FedUpUSA

Archive for January 7th, 2010

Non-Farm Payrolls 12/2009 – Eek

Posted by Karl Denninger

This is not a good report.

Nonfarm payroll employment edged down (-85,000) in December, and the unemployment rate was unchanged at 10.0 percent, the U.S. Bureau of Labor Statistics reported today. Employment fell in construction, manufacturing, and wholesale trade, while temporary help services and health care added jobs.

This is huge, and is why last month the report was an actual “green shoot” but not conclusive evidence of a turn.

This month threw cold water on the premise that the corner has been reached and we are now on the “upswing”.

While the number of employed is not dropping as quickly on an annual comparison basis, it is still declining.  For me to get somewhat-positive that red line has to go above zero and remain there, as it did in the middle of 2002.

But the truly bad news is found here when it comes to sustainable recovery and a look forward in terms of budget deficits and thus being able to “work our way out of the hole” on systemic debt:

After dipping back monentarily the inexorable rise continues.

This graph, more than anything else, shows the structural problem our economy faces going forward, and is one of the reasons that I believe “this time it’s different” when it comes to sustainable recovery.

We have not managed to add people back into the labor force on an annualized basis since this series began!

This means that there are more and more people who are sucking on the government teat, which is not true GDP – it is a transfer tax.  It is part and parcel of the Ponzi.  And since this downturn began both of the indications that we might be seeing “hope” – the first around the end of 2008 and now this year at the end of 2009 – proved to be nothing more than tiny downward blips in a pattern that shows incredible and continuing deterioration.

Government fools have already been out this morning talking about further extending unemployment benefits.  All that will do is cause interest rates to move higher (due to more government borrowing) and further smash housing and other long-running investment.

Sorry folks.

This report is, unfortunately, a whole bottle of “Round Up” dumped on the top of the previous month’s “Green Shoot.”

What is especially troubling in this report is the implication that employers, who usually hold off on firing until after Christmas, didn’t this time around.  That has nasty written all over it – and leaves open the possibility that we’re nowhere near the bottom on this cycle.

Goldman Under Fire (Again): Ponzi Bonuses?

Posted by Karl Denninger

Are we seeing once again the same game being played that WaMu played in the spring of 2007 – and which started me writing Tickers?

In his lawsuit (PDF), Brown states that Goldman Sachs gave out $4.82 billion in bonuses in 2008, despite earnings of only $2.32 billion that year. The lawsuit alleges that the company spent 259 percent of its income in the first quarter of 2009 on compensation.

Uh, that’s kinda interesting.  It is somewhat like WaMu, no? 

If you remember back in 2007 I wrote one of my seminal Tickers – one of the first – that spoke to Washington Mutual paying out funds they didn’t really have in cash in dividends.  That is, they were booking “capitalized interest” (negative amortization on Option ARM loans) as “earnings” and then paying part of that – plus all of their cash earnings – out to shareholders in the form of a dividend.

The problem with such a game is that non-cash “earnings” aren’t money and while they look good on the balance sheet if they don’t materialize later on you’re sunk!  My call at the time was that they wouldn’t materialize and WaMu would indeed be sunk, and it was.

This is a bit different, in that nobody is (yet) claiming that Goldman doesn’t have the money.  What’s being alleged here is that they have effectively pilfered the public Treasury and then paid that out as bonuses, rather than doing with it as Treasury intended and their shareholders were entitled to, which is to use the capital to rebuild the firm’s foundation and strengthen it against future potential losses.

This also ties in with the revelation yesterday that The NY Fed tried to cover up the pass-through via AIG of Treasury money to Goldman when Tim Geithner was it’s head, as I wrote about yesterday.

Goldman, for its part, claims the lawsuits are without merit.  We’ll see.

The better question from my point of view is not whether Goldman’s compensation practices are reasonable.  It is whether public companies (or private ones for that matter) should have access to public support under any set of circumstances.

It is my position that such support, if it is required to be offered at some point, come with the effective dissolution of the firm – and the wipe-out of shareholder equity.  Bondholders would get whatever is left as the firm is liquidated in bankruptcy.

Commentators call this “disorderly.”  I call it what Capitalism prescribes when you blow it.  Having had my “best laid plans” in business go boom on me before, I don’t see the issue. 

Those who argue for a “too big to fail” viewpoint are in fact arguing for a “too big to exist” firm.  If some company asserts such a position in the global financial marketplace then in my view it has declared of its own volition that it is a danger to the economic stability of the United States and as such it must be immediately broken up and dissolved. 

If the firm requires public support before that can occur then it must be liquidated immediately, with that public support being used to maintain order – not enrich employees and allow yet more skimming off of funds for a privileged few.

How much does the Average American Make? Breaking Down the U.S. Household Income Numbers.

How much does the typical American family make?  This question is probably one of the most central in figuring out how we can go about fixing our current economic malaise.  After all, we don’t hear many people saying in today’s world that they have too much money.

The median household income in the United States is $46,326.  Here in California people have a hard time understanding that yes, 50 percent of our population live on $46,000 or less a year.  Even today, all the elixirs and remedies being thrown around fail to focus on income and the big brother of income, solid employment.  Dual earner households have a higher median income at $67,348.

To highlight the massive discrepancy I’ve put together a chart showing the household income distribution:

As you can see from the above chart, only 17.8% of all U.S. households make more than $118,200 a year.  Only 2.67% make more than $200,000.  The fact that only 34% make more than $65,000 is astounding given how expensive other cost of living items have gotten over the past decade.  That is why the middle class is feeling squeezed from all different sides.

When I put together a budget for a family making $100,000 I received a bit of feedback on both sides.  Even though I realized very few people had household incomes in the 6 figure range looking very closely at the data, I can understand why people took issue with a budget that was at that level.  I also put together a budget from someone living in California making $46,000 a year and received feedback as well.  I think when it comes to income, you can never have too much.

What is even more fascinating, is how even amongst the super wealthy income is not distributed evenly.  There are approximately 146,000 (0.1%) households with incomes exceeding $1,500,000 a year.  Even at that, the top 0.01% of households had incomes of $5,500,000 and accounted for 11,000 households.  The 400 highest tax payers in the nation brought in a stunning $87,000,000 a year.  Now that is wealth.

For us mere mortals, it is important again to focus on that chart.  $46,000 does not go a long way.  In a recent Census report there are 110,000,000 households in the United States.  What this data tells us is that 55,000,000 households are living on $46,000 or less a year.  Let us assume this is a married couple with 1 child.  Let us run the numbers:

I ran the numbers for a state with no state income taxes, Texas.  A family at this level is only bringing in $3,215 a month.  The national median home price peaked around $200,000.  So let us assume this family purchased the median home:

5% down payment:         $10,000

Mortgage 30-year fixed (6.5%):   $1,200

Taxes and Insurance:     $333

PITI:  $1,533

Right off the bat, this family is spending 47% of their net pay on a median priced home.  We didn’t even account for any pre-tax retirement account investing.  Given the recent stock market performance and the loss of $50 trillion in global wealth, maybe that wasn’t such a bad idea.  The bottom line is the average American family is being squeezed from every angle.   What we need is a focus on jobs and our economy, not bailing out banks.  That defeats the entire purpose.  The average American family is struggling getting by and when they hear about these billion dollar handouts, they can’t help but to feel left out.

Time To Indict Geithner For Securities Fraud

The web of known parties guilty of fraud, coercion, or securities manipulation keeps getting bigger. Please consider N.Y. Fed Told A.I.G. Not to Disclose Swap Details.

Starting in November 2008, the Federal Reserve Bank of New York under Timothy Geithner began urging American International Group, the huge insurer that the government had bailed out, to limit disclosure on payments made to banks at the height of the financial crisis, e-mail messages obtained by DealBook show.

The e-mail exchange between the bailed-out insurance giant and its regulator portray a strange reversal of roles, with A.I.G. staff arguing for the disclosure of certain details on payments for credit-default swaps to major banks, only to be discouraged by officials at, or representing, the Federal Reserve.

In a draft of one regulatory filing, A.I.G. stated that it had paid banks — including Goldman Sachs Group, Merrill Lynch, Société Générale and Deutsche Bank — the full value of C.D.O.’s, or collateralized debt obligations, that they had bought from the company.

In the response to that draft from the law firm Davis Polk and Wardwell, which represented the New York Fed, that crucial sentence was crossed out, and did not appear in the final version filed on Dec. 24, 2008.

In a March 12 e-mail message whose subject line is “Fw: counterparties” — importance: “high” — Kathleen Shannon, a senior vice president at A.I.G., writes:

“In order to make only the disclosure the Fed wants us to make, which we understand to be to not include the CUSIPs or Tranche names and give the amounts by counterparty on a total rather than a transaction by transaction basis, we need to have a reasonable basis for believing and arguing to the SEC that the information we are seeking to protect is not already publicly available.”

The messages were initially obtained by Representative Darrell Issa, Republican of California and ranking member of the House Oversight and Government Reform Committee, and first reported by Bloomberg News.

“It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information to the S.E.C.,” Representative Issa said in an e-mailed statement.

Mr. Geithner, for his part, has defended the A.I.G. rescue, saying he had no choice but to pay full value on the credit default swaps in order to avoid a panic.

Geithner Allowed To Defend Himself

Please see the article for actual memos and other damning evidence.

I am 100% in favor of allowing Geithner to defend himself … In a court of law, for securities fraud.

And as I have stated before Paulson, Bernanke, and Bank of America ex-CEO Lewis as well.

April 24, 2009: Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis

July 17, 2009: Paulson Admits Coercion; Where are the Indictments?

October 20, 2009: Bernanke Guilty of Coercion and Market Manipulation

While you are wondering where the indictments are perhaps you may wish to review Where The Hell Is The Outrage?

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

What Isn’t Happening with the $3 Trillion Commercial Real Estate Market: Loans Falling and Vacancy Rates at Record Heights at 10 Percent.

With commercial real estate, you can learn a lot from what isn’t happening.  We all know that the $3 trillion commercial real estate market is already taking a drubbing in terms of pricing.  CRE prices are down over 40 percent from their peak elevated levels.  Yet with commercial real estate you don’t have the typical headline grabbing stories of individuals being forced out of their homes in foreclosures.  With CRE it is seen as a more calculated business move and those losing their shirts are those who should have known better.  Now this is how things should be but the U.S. Treasury and Federal Reserve have already back stopped the entire banking system so implicitly, the failing of any real estate is now a direct burden to all taxpayers.

What is not happening is a natural stable demand from the market.  Why?  Just like the residential market, commercial properties were over built.  We have years of excess to work off.  That is why I simply don’t buy the notion that we will somehow be back on the run by tweaking a few balance sheet numbers.  The problem is many structures are now built and are sitting vacant yet the loans still need servicing.  Who is going to pay for it?  The U.S. Treasury has already had low key talks about a preemptive bailout for this industry labeled Plan C.

While banks tell the public all is well, their actions speak louder:

If things were improving in the overall economy it is likely you would see a natural demand for CRE loans.  People want to build something or start a new business and loans are easily available so long as you can fill the building.  The chart above shows a very clear pattern.  Less and less loans are being made in this sector.  Do banks know something the public doesn’t?

Larger housing complexes fall in the commercial category.  Typically these are places with more than 4 units at least on the residential front.  Assuming a market demand, you would expect to see permits rise:

The above chart clearly shows anything but this.  This is an important indicator because those who sense the economy is turning are more likely to build additional housing units.  This is a large part of our economy since banking heavily relies on real estate for profits.  That is largely a reason for the gigantic banking bailout while the vast majority of Americans wonder what they got for the $14 trillion in financial backstops.  The chart clearly shows one thing and that is there is virtually no demand for large unit housing complexes.  We are at record keeping demand lows even after all the bailouts.  Why?  Well most of these larger complexes are rental units and the market seems to be flush with these units:

The market is saturated with rentals.  Anyone that is both a landlord and renter will know this.  Many places are offering free HDTVs with a one year contract or even better, a few months of free rent.  Rentals always have a higher vacancy than regular homes because that is the nature of the property.  Renters are more mobile and vacancies are just part of the game.  But the current vacancy rate at nearly 10 percent is putting downward pressure on rent prices.  In fact, the BLS uses an owner’s equivalent of rent and this has been falling:

The interesting thing about the BLS data is that it understated the housing bubble because most people during the bubble shifted to buying overpriced homes while the data series was still focused on rental equivalents.  Now, with such a high rate in rental vacancies and large numbers of foreclosures the BLS is adjusting quickly to the downside and making it look like we are having massive deflation since housing makes up over 30 percent of the BLS CPI measure.  Why is this important?  This factors into many things including the cost of living adjustments many receive.

So all this adds into the fact that commercial real estate has very little pricing power in today’s market.  So what are the too big to fail banks doing?  They are laying the problem off on the public.  This was seen when Morgan Stanley simply walked away from the debt obligation in a San Francisco CRE deal:

“(WSJ) So we’ve discussed the ethics of individual borrowers walking away from their mortgages. (Some say we’ve over-discussed it.) If it’s immoral, as some would say, for a borrower to walk away their mortgage, is it any different for a bank?

Morgan Stanley is doing just that. News reports on Thursday said the bank plans to give back five San Francisco office buildings to its lender-just two years after buying them at the top of the market.

“This isn’t a default or foreclosure situation,” spokeswoman Alyson Barnes told Bloomberg News. “We are going to give them the properties to get out of the loan obligation.”

Sound familiar?

Morgan Stanley bought the buildings, along with five others, in San Francisco’s financial district as part of a $2.5 billion purchase from Blackstone Group in May 2007. The buildings were formerly owned by billionaire investor Sam Zell’s Equity Office Properties and acquired by Blackstone in its $39 billion buyout of the real estate firm earlier that year, Bloomberg reports. One analyst estimates that the buildings are now worth half of what Morgan Stanley paid.”

Now this is fascinating coming from an industry leader who has had its champion in the U.S. government moralizing that people shouldn’t walk away from their debt obligations.  The CRE market is in for a long and troubled road ahead.  Right now much of the data on retail sales is being championed as great but we are comparing it to data that was down in the abyss:

When you hear of those wonderful year over year gains we are going back to early 2009 when the economy was flying off a cliff.  So sure, things are up but what are we comparing it to?

The Federal Reserve has over $2 trillion in questionable assets that they are fighting to keep from an audit.  It is likely many loans in their portfolio are now commercial loans.  The fact that vacancy rates are so high and the employment situation is still dismal, where will the demand come from?  If anything, the best we can hope for is that current spaces get leased out and we start reaching more equilibrium levels of vacancies.  But we are so far away from even that.

What isn’t happening in the CRE market is very telling.  2010 is expected to bring much pain in this market and so far, we have had very little evidence pointing to any upsurge in this market.   And with $3 trillion at stake, any small movements mean big bucks.