Mish's Global Economic Trend Analysis

FICO Credit Scores Collapse - 25% of Americans Sink Below 600 vs. 15% Historically
Oldest Community in Colorado Puts Entire Police Department Out to Pasture
Stuck in Mid-Summer Construction Traffic? Here's Who to Blame
Indexing and Futures Take Over - Component Stocks' Correlation to S&P 500 at Highest Level Since '87 Crash
Are we "Trending Towards Deflation" or in It?

FICO Credit Scores Collapse - 25% of Americans Sink Below 600 vs. 15% Historically

Posted: 13 Jul 2010 10:14 PM PDT

The Los Angeles Times reports Credit scores sink to new lows.

Battered by unemployment and tighter lending standards, the credit scores of millions of Americans are sinking to new lows.

About 25.5% of consumers — or 43.4 million people — had credit scores below 600 in April, according to FICO Inc. Historically, only about 15% of consumers — or 25.5 million — have had scores below that level, FICO said.

Those in the middle of the spectrum have also declined. Moderate credit scores, between 650 and 699, fell to 11.9% from a historical average of 15%.

Consumers with low credit scores will have increased difficulty obtaining credit cards and other loans, said Christian deRitis, director of credit analytics at Moody's Analytics.

"Until the labor market turns around, people will remain unable to pay bills," DeRitis said. "Lowered consumption will only add extra friction to the economy."

The calculation for FICO scores considers two factors: how consistently bills are paid and how much available credit is in use. Slow or delinquent payments and high amounts of debt result in lowered scores.

Inquiring minds might be interested in charts of consumer credit and revolving credit.

Total Consumer Credit

Total Consumer Credit - Percent Change From Year Ago

Total Revolving Credit

Total Revolving Credit - Percent Change From Year Ago

Those chart are unprecedented.

Reasons

Banks are curtailing new credit
Customer attitudes towards borrowing have changed
Bank writeoffs of consumer credit have increased
Troubled consumers are paying off their credit cards and defaulting on their house. Historically, the reverse was true

The big factor is attitudes. A secular peak has turned. Think of attitudes like a pendulum. This trend has a long way to play out.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Oldest Community in Colorado Puts Entire Police Department Out to Pasture

Posted: 13 Jul 2010 07:14 PM PDT

Three cheers for San Luis, Colorado for deciding it makes no sense to keep its police force. Instead it outsourced the duties to the county sheriff's association.

Please consider Penny-Pinching Towns Put Police Out to Pasture

The sheriff will be walking the streets again in San Luis -- the oldest community in Colorado. But it's not a return to the Wild West; the town fired its entire police force to save money.

Around the country other towns -- large and small -- are also eliminating their police departments. The Los Angeles suburb of Maywood, Calif., fired its officers, as did rural Bethel, Maine. Near Pittsburgh, Fallowfield, Pa., also voted to disband its police department.

San Luis, established in southern Colorado in 1851, is facing a $750,000 budget deficit. The town of 740 residents has a median income is $20,875. It's about 225 miles from Denver.

"We just did not have the money to pay these people," San Luis Mayor Theresa S. Medina said by telephone.

She said firing the police chief and three part-time officers was expected to save about $10,000 a month in salaries, gas and car maintenance. The unanimous decision by the San Luis City Council on July 2 also saw the town's sole maintenance worker fired, leaving the town clerk as the only employee.

At the monthly town meeting, the only opposition came from the police chief, Medina said. Discussions about a volunteer force didn't make sense because the town would have liability problems, she said.

The decision to eliminate the police force in Bethel, Maine -- 70 miles northwest of Portland -- was also one that divided the vacation town of 2,500.

Bethel had only one full-time officer and five vacancies it hadn't been able to fill, Town Clerk Christen Mason told AOL News in a telephone interview.

It would have cost $453,800 for academy-trained officers. The contract with the Oxford County sheriff, which started July 1, costs $295,000 per year, she said.

In Fallowfield, Pa., the supervisors voted 2-1 to fire the two full- and three part-time officers when their contract expires Dec. 31. The town, about 25 miles south of Pittsburgh, has 4,400 residents.

Supervisor Olga Woodward said in a telephone interview that she couldn't comment because the police union may sue. However, 14 townships in Pennsylvania's Washington County have no municipal police force, she said.

"This is happening everywhere," Woodward said.

I wish this was happening everywhere. Moreover, it should happen everywhere. Unfortunately, it's not happening everywhere. Nonetheless, every trend starts somewhere and this trend is rightfully picking up steam.

Police salaries and benefits are outrageous. Unions complain their life is on the line. Yet, here is the reality - any officer whining like a stuck pig has a clear option, an option to not take the job. The Sheriff's association will take the job at a lower cost.

Shouldn't government attempt to provide the most taxpayer benefits at the least cost instead of the fewest benefits at the most cost?

Public unions, without a doubt do the latter. If you want to do something about this you have a chance. Vote against any candidate endorsed by any public union.

Finally, note the absurd slant on the AOL News article.

Penny-pinching?!

Please be serious. Towns are acting "smartly". It's about time.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Stuck in Mid-Summer Construction Traffic? Here's Who to Blame

Posted: 13 Jul 2010 01:17 PM PDT

The Herald-News reports Talks fail - Illinois construction strike drags on

Monday's negotiations failed to produce a settlement between striking union laborers and operating engineers and their employers.

Jim Sweeney, president and business manager of International Union of Operating Engineers Local 150, said he was " ... tremendously disappointed at the employers' lack of urgency."

Mish Translation: Local 150 wants employers to quickly cave into obscene union demands

"We are asking the employers to share the burden with us," Sweeney said.

Mish Translation:

This is what sharing the burden really looks like.

A press release issued Monday night by MARBA said the unions "... have been unwilling to come to the table with a proposal that is in line with the state of the industry and the economy."

The strike has stopped a wide variety of projects in nine Chicagoland area counties. Will County projects affected by the strike include the new Silver Cross Hospital in New Lenox, 159th Street work in Lockport and the Route 59 widening through Shorewood, Joliet and Plainfield.

What's MARBA?

Inquiring minds are reading About MARBA.

Formed in 1971, the Mid-America Regional Bargaining Association (MARBA) is a multi-employer association focused on collective bargaining in the construction industry. It brings together various contractor associations in the Metropolitan Chicago region for the purpose of unified labor relations.

MARBA recruits industry experts to serve in the leadership roles during negotiations. These individuals are usually one of the leading employers in the particular craft for which MARBA is negotiating. MARBA stabilizes the construction industry by unifying contractors and providing them with a strong, single voice to handle union relations.

Negotiating twenty-one separate collective bargaining agreements with ten unions is just one aspect of MARBA's services to its members.

MARBA Press Release

I happen to have a copy of a document from MARBA that shows who is really holding up contract negotiations. Here goes.

A Sense of Urgency

The union accuses employers of having "no sense of urgency". The Collective Bargaining Association points out why.

Unions are asking for a 4.55% raise per year for 3 years
The Operating Engineers' medical plan covers 100% of most medical expenses with no deductible or co-payment and the maximum deductible for anything is $300.
The Laborers' plan covers 100% of the first $10,000. After that, members are responsible for a mere $200 per calendar year deductible per person ($400 per family).

Tom Nordeen, Chairman of MARBA says "These are the kind of benefits many would envy"

I think that is quite an understatement, don't you? Yet greedy unions are holding out for obscene pay hikes on top of those benefits.

Gall of Jim Sweeney, President of Local 150

Jim Sweeney, president and business manager of International Union of Operating Engineers Local 150 has the gall to talk about "Shared Sacrifice".

What You Can Do About It

If you are in Chicago, stuck in construction-zone traffic, looking for where to place the blame, please blame the unions.

Better yet, if you want to do something about this, do not vote for any candidate who wins a union endorsement. In general that means boot Governor Quinn out of office and his Democrat cronies right along with him.

Not in Illinois?

No problem, just do the same thing in your state: Do not vote for any candidate beholden to public unions and do not vote for any candidate who thinks raising taxes is the solution to the problem of union arrogance and greed.

By the way ....
Want to know one reason medical costs are soaring?

Look how union employees have absolutely no incentive to hold down costs. They do not care what medication costs or how many tests are done. Those with high deductibles are less prone to do needless tests and more prone to use generics. Taxpayers foot the bill for this extravagance twice, once in insane salaries and pensions, the second in rising health care costs.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Indexing and Futures Take Over - Component Stocks' Correlation to S&P 500 at Highest Level Since '87 Crash

Posted: 13 Jul 2010 10:09 AM PDT

The Wall Street Journal notes that stocks are trading in lock-step more than at any time since the 1987 crash. Please consider The Herd Instinct Takes Over.

In recent weeks, stocks in the Standard & Poor's 500-stock index have shown an increasing tendency to move in the same direction at the same time. Last week, those stocks' tendency to move in the same direction as the index hit an extreme not seen since October 1987, according to research by investment group Birinyi Associates in Westport, Conn.

The average correlation since 1980 has been 44%. But by mid-June, the correlation had jumped back above 70%, as investors stopped looking for winners and just sold broadly. Last week it surpassed its 2008 high of 79% and hit 81%, the highest level since the 1987 crash, when it touched 83% for one day. That means that on most days recently, the great majority of stocks in the S&P 500 were moving in the same direction, up or down.

Correlation typically goes up during volatile periods, reflecting investors' tendency to dump stocks wholesale rather than try to pick out stocks that once were viewed as refuges, such as those that pay dividends.

Volume has been anemic during this rise, with little individual participation. So did "herding" take over or did black-box futures and flash-trading take over?

I do not consider this a good omen for equities.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Posted: 13 Jul 2010 12:18 AM PDT

Paul Krugman is worried we are Trending Toward Deflation.

Inflation has been falling, but how close are we to deflation? I found myself wondering that after observing John Makin's combusting coiffure, his prediction that we might see deflation this year.

Here's the thing: the usual way inflation is measured is by looking at the change from a year earlier. But if inflation is trending lower, that's a lagging indicator — if prices have been falling for the past few months, but were rising before that, inflation over the past year will still be positive. On the other hand, monthly data are noisy. So what to do?

Well, a crude approach would be simply to fit a trend line through those noisy monthly numbers. Here's what happens when you do this for the Cleveland Fed's median consumer price inflation number. On the vertical axis is the monthly inflation at an annual rate, on the horizontal axis months with Jan. 2008=0:

...
What I take from this is that deflation isn't some distant possibility — it's already here by some measures, not far off by others. And of course there isn't some magic boundary effect when you cross zero; falling inflation is raising real interest rates and making debt problems worse as we speak.

There is a second chart and further discussion in Krugman's article.

The Rising Threat of Deflation

The article Krugman referred to is The Rising Threat of Deflation. Here are a few snips highlighting Makin's and Krugman's concern over prices.

U.S. year-over-year core inflation has dropped to 0.9 percent—its lowest level in forty-four years. The six-month annualized core consumer price index inflation level has dropped even closer to zero, at 0.4 percent. Europe's year-over-year core inflation rate has fallen to 0.8 percent—the lowest level ever reported in the series that began in 1991. Heavily indebted Spain's year-over-year core inflation rate is down to 0.1 percent. Ireland's deflation rate is 2.7 percent. As commodity prices slip, inflation will become deflation globally in short order.

Meanwhile in Japan, while analysts were touting Japan's first-quarter real growth rate of 5 percent, few bothered to notice that over the past year Japan's gross domestic product (GDP) deflator had fallen 2.8 percent, reflecting an accelerating pace of deflation in a country where the price level has been falling every year since 2004. As of May, Japan's year-over-year core deflation rate stood at 1.6 percent.

Consumer Prices Least of Bernanke's Worries

Note the concern over the CPI by Krugman and Makin. Is that what Bernake is most worried about?

I doubt it.

Bernanke is far more likely to be worried about home prices and commercial real estate prices, neither of which are is in the CPI. Next up, Bernanke is seriously concerned over falling bank credit and marked-to-market valuations of debt on the balance sheets of banks. Those are not in the CPI either.

No doubt Bernanke is also very concerned over the falling yield curve which signals risk avoidance. Of course Bernanke is very concerned about jobs.

I do not know how to rank those concerns other than to say everyone of them is far more important to the Fed than whether the CPI drops an essentially meaningless point from here.

The CPI is meaningless because we are already back in deflation. I say "back" because we were in deflation in 2007 and 2008.

Devil is in the Definition

Whether or not we are in deflation or trending towards it depends on how it is defined.

For example, monetary purists worried about money supply alone are under the preposterous notion that we are trending towards hyperinflation.

The problem with using money supply alone as a measure of inflation is it looks (and is) damn silly. Home prices have never fallen in hyperinflation and never will. Short-term yields have never been at 0% in hyperinflation and never will. The list goes on and on.

Given that we have a fiat-based credit system, it is equally silly to discuss inflation/deflation without paying attention to credit. After all, the Fed can print but it cannot force banks to lend or consumers to spend.

Credit expansion is the key to inflation in a fiat-credit system. Those focused on prices or money supply alone, and those worried that Fed printing and excess reserves will soon spark inflation have missed the boat.

Please see Fictional Reserve Lending And The Myth Of Excess Reserves and also Fiat World Mathematical Model for a rebuttal to the notion that monetary printing will soon have the inflation genie flying out of the bottle.

Practical Definition of Inflation and Deflation

My definition of inflation is much more practical given that it incorporates credit and marked-to-market concerns that affect banks' willingness to extend credit.

I define inflation as a net expansion of money supply and credit, with credit marked-to-market. Deflation is a net contraction of money supply and credit, with credit marked-to-market.

Given that consumer credit is plunging at unprecedented rates, given that credit dwarfs money supply creation, and given that marked-to-market valuations of credit on the balance sheets of banks is again falling, I propose we are back again in deflation.

My model suggests part of 2007 and all of 2008 were deflationary years. Inflation returned in 2009, and the economy is back in deflation now.

Proof is in conditions one would expect to see in deflation.

Humpty Dumpty on Inflation

In Humpty Dumpty on Inflation I proposed a series of conditions one might expect to see in deflation. Let's take a look at the current state of those conditions.

Falling Treasury Yields - Yes
Falling Home Prices - Yes, as measured by Case-Shiller
Rising Corporate Bond Yields - Not substantially - Yet. However sovereign credit spreads are widening
Rising Dollar - Yes
Falling Commodity Prices - Yes as measured by the $CRB from the beginning of 2010
Falling Consumer Prices - Yes (or at least close) as measured by the CPI. My preferred measure would directly include home prices and that would/will tip the CPI negative soon enough. I consider housing (but not the land it sits on) a consumer good.
Rising Unemployment - It is high and essentially steady. My model suggests no improvement at best, and far more likely new highs above 11%
Falling Stock Market - Yes as measured since the start of the year
Falling Credit Marked to Market - Yes, most assuredly
Spiking Base Money supply as Fed fights Deflation - This depends on your timeframe, but charts sure show a spike - Another spike is likely
Banks Hoarding Cash - Falling consumer loans - Declining bank credit - Yes, Yes, Yes
Rising Savings Rate - Yes. The US savings rate rose to an 8-month high in May
Purchasing power of gold rising - Yes
Rising numbers of bank failures - Yes

Nearly every condition one would expect to see in deflation is happening, The few that aren't are close at hand and likely. If those are the things one would expect to see in deflation, and the scorecard is close to unanimous, I suggest that those who say this is not deflation have the wrong definition.

Note that I expect gold should rise in deflation. I say that on the basis that Gold is Money and gold in the senior currency has historically increased in value in deflationary times. Other deflationists, some very notable ones, definitely got this wrong.

Bernanke's Deflation Prevention Scorecard

In case no one is keeping track, Bernanke has now fired every bullet from his 2002 "helicopter drop" speech Deflation: Making Sure "It" Doesn't Happen Here.

Bernanke's Scorecard

Here is Bernanke's roadmap, and a "point-by-point" list from that speech.

1. Reduce nominal interest rate to zero. Check. That didn't work...
2. Increase the number of dollars in circulation, or credibly threaten to do so. Check. That didn't work...
3. Expand the scale of asset purchases or, possibly, expand the menu of assets it buys. Check & check. That didn't work...
4. Make low-interest-rate loans to banks. Check. That didn't work...
5. Cooperate with fiscal authorities to inject more money. Check. That didn't work...
6. Lower rates further out along the Treasury term structure. Check. That didn't work...
7. Commit to holding the overnight rate at zero for some specified period. Check. That didn't work...
8. Begin announcing explicit ceilings for yields on longer-maturity Treasury debt (bonds maturing within the next two years); enforce interest-rate ceilings by committing to make unlimited purchases of securities at prices consistent with the targeted yields. Check, and check. That didn't work...
9. If that proves insufficient, cap yields of Treasury securities at still longer maturities, say three to six years. Check (they're buying out to 7 years right now.) That didn't work...
10. Use its existing authority to operate in the markets for agency debt. Check (in fact, they "own" the agency debt market!) That didn't work...
11. Influence yields on privately issued securities. (Note: the Fed used to be restricted in doing that, but not anymore.) Check. That didn't work...
12. Offer fixed-term loans to banks at low or zero interest, with a wide range of private assets deemed eligible as collateral (…Well, I'm still waiting for them to accept bellybutton lint & Beanie Babies, but I'm sure my patience will be rewarded. Besides their "mark-to-maturity" offers will be more than enticing!) Anyway… Check. That didn't work...
13. Buy foreign government debt (and although Ben didn't specifically mention it, let's not forget those dollar swaps with foreign nations.) Check. That didn't work...

Bernanke has failed. "It" has happened.

Now What?

I wrote about Bernanke's Deflation Prevention Scorecard in April 2009.

Regarding points 8 and 9 above: the Fed did purchase treasuries and agencies, but admittedly without an explicit ceiling.

The Fed has stopped those purchases but is likely to start again.

Would Flattening the Curve Help?

Many propose that the Fed is likely to flatten the yield curve by setting explicit yield targets on the high end. Will that help? How?

I see no credible reason it would cause banks to go on a lending spree or consumers to go on a buying spree. Indeed, I do not see how forcing down the yield curve with massive treasury purchases will do much of anything but making a bigger exit problem for the Fed at some point down the road.

Moreover, it looks like the yield curve is falling nicely on its own accord!

Consumer Credit Inflection Point

The key problem for Bernanke is we have reached the Consumption Inflection Point - No One Wants Credit; Consumer Spending Plans Plunge

Keynesian Policies Fail

Keynesian stimulus measures have failed and will continue to fail. Please see Three Mish Segments on Tech Ticker, on Stimulus, Retail Sales, the Markets, Alternatives for details and an online interview.

We have wasted $2 trillion fighting deflation. It has not produced any jobs.

The correct way to spur growth is by fostering an economy that supports economic growth. For details, please see Bleak Outlook for Small Businesses and Job Creation; Where Obama Went Wrong, and What to do About It.

Keynesian Cures Worse than the Disease

Krugman has the wrong definition and the wrong worry. However, he is correct in his call for deflation. Unfortunately, this will lead to a bunch of "I told you so" kinds of posts from Krugman, in spite of the fact his cures are worse than the disease.

Indeed, Keynesian "cures" are one of the reasons this economy is in the mess it is in.

The final analysis shows that the real threat is not of deflation, but of absurd Keynesian and Monetarist attempts to prevent it. The Greenspan-Bernanke housing bubble (and subsequent crash), and decades of futility in Japan should be proof enough.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Tuesday, July 13, 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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