Category Archives: Economic Indicators
You may remember back in 2007, the Federal Reserve changed the rules and allowedÂ some banks to use a greater amount of moneyÂ borrowed from the discount window to help their brokerage affiliates. In fact, this amount was 25 billion for Bank of Amerika. The Fed also began accepting more risky assets as collateral, with Bank of Amerika participating. Mish had a good article about it here: Now We Know Who and Why.
On Monday, July 21st, Bank of Amerika was one of 18 other banks on the SEC’s list for restricted short sales. Presumably, this was done so that the share prices would rise and allow the banks access to capital at better rates. Or, they were truly in danger of IndyMacing, and the SEC wanted to prevent another collapse.
Bank of AmerikaÂ reported earnings on the same day of 3.41 billion.
Today, Bank of Amerika announces a 3.75 billion stock repurchase plan.
I have to ask, what the fuck country am I living in?
Pinky Paulson and Helicopter Ben have allowed Bank of Amerika to borrow my money and yours, with no risk premium, so they could prop up their own brokerage affiliates. The SEC has changed the rules to provide Bank of Amerika cash for their risky assets, andÂ protection from short sellers. And now, it appears that Bank of Amerika is doing quite well, and has simply used my money and yours, with no premium, to theÂ benefit of the corporation and their large investors.
I am so pissed off at this fuckery, I am unable to coherently express myself. I am left with the distinct feeling that our government is from Mars. I am also left with a good understanding of why so many Americans do not trust corporations, CEOs, and “the rich.”
Welcome to the Keynesian Nightmare
British economist John Maynard Keynes was an advisor to the American government in the 1930s when it was struggling to restart the domestic economy. The Depression was tragic but, to put it in historical context, Keynes and his client were dealing with a cyclical problem that, by the 1930â€™s, had already happened regularly during US history.
Before World War II, the US had had many serious recessions or depressions, including 1807, 1837, 1873, 1882, 1893, 1907, 1920, 1933, and 1937. During the 1930s Depression, Keynesâ€™ interpretation of the economic problem was that the US, indeed the world, was caught in what he described as a liquidity trap. A liquidity trap is defined as a time when institutions and consumers hoard money and refuse to spend, protecting their own financial assets for fear of losing them. He argued mightily for his solution to the problem, what we now call Keynesianism. To simplify, he wanted FDR to â€˜prime the pumpâ€™ of the economy, to put so much money in peopleâ€™s hands that the increased consumption would lead the way out of the liquidity trap, that the resulting improvement in consumer confidence and normalization of lending habits would reestablish the footing of the economy. The Roosevelt Administration and the economic community initially dismissed his ideas as too simplistic, but the New Deal came to look a lot like the Keynesian construct.
Ultimately, the US was dragged out of the Depression by the deficit spending of World War II, but Keynesianism got the credit, thus setting the course of economic policy for much of the post-war Western world. Keynes, who died in 1946, didnâ€™t live to see the implementation of his theory in the real world.
Since WWII there have been ten recessions in the US, but unlike the pre-war recessions, none of them turned into a depression. I think this is because the Keynesian prescription of deficit spending and heavy government pump-priming has been engineered on a massive scale. Or, as Richard Nixon famously claimed in 1971, â€œI guess we are all Keynesians now.â€ Keynesianism had triumphed, and the result is that Keynesian spending provided the foundation for the greatest economic boom that the world had ever experienced. Capitalists throughout the world piled into the example of the US, and in the process turned Keynesâ€™ dream into a nightmare: The nightmare of economies powered by huge amounts of debt and inescapable liquidity traps.
So here we are sixty years past Americaâ€™s emergence as the worldâ€™s dominant superpower, and the perversity of Keynesian theory has grown like a weed. I think it is fair to say that the world we are in today is not the world Keynes foresaw when he wrote his General Theory of Employment, Interest and Money in 1936. The most pronounced change, to me, is to the amount of debt capital issued in the US and its changing composition. The US grew during the Cold War economic boom thanks to the issuance of the US Treasuryâ€™s full faith and credit notes and bonds,, and since then the rest of the US economy has followed suit as society has gotten more and more comfortable with credit riskâ€” first corporate debt, then consumer debt, then junk bonds, then mortgage debt, then structured debt. As a result, today the dominant part of the total debt structure in the US, the part that has played the largest role in driving GDP growth over the last decade, has occurred outside of the governmentâ€™s purview.
It is no secret that the US is a country driven by debt. It now takes approximately $3.25 of total debt in the US to generate $1 of GDP, a significant increase from 1952, when it took just $1.30 in debt to generate $1 of GDP. However, in 1952, government debtâ€”federal, state and localâ€” was $244 billion and accounted for 55.1% of the $443.6 billion in total debt outstanding in the US. Today, government debt stands at $7.2 trillion but accounts for just 15.7% of the $45 trillion in total debt. Household debt today has a much larger impact on economic growth than government debtâ€” at $13.6 trillion, it is almost twice as much as government debt, while in 1952 it was just one-third of government debt.
The first part of the Keynesian nightmare is related to this change in the composition of debt in the US. If we are counting on deficit spending and the resulting debt capital creation to pull the economy out of recession, the non- governmental borrower who has driven economic growth over the last half decade wonâ€™t be there. Donâ€™t count on him. That borrower marks to market and has to cover debt service out of earnings. His ability to borrow today is severely restricted by the asset deflation in house prices and on bank balance sheets. The government, on the other hand, doesnâ€™t mark to market and owns a printing press. So we would be on the watch for much, much deeper government deficits and a surge in government debt issuance going forward.
The second part of the Keynesian nightmare is that we might be in the middle of one of the worst liquidity traps ever. Banks are hoarding liquidity not so much because they are afraid to lend to weak credits but because they are protecting their own capital ratios. Their massive writedowns and equally massive capital infusionsâ€”neither of which are doneâ€” arenâ€™t working. So while the ECB and the Fed are trying to break the excess liquidity preference of financial institutions through extraordinary measures, the market is doing the opposite: While the Fed may be accommodative, the widening of credit spreads is restrictive. I suggest that this should offset the inflationary potential of the Fedâ€™s actions. The struggling consumer will also likely start to pull in his horns and spend less and save more. Weâ€™ll see whether those election-year fiscal stimulus checks change consumer confidence, but my guess is that $600 or $800 or whatever the package provides to consumers will be a transient event for the economy.
In short, the Keynesian nightmare is that it wonâ€™t work. Maybe thatâ€™s why the Fed cut 125 basis points in just eight days. And maybe thatâ€™s why they have more to do.
Michael A.J. Farrell
Chairman, CEO and President of Annaly Capital Management, Inc.
The Employment Situation is the most eagerly awaited news on the economy. Because the news is very timely, only one week after the month covered, and because of the amount of data about the job market and household, this report has great economic and political significance. “No single economic indicator can jolt the stock and bond markets as much as the jobs report.Â¹”
The ADP National Employment ReportÂ is always released two days prior to the BLS data. As one could tell from today’s bullish session, this report does not carry much market-moving influence. The ADP Report is disregarded by market participants as it has not been around long enough to build credibility and because of the perception that it is not statistically signifacant compared to the government’s data.
That perception is incorrect.
I have pasted here the statistical properties of the ADP Report.Â You can go the site and read them in a larger format here:
Because there is statistical significance to the report, I’m surprised it is not given greater weight. Anyway, that’s a debate for another time.
Here is the meat of the report released today:
Nonfarm private employment declined 23,000 from January to February 2008 on a seasonally adjusted basis, according to the ADP National Employment Reportâ„¢. The estimated change in employment from December 2007 to January 2008 was revised down 11,000 to 119,000. Februaryâ€™s decline of 23,000 signals a deceleration of employment growth across businesses of all sizes.
Employment in the service-providing sector of the economy grew 47,000, while employment in the goods-producing sector declined 70,000, the fifteenth consecutive monthly decline. Manufacturing employment fell 40,000 in February after declining a revised 3,000 in January, and marked the eighteenth consecutive monthly decline.
Read the rest of it and see some nice charts here : Complete ADP Employment Report
Here is the issue: Last month the ADP Report showed growth of 130,000 jobs, while the government’s estimates were -17,000. Note that the market has not traded past the high of February 1st, the same day the government released the BLS estimates of -17,000.
As today’s ADP Report shows -23,000 jobs, let us play a game of “What if…” What if Friday’s jobs numbers are of a similarÂ spreadÂ and relationship to the ADP numbers as last month. If so, on we could expect the BLS to report -170,000 jobs on Friday.
What would that do to the market?
Finally, the other reason the Employment Situation moves the markets is because it can often be a surprise. Anyone want to predict if there will be a surprise Friday?
See the Bloomberg consensus estimates here: Bloomberg Employment Situation Consensus Estimates. Their estimate is creation of 25,000 jobs.
Â¹Baumohl, Bernard. (2008). The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities. 2nd Ed.Â Wharton School Publishing. Upper Saddle River, New Jersey. Pg. 25