Looking for Work? Try University Towns and State Capitals

The recession is hitting everywhere but not everywhere equally. CNN Money notes 13 cities post unemployment above 15%.

There were 13 unlucky cities with unemployment rates topping 15% in April, and another 93 saw joblessness climb above 10%, according to a government report released Wednesday.

Nine of the baker's dozen are in California, a state ravaged by the housing meltdown and an unparalleled state budget crisis.

Elkhart-Goshen, Ind., posted the biggest year-over-year increase in April -- 12.7 percentage points.

El Centro, Calif., continued to have the highest rate of any metropolitan area at 26.9%. The town is located near the Mexican border and relies on agricultural employment, according to economists. As a result, the area's jobless rate tends to rise and fall depending on the farming season.

For areas with 1 million or more residents, Detroit was the worst hit, posting a rate of 13.6%. Portland, Ore., showed the largest increase, jumping to 11.6% from 4.7% in April 2008.

Government Jobs The Key

Inquiring minds are comparing the above stats to places where Government jobs shield workers from the recession.

An AP analysis of economic data from around the country shows that economic pain in a county decreases as the percentage of government workers in its work force rises.

Leon County, Fla. — Home to the state capital, Tallahassee. Population 264,000. Percentage of government workers 20. 6.2 percent March unemployment and an AP Stress Index Score of 7.26 (4th lowest in Florida).

Champaign County, Illinois — Location of the University of Illinois. Population 193,600. Percentage of government workers 18.5. 7.1 percent unemployment in March and an AP Stress Index Score of 7.87 (ninth lowest in Illinois).

Johnson County, Iowa — Location of the University of Iowa. Population 128,000. Percentage of government workers 25.6. 3.6 percent March unemployment and an AP Stress Index Score of 3.89 (lowest in Iowa).

Riley County, Kansas — Home to U.S. Army's Fort Riley and Kansas State University. Population: 71,000. Percentage of government workers 17.4. 3.4 percent March unemployment and an AP Stress Index Score of 3.71 (12th lowest in Kansas).

Washtenaw County, Mich. — Home to the University of Michigan. Population 347,000. Percentage of government workers 19.1. 7.4 percent March unemployment and an AP Stress Index Score of 9.25 (second lowest in Michigan).

Los Alamos County, N.M. — Los Alamos National Laboratory location. Population 18,000. Percentage of government workers 30.7. 2.9 percent March unemployment and an AP Stress Index Score of 3.28 (second lowest in New Mexico).

Albany County, N.Y. — Has both the state capital in Albany and a State University of New York campus. Population 298,000. Percentage of government workers 22.6. 7 percent March unemployment and an AP Stress Index Score of 8.4 (seventh lowest in New York).

Orange County, N.C. — University of North Carolina located here. Population 126,000. Percentage of government workers 26.2. 6.5 percent March unemployment and an AP Stress Index Score of 7.13 (lowest in North Carolina).

Dane County, Wisc. — Both University of Wisconsin and the state capital, Madison, are here. Population 482,000. Percentage of government workers 16.3. 5.5 percent unemployment in March and an AP Stress Index Score of 6.34 (lowest in Wisconsin).

Albany County, Wyo. — Location of the University of Wyoming. Population: 32,700. Percentage of government workers 21.9. 2.9 percent March unemployment and an AP Stress Index Score of 3.05 (second lowest in Wyoming).

If you are looking for work, get the hell out of Detroit, Portland, and many California cities and move to places like Johnson County, Iowa; Albany County, Wyoming; Riley County, Kansas; and Los Alamos County, New Mexico, all with unemployment rates under 4%.

If you want a larger metropolitan area try Dane County, Wisconsin with 5.5% unemployment. Madison is a great city and there is plenty of outdoor recreation in Wisconsin. The caveat in this analysis is that many states are going to start cutting workers if California is any indication.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Optimistic Unemployment and Housing Forecasts Looking Downright Silly

Economics may be the "dismal science" but economists as a group sure seem to be an optimistic lot. Yes, there are a handful of "doomers" like Nouriel Roubini but most economists did not see the recession coming until it was already 10 months old.

Please consider unemployment forecasts. The Fed forecast unemployment at 8.4% in 2009 and the "adverse forecast" was at 10.3% in 2010.

Hello Ben, in case you did not notice, Jobs Contract 17th Straight Month; Unemployment Rate Soars to 9.4% and Bankruptcy Filings Reach 6,000 A Day.

Adverse Assumptions

Let's take a look at all the Fed's adverse assumptions for the recently conducted "stress-free test" as laid out in the Fed's Stress Test White Paper.



Click on Table for Sharper Image

1 Percent change in annual average.
2 Baseline forecasts for real GDP and the unemployment rate equal the average of projections released by Consensus Forecasts, Blue Chip, and Survey of Professional Forecasters in February.
3 Annual average.
4 Case‐Shiller 10‐City Composite, percent change, fourth quarter of the previous year to fourth quarter of the year indicated.

Case Shiller Housing Index

Please consider the latest Case Shiller Housing Index.

The S&P/Case-Shiller Home Price Index ― which covers 20 metropolitan areas ― showed a price decline of 18.7% in March, suggesting a greater fall in prices than expected. Analysts were looking for an -18.40% reading, following the -18.67% reading for February. The 10-city measure fell a similar 18.6%.

The numbers were even worse on a quarterly basis. The Q1 report ― which covers all nine U.S. census divisions, rather than just 20 metropolitan areas ― recorded a 19.1% decline compared to the first quarter of 2008, marking the steepest fall ever in the 21-year history of the index.

“All 20 metro areas are still showing negative annual rates of change in average home prices with nine of the metro areas having record annual declines,” said David Blitzer, Chairman of the Index Committee at Standard & Poor’s. “Seventeen metro areas recorded a monthly decline in March, with Minneapolis, Detroit and New York posting record monthly declines.”

Note that the baseline scenario for housing for 2009 is -14%. Home prices are already down 19.1% and the adverse scenario will be under attack next month.

Unemployment Projections



The consensus forecast of unemployment for 2009 was 8.4%. The Blue Chip Forecast, a survey of America's leading business economists that costs $875 annually. Blue Chip had the unemployment rate at 8.3% for 2009 and 8.7% for 2010.

Check out this footnote in the WhitePaper.

The “more adverse” scenario was constructed from the historical track record of private forecasters as well as their current assessments of uncertainty. In particular, based on the historical accuracy of Blue Chip forecasts made since the late 1970s, the likelihood that the average unemployment rate in 2010 could be at least as high as in the alternative more adverse scenario is roughly 10 percent.

As noted, the Fed had a mere 10% chance the unemployment numbers get as high as the adverse scenario. The adverse scenario for 2009 has already been exceeded unless you think unemployment has peaked and is going lower over the next several months.

Meanwhile the Survey of Professional Forecasters pegged the unemployment rate at 8.4% for 2009 and 8.8% for 2010 (now revised much higher as is always the case).

Across the board, the Fed's adverse scenarios were a cakewalk, especially the unemployment forecasts.

Flashback February 11, 2008

White House: Unemployment to stay near 5%

The Bush administration's top economists see annual unemployment remaining just below 5% through 2013, meaning an extended period when the jobless rate would top the full-year average in six of the last 10 years.

The annual outlook of the president's Council of Economic Advisors, released Monday, also projects that the economy will keep growing this year and avoid a recession. In fact, real gross domestic product is forecast to rise by a healthy 2.7% when comparing the fourth quarter of this year to a year earlier.

But the report projects the full-year unemployment rate will rise to 4.9% in 2007, up from 4.6% each of the last two years. And it expects the unemployment rate will stay at the 4.9% rate in 2009 before starting to retreating slightly to 4.8% in each of the following four years.

Are economists paid to say what people want to hear? If not, can someone please tell me why economists are perennially such an optimistic lot, seldom collectively in the ballpark and constantly revising forecasts lower?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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How To Balance The California Budget - You Decide

The Los Angeles Times has an interesting Interactive On Balancing The California Budget.

Try your hand at closing California’s budget shortfall, estimated at $24 billion. It’s not easy, but it can be done. Cut spending, raise taxes and/or borrow to get the state out of the red. For each choice -- drawn from proposals from across the political spectrum -- we’ve tried to give some sense of the effects. As you craft your proposal, the Deficit Meter will show your progress.

The Times says "It’s not easy" but I think it is trivial. In fact I ended up with a $4.469 billion surplus as shown below.



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To achieve that I did not vote for any "One Time Fixes" but I did vote to increase taxes on Cigarettes and Alcohol. The latter was in case some of the "it may be illegal" things (that need to happen) I voted for get discarded. Certainly if any taxes have to be raised I would look at sin taxes first.

The big problem I have with the exercise is that it does not include some of the things that desperately need to be done like privatizing all prison guards, legalizing marijuana, scrapping state defined benefit pension plans and eliminating countless programs not mentioned.

Balancing California's budget is trivial.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bankruptcy Filings Reach 6,000 A Day

The USA Today is reporting Bankruptcy filings rise to 6,000 a day as job losses take toll.

Consumer and commercial bankruptcy filings are on pace to reach a stunning 1.5 million this year, according to a report from Automated Access to Court Electronic Records.

While well below the record 2 million filings in 2005, the number of filings is up sharply from last year's 1.1 million, says Robert Lawless, professor of law at the University of Illinois.

Bankruptcy filings took a dramatic nose dive after a 2005 bankruptcy reform measure was signed into law to curb bankruptcy abuse and make it harder to erase debts.

"People are coming to us in much worse shape than they used to be," says David Jones, president of the non-profit Association of Independent Consumer Credit Counseling Agencies. "We used to be able to help 20% to 25% of people who came to us, and now we can only help 7% to 8%."

Last month, commercial filings hit 376 a day, up from 255 in May 2008. Hartmarx, which manufactures and markets apparel, and Silicon Graphics, a manufacturer of computer workstations and storage products, were among the filers.

The wave of corporate bankruptcies will cause a secondary wave in consumer filings, says John Pottow, University of Michigan bankruptcy law professor.

Bankruptcy filings are apt to exceed the 2005 number eventually, given data like Jobs Contract 17th Straight Month; Unemployment Rate Soars to 9.4%.

What set 2005 apart was Hurricane Katrina filers rushing to beat the deadline of Bush's Debt Slave Act officially known as the Bankruptcy Reform Act of 2005. One of the consequences of that act was banks lent with impunity to the worst credit risks thinking that debts could not easily be discharged in bankruptcy.

Those banks and other institutions that lent recklessly are now about to find out otherwise. Moreover, I expect walking away to start picking up steam as well.

Please see Walking Away Revisited for the Moral Dilemma that many are facing.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Housing Math: Bottom Seekers + Neglect = Repetitive Foreclosures

The bottom will come. I guarantee it. When it does, few will want to buy. In the meantime knife catching is fraught with danger as flippers get washed out one by one.

Wash, Rinse, Repeat

Please consider the following from "MG" who writes:

Mish,

I am familiar with the house at 755 Eames Way in zipcode 02050 because it is just up the road from me. It's currently in its 3rd foreclosure since January of 2007. The family that purchased it in June of 2005 ($635k 95%LTV) bailed in December of 2006.

A group of realtors came in and bought the home from $544,500 with the intent for a quick flip. That failed and they went into foreclosure.

HSBC sold the home to a local investor for $440K. The investor was able to secure a $417K loan (conforming limit) from First Horizon. Shortly thereafter in early Spring of 2008 the same investor obtained a 2nd loan from Bank of America for $125K and apparently took the money and ran.

The home has been empty since December of 2006. Offers now are sub $200k.

755 Eames Way, Marshfield MA



Judging from the picture, the house does not look too bad. However, inquiring minds are investigating the listing details.

Property in need of work. Owner planning on repairing water damage to floors & ceilings prior to sale. This is a short sale and offers are subject to third party approval. Lots of potential to be restored to a beautiful, spacious home with great amenities. Circular drive and mature plantings. Pool in back yard in need of repair. Bring all offers!

Well the offers are in. They are under $200K according to"MG".

Here's the deal ....

Banks selling to unqualified and undercapitalized flippers is still not such a hot idea. In case banks have not noticed, home prices are still falling.

The math is rather simple: Bottom Seekers + Neglect = Repetitive Foreclosures.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Minnesota Governor To Begin "Unallotments"

Three cheers for the few willing to make a step in the right direction. Minnesota's governor is one of the few. Please consider Pawlenty gets official go-ahead to begin making budget cuts.

Let the cutting begin.

Minnesota's top state finance official on Thursday formally notified Gov. Tim Pawlenty that the state will not take in enough money to pay its bills over the next two years, setting the stage for the governor to start using his executive power to unilaterally cut spending.

In a letter to Pawlenty, Management and Budget Commissioner Tom Hanson wrote that, as expected, the spending he and the Legislature approved for 2010-11 would exceed the state's revenue collections by $2.7 billion.

"Therefore, at the beginning of the next fiscal year (July 1), it will be necessary to reduce allotments of appropriations or transfers," Hanson wrote.

Under state law, Pawlenty can't start to cut spending until the commissioner notifies him that the state faces a budget shortfall. Hanson's letter satisfies that requirement.

Pawlenty has said he will start making spending reductions, officially known as "unallotments," as soon as possible after July 1 to protect the state's credit rating and give him the most possible options.

Let The Cutting Begin

Cutting services rather than raising taxes is the right thing to do.

Pawlenty is looking to cut health and welfare spending, college and university appropriations and state agency budgets. That's a good start, with start being the operative word. Eliminate would be a better word for many state agency departments.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Jobs Contract 17th Straight Month; Unemployment Rate Soars to 9.4%

This morning, the Bureau of Labor Statistics (BLS) released the April Employment Report.

Nonfarm payroll employment fell by 345,000 in May, about half the average monthly decline for the prior 6 months, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The unemployment rate continued to rise, increasing from 8.9 to 9.4 percent. Steep job losses continued in manufacturing, while declines moderated in construction and several service providing industries.




Establishment Data



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Highlights

• 345,000 jobs were lost in total vs. 539,000 jobs last month.
  
• 59,000 construction jobs were lost vs. 110,000 last month.
  
• 156,000 manufacturing jobs were lost vs. 149,000 last month.
  
• 120,000 service providing jobs were lost vs. 269,000 last month.
  
• 18,000 retail trade jobs were lost vs. 47,000 last month.
  
• 51,000 professional and business services jobs were lost vs. 122,000 last month.
  
• 44,000 education and health services jobs were added vs. 15,000 added last month.
  
• 3,000 leisure and hospitality jobs were gained vs. 44,000 lost last month.
  
• 7,000 government jobs were lost vs. 72,000 added.
  

A total of 225,000 goods producing jobs were lost (higher paying jobs), and the service sector was hit again but less than half compared to last month. Indeed most of the improvement vs. last month was a 149,000 relative improvement in the service sector.

It was nearly a clean sweep again this month with education and health services jobs the only real winner for the month.

Note: some of the above categories overlap as shown in the preceding chart, so do not attempt to total them up.

Index of Aggregate Weekly Hours

New this month I added hours of work to the above table. Those hours are now down to 33.1 in aggregate. This is contributing to household problems.

Birth Death Model Revisions 2008



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Birth Death Model Revisions 2009



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Birth/Death Model Revisions

After the typical in January in which the Birth/Death Model revisions bore some semblance of reality, the Birth/Death numbers are back in outer space.

At this point in the cycle birth death numbers should have been massively contracting for months. The BLS is going to keep adding jobs through the entire recession.

This is a complete joke.

BLS Black Box

For those unfamiliar with the birth/death model, monthly jobs adjustments are made by the BLS based on economic assumptions about the birth and death of businesses (not individuals). Those assumptions are made according to estimates of where the BLS thinks we are in the economic cycle.

The BLS has admitted however, that their model will be wrong at economic turning points. And there is no doubt we are long past an economic turning point.

Here is the pertinent snip from the BLS on Birth/Death Methodology.

• The net birth/death model component figures are unique to each month and exhibit a seasonal pattern that can result in negative adjustments in some months. These models do not attempt to correct for any other potential error sources in the CES estimates such as sampling error or design limitations.
• Note that the net birth/death figures are not seasonally adjusted, and are applied to not seasonally adjusted monthly employment links to determine the final estimate.
• The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend.

Household Data

The number of unemployed persons increased by 787,000 to 14.5 million in May, and the unemployment rate rose to 9.4 percent. Since the start of the recession in December 2007, the number of unemployed persons has risen by 7.0 million, and the unemployment rate has grown by 4.5 percentage points.

The number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed in May at 9.1 million. The number of such workers has risen by 4.4 million during the recession.

Persons Not in the Labor Force

About 2.2 million persons (not seasonally adjusted) were marginally attached to the labor force in May, 794,000 more than a year earlier. These individuals wanted and were available for work and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Among the marginally attached, there were 792,000 discouraged workers in May, up by 392,000 from a year earlier.

Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The other 1.4 million persons marginally attached to the labor force in May had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.

Table A-5 Part Time Status



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The chart shows there are 9.1 million people are working part time but want a full time job. A year ago the number was 5.3 million.

Table A-12

Table A-12 is where one can find a better approximation of what the unemployment rate really is. Let's take a look



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Grim Statistics

The official unemployment rate is 9.4% and rising sharply. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

It reflects how unemployment feels to the average Joe on the street. U-6 is 16.4%. Both U-6 and U-3 (the so called "official" unemployment number) are poised to rise further.

Looking ahead, I expect the service sector to continue to weaken. Mall vacancy rates are rising and a huge contraction in commercial real estate is finally started. There is no driver for jobs and states in forced cutback mode are making matters far worse.

Unemployment is likely to continue rising until sometime in 2010.

Depression Level Statistics

I consider these job losses to be depression level totals. Admittedly conditions are not as bad as the great depression, but this is certainly no ordinary recession by any economic measure including lending, housing, bank failures, jobs, the stock market, commodity prices, treasury yields etc. For more on this idea please see Humpty Dumpty On Inflation.

Regardless of whether you think these are depression level statistics, unemployment is high and rising. Moreover, the "adverse scenario" in the Fed's stress test was unemployment at 10.3% at the end of 2010.

I stated many months ago we are going to be close to 10% by August and close to 11% by the end of 2009. It seems I was an optimist. We might hit 10% by June or July.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Walking Away Revisited - Reader Mailbag - Moral Dilemma

Tonight I received a request from "SS" asking to revisit the subject of walking away.

SS Writes:

Mish,

Over a year ago you wrote this article: Walking Away: The Next Mortgage Crisis

A lot has changed since the publication and most - if not all - changed for the worse economically since that time. I was wondering if you would/could write a post to address the topic once again.

I am a condo owner who has done nothing wrong. I put money down, I did not buy over my means, and I did not attempt to use my house as a credit card. As a matter of fact, I am still employed and I still continue to make payments on my mortgage. All that said, I am at a loss of over 100K and the banks are unwilling to work with me because of the loss of equity.

I've actually had one loan officer laugh at me when I called to discuss the refi. So while others simply there are those who get help from the banks/government because of their mismanagement, I am being penalized for "doing the right thing".

To add insult to injury, the city will not lower taxes despite contesting.

In my building there are 43 units, of which 34 are occupied, and no units have sold in the last year and a half. In the last two months we've witnessed two foreclosures in the building and I believe things will only continue as layoffs in the area have begun to take effect and the general economy of the area is starting to really take a hit.

If one were to make the assumption that the economy was going to turn around tomorrow morning, and real estate began to pick up, it would take almost 8 years for the value to come close to a breakeven point - not even make a profit.

I simply - simply - cannot see a good business reason to continue paying on my mortgage. I try to rationalize the situation, but there is *NO* good business reason. Please understand I say this as a person who has NEVER missed a bill in my life. My credit rating is 780 (averaged between all three agencies). I've always taken pride in paying and making my own way... but I've reached my breaking point.

I am not asking for guidance, nor and I asking for legal advice, I simply think this is a topic that has not really been discussed in the press and really should be.

Please understand that I know I am not the only one facing this question or situation. A number of people are worse off, and I am not trying to say "poor me" but no one is really talking about the obvious. The "dream" of home ownership is a myth and a prison sentence for a large group of American that played by the rules, and as I have a great amount of respect for your writing, I figured you would be a good place to provide updated thoughts to everyone.

Thank you for the time, and if this is not a topic you wish to once again address I can understand.

Best,

SS

SS, admittedly your situation is in contrast to what Karl Denninger described in Ok, I'm Done With Being Nice.

The woman Karl wrote about bought a two-bedroom home in 1997 for $77,500 then used it as an ATM machine to live extravagantly, running the mortgage balance up to a clean double to $143,000. The woman was complaining Countrywide Financial, now part of Bank of America would not offer to alter her mortgage.

Had the woman taken out a 15 year mortgage an made one extra payment a year, instead of owing $143,000, she would now be a proud homeowner with zero mortgage! The woman believes she did nothing wrong.

Karl ripped her to shreds, and deservingly so.

While you did not make the serious error Karl lambasted, the first thing you must realize is that you are in a dilemma of your own making. You claim you did nothing wrong, but actually you did. You made one critical mistake: You bought a piece of property at a very poor price. That is your fault, not the man in the moon's.

People are seldom willing to point the finger where it needs to be pointed, at themselves. You need to point the finger at yourself. That said, the lender also made a mistake: giving you a loan. I am not sure what your down payment was, but the smaller the down payment the bigger the lender's mistake.

I believe you are correct when you state "It would take almost 8 years for the value to come close to a break even point - not even make a profit" and that is assuming the economy quickly turns around. Heck, it could take more than that on a condo. 20 years is not out of the question depending on the bubbliness of the area you invested in.

The question is what to do about it. The law provides a penalty for walking away. That penalty is ruined credit for five years. That is it. Lest people get all bent up over how easy you can get off, the lender knew those risks in advance and took them anyway.

There are no debtors prisons anymore, and the stigma (if any) of bankruptcy or walking away decreases every day. Although some people will resent you walking away, still others will be envious if you can shed that debt and they can't because of second mortgages or because their conscious will not allow them to walk away.

As you say, "there is no good business reason" to keep paying your mortgage.

Should you decide to walk away, I would advise you to consult an attorney specializing in these matters, such as the ones at YouWalkAway.Com. For the record, I get nothing for this referral.

And although I am not a lawyer, given that you can easily afford the payments, I would strongly advise not buying a new house before you walk away. That may constitute fraud.

The moral hazard here is that if you walk away, the property may be dumped on a bank and taxpayers may end up footing the bill. Alternatively, the quicker all this malinvestment debt is wiped out, the quicker housing will bottom and the economy will recover. It's easy to rationalize any position you want to take.

The fact that you wrote indicates you are in a moral dilemma. And as stated above, you need to put the blame on yourself even if other parties aided and abetted. Having done that, please review Walking Away: The Next Mortgage Crisis the Moral Obligations Of Walking Away and Businesses Advised To Walk Away to see if you can resolve your conflict.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Benefit Spending Hits $2 Trillion, Highest Percent Since 1929; One Dollar Out of Every Six From Vouchers

As economic conditions deteriorate and unemployment continues to soar, one in nine Americans are now on food stamps. Moreover, a staggering one of every six dollars of Americans' income is now coming in the form of a federal or state check or voucher.

One in Nine Americans on Food Stamps

According to the USDA One in nine Americans on food stamps.

One in nine Americans are using federal food stamps to help buy groceries as the country's deep recession forced another 591,000 people onto the federal anti-hunger program at latest count.

Enrollment jumped 2 percent to 33.2 million people in March, the fourth consecutive month that rolls hit a record, said the Agriculture Department. The average monthly benefit was $113.87 per person.

"It's tough out there for struggling families and will be for many months to come," Jim Weill, president of the Food Research and Action Center, said. In 20 states, as many as one in eight are on the food stamp program, according to the Food Research Center.

Benefit Spending Accounts for 16.2% of Personal Income

According to the Bureau of Economic Analysis, Benefit spending soars to new high.

The recession is driving the safety net of government benefits to a historic high, as one of every six dollars of Americans' income is now coming in the form of a federal or state check or voucher.

Benefits, such as Social Security, food stamps, unemployment insurance and health care, accounted for 16.2% of personal income in the first quarter of 2009, the Bureau of Economic Analysis reports. That's the highest percentage since the government began compiling records in 1929.

In all, government spending on benefits will top $2 trillion in 2009 — an average of $17,000 provided to each U.S. household, federal data show. Benefits rose at a 19% annual rate in the first quarter compared to the last three months of 2008.

The recession caused about half of the increase, according to the report. Unemployment insurance nearly tripled in the past year. The other half is the result of policies enacted during President George W. Bush's first term.

"The increase in social spending is still relatively modest given the severity of the downturn," says economist Dean Baker of the liberal Center for Economic and Policy Research. "We're not France."

Adam Lerrick, economist at the conservative American Enterprise Institute, says the benefits' explosion will eventually lead to an economic crisis. "We've seen this movie before in many countries. It always has the same ending," he says.

Nevada, Michigan and California had the biggest per-capita increase in bankruptcy filings in May, according to AACER.

California Unemployment Fund Short By Billions

The San Francisco Chronicle is reporting State's unemployment fund short by billions.

California is paying out so much for jobless benefits and collecting so little in payroll taxes that its unemployment insurance fund could be $17.8 billion in debt by the end of 2010, according to a new report from the state Employment Development Department.

This latest fiscal crisis won't immediately affect the 1.1 million Californians now collecting benefits because the state is using an interest-free federal loan to cover their checks.

But the state is supposed to repay that loan and restore its unemployment fund to solvency by 2011 - and right now, policymakers aren't sure exactly how to do that, or at what cost.

"The deficit that California looks like it is facing is staggering," said Bud Bridger, fiscal officer for the unemployment insurance program.

To rebalance the system and pay back the federal loan, lawmakers must raise payroll taxes on employers, reduce benefits for recipients, or both. In 2009 and 2010, the state expects to pay out $29 billion in benefits. It will collect just $11 billion.

Alicia Trost, spokeswoman for state Senate President Pro Tem Darrell Steinberg, D-Sacramento, said legislative leaders met with business and labor officials Monday to discuss the unemployment issue, but it took a back seat to more pressing problems.

"We're going to have to address it," Trost said. "But the most important thing now is to close the current budget shortfall."

Collectively this is a stunning series of problems, both nationally and locally.

California is $17.8 billion in the hole (and counting) on unemployment insurance but the legislature is not even looking at the situation because of more pressing problems and because the state is using an interest-free federal loan to cover benefits.

Excuse me but is this $17.8 billion deficit in addition to the $24 billion budget deficit? How the Hell is California going to pay that back and fix a $24 billion budget deficit that without a doubt will cause a massive increase in unemployment? Has anyone factored that in?

How can loans of $17.8 billion not be considered as part of the deficit that needs to be fixed? What about California pension promises that cannot possibly be met?

One final question: Are we France or does it just look like we're headed that way?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Initial Unemployment Claims Dip Slightly; Continuing Claims Dip Slightly Snapping Streak at 17

The string of 17 consecutive weeks of higher continuing claims ended today with slight dip in claims.

Continuing claims hit 6.788 million last week, setting a 17th consecutive record (revised slightly lower to 6.750 million). Today's number is 6.735 million, breaking the streak (assuming the number is not revised up later).

Please consider the Department of Labor Weekly Claims Report.

Seasonally Adjusted Data

In the week ending May 30, the advance figure for seasonally adjusted initial claims was 621,000, a decrease of 4,000 from the previous week's revised figure of 625,000. The 4-week moving average was 631,250, an increase of 4,000 from the previous week's revised average of 627,250.

The advance seasonally adjusted insured unemployment rate was 5.0 percent for the week ending May 23, unchanged from the prior week's revised rate of 5.0 percent.

The advance number for seasonally adjusted insured unemployment during the week ending May 23 was 6,735,000, a decrease of 15,000 from the preceding week's revised level of 6,750,000. The 4-week moving average was 6,687,500, an increase of 88,750 from the preceding week's revised average of 6,598,750.

Weekly Claims



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The dip in initial claims from the March peak of roughly 650,000 is not accelerating very fast, if indeed at all.

Note that the 4-week moving average of initial claims rose this week after generally declining for a couple months. Also note that the 4-week moving average of continuing claims rose a significant amount.

Economists expect to see unemployment by 10% at the end of the year. I expect to see it at 9.8%+- by August and approaching 11% by the end of the year. Bear in mind the "stress-free tests" conducted by the Fed had an adverse scenario of 10.3% at the end of 2010.

Finally, I would like to point out that unemployment insurance does run out. People will drop off the rolls when benefits expire.

Those looking for a recovery in jobs soon are going to be disappointed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bernanke's Monkey See Monkey Don't Policy

Bernanke's knows deficits are a problem and unsustainable as well. He is even warning Congress about them. Bernanke also knows that the Fed is going to have to unwind the garbage on its balance sheet.

Bernanke sees the problems, yet he is still willing to add to those problems. This is clearly a case of Monkey See Monkey Don't.

Let's investigate the situation starting with Treasuries Rise as Bernanke Warns on Deficits, Fed Buys Debt.

Treasuries rose for a second day after Federal Reserve Chairman Ben S. Bernanke said large budget deficits threaten financial stability and the central bank purchased $7.5 billion of U.S. government securities.

Yields on 10-year notes declined as the Fed chief said deficit concerns are already influencing the prices of long-term Treasuries after yields climbed to the highest since November last week. The central bank plans to purchase U.S. debt again tomorrow as part of its $300 billion, six-month effort to cap lending rates.

The U.S. can’t continue to borrow at the current rate to finance the budget deficit, Bernanke said in testimony to the House Budget Committee today.

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Bernanke said. “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.”

Bill Gross, founder of Pacific Investment Management Co., said Treasury Secretary Timothy Geithner’s plan to bring the budget back into balance won’t be successful as consumers shrink spending and the U.S. growth rate slows. The budget deficit will be narrowed to “roughly” 3 percent of GDP from a projected 12.9 percent this year, Geithner said June 1.

‘Balanced Rabbit’

“I think he’ll fail at pulling a balanced rabbit out of a hat,” Gross said in a Bloomberg Radio interview today from Pimco’s headquarters in Newport Beach, California. “They are talking about -- once the economy in the U.S. renormalizes --the move back toward balance or much less of a deficit. I suspect that will be hard to do.”

Gross advised holders of U.S. dollars to diversify before central banks and sovereign wealth funds ultimately do the same amid concern about surging deficits.

Dearth of Rabbits

I suspect Gross is talking his book and the dollar may be poised for a rally as noted in Speculative Bets Against The Dollar Highest Since July 15 2008.

However, I happen to agree with the idea that there is a dearth of rabbits available to pull out of hats.

It's your problem, Bernanke tells Congress

The question of the day is: Who is going to shut off the spigot? Clearly it's not the Fed, at least not Bernanke, as noted above. Indeed, Bernanke tells Congress, It's your problem.

Congress and the people who elected it must decide how much government they want to afford, Bernanke said. Stating the obvious, he went on to say: "Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run."

Unfortunately, Congress and the people have seldom gotten the balance right. We want the benefits of a large government without paying the costs, just as we wanted a loftier personal living standard than our income could support.

For its part, the Fed also faces having to make some tough choices. The U.S. central bank has lowered interest rates substantially and has expanded its balance sheet by about $1.2 trillion, effectively flooding the banking system with cash to keep the economy from collapse.

Everyone knows this and accepts it in principle -- but in practice, it will come down to knowing when to let go. It will require a deft hand and a dollop of good luck to keep the economy from crashing back to the ground or, conversely, from soaring like Icarus and burning up with inflation.

Sadly, the Fed's near-impossible task is child's play compared with the problem faced by the Obama administration, the Congress and the people.

Tough Decisions For The Fed

Inquiring minds are reading An Economy at Risk: The Tough Decisions Ahead by Thomas Hoenig, President, Federal Reserve bank of Kansas City. Here are a few quotes.

"In the long run we are all dead but our children will be left to pick up the tab".

"In our efforts to fix the oversight process for our financial system, we should not misdiagnose the patient. Unfortunately, I'm afraid we are witnessing some regulatory malpractice now. The emphasis on reform at the moment is to change the structure of the regulatory system rather than address the fundamental weakness of that system."

"Capitalism is a process of success, failure and renewal, and for it to work properly, institutions must be allowed to fail, no matter their size or political influence."

"Over the past two decades, The US has created for itself a set of economic imbalances that, in my judgment, have significantly increased uncertainty and placed economic growth at risk for future generations of Americans".

"Starting from where we are today, it is clear that interest rates must rise."

"I suspect there will be considerable pressure on the central bank to 'help out' in easing this adjustment process by keeping interest rates low for an extended period. This happens because people often confuse the establishment of low interest rates - and therefore the creation of money - with the creation of wealth".

Fed's Hoenig Is A Monkey See Monkey Don't Policy Advocate

The first quote above is Hoenig quoting Keynes, and one of the few things Keynes said that makes much sense. Most of the rest seem to come from the Austrian economic handbook.

I especially like "In our efforts to fix the oversight process for our financial system, we should not misdiagnose the patient. Unfortunately, I'm afraid we are witnessing some regulatory malpractice now. The emphasis on reform at the moment is to change the structure of the regulatory system rather than address the fundamental weakness of that system."

Yes indeed, it is the Fed and Fractional Reserve Lending that are the "fundamental weakness of that system" and no amount of regulation can possibly fix that problem. Please see Case Against the Fed and Fractional Reserve Lending for details.

Yet, for all Hoenig's talk, where is the action? Where are the dissenting votes? More so than Bernanke, Hoenig seems to understand at least a few basic principles including the extremely important distinction between rising prices with rising wealth.

However, actions (or lack of them) speak louder than words. I hope Hoenig can prove me wrong, but as of right now Hoenig appears to be a willing participant of Bernanke's Monkey See Monkey Don't Policy.

No Rabbits For Obama Or Congress Either

The magic hats are empty. There are no rabbits to be found.

Monkeys are large and in charge, everywhere one looks. Meanwhile, rabbits are hiding in Wonderland with Bernanke chasing them down the zero interest rate hole. Unfortunately, even the monkeys who see problems and know what to do about them are unwilling to make the tough choices necessary.

It's a sad case of Monkey See Monkey Don't.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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"Preposterous Prices" For Luxury Condos In Philadelphia

Condo prices were the first to show weakness and will be the last to revive. Supply is simply too great and demand at "normal prices" is non-existent.

Please consider Fire-sale prices for luxury Center City condos.

Price break on luxury condos in striking glass tower in Center City. Best offers over $250,000 considered.

That's the strategy for moving 40 of the 178 units still unsold at the Murano at 21st and Market Streets, to be sold at auction for sums 50 percent below their original list price later this month.

Take the 1,405-square-foot, 23d-floor unit originally listed at $995,000. It could go for $485,000, less than what it would cost to build today, said Jon Gollinger, president of Accelerated Marketing Partners, of Boston, which is handling the sale for Murano's developer, Thomas Properties Group Inc.

"These are preposterous numbers," Gollinger said of the prices, which are based on his analysis of the Philadelphia high-rise condo market. "But there is disequilibrium in the market, and the only way to get it moving is to try to provide an extreme-value opportunity - a once-in-a-lifetime event."

The sale, set for 1 p.m. June 27 at the Westin Philadelphia, 99 S. 17th St., is not an auction with absolutes, said Gollinger, who markets high-rise condo buildings nationally.

"If the reserve published minimum bid is $250,000 and no one bids above it, the condo sells for $250,000," he said.

"The market dictates prices, and I don't see these being gobbled up like they think it will," said Center City mortgage and real estate broker Fred Glick. "No matter the price, financing is extremely difficult for a building that is not 50 percent presold, so . . . investors with cash will be the only ones that will probably buy these."

The developer seems to have the idea that if they can get 40 units sold at fire sale prices, the rest will go at better prices. Let's look at the math: There are 302 units, only 124 sold, and only 112 of the sold units have closed. The likelihood that that the 12 sold, unclosed units actually close is slim.

If 40 units are sold for 50% off, and all of them close soon, the building will be 50.3% closed (clearly the reason for precisely 40 units). At that point perhaps bank financing becomes available with the key word being perhaps. What then?

Will buyers rush in with attractive offers? No Chance. Expect to see "Preposterous Prices" on condos for a long time to come.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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May 2009 Non-Manufacturing ISM - Details Suggest Weakness

The Institute for Supply Management Report On Business® shows the May 2009 Non-Manufacturing ISM is Still Contracting, but at a lesser rate. As is often the case, details and the headline numbers suggest different things.

The NMI (Non-Manufacturing Index) registered 44 percent in May, 0.3 percentage point higher than the 43.7 percent registered in April, indicating contraction in the non-manufacturing sector for the eighth consecutive month, but at a slightly slower rate.



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ISM's Non-Manufacturing Business Activity Index in May registered 42.4 percent, a decrease of 2.8 percentage points when compared to the 45.2 percent registered in April. Six industries reported increased business activity, and 10 industries reported decreased activity for the month of May. Two industries reported no change from April. Comments from respondents include: "Many initiatives and plans on hold"; and "Delay in start date of new client projects."

The six industries reporting growth in May based on the NMI composite index — listed in order — are: Real Estate, Rental & Leasing; Arts, Entertainment & Recreation; Utilities; Retail Trade; Construction; and Accommodation & Food Services. The 11 industries reporting contraction in May — listed in order — are: Other Services; Mining; Educational Services; Management of Companies & Support Services; Wholesale Trade; Finance & Insurance; Public Administration; Agriculture, Forestry, Fishing & Hunting; Transportation & Warehousing; Health Care & Social Assistance; and Information.

Employment

Employment activity in the non-manufacturing sector contracted in May for the 16th time in the last 17 months. ISM's Non-Manufacturing Employment Index for May registered 39 percent. This reflects an increase of 2 percentage points when compared to the 37 percent registered in April. Three industries reported increased employment, 12 industries reported decreased employment, and three industries reported unchanged employment compared to April. Comments from respondents include: "Layoffs and non-replacement of attrition continue to lower overall employee populations"; "Hired some line workers for small increase in business"; and "Properties beginning to add back staff to take care of increased demand."

The industries reporting an increase in employment in May are: Arts, Entertainment & Recreation; Real Estate, Rental & Leasing; and Mining. The industries reporting a reduction in employment in May — listed in order — are: Educational Services; Public Administration; Other Services; Information; Transportation & Warehousing; Management of Companies & Support Services; Wholesale Trade; Construction; Finance & Insurance; Accommodation & Food Services; Health Care & Social Assistance; and Retail Trade.

There is much more in the report so inquiring minds may wish to take a look.

Data Weaker Than Headline Number

Orders, employment, backlog of orders, imports, and exports suggest the report is much worse than the headline sentiment of "contracting at a lesser rate".

New Orders is arguably the most important measure of activity and orders are contracting faster than last month. The Backlog of Orders index is also contracting at a faster pace.

Employment is contracting at a lesser pace. However, employment is sitting at 39, the weakest component, and a long way from neutral. Inventories are contracting at a lesser pace. Prices are falling at a lesser rate, but the US$ has also been getting crushed.

Collectively, the data suggests an inventory replenishment phase as opposed to "green shoots" that will amount in sustainable trends. The report may not have been a disaster, but the details show it was not very good.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Case-Shiller and CAR Housing Declines Since Peak - May Report

The following charts were produced by my friend "TC" who has been monitoring Case-Shiller and California Association of Realtors housing data. Although individual cities topped at varying times, the top-10 and top-20 city composites peaked in a June-July 2006 timeframe.

Case-Shiller data lags by two months and is from March. CAR data lags by one month and is from April. The charts all show home price declines from respective peaks.

Case-Shiller Declines Since Peak Current Data



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Case-Shiller Declines Since Peak Futures Data



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CAR Median Home Prices, Declines From Peak



"TC" writes:

Case-Shiller – March 2009

Home prices continued decline despite an $8000 federal tax credit nationally. Median national prices have now fallen 32% peak-to-trough over the past 3 years or $80,000.

In the 20 cities that Case-Shiller tracks prices have fallen from 11% (Dallas) to 53% (Phoenix). Price declines are highest in CA, NV, AZ, FL and Detroit. In all of the cities prices have now declined back to early 2000 prices and thinly traded futures data points to a bottom occurring in about 15 months.

It is important for readers to know that Case-Shiller uses a Repeated Sales Methodology (RSM) which provides the most accurate housing data available. Additionally, there are two newer columns titled "Price Level" which show both the last time prices were at the current level and what price level prices are projected to decline to based upon the CME Futures market.

CAR – April 2009

Home prices in California mostly stagnated month-over-month resulting in a disappointment for a state now offering $18,000 in tax rebates to purchase a home (7% - 8% the median home value). Median state prices have been more than cut in half and cities have declines varying from 40% to 73% peak-to-trough.

This results in the median Californian having lost nearly $350,000 in just 2 years! In higher rent areas the price drops are even more staggering with Santa Barbara South Coast leading the way with a price drop of nearly $850,000 in only a 1 ½ years!

This data does not use the Repeated Sales Methodology (as Case-Shiller does) and consequently can be biased based upon the sales pool. Additionally, the DQ News data includes the sale of new homes and resales; whereas the CAR data only includes resales.

Thanks "TC"

Unemployment is soaring in 2009 and so will foreclosures, credit card writeoffs, and bankruptcies. That will add to the inventory problems and further price declines. For additional analysis please see Mortgage Meltdown, More Pain To Come.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Schwarzenegger declares 'day of reckoning'; Wells Fargo CEO says California in 'financial ruin'

California is in dire straits. Hoping to find opportunity amidst the angst, Schwarzenegger declares 'day of reckoning'.

Declaring that "California's day of reckoning is here," Gov. Arnold Schwarzenegger said today the state should turn its dire budget straits into an opportunity to make government more efficient.

Speaking to a relatively unusual joint session of the Legislature and other constitutional officers, Schwarzenegger acknowledged the billions of dollars in spending cuts he has proposed to close a $24.3 billion hole in the budget will be devastating to millions of Californians.

"People come up to me all the time, pleading 'governor, please don't cut my program,'" he said. "They tell me how the cuts will affect them and their loved ones. I see the pain in their eyes and hear the fear in their voice. It's an awful feeling. But we have no choice.

"Our wallet is empty. Our bank is closed. Our credit is dried up."

The short-term problem faced by lawmakers is closing the budget gap in time for state officials to go the private investment markets and borrow billions of dollars to get the state through the first months of the fiscal year that starts July 1.

State Controller John Chiang has warned that without such loans, the state's coffers will run dry by the end of July. Chiang said last week that as a practical matter, the budget must be patched up by mid-June in order to give officials time to borrow the money.

To do that, Schwarzenegger has proposed a plan that relies partially on accounting maneuvers and borrowing funds from coming fiscal years, but mainly on deep cuts in nearly every program funded by state government.

Those range from cutting spending on K-12 schools, community colleges, the University of California; releasing some non-violent prisoners a year early; closing 80 percent of the state's parks, and wiping out or paring back on health and social service programs for California's neediest residents.

I see very little new in what Schwarzenegger is saying. I would like to see a list of items, what each is going to save and whether or not the total comes up to $24 billion. Short term borrowing or accounting shenanigans are not going to do it. My fear is Obama throws taxpayer money at the problem like he is everything else.

Unions, local governments split on bankruptcy bill

Meanwhile, a battle is brewing in the California state legislature with Unions, local governments split on bankruptcy bill.

What started as a municipal bankruptcy in the city of Vallejo has morphed into an all-out fight between California's local governments and unions over the sanctity of labor contracts vs. the autonomy of cities and counties.

Next battle zone: the floor of the state Assembly, where legislation requiring local governments to get state approval to file for bankruptcy protection is headed for a vote later this week.

The bill by Assemblyman Tony Mendoza, D-Artesia, is sponsored by the California Professional Firefighters and supported by nearly three dozen labor organizations in the state and AARP – groups worried about labor contracts or pensions potentially being affected by bankruptcy filings.

The legislation, AB 155, would require local governments to get approval from the California Debt and Investment Advisory Commission before filing. If it passes in the Assembly, it goes to the Senate.

The law is intended to help protect the state's credit rating on Wall Street, said Richard Garcia, Mendoza's spokesman.

My Comment: The law is intended to get Mendoza re-elected by sponsoring legislation favorable to the unions, and extremely unfavorable to taxpayers who have to foot the bill for ridiculous pension promises.

"Every city is in trouble," said Marc A. Levinson, the lead insolvency lawyer on the Orrick Herrington & Sutcliffe team handling Vallejo's bankruptcy filing.

"Nobody wants to go through bankruptcy. I counseled Vallejo to stay out of bankruptcy. But if you can't pay your bills, what do you do?"

Strongly opposing the bill are the League of California Cities and the California State Association of Counties.

If you live in California it would behoove you to write your state representatives and tell them to vote down this monstrosity and that you are sick to death of your taxes funding ridiculous pensions for state employees.

Hopefully Schwarzenegger will have the common sense to veto this ridiculous bill if it passes.

Wells Fargo CEO says California in 'financial ruin'

The Sacramento Business Journal is reporting Wells Fargo CEO says California in 'financial ruin'

“The state of California is in financial ruin,” Stumpf told those attending a statewide microfinance lenders’ conference at Stanford University. “The budget deficit in California is staggering.”

Stumpf said the recession is taking a toll on some of the loans made to creditworthy borrowers who lost their jobs and fell behind on payments.

“Today we’re charging off loans to people we should have made loans to,” said Stumpf, reiterating that the bank avoided many of the exotic mortgages offered by rivals.

Stumpf’s comments were not intended as guidance on how the San Francisco bank is faring in the second quarter, a bank spokesman said.

Regardless of what Stumpf intended to imply, his statements are a reflection on Wells Fargo.

But the idea that the bank avoided many of the exotic mortgages offered by rivals is extremely disingenuous. Wells Fargo (by acquisition of Wachovia) is veritable hotbed of foreclosures to come via its Pay Option ARM and Alt-A portfolios.

Let's revisit Mortgage Meltdown, More Pain To Come.

Here's the good news:
The Wave of Resets from Subprime Loans Is Mostly Behind Us.

Alt-A Mortgage Resets



Here's the bad news:
There Are $2.4 Trillion of Alt-A Mortgages and Their Resets Are Mostly Ahead of Us.

Option Arm Oiginations



About $750 Billion of Option ARMs Were Written, Nearly All at the Peak of the Bubble.

Option ARMs by State


California accounts for 58% of all Option ARMs. Think Wells Fargo, a big option ARM player is going to come out of this glowing? Warren Buffett does. I don't. Place your bets.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Speculative Bets Against The Dollar Highest Since July 15 2008

Anti-dollar sentiment is again running rampant. Please consider Bets against dollar highest since start of economic crisis.

Speculative bets against the dollar have risen to their highest level since the onset of the financial crisis.

Positioning data from the Chicago Mercantile Exchange, often used as a proxy for hedge fund activity, showed that in the week ending May 19, bets against the dollar – short positions – versus the euro exceeded bets on dollar strength by 12,250 contracts.

This net short position was the highest level since the week of July 15, when the dollar hit a record low of $1.6038 against the euro.

Ashraf Laidi at CMC Markets said considering that long positions in the euro and yen against the dollar were still about 11 times lower than their record highs, speculators had plenty of upside against the dollar in terms of quantity as well as price.

Dollar Bears with an Ugly American Accent

Professor James Kostohryz offered his thoughts on the dollar on Monday. It’s well worth another look. Emphasis mine.

Dollar Bears with an Ugly American Accent

One of the things that have always puzzled me is how it is that perma-bears that are forever predicting the demise of the US Dollar never speak about any other problem other than the ones in the US. It s as if the US were the only country that had any problems.

Truth be told, my long experience with these folks has been that the vast majority of them simply don t know much of anything about foreign countries and even less about foreign currencies and interest rates.

The fact is that economic fundamentals in the US, and the fundamentals of the US financial system in particular, are much better on average than in the vast majority of other industrialized countries. Inexplicably, although the value of the dollar is measured against other currencies, the bears never even seem to fathom this.

Next time you run across one of these Dollar Cassandras, please ask them to tell you the names of the currencies that the Dollar going to decline against, and to please speak to you in detail about the relative fundamentals of these nations. Ask them about sovereign debt ratios. Ask them about external debt ratios. Ask them about bank capitalization ratios. My experience has been that when you pose this question to the perma-bears, it usually elicits a long pause and empty stare.

For example, none of the Dollar bears that were getting all lathered up last week about how rising Treasury yields were signaling the Demise of America appeared to have any clue that rates were rising all over the world.

Indeed, yields on many equivalent European bonds, including the Bunds, rose by even greater amounts.

Another example is that the perma-bears that are forever talking about Dollar Debasement, seem to think that monetary stimulus only happens in the USA. They seem blissfully unaware of central bank stimulus measures in other nations that have been just as expansionary or even more so than the policies of the US Fed.

Folks who emit opinions on the US Dollar need to spend as much, or even more, time analyzing and explicating economic and financial conditions outside of the US as they do handwringing about the demise of the USA.

The US dollar retested a bottom in July 2008. Anti-dollar sentiment was rampant. Here is the chart.



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Carry Trade Is Back

One thing is certain. The carry trade is back (borrowing money in one currency to invest in another currency with higher interest rates, or in foreign stocks or commodities). It remains to be seen how carried away speculators get with these positions but I can guarantee they will have to be unwound at some point.

In the meantime, I caution everyone not to make bets on the basis of Commitment Of Traders reports on sentiment. The COT reports are not a timing device.

Moreover, please note that I am not a huge dollar bull. I was at the lows, and to be honest, quite some time before that. However, since the top (when dollar bulls came out of the woodwork), I called for a trading range. Now we are well within that trading range and there is plenty of room for the dollar to go either way.

Fundamentally it's hard to like the dollar here. However, it's not easy to like the Euro here either. And the fundamentals of the British Pound are even worse than the dollar in my estimation.

As noted in US Manufacturing Contracts 16th Consecutive Month; China Expands 3rd Month China passed a $586 billion stimulus package. For the size of China's economy, $586 billion is quite massive. That stimulus went directly into production, and if the global economy does not pick up to support Chinese exports, China may easily overheat.

Those who think the RMB (Yuan) is going to replace the US dollar as the next world's reserve currency are in complete fantasyland. I doubt there even is a next reserve currency.

Hell's Bells, the RMB does not even float yet.

Of course fiat currencies do not really float anyway. They simply sink at varying rates, slowly going worthless over time.

Eventually, every fiat currency in existence is headed for zero. Gold is not headed to zero.

Short-term, I do not know where the dollar goes, nor does anyone else. What I do know is anti-dollar sentiment is quite extreme and that signals caution on anti-dollar bets.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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GM's Inglorious Conclusion

At long last GM has gone bankrupt and was booted from the DOW along with Citigroup. The world did not end as former CEO Wagoner suggested would happen. Indeed the markets seemed to be cheering the news. Let's take a look at some headlines.

GM Files Bankruptcy to Spin Off More Competitive Firm

General Motors Corp., the largest manufacturer to go bankrupt, filed for court protection with a government-financed plan intended to create a viable company that can compete in world markets.

The U.S. government will extend $50 billion of loans to the 100-year-old automaker and plans to convert that into a 60 percent stake in the reorganized company, according to a filing in U.S. Bankruptcy Court in New York. GM today missed a deadline to show that it could reorganize outside of court and reported debt of $172.8 billion, more than twice its assets.

“Any suggestion that an American corporate icon like GM could file for bankruptcy would have been laughable a few years ago,” said Lynn Hiestand, a lawyer specializing in restructuring with Skadden, Arps, Slate, Meagher & Flom LLP.

U.S. Gets Majority Stake in New GM

The United States will invest another $30 billion during and after the GM bankruptcy process, bringing the U.S. commitment to $50 billion. Following that infusion, "the U.S. Treasury does not believe or anticipate that any additional assistance to GM will be required," a senior administration official said Sunday night, calling the restructuring a "permanent" solution.

Under the proposed restructuring, about 60 percent of the new GM would be owned by the United States, about 12 percent by the governments of Canada and Ontario, a union health trust would own 17.5 percent, and the company's current bondholders would get 10 percent.

"The proposal seems to favor the rights and claims of the UAW, a political ally of the current administration and a powerful lobbying force in Washington, over the rights and claims of the company's diverse group of bondholders," according to a letter from 20 House members, led by Rep. Jeb Hensarling (R-Tex.), to Treasury Secretary Timothy F. Geithner. "Contractual rights of investors are being trampled by the government under the rationale of 'extraordinary circumstances.' "

A critical legal issue is whether the bondholders might be able to get more for their debt if the company were simply liquidated, the proceeds distributed among those with claims.

The first critical issue is fairness. And by that measure bondholders were robbed. The next critical issue is the taxpayer investment of $50 billion into GM that will never be repaid.

GM to Announce Tentative Hummer Sale

GM has been studying strategic alternatives for the brand for a year, and has settled on a buyer that could take over the brand by the end of the third quarter, these people said. GM will continue producing Hummer H2 and H3 trucks and SUVs at plants in Louisiana and Indiana for the buyer.

GM is withholding the name of the buyer until a later date, and will only say on Tuesday that this investor is committed to continuing to develop the Hummer portfolio and build alternative-fuel models for the brand at some point. The purchase price will also be withheld.

If GM had not found a buyer by early June, Hummer would likely have been killed in bankruptcy court, one person involved in the deal. GM found an investor for its Opel brand over the weekend -- Magna International Inc. -- and is seeking buyers for Saturn and Saab.

Anyone dumb enough to buy the Hummer deserves to follow GM into bankruptcy.

Filings Reveal Depth of Problems

General Motors Corp.'s $82.2 billion in assets and $172 billion in liabilities spell out the extent of its problems and sheer breadth of the 101-year-old giant's bankruptcy.

In a torrent of filings at the U.S. Bankruptcy Court in Manhattan, GM's mind-numbing scale is evident: It has 463 subsidiaries and has built 450 million cars and trucks over the years. It employs 235,000 people world-wide. This includes 91,000 in the U.S., which it pays $476 million each month, and 493,000 retirees with various benefits. It spends $50 billion a year buying parts and services from 11,500 vendors in North America.

A liquidation analysis by the turnaround and advisory firm AlixPartners LLP, which is also providing a chief restructuring officer to GM, estimated that GM would have paid back its banks 23 cents to 77 cents on the dollar on the $6 billion it owed them.

The Treasury, on the hook for $20 billion, would have gotten back 12 cents to 24 cents. Bondholders, the UAW's health-care trust and other unsecured creditors would have received nothing.

A Saga of Decline and Denial

The above is a long, interesting read with enough details to suggest Wagoner was incompetent.

For the New GM, A Final Challenge to Please Drivers

America will soon have a new auto maker, "The New GM" -- or as some will call it, "Government Motors." Politicians, financiers and lawyers created it. American consumers will decide whether it succeeds.

The New GM will be a shadow of what the once-mighty old General Motors Corp. used to be. But it will be a really big shadow -- with more brands, more models, more dealers and possibly more market share than any other player in the U.S. industry. It will have a diverse ownership: the U.S. Treasury, the governments of Canada and the province of Ontario, a collection of bond investors and the United Auto Workers.

Mr. Henderson vowed that the New GM, freed of many of the health-care and debt-service obligations that sucked up its capital, will now "increase our investment in new technology" and no longer waste effort on cars that aren't "best in class."

GM has said this before. Now it will have to deliver.

Pray tell, why should GM have to deliver now? Obama has already thrown $50 billion at GM, what's another $50 billion more to win union votes?

Obama: Nationalization of GM to be short-term

In a defining moment for American capitalism, President Barack Obama ushered General Motors Corp. into bankruptcy protection Monday and put the government behind the wheel of the company that once symbolized the nation's economic muscle.

The fallen giant, the largest U.S. industrial company ever to enter bankruptcy, is shedding some 21,000 jobs and 2,600 dealers. Sparing few communities, the retrenchment amounts to one-third of its U.S. work force and 40 percent of its dealerships.

"We are acting as reluctant shareholders because that is the only way to help GM succeed," Obama said of the temporary nationalization of the 100-year-old company.

"What I have no interest in doing is running GM," Obama said. His only goal, he said, was to get GM back on its feet and then "to get out quickly."

Take a look at the lead sentence of this article. The writer of this story clearly does not know the difference between capitalism and toenail fungus.

The Ad Campaign for a ‘New’ G.M.

Can General Motors make up for decades of mistakes and misfires in a minute?

That is the ambitious goal of a 60-second commercial to begin running on television on Wednesday. The spot is already available on a Web site (gmreinvention.com) and on YouTube.

The commercial was created by Deutsch, an advertising agency owned by the Interpublic Group of Companies that handles assignments for G.M. like producing campaigns for the (soon to be divested) Saturn division.

GM Reinvention



Does anyone find that music extremely scratchy and irritating? That sound is god awful to me. Speaking of which I find those on-star ads extremely irritating as well. I will immediately turn the station when I hear one. So does my wife who even drives a GM.

Booted From The DOW

At long last GM is booted from the DOW.

GM, Citigroup Replaced in Dow by Cisco, Travelers

By replacing GM with Cisco, Dow Jones & Co. has removed automakers from the best-known benchmark for U.S. stocks, saying in an e-mailed statement that computers are as central to the economy as cars were in the previous century.

Cisco, the world’s largest maker of computer-networking equipment, joins Microsoft Corp., International Business Machines Corp., Intel Corp. and Hewlett-Packard Co. in the Dow, boosting its technology weighting from about 17 percent.

Travelers, the second-biggest U.S. commercial insurer, joins JPMorgan Chase & Co., American Express Co. and Bank of America Corp. among financial companies in the Dow. Its higher price than Citigroup’s will boost the benchmark’s financial weighting to about 10 percent from about 7 percent. Financials make up about 14 percent of the S&P 500, a broader benchmark.

The choice of New York-based Travelers restored an insurer to the Dow average, which had lacked one since the removal of AIG.

No One Could Have Predicted This

Let's return one more time to the opening snip:

“Any suggestion that an American corporate icon like GM could file for bankruptcy would have been laughable a few years ago,” said Lynn Hiestand, a lawyer specializing in restructuring with Skadden, Arps, Slate, Meagher & Flom LLP.

Really?

Flashback Wednesday, November 16, 2005

Inquiring minds are reading Can GM Be Saved?

...the real debate is not whether GM will go bankrupt, but whether said bankruptcy occurs sooner rather than later.

The real question then should be how to handle the upcoming bankruptcy in the most equitable manner possible rather than wasting money trying to prevent it.

...

GM is currently on collision course with bankruptcy anyway so it may as well happen in a manner that protects the most people. The 5 step program above would protect both GM pensioners and US taxpayers. No doubt union members will object to step number 4, but a reduction in the power of the UAW would appear to be a foregone conclusion anyway.

...

Finally, the union may as well lock in a good deal for its pensioners right now as opposed to a poor one later that might also affect taxpayers to the tune of $30-100 billion or so.

...

the Mish plan to save GM in a "fair and equitable manner" was a purely theoretical exercise that favored pensioners while ignoring huge implications to GM stockholders and bondholders. In that regard it can not be viewed as a serious proposal.

...

Here is the bottom line: No matter what CEO Wagner believes about bankruptcy, it seems likely the market or the PBGC or perhaps even a new law protecting pension benefits over bondholders will force him to change his mind. If history is any guide, not only will GM go bankrupt, but pensioners will get the shaft and taxpayers will end up footing some of the bill.

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Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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