by Calculated Risk on 5/11/2009 09:12:00 PM

From Crain's Chicago Business: Foreclosure wave slams suburbia (ht Atrios)

Home foreclosures are surging in Chicago's suburbs just as they level off or decline in many city neighborhoods already ravaged by mortgage defaults.

Foreclosure cases filed in the first quarter jumped between 25% and 70% from the fourth quarter in DuPage, Will, McHenry, Lake and Kane counties, according to new data provided to Crain's by the Woodstock Institute, a Chicago-based housing advocacy group. Meanwhile, foreclosures fell 8% in Chicago, the first quarterly decline in a year.
...
The shifting locus of new foreclosures shows how the recession and job losses are supplanting subprime lending as the main driver of mortgage defaults ... While the first wave of foreclosures hit hardest in poorer city neighborhoods ... the latest round is striking middle-class areas where most borrowers qualified for standard-rate mortgages.

The decline in foreclosures in Chicago might be because of the recent moratorium, but clearly foreclosures are moving into the middle-class areas.

We're all subprime now!

And that gives me an excuse to post this ...

Click on drawing for larger image in new window.

My friend and co-blogger Tanta originated the phrase "We're all subprime now!" One of her many talents was something she called "Excel Art". This drawing is from December 2007 and is titled "The Adventures of Mortgage Pig, Chapter 4: Hanging Over the Cubicles of the Mod Squad".

The drawing is from an excel file that Tanta used to explain how Option ARM loans recast - see Tanta's UberNerd post: On Option ARMs

by Calculated Risk on 5/11/2009 06:52:00 PM

UPDATE: Speech Text: The Supervisory Capital Assessment Program

My remarks this evening will focus on the Supervisory Capital Assessment Program, popularly known as the banking stress test. ...

It is important to note that this was not a solvency test. After including capital previously provided by the Treasury, all of these banking organizations currently have capital well in excess of the minimum stated capital requirements of the supervisors. Instead, the purpose of the exercise was to determine the size of the capital cushion that each organization would need to remain well capitalized and still be able to lend--even in an economic scenario more severe than expected.
...
Conclusion
In summary, the Supervisory Capital Assessment Program is an important element of broader and ongoing efforts by the Federal Reserve, other federal bank regulators, and the Treasury to ensure that our banking system has sufficient resources to navigate a challenging economic downturn. A collateral benefit is that many lessons of the exercise can be used to improve our supervisory processes. In particular, the supervisory capital assessment has demonstrated the benefits of using cross-firm, cross-portfolio information and the simultaneous review of a number of major firms to develop a more complete and fine-grained view of the health of the banking system.

Whether the objectives of the assessment program were achieved will only be known over time. We hope that in two or three years we will be able to reflect on the banking system's return to health with a sharply diminished reliance on government capital. More immediately, we hope and expect that the public and investors will take considerable comfort from the fact that our largest financial institutions have been evaluated in a comprehensive and rigorous fashion; and that they will, as a consequence, be required to have a capital buffer adequate to weather future losses and to supply needed credit to our economy--even if the economic downturn is more severe than is currently anticipated.

Fed Chairman Ben Bernanke will speak tonight at the Atlanta Fed's Financial Markets Conference in Jekyll Island, Georgia.

I believe Bernanke will be talking about the stress tests.

I'll post a link and excerpts from the prepared text when available ...

Here is the CNBC feed (maybe they will cover the speech).

by Calculated Risk on 5/11/2009 04:52:00 PM

Here is Meredith Whitney on banks and stress tests today ...

On the stress test leaks:

"I couldn't believe how poorly the impressions leaked, how effectively people say it was leaked, if it was any other company leaking that information there would be SEC investigations all over the place."

by Calculated Risk on 5/11/2009 04:19:00 PM

By popular demand, the 2nd graph is Doug's "Mega-Bear Quartet" that includes the Nikkei and NASDAQ bear markets.

Click on graph for larger image in new window.

The first graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

This is the 2nd worst S&P 500 / DOW bear market in the U.S. in 100 years.

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

The second graph compares four significant bear markets: the Dow during the Great Depression, the NASDAQ, the Nikkei, and the current S&P 500.

See Doug's: "The Mega-Bear Quartet and L-Shaped Recoveries".

by Calculated Risk on 5/11/2009 03:09:00 PM

"We are, as far as growth is concerned, around the inflection point in the cycle"
European Central Bank President Jean-Claude Trichet, May 11, 2009

From The Times: Britain may be on road to recovery, says OECD

The worst of Britain's recession may now be over, according to the Organisation for Economic Co-operation and Development (OECD).

The OECD, the umbrella group for the top 30 developed nations, said its indicators, which are considered to be a bellwether for the global economic outlook, pointed to a strong slowdown in the OECD area, but said that Britain, France and Italy were showing “tentative signs” of a pause in the slowdown.

Canada, Japan, Germany and the US, are still in the midst of a "strong slowdown".
...
“However, with the exception of China, where signs of a pause have also emerged, major non-OECD economies still face deteriorating conditions,” the OECD said.
...
“We are, as far as growth is concerned, around the inflection point in the (economic) cycle,” said Jean-Claude Trichet, head of the European Central Bank, at a G10 meeting in Switzerland.

More from Bloomberg: Trichet Says Global Economy Is Near Turning Point

Once global growth starts to pick up, central banks will have to scale back their support for the economy, Trichet said.

“Insistence is put on the exit strategy, on the medium- term path that permits us to go back to a normal situation, a sound and sustainable situation,” he said. At the same time, central banks will “do what is necessary in terms of extraordinary measures, as long as necessary,” he added.

It took just a couple of months to go from Great Depression II to "green shoots". Now Trichet is talking about an "inflection point" and central bankers scaling back their support - this seems a little premature.

by Calculated Risk on 5/11/2009 01:44:00 PM

On Saturday I excerpted from a NY Times article Shift to Saving May Be Downturn’s Lasting Impact. I argued:

The saving rate will probably continue to rise (an aging population usually pushes the saving rate higher) and a rising saving rate will repair household balance sheets, but ... this will also keep pressure on personal consumption.

First, here is a graph of the annual saving rate back to 1929.

Click on graph for large image.

Notice that the saving rate went negative during the Depression as household used savings to supplement income. And the saving rate rose to over 25% during WWII.

There is a long period of a rising saving rate (from after WWII to 1974) and a long period of a declining saving rate (from 1975 to 2008).

Some of the change in saving rate was related to demographics. As the large baby boom cohort entered the work force in the mid '70s, the saving rate declined (younger families usually save less), however I expected the saving rate to start to rise as the boomers reached their mid-40s (in the late '90s). This didn't happen.

Perhaps the twin bubbles - stock market and housing - deluded the boomers into thinking they had saved more than they actually had. Perhaps the boomers were deluded by bad economic analysis (see David Malpass: Running on Empty?)

Whatever the reason, I expect the saving rate to continue to rise over the next year or two. And that raises a question: what will be the impact on PCE of a rising saving rate?

I created the following scatter graph for the period from 1955 through Q1 2009. This compares the annual change in PCE with the annual change in the saving rate.

Note that R-squared is only .125, so there are other factors impacting PCE (like changes in income!).

But a rising saving rate does seem to suppress PCE (as expected). If the saving rate rises to 8% by the end of 2010, this suggests that real PCE growth will be about 1% below trend per year.

So with wages barely rising, and a rising saving rate suppressing PCE, I'd expect PCE growth to be sluggish for some time. And since PCE is usually one of the engines of recovery (along with residential investment), I expect the recovery to be very sluggish too (no Immaculate recovery).

by Calculated Risk on 5/11/2009 10:51:00 AM

“Certainly the task that we have in front of us is large, but we know that we can get it done. Today it’s more probable that we would need to resort to a bankruptcy process. But there’s still a possibility and an opportunity for it to be done outside of a bankruptcy.”
GM Chief Executive Officer Fritz Henderson

The NY Times is live blogging the conference call, but there doesn't sound like much news.

GM received three bids for Hummer, and expects a sale by the end of May.

On the bonds:

Mr. Henderson said the Treasury told G.M. to offer its bondholders up to a 10 percent stake in the company in return for the $27 billion in debt that they hold but did not give a reason why. Bondholders have said the stake is too small compared to what others are receiving.

And that is why a BK is likely ...

by Calculated Risk on 5/11/2009 08:58:00 AM

A few quotes from Paul Krugman in China ...

From Reuters: Krugman fears lost decade for US due to half-steps

"We're doing half-measures that help the economy limp along without fully recovering, and we're having measures that help the banks survive without really thriving," Krugman said.

"We're doing what the Japanese did in the nineties," he told a small group of reporters during a visit to Beijing.
...
"I'm mostly worried that the U.S. and the euro zone will have Japanese-type lost decades," he said.
...
"It's clear the administration won't take radical action to strengthen the banks any time soon," he said.

by Calculated Risk on 5/10/2009 11:25:00 PM

Click on graph for larger image in new window.

The first graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

The S&P 500 is up 37.4% from the bottom, but still off 40.6% from the peak.

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

The second graph is the Shanghai SSE composite index. I used to post this graph with the subtitle "Cliff Diving"!

The Shanghai composite is up again tonight, and this index is now up 54% from the bottom, but still off 55% from the peak.

Both these markets show how the denominator impacts percentages. Imagine a market that peaked at 100 and dropped to 30. Then rallied back to 50. The market would the be up 67% from the bottom: 50 minus 30 = 20, divided by 30, but still off 50% from the peak. That is why it helps to report both numbers!

The S&P 500 is up 37.4% from the bottom, but that just puts it near the level following the early October crash.

The U.S. futures are off tonight:

CBOT mini-sized Dow

Futures from barchart.com

CME Globex Flash Quotes

And the Asian markets. The Asian markets are mixed.

And a graph of the Asian markets.

Best to all.

by Calculated Risk on 5/10/2009 06:44:00 PM

From the NY Times: White House Forecasts No Job Growth Until 2010

Speaking on C-SPAN, Christina Romer, chairwoman of the White House Council of Economic Advisers, said that she expected the G.D.P. to begin growing in the fourth quarter of this year. ... Ms. Romer also said that she expected unemployment to rise even after the economy turns, saying that the G.D.P. has to grow at a rate of about 2.5 percent before unemployment will fall. Before that happens, she said, it is “unfortunately pretty realistic” that the unemployment rate could reach 9.5 percent. A reasonable estimate for the G.D.P.’s growth rate in 2010, she said, is three percent.

Three percent is pretty close to trend growth. Although three percent is possible, I think a more sluggish recovery is likely. Note: Romer isn't forecasting a "V-shaped" recovery with strong growth coming out of the recession.

The usual engines of recovery - personal consumption expenditures (PCE) and residential investment (RI) - will both be under pressure. With nearly stagnant wages and a rising saving rate (my forecast based on households repairing balance sheets and an aging population), PCE growth will probably be below trend. And for RI, there is far too much inventory for any significant rebound in new home construction. Where will growth come from? Not investment - there is too much capacity.

Meanwhile the banking system is still very fragile, with the Obama administration gambling that the banks will earn their way out of the mess.

I'm still amazed by the bipolar outlooks of forecasters: just a few months ago, many forecasters were openly talking about a 2nd Great Depression (while I was writing about seeing a bottom in a few key leading indicators), and now some forecasters are talking about an immaculate recovery. Amazing.