Daily Digest

Daily Digest - June 3

Wednesday, June 3, 2009, 11:27 AM
  • Crash Test Wham-O: GM (General Malaise) Hits the Wall (MachineHead Article, Good Comments Also)
  •  American Austerity by Sector (Chart)
  • Lost Generation
  • Hotel YoY occpancy rate, 3 week average (Chart)
  • Worsening Bank Loans
  • Worsending Bank Loans (Chart of Net Charge-Offs)
  • Durable Goods - New Orders YTD April (Chart)
  • How economists can misunderstand the crisis
  • Alt-A Foreclosures in Sonoma
  • End of the financial system may be imminent (Video, Ron Paul)
  • Both the US dollar and GM are broke!
  • Dollar Declines as Slump Prompts Nations to Mull Alternative
  • The Fifth Problem: Peak Capital (H/T JerryLee)


Crash Test Wham-O: GM (General Malaise) Hits the Wall (MachineHead Article, Good Comments Also, H/T CM)

Today marks Chapter 11 for General Motors, and its replacement in the DJIA by Cisco. What we can learn from this 'driving while blind' crack-up?

First, let's put on our surgical masks and examine the collapse. For sure, GM was on the sick list for a long time. The late John Z. DeLorean told us so thirty years ago, in his book titled On a Clear Day You Can See General Motors. Early in this decade, The Economist stated quite clearly that global auto production was plagued with 25 percent overcapacity even during good times, and that a bloody shakeout would follow.

But just as the extreme overshoots of stocks in 2000 and 2007 set the stage for the savage bear markets which followed, the extreme overshoot in car sales in mid-decade led to the severe sales drought we have today. The 'zero/zero/zero' rate blowout announced in mid-2003 by the fatuous halfwit Alan Greenspan produced an orgy of overconsumption, much of it borrowed from sales that would have taken place during 2008-2010. GM throttled up during Bubble II to maintain market share. When sales evaporated during the ensuing bust, it was a life-threatening event for a high-fixed-cost dinosaur like GM. It had no place to hide when sales plunged.

And the lessons for today? Both similarities and differences exist. A similarity is that we've gone 'beyond zero/zero/zero' into 'unconventional measures.' However, unlike Bubble II, this rate distortion is not being used to turbocharge auto, housing and retail sales. Instead, it's being used for something far worse -- dumping the next ten years' worth of capital investment into a collapsing Ponzi scheme.

Everyone who's ever escaped from a Ponzi scheme with a profit -- such as those who bailed out of Bernie Madoff's fund two or three years ago -- knows that you have to leave before the first default. Once the cracks in CONfidence appear, it's too late.


American Austerity by Sector (Chart)

Lost Generation

From Bill Bonner today:

The luck of one generation is the curse of the next. Like Pericles, your parents inherited a dollar; they leave you a peso. They took over the strongest, richest, most competitive nation in the world. And like Pericles they minded everyone’s business but their own. Now, not only does the US owe money all over town, its government puts out trillions more in IOUs every year - each one with your name on it. You’re not even out in the real world yet, and you’re getting the bill for 50 cents of every dollar the feds spend - almost none of it earmarked for you. But that is the thing about the real world your teachers probably forgot to tell you about. It is more unreal and fantastical than anything you studied. Here’s what’s real: You’ve been dealt a bad hand. From the bottom of the deck…your parents have slipped you some nasty cards. Our advice? Fold ‘em. Get up from the table before they clean you out.

Enjoy your weekend, Bill Bonner

Hotel YoY occpancy rate, 3 week average (Chart)

Worsening Bank Loans

OVERALL loan quality at American banks is the worst in at least a quarter century, and the quality of loans is deteriorating at the fastest pace ever, according to statistics released this week by the Federal Deposit Insurance Corporation.

The report highlighted that even as the government and major banks have scrambled to deal with the impaired securities the banks own, the institutions have been plagued by an unprecedented volume of old-fashioned loans going bad.

Of the entire book of loans and leases at all banks — totaling $7.7 trillion at the end of March — 7.75 percent were showing some sign of distress, the F.D.I.C. reported. That was up from 6.9 percent at the end of 2008 and from 4.1 percent a year earlier. It also exceeded the previous high of 7.26 percent set in 1990 and 1991, during the last crisis in American banking. (The F.D.I.C. has been collecting the figures since 1984).”

Worsending Bank Loans (Chart of Net Charge-Offs)

McCulley Sees No Significant U.S. Recovery Until 2010 (Video)

Durable Goods - New Orders YTD April (Chart)

The Shadow Banking System and Hyman Minsky’s Economic Journey (12 pages, an important read IMHO)

Minsky took Keynes to the next level, and his huge contribution to macroeconomics comes under the label of the “Financial Instability Hypothesis.” Minsky openly declared that his Hypothesis was “an interpretation of the substance of Keynes’s General Theory.” Minsky’s key addendum to Keynes’ work was really quite simple: providing a framework for distinguishing between stabilizing and destabilizing capitalist debt structures. Minsky summarized the Hypothesis beautifully in his own hand in 1992:

“Three distinct income-debt relations for economic units, which are labeled as hedge, speculative, and Ponzi finance, can be identified.

Hedge financing units are those which can fulfill all of their contractual payment obligations by their cash flows: the greater the weight of equity financing in the liability structure, the greater the likelihood that the unit is a hedge financing unit. Speculative finance units are units that can meet their payment commitments on ‘income account’ on their liabilities, even as they cannot repay the principal out of income cash flows. Such units need to ‘roll over’ their liabilities (e.g., issue new debt to meet commitments on maturing debt).…

For Ponzi units, the cash flows from operations are not sufficient to fulfill either the repayment of principal or the interest due on outstanding debts by their cash flows from operations. Such units can sell assets or borrow. Borrowing to pay interest or selling assets to pay interest (and even dividends) on common stock lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes.…

It can be shown that if hedge financing dominates, then the economy may well be an equilibrium-seeking and -containing system. In contrast, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a deviation-amplifying system. The first theorem of the financial instability hypothesis is that the economy has financing regimes under which it is stable, and financing regimes in which it is unstable. The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system. 

In particular, over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values.”

 How economists can misunderstand the crisis

It is hardly surprising, then, that the bond market is quailing. For only on Planet Econ-101 (the standard macroeconomics course drummed into every US undergraduate) could such a tidal wave of debt issuance exert “no upward pressure on interest rates”.

Alt-A Foreclosures in Sonoma

The Press Democrat: Alt-A loans: Second wave of foreclosures ahead (ht Atrios) reports that there are 18,000 Alt-A mortgages in Sonoma County (about 18 percent of all mortgages). This is a larger percentage of mortgages in Somona County than for subprime - which accounted for about 10 percent of all mortgages in the county at the peak.

According to the story - using First American CoreLogic as a source - about two-thirds of these Alt-A loans will see a significant payment increase over the next few years, with recasts peaking in 2011.

First, I strongly recommend everyone read Tanta's Reflections on Alt-A

Alt-A is sort of a weird mirror-image of subprime lending. If subprime was traditionally about borrowers with good capacity and collateral but bad credit history, Alt-A was about borrowers with a good credit history but pretty iffy capacity and collateral. That is to say, while subprime makes some amount of sense, Alt-A never made any sense. It is a child of the bubble.

Alt-A ... overwhelmingly involved the kind of "affordability product" like ARMs and interest only and negative amortization and 40-year or 50-year terms that "ramps" payment streams. But it doesn't do this in order to help anyone "catch up" on arrearages; people with good credit don't have any arrearages. Alt-A was and has always been about maximizing consumption, whether of housing or of all the other consumer goods you can spend "MEW" on. If subprime was supposed to be about taking a bad-credit borrower and working him back into a good-credit borrower, Alt-A was about taking a good-credit borrower and loading him up with enough debt to make him eventually subprime.


End of the financial system may be imminent (Video, Ron Paul)

Both the US dollar and GM are broke!

Even with US GDP slowing down less than expected in the 1st Q, coupled with an uptick in consumer confidence, has done little to aid a currency that literally has fallen out of bed over the last month. Last night was no exception, further liquidation of US assets violently occurred after China’s manufacturing data rose for a 3rd-month, with the official PMI at a seasonally adjusted 53.1 in May after registering 53.5 in Apr. Global investor confidence combined with renewed faith in the financial industry is pushing commodities higher and by default squeezing the once mighty dollar.

With Geithner in Beijing to reassure China its holdings of US debt are safe even as US government borrowing soars, the dollar can be expected to experience further losses as the worldly investor turns to other regions!

The USD$ currently is lower against the EUR +0.51%, GBP +1.35%, CHF +0.39% and JPY +0.83%. The commodity currencies are stronger this morning, CAD +1.01% and AUD +1.42%. The loonie continued its strengthening bias on Friday, albeit too quickly, too soon and is now appearing on the BOC’s radar. The strengthening bias is on the back of commodities, especially crude touching 8-month high’s and enticing investors to invest in higher-yielding assets. With the USD struggling, parity talk is back on the table. Some are buying into the theory that with Canada being a small, open economy and sensitive to trade flows, if and when the global economy is doing better then Canada is expected to reap the benefits very quickly. There is no disputing this theory, it’s expected over time that the loonie will trade at a premium to its southern neighbor, but, at such an early stage in the game, the move has been too aggressive and too quick. The month of May was good for the higher yielding commodity currencies (AUD, NZD and CAD). There is nothing fundamentally supporting the currency, even the Canadian finance minister last week said that the proposed national deficit will balloon to $50b from the $34b announced in Jan. The longer term fundamentals certainly support a much stronger CAD, however investors have plenty of time to add to their positions at more favorable levels.

Dollar Declines as Slump Prompts Nations to Mull Alternative 

June 2 (Bloomberg) -- The dollar dropped to its lowest level against the euro this year on speculation record U.S. borrowing will undermine the greenback, prompting nations to consider alternatives to the world’s main reserve currency.

The 16-nation euro gained for a fourth day versus the dollar as the Russian government said emerging-market leaders may discuss the idea of a supranational currency. The pound strengthened to $1.65 for the first time since October.

“There’s been a lot of talk out of Russia about a new global currency, and that’s contributing toward this latest bout of dollar weakness,” said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London. “These latest comments are just adding to the general dollar weakness we’ve seen recently.”

The dollar slid 0.9 percent to $1.4289 per euro at 10:52 a.m. in New York, from $1.4159 yesterday. It touched $1.43, the weakest level since Dec. 29. The dollar fell 0.5 percent to 96.08 yen, from 96.59. The euro rose 0.4 percent to 137.36 yen from 136.78. The pound traded at $1.6557, compared with $1.6443, after touching $1.6564, the highest level since Oct. 30.

The U.S. currency pared its decline versus the yen as the National Association of Realtors said pending sales of existing homes climbed 6.7 percent in April. The median forecast of 32 economists surveyed by Bloomberg News was a 0.5 percent gain.

The Dollar Index, which ICE uses to track the currency’s performance against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, fell 0.5 percent to 78.77.

Russian Proposal

Russian President Dmitry Medvedev may discuss his proposal to create a new world currency when he meets counterparts from Brazil, India and China this month, Natalya Timakova, a spokeswoman for the president, told reporters by phone today. Medvedev first proposed seeking alternatives to the U.S. dollar as a reserve currency in March.

The dollar also declined on speculation “smaller” central banks started today’s selling of the greenback, said Sebastien Galy, a currency strategist at BNP Paribas SA in New York.

“If people believe that there is official pressure behind it, then obviously it puts pressure on euro-dollar on the upside,” Galy said. Galy predicted the 16-nation currency may reach $1.4360 today, a peak last reached in December.

There will be demand for the record amount of debt the U.S. is selling, Treasury Secretary Timothy Geithner said in an interview earlier today with state media outlets in China.


The Fifth Problem: Peak Capital (H/T JerryLee)

The world' global positioning system (GPS) is in trouble. The US government accountability office (GAO) has published a worrysome report on the situation. The GPS satellites are wearing down and, if no new investments are made, the accuracy of the positioning system will be reduced. Eventually, the whole system may cease functioning.

What's happening here? The GPS system is a pinnacle of modern technology, a demonstration that the thing we call "progress" exists. If you have a car navigator, the idea of going back to clumsy printed maps just seems impossible. And that is just one of the many uses of the GPS system. How come that we left such an important system degrade? How can it be that someone forgot that satellites need to be replaced after a while?

The degradation of the GPS system may be attributed to mistakes, incompetence, bureaucracy or even conspiracies. But the problem may lie at a much deeper level. It may be a symptom of the degradation of the whole economy. But why is this happening? People mention evil banking practices, speculation, subprimes, terrorism, and what you have. But, with so many things going on at the same time, what is really the origin of the problems and what is just a consequence of other factors? To find an answer, you need to understand how the world's economic system works. One of the first attempts to do that in a comprehensive way was the 1972 report to the Club of Rome known as "The Limits to Growth" (LTG).

The LTG study was based on a rather complex model which, however, can be summarized in terms of five main elements, as you see in the figure at the beginning of this post. The five elements are 1) population, 2) mineral resources, 3) agricultural resources, 4) pollution and 5) capital investments. This is just one of the many ways to build such a model. Other choices are possible, but the LTG model, improved over the years, is a good way to capture the essential elements of the world's economy. Despite the persistent legend that the LTG study was "wrong"; the results of the study have been found to be remarkably accurate

None of the five elements of the model is a problem in itself. But each one can become a problem. In that case, we speak of 1) overpopulation, 2) mineral depletion, 3) famine, 4) ecosystem collapse and 5) economic decline. Often, these five problems are considered as if they were independent from each other. People tend to attribute all what is going on to a single problem: peak oil, climate change, overpopulation, and so on. In particular, economists tend to see the economy as independent from the availability of natural resources. Of course, this cannot be true and in a "dynamic" model, such as the LTG one, all the elements of the economic system interact with each other; either reinforcing each other (positive feedback) or weakening each other (negative feedback). To understand how the economy behaves as the natural resources are exploited (and overexploited) it is important to consider the role of the "capital" parameter. The behavior of the capital stock directly affects industrial production and other parameters which are counted as part of economic indicators such as the gross domestic product (GDP).



Ruhh's picture
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Re: Daily Digest - June 3

news from your northern neighbors.

Canada to sell off it's cherished assets while they buy up useless ones (GM)

Canada's debt to jump to $630 Billion in 5 years

Maybe I can make a killing selling pitchforks and torches? Too bad everyone up here is too busy watching hockey.

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Re: Daily Digest - June 3

"Fold ‘em. Get up from the table before they clean you out."

If so, then who will clean up the mess?  *sigh*

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Re: Daily Digest - June 3

Are pending Home sales real??


Really if we don't laugh about all this "stuff" it would make us crazy. I know I have all these wonderful "pending" things that are going to happen for me but I don't count them.


Davos thanks for all your posts, they are a big help. You remind me of Peter Schiff from what I read. You see things very clear & you are stick-en with it. I admire that.

I like how Schiff uses his very direct blunt humor in this video yesterday.

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Re: Daily Digest - June 3

" If you have a car navigator, the idea of going back to clumsy printed maps just seems impossible."

What a JOKE!  Complex systems doomed to fail like this are typical of how we all end up up fat and lazy... What's wrong with using our brains for goodness sake....?


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Re: Daily Digest - June 3

 Hello iDoctor, thanks for the watch, posted it on the 5th and thenks for the kind words. take care

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Re: Daily Digest - June 3

I think the GPS issue may be more press than real.  Here is a link to a story that seems to debunk the GPS fail myth pretty well:  GPS Link To Fail



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Re: Daily Digest - June 3

Here is another debunking of the GPS story:

I, Cringely - WAAS Up?

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Re: Daily Digest - June 3

The problem with this whole GPS story is they don't know how many sattelites are actually going to fail before the replacements start to flow again. A huge number of the  GPS satellites are still working many years past their design life, so it's a lottery. Will we loose none or a dozen in the next few years, nobody really knows and that's the problem, everyone is just guessing.


- Ernie.


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Re: Daily Digest - June 3

Yep. A great certainty about any system will always be:  the more complex a system is, the more unpredictable its behavior will be.    Period.    Therefore its failures will be more unpredictable by its very nature. 

Of course an addendum could be:  the more complex any system is, the more CERTAIN its eventual failure is, regardless of how accurately you can predict the timing of said failure(s).

Reality is a harsh mistress. Anyways, its going to be an exciting ride folks!

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Re: Daily Digest - June 3

About Lost Generation:

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Re: Daily Digest - June 3

States' Budget Woes Are Poised to Worsen - WSJ.com

State budgets look bad now, but they are set to get worse.

The bulk of funds from the federal government's stimulus package will be allocated by 2011, but tax collections aren't likely to be enough to take their place -- even if the economy is recovering.

The drop in tax revenue is set to be deeper and last longer as collections have become more sensitive to business cycles in recent years. At the same time, states face growing health-care costs and the need to replenish pension programs funded by decimated investments. And some of the stimulus funds expand programs that will require state money to sustain them after the federal largesse runs out.

"There are so many issues that go way beyond the current downturn," said Scott Pattison, executive director of the National Association of State Budget Officers. "This is an awful time for states fiscally, but they're even more worried about 2011, 2012, 2013, 2014."


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Re: Daily Digest - June 3

German criticism may limit ECB's room for maneuver - MarketWatch

LONDON (MarketWatch) -- German Chancellor Angela Merkel's unprecedented criticism of the European Central Bank's unconventional efforts to spur the flow of credit by purchasing covered bonds could leave policy makers little room for further maneuver as they wrestle with a deep recession, economists said Wednesday.

The bank's Governing Council is widely expected to leave its key lending rate unchanged on Thursday. But investors and economists are keen to see details of the Frankfurt-based ECB's plan to purchase 60 billion euros ($84.9 billion) worth of covered bonds. These are highly-rated instruments banks issue to refinance mortgages or public-sector loans.


Merkel's harshest words, in a speech delivered Tuesday in Berlin, were reserved for the U.S. Federal Reserve and the Bank of England. Both central banks have embarked on aggressive quantitative-easing policies that center on effectively printing new money and using it to purchase government bonds and other assets in an effort to boost nominal spending, support lending and avoid a deflationary spiral.

"I view with great skepticism the powers of the Fed, for example, and also how, within Europe, the Bank of England has carved out its own small line," Merkel said, according to news reports. "We must return together to an independent central-bank policy and to a policy of reason, otherwise we will be in exactly the same situation in 10 years' time."

The Fed has committed to purchasing $300 billion worth of assets as part of its quantitative easing program, while the Bank of England last month said it would expand its program to 125 billion pounds ($207 billion) from its initial 75 billion pounds.

Merkel accused the ECB of bowing "somewhat to international pressure" with its plan to buy covered bonds. The ECB plan is substantially smaller than the Fed and BOE programs and isn't likely to include the creation of new money, economists said.


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Re: Daily Digest - June 3


U.S. bankruptcy filings up 37% last month

The Atlanta Journal-Constitution

Tuesday, June 02, 2009

U.S. consumer bankruptcy filings soared 37 percent in May compared with the same period last year, according to figures released Tuesday by the American Bankruptcy Institute.

The figures, using data compiled by the National Bankruptcy Research Center, show total filings in May were 124,838, up from 91,214 recorded in May 2008.

30 percent from 2007.

At that pace, the ABI expects more than 1 million will seek bankruptcy protection by December.

The trend is being fueled by the economy as companies shed employees, who in turn fall into financial straits, unable to pay their bills.

“As consumers continue to face increasing levels of unemployment and rising foreclosure rates, bankruptcy filings will continue to accelerate as families seek financial relief from the tough economic climate,” Samuel J. Gerdano, the ABI’s executive director, said in a statement. “We predict more than 1.4 million new bankruptcies by year end.”

oldvanman's picture
oldvanman (not verified)
Re: Daily Digest - June 3

G'day from Western NSW Australia.

Our Government is telling us that we are the lucky country and are not in Recession, however here is an indication that the local economy is stuffed.

I went to an auction sale yesterday and most things went for $1!
It didn't seem to matter what was in the box or how big it was,  $1 was the knock down price.
It was a bit sad really.
It was the contents of a lock up storage shed and was everything out of somebody's home. Apparantly the family had moved interstate to take up a new job and were going to get their possesions moved when they found accommodation. He got retrenched just after starting and didn't have enough money to get back.
They hadn't paid the monthly fees and so the Real Estate Agent sold the lot.
Even the family photos went; the box they were in was bundled with a box of DVDs and sold for a $1.

5 piece dining room setting $1
A big box full of kitchen electrical appliances $1
A really nice 4 piece solid timber queen size bedroom setting 50c
A chest freezer $5
A LARGE quantity of brand name toys $27
The entire sale would have only made a couple of hundred dollars at most. I was disgusted at the morality of the proceedings and left.

The sale was well advertised and there were plenty of people there, just no money.

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Re: Daily Digest - June 3

I agree with the notion that all of these issues are related and we must look at them together.  That is what I stress when I try to explain these things to people.  Everything is related and they are converging on us NOW!  Yikes! 


Thanks, Jim

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