by Calculated Risk on 1/22/2009 02:01:00 PM

Here is a partial transcript from Susie Gharib’s interview with Warren Buffett airing tonight on Nightly Business Report. You can check your local listings here

SUSIE GHARIB, ANCHOR, NIGHTLY BUSINESS REPORT: Are we overly optimistic about what President Obama can do?

WARREN BUFFETT, CHAIRMAN, BERKSHIRE HATHAWAY: Well I think if you think that he can turn things around in a month or three months or six months and there’s going to be some magical transformation since he took office on the 20th that can’t happen and wouldn’t happen. So you don’t want to get into Superman-type expectations. On the other hand, I don’t think there’s anybody better than you could have had; have in the presidency than Barack Obama at this time. He understands economics. He’s a very smart guy. He’s a cool rational-type thinker. He will work with the right kind of people. So you’ve got the right person in the operating room, but it doesn’t mean the patient is going to leave the hospital tomorrow.
...
SG: But I know that during the election that you were one of his economic advisors, what were you telling him?

WB: I was telling him business was going to be awful during the election period and that we were coming up in November to a terrible economic scene which would be even worse probably when he got inaugurated. So far I’ve been either lucky or right on that. But he’s got the right ideas. He believes in the same things I believe in. America ’s best days are ahead and that we’ve got a great economic machine, its sputtering now. And he believes there could be a more equitable job done in distributing the rewards of this great machine. But he doesn’t need my advice on anything.
...
SG: What’s the most important thing you think he needs to fix?

WB: Well the most important thing to fix right now is the economy. We have a business slowdown particularly after October 1st it was sort of on a glide path downward up til roughly October 1st and then it went into a real nosedive. In fact in September I said we were in an economic Pearl Harbor and I’ve never used that phrase before. So he really has a tough economic situation and that’s his number one job. Now his number one job always is to keep America safe that goes without saying.

SG: But when you look at the economy, what do you think is the most important thing he needs to fix in the economy?

WB: Well we’ve had to get the credit system partially fixed in order for the economy to have a chance of starting to turn around. But there’s no magic bullet on this. They’re going to throw everything from the government they can in. As I said, the Treasury is going all in, the Fed and they have to and that isn’t necessarily going to produce anything dramatic in the short term at all. Over time the American economy is going to work fine.

SG: There is considerable debate as you know about whether President Obama is taking the right steps so we don’t get in this kind of economic mess again, where do you stand on that debate?

WB: Well I don’t think the worry right now should be about the next one, the worry should be about the present one. Let’s get this fire out and then we’ll figure out fire prevention for the future. But really the important thing to do now is to figure out how we get the American economy restarted and that’s not going to be easy and its not going to be soon, but its going to get done.

SG: But there is debate about whether there should be fiscal stimulus, whether tax cuts work or not. There is all of this academic debate among economists. What do you think? Is that the right way to go with stimulus and tax cuts?

WB: The answer is nobody knows. The economists don’t know. All you know is you throw everything at it and whether it’s more effective if you’re fighting a fire to be concentrating the water flow on this part or that part. You’re going to use every weapon you have in fighting it. And people, they do not know exactly what the effects are. Economists like to talk about it, but in the end they’ve been very, very wrong and most of them in recent years on this. We don’t know the perfect answers on it. What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake and we don’t know how effective in the short run we don’t know how effective this will be and how quickly things will right themselves. We do know over time the American machine works wonderfully and it will work wonderfully again.

SG: But are we creating new problems?

WB: Always

There is much more including a discussion of Madoff.

Saturday UPDATE: Full transcript is now online: Warren Buffett One on One, Extended Transcript

by Calculated Risk on 1/22/2009 12:16:00 PM

From CNBC: Former Merrill CEO Thain Leaving Bank of America

Former Merrill Lynch CEO John Thain agreed to resign from Bank of America ... less than a week after Bank of America was forced to seek $20 billion in government bailout money to absorb Merrill.
...
Merrill, meanwhile, decided to move up its year-end bonuses, doling out cash just days before it was officially acquired by Bank of America, it was reported earlier Thursday.

Take the money and run ...

by Calculated Risk on 1/22/2009 09:48:00 AM

The Dept of Transportation reports on U.S. Traffic Volume Trends:

Travel on all roads and streets changed by -5.3% (-12.9 billion vehicle miles) for November 2008 as compared with November 2007. Travel for the month is estimated to be 230.4 billion vehicle miles.

Cumulative Travel for 2008 changed by -3.7% (-102.1 billion vehicle miles). The Cumulative estimate for the year is 2,656.2 billion vehicle miles of travel.

Click on graph for larger image in new window.

This graph shows the annual change in the rolling 12 month average of U.S. vehicles miles driven. Note: the rolling 12 month average is used to remove noise and seasonality.

By this measure, vehicle miles driven are off a record 3.7% Year-over-year (YoY); the decline in miles driven is worse than during the early '70s and 1979-1980 oil crisis. As the DOT noted, miles driven in November 2008 were 5.4% less than November 2007, so the YoY change in the rolling average may get worse.

So far the slowing economy is more than offsetting the sharp decline in gasoline prices last year.

by Calculated Risk on 1/22/2009 09:09:00 AM

Click on image for larger image in new window.

Just headlines for now.

by Calculated Risk on 1/22/2009 08:52:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending Jan. 17, the advance figure for seasonally adjusted initial claims was 589,000, an increase of 62,000 from the previous week's revised figure of 527,000. The 4-week moving average was 519,250, unchanged from the previous week's revised average of 519,250.
...
The advance number for seasonally adjusted insured unemployment during the week ending Jan. 10 was 4,607,000, an increase of 97,000 from the preceding week's revised level of 4,510,000. The 4-week moving average was 4,559,750, an increase of 58,750 from the preceding week's revised average of 4,501,000.

Click on graph for larger image in new window.

The first graph shows weekly claims and continued claims since 1971.

The four week moving average is at 519,250; a decline from the recent peak of 558,750
in December.

Continued claims are now at 4.61 million, just below the high time peak of 4.71 million in 1982.

The second graph shows the 4-week average of initial weekly unemployment claims (blue, right scale), and total insured unemployed (red, left scale), both as a percent of covered employment.

This normalizes the data for changes in insured employment.

As I've noted before that by these measures, the current recession is already worse than the '01 recession, and about the same as the '90/'91 recession - but far less than the severe recessions of the early '70s and early '80s.

by Calculated Risk on 1/22/2009 08:30:00 AM

Click on graph for larger image in new window.

Total housing starts were at 550 thousand (SAAR) in December, by far the lowest level since the Census Bureau began tracking housing starts in 1959.

Single-family starts were at 398 thousand in December; also the lowest level ever recorded (since 1959). Single-family permits were at 363 thousand in November, suggesting single family starts may fall even further next month.

Here is the Census Bureau report on housing Permits, Starts and Completions.

Building permits decreased:

Privately-owned housing units authorized by building permits in December were at a seasonally adjusted annual rate of 549,000. This is 10.7 percent (±1.3%) below the revised November rate of 615,000 and is 50.6 percent (±1.6%) below the revised December 2007 estimate of 1,111,000.

Single-family authorizations in December were at a rate of 363,000; this is 12.3 percent (±1.5%) below the November figure of 414,000. Authorizations of units in buildings with five units or more were at a rate of 170,000 in December.

On housing starts:

Privately-owned housing starts in December were at a seasonally adjusted annual rate of 550,000. This is 15.5 percent (±9.3%) below the revised November estimate of 651,000 and is 45.0 percent (±6.1%) below the revised December 2007 rate of 1,000,000.

Single-family housing starts in December were at a rate of 398,000; this is 13.5 percent (±11.2%) below the November figure of 460,000. The December rate for units in buildings with five units or more was 145,000.

And on completions:

Privately-owned housing completions in December were at a seasonally adjusted annual rate of 1,015,000. This is 5.2 percent (±11.9%)* below the revised November estimate of 1,071,000 and is 23.6 percent (±9.2%) below the revised December 2007 rate of 1,329,000.

Single-family housing completions in December were at a rate of 668,000; this is 13.1 percent (±12.5%) below the November figure of 769,000. The December rate for units in buildings with five units or more was 330,000.

Once again, note that single-family completions are significantly higher than single-family starts. This is important because residential construction employment tends to follow completions, and completions will probably continue to decline.

Another extremely weak report ...

by Calculated Risk on 1/22/2009 01:06:00 AM

From Bloomberg: BOJ to Consider Buying Company Bonds; Cuts Forecasts

The Bank of Japan said it ... may buy corporate bonds with a maturity of up to one year ...

Policy makers today slashed their forecasts for growth and signaled a return to deflation in a quarterly review of the economic outlook.

It sounds like Japan and the U.K are both in worse shape than the U.S.

A late night thread for you all.

by Calculated Risk on 1/21/2009 09:39:00 PM

From Bloomberg: China GDP Grew 6.8% in Fourth Quarter, Slowest Pace in 7 Years

China’s economy expanded 6.8 percent in the fourth quarter, the slowest pace in seven years, dragging down growth across Asia and increasing pressure for more stimulus measures as exports plunge.
...
Plummeting Chinese demand for parts and materials for exports is reverberating across Asia and the Pacific, driving Taiwan, South Korea and Australia closer to recessions and worsening Japan’s slump. Premier Wen Jiabao said this week that the government must work urgently this quarter to reverse the slowdown and maintain social stability amid a “very grim” outlook for jobs.

UPDATE: China reports GDP on a Year over year basis, as opposed to an annual rate for each quarter. As Roubini notes: The Chinese Devil Wears Prada: Why 0% Growth is the New Size 6.8%

The Chinese came out today with their 6.8% estimate of Q4 2008 growth. China publishes its quarterly GDP figure on a year over year basis, differently from the U.S. and most other countries that publish their GDP growth figure on a quarter on quarter annualized seasonally adjusted (SAAR) basis.

When growth is slowing down sharply the Chinese way to measure GDP is highly misleading as quarter on quarter growth may be negative while the year over year figure is positive and high because of the momentum of the previous quarters’ positive growth.

Indeed if one were to convert the 6.8% y-o-y figure in the more standard quarter over quarter annualized figure Chinese growth in Q4 would be close to zero if not negative.

by Calculated Risk on 1/21/2009 07:44:00 PM

The American Institute of Architects reports: Architecture Billings Index Remains at Historically Low Levels


Click on graph for larger image in new window.

Following consecutive months with record low scores, with the Architecture Billings Index (ABI) moved up only very modestly, signifying that the design industry remains mired in a steep downturn. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the December ABI rating was 36.4, up from the 34.7 mark in November (any score above 50 indicates an increase in billings). The inquiries for new projects score was 37.7.

“The inability to get financing for construction projects is a key reason that business conditions continue to be so poor at design firms,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “It will be important to see what the proposed economic stimulus package includes that is geared towards the construction industry, and how quickly developers who have had to put projects on hold can get them moving again.”

Commercial / industrial and multi-family residential are the hardest hit sectors. This is just more evidence that non-residential investment in structures will fall off a cliff in 2009.

by Calculated Risk on 1/21/2009 06:23:00 PM

From Northern Trust Chief Economist Paul Kasriel: DUBYA

No, our title does not refer to our 43rd president. Rather, it refers to the shape of an economic scenario that is beginning to look to us as the most probable going forward. The current economic environment is indeed bleak and there are precious few signs of a recovery. But we believe that if the massive fiscal stimulus package being worked up in Congress is financed largely by the banking system and the Federal Reserve, there is a good chance the economy will begin to grow by the fourth quarter of this year and continue to do so throughout 2010. And if we are correct on this, we also believe there is a good chance that the consumer price index will be advancing at a fast enough pace by the second half of 2010 to induce the Federal Reserve to become more aggressive in draining credit from the financial system. This could set the stage for another recession commencing in 2012, or perhaps some time in 2011. So, the shape of the path of economic activity we see over the next few years is not a “V”, a “U”, or an “L”, but a “W” – down, up, down, up, all within four or five years.

I think there is a good chance that the stimulus package will lead to positive GDP growth later this year (although we still need to see the details) . Northern Trust is forecasting positive GDP growth in Q4 2009.

[W]hat is our rationale for a late-2009 economic recovery and a subsequent 2011 or 2012 slowdown/downturn? Massive federal spending funded by the Federal Reserve and the banking system. The Obama administration and Congress are in the process of developing a two-year fiscal stimulus package that at last, but likely not the final, count totals $825 billion. This fiscal stimulus program will include all things to all people – traditional and non-traditional infrastructure spending, aid to state and local governments, expansion of food stamp and unemployment insurance programs, and tax cuts for households and businesses. This massive federal spending and tax cut program will be financed by issuing additional federal debt. Who is likely to purchase this debt? The Federal Reserve and the banking system.

This is an interesting suggestion. I've been concerned about rising rates because of the huge financing needs of the U.S. government. Kasriel is suggesting this debt will be bought by the Federal Reserve to keep rates down.

The implication of the banking system and the Federal Reserve monetizing large proportions of nonfinancial sector borrowing – government or private sector – is that the borrowers are able to increase their spending without any other entity cutting back on its spending. Thus, in terms of the GDP accounts, total spending in the economy increases. This is why we expect a recovery in real GDP by the fourth quarter of this year.

If monetizing nonfinancial debt were costless, economically speaking, the Zimbabwean economy would be the envy of the world. But, of course, there are economic costs. Monetizing debt means printing money. And printing money ultimately leads to accelerating prices – prices of goods, services and assets.
...
If we are correct that a real GDP recovery commences by the fourth quarter of this year, then we believe the Federal Reserve will cautiously begin slowing its credit creation in the first half of 2010 – that is, the Fed will begin to slowly increase the federal funds rate. We then see inflationary pressures intensifying in the second half of 2010 and the Fed reacting to this with more aggressive hikes in the federal funds rate. This is what we believe will trigger the next official recession, or at least, growth recession.

In conclusion, over much of 2009, the year-over-year change in the CPI is likely to be negative. We advise investors not to extrapolate this “deflation” into 2010 and 2011. With the massive monetization of debt that is likely to occur, increases in the CPI are expected to resume.

It is amazing how people are swinging from fears of inflation to fears of deflation to fears of inflation again.