Posted by Michael A. Kamperman on June 30, 2009
The Consumer Confidence Index fell in June to a reading of 49.3 from a reading of 54.8 in May. The green-shoot crowd expected confidence to continue rising. Based on an increase in the value of the stock markets and the constant press coverage for green-shoots and an improving economic picture, the decline in confidence in June has come as a cold slapped in the face to those looking for an imminent rebound in the economy. What I found ominous in the report was the consumer outlook for employment. The Conference Board stated “the job outlook was also more pessimistic. Those anticipating more jobs in the months ahead decreased to 17.4 percent from 19.3 percent, while those anticipating fewer jobs increased to 27.3 percent from 25.6 percent.” If this survey is accurate, then the unemployment rate reported for June could approach 10%. The survey is a measure of attitudes and feelings. The news coverage in May and June has been positive. The retrenchment in consumer sentiment can only be traced to further deterioration in the real economy. The drop is especially significant since people receiving a paycheck had fewer payroll related taxes withheld from their checks.
Access to credit remains as tight as ever for both consumers and businesses. The credit markets remain broken. The economy is made up of spending based on access to cash. Access to cash can come from savings, income, or credit. As long as credit remains extremely tight the economy has to rely on savings and income. But with unemployment rising and unemployment benefits starting to run out for those that lost their jobs last summer and fall, incomes are not in a position to pick up the slack for access to credit. That leaves savings. The rational response to a deteriorating economy even for those with access to credit is to save more. Plus, if one cannot qualify for a mortgage or auto loan one does not spend what savings they have for a downpayment.
Washington has gone on a wait and watch approach to the economy. This week they could get well get a wakeup call when the unemployment data is released. They may seek to demean the data for the unemployment rate and call it once again a lagging indicator. Fine, but weekly unemployment claims are not a lagging indicator. The weekly number has to begin to improve before the unemployment rate can improve. When the economy improves employers first slow down their rate of layoffs. Then employers have their existing workforce work longer hours. Finally employers hire and the unemployment rate begins to go down. The weekly claims number released this week will be part of the July unemployment report. If that number is above 600,000 again, then we will know the July unemployment report will also be weak. The credit markets and the economy will not heal on their own in the near term. Only meaningful intervention from Washington will fix the credit markets within the next few years.
Posted by Michael A. Kamperman on June 28, 2009
In today’s New York Times, columnist Thomas Friedman said “we might be able to stimulate our way back to stability, but we can only invent our way back to prosperity. We need everyone at every level to get smarter.” He is right that the long term solution to having America become a better and more prosperous society for all is to focus both on having all of our teenagers graduate from High School and on raising the bar on what counts for excellence. But other than offering a superfluous suggestion from Craig Barrett that “any American kid who wants to get a driver’s license has to finish high school,” he doesn’t explain how we can get from here to there. Who would be surprised to see High School dropouts drive without a license if we made such a ridiculous law? He also says “lately, there has been way too much talk about minting dollars and too little about minting our next Thomas Edison…” No, there has been too little talk about printing dollars to stimulate our way back to stability. Mr. Friedman needs to understand that we cannot put the cart before the horse. Yes, we can tackle both problems at the same time. But if we don’t restore stability and have a job waiting for the kids that graduate from High School and College, then we will never get them to stay in school. And we want them to want to learn something, not coerce them.
The Congress should enact a second stimulus bill focused solely on making America’s 1st through 12th grades the best education for young people in the world. Yes, this will take money. But it will also instantly create a couple of million new jobs, which is nothing to sneeze at. The depression already is forcing many school districts to lay off teachers. Right now only 1 in 5 of this spring’s college graduates found a job before graduation. There is no reason to believe the prospects are any better for next spring’s graduates. Let’s get some of these bright young people off of mom and dad’s couch and into a classroom. Research has shown that one of the best ways to improve performance in a classroom is to lower the student teacher ratio. We should double the number of teachers in America and cut the student teacher ratio in half. We should also up the budget for science labs and other educational resources for schools. This will improve the potential performance for both our high achievers and those who plan to graduate from High School without further assistance. And with more teachers per pupil some who may have dropped out will graduate instead.
However, this will not be enough to come close to having every kid stay in school. We have many high schools in America where two out of three 9th graders never finish the 12th grade. Most of these are at risk kids. There are very few national honor society students who fail to graduate. We need to find a way to have these teenagers feel a connection to learning and to their school. One thing that would help would be a return to vocational training where English and math are the only required academic courses. No student should fail to advance to the next grade because they cannot pass some minimum proficiency exit exam. As long as the student attends school and puts forth an effort they should advance with their grade. Not everyone was born to be the next Thomas Edison. And the next Thomas Edison that will invent America’s next breakthrough is not going to take beauty shop class rather than physics, chemistry, or biology. But the next potential dropout might. Additionally, we should find a meaningful club for every student. How about starting with an extensive intramural sports program so that every kid that cannot make the varsity can still play on a team? If a young person feels connected to an activity and has friends in school and isn’t shamed, then they will be more likely to stay in school. Lower student teacher ratios and better resources will aid out top students. To aid our at risk students we need to give up on the idea that everyone was born to be an academic genius. I love and play basketball. I can tell you that at 5’9” not everyone was born to play in the NBA.
Posted by Michael A. Kamperman on June 27, 2009
We are not in a recession. We are in a depression. If Washington doesn’t recognize this soon and take dramatic action, then we will fall into a new great depression. The reality is there is no leadership in Washington prepared to place the responsibility for the economy’s outcome on their shoulders. The Republicans are in disarray and are looking for an issue to get back in the electorates good graces. So far they have not found something positive and proactive to rally the country to their side. Therefore they are playing defense and waiting for the Democrats to stumble to be in a position to benefit from the fallout. The Republicans should come up with a comprehensive plan to restore the economy and they should hammer President Obama every day that he doesn’t enact their solutions. Unfortunately I have not heard a single Republican pound the table with alarm that too little is being done. Too often the refrain is too much is being done.
This leaves the Democrats who control both chambers of Congress and the Presidency to offer new solutions to restore the economy. However, the Democrats are intent on taking advantage of their large majorities in Congress and reshaping the agenda in America. Hence, the focus is on fighting global warming and re-engineering healthcare. The problem is both of these initiatives require large amounts of new federal spending at a time when the budget is already in way out of balance. If the Democrats acknowledged the number one issue confronting the nation is an economic crisis that could turn into a new great depression, then their large spending initiatives would wither and die on the vine. Additionally, like the Republicans, I have not heard a single Democrat pound the table with alarm that too little is being done.
What will it take to wake Washington up? I believe unemployment will run right past 10% and will reach 11% by this fall. Perhaps then someone in a leadership position in Washington will become alarmed enough to start pounding the table. Statesmanship requires one to do what is in the best interests of the country rather that what is politically expedient. Are there no statesmen, or stateswoman left in Washington? It would be nice if Ben Bernanke and the Federal Reserve were willing to push for more, but they too have been cowered by recent criticisms and have fallen into a wait and watch mode. If we do not acknowledge the economy is facing a serious crisis that will not heal itself with time, then we cannot take the bold and courageous actions as Americans to solve the crisis. As Warren Buffet said, “we are facing an economic Pearl Harbor.” Winning the war was the country’s sole focus in the 1940’s. People were willing to do whatever it took to win. If we are not willing to do whatever it takes to fix the economic crisis today, then we will lose the economic war we are facing.
Posted by Michael A. Kamperman on June 25, 2009
The most real time U.S. government economic indicator is the weekly jobless claims reported by the Department of Labor. The latest report showed jobless claims were still over 600,000 for the 21st straight week. Jobless claims first passed 500,000 per week in November of 2008, and have now stayed there for 33 weeks. With weekly jobless claims staying over 600,000 for most of the June reporting period, it is reasonable to assume the unemployment for June will rise to somewhere between 9.5% to 10%. To bring the current weekly jobless claims stat into perspective, weekly jobless claims never reached 500,000 in either the 1991 nor 2001 recessions. In the more severe recession of 1974-1975, jobless claims did pass 500,000 per week and stayed there back and forth for 29 weeks. In the double dip recession of 1980/1982, jobless claims did pass 600,000 per week. In the 1980 recession jobless claims stayed above 500,000 for 22 weeks and passed 600,000 for a few of those weeks. In the more severe 1982 downturn, jobless claims were over 600,000 for 12 weeks and stayed back and forth over 500,000 per week for 67 weeks. The workforce is quite a bit larger today than it was in the 1970’s and early 1980’s. However, the economy has become more reliant on services and on people who are self-employed. If you are self employed you usually do not qualify for unemployment compensation even if work has dried up. It is therefore difficult to draw an apples to apples comparison between the 1970’s and early 1980’s versus today. We do know that the unemployment rate reached a high of 10.8% at the height of the second leg down of the 1980/1982 recession. The overall unemployment rate is the best apples to apples comparison we have to compare today’s overall unemployment pain with the past.
The weekly unemployment claims are screaming that the recession is not over. It doesn’t mean the recession won’t end next week, it simply means it is not over yet. The depression could go on and on, or it could all turn on a dime next week. Unfortunately, the thing necessary to turn the economy around is a restoration of the credit markets. Washington is now moving backwards rather than forwards in repairing the broken credit markets. Today, the Fed announced that they are scaling back on some of their ill-conceived programs designed to support the credit markets due to a lack of demand from most of the Zombie banks. Rather than offering new more effective programs to restore lending the Fed is content for now to let the markets sort the economy out. The Administration and the Fed should ask their predecessors of the 1930’s how well that strategy worked.
The message needs to reach President Obama that we are in a debt-induced asset-bubble-popping deflationary depression akin to the one in the 1930’s. I believe that if he was surrounded by advisors informing him of this he would be willing to take dramatic action to right the ship. Unfortunately, President Obama has surrounded himself with wonkish academic economists that rely on extrapolating past charts to predict the future. Right now these economists are looking at the worst post World War II economic downturns and saying the turn should come soon, just be patient. The credit markets were not broken in the 1970’s and 1980’s. However, they are broken today just like they were in the 1930’s. How much common sense does it take to realize our consumer based economy cannot recover if mom and pop cannot buy a home or a car?
Posted by Michael A. Kamperman on June 24, 2009
Yesterday, President Obama acknowledged the unemployment rate is likely to exceed 10%. He was asked at his press conference if more action was necessary to boost the economy. He said the stimulus plan still had a ways to run and he wanted to wait and see if the actions taken so far are enough to restore the economy. The Congress is bogged down in energy reform, healthcare reform, and financial regulatory reform and has simply taken its eye off of the economic ball. That has left the Fed as the last line of defense to battle the economic depression. But the Fed has yielded to the bond vigilantes worried about renewed inflation from quantitative easing. The Fed has decided to take no further action at this time and will wait and see how the economy and the markets respond. What is significant about the Fed’s lack of action is their own reading of the economy is inflation is not a threat in the near future and they expect commodity prices to moderate and respond to supply and demand imbalances. Additionally, the Fed does not see an economic recovery taking hold yet. It only sees the rate of economic decline slowing. My biggest complaint is the Fed has gone on hold because it is confused by the trading actions of speculators, not because it anticipates a potential V-shaped recovery and a resurgence of inflation. Washington has now officially signaled this week that they are on the sidelines and are willing to wait and watch before taking further action. Since the President already anticipates a 10% unemployment rate, it is reasonable to assume that a significant impetus for further economic action will have to wait until the unemployment approaches 11%.
If one looks back at the severe U.S. recessions of 1973-1974, 1980-1982, or the milder recessions of 1991 or 2001, then one would see that a V-shaped economic recovery did occur. So my take is Washington doesn’t think it’ different this time. They have bought in to the rhetoric that the risk of a deflationary depression is now off the table. Why? The economic collapse can be traced directly to a crash in the non-government asset-backed securities market that relied upon the credit rating agencies. This market fueled the shadow banking system that was responsible for providing over 70% of the credit needs of the U.S. in recent times. This market remains broken and the commercial banks have not increased lending despite the TARP and the increase of reserves provided by the Federal Reserve.
Perhaps if they got out of Washington and talked to small business people rather than think tank economists they would actually hear what is happening on the ground in this economy. The consumer accounts for 70% of U.S. economic activity. The consumer is facing rising unemployment and still further tightening credit standards. Reports from realtors are that strict new guidelines for appraisals from Fannie Mae and Freddie Mac are killing multiple potential sales transactions. Unfortunately, Washington seems to believe that our economy should rely much more on manufacturing, exports, and consumer savings. The only problem is they have yet to answer the question increase exports to whom? Today, the Swiss government intervened in the currency markets to drive down the value of their currency against the dollar. The world doesn’t want to lose export market share to the U.S. The Fed should have upped its program of quantitative easing today. The President and the Congress should be focused on fixing the broken credit markets before they try to tackle long-term issues such as healthcare reform, energy reform, or financial regulatory reform. Because a lack of further needed action from Washington the possibility of a 1930’s deflationary depression is not only still on the table, it is the probable outcome.
Posted by Michael A. Kamperman on June 22, 2009
The World Bank released a revised forecast of global economic activity and is now forecasting a 2.9 percent contraction in gross domestic product for this year, as opposed to the 1.7 percent decline it projected in March. But this is going to be way too positive. Lost in the World Bank headlines is this little tidbit, the negative 2.9% forecasted economic contraction assumes the global economy returns to positive growth in the second half of 2009. Is this assumption based on some theory about reversion to the mean? Is it based on a concept that economic growth is a natural condition and will therefore naturally return at some point? The World Bank does not explain why it expects the world to return to economic growth in the second half of the year. Perhaps it is based on optimism and a belief that the green shoots are real.
The New York Times reported today that “the chief economist of the International Monetary Fund, Olivier Blanchard, said Monday that the U.S. economy would see a sustainable recovery only if exports rose substantially, and that this might require an adjustment in the dollar’s exchange rate.” In the post World War II era the U.S. has competed on technological breakthroughs. The World is not prepared for the U.S. to compete on cost. The dollar would have to drop dramatically for the U.S. to be able compete with the rest of the world based purely on cost. If the dollar dropped that far it would end the U.S. role as the source of final demand in the world. That would lead to a further economic downturn in exporting nations like China, Germany, and Japan just when they would face for the first time cost competition for their own exports from the U.S. The U.S. cannot export its way out of the economic crisis. The world cannot depend on vigorous U.S. exports as the solution to global economic downturn.
The credit markets, the source of the recent global economic collapse, have not been fixed. The only way for global growth to resume is for the credit markets to be fixed. In the second half of 2009 the global economies will have much higher rates of unemployment than they had in the first half of the year. Additionally, the credit worthiness of most borrowers will be impaired further. The only thing that will restore global economic growth in the next few years is to fix the broken credit markets. Part of the solution to fixing the broken credit markets is for the Fed to significantly up its program of quantitative easing. There is not enough money in the bond market and the only way to increase the real supply of money is for the Fed to start printing a lot more money and purchase a lot more U.S. Treasury bonds.
Posted by Michael A. Kamperman on June 15, 2009
Talk of green shoots has led to denial and self delusion in Washington. The green shoots are a mirage. Last May 1 in 2 college graduates had a job offer before graduation. This year the number is 1 in 5. Yet the Federal Reserve is now concerned that the bond markets are concerned about potential inflation. Hence, the Fed has signaled there are divisions in their ranks and that they may back off on increasing the amount of quantitative easing. The markets are controlled by hedge fund managers who are just as happy to make a buck by betting down as up. I seriously doubt the wisdom of the Fed following a group of speculators that pushed the internet bubble and the subprime real estate bubble. The recent rise in commodities prices is based on a falling dollar, fears of renewed inflation, and strong buying of commodities from China. The dollar is currently considerably higher against almost all other major currencies than it was 12 months ago. The fears of inflation come from people whose whole life experience is from an inflationary world, and they don’t understand that we have left that world behind for now. Finally, China is buying far more commodities than it is using. At its current pace there will soon be no place left for China to store any more stuff. Both Chinese imports and exports fell sharply again in May, which is a sign of a contracting economy. It is not yet clear if the Chinese want to turn their wealth into hard assets rather than paper assets, or if they misjudged the seriousness of the economic crisis and thought the global stimulus bills would lead to a V-shaped recovery.
Bernanke hinted at his new attempt to rely on talk rather than action when he called on Congress to get its fiscal house in order. He then confirmed the turn to talk when the Federal Reserve leaked to the Wall Street Journal that a shift in policy away from further quantitative easing is in the works. Assuming this recent effort at jawboning and policy shifting doesn’t work, will the Fed actually raise rates as some so called experts are suggesting? Back in the Great Depression the biggest policy mistake that was made was continually doing too little, rather than too much.
Bernanke is one of the world’s foremost authorities on the Great Depression. He has given speeches that have called for dropping dollars from helicopters if necessary to ward off deflation. But it is not enough just to have head knowledge of what to do. As a leader, Bernanke needs the will to go in a direction even if many disagree and are against him. Talk will not get the country out of the new great depression it has entered. Hoover initially tried talk and moral persuasion and it had little lasting effect. The velocity of money has collapsed. This economy needs much more quantitative easing and it needs it now. It will be too late to ward another major leg down in the economy if Bernanke waits for clear evidence the economy is still rapidly contracting. The Obama administration needs to put some political capital on the line and go to the wall for more economic stimulus. If the economy keeps sliding into next year than President Obama’s political future might mirror the political future of President Hoover in the early 1930’s.Fed actually raise rates as some so called experts are suggesting? Back in the Great Depression the biggest policy mistake that was made was continually doing too little, rather than too much.
Posted by Michael A. Kamperman on June 13, 2009
The burning question of the day is whether or not the federal government should bailout the State of California? The California State Treasurer is predicting the state could run out of cash before the end of the summer. Sacramento is in shock at the speed of the economic downturn and its ravishing effects on the state budget. Unlike the federal government, the State of California cannot print money. And, unlike the federal government, the State of California does not have the luxury of an AAA credit rating to borrow seemingly unlimited amounts of money and let the next generation worry about it. In April, California state income tax revenues dropped nearly in half from a year ago. Real estate values are collapsing so much that the effects of Prop 13 may soon be a moot point. International trade is down at the ports, as is tourism. Sales tax revenues will continue to trend lower as consumers with money remain cautious and those without money remain shutout from the credit markets. No more gladly paying on Tuesday for a hamburger today. Only an upturn in the global depression will turn California’s fortunes around and that is not in the cards.
I absolutely believe the federal government should throw California a lifeline. If GM and Bank of America can be bailed-out, then so should California. But, the federal government should keep the ultimate burden for fiscal responsibility on California’s leaders in Sacramento. The federal government should offer to guarantee all new debt issued by the State of California. This way California would have its cash, yet it would still have the responsibility of one day paying it back. The state would be given time to work out its problems. And what’s good for California is good for the rest of the country. All 50 states should have federal guarantees placed on new debt issues until the credit crisis is over. Borrowing costs remain very elevated for most municipal borrowers. The market for private municipal bond insurance guarantees dried up when the bond insurance companies dabbled away their reserves by backing subprime CDO squared junk. Another option is for the federal government to just mail out a bigger bailout check to all 50 states. The federal government has already mailed out billions of dollars to the states as part of the stimulus bill to help them cover growing Medicaid and unemployment insurance costs.
I am doing my part to help California. I am spending this week on vacation in California. The car I am renting for the week has $173 in municipal taxes tacked on to the bill. I’m sure the state has other surprising opportunities available for me to provide them with even more assistance. The choice of not bailing out California is to then treat them like the world is treating Latvia, Iceland, and Ireland right now. We could tell California to make whatever austere budget cuts are necessary to stand on their own two feet. State budget cuts mean more layoffs, wage concessions, and fewer contracts for private firms. This in turn will further lower real estate values for all of us and deepen the depression. I plan to swing by Hollywood this weekend. Soon the horror movie playing out in the State of California could be playing in your state capital too.
Posted by Michael A. Kamperman on June 11, 2009
First of all modern money is not gold. Gold is a commodity. In ancient times gold was money, but not today. If you don’t believe me just go to the local grocery store and try to buy your cart of goods from the cashier with a measure of gold as payment. However, if you pull out some cash, or write a check, you can acquire the groceries. Similarly, in the vast majority of stores you can pull out the plastic fantastic and if the electronic swipe says transaction approved, then you can walk out of the store with the groceries. What constitutes money is whatever gives you the ability to complete a transaction. It doesn’t matter to the grocer where your money comes from as long as he gets paid. Likewise, when you sell your home you only care if the buyer can show up with the cash to complete the deal. It doesn’t matter to you whether or not the buyer is a cash buyer, or whether he needs a loan. It’s all cash to you. Hence, what constitutes money is whatever enables a buyer to complete a transaction with the vast majority of sellers.
Why this is important is it is relevant to the discussion of whether or not we are on the verge of deflation or renewed inflation. It is imperative the Fed gets this right at their next meeting. Those that look at only cash as money are insisting we are on the verge of hyperinflation. But they miss that credit is money too. For the seller of the house it doesn’t matter where or how the buyer gets the cash. If the buyer can get the cash, then the deal goes through. If the buyer cannot get the cash, then the deal falls apart. Has the Fed increased the monetary base, absolutely. Has it led to inflation, no. The reason is the credit side of the money equation has collapsed. The access to credit is severely constricted everywhere in the world, except China. To illustrate this truth despite the Fed’s printing money the M1 multiplier has fallen almost in half, from an average of 1.6 in 2008 to .86 last month. Transactions are not occurring nearly as frequently as they did in the past. If this continues our fate is deflation, not inflation.
When the Fed meets soon it will be confronted with a market that fears fiscal irresponsibility and pending inflation, maybe even hyper. But it will also face a real world economy where transactions are still slowing because credit is becoming even tighter. For example, the cap rate on commercial real estate transactions in 2007 was 4%, despite a Fed Funds rate of 5.25%. This means that a bank would loan a company 25 times the annual collected rents on a building. Today the cap rate for commercial real estate is 8%, despite the Fed Funds rate being close to 0%. This means a bank will only lend 12.5 times the annual rents collected. It is not enough for Ben Bernanke and his colleagues to have an intellectual knowledge of what to do. They also have to have the chutzpah. The real economy needs massive quantitative easing and the bond vigilantes, like China, call for raising rates and defending the dollar. The Fed needs to lead and not follow.
Posted by Michael A. Kamperman on June 9, 2009
Today Elizabeth Warren spoke truth and said we need to redo the stress test of the banks because the economy is already worse than the worst case assumptions used in the stress test. She also called for making public the criteria used in the stress test. This strong rebuke of Treasury’s stress test comes from none other than the Chairperson of the Congressional oversight panel for the $700 billion TARP fund. We all know the worst case assumption for unemployment in 2009 used in the test was 8.9%. By the end of May the unemployment rate had already reached 9.4%, and the consensus opinion is that unemployment rates in the U.S. are still rising. But why bother with another exercise that doesn’t fix anything. This time, let’s focus on helping the banks to heal so that we have lending banks and not zombie banks.
The first step in this process is to go back to the drawing board and establish a “bad bank.” Every bank in the U.S. should be required to move their troubled securities and troubled in-house real estate loans to the “bad bank.” The banks should receive a cash loan from the “bad bank” backed by the troubled assets as collateral. The federal government should not issue more debt to fund the “bad bank.” Instead, the federal government should print money to fund the “bad bank.” Each bank should be allowed to transfer their troubled assets to the “bad bank” based on the 2008 year-end carrying value of those assets. The banks will be given a very long time to repay the “bad bank.” The banks will have cash to lend to the economy and earn an economic profit to help pay back the “bad bank.” Importantly, all of the cash-flow from the troubled assets will go directly to the “bad bank” to pay back principal and interest. If the cashflow from the assets do not fully pay the loan the banks will be on the hook for the difference. The interest rate charged should be a variable rate based on the current Fed Funds rate. The banks will ultimately bear the economic gains or losses from the troubled assets they pledge as collateral to the “bad bank.” The FDIC will still have the authority to close a troubled institution, even if it has a loan at the “bad bank.” And, there should be a complete moratorium on the sale of foreclosed real estate held by the “bad bank.” Vacant real estate can be leased out by a property manager, but not sold, for as long as the economy remains in a deflationary depression. This arrangement allows banks to buy the time they need, and it will give the economy better access to affordable credit.
Other steps will need to be taken to fix the credit markets. Specifically, the U.S. government will need to guarantee jumbo-mortgage-backed securities and auto-backed securities. Without an improvement in the credit markets there will be no real recovery in the broader economy. The time for waiting for things to get better on their own is over. The time for more gimmicks is also over. If the economy doesn’t turn up soon, then the enthusiasm for green shoots in the markets will fade and everything will take another leg down ala 1931. Elizabeth Warren and her Congressional oversight committee are right to say more needs to be done. However, this time let’s do it right.
