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The Most Important Economic Chart Of The Year

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Dec 262011

courtesy of Spiegel Online:

This chart illustrates the end of euro complacency. Investors once acted as though the euro eliminated not just currency risk but sovereign credit risk. All nations–from Greece to Germany–could borrow at the same low rates. No longer. As the financial crisis enters its fifth year, markets are again distinguishing between strong nations and weak.

I subsequently discovered that I am not alone in choosing this chart. The BBC has a version of this as the first entry in its survey of top graphs of the year (with commentary by Vicky Pryce of FTI Consulting), and Desmond Lachman of the American Enterprise Institute included it in Derek Thompson’s survey of top graphs over at the Atlantic.

P.S. For the United States, I think Brad DeLong is right: behold the shortfall in nominal U.S. GDP.

The Most Important Economic Chart Of The Year by Donald Marron

I think the most notable development this week was Thursday’s big release of global factory activity surveys. It wasn’t pretty. Overall, the JP Morgan Global Manufacturing PMI dropped for the third straight month and fell below the 50 level — the line of demarcation between growth or contraction in monthly factory activity — for the first time since recession was descending upon us back in early 2008. Scary stuff.

Although U.S. activity was buoyant (no doubt a remnant of the sentiment tailwinds enjoyed from the market rally in October), we cannot remain an island of tranquility as Asia and Europe fall into the abyss.

Here are the highlights (any reading under 50 indicates a drop in activity):

*Brazil PMI: 48.7 vs. 46.5 prior
*Ireland PMI: 48.5 vs. 50.1 prior
*Sweden PMI: 47.6 v. 49 estimated
*Norway PMI: 48.6 vs. 50.2 estimated
*Denmark PMI: 47.7 vs. 43.6 prior
*Poland PMI: 49.5 vs. 51.7 prior
*Spain PMI: 42.8 vs. 43.9 prior
*Swiss PMI: 44.8 vs. 46.6 estimated
*Czech PMI: 48.6 vs. 51.7 prior
*Italy PMI: 44 vs. 42.8 estimated
*France PMI: 47.3 vs. 47.6 estimated
*Germany PMI: 47.9
*Greece PMI: 40.9 vs. 40.5 prior
*South Korea PMI: 47.1 vs. 48 prior
*Taiwan PMI: 43.9 vs. 43.7 prior

And, now for the big boys:

*Eurozone PMI: 46.4 — lowest reading since recession ended in July 2009
*U.K. PMI: 47.6 vs. 47 estimated — lowest since June 2009
*China PMI: 49 vs. 49.8 estimated — lowest reading since February 2009
*China HSBC PMI: 47.7 vs. 51 prior — 32-month low

In addition to signs of economic weakness — which was enough for a Chinese vice finance minster to say the global economy faces a “worse situation” than in 2008 — there was evidence that the financial system remains under severe stress despite the freak out over Wednesday’s move by the Federal Reserve to lower dollar funding costs for foreign banks (which, as I discussed at the time, wasn’t really a game changer). The European Central Bank reported that eurozone banks borrowed nearly €9 billion in overnight emergency cash — up from €2.7 billion earlier this week. Not good.

Other signs of strain could be seen in the way German 12-month bill yields dropped below zero on Wednesday as European investors were willing to pay Berlin for the luxury of lending it money. The motivation is that, if you’re holding a big wad of euros, German short-term debt is one of the few “sure bets” left out there. It’s a sign of extreme risk aversion and fear.

Of course, the epicenter for all this is Europe.

Adding to concerns were comments this week from new ECB chief Mario Draghi that while downside risks to the economic outlook have increased, he cannot ride to Europe’s rescue by engaging in unmitigated money printing and bond buying; instead, it must adhere to its founding principles, including an inability to engage in monetary financing of government debts (exactly what the likes of Italy would love right now).

Draghi’s comments were akin to yelling “fire” in a crowded theater before announcing all the fire extinguishers are empty. Whoops.

According to the team at Capital Economics, based in London, the eurozone economy is on track to contract by 1% next year and by 2.5% in 2013, with risks to the downside for both forecasts. Recession will only deepen the budget deficits at the center of the eurozone debt crisis. The only way out is growth. And the only way the likes of Greece, Portugal, and Italy can restore growth is via massive currency depreciation and domestic inflation — something that’s not going to happen as long as they’re in the eurozone.

Sure, there will be distractions like Wednesday’s move by the Fed or additional stimulus measures out of places like China and Brazil. That’s just how the market gods like it. All the better to keep the masses confused and complacent as the fundamentals just get worse and worse.

To put it differently: When you look around the theater, everyone’s still focused on center stage blissfully unaware what’s happening around them. Turn around. The balcony level is in flames.

The Economy Is About To Get A Lot Worse – Anthony Mirhaydari, MSNBC

The QE Failure

A Changing Europe, A Growing List Of One Term Presidents, A Moral Question - Not A Political One, A Shareholder-Not Just a "Stakeholder", A State of Distress, A Time To Repent, Catholic Social Teaching, Collateral Damage, Coming Social Unrest, Commercial Real Estate Bust, Consumption Ran the Old Economy, Creditors Caveat, Death of the Dollar, Deficit Death Spiral, Deflation-Inflation-Stagflation, Deleveraging, Small Business-Bedrock of America, Smaller Can Be Better, Subsidiarity, TARP fruit loops, The American Financial Oligarchy, The Consequences of Greed, The Currency Wars Officially Begin, The Economics of Schumpeter, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Importance of Strategic Planning, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Judeo-Christian Political Coalition, The New American Socialism, The Obama OMG magic factory, The Suffering Poor, Unintended Consequences, USA Is the New Japan, Wage Deflation, We Are All Cooked, We Have Become Beggars To The World, Who Guarantees the Guarantor?-You Do!, Who owns Congress-Still! No Responses »

Oct 242010

The world seems full of smoke ahead of a world currency war. The weapon of choice is quantitative easing, a.k.a. QE. If you print a trillion, I’ll print a trillion. Of course, he and she will too. No change in exchange rates after a trillion? Let’s do it again, QE2. If you listen to people like Geithner, the end of the world is quite near. Rich people everywhere are buying gold for a little peace of mind, not just the Chinese. They are literally trucking it by the ton or two home. When currency values vanish in a QE melee, at least the rich have the gold to stay rich.

If you listen to American pundits, politicians or government officials, it’s all China’s fault. China is far from perfect. Its currency policy certainly isn’t. But it is not the cause for the world’s ills. The U.S. is by far the biggest source of uncertainty and the initiator of the QE war. Its elite created the biggest financial bubble since 1929, even removing regulations designed to prevent it, and left the U.S. economy in shambles after its burst. The same people want to find a quick cure to hold onto their power. Unfortunately, there is no quick cure.

The U.S. has cut interest rates to zero and run up the budget deficit to 10 percent of GDP. It’s a shock-and-awe Keneysian policy. But, after a few quarters of strong growth, the economy is turning down again, and the unemployment remains close to 10 percent. And this figure would be much higher, close to 20 percent like Spain’s, if it included the underemployed and those who have stopped looking for work.

The stimulus has failed.

QE: The Numberless Oblivion Andy Xie, Caixin.

Collapse?

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Aug 152010

Taleb Says Government Bonds to Collapse, Avoid Stocks – Bloomberg

Nassim Nicholas Taleb, who warned that unforeseen events can roil markets in “The Black Swan,” said he is “betting on the collapse of government bonds” and that investors should avoid stocks.

“I’m very pessimistic,” he said at the Discovery Invest Leadership Summit in Johannesburg today. “By staying in cash or hedging against inflation, you won’t regret it in two years.”

Treasuries have rallied amid speculation the global economic recovery is faltering, driving yields on two-year notes to a record low of 0.4892 percent today. The Federal Reserve yesterday reversed plans to exit from monetary stimulus and decided to keep its bond holdings level to support an economic recovery it described as weaker than anticipated. The Standard & Poor’s 500 Index retreated 16 percent between April 23 and July 2, the biggest slump during the bull market.

The financial system is riskier than it was before the 2008 crisis that led the U.S. economy to the worst contraction since the Great Depression, Taleb said.

Things could get nasty

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Jun 122010

PR Push Against Strategic Defaulters Underway (Is There a Debtors’ Prison in Your Future?) – 06/12/2010 – Yves Smith

The new mortgage fraud

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Aug 222009

The New Mortgage Fraud: Kick ‘Em When They’re Down By Kelsey VanOverloop

The mortgage fraudsters are back, but this time they’re preying on people struggling to keep their homes out of foreclosure. Kelsey VanOverloop looks at how the “Foreclosure Rescue” come-on works and what homeowners can do to avoid the serious consequences of dealing with an unethical lender. Read more »

Just so you know

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Aug 132009

Announced changes in the regulatory landscape, including for hedge funds, private equity, and derivatives and securitization markets, will contribute to an increase in overall credit costs. The secular trend towards lower nominal interest rates, which has sustained financial intermediation and credit markets in the past 25 years, has come to a halt.

“Increasingly, the determination of when to default is not guided by the moral question: Is this the right thing to do? It is guided by the pragmatic concern: Am I too far underwater on my mortgage?”

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Jul 252009

Walking Away When You Can Pay By Kelsey VanOverloop

Homeowners are turning to the “strategic default” — walking away from a mortgage even when there are funds available to keep paying. “Increasingly, the determination of when to default is not guided by the moral question: Is this the right thing to do? It is guided by the pragmatic concern: Am I too far underwater on my mortgage?” writes Kelsey VanOverloop. Read more »

Credit card firms try end run around new federal rules

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Jul 102009

Banks are quietly changing the terms of millions of credit card accounts as they brace for a tough new law that will limit rate hikes.

The law would restrict interest rate increases unless a credit card has a variable rate. So at least two major lenders are switching their cards with fixed rates to — you guessed it — variable rates.

“It’s completely unfair,” said Linda Sherry, a spokeswoman for Consumer Action. “It’s an end run around the intent of the new law.”

That law is the Credit Card Accountability, Responsibility and Disclosure Act, which President Obama affixed with his signature in May. Its various provisions will be phased in between next month and February.

Congress passed the law to curb what politicians called abuses of cardholders by lenders, including runaway interest rates and constantly changing terms.

Credit Card Firms Try End Run Around New Federal Rules – LA Times

Chrysler Mows Down Debtholders’ Claims in Court

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Jun 112009

June 5 (Bloomberg) — Today was supposed to be the day that Chrysler LLC sold itself to Fiat and embarked on a new, government-designed chance at survival. Instead, its lawyers are arguing in a federal appeals court this afternoon to please, please let the sale go through.

It probably will. No matter what the law says, it’s hard to picture a three-judge appellate panel throwing itself into the path of a speeding train carrying the futures of Chrysler and General Motors Corp. and, with them, a segment of the ailing U.S. economy.

However messy, derailment is what the law seems to demand. But that’s not what these judges are likely to order.

“Circumstances have conspired to force them to find a way to approve the sale,” says Daniel Glosband, a bankruptcy lawyer with Goodwin Procter in Boston.

The package the White House hammered together to convert big, old, dying Chrysler into a smaller, healthier car company looks a lot like a massive violation of bankruptcy law. A few dissident creditors, namely three Indiana pension funds that banded together, remain defiant enough to say so.

The Chrysler plan “seeks to extinguish the property rights of secured lenders, trampling the most fundamental of creditor rights in disregard of over 100 years of bankruptcy jurisprudence,” the funds argued in bankruptcy court papers.

Their share is tiny, to be sure. Out of $6.9 billion in senior secured loans, the Indiana funds have $42 million. They paid 43 cents on the dollar, and would get roughly 29 cents after the sale.

The Gall

What galls them is that the United Auto Workers’ retiree health care trust fund, the most prominent of the unsecured creditors, would own 55 percent of the new company and get a $4.5 billion note for its $10.5 billion unsecured claim.

Putting unsecured creditors ahead of secured lenders isn’t how bankruptcy law is supposed to work.

Plus, the government has no business giving Chrysler money meant only for financial institutions under the Troubled Asset Relief Program, the funds say.

They say the sale is really reorganization in disguise, which is illegal under bankruptcy law. By claiming it’s a sale, Chrysler avoids months of court scrutiny and legal wrangling over how much to give each creditor. They slip past rules that reorganization requires.

“If there ever was a stealth reorganization plan, this is it,” David Skeel, law professor the University of Pennsylvania, told Bloomberg Radio.

Heated Debate

It looks like a sub rosa reorganization to me, too, but bankruptcy experts hotly debate the point in blogs and in news interviews.

U.S. Bankruptcy Judge Arthur Gonzalez this week declared it a bona fide sale, a fair deal for creditors and the best possible result under dire circumstances.

As for using TARP funds to save a car company, Gonzalez didn’t rule on that, saying the Indiana funds had no legal authority to raise the issue in the first place.

It would have been almost impossible for him to turn down the Chrysler-Fiat deal. If you think the Second Circuit Court of Appeals feels pressure to give Chrysler what it wants, imagine the stress on a sole bankruptcy judge.

The Obama administration decided Chrysler and, behind it, General Motors, are too American to fail, no matter how poorly they’ve been run. It’s pumped billions into the companies while structuring this quick sale and dragging most secured creditors into agreement. If the sale doesn’t go through this very minute, or at least by June 15, Fiat can walk away, leaving liquidation as the only option, Chrysler and its partners in the deal declare.

Contrived Emergency

But the urgency is largely self-inflicted. The government, as financier-in-chief, created the emergency in fashioning the sale the way it did.

It’s a common tactic for debtors to declare themselves in imminent danger of total demise while demanding a rushed sale to avoid reorganization, says Glosband, the Boston bankruptcy lawyer. Judges usually see through it.

If Chrysler gets away with it, and he predicts it will, the precedent will ripple through bankruptcy courts for years to come.

“It basically circumvents the bankruptcy code provisions that deal with how you address the rights of all the different constituencies in the case,” says Glosband.

Those rules are there to make the process fair. But in this case, the Obama administration played the lead role in figuring out who gets what, and providing the finances to make it work before the matter ever got to court.

Fast Moving

After today’s argument in New York, the Second Circuit judges could rule as soon as this weekend. That’s extraordinary speed for a federal appellate court.

“If Chrysler wins,” says Stephen Lubben, bankruptcy law professor at Seton Hall University, “it takes the wind out of a lot of objections likely to be filed with GM.”

Lubben considers that a fine result, as he believes the Chrysler sale’s legit.

But those who argue Chrysler can’t win if the courts follow law worry that when judges let big cases bend the rules, they erode the rule of law for everyone.

(Ann Woolner is a columnist for Bloomberg News. The opinions expressed are her own.)

Chrysler Speeds Past Legal Limits to Live – Ann Woolner, Bloomberg

Credit Card Changes

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May 202009

From the NYT: http://www.nytimes.com/2009/05/20/your-money/20money.html?_r=1&hp

At first glance, the sweeping credit card legislation that passed the Senate on Tuesday looks like a huge victory for consumers. The bill, after all, contains relief from penalty fees and certain interest rate spikes.

But for people who pay off their bills each month, and milk the card rewards programs for everything they’re worth, there is some cause for concern.

For months now, the card companies have been threatening to cut rewards programs sharply to make up for revenue lost because of the new restrictions.

My guess, however, is that this talk is just so much saber-rattling.

Card companies want to make money, and big spenders help them do it, even if those cardholders do not go into debt.

First, let’s lay out the things we know will change because of the new legislation. The bill is chock-full of new rules, which will take effect at various points in the year after President Obama signs the final legislation.

¶There are new restrictions on when card companies can increase the interest rate on balances you’ve already run up. The bill says that banks generally must wait until you’re 60 days late in making the minimum payment before applying a penalty interest rate to your existing debt.

While an earlier bill in the House of Representatives suggested less strict rules, House members have agreed to adopt the Senate version and intend to vote on it on Wednesday. On Tuesday, senators voted 90-5 in favor of the measure.

¶Card companies will have to give 45 days’ notice before raising their interest rates. There’s also a notice requirement for any significant change to a card’s terms, which may keep companies from surprising customers who have been saving their loyalty points for years with huge alterations in rewards programs.

¶Banks must send out your bill no later than 21 days before the due date. They cannot send it with, say, 14 days to go, hoping that you won’t get a check to the bank in time to avoid a late fee.

¶If the card company gets your payment by 5 p.m. on the due date, it’s on time, according to the new rules. No more of this early morning deadline nonsense, which led to late fees for payments that arrived with the afternoon mail. Also, no more late fees if the due date is a Sunday or holiday and your payment doesn’t arrive until a day later.

¶Let’s say you’re paying different interest rates on the debt on a single card — one for a cash advance, another for a balance transfer and a third for new purchases. Now, when you make a payment over the minimum balance, banks will have to apply it to the highest-interest debt first. I bet you can guess how some banks used to handle this sort of situation.

¶Banks will need your permission before allowing you the “privilege” of spending more than your credit limit and paying a fat $39 fee for that privilege. The card companies should be ashamed that they needed a law to make this “opt in” requirement a reality.

¶If you’re a student, it will become harder to get a credit card. No one under 21 can have a card unless a parent, legal guardian or spouse is the primary cardholder. Students with their own income can submit proof and ask for an exception to the co-signer requirement.

The senators, in an apparent endorsement of helicopter parenting, also require written permission from the parent, guardian or spousal co-signer for any increase in a card’s credit line. You can read all the gory details through links to the Senate bill.

¶Hate gift cards? Me, too. There will be some helpful new rules regarding those absurd dormancy fees, which punish people who let the cards sit around before using them.

Under the Senate’s rule, retailers and others that issue Visa, MasterCard, American Express or Discover gift cards or certificates will have to print explicit dormancy fee information on the card. Sellers of the cards will also have to inform the buyer of the fee. That’s a smart twist, since the gift giver can then become aware of the noxious nature of the fee — and elect to give cash or some other gift.

The bill also bans expiration dates on gift cards and certificates any sooner than five years after the card’s original issue date. And the retailer or card issuer will have to print the terms of any expiration date in capital letters in at least 10-point type. Call it the fine print rule.

It will be fascinating to see which retailer or card issuer has the nerve, after having free use of your money for five years, to tell you it will lose the money altogether if you don’t use up their gift card. I dare them to try.

So will credit card companies kill reward programs or drastically scale most of them back? Of course not.

“If you strip away the reward component of a credit card, it’s essentially a commodity,” said Rick Ferguson, editorial director at the loyalty marketing company LoyaltyOne. “The reward is what gives it its personality. It works from a branding perspective as well as a mechanism to influence customer behavior and consolidate spending on a particular card.”

That last part is crucial. People who spend a ton generate fees galore from merchants, and that money helps the card company stay in business. So you may soon see card companies giving away more goodies or lowering annual fees for people who hit certain spending thresholds each year. American Express already does this on a number of cards.

Also, keep in mind that you may have more control over what the card companies do to you than you may think.

If you don’t like the new fees and other things that banks will soon be testing as they grapple with their new economic reality, then make some noise. Send a note to me at rlieber@nytimes.com, so I can write about the latest foolishness — or consumer-friendly twist. At the very least, all of our complaints to the higher-ups at the banks may help persuade the companies to head in another direction.

“Work your way up the chain,” said Dennis C. Moroney, research director for bank cards at TowerGroup, a MasterCard-owned financial services consultant. After all, it may cost less to appease you than it would to replace you.

Barack Obama and the carmakers

Collateral Damage, Creditors Caveat, The Disappearing Car Makers, Want To Buy A Car? No Responses »

May 122009

Opinion from The Economist : http://www.economist.com/opinion/displaystory.cfm?story_id=13610871

An Offer You Can’t Refuse

NO ONE who lent money to General Motors (GM) or Chrysler can have been unaware of their dire finances. Nor can workers have failed to notice their employers’ precarious futures. These were firms that barely stayed afloat in the boom and both creditors and employees were taking a punt on their promise to pay debts and generous health-care benefits.

The bet has failed. The recession has tipped both firms into the abyss—together they lost $48 billion last year. Chrysler has entered bankruptcy, from which it may emerge under Fiat’s control (see article). GM could soon follow if efforts to hammer out a voluntary restructuring fail. America’s government, keen to protect workers, is providing taxpayers’ cash to keep the lights on at both firms. But in its haste it has vilified creditors and ridden roughshod over their legitimate claims over the carmakers’ assets. At a time when many businesses must raise new borrowing to survive, that is a big mistake.

Bankruptcies involve dividing a shrunken pie. But not all claims are equal: some lenders provide cheaper funds to firms in return for a more secure claim over the assets should things go wrong. They rank above other stakeholders, including shareholders and employees. This principle is now being trashed. On April 30th, after the failure of negotiations, Chrysler entered Chapter 11. Under the proposed scheme, secured creditors owed some $7 billion will recover 28 cents per dollar. Yet an employee health-care trust, operated at arm’s length by the United Auto Workers union, which ranks lower down the capital structure, will receive 43 cents on its $11 billion-odd of claims, as well as a majority stake in the restructured firm.

The many creditors who have acquiesced include banks that themselves rely on the government’s purse. The objectors have been denounced as “speculators” by Barack Obama. The judge overseeing the case has consented to a quick, “prepackaged” bankruptcy, which seems to give little scope for creditors to argue their case or pursue the alternative of liquidating the company’s assets. In effect Chrysler and the government have overridden the legal pecking order to put workers’ health-care benefits above more senior creditors’ claims, and then successfully argued in court that the alternative would be so much worse for creditors that it cannot be seriously considered.

The Treasury has also put a gun to the heads of GM’s lenders. Unsecured creditors owed about $27 billion are being asked to accept a recovery rate of 5 cents, says Barclays Capital, whereas the health-care trust, which ranks equal to them, gets 50 cents as well as a big stake in the restructured firm. If creditors refuse to co-operate, the government will probably seek to squash them using the same fast-track legal process.

Chapter and verse

The collapse of Detroit’s giants is a tragedy, affecting tens of thousands of current and former workers. But the best way to offer them support is directly, not by gerrymandering the rules. The investors in these firms are easily portrayed as vultures, but many are entrusted with the savings of ordinary people, and in any case all have a legal claim that entitles them to due process. In a crisis it is easy to put politics first, but if lenders fear their rights will be abused, other firms will find it more expensive to borrow, especially if they have unionised workforces that are seen to be friendly with the government.

It may be too late for Chrysler’s secured creditors and if GM’s lenders cannot reach a voluntary agreement, they may face a similar fate. That would establish a terrible precedent. Bankruptcy exists to sort legal claims on assets. If it becomes a tool of social policy, who will then lend to struggling firms in which the government has a political interest?