Economic Commentary

NEW -> Contingent Buyer Assistance Program
Better news on the foreclosure file

The number of filings fell 10% in January to 274,399 from 303,410 in

December – though they are still up 18% YoY (even here, it looks like we have

plateaued as the triple-digit increases now look to be behind us). There obviously

is an intensifying effort to work out stressed–out delinquent mortgages and

provide moratoria too – which the banks just ‘agreed’ to (see “Bankers Yield To

Congress Foreclosure Demands” on the front page of the FT). Even so, both

RealtyTrac and Moody’s still see another 3 million foreclosures in 2009.

Another sign the housing recession is deepening

Toll Brothers, the nation’s largest luxury homebuilder, reported a 51% drop in first

quarter revenue. Revenue was down for the 11th consecutive quarter.

Mortgage applications plummet

Mortgage applications plummet with large declines in both purchase and refi

volumes: Mortgage applications plummeted 24.5% in the week ending February 6th

with declines in both refi (-30%) and purchase (-10%) activity. Contract rates for

new loans fell by 9bps to 5.19% (30-year fixed) and were down by a similar amount

for jumbo mortgages, which now stand at 6.93%. Still, both are at least 20bps

higher than lows recorded several weeks ago when the government stepped up

purchases of mortgage-related debt. The bulk of activity continues to be refi-related

with most homeowners swapping out of problematic adjustable-rate loans and into

fixed rate mortgages. The large decline in refi activity last week could signal that

many are waiting for rates to go lower given the ongoing initiative by the Fed and

Treasury to drive rates down. In year-over-year terms the FHA refi volumes are up

35% versus a 54% decline in the conventional index.

February home sales off to very weak start

The large decline in purchase volumes puts February index levels down 21.3%

versus January, suggesting that home sales activity is off to a very weak start.

Relative to year-ago levels purchase applications are down 42% Y/Y for a new

cycle low. Barring a suspicious drop in early 1999, this index now is close to

10-year lows – clearly reflective of the state of housing demand into early

February. Despite record affordability on lower interest rates and home prices,

demand continues to decline, putting the floor in housing many quarters (if not

years) away, in our view. We expect to see an ongoing overhang in inventories

that will lead to continued declines in home prices.

Attached files
 
Budget blues

The US Treasury reported an $84 billion budget deficit for the month of January,

bringing the fiscal year-to-date deficit to $569bn, $114bn higher than all of fiscal

year 2008. So far for the year individual income taxes are down 10% while

corporate income taxes are down 44%. Overall receipts are lower by 10%. Outlays

are up 41%, driven by TARP spending and the Treasury’s mortgage-backed

securities (MBS) buying program. Of the $569bn deficit, $369bn, or 65%, was

related to TARP spending and MBS purchases. We believe that this outlay is, in

actuality, an investment that is likely to lower Treasury outlays in future years. That

being said, even the remaining year-to-date deficit of $200bn would dwarf the

$89bn figure seen over the same period last year.

California is nearing a budget deal

California Governor Arnold Schwarzenegger and legislators are nearing an

agreement to fill the state’s $42 billion budget hole. Some of the proposals under

consideration include raising the state sales tax rate to 8.25% from 7.25%,

increasing the vehicle license fee to 1.15% from 0.65% on the value of the car, a

12-cent per gallon tax on gasoline, and surcharge on income taxes. All told, the

tax increases would amount to $14 billion with $16 billion in spending cuts and

add $10 billion in new state debt.
 
BlackVault CM said:
tenmagnet said:
Which consulting firm is getting the $1 Billion handout/contract to study healthcare effectiveness?
Click to expand...

Wouldn't that be good to know ahead of everybody else.
Click to expand...

Yeah it would.

Even better if we ran the consulting firm.

Especially now with the gov’t doling out cash for the stupidest things.

Doesn’t matter that we know nothing about healthcare

All we’d have to do is pay a “fee” to the guy in Washington to steer the fat contract over to us.
 
Less in the fiscal package than meets the eye

Fiscal stimulus may provide some support for various sectors, like broadband,

telecom, e-health and asphalt, but there is really less in the package than meets

the eye. For all the talk about “infrastructure”, only $150 billion of the $789.5 bln

plan is targeted for such. Go figure. The $54 bln aid for the states barely cuts

into more than half of next year’s expected fiscal shortfall. The tax breaks do not

involve changes to tax rates that elicit permanent changes to spending behavior –

$400 individual tax breaks are going to likely exert as much of a tepid impact as

last year’s rebates. Tax breaks for housing and auto buying leave us less than

inspired. Temporary relief from the AMT is something we see every year – but is

still seen as “stimulus”. Jobless benefit extension will help buy food and assist

people to meet their rental and utility bills, but we fail to see how the recession

ends with these measures. Note that the White House began to leak out

proposals for mortgage loan modification – a new program to subsidize mortgage

payments for troubled homeowners who have gone through a standardized

reappraisal and affordability test – these tests would occur before the borrower

becomes delinquent. That is the new wrinkle.

Seasonal effects at work in retail sales lift

Retail sales surprised higher in January, posting a 1.0% m/m gain which is the

first positive read since last June. Amazing – the best retail sales result in 14

months at the same time we lose almost 600,000 jobs. After all, isn’t that you do

when you are about to lose your job? Go and max out on the credit card? Most

likely, seasonal distortions played a key role in boosting the figure as consumers

waited for post holiday sales to make purchases. Therefore, we think the rise in

January has to be taken in conjunction with the downwardly revised 3.0% drop in

December, suggesting that the trend in sales remains negative. In the details,

sales were better in apparel at 1.6% gain after a 4% drop in December. Tech

stores saw a 2.6% rise after a 5.8% decline in December and non-store retailers

(the category where online sites are recorded) posted a 2.7% increase, following

a 1.2% decline in December.

What is interesting is that the raw – not seasonally smoothed – retail sales data

showed a 19.7% decline: Usually sales are down way more than 20% MoM on

this basis after what is generally a strong December because of the holidays –

December has ALWAYS been the best month of the year, even in depressions.

This time around, sales in December were only up 14% whereas they normally

are up well over 17% – so in this sense, the January jump was in part due to the

fact that the raw data were coming off a much weaker-than-normal December.

Inventory to sales highest since 2001

Business inventories fell 1.3% m/m in December – a bit lower than consensus

expectations; however the 3.2% slide in sales means that companies fell even

further behind in their efforts to control inventory costs. The inventory to sales

ratio rose to 1.44 months and is now the highest since 2001. The increase in the

past 6 months from a low of 1.23 months rivals the sudden inventory back-up

seen in the early 1980s. Moreover, the surge in inventories is most severe at the

retail level, where the inventory to sales ratio now sits at 1.61 months and is the

steepest 6-month rise ever recorded (going back to 1967). We have an excess

inventory situation on our hands, pure and simple, suggesting that more

production and employment cutbacks are on their way.
 
Business surveys likely to show further falls in February

Next week will see the release of the first business surveys for February in the US

(Empire State and Philly Fed) and in Europe (PMIs). Our team expects to see

continuing signs of extreme weakness on both sides of the Atlantic.

The sharp decline in global economic activity will be highlighted by Japan’s real

GDP figures for Q4, which we expect to show an 11% drop at an annualised rate.

Consistent with this week’s worse-than-expected Euro area GDP data, the

Japanese figures are likely to confirm that, as the global economy entered a

synchronous recession in the second half of 2008, export oriented economies

suffered relatively larger falls more than the US, where the crisis originated.

However, the US housing data should once again highlight the still-depressed

conditions of the sector where the crisis began, with starts and permits expected

to plumb new post-war lows, in a dramatic reversal of the longest expansion on

record.

Against this dismal backdrop, central banks appear to be running out of

ammunition. The FOMC Minutes may contain clues as to whether the Fed is

getting closer to outright purchases of Treasuries. The Bank of England Minutes

will be watched for signals concerning the March decision (a 50bp cut, we think)

and prospects for quantitative easing. Meanwhile, we expect the Bank of Japan to

leave its policy rate unchanged at 0.10% on Thursday.

Attached files
 
Ron Paul

Before the US House of Representatives, February 4, 2009, introducing the The Federal Reserve Board Abolition Act, H.R. 833.

Madame Speaker, I rise to introduce legislation to restore financial stability to America's economy by abolishing the Federal Reserve. Since the creation of the Federal Reserve, middle and working-class Americans have been victimized by a boom-and-bust monetary policy. In addition, most Americans have suffered a steadily eroding purchasing power because of the Federal Reserve's inflationary policies. This represents a real, if hidden, tax imposed on the American people.

From the Great Depression, to the stagflation of the seventies, to the current economic crisis caused by the housing bubble, every economic downturn suffered by this country over the past century can be traced to Federal Reserve policy. The Fed has followed a consistent policy of flooding the economy with easy money, leading to a misallocation of resources and an artificial "boom" followed by a recession or depression when the Fed-created bubble bursts.

With a stable currency, American exporters will no longer be held hostage to an erratic monetary policy. Stabilizing the currency will also give Americans new incentives to save as they will no longer have to fear inflation eroding their savings. Those members concerned about increasing America's exports or the low rate of savings should be enthusiastic supporters of this legislation.

Though the Federal Reserve policy harms the average American, it benefits those in a position to take advantage of the cycles in monetary policy. The main beneficiaries are those who receive access to artificially inflated money and/or credit before the inflationary effects of the policy impact the entire economy. Federal Reserve policies also benefit big spending politicians who use the inflated currency created by the Fed to hide the true costs of the welfare-warfare state. It is time for Congress to put the interests of the American people ahead of special interests and their own appetite for big government.

Abolishing the Federal Reserve will allow Congress to reassert its constitutional authority over monetary policy. The United States Constitution grants to Congress the authority to coin money and regulate the value of the currency. The Constitution does not give Congress the authority to delegate control over monetary policy to a central bank. Furthermore, the Constitution certainly does not empower the federal government to erode the American standard of living via an inflationary monetary policy.

In fact, Congress' constitutional mandate regarding monetary policy should only permit currency backed by stable commodities such as silver and gold to be used as legal tender. Therefore, abolishing the Federal Reserve and returning to a constitutional system will enable America to return to the type of monetary system envisioned by our nation's founders: one where the value of money is consistent because it is tied to a commodity such as gold. Such a monetary system is the basis of a true free-market economy.

In conclusion, Mr. Speaker, I urge my colleagues to stand up for working Americans by putting an end to the manipulation of the money supply which erodes Americans' standard of living, enlarges big government, and enriches well-connected elites, by cosponsoring my legislation to abolish the Federal Reserve.
 
"Truthfully," Williams pointed out, "there is no Social Security 'lock-box.' There are no funds held in reserve today for Social Security and Medicare obligations that are earned each year. It's only a matter of time until the public realizes that the government is truly bankrupt and no taxes are being held in reserve to pay in the future the Social Security and Medicare benefits taxpayers are earning today."

The real 2008 federal budget deficit was $5.1 trillion, not the $455 billion previously reported by the Congressional Budget Office, according to the "2008 Financial Report of the United States Government" as released by the U.S. Department of Treasury.

The real deficit
 
Still no good news....

Job conditions still deteriorating

Mass layoffs (more than 50 people at a time) nearly doubled in 4Q from 3Q to

3,140 – the highest since the records began in 1995. The construction and

manufacturing sectors took the biggest hit.

Hotel industry outlook very clouded

See “What if Nobody Comes” on page B6 of the NYT. According to a survey

jointly conducted between Amex and an industry trade group, 7% of business

meetings nationwide have been cancelled this year and the ones that have not

been cancelled are expected to see attendance decline 5% this year.

The fiscal bill is about to see the light of day

The House passed a $787 billion package and it looks like the Senate will do the

same – a 1,073 page bill that includes a $500 billion in spending and $287 billion

in tax relief (amazingly, the ‘Buy American’ provision is still there – see “Hire

American Measures Raise Protectionism Concerns” on page 2 of the weekend

FT; and “G7 Targets Spectre of Economic Nationalism” in the Saturday Globe and

Mail.) The banks have agreed to hold off on new foreclosures until March 6th as

the government unveils its new $50 billion loan modification plan. Not only that,

but the bill (which not one House Republican voted for – neither did 7 Democrats

– since the Republican party has said it does not feel it will bring anything

remotely close to sustained growth for an incentive-based as opposed to welfarebased

economy) contains provisions that sharply curtail executive compensation

in the financial services sector.

A stimulus bill that gives tax credits to people who pay no tax but restricts

executive pay going forward because of mistakes made by a relative few, is, shall

we say, just about as populist as it gets. And it is a fiscal plan that has more of a

welfare feel to it, in our view, than anything incentive-based that will actually

encourage people to change their spending and investing patterns. To be sure,

the budget plan is better than nothing, but it is not enough, in our view, and

adequately dubbed “sprawling and incoherent” in the weekend FT’s editorial page

(page 6 – “A Plan That is Ugly But Necessary”). If there is a good plan out there,

it is the plan being espoused on the front cover of Barron’s, in our opinion, touting

a move that would provide the banks with $200 billion of TARP money on the

condition that the funds be used to cut the principal amount of the $850 billion of

the nation’s subprime mortgages by 25%. Good idea, but what about the Alt-A

and prime mortgage borrowers too, because their delinquency rates have also

soared to record highs.
 
Consumer Sentiment Slides

The U of M consumer sentiment index fell a larger-than-expected 5 points in

February to 56.2 – perilously close to the November lows. In fact, the

‘expectations’ component dropped to its lowest level since 1980 (49.1). The 1-

year inflation outlook hit a cycle-low of 1.6% versus 5.1%.

Mortgage rates surge

The 30-year fixed rate jumbo is now 7.08% versus 6.92% a month ago. The 5/1

year jumbo ARM is up to 5.99% as well from 5.80%.

Household net worth down 20% from 2007 peak

A Fed survey just came out and indicated that household net worth has

contracted 20% from the 2007 peak and that people between 55 and 64 have

taken the biggest hit: But the belief system on the part of the younger generation

has also been shattered in terms of their future expectations of income and

wealth – have a good hard look at “The Legacy of a Crisis: A Risk-Shy

Generation”. Even so, for people under the age of 40, half of those surveyed

have their money in the equity market. Going forward, “the majority would put

less than half in stocks” (as per a Desalles University poll). The article also cites

a Charles Schwab official saying that 401(k) participants “are not making many

big investment moves … there is a sense at least some younger investors may

divert 401(k) contributions to other uses … one sensible way to reduce overall

risk is to pay down high-interest debt, like credit cards or private student loans”.

Pay down debt or buy bonds – it’s all about saving on or capturing future cash

flows.
 
Number of vehicles on the road is declining

Auto sales have been 10.5 million units or lower (annual rate) for four months

running, a string of weak data not seen since 1982. Replacement demand is

estimated at around 12 million units so this is truly unprecedented – four straight

months in which the number of light trucks and cars on the road has declined.

And it may well be that replacement demand itself may be in secular demand,

which in turn means that we could well see vehicle sales touch even newer lows

in coming months, quarters and perhaps years. The reason – in this frivolity-turnfrugality

future, people are learning to drive their cars longer. In other words,

consumers are no longer just rolling over the leases every year or two or trading

in their cars after the first sign of engine trouble. This could be a backstop for the

local garage or even the parts makers, but what it means is that the average age

of the auto fleet, already up to a record of 8 years, is on a secular uptrend. Our

auto analysts see a move to 10 years before too long.(see attached chart)

Sharp downturn in homebuilding continues unabated

The National Association of Homebuilders (NAHB) housing market index rose

slightly from a record low of 8 in January to 9 in February. Recall that this is a

diffusion index where readings above 50 represent optimism about homebuilding

activity and anything below represents deteriorating conditions – the last time 50

or higher was reported was April 2006. Results were in line with consensus

forecasts and a tick higher than BAS-ML. Potential homebuyer traffic rose 3

points over the month, but at 11 still reflects very weak activity. The present sales

index only rose 1 point, indicating that any improved traffic is not translating into

higher sales. So far this month, mortgage applications for purchases are down

21.3% versus the January average, clearly reflecting that the downturn in sales

activity continues apace. Despite the small rise in traffic and present sales,

homebuilders were decidedly more pessimistic about future sales, as that index

dropped to a new low of 15. Regionally, marginal gains were seen everywhere

except the Northeast; all were still at levels consistent with sharp declines in

activity. Looking ahead, record inventories of new homes, precipitous declines in

demand and the competing stock of distressed properties all point to further

cutbacks in building before this market can begin to stabilize. While there was a

huge increase in the volatile mortgage application series last week (+45.7%, led

by a 64.3% surge in refinancings), the ‘new purchase’ index rose 9.1%, which did

not even reverse the 9.8% slide the week before and it is still down 29% YoY.

Another soft housing statistic just came out

The architectural firm billing index for January: it rang in at a new record-low of

33.1 from 34.1 in December, 34.2 in November, 37 in October and 41.2 in

September. Detect a pattern here? And note that the deflation has spread from

residential to commercial, where nationwide property values are down 20% YoY

and by as much as 50% in NYC – see “After the Boom, a Hard Fall” on page B6

of the NYT).

Attached files
 
Let me get this straight. The Treasury has no actual treasure. So, it is authorized by a Congress to borrow what it needs (that is because Congress has already spent all the tax revenue) and the Treasury will then issue $100 billion in Treasury instruments of some sort that supposedly qualify as ‘capital’. Then that ‘capital’ will be transformed into $1 trillion in new currency. Congress is not raising taxes in order to provide a revenue stream. So where does this money come from? How does this magic work.

Zero dollars becomes $100 billion in capital.

Here is the trick. The Treasury will borrow some money to pay the interest on Treasury Notes that the new Congressional authorization allows. The borrowed money will be comingled with all the other cash flows at Treasury and transmogrified (Calvin and Hobbes term) into a revenue stream. Only the US Treasury can transmute borrowed money into revenue!! What will happen is that a physical pile of borrowed money will be wheeled in the front door of the Treasury and out the back door will appear a periodic revenue stream created by cutting the borrowed money into as monthly chunks. That finagling will transform the borrowed money into interest payments. The borrowed money, now a revenue stream will be processed some more. It will go in another door of the Treasury and be combined with ‘Congressional Authority” that will further transmute these chunks of borrowed money into Treasury Notes (short term bonds). The value of these notes will be determined by using a ratio between the interest payment on Notes held by your retirement fund and what your retirement fund paid when it bought them. Knowing that the desired face value of the Notes will be $100 billion, the Treasury can figure out the size of the periodic interest payment that Treasury will have to print on the Notes.

As was pointed out earlier, the interest payment will really be chunks of a lump sum of money the Treasury will have borrowed. This will be the first of two one sleight-of- hand tricks at Treasury. Next, Treasury will actually print a bunch of new Notes which it gives a total face value of $100 billion. Not done yet, the Treasury will trot those paper Notes over to the FED. The FED chief accountant will enter them in the FED ledger as capital received from the Treasury. Ok that is trick number one. Zero dollars will be transmuted into $100 billion in capital using borrowed money. WOW! Let’s move to trick number two. The second trick will occur at the FED and will be every bit as good as the first trick!!

$100 billion in capital becomes $1 trillion in currency.

Ok, we need to put some dollar amounts on this mirage. So, let’s review the cost of all this to Treasury. Let’s use the 3 year Treasury rate of … say 1% per year. So Treasury will borrow $3 billion upfront in order to create the interest payments that will give the appearance of a revenue stream of $1 billion per year over the three year period specified by Congress for Notes. Be careful, these Notes will not be sold! Instead the Treasury will pretend that the $3 billion it borrowed is really a revenue cash flow that it will be combined with the hocus-pocus of Congressional Authority to create into Treasury Notes with a face value of $100 billion. The ‘capital’ will be deposited with the FED and the FED will count it as a $100 billion dollar capital asset (see trick #1 above.) But now we can start to count dollars.

The FED will then use the Treasury notes as ‘capital’ to back the currency it will then proceed to print. Using fractional reserve it will then issue up to $1 trillion in brand new greenback dollars that it will lend to the banks. The banks will pay interest on the funds they borrow from the FED. So let’s use 3% per year as the cost to the banks to borrow this brand new money from the FED. Out of this arrangement, the FED will receive back 3% of $1 trillion each year. That becomes a potential receipt by the FED of $30 billion per year. Over the three year period, that may total up to $90 billion. Not bad, for zero dollar investment and not a single appropriation or tax increase by Congress. Yet, somehow the American people fork over to government $90 billion.

In order to avoid any suspicion of an underhanded deal and thoroughly confuse the media, everyone involved will earnestly and loudly assure the American people that all of the money will be repaid! I think the term used by Mr. Bernanke is that this will be a “sterilized operation.” But, wait a minute, there will be $87 billion ($90 billion minus payback of the borrowed $3 billion) that this ‘sterilized’ operation will pull straight out of the American economy and that $87 billion will never be repaid back to the economy!!!

I am not sure what this is. All I know is that the John and Sarah Doe family is going to be sorely ripped off. Is it usury? Is it theft? Why aren’t the union presidents screaming at Congress? What is going on? Ok, never mind the rhetorical questions.…

Who actually has skin in this game? If this works, the FED stands to ‘make’ $87 billion and part of that will be shunted over to the Treasury where it will be sent on to boost the capital at the banks so we can all cheer at how well Bank CEOs have done. This $87 billion is in unmarked bills (non appropriated funds) so will be somewhat of a slush fund for whatever use Treasury is allowed. If this scheme fails, the taxpayer ends up footing a bill for $1 trillion paid off as inflation over many, many sad years.

But, exactly where in this horrible economy will the $87 billion that the FED will receive from the banks, actually come from? Yep, you guessed it!! The individual American worker pays it. Sara and John Doe will see it as abysmal increases in salaries and wages. It will be paid to the government by denying rewards to the workforce for their increased productivity. But, there remains another minute problem to address. If $87 billion will go to the government without the government putting up a single dollar, where will those investment funds come from that must be assembled in order to create the factories and train the personnel that will produce the goods and services that will be sold so $87 billion can be paid in interest payments to the government?



- Richard K. Brawn
 
Further proof that America is corrupt just like any other corrupt nation.

Wouldn't it be funny if the Madoff ponzi scheme of 50B is just a drop in the pond. Wait till we one day read about how America robbed you and me.

Either get rid of corruption or create more so I can participate in it too.
 
Foreclosure prevention plan shares the pain

Yesterday, President Obama announced his foreclosure prevention plan that will

begin on March 4. The cost of the Homeowner Affordability and Stability Plan is

estimated at $75 billion and includes three key approaches:

???? First, the plan will allow the GSEs to refinance homes up to 105% of their

appraised value.

???? Second, lenders who reduce mortgage rates to borrowers will be partially

compensated by the government. Borrowers will accrue a $5,000 incentive

mortgage debt reduction (over five years) if they make timely payments on

their modified mortgages.

???? Finally, they are boosting their commitments to the GSEs.

Keeping supply off market

Even marginal reductions in the number of foreclosed properties will help the

supply-demand imbalance in housing that is driving home prices lower. The latest

data on housing starts and completions (more on this below) suggest that the

imbalance continues to persist as homes that were begun months ago are still

being completed at a pace well above the rate of sales. Although this new plan is

not likely to be a panacea, we believe that adding a smaller number of foreclosed

homes to a falling number of new homes entering the market will be a positive for

the housing market and the economy more broadly. For now we continue to

expect home price declines.
 
Housing starts sink to new record low

Housing starts plummeted 16.8% M/M in January to an annualized rate of 466K

units, well below consensus (530K) and BAS-ML (525K) estimates. Our

estimates for 1Q real GDP remain unchanged at -5.8%, as we have factored in

substantial weakness for residential investment. A correction unfolded in both

multi-family units (down 28% M/M to a 16-year low at 119K) and single-family

starts (down 12% M/M to a new historic low of 347K). This marks the third straight

month of new lows in single-family construction, reflecting some progress by

homebuilders to pare back building. While building in this segment is now

running below underlying demand (we estimate a pace around 500K/month), we

continue to see a significant inventory overhang of over 1M units that will likely

bring further declines in construction. Until home sales activity picks up from the

330K annualized pace at end-2008, prices for new homes should continue to

head lower. These figures point to no improvement in months’ supply for new

homes, which is expected to remain close to record highs at 13 months in

January. Prospects for any improvement in demand remain subdued given

tighter lending standards in a rising unemployment environment.

Attached files
 
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