by Calculated Risk on 3/11/2009 01:49:00 AM

Link: A conversation with Timothy Geithner

Stress test / public-private discussion starts at just after 6 minutes ...

by Calculated Risk on 3/10/2009 11:16:00 PM

From Bloomberg: Libor Creep Says Credit Markets Risk Freeze on Policy Distrust

The cost of borrowing in dollars is rising as the global recession deepens and central bank efforts to prop up the financial system fail to prevent a growing number of banks from requiring government bailouts.

The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans climbed to 1.33 percent yesterday, the highest level since Jan. 8 ...

Short-term borrowing costs are increasing as banks hoard cash and governments struggle to thaw credit markets ... “The market is beginning to think that the solution is either not politically possible, or we can’t afford it, or maybe there isn’t a solution,” said Bob Baur, chief global economist at Des Moines, Iowa-based Principal Global Investors ...

And from Bloomberg: Bank Debt Stressed at Bear Stearns, Lehman Peaks

Bank debt is as stressed as when Bear Stearns Cos. had to be bailed out and Lehman Brothers Holdings Inc. collapsed, according to analysts at BNP Paribas SA.
...
“We’re seeing the start of the next leg of the crisis and that’s going to be financial bondholders taking a haircut as lenders default,” said Mehernosh Engineer, a London-based strategist at BNP Paribas.

by Calculated Risk on 3/10/2009 08:09:00 PM

It seems like the "D" word is everywhere. And that raises a question: what is a depression? Although there is no formal definition, most economists agree it is a prolonged slump with a 10% or more decline in real GDP.

Yesterday I heard an analyst say that a 10% unemployment rate is a depression. But the unemployment rate peaked at 10.8% in 1982, and that period is usually not considered a depression.

Some people argue the duration of the economic slump defines a depression - and the current recession is already 15 months old. That is longer than the recessions of '90/'91 and '01. The '73-'75 recession lasted 16 months peak to trough, and the early '80s recession (a double dip) was classified as a 6 month recession followed by a 16 month recession (22 months total). Those earlier periods weren't "depressions", so if duration is the key measure, the current recession still has a ways to go.

Here is a graph comparing the decline in real GDP for the current recession with other recessions since 1947. Depression is marked on the graph as -10%.

Click on table for larger image in new window.

Q1 2009 is estimated at a -7.0% decline in real GDP (Seasonally adjusted annual rate). This will push the cumulative decline (peak to trough) to about 3.4%.

Even though the current recession is already one of the worst since 1947, it is only about 1/3 of the way to a depression (assuming a terrible Q1).

To reach a depression, the economy would have to decline at about a 6.6% annual rate each quarter for the next year.

The second graph compares the current recession (estimated through Q1 2009) with the more severe recessions of the last century.

Note that the data is annual for the pre-1947 economic slumps.

The Great Depression saw real GDP decline 26.5%.

The post-WWII recession lasted 8 months and saw real GDP decline 13%. This decline in GDP was due to winding down the war effort - something that was celebrated - and is excluded when analysts call the current slump the "worst since the Great Depression".

I still think a depression is very unlikely. More likely the economy will bottom later this year or at least the rate of economic decline will slow sharply. I also still believe that the eventual recovery will be very sluggish, and it will take some time to return to normal growth.

As I noted last weekend, business cycles have a typical pattern (see Business Cycle: Temporal Order). Housing and personal consumption usually lead the economy out of recession - and both of these areas will probably be slow to recover this time.

The following table and text are an excerpt from the previous post. The table shows a simplified typical temporal order for emerging from a recession.

When Recovery Typically Starts

During Recession	Lags End of Recession	Significantly Lags End of Recession
Residential Investment	Investment, Equipment & Software	Investment, non-residential Structures
PCE	Unemployment(1)

This business cycle there are reasons that housing will not be a significant engine of recovery. It is possible - see Looking for the Sun - that new home sales and housing starts will bottom in 2009, but any recovery in housing will probably be sluggish.

That leaves Personal Consumption Expenditures (PCE) - and as households increase their savings rate to repair their balance sheets, it seems unlikely that PCE will increase significantly any time soon. So even if the economy bottoms in the 2nd half of 2009, any recovery will probably be very sluggish.

At least we know what to watch: Residential Investment (RI) and PCE. The increasingly severe slump in CRE / non-residential investment in structures will be interesting, but that is a lagging indicator for the economy.

(1) In recent recessions, unemployment significantly lagged the end of the recession. That is very likely this time too.

by Calculated Risk on 3/10/2009 06:13:00 PM

From the NY Times: Rising Appeal of Short-Term Leases

Both tenants and landlords seem to be growing afraid of commitment these days. With the economic outlook murky at best, fewer of them want to tie themselves to long leases.

In Manhattan, where office leases often last 10 years, there has been a noticeable uptick recently of leases lasting only one to three years. ...

In all of Manhattan, 21 percent of the office leases that were signed in the fourth quarter of 2008 were for three years or less, compared with 15 percent in the corresponding quarter a year earlier, according to Cushman & Wakefield, a real estate brokerage firm that compiles data on commercial transactions. Brokers say they expect short-term leases to become even more fashionable this year.

“There’s a lot of anxiety out there, and short-term decisions are easier to rationalize,” said David L. Hoffman Jr., a principal at Colliers ABR, a real estate services company.
...
[Jeff Furber, the chief executive of AEW Capital Management] said that tenants were driving the demand for short-term contracts and that he would be happy to sign office leases for five years or more. “But business conditions are deteriorating so rapidly,” Mr. Furber said. “Tenants are saying that they’re just not sure how much space they’ll need in a year or two, so it is hard for them to commit.”
...
“This is the first time that I can remember when both landlords and tenants want to do short-term leases,” [Ken Perry, the chief investment officer and director of asset management for the Swig Company] said.

He said that usually one side or the other saw an advantage in this approach, depending on which direction rents were thought to be heading. “But with all of this uncertainty in the markets, neither side wants to go long term.”

As Mr. Perry notes, usually one party or the other wants to go long term. Now landlords don't want to go long term - because they are hoping rents will recover - and tenants don't want to go long term because business conditions are deteriorating rapidly and they don't want to be stuck with excess space. Interesting times ...

Update: to be clear - it is a tenant market - so whatever the tenant wants, the tenant gets.

by Calculated Risk on 3/10/2009 03:57:00 PM

Quite an up day ....

DOW up 5.7%

S&P 500 up 6.3%

NASDAQ up 7.1%

The following graph puts the rally into perspective:

Click on graph for larger image in new window.

This 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.