The credit crunch will persist. Banks, other lenders and borrowers are scrambling for liquidity, deposits, borrowings and especially capital. Even the markets for commercial paper and other short funding are exhibiting pronounced signs of distress. Capital infusions are a necessary prerequisite for the survival of publicly owned financial institutions that hold distressed mortgages or mortgage-related debts so as to be able to take the asset-loss writedowns required. Even with injections of additional capital there is unlikely to be an adequate expansion of credit to reverse the credit contraction that has already occured. The sub-prime and Alt-A categories of borrowers can no longer secure credit. Credit standards have been tightened even for prime mortgage borrowers. Investment banks with their excessive leverage of assets to capital as a category have ceased to exist, either through failure or by becoming banks or bank subsidiares. Now other financial institutions from hedge funds to insurance companies have become far more cautious lenders and investors. That in turn appears to be triggering precautionary borrowering and funding concerns on the part of nonfincial businesses.
The housing sector is still in retreat. Home prices are falling and destined to fall further, perhaps twice as far as they have already retreated. That seems a reasonable conclusion considering home mortgage defaults and foreclosures are still soaring, which together with the large inventory of unsold homes, will place an inevitable further downward pressure on home prices. And mortgage funds along with other types of credit remains constrained.
Auto credit and credit card debt are experiencing rising delinquencies and defaults. That is to be expected to not only persist but worsen with the prospect of a consumer led deepening of the recession.
Employment will continue to contract in next weeks Bureau of Labor Statistics nonfarm payroll report for September. Given the spurt in initial claims for unemployment benefits that came too late in the month to be included in the coming September employment report, the October employment report is likely to reveal another sharp decline in nonfarm payrolls. Though the official unemployment rate is likely to remain at 6.1% in the September report, it will rise materially in coming months, probably eventually to 7%. But, in realty the unemployment rate is already some 10% of the labor force, including those who for economic reasons have taken part-time or temporary work and those who have been so discouraged by the absence of job opportunities that they have given up looking for employment.
Even if the Federal rescue package is enacted, it will not be the panecea that many mistakenly believe it to be.
First, there are some things that the heart of the Federal plan, the purchase of distressed mortgage assets, would do. It would help rejuvinate the now virtually nonfunctioning market for mortgage-related assets. JP Morgan Chase estimates that its losses on the Washington Mutual mortgages it has acquired in the takeover will be as high as 54 cents on the dollr on subprime, 31 percent of home-equity loans, 25 percent of option ARMS, but only 9 cents on the dollar of other mortgages. Yet when trades can be made, the prices of mortgage potfolios have been as low as some 22 to 35 cents on the dollar even for mortgage pools that for the most part are not in default and still paying. If the mortgage market was functioning properly, prices for some mortgage paper might be closer to 80 cents on the dollar, based on their projected eventual recovery rate.
Because of that huge disparity and the distructive mark-to-market requirement for valuing assets at their currently depressed prices, the charge-offs against capital are large enough to materially increase the risk of bankruptcy for financial institutions with substantial mortgage holdings. The Federal rescue plan will help set a price for distressed mortgages and mortgage related paper that is closer to its ultimate pay-off value than to its current panic fire-sale liquidation price.
While the Federal rescue package will undoubtedly be useful, it will not end the problems besetting financial institutions, especially the need for additional capital with which to write off losses, the consequent credit squeeze, the housing price decline and the recession. It would only mitigate the severity of the economic and financial contraction that would otherwise occur. As I indicated in previous weeks,there should be a Federal program that attempts to stabilize home prices, perhaps by buying them for future sale at a profit, and at least a temporary suspension of mark-to market requirements. Offering Federal funds to provide short term capital through preferred stock with warrants(as Warren Buffet provided Goldman Sachs) would prove effective.
Nevertheless, the passage of the Federal rescue plan is likely to produce a brief rally in the equity market in the mistaken hope that the initiative will be sufficient to resolve the economy's and financial markets' ills. It won't.
The cyclical lows in corporate profits, equity prices, Treasury bond yields, and inflation still lie well ahead.
Philip Braverman, President
Braverman Economic and Finance Consulting
One Hewitt Square #249
East Northport, New York 11731
E-mail Address: philipbraverma@Gmail.com
Saturday, September 27, 2008
Saturday, September 20, 2008
Despite equity market euphoria, the worst is ahead for stocks, the economy and credit
Equity prices will decline anew, not only testing old price lows but setting new ones. The US and global recession will worsen. Unemployment will continue rising. The consumer will sharply curtail spending. Commodity prices will trend lower, with gold a possible exception. Credit will remain constrained. That all adds up to persistant and intense problems for financial institutions, business, governments and consumers. The worse is yet to come. I cannot make it any clearer than that.
Treasury yields will decline anew, though a return to the zero rate on Treasury bill yields on the panic flight to quality this past week is unlikely. A decline in inflation fears is likely to outweigh the increased volume of Treasury borrowing, at least for a year or possibly two beyond the recession. The Fed is virtually certain to be forced by circumstances to ease further.
Quality yield spreads will widen. There will be additional financial institution bankruptcies. Indeed, the Administration will be looking for financial bankruptcies to accept, those that do not threaten to destroy the global financial marketplace. The Admistration still wants to subscribe to the view that bankruptcies serve a useful purpose in capitalism, as well as avoiding the appearance of promoting the so called "moral hazard" risk that even incompetence will be bailed out. Losses are likely to force the FDIC to borrow from the Treasury to shore up its asset base. The Federal effort to quarantee money market funds will benefit brokerage firms at the expense of banks.
Corporate profits will erode, even with the slide off in commodity prices. The reason of course is that global demands for goods will slacken, intensifying competition. There has been a speculative over-expansion across the globe. Even China has its share of vacant speculative real estate. So far there is no proposal to significantly ameliorate soaring US home foreclosures and forced US bank sales of such foreclosed properties. The FDIC ended foreclosures at Indymac, the bank it siezed. Such a moritorium on foreclosures of occupied homes when homeowners were making good faith efforts to be current on their mortgages was the pattern when the FDIC was first organized late in the depression. It is time to resurrect that practice.
Do not be misled by the spectacular equity market rally toward weeks end and the lessening in the flight to quality amidst pronounced credit market fears. It will not last. The favorable Thursday and Friday market developments were largely due to a panic short-covering rally on a temporary ban on shorting 799 financial equities (until October 2) and market relief on the proposed $700 billion two-year Resolution Trust Company-type Federal bailout of Wall Street, as well as other forms of financial institution problem solving. The heart of the proposal is the Federal government purchase of up to $700 billion of the possible two to four trillion dollars in distressed mortgages and other related financial instruments currently worth 80 cents or far less on the dollar. The purchases will relieve the pressure on beleagured financial institutions. At the same time it is hoped that the distressed assets will eventually improve in value and price so that the net loss on the Federal purchases are minimal. The Federal entity will presumably not be subject to the disasterous mark-to-market rules that deprive non-Federal corporations of capital.
As far reaching as the new intiatives may seem, the favorable market responses thus far are likely to prove only temporary. Even if the Treasury-Fed proposals are enacted, by no means a certainty, they will not address the deepening global recession, the continuing real estate price contraction and the still intense credit crunch. And they will not solve all the financial industry problems. Far from it. The bailout or takeover of AIG will turn out to be more the exception than the rule. Rather, the acquisition of Merrill by Bank of America is more likely to set the pattern for the resolution of further distressed financial institutions. Thus, the equity market rally is best viewed as a welcome opportunity to raise cash. Even the perennially bullish Jim Cramer of CNBC Mad Money recommended selling twenty percent of your equity holdings on Monday, especially of newly reflated financial institution stocks.
The necessary deleveraging of the debt-bloated financial industry will continue. The requirement to write down the market value of depressed assets even when there is no effective market for those assets under the pernicious mark-to-market rules remains a destructive force in the viability of financial institutions. Thus, unless mark-to- market write downs are at least temporarily suspended, the need for substantial new capital infusions will persist, a prerquisite for recognizing losses. Despite the proposed Federal purchases of distressed assets, the sales of those financial assets will still be at considerable losses. Credit growth will thereby remain contrained. And with credit growth the key determinant of economic activity, that credit contraction will comensurately depress economic growth.
The signs of deepening recession abound. The index of leading indicators is still falling. Industrial production is dropping. The consumer is retrenching. The housing sector is still deteriorating. Home prices nationwide are only down about half as far as they will ultimately fall. Car sales will weaken further. Indeed, the recession will likely persist throughout 2009 and perhaps into 2010. That exceptionally prolonged recession will markedly slow the rate of inflation, both overall and core.
Philip Braverman,President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
E-mail address:philipbraverman@Gmail.com
Treasury yields will decline anew, though a return to the zero rate on Treasury bill yields on the panic flight to quality this past week is unlikely. A decline in inflation fears is likely to outweigh the increased volume of Treasury borrowing, at least for a year or possibly two beyond the recession. The Fed is virtually certain to be forced by circumstances to ease further.
Quality yield spreads will widen. There will be additional financial institution bankruptcies. Indeed, the Administration will be looking for financial bankruptcies to accept, those that do not threaten to destroy the global financial marketplace. The Admistration still wants to subscribe to the view that bankruptcies serve a useful purpose in capitalism, as well as avoiding the appearance of promoting the so called "moral hazard" risk that even incompetence will be bailed out. Losses are likely to force the FDIC to borrow from the Treasury to shore up its asset base. The Federal effort to quarantee money market funds will benefit brokerage firms at the expense of banks.
Corporate profits will erode, even with the slide off in commodity prices. The reason of course is that global demands for goods will slacken, intensifying competition. There has been a speculative over-expansion across the globe. Even China has its share of vacant speculative real estate. So far there is no proposal to significantly ameliorate soaring US home foreclosures and forced US bank sales of such foreclosed properties. The FDIC ended foreclosures at Indymac, the bank it siezed. Such a moritorium on foreclosures of occupied homes when homeowners were making good faith efforts to be current on their mortgages was the pattern when the FDIC was first organized late in the depression. It is time to resurrect that practice.
Do not be misled by the spectacular equity market rally toward weeks end and the lessening in the flight to quality amidst pronounced credit market fears. It will not last. The favorable Thursday and Friday market developments were largely due to a panic short-covering rally on a temporary ban on shorting 799 financial equities (until October 2) and market relief on the proposed $700 billion two-year Resolution Trust Company-type Federal bailout of Wall Street, as well as other forms of financial institution problem solving. The heart of the proposal is the Federal government purchase of up to $700 billion of the possible two to four trillion dollars in distressed mortgages and other related financial instruments currently worth 80 cents or far less on the dollar. The purchases will relieve the pressure on beleagured financial institutions. At the same time it is hoped that the distressed assets will eventually improve in value and price so that the net loss on the Federal purchases are minimal. The Federal entity will presumably not be subject to the disasterous mark-to-market rules that deprive non-Federal corporations of capital.
As far reaching as the new intiatives may seem, the favorable market responses thus far are likely to prove only temporary. Even if the Treasury-Fed proposals are enacted, by no means a certainty, they will not address the deepening global recession, the continuing real estate price contraction and the still intense credit crunch. And they will not solve all the financial industry problems. Far from it. The bailout or takeover of AIG will turn out to be more the exception than the rule. Rather, the acquisition of Merrill by Bank of America is more likely to set the pattern for the resolution of further distressed financial institutions. Thus, the equity market rally is best viewed as a welcome opportunity to raise cash. Even the perennially bullish Jim Cramer of CNBC Mad Money recommended selling twenty percent of your equity holdings on Monday, especially of newly reflated financial institution stocks.
The necessary deleveraging of the debt-bloated financial industry will continue. The requirement to write down the market value of depressed assets even when there is no effective market for those assets under the pernicious mark-to-market rules remains a destructive force in the viability of financial institutions. Thus, unless mark-to- market write downs are at least temporarily suspended, the need for substantial new capital infusions will persist, a prerquisite for recognizing losses. Despite the proposed Federal purchases of distressed assets, the sales of those financial assets will still be at considerable losses. Credit growth will thereby remain contrained. And with credit growth the key determinant of economic activity, that credit contraction will comensurately depress economic growth.
The signs of deepening recession abound. The index of leading indicators is still falling. Industrial production is dropping. The consumer is retrenching. The housing sector is still deteriorating. Home prices nationwide are only down about half as far as they will ultimately fall. Car sales will weaken further. Indeed, the recession will likely persist throughout 2009 and perhaps into 2010. That exceptionally prolonged recession will markedly slow the rate of inflation, both overall and core.
Philip Braverman,President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
E-mail address:philipbraverman@Gmail.com
Saturday, September 13, 2008
Concerns over financial firms will continue to roil market after Lehman
Every time there is yet another financial crisis many in the market mistakenly assume that the worst has finally passed. But the underlying problems besetting the financial markets, banks, investment banks, and insurance companies, among others, are destined to continue until their root causes are effectively dealt with. More about that later.
This past week, the markets' concerns focused primarily on the desperate travails of Lehman Brothers holdings in their effort to survive. Fears of the market dislocations that would ensue in the wake of the firm's failure drove Federal authorities to attempt to broker their acquisition by a white knight. The Bank of America was prominently mentioned as the potential acquirer. Others,including two UK financial institutions, have also been reported to be actively pursuing a purchase, But a sticking point is reportedly a requirement of acquirers that Treasury funds be made available to offset losses, which Federal authorities refuse to commit yet again. Lehman has been attempting to tough it out and delay, both in writing down its assets and attempting to raise new capital in a decidedly unfriendly market At one point late this week, Lehman bonds were offered at eye-popping yields in the high 30% to low 40% range. To delay further, Lehman is reportedly offering to sell one or more of its prize assets.
It was only the week before last week that market concerns were centered on the survival of Fannie Mae and Freddie Mac and the cascading negative consequences of their threatened demise. That crisis was resolved by putting the mortgage giants into Federal conservership, a politically more acceptable eupheumism for effective nationalization.
After the fears focused on Lehman, Merrill, AIG or Wahington Mutual subside there will be new targets for the potential disaster scenario. The basic reason is that the basic underlying problems are not being addressed, nor is there any sign that they are even adequately recognized. It is no solution to the problem to promise appropriate regulation next time. Or to shore up financial instutions overburdend with losses by injecting sufficient Federal or foreign capital to allow the write down of depressed assets. Those lines of attacking the current array of financial instution problems are no more effective than locking the barn door after the proverbial horse has been stolen or postponing the point of crisis to another day.
As helpful as the various initiatives may be in avoiding an immediate financial calamity, they will not resolve the problems.
The underlying problem is first and foremost a continuing plunge in real estate prices. From that stems all the other problems. Solve that problem and all the other will at least abate if not be rapidly on their way to being resolved. There are any number ways to stem the drop in home prices. With subprime and Alt-A borrowers out of the picture and a worsening credit crunch, new home purchasers and a source of investable funds have to be found. That is all more difficult at this juncture given the rapidly worsening job picture, which is traditionally closly tied to home demand and home prices. The consumer is retrenching as evidenced by the decline in retail sales reported this past week.
The Federal government could take a role by stockpiling vacant homes that could then be rented or sold at favorable terms with a Federal equity participation. A mere active Congressional move in that direction could well be enough to spur vulture funds to buy the large volume of vacant speculator-purchased homes available for sale or foreclosed. State and local governments, paricularly in those states and locals where real estate speculative builing was most intense, should also be active in buying up vacant properties at depressed prices, issuing bonds for the purpose if other funds are unavailable.
Financial institutions should, for the duration of the crisis, be no longer required to mark down assets to market or promptly sell foreclosed properties. Foreign purchasers of homes with substantial down-payments could be fast tracked for approval by homeland security for the right to live in the home. That is a varient on the option given Hong Kong residents, prior to China's take-over of Hong Kong, to gain Canadian citizenship if they invested a substaial sum in a Canadian business. If a concerted effort is made to arrest the plunge in home prices, the crisis can be brought to an earlier and far less onerous conclusion than is otherwise likely.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
This past week, the markets' concerns focused primarily on the desperate travails of Lehman Brothers holdings in their effort to survive. Fears of the market dislocations that would ensue in the wake of the firm's failure drove Federal authorities to attempt to broker their acquisition by a white knight. The Bank of America was prominently mentioned as the potential acquirer. Others,including two UK financial institutions, have also been reported to be actively pursuing a purchase, But a sticking point is reportedly a requirement of acquirers that Treasury funds be made available to offset losses, which Federal authorities refuse to commit yet again. Lehman has been attempting to tough it out and delay, both in writing down its assets and attempting to raise new capital in a decidedly unfriendly market At one point late this week, Lehman bonds were offered at eye-popping yields in the high 30% to low 40% range. To delay further, Lehman is reportedly offering to sell one or more of its prize assets.
It was only the week before last week that market concerns were centered on the survival of Fannie Mae and Freddie Mac and the cascading negative consequences of their threatened demise. That crisis was resolved by putting the mortgage giants into Federal conservership, a politically more acceptable eupheumism for effective nationalization.
After the fears focused on Lehman, Merrill, AIG or Wahington Mutual subside there will be new targets for the potential disaster scenario. The basic reason is that the basic underlying problems are not being addressed, nor is there any sign that they are even adequately recognized. It is no solution to the problem to promise appropriate regulation next time. Or to shore up financial instutions overburdend with losses by injecting sufficient Federal or foreign capital to allow the write down of depressed assets. Those lines of attacking the current array of financial instution problems are no more effective than locking the barn door after the proverbial horse has been stolen or postponing the point of crisis to another day.
As helpful as the various initiatives may be in avoiding an immediate financial calamity, they will not resolve the problems.
The underlying problem is first and foremost a continuing plunge in real estate prices. From that stems all the other problems. Solve that problem and all the other will at least abate if not be rapidly on their way to being resolved. There are any number ways to stem the drop in home prices. With subprime and Alt-A borrowers out of the picture and a worsening credit crunch, new home purchasers and a source of investable funds have to be found. That is all more difficult at this juncture given the rapidly worsening job picture, which is traditionally closly tied to home demand and home prices. The consumer is retrenching as evidenced by the decline in retail sales reported this past week.
The Federal government could take a role by stockpiling vacant homes that could then be rented or sold at favorable terms with a Federal equity participation. A mere active Congressional move in that direction could well be enough to spur vulture funds to buy the large volume of vacant speculator-purchased homes available for sale or foreclosed. State and local governments, paricularly in those states and locals where real estate speculative builing was most intense, should also be active in buying up vacant properties at depressed prices, issuing bonds for the purpose if other funds are unavailable.
Financial institutions should, for the duration of the crisis, be no longer required to mark down assets to market or promptly sell foreclosed properties. Foreign purchasers of homes with substantial down-payments could be fast tracked for approval by homeland security for the right to live in the home. That is a varient on the option given Hong Kong residents, prior to China's take-over of Hong Kong, to gain Canadian citizenship if they invested a substaial sum in a Canadian business. If a concerted effort is made to arrest the plunge in home prices, the crisis can be brought to an earlier and far less onerous conclusion than is otherwise likely.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
Saturday, September 6, 2008
Expected support for Freddie and Fannie delays equity selloff on employment plunge
The markets were in the midst of an adverse reaction to the August surge in the unemployment rate on Friday when reports surfaced of a possible US Treasury bail-out of Fannie Mae and Freddie Mac. That was enough to turn a sharp equity market selloff into a small gain and reverse a flight to the safety in Treasuries. But, unfortunately, those late Friday reactions are temporary.
The Treasury will certainly attempt to bolster the two mortgage entities sufficiently to keep them afloat and their debts liquid, but it is highly unlikely to want to nationalize them and then go on the major expansion necessary to revitalize the housing market. That would make too much sense in the midst of the worst financial crisis since the great depression. After all, the Treasury Secretary headed up Goldman Sacks when that firm, along with the rest of the financial community, inept regulators, including the Fed, and Congress, was contributing to the irresponsible financial engineering that Warren Buffet has called "weapons of mass destruction". And mass destruction they have wrought. But the process of distruction is far from over.
What forced the Treasury to act were signs that an international central bank flight from Fannie and Freddie paper to US Treasuries was beginning. There is an international agreement that each country is responsible for stemming a domestic financial meltdown that could disrupt the functioning of the international financial market. And a collapse of the $10 Trillion plus housing paper market would certainly fit that definition, and then some.
Even with Treasury action, US and global financial problems will persist. Thus far, the recognized financial institution losses and writedowns have totaled some $500 billion globally. The total will probably reach at least twice that, some one trillion dollars or more. That will certainly put a crimp in credit availability and thereby dampen economic global growth, what there will be left of it. It is my view that as credit availability goes, so goes economic growth. I know that for monetarists it borders on heresy to say that it is not money growth, but credit expansion that is the key determinant of economic growth. Milton Friedman misspecified early credit data as money. But it makes little differnce. Both money and credit growth will slow sharply as a result of the reckless squandering of our financial integrity for what, short-term profits. Foreigners sold us televions and cars that are still functioning in exchange for our financial toxic waste.
What should we do now? We should recognize that first and foremost it is necessary to stem the plunge in home prices. Focus on that objective. As unpleasant a prospect as Government purchase of private assets may be in a capitalist society, that is one solution. Increase Federal grants to state and local governments to purchase vacant properties to be made available for purchase on favorable terms to needy families. There should also be a halt to foreclosures on any occupied home that the owner is making a good faith effort to keep. This was the approach taken by the FDIC when it was first organized. Banks should no longer be forced to quickly sell homes they have acquired or mark down to market assets for which there is virtually no market. Both requirements are counterproductive in this environment. They only serve to further depress home and financial asset prices. Unless and until such actions are taken the losses will continue to mount, forcing more and more financial institutions to the wall, increasing investing caution to the point of decision making paralysis.
The signs of a deepening US and global recession are proliferating. The jump in the unemployment rate to 6.1% in August from 5.7% in July reflected a 342,000 drop in August employment in the household survey. That usually more reliable indication of employment loss in recessions suggests the Bureau of Labor Statistics officially estimated 84,000 August drop in nonfarm payrolls, after a 100,000 drop in June and 60,000 in July, grossly understates the actual deterioration in the labor market. One reason: this latest nonfarm payroll estimate is after deducting an assumed 125,000 quessed rise in nonsurveyed employment at new small businesses. Thus, without this wrongheaded guess, there was actually a 209,000 August drop in surveyed nonfarm payrolls.
By some measures, the unemployed, underemployed and discouraged workers in aggregate constitute more than ten percent of the labor force, and rising towards 11 percent. Commodity demand and prices are in a recessionary retreat. That may improve the earnings outlook for some stressed manufacturers squeezed between consumer price resistance and rising commodity costs. But, the realty remains that despite that positive, the overall corporate earnings outlook will continue to fade amidst a deepening recession.
The dollar will continue to strengthen. Not because our recession is ending, far from it. But, rather because the UK, continental european and Japanese recessions are just beginning, with the economy of Russia and Asia at the very least slowing. Commodity prices will continue retreating. That will produce a significant slowing in inflation and inflation expectations. The equity market will trend lower, not only retesting, but piercing the previous cyclical lows, along with Treasury yields. The Fed will remain on hold until the pace of bank failures intensifies, probably leading to at least two quarter percentage point Fed easing moves. There is much financial pain still to come.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport New York 11731
Email address: philipbraverman@Gmail.com
The Treasury will certainly attempt to bolster the two mortgage entities sufficiently to keep them afloat and their debts liquid, but it is highly unlikely to want to nationalize them and then go on the major expansion necessary to revitalize the housing market. That would make too much sense in the midst of the worst financial crisis since the great depression. After all, the Treasury Secretary headed up Goldman Sacks when that firm, along with the rest of the financial community, inept regulators, including the Fed, and Congress, was contributing to the irresponsible financial engineering that Warren Buffet has called "weapons of mass destruction". And mass destruction they have wrought. But the process of distruction is far from over.
What forced the Treasury to act were signs that an international central bank flight from Fannie and Freddie paper to US Treasuries was beginning. There is an international agreement that each country is responsible for stemming a domestic financial meltdown that could disrupt the functioning of the international financial market. And a collapse of the $10 Trillion plus housing paper market would certainly fit that definition, and then some.
Even with Treasury action, US and global financial problems will persist. Thus far, the recognized financial institution losses and writedowns have totaled some $500 billion globally. The total will probably reach at least twice that, some one trillion dollars or more. That will certainly put a crimp in credit availability and thereby dampen economic global growth, what there will be left of it. It is my view that as credit availability goes, so goes economic growth. I know that for monetarists it borders on heresy to say that it is not money growth, but credit expansion that is the key determinant of economic growth. Milton Friedman misspecified early credit data as money. But it makes little differnce. Both money and credit growth will slow sharply as a result of the reckless squandering of our financial integrity for what, short-term profits. Foreigners sold us televions and cars that are still functioning in exchange for our financial toxic waste.
What should we do now? We should recognize that first and foremost it is necessary to stem the plunge in home prices. Focus on that objective. As unpleasant a prospect as Government purchase of private assets may be in a capitalist society, that is one solution. Increase Federal grants to state and local governments to purchase vacant properties to be made available for purchase on favorable terms to needy families. There should also be a halt to foreclosures on any occupied home that the owner is making a good faith effort to keep. This was the approach taken by the FDIC when it was first organized. Banks should no longer be forced to quickly sell homes they have acquired or mark down to market assets for which there is virtually no market. Both requirements are counterproductive in this environment. They only serve to further depress home and financial asset prices. Unless and until such actions are taken the losses will continue to mount, forcing more and more financial institutions to the wall, increasing investing caution to the point of decision making paralysis.
The signs of a deepening US and global recession are proliferating. The jump in the unemployment rate to 6.1% in August from 5.7% in July reflected a 342,000 drop in August employment in the household survey. That usually more reliable indication of employment loss in recessions suggests the Bureau of Labor Statistics officially estimated 84,000 August drop in nonfarm payrolls, after a 100,000 drop in June and 60,000 in July, grossly understates the actual deterioration in the labor market. One reason: this latest nonfarm payroll estimate is after deducting an assumed 125,000 quessed rise in nonsurveyed employment at new small businesses. Thus, without this wrongheaded guess, there was actually a 209,000 August drop in surveyed nonfarm payrolls.
By some measures, the unemployed, underemployed and discouraged workers in aggregate constitute more than ten percent of the labor force, and rising towards 11 percent. Commodity demand and prices are in a recessionary retreat. That may improve the earnings outlook for some stressed manufacturers squeezed between consumer price resistance and rising commodity costs. But, the realty remains that despite that positive, the overall corporate earnings outlook will continue to fade amidst a deepening recession.
The dollar will continue to strengthen. Not because our recession is ending, far from it. But, rather because the UK, continental european and Japanese recessions are just beginning, with the economy of Russia and Asia at the very least slowing. Commodity prices will continue retreating. That will produce a significant slowing in inflation and inflation expectations. The equity market will trend lower, not only retesting, but piercing the previous cyclical lows, along with Treasury yields. The Fed will remain on hold until the pace of bank failures intensifies, probably leading to at least two quarter percentage point Fed easing moves. There is much financial pain still to come.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport New York 11731
Email address: philipbraverman@Gmail.com
Subscribe to:
Posts (Atom)