The Market Ticker - Macro Economics

Reality .vs. Spin - Confidence And Trade

nospam@example.com (Karl Denninger) — Fri, 13 Nov 2009 09:56:00 -0500

The spinmeisters were out this morning on the trade data:

The gap grew a larger-than-anticipated 18 percent to $36.5 billion, the highest level since January, from a revised $30.8 billion in August, the Commerce Department said today in Washington. Imports surged by the most in 16 years, swamping a gain in exports.

This is being cited as "evidence" that the consumer has turned the corner - that consumption is increasing, and the economy recovering.

“Sometimes what looks bad on the surface is actually quite good and I think that’s the case this time around,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “Exports are growing strongly and imports are turning up because domestic spending has turned the corner.”

Ok, if that's true, where are the clear and obvious increases in sales tax receipts?

That data is near-real-time, it is not gamed, and it automatically (mostly) excludes food, since food sales are not taxed in most jurisdictions.

It thus correlates very well with discretionary consumer spending on goods - you know, the things that are imported?

Sal Guatieri hasn't bothered to look at those numbers, because they don't support his thesis. Yet sales tax receipts aren't just "support" for a thesis, they are in fact the final word on it, as they're not subject to government game-playing or "adjustments."

Consumer confidence came in at 66 even, much lower than expected. Big surprise? How? Were you freaking blind with the 10.2% unemployment number, and expected that consumers wouldn't be impacted by that?

Told 'ya so.

Employment Report: OUCH

nospam@example.com (Karl Denninger) — Fri, 06 Nov 2009 09:00:00 -0500

Yow.

The BLS employment report is out and it's not good.

Here's the BLS' top-line graph set:

But the internals were markedly nasty. Top-line, U-3, is now reported at 10.2%. But U-6 is 17.5%, rising dramatically from 17.0% previously (both "seasonally adjusted.")

What I really don't like however is the household survey information.

Here, once again, is my personal set of data that I use for employment situations, and again, there is no positive trend change in either. Let's start with the y/o/y trends in the "employed":

Remember, the annualized change turning positive has marked the end of recessions in the past, and turning negative has given a roughly 12 month "lead" on the initiation of a recession. It has not turned positive.

The "not in labor force" graph is even worse:

This graph continues to accelerate in a near-parabolic rise since June. In the history of the data available for this series, unfortunately only back to 1999, this has never before happened.

Our government, by choosing to protect the oligarchs and banksters instead of allowing the market to force the bad debt out into the open where it defaults has chosen to saddle our nation's citizens with unconscionable and unsustainable debt loads, both at a government and personal level. This was a critical error and, as I expected and predicted, it is now being reflected directly into the employment situation.

There is no reason for cheering in this report; you can argue over "productivity gains" all you want but without jobs the civilian population cannot buy "stuff", whether that be goods or services, and a durable economic recovery is impossible.

Buckle up folks; this ride could get a bit rough, especially with the holidays right around the corner upon which virtually all retailers depend for their continued viability.

Watch The Distortions (UIC Data)

nospam@example.com (Karl Denninger) — Thu, 05 Nov 2009 09:13:00 -0500

The unemployment claim release looked good. Here's the headline:

In the week ending Oct. 31, the advance figure for seasonally adjusted initial claims was 512,000, a decrease of 20,000 from the previous week's revised figure of 532,000.

Sounds good, right? So does this:

The advance number for seasonally adjusted insured unemployment during the week ending Oct. 24 was 5,749,000, a decrease of 68,000 from the preceding week's revised level of 5,817,000.

Now let's talk truth:

The advance number of actual initial claims under state programs, unadjusted, totaled 480,178 in the week ending Oct. 31, a decrease of 14,216 from the previous week. There were 466,341 initial claims in the comparable week in 2008.

The rate of firing is higher than it was this week last year - a really, really bad time, if you remember. This was immediately post-Lehman and AIG, when firms were shedding employees like water off a duck's back.

So why the disconnect?

States reported 3,459,148 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending Oct. 17, an increase of 90,239 from the prior week.

68,000 people came off the rolls and found jobs, right?

Wrong.

90,239 fell off the government's "official statistics" and rolled into "extended programs." That means that net-on-net the picture got worse by 22,239.

It gets even better than this, however, as we are now far enough into the mess that people are rolling off even the extended benefit programs in many states! There is no current tabulation of that count, but any number greater than zero simply adds to the malaise.

The bottom line:

Unemployment continues to get worse, not better. The "official" numbers used for the headline don't count you once you "roll off" the original unemployment program - "extended benefits" and those who have rolled off even the extended programs are not counted as "continuing claims."
More people were fired the last week of October this year than were fired the last week of October last year, and last year was directly in the blast zone from Lehman and AIG.

You want to cheer these numbers?

The market might, but Main Street, where most of us live (myself included) has a somewhat different view.

Productivity And Costs: More Caution

nospam@example.com (Karl Denninger) — Thu, 05 Nov 2009 08:44:00 -0500

This is pretty amazing, really:

Nonfarm business sector labor productivity increased at a 9.5 percent annual rate during the third quarter of 2009, the U.S. Bureau of Labor Statistics reported today.

That's a stunning number. But you better pay attention to what this means:

Output increased 4.0 percent and hours worked decreased 5.0 percent in the third quarter of 2009.

Got it? Here's the bottom line:

From the third quarter of 2008 to the third quarter of 2009, nonfarm business output fell 3.5 percent and hours worked fell faster, 7.5 percent, resulting in a productivity increase of 4.3 percent (tables A and 2). The four-quarter decline in hours was the largest in the series, which begins in 1948.

Here was the mantra from employers:

Work harder, get paid for fewer hours, OR GET FIRED!

This sounds great if you're an employer, but as an employee, or wanna-be employee (that is, you're unemployed)?

Then it's horrible, as the better the productivity of existing workers, the less likely it is that you, dear reader, will be able to find a job, as the wall of output has yet to meet the wall of exerted labor.

This also means that per-unit of output, labor is reaping less in wage, which in turn means that per unit of output there is less in disposable income available to purchase it.

Yeah, the futures liked that report, "amped" by the CNBC liars parade - it's "great" that companies are squeezing the employee and getting better profits out of smaller labor inputs, right?

Exactly who is it that buys the output of those firms, and with what do they purchase it? On a forward basis what will this mean for consumption - and eventually, both production and sales?

Why Bernanke And Geithner's Gambit Fails

nospam@example.com (Karl Denninger) — Tue, 03 Nov 2009 09:55:00 -0500

Since I wasn't invited to Treasury's confab of bloggers yesterday (there's no surprise there, given how critical I've been of them and how Obama's administration is no less of an echo chamber than was Bush's!) I thought I'd loose this on the blogosphere - a post I've been sandbagging for about a week now.

There has been much discussion over whether the generally-Keynesian approach, along with Bernanke's "Depression Thesis", have in fact staved off Armageddon in the financial world, or simply played "extend and pretend" on the fuse, clearing and solving nothing.

It is my position that we have in fact not only solved nothing we have made the situation materially worse than it would have been if we had left things alone.

Two days ago Ambrose Evans-Pritchard opined that Japan is staring down a dramatic implosion in their economy and government:

Japan is drifting helplessly towards a dramatic fiscal crisis. For 20 years the world's second-largest economy has been able to borrow cheaply from a captive bond market, feeding its addiction to Keynesian deficit spending – and allowing it to push public debt beyond the point of no return

Right. But then he goes on to close with:

Japan's terrible errors are by now well known. It failed to jettison its mercantilist export model in time. It resisted the feminist revolution, leading to a baby strike by young women. It acquiesced in a mad investment bubble (like China now) in the 1980s, stealing growth from the future.

It wasted its immense fiscal firepower, scattering money for 20 years on half-baked spending projects to keep the economy afloat. QE was too little, too late, and this is the lesson for the West. We must cut borrowing drastically over the next decade, and offset this with ultra-easy monetary policy. Does Downing Street understand this? Does the White House? Does the European Central Bank? Clearly not.

What?

No, Japan's error was not "being less than properly forceful in their printing of money" (which is what "Quantitative Easing" really is.)

Japan's error was in papering over bad debt with more debt, transferring defaults that had already taken place but were being hidden to the public treasury and, as a consequence, to the taxpayer.

This in turn put in place a structural drag on GDP that cannot be jettisoned, as that debt did not go to build a road or bridge over which commerce flows, but instead went to bail out oligarchs who successfully persuaded lawmakers to kneel before them and perform obscene acts.

Bernanke's and Treasury's gambit has and will continue to fail because they refuse to honestly discuss and operate upon the actual failure that occurred in the marketplace.

That failure was lending money to people on obscenely-easy terms with no reasonable expectation that they would be able to pay as agreed, creating a churning business out of a legitimate lending business.

If I loan you money at a ridiculously low original interest rate with a built-in "jack it up" escalator in the deal I strongly encourage you to come back from another bite. This is extremely profitable, as these fees are not "interest" and yet they amount to a huge mark-up on the market.

Let's posit a $200,000 mortgage. If I make one 30 year mortgage and you pay it off over 30 years, I make one set of fees. Application, processing and similar fees might total $2,000 - $3,000 for the bank, with another $1,000 paid in title insurance and of course the other fees that are larded into the pie (e.g. doc stamps for the county, etc.)

The point here is that the bank makes perhaps as much as 2% of the gross face amount of the loan right here and now on the mortgage.

Let's assume that the bank borrows money at 5% and lends it at 7%. They thus have a NIM, or "net interest margin", of 2% on the transaction. "Turned" via fractional reserves they might be able to crank out a 20-25% gross pretax operating margin on lending operations. Not a bad profit margin for what is essentially a utility function.

Now let's presume that the bank is able to somehow force you to come back into their office every couple of years and refinance that mortgage. Suddenly they can take what is a 2% NIM and add on another 1% (annually, since it's every two years) in fees and costs. Oh, now we're getting somewhere, right? That's an instantaneous 50% improvement in their gross money, and cranks up that 20% pretax margin to 30%!

This is not a small increase, and is in fact why the banks pulled this nonsense.

Variations on this theme played out in the credit card space. You would get a "0% balance transfer for 12 months" deal in the mail. All fine and well. But the amount you charged today on that card was paid last, and it carried a 15% interest rate. So if you transferred $10,000 to that card then charged a $1,000 computer you'd pay 15% interest on that $1,000 for a couple of years - or forever - since the entire $10,000 transfer had to be retired before any of your current charges would begin to be paid down. The CARD law passed this spring ended this charade, forcing payments to go to the highest interest rate charge first (when it goes into effect.)

Now some consumers took good advantage of this balance transfer game, putting the card (wisely) in the drawer and never activating it. They thus got what amounted to a 2 or 3 year "free loan" (0% interest) on that $10,000 balance! Nice, right? Well, maybe. But if you were late just one time with a payment, suddenly that entire balance got hit with a 29% default rate.

The banks, on a statistical basis, never lose this game. Yes, some people could (and did) game it successfully, but far more of the population lost. Those who could game it did so only because of asset price appreciation - they HELOC'd the house when they missed a payment and covered the card!

The fundamental problem here is that sound lending went out the window - the entire economy became based on one and only one thing - complex bets placed in the capital markets on asset price appreciation.

That's all it was.

But those bets are never sustainable, because asset prices go down as well as up! Indeed, they have to, because asset prices over time cannot grow faster than incomes, net-on-net over long periods of time. And real disposable personal income has basically not grown at all since 2000 for anyone not in the top 5% of earners - everyone else actually lost ground during the last decade.

This of course only supports lower prices for assets, not higher ones. The imbalance became more and more ridiculous with each passing year as we went into the middle of the decade, supported not by wages but by ever-more complex (and obfuscated) securities where the creator had gamed the system to be a "never lose" for him, and "always lose" for whoever was on the other side. These "features" were of course not disclosed (would YOU buy a "must lose" security?) but provided a convenient means of continuing the game - for a little while.

When the game collapsed TARP was allegedly going to provide for "restarting and supporting lending." This was a lie and I believe Paulson knew it - he's not stupid, and neither is Bernanke. In point of fact the consumer had taken on more debt that they could service (witness the collapsing lending numbers), but it was the only way to "sell" the program to Congress.

Capital will always go where the holder believes they can make the best return given the environment they have. The big trading and investment houses have inside information that they use daily in making their bets, with most of it being shady but legal, coming from their conveyor-belt style access to Washington. As they demand fealty (and an obscene act of 8 letters beginning with the letter "f") from their bought-and-paid-for Congressfolk, they of course get to both dictate actions and are fed "inside baseball", allowing them to place bets in the capital markets with a far better chance of success than you, the ordinary American. Even better, in the instant case they were gambling not with their money but yours!

The outcome was both predictable and obvious - the banksters bet on "asset reflation" in the equity markets and got it - to the tune of a P/E in the S&P 500 of 140 (as of the end of September.) This "ramp job" is, in fact, nearly identical to what happened in the Nikkei following their collapse, and it occurred for the same reason!

But neither Bernanke or Geithner can fix an over-levered consumer. Doing that would require either massive debt defaults (bankrupting both lenders and borrowers) or the erection of trade barriers worse than anything ever seen in the history of America, forcing manufacturing (and thus high-wage jobs) home. That in turn would fuel price inflation as wages and prices both rose.

There is no way out of the box that Geithner and Bernanke face. Bernanke concluded in this famous speech on deflation that:

We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Notice that Bernanke confuses higher prices (the result of a devalued currency) with higher spending.

Under a paper-money system a determined government can always generate higher prices by deprecating the currency but generating higher spending net of that currency devaluation requires that the aggregate purchasing power increase or that sufficient slack between income and mandatory spending (e.g. that on food, fuel, etc) exists to increase expenditures.

A determined government can only do that by either driving productivity higher or incenting companies to locate their high-paying jobs here rather than abroad - that is, inhibiting global wage arbitrage. Absent that all higher prices do is impoverish a greater portion of the population and that in turn destroys debt carrying capacity among the very same people.

Since all modern monetary systems are debt-based the consequence of such a program is in fact the exact opposite of that which Bernanke (and Treasury) expected.

Leave it to the ivory tower folk to forget that in the real world (the one where you have to go to both the grocery store and gas station and buy your own stuff as opposed to having it all handed to you on a silver platter) consumption is driven by the spread between wages and mandatory spending (that on food, fuel, medical care, etc.)

Ramping prices through currency deprecation in an environment where global wage arbitrage has capped the feedback mechanism into earnings capacity destroys credit capacity instead of adding to it.

Oops.

PMI: Heh, An Actual Good Number!

nospam@example.com (Karl Denninger) — Mon, 02 Nov 2009 10:58:00 -0500

This isn't a bad report! (Headline 55.7%)

On balance, quite strong. Warning signs in new orders (slowing in advance, although still growing) and prices (increasing.)

No change in backlogs; production up, employment went positive, and this is significant.

Inventories are still contracting, but at a slower pace, and customer inventories are below critical levels.

This last point is a potential trouble spot and could lead to some really ugly price dislocations if the economy actually improves.

That is, there are a lot of people who appear to believe this is a "false dawn" (I'm one of them) but if they're wrong the consequence could be a truly ugly price spike at the final side and/or outright shortages. That would be very bad for the consumer, although it might produce some impressive profit numbers - for a while - on the business side.

On balance this is the first ISM report I like. We'll see what it looks like next month, but my "first blush" reaction to this is quite positive.

Another Bad Economic Report (PCI/Spend)

nospam@example.com (Karl Denninger) — Fri, 30 Oct 2009 09:05:00 -0400

How do you get "economic recovery" out of these numbers?

Personal income decreased $0.1 billion, or less than 0.1 percent, and disposable personal income (DPI) decreased $0.2 billion, or less than 0.1 percent, in September, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $47.2 billion, or 0.5 percent.

That looks like flat income and down spending to me.

Oh wait - we have to read past the first two sentences, right?

Let's do that.

Private wage and salary disbursements decreased $11.2 billion in September, in contrast to an increase of $10.1 billion in August. Goods-producing industries' payrolls decreased $7.8 billion, compared with a decrease of $6.3 billion; manufacturing payrolls decreased $1.5 billion, compared with a decrease of $4.1 billion. Services-producing industries' payrolls decreased $3.4 billion, in contrast to an increase of $16.4 billion.

Wait a minute. I thought that income was flat? We have a decrease, a decrease, a decrease and a decrease. How do we get to flat with those?

Supplements to wages and salaries increased $0.1 billion in September, compared with an increase of $2.0 billion in August.

Proprietors' income increased $0.7 billion in September, compared with an increase of $3.4 billion in August. Farm proprietors' income decreased $1.6 billion, compared with a decrease of $1.2 billion. Nonfarm proprietors' income increased $2.3 billion, compared with an increase of $4.6 billion.

Rental income of persons increased $5.4 billion in September, compared with an increase of $5.2 billion in August. Personal income receipts on assets (personal interest income plus personal dividend income) decreased $13.8 billion, the same decrease as in August. Personal current transfer receipts increased $17.3 billion in September, compared with an increase of $9.6 billion in August.

Ah.

Small business income was down compared to August, rental incomes were basically flat (compared to prior month), but income receipts on assets (dividends + interest on assets) decreased. Those are bad comps too.

The big Kahuna was government handouts, which was up big m/o/m. There's the entry that kept PCI and DPI from collapsing.

Real PCE -- PCE adjusted to remove price changes -- decreased 0.6 percent in September, in contrast to an increase of 1.0 percent in August.

Consumers are not spending.

All in all, another bad report. Not a disaster, but certainly not the stuff of which "economic recovery" is made.

The evidence continues to pile up......

GDP Is..... Better Than Expected?

nospam@example.com (Karl Denninger) — Thu, 29 Oct 2009 08:59:00 -0400

Oh what a tangled web we weave....

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.5 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent.

Looks good, right?

Hmmmm.... or is it?

Motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change.

....

Real federal government consumption expenditures and gross investment increased 7.9 percent in the third quarter, compared with an increase of 11.4 percent in the second.

Ok, from this we can compute a few things.

3.5 - 1.66 - (7.9 * 30%) = -0.53%

Now let's adjust for inventories:

The change in real private inventories added 0.94 percentage point to the third-quarter change in real GDP after subtracting 1.42 percentage points from the second-quarter change.

-0.53% - 0.94% = -1.47%.

Ok, that's bad but not catastrophic and is an actual improvement compared to the second quarter. But....

Current-dollar personal income decreased $15.5 billion (0.5 percent) in the third quarter, in contrast to an increase of $19.1 billion (0.6 percent) in the second.

Personal current taxes increased $4.8 billion in the third quarter, in contrast to a decrease of $119.1 billion in the second.

Eeeeehhh... those are both going the wrong way. Taxes up, income down. And...

Disposable personal income decreased $20.4 billion (0.7 percent) in the third quarter, in contrast to an increase of $138.2 billion (5.2 percent) in the second. Real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent.

That's worse. A lot worse. Disposable personal income decreased in nominal terms q/o/q by 5.9% while in real terms (inflation adjusted) it decreased q/o/q by 7.2%! That is an enormous swing in purchasing power and not in the right direction!

Personal outlays increased $148.2 billion (5.8 percent) in the third quarter, compared with an increase of $8.2 billion (0.3 percent) in the second. Personal saving -- disposable personal income less personal outlays -- was $364.6 billion in the third quarter, compared with $533.1 billion in the second.

The personal saving rate -- saving as a percentage of disposable personal income -- was 3.3 percent in the third quarter, compared with 4.9 percent in the second.

So into decreasing personal income and disposable personal income people tried to spend anyway. Best guess: most of this was "cash for clunkers", which is the worst sort of "spending" - it is the taking on of more debt by replacing a paid-off car with one that now comes with a shiny (and nasty) payment book. The Trade: Go long auto repo outfits (aside: as far as I know there are no publicly-traded repo companies.)

Nothing in here I like; to the contrary, this report sucks and on a drill-down appears to be full of outright lies.

Looking inside the data, the "big change" in private domestic investment is all residential fixed - up 23.4%. I don't believe it. I've been scouring the homebuilder earnings releases and data, and I don't see the numbers that support this. An improvement over the ditch-diving of the last many quarters, yes - but a 23.4% increase, a swing of fifty percent from Q2-Q3? Oh hell no. Where is it? It's not in Home Depot's or Lowe's quarterly results, it's not in the homebuilders, and I can't find it in the suppliers (lumber companies, etc) either. This sort of move would result in monstrous top-line revenue increases reported by firms in this sector and that simply has not happened.

Nor do the export and import numbers look right. Port of Long Beach and LA anyone? Those numbers also don't add up - swings of 20-25% in one quarter? Not reflected in container volumes and freight loadings. Yet it has to be - how do you get something in or out of here without it going through a port?

Government looks right, both federal and state/local. The "Obama will cut defense and war spending" folks have to be bashing themselves with a hammer - there's no evidence for that in the data, now three quarters into his administration. If you're anti-war and "bring the troops home", you may want to re-think whether voting for Barry was a wise decision - he sure as hell hasn't kept that promise. (Note that I didn't think he would either but that lie sure played well in San Francisco, didn't it?)

Forward the big problem is the deterioration in personal income. You can't spend what you don't have without credit creation, and that's fallen off a cliff. The Fed's credit reports continue to come in with huge contractions - this should not surprise, as demanding that banks lend to people who are seeing their income shrink is into the realm of pure idiocy.

The market likes the numbers although a lot of the move - perhaps all of it - is Bucky getting thrown under the bus once again.

You can't expect the cheerleaders on CNBC to read beyond the headline numbers, and they (once again) did not disappoint in this regard. The first 20 minutes of "analysis" brought not one mention of the decease in personal income or disposable personal income, yet on a forward basis this is in fact the most important piece of information in the report.

You cannot have an economic recovery when on a q/o/q basis real disposable income is contracting at a 7.4% annual rate and worse, the spread between nominal and real income is widening, indicating that mandatory purchases such a food, energy and health care - are increasing.

Recovery? How, Given THIS?

nospam@example.com (Karl Denninger) — Thu, 22 Oct 2009 17:57:00 -0400

This is the sort of thing that, in my opinion, makes meaningful economic recovery impossible. (Click for a larger copy)

Here's what it says:

To continue to provide our customers with access to credit, we have had to adjust our pricing.

....

These changes include an increase in the variable APR for purchases to 29.99% and will take effect November 30, 2009.

(It then goes on to say that if you pay on time you can get 10% of your interest charges back, which lowers the effective rate by about 3%.)

I have multiple copies of this letter, all on the same theme - 30% interest rates, vastly higher than they were.

The obvious message in this letter is simple: Those who are responsible and can pay their bills will be subsidizing those who cannot - that is, you, the responsible cardholder, will pay the deadbeat's bill!

Citibank has 92 million cards in circulation and is #4 in market share in terms of purchase volume, with 11.05% of the total.

Overall, consumers hold an average of 5.4 revolving (credit) cards. Half of all undergraduates in college have 4 or more cards.

Average card debt per household, including households that have no cards at all, is $8,329. For households with one or more cards, it is $10,679, both figures at the end of 2008.

Of the 73% of families with credit cards, 60.3% carried a balance. This means that for those with balances, the average balance is nearly $18,000.

If the previous interest rate on those cards was around 20% and is now 29%, the average family with a balance (about 44% of all households) was paying $3,600 in interest charges previously, but now will be paying $5,220, and increase of $1,620 a year or $135.00 a month.

There are approximately 116 million households in the US. As a consequence the decrease in disposable personal income attributable to this sort of interest rate change is approximately $113 billion, or a bit under 1% of GDP.

And that's only the direct cost of the interest. What cannot be measured is the impact on consumer spending that comes from changes in consumer behavior - that is, this is only the interest component of the change in rate.

If this interest rate change prompts people to pay down just 25% of their credit card debt over two year's time the impact on GDP simply from paying down the debt as opposed to holding it level will raise the impact to approximately 1.9% of GDP, or about $270 billion annually in foregone consumer spending.

Good luck with your "recovery" thesis folks.

PPI: Freezing ("Below Zero" Deflation Alert)

nospam@example.com (Karl Denninger) — Tue, 20 Oct 2009 08:59:00 -0400

But I thought Bennie And The Feds programs were working?

The Producer Price Index for Finished Goods declined 0.6 percent in September, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This decrease followed a 1.7-percent rise in August and a 0.9-percent decline in July. In September, at the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 0.2 percent and the crude goods index fell 2.1 percent. On an unadjusted basis, from September 2008 to September 2009, prices for finished goods fell 4.8 percent, the tenth consecutive month of year-over-year declines. (See table A.)

Eek.

Intermediate prices rose but crude goods prices declined. This shows "profit push" inflation being attempted by producers, but it's not working, as the finished goods numbers show. Ex-food-and-energy the number was also negative, down 0.1%.

Food was down 0.1% after rising at 0.5% last month, but the trend is clearly still negative. Energy, after spiking huge in August (up 8%) and generally being strong on balance all year (coming off the insane price spike in oil LAST year), was down 2.4% last month.

The 12 month change is the key number, and here is the problem, as one can see in the below table (mine):

The expectation, of course, was that we would continue to see a positive slope after the declines down to July. Those hopes were dashed this morning.

Is this significant? Hell yes, and here's why:

In short, despite the collapse in the dollar this year PPI continues to decline. This is a particularly ominous development, as one would expect (given our import-dependence on balance) that we would see significant increases in both core and headline PPI given the relative decline in our currency.

It is not happening, which belies the extreme underlying weakness in our economy at the producer level.

This phenomena, by the way, mirrors what happened in the 1930s. FDR intentionally devalued the currency (one of the "benefits" of being on a gold standard is that you can do that with the stroke of a pen!) but this failed to lift PPI, especially in the area of farm products.

He then sent government agencies into the field with rifles and gasoline cans, burning farmer's fields and shooting their livestock in an outrageously unlawful and Hitleresque attempt to boost producer prices by destroying people's private property and livelihood - all while people were literally starving due to inability to afford to buy food!

We're not (yet) seeing that sort of intervention in our markets, but I don't put it past our government as this economic mess continues to deteriorate.

What is clear is that our government and Federal Reserve's intentional devaluation of the currency is not working to boost prices on the producer level, and despite the claims of "green shoots" the turn back into inflationary conditions has not occurred.

Told You So (Again): Bank Lending

nospam@example.com (Karl Denninger) — Fri, 09 Oct 2009 12:07:00 -0400

Time for one of these....

According to weekly figures provided by the Federal Reserve, total loans at commercial banks have fallen at a 19% annual rate over the past three months, while loans to businesses have dropped at a 28% annualized pace.

Gee, I wonder why? Here's what the Fed's spew has been:

Despite more than a trillion dollars from the Fed and from the Troubled Asset Relief Program, "the banking system has still not fully recovered," New York Fed President Bill Dudley said in a speech this week.

The real problem is that banks continue to hide bad paper, encouraged in their outrageous and indeed I'd argue fraudulent accounting by the government and Fed. By refusing to account for losses (such as blown real estate loans) they not only lock up inventory that should be sold off at the market price to a willing buyer (thereby deploying it productively) they also lock up credit capacity and raise everyone else's cost of credit in an outrageous cross-subsidization of blown loans with performing ones.

The solution today is the same as it was in 2007 and 2008, as I have written about repeatedly:

Force all institutions to recognize their marks. If this results in insolvency, so be it. Close those banks, including the really big ones, and sell off their assets into the market at whatever price they will bring.

The existing and sound regional and local banks, along with the credit unions, will step in to fill this gap. They will profit, the cost of credit for legitimate, sound borrowers will come down, the monopoly of big banks will be broken and while you're at it lock up those who cooked the books for violations of Sarbanes-Oxley.

But no! Both Congress and The Fed are more interested in protecting the guilty than resolving the problem and allowing the economy to recover. They have been bought and paid for, and continue to spout the lie that in playing "extend and pretend" we can somehow manage to paper over all the bad debt without assigning anyone the loss and the economy will recover like nothing ever happened.

Santa Claus only exists in fairy tales folks.

Employment: You're SMOKING Green "Shoots"

nospam@example.com (Karl Denninger) — Fri, 02 Oct 2009 14:39:00 -0400

Grrrr.... after hearing packs of lies all day on "Tout TV" regarding the radically worse-than-expected employment report, and on the back of my own report on the data, I am compelled to post some CHARTS.

Let's start with this one:

Note that all of these are from the BLS "A" tables - that is the actual count of people from a survey, not the cooked, "birth-death-adjusted" nonsense that BLS calls a "headline" number.

This first chart shows the bad news - the blue line is monthly change from the previous month. It is very noisy, as you'd expect.

The solid line is annualized change - that is, the actual count compared to one year prior.

Notice that employment went to a negative 12-month rate of change right at the start of 2008 - coincidentally, right at the start of the official "start" of the recession.

Also note that the last recession, which began at the end of the first quarter of 2001, also had the rate of change on a 12-month basis go negative at roughly the same time.

(Not-so-coincidentally, you also got a 12 month advance warning of the recession when the trend changed in both cases too. Now you know what one of the indicators I used in my 2008 "Outlook" Ticker in which I said we would enter a formal recession was.....)

I want to to pay particular attention to the bottom of the last recession, which was (officially) 11/01.

Notice that the spike bottom in the first derivative, that is, when the rate of change on a 12 month basis turned positive, was almost exactly when NBER called that recession (in retrospect) "over".

Has the first derivative turned in the table at this point on an annualized basis? NO.

First question: What does this say about the calls that "the recession is over"?

You will also note that in terms of the 12 month rate of change this recession is more than three times as severe in its impact on employment as was the 2001 recession. In fact, "by the numbers" we have 8,236,000 fewer people employed now than we had at the peak in July of 2007.

It is, however, worse than it first appears. Here's the second chart, and this is the chart that, if you're sentient, should be sending cold chills up and down your spine:

Again, the monthly change data is in light blue, the annualized in red.

This chart shows that since 1999 (the furthest back I have ready access to the BLS data in easy-to-chart form) the number of persons that are not in the labor force has continually risen on a 12 month trend basis. While it has reached "zero" on two occasions and gotten close once more the number of people in the country but not in the labor force continues to rise.

If we were a "gentifying" population this would be bad. But the boomers are not yet starting to retire in significant numbers; at present we are adding about 150,000 "working age" people to the population each and every month, or about 1.8 million annually.

YET WE ARE LOSING PEOPLE IN THE LABOR FORCE AS THEY EITHER GIVE UP OR DECIDE TO LIVE ON THE DOLE!

This is an unmitigated catastrophe, and it did NOT abate during the so-called "economic expansion" of the 2000s. If that was a true economic expansion - that is, driven by people going to work and earning a productive living - then the "NILF" numbers would have contracted on a 12 month trailing basis during that so-called "expansion."

They did not, which means the so-called "expansion" didn't come through productive labor.

To put this in context unless this number is at -1800 (or less) we are not "absorbing" the new workers that come into the market - that is, while we "lost" 8.2 million jobs in this recession thus far we have also managed to stuff at least twice that many more people of working age who aren't working into this country in that same amount of time, and none of them show up in the official "unemployment" statistics because none of the people in the "Not In Labor Force" bucket are "looking for work."

If that "expansion" did not come through productive labor, where did it come from?

Do I REALLY need to put this graph up again?

What comes next?

September Unemployment: ACTUAL LOSS 995k

nospam@example.com (Karl Denninger) — Fri, 02 Oct 2009 08:50:00 -0400

YOUCH.

Headlines: 263,000 "jobs lost" and unemployment rate up to 9.8%.

That's not good - there goes the "second derivative" argument.

Weekly earnings are also down by $1.54, which is bad news too.

But the Household Data is VASTLY worse than reported. Here are the month-over-month changes, and they're in the realm of frightening. (all numbers in thousands)

Civilian Labor Force: 154,879 to 153,617 this month.

Employed: 140,074 down to 139,079 this month.

That's a loss of 995,000 jobs, not 263,000, and the labor force contracted by 1,262,000 people!

The participation rate was absolutely decimated, down 0.6% this last month alone. The people "not in the labor force" rose by a staggering 1,516,000 in the last month.

The government doesn't count people as "unemployed" who have given up and exited the labor force, but as I have repeatedly noted whether the government counts them or not the corner store owner sure as hell does!

The fact of the matter is that nearly 1 million fewer people were working in September as compared to August; there has been absolutely no improvement in that trend whatsoever.

Tumbleweeds! (Chicago PMI)

nospam@example.com (Karl Denninger) — Wed, 30 Sep 2009 09:48:00 -0400

Gee, I thought the economy was improving?

SEPT CHICAGO PURCHASING MANAGERS INDEX: 46.1 V 52E
**sub-indices:
- Prices Paid: 51.3 v 50.0 last
- New Orders: 46.3 v 52.5 last
- Employment: 38.8 v 38.7 last
- Inventories: 38.9 v 27.5 last
- Supplier Deliveries: 49.3 v 54.6 last
- Production: 47.2 v 52.9 last
- Order Backlogs: 36.7 v 45.8 last

Let's see.... besides the topline miss, we have prices paid up (bad), new orders down (bad), employment up 0.1% (marginally better to flat), inventories up (bad if you're not selling 'em!), supplier deliveries down (bad), production down (bad) and order backlogs collapsing (really bad.)

I know it probably gets old, but I told 'ya you were smoking 'dem "green shoots"!

(Still bullish are 'ya?)

Is It Time To Recognize Reality?

nospam@example.com (Karl Denninger) — Tue, 29 Sep 2009 08:39:00 -0400

Or must we go entirely off the cliff and play Wile-E-Coyote?

Yes, I know, we "came back from the brink." Or did we?

Let's look at a few facts:

The Fed is literally the entire mortgage market. Yes, really. As Chris Martenson points out (correctly) we have issued roughly $685 billion in new mortgages through August, while The Fed has bought $722 billion of mortgage paper and GSE debt (I argue illegally, and have for months) with printed money. That is, they are the market - not a part of the market. But reality is much worse - there is no market when a central bank simply buys with printed money, intentionally overpaying. After all it's not their money, right? (On the contrary, it's yours they're spending - without your consent! Must be nice eh?)

Fannie announced a change in lending policies today, effectively tightening mortgage credit. The "new criteria" will get rid of the 50%+ DTIs they used to allow and demand a 620 FICO. This is still massively below anything that can be considered "prudent"; the average FICO is reported to be 680. But Fannie has found that FICOs under 620 are in fact defaulting at a rate nine times higher than those with a higher score (!) Nine times is 800% - that's bad, right? They didn't release the percentage of loans that they had bought with the lower scores - so we don't know how ugly their book is - but remember, The Fed effectively owns all of their current-year issuance. This could end very badly for them - and us.

We claim that we're "helping homeowners" yet a recently-run study by Amherst (on Bloomberg this morning) shows that missing just one payment on your house places the probability of eventual default at 75%. Miss two and the probability is 95%. Any loan against which there is a "reasonable likelihood" of default must be reserved against according to GAAP (and just plain common sense) according to its probability of loss and recovery value. Yet most banks don't even consider an account "late" until it reaches 120 days behind! This is outrageously optimistic and is well beyond the threshold of intentional fraud if those numbers from Amherst prove up (and I suspect they do; consider that if you miss a payment you must make two at once to catch up!) Banks are willfully hiding probable losses on these loans for the simple reason that were they to reserve against them they would be instantly recognized as bankrupt. The fact of the matter is that they are bankrupt and our so-called 'regulators' are looking the other way rather than recognize massive control and accounting fraud.

The Fed has run monetary policy on a "Ponzi" basis for nearly three decades; in only one year out of 28 has their "monetary policy" resulted in improving rather than degrading credit stability¹. This is a mathematical fact. We have become inebriated with excessive credit consumption throughout society, including the private and government sectors. This in turn has led government regulators to willfully and intentionally ignore the foundational principle of sound banking: one must never lend more unsecured than one has in excess capital and willfully stick their heads in the sand as credit growth has exceeded GDP expansion. In addition the government has "cooked" both GDP and inflation indices ("CPI") as a means of further justifying bankrupt policies by distorting reported economic statistics.

We ask "where did the credit go" repeatedly as consumer leverage has risen but personal consumption has risen at a slower rate. There is in fact no mystery: production was offshored to China, India and Vietnam (among others) and replaced with lower-wage "service" jobs. We have used credit as a means of masking our falling real standard of living by engaging in serial Ponzi Finance - first with the Internet Bubble and now with the Housing Bubble. But the Internet Bubble was small potatoes compared to the Housing Bubble, and we've run out of "bigger bubbles" we can blow to take the Housing Bubble's place. As defaults mount the facts are exposed whether we want them to be or not: our earnings power has been severely damaged as a whole by the intentional off-shoring of high-quality jobs and the importation of lower-quality (and lower-wage) workers into the US and we have tried to make up for the deficiency through borrowing. But borrowed money has to be paid back - and we can't make the payments.

Every nation that has ignored the foundational principles of sound banking and credit for a sufficient period of time has suffered either severe economic depression or monetary collapse. There are no exceptions. The United States and other western nations suffered ugly Depressions in the 1870s and 1930s. Weimar Germany, Zimbabwe, Argentina and others suffered monetary collapses. Going further back Tulip Mania and the Fall of Rome were both caused by monstrous mis-allocation of credit leading to hyperinflation in assets, the monetary supply, or both. The cause of these collapses and depressions is mathematics, not political. It can no more be avoided given improper banking and credit policy than can perpetual motion be achieved.

A "mere" 7% growth rate - what many economists would call "robust" economic expansion - causes the amount of whatever is being grown (or consumed) to double every 10 years. Each doubling in fact consumes (or grows) more than all of the previous time ever in history put together! Jimmy Carter lost his re-election bid in no small part because he had the audacity to make the (true) statement that this was impossible to continue into the indefinite future in regards to energy consumption. It is equally impossible to continue this into the indefinite future when it comes to GDP or, for that matter, credit.

Two functions of growth, where one is greater than the other, will always eventually run away from one another and, where the larger is dependent on the smaller to be able to be sustained, collapse becomes inevitable². This is an extension of the above point. In economic terms if credit expansion exceeds real output expansion (since output is necessary to pay the servicing costs of credit of course) collapse of the system is inevitable, with the only variable being the amount of time that elapses before the collapse occurs.

Ok, so given all of these facts what can we do about it?

We can force improperly-granted credit - that is, credit granted to those who can't pay, to be recognized as bad debt and defaulted. This will result in the bankruptcy of lenders who imprudently made loans, but it also will result in the clearance of that bad debt from the system.

We can force lending going forward to take place such that all unsecured lending must be made only against excess capital on a dollar-for-dollar basis. This provides an immutable counter-cyclical check and balance on lending and leverage. If a bank wishes to grant someone a 100% LTV mortgage, they can - but since real estate fees and closing costs average 8%, they must at closing have 8% of the value of the loan in segregated cash reserves! If the loan is for 92% or less of the current value they need no immediate cash reserves. There remains the risk of asset valuation declines, of course, which could force the immediate sale or capital raising requirement; as such most institutions would choose to build in some sort of "cushion" against that contingency by requiring a larger down payment. Credit card loans would carry a high interest rate (as they do now) and be limited in line size since they would require 100% reserves (being entirely unsecured); auto loans would likewise have a sizable down payment requirement since new automobiles depreciate markedly upon delivery.

We can demand that system liquidity (and thus interest rates) be set no lower than that which holds the "Ponzi Finance Indicator"¹ to a slight positive bias with automatic (per statute) corrections made should the ratio fall negative. This will cause rates to be sufficiently high so that "ponzi finance" (that is, debt taken to finance consumption) is never a large enough percentage of the whole as to imperil the stability of the monetary system. We must also demand and insist upon accurate reporting of GDP and inflation statistics, of course; both of these computations need to have the built-in "adjustments" that currently distort their results removed.

We have but two choices: we can accept the mathematical reality of compound growth rates and our attempt to cheat math through fraud or we can plunge off the cliff of history, as every other government and economy that has willfully ignored these mathematical realities has done.

Credit demand has effectively collapsed in The United States³ as we have reached the limit of debt service given the degradation of earnings power in the American People along with grossly-imprudent credit expansion. Further attempts to "stimulate the economy" via yet more credit creation cannot succeed, as we have reached the limit of the geometric progression of both credit and output in terms of sustainable debt service.

Attempting to hide credit deterioration will only cause the inevitable contraction of both to be more violent and disorderly.

It is mathematically impossible to prevent the outcome that now faces us; we are choosing only between the violence with which it comes and whether we have control over the process, or whether it will inevitably jump any "fire lines" we try to establish and potentially consume not only many private businesses and individuals but the government itself.

It is time to choose wisely; we face not a matter of politics or "pie in the sky" economics as practiced by ivory-tower academics, but rather the cold, hard mathematical realities that are inviolate and impersonal - the mathematical realities that control our destiny.

Charts used in this Ticker

1: The "Ponzi Finance Indicator" - when the indicator is negative then debt is compounding at a greater rate then GDP, and vice-versa. Negative values denote decreasing monetary stability, positive values denote increasing monetary stability.

2: A simple chart showing how badly (and quickly) debt "runs away" from GDP. Assumptions are that both debt and GDP begin with $1,000 outstanding at "year zero" and GDP increases at 5% a year, with the "spread" as indicated for each curve.

3: Credit outstanding in the US, by sector, cumulative. Note that with the exception of Federal Government debt all other sectors are either flat or contracting.