Home Refinance Calculator: August 2011

Wednesday, August 31, 2011

Mish's Global Economic Trend Analysis

State Takeover of Pennsylvania State Capital Harrisburg Likely Coming Up as City Council Rejects Mayor's Fiscal-Recovery Plan
Obama Spent $535 Million on Solyndra Solar Energy Firm in 2010; Firm Went Bankrupt Today; Pricetag $486,363 Per Job Saved for 18 Months
Illinois Loses Most Jobs in Nation Following Tax Hikes
Three in 10 Workers Worry Over Layoffs, Double the Level in August 2008

State Takeover of Pennsylvania State Capital Harrisburg Likely Coming Up as City Council Rejects Mayor's Fiscal-Recovery Plan

Posted: 31 Aug 2011 07:18 PM PDT

State Takeover of Pennsylvania State Capital Harrisburg Likely Coming Up as City Council Rejects Mayor's Fiscal-Recovery Plan

Harrisburg, Pennsylvania is bankrupt and has been for years. Instead of recognizing that simple fact, the mayor and most of the city council have been looking for miracles.

There are no miracles and there will be no miracles. Fortunately, and at long-last, the city council rejected Mayor Linda Thompson's scheme of selling city assets to deal with debt issues.

Harrisburg now faces a state takeover.

Please consider Harrisburg City Council Rejects Fiscal Plan to Rescue Pennsylvania Capital

Harrisburg's City Council rejected a fiscal-recovery plan proposed by Mayor Linda Thompson, putting state aid at risk and leaving Pennsylvania's capital in financial limbo.

By a vote of 4-3, the council turned down the mayor's blueprint, which called for asset sales. The proposal wouldn't provide a guaranteed fix of the city's debt problems and, by selling off assets, raised the possibility of higher taxes later, said Councilman Brad Koplinski.

"It is a plan, yes, but it's an unreliable one," Koplinski said. "It's making sure that Wall Street gets paid and Main Street gets the shaft."

The decision means the city has no procedure to deal with more than $300 million of debt, or five times its general-fund budget. Harrisburg helped finance improvements to a municipal incinerator that hasn't generated enough revenue to pay its costs. The city of about 49,500, where a third live below the poverty level, may skip a $3.3 million payment next month.

The move may hasten a state takeover, Councilwoman Patty Kim said last week.

Inquiring minds note that the Patriot-News Editorial board says Harrisburg should approve flawed Act 47 plan because a state takeover will be even worse

The real question for Harrisburg City Council tonight when it votes to accept or reject Mayor Linda Thompson's fiscal recovery plan is whether local control or a state takeover is better for city residents.

A yes vote on the plan means local officials will lead with help from the state and county. A no vote means that what happens in Harrisburg will be left to either a state-appointed panel or the courts.

There is certainly plenty to dislike in Mayor Linda Thompson's plan. It is horrendously written with many grammatical errors. The mayor also added new initiatives that are not fully vetted or clearly funded, such as the blight program.

Perhaps the biggest concern to most taxpayers is the property tax increase. It is likely to be higher than $50 a year for the average homeowner. That is a best-case scenario if assets are sold, union contracts renegotiated and hundreds of little changes made.

But despite this plan's flaws, what is the alternative?

The city's creditors are pursuing lawsuits that would force Harrisburg to pay immediately.

Bankruptcy is off the table. The state is forbidding it for at least a year, and it's almost certain the Legislature and governor would extend that ban.

The editorial board lacks common sense. Regardless of what anyone says, Harrisburg is bankrupt.

The citizens of Harrisburg certainly do not need higher taxes, and the city needs to get rid of a mayor who cannot type English sentences properly.

There simply is no alternative to bankruptcy and now the courts can and will deal with bondholders who refused to take proper haircuts and also deal with untenable public union contracts as well.

Moreover, one nice bankruptcy will lead to another, and another, exactly the relief cities need. Public unions will get what they have coming to them: slashed benefits and contracts tossed out by the courts.

What can possibly be better than that? Certainly not higher taxes.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Obama Spent $535 Million on Solyndra Solar Energy Firm in 2010; Firm Went Bankrupt Today; Pricetag $486,363 Per Job Saved for 18 Months

Posted: 31 Aug 2011 01:12 PM PDT

The federal government should get out of the business of picking technology and "green" winners. Government backing of alternate energy companies has been nothing short of disastrous.

A solar energy firm touted by the administration in 2010 as a as a "gleaming example of green technology" today announced bankruptcy. 1,100+ employees will be fired.

Please consider Solyndra Filing a Disaster for Obama

President Obama faces political catastrophe in the form of Solyndra -- a San Francisco Bay area solar company that he touted as a gleaming example of green technology. It has announced it will declare Chapter 11 bankruptcy. More than 1,100 people will lose their jobs.

During a visit to the Fremont facility in spring of 2010, the President said the factory "is just a testament to American ingenuity and dynamism and the fact that we continue to have the best universities in the world, the best technology in the world, and most importantly the best workers in the world. "

It's not his statements the administration will regret; it's the loan guarantees. The President was celebrating $535 million in federal promises from the Department of Energy to the solar startup. The administration didn't do its due diligence, says the Government Accountability Office. "There's a consequence if you don't follow a rigorous process that's transparent," Franklin Rusco of GAO told the website iWatch News.

Seen and Unseen

The "seen" math is simple enough. $535 million divided by 1,100 is roughly $486,363 per job saved, now job lost.

That is just the "seen" consequence. The "unseen" consequences are not directly calculable but by giving Solyndra money, other companies that the free market would have preferred have been harmed, perhaps permanently harmed.

Although Obama clearly rushed this pathetic company for a nice photo-op, this is not a simple case of the president failing to do his homework as the GAO implies. The government has no business promoting this kind of crap in the first place.

In this case, it is rather amazing how fast Solyndra wasted over half a billion US taxpayer dollars, so fast I suspect fraud.

In general, if companies cannot survive without government subsidies then they should not survive at all.

Solyndra could not survive even with massive government subsidies. The same happened to many ethanol companies as well. Speaking of which, taxpayers pay though the nose for ethanol subsidies and tariffs both at the pump and in the price of corn, in turn, the price of beef as well.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Illinois Loses Most Jobs in Nation Following Tax Hikes

Posted: 31 Aug 2011 09:35 AM PDT

Thanks to Illinois governor Pat Quinn and the Illinois legislature Illinois Loses Most Jobs in the Nation

In a trend that continues to worsen, more Illinoisans found themselves unemployed in the month of July.

Illinois lost more jobs during the month of July than any other state in the nation, according to the most recent Bureau of Labor Statistics report. After losing 7,200 jobs in June, Illinois lost an additional 24,900 non-farm payroll jobs in July. The report also said Illinois's unemployment rate climbed to 9.5 percent. This marks the third consecutive month of increases in the unemployment rate.

Illinois started to create jobs as the national economy began to recover. But just when Illinois's economy seemed to be turning around, lawmakers passed record tax increases in January of this year. Since then, Illinois's employment numbers have done nothing but decline.

When it comes to putting people back to work, Illinois is going backwards. Since January, Illinois has dropped 89,000 people from its employment rolls.

A combination of high taxes, overspending and red tape do nothing but chase away job creators and leave too many citizens without jobs. Springfield needs to act now and reverse course.

Inquiring minds may also wish to check out the foreclosure pipeline in Illinois, 7th worst in the nation at 128 months (over 10 years).

See First Time Foreclosure Starts Near 3-Year Lows, However Bad News Overwhelms; Foreclosure Pipeline in NY is 693 months and 621 Months in NJ for more details on the mortgage mess everywhere.

Illinois Unemployment Rises from 9.1% to 9.5% after Tax Hike

Please listen to CEO of the Illinois Policy Institute John Tillman on WLS AM on the Fiasco in Illinois. It is an excellent interview that gets much better as it progresses.

A tip of the hat to John Tillman for an excellent, must-hear interview.

I have little to add to this miserable report other than to emphasize Pat Quinn is the worst governor in the nation. He will not be re-elected. Unfortunately, taxpayers will suffer the consequences of his stupidity for the full length of his term.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Three in 10 Workers Worry Over Layoffs, Double the Level in August 2008

Posted: 31 Aug 2011 08:23 AM PDT

If you are looking for the reason Consumer Confidence Plunged to 44.5, Lowest Since April 2009 the answer can be found in a recent Gallup poll regarding fear of being laid off.

Please consider In U.S., Worries About Job Cutbacks Return to Record Highs

American workers' concerns about various job-related cutbacks have returned to the record highs seen in 2009, after improving slightly in 2010. In terms of the most significant employment risk measured, 3 in 10 workers currently say they are worried they could soon be laid off, similar to the 31% seen in August 2009 but double the level recorded in August 2008 and for several years prior.

Separately, 30% of workers say they are worried their hours will soon be cut back, and 33% worry their wages will be reduced. An even larger number, 44%, worry their benefits will be reduced, making this the most prevalent job-related concern.

Workers are least likely to be concerned that their company will move jobs overseas; however, at 13%, this is by one percentage point the highest level of concern since Gallup began measuring it in 2003. Most of the five items tested are at or near record highs this year.

Why Only 13% Worry About Jobs Leaving Overseas?

Some may be wondering why so few worry about jobs leaving for overseas.

The answers are straight-forward.

So many have already lost their jobs overseas so they are no longer worried about it
Those working in government positions have no such fear
Those working at retail stores such as Pizza Hut, Nail Salons, Home Depot, the corner bar, and Walmart have no such fear
Those working in most healthcare positions, especially doctors and nurses have little fear for now even with medical tourism
Those working in education have little fear for now even though online education will someday instill that fear
Some simply do not understand the risks

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Tuesday, August 30, 2011

Mish's Global Economic Trend Analysis

First Time Foreclosure Starts Near 3-Year Lows, However Bad News Overwhelms; Foreclosure Pipeline in NY is 693 months and 621 Months in NJ
Retail Giant in Australia Warns of Massive Price Deflation and Falling Sales, "Hardest Christmas in Retailer Lives" Coming Up
Eurozone Retail Sales Drop 4th Straight Month; Confidence Drop Most Since 2008; EU GDP .2%; Leading Indicators Negative; S&P Fantasyland Forecast
Consumer Confidence Plunges to 44.5, Lowest Since April 2009; Case Shiller Home Index at 2003 Levels, Down 5.9% vs. Year-Ago
Wells Fargo Says 12 States in Economic Contraction

First Time Foreclosure Starts Near 3-Year Lows, However Bad News Overwhelms; Foreclosure Pipeline in NY is 693 months and 621 Months in NJ

Posted: 30 Aug 2011 06:35 PM PDT

The LPS Mortgage Monitor August 2011 Mortgage Performance Report Shows First-Time Foreclosure Starts Near Three-Year Lows. That's the good news.

The Bad News

Average Loan in Foreclosure Is Delinquent for Record 599 Days
Of the nearly 1.9 million loans that are 90 or more days delinquent but not yet in foreclosure, 42 percent have not made a payment in more than a year with an average delinquency of 397 days, also a new record.
As of the end of June, 4.1 million loans were either 90 or more days delinquent or in foreclosure, as delinquencies remain two times and foreclosures eight times pre-crisis levels.
On average, at the current rate of foreclosure sales, judicial foreclosure states would require 111 months to work through inventories of loans that are 90 or more days delinquent or in foreclosure as compared to non-judicial states, which would be able to clear the inventories in approximately 32 months.
Most of the foreclosure "outflow" is back into delinquency
Loans deteriorating over 90 days still outnumber foreclosure starts 2:1
Foreclosure starts outnumber sales by a factor of almost 3:1

Here are a few charts from the LPS Mortgage Monitor Report

click on any chart for sharper image

First time foreclosure starts near three year lows

42% of Loans 90 Day Delinquent+, Not Made a Payment in 12 Months or More

Most of the foreclosure "outflow" is back into delinquency

Loans deteriorating over 90 days still outnumber foreclosure starts 2:1

Foreclosure starts outnumber sales by a factor of almost 3:1

The pipeline ratio in judicial states is more than 3 times that of non-judicial

States with highest percentage of non-current loans: FL, MS, NV, NJ, IL
States with the lowest percentage of non-current loans: MT, WY, AK, SD, ND

Non-current totals combine foreclosures and delinquencies as a percent of active loans in that state.

The Foreclosure Pipeline in New York is 693 months (over 57 years) and 621 Months (over 51 years) in New Jersey!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Retail Giant in Australia Warns of Massive Price Deflation and Falling Sales, "Hardest Christmas in Retailer Lives" Coming Up

Posted: 30 Aug 2011 05:15 PM PDT

The CEO of Harvey Norman, Australia's largest electrical and furniture chain, warns of massive price cuts and a Christmas Retail Shocker.

"Retailers will have the hardest Christmas in their lives," said the boss of the country's biggest electrical and furniture chain .

"I see unemployment going up, small businesses going under, manufacturing under huge duress and tourism hit very badly. I don't think the outlook will improve."

He said Harvey Norman would crank up its online strategy in October, but he didn't expect it to return profits.

"Our sales in technology, computers and television have been hit badly because of price deflation," he said." Televisions were the biggest offender.

"Prices have dropped by so much we have to sell three times as many TVs to get the same revenue.

"The same goes for computers -- they are half their price of a year ago -- and we have to sell twice as much to stand still.

"Even whitegoods and washing machines are 10 per cent cheaper today.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Eurozone Retail Sales Drop 4th Straight Month; Confidence Drop Most Since 2008; EU GDP .2%; Leading Indicators Negative; S&P Fantasyland Forecast

Posted: 30 Aug 2011 12:15 PM PDT

The Eurozone economy is in shambles. Retail sales are down for the 4th consecutive month, consumer and economic confidence have plunged.

Yet, economic denial runs deep. Government GDP estimates in Spain and Italy are preposterous, as are S&P growth forecasts. Let's take a look at the reports.

Eurozone Retail Sales Drop 4th Straight Month

Finfacts reports Retail sales in Eurozone fell for the fourth month in a row in August

Retail sales in the Eurozone fell for the fourth month in a row in August, according to Markit's latest PMI (Purchasing Managers' Index). A stronger rise in German retail sales was not enough to offset weakness in France and Italy, the two next-largest euro economies. The overall rate of decline accelerated slightly to the fastest since October 2010.

The third-largest euro economy, Italy, registered another steep fall in retail sales in August. The monthly rate of contraction was broadly similar to that posted in July, remaining stronger than the long-run series average. Italian retail sales have fallen continuously for the past six months.

Retailers' inventories of goods for resale rose for the sixth month running, the longest sequence in three years. Moreover, the rate of growth strengthened to a robust pace.

Consequently, the value of goods purchased by Eurozone retailers fell slightly in August. Moreover, the volume of purchases fell more sharply, as average purchase prices continued to rise rapidly during the month. This sustained inflationary pressure, added to weak sales demand, led to a further marked deterioration in retail gross margins during August.

A combination of falling sales and cost pressures led retail employment to slow almost to a halt in August. Latest data marked a third successive month of net job creation in the sector, but at only a negligible rate.

European Economic Confidence Falls Most Since December 2008

Bloomberg reports European Economic Confidence Falls Most Since December 2008

European confidence in the economic outlook plunged the most since December 2008 this month as a persistent debt crisis roiled markets and clouded growth prospects across the 17-nation euro region.

An index of executive and consumer sentiment in the single- currency region fell to 98.3 from a revised 103 in July, the European Commission in Brussels said today. That's the lowest since May 2010. Economists had forecast a decline to 100.2, according to the median of 29 estimates in a Bloomberg News survey. In the U.S., consumer sentiment dropped to the lowest level in more than two years, a separate report showed.

The euro area's economic prospects are deteriorating as national governments cut spending in a bid to narrow deficits and tackle the debt crisis. Economic and Monetary Affairs Commissioner Olli Rehn signaled yesterday that the EU may reduce its 2011 growth forecast from 1.6 percent on concerns that financial turbulence could spill into the broader economy.

"Hard Fall" in Spain

In Spain, via Google translate Tourism only Saving Grace in Economic Debacle here are some bullet points I gathered.

Director of a major research service says the Spanish economy is in a "hard fall"
Cement consumption is down 20%
Electricity consumption down 1%
Private sector spending fell 3.6%
Tourism is up but hotel prices are at 1995 levels
Unemployment still rising

"Nothing indicates that between August and November, things will change for the better, as indicated by the index of economic sentiment. The slowdown in economic activity in the European Union (to which targets 65% of Spanish exports) anticipates a slowdown in overseas sales.

The Government fears the worst, mainly due to the stagnation of private consumption, dependent on the creation of employment and compensation of employees. And none of these variables shows signs of recovery."

Eurozone GDP .2%, Leading Indicators Negative

Balkans Business News reports The Eurozone GDP fell short of expectations

Eurozone GDP growth below expectations in 2Q. Data for the US had already disappointed earlier. The Eurozone GDP reading - at 0.2% - fell short of expectations as well (0.4% q/q). In particular, very slow growth in Germany and stagnation in France have been a drag on growth.

Asia did not contribute to y/y growth any further in this month. In fact, Europe was the only destination contributing at all (both within and outside of the Eurozone). This seems likely to be the most important explanation for the German growth slowdown, as exports have been one of the main growth drivers so far.

Leading indicators are not on bright side, either. The global growth slowdown is already reflected in lower y/y growth rates of Eurozone industrial production. In addition, the OECD leading indicator has - similar to the ZEW Index in Germany - turned negative. Hence, it seems likely that industrial production growth will lose steam too. Inventories of finished goods have increased as well, which is a negative signal, even beyond lower production expectations. Sentiment on financial markets could be drag on private consumption, too. Private consumption is not an important growth driver in the Eurozone. However, a deterioration of sentiment could be dampening final demand.

The extremely weak economic growth in Italy does not seem sufficient to lower Italian unemployment significantly in the coming year. Even in countries that are in better economic shape, such as Germany, slower growth will slow down the recovery on the labor markets, too. We therefore expect the decline in the unemployment rate to be even more gradual than expected so far.

GDP Forecast +1.8% 2011, +1.6% 2012!?

In spite of that horrendous news optimism reigns supreme as the following paragraph shows:

We have revised our 2011 GDP forecast for the Eurozone from +2.0% to +1.8%. Additional austerity measures by governments as a result of the recent turbulence on the financial markets, as well as the weak sentiment, should also dampen economic growth in 2012. Hence, we also slightly revise our GDP growth forecast for 2012 from +1.6% to +1.4%.

I have no idea how you get any growth out of this horrendous mix, let alone fantasy projections of 1.8%, but the S&P has the same conclusion.

S&P Fantasyland Forecast

Please consider S&P trims euro zone growth outlook

Ratings agency Standard and Poor's lowered its economic growth forecasts for the euro zone on Tuesday, but said the shared currency bloc was not headed toward a new recession.

Public and private institutions have been scrambling to revise down their growth outlooks for Europe as a stream of weak data have pointed to sharply slowing activity in recent months.

S&P said in a new report it forecast growth of 1.7 percent in 2011 and 1.5 percent in 2012, down from estimates in July of 1.9 percent and 1.8 percent respectively.

For Germany, Europe's biggest economy, S&P cut its 2012 forecast to 2.0 percent from 2.5 percent previously, down sharply from the 3.3 percent it expects to see this year.

It trimmed its forecasts for France to 1.7 percent in 2011 and 2012, in line with recently downwardly revised French government estimates. Previously, S&P had forecast the euro zone's second-biggest economy would grow 2.0 percent and 1.9 percent in 2011 and 2012 respectively.

S&P cut its 2012 outlook for Spain to 1.0 percent from 1.5 percent previously, still better than the 0.8 percent growth it forecasts for 2011.

Outside the euro zone, S&P trimmed its forecast for Britain, estimating its economy would grow 1.3 percent in 2011 and 1.8 percent in 2012, down from 1.5 percent and 2.0 percent respectively.

Despite the bleaker outlook, S&P did not see Europe sinking back into recession.

"We continue to believe that a genuine double dip will be avoided given the still existing avenues for growth, although we recognize that downside risks are significant," S&P said in a report. "In particular, we will closely monitor trends in consumer demand over the coming quarters," it added.

S&P economic forecasts do not seem any better than their debt ratings. Country by country I will take the "under" line vs. S&P estimates. Odds are strong Europe is already in a recession, and these guys cannot see one coming.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Consumer Confidence Plunges to 44.5, Lowest Since April 2009; Case Shiller Home Index at 2003 Levels, Down 5.9% vs. Year-Ago

Posted: 30 Aug 2011 09:24 AM PDT

In a healthy economy, consumer confidence would be 90. Instead it is slightly less than half that.

Please consider U.S. Consumer Confidence Falls to Two-Year Low

The Conference Board's index slumped to 44.5, the weakest since April 2009, from a revised 59.2 reading in July, figures from the New York-based research group showed today. It was the biggest point drop since October 2008. A separate report showed home prices declined for a ninth month.

"This paints a picture of underlying demand weakening," said Bricklin Dwyer, an economist at BNP Paribas in New York, whose forecast of 45 was most accurate in a Bloomberg News survey. "Consumers are seeing their wealth deteriorate. We've seen a huge decline continuing in the housing market. They've also been hit on the chin by the equity markets."

The S&P/Case-Shiller index of property values in 20 cities fell 4.5 percent in June from a year earlier, after a 4.6 percent drop in the 12 months ended in May that was the biggest since 2009.

Today's confidence report is in line with other figures. The Thomson Reuters/University of Michigan final index of consumer sentiment dropped this month to the lowest level since November 2008. The Bloomberg Consumer Comfort Index has been hovering at levels previously consistent with recessions.

The Conference Board's data showed a measure of present conditions declined to 33.3, the second-lowest this year, from 35.7 in July. The measure of expectations for the next six months slid to 51.9, the weakest since April 2009, from 74.9.

The percent of respondents expecting more jobs to become available in the next six months fell to 11.4, the lowest since March 2009, from 16.9 the previous month. The proportion expecting their incomes to rise over the next six months declined to 14.3 from 15.9. The percent expecting a drop rose to 18.7, the highest since November 2009.

Fewer respondents in the Conference Board's survey indicated they were planning to buy a house, while more intended to purchase cars or major appliances in the next six months.

Housing Prices Drop 5.9% vs. Year-Ago

S&P reports Nationally, Home Prices Went Up in the Second Quarter of 2011 According to the S&P/Case-Shiller Home Price Indices.

Bear in mind that number is not seasonally adjusted. In other words, it really didn't happen. Let's look at some details to show why.

click on any chart below for sharper image

As of June 2011, 19 of the 20 MSAs covered by S&P/Case-Shiller Home Price Indices and both monthly composites were up versus May – Portland was flat. However, they were all down compared to June 2010. Twelve of the 20 MSAs and both Composites have now increased for three consecutive months, a sign of the seasonal strength in the housing market. None of the markets posted new lows with June's report. Minneapolis posted a double-digit 10.8% annual decline; Portland is not far behind at -9.6%. Thirteen of the cities and both composites saw improvements in their annual rates; however; they all are in negative territory and have been so for three consecutive months.

The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 5.9% decline in the second quarter of 2011 over the second quarter of 2010. In June, the 10- and 20-City Composites posted annual rates of decline of 3.8% and 4.5%, respectively. Thirteen of the 20 MSAs and both monthly Composites saw their annual growth rates improve, although remaining in negative territory in June.

The National Index was up 3.6% from the 2011 first quarter, but down 5.9% compared to a year-ago," says David M. Blitzer, Chairman of the Index Committee at S&P Indices. "Looking across the cities, eight bottomed in 2009 and have remained above their lows. These include all the California cities plus Dallas, Denver and Washington DC, all relatively strong markets. At the other extreme, those which set new lows in 2011 include the four Sunbelt cities – Las Vegas, Miami, Phoenix and Tampa – as well as the weakest of all, Detroit. These shifts suggest that we are back to regional housing markets, rather than a national housing market where everything rose and fell together.

Nationally Home Prices at 2003 Levels

The only valid comparison for not seasonally adjusted prices is vs. a year ago, otherwise one must use seasonally adjusted number. Here are a pair of charts from the report.

All 20 Cities Down vs. Year ago

Seasonally-Adjusted vs. Not-Seasonally-Adjusted

Not seasonally-adjusted, home prices fell in only two cities. Seasonally-adjusted, home prices fell in 13 of 20 cities. The difference is a slight decline this quarter vs. a headline gain of +1%.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Wells Fargo Says 12 States in Economic Contraction

Posted: 30 Aug 2011 12:56 AM PDT

According to a Wells Fargo report, 12 States in Contraction, Alabama in Recession.

The report from the San Francisco-based bank said Alabama was one of 12 states experiencing an economic contraction in July and "likely slipped into a recession."

The report, written by senior economist Mark Vitner and economist Michael A Brown, said more states "are likely to fall into negative territory within the next six months" because of a persistent decline in manufacturing jobs.

Of the 12 states cited in Wells Fargo's report, five were in the South. Joining Alabama were Georgia, South Carolina, North Carolina and Virginia. The other seven states were Michigan, Nevada, Montana, Illinois, Indiana, Vermont, and Alaska.

12 Down 38 to Go

The amusing thing was Alabama state officials in denial.

Some farm states may avoid a recession this time around, but otherwise a clear picture has emerged: US In Recession Right Here, Right Now

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Monday, August 29, 2011

Mish's Global Economic Trend Analysis

Battle Brews Over Texas Public Pensions, Group Seeks End of Defined benefit Plans
Value Restoration Project: Stock Market Valuations and Trends Over Time
US In Recession Right Here, Right Now

Battle Brews Over Texas Public Pensions, Group Seeks End of Defined benefit Plans

Posted: 29 Aug 2011 01:14 PM PDT

In a prelude for what will eventually happen in every state, a Battle brews over Texas public pensions.

Texas could be gearing up for its own Wisconsin-style grudge match over public employee benefits.

A group of high-powered Houston business leaders is starting a statewide campaign to overhaul retirement for future teachers, firefighters, police officers, judges and other state and local government workers.

"I think the state needs to get the hell out of this (pension) business completely," said lawyer Bill King , who is forming Texans for Public Pension Reform with others from the Greater Houston Partnership, an über-chamber of commerce with business members representing $1.5 trillion in assets.

Talmadge Heflin, former House appropriations chairman, agreed that it is probably too late for the pension reform group to be a major force in the 2012 elections.

But they could make waves during the 2013 legislative session, said Heflin, who has advocated for similar reforms as director of the Texas Public Policy Foundation's Center for Fiscal Policy.

Pension Haircuts Mandatory

Merely doing away with public defined benefit pension plans is insufficient. The article notes ...

In 2010, eight governors made pension reform a key campaign promise with the aim of cutting government spending and appealing to tea party supporters.

Yet not one has scrapped pensions this year in exchange for a 401(k)-style system, said Stephen Fehr, a researcher with the Pew Center on the States.

The problem is that states can't save money anytime soon by doing away with pensions.

In fact, it costs more in the midterm because taxpayers must contribute more to cover the benefits accrued by retirees and current workers because new workers would no longer be chipping in to the pension, Fehr said.

When a Texas Senate committee looked in 2008 at a similar pension conversion, the committee found no compelling reason to do so.

The state's Pension Review Board at the time estimated the combined contribution from the state and employees to the Employees Retirement System of Texas would have to rise from around 17 percent of payroll to as much as 30 percent if the pension were closed to new people.

In 30 years, the contribution rate would climb beyond 80 percent .

The first step is to stop the bleeding. The way to do that is to immediately kill defined benefit pension plans for all public employees.

The second step is to admit what has been promised cannot possibly be paid. Legislation that would allow public pension plans to go bankrupt may be needed.

Like it or not, one way or another, haircuts are coming. The sooner this is recognized and acted on, the smaller (and more equitable) the haircuts would be.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Value Restoration Project: Stock Market Valuations and Trends Over Time

Posted: 29 Aug 2011 10:59 AM PDT

I have written much about valuations of stocks recently, the bear market in stocks compression of PE ratios, and normalized earnings.

An associate, JJ Abodeely has been doing the same thing. His blog "Value Restoration Project" is dedicated to valuations and trends in valuations over time.

What follows is a JJ's most recent post in entirety, Are We There Yet? The Value Restoration Project Resumes

For readability purposes, I will not follow my normal "blockquote" process of quotes. What follows is from JJ, except where he quotes another source.

click on any chart in this post for sharper image

Are We There Yet? by JJ Abodeely

The declines in the stock market over the last three weeks have done a lot of damage to most investors' portfolios. This would merely be an inconvenience if it meant that future returns could be expected to be robust enough to compensate for the losses. In a July 22nd post which coincidentally, was the most recent top in the stock market, I suggested that "the conditions present in the market suggest that the Value Restoration Project in stocks, underway in fits and starts since 2000, will eventually resume."

Investors in the stock market may rightly be viewing this recent decline of about 12% over the last 16 trading days as a painful, but necessary, correction in prices which will once again bring value back to the market. After all, as I wrote in two recent missives, Expensive Markets Mean Low or Negative Prospective Returns and Denominators Matter

The fact is that what you pay matters and expensive markets today mean low or even negative prospective returns going forward. The value restoration project, which began with the peak of the stock market in 2000, is ongoing despite a 2 year cyclical rebound on the heels of unprecedented stimulus.

History however, suggests that market prices broadly will eventually resume declining relative to several denominators, in particular, normalized earnings and gold. Since late 2009, the market's gain has been of a very different nature– not only have stocks actually declined versus gold and other currencies, but they have been powered by normalized valuations going from expensive (19-20x) to more expensive (23x). This makes the gains over the last year or so particularly vulnerable.

So, in the spirit of Summer driving season and family road trips, the recent market decline begs the question, "Are we there yet"? Unfortunately, checking in with some important valuation indicators suggests the decline of the last several weeks has not accomplished enough to merit a more aggressive long-term portfolio stance.

Normalized P/E Ratio

For most of the Spring, the S&P 500 traded between 1300 and 1350 and sported a normalized P/E ratio of around 23x trailing 10 year earnings. In Expensive Markets Mean Low or Negative Prospective Returns I noted that when the cyclically adjusted P/E ratio is between 22 and 24 the average annual real returns (after inflation) for the subsequent 10 years is -2.2%, the median is-3.1% and the distribution looked like this

With the S&P's recent decline to 1178, the Cyclically-Adjusted or "Shiller" P/E has decline from a recent high of 23.6 to a somewhat more palatable 20.4. This begs the question of what sort of long-term returns have investors historically seen when the market P/E stood at similar levels as today?

There have been 125 monthly occurrences since 1881 when the normalized P/E ratio was between 19 and 21. The average annual real return with dividends reinvested over the subsequent 10 year period is about 1.6%, with roughly a third of the 10 year periods resulting in negative returns.

While somewhat more encouraging, these are hardly the returns that dreams are made of-- or financial planning assumptions, for that matter. For those who prefer to see their probable outcomes expressed in nominal returns, the average is about 4.5%.

A thorough understanding of history suggests that today's P/E level is still not low enough to warrant a buy and hold or passive approach to U.S. stocks broadly. As Ed Easterling of Crestmont Research is fond of saying, "secular market cycles are not driven by time, but rather they are dependent upon distance—as measured by the decline in P/E to a low enough level to then enable a significant increase."

Considering that the most recent secular market is starting from a spectacularly overvalued normalized P/E of 43.8x in 2000, we have quite a bit farther to travel.

Stocks Priced in Gold

Like a normalized earnings measure, adjusting stock market prices for the effects of a nearly constantly depreciating currency, allows us to assign deeper meaning to price. Please consider my recent post Denominators Matter! What the Price of Gold Tells Us About the Value of Other Assets.

The good news is the stocks prices have become even cheaper when adjusted for gold. Amazingly, the nominal price gains since the market low in March of 2009 have now been completely lost, when adjusted for gold. While this is mainly good news for those who own gold, it also gives us insight into the process by which the market is returning to a level where real, long-lasting value can be seen.

Fellow contrarians or disciples of mean reversion may think that this trend is poised to reverse, however a longer-term perspective is in order. We can easily see the secular bull and bear cycles from this chart which shows the Dow Jones Industrials Stock Index adjusted for gold since 1969. The 7x rise in gold since 1999, coupled with the nominal price decline in the Dow or S&P 500, has gone along way towards rectifying the imbalances in the valuation of the two asset classes. However, history suggests that durable, decade long, market bottoms are made at much lower levels.

No, we are not there yet

The recent sell off in the markets have been fast and furious and it would not be surprising to see stocks recover some of the recent losses in the weeks and months ahead. However, as John Hussman wrote in Two One-Way Lanes on the Road to Ruin

It is important to recognize that the S&P 500 is presently only about 13% below its April peak, and the word "only" deserves emphasis...The main problem here is that we essentially have nowhere constructive to go on the upside - advisory sentiment is already overbullish, and despite the recent decline, our 10-year total return projection for the S&P 500 has still only climbed to 5.1% annually. The ensemble of evidence remains steeply negative here.

This evidence most certainly includes the long-term valuation measure discussed here. Investors who take steps to protect their portfolios from the inexorable value restoration project will be in position to benefit from the next real bull market in stocks.

End Value Restoration Post

Everything from "Are We There Yet?" to "End Post" is from JJ Abodeely's Value Restoration Project. If you wish to contact him, you can do so with a button on his blog.

Here are my posts regarding valuations, value traps, and earnings.

February 07, 2011: Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think

March 15, 2011: Anatomy of Bubbles; Negative Returns for a Decade Revisited; Is Gold in a Bubble?

June 20, 2011: Value Traps Galore (Including Financials and Berkshire); Dead Money for a Decade

August 17, 2011: Earnings Collapse Coming Up; Don't Worry Companies Will Still "Beat the Street"; Value Traps and Road to Ruin

August 23, 2011: Another "Lost Decade" Coming Up; Boomer Retirement Headwinds; P/E Expansion and Contraction Demographic Model; Negative Returns for a Decade Revisited

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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US In Recession Right Here, Right Now

Posted: 29 Aug 2011 12:54 AM PDT

I am amused by those who think a US recession will come within a year. Even more amusing are those who think a recession will not come at all.

The US is in a recession now. I am not the only one who thinks so.

Last Friday, I received an email from Rick Davis at Consumer Metrics, complete with an Excel spreadsheet that shows that had the GDP deflator been based on the consumer price index (CPI) rather than the BEA's measure of price inflation, the US would already be in the second quarter of contraction.

My friend Tim Wallace noted Davis' explanation would be consistent with Petroleum Distillates Demand Shows "Definite Economic Downturn Starting April/May 2011".

Thus Wallace was not surprised at all.

In the meantime, I received a set of emails from Doug Short. He had already charted what I was about to graph. Let's take a look.

The Deflator Makes Big a Difference

Please consider Will the "Real" GDP Please Stand Up? by Doug Short.

How do you get from Nominal GDP to Real GDP? You subtract inflation. The Bureau of Economic Analysis (BEA) uses its own GDP deflator for this purpose, which is somewhat different from the BEA's deflator for Personal Consumption Expenditures and quite a bit different from the better-known Bureau of Labor Statistics' inflation gauge, the Consumer Price Index.

I've updated my charts showing quarterly Real GDP since 1960 with the official and three variant adjustment techniques. The first chart is the official series as calculated by the BEA with the GDP deflator. The second starts with nominal GDP and adjusts using the PCE Deflator, which is also a product of the BEA. The third adjusts nominal GDP with the BLS (Bureau of Labor Statistics) Consumer Price Index for Urban Consumers (CPI-U, or as I prefer, just CPI). The forth chart, a recent addition prompted by several requests, adjusts nominal GDP using the Alternate CPI published by economist John Williams at shadowstats.com

The following charts are courtesy of from Doug Short.

Real GDP With GDP Deflator

Real GDP With CPI Deflator

Recession It Is

There you have it. That is what Tim Wallace spotted, that is what Rick Davis spotted, that is what Doug Short spotted.

No one really needed a chart for this.

I have been talking about a global slowdown for a long time. My only concern was if and when the NBER would agree to admit the obvious. I still do not know, but as I have stated before, I expect the NBER to backdate the recession to this quarter or next.

That is a guess, not a certainty.

Permanent Recession Since 1988?

Doug Short also produced a chart using the CPI as calculated by John Williams at ShadowStats. Here is that chart.

As much as I think GDP is nonsense (and I really do think it is nonsense, figuring the first 2% is hedonics and imputations), Williams carries the idea to ridiculous extremes.

Doug Short politely comments "I find this 'alternate Real' GDP to be interesting (in a freakish sort of way), but I personally see no credibility in the hyper-negative GDP is produces."

"Freakish" Hyperinflation Report

Please consider Williams' Hyperinflation Special Report (Update 2010)

Risks are high for the hyperinflation beginning to break in the year ahead; it likely cannot be avoided beyond 2014.

It is this environment of rapid fiscal deterioration and related massive funding needs, the U.S. dollar remains open to a rapid and massive decline and to the dumping of U.S. Treasuries. The Federal Reserve would be forced to monetize significant sums of Treasury debt, triggering the early phases of a monetary inflation. Under such circumstance multi-trillion dollar deficits rapidly would feed into a vicious, self-feeding cycle of currency debasement and hyperinflation.

Hyperinflation When?

That was written in 2009 with an update in 2010.

Amusingly in the Hyperinflation Special Report (2011) William comments on his timeline for hyperinflation.

Outside timing on the hyperinflation remains 2014, but there is strong risk of the currency catastrophe beginning to unfold in the months ahead. It may be starting to unfold as we go to press in March 2011, but moving into a full blown hyperinflation could take months to a year, beyond the onset, depending on the developing global view of the dollar and reactions of the U.S. government and the Federal Reserve. ...

The federal government and Federal Reserve's actions in response to, and in conjunction with, the economic and financial crises of 2007, however, accelerated the ultimate process—both in terms of fiscal deterioration and global perception of the issues—moving the outside horizon for hyperinflation from 2018 to 2014.

Even so, over the last year or two, the government and Fed's actions and policies, and economic and financial-market developments have continued to exacerbate the circumstance, such that there is significant chance of the early stages of the hyperinflation breaking in the months ahead. Key to the near-term timing remains a sharp break in the exchange rate value of the U.S. dollar, with the rest of the world effectively moving to dump the U.S. currency and dollar-denominated paper assets.

Williams Fails to Understand

Debt-deflation
The role of credit vs. money
Flight to cash
The significance of trillions of dollars in excess reserves just sitting there because banks are undercapitalized and there are to few credit-worthy borrowers
How little power the Fed has in controlling the demand for credit (and thus inflation)
How international trade works

Breathtaking Ignorance

That is a heck of a lot of things to not understand, but let's focus on one critical error namely Williams' statement "the rest of the world effectively moving to dump the U.S. currency and dollar-denominated paper assets".

I have commented on the invalid nature of such statements at least a dozen times. Here is one from a week ago in Michael Pettis: Long-Term Outlook for China, Europe, and the World; 12 Global Predictions

Via email, Michael Pettis at China Financial Markets shared his outlook for China, Europe, and the world. The overall outlook is not pretty, and includes a breakup of the Eurozone, a major slowdown for China, and a smack-down of the much beloved BRICs.

Pettis Writes ...

August is supposed to be a slow month, but of course this August has been hectic, and a lot crueler than April ever was. The US downgrade set off a storm of market volatility, along with bizarre concern in the US about whether or not China will stop buying US debt and the economic consequence if it does, and equally bizarre bluster within China about their refraining from buying more debt until the US reforms the economy and brings down debt levels.

What both sides seem to have in common is an almost breathtaking ignorance of the global balance of payment mechanisms. China cannot stop buying US debt until it engineers a major adjustment within its economy, which it is reluctant to do. Until it does, any move by the US to cut down its borrowing and spending will trigger a drop in global demand which will cause either US unemployment to rise, if the US ignores trade issues, or will cause Chinese unemployment to rise, if the US moves to counteract Chinese currency intervention.

Emphasis in red added.

Just the Math Ma'am

What Pettis states, and I have reiterated at least a dozens time is that as long as the US runs a trade deficit, US treasuries will have a bid.

This is not speculation, the statement is a near mathematical certainty. Moreover, the US Would Welcome China Not Buying US Treasuries! exactly the opposite of what hyperinflationists would have you believe.

Please read the link for a detailed explanation.

Yield Curve as of 2011-08-28

As the silly calls for near-term hyperinflation mount, I point out a chart of the yield curve.

click on chart for sharper image

Does that look like hyperinflation or does it look like deflation?

Back to the Real World

In the real world, Doug Short comments on Real GDP Per Capita, Year-over-Year Change, and the Next Recession

The next chart shows the YoY change in real GDP from the earliest quarterly data in 1947. I've again highlighted recessions. The red dots show the YoY real GDP for the quarter in which the recession began. The blue dot shows the latest YoY real GDP. Note: Unlike the previous chart, this one does not include a per-capita adjustment.

As the chart illustrates, the latest YoY real GDP, at 1.5%, is below the level at the onset of all the recessions since the first quarterly GDP was calculated — with one exception: The six-month recession in 1980 started in a quarter with lower YoY GDP (1.4% versus today's 1.5%). And only on one occasion (Q1 2007) has YoY GDP dropped below 1.5% without a recession starting in same quarter. In that case the recession began three quarters later in December 2007.

In his 2011 Jackson Hole speech, Chairman Bernanke observed that "growth in the second half looks likely to improve." Our look at YoY GDP percent change suggests that we must indeed see stronger second half growth to avoid the recession that now appears to be a high-probability risk. If Q3 real GDP shows a continuation of the current trend, the NBER will likely pick a month in Q2 as the beginning of a new recession.

Unless there is an immediate pickup in GDP, highly doubtful given Hurricane Irene, the NBER will backdate the recession to the second quarter, just as Tim Wallace stated.

Some analysts will blame Irene. If so, it will be just another "bullshill" excuse by analysts to avoid admitting they blew it. Bernanke may try the same ploy. If so, it will be an attempt to buy time, hoping for a miracle.

No miracles are on the horizon.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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