by Calculated Risk on 12/12/2011 08:50:00 PM

From the WSJ: Economy Poised for Growth Spurt, but Risks Abound

Forecasting firm Macroeconomic Advisers on Friday raised its estimate to 3.7%, from 3.5%, while Goldman Sachs has raised its target to 3.4% from the 2.5% it was predicting two weeks ago.

Nomura Global Economics lifted its target from 3.7% to 3.9%, which, if achieved, would match the fastest quarterly growth of the recovery.

It does look like GDP growth will be slightly above trend in Q4, but this is still weak growth considering all the slack in the economy. Back in Q4 2009 and early 2010, real GDP increased at around 3.8% annualized for a few quarters, but almost all of that growth was from increases in private inventories (a classic inventory cycle). This quarter most of the increase will be from final demand.

However some of this "growth spurt" is just a bounce back from earlier events - auto sales have finally recovered from the impact of the tsunami, and consumer and business spending have bounced back a little from the threat of a U.S. default in August during the debt ceiling debate.

And recently personal spending has been increasing faster than personal incomes, and the saving rate has been declining. That isn't sustainable.

Also, there are significant concerns about the first half of 2012 both from the European financial crisis and from fiscal tightening in the U.S. (fiscal policy in the U.S. will subtract from GDP in 2012 even if the payroll tax cut is extended).

Overall I still expect sluggish growth in early 2012, but at a slower pace than in Q4.

by Calculated Risk on 12/12/2011 04:52:00 PM

From the WSJ: Realtors to Revise 2007-2011 Sales Data Lower

The National Association of Realtors, which publishes the monthly report on sales of previously occupied homes, said it will release revisions to home sales for 2007 through 2010 and for the first 10 months of this year. The data is scheduled to be released on Dec. 21, along with the group’s monthly report on home sales in November.

Last year the NAR reported sales of 4.9 million previously occupied homes. I expect 2010 sales to be revised down by 10% to 15%. Using the HousingTracker data, I've estimated 2010 sales will be revised down to around 4.25 million.

by Calculated Risk on 12/12/2011 03:48:00 PM

On 60 Minutes, President Obama was asked if he thought the unemployment rate could decline to 8% by next November (currently 8.6%).

From the 60 Minutes interview:

Kroft: With the unemployment [rate at] 8.6 [percent], you've still got soft consumer demand. You've got no business investment. There's still a fairly steady downturn in housing prices. Do you see some hope? Do you think that things are gonna get better? Well, do you think that you might have the unemployment rate down to eight percent by the time the election rolls around?

Obama: I think it's possible. But, you know, I'm not in the job of prognosticating on the economy.

Many forecasters think the unemployment rate will increase next year because of sluggish growth. Right now the FOMC is forecasting the unemployment rate will be in the 8.5% to 8.7% range in Q4 2012, and private forecasters are even more pessimistic. Goldman Sachs is forecasting 9% in Q4 2012, and Merrill Lynch is forecasting 8.8%.

But it is possible that we could see 8% by the election. It depends on job creation and the participation rate.

Here is a table looking at several participation rates (the current rate is 64.0%, down from 66.0% at the beginning of the recession). The participation rate is the percent of the working age population that considers themselves in the labor force.

Projections: Jobs needed to reach 8% unemployment rate by Nov 2012 All numbers in thousands.
Participation Rate	Labor Force	Employed at 8% unemployment Rate	Jobs Added over Year	Jobs added per month
63.5%	153,776	141,474	894	74
64.0%	154,987	142,588	2,008	167
64.5%	156,198	143,702	3,122	260
65.0%	157,409	144,816	4,236	353

Note: I estimated that the civilian noninstitutional population will grow at the same pace over the next year as the past year (add 1.726 million people). Also - this is jobs added in the household survey, not the establishment survey.

If the participation rate falls to 63.5%, the economy needs to add 74 thousand jobs per month for the unemployment rate to fall to 8%. But a further decline in the participation rate would not be good news. I expect the participation rate to increase if the economy improves at all.

Most likely I think the participation rate will be in the 64.0% to 64.5% range next November. That would mean the economy would need to add somewhere between 167,000 and 260,000 jobs per month. The bottom end of that range seems possible with sluggish growth, but the top end is less likely.

This is very sensitive to the participation rate. If the economy adds 167,000 jobs per month next year, and the participation rate increases to 64.5%, the unemployment rate would be at 8.7%. So 8% is possible, but it seems unlikely unless growth picks up.

by Calculated Risk on 12/12/2011 12:46:00 PM

Initially I ignored MF Global - it seemed that MF Global had inappropriately used client money and that appeared to be an unusual event. However there is another scarier possibility ...

Last week reader jb sent me a Reuters article: MF Global and the great Wall St re-hypothecation scandal

By way of background, hypothecation is when a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral but is “hypothetically” controlled by the creditor, who has a right to seize possession if the borrower defaults.
...
Re-hypothecation occurs when a bank or broker re-uses collateral posted by clients, such as hedge funds, to back the broker’s own trades and borrowings. The practice of re-hypothecation runs into the trillions of dollars and is perfectly legal.
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[I]n the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated.
...
U.S. prime brokers have been making judicious use of European subsidiaries. Because re-hypothecation is so profitable for prime brokers, many prime brokerage agreements provide for a U.S. client’s assets to be transferred to the prime broker’s UK subsidiary to circumvent U.S. rehypothecation rules.

Under subtle brokerage contractual provisions, U.S. investors can find that their assets vanish from the U.S. and appear instead in the UK, despite contact with an ostensibly American organisation.

As a followup I read an IMF working paper this weekend by Manmohan Singh and James Aitken: The (sizable) Role of Rehypothecation in the Shadow Banking System

Note: James Aitken of Aitken Advisors correctly called the subprime implosion and has been ahead of the curve on Europe too.

Rehypothecation occurs when the collateral posted by a prime brokerage client (e.g., hedge fund) to its prime broker is used as collateral also by the prime broker for its own purposes. Every Customer Account Agreement or Prime Brokerage Agreement with a prime brokerage client will include blanket consent to this practice unless stated otherwise. In general, hedge funds pay less for the services of the prime broker if their collateral is allowed to be rehypothecated.
...
A defined set of customer protection rules for rehypothecated assets exists in the United States, but not in the United Kingdom. In the United Kingdom, an unlimited amount of the customer’s assets can be rehypothecated and there are no customer protection rules. By contrast, in the United States, Rule 15c3–3 limits a broker-dealer from using its customer’s securities to finance its proprietary activities.

Bruce Krasting adds: The Fed, MFG and Reg. T

I think there is sufficient evidence today to conclude that Re-Hypothecation is at the root of the customer losses at MFG. ... Let me add one additional bit of info.

The Canadian customers of MFG got their money back within 10 days of the MFG bankruptcy. The accounts that have lost money are either USA or UK based. In Canada, re-hypothecation is not permitted. I got these comments from a Canadian MFG account holder:

The trustee where segregated MF Global Canada customers' funds were held was RBC Dominion Securities. I don't think any of these funds ever left the trustee in Canada. Likelihood is if they left, the Canadian government would have made the parent Royal Bank of Canada eat up the losses and make full restitution.

If MF Global moved their US client assets to their UK subsidiary (added: moved legally with client approval), and then followed the UK rules on rehypothecated assets - the client money is gone and nothing illegal happened. That would be the worst possible outcome.

by Calculated Risk on 12/12/2011 08:52:00 AM

Another summit. More disappointment ...

The Italian 2 year yield is up to 6.14%, and the 10 year yield is up to 6.72%. Both were below 6% last week.

The Spanish 2 year yield is up sharply to 4.7%, and the 10 year yield is up to 5.98%.

From the NY Times: Chronic Pain for the Euro

“More tests will obviously come, and soon,” perhaps as early as the opening of financial markets on Monday, said Joschka Fischer, the former German foreign minister.
...
The European stock markets had slipped by midmorning on Monday and ... Moody’s Investors Service said it could downgrade the sovereign ratings of some European Union countries in coming months, adding that the crisis remained at a “critical and volatile stage.”
...
The issue is how to promote economic growth and competitiveness in the poorer countries at the euro zone’s periphery that ran up large debts and trade deficits. “You need discipline as part of your stabilization strategy, but we also need a much stronger growth strategy for the southern countries,” including Italy, Mr. Fischer said.

Yesterday:
• Summary for Week ending Dec 9th
• Schedule for Week of Dec 11th

by Calculated Risk on 12/12/2011 12:26:00 AM

A depressing column from Paul Krugman at the NY Times: Depression and Democracy

Let’s talk, in particular, about what’s happening in Europe — not because all is well with America, but because the gravity of European political developments isn’t widely understood.

First of all, the crisis of the euro is killing the European dream. ... Specifically, demands for ever-harsher austerity, with no offsetting effort to foster growth, have done double damage. They have failed as economic policy, worsening unemployment without restoring confidence; a Europe-wide recession now looks likely even if the immediate threat of financial crisis is contained.
...
Nobody familiar with Europe’s history can look at this resurgence of hostility without feeling a shiver. Yet there may be worse things happening.

Right-wing populists are on the rise from Austria ... to Finland, where the anti-immigrant True Finns party had a strong electoral showing last April. And these are rich countries whose economies have held up fairly well. Matters look even more ominous in the poorer nations of Central and Eastern Europe.
...
And in at least one nation, Hungary, democratic institutions are being undermined as we speak.

One of Hungary’s major parties, Jobbik, is a nightmare out of the 1930s: it’s anti-Roma (Gypsy), it’s anti-Semitic, and it even had a paramilitary arm. But the immediate threat comes from Fidesz, the governing center-right party.
...
The European Union missed the chance to head off the power grab at the start ... It will be much harder to reverse the slide now. Yet Europe’s leaders had better try, or risk losing everything they stand for.

And they also need to rethink their failing economic policies. If they don’t, there will be more backsliding on democracy — and the breakup of the euro may be the least of their worries.

The Asian markets are mostly green tonight. The Nikkei is up about 1.5%, and the Hang Seng is up 1.4%.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P 500 and Dow futures are down slightly.

Oil: WTI futures are down to $99.16 and Brent is down to $108.17 per barrel.

Yesterday:
• Summary for Week ending Dec 9th
• Schedule for Week of Dec 11th

by Calculated Risk on 12/11/2011 06:18:00 PM

From Wolfgang Münchau at the Financial Times: Snags, diversions – and the crisis goes on

Remember what everybody said a week ago? To solve the crisis, the eurozone requires, in the long run, a fiscal union with a prospect of a eurozone bond and, in the short run, unlimited sovereign bond market support by the European Central Bank. What we now have is no treaty change, no eurozone bond and no increase either in the rescue fund or in ECB support. ... The crisis ... goes on.
excerpt with permission

This definitely seems like more "can kicking", although the actions of the ECB will provide some liquidity for European banks. It still doesn't seem like European policymakers have addressed the issues of growth and rebalancing.

And from the WSJ: Europe Debt-Crisis Deal Not a Cure-All

by Calculated Risk on 12/11/2011 02:39:00 PM

From Professor Hamilton: More on those secret Federal Reserve loans to banks

The claim that the Federal Reserve extended trillions of dollars in secret loans to banks continues to be spread. Here at Econbrowser we will continue to try to correct some of the misunderstanding that is out there.
...
If you take the position that each new loan should be added as a running contribution to some total, then you are led to maintain that when the Fed loans $1 B to Bank A in the form of a 30-day loan, and loans $1 B to Bank B in the form of an overnight loan that is repaid and renewed each day, then the Fed has 30 times the exposure to Bank B as it does to Bank A. You are further led to infer that the Fed could have lost $1 B in lending to Bank A but somehow could have lost $30 B lending to Bank B. And you are led to infer that it is 30 times safer to make a 1-month loan than it is to make a series of overnight loans in the same amount. Good luck managing your or anybody else's finances, if that's your way of thinking.

But Professor Wray goes on to speak admirably about an analysis by his student James Felkerson that does exactly that, and concludes that the Fed lent not $7.77 trillion but instead $29 trillion. For example, Felkerson takes the gross new lending under the Term Auction Facility each week from 2007 to 2010 and adds these numbers together to arrive at a cumulative total that comes to $3.8 trillion. To make the number sound big, of course you want to count only the money going out and pay no attention to the rate at which it is coming back in. If instead you were to take the net new lending under the TAF each week over this period-- that is, subtract each week's loan repayment from that week's new loan issue-- and add those net loan amounts together across all weeks, you would arrive at a cumulative total that equals exactly zero. The number is zero because every loan was repaid, and there are no loans currently outstanding under this program.

But zero isn't quite as fun a number with which to try to rouse the rabble.

There is much more in Hamilton's piece.

CR Note: There is much more to this story - the need for transparency, the lawsuit to have the information released - but I'm glad that Professor Hamilton is trying to correct some of the faulty analysis of the actual numbers. We have to remember that banks (and other institutions) borrow short and lend long. During a panic (a liquidity crisis), banks are stuck with solid assets that are illiquid, but they have a need for short term cash. The Fed steps in as the lender of last resort, and the banks use the long term assets as collateral to obtain cash. This is a key role for the Fed.

During the crisis, the peak liquidity lending was about $1.5 trillion. A large number, but we need to compare that to the total amount of household and corporate debt outstanding (about $24 trillion in 2009). So, at the peak of the crisis, the Fed was providing liquidity for about 6% of the outstanding corporate and household debt.

Yesterday:
• Summary for Week ending Dec 9th
• Schedule for Week of Dec 11th

by Calculated Risk on 12/11/2011 09:36:00 AM

There will be a one day meeting of the Federal Open Market Committee (FOMC) on Tuesday, December 13th. The FOMC statement will be released around 2:15 PM ET on Tuesday.

Although there are several topics currently being discussed - such as adding a probable path for the Fed funds rate to the quarterly forecasts, and another round of QE ("QE3") by buying additional Mortgage Backed Securities (MBS) - those possible changes are more likely to be announced early next year.

So I expect no changes to interest rates, or to the program to extend the average maturity of its holdings of securities, or to the policy of reinvesting principal payments.

The FOMC statement might be changed to reflect the slight improvement to incoming data - but the wording changes will probably be minor. The trends the FOMC mentioned in November have continued: "economic growth strengthened somewhat", "unemployment rate remains elevated" and "Inflation appears to have moderated". And the downside risks remain: "there are significant downside risks to the economic outlook, including strains in global financial markets".

So I expect few changes to the FOMC statement, and the key sentence will remain unchanged: "The Committee ... currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."

Charles Evans will probably argue for additional policy accommodation and he is likely to dissent again.

Yesterday:
• Summary for Week ending Dec 9th
• Schedule for Week of Dec 11th

by Calculated Risk on 12/10/2011 11:24:00 PM

Earlier:
• Summary for Week ending Dec 9th
• Schedule for Week of Dec 11th

A versusplus.com holiday econoparody sampler, including "In excess, and way so!" and "It's beginning to look a lot more riskless"