Mish's Global Economic Trend Analysis

Survey of European Banks Shows a Sharp Cutback in Lending; Three Reasons LTRO Will Not Get Banks to Lend
Obama Releases Details on His Plan to Bail Out Banks, Fannie Mae, Hedge Funds, Wall Street, Fixing MERS and Screwing Taxpayers at Same Time; Key Aspects of Plan as Presented vs. Reality
Rare Triumph of Freedom and Common Sense: Indiana Senate Sends Right-to-Work Bill for Governor Daniels’s Signature
French Consumption Drops Most Since 1997, Increased VAT Supposed to Help
Trim Tabs Fearless Forecast: US Payrolls +45,000 Jobs; Analysis of Jobs, Wages, GDP, Weekly Claims, Housing; Forced Lifestyle Changes; Boomer Drag on GDP Trends

Survey of European Banks Shows a Sharp Cutback in Lending; Three Reasons LTRO Will Not Get Banks to Lend

Posted: 01 Feb 2012 08:32 PM PST

The LTRO may have ignited the bond markets and the stock market but it did not do anything for bank lending. The New York Times reports Survey of European Banks Shows a Sharp Cut in Lending

Banks in the euro area cut lending sharply at the end of 2011, according to data published Wednesday, raising concern that Europe was on the verge of a credit crisis that could lead to a deeper recession than expected.

A quarterly survey of commercial banks by the European Central Bank showed a surge in the number of institutions that were becoming more restrictive about who they lent to, because the banks themselves were having trouble raising money and were under pressure from regulators to reduce risk.

"It is obvious that we see a deleveraging, a retrenching process unfolding," Thomas Mirow, the president of the European Bank for Reconstruction and Development, said in an interview last week. He said the figures from the Bank for International Settlements showed "this is not just perception but reality." The reconstruction bank provides credit to support the development of free markets in the former Soviet bloc.

Banks tightened their lending standards for businesses as well as for individuals, according to the central bank. Of the banks surveyed, 35 percent said they were applying stricter criteria to business loans compared with 16 percent in the previous quarter. Banks also became more reluctant to provide mortgage loans. And they said they expected credit to become more scarce in months to come.

Germany was an exception. Lending there remained steady, according to separate data published Wednesday by the Bundesbank, the German central bank.

One reason banks in the euro area are reluctant to lend is that they have their own problems raising money. About half said they were still having trouble getting access to money markets, the central bank said. Funds in the United States and elsewhere that lend large sums to banks remain wary of the health of many euro area institutions because of their holdings of European government bonds.

A fifth of banks surveyed said that the need to raise their capital reserves had forced them to restrict lending. But twice that many banks said the flagging euro area economy was the main reason for tighter credit standards.

Three Reasons LTRO Will Not Get Banks to Lend

Contrary to popular belief the LTRO is not going to do much if anything to get banks to lend. Here are the reasons.

Banks are capital impaired if not outright insolvent
There are few credit-worthy borrowers
Banks have three years guaranteed profits by speculating in government bonds

There is much ongoing debate about whether or not LTRO funding will be used to speculate in government bonds and if so how much. The bulk for the money so far as been to rollover debt, but the temptation to borrow from the ECB at 1% and buy 3-year Spanish bonds yielding 2.89%, 3-year Irish bonds yielding 5.43%, or 3-year Italian bonds at 3.8% is extremely high.

Note that even 2-year bonds are in play. For example, 2-year Italian bonds yield 3.17%. Thus, the idea that none of the LTRO will go into government bonds is unlikely to hold up under scrutiny.

Indeed banks are salivating to double or triple the €489bn they borrowed in December. For details please see You Ain't Seen Nothin' Yet; Another Trillion (or Two) Euro LTRO Coming Next Month

The LTRO is good for bank profits, for now, but please remember that speculation in government bonds is what got European banks into trouble in the first place.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Obama Releases Details on His Plan to Bail Out Banks, Fannie Mae, Hedge Funds, Wall Street, Fixing MERS and Screwing Taxpayers at Same Time; Key Aspects of Plan as Presented vs. Reality

Posted: 01 Feb 2012 12:10 PM PST

Today, under guise of helping "responsible homeowners" president Obama published details of Plan to Help Homeowners and Heal the Housing Market

Key Aspects of the President's Plan as Presented

Broad Based Refinancing to Help Responsible Borrowers Save an Average of $3,000 per Year: The President's plan will provide borrowers who are current on their payments with an opportunity to refinance and take advantage of historically low interest rates, cutting through the red tape that prevents these borrowers from saving hundreds of dollars a month and thousands of dollars a year. This plan, which is paid for by a financial fee so that it does not add a dime to the deficit, will:
Provide access to refinancing for all non-GSE borrowers who are current on their payments and meet a set of simple criteria.
Streamline the refinancing process for all GSE borrowers who are current on their loans.
Give borrowers the chance to rebuild equity through refinancing.
Homeowner Bill of Rights: The President is putting forward a single set of standards to make sure borrowers and lenders play by the same rules
Moving the Market to Provide a Full Year of Forbearance for Borrowers Looking for Work: Following the Administration's lead, major banks and the GSEs are now providing up to 12 months of forbearance to unemployed borrowers.
Pursuing a Joint Investigation into Mortgage Origination and Servicing Abuses: This effort marshals new resources to investigate misconduct that contributed to the financial crisis under the leadership of federal and state co-chairs.
Rehabilitating Neighborhoods and Reducing Foreclosures: In addition to the steps outlined above, the Administration is expanding eligibility for HAMP to reduce additional foreclosures, increasing incentives for modifications that help borrowers rebuild equity, and is proposing to put people back to work rehabilitating neighborhoods through Project Rebuild.

State of the Union Analysis

I did an analysis of the proposal based on sketchy details, immediately following the president's State of the Union Address.

Obama Proposes Mortgage Bailouts, Handouts, Copouts Exactly One Paragraph After Stating "Top to Bottom: No Bailouts, No Handouts, and No Copouts"; How the Taxpayer Ripoff Works.

$10 Billion?! Really?

The proposal as outlined rates to take every ~~"responsible"~~ underwater mortgage held by banks, Fannie Mae, Freddie Mac, hedge funds, foreign banks, and pension plans, and transfer all of them to the FHA. The idea this will only cost $10 billion is absurd.

The "small fees on the largest financial institutions" are absolutely guaranteed to not cover the cost of this monstrous proposal. Indeed there is something in Obama's proposal for everyone except "responsible citizens".

"Let's never forget: Millions of Americans who work hard and play by the rules every day" will be royally screwed by Obama's proposition in the form of higher taxes down the road.

One key point that I did not consider at the time came for reader David who said "A refinanced mortgage is a properly documented mortgage. So this also helps to clean up the mess of all the MERS, notes with broken signatures, improperly registered, etc."

There is also a change in availability, one has to be current to take advantage. So taking those points into consideration....

Five Key Aspects of the President's Plan in Reality

Bail Out Banks, Fannie Mae, Hedge Funds, Wall Street, literally everyone holding mortgage-backed paper.
Bank of America with all its Countrywide Financial garbage and Wells Fargo with all its Option ARM garbage will be especially big beneficiaries
Fix MERS. Every refinanced loan will have clear title
Throw homeowners a relatively small bone
Screw responsible taxpayers who have no mortgage as well as those who rent

Addendum:

Reader Barry comments on "responsible" taxpayers.

Hello Mish
I lived in a two bedroom apartment for 17 years with my wife, and then my wife and two sons to save up money.

I did not buy a home until 2 1/2 years ago. I bought my home with cash. I have not been to Disneyland, nor have my children been on any fancy vacations (my sons are now 6 and 8).

Since the government doesn't actually earn any money, it just distributes it, how about instead of giving these billions to those who bought homes they shouldn't have, instead they give it to people like me.

Instead of the money going to the banks to pay off mortgages that should never have been granted in the first place, I would use the money to help pay for my son's college education, my retirement, and maybe a new car which will help employ some Detroit workers.

Seriously, why should those "alleged responsible" citizens get any more consideration than I do?

Anyway, thanks for listening,

Barry

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

Rare Triumph of Freedom and Common Sense: Indiana Senate Sends Right-to-Work Bill for Governor Daniels’s Signature

Posted: 01 Feb 2012 10:45 AM PST

In a triumph of freedom and common sense over forced union slavery, the Indiana Senate Sends Right-to-Work Bill for Governor Daniels's Signature.

Indiana will become the nation's 23rd right-to-work state after its Senate exempted nonunion employees from paying dues when working alongside their unionized colleagues.

The vote was 28-22, sending the measure to Republican Governor Mitch Daniels for his promised signature. The Republican-controlled House of Representatives passed the bill Jan. 26, ending three weeks of Democratic boycotts that prevented the chamber from operating.

Republican Senator Carlin Yoder, the bill's sponsor, said unions "will still be allowed to exist." During floor debate, Yoder said right to work gives "freedom to those who don't want to be part of something they don't believe in."

Twenty-two states, mostly in the Deep South and the Rocky Mountain West, have enacted right-to-work laws. Republican gains in the 2010 elections prompted legislation in states including Wisconsin and Ohio aimed at restricting bargaining rights for government workers' unions.

The bill will be sent to Daniels' desk today and, once signed, will take effect March 14.

The bill does not go far enough. What's needed is the termination of all public union collective bargaining rights nationally. Cities and states are in trouble because politicians have been in bed with unions, driving up costs and taxpayers have to foot the bill.

It's time to end union insanity, and more importantly union slavery. This bill is a step in the right direction. To understand why, please consider ...

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

French Consumption Drops Most Since 1997, Increased VAT Supposed to Help

Posted: 01 Feb 2012 09:54 AM PST

Courtesy of Google Translate, please consider French Consumption Drops Most Since 1997

Last year, consumption of French manufactured goods, food and energy fell by 0.5% on average, the largest drop since 1997. Even during the 2008-2009 recession, the decline was not as marked. December was particularly bad (- 0.7%), raising fears of a difficult early 2012 against a backdrop of rising unemployment. Paradoxically, the government relies on the announcement of a social VAT to encourage the French to bring forward purchases before the increase in the rate in October.

Increased VAT Supposed to Help!?

Straight from the economically insane department, French president Nicolas Sarkozy wants to improve sales by increasing taxes. His belief is consumers will make major purchases before the rise in taxes.

Lovely.

What about the collapse in sales afterword? What about the need to hire then fire masses of workers because companies ramp up production now in expectation of increased sales now (that may or may not even happen), only to get rid of them later?

The idea that borrowing sales from the future will accomplish anything good is preposterous. Generally politicians make such proposals in attempt to speed up the economy by carefully timing tax credits to help their election chances. In this case Sarkozy proposed the opposite way to bring forward sales.

Bear in mind that Sarkozy's VAT increase would happen in October but French presidential elections are in April and May. Those elections are too soon for Sarkozy to benefit from his proposal. Taxpayers would likely put off purchases of major consumer goods as long as possible. Thus, an increase in sales (demand pulled forward) would likely be in July, August, and September, not February, March, and April.

Challenger François Hollande jumped all over Sarkozy's increased VAT proposal. He has a more populist message, far more likely to resonate with voters: Hollande Vows to Tax the Rich, Take Pay Cut.

Election politics aside, the French economy is slowing far more rapidly than most expected. Increased taxes whether on everyone or just the rich, certainly will not help. Such economically inane programs will intensify the strength and the length of the European recession.

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

Trim Tabs Fearless Forecast: US Payrolls +45,000 Jobs; Analysis of Jobs, Wages, GDP, Weekly Claims, Housing; Forced Lifestyle Changes; Boomer Drag on GDP Trends

Posted: 31 Jan 2012 11:20 PM PST

Last month Trim Tabs estimated December payroll growth was 38,000. ADP estimated payroll growth at 325,000. I estimated +78,000.

The BLS reported +200,000.

For details, please see Nonfarm Payroll +200,000 ; Labor Force Drops Another 50,000 ; Those Not in Labor Force Rises by 194,000 ; Unemployment Rate 8.5%

Was this a miss by Trim Tabs? ADP? Me?

Here is the correct answer, whether or not you believe the BLS: I don't know and no one else does either.

Seasonal Adjustments

The BLS numbers are subject to massive revisions. Literally millions of jobs are revised away (or added) months, even years later. December and January are typically the hardest months to estimate, subject to huge seasonal adjustments and later revisions.

Economic Turning Points

Economic turning points compound the problem greatly. The BLS readily admits its birth-death adjustments are hugely wrong at turning points.

Are we at an economic turning point now? I think so, and a turn in supporting data is all I need to convince me. If so, the BLS can be off on its numbers by a great deal.

Trim Tabs Fearless Forecast

The following weekly macro analysis and forecast (via email) is from Madeline Schnapp, Director, Macroeconomic Research, Trim Tabs. The above title is mine.

Jobs: Based on our analysis of real-time income tax withholdings, we estimate that the U.S. economy added only 45,000 jobs in January, little changed from 38,000 in December.

Wages: While the BEA reports that wages and salaries increased 3.8% in December, TrimTabs real-time analysis shows that wages and salaries rose only 2.9%. When TrimTabs data is used to replace the BEA wage and salary estimates, disposable income falls by $45 billion and the savings rate declines from 4.0% to 3.6%.

Unemployment Benefits: Expiring emergency and extended unemployment insurance benefits will likely leave Americans with as much as $25 to $50 billion less cash in 2012.

Bonuses: Wage and salary growth net of inflation weakened to -2.1% y-o-y in January from -0.5% y-o-y in December. While much of the January decline is due to lower bonuses this season relative to last, wage growth is still considerably weaker than it was in December.

Weekly Claims: Weekly initial unemployment insurance claims jumped 21,000 in the latest reporting week, coincident with the decline in seasonal adjustment factors. Last week's increase suggest recent declines were likely due to seasonal adjustments rather than a significant improvement in the labor market.

GDP: Last week's preliminary Q4 2011 GDP growth estimate of 2.8% was probably overstated. The price deflator for Q4 2011 was just 0.39%, down from 2.56% in Q3 2011. Also, two-thirds of growth in Q4 2011 was due to a swing in inventories from -1.35% in Q3 2011 to +1.94% in Q4 2011, which is likely to be reversed in Q1 2012. We believe the slowdown in GDP growth from 3.03% in 2010 to 1.72% in 2011 provides a better sense of the trend.

Housing: The housing market is likely to remain weak despite near record low mortgage rates because 23.4 million Americans are unemployed or underemployed, 10.1 million mortgage borrowers are underwater, and 6.2 million mortgage borrowers are delinquent.

Synopsis: We see nothing on the horizon to knock the economy out of its slow growth mode. The economy faces substantial headwinds from negative real wage and salary growth, high unemployment, waning government support, expiring tax incentives, contracting state and local governments, elevated fuel prices, and a sluggish housing market. The economy is highly vulnerable to economic shocks from overseas.

Commentary

Workers in the U.S. are faring much worse than U.S. government statistics indicate. The personal income report released Monday by the Bureau of Economic Analysis (BEA) reported that wages and salaries rose 3.8% y-o-y in December, while our analysis based on withholdings indicates that wages and salaries rose only 2.9% y-o-y.

We believe the BEA is missing the slowdown in wages and salaries because it relies on lagged data to compute current trends. The BEA derives its results from the Quarterly Census of Employment and Wages (QCEW) which it receives a quarter in arrears. The BEA's wage and salary data for December is derived from QCEW data from Q2 2011, when the economy was picking up steam in response to massive monetary stimulus.

To compute current wages and salaries, the BEA interpolates and extrapolates the lagged QCEW data forward, using inputs from the BLS to make necessary adjustments. Unfortunately, this methodology misses rapid changes in wages and salaries that occur when the economy moves from expansion to contraction or vice versa.

The BEA is overstating employment growth due to distortions caused by huge seasonal adjustments to the BLS employment data. The BEA will probably continue to overstate wages and salaries, personal income, and the savings rate for the period from October through December until April 2012, when QCEW data from Q4 2011 will be available.

Unemployment Insurance and Weekly Claims

Here are two of the many charts from the report.

Weekly Trend of Claims

click on chart for sharper image

Trim Tabs writes ... "At its peak in February 2010, the federal government's emergency and extended unemployment benefits programs provided assistance to 6.0 million people. Since then, the number of people receiving benefits has steadily declined, and they totaled only 3.4 million as of the week ended January 6. Since only 2.2 million jobs have been created since the recession started in December 2007—fewer than the number of people no longer receiving benefits—it is likely that 1.0 million or more people now lack both benefits and jobs."

Emphasis added.

Involuntary Retirement

I think it is much worse than that. Technically it could be as high as 3.5 million (assuming no one with expiring benefits ever found a job). It would only be a million or so, if all of them did. Neither of those extremes is likely so I will make a rough guess that 2 million lost benefits and still have no job.

However, many of those with expiring benefits likely took what I call "forced retirement". They wanted a job, needed a job, yet had no job and no prospects of a job. To survive, those of sufficient age retired involuntarily to collect social security benefits.

Weekly Trend of Benefits

Trim Tabs writes "According to the BEA, the loss of income from extended and emergency unemployment insurance benefits has amounted to $57 billion since January 2010. In the past twelve months, the loss of income amounted to $23 billion, which is equal to about 13.4% of the estimated $188 billion increase in wages and salaries in 2011. In 2012, we estimate that expiring benefits will reduce incomes by approximately $25 to $50 billion.".

It's safe to assume the loss of income is substantial, and it's about to get "more substantial". However, one does need to factor in involuntary retirement and subsequent social security payments.

Social Security Benefits

Social Security Benefits Detail

That's quite a jump. Boomer demographics is clearly at play. But how much is "involuntary retirement"?

Regardless, one thing is certain: That exponential trend is not remotely sustainable.

Forced Lifestyle Changes

One final point about social security: Retirement income does not match employment income. The presumption is "it doesn't have to".

Just how valid is that presumption? Even if it is valid, how many have sufficient savings to retire with the same lifestyle?

For someone with a mortgage and underwater on their house with rising food and energy costs, the presumption is not likely to be correct and/or savings are not likely to be sufficient.

The obvious result is a "forced lifestyle change" and less spending.

This boomer drag on GDP trends is enormous, yet few see it.

Moreover, interests rates of 0% on CDs does not help any. Those on fixed income have been clobbered by Fed policies. I have talked about this numerous times but here is a quick recap of a pair of recent articles.

Recession Rationale Stacked Up

Recent earnings reports have contained numerous misses, economic data has been generally weak in the US and very weak in Europe, and the Fed did not pledge to hold interest rates to zero through the end of 2014 for no reason.

Recession rationale is stacked up, we just need coincident indicators to confirm.

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

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Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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