Investment Grade Bonds Return 9.2%, Junk Returns 29%; Has the "Hard Money" Been Made?

As long as the corporate bond market is healthy there is going to be a bid on equities. And in the first half of 2009, junk bonds have been running.

Please consider Corporate Bonds Show Lehman Doesn�t Matter With 9.2% Return.

Nowhere is the recovery in financial markets more evident than in corporate bonds, where Lehman Brothers Holdings Inc.�s bankruptcy is becoming a distant memory.

U.S. investment-grade company debt returned 9.2 percent in the first half of the year, outperforming Treasuries by 13.7 percentage points, the most on record, according to Merrill Lynch & Co. index data. Corporate bonds also did better than the Standard & Poor�s 500 Index of stocks, marking the first time since 2002 that the fixed-income securities outshined both Treasuries and equities.

Yields on investment-grade company securities fell to within 3.31 percentage points of Treasuries yesterday, the least since Sept. 10, according to Merrill�s U.S. Corporate Master Index. Spreads widened to a record 6.56 percentage points on Dec. 5, and the securities lost 6.8 percent in 2008, the worst year on record, as the shock to financial markets from Lehman�s collapse Sept. 15 froze credit markets and sparked a run on Treasuries that caused bill rates to fall below zero.

�Spreads on corporate debt were so out of whack coming into the year, implying default rates that indicated more than 20 percent of all speculative-grade companies would go bankrupt,� said Kevin Sherlock, co-head of loan and high-yield capital markets at Deutsche Bank in New York. �The risk appetite is far more aggressive now than it was three months ago. It�s about where we were last summer at pre-Lehman levels.�

The biggest returns came in the riskiest securities. High- yield, high-risk bonds gained 29 percent, or 34 percentage points more than Treasuries, Merrill Lynch indexes show.

While credit spreads are narrowing, defaults continue to rise. The U.S. speculative-grade default rate jumped to 8.1 percent in May, the highest since October 2002, and may reach 14.3 percent by the first quarter of 2010, according to S&P.

�The easy money has been made,� said Richard Lee, a managing director in the fixed-income trading department of closely held broker-dealer Wall Street Access in New York. �You could have bought any corporate credit in January and February and made out like a bandit.�

Other measures of credit also show improvement. The difference between what banks and the U.S. government pay to borrow for three months, the TED spread, has shrunk to 41 basis points, the lowest since July 2007 and down from 464 basis points in October. A basis point is 0.01 percentage point.

The Libor-OIS spread, an indicator for banks� willingness to lend, ended yesterday at 0.38 percentage point. That�s approaching the 0.25 percentage point that former Fed Chairman Alan Greenspan has said would indicate that markets were back to �normal.�

Has The Hard Money Been Made?

It is perfectly clear the easy money has been made. Junk bonds are up 29% for the year while the S&P 500 is up 3.2%.

The question now is "Has the Hard Money Been Made?"

While no one knows the answer to that question, we do know risk appetite is back at pre-Lehman levels even though speculative grade defaults are at 8.1 percent and climbing, the highest since October 2002.

Please note the differences. In October of 2002 the economy and jobs were about to improve dramatically along with consumer spending. Housing was robust and about to get white-hot.

This go around, there is not going to be a quick revival in jobs and the housing bottom is still not in. Even when housing bottoms, where is it going? I suggest nowhere in real terms for a decade. Moreover, consumer attitudes towards debt and saving are dramatically different now than in 2003.

Household Deleveraging

In Effect of Household Deleveraging on Housing, Consumption and the Stock Market I posted the following chart and commentary.

Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the deleveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates. Alternatively, if accomplished through some form of default on existing debt, such as real estate short sales, foreclosures, or bankruptcy, deleveraging could involve significant costs for consumers, including tax liabilities on forgiven debt, legal fees, and lower credit scores. Moreover, this form of deleveraging would simply shift the problem onto banks that hold these loans as assets on their balance sheets. Either way, the process of household deleveraging will not be painless.

....

Think the US stock market is going to come roaring back if consumer deleveraging plays out as it must? Think again.

Expect another "Lost Decade" when it comes to housing and the stock market. It's the deflationary payback for the greatest credit binge in world history.

On June 26, the US Savings Rate Hits 6.9%, Highest In 15 Years. It was 4% when I posted the above chart on May 19, 2009.

Consumer attitudes towards spending have changed. So have banks' attitudes towards lending.

Moreover, the so-called stimulus plans and Bernanke's wizardry have bailed out banks (at taxpayer expense) but have done nothing for consumer debt levels or housing. Indeed Home Loan Delinquencies Double on Prime Loans; Foreclosure Filings Top 300,000 3rd Straight Month.

Expect a double dip recession because one is coming. A triple dip is certainly not out of the question. With that in mind, and with rising junk bond defaults, the stock market and corporate bonds are both priced for perfection.

Nonetheless, if junk bonds continue to run more "hard money" can be had. Feelin' Lucky?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Home Loan Delinquencies Double on Prime Loans; Foreclosure Filings Top 300,000 3rd Straight Month

The Office of the Comptroller of the Currency says Delinquencies Double on Least-Risky Loans.

Delinquency rates on the least-risky mortgages more than doubled in the first quarter from a year earlier as U.S. efforts to help homeowners failed to keep pace with job losses that pushed more borrowers toward foreclosure.

Prime mortgages 60 days or more past due climbed to 2.9 percent of such loans through March 31 from 1.1 percent at the same point in 2008, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said today in a report. First-time foreclosure filings on the loans rose 22 percent from the fourth quarter, the report said.

�I�m very concerned about the rise in delinquent mortgages and foreclosure actions,� Comptroller of the Currency John Dugan said in a statement with the report. President Barack Obama�s plan to create �sustainable, payment-reducing modifications is a positive step that should show significant benefits in the coming months,� Dugan said.

Obama�s program, unveiled Feb. 18, aims to help as many as 4 million homeowners by modifying loans and calls for Fannie Mae and Freddie Mac to refinance mortgages for as many as 5 million borrowers who owe more than their houses are worth. Foreclosure filings surpassed 300,000 for a third straight month in May, according to RealtyTrac Inc., and the U.S. economy has shed about 6 million jobs since the recession began in 2007.

Serious delinquencies on prime loans, which account for two-thirds of all U.S. mortgages, rose to 661,914 in the first quarter from 250,986 a year earlier, according to the report. Overall, mortgages 60 days or more past due rose 88 percent from last year, the report said.

�Serious delinquencies are a leading indicator of increased foreclosure actions in the future,� the report said.

The data shows 5.9 percent of the 21.8 million Fannie Mae and Freddie Mac loans serviced by national banks or thrifts were at least days 30 days late, in foreclosure or subject to bankruptcy, compared with 3.2 percent a year earlier.

The report covers the performance of 34 million loans totaling $6 trillion, the agencies said.

Mortgage Metrics Report for First Quarter 2009

Inquiring minds are digging into the OCC and OTS Release Mortgage Metrics Summary for First Quarter 2009.

The report, based on data from loan servicing companies that manage 64 percent of all first-lien U.S. mortgages, shows:

• The number of loan modifications significantly increased. During the quarter, servicers implemented 185,156 new loan modifications, up 55 percent from the previous quarter and 172 percent from the first quarter of 2008.


• The proportion of payment-reducing modifications also increased. More than half of the modifications in the first quarter of 2009 resulted in lower monthly principal and interest payments, as servicers focused on achieving more sustainable mortgage payments. Modifications that reduced monthly payments by 20 percent or more jumped 19 percent from the previous quarter, to 29 percent of all modifications. By contrast, actions that resulted in increased payments constituted only 19 percent of modifications, a drop of 25 percent from the previous quarter.


• Modifications that reduce payments have lower delinquency rates over time. Although delinquencies on modified loans increased each month following modification, delinquency rates were considerably lower for mortgages in which monthly payments were reduced. Six months after modification, only 24 percent of the mortgages that had monthly payments reduced by 20 percent or more were 60 or more days past due, compared with 54 percent of mortgages with monthly payments left unchanged, and 50 percent with higher monthly payments.


• Seriously delinquent mortgages increased. Seriously delinquent mortgages (60 or more days past due or involving delinquent bankrupt borrowers) increased as economic pressures continued to weigh on homeowners. Prime mortgages, which represented two-thirds of all mortgages in the portfolio, had the highest percentage increase in serious delinquencies, climbing by more than 20 percent from the prior quarter to 2.9 percent of all prime mortgages.


• Foreclosures in process increased. Foreclosures in process also increased during the quarter to 844,389, or about 2.5 percent of all serviced loans, as moratoriums on foreclosures expired during the first quarter. This increase represented a 22 percent jump from the previous quarter and a 73 percent rise from the first quarter of 2008.

Data also showed a continuing emphasis on preventing avoidable foreclosures to keep families in homes and mitigate losses, as servicers continued to implement more home retention actions (loan modifications and payment plans) than home forfeiture actions (foreclosures, short sales, and deed-in-lieu-of-foreclosure actions). Prime borrowers received about twice as many home retention actions as home forfeiture actions, while subprime borrowers received more than seven times as many.

The report covers the performance of 34 million loans totaling more than $6 trillion in principal balances from the beginning of 2008 through the end of the first quarter of 2009. The impact of the increase in modifications, particularly those with reduced monthly payments, will be seen only in future data.

OCC and OTS Mortgage Metrics Report

Inquiring minds are also digging into the 42 page OCC and OTS Mortgage Metrics Report

Click On Any Chart For Sharper Image

Home Retention Actions: Loan Modifications and Payment Plans

Increased emphasis on loan modifications drove an overall increase in home retention actions, as shown in the table below. Newly initiated loan modifications reached 185,156 during the quarter� rising by 55.3 percent from the previous quarter and 172.3 percent from the first quarter of 2008. The impact of this increase in modifications on reducing foreclosures and enabling borrowers to remain current on their loans will only be seen in future data. Likewise, modification data through the first quarter do not reflect the impact of the Administration�s �Making Home Affordable� program, which was announced in March and began to be implemented after this reporting period.



Modifications during the first quarter of 2009 resulted in lower monthly principal and interest payments on 54.1 percent of all modified loans, as servicers focused on achieving more sustainable mortgage payments. The percentage of modifications that reduced payments by 20 percent or more increased to 29.3 percent of all modifications made in the first quarter of 2009, up 19.2 percent from the previous quarter. Modifications that increased monthly payments declined to 18.5 percent of all modifications during the quarter, down from 25 percent in the fourth quarter and 33.5 percent in the third quarter. Actions that left payments unchanged increased slightly to 27.3 percent.

New to this report are data on the types of actions taken to modify loans. Nearly two-thirds of modifications were �combination modifications� that involved two or more changes to the terms of the loan. Capitalization of delinquent interest, fees, and advances, combined with interest rate reductions and extended maturities were the predominant combination of modifications made during the first quarter. Interest rate and payment freezes, principal reductions, and principal deferrals were less prevalent. Of the 185,156 mortgages that were modified in the first quarter of 2009, 70.2 percent included a capitalization of missed payments and fees, 63.2 percent reduced the interest rate, and 25.1 included an extended term. By comparison, 12.6 percent of the mortgages received modifications that froze the interest rate, 1.8 percent included a reduction of principal, and 1.1 percent included a deferral of principal.

Status of Loans Modifications as of March 31, 2009



Re-Default Rate for 2008 Modifications



Re-Default Rates for Portfolio Loans and Loans Serviced for Others



Overall Mortgage Portfolio



Portfolio Composition
(Percent of All Mortgage Loans in the Portfolio) First Quarter 2009

Damning Report

This is a damning report on the success (or lack thereof) of the mortgage foreclosure workout programs to date. Redefault rates are near 50% after Fannie/Freddie loan modifications. Of course Fannie and Freddie can grant bigger loan mods (and probably will), but taxpayers will have to eat the cost.

Private loan mods are redefaulting at a stunning 58.1% rate 12 months after modification. Can those people redeafulting can afford ANY payment? Even if they can, the incentives to walk away are enormous.

Certainly those out of a job are unlikely to be able to afford any payment, and the unemployment rate is soaring.

Prime Loan Math in Dollars

Moreover note that 67% of loans are "Prime Loans". Prime mortgages 60 days or more past due climbed to 2.9 percent of such loans through March 31 from 1.1 percent at the same point in 2008 according to the report.

Total Servicing is $6 Trillion. $4 Trillion of that is "prime". 2.9% of that is 60 days late or worse. 2.9% of $4 Trillion is $116 billion. And that ignores the problem in Alt-A and Pay Option ARMs.

Prime Loan Math in Units

There are 22.8 million prime loans. 2.9% of that is 661,200. That's a lot of potential housing supply.

Jobs Are The Key

Unless the job market quickly improves, expect those numbers to soar. Here's a hint: the job market is unlikely to significantly recover for years.

This was a very damning report on the state of housing.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Corn Futures Down Lock Limit, Soybeans and Wheat Drop On Crop Reports

As U.S. Farmers Boost Acreage, Corn, Soybeans, Wheat Plummet.

Corn plunged by the Chicago Board of Trade�s limit after a government report showed U.S. farmers planted more acreage with the grain than estimated in March. Wheat and soybeans also tumbled on signs of increasing supplies.

Corn futures for December delivery dropped by the maximum of 30 cents, or 7.6 percent, to $3.6725 a bushel at 11:02 a.m. on the CBOT. The price headed for the fourth straight quarterly slide.

The U.S. corn report showed �an awfully big acreage number and suggests inventories will be more comfortable,� said Tim Emslie, a research manager at Country Hedging Inc. in Inner Grove Heights, Minnesota.

The U.S. is the world�s largest exporter of corn, soybeans and wheat. Corn is the nation�s biggest crop, valued at $47.4 billion in 2008, followed by soybeans, hay and wheat, government figures show.

Soybean futures for November delivery fell 22 cents, or 2.2 percent, to $9.615 a bushel. Earlier, the price touched $9.435, the lowest since April 1.

U.S. farmers will sow a record 77.483 million acres with the oilseed, up 2.3 percent from 75.718 million last year, the USDA said. In March, the agency said farmers intended to plant 76.024 million acres.

Wheat futures for July delivery tumbled 18.25 cents, or 3.5 percent, to $5.0975 a bushel. The price earlier touched $4.9575, the lowest since Dec. 12.

About 13.77 million acres were seeded with spring wheat, the USDA said. That topped the 13 million projected by analysts surveyed by Bloomberg News last week. Total inventories on June 1 were 667 million bushels, doubling from a year earlier.

Cattle and hog futures rallied today as the crop reports signaled lower costs for livestock feed.

�This is a great day for the cattle and hog producer and the dairyman,� Basse said. �Corn, soybeans and wheat all made their seasonal highs earlier this month. Given favorable weather for the remainder of the growing season, we should have a breathable cushion of inventories.�

Corn Futures Daily Chart



Corn Futures Monthly Chart



Wheat Futures Daily Chart



Wheat Futures Monthly Chart



Soybean Futures Daily Chart



Soybean Futures Monthly Chart



Charts are from Barchart Futures.

As compared to a year ago, prices are down across the board, even on soybeans. Corn prices are down by 50%.

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

UK First Quarter GDP Drops 2.4%, Most Since 1958; US GDP Fell 5.5%

Expect to see more headlines like this, worldwide: U.K. First-Quarter GDP Drops 2.4%, Most Since 1958.

The U.K. economy shrank more than previously estimated in the first quarter in the biggest contraction since 1958 as the recession choked industries from construction to services.

Gross domestic product fell 2.4 percent from the final three months of 2008, compared with the prior measurement of a 1.9 percent drop, the Office for National Statistics said today in London. The median prediction in a Bloomberg survey of 28 economists was for a 2.1 percent decline. Construction activity plunged almost three times as much as originally estimated.

Bank of England Governor Mervyn King said last week that Britain�s recovery from recession may turn out to be �a long, hard slog.�

The U.K.�s GDP will probably fall 4.3 percent this year, the Organization for Economic Cooperation and Development said in a June 24 report. That compares with a 4.8 percent drop in the euro area and a 2.8 percent decline in the U.S.

The Bank of England is pumping newly created money into the financial system and keeping its benchmark interest rate at a record low of 0.5 percent to fight the recession.

Still, King said June 24 that problems in the banking system mean the recovery is �uncertain� and policy maker Kate Barker said the same day that Britain�s housing market was �still some way away from normal.

US First Quarter GDP Dropped At 5.5%

Last week the BEA announced the US Gross Domestic Product, for the 1st Quarter 2009.

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 5.5 percent in the first quarter of 2009,(that is, from the fourth quarter to the first quarter), according to final estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP decreased 6.3 percent.

The decrease in real GDP in the first quarter primarily reflected negative contributions from exports, equipment and software, private inventory investment, nonresidential structures, and residential fixed investment that were partly offset by a positive contribution from personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, decreased.

The smaller decrease in real GDP in the first quarter than in the fourth primarily reflected an upturn in PCE and a larger decrease in imports that were partly offset by larger decreases in private inventory investment and in nonresidential structures.

The 2.8% GDP contraction estimate for the US looks a little optimistic but there are so many give-away programs and government spending that perhaps they the NBER will be declaring the end of this recession later this year. If so it will be nothing to get excited over.

A double dip will be coming in 2010 or 2011 once the stimulus wears off. Consumers are not about to go on a sustained spending spree anytime soon and consumer spending is 70% of the economy.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Chicken Farmers Have Hearts Plucked Out

Last December, Pilgrim's Pride Went Bankrupt. The repercussions on chicken farmers are still being felt.

Please consider At Chicken Plant, a Recession Battle.

DOUGLAS, Ga. -- This small town was devastated in February when its largest employer, Pilgrim's Pride Corp., said it would close a chicken-processing plant as part of the company's bankruptcy filing.

Since then, city and county officials have been working to find a buyer who could save the plant's nearly 1,000 jobs and $300,000 in annual county tax revenues. But there's a problem: Pilgrim's Pride isn't eager to sell.

Pilgrim's has so far rejected a $32 million bid for the plant from Amick Farms LLC of Batesburg, S.C., company and city officials say. Another chicken company took a look and decided Pilgrim's asking price was too high, say people familiar with the matter. City officials say the company kept a prospective bidder from touring the plant, making it a challenge to market.

Pilgrim's says it hasn't been offered a fair price for the plant and is cautious about letting rivals see its manufacturing processes. In an email to the city of Douglas, Pilgrim's President and Chief Executive Don Jackson said, "With declining demand for chicken in this terrible economy we need to remove chicken from the market. This would not be accomplished with a sale." While he said he recognized the "devastating impact" a closing would have on Douglas, "the actions do strengthen the company and help protect the jobs" of the company's 40,000 U.S. employees and farmers.

Many businesses in the U.S. are struggling with excess capacity. From autos to airlines to houses, "there's a landscape of industries and sectors that are recognizing that they're going to need to scale down," says Nancy L. Rose, an economist at the Massachusetts Institute of Technology Department of Economics in Cambridge.

With no plant to process the birds they raise, local chicken farmers have no income to pay off debts. Months ago, the hundreds of cavernous, metal-and-wood chicken houses in the county were worth at least $200,000 each when filled with chickens, farmers say. Now, except for flies and old feathers, the structures sit empty and are virtually worthless.

Mr. Jackson, Pilgrim's CEO, appears to have struggled over the decision to shut the plant. In a March 11 email to Ms. Lewis, the Economic Development Authority official, he said: "I do not mean to 'pluck the heart' out of Douglas or any other community. All of my 58 years have been spent in agriculture. Thirty of it in the chicken business. I grew up on a farm and my father spent his entire life farming. Not some 'rich' farmer but one just like your neighbors in Coffee County. He would be sick over this situation." Mr. Jackson declined to be interviewed.

Pilgrim's began dismantling chicken operations in the area, slaughtering hens and selling off eggs. The steps were necessary because "you can't close a plant and have tens of thousands of live chickens there with no place to go," Pilgrim's bankruptcy attorney, Stephen A. Youngman, said in court transcripts.

Douglas residents still hope the plant will reopen. One recent afternoon, after a corporate jet landed at the local airport, rumors flew that a buyer might have arrived. It turned out the plane was carrying executives from Little Debbie, a maker of cookies and cakes, doing business in the region.

Oh' The Humanity!

I am not sure quite why but the above story reminds me of a scene from the Cincinnati WKRP Turkey Drop Episode.

"As God is my witness, I thought turkeys could fly!!!" -- Arthur Carlson, WKRP in Cincinnati.

The above quote is from the famous WKRP in Cincinnati episode where Station Manager, Arthur Carlson (played by Gordon Jump), arranged to have live turkeys dropped from a helicopter as an advertising stunt.

Unfortunately, this turned out to be a serious miscalculation. The poor birds plunged to earth, never even having a chance. Their tragic "last flight" was relayed to WKRP listeners by reporter Les Nessman, played by Richard Sanders:

"It's a helicopter, and it's coming this way. It's flying something behind it, I can't quite make it out, it's a large banner and it says, uh - Happy... Thaaaaanksss... giving! ... From ... W ... K ... R... P!! No parachutes yet. Can't be skydivers... I can't tell just yet what they are, but - Oh my God, Johnny, they're turkeys!! Johnny, can you get this? Oh, they're plunging to the earth right in front of our eyes! One just went through the windshield of a parked car!

Oh, the humanity! The turkeys are hitting the ground like sacks of wet cement! Not since the Hindenburg tragedy has there been anything like this!"

Tomorrow a report on lobsters.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Long Term Budget Projections at Unprecedented and Intolerable Levels

The Committee for a Responsible Federal Budget has an interesting report on the Long Term Budget Outlook as reported by the Congressional Budget Office. Let's take a look.

Last week, the Congressional Budget Office (CBO) released its Long-Term Budget Outlook. The reports suggests a brief window in which deficits subside a bit, after which the effects of health care cost growth and population aging will drive them rapidly upward and bring the national debt to unprecedented and intolerable levels.

Under current law, CBO projects debt held by the public will rise from less than 40 percent of GDP before the economic crisis to nearly 100 percent by 2040 and 300 percent by 2083. If current policies are continued, CBO projects the debt will rise to 100 percent by the early 2020s, to 200 percent before 2040, and eventually to 750 percent.

Ultimately, revenue increases and/or spending cuts will be necessary to prevent �a vicious cycle in which the government had to issue ever-larger amounts of debt in order to pay ever-higher interest charges.�

Ever-Growing Deficits

If we continue on our current path, according to the CBO, deficits will persist and grow, driving public debt to untenable levels. The CBO makes two sets of long-term projections: the �extended baseline scenario,� which essentially assumes current law, and the �alternative fiscal scenario,� which assumes policy makers continue a number of current practices such as maintaining physicians payments in Medicare, continuing to patch the Alternative Minimum Tax, renewing the 2001/2003 tax cuts, and allowing discretionary spending to grow with GDP rather than inflation over the next decade.



Rising deficits are caused by spending growing considerably faster than revenue. Projected spending increases come mainly from the growth of Medicare and Medicaid, and to a lesser extent Social Security.

Although a relatively small portion of our budget today at 1 percent of GDP, interest on the debt would grow to consume 12 percent of GDP by 2080 under CBO�s baseline scenario or 30 percent under its alternative scenario. Of course, even the baseline scenario displayed below would be unlikely to occur, since investors and lenders would not allow the United States to accumulate such high levels of debt. But this projection represents the magnitude of the gap that must be closed.



Ultimately, the long-term budget outlook will necessitate serious tax and spending changes. Absent such changes, we face the real threat of a fiscal and economic crisis more severe than what we've already endured.

There are more interesting charts in the article including one on Factors Impacting Growth of Medicare, Medicaid, and Social Security.

To say that the present course is unsustainable is putting it mildly. Spending cuts are mandatory. However, neither the Obama administration nor Congress has gotten the message. Nor has the Free Lunch Society of which Paul Krugman is the high priest.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Complacency as Measured by VIX Returns to Wall Street

Bloomberg is reporting VIX Drops to Lowest Level Since Lehman�s Collapse as Fear Ebbs.

The benchmark index for U.S. stock options fell below its closing level from the day before Lehman Brothers Holdings Inc.�s September collapse as stocks rallied and investors paid less to hedge against equity losses.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, lost 1.1 percent to 25.65 at 11:54 a.m. in New York. The index measures the cost of using options as insurance against declines in the Standard & Poor�s 500 Index, which added 0.9 percent.

�Fear of the doomsday scenario has definitely subsided,� Jeremy Wien, a VIX options trader at Societe Generale SA in New York, said before the index slipped below its Sept. 12 close of 25.66.

Before today, the VIX averaged 20.18 in its history stretching back to the start of 1990. The index peaked at 80.86 in November and dipped below 30 in May for the first time in eight months. It reached an intraday record of 89.53 on Oct. 24.

The volatility benchmark, known as Wall Street�s �fear gauge� because it almost always increases as stocks fall, reflects expectations for price swings for the next 30 days and is calculated from S&P 500 options that are one or two months from expiration.

Federal Reserve Chairman Ben S. Bernanke has made unprecedented use of the central bank�s powers as the lender of last resort. He kept banks liquid by accepting bonds they can�t trade as collateral for Treasuries and bailed out the nation�s biggest insurer, American International Group Inc.

The S&P 500�s swings were the biggest in the benchmark�s 80-year history last year as it plunged 38 percent, the most since 1937. There were 18 moves of more than 5 percent after Sept. 29. That was more than half of the 35 swings of that size that have occurred from 1955 through 2008, according Howard Silverblatt, the senior index analyst at S&P in New York.

Giving Bernanke or the Fed any credit for this is preposterous. The Fed helped create this mess. For a complete trashing of Bernanke please see Bernanke is a Total Failure Unsuited for Role as Fed Chairman.

Moreover, we have still not felt the repercussions of the Fed's actions nor does the Fed have an exit strategy for what it has done. Premature celebration for the Fed's policies is certainly unwarranted. The payback period may last a decade or more.

$VIX Daily



click on chart for sharper image

Looking forward, consumer spending attitudes have changed for good (and consumer spending is 70% of the economy), there is virtually no chance for a V shaped recovery, housing is going to remain in the doldrums (at best) , lending standards have tightened dramatically, the jobs picture is going to be bleak for a long time, bank leverage will not come back to the same extent for decades, if ever, and Peak Earnings are in.

In light of the above, the stock market is priced for perfection.

New lows might be coming whether there is another outright panic or not as measured by the VIX. Indeed that is what happened in March, with the S&P 500 making a new low although the VIX was nowhere near the October and November 2008 spikes.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bernanke is a Total Failure Unsuited for Role as Fed Chairman

Inquiring minds are reading Bernanke Flubs Tryout, Still Up for Leading Role by Caroline Baum.

Most often I agree with Caroline, but not this time.

After trashing (and rightfully so) Bernanke's last appearance before Congress, Caroline somehow arrives at the following conclusion.

It would be hard to find someone more suited for the job of Fed chairman than Bernanke. His performance yesterday has nothing to do with his unique qualifications for the position. ... Unless President Barack Obama wants a solo pilot, he would do well to tap Bernanke for a second term.

Let's take a look at the qualifications of which Baum speaks.

Ten Qualifications

1) Bernanke is either a liar or has a memory problem. I believe the former. Either way, there is a problem when a Fed chairman cannot recall a conversation with another Fed governor over something as critical as the Bank of America/Merrill Lynch merger. See Bernanke Suffers From Selective Memory Loss; Paulson Calls Bank of America "Turd in the Punchbowl" for my take.

2) Bernanke claims to be a student of the great depression yet amazingly concludes the cause was misguided Fed policy after the stock market crash. This is nonsense. The cause of the great depression and the cause of the current depression (yes we are in a depression), is the massive expansion of credit and debt fostered by the Fed itself. Bernanke is no student of history, he is a dunce.

3) Bernanke has on many occasions promised transparency. This is an outright lie. There is no transparency and Bloomberg has filed freedom of information lawsuits requesting information that should have been disclosed. Moreover, Congress had to subpoena the Fed in regards to the Bank of America / Merrill Lynch shotgun wedding which is how we know about Bernanke's selective memory loss. What else is Bernanke hiding?

4) Bernanke is creative. Some might think creativity is a positive attribute. It is, for a design engineer. Unfortunately creativity is not a good attribute for a Fed chairman. This whole mess was sponsored by the Fed when Greenspan got creative with interest rate policy. Bernanke is light-years more creative than Greenspan as witnessed by an amazing array of Fed lending facilities and the ballooning of the Fed's balance sheet swapped for garbage collateral. The unintended consequences of Bernanke's extraordinary actions are coming down the road. We do not even know what those consequences are. However, we do know that the Fed has no exit policy, and will come up with one by the seat of Bernanke's pants on the fly. Given there is no need for the Fed at all, the last thing we need is for a creative Fed.

5) Bernanke supports policies of theft. Proof of this is easy to establish. Bernanke favors a policy of 2% inflation, and inflation is theft. How so? Inflation benefits those with first access to money: governments, banks, and the wealthy. Government benefits when property taxes rise more than wages, banks benefit by borrowing money into existence, and the already wealthy benefit by being next in line for access to cheap money. By the time those low on the totem pole have access to cheap money, asset prices are already through the moon. Moreover, those with enough common sense to avoid the bubbles, get nothing for their money sitting in the bank. The middle class has been ravished by inflation, and Bernanke supports that inflation.

Please note that Bernanke cannot even follow his own mandate. Where was Bernanke when property and commodity prices were soaring? The answer is he was ignoring them. Thus we see the one sided nature of Bernanke's policies. He let home prices soar, and now that they are crashing looks to support them. By the way, this is not just Bernanke, this is a symptom of central bankers in general.

6) Bernanke cannot dissent. As a member of the Greenspan Fed, Bernanke went along with everything Greenspan did. It is clear Greenspan failed. Thus it is clear that Bernanke failed by supporting Greenspan's policies.

7) Bernanke supports policies of outright fraud. Fractional reserve lending is a fraud. Please consider Murray N. Rothbard and the Case for a 100 Percent Gold Dollar in which Rothbard condemned fractional reserve banking as a violation of contract. "In my view, issuing promises to pay on demand in excess of the amount of the goods on hand is simply fraud, and should be so considered by the legal system. For this means that a bank issues "fake" warehouse receipts � warehouse receipts, for example, for ounces of gold that do not actually exist in the vaults. This is legalized counterfeiting; this is the creation of money without the necessity of production, to compete for resources against those who have produced. In short, I believe that fractional-reserve banking is disastrous both for the morality and for the fundamental bases and institutions of the market economy...."

8) Bernanke could not spot the housing bubble. Amazingly Bernanke thought the housing bubble was "well contained" right before it exploded in his face. Of course there is another possibility: Bernanke is a liar and knew it was not contained but did not want to say so.

9) Bernanke has no idea where interest rates should be. Of course no one else does either. But Bernanke thinks he does. The result is overshooting interest rate policy in both directions, just as Greenspan did. This is the Fed Uncertainty Principle Corollary Number One in action: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to admit), particularly in times of economic stress.

10) Bernanke is a power grabbing hack. This is the Fed Uncertainty Principle Corollary Number Two in action: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Summary:

Bernanke is a disingenuous liar with a memory problem. He is also an economic dunce who does not understand the cause of great depression nor could he spot a housing/credit bubble visible to nearly every blogger in the country. However, like his mentor Greenspan, Bernanke believes that every problem can be cured by throwing money at it. Finally, he is a creative, political power grabbing hack who gives memorable speeches about throwing money out of helicopters.

I have to hand it to Caroline. That is indeed a unique set of qualifications.

Bernanke�s four-year term ends in February, let us hope he is gone. Better yet, it's time to Audit the Fed Then End It!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bloated State Police Pension Plans � Something Has To Give

The police union in Michigan is doing what public service unions in general usually do, 1) whine for more taxes 2) Complain they need more workers to maintain safety 3) Elect layoffs over reduced pay 4) Ignore the long term issues that need addressing.

Please consider Michigan State Police layoffs take effect Sunday.

LANSING, Mich. (AP) - About 100 Michigan State Police troopers will be laid off Sunday after a last-ditch effort to avoid the job loss failed.

Members of the Michigan State Police Troopers Association voted against a furlough plan that would have temporarily cut their pay to avoid layoffs of low seniority workers.

The furlough plan would have required troopers to take 37 hours of unpaid leave over a six-week period. That would have saved jobs now, but there was no guarantee low-seniority officers would have kept their jobs in the next budget year.

Mike Moorman, the troopers' union president, said the vote reflects dissatisfaction with how the state has handled public safety funding in recent years. Michigan has lost more than 2,000 law enforcement officers statewide this decade, including more than 400 from the state police. Positions have been eliminated as government tax revenues decline during a lengthy recession.

"The membership's rejection of furlough time is not a reflection on our unwillingness to stop the loss of 100 troopers," Moorman said in a statement. "Our members are fed up with the lack of public safety priorities in Michigan, which have been discussed for years, yet never acted upon."

Col. Peter Munoz, director of the Michigan State Police, said in a statement he is "deeply disappointed" a solution could not be found to avoid the layoffs.

The state spent more than $8 million in the past few years training the troopers it now plans to lay off to save less than $2 million in the current budget year.

Some state lawmakers continue to question why Gov. Jennifer Granholm's administration plans to move the police department into a new $40 million headquarters building in downtown Lansing early next year. The move could have long-term financial implications for the state police -- including significantly higher annual lease payments of $3.7 million per year -- but it does not affect the department's budget for the current fiscal year.

Peter Munoz, director of the Michigan State Police, whines he is "deeply disappointed a solution could not be found to avoid the layoffs". Munoz is wrong. There was a perfectly good solution to avoid the layoffs. If the union wanted to protect the most workers, the vote would have been for pay cuts. Instead, the union elected to do what unions typically do, protect the few instead of sharing the pain.

Of course there is plenty of blame to be spread around. Why is the legislature and/or Governor authorizing a new $40 million police headquarters in Lansing with lease payments $3.7 million per year higher?

After the layoffs, the Michigan State Police will have 958 troopers at posts across the state. Reduce the pension plans and benefits to reasonable levels and perhaps Michigan can afford 1200 officers. Then again, why isn't 900 or even 850 officers enough? Michigan has lost 400 state police in a decade. Is anyone suffering for it? How?

Voters are fed up with paying ever increasing taxes to keep unneeded public servants in high paying jobs with ridiculous pension benefits.

State Police Pension Double-Dipping

Inquiring minds are digging further into the Michigan State Police layoff situation. Please consider Why another budget "crisis?" State Police Pension Double-Dipping (among other reasons).

Troopers start getting a portion of their pension while still working and simultaneously collecting their regular salary. The amount of pension they can collect is 30 percent the first year, 50 percent the second, and then increases 10 percent each year until eventually they are getting full pension and full pay before they have retired. The money is not paid out to them immediately but is deposited into an interest-bearing retirement account they get when they really retire.

That's nuts, of course. No sane private sector employer would give away such a benefit.

We offer one because legislators abandoned their fiduciary duty to be responsible stewards and gave away a huge pile of loot to a powerful public employee union.

The rationale under which that caper was foisted on taxpayers was that Michigan State Police are eligible to retire and collect their pensions after just 25 years of service with no minimum age. As a result it's not uncommon to have age 40-something men and women in the prime of life eligible to call it a career and head for the beaches, spending the last 35-40 years of their lives lounging at taxpayer expense.

Needless to say this causes potential staffing problems at the MSP. Rather than fix the problem in a rational and fiscally prudent way - establish a minimum age of say 55 or 65 before an individual can start collecting a pension - the political class gave away some boodle in the form of a goofy DROP program as an incentive to keep troopers working.

Pretty sweet deal, huh? Sweet for the troopers, but not for the taxpayers. And just one more example of why you should never believe a politician who says, "Our budget has been cut to the bone."

Mike Moorman, the troopers' union president, whines "Our members are fed up with the lack of public safety priorities in Michigan".

Moorman is not bright enough to figure out what everyone else in the world knows: The US is in recession and Michigan is at the top of the list. There simply is no more tax money to pay for boated unions or their pension plans.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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175 California Hotels In Default; Sheraton Keahou Bay Resort in Hawaii Defaults; More Defaults Coming

Hotel owners are facing the same problems as homeowners, being upside down on their properties with no good escape. Please consider Hotel foreclosures jump in California.

In California, 175 hotels are in default -- the first stage in the foreclosure process -- according to a report from Atlas Hospitality Group, an Irvine-based brokerage firm. Another 31 have been foreclosed, nearly one third of them in the Inland region.

Of those in default or foreclosure, about 75 percent obtained new loans between 2005 and 2007 for construction financing, re-financing or to buy the hotel, according to the firm. Atlas Hospitality estimates that 2,500 hotels -- about 25 percent of the state's entire hotel population -- refinanced or obtained new loans in that time meaning more defaults and foreclosures could be on the horizon.

The industry has been rattled by foreclosures before, especially in the mid-1990s, but the impact today is more widespread, hitting both low-end and high-end properties in every region, Reay said.

Those who bought hotels between 2006 and 2006 are likely sitting on properties worth at least 50 percent less than what they paid, he said. [Mish: obviously there is a typo in the date range]

Reay's firm is marketing The Block at Big Bear, a 50-room hotel that catered to snowboarders. The hotel's owner walked away earlier this year and closed the hotel, which is in default. The hotel was appraised for more than $4 million in 2006. Today, Reay's firm, working with a court-ordered receiver, is asking $2.04 million for the property.

Hoteliers will likely have to survive at least two more years of low revenues, diminishing profit margins and fewer rooms booked by travelers unwilling to spend.

Atlanta-based PKF Hospitality Research has forecast that the revenue hoteliers earn per room will reach its lowest point of the recession in the third quarter of this year.

Sheraton Keauhou Bay In Foreclosure

In Hawaii, the Sheraton Keauhou Bay Resort and Spa is in foreclosure after owner defaults.

The Sheraton [Keauhou] Bay Resort and Spa on the Big Island is going into foreclosure after the resort's owner defaulted on its mortgage, another sign Hawaii's beleaguered tourism industry is suffering during the global recession.

Owners Koa Hotel LLC have defaulted on nearly $60 million remaining on their mortgage, interest and fines. Koa Hotel is owned by the New York private equity firm Brickman Associates. The property's major creditor is Lehman Brothers Holdings Inc., which filed for bankruptcy last year.

The resort's business declined amid a broader drop in visitors to Hawaii since last spring. So far this year, 15 percent fewer tourists have visited the Big Island compared to the first part of 2008.

Anyone who bought hotels in anywhere in the US between 2003 and 2007 more than likely overpaid, and by as much as 50% or more. Tourism is down everywhere and that tourism is not going to recover for years, perhaps decades as cash strapped consumers attempt to repair balance sheets.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Embrace Deflation - It's The Cure, Not The Problem

Concern over Japanese deflation is increasing. Please consider Japan Succumbs to Deflation as Consumer Prices Fall Record 1.1%.

Japan�s consumer prices fell at a record pace in May, adding to the risk that deflation will become entrenched and hamper a rebound from the nation�s worst postwar recession.

Prices excluding fresh food slid 1.1 percent from a year earlier after dropping 0.1 percent in the preceding two months, the statistics bureau said today in Tokyo. It was the sharpest decrease since comparable figures were first compiled in 1971.

Bank of Japan Governor Masaaki Shirakawa said last week that price declines will accelerate through the middle of the fiscal year as demand slackens and crude oil continues to trade lower than last year�s record. Retailers including Aeon Co. are cutting prices to attract customers as falling wages and the worsening job outlook damp spending.

�Profits fall, then wages come down, then consumers stop shopping,� said Junko Nishioka, chief Japan economist at RBS Securities Japan Ltd. in Tokyo. �And because people aren�t shopping, companies lower prices. That�s the process that we�re starting to see. It isn�t easy to break out of.�

�With demand deteriorating, companies are finding it more difficult to sell goods and services and are turning to discounting,� said Azusa Kato, an economist at BNP Paribas in Tokyo.

Some 47 percent of 775 Japanese retailers surveyed by the Nikkei newspaper plan to lower prices in the year ending March 2010 to spur sales, up from 9 percent a year earlier. Aeon, Japan�s second-largest retailer, this week started a discount campaign for confectionary, drinks and mayonnaise.

Consumers, whose spending accounts for more than half of the economy, may delay purchases if they expect goods to get cheaper. That would erode profits and force companies to cut wages, which have already slid for 11 months. Japan only escaped from a decade of deflation in 2005.

Japanese Deflation Deepens

As Japanese deflation deepens, Japanese Bonds Complete 2nd Weekly Gain.

Japan�s bonds gained for a second week as a government report showed consumer prices fell at a record pace, adding to signs deflation will hamper the economic recovery and boost the value of the fixed payments of debt.

Ten-year yields touched the lowest in almost three months after the statistics bureau said yesterday prices excluding fresh food fell 1.1 percent in May from a year ago.

�The drop in consumer prices may accelerate to about 2 percent in the summer,� said Yuichi Kodama, chief economist in Tokyo at Meiji Yasuda Life Insurance Co., Japan�s third-largest life insurer. �The 10-year yield may decline to 1.3 percent or below as the market needs to prepare for deeper deflation.�

An �extreme� slump in demand and production are causing the drop in prices, Finance Minister Kaoru Yosano said yesterday. �We continue to monitor developments in prices and need to carefully manage the economy to avoid a deflationary spiral.�

The Organization for Economic Cooperation and Development this week urged the Bank of Japan to keep pumping cash into the economy �until underlying inflation is firmly positive.� Since it cut the key interest rate to 0.1 percent in December, the central bank has been buying corporate debt and increased government bond purchases from lenders to revive growth.

Japan Fighting Deflation For Decades

Notice the misguided advice by the OECD about pumping cash into the economy. Japan has been doing this for 15 years and all they have to show for it is massive national debt and bridges to nowhere.

Will Deflation Derail A Japanese Recovery?

Jun Saito, a top Japanese economist says Deflation May Derail Japan Recovery.

Deflation �will exert a significant amount of downward pressure on the recovery,� Jun Saito, an adviser to Economic and Fiscal Policy Minister Kaoru Yosano, said in an interview yesterday in Tokyo. �An increase in deflationary expectations will raise real interest rates and that will restrain business investment.�

�Declining prices will mean lower profits, less investment and wage cuts that will weaken consumer spending further,� said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co.

According to Saito, who quantifies the risk of deflation by using government data and figures from the International Monetary Fund, the risk of persistent price declines climbed to the highest level since 2003 and almost doubled since last year.

�I think there�s a risk we may slip back into deflation,� Saito said, adding that he defines it as a sustained decline in prices.

Japanese companies cut spending at the fastest pace in 54 years in the three months ended March 31. Wages have dropped for 11 months and households reduced spending for a record 14th month in April.

Falling prices are a blow to households who borrow money because it makes it harder to repay debt, Saito said. Consumers will cut back spending if entrenched price declines push up their borrowing costs, he added.

Deflation Misinformation

There is so much misinformation in the above articles it's hard to know where to begin. For starters, inflation and deflation are monetary measures not price measures. However, let's talk about prices for a change.

The idea that "Falling prices are a blow to households who borrow money because it makes it harder to repay debt" is preposterous. When prices fall, consumers have more money and they can pay off debts faster, provided of course they have a job. Falling prices reward the fiscally prudent, which is the way it should be.

Falling home prices do encourage more mortgage walk-aways which is another matter. However, home prices must drop to the point of affordability before a recovery in housing can begin, so even falling home prices are desirable. The sooner home prices fall to the point of affordability, the better of everyone will be.

In general, falling prices are good for consumer balance sheets. Imagine the problems we would have if prices were soaring with the unemployment rate approaching 10%.

Profits are falling along with prices because demand is returning to some sense of normalcy that businesses did not plan for. In the meantime, cash strapped consumers spent recklessly for decades and need to save. They are. Proof is easy to find: US Savings Rate Hits 6.9%, Highest In 15 Years.

This saving is not bad for business as Keynesian clowns believe. Savings provides capital for businesses to expand. For more on this as well as a rebuttal to the ridiculous concept callled "Paradox of Thrift", please see Families Start Saving; Does This Aggravate The Nation's Woes?.

The only reason it appears that savings is bad is after decades of loose credit and monetary expansion by the Fed the world is awash in overcapacity. Now is payback time for misguided Fed polices and reckless consumer spending.

This recession and a rising savings rate are both necessary ingredients to restore fiscal sanity. Deflation should not be feared; deflation should be embraced. What should be feared is the reckless expansion of consumer and corporate credit made possible by Fed policies under both Greenspan and Bernanke. Deflation is not the problem, it is the cure for those reckless policies.

Ironically both Greenspan and Bernanke encouraged Japan to write off bad debts as the means to return to normalcy. However Bernanke Suffers From Selective Memory Loss and cannot follow his own advice.

Addendum:
The Fed likes to portray itself as being an "inflation fighter" when the ONLY source of inflation is the Fed itself. Because of rising productivity over time, the natural state of affairs is actually deflation.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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US Savings Rate Hits 6.9%, Highest In 15 Years

Personal incomes are rising reflecting tax cuts and consumer spending is up as well, notably car sales. However, consumers are still struggling to fix their personal balance sheets, currently overloaded in debt.

Please consider Surging U.S. Savings Rate Reduces Dependence on China.

In the recession following a borrowing binge that sent consumer debt to the highest level ever, Americans are shutting their wallets and building their nest eggs at the fastest pace in 14 years.

While the trend will put the country�s finances in better balance and reduce its dependence on Chinese investment, it may also restrain economic growth in 2010 and beyond, said Lyle Gramley, a senior economic adviser with New York-based Soleil Securities Corp. and a former Federal Reserve governor.

�There�s been a fundamental change in people�s behavior,� he said. �It will affect the economy for years.�

Government data today showed that the household savings rate rose to 6.9 percent in May, a 15-year high, as personal spending increased less than incomes. The rate in April 2008 was zero.

Americans� newfound frugality is pinching airlines such as Chicago-based UAL Corp., which is cutting staff amid dwindling demand for leisure travel. Donations to charities dropped last year for the first time since 1987, and they�re in danger of declining further in 2009.

Banks are benefiting. Deposits grew 1.7 percent in May, the ninth-biggest monthly rise since 1973.

The bigger cash reserves will lessen U.S. dependence on investment by China and other foreign countries to finance economic growth, Gramley said. The current-account deficit, which includes trade in goods, services and income transfers, narrowed in the first quarter to its lowest since 2001 as Americans saved more and brought fewer imports.

Banks are already gaining from American�s thriftiness. Fed data show that deposits at commercial banks stood at $7.5 trillion in the week ended June 10 after recording the biggest monthly increase of this year in May. �They�re getting cheap deposits,� said Allen Sinai, chief economist at Decision Economics in New York. �It�s part of the healing process.�

Rebuilding Balance Sheets

From 1960 until 1990, households socked away an average of about 9 percent of their after-tax income, government figures show. Americans got out of the habit in the 1990s as they saw their wealth build up in other ways, first through surging stock prices and then soaring home values, Gramley said.

Retailers are adjusting their strategies to reflect that new reality of a permanently higher savings rate. Saks Inc., Neiman Marcus Group Inc. of Dallas and other luxury businesses are reducing orders this year to limit supply and boost profitability.

�Across the board you are going to find less of the sizes, less of the availability in almost all of the categories,� Saks Chief Executive Officer Stephen Sadove said in an interview on June 23.

Roubini is concerned the savings rate will rise too quickly.

Nouriel Roubini, an economics professor at New York University and chairman of RGE Monitor, forecasts that the savings rate will ultimately reach 10 percent to 11 percent. What�s critical, he said in a Bloomberg Television interview on June 24, is how quickly it increases.

A rapid rise in the next year because of a collapse in consumption would push the economy, already in its deepest contraction in 50 years, further into recession, he said. If it occurs over a few years, the economy may grow.

Edmund Phelps, winner of the Nobel Prize in economics in 2006 and a professor at Columbia University in New York, said it may take as long as 15 years for households to rebuild what they lost in the recession.

�The only way we�re going to get a healthy, full recovery is over a long period of time, involving households rebuilding their balance sheets,� Phelps said in an interview on June 22 with Bloomberg TV. �There�s no silver bullet that�s going to get us into good shape quickly.�

On this issue I side with Phelps.

The increasing savings rate is a good thing not a bad one. The faster the savings rate rises the better off we will be in the long run.

Fortunately consumer attitudes towards debt have changed and changed for good, something that many have told me would never happen. Retailers are now adjusting for this new reality.

Consumer Spending Stabilizes, Incomes Rise, Wages and Salaries Drop

Bloomberg is reporting U.S. Consumer Spending Rose, Incomes Gained in May.

Consumer spending rose for the first time in three months in May as incomes jumped by the most in a year, a sign that government efforts to revive the economy may be starting to pay off.

The 0.3 percent gain in purchases followed no change in April, the Commerce Department said today in Washington. Incomes surged 1.4 percent, reflecting tax cuts and Social Security payments from the Obama administration�s stimulus and driving up the savings rate to a 15-year high.

Wages and salaries dropped 0.1 percent in May, showing the effects of mounting job losses.

Today�s report also showed inflation moderated. The price gauge tied to spending patterns rose 0.1 percent from May 2008, the smallest gain since records began in 1959. The Federal Reserve�s preferred gauge of prices, which excludes food and fuel, rose 0.1 percent from a month earlier and was up 1.8 percent from a year earlier.

Adjusted for inflation, spending climbed 0.2 percent, following a 0.1 percent drop the prior month.

U.S. auto sales rose to a 9.9 million-unit rate in May from 9.3 million the prior month. Industry estimates for June show the rate may exceed 10 million for the first time this year.

Car sales will rebound, but it's important to remember how depressed the current level is. Moreover, a significant portion of sales this year will be profit-losing sales as dealers cut prices to clear inventories. These sales will cut into demand for 2010 as will the silly as well as wasteful, cash for clunkers plan.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bernanke Suffers From Selective Memory Loss; Paulson Calls Bank of America "Turd in the Punchbowl"

Fed chairman Ben Bernanke's memory seems to be failing at an amazingly convenient time, for Bernanke. Please consider Bernanke Blasted in House.

Federal Reserve Chairman Ben Bernanke faced open hostility from lawmakers who barraged him during a Congressional hearing over his handling of the financial crisis and the central bank's role in reshaping the banking system.

Setting aside the deferential tone usually reserved for Fed chairmen, members of the House Committee on Oversight and Government Reform repeatedly interrupted Mr. Bernanke at Thursday's hearing to review the Fed's role in engineering a government aid package for Bank of America Corp. The lawmakers pored over internal Fed emails subpoenaed by the committee and projected on a screen in the hearing room.

Much of the heat focused on the Fed's part in pushing Bank of America to complete its acquisition of Merrill Lynch in January. House members on both sides grilled Mr. Bernanke on whether he threatened to force out Bank of America Chief Executive Kenneth Lewis. They accused him of inconsistencies in his statements and of keeping information from other agencies.

The biggest point of contention was over whether Mr. Bernanke threatened to oust Bank of America CEO Mr. Lewis. Bank of America approached top U.S. officials in mid-December about abandoning its deal to buy Merrill Lynch.

Mr. Bernanke defended the Fed's actions, saying the central bank acted with the "highest integrity" in the negotiations with Bank of America. "I did not tell Bank of America's management that the Federal Reserve would take action against the board or management," Mr. Bernanke said, adding that the decisions were "taken under highly unusual circumstances in the face of grave threats to our financial system and our economy."

Lawmakers pointed to a Dec. 20 email written by Richmond Fed President Jeffrey Lacker. One of a series unearthed by the panel, the email recounts a conversation between Messrs. Lacker and Bernanke in which the Fed chief planned to tell Bank of America that "management is gone," if they quashed the deal and later needed more government aid, wrote Mr. Lacker.

Pressed on the issue, Mr. Bernanke said he didn't make such a comment to Mr. Lewis and didn't remember that part of the conversation with Mr. Lacker.

Rep. Dan Burton, (R., Ind.), a former Oversight chairman, said people often used such language to avoid perjuring themselves. "Are you sure you can't remember?"

The reams of documents gathered by the committee offer a rare glimpse inside the government's decision making at the height of the financial crisis. At one point, according to handwritten notes taken by an unnamed Fed official, Mr. Paulson refers to Bank of America as "the turd in the punchbowl." The notes were taken during a conference call in early January among top U.S. officials to discuss the government's rescue package.

How Did a Private Deal Turn Into a Federal Bailout?

Today the Committee on Oversight and Government reform released some documents investigating the question "How Did a Private Deal Turn Into a Federal Bailout?"

Calculated Risk commented on this earlier in House Committee on Oversight Releases BofA Merrill Documents. Here is a snip from one the documents that Calculated Risk pointed out.



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Bernanke Grilling May Weaken Case for Fed as Risk Regulator

Here's something we should all be hoping for: Bernanke Grilling May Weaken Case for Fed as Risk Regulator.

Chairman Ben S. Bernanke�s grilling by legislators over Federal Reserve conduct in Bank of America Corp.�s takeover of Merrill Lynch & Co. may reduce the odds the central bank will win new powers in a regulatory overhaul.

Bernanke failed to resolve some lawmakers� questions on whether the Fed bullied executives and stepped over other regulators in the name of financial stability in a three-hour congressional hearing yesterday. Republicans asserted the Fed interfered with commercial decisions, and Democrats said it should have wrung more concessions in return for taxpayer aid.

Criticisms by members of both parties are likely to diminish support for the Obama administration�s plan to make the Fed the single agency responsible for the largest and most interconnected financial institutions. The proposal, part of a broad revamp of bank regulation, would give the Fed power to dictate standards on capital, liquidity and risk management.

�It may be more important for us to find another systemic risk regulator,� Representative Paul Kanjorski, a Pennsylvania Democrat and member of the House Oversight Committee where Bernanke appeared, said in a Bloomberg Television interview after the hearing. Congress should �hesitate to put any more authority on the back of the Federal Reserve,� he said.

Representative Darrell Issa, the ranking Republican on the House panel, said the Fed�s actions �ought to be a note of caution to those who want to dramatically increase its power and authority.�

�There�s something rotten in the cotton here -- no ifs, ands or buts about it,� Representative Edolphus Towns, a New York Democrat who chairs the House Oversight Committee, told reporters after the hearing. �There was a forced situation, a shotgun wedding� and �we�re just trying to find out who had the shotgun.�

Bernanke's Selective Memory Loss

When it comes to memory loss, there is virtually no chance that Bernanke could have forgotten a conversation with Fed Governor Lacker in which Bernanke planned to tell Bank of America that "management is gone".

That is not the kind of conversation that anyone forgets, except on purpose. With that in mind "Elective Memory Loss" is a more fitting term.

Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis

Selective memory loss is hard to prove. However, we do not yet fully know what's in memos and Emails circulating at the Fed.

The case against Bank of America CEO Ken Lewis and former Treasury Secretary Hank Paulson is rock solid. I say go for it. Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis.

New York State Attorney General Andrew Cuomo's letter to the SEC and Senate Banking Committee on the Bank of America, Merrill Lynch Merger provides strong evidence of coercion to commit securities fraud by former Treasury Secretary Paulson and Fed Chairman Ben Bernanke, and actual securities fraud by Bank of America CEO Kenneth D. Lewis.

Bank of America's attempt to exit the merger came to a halt on December 21, 2008. That day, Lewis informed Secretary Paulson that Bank of America still wanted to exit the merger agreement. According to Lewis, Secretary Paulson then advised Lewis that, if Bank of America invoked the MAC, its management and Board would be replaced.

In an interview with this Office, Secretary Paulson largely corroborated Lewis's account. On the issue of terminating management and the Board, Secretary Paulson indicated that he told Lewis that if Bank of America were to back out of the Merrill Lynch deal, the government either could or would remove the Board and management.

The Fed is largely to blame for the housing/credit bubble by holding interest rates too low, too long. The way to control risk is to get rid of the Fed and its micro-mismanagement of interest rates, not to extend the Fed's power.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Decade of Lost Jobs

Before taking a look at the worst 10-year job growth record since the Great Depression, let's take a look at the unexpected rise in weekly unemployment claims.

Please consider the Department of Labor Weekly Claims Report.

Seasonally Adjusted Data

In the week ending June 20, the advance figure for seasonally adjusted initial claims was 627,000, an increase of 15,000 from the previous week's revised figure of 612,000. The 4-week moving average was 617,250, an increase of 500 from the previous week's revised average of 616,750.

The advance seasonally adjusted insured unemployment rate was 5.0 percent for the week ending June 13, unchanged from the prior week's unrevised rate of 5.0 percent.

The advance number for seasonally adjusted insured unemployment during the week ending June 13 was 6,738,000, an increase of 29,000 from the preceding week's revised level of 6,709,000. The 4-week moving average was 6,759,750, a decrease of 3,250 from the preceding week's revised average of 6,763,000.

Weekly Claims



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For eight weeks I have been saying the dip in initial claims from the March peak of roughly 650,000 is not accelerating very fast, if indeed at all.

In three months the 4-week moving average of initial claims has gained roughly 35,000 jobs. For the sake of argument let's call it 15,000 jobs per month. At that rate it will take another 4 months just to get to where we were a year ago and those were God awful numbers at 381,500 claims a week.

Of course things might speed up significantly, then again I was reasonably generous with the initial rate of improvement. Moreover, A drop in initial claims will mean that corporate firings have stabilized, it will not mean that significant hiring is underway.

However you slice things the employment situation remains grim.

Horrifying Job Statistics

Michael Mandel of BusinessWeek is writing about a Lost Decade For Jobs.

Private sector job growth was almost non-existent over the past ten years. Take a look at this horrifying chart:



Between May 1999 and May 2009, employment in the private sector sector only rose by 1.1%, by far the lowest 10-year increase in the post-depression period.

It�s impossible to overstate how bad this is. Basically speaking, the private sector job machine has almost completely stalled over the past ten years.



Over the past 10 years, the private sector has generated roughly 1.1 million additional jobs, or about 100K per year. The public sector created about 2.4 million jobs.

But even that gives the private sector too much credit. Remember that the private sector includes health care, social assistance, and education, all areas which receive a lot of government support.

Where The Jobs Are

Mandel goes on with tables that show what sectors gained jobs. The top three were Private healthcare, Food and drinking place, and Gov Education.

It's easy to forecast another 1.1 million job losses in the next year given that we are currently losing jobs at the rate of 345,000 a month. (See Jobs Contract 17th Straight Month; Unemployment Rate Soars to 9.4% for details).

Note that the economy has been shedding jobs at a rate of 500,000 a month or more for months on end. The unemployment rate is currently 9.4%.

Within months, the economy will have lost jobs over a full decade for the first time since the Great Depression. Moreover no job recovery is in sight.

At the beginning of the year President Obama made a Fantasyland prediction of 8% unemployment whereas I predicted 9.8% by August and 11% next year. President Obama now concedes the unemployment rate will reach 10%.

Obama claims his policies will save or create millions of jobs. President Bush made similar claims. Such claims are ridiculous because there is no way to measure a "saved job". No matter what the jobs picture looks like, Obama will be free to say he "saved" 3.5 million jobs, or whatever number he wants.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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