Posted by Michael A. Kamperman on June 8, 2009
The yield on the 10-year Treasury continues to rise and now the yield on the 2-year Treasury is rising sharply as well. There are multiple factors contributing to the upward move including fears of renewed inflation, a large amount of supply coming into a deleveraging world, a seeming lack of fiscal discipline in Washington, and uncertainty about the Fed’s commitment to aggressive quantitative easing. However, comments coming out of China are also pressuring rates higher. China has expressed concern about the “safety” of its large investments in U.S. government backed bonds. China has talked about replacing the dollar as the reserve currency of the world with a basket of currencies, including the Chinese yuan. Finally, China has warned the U.S. not to aggressively print money. The word on the Street is China is moving its continuing purchases of U.S. Treasuries to the shorter end of the curve.
However, China is the world’s largest currency manipulator and is in no position to lecture the U.S. The Chinese economy is the second largest economy in the world, and yet the yuan does not trade freely against other currencies. China sells the U.S. over $4 worth of goods and services for every $1 they buy. It seems China wants its cake and it wants to eat it too. China wants to maintain the status quo and keep things as they have been for the last few years. This is because U.S. policy has been very good for China. China fears a change in policy. China doesn’t want to see the yuan strengthen significantly and their trade advantage dissipate. Hence, China is using its position as our largest creditor to pressure our leaders in Washington. Unfortunately, some statements made by Treasury Secretary Geithner after his recent trip to China indicate China is being heard and heeded in Washington.
Why? The U.S. economy would benefit from a more aggressive policy of quantitative easing. If the dollar falls as a consequence of that action then so be it. U.S. goods would become more competitive on the world stage and it would become cheaper to manufacture goods in the U.S. rather than abroad. It is possible the leaders in China do not grasp the seriousness of the deflationary depression that is sweeping the world. It is obvious German Chancellor Angela Merkel doesn’t get it. For the two largest net exporters to dream of a return of the good times is understandable, but not realistic. Rather than listening in China, perhaps Treasury Secretary Geithner would have been better off lecturing. Of course, with the collapse of his troubled asset purchase program that was to be levered with taxpayer dollars, one is left at times to wonder if Treasury Secretary Geithner gets it.
Posted by Michael A. Kamperman on June 7, 2009
In April, consumers paid back $15.7 billion more in consumer debt than they borrowed, including credit cards and auto loans. This comes on the heels of paying back $16.6 billion in March. The savings rate has rapidly risen in the last few months and reached 5.7% in April. It makes perfect sense for individual families to reduce spending and pay off debt in these uncertain economic times. No doubt many prudent families are willingly doing this. The problem, of course, is that if everyone does the rational thing by cutting spending and adding to savings, then in the near term the economy will only worsen. Unemployment will continue to rise and deflationary pressures will continue to grow. Ironically, the sacrificing family is contributing to a pattern of behavior that could cost one or more of the family’s breadwinners their jobs. What can be good on a micro level can be disastrous on a macro level. The increase in the savings rate is occurring so rapidly that policymakers cannot adjust quickly enough. Not much can be done in the near term to lure some of these new savers back to their spending ways.
However, not all families are voluntarily adding to their savings. Some families have lost access to credit and are being forced by the credit markets to save. It is very difficult to qualify for a new car loan with so-so credit. With bad credit, forget about it. The consumer borrowing data, when combined with the retail data, paints a picture of banks cutting back on consumer credit card lines as well. In a perfect world those voluntarily saving would start spending, picking up the slack for those families that need to save. But the world is not perfect and we do not live in a vacuum. Policy makers could increase consumer spending if they could find a way to open up the credit markets. While I believe those with credit cards need to stand on their own or do without, the same cannot be said for auto loans. In aggregate, our country would be better off bearing the cost repossessing a few more cars than we are now by bearing the cost of hundreds of thousands of lost jobs in the auto sector with many more losses on the way.
Since we know a large portion of the drop in consumer borrowing is forced, we can be certain that the savings rate will continue to rise and that consumer borrowing will continue to fall. The reason for this is that our policy makers in Washington have come up with nothing so far to restore consumer credit. The consumer represents 70% of the U.S. economy and will remain weak. Businesses will not pick of the slack for the consumer with capital expenditures. Everything is already overbuilt and revenues continue to fall. This leaves only government spending as a possible source of propping up the economy. Our catch-22 seems to be either accepting more subprime lending, accepting a much bigger government, or accepting a continuing deflationary depression.
Posted by Michael A. Kamperman on June 6, 2009
Most of the retail data for May shows the consumer is keeping his wallet in his pocket and her purse snapped shut. Auto sales remained abysmal and declined over 30% across the board. Sales from retailers were generally weaker than expected, with Target down 6%, and Costco down 7% when compared to year ago levels. What is important to note is oil was over $100 per barrel last year. Sales of gas guzzling light trucks fell off a cliff. Gasoline prices that were over $4 per gallon left consumers with less discretionary income to shop at the stores. The year over year comparisons are starting to get easier, because we are comparing them to already weak numbers. Still the slide continues. The decline in auto sales is of course partially due to extremely tight credit markets for auto loans.
What is particularly troubling about the May reports from the nation’s largest retailers is that the reduced payroll withholding that is part of stimulus package went into effect in April. The average worker took home over $30 per month more in income during May when compared to March. Additionally, the stock market rallied and has stayed back over 8,000. The most recent consumer confidence reports were up. The media has had many positive economic stories about how disaster has been averted and the worst may well be behind us. So where is the spending?
Deflationary pressures are partly to blame. Costco has specifically mentioned deflationary pressures affecting its overall sales. However, deflation is not the only reason sales are shrinking. Recent data indicates the savings rate has risen above 5% as consumers change from their spendthrift ways. Rising unemployment is also a key factor. However, a new and predicted factor could be biting the economy. The decline in sales from the stores could signal banks are cancelling credit cards and cutting credit lines for consumers. For a typical middleclass consumer that has seen her home drop in value, her 401(k) drop in value, and her colleague get laid off, having a credit line on a credit card cut in half is another shock to her sense of financial well being. People consider their credit lines to be part of their cash resources to manage monthly cash flow, make larger discretionary purchases, and most importantly as a backup for unexpected cash calls such as health care, a blown transmission, an out of town funeral, or the loss of their own job. Without access to credit the consumer must save cash to provide a cushion in case of an emergency. The shocks to the consumer keep coming. The May retail numbers should be we all we need to declare that the stimulus plan is too small and much more needs to be done to resuscitate the economy.
Posted by Michael A. Kamperman on June 5, 2009
Unfortunately, the official unemployment rate rose to 9.4% in May. This is ½% over the Treasuries worst case assumptions used in the stress tests for the banks, and it is only May. Significantly, the rate for those without jobs plus those working part-time seeking full-time work rose to 16.4%. There was good news in that the payroll figure showed a loss of 345,000 jobs in May, which is about half of the losses that have been occurring over the last few months. The survey showed a deteriorating jobs picture in the U.S., and the payroll figure showed a surprising slowing in the rate of decline. I will not try to divine which report is more accurate. Time will tell.
What was particularly concerning to me in the most recent report was the figure that government jobs in the month of May declined by 7,000. While this is not a lot relative to the size of government in the economy, it is still a negative number. My concern is that this number should have been way up. While less than 10% of the $789 billion stimulus package has been spent to date, most of what has been spent has been direct aid to state and municipal governments. Combined with the nearly $2 trillion projected federal budget deficit resulting in very large borrowing needs for the federal government, government employment should have gone up. It doesn’t matter whether one thinks growing the government is a good or bad idea. This economy needs something to hang its hat on.
If this trend continues it will indicate state and city revenues have deteriorated to the point that they have to cut jobs even with the extra cash coming from Washington. The country is running huge government deficits to boost the economy, yet it is not enough to have government assume a larger share of the economic pie. Where will growth come from? The only sector in the economy still healthy is healthcare. Yet the goal of the administration is to restrict the growth in this sector. While I agree this makes sense, it only makes sense if we have an alternative sector step up and assume the mantle of growth. If even the government cannot add jobs in this environment, who can?
Posted by Michael A. Kamperman on
My Letter to the Editor in the June 5, 2009 WSJ:
http://online.wsj.com/article/SB124416582412987641.html
Regarding Mary Anastasia O’Grady’s “The Weekend Interview with Richard Fisher: Don’t Monetize the Debt” (May 23): Texas went through a debt-induced, asset bubble-popping in the late 1980s and lived to tell about it. But that happened because Texas had vibrant businesses that had growing customer bases outside of Texas. Also, people flocked to Texas from California and New York to scoop up cheap real estate. Texas received a lifeline of growing trade and out-of-state investors that wasn’t available to the U.S. in the 1930s. I know this because I was a banker in Texas in the 1980s and witnessed nine of the 10 largest banks go out of business. Similarly, Japan has received a lifeline of global trade from growing economies in the U.S. and China that wasn’t available to the U.S. in the 1930s, either.
Mr. Fisher, where is our lifeline going to come from? The German and Japanese economies are in worse shape than ours is. Mexico is in a serious depression. We cannot export our way out of this crisis, and massive amounts of foreign money will not be coming to our shores to snap up bargains. Other countries have bargains in their own backyards. In short, the only way out of this crisis is to monetize the debt. We need massive quantitative easing, and we need it now.
If we don’t monetize the debt, the federal government will have to reduce spending. If that happens, we could see asset prices in aggregate fall below the amount of the total outstanding private-sector debt. At that point our economy will not enter a phase of “creative destruction”; it will simply enter a phase of destruction.
Michael A. Kamperman
Waco, Texas
Posted by Michael A. Kamperman on June 3, 2009
If you can’t handle the heat, get out of the kitchen. Carping and criticism come with the territory of leadership. Geithner says “we have a strong independent central bank” and “the U.S. does not intend to monetize the debt.” This message for the Fed comes after Geithner got chewed on in China for U.S. policies that are perceived by some Chinese not to be in the best interests of their large quantity of U.S. Treasury holdings. Then, Bernanke says “Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.” Pressure and protests from China, bond vigilantes, followers of the Austrian School of Economics, and other worry warts should be ignored. Unfortunately, it appears Geithner and Bernanke may be doing something more than throwing these misinformed groups a bone. It appears there could be a change in U.S. policy to ease off of both quantitative easing and significant further stimulative spending by the federal government. I pray this is not so.
We are in a debt-induced asset bubble popping deflationary depression akin to the one in the 1930’s. The New Deal eased some of the pain during the Great Depression, but it certainly did not come close to ending it. World War II ended the Great Depression. To country decided that winning the war was more important than anything, and no consideration would be put in front of the war effort. To fight the war, the U.S. government spent the equivalent in today’s dollars of $8 trillion per year for four years in a row. The current hodge-podge stimulus plan of $789 billion is spread out over two years. Furthermore, much of the direct spending is simply plugging holes in state budgets that cannot meet basic unemployment and Medicaid expenditures. The U.S. government entered World War II with a relatively low amount of debt compared to U.S. GDP. It also had a nation with a strong savings ethic and not many goods to spend money on. Hence, it was able to internally fund most of its cash needs. Today, the U.S. has a much higher debt to GDP ratio and we are just in the process of being forced to relearning our savings ethic.
China would benefit much more from a resurgent U.S. economy than it would from a country that took on austerity measures to keep its currency high. Besides, China is the biggest currency manipulator in the world and doesn’t even allow the yuan to float freely. And China doesn’t have enough money to lend us to solve our problems anyway. We need to go down a different path whether they approve or not. The bond vigilantes are worried about a coming surge in inflation. With unemployment rates soaring and capacity utilization rates plummeting, exactly what inflation are they talking about? For those worried about a collapse in the dollar, the question is collapse against what, the yen, the pound, the euro? Those societies face bigger challenges than we do. And we face huge challenges. The next major bailout will probably be the State of California. We need much more in the way of quantitative easing and we need much more in the way of stimulus spending. Without it we will repeat the experience of the Great Depression of the 1930’s. It only ended when unrestrained spending to win the war started after Pearl Harbor. We are facing an economic Pearl Harbor and this is no time for leaders that don’t have the stomach and the intestinal fortitude to lead.
Posted by Michael A. Kamperman on June 2, 2009
The GM news has dominated the headlines, and rightfully so. But GM is a symptom of the crisis, not the cause. The cause of the crisis is the collapse of credit all over the globe. The shadow banking system is broken because the asset-backed securities market that relies on AAA ratings is broken. The U.S. economy is dependent upon the commercial banks to increase lending and absorb a portion of the credit market share that belonged to the shadow banking system. However, recent data that has gone under the media radar indicates all of the banks that received TARP funding from the federal government saw a combined 3% decrease in lending in March. This follows on a 2% decrease in lending in February from the 19 largest banks in the country that received TARP funding. Credit remains extremely tight, even today. Mike Jackson, the CEO of Auto Nation, stated that 65% of buyers coming into the showroom with prime credit are qualifying for a prime auto loan, and only 10% of subprime borrowers are qualifying for anything. A year ago, 95% of prime borrowers were able to qualify, and 50% of subprime borrowers could obtain an auto loan. This pattern of tight credit is true for other consumer loans and for commercial loans.
While the TARP prevented a run on the banks, it has been unsuccessful in restoring the availability of credit. Part of this is because many of the banks have significant potential future losses and are trying to remain solvent. The problem is the banks that are in a position to lend are not lending the TARP money they received. These healthier institutions parked the TARP funds and have been waiting for an opportunity to return them to the federal government to avoid unwanted interference in their private businesses. The Treasury needs a new plan to restore the availability of credit in the economy.
What the Treasury should do with the returned TARP funds is quit using it as a rescue fund and use it as an economic renewal fund. The Treasury should reignite the asset-backed securities market for auto’s and jumbo mortgages by taking the returned TARP funds and using them as a reserve to guarantee newly issued asset backed securities ala Fannie Mae to support new lending in these markets. The Treasury should establish down payment and affordability guidelines to ensure the people receiving the loans have a reasonable chance to repay the loans. And the Treasury should not exclude someone with a subprime credit score if they can make a suitable down payment and afford the monthly payments. The strategy of not monetizing the debt combined with keep credit markets very tight is a strategy to plummet us to the economic depths experienced in the 1930’s.
