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Tuesday, January 19, 2010

Transcript: 346 Black Shoots

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We have too much on our plate today.  We are going to look at some current measures of the economy, but we are not going to put off listening to Maria Cantwell introduce the Cantwell-McCain return to Glass-Steagall.  And somewhere we're going to get some sobering words from George Soros in his Central European University lectures and from Joseph Stiglitz in his brand new must read book Freefall: America, Free Markets and the Sinking of the World Economy.

On top of the news

The revision to November's Current Employment Statistics from the Bureau of Labor Statistics that produced the first positive job numbers in years -- 4,000 -- was immediately contradicted by the BLS's JOLTS (Job Openings and Labor Turnover Survey) which calculated 164,000 net jobs lost for that month.  (see the clip from Calculated Risk in the transcript)  We do not mention the 800,000 new unemployment claims, because the data is not seasonally adjusted.  But it IS big.

From Calculated Risk
BLS: Near Record Low Job Openings in November
Job Openings and Labor Turnover Survey Click on graph for larger image in new window.
This following graph shows job openings (yellow line), hires (purple Line), Quits (light blue bars) and Layoff, Discharges and other (red bars) from the JOLTS. Red and light blue added together equals total separations.

Notice that hires (purple line) and separations (red and light blue together) are pretty close each month.

When the purple line is above total separations, the economy is adding net jobs, when the blue line is below total separations, the economy is losing net jobs.

According to the JOLTS report, there were 4.176 million hires in November, and 4.340 million separations, or 164 thousand net jobs lost. The comparable CES report showed a gain of 4 thousand jobs in November (after revisions).

Also from Calculated Risk, we get an estimate of the payment shock coming in 2010 and 2011 from Option ARMS mortgages.  As you can see from the charts on the transcript, 2009 was a mild year for recasting the payments on mortgages.  2007 and '08 were big for subprime.  2010 and 2011 will be heavy on Option ARMS.

Combined with the enormous percentage of Option ARMS that are under water.  Well over half have negative equity in their homes.

Of course, there is guesswork, including a projected increase in LIBOR.  But the folks who were stretching to buy in the first place, are now in the position of making the strategic default decision.  We presume there are plenty of securities behind these mortgages that the Fed will need to backstop in order to remain consistent.  SCUBA anyone?

Option ARM Recast Update
The following data is from Amherst Securities:
Option This chart shows the expected payment shock coming in 2010 and 2011 from Option ARMs. This chart includes projected increases in LIBOR (if LIBOR stays low, the shock will not be as high), and the recast due to reamortizing the loan over the remaining period.

For more details, see: Option ARM Recast Updateand More on Option ARMs
Option On negative equity, this graph from Amherst shows the CLTV for various mortgage products. Note that subprime and Alt-A had a somewhat higher percent of borrowers with negative equity than prime - but Option ARMs (red) borrowers are mostly in negative equity!

As Laurie Goodman at Amherst Securities noted, Option ARM borrowers were a self selecting group (people stretching to buy homes) and that is why most have negative equity in their homes.

And also from Calculated Risk, (gee that was easy), a chart on the trade balance, noting the trade deficit increased in November.  What is most interesting about the chart is the collapse of trade at the time of the collapse of the oil price bubble in 2008.  July 4 of that year saw prices at $147.  They collapsed to eventually around $30 and now their back in the bubble at between $70 and $80.  But the point is, and I do not have the definitive analysis, there was a boom and bust in exports and imports that was likely oil related that masks a clear view of the trade situation.

Trade Deficit Increases in November

U.S. Trade Exports ImportsThis graph shows the monthly U.S. exports and imports in dollars through November 2009.

Both imports and exports increased in November. On a year-over-year basis, exports are off 2.3% and imports are off 5.5%.

Overall trade continues to increase, although both imports and exports are still off significantly from the pre-financial crisis levels. Net export growth had been one of the positives for the U.S. economy - but now imports are growing faster than exports.

Here is the Census Bureau report on trade.

Elsewhere, the second week of the Financial Crisis Inquiry Commission is underway.  It would be better for the commission to get into the weeds than angle for face time with the fat cats.  Interview the inspectors and agents at the lower levels of the regulatory bodies and regulated bodies to see what they heard, saw and were told to do and not do.

And here from Jim Chanos, whom I do not know, but posts at New Deal 2.0 and agrees with me, 

Owning your own home is fast becoming the number one goal — and fear — of the working and middle-classes of China. Compounded by the fact that there are few modern public or private pension plans for retired workers, this “nation of frugal savers” has made the bet of a lifetime (literally) on already over-priced residential real estate — often with accumulated family savings. If it turns out that foreign “hot money” and Party insiders have been the sellers (or more accurately, the “flippers”), while the workers have been the buyers, the potential for social unrest will soar. More importantly, confidence in Beijing’s economic “Miracle” and its mandarins will soon shatter as investors around the world realize that Chinese policymakers learned nothing from the West’s crisis of just a few years ago. Forget Chinese trade, the yuan, shoddy construction and manufacturing, the pollution, commodity demand, labor migration, or even $2.3 trillion in foreign currency reserves. The only Chinese political economy story that “counts” is the “Chinese Residential Real Estate Bubble.”


Now we're going to get a bit from Maria Cantwell, co-sponsor with former Republican presidential candidate John McCain of the McCain-Cantwell Return to Glass-Steagall bill.  Here from Dylan Rattigan.


One of these days we're going to do some work in our archives and bring back some previous calls, because once again, Demand Side called for this break 'em up strategy a year and a half ago.  Then we were once again on the radical fringe.  Without it, too big to fail insurance is going to bankrupt the us.  Well, I guess it has already.  But coming out of bankruptcy, we need a banking system that is useful for the citizens, not a seat for big players at the casino.

And finally, sorry it's not more uplifting, some pointed words from George Soros describing the condition of academic economics and the prospects for enactment of economic common sense in a world dominated by media mind manipulators and big money.  This from the Open Society Podcasts.

What we're not getting to today is Elizabeth Warren and Roger Butyl.  Warren on the TARP and Butyl on the structure of banking.  We may have to run that on the Saturday relay.


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