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Friday, December 31, 2010 6:46 PM

"Crash Tax" Ripoff Expands in California and New York

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You pay taxes for services. At least you think you do. Fifty cities in California think you don't. They tax the hell out of you, then bill you if you need services. Drivers who cause accidents in at least 50 cities can be billed for the police and firefighters who show up.

Please consider 'Crash taxes' are growing in popularity among cash-strapped California cities

At least 50 cities in the state have adopted so-called crash-tax laws allowing local governments to seek reimbursement from insurance companies for the costs of sending public emergency crews to accident scenes. The fees can amount to hundreds or even thousands of dollars. If insurers don't pay, cities can hire collection agents to seek payment from the motorists involved.

Sacramento, with nearly half a million residents, soon could be the largest city in California to do so. The City Council has scheduled a vote next month to establish what it's calling a "fire cost recovery charge." The fee would reimburse the city for a variety of emergency-related chores, including cleaning up hazardous fluids, putting out vehicle fires and responding to gas line explosions and downed power poles. Proposed fees would range from $432 for a "scene stabilization" to $2,275 for a helicopter evacuation. The measure is expected to raise as much as $500,000 a year, city spokeswoman Linda Tucker said.

"To me, it's an outrage. We're already paying these people — the police department, the fire department, the emergency vehicle drivers — handsome salaries and benefits," said Lew Uhler, president of the National Tax Limitation Committee. "Either we stop this kind of nonsense or we should quit paying taxes for these kind of services."

The practice isn't limited to cities in struggling California. It's gaining momentum nationwide as cash-strapped communities seek a way to offset budget cuts.

This month, New York Mayor Michael R. Bloomberg proposed charging drivers there as much as $490 when firefighters respond to an accident or a vehicle fire, beginning July 1. A public hearing is set for January.

Local taxpayers shouldn't have to pay for accidents they had no part in creating, said Costa Mesa Fire Battalion Chief Bill Kershaw.

"Someone has to pay for the cleanup," he said. "We're subsidizing the insurance companies" if cities don't collect from the responsible parties.

At least 10 states, including Florida, Georgia and Pennsylvania, have already banned the collection of accident-response fees, according to A.M. Best Co., an independent insurance information service based in Oldwick, N.J.

But California cities and the companies they hire to collect accident fees are gearing up for a fight. The Strickland bill would prohibit local governments from collecting for all types of emergency services, including fire, police and medical, they said.

Such a ban "could devastate city services and economic health," the League of California Cities said in a letter to lawmakers.

Insurance companies are trying to harness populist antitax sentiment, typified by the "tea party" movement, to protect their own profits, said Rick Benner, chief financial officer of Fire Recovery USA.
The gall of Rick Benner of Fire Recovery USA and Costa Mesa Fire Battalion Chief Bill Kershaw infuriates me.

Firefighters together with police unions they have bankrupted most cities in the nation. Public union firefighters and police (in general) are the most overpaid undeserving ungrateful ingrates the country has ever known.

Those statements will annoy many, but it is the truth, in general, especially for the larger cities. If you are a small town police officer or firefighter with few benefits then what I said may not apply to you.

I would gladly support collection measures if tax dollars did not already go to overbloated, untenable public union pension contracts.

Spare me the sap about how dangerous the jobs are. Please consider the 8 Most Dangerous Jobs in the World

1. Fishermen
2. Pilots and airline employees
3. Loggers
4. Structural construction workers
5. Waste management employees
6. Farmers and ranchers
7. Power-line technicians
8. Roofers

The true heroes deserving of respect and appreciation are volunteer fire departments.

The problem is expenses not lack of revenues. Cities ought to outsource both police and firefighters, the latter to volunteer departments in return for reduced or eliminated property taxes.

How many people do you think would volunteer for a few days a month in return for elimination of property taxes?

I bet enough to get rid of nearly every public union fire department in the country.

Please see In Praise of Volunteer Fire Departments
for an email response from a 20-year police and fire union worker, and my rebuttal to his response.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

2:04 PM

Credit Default Swaps PIIGS vs CINN Group (California, Illinois, New York, New Jersey)

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In response to European Sovereign Debt Crisis in Pictures; PIIGS Spreads to Germany at or Near Record Levels I received this chart from Chris Puplava at Financial Sense.

click on chart for sharper image

Chris writes "In addition to foreign credit risk (Greece, PIIGS), I’m seeing my CINN STATE (CA, IL, NY, NJ) Credit Default Swap (CDS) composite moving higher again."

Mike "Mish" Shedlock
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11:40 AM

Housing Bubble in Norway

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Here is a quick post under the theme "Housing Bubbles Around The World". This one is from Norway, courtesy of reader Espen Johansen.

Dear Mish

Thank you for your effort to spread the economic truth in the jungle of lies. The Norwegian Central Bank and the authorities has fed the bubble monster for years by keeping interest rates too low too long, and the biggest culprit, socializing credit. (We have a socialist/communist government, and have had a blend of that since 1990)

I have tried sending letters to the finance ministry, and the central bank, but no one seem to wake up. About 90 % of all households have Floating rate mortgages.

I do not blame the banks, they know they will be bailed out, and compete doling out as much money as they can to make a profit for share/bondholders with the given terms of a bailout waiting.

A picture says more than a 1000 words, and enclosed are some graphs I believe tell it all.

Sources: The blog “krakk!
House price indices for Norway

End the central bank cartel, and we will see prosperity and peace.
Merry Christmas and a Happy New Year
Med vennlig hilsen/Best regards
Espen Johansen
Inflation Adjusted Housing Prices In Norway

Norway Homes Prices In Gold

Mike "Mish" Shedlock
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4:14 AM

European Sovereign Debt Crisis in Pictures; PIIGS Spreads to Germany at or Near Record Levels

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The sovereign debt crisis in Europe is still simmering. Country by country, spreads to German debt are at or near record levels.

Chart follow snips from German Bonds Climb in 2010 as Fiscal Crisis Roils Euro Area

German bunds climbed this year, the best performance since 2008, as the fiscal crisis that roiled the euro area’s most-indebted nations drove investors to the safest fixed-income assets in the region.

Top-rated euro-denominated securities from Austria, Germany, the Netherlands, Finland and France led gains in 2010, while the debt of Greece and Ireland, which sought bailouts this year, had the biggest losses among 26 markets tracked by Bloomberg and the European Federation of Financial Analysts Societies.

German bonds returned a profit of almost 6 percent this year, according to the Bloomberg/EFFAS data, compared with a 20 percent loss on Greek debt, a 14 percent slump in Irish securities and an 8 percent decline for Portuguese securities. Spanish and Italian bonds also made a loss as investors demanded increasing yields to own the debt of the euro area’s high-deficit nations.

As borrowing costs climbed again amid a wave of sovereign downgrades that saw Greek debt cut to non-investment grade at Moody’s Investors Service and Standard & Poor’s, Ireland opted on Nov. 28 to follow Greece, accepting an 85 billion-euro bailout. That, too, failed to prevent the spread of the debt crisis, fueling investor concern that Europe’s stronger nations may be unwilling or unable to foot the cost of future rescues.

The extra yield investors demand to hold Greek 10-year government bonds instead of German bunds, Europe's benchmark government securities, surged to a euro-era record of 973 basis points on May 7, and was at 953 basis points today. It started the year at 239 basis points. The difference in yield, or spread, between German bonds and 10-year debt from Ireland, Portugal, Spain and Italy also reached euro-era records.
Germany, Ireland, Portugal, Greece Sovereign Debt Yields

click on chart for sharper image

France, Spain, Belgium, Italy Sovereign Debt Yields

click on chart for sharper image

Sovereign Debt Spread to Germany
Country Jan 01 May 07 Dec 30
Belgium 0.3% 0.7% 1.0%
France0.2% 0.4% 0.4%
Greece 2.4% 9.7% 9.5%
Ireland1.4% 3.1% 6.0%
Italy0.3% 1.5% 1.8%
Portugal0.7% 3.5% 3.6%
Spain0.6% 1.6% 2.5%

The bailouts to Greece and Ireland solved nothing. Spain and Portugal are up next. The country to keep an eye on is Italy. It is off nearly everyone's radar right now. Not mine. Italy is simply too big to bail and its spreads are creeping up.

Correction: Second chart as originally posted contained a line for Spain that was actually Portugal a second time. Now corrected.

Mike "Mish" Shedlock
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Thursday, December 30, 2010 7:16 PM

Looking for Love in all the Wrong Places? Contrary Investor Examines Misguided Fed and Obama Admin. Efforts to Increase GDP Via Increased Consumption

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The latest Contrary Investor Subscriber Report contains an interesting set of charts and commentary that shows just how misguided Fed and Obama administration focus on supporting consumption as the means to improve GDP.

Their analysis is always well written, so inquiring minds may wish to take a closer look.

I have permission to do occasional clips so please consider this clip from Looking For Love In All The Wrong Places?

Looking For Love In All The Wrong Places?...You are all very much aware of the change in market tone and sentiment over the last four months. Strategists and investors fretting over rapidly deteriorating macro leading economic indicators (remember the ECRI reaching levels always consistent with recession?) and contemplating the possibility of a double dip has given way to these same folks now trying to one up each other in putting forth ever higher domestic GDP growth estimates for the new year. Goldman (Jan Hatzius) has been a poster child example of this about face, but they have plenty of company. The transition is not hard to understand. With the heavy POMO started in September, followed up by QE2, and now the tax cut extension legislation that should add about $400 billion of "new" fiscal stimulus in 2011, we better have an improved outlook. Certainly THE issue as we move into 2011 is the potential for organic economic growth, or otherwise. Personally, we just can't put a big "multiple" on marginal stimulus (read borrowed money) additions to macro near term economic expansion. But this issue will not become relevant until 2011 is well underway.

As we see it, one of the really big keys for economic and we believe ultimately financial market performance in the new year will be first, whether corporations spend their currently amassed "savings". It's more than well known that through both operations and borrowing in a generationally low interest rate environment, corporations are sitting on top of a boatload of cash at the moment. We're already seeing the M&A deals primarily in tech and health care sectors taking place. Secondly, again if QE2 is to be effective, corporations must spend their cash domestically, and not let that cash "leak" into foreign direct investment and/or capital markets. Preferably, corporations would spend their cash domestically on productive investment. Even we'll admit, that would be bullish. And crazily enough, it would be in stark contrast to what we believe are the misguided policies of the Fed and US government over the last three years.

Right to the key point of this portion of the discussion that happens to be a question and will hopefully become clear as we look at a few longer term data points. Why has the Fed and Administration focused their monetary and fiscal policies virtually exclusively on consumption when it is productive investment that is the key to longer term sustainable economic health and ultimately growth?

The Fed and Administration are carrying out a failed longer term policy of focusing virtually exclusively on trying to stimulate consumption. Unless they change their ways, and fast, it will only be the corporate sector that can truly save the day for the longer term sustainable health of the US economy. Keep an open mind and let's walk through a bit of history.

The top clip is self explanatory. You may also remember, and we will not drag you through it again, that US credit market debt relative to GDP began a three decade acceleration in the early 1980's leading up to the recent peak of a generational credit cycle.

We believe the message of the combo chart above is as clear as a bell. As consumption became an ever larger piece of US GDP over time, the ten year rolling average of US GDP growth went into longer term rate of change decline.

The point is that debt financed consumption pressured the longer term growth rate of US GDP over time as consumption adds nothing back to the longer term infrastructure and productive capacity of the economy itself.

Now, remember that disposable income can either be consumed or saved. And it's that very savings that ends up as productive economic investment over time. So next up is a look at the US savings rate relative to the 10 year rolling average of US GDP growth over the last half century. Notice anything? Of course you do.

From the late 1950's through to the early 1980's, the US savings rate reached ever higher highs, as exactly did the rolling ten year average of US GDP growth. But once the decline in the savings rate began, so did the decline in the longer term growth rate in US GDP. Directionally these two data points are twins.

Below we're looking at the year over year change in nominal US GDP. About as simple as it gets. Alongside is the year over year change in non-residential US fixed investment. A very broad proxy for productive investment/corporate capital spending. These two data points are about as highly directionally correlated as they come. And what this clearly implies is that the longer term rhythm of the US economy is integrally tied to productive investment. Not consumption, but productive investment.

So stepping back just a bit, why have the Fed and Administration been focusing their efforts on consumption when it's clear that productive investment is the driver of longer term US economic growth? Is it consumption that allows China to grow its economy at double digits, or productive investment? Again, we know there has been over investment in China and we have too much productive capacity globally for now, as this is really a story for another complete discussion. But China never could have "arisen" economically without an important investment in long lived productive assets. You know the fiscal remedies so far stateside. Cash for clunkers, home buyer tax credits, appliance purchase rebate credits, the recent one year drop in the employee side of payroll tax rates, etc. - every single initiative focuses on consumption as opposed to investment. Again, maybe we'll look like nut balls before the current cycle is over, but Fed and Administration policies are not going to put the US on a longer term firm economic footing, especially within the context of a globalized economy. The US is not going to borrow and consume its way to prosperity. That only enriches the nations doing the actual production. We did that over the last thirty years and the rolling ten year US GDP growth report card is our reward.

Unfortunately, as opposed to supporting and encouraging this transition from reliance on consumption (in a still highly levered economy) to increasing focus on productive investment, the Fed and Administration are acting in contravention. They appear blind to the messages of history. We're scratching our heads. To be honest, we have only one answer as to why this is happening, and we sound like conspiratorial maniacs when we voice it. Consumption favors the financial sector, especially if that consumption is even partially financed.

It's simply out in the open these days that the Fed and Administration have done everything in their power to protect the financial sector in the US, even at the expense of the taxpayers and small business. The same thing is happening in Europe. Could it really be that this misguided and myopic focus on consumption as our current savior is simply an extension of that blanket of "protection" to the financial sector? Let's hope not. Let's just hope it's ignorance, ok?
Explaining Fed Actions

The Fed is clearly beholden to the banks, especially large too-big-to-fail (TBTF) banks. Certainly the Fed may sound concerned about unemployment, but it's safe to assume the Fed's overriding concern is borrowers' ability and willingness to pay back the banks.

History shows Bernanke's idea of inflation targeting at 2% ignoring asset bubbles that build along the way is economically stupid. So why does he do it?

For the sake of argument and in deference to Occam's Razor , let's assume that all of the Fed's mistakes are out of ignorance as opposed to some conspiracy by the Fed to transfer wealth to the financial sector. Simply put, never ignore stupidity when it is a plausible answer to why something happened.

Regardless of why, nothing changes from the perspective of the Bank CEO. The TBTF banks know full well they can take enormous economic risks, secure in the knowledge the Fed will bail them out if they get into trouble.

The latest twist is Citigroup's chairman now brags that Citigroup is "Too Interwoven To Fail". Please see 98 TARP Recipients Close To Failure; Citigroup's Chairman Gives Reasons Citigroup Should Be Broken Up for details.

When profits are rising CEO and executive compensation soars. When the banks fail, taxpayers bail out the banks and shareholders take the hit. However, the CEO gets a golden parachute worth hundreds of millions of dollars. Thus, from the perspective of TBTF banks, the right thing to do is take enormous risks.

The same thing is happening in Canada right now. Please see Canadian Borrowing Gone Mad: A Look at BMO's Misguided Balance Sheet Theory and the Keep on Dancin' Market Share Theory of Toronto-Dominion for further discussion.

This process explains the massive boom bust cycles we have seen and how wealth gets increasingly concentrated into fewer and fewer hands over time.

Mike "Mish" Shedlock
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1:46 PM

Anecdotes on the Payroll Tax Cut

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A small business owner friend of mine has some thoughts on the 2% payroll tax cut that I would like to share.

SBO writes ...

Hello Mish
Here's a quick note on the 2% payroll tax cut. We own a couple of small companies, each with under 200 employees. We provide health insurance to our employees, but they share the cost. We pay $300 per month per individual, and any cost above that (including cost increases) are shared 50-50. Our average salary is about $42,000. The 2% payroll tax cut will be about $70/month for the average person.

However, our health insurance cost increased by $117 per month for individuals (more for families) and that was only after altering the benefits, shopping intensively, and changing providers.

Thus, the same average employee will pay an additional $58.50/month for increased health care costs. The net additional dollars to the employee will be $11.50/month. So, spending another $70/month will all be a boost to GDP, since spending on health care is deemed consumer spending but I don't think my employees are going to feel any richer.
This adds to what I said in Jobs Forecast 2011 Calculated Risk vs. Mish (correcting a couple of awkward sentences).
OK there is going to be more money in paychecks because of a reduction in Social Security collection. In response, I see ever increasing estimates as to how much that payroll tax cut will add to GDP.

However, I have to ask "How much of that payroll tax cut will go to increased sales taxes, state income taxes, and property taxes?"

I have not seen anyone properly address that question. I suggest we need that payroll tax cut to break even. Certainly taxes of all kinds are going up in Illinois. Our idiotic governor wants to hike income taxes 33%. Sales taxes will likely go up as well.

While Illinois may be an extreme example, bear in mind that places where taxes are not going up will see more layoffs.
SBO adds another aspect I did not even consider. Some employees who share medical costs with their employer will have the payroll tax cut completely eaten up before they see a penny of it. The payroll tax cut will not be there to spend, it will have already been spent. That applies even more so to the self-insured.

Then there are property taxes, state income taxes, and sales tax increases to consider (or additional cutbacks in states that do not raise taxes). GDP may get a small boost from this in theory, but the overall net effect will be a decrease in jobs and the average taxpayer will not see a dime of the decrease.


Here is a a reader email from David who lives in North Carolina regarding the above post.
Hi Mish,

Just read the article and thought I would offer my two cents (maybe a dollar after you finish this!) on the payroll tax cut.

I am the sole employee of my S Corp, so I am self employed. The 2% FICA cut is worth about $155 a month to me. I got my annual letter from Blue Cross stating my new rate for Health Insurance. It goes up $154 a month, so I net out $1 per month. I if see you in North Carolina maybe we can share a cup of coffee if we can find a cup for $1.

I read you blog every day along with several others I deem worthy. Really enjoy it. I am floored by stories of the public unions and pensions in other states and click on the links to read the full story. NC has no public unions, virtually no private unions, and a pension system that is solvent NC public pensions are not extravagant. These stories are unheard of in NC, not that we don't have a few of other types to tell. Our corruption is a little different.

NC is facing a 20% (3.7 billion about) hole in the state budget next year. The politicians are stating they will close it without raising taxes or borrowing, but I am waiting to see what they do. There is no way to close the budget without cutting the state payroll. Most State employees have gone without pay increases for the last two years. I suspect a number of them will be laid off unless the idea of pay cuts I am starting to hear discussed is real. The precedent is there, NC cut pay in the Great Depression to close a similar gap without cutting employees / services.

Chapel Hill NC
Mike "Mish" Shedlock
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6:05 AM

Jobs Forecast 2011 Calculated Risk vs. Mish

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Calculated Risk, a good friend of mine, has come up with employment projections for 2011. He thinks the economy will grow by 2.4 million private jobs (200,000 a month), with an upside chance of 3 million jobs.

I think those estimates are extremely high and we will not come close to even 2.4 million jobs. I give my rationale below, but first let's see what Calculated Risk has to say.

Please consider Calculated Risk's Question #5 for 2011: Employment

The U.S. economy added about 87 thousands payroll jobs per month in 2010 through November. This was extremely weak payroll growth for a recovery. How many payroll jobs will be added in 2011?

The U.S. will add around 1.2 million private sector jobs in 2010. And this despite the construction sector losing over 100 thousand jobs in 2010 (the fourth year in a row of construction job losses).

It now appears that job creation is picking up, and it also appears that the construction sector will add employees for the first time since 2006. There were over 2 million construction jobs lost during the downturn, and a relatively small number will be added next year - but every little bit will help.

This suggests to me that private payroll employment will increase by over 2 million jobs next year, maybe as high as 3 million jobs! My guess is around 2.4 million jobs as shown on the following graph.

Of course state and local governments will probably lose some jobs, but it looks like 2011 will be the best year for private job creation since the '90s.
What is the Driver for Jobs?

One question I continually ask is "What is the driver for jobs?"

Let's address that question, sector by sector, using all the major component breakdowns of job categories by the BLS, starting with the BLS Current Statistics reports for October or November (the latest graphs available).

Please click on any chart below to see a sharper image.

For all the brouhaha about the manufacturing recovery, employment in the manufacturing sector has dropped four consecutive months. Before estimating manufacturing for 2011, let's look at the long-term chart.

That does not look so pretty. Nonetheless, manufacturing averaged +10,000 jobs a month in 2010. Will 2011 look more like the first half of 2010, more like the second half, more like the long-term trend, or more like another temporary flattening out?

I will take an average of 2010 as a guess.

Manufacturing Jobs Expectation for 2011 is +10,000 per month.

January and February were a disaster for construction in 2010 so let's drop those. The average March through November is +3,000. Let's be generous and round to the nearest 5,000.

Construction Jobs Expectation for 2011 is +5,000 per month.

The average number of mining jobs January-October 2010 is +8,000.

Mining Jobs Expectation for 2011 is +8,000 per month.

Temporary help services was one bright spot in 2010. The January-November average is +27,000 a month. The August-November average is 31,000 a month. Let's be generous and add 4,000 jobs a month to the August-November total.

Temporary Help Services Jobs Expectation for 2011 is +35,000 per month.

BLS has Temporary Help as a subcomponent of Professional and Business Services. It is hard to say whether or not permanent hiring takes hold but if it does it will likely be at some expense to Temporary Help.

There are no charts available for Professional and Business Services, but let's add another 10,000 jobs a month to give a total of +45,000 jobs per month for Professional and Business Services.

Retail trade was certainly all over the map in 2010. I am not sure what to make of these big swings. The average for January-November 2010 is +6,000.

Retail Trade Jobs Expectation for 2011 is +6,000 per month.

Let's discard January and February as not being representative of the year. The 9 month average March-November is 9,000.

Transportation and Warehousing
Jobs Expectation for 2011 is +9,000 per month.

Financial activities is one sector that did not recover in 2010. Look for a repeat in 2011. Mortgage refinancing is falling off a cliff. I expect bank warnings about profits and lots of layoffs in this sector as a result of rising interest rates in general and mortgage rates in particular.

The average number of jobs January-November is -7,000. Look for a repeat with job losses stacked in the first half.

Financial Activities Jobs Expectation for 2011 is -7,000 per month.

The January-November average is +15,000. I think we have seen some of the restaffing we are going to get and growth in 2011 will not be as robust.

Leisure and Hospitality Jobs Expectation for 2011 is +10,000 per month.

Healthcare has been a rock solid performer throughout the recession. The one possible downside to 2011 is cutbacks at country hospitals over budget concerns. Otherwise a continuation of 2010 seems likely. The average for January-October is +20,000. Let's ignore the downside risk and be slightly generous, using the average of the latest 4 months.

Healthcare Jobs Expectation for 2011 is +24,000 per month.

The BLS groups education and healthcare together in the monthly jobs reports (why I do not know). However in these summary reports the BLS breaks out healthcare separately. There are no charts for education.

Education is one of the big wildcards. Traditionally this is a growing segment. However, cities are under a lot of pressure here. There could be losses in this component, perhaps big losses with increasing class sizes unless teachers' unions take pay or benefits cuts or unless help comes from the federal government. I am going to assume no growth in education as a middle ground.

Education Jobs Expectation for 2011 is +0 per month.

Wholesale trade is a minor jobs component. I do not have a chart, but will assume a nominal amount of growth.

Wholesale Trade Jobs Expectation for 2011 is +3,000 per month.

Information is a very minor jobs component. I do not have a chart. The last three months were -7,000, -1,000, and +1,000. Let's assume +1,000 a month.

Information Jobs Expectation for 2011 is +1,000 per month.

I do not have a chart of Other Services . The last three months were +17,000, +30,000, and -8,000. The average is +13,000.

Other Services Jobs Expectation for 2011 is +13,000 per month.

Note how local governments were still expanding mid-recession, all the way up till July of 2008. A year later, starting June of 2009, local governments finally got religion and started cutting jobs. Look for this trend to continue into 2011.

The average number of local government jobs for January-November 2010 was -21,000. Let's assume it will be the same for 2011 although there could be a disaster coming up at the local level.

Local Government Jobs Expectation for 2011 is -21,000 per month.

In spite of all the whining at the state level, states have not yet made any significant cuts in employment. The average for January-November 2010 rounded to the nearest 1,000 is 0. Let's assume there will be no net gains or cutbacks at the state level for 2011, even though I expect some losses.

State Government Jobs Expectation for 2011 is +0 per month.

Total private employment January-November 2010 was +1.2 million. Total nonfarm employment was +951,000. That means 249,000 government jobs were lost so far in 2010. Of those 231,000 were local government jobs and none at the state level. Thus a net of 18,000 jobs, about 1,000 a month were lost at the Federal level. Instead, let's assume no net federal jobs for 2011.

Federal Government Jobs Expectation for 2011 is +0 per month.

Totals and Subtotals by Category

I come up with +127,000 private jobs a month in comparison to Calculated Risk's estimate of +200,000 jobs a month. That is quite a difference.

I have total nonfarm jobs at +106,000.

Let's do a reality check.

Monthly Job Growth 1999-2009

Chart courtesy of BLS. Annotations by me, numbers are in thousands.

The areas in deep blue mark recessions.

  • At the height of the internet bubble with a nonsensical Y2K scare on top of that, the economy managed to gain 264,000 jobs a month.
  • At the height of the housing bubble in 2005, the economy added 212,000 jobs a month.
  • At the height of the commercial real estate bubble with massive store expansion, the economy added somewhere between 96,000 and 178,000 jobs per month depending on where you mark the peak.

Neither the housing boom, nor the commercial real estate boom is coming back. Nor is there going to be another internet revolution. If anything, outsourcing of jobs to Asia is likely to remain intense.

Finally, consider all the financial engineering jobs, banking jobs etc, that are not coming back.

I simply do not see any driver for jobs. Many of these optimistic scenarios are based on a "typical recovery". Well this is not going to be a typical recovery. Indeed, it already is not a typical recovery.

Furthermore, Europe is a basket case, the housing bubbles in Australia and Canada are popping, China and India are both overheating and will slow, and topping it off, there is a very genuine chance that the retail hiring done for the Christmas season is all we get.

Store expansion is not going to be like it was in 2006-2007.

OK there is going to be more money in paychecks because of a reduction in Social Security collection. In response, I see ever increasing estimates as to how much that payroll tax cut will add to GDP.

However, I have to ask "How much of that payroll tax cut will go to increased sales taxes, state income taxes, and property taxes?"

I have not seen anyone properly address that question. I suggest we need that payroll tax cut to break even. Certainly taxes of all kinds are going up in Illinois. Our idiotic governor wants to hike income taxes 33%. Sales taxes will likely go up as well.

While Illinois may be an extreme example, bear in mind that places where taxes are not going up will see more layoffs.

Thus, from every angle, I struggle mightily to come up with +200,000 a month. Note that I stretched in several places to be purposely optimistic, tossing out bad months at the beginning of the year, etc. If everything goes right, perhaps we can add 160,000 jobs a month, but that assumes I am way off on the education component.

If the economy does add 160,000 private jobs a month, depending on government cutbacks, the unemployment rate will barely drop, and in fact might not even drop at all.

At +100,000 to +125,000 total jobs a month, the unemployment rate will likely rise. Given all the tremendous risks, the economy might not add that.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

Wednesday, December 29, 2010 11:18 PM

China Slashes Rare Earth Export Quotas, Cracks Down On Illegal Mining

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Rare earth elements are used in iPhones, iPads, hybrid-electric cars, wind turbines, flat-panel monitors, tiny magnets in the fins of bombs, missiles, laser-guided smart bombs, and a myriad of other industrial applications.

China cut exports last summer, then totally blocked exports to Japan last September in a border dispute with Japan and now has reduced export quotas again by 35 percent.

There is growing concern about this problem at the Pentagon and by manufacturers for obvious reasons. Please consider China's rare earths export cut spurs trade concerns

China's move to slash export quotas on rare earth minerals -- vital in a slew of high-tech products -- has raised fresh international trade concerns, and Japan's Sony Corp vowed on Wednesday to reduce its reliance on the minerals.

China, which produces about 97 percent of the global supply of rare earth minerals, cut its export quotas by 35 percent for the first half of 2011 versus a year ago, saying it wanted to preserve ample reserves. It also cautioned that it has not decided on the quotas for the second half of the year.

The little-known class of 17 related elements is used in numerous electronic devices and clean energy technology.

Sony, maker of Bravia brand flat TVs, Vaio PCs and the PlayStation 3 videogame console, will look for ways to cut its use of rare earth elements, including developing alternative materials, Iguchi said.

Prices have surged for these minerals since authorities in Beijing slashed their rare earth exports by 40 percent this summer, saying China needed them for its economic development.
Crackdown on Illegal Mines

It's not that rare earth elements are that rare, but supply of the metals is limited because of production concerns, especially pollution. Unauthorized mining operations account for as much as 50% of China's rare earth exports, leaving sulfuric-acid poisoned streams and land in the wake. Over such concerns Illegal Rare Earth Mines Face Crackdown
China’s national and provincial governments [have started] to crack down on the illegal mines, to which local authorities have long turned a blind eye. The efforts coincide with a decision by Beijing to reduce legal exports as well, including an announcement by China’s commerce ministry on Tuesday that export quotas for all rare earth metals will be 35 percent lower in the early months of next year than in the first half of this year.

Rogue operations in southern China produce an estimated half of the world’s supply of heavy rare earths, which are the most valuable kinds of rare earth metals. Heavy rare earths are increasingly vital to the global manufacture of a range of high-technology products — including iPhones, BlackBerrys, flat-panel televisions, lasers, hybrid cars and wind-power turbines, as well as a lot of military hardware.

China mines 99 percent of the global supply of heavy rare earths, with legal, state-owned mines mainly accounting for the rest of China’s output. That means the Chinese government’s only effective competitors in producing these valuable commodities are the crime rings within the country’s borders.

Prices have soared for rare earth elements mined almost exclusively here in the red clay hills of southern China: dysprosium, terbium and europium. According to a new United States Energy Department report, the most important of these for clean energy is dysprosium. Its price is now $132 a pound, compared with $6.50 a pound in 2003.

In the last few months, the government has deployed helicopter patrols to spot illegal mines. Teams of dozens of police officers have conducted raids into the hills of northern Guangdong and arrested at least 100 owners and managers of rare earth mines and refineries, said a Chinese mining expert who insisted on anonymity because of the issue’s political risks. Government workers equipped with blowtorches have accompanied the police to cut apart illegal mining equipment and either seize it or distribute it to peasants for sale as scrap.

The gangs have terrorized villagers who dare to complain about the many tons of sulfuric acid and other chemicals being dumped into streambeds during the processing of ore. Illegal rare earth mining and chemical runoff have poisoned thousands of acres of prime farmland, according to the government of Guangdong Province, and have been blamed for many illnesses.
It's nice to see this concern over pollution, but cynically, I cannot help wondering if the real goal of this crackdown is to raise prices or secure favorable trade agreements.

Mike "Mish" Shedlock
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3:06 PM

Stoneleigh and Max Keiser on Canadian Housing Bubble: "Expect Enormous Comeuppance, Tremendous Sense of Denial, Ireland-Like Dynamics, 90% Price Drops

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Inquiring minds are watching a superb interview with Max Keiser and Nicole "Stoneleigh" Foss regarding the Canadian Housing Bubble. The interview starts at 13:42.

Interview Snips

  • Canadian banks are not as "bulletproof" as everyone thinks.
  • When the housing bubble bursts there will be tremendous consequences to Canadian banking system.
  • We are in a massive bubble and there will be an enormous comeuppance.
  • Canada housing bubble currently peaking.
  • When you are in a bubble, the psychology is such that you cannot see it for what it is. Talking to Canadians about the housing bubble is like talking to Americans in 2006. There is a tremendous sense of denial.
  • People pay 50-70% of their income for mortgage costs in places like Vancouver, but it's not just Vancouver. Such things are absolutely characteristic of a bubble.
  • Canada will play catch-up to the downside in the fairly near future.
  • Ireland-like dynamics absolutely coming to Canada.
  • There is also a tremendous commercial real estate problem that will affect Canadian banks.
  • Canadian banks have also acted as reinsurers in the derivatives market for a number of extremely risky things. So in a number of cases "the bucks stops with the Canadian banks".
  • Real estate prices will fall about 90% on average. Deflationary credit collapse coming.

"Stoneleigh" lives in Canada and is author of the popular Automatic Earth Blog. Also see Stoneleigh and Max Keiser Flatten the Canadian Economy

I agree with everything "Stoneleigh" said in the above bullet point list except I do not see a price collapse of 90% on average. I think 50-60% in some areas is more like it. Even 40% would be devastating and that would be my best case scenario.

Mike "Mish" Shedlock
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12:30 PM

Pension "Armageddon" in Pittsburgh; State Threatens Takeover of City Pension Plan

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Pension stories seem to be going viral lately, not any story in particular, just the sheer number of them. Please consider Pittsburgh City Council, Mayor Clash on Pension ‘Armageddon’

Pittsburgh’s City Council ordered Mayor Luke Ravenstahl to attend a meeting today to hash out a plan to avoid a state takeover of the underfunded municipal pension, which may more than double its cost to taxpayers.

A vote to compel Ravenstahl to come before the council’s finance committee followed about six hours of debate on shoring up the pension system using parking fees. The retirement plan has about $325 million in assets to cover $1 billion in promised benefits, according to a consultant’s report. The city has until Dec. 31 to show the state how it will bolster the plan.

“It’s merely an accounting gimmick to get past Dec. 31,” said Scott Kunka, Ravenstahl’s finance director, on the proposal to use parking fees over the next 30 years to support the pension system. “It’s just a bad concept,” he said.

Pittsburgh, whose pension problem was called a “financial Armageddon” by two city councilors yesterday, joins cities such as San Diego and states such as Illinois and New Jersey that may cut services or raise taxes to meet ballooning retirement costs. Those states and 18 others skipped payments or underfunded their retirement systems from 2007 to 2009, according to an October report from Loop Capital Markets in Chicago.

Pittsburgh’s pension system includes three retirement plans for about 7,000 active and retired firefighters and government workers. Under Pennsylvania law, the state must begin taking control if the city’s obligations are less than 50 percent funded as of Dec. 31.
Raising taxes is not the answer. It would encourage both white flight and business flight. Higher property taxes would cause more bankruptcies from people already on the edge, barely able to get by right now. Higher taxes certainly would do nothing to attract business.

Gary, Indiana twice received special permission from the state to raise taxes to meet funding requirement. The result is taxes are higher and Gary is still broke. Instead, Indiana, one of 26 states that do not allow municipal bankruptcies, is about to. For details please see Indiana Bill Would Allow Cities to Declare Bankruptcy; Gary, Lake Station, Georgetown Likely Candidates; Hands Tied in Rhode Island

Interestingly, Pennsylvania is one of the states that do allow bankruptcy. I urge the Pittsburgh city council to take just that option.

Five Step Plan For Pittsburgh

  • File Bankruptcy
  • Outsource its entire police department to the local sheriff's association
  • Outsource it fire department to the lowest qualified bidder
  • Outsource garbage collection and any other services to the lowest qualified bidder
  • Seek to reduce pension obligations in bankruptcy court

Pennsylvania Governor-elect Tom Corbett is a Republican. He takes office on January 18, 2011. Please consider Pennsylvania Gov.-elect Tom Corbett says transition team provides 'fresh set of eyes' on state government
Gov.-elect Tom Corbett met today for the first time with the small army of volunteer advisers who form his extended transition team, but he remained tight-lipped about prospective Cabinet appointments or his promised government belt-tightening.

Corbett characterized the collection of more than 400 business leaders, veterans of past Republican administrations, conservative activists, legislators and even a few Democrats as "a fresh set of eyes" with which the architects of his administration can size up state government and recommend new ways of doing things.

He is scheduled to be sworn in Jan. 18 as the successor to Democratic Gov. Ed Rendell, who is stepping down after serving the maximum two consecutive terms.

The transition team is divided by subject into 17 committees. One panel is assigned to the budget, pensions and revenue, for example, while others focus on topics that include health and aging, education, criminal justice and economic development. The committees will scrutinize 25 state departments and agencies, transition officials said.

The committees' final reports are due by the second week of January, Corbett said.

One Democratic transition team member at Tuesday's meeting was state Sen. Anthony Hardy Williams of Philadelphia, who finished third in a four-way Democratic gubernatorial primary in May. Corbett has praised Williams' advocacy of expanding "school choice" — an umbrella term for vouchers, charter schools and other taxpayer-financed alternatives to public schools.
The city should be talking with Tom Corbett's transition team regarding bankruptcy right now. I bet the governor would consider it. Bankruptcy and killing untenable public union contracts, not higher taxes is all that can save Pittsburgh.

The mayor and the city council should have one master, the people of Pittsburgh, not the police and fire unions.

Pittsburgh's city council's obligations to the city are to produce the most services for city residents at the least cost. Public unions provide the fewest services at the most cost. It is time to put an end to this widespread practice that threatens to bankrupt numerous cities in the country this year.

Mike "Mish" Shedlock
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4:25 AM

Technology Transfer from GE to China will Directly Compete Against the Boeing/Airbus Duopoly

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A joint venture deal between GE and a Chinese military-jet maker will strike at the very heart of the existing Boeing/Airbus duopoly in control of most of the world's large commercial jet market.

The Wall Street Journal reports China Squeezes Foreigners for Share of Global Riches

Foreign companies have been teaming up with Chinese ones for years to gain access to the giant Chinese market. Now some of the world's biggest companies are taking a risky but potentially rewarding second step—folding pieces of their world-wide operations into partnerships with Chinese companies to do business around the globe.

General Electric Co. is finalizing plans for a 50-50 joint venture with a Chinese military-jet maker to produce avionics, the electronic brains of aircraft. The deal with Aviation Industry Corp. of China would give GE access to a Chinese government project aimed at challenging Boeing Co. and Airbus in the civilian-aircraft market.

General Motors Co. established a joint venture this year with SAIC Motor Corp., its longtime partner in China, to produce and sell their no-frills Wuling-brand microvans in India, and eventually in Southeast Asia and other emerging markets as well.

The two deals show China Inc.'s growing international ambitions, as well as its increasing leverage over foreign partners. To make the GE deal happen, GE Chief Executive Jeffrey Immelt made an extraordinary concession, agreeing to fold into the venture all of GE's existing world-wide business in nonmilitary avionics. GM, in its deal, contributed technology, its manufacturing facilities in India and use of its Chevrolet brand name in that market.
End of the Duopoly

Please consider Competition between Airbus and Boeing
Competition between Airbus and Boeing (sometimes referred to as the "Airliner Wars") is a result of the two companies' domination of the large jet airliner market since the 1990s, which is itself a consequence of numerous corporate failures and mergers within the global aerospace industry over the years. Airbus began its life as a consortium, whereas Boeing took over its former arch-rival, McDonnell Douglas, in 1997. Other manufacturers, such as Lockheed and Convair in the USA and Dornier and Fokker in Europe, have pulled out of the civil aviation market after disappointing sales figures and economic problems. The collapse of the Eastern Bloc and its trade organisation Comecon around 1990 has put the former Soviet aircraft industry in a disadvantaged position, although Antonov, Ilyushin, Sukhoi, Tupolev and Yakovlev develop new aircraft and gain a small market share. All this has left Boeing and Airbus in a near-duopoly in the global market for large commercial jets comprising narrow-body aircraft, wide-body aircraft and jumbo jets. However, Embraer has gained market share with their narrow-body aircraft in the Embraer E-jets series. There is also a similar competition in regional jet manufacturing between Bombardier Aerospace and Embraer.

In the decade between 2000 and 2009 Airbus received 6,452 orders, while Boeing received 5,927. Airbus had higher deliveries between 2003 and 2009, but fell slightly short of Boeing's deliveries, delivering 3,810 aircraft compared to Boeing's 3,950. The competition is intense, and each company regularly accuses the other of receiving unfair state aid from their respective governments.
There is a lot more information in the above link. Inquiring minds will give it a closer look.

Short and Long-Term Risks

The obvious long-term risk is China ends up with GE's technology then later dumps GE as a partner. Short-term, this deal will cost Boeing and Airbus jobs in the US and Europe respectively, starting as soon as production begins.

Moreover, this will put huge wages pressures on Boeing and Airbus. Think Aviation Industry Corp. of China is going to pay US union wages and benefits to its workers? The hollowing out of US manufacturing marches on.

Already Boeing and Airbus are continually griping about who is getting more government subsidies. Expect both companies to quickly start bitching about Chinese government subsidies.

Finally, look for large commercial jet prices to drop. That's what competition does, and that's the good side of this deal. Regardless of how you see it, we can safely add this news item to the list of deflationary pressures.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

Tuesday, December 28, 2010 8:15 PM

Illinois Governor Wants to Borrow $15 Billion to "Balance" the Budget; Illinois Total Unfunded Liabilities Exceed $200 Billion Already

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The state of Illinois elected a Keynesian nutcase of epic magnitude in Governor Quinn. Quinn's latest brainstorm is to borrow $15 billion to "stabilize things".

Quinn has not said how he will pay back the loans. Then again, he does want to raise taxes like mad and probably will do so. Regardless of what he does, Quinn is so beholden to unions, Illinois will need to borrow again 12 months from now.

Please consider Quinn Weighs $15 Billion Illinois Borrowing ‘Option’

Illinois Governor Pat Quinn is considering borrowing $15 billion to pay overdue bills and balance the biggest budget deficit in the state’s history.

Illinois faces a budget shortfall of at least $13 billion because of declining tax revenue. The state Senate in November didn’t have the votes to approve the borrowing of $3.7 billion to cover pension-fund contributions for the fiscal year that ends June 30.

Senate President John Cullerton and House Speaker Michael Madigan declined through spokesmen to say if the bond sale would draw enough support to pass.

The Senate Republican leader, Christine Radogno, criticized the proposal as lacking specifics about how the money would be paid back.

Other ideas under consideration include a 2 percentage- point increase in the state income tax that the Senate approved in 2009. The current rate is 3 percent. The House didn’t take the measure up for a vote.

Quinn’s new borrowing proposal, which the Chicago Tribune reported today, drew criticism from one municipal-bond investor. Matt Dalton, chief executive officer of Belle Haven Investments Inc., in White Plains, New York, questioned the wisdom of borrowing.

“He’s trying to sign up for another credit card,” said Dalton. “That’s going to put a lot of pressure on Illinois.”

The cost of insuring Illinois’s bonds against default rose to the highest level in five months as the state headed for the new year without a plan to finance the pension-fund contributions.
Illinois Needs Over $200 Billion Not $15 Billion

Illinois current budget deficit is $13 billion. However, Illinois debt including pension underfunding is $130 billion for fiscal year 2009.

I talked about this 10 months ago in Illinois Pension Fund $61 Billion Underwater; State Borrows Money For 2010 Contribution; California $20 Billion in the Hole Again
Illinois's pension fund is deep in the hole and getting deeper every year.

The state's reaction never changes: borrow money and hope the returns beat the cost of borrowing. Former governor Rod Blagojevich tried that to the tune of $10 billion and it worked out less than spectacularly to say the least. Nonetheless Illinois is back at it for 2010.

Illinois Is Broke

Inquiring minds are looking at Illinois Is Broke, a website mentioned in the above article.
By July, Illinois will be $130,000,000,000 in debt. This crushing load hampers the state’s ability to fund public schools and universities, health care, and other essential public services. Most of that money is owed to the state’s pension funds and retiree health care plans. And YOUR SHARE of that debt is $25,000 per household.

How did this happen? Basically, Illinois spends $3 for every $2 it takes in. Only in Springfield is this kind of math possible. The state accomplishes this by borrowing or by simply ignoring its unpaid bills. And it has been doing so for years.
Here are a couple charts from the site. Click on either charts to see a sharper image.

Illinois Budget Gap

Illinois Needs Over $200 Billion Not $15 Billion

Flash forward to fiscal year 2010 and take a look at Illinois pension liabilities as shown in Interactive Map of Public Pension Plans; How Badly Underfunded are the Plans in Your State?

Illinois pensions alone are $208 billion underfunded using realistic measures. The overall level of funding is 29%, the worst in the nation.

Click on the above link to see how your state fares.

Governor Quinn's Crazy Borrowing Plan Makes State's Problem Worse

Please consider this email from John Tillman at the Illinois Policy Institute.
Governor Quinn's Crazy Borrowing Plan Makes State's Problem Worse

CHICAGO – Governor Quinn’s borrowing plan will worsen the state’s fiscal health, not improve it, notes the nonpartisan Illinois Policy Institute. The independent think tank points out that while borrowing now might give the state some temporary breathing room, the funding of core government services will be threatened in the future as the cost of debt service mounts.

“Governor Quinn’s borrowing will hit the working class, poor, and disadvantaged of Illinois the hardest,” said John Tillman, CEO of the Illinois Policy Institute. “Borrowing costs, combined with annual increases in the expected pension contribution, will crowd out basic government functions in the near future. Our past borrowing is already catching up to us. Illinois would have had an extra $1.6 billion in available revenues this year if not for the debt service costs of previous years’ borrowing.”

The Institute urges lawmakers to face up to the unsustainable structural overspending that is driving the deficits year after year. The Institute’s Budget Solutions 2011 alternative budget showed how Illinois could balance the FY2011 budget, make the pension payment, and have money left over to begin paying down past-due debt—all without a tax increase or borrowing. Had Governor Quinn followed that roadmap, the Institute argues, Illinois would be in far better shape today. Instead, Governor Quinn has put his focus on borrowing and tax hikes in order to avoid taking on the public employee unions, Medicaid reforms, and other reforms offered by the Institute and others.

“It’s worth remembering that Governor Quinn only found one program—out of thousands—to veto outright when he signed this year’s spending bill in July. Had he taken a closer look at structural spending reforms and not agreed to politically motivated “no layoff and closure” deals with public employee unions, we could be on the path back to recovery instead of being stuck in ever-mounting debt,” noted Tillman.

Governor Quinn wants to pair the unprecedented borrowing with tax hikes on those who can least afford it. Under one revenue plan calling for a 66 percent income tax hike, a firefighter and a preschool teacher with two kids earning a combined $80,000 would have to pay $1,440 more in state taxes. This is more than double the expected savings from the federal tax cuts recently signed by President Obama. Struggling families shouldn’t have to bear the brunt of the state’s ill-advised spend-and-borrow habits.

The Illinois Policy Institute recently released a study, How to Lose Jobs and Alienate People, providing statewide and county-by-county income and job loss estimates associated with plans to increase the state income tax. The study, along with a tax calculator to see how the tax increase would impact individual taxpayers, is available at What You Need to Know: Tax Hike Research and Resources.
Quite literally Illinois is insolvent and Governor Quinn thinks borrowing another $15 billion will help.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

5:13 PM

LPS Mortgage Monitor: Foreclosure Inventory Rising for 5th Straight Month, Nearly 2.2 Million Loans are 90 days+ Delinquent Not Yet in Foreclosure

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A press release from LPS' Mortgage Monitor Report shows Foreclosure Inventory Rising for 5th Straight Month

The November Mortgage Monitor report released by Lender Processing Services, Inc. (LPS) shows that the volume of loans moving to REO continued to drop as moratoria further delayed foreclosure sales. While the 90+ delinquency category has steadily declined, the number of loans moving to seriously delinquent status beyond 90 days far outpaced the number of foreclosure starts. Nearly 2.2 million loans are 90 days or more delinquent but not yet in foreclosure.

Foreclosure inventories also continued to rise for the fifth straight month as delinquent accounts are referred for foreclosure, but the sale of foreclosure properties continued to decline. When compared to January 2008 levels, the foreclosure inventory of Jumbo Prime loans is nearly seven times higher; the inventory of Agency Prime loans is nearly six times higher; and the foreclosure inventory of Option ARM loans is approaching five times the inventory in January 2008.

The report also shows that one-third of loans that are 90 days or more delinquent have not made a payment in a year; however, the number of new problem loans declined nearly 5.4 percent from October, which is opposite of the seasonality trend that typically impacts new delinquencies this time of year. Self-cures for loans one to two months delinquent increased in November to a six-month high.

In the month of November, 261,153 loans were referred to foreclosure, which represents a 0.7% month-over-month decline. The total number of delinquent loans is nearly 2.1 times historical averages - and foreclosure inventory is currently at 7.7 times historical averages.

As reported in LPS' First Look release, other key results from LPS' latest Mortgage Monitor report include:

  • Total U.S. loan delinquency rate: 9.02 percent
  • Total U.S. foreclosure inventory rate: 4.08 percent
  • Total U.S. non-current* loan rate: 13.10 percent
  • States with most non-current* loans: Florida, Nevada, Mississippi, Georgia, New Jersey
  • States with fewest non-current* loans: North Dakota, South Dakota, Alaska, Wyoming, Montana
Charts From The Report

The report is 34 pages long. Inquiring minds may wish to give it a closer look. Here are a few select charts.

click on any chart for sharper image

Delinquent and Foreclosure Rates by Month

Total Delinquency Percent Excluding Foreclosures

Total Foreclosure Percent By Product

Foreclosure Increase Compared to January 2008

Loan Cures

Serious Delinquencies

Foreclosure Starts vs. Serious Delinquencies

While there are some welcome trends in direction, actual foreclosures are lagging. The pent-up need to foreclose is huge.

Moreover, mortgage rates have rising nearly a full percentage point in the last 45 days. This will put a damper on already depressed home sales, making it harder to unload inventory.

Look for months of inventory to soar in the upcoming months with continued declines in home prices. Contrary to what most think, falling prices are a good thing. Home prices need to fall to a point low enough where genuine demand kicks in.

Foreclosure moratoriums are counterproductive and exacerbate existing problems.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

11:51 AM

China, ECB Gov't Bond Auctions Fail; Chinese Interbank Lending Rate Hits 5.67% vs. 3.68% Gov't Bills; ECB Monetizes Bond Purchases; Gold, Silver Soar

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Gold and silver are up sharply with bank auction failures in China and Europe today. Interbank lending rates in China doubled in a week and hit a three-year high of 5.67% vs. the failed auction on 91-day securities yielding 3.68%. This was the Second China Failure This Month To Complete Bill Sale.

China’s government failed to draw enough demand at a bill sale for the second time in a month as seasonal demand for funds and higher reserve-requirement ratios left banks with less cash.

The finance ministry sold 16.76 billion yuan ($2.53 billion) of 91-day securities, falling short of the planned 20 billion yuan target, according to a statement on the website of Chinabond, the nation’s biggest debt-clearing house. The average winning yield was 3.68 percent, higher than the 3.22 percent rate for similar-maturity debt in the secondary market yesterday.

“Banks are badly short of cash,” said Qu Qing, a bond analyst at Shenyin Wanguo Securities Co. in Shanghai. “Given the cash squeeze, the central bank probably won’t announce any tightening measure by the end of this year.”

The seven-day repurchase rate, which measures lending costs between banks, has more than doubled in the past two weeks and yesterday reached a three-year high of 5.67 percent, according to daily fixings published at 11 a.m. by the National Interbank Funding Center.

“The market is desperate for cash,” said Chen Liang, a bond analyst at Guohai Securities Co. in Shenzhen. “It’s too costly to park money with debt at such a price given the seven- day repo rate has risen above 5 percent.”

“Some banks may be buying the local currency in the foreign-exchange market because it’s hard to borrow money in the fixed income,” said Li Tao, a foreign exchange trader at Shenzhen Development Bank Co. in Shenzhen. “There is also concern the appreciation may get quicker before President Hu’s visit.”
The auction was for 20 billion Yuan which is a mere 3.2 billion US dollars and it could not find bidders for that paltry amount. Is this a "year-end" thing or the start of a cash crunch? Regardless, watch what happens when China's property bubble takes a big nosedive.

ECB Monetizes Bond Purchases

Meanwhile in Europe, the ECB fails to fully offset government bond buys, thereby monetizing 13.5 billion euros in government bond purchases.
The European Central Bank failed to attract the 73.5 billion euros from banks on Tuesday needed to offset its seven-month run of euro zone government bond purchases, instead managing to draw just over 60 billion.

"It has happened before but I wouldn't make too much of a big deal out of it," said ING economist Martin Van Vliet.

"The end of year is typically a quiet period and banks books are closed so it shouldn't be seen as a sign that tensions are returning to interbank markets."
Once again we ponder the question "Is this a year-end phenomenon or the start of something more significant?" Right now I suggest China is the real deal. I do not know about the ECB failure but it sure does not look pretty, regardless of the reason.

$SSEC - Shanghai Index Drops 1.74%

click on chart for sharper image

The Shanghai Stock Index is where it was in June 2009. The rally that fueled US equities (Bernanke's printing press), did not do the same for the $SSEC in spite of rampant price inflation and a massive expansion of credit and money supply in China.


The entire metals futures market is up today, with gold up nearly $22 to $1405 and silver up nearly a buck to $30.20. Copper futures hit a new all-time high of $4.30 a pound. In contrast, oil is nearly flat, up 38 cents to $91.38.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

Monday, December 27, 2010 11:01 PM

Indiana Bill Would Allow Cities to Declare Bankruptcy; Gary, Lake Station, Georgetown Likely Candidates; Hands Tied in Rhode Island

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A bill in the Indiana legislature would allow local governments to declare bankruptcy. Given Governor Mitch Daniels is backing this plan, I expect it to pass. Best of all, the bill gives an emergency manager the ability to renegotiate labor contracts, and approve or veto contracts, expenses, loans and hiring.

Please consider Bill would allow Indiana cities to declare bankruptcy

A plan backed by Gov. Mitch Daniels would allow local governments in Indiana to ask for a state takeover and declare bankruptcy if necessary. Daniels says he hopes there won't be many local governments that seek bankruptcy, but says the state needs to have the law clarified and on standby in case it happens.

Republican state Sen. Ed Charbonneau of Valparaiso is sponsoring a bill to outline the procedure. His bill would allow a local government in financial trouble to ask the Indiana Distressed Unit Appeals Board to appoint an “emergency manager” to run the government.

The emergency manager would have the power to cut the budget, renegotiate labor contracts, and approve or veto contracts, expenses, loans and hiring.

The bill states that if the emergency manager can't turn around the local government's finances, the unit would be allowed to seek federal bankruptcy protection.

The State Board of Accounts in recent audits has questioned the abilities of the city governments in Gary and Lake Station to “continue as a going concern” because of continued high city spending despite significantly reduced city revenues because of statewide property tax caps.
I salute this bill and look forward to the bankruptcy of a handful of Indiana cities. Gary has a population of around 100,000 and is Indiana's fifth largest city. Lake Station has a population of about 14,000.

Details of the Bankruptcy Bill

Inquiring minds are reading Law would let cities declare bankruptcy for details about the bill.
State Sen. Ed Charbonneau, R-Valparaiso, is sponsoring Senate Bill 105, which would repurpose the Indiana Distressed Unit Appeals Board from providing property tax cap relief to supervising direct management of a local government.

Gary twice has won DUAB permission to charge the highest property tax rates in the state to bring its city budget into balance.

Under Charbonneau's bill to restructure DUAB, the council and executive of a local government could jointly seek to be designated a "distressed unit" if it meets one of eight financial criteria. Or, a coalition of a government's creditors owed more than 30 percent of the unit's anticipated annual revenue could ask DUAB to declare a local government distressed.

If DUAB agreed the local government were distressed, DUAB would appoint an "emergency manager" with the powers of both the council and executive, who could slash the budget; renegotiate labor contracts; review salaries; approve or veto contracts, expenses, loans and hiring; and audit the books -- all independently of the government's elected officials.

The emergency manager would not be allowed to raise taxes and would be required to work with elected officials to develop a financial plan for the future, according to the legislation.
Hallelujah! Raising taxes to meet untenable union wages and pension benefits has to stop.

Criteria for "distressed" designation (one of eight needed):

  • 1) Default in payment of principal or interest on bonds or notes
  • 2) More than 30 days late on payroll or two consecutive payrolls missed
  • 3) Failed to pay judgment creditors more than 30 days after judgment
  • 4) More than 30 days late any of the following: sending taxes withheld from employees, sending employer or employee contributions to Social Security or Medicare, depositing minimum obligation payment to a pension fund
  • 5) Accumulated a deficit in total government funds of more than 5 percent of current year revenues
  • 6) Seeks renegotiation of payments owed that are more than 30 percent of annual revenues and more than 90 days overdue
  • 7) The state is intercepting local government funds to make required payments
  • 8) Uses interfund loans to support the same fund for two years in a row

Tax Free Does Not Mean Worry Free

The Financial Sense article Muni Bonds: Tax Free Doesn't Mean Worry Free has a list of 26 states (up from 21 in 2007) that currently do not allow bankruptcy.

AlaskaNew Hampshire
DelawareNew Mexico
GeorgiaNorth Dakota
IllinoisRhode Island
IndianaSouth Dakota
MassachusettsWest Virginia

The most recent addition to the above list is Rhode Island which just passed a law outlawing bankruptcy after the City of Central Falls disclosed it would seek bankruptcy.

Do the governors that signed such legislation really think problem will go away if the one possible solution is removed? Sheeesh?

Look for Indiana and Michigan to come off the list. In addition, Wisconsin governor-elect has proposed decertification of public unions, so I believe he would be agreeable to local bankruptcies if such a bill was presented to him.

Please see Hardball in Wisconsin; Massive Defeat for Unions in Lame-Duck Session for more about Wisconsin, governor-elect Scott Walker's showdown with state union employees.

Central Falls Prohibited From Bankruptcy

The only thing that makes any sense for Central Fall is bankruptcy, but that option is currently missing. Please consider Receiver to city: Financial ruin near
CENTRAL FALLS — The city’s financial problems are so profound that the only way to solve them is through a merger with Pawtucket or a regionalization of city services, the state-appointed receiver said in a report Thursday to the Carcieri administration.

“Central Falls, in my judgment, cannot remain a stand-alone community as it presently is, unless the state wants to subsidize this into the future,” said retired Superior Court judge Mark A. Pfeiffer, the man appointed by the state Department of Administration in July to run the city, with elected government officials in advisory roles, after those officials had earlier declared the city insolvent.

The underlying, built-in problems in the city’s finances — with sizable operating budget deficits projected well into the future — require significantly changing how municipal employee contracts and retirement benefits are handled under state law, he said.

Senate President M. Teresa Paiva Weed said underfunded municipal pensions have been the subject of a special Senate study commission, and Central Falls — with a $48-million unfunded pension liability, according to Pfeiffer — would put even more focus on that work.

“This will be a priority for the Senate in the upcoming legislative session,” she said. “TheSenate agrees that there is a need for swift but prudent action by the state.”

The state is already heavily involved in the city. It took over financing the local school system in the last big state fiscal intervention in 1991 and has spent $604 million on the city’s schools since then. Despite that effort, improvement has been difficult: this year, the city’s high school was rated one of the six worst-performing ones in the state.

In the short term, Pfeiffer said the city will need about $2.1 million in some form of state support authorized by the General Assembly, a grant or some kind of bond guarantee, to close a deficit in the current budget. Beyond that, he said more substantial changes were needed.

The major problem is the city, with an annual operating budget of about $16 million, is facing about $32 million in promised after-retirement health-insurance costs in addition to the $48 million in pension obligations.

“That’s $80 million for a city that has 19,000 citizens, approximately,” he said. “That’s a huge problem.”
No city would merge with Central Falls in a foolish attempt to save it. It would mean their own financial ruin. Furthermore, why should Rhode Island taxpayers in general have to fund Central Fall's pension obligation?

Massive Teacher Absenteeism at Central Falls High School

Check out the morally corrupt Central Falls Teachers union: Central Falls teacher absences still on the rise
Since the school year started Sept. 1, there has not been a single day when all of the 88 teachers at Central Falls High School have shown up for work.

On that first day, two teachers called in sick and a third took a personal day.

And there have been only five days — all in September — when administrators were able to replace all the missing teachers with substitutes.

Last week alone, there were at least 19 teachers out every day, 10 to 13 of whom called in sick each day.

The severity of the problem came to light last week when The Journal reported that more than half of the high school’s 840 students didn’t receive a grade in one or more classes for the first quarter.

The school’s leaders, Deputy Supt. Victor Capellan and co-principals Evelyn Cosme-Jones and Sonn Sam, said 453 students did not receive solid instruction in several classes, and therefore no grade could be given.

Since Nov. 12, there have been at least 20 teachers missing or absent at the high school each Friday. Starting Oct. 21, there were 14 to 19 teachers absent daily for seven straight days. And 453 of the 840 students at Central Falls High School didn’t receive enough instruction this fall to earn a grade in at least one class.
Like Detroit, Central Falls is fiscally, morally, and educationally bankrupt. The one and only thing that makes any sense for Central Falls is to declare bankruptcy.

Please see Detroit Mayor Plans to Halt Garbage Pickup, Police Patrols in 20% of City; Expect Bankruptcy, Massive Municipal Bond Turmoil in 2011 for the problems Detroit faces.

I expect Governor Snyder to do the right thing and allow Detroit to file. If it takes legislation, he will get it if he asks. The pending legislation in Indiana appears to be a good model for both Michigan and Rhode Island.

Let's hope Rhode Island governor-elect Lincoln D. Chaffee, an independent, has his head screwed on straight and asks the legislature to allow municipal bankruptcies. It is the only hope for Central Falls.

Mike "Mish" Shedlock
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