by Calculated Risk on 10/04/2011 04:00:00 PM

Click on graph for larger image in new window.

The first graph shows the S&P 500 since 1990 (this excludes dividends).

The dashed line is the closing price today. The S&P 500 was first at this level in April 1998; over 13 years ago.

The second graph (click on graph for larger image) from Doug Short shows the sharp decline over the last few weeks.

The S&P dipped into bear market territory (down 20%) within the day, but closed up over 2%. This puts the S&P500 down about 17.5% from the recent peak.

by Calculated Risk on 10/04/2011 12:26:00 PM

The following article makes a few key points that we've been discussing:
• It is very unlikely that the U.S. economy was in a technical recession at the end of Q3. In fact, Goldman revised up their Q3 forecast to 2.5% (Merrill Lynch and others revised up their Q3 forecasts too). The recent data suggests sluggish growth, not recession (examples include the ISM manufacturing survey showing expansion in September, the Chicago PMI increasing, and auto sales back up over 13 million SAAR).

• There are clear downside risks to the U.S. economy mostly from the European financial crisis, the apparent renewed recession in Europe, and from U.S. fiscal tightening. However the potential spillover from Europe is difficult to quantify.

• Since the cyclical sectors in the U.S. remain very depressed, it is difficult for those sectors to fall significantly. Usually these sectors decline prior to a recession in the U.S., and that is not happening now.

From Jeff Cox at CNBC: Recession Chance 40% in 2012, Jobless Rate to 9.5%: Goldman

Jan Hatzius, Goldman's chief US economist, pegged recession chances at 40 percent and said the jobless rate is likely to surge to the mid-9 percent range in 2012.

While that still jibes with the firm's forecast that a recession — or two consecutive quarters of negative growth — is not the most likely scenario, the warning signs flashed Tuesday underscore concerns about European debt contagion on an already fragile US economy.

Here are the upside and downside risks from the research note:

The upside risk is that either financial stresses ease--with the most likely cause of this a more aggressive and coordinated move by European policymakers to turn the tide--or that the spillovers from those financial stresses into US credit and financial conditions prove relatively limited. The quickest and easiest way to gauge the former is the behavior of borrowing spreads for sovereigns in the European periphery, and banks in the Eurozone as a whole. ... Without a clear pass-through into domestic financial or credit conditions, the base-case outlook would revert to our previous forecast of trend or slightly-below trend growth in 2012. (The "hard data" on the economy have held up sufficiently well in the third quarter that we now expect 2.5% growth in Q3, from 2.0% previously.)

The downside risk is of course that these financial spillovers--or conceivably some other shock, perhaps greater fiscal tightening in 2012 than we now anticipate--prove sufficient to push the US economy into recession; both a quantitative model and our subjective assessment put recession risk in the neighborhood of 40% at this point. For now, we still think the base case is that the US economy avoids this outcome. The cyclical sectors of the economy are already quite depressed--in particular, homebuilding is barely above the depreciation rate of housing--so downside looks more limited.

by Calculated Risk on 10/04/2011 10:00:00 AM

Fed Chairman Ben Bernanke's testimony, "Economic Outlook and Recent Monetary Policy Actions", Before the Joint Economic Committee, United States Congress, Washington, D.C.

Here is the CSpan feed

Prepared testimony: Economic Outlook and Recent Monetary Policy Actions

Recent revisions of government economic data show the recession as having been even deeper, and the recovery weaker, than previously estimated; indeed, by the second quarter of this year--the latest quarter for which official estimates are available--aggregate output in the United States still had not returned to the level that it had attained before the crisis. Slow economic growth has in turn led to slow rates of increase in jobs and household incomes.

The pattern of sluggish growth was particularly evident in the first half of this year, with real gross domestic product (GDP) estimated to have increased at an average annual rate of less than 1 percent. Some of this weakness can be attributed to temporary factors. Notably, earlier this year, political unrest in the Middle East and North Africa, strong growth in emerging market economies, and other developments contributed to significant increases in the prices of oil and other commodities, which damped consumer purchasing power and spending; and the disaster in Japan disrupted global supply chains and production, particularly in the automobile industry. With commodity prices having come off their highs and manufacturers' problems with supply chains well along toward resolution, growth in the second half of the year seems likely to be more rapid than in the first half.

However, the incoming data suggest that other, more persistent factors also continue to restrain the pace of recovery. Consequently, the Federal Open Market Committee (FOMC) now expects a somewhat slower pace of economic growth over coming quarters than it did at the time of the June meeting, when Committee participants most recently submitted economic forecasts.

And on policy:

One crucial objective is to achieve long-run fiscal sustainability. The federal budget is clearly not on a sustainable path at present. ...

A second important objective is to avoid fiscal actions that could impede the ongoing economic recovery. These first two objectives are certainly not incompatible, as putting in place a credible plan for reducing future deficits over the longer term does not preclude attending to the implications of fiscal choices for the recovery in the near term.
...
In view of the deterioration in the economic outlook over the summer and the subdued inflation picture over the medium run, the FOMC has taken several steps recently to provide additional policy accommodation.
...
Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy. Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector. Fiscal policy is of critical importance, as I have noted today, but a wide range of other policies--pertaining to labor markets, housing, trade, taxation, and regulation, for example--also have important roles to play. For our part, we at the Federal Reserve will continue to work to help create an environment that provides the greatest possible economic opportunity for all Americans.

by Calculated Risk on 10/04/2011 08:45:00 AM

From the NY Times: Rescue Aid to Greece Delayed as Pressure Rises for Reforms

Meeting in Luxembourg, the finance ministers made it clear that Greece was now unlikely to receive 8 billion euros ($10.6 billion) before November.

Greece has said it could default on its debt within weeks without the aid — an outcome with potentially disastrous consequences for the euro zone.

From the WSJ: Greece: Finances Can Withstand Delay

Greece's government has enough cash to continue operating until the middle of November, the country's finance minister said Tuesday, after euro-zone finance ministers delayed the disbursement of the next tranche of promised aid for the debt-stricken country.

"Until mid-November there is no problem," Finance Minister Evangelos Venizelos said at a news conference. "We have done a cash-flow forecast and our estimates are secure."

Meanwhile, on approving the expanded European Financial Stability Facility (EFSF), Slovakia’s will vote sometime between October 11th and October 14th, there will be a vote in Malta tomorrow (Wednesday), and the Dutch vote on October 12th. The goal is to have full ratification before the EU summit on October 17th.

by Calculated Risk on 10/03/2011 10:28:00 PM

A busy day ... here are the earlier posts:
• ISM Manufacturing index increases in September
• Construction Spending increased in August
• U.S. Light Vehicle Sales at 13.1 million SAAR in September
• LPS: Foreclosure Starts increased in August, Seriously Delinquent Mortgage Loans fall to 2008 levels

CR Note: Surferdude808 started compiling the unofficial problem bank list over two years ago. Thanks!

From surferdude808:

With the third quarter of 2011 coming to an end this past Friday, it is time to update the Unofficial Problem Bank List transition matrix. The list debuted on August 7, 2009 with 389 institutions with assets of $276.3 billion (see table below). Over the past 25 months, about 54 percent or 210 institutions have been removed from the original list with 129 from failure, 62 from action termination, and 19 from unassisted merger. More than 33 percent of the 389 institutions on the original list have failed, which is substantially higher than the 12 percent figure usually cited by the media as the failure rate for institutions on the FDIC Problem Bank List.

Since the publication of the original list, another 1,052 institutions have been added. However, only 807 of those 1,052 additions remain on the current list as 245 institutions have been removed in the interim. Of the 245 inter-period removals, 155 were from failure, 55 were from an unassisted merger, 33 from action termination, and two from voluntary liquidation.

In total, 1,441 institutions have made an appearance on the Unofficial Problem Bank List and 284 or 19.7 percent have failed. Of the 455 total removals, the primary way of exit from the list is failure at 284 or nearly 63 percent. Only 95 or around 21 percent have been able to rehabilitate themselves to see their respective action terminated. Alternatively, another 74 or 16 percent found merger partners most likely to avoid failure. Total assets that have appeared on the list amount to $777.8 billion and $272.4 billion have been removed due to failure. The average asset size of removals from failure is $959 million.

Unofficial Problem Bank List
Change Summary
		Number of Institutions	Assets ($Thousands)
Start (8/7/2009)		389	276,313,429
Subtractions
	Action Terminated	62	(14,365,497)
	Unassisted Merger	19	(3,290,170)
	Voluntary Liquidation	0	-
	Failures	129	(174,696,774)
	Asset Change		(19,508,778)
Still on List at 9/30/2011		179	64,452,210
Additions		986	340,680,808
End (9/30/2011)		1001	405,133,018
Intraperiod Deletions1
	Action Terminated	33	23,221,613
	Unassisted Merger	55	39,058,992
	Voluntary Liquidation	2	833,567
	Failures	155	97,669,948
	Total	245	160,784,120
1Institutions not on 8/7/2009 or 9/30/2011 list but appeared on a list between these dates.