Glenn Wilson

Compared to one year ago today, the major stock market indices are up. The S&P 500, for example is up about 20% year over year. Compared to two years ago though, the S&P 500 is down 31%. A gain of 45% is needed to get the market back to even. Ouch.

Many experts expect a "jobless recovery." Cost cutting measures may lead to some earning surprises on the upside and a market bump in the near term. But how far can the economy and the markets go without jobs?

How much of the current unemployment will turn out to be long term structural unemployment? The current unemployment picture is bleak:



When does that picture improve and how much can it improve in the U.S. with the long term or permanent loss of many jobs? And what impact does that have on the economy and the markets?

Are the U.S. Stock Markets at a bottom? Are they at THE bottom? There was a huge selloff last Friday and then the markets rallied, although they did fall off at the end of the day. The Dow and S&P 500 finished negative on the day and the Nasdaq was slightly up for the day. Last week was the worst week ever for the stock market.

At this moment, the Asian markets are up. European markets are up. U.S. Market futures are up. The TED Spread is down but still very high.

If this is a typical post WWII recession and bear market then we should be at or very near a market bottom. But, we know enough to know that this is not a typical bear market or recession. Things that are different are not the same.

If this is more like the 1870 or 1927 crashes then the market still has a long way to fall and a long time before it rises. Compared to those scenarios there are many reasons for optimism. At least so far.

If the market rallies today will it be sustainable or will it be a sucker's rally? Is there still more de-leveraging and forced selling to come?

Some of the answer about the future of the economy and the markets will depend on governments action that is still yet to come.

The chairman of the Federal Reserve is also one of the nation's pre-eminent scholars of the Great Depression.
Fed chief guided by lessons from Depression

He must be an expert on the Great Depression because so far, he and Paulson and the Bush Administration have taken all of the right steps to create the conditions for another one. But again, things that are different are not the same.

We'll see. Clearly, the economy will get worse before it gets better. The stock market is expected to recover before the economy does. But is that now or a year from now? How does one weigh the risk of further falls against the reward of rises in value? Another data point to compare against:

The Nikkei 225 is now almost back to where it was in 1981 and has never made any attempt to regain its 1989 peak.

S&P 500 VS NIKKEI 225

Labels: economy

Nouriel Roubini predicted this mess and continues to predict further mess.

The IMF warned on Saturday that the global financial system was on the brink of meltdown, while France and Germany pushed ahead with a pan-European crisis response to try to prevent the worst global downturn in decades.IMF warns of financial meltdown

German Chancellor Angela Merkel heads to Paris to present Sunday to her colleagues from the euro zone a financial sector bailout plan for Germany that's expected to be more than half the size of what has been enacted in the U.S.
German Bailout Likely to Be Over $400 Billion

Those responsible for the meltdown are trying to shift the blame to minorities and the poor:

As the economy worsens and Election Day approaches, a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans has taken off on talk radio and e-mail. ...

Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis. ...

Federal Reserve Board data show that:

• More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.


• Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

"I don't remember a clarion call that said Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster," said Neil Cavuto of Fox News.
Private sector loans, not Fannie or Freddie, triggered crisis

Now, as he spends his last months in office trying to avert a global economic collapse, Mr. Bush has been telling people privately that it’s a good thing he’s in charge.

“He said that if it was going to happen at all, he was glad it was happening under his presidency, because he had a good group of people in D.C. working for him,” Dru Van Steenberg, one of several small-business owners who met with Mr. Bush in San Antonio earlier this week. The president expressed the same sentiment, others said, during a similar private session in Chantilly, Va., the next day.

“He said that whoever was going to take over in January was going to have a huge crisis on their hands the day they come into office,” Ms. Van Steenberg added. “He thought by this happening now, that perhaps everyone could see signs of improvement before the next president comes into office.”In Final Months in Office, Bush Is Burdened but Still Confident

Meanwhile, back in the world of reality and facts:

So what do we get from this? Well, the economy performed best under Clinton, then JFK/LBJ. Then Carter, and since he’s almost as good, we’ll call Reagan a tie for third. Then Nixon/Ford, with Ike and GW tied for sixth, and GHW bringing up the rear. And in terms of parties, there is no contest… the economy as a whole seems to grow faster under Democrats. Giving Reagan the benefit of the doubt, he’s the only the Republican that does as well as the worst Democratic President. 100% of Democratic administrations in the sample get at least a bronze medal.Comparing Presidents: Rankings of Economic Growth

Labels: economy

At this point the recession train has left the station; the financial and banking crisis train has left the station. The delusion that the US and advanced economies contraction would be short and shallow – a V-shaped six month recession – has been replaced by the certainty that this will be a long and protracted U-shaped recession that may last at least two years in the US and close to two years in most of the rest of the world. And given the rising risk of a global systemic financial meltdown the probability that the outcome could become a decade long L-shaped recession – like the one experienced by Japan after the bursting of its real estate and equity bubble – cannot be ruled out. ...

At this point the risk of an imminent stock market crash – like the one-day collapse of 20% plus in US stock prices in 1987 – cannot be ruled out as the financial system is breaking down, panic and lack of confidence in any counterparty is sharply rising and the investors have totally lost faith in the ability of policy authorities to control this meltdown.

Thursday midnite update: A few hours after I had written this note the market crash that I warned about is underway in Asia: the Nikkei index in Japan is down 11% and all other Asian markets are sharply down. This reinforces the urgency of credible and rapid policy actions by the G7 financial officials who are meeting in a few hours in Washington and the need to also involve in such global policy coordination the systemically important emergent market economies.
The world is at severe risk of a global systemic financial meltdown and a severe global depression

Yesterday, IBM announced favorable earnings:

IBM posted a stronger-than-expected preliminary quarterly profit and stood by its full-year outlook, defying worries that the financial crisis would hurt demand for its computer products and services.
IBM Preliminary Profit Beats Expectations

But:

Shares of IBM fell $1.55, or 1.7 percent, to close at $89 on Thursday.
link

The stock market is the only source of "liquidity" (cash) for some big players. Unwinding and de-leveraging is leading to forced selling of stocks at distressed prices. Which lowers prices and the value of remaining leveraged stocks further. Which leads to more forced selling and reduced prices. So people pull money out of hedge funds and mutual funds forcing those to sell equities in a down market. Investors panic. Where does it end? How low can we go?

What should be done? The United States and Europe should just say “Yes, prime minister.” The British plan isn’t perfect, but there’s widespread agreement among economists that it offers by far the best available template for a broader rescue effort.

And the time to act is now. You may think that things can’t get any worse — but they can, and if nothing is done in the next few days, they will.
Moment of Truth

In this financial catastrophe, last week's unthinkable idea quickly becomes this week's imperative. The Bush administration is wisely contemplating following the lead of British Prime Minister Gordon Brown in having government take ownership shares in many banks to get them more cash and allow them to lend again.
Hoover vs. Roosevelt?

Labels: economy

For a number of weeks professional economists and experts of banking crises have been arguing that the proper way to resolve a banking crisis is not to buy toxic assets but rather to recapitalize banks directly via injections of public capital (in the form of preferred shares) into distressed but solvent financial institutions. We criticized the TARP legislation just passed by Congress for not allowing for such a recapitalization of banks via public capital (an approach that has been instead now taken by the UK with its $87 bn bank rescue package and even Belgium/Netherlands in the case of the rescue of Fortis).

So how come that "to inject capital into financial institutions" was the first item that Hank Paulson listed as his priority in his press conference yesterday, thus suggesting that now the US, like the UK, will undertake a partial nationalization of its distressed banks?

The reality is that the TARP legislation passed by Congress (formally the Emergency Economic Stabilization Act) does not in any explicit way allow for such recapitalization of banks via injection of public capital. The US Treasury has initially resisted including explicitly such authority in the Act for several reasons: the banking industry that helped drafting the legislation was against it; there was ideological resistance to the idea of the government taking equity – however preferred – in financial institutions; there was concern that being explicit about public recap of banks would lead to banks’ resistance to participate in the toxic asset purchase program. That is why the Treasury formally resisted putting any explicit wording of public recapitalization of banks into the legislation.
How authorization to recapitalize banks via public capital injections (“partial nationalization”) was introduced - indirectly through the back door - into the TARP legislation

But Congress went ahead and forced on Paulson a provision that said he had to get equity or senior debt from financial institutions in exchange for taking significant assets off their hands--effectively enabling backdoor recapitalizations. Yesterday Ben Bernanke hinted that a change in emphasis might be in the offing for the TARP. And today Paulson seemed to confirm it.

None of the people asking questions at the press conference really seemed to pick up on this, of course (&%%$# Washington journalists!). Along with Paulson's affirmation that the FDIC was going to use its "systemic risk" powers to protect depositors and unsecured creditors "as appropriate," I take it as one more sign that we're headed toward a Swedish solution of our banking crisis—recapitalization and temporary nationalization of much of the banking system. This is the right thing to do, I think. But I'm still a little bit confused as to why Paulson had to back into this instead of asking for it in the first place. Maybe because he thought President Bush would never sign a bill to nationalize the banks? Just a thought.

Treasury prepares for a TARP-and-switch. And it's a good thing, too

Labels: economy

Yesterday Thursday a senior market practitioner in a major financial institution wrote to me the following:

Situation Report: So far as I can tell by working the telephones this morning:

* LIBOR bid only, no offer.
* Commercial paper market shut down, little trading and no issuance.
* Corporations have no access to long or short term credit markets -- hence they face massive rollover problems.
* Brokers are increasingly not dealing with each other.
* Even the inter-bank market is ceasing up.

This cannot continue for more than a few days. This is the economic equivalent to cardiac arrest. Then we debated what is necessary to restart the system.

Financial and Corporate System is in Cardiac Arrest: The Risk of the Mother of All Bank Runs

Labels: economy

They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments. ...

The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary. ...

With that, the five big independent investment firms were unleashed.

In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves.

Agency’s ’04 Rule Let Banks Pile Up New Debt, and Risk

No wonder the bailout package is so poorly crafted: The same genius, Hank Paulson, that helped us to get into this, and has utterly failed to see this coming until it was all but on top of is, is trying to get us out. He is uniquely unqualified for this task. How this guy hasn't honorably fallen on his own sword yet is beyond me.

SEC Deregulation Let Banks Leverage Up

Labels: economy

Via email:

This is an actual sign posted off Bunker Hill in West Houston. One must keep a sense of humor during tough times....

Power outages dropped to 114,000 customers Monday as crews worked block-by-block to repair transformers and lines serving individual homes and businesses.

At 9 p.m. Monday, 5 percent of CenterPoint Energy's 2.3 million customers were without electricity 17 days after Hurricane Ike knocked nearly everybody in the greater Houston area off the grid.

Early Monday, the transmission company announced all major line repairs were complete, but CenterPoint spokesman Floyd LeBlanc said later that crews were still wrangling with isolated problems among its 91,000 line fuses.
About 114,000 sit powerless as new issues pop up

Labels: Hurricane Ike

The $700 Billion bailout bill failed yesterday. Meanwhile:

The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.

The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.

Fed Pumps Further $630 Billion Into Financial System

Responding to ongoing strain in credit markets, the Federal Reserve, European Central Bank, Bank of Canada, Bank of England, Bank of Japan, Denmark's National Bank, Norges Bank, Reserve Bank of Australia, Riksbank and Swiss National Bank announced plans to increase funding operations worldwide. ...

The Fed announced that its swap agreements have been increased to $620 billion from $290 billion, with the European Central Bank accounting for $240 billion, $120 billion from the Bank of Japan, $80 billion from the Bank of England, $60 billion from the Swiss National Bank, $30 billion from the Bank of Canada, 20 Billion from the Reserve Bank of Australia, $30 billion from the Swedish Riksbank, $15 billion from the Norges Bank, and $15 billion from the Denmark's National Bank.

Global Central Banks Increase FX Swap Facilities With Fed

The increase to $75 billion per auction will triple the supply of 84-day maturity credit to $225 billion from $75 billion. ...

The Federal Open Market Committee (FOMC) has authorized a $330 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide funding for U.S. dollar liquidity operations by the other central banks.

Federal Reserve Press Release

The revolution will not be right back after a message
about a white tornado, white lightning, or white people.
You will not have to worry about a dove in your
bedroom, a tiger in your tank, or the giant in your toilet bowl.
The revolution will not go better with Coke.
The revolution will not fight the germs that may cause bad breath.
The revolution will put you in the driver's seat.

The revolution will not be televised, will not be televised,
will not be televised, will not be televised.
The revolution will be no re-run brothers;
The revolution will be live.

The Revolution Will Not Be Televised

Labels: economy

From Eugene Robinson:

"Our investigation found significant evidence that political partisan considerations were an important factor in the removal of several . . . U.S. attorneys." ...

The [Justice Department] investigators reported being stonewalled by the White House, saying they were unable to look at all the evidence "because of the refusal by certain key witnesses to be interviewed by us, as well as by the White House's decision not to provide internal White House documents to us." ...

In releasing the report, Attorney General Michael Mukasey announced that he had ordered a new investigation to "pursue this case wherever the facts and the law require," including possible criminal charges. By most accounts, Mukasey has taken pains to cleanse Justice of the partisan taint that Gonzales left behind. Whatever ultimately comes of this disgraceful episode, however, we already know enough to put it in context.

The people who have been running our government for the past eight years have nothing but contempt for government. They believe only in politics and ideology, in that order. First, win elections by any means necessary. Second, once in a position to act in the public good, govern with the ideological conviction that government is either irrelevant or harmful to the public interest.

Politics Over Prosecutors

A majority of Democrats voted for this bill.

A majority of Republicans voted against this bill.

The Dow is down about 500 600 700 777 points on the day.

I'm not that big a fan of this bill (but it seems we do need to do something) and maybe this will help us get a better bill (although my expectation is we will get this bill or something worse).

Labels: economy

Ike made landfall about two weeks ago. The Laura Recovery Center lists over 300 people still missing in its database.

People reporting missing after Hurricane Ike, from a database by the Laura Recovery Center.
(from a comment):

This is the first I've heard about people trying to find the hundreds and hundreds of people who were on the coast for the storm, specifically on Bolivar, who aren't there any more.

Ike's missing

"We expect to see a huge improvement in outage count by the end of the weekend," CenterPoint spokesman Floyd LeBlanc said Friday when about 377,000 customers of 2.3 million still were without power because of Hurricane Ike.
Most may see power by Sunday

Warren Adams insists that there is nothing special about the way the home was constructed. It was built to Galveston County code, he said, which anticipates 130-mile-per-hour winds on the seaward side of the county.

But the elevation may have helped. Adams said he built high, in part, to get a break on flood insurance. The home sits 15 feet above ground.

"The piece of land my house is sitting on was probably one of the highest above sea level in the area, about 8 or 9 feet above sea level before we even started the house," he said. "I think the house is about 16 inches higher than it needs to be."
Ike obliterated most homes, but spared one on Church Street

Swimming in the shimmering Gulf of Mexico may seem inviting this weekend, especially after long hours spent cleaning homes, but people should say out of the water, said Peter Davis, chief of Galveston Island Beach Patrol.

Davis said an order prohibiting swimming in the Gulf that Mayor Lyda Ann Thomas issued soon after the storm remains in effect. It may be rescinded next week after water quality experts and debris removal teams assess the Gulf near the Seawall.

Ike swept debris as well as possible hazardous materials into the water, Davis said. Much of the debris is partially buried in the sandy Gulf bottom and is exposed at low tide. Concrete chunks, steel pipes, bushes, trees and other debris litter the sand.
Galvestonians warned to stay out of water

Labels: Hurricane Ike

Update: Republican Thaddeus Otter on the Paulson Splurge:

Labels: economy