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Daily Digest - Jan 3

Friday, January 2, 2009, 8:15 PM
  • I.O.U.S.A. Four Deficits: Budget, Savings, Trade & Leadership (Warms up @ the 25 minute point)
  • Less than a week to read the $1 trillion bill before voting?
  • Steel industry hopes for big stimulus shot 
  • Homes For the Holidays
  • How David Rosenberg foresaw the crash 
  • NotSince the '30s (Chart S&P)
  • Why We're Still Happy
  • Paradigm lost

Economy

Less than a week to read the $1trillion bill before voting?  

President-elect Barack Obama will meet with House Speaker Nancy Pelosi (D-Calif.) on Monday as Congress prepares to reconvene and debate a massive recovery plan for the nation's struggling economy, according to Democratic sources. 

The face-to-face meeting between two of the nation's top Democrats will be one of the president-elect's first acts after relocating his family to a hotel in Washington over the weekend.

Sources said Obama and Pelosi will discuss the scope and timing of the economic recovery package, which Obama has said will be his first priority upon being sworn into office. Pelosi has said her goal is to have the legislation on the new president's desk and ready to be signed on Jan. 20.

But that schedule appears increasingly likely to slip, as Republicans and conservative Democrats are raising concerns about the impact on the federal deficit of spending hundreds of billions on an array of projects with little vetting by Congress. Lawmakers now expect a spending package of between $675 billion and $775 billion. 

Steel industry hopes for big stimulus shot 

The steel industry, having entered the recession in the best of health, is emerging as a leading indicator of what lies ahead. As steel production goes, and it is now in collapse, so will go the national economy. 

That maxim once applied to the Big Three car companies. Now they are losing ground in good times and bad, and steel has replaced autos as the industry to watch for an early sign that a severe recession is beginning to lift.

The industry itself is turning to government for orders that, until the collapse, came from manufacturers and builders.

Its executives are waiting anxiously for details of President-elect Obama's stimulus plan and adding their voices to pleas for a huge public investment program - up to $1 trillion over two years - that will lift demand for steel to build highways, bridges, power grids, schools, hospitals, water-treatment plants and rapid transit.

"What we are asking," said Daniel R. DiMicco, chairman and CEO of Nucor, a giant steelmaker with a Seattle plant, "is that our government deal with the worst economic slowdown in our lifetime through a recovery program that has in every provision a 'buy America' clause."

Economists in the Obama camp said the proposals to Congress will include significant infrastructure spending that draws on heavy industry. 

Homes For the Holidays 

Unfortunately, yeah, and plenty of ‘em. It's an understatement to suggest residential real estate was either directly or tangentially very important to both economic and financial market outcomes in 2008. It has been the cornerstone of solvency, or lack thereof, in so many quarters of the financial sector. And as such, has had profound influence on the character of the US and really global credit cycle. It's been a while since we've checked in and all of us know that residential RE will continue to be a key macro economic health watch point as we move into the New Year. The current reconciliatory cycle drag that is residential real estate affecting financial sector balance sheets, household balance sheets (and P&L's for that matter), etc. is not about to dissipate in importance to macro economic outcomes in 2009. 

You've seen what has happened recently as the Fed has gone into a good bit of hyper drive in terms of trying to financially engineer at least some type of stabilization in what continues to be a downhill journey for the asset class. They've allocated $600 billion to essentially buy agency debt (Fannie and Freddie paper) in the hopes of getting and keeping US conventional mortgage rates down. And so far that has indeed happened as post the establishment of this new Fed investment endeavor, conventional 30 year fixed mortgage rates dropped a good 100 basis points, plus or minus, in a matter of weeks. We'll spare you the graph, but in recent weeks we've seen new mortgage applications and refi apps spike meaningfully higher.

Mission accomplished by the Fed? We'll see, as we need to remember that a lot of folks with rate-locked in-process loans could only have taken advantage of these new lower mortgage rates by canceling the prior loan and writing a new one, probably with another mortgage vendor, which naturally would count as a "new" mortgage or refi app in recent data. Hence, there may be a bit of anomalistic higher counts in recent weeks due specifically to getting around prior rate lock issue, so we'll need to continue watching the data in the months ahead. Lastly, and you may know this already, China and a few foreign friends have been big sellers of government agency paper since the summer of this year. The $600 billion the Fed has already so generously provided is in part simply offsetting current foreign selling of US agency paper.

How David Rosenberg foresaw the crash

David Rosenberg drew on inspiration from market-rules theorist Robert Farrell and asset-bubble historian Charles Kindleberger to predict the economy's demise this year.

Rosenberg, the chief North American economist at Merrill Lynch & Co. in New York, by January had already called the recession that this month was officially declared to have started in December 2007. He also said the Federal Reserve would lower its main interest rate to 1% by year-end, one-third of the median estimate of economists surveyed by Bloomberg News; by October, policy makers brought the rate to that level.

Rosenberg, 48, refused to trust his computer models, sensing that the end of the credit and housing-market booms would cause a deeper rout than most analysts thought. Now, he predicts the carnage will cause a 2.5% contraction in gross domestic product in 2009, and sees historians calling the current era "GDII," a reference to the Great Depression.

NotSince the '30s (Chart S&P)

Why We're Still Happy

THESE days, bad news about the economy is everywhere.

So why aren't we panicking? Why aren't we spending our days dejected about the markets? How is it that we manage to remain mostly preoccupied with the quotidian tasks and concerns of life? Traffic, dinner, homework, deadlines, sharp words, flirtatious glances.

Because the news these days affects everyone.

Research in psychology and economics suggests that when only your salary is cut, or when only you make a foolish investment, or when only you lose your job, you become considerably less satisfied with your life. But when everyone from autoworkers to Wall Street financiers becomes worse off, your life satisfaction remains pretty much the same.

Indeed, humans are remarkably attuned to relative position and status. As the economists David Hemenway and Sara Solnick demonstrated in a study at Harvard, many people would prefer to receive an annual salary of $50,000 when others are making $25,000 than to earn $100,000 a year when others are making $200,000.

Paradigm lost

THE DEEPENING ECONOMIC downturn has been hard on a lot of people, but it has been hard in a particular way for economists. For most of us, pain and apprehension have been mixed with a sense of grim amazement at the complexity of what has unfolded: the dense, invisible lattice connecting house prices to insurance companies to job losses to car sales, the inscrutability of the financial instruments that helped to spread the poison, the sense that the ratings agencies and regulatory bodies were overmatched by events, the wild gyrations of the stock market in the past few months. It's hard enough to understand what's happening, and it seems absurd to think we could have seen it coming beforehand. The vast majority of us, after all, are not experts.

 

 

 

 

 

 

 

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15 Comments

RussB's picture
RussB
Status: Silver Member (Offline)
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Posts: 101
Re: Daily Digest - Jan 3

Re mortgages and housing prices:

What is most disturbing to me is this: It's clear that the bubble's (false) foundation was the absurdly bloated, inflated prices for real estate, and that the main slick surface upon which everything has been sliding down is housing prices now seeking their "correct" level. It seems clear that they still have a ways to go to get there, and only then will the system be resting on a more secure base.

Yet the only answer anyone in power or punditry seems to have is to arrest the slide and get those prices rising again - that is, start reinflating the same bubble. This is insane. And it's apparently unanimous. 

Re Obama's "Stampede!" cry:

During the Bush years we've become acquainted with the frantic call, "We have to do this NOW! There's no time to lose! No time to deliberate - you'll just have to trust me! STAMPEDE!" This brought us the Patriot Act, it brought us Iraq, it brought us the (partially successful) attempt to suspend all environmental regulations in the aftermath of Katrina, and they tried to use it this past October to install a Treasury dictator. As it was, they were successful enough to ram the $700 billion plunder program through congress even though the people smelled a rat.

We also know that "as-fast-as-possible" was the slogan of every World Bank/IMF pirate raid on developing countries.

So it seems to me that we can take this "Stampede" cry as prima facie evidence of bad faith and wicked intent, and there should always be a presumption of guilt.

I see zero evidence that we should "trust" Obama and Pelosi any more than anyone else when they call out that way.  

Re the relativity of anxiety:

This isn't just a matter of psychology. Wealth inequality is very much a zero-sum game in how it allows the wealthy to use money aggressively, to bully those who don't have it, externalize every cost possible upon the heads of the non-wealthy, figuratively (and often literally) dump their garbage on the land (or head) of those not rich. The political and legal system is intentionally set up to enable this externalizing as much as possible.

So it's not just emotional when people feel some relief that, while they may have taken an absolute economic hit, they didn't lost ground relatively (that is, the rate at which they're relatively losing ground, as wealth concentrates more and more every year, didn't increase).

Re economist angst:

Yes, if one has the slightest shred of integrity one should, when his whole ideology comes crashing down around his head, when every "truth" he's been peddling is proven to be a lie, when everything he's ever trumpeted is proven to have been wrong, and when the result of his aggressive delusions if not outright lies has been disaster for so many innocent bystanders, most of whom never had any chance to benefit even if the ideology had been correct, feel confused, chastened, and ashamed.

Of course, since this is modern America, and while everyone here is always confused, there simply is no such thing as shame anymore. So we see them all going around blaming someone else, or explaining how they were really right all along except for some out-of-the-blue curveball no one could have foreseen (I'm reminded of, during the Renaissance, a cardinals' conclave gone wrong where they ended up saying, "the holy ghost must have intervened"), or even saying nothing is really wrong (Mccain got slammed for saying, "the fundamentals are still good", but it seems to me lots of commentators are saying exactly that, just in more clever verbiage - the NYT just had an article a day or two ago about all the investors, who of course have a vested interest, crowing that recovery is just weeks away).

I normally have nothing good to say about Greenspan, but I will give him this - he has seemed sincerely contrite and to have actually learned something. Of course, he could just be in remorseful alcoholic mode. We'll see if his newfound wisdom sticks and develops.  

TRK29's picture
TRK29
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Re: Daily Digest - Jan 3

I would like to wholeheartedly endorse the view expressed by RussB.

It seems that our World Leaders have unanimously accepted the idea that what we are now experiencing is like a temporary blockage on a freeway and that all we need to do is spend some money on widening the road so we can renew the journey at full speed.

It does not seem to have entered their heads that they might be travelling in the wrong direction, and that this crisis has been a warning sign that we need to take a new direction, which would mean that we need to recognise that sustained year-on-year growth in GDP for all countries in a finite world is an impossible dream which will inevitably end in tears.

While it may be true that a healthy housing market can be an indicator of economic health, the apparent assumption that getting the housing market going again will lead to a recovery of a healthy economy is quite false. The key word is "healthy" and what we had in both the UK and USA housing markets before the crash was certainly not healthy.

 

MarkM's picture
MarkM
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Re: Daily Digest - Jan 3

No shame...right on the money.  Also, these folks cruise along with absolutely no consequences for their actions.  That must change for any hope of repairing the damage done to the reputation of our political and financial leaders.  At that, I don't know that the damage can be undone.  Maybe the genie really is out of the bottle.

Even though there is lip service given to attempting to restore housing prices, it is obvious that the real emphasis has been directed to the financial industry itself.  When the decreased property values finally filter down to local and state tax revenues, I believe we will see a problems that we can't even imagine now.  I think this will take another year or two to really be felt completely.  I believe that ANYONE thinking house prices will return to their peaks is delusional.

Gadfly's picture
Gadfly
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Re: Daily Digest - Jan 3
RussB wrote:

So we see them all going around blaming someone else, or explaining how they were really right all along except for some out-of-the-blue curveball no one could have foreseen (I'm reminded of, during the Renaissance, a cardinals' conclave gone wrong where they ended up saying, "the holy ghost must have intervened"),

RussB, without any context to your example, it gives the appearance that you are taking the opportunity to throw in some anti-religious rhetoric.  I do not know if this is your intention or not, however, I would suggest to you that this is not the appropriate forum for this.  Mr. Martenson is looking to make this an inclusive website and, whether intentionally or not, you subvert that.  You have made some excellent points(that I agree with) in your post and I look forward to reading future posts.

 

Your friend; Gadfly 

RussB's picture
RussB
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Re: Daily Digest - Jan 3

Gadfly,

I wasn't intending that as anti-religious (don't worry, I save that for elsewhere), nor did it occur to me for a second that anyone would take it that way. I believe it's a good example analogous of some of the excuses we're hearing from these financial "experts" who are claiming nothing is wrong with their theories, models, etc., it's just that something......mysterious, inexplicable......has happened, when really it's simply that they screwed up royally.

I've always found the Renaissance example to be fine comedy (though thinking about anything from the Renaissance always puts me in a good mood). That's why I used it.

As for the way you took it, I fear that's exactly the kind of self-censoring paranoia I protested about when I first read that, to me rather strange, post from Chris. I confess I didn't understand it, except for the threat part. (It's rather odd to make one's plea for inclusion by threatening everybody; then again, like I said at the time, this isn't the only place I'm suddenly seeing this new police mentality. It's as if, now that Bush is gone, the time for freewheeling is over; the frontier is closed. Now's the time to be good Obama dittoheads and fall into line.)

But like I said then, I don't intend to gratuitously insult anyone. If that's not good enough, c'est la vie. (After being against political correktness for going on 20 years now, I'm not going to change now.) 

But thanks for asking,

-Russ  

builder's picture
builder
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Re: Blame Television for the Bubble

Pretty funny article in the Wall Street Journal this weekend about HGTV. See http://online.wsj.com/article/SB123094453377450603.html

"Blame Television for the Bubble"

"And yet on episode after episode for this entire irrational decade, HGTV pumped up the housing bubble by parading the most mediocre, unworthy-looking homeowners into our living rooms to watch while they put their tacky, run-of-the-mill tract homes on the market for twice what they paid and then went out and bought houses with price tags too obscene to repeat. You couldn't watch these shows without concluding that you must be an idiot and a loser if you lived in a house you could actually afford."

"HGTV is an evil empire that never rests. You can loathe your current domicile 24/7 with programs such as "Stagers" (move a few things around and double the value of your home); "Designed to Sell" (you can sell your house, even if the house next to yours is in foreclosure); "Design on a Dime" (see, it's cheap); and "Property Virgins" (losing your virginity was fun, wasn't it?) Every show features highly attractive hosts who show you how to "unlock the hidden potential" in your home, how to turn a $10 thrift-store table into a "wow" media center, and how to make everything "pop." Pop is the word of choice on HGTV."

"Ironic, isn't it, given the fact that pop is the sound we keep hearing from the McMansion-sized housing bubble HGTV created."

Damnthematrix's picture
Damnthematrix
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The Sustainable Development Paradox

The January 2009 issue of the E-Journal of "Solidarity, Sustainability,
and Nonviolence" has been posted. As always, it is open access. Simply
click the following link:

The Sustainable Development Paradox
http://pelicanweb.org/solisustv05n01.html

A series of articles on "dimensions of sustainable development" is being
published. The January 2009 issue shows the impossibility of
integrating the social, economic, and political dimensions of
sustainable development unless "homo economicus" becomes "homo solidarius."

Please post and/or forward this notice to friends and colleagues who
might be interested in the complex issues of human development,
international solidarity, and environmental sustainability. See the
archive for links to previously posted issues (annotated with content
outlines):

May 2005 to December 2008
http://pelicanweb.org/solisust.html

Damnthematrix's picture
Damnthematrix
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Re: Daily Digest - Jan 3

For what it's worth, I disagree....  RussB is spot on.

Damnthematrix's picture
Damnthematrix
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Re: Blame Television for the Bubble

For those non-Americans among us, can you explain what HGTV is?

Mike 

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Re: Blame Television for the Bubble
Damnthematrix wrote:

For those non-Americans among us, can you explain what HGTV is?

Mike 

Home & Garden Television

Damnthematrix's picture
Damnthematrix
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Re: Blame Television for the Bubble

Ah those stupid shows......  we have them here too (probably copied yours)...  can't stand the bad workmanship and consumerism.  We call them Home Improvement TV here...  improved to what, I could never figure out..!

Mike 

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SamLinder
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Re: Blame Television for the Bubble
Damnthematrix wrote:

Ah those stupid shows......  we have them here too (probably copied yours)...  can't stand the bad workmanship and consumerism.  We call them Home Improvement TV here...  improved to what, I could never figure out..!

Mike 

"(probably copied yours)"

Now that was a mistake! Wink

HGTV is just one of many cable channels available to the masses. As you mentioned not too long ago, it's amazing how many channels are available but there's nothing decent on! I know this dates me but, I think we had much more quality TV in the 1950's then we do today - and we had a lot fewer channels!

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Re: Daily Digest - Jan 3

I don't agree that the housing bubble is the singular cause of any of this. While it could be considered an inciting incident, there are a myriad of other factors (including under-regulation). Even if it was, all the action being taken has nothing to do with recovery - it's about saving the top.

I would think that a better way would have been to pay down a % of all outstanding mortgages, force the banks to restructure all ARMs and high interest rate mortgages to fixed rate long term mortgages and change the bankruptcy laws to permit chapter 7 debtors to get a discharge and still restructure their loans in bankruptcy. By doing all of this you would stabilize the markets, free up disposable income for everyone with a mortgage (and increase spending) and give the banks the money anyway (only as a payoff of the underlying paper) thereby also addressing the credit freeze.

I'm thinking that the top believes they are insulated from the coming crime wave, hyper-inflation, social unrest and any other negative consequences that result from drowning the middle/lower class.

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Davos
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Re: Daily Digest - Jan 3

Hello AmosKnows:

Your last paragraph really made me think. The other day my little guy whipped me in Monopoly and he realized that if he didn't offer me four times the value for my real estate I wouldn't be able to pay the rent and it would be game over.

Your second paragraph stated a better way to have fixed things. I think like in the Feudal days when the surfs were starved out and the lords fell we might be up against the same thing these days. 

Of course the lords have the counterfeit press in their pockets, so unless gold becomes king... 

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Re: Daily Digest - Jan 3

Great points - superb analogy.

You hit on what I think is the keystone concept. We are "here" because of the actions (and inaction) of our 'leaders'. Compounding this is our own inaction. Subjecting one's self to such benevolent neglect is much easier than tilting against the windmill of "we've always done it this way"

I think that rather than putting our faith in our elected officials to get us out of this mess we need a wholesale swap out. I can't see the same amalgam of idiots who got us into the curent situation being the ones to lead us out of it. We are travelling down your analagous highway at 60 miles per hour and we just passed a sign that said "Bridge Out - 20 Feet"

You do the math......... Be Well.

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