Economic and Financial Bad News 32 comments
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If you're one of those people who needs a negative GDP number to convince yourself that we're in a recession, here you go. But the headline -0.3% figure isn't the worst bit: That would be the 8.7% fall in disposable personal income. If there was any doubt about the outcome of this election, that number alone should put it to rest: There's no way that the incumbent party can win in that kind of economic environment.
And while the macro picture is bad, the financial picture is just as gnarly. The NYT has had a great pair of back-to-back pieces on important financial stories which people aren't paying enough attention to: Diana Henriques looked at the The Reserve Fund yesterday, while Mary Williams Walsh, today, turns her attention to AIG.
While both of these entities look like studies in incompetence, The Reserve is clearly the worse of the two. The shock of breaking the buck seems to have been so great that it suffered some kind of institutional cardiac arrest, to the point at which it has become utterly unresponsive:
Initially, the company simply announced that it would delay redemptions from the Primary Fund for up to seven days, as allowed by law. Customers were somewhat reassured, but anyone trying to get additional information was met with busy phone lines and unanswered e-mail.
The news occasionally posted on the fund's Web site got steadily worse. On Sept. 18, investors in a host of other Reserve money funds learned that their money would be tied up for as long as a week; that delay later became open-ended. On Sept. 19, the fund delayed redemptions from both the Primary Fund and the US Government Fund indefinitely.
Since then, investors have been on a rollercoaster of broken promises, with the company repeatedly blaming its record-keeping systems for delays.
Several requests for comment from management of the Reserve Fund have been declined. "I have no confidence at all in what it says," said Mrs. Dews.
This is incompetence of the highest order, in the context of a world where institutional investors are actually putting money in to money-market funds. A couple of days' delay in communication is one thing; a month and a half is so far beyond unacceptable as to mean that The Reserve is going to be tied up in litigation for years. Certainly while The Reserve has shut down like this, it won't be the beneficiary of any inflows. Quite the opposite: All its investors are likely to leave as soon as they can -- including, I suspect, the Chinese government, which has as much as $100 billion invested with The Reserve.
As for AIG, the problems there stem from the fact that the financial-products people kept on insisting that their assets were just fine, thank you very much, that marking to market was a silly thing to do, and that their CDS portfolio was worth much more than the market said it was worth.
Of course, they were spectacularly wrong.
I'm reminded of Alea's "why you should cut your losses quickly" chart from last Friday. You thought it was a bad idea for SocGen (SCGLY.PK) to liquidate Jerome Kerviel's massive stock-futures position on a US holiday? Well, maybe. But in hindsight, if they'd decided to wait for the markets to rebound, they would have lost much more. AIG, in contrast, decided to hold on to its positions for dear life, and pray they'd go up:
After the insurer's credit rating was downgraded in September, its G.I.C. customers had the right to pull out their proceeds immediately. Regulators say that A.I.G. had to come up with $13 billion, more than half of its total G.I.C. business. Rather than liquidate some investments at losses, it used that much of the Fed loan.
Clearly, liquidating in September would have been a much better idea than holding on through October: I'm sure the losses AIG was worried about have gotten substantially larger over the past month.
And then of course there's the CDS portfolio, which AIG has been overly optimistic about every step of the way. It could have hedged in 2007 or earlier this year, but passed up all opportunities to do so, and as a result it is now facing hundreds of billions of dollars in unnecessary losses. This is why marking to market is a good thing: It forces companies to realize losses and liquidate early at a survivable loss, rather than adopting the hope-and-pray strategy and seeing losses become so large as to be systemically dangerous.
Finally, in the intersection of the economy and finance, James Hagerty of the WSJ looks at Frannie (FRE)(FNM) spreads, which have been widening out steadily for the best part of two months now, despite nationalization. The first thing the new Treasury secretary should do is implement an explicit government guarantee on the senior debt of both companies. It won't cost anything, since the guarantee is there already, just not explicit. But it might help mortgage rates come down rather than up during a time when the Fed's rate cuts clearly aren't doing the job.
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This article has 32 comments:
Source please?
The decline of -.3 percent in the GDP is insignificant .It very well may be adjusted upwards next time around because of accelerated inventory build up.
As a matter of economic facts the recession is defined as two quarterly declines in the GDP-we are not there yet.
Allowing for the unprecedented "Stabilization"plan ,which will provide five trillion dollars of stimulus(40% of the GDP) and the aggressive easing by the FED(an economic jet fuel) ,we may be able to deflect a traditionally defined recession.
In fact allowing for the lag(some marginal period),this economy/market are heading for uprecedented rebound(synonym Gabe).
By the second half of 2009 ,5% GDP growth is reality.
Consumer disposable income will be significantly increased because of implodimg energy and commodity prices.
Enough of these emotional and pessimistic articles ,they should have been written a year or two ago.Now ,they are a history.
For myself ,I had issued the warning about the current debacle as early as June 3 ,2005 in an interview with Mark Gibert(Bloomberg ,London).
I have reiterated the warning about the impending financial Armageddon in an interview with Brian Sullivan on September 18 ,2007 during the FED time (Bloomberg TV).
Now I am sick and tired of reading doom and gloom psychotic opinions.
We have identified all of the key issues and addressed them with an incredible cooperation of various agencies ,FED and the Congress(internally).
Global cooperation is contributing to the issues solution outside of the U.S.
Daily volatiity and pullback willcontinue,but we are amidst a historically relevant rally in making.
The Dow is heading for 20,000 level in two years-period.
The Fed has lowered rates;
the banks will now inflate.
We'll have a boom
but it is doomed.
No, wait!
The Fed has lowered rates ...
Who pays for the 5 trillion dollars? How can you predict that the Dow will be at 20000 in two years? Do you have a crystal ball?
Federal underwriting is not free, or particularly reassuring to anyone, in fact it has just the reverse effect. A debt or an undertaking to stand good for the debt of another is counted as two debts by most creditors. Anyway you look at it the Federal assurances of the debt of other entities (Fred and Fran) just spells the insolvency of the Federal Treasury and adds to its lack of credibility as a financial intermediary. The outstanding debt of the treasury is 4,800 billion dollars. At some point it will become obvious to most observers that the US is no different than Japan, a Zombie nation. Z
Boy, talk about throwing your biased views out there, Salmon!! Disposable income dives...and you say that's a problem for McCain??? Try talking about what the Marxist Obama tax gestapo will do to our disposable incomes!!!
The 700 billion dollars allowing for 15% reserve requirement (with the FED), creates a 5 trillion dollars of stimulus(700 billion x 7).
The exposure to the taxpayers is seven hundred billion dollars most of it "invested" in various types of collateral .As economy stabilizes these "investments" bought at a considerable discount to the face value ,will produce substantial profit.Certainly as the Dow hits20,000.the taxpayers will hit a home run.
No, I dont have a crystal ball in for predicting the economic future ,for that I use macroanalysis.
Google my name and read my track record.
Get a tape of my interview on September18/2007 during the FED time (Bloomberg TV-Brian Sullivan interview )and listened to my exact prediction of the current turmoil.
My clients ,which include the Central Banks ,had nothing but the treasuries in their portfolio.
I have done my job -no excuses.
I am certain again that the worst is over and the Dow will hit 20,000 period.
Yes ,I am sick and tired of the gloom and doom articles which cause investor mental paralysis and are written year too late.
We are amidst historically relevant rally-period.
Your leverage only works if banks lend and people borrow, neither of which is happening. Newly laid-off workers don't buy new Hummers. Your newly-created capital isn't real anyway; it is phony, newly-printed money from nowhere. Accounting gimmicks to sanitize it don't make it any less dilutive of existing capital.
If you are consulting to the CB's I can understand why we are where we are. We are going to borrow our way out of debt. That would only make sense to a central banker, and only a central banker would believe it was possible.
Did Greenspan run a school or something? Where do all these guys come from?
I think we need an independent statistics administration. Stop screwing with economic data.
This is why we are warned by wise people not to indulge in crack.
If I had any money in your fund (Thank God I do not) I would immediately pull out every last cent for that kind of remark on top of the monumentally silly Dow 20,000 quip.
Even the lowliest investor understands this statement on every prospectus...
"Past performance is NOT indicative of future results."
I call on everyone who has money invested with this character to immediately remove your assest to someone with a little more sanity.
The technical definition of 2 quarters of negative GDP growth is flawed. By any logical definition the US is already in a recession.
With lower incomes, less credit, lower home equity values, etc. how are American consumers supposed to purchase enough products to increase EPS to a level that will double every companies stock price in the next 2 years? I just don't see it.
You can see why Gabe is so bullish. It's his job.
www.prnewswire.co.uk/c...
Good article Felix. The truth is that it's ugly out there, and not likely to improve much any time soon.
I now understand where the phrase "full of bull" came from, I think.
<i>In US, a recession is said to occurs, whenever the National Bureau of Economic Research NBER says so. Their definition is:
..... a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
NBER further tells us that:
"There is no fixed rule about what weights are assigned to the various indicators, or about what other measures contribute information to the process."</i>
Franklin Sanders
No hit men to take care of pesky poets? I hope to make them reconsider.
Not necessary. They will simply have W. declare you a financial terra-ist and sic the Dept. of Homeland Security on you.
We have identified all of the key issues and addressed them with an incredible cooperation of various agencies ,FED and the Congress(internally). " - Gabe B.
Translation: We're from the gub'mint and we're here to help (ourselves to your wallet) whether you like it or not.
News Flash for Gabe: ANYTHING the gub'mint tries to do it screws up and creates an even bigger problem. Greenspan spent 18 years trying to 'guide' the economy only to find out that he drove it right to the edge of a cliff and then let Bernanke drive it over. Now we are frantically trying to shift to reverse and stomp on the accelerator to recover. Fat chance. Ain't gonna happen.
IF the Dow hits 20,000 in two years we can be fairly certain that gold will be over $2000/oz at the same time. Only massive inflation can possibly result in such a huge market turn-around with current fundamentals.
That the FED didn't help as they fiddled,
The G-men saw red,
So they shot moonbat dead,
Coated lead through his body they riddled.
so the Feds though he'd stay in a coffin.
They shot him thrice dead
but the thoughts in his head
came back and often did haunt them.
which the Feds thought might stay in a coffin.
They shot him thrice dead
but the thoughts in his head
came back and often did haunt them.
so the Feds thought him better in a coffin.
They shot him thrice dead
but the thoughts in his head
came back and often did haunt them.
Whether moonbat had published a spree,
Or if thoughts in his head,
Caused his screen font to spread,
Yielding limerick repeated times three.
A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.
Please note negative GDP for 2 quarters is not part of their definition.
Part of it only.
A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.
Note that the 2 negative growth quarters of GDP do not by them selves show a recession, its more than just GDP that defines it.
It would be more accurate to say that, with spectacular hubris, they were spectacularly dishonest.