Kudlow on the Recession
Posted by Eddy Elfenbein on December 1st, 2008 at 4:06 pm

From December 5, 2007:

The Recession Debate Is Over
There ain’t no recession.
Today’s ADP private jobs survey of 189,000 could produce a 200,000 non-farm payroll job gain for November. I don’t know — these wacky BLS numbers are subject to huge revisions. But the ADP was a huge number. In fact, jobs seem to be picking up major steam from their August low, rising in September and October. And now I’m expecting a good increase in November to be reported by the BLS this Friday.
Plus, profits are stronger than people seem to understand. The ISMs are fine. Productivity, reported out today, soared to over 6 percent annually in the third quarter. That’s the best productivity number in four years for output per person.
On top of that, business inflation is zero. Flat. Nada.
The recession debate is over. It’s not gonna happen. Time to move on.
At a bare minimum, we are looking at Goldilocks 2.0. (And that’s a minimum). The Bush boom is alive and well. It’s finishing up its sixth splendid year with many more years to come.

Want to Know About Hedge Funds
Posted by Eddy Elfenbein on December 1st, 2008 at 2:43 pm

Donald MacKenzie in the London Review of Books has a long article on hedge funds:

You could walk around Mayfair all day and not notice them. Hedge funds don’t – can’t – advertise. The most you’ll see is a discreet nameplate or two. An address in Mayfair counts in the world of hedge funds. It shows you’re serious, and have the money and confidence to pay the world’s most expensive commercial rents. A nondescript office no larger than a small flat can cost £150,000 a year. Something bigger and in the style that hedge funds like (glass walls, contemporary furniture) can set you back a lot more. It’s fortunate therefore that hedge funds don’t need a lot of space. Two rooms may be enough: one for meetings, for example with potential investors; one for trading and doing the associated bookkeeping. Some funds consist of only four or five people. Even a fairly large fund can operate with twenty or fewer.

Investing During a Recession
Posted by Eddy Elfenbein on December 1st, 2008 at 2:24 pm

Today, the NBER made news by saying the recession officially started in December 2007. This is the fifteenth recession since 1926.
Of the 82 years from the beginning of 1926 through 2007, 182 months have been in recession which is about 18.5% of the time. During those 182 months, the stock market fallen at an annualized rate of 9.6% (including dividends and inflation).
Of the 802 months of expansion, the stock market has risen at an annualized rate of 11.3%.

NBER: Recession Began in December 2007
Posted by Eddy Elfenbein on December 1st, 2008 at 1:42 pm

I was wrong. I thought the National Bureau of Economic Research would date the beginning of the recession in May of 2008. The committee today pinpointed December 2007.
I understand that selection since that’s when employment peaked. The reason for my later date was that GDP numbers continued to look decent through the second quarter. I didn’t think the committee would “overrule” that data, but I guess they did.
NBER Announces December 2007 Peak in Economic Activity
Next question: When will it end?

Gasoline Down for 75 Straight Days
Posted by Eddy Elfenbein on December 1st, 2008 at 12:04 pm

The plunge continues:

Gas prices fell for the 75th consecutive day on Monday, and sold below $2 a gallon in all but three states and the District of Columbia, according to a daily survey of credit-card swipes at gas stations.
Gas prices slipped 0.5 cents to a national average of $1.82 a gallon, the cheapest price since January 2005, according to Monday’s survey from motorist group AAA. That price is $1.24 less than what gas cost on the same day last year.
Gas prices have fallen by more than 55% since hitting a record high of $4.114 a gallon on July 17. Concern about falling fuel consumption in the midst of the current economic crisis has driven the price of oil, a main component of gasoline, down more than 65% since July.

Profiting off the Liquidity Preference
Posted by Eddy Elfenbein on December 1st, 2008 at 11:14 am

One aspect of this market that I find fascinating is the dramatic yield spreads between short-term Treasury yields (^IRX) and just about everything else. Short-term Treasuries have one major benefit over all other securities and that is their safety. No matter what happens, an investor can be very confident that the U.S. Treasury will pay them back. The Feds, after all, own the printing press.
But what we’re seeing recently is being caused by another advantage of Treasuries and that is their liquidity. The Treasury market is one of the most liquid markets in the world. If need be, Treasuries can be dumped at a moment’s notice for something else. That factor is drawing lots more buyers. The short-term T-bill continues to trade as inches above 0%. Going further out, the 10-year Treasury is now down to 2.8%.
There’s an opposite reaction going on in less-liquid assets. I think this is partly why micro-cap stocks like Nicholas Financial (NICK) are so cheap. There’s an illiquidity discount. In other words, you can’t easily sell when no one is willing to buy. We’re also seeing nearly ridiculous yields for junk bonds.
There are a number of junk bond ETFs. For example, the PowerShares High Yield Corporate Bond (PHB) is yielding 13.8% based on its most-recent monthly dividend payment.
I think we saw a similar “gravitational pull” during the dot.com bubble. When sock puppet companies were going for over 100 times dreams, many high-quality REITs were paying dividends over 12%. The problem was the REITs had kept going down and the dot.coms kept rallying. It seemed as if the breaking point had already passed.
Here’s a look at BAA corporate yields, which still isn’t junk, compared with short-term Treasuries.

One advantage of the liquidity preference would be for the government to issue massive amount of short-term T-bills at their regular auctions. The proceeds could be used to by high-yielding preferred stock is locked-up companies. That way we could use the liquidity premium to the taxpayers’ advantage.
Arnold Kling has more.

RIP: Tanta
Posted by Eddy Elfenbein on November 30th, 2008 at 9:38 pm

This is just awful news. Doris Dungey, aka Tanta of Calculated Risk, died this morning. I’m absolutely speechless. This is from the New York Times:

The blogger Tanta, an influential voice on the mortgage collapse, died Sunday morning in Columbus, Ohio.
Tanta, who wrote for Calculated Risk, a finance and economics blog, was a pseudonym for Doris Dungey, 47, who until recently had lived in Upper Marlboro, Md. The cause of death was ovarian cancer, her sister, Cathy Stickelmaier, said.
Thanks in large part to Tanta’s contributions, Calculated Risk became a crucial source of prescient analysis as the housing market at first faltered, then collapsed and finally spawned a full-blown credit crisis.
Tanta used her extensive knowledge of the loan industry to comment, castigate and above all instruct. Her fans ranged from the Nobel laureate Paul Krugman, an Op-Ed columnist for The New York Times who cited her in his blog, to analysts at the Federal Reserve, who cited her in a paper on “Understanding the Securitization of Subprime Mortgage Credit.”
She wrote under a pseudonym because she hoped some day to go back to work in the mortgage industry, and the increasing renown of Tanta in that world might have precluded that. Tanta was Ms. Dungey’s longtime family nickname, Ms. Stickelmaier said.
Calculated Risk, which gets about 75,000 visitors a day, was started in early 2005 by a retired technology executive named Bill McBride. The housing market was soaring, but Mr. McBride sensed that the industry was about to peak, and he posted articles and data that made his case.
The blog quickly drew a lively and informed group of commentators, few livelier and none more informed than someone who called herself Tanta. She began by correcting some of Mr. McBride’s posts. “She would tell me either I was wrong or the article I was quoting was wrong,” he said Sunday. “It was clear she really knew her stuff. And she was funny about it.”
Tanta soon graduated from merely commenting to being a full-scale partner. Her first post, in December 2006, took issue with an optimistic Citigroup report that maintained that the mortgage industry would “rationalize” in 2007, to the benefit of larger players like, well, Citigroup.
“Bear with me while I ask some stupid questions,” Tanta wrote, and proceeded to assert that the industry was less likely to “rationalize” than fall apart, which it did. Citigroup was bailed out by the government last month.
She loved the intricacies of mortgage financing and would joke about being not just a nerd on the subject but a nerd’s nerd. She eventually wrote, for the Calculated Risk site, “The Compleat ÜberNerd,” 13 lengthy articles on mortgage origination channels, mortgage-backed securities and foreclosures that constituted a definitive word on the subject.
The rest of the time, Tanta liked to chew on the follies of regulators, the idiocies of lenders and — a particular favorite — clueless reporters, which according to her was just about all of them. She did not approve, she once wrote, of “parading one’s ignorance about mortgages in an article full of high-minded tut-tutting over ignorance about mortgages.”
In March 2006, Ms. Dungey was diagnosed with late-stage ovarian cancer.
Ms. Dungey was raised in Bloomington-Normal, Ill., had a graduate degree in English, and worked as a writer and trainer for a variety of lenders, including Champion Federal and AmerUs Mortgage.
One of Tanta’s last posts was written as the $700 billion bailout was first being debated in mid-September, and it seemed that the Treasury Department might buy bad assets directly from troubled banks.
Tanta argued that for every asset that banks unloaded on the government, the chief executives should be required to explain “why they acquired or originated this asset to begin with, what’s really wrong with it in detail, what they have learned from this experience, and what steps they are taking to make sure it never happens again.”

My deepest sympathies to her family.

Krugman on What to Do
Posted by Eddy Elfenbein on November 30th, 2008 at 12:50 pm

Paul Krugman favors lots more spending:

What the world needs right now is a rescue operation. The global credit system is in a state of paralysis, and a global slump is building momentum as I write this. Reform of the weaknesses that made this crisis possible is essential, but it can wait a little while. First, we need to deal with the clear and present danger. To do this, policymakers around the world need to do two things: get credit flowing again and prop up spending.
The first task is the harder of the two, but it must be done, and soon. Hardly a day goes by without news of some further disaster wreaked by the freezing up of credit. As I was writing this, for example, reports were coming in of the collapse of letters of credit, the key financing method for world trade. Suddenly, buyers of imports, especially in developing countries, can’t carry through on their deals, and ships are standing idle: the Baltic Dry Index, a widely used measure of shipping costs, has fallen 89 percent this year.
What lies behind the credit squeeze is the combination of reduced trust in and decimated capital at financial institutions. People and institutions, including the financial institutions, don’t want to deal with anyone unless they have substantial capital to back up their promises, yet the crisis has depleted capital across the board.
The obvious solution is to put in more capital. In fact, that’s a standard response in financial crises. In 1933 the Roosevelt administration used the Reconstruction Finance Corporation to recapitalize banks by buying preferred stock—stock that had priority over common stock in terms of its claims on profits. When Sweden experienced a financial crisis in the early 1990s, the government stepped in and provided the banks with additional capital equal to 4 percent of the country’s GDP—the equivalent of about $600 billion for the United States today—in return for a partial ownership. When Japan moved to rescue its banks in 1998, it purchased more than $500 billion in preferred stock, the equivalent relative to GDP of around a $2 trillion capital injection in the United States. In each case, the provision of capital helped restore the ability of banks to lend, and unfroze the credit markets.

Rescue Plan Strained by Lack of Staff
Posted by Eddy Elfenbein on November 28th, 2008 at 10:17 pm

If you’re looking for a job, there’s one government agency that’s desperately short of people:

President-elect Barack Obama has made his most important Treasury Department personnel choice, but Timothy Geithner has big personnel challenges of his own.
The current Treasury has so far struggled to keep up with the task of hiring enough people to handle the $700 billion financial rescue package passed by Congress in October. The man now in charge of running the Troubled Asset Relief Program, Assistant Secretary Neel Kashkari, said the department’s Office of Financial Stability, with about 40 full-time employees, is operating at half-staff.
Federal banking regulators, who must approve the applications from banks before they go to Treasury, said there is a backlog of unprocessed applications for relief. Outside observers said the difficulty of quickly building a qualified staff may be one reason the Treasury abandoned its original plans to use the TARP to purchase assets from financial institutions, deciding instead to inject capital into the banking system.

So we have $700 billion that’s to be spent by 40 people. I think I know how this story will end.

Almanac Day
Posted by Eddy Elfenbein on November 28th, 2008 at 8:23 pm

For reasons I may never know, I’m an extreme dataphile. I love numbers. Even better, numbers in charts! Or numbers in tables!! Historical data. Stock data. Sports data. Voting data. It really doesn’t matter, I’ll read it.
That’s why I’ve always been a big fan of the World Almanac. All of us dataphiles love the World Almanac. As I kid, I used to digest these books whole.
The new version always comes out around Thanksgiving time, and I made my annual trek to the book store to get it. Nope, I can’t even wait for Amazon.
I have on my bookshelf the last 20 World Almanacs, and I guess I’ll be collecting them for the rest of my life. I just spent the last few hours reading the newest version from cover to cover. Imagine Burgess Meredith in that classic Twilight Zone episode. That’s me, just World Almanacs.
Sigh….