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    Daily Digest – Jan 3

    by Davos

    Saturday, January 3, 2009, 1:15 AM

  • 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



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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