by Calculated Risk on 1/24/2009 08:06:00 PM

“President Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency.”
Treasury Secretary nominee Tim Geithner, Jan 22, 2009

I'm just thinking about some trades issues, and here a few graphs that might be helpful:

Click on graph for larger image.

The first graph shows the monthly U.S. exports and imports in dollars through November 2008 (most recent data). The recent rapid decline in foreign trade is clear. Note that a large portion of the decline in imports is related to the fall in oil prices.

Looking at port traffic data, exports and imports collapsed further in December.

The second graph shows the U.S. trade deficit / surplus as a percent of GDP since 1960 through Q3 2008.

The trade deficit as a percent of GDP started declining in 2006, even with the rapid increase in oil prices. Now, with oil prices falling rapidly, the trade deficit as a percent of GDP will decline sharply in Q4 2008 and Q1 2009.

The third graph shows the U.S. trade deficit, both with and without petroleum through November.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

So, excluding petroleum, the trade deficit has been falling since early 2006.

This graph compares monthly U.S. spot oil prices from the Energy Information Administration (EIA) with import oil prices from the Census Bureau trade report.

Obviously the two price series track very well. This implies that import oil prices will drop sharply in the December and January reports, from $67 per barrel in November to around $37 per barrel in January.

Based on this decline in oil prices, and looking back at the third graph, the oil deficit will probably fall from around $19 billion in November to close to $10 billion in January (the actual decline depends on volumes in addition to price). All else being equal, this would push the trade deficit down to $30 billion in January.

And this brings us back to the quote at the top from Geithner. The trade deficit with China was $23 billion in November alone, and even with declining imports from China, the deficit with China will probably account for well over half of the U.S. trade deficit in January.

Just some thoughts ... For some excellent discussion of trade issues (especially with China) see Brad Setser's blog: Follow the Money

by Calculated Risk on 1/24/2009 06:42:00 PM

From The Times: RBS to purge directors in big shake-up

The Sunday Times can reveal RBS is preparing to place £50 billion to £100 billion of loans into the government’s new bank-insurance scheme ... designed to protect RBS from significant further losses and allow it to restart lending to British companies.

The move comes as [new chief executive Stephen] Hester puts the finishing touches to a radical restructuring. As many as 30,000 jobs, out of 170,000, could go in the next three to five years ...

RBS, which has more than £2 trillion of assets, is being used as a guinea pig for the government’s loss insurance rescue scheme.

This is similar to the insurance plan the U.S. provided for Citigroup and Bank of America. RBS will take the first 10% of losses on the loans and the U.K. taxpayers are on the hook for any additional losses.

by Calculated Risk on 1/24/2009 04:19:00 PM

From the Seattle Times: More layoffs expected at Starbucks

Another big round of layoffs is expected at Starbucks, possibly 1,000 people — a third of its headquarters employees — and some district managers and field employees, according to an e-mail sent to a stock brokerage's customers Friday.

"The cuts might be next week or in February," wrote Diane Daggatt, a managing director at McAdams Wright Ragen in Seattle.

The story doesn't mention any more store closings - although apparently no "barista jobs are in jeopardy".

by Calculated Risk on 1/24/2009 09:24:00 AM

From Professor Roubini: Is the U.K. an Iceland 2? No but there are serious financing risks ahead. Also: BBC News TV and Radio Interviews.

... [I]s the risk that the UK will be Iceland 2? Let us discuss next this issue in more detail:

In many ways the UK looks more like the US than Iceland: a housing and mortgage boom that got out of control; excessive borrowing (mortgage debt, credit cards, auto loans, etc.) and low savings by households; a large and rising current account deficit driven by the consumption boom (and private savings fall) and the real estate investment boom; an overvalued exchange rate; an over-bloated financial system that took excessive risks; a light-touch regulation and supervision system that failed to control the financial excesses; and now an ugly financial and economic crisis as the housing and credit boom turns into a bust. This will be the worst financial crisis and recession in the UK in the last few decades.

Iceland had the same macro and financial imbalances as the US and the UK but the Icelandic banks were both too big to fail and too big to be saved as their losses were much larger than the government capacity to bail them out. Thus, in Iceland you have a solvency crisis for the banks, for the government and for the country too leading to a currency crisis, systemic banking crisis and near sovereign debt crisis.

The US has also a busted banking system and an insolvent household sector (or part of it) but so far the sovereign has the willingness and ability to socialize such private losses via a vast increase in public debt.

This week in the UK investors started to worry that the UK government looks more like the Iceland one than the US: having banks that are too big to be saved given the fiscal/financial resources of the country.

But in principle the UK looks more like the US: the public debt to GDP is relatively low (in the 40s % range) and thus the sovereign should be able to absorb fiscal bailout costs and additional fiscal stimulus costs that may eventually increase that debt ratio by as high as 20% of GDP. Note that during WWII the UK public debt to GDP ratio peaked well above 150% and the UK government remained solvent.

... at best, the UK faces an economic and financial crisis that will be as bad as the US one: a severe and protracted recession that could last two years with very weak growth recovery once it is over; a near insolvent financial system, most of which will be formally or informally nationalized; a large fiscal costs of budget deficits surging because of the recession and the bailout of financial institutions; a weakening currency that may risk a hard landing if the crisis is not properly managed. A more dramatic run on the cross-border liabilities of banks, a run on the government debt and a hard landing of the pound can be prevented by coherent and forceful policy action.

I agree with Roubini that the U.K. will probably not be the next Iceland, but the U.K. clearly has some serious problems.

by Calculated Risk on 1/24/2009 12:24:00 AM

Earlier this week I noted that the Intrade method of calculating a depression was flawed.

I found out today that James Kwak at RGEMonitor noticed it before me: Betting on a “Depression” Kudos to James!

Now Intrade has added some more depression bets, including a 10% decline in nomimal GDP by the end of 2009. Jay Hancock, who blogs at the Baltimore Sun, points out these are flawed too: Intrade modifies depression bet, messes up again

[T]here are new depression bets, which Intrade couches in terms of absolute change in GDP dollar value rather than the rates that tripped it up before. ... But the rules are still problematic. In the new bet, Intrade will trace changes in nominal GDP instead of real, inflation-adjusted GDP. Nobody measures business cycles this way.

I guess they can't figure out how to explain a 10% real decline in GDP, so the bet is based on nominal GDP instead. Interesting - at least to nerds like me - is that the GDP price deflator could be negative in 2009, and therefore a 10% nominal decline in GDP could actually be less likely than a 10% decline in real GDP!

by Calculated Risk on 1/23/2009 09:21:00 PM

From the FDIC:

1st Centennial Bank, Redlands, California, was closed today by the California Department of Financial Institutions, which then appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with First California Bank, Westlake Village, California, to assume the insured deposits of 1st Centennial.
...
As of January 9, 2009, 1st Centennial had total assets of $803.3 million and total deposits of $676.9 million, of which there were approximately $12.8 million that exceeded the insurance limits. ...

1st Centennial also had approximately $362 million in brokered deposits that are not part of today's transaction. ...

First California agreed to assume the insured deposits for a 5.29% premium. It will also purchase approximately $293 million of the failed bank's assets. The assets are comprised mainly of cash, cash equivalents and marketable securities. The FDIC will retain the remaining assets for later disposition.

The cost to the FDIC's Deposit Insurance Fund is estimated to be $227 million. 1st Centennial is the third bank to fail this year, and the first in California since Downey Savings and Loan, F.A., Newport Beach, was closed on November 21, 2008.

It is officially Friday.

by Calculated Risk on 1/23/2009 05:35:00 PM

From Bloomberg: Citigroup Raises $12 Billion in Largest FDIC-Backed Bond Sale (hat tip stockdog42)

Citigroup Inc. sold $12 billion of notes guaranteed by the Federal Deposit Insurance Corp. ... The sale is the biggest offering of debt backed by the FDIC since banks began using the government’s Temporary Liquidity Guarantee Program on Nov. 25

From Freddie Mac 8-K SEC filing (hat tip Comrade Byzantine_Ruins):

Freddie Mac (formally known as the Federal Home Loan Mortgage Corporation) is in the process of preparing its financial statements for the fourth quarter of 2008 and the year ended December 31, 2008. Based on preliminary unaudited information concerning its results for these periods, management currently estimates that the Federal Housing Finance Agency, in its capacity as conservator of Freddie Mac (Conservator), will submit a request to the U.S. Department of the Treasury (Treasury) to draw an additional amount of approximately $30 billion to $35 billion under the $100 billion Senior Preferred Stock Purchase Agreement (Purchase Agreement) between Freddie Mac and Treasury. The actual amount of the draw may differ materially from this estimate as Freddie Mac goes through its internal and external process for preparing and finalizing its financial statements.

See previous post for some comedy relief: "I Want some TARP".

by Calculated Risk on 1/23/2009 05:08:00 PM

Enjoy ...

by Calculated Risk on 1/23/2009 04:20:00 PM

I've joked about "accidental landlords" before, and how these owners are just more shadow housing inventory.

Here is a UK story from the Financial Times: ‘Accidental landlords’ face shrinking rents

Letting agents saw a rush of so-called “accidental landlords” into the market last year, as falling house prices convinced property vendors to delay their sales. But the sheer volume of properties that have become available to potential tenants in recent months has brought stiff competition for landlords and put pressure on rents.
...
Many landlords have had to slash rents by around 20 per cent, according to agents. In the most oversupplied parts of London, falls in rental income have been as sharp as 30 per cent.

Ouch.

In the U.S. if an owner decides to rent, the mortgage rate doesn't change (although many areas have a property tax exemption for homeowners that no longer applies). But in the UK:

Homeowners who let their property are obliged to tell their lender and may have to move on to a more expensive buy-to-let mortgage.

Falling rents, more vacancies, and a higher mortgage payment - and falling property values - the joys of the accidental landlord. They probably would have been better off just selling at a loss.

by Calculated Risk on 1/23/2009 02:57:00 PM

From CNNMoney: Flood of foreclosures: It's worse than you think (hat tip Larry)

There is probably even more excess housing inventory gumming up the market than current statistics indicate, thanks to a wave of foreclosures that has yet to hit the market.
...
The problem: Many foreclosed homes and other distressed properties that are now owned by banks have yet to be listed for sale.
...
RealtyTrac looked at listings in four states, California, Maryland, Florida and Wisconsin, and found that they contained only a third of the foreclosures it has in its database.

Usually most REOs (lender Real Estate Owned) are listed pretty quickly, although lenders typically clean up the properties and sometimes do minor repairs before listing the property, so there is some lag between foreclosure and the property being listed. The size of this "ghost inventory" is unknown.

I've also heard a number stories of lenders delaying foreclosures, probably because they are overwhelmed right now. This is another type of potential "ghost inventory", although many of these properties might already be listed as short sales by the owner.

There is also a substantial shadow inventory – homeowners wanting to sell, but waiting for a better market - so for all these reasons, existing home inventory levels will probably stay elevated for some time.