funds a “Scarlett Letter.” Additionally, J.P. Morgan does not plan to participate in the Treasuries new Public-Private Investment Program designed to move troubled assets off the banks balance sheets. This means J.P. Morgan is sitting on the TARP funds and not lending them out.
The solution is to let any bank in a position to repay the Treasury out of the TARP program. The funds can then be placed into a program that will enhance access to affordable credit for consumers and businesses. If Wall Street learns which banks are the zombie banks, then so be it. The zombie banks will be able to survive with government assistance anyway. The federal government needs to focus on reviving access to affordable credit, and it needs to quit focusing on reviving trading in troubled legacy assets. No matter how many of these distressed assets trade back and forth between government-backed hedge funds, credit won’t revive. And unless affordable credit is revived, the economy is destined to sink further.
Posted by Michael A. Kamperman on April 15, 2009
Most economists are still predicting that the Chinese economy will grow somewhere between 5 to 8% in 2009. But I have serious doubts about these estimates. Reports out of China indicate thousands of factories have closed and up to 20 million people have lost their jobs. Last week it was reported by the WSJ that “China’s exports fell 17.1% to $90.29 billion in March from a year earlier, while imports fell a steeper 25.1% to $71.73 billion, the General Administration of Customs said Friday on its website.” Economies have two main components; exports and internal demand. China can have declining exports and still grow its economy by increasing domestic consumption and demand. Or, China can see a decrease in internal demand and focus on increasing exports to maintain growth. But China cannot have declining exports and shrinking domestic consumption and still grow its economy.
With exports in March down 17.1% from a year earlier China would need a large increase in domestic demand to keep growing. However, imports fell more steeply than exports declining 25.1%. Part of this can be explained by lower prices for many of the raw materials China imports such as oil or copper. But not all of it can be explained away by price declines. If any other country reported millions of people have recently become unemployed and exports and imports plunged from year ago levels, then most economists would normally forecast a deep recession for that country. So why are there no recession forecasts for China?
The Chinese recently questioned the safety of U.S. Treasuries and their own strategy of buying more and more U.S. Treasuries in the future. Could it be that this is a face saving move on the part of the Chinese government designed to hide their own weaknesses? If China has fallen into recession, they will not have billions and billions of new U.S. dollars that need a place to be parked. The only way China can continue to fuel its economic growth rates is for the Chinese consumer to turn from a saver into a consumer. In the months ahead my recommendation is follow the tea leaves from the Chinese consumer. As they go so goes the Chinese economy.
