USGM, anyone?

[solarbird]

Good evening, or, more likely for most readers, good morning.

I'm not going to talk about the pending auto-company bailout package until we actually see it - however, a partial nationalisation is apparently being floated, via stock dilution in exchange for loans. But until we see the result, this is about everything else.

I'm afraid there's no theme; a lot is happening, but it's not all tied together very well.

Despite the very good day in the US equities markets - Mish thinks we are finally in Wave 4 - most news today and over the weekend was rather bad. So we'll start off with a rarity; an 'up' article from uberbear Mish Shedlock, discussing possible winning companies in the upcoming green-tech/green-energy boom. Also, a former Chinese Central Bank advisor has extreme doubts about any plans to devalue the Yuan, and calls the recent uptick a "blip." Mish agrees.

Breathe deep, because having enjoyed those two pleasant bon mots, it's all downhill from here. Remember; Wave 4 Up ends in Wave 5 Down.

Karl Denninger comments on a repeated CNBC report that - and this is a CNBC quote - "Administration officials are allegedly considering using eminent domain to buy up MBS, with the justification for doing so being invocation of 'national security'." From a legal standpoint, the justification sounds like absolute crazytalk - but we've been so far from law for so long that I can't just toss it aside as crazy anymore. Public Citizen is talking it up. Karl thinks it's a good way to insure all remaining lending stops overnight.

Tribune Company of Chicago - owner of the Los Angeles Times, the Chicago Tribune, and the Chicago Cubs - filed Chapter 11 bankruptcy today. (In that story, the longer one, it was merely expected; confirmation came later today.) Executives noted that, "revenue declines have been dramatically worse, even over the last couple of weeks," forcing the move. Consumers cut back sharply on borrowing in October, defying a predicted increase. Meredith Whitney thinks credit-limit slashing is about to become the norm; anecdotally I know people who have had their credit suddenly cut.

Mortgage renegotiation leads to new lending agreements, but within six months, more than half of them are again in default. At eight months, the rate climbed to 58%. That's better than 100%, but the failure rate is still exceedingly high. And here's yet another story about "omg wealthy neighbourhoods aren't exempt!" Well, no, they're not.

Dow Chemical plans to cut 11% of its workforce and 180 plants. It works out to about 11,000 jobs. Meanwhile, companies are begging Congress to let them out of legally-required compensatory deposits into pension funds which are now dramatically underwater thanks to extensive stock losses.

Japan's third quarter turned out to be worse than originally thought, with the Japanese economy contracting at an annualised rate of 1.8%. Sony is cutting 8,000 jobs, but the article doesn't say where. The Telegraph notes that the "deflation virus is moving... beyond the 1930s extremes." That's not actually true, yet, but they're pro-printing to avoid deflation. Dr. Roubini at RGE Monitor thinks the Ruble is 20-25% overvalued, and S&P has downgraded Russian debt from BBB+ to BBB with negative outlook.

Brad Setser at the Council on Foreign Relations says goodbye to the age of Great Moderation in economic swings. He's not convinced it was ever real, but it was certainly perceived as such. Satyajit Das at RGE Monitor thinks there never was as much liquidity was was perceived during the bubble. That perception of overabundance is gone, and is boosted with actual losses. Finally in analysis, the Centre on Budget and Policy Priorities says 41 states can expect severe budget problems in the next two years. Washington State is on the list, but not until 2010.

Paul Volcker is back, and warning people to get ready: it's getting a lot worse. The Financial Times expects bankruptcies to hit record levels next year, based on a report by German insurer Allianz. Heather Stewart and Ruth Sunderland at The Observer report that GFC Economics suggest that a one-million job-loss months are possible in the new year. It's not so much that there's panic; it's that there's a rolling panic which reinforces itself.

Barack Obama has endorsed the sit-in at the Chicago window factory which closed down on three days notice and is trying not to pay its workers money due. The company is blaming Bank of America, but reports elsewhere say the company is trying to pull a fast one and relocate to Des Moines, Iowa, and rip off its Chicago workers at the same time. This is rapidly becoming a cause.

Three-month treasuries are selling at rates not seen since 1929 - 0.005 percent. That's indicative of severe, severe fear of the next three months. The Baltic Dry Index has leveled off and actually pulled up today, to 671 - still the lowest figure since 1986, but the decline has halted at least for a day. The US dollar has fallen out of its late November/early December trading range. The Fed continues not to try to defend its 1% target rate; over the last few days, the actual rate has dropped to between 0.12% and 0.36%. Old-school TAF/TIO/Discount Window sloshing has picked up a bit, but is of course dwarfed by the TARP and TARP-like programmes. The TED spread insists upon staying uncomfortably above 2.1 (where .25-.5 is normal).

Keep watching the M1. Things are going on.

And in the theme of the times, enjoy this most unusual review of the new Vahxhall Insignia 2.8 V6 automobile, "An adequate way to drive to hell."

Comments

[silussa.livejournal.com]

Given what Paul Volcker put us through to flush inflation out of the economy...I worry about what "a lot worse" is going to mean. At the very least, obviously, a whole lot of "leverage"(debt) still has to be unwound out of the economy.

I'm personally already refinancing any outstanding debt (including credit cards) at fixed rates...and dumping a few cards that I simply won't need. I fully expect that the current "credit line cutting" by the banks is also going to get a lot heavier; securitizing credit card debt is gone, at least for now. I also full expect "buy and hold" mortgages are going to return...and is that such a bad thing?

[solarbird]

Mostly what I would do is eliminate debt. Fixed-rate debt is better than unrestricted-change debt (e.g., credit cards, where the rates can be set to "loot," "bankrupt," and "drive away") but is not better than variable-but-linked debt (e.g., in a deflationary environment, an adjustable-rate mortgage might be okay. Mish has been doing very well with his, for example.)

I don't know what you mean by buy-and-hold mortgages.

[silussa.livejournal.com]

My phrasing is probably off; writing comments early in the morning isn't one of my better ideas.

Bu the OLD style of handling mortgages was: you wrote the mortgage, then you set it on the shelf. You OWNED it. Today, the primary style is to write it, then sell it to the securities market. One of the major headaches today in trying to modify the mortgages is that there isn't a single owner who can say "yes".

[silussa.livejournal.com]

http://www.mtgprofessor.com/A%20-%20Type%20of%20Loan%20Provider/why_do_most_lenders_sell_their_mortgages.htm (http://www.mtgprofessor.com/A%20-%20Type%20of%20Loan%20Provider/why_do_most_lenders_sell_their_mortgages.htm)

[solarbird]

Portfolio mortgages, those are called. And yes, the MBS and CDO have made the situation much more complex for no good reason. But even before CDOs, they were often sold off to larger banks which specialised in mortgage-holding.

[silussa.livejournal.com]

I think the reason for securitization is, simply, what happened to the Savings & Loans. Holding long term debt using short term money isn't the best situation in the world...but turning them into securities obviously takes everybody off the hook for making sure they're GOOD loans.

[peakoilchaplain.livejournal.com]

Washington State is projecting a $5.2 billion revenue shortfall. If we aren't to be expecting severe budget problems until 2010, I hate to see what they consider "severe".

Okay, that was me being facetious. More seriously, I think Washington is in the same boat as the states projecting midyear FY2009 problems, its just that since we have a Fiscal Biennium, as opposed to a Fiscal Year, and because it starts in July, not January, the writer of the article probably got a little confused as to exactly when our budget problems are expected to crop up.

[llachglin.livejournal.com]

The $5.2 billion shortfall is for the next biennium, i.e. 2010. If fiscal 2009 starts in July 2009, midyear FY2009 is January 2010, right? It seems consistent to me anyway.

Also, it turns out that deficit spending is allowed under our state Constitution, so we've got more room to maneuver. I also expect that the Obama administration will provide a lot of money to the states that will help, and that by 2010 we should be at least beginning an upturn nationally (though probably not by January). So the timing should work out OK for us compared to states that have a current-year deficit.

[z111.livejournal.com]

What's your take on the economic outlook for 2009? I remain stupidly optimistic for no good reason. I think housing will start to get a bit better in Q3 and there will be solid evidence of the beginning of a recovery by Q4.

I think Q1 and Q2 will continue job losses and foreclosures though.

IOW, I think we're trolling around the bottom right now.

[solarbird]

I think we are at the end of the beginning and that this should not be confused with the beginning of the end. C.f. these important charts I posted a few months ago. Please note where we are in that process; about halfway through, in aggregate. Also, inventories continue to be insanely high. Last I checked, the US could build no new houses for around four years and still meet demand. But homes are still being built, if in significantly fewer numbers.

So I would expect 2009 to be consistently bad, including in housing. If - and at this point that's a substantial if - they manage not to pooch the currency and raise debt financing costs to the sky, then 2010 could (and really should) see recovery... except...

Really, there's a couple of "except"s here. One: A lot of these policies tend to make things worse rather than better. Will that happen here? I've certainly opposed my share of these actions, but I could be wrong. I've talked about this in economic posts past, and in comments. This is manageable.

Two: the oil problem has not gone away. This spike down (based on shipping and production collapse - see my obsession with the DBI, and if there were a similar number for trucking I'd be posting it, but the reports I see are very bad) combined with the credit situation has made it worse, not better, as money for operations on alternatives and alt-oil (deepwater, tar sands, etc) is vanishing. There's even been a bottoming-out of SUV sales, and when petrol dropped below US$2/g last week, the impact on traffic was immediate and obvious; old habits snap right back.

One of the scenarios talked about in the oil economics world is the idea of extreme oscillations in price; spikes to high levels crush economic activity, economic activity collapses hard and fast, oil plummets, the economy starts to rebuild, demand begins to exceed immediately supply again, and you get another ramp right back up. This is part of the 20-year impact time outlined by the Hirsch Report, which is available all sorts of places online. (As an unclassified US government report, it's public domain.) A lot of other people may have decided to forget about oil now; I haven't.

So I think there should be recovery in 2010, but it is likely to be halting and strange.

html is apparently difficult

[silussa.livejournal.com]

Marketplace on American Public Radio reported that 4 week Treasuries sold at zero yield today. And that 3 month Treasuries went negative for a little while.

Bleh.