by Calculated Risk on 11/13/2008 04:36:00 PM

Some day the Fed's balance sheet will shrink ... hopefully ... but for now the assets are increasing rapidly. The assets on the Fed's balance sheet have more than doubled from under $1 trillion at the beginning of 2008 to about $2.214 trillion now.

Dallas Fed President Richard Fisher commented last month that he expects the assets to grow to $3 trillion by the end of this year.

"I would not be surprised to see them aggregate to $3 trillion—roughly 20 percent of GDP—by the time we ring in the New Year."

Here is the Federal Reserve report released today.


Click on graph for larger image in new window.

The Federal Reserve assets increased $139 billion this week to $2.214 trillion. Note: the graph shows Total Factors Supplying Federal Reserve Funds and is an available series that is close to assets.

So far the graph shows Federal Reserve assets are still increasing rapidly. Fisher may be right - $3 trillion by the end of the year.

The good news is the Fed marked up the value of the Bear Stearns assets to $26,949 from $26,863 million last week - an increase of $86 million!

by Calculated Risk on 11/13/2008 02:30:00 PM

Here is another measure of credit stress. The following graph shows the spread between 30 year Moody's Aaa and Baa rated bonds and the 30 year treasury.

The Moody's data is from the St. Louis Fed:

Moody's tries to include bonds with remaining maturities as close as possible to 30 years. Moody's drops bonds if the remaining life falls below 20 years, if the bond is susceptible to redemption, or if the rating changes.

Click on table for larger image in new window.

There are periods when the spread increases because of concerns of higher default rates (like in the severe recession of the early '80s), but the recent spread is unprecedented.

by Calculated Risk on 11/13/2008 12:15:00 PM

As economic activity falls off a cliff, here is the daily look at a few credit indicators ...

LIBOR increased today breaking a 23 day streak of declines:

The London interbank offered rate, or Libor, that banks say they charge each other for such loans increased almost 2 basis points to 2.15 percent today, according to British Bankers' Association data. The last time the rate climbed was Oct. 10.

The three-month LIBOR was 2.13% yesterday so this isn't much of a change. The rate peaked at 4.81875% on Oct. 10. (unchanged)

The yield on 3 month treasuries rose to 0.18% from 0.145%. (slightly better)

This is just plain ugly, but with the effective Fed Funds rate at 0.29% (as of yesterday), this is probably somewhat in the right range. At some point, I'd like to see the effective Fed funds rate close to the target rate (currently 1.0%) and the 3 month yield within 25 bps of the target rate.

The TED spread: 1.98, unchanged (unchanged)

The TED spread is under 2.0, but still too high. The peak was 4.63 on Oct 10th. I'd like to see the spread move back down to 1.0 or lower. A normal spread is about 0.5.

The two year swap spread from Bloomberg: 112.25 up from 100.62 (worse). This spread peaked at near 165 in early October, so there has been significant progress, but I'd like to see this below 100.

Activity in the Treasury's Supplementary Financing Program (SFP). This is the Treasury program to raise cash for the Fed's liquidity initiatives. If this program slows down borrowing, I think that would be a good sign.

Here is a list of SFP sales. It has been a few days without an announcement from the Treasury... (no progress).

Weekly Fed Balance Sheet. This will be updated this afternoon.

So far the Federal Reserve assets are still increasing rapidly. It will be a good sign - sometime in the future - when the Fed assets start to decline.

The A2P2 spread is down to 4.47 from 4.61 earlier this week, and down from 4.72 two weeks ago. (slightly better).

This is the spread between high and low quality 30 day nonfinancial commercial paper.

The Fed is buying higher quality commercial paper (CP) and this is pushing down the yield on this paper (0.65% yesterday!) - and increasing the spread between AA and A2/P2 CP. So this indicator has been a little misleading. Also the recession is creating concern for lower rated paper. Still, if the credit crisis eases, I'd expect a significant decline in this spread.

Mostly a "no progress" day for these indicators ... there is a long way to go. I'm looking forward to seeing the Fed's balance sheet (to be released at 4:30PM ET).

by Calculated Risk on 11/13/2008 11:00:00 AM

From Campbell Surveys: Survey of Real Estate Agents Shows 19% Drop In Home Sales From September to October (no link)

Stresses in the real estate market caused U.S. home sales to fall sharply between September and October, according to a national survey of more than 2,500 real estate agents conducted November 1-8.

According to the survey firm, Campbell Communications, buy-side agents responding to the survey indicated a 19% drop in completed transactions between the months of September and October. Declines were especially severe for sales of non-distressed properties in states where home prices have fallen rapidly during the past year, agents indicated. For example, buy-side agents indicated a 22% decline in non-distressed sales in Florida, a 32% drop in California, and a 51% drop in Michigan.

The most recent Pending Home Sales report from the NAR indicated a decline in pending sales in September, but this survey suggests pending sales fell off a cliff in October.

by Calculated Risk on 11/13/2008 10:54:00 AM

Rumor has it Petco is applying to become a bank holding company (just kidding - from BR!).

From the WSJ: CIT Looks to Transform Into Bank

Commercial lender CIT Group Inc. said it has applied to become a bank holding company, looking to access part of the Federal Reserve's $700 billion in funds being pumped into financial companies and to participate in the Treasury Department's $250 billion capital-infusion program.

by Calculated Risk on 11/13/2008 09:03:00 AM

A few points from the trade report:

Both imports and exports are declining.

The oil trade deficit is falling sharply, and will fall much further. The petroleum deficit was just over $32 billion in September, and that was based on average oil prices of $107.58 per barrel for the month. With oil now trading in the $50s, the petroleum deficit will decline sharply in coming months.

The trade deficit with China was a record $27.8 billion.

The Census Bureau reports:

[T]otal September exports of $155.4 billion and imports of $211.9 billion resulted in a goods and services deficit of $56.5 billion, down from $59.1 billion in August, revised. September exports were $9.9 billion less than August exports of $165.3 billion. September imports were $12.5 billion less than August imports of $224.4 billion.

Click on table for larger image in new window.

This graph from the Census Bureau shows that both imports and exports are declining.

Although the trade deficit is declining - and will decline more in coming months because of the decline in oil prices - growth in export related business will probably no longer be a positive for the U.S. economy as the global economy slides into recession too.

This graph shows the U.S. trade deficit through September. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. The current recession is marked on the graph.

The oil deficits is starting to decline and will decline much further in October and November. Note that the trade deficit ex-petroleum is really a China problem now (the trade deficit with China was a record $27.8 billion in September).

by Calculated Risk on 11/13/2008 08:39:00 AM

Initial unemployment claims of 516,000 were the highest since Sept 2001; just after the attacks of 9/11. Continued unemployment claims are at the highest level since 1983.

The DOL reports on weekly unemployment insurance claims:

In the week ending Nov. 8, the advance figure for seasonally adjusted initial claims was 516,000, an increase of 32,000 from the previous week's revised figure of 484,000. The 4-week moving average was 491,000, an increase of 13,250 from the previous week's revised average of 477,750.
...
The advance number for seasonally adjusted insured unemployment during the week ending Nov. 1 was 3,897,000, an increase of 65,000 from the preceding week's revised level of 3,832,000.

Click on graph for larger image in new window.

The first graph shows weekly claims. The four moving average is at 491,000. This is a very high level, and indicates significant weakness in the labor market.

Continued claims are now at 3.897 million, the highest level since 1983.

The second graph shows continued claims since 1989.

Note: Continued claims hit 4.7 million during the 1982 recession (not shown), although the population was much smaller then. The unemployment rate peaked at 10.8% in 1982 (compared to 6.5% currently).

This suggests that Novemeber will be another very weak month for employment.

by Calculated Risk on 11/13/2008 01:06:00 AM

From The Times: Economy faces sharpest downturn for 30 years

The British economy faces its toughest year in almost three decades, the Governor of the Bank of England said yesterday. Mervyn King gave warning of “very difficult times” ahead and an even sharper recession than that of the early Nineties.
...
In a dire forecast, the Bank predicted that the economy would shrink next year by up to 2 per cent. A slump on this scale would outstrip even the brutal downturn of 1991, when GDP fell 1.4 per cent. It would mark the economy’s gravest year since 1980 ...

The report said that the slowdown could be deeper and longer lasting if banks continued to curb their lending, if consumers and businesses had to cut spending even more sharply and if unemployment climbed even more rapidly than is feared.

by Calculated Risk on 11/12/2008 09:37:00 PM

Check out the ABX-HE-AAA- 07-2 close today. More Cliff Diving!

Note: The ABX indices are based on credit default swaps (CDS) for various tranches of subprime mortgage-backed securities (MBS). For some background, here is a post at the Cleveland Fed back in March, 2007.

All of the CMBX indices are setting new record lows again.

Check out the CMBX-NA-BB-4 close today. To the moon, Alice!

The CMBX is a CMBS (Commercial Mortgage-Backed Securities) credit default index just like the ABX - except up is down for the CMBX indices. The CMBX is quoted as spreads, whereas ABX is quoted as bond prices. When the spreads increase - chart going up - the bond prices are going down.

by Calculated Risk on 11/12/2008 08:09:00 PM

Professor Duy writes a regular column at Economist's View called Fed Watch - it is definitely worth reading (as is Economist's View).

From Fed Watch: Misguided Policies

From the wires:

15:30 *PAULSON SAYS MARKET TURMOIL WON'T ABATE UNTIL HOUSING REBOUNDS

Such comments always leave me with a sick feeling in my stomach – if policymakers are waiting for the housing market to rebound, they had better be prepared for a long wait. ... I think the biggest potential for policy error lies in maintaining the delusion that preventing housing, and by extension, consumer spending, from adjusting is central to fixing the nation’s economy. Policy would be best focused on supporting the inevitable transition away from debt-supported consumer dependent growth dynamic.

Housing prices are falling because fundamentally the price of housing became unaffordable.
emphasis added

Dr. Duy offers some suggestions for policy makers:

Policymakers need to come clean with the American public: Future patterns of growth will simply be less dependent on consumer spending. We are entering a period of structural adjustment, and it will be painful. We spent decades pretending that the relentless focus on producing nontradable goods and relying on a ballooning current account deficit to hide our lack of productive capacity was an appropriate policy approach. But ultimately, those policies have failed us, with stagnant income growth for median income families and the deepest recession since the 1980’s (or even worse).

This admission, however, in no way, shape, or form means policy options are limited. The admission simply defines your policy. In the short term, policy can cushion the transition by expanding the social safety net. In the medium term, if consumption is falling, and private investment is unable to compensate, then the federal authority should fill the gap. There is no shortage of sectors of the economy that offer opportunities for investment. In so many ways, we are running on the fumes of the infrastructure investment made by the last generation. Roads, bridges, channels, etc. – you name it, there is an opportunity. Or human capital, via education?... Reasonable policymakers free from ideological constraints can develop a host of potential projects without relying on bridges to nowhere.

Investment in infrastructure makes sense, especially since construction (and construction employment) is one of the hardest hit sectors of the economy. And with the commercial real estate slump picking up steam (and more construction job losses to come), what better area to invest than in the infrastructure of the U.S.A.?