Normalizing earnings during profit freefalls. Barry Ritholtz.
Novelty chart of the day. Zero Hedge, with chart from NDR.
Perfect revelation. Cassandra Does Tokyo (on origins, and bastardization, of QE).
Chasing the shadow of money. Tyler Durden, via nakedcapitalism.
Why I'm freaking out. Gonzalo Lira, via nakedcapitalism.
The simplest explanation. Distressed Lookout, via Zero Hedge.
*** The last hurrah and seven lean years. Jeremy Grantham, GMO Quarterly Letter, via Option Amageddon
excerpt: "Probably the single biggest drag on the economy over the next several years will be the massive write-down in perceived wealth that I described briefly last quarter. In the U.S., the total market value of housing, commercial real estate, and stocks was about $50 trillion at the peak and fell below $30 trillion at the low. This loss of $20-$23 trillion of perceived wealth in the U.S. alone (although it is not a drop in real wealth, which is comprised of a stock of educated workers and modern plants, etc.) is still enough to deliver a life-changing shock for hundreds of millions of people. No longer as rich as we thought – under-saved, under-pensioned, and realizing it – we will enter a less indulgent world, if a more realistic one, in which life is to be lived more frugally. Collectively, we will save more, spend less, and waste less. It may not even be a less pleasant world when we get used to it, but for several years it will cause a lot of readjustment problems."
Enjoy the rally while it lasts -- but expect to take a sucker punch. Ambrose-Evans Pritchard, Telegraph. (quoting James Montier and Albert Edwards from SocGen and Teun Draaisma from Morgan Stanley)
Was it a sucker's rally? Andy Kessler, WSJ.
Liquidity crisis? Check. James Kwak, The Baseline Scenario.
with stocks having rallied as much as they have since March 9, its good to note that its not been just an equity-mope phenomenon, as credit indications have improved also; green shoots theories helping all risk assets:Credit crisis watch: thawing -- noteworthy progress. Prieur du Plessis, via The Big Picture.
HOWEVER...
The world in recession. Carnegie Endowment. includes presentations from Olivier Blanchard, Director of the Research Department of the IMF, among others.
U.S. banking crisis may last until 2013: S&P. Reuters.
Secular Outlook: A new normal. Mohamed El Erian, PIMCO.
The "new normal" for growth. Kenneth Rogoff, Project Syndicate.
Damage assessment: how much will the financial crisis hurt America's economic potential. The Economist.
It's that "vision" thing: why the bailouts aren't working, and why a new financial system is needed. Jan Kregel, Levy Institute.
*** The $33,000,000,000,000 question. Niels Jensen, via John Mauldin's Outside the Box.
Faith-based economics. John Mauldin, Thoughts from the Frontline.*** The end-game draws nigh: the future evolution of the debt-to-GDP ratio. Dr. Woody Brock, of Strategic Economic Decisions, via John Mauldin's Outside the Box.
The exuberance glut, or the dollar-euro short squeeze race. Tyler Durden, Zero Hedge.
Deep thoughts from Bob Janjuah. Zero Hedge.
*** Banks pass stress test; regulators fail ethics test. John Hussman.
read it all, but here's one excerpt on the markets:
"Even if we have observed the ultimate lows of this downturn (which I would not take as given), it does not follow that the decline we've observed over the past 18 months will be progressively recovered without a great deal of intervening difficulty. The S&P 500 has retraced just over 25% of its bear market loss. The 904 level on the S&P 500 was a 25% retracement, and 977 would be a 1/3 retracement, which is not unreasonable. Aside from such retracements, the idea of a “V-shaped” recovery in the market is strongly odds with “post-crash” market behavior, which generally features a long and drawn-out flat period for years afterward. Given the enormous overhang of Alt-A and option-ARM resets scheduled to begin later this year, extending into 2012, such a profile would not be surprising in the present case."
and another on the stress tests:
"Now, just think of this for a minute. Even if you assume that the “risk-weighted assets” of the banks are about two-thirds of their total assets (as the stress-test does), we're still looking at $7.8 trillion in total assets at risk in these banks, and despite being on the edge of insolvency only weeks ago, we are asked to believe that they will need less than 1% of this amount – $74.6 billion – of additional capital even in a worst case scenario."
The destructive implications of the bailout -- understanding equilibrium. Hussman again.
excerpt:
"One of the features that has enabled the bureaucratic abuse of the public during the past year has been the frantic, if temporary, flight-to-safety by investors. The Treasury has issued an enormous volume of debt into the frightened hands of investors seeking default-free securities. This has allowed the Treasury to finance a massive and largely needless transfer of wealth to bank bondholders so easily over the short-term that the longer-term cost has been almost completely obscured. But by transferring wealth from those who did not finance reckless loans to those who did – providing monetary compensation without economic production – the bureaucrats at the Treasury and Federal Reserve have crowded out more than a trillion dollars of gross investment that would have otherwise have been made by responsible people in the coming years, shifted assets to the control of those who have proven themselves to be irresponsible destroyers of capital, and have planted the seeds of inflation that will cut short any emerging recovery."
a bunch on banks:
Inside Citi's stress test: more like an F than a B+. Time.
and
How the bailouts screw smaller banks. Barry Ritholtz.
and
I would not own banks stocks: Meredith Whitney. CNBC.
and
The race: future earnings vs. writedowns. CR, with reference to Roubini and Hatzius.
and
Mark Patterson: "It's a sham; the banks are insolvent." Zero Hedge.
and
Breathing easier after bank stress tests? You shouldn't. McClatchy.
and
Red pill or blue pill? Jesse's Cafe Americain.
and a bunch on housing and mortgages:
Housing bubbles around the world: looks pretty bad. Rebecca Wilder, News N Economics.
and
On "rock bottom" housing prices. Zero Hedge.
and
A portrait of the ax, not falling. Rolfe Winkler, Option Armageddon.
and
April foreclosure and servicer tracker report. Mark Hanson, Mr. Mortgage.
excerpt:
"Bottom Line — after seeing these latest figures I am more convinced than ever that the next step is wide-spread principal balance reductions that will reduce the massive negative equity burden in America and be a first-step to solving the mortgage and housing crisis once and for all."
and
Loan reset threat looms until 2012. Mathew Padilla, Mortgage Insider, with charts from Credit Suisse.
and
Loan reset / recast schedule. Calculated Risk.
and
Zillow: higher percentage of homeowners waiting for a market turnaround. Calculated Risk.
and
Foreclosure activity remains at record levels in April. RealtyTrac.
excerpt:
"This suggests that many lenders and servicers are beginning foreclosure proceedings on delinquent loans that had been delayed by legislative and industry moratoria. It's likely that we'll see a corresponding spike in REOs as these loans move through the foreclosure process over the next few months."
and
Freddie reports $9.9 billion quarterly loss. MarketWatch.
excerpt:
"This delinquency data suggests that continuing home price declines and growing unemployment are significantly affecting behavior by a broader segment of mortgage borrowers. Additionally, as the slump in the U.S. housing market has persisted for more than a year, increasing numbers of borrowers that began with significant equity are now “underwater,” or owing more on their mortgage loans than their homes are currently worth. Our loan loss severities, or the average amount of recognized losses per loan, also continued to increase"
so, house prices are still too high, shadow inventory is building, more foreclosures are coming, and plenty more mortgage resets will be coming down the pike, more homeowners are underwater and it sounds like from Freddie that walking away is becoming more common (even in prime, not just subprime), all at time when mortgage rates are lower but lending standards are MUCH tighter.
Options for Fannie, Freddie may include "wind-down" [:OMB]. Bloomberg. (after hundreds of billions sunk)
meanwhile...
Commercial property prices. Mark Thoma, Economist's View, with info from MIT.
MEW, consumption, and personal savings rate. Calculated Risk again.
Update on inventory correction. CR. (yes, there was a big inventory correction in recent quarters, but inventory decumulation not keeping pace with decline in sales, so inventory-to-sales ratios remain higher than they've been since 01-02 recession -- and with retail sales still declining in April, that doesn't bode well for the inventory correction being done)
The anorexia of earnings and the government's junk diet. Tyler Durden, Zero Hedge.
Krugman fears lost decade for U.S. due to half-steps. Reuters.
Turning which corner? and Not so green Wednesday. Tim Duy's FedWatch.
Financial policy: looking forward. Susan Woodward and Robert Hall, Financial Crisis and Recession.
The worst is yet to come. Jesse's Cafe Americain, channeling Howard Davidowitz.
[update: Mish gives his take on this here]
The collapse of the neoliberal model: Where Russia went wrong. Michael Hudson, counterpunch.
excerpt:
"The problem is how to restructure the financial system to make it serve the objectives of industrial growth rather than merely facilitating capital flight. Throughout the world financial interests have taken control of government and used neoliberal policies to promote their own gain-seeking – financial gains without industrialization or agricultural self-sufficiency. Betting against one’s own currency is more remunerative than making the effort to invest in capital equipment and develop markets for new output. So unemployment and domestic budget deficits are soaring. The neoliberal failure to distinguish between productive and merely extractive or speculative forms of gain seeking has created a travesty of the kind of wealth creation that Adam Smith described in The Wealth of Nations. The financialization of economies has been decoupled from tangible capital investment to expand employment and productive powers."
Apocalypse when? Investors' Business Daily. (on social security and medicare)
Unintended consequences....again! Karl Denninger, The Market Ticker.
re: Obama's treatment of GM and Chrysler debt-holders:
"Without capital formation and private investment, our capital markets and ultimately our business environment will wither and die. This is not conjecture, it is mathematical certainty.
The Rule of Law is what has separated us from a banana republic for over 200 years. That has now been relegated to the dustbin of history"
The 81% tax increase. Bruce Bartlett, Forbes.
Fed: delinquency rates surged in Q1 2009. Calculated Risk.
and
Credit card defaults reach record highs in April. CNBC.
Asia needs to dump its growth model. Michael Pettis, FT.
China cuts lending amid asset bubble fears. FT.
Chinese power generation. Jake, Econompic Data.
China and the liquidity trap. Paul Krugman.
Not putting your money where your mouth is. Brad Setser, Follow the Money.
The wonderful world of negative nominal interest rates, again. Willem Buiter, Maverecon.
Inflection points and turning points - since you asked. Buiter again.
Credit growth in the aftermath of a crisis. Michael Pomerleano, FT.
(so, with no income growth, and no credit growth, where is PCE spending growth supposed to come from?)
Consumer credit contracts. Jake, EconompicData.
for more on that point, we have:
U.S. household deleveraging and future consumption growth. FRBSF Economic Letter.
excerpt:
"In the long-run, consumption cannot grow faster than income because there is an upper limit to how much debt households can service, based on their incomes. For many U.S. households, current debt levels appear too high, as evidenced by the sharp rise in delinquencies and foreclosures in recent years. To achieve a sustainable level of debt relative to income, households may need to undergo a prolonged period of deleveraging, whereby debt is reduced and saving is increased. This Economic Letter discusses how a deleveraging of the U.S. household sector might affect the growth rate of consumption going forward.....
... More than 20 years ago, economist Hyman Minsky (1986) proposed a "financial instability hypothesis." He argued that prosperous times can often induce borrowers to accumulate debt beyond their ability to repay out of current income, thus leading to financial crises and severe economic contractions....
... could result in a substantial and prolonged slowdown in consumer spending"
[update: Mish has his own commentary here on this FRBSF report]
a bunch from Hellasious:
How steep is my valley. (does the shape of the yield curve mean now what it would normally mean?)
and
It's a copycat - deadcat bounce. (from risk revulsion to risk appetite.... on what?)
and, to answer that question:
Bailouts, inventories and jobs.
and why things are likely getting ahead of themselves:
The great reset results in traps. and The Lazarus market. and The real economy in pictures. and
*** Low wages + high consumption = massive debt. and GDP on debt steroids.
all from Sudden Debt.
One thought could change your life. Michael Matovcik, via Zero Hedge.
lotsa little quotes/ideas, my favourite of which is:
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” Ludwig Von Mises
FRBSF Economic Outlook. Mark Thoma, Economist's View.
Economists stuck in 1930s need a decade update. Caroline Baum, Bloomberg. (partly about leading indicators, partly about Alan Blinder's opinion not to take the foot off the gas too soon, partly C.B.'s opinion that following A.B.'s advice to avoid the 1930s might lead to reprise of 1970s)
Involuntary part-time workers and the deficiencies of the unemployment rate. Federal Reserve Bank of Cleveland.
Government payroll warping overall data? Jake, Econompic Data. (published figure: -539, take off downward revisions to past months of -66 and one-time census hiring -66, and you get -671 (and that's ignoring the huge assumed positive contribution (241k) of the Birth/Death adjustment)
Bad collateral. Jim Kunstler.
excerpt:
"... All this is to say why it is so dispiriting to see Mr. Obama's White House mount a campaign to sustain the unsustainable in the economic realm. Everything they've done for four months involving money management and enterprise policy -- from backstopping hopeless banks, to gaming the bankruptcies of the big car companies, to the bungled efforts to prop up artificially-high house prices -- amounts to a gigantic exercise in futility. Worse, it gives off odors of dishonesty or stupidity, since the ominous tendings of our system are so starkly self-evident. Not least of the problems entailed in all this are the scary political consequences. ... The Obama White House has very quickly painted itself into a corner on these things. The so-called bank "stress test" couldn't have backfired more completely. Rather than bolster confidence in our money system and the people who run it, it only made the system appear more obviously corrupt. It made the Treasury Department (and the White House by extension) look idiotic for concocting it. Worse, the game of allowing the banks to audit themselves, and cook their books under newly jiggered accounting rules, only made them look less sound and trustworthy, and their executives more venal and mendacious. The stress test scam also virtually guaranteed that the banks will not get another dime out of congress -- even while it is common knowledge that they will desperately need quadrillions more dimes in the months ahead. Who knows what the point of this ludicrous exercise was?"
Another 'I told you so': pensions. Karl Denninger. (the PBGC's deficit has tripled in the last six months to $33.5B, and that's before it has to account for Chrysler or GM)
Let's assume we have a can opener. Steve Keen's Debtwatch. (applies to Australia's budget forecasts, but same line of thinking applies to Obama's and even the BoC's rosy forward-looking return to trend-growth forecasts.)
Wholesale prices post largest 12-month decline since 1950 [finished goods PPI down 3.7% YoY, but intermediate goods down 10.5% and crude goods down 40%!]
and Non-existent "pre-recovery" in manufacturing suggests U.S. Treasuries a buy. both by Michael Shedlock.The dynamically-hedged economy II. Doug Noland, Prudent Bear (skip to the last section); excerpt:
"The more bearish analysts argue that current economic underpinnings do not support surging stock and debt prices. Of course they don’t, but that’s not really the key issue. Rather, the question is whether the return of liquidity and securities market inflation will stoke sufficient confidence (from both spenders and lenders) to spur sustainable economic recovery. Here I must lean heavily on my analytical framework. In the short-run, I have to presume that major financial sector and market developments will work to stimulate the real economy (as they have repeatedly in the past). At the same time, it’s my view that the economy today is unusually susceptible to an artificial and fleeting recovery. The unwind of bearish hedges will at some point have run its course, concluding a period of major artificial liquidity generation. Moreover, I question the sustainability of the Government Finance Bubble (fiscal and monetary) overall. The markets are setting themselves up for disappointment."
The economic crisis and its implications for the science of economics. The Perimeter Institute Recorded Seminar Archive. (includes Roubini, Taleb, Andrew Lo, Bill Janeway)
'I think people are still in denial'. Brian Milner interviews David Rosenberg, G&M.
and, great news, at least for a limited time:
Sign up for economic reports featuring David Rosenberg. Gluskin Sheff.
and, a few on the light-hearted side:first, in praise of gold:
Financial Psalm 16. Cassandra.
Monetizing the debt: explanation for non-economists and laymen. The Prudent Investor.
a little bball debate:
Kobe vs. LeBron. excerpts from TrueHoop debate.
and some cool art:
WOW! 3D pavement art. must see. Edgar Mueller.
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