Sunday, November 30, 2008

Will Microsoft and Yahoo work out a deal?

Sooner or later, Microsoft and Yahoo will come to some sort of agreement on their common interests, even though they also have divergent interests, but the idea of a full acquisition of Yahoo is essentially a non-starter. Sure, Microsoft has a content business, but trying to outright merge it with MSN would not be worth the effort or the upfront or long-term costs. Maybe some form of blending or cross-promotion would benefit both parties. What Microsoft really should do is to become the search provider for Yahoo. Ultimately, Microsoft does not need to buy any assets at all, but simply should become the search service provider for Yahoo. But, since Yahoo has such a large investment in search, Microsoft may need to buyout some major chunk of that investment in order to convince Yahoo to make a deal happen. I suspect that what really needs to happen is for Microsoft to provide some form of preferential treatment for Yahoo content search results. And, maybe, Microsoft would abandon some, but not all, of its own content services in favor of associating with Yahoo content services.

One big unknown is the degree to which Yahoo would get out of the ad brokering business and rely on Microsoft to sell ad space on Yahoo content. I am sure Microsoft wants that, but Yahoo may not be willing to do that, at least in any initial search-provider deal. Longer term, this does seem the way that Yahoo should go, to limit and leverage its own resources.

This whole deal might be a multi-step process, a confidence-building process, with each step getting bigger until the final deal can be completed.

In any case, it is still likely that Yahoo would remain a separate corporation from Microsoft, even as Microsoft becomes a very significant service provider to Yahoo.

Ultimately, Yahoo needs to dramatically shrink its level of investment, effectively outsourcing that to Microsoft, who will be in a better position to leverage investment, so that Yahoo can focus on the content areas where it does best. And maybe then Microsoft can outsource some of its own content to Yahoo to leverage their investment as well. In essence, Microsoft is a platform company, with search and advertising being key platforms.

I suspect that Microsoft and Yahoo will in fact ultimately do some sort of deal. Maybe it will simply take some additional economic weakness to convince Yahoo to give up some of their overly idealistic fantasies of doing everything on their own.

Disclosure: I do own Microsoft stock.

-- Jack Krupansky

Friday, November 28, 2008

Gasoline continuing to fall, but how much further?

With the price of crude oil seeming to stabilize in the low $50's, it would seem that the retail price of gasoline would be unlikely to fall a lot further. But, there are simply too many variables in the economic outlook that are pulling in different directions to clearly conclude any definitive direction in the price of commodities. Although I think it is very likely that the Obama administration will engineer a successful economic recovery, I also think that plenty of consumers and businesses are likely to take an "I'll believe it when I see it" attitude and continue to keep a tighter rein on their energy spending, if not tighter further. Sure, OPEC may cut back on output since demand is lower, but hedge funds and banks are more likely to have even less cash available to gamble on commodities speculation.

In any case, the price of retail gasoline continue to ratchet downwards, with the AAA Daily Fuel Gauge Report national average price falling to $1.835, significantly less than half its peak price in July.

December RBOB unleaded gasoline futures are at $1.1350, indicating that retail prices are headed for $1.73 to $1.78 within a few weeks, only about 5 cents below the current price level.

That "1" handle on the price will certainly add at least a modest degree of holiday cheer to the average consumer.

Energy commodities prices may begin to stabilize, especially if market participants begin to expect that Team Obama and massive fiscal stimulus are on the verge of turning the economy around. One scenario is that prices pop up on psychological expectations, and then reverse and head back down as people realize that even with massive stimulus a recovery will take some time.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP (or at least limiting its decline) by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

Some people are suggesting that we are seeing deflation, but the recent sharp declines on commodities-driven prices is simply the unwinding of the great speculative bubble in commodities of the past five years. If we see crude oil back down under $5 and gasoline under $1 and gold under $250, that would be an indication of true deflation. Besides, year-over-year core consumer prices rises are still above 2%. It takes more than a few months for there to be any sea-change in the price change trend. Currently, we are simply experiencing some welcome disinflation.

-- Jack Krupansky

Thursday, November 27, 2008

How low are T-bill yields?

I have not paid much attention to T-bill yields for quite some time since that have been rather low relative to "safe" money market funds and FDIC-insured money market accounts. The primary reason for T-bill yields being so low is that demand for them is incredibly high since they are so safe. Here are the results from the most recent weekly auction (on Tuesday):

  • 4-week T-bill: 0.051%
  • 3-month (13-week) T-bill: 0.152%
  • 6-month (26-week) T-bill: 0.498%
  • 1-year (328-day) T-bill: 1.021%

The price for $100 of 4-week T-bills was $99.996111, or $999.96 for $1,000, the minimum purchase, or $9,999.61 for $10,000.

Actually, those T-bills are not yet "in circulation" since they will be issued on Friday, November 28, 2008.

The auction results for last week:

  • 4-week T-bill: 0.101%
  • 3-month (13-week) T-bill: 0.152%
  • 6-month (26-week) T-bill: 0.855%
  • 1-year (52-week) T-bill: 1.063%

According to Bloomberg, T-bills were trading yesterday at:

  • 4-week T-bill: does not trade
  • 3-month (this week's) T-bill: 0.04%
  • 6-month (this week's) T-bill: 0.48%
  • 12-month (last week's) T-bill: 0.91%

In other words, shortly after the auction the T-bills could be "flipped" for a quick pop in price.

This week's T-bills actually trade "when issued" even though they have not yet been issued. The 1-year (12-month) T-bill of last week trades since there was no 52-week T-bill issued this week (the odd 328-day T-bill was auctioned.)

It is interesting how a security that is available at a regular auction every week can so quickly be bid up in price. That is because only a limited amount is available in each auction, based on the needs of the U.S. Treasury. At least some of the big investors (e.g., mutual funds needing Treasuries since that is their charter) do not have their full needs met at auction, especially if they do not bid high enough, and have to buy on the open market.

Us retail investors can have all of our purchase orders fully met, up to $5 million, at the auction price, direct from the U.S. Treasury via TreasuryDirect. For us small retail investors almost any FDIC-insured interest-bearing bank account offers a better yield. Treasuries only become attractive for inividuals with much more than the FDIC, or even CDARS, limits.

-- Jack Krupansky

Treasury money market fund guarantee program extended from December to April

Good news for money market fund investors. On Monday the U.S. Treasury announced an extension of the Treasury's Temporary Guarantee Program for Money Market Funds until April 30, 2009. If your money market fund has signed up for the program, your account balance as of September 19, 2008 will be fully protected in case the fund "breaks the buck." Without the extension the program would have terminated on December 18, 2008. The program as announced on September 18, 2008 can only be extended until September 18, 2009, but there is an excellent chance that the incoming administration will supersede this "temporary" program with something more permanent.

There is an extremely important caveat on this program: it only covers "balances" in accounts as of September 19, 2008. In particular, the guarantee will not cover any new money since that date, including interest, additional deposits, or new accounts opened or funded after that date. But, it is acceptable to put money back into the account if you had taken it out after that date.

Personally, I have moved most of my money market fund assets to bank money market accounts since banks are now paying better yields than money market funds and with full FDIC protection to boot.

-- Jack Krupansky

Wednesday, November 26, 2008

Paul Volcker is a great addition to Team Obama

I am glad to see that P-E Barack Obama has found a great way to utilize the talent and experience of Paul Volcker. Although he had been talked about for Secretary of Treasury, that did not seem to be the right fit to me. Age is not a primary criterion, but "high energy" of the sort needed for hands-on operation of Treasury did not seem to be what Volcker is all about these days. But part-time head of a special team to oversee the administration's response to the financial and economic crisis with the President's Economic Recovery Advisory Board seems to be an ideal fit to me.

In short, after a slow start out of the gate, Team Obama is now firing on all cylinders. Not that any of these announcements actually "fix" anything at this moment, but they do help to instill confidence that Barack will have a great economic team in place on the real Day One of his administration on January 20, 2008.

I am also heartened by the fact that Barack has focused his team on hard-core pragmatic centrists and not the kind of "flighty" idealistic Progressive zealots that were his core supporters during the campaign. His economic team members are people focused on the job to be done rather than mindlessly babbling (and bubbling) "Yes we can! Yes we can!"

-- Jack Krupansky

Opened a personal checking account at TD Bank

I just opened a new personal checking account at TD Bank here in New York City. Actually, it is a little more complicated than that.

I had an account with CommerceBank the last time I lived in New York City. I stopped using it after I moved to Boulder, CO in 2005.

I tried to re-activate the account when I moved back to New York City in May, but the branch (same branch as in 2005) said I could not and that I would have to open a completely new account. I ended up opening an account at a Capital One Bank branch nearer to my apartment.

Then, in September I stopped by the CommerceBank branch to open a fresh account. They took my information and entered it into their computer, but then said that they would not be able to open the account and would have to send the information somewhere else to resolve the (unknown) issue and then get back to me. I waited a week, even after they said it would only be two days at most, and then I gave up and went and opened an account at Sovereign Bank a couple of blocks up the street.

I never did hear from CommerceBank.

They told me about the transition to TD Banknorth and eventually TD Bank back in September, but whether that caused my unresolved issued is unknown.

Today, I had some spare time and stopped by the same branch, now TD Bank rather than CommerceBank, to try again. They entered my social security number and told me that I had an opened account and it had all the information that I had given them in September. But they had no clue as to why nobody had called me back. I had not received any statements or other mailings either, but maybe that was because there had not been any activity in the account.

Usually, there is at least an initial deposit that counts as activity, but they gave me a special account called a "50 Plus Club" since I am more than 50 years old, and that type of account does not have an initial deposit requirement.

They went ahead and issued my a debit card, which they actually print in the branch, and ordered checks.

Then, I tried to enroll the account online, but got an error message saying that I was already enrolled, which was true with the old deactivated account, and it told me to call a customer service number. I called and they did something to clear the status and reset my password.

I went through the process of creating security questions and now I can access the account online.

The next obvious step was to link the account with Fidelity so that I can transfer funds to and from Fidelity and my new TD Bank account. I went through the process on the Fidelity web site, giving them my routing and account information. Unfortunately, the confirmation screen reminds me of a restriction which I had forgotten from the last time I did this: Fidelity waits 7 to 10 business days before sending the verification deposits and letting you use the linked account. I have not found any justification for such a long delay. There does not appear to be any technical or legal reason. Whatever.

So, now my new TD Bank is ready to go, other than the fact that there is no money in it pending completion of the link from Fidelity that I will use to fund the account.

My goal is to have several distinct accounts so that my life will not be completely disrupted if I should encounter a severe problem with any single account, such as identity theft. Or if I get really annoyed with any particular bank. I will keep a small amount of cash in each so that I have access to cash in an emergency. Also, that will be a modest reserve of cash that I will not count when computing my avalable cash for my regular monthly budget. A little "Out of sight, out of mind" cash never hurt anybody.

This "50 Plus Club" account offers free checking and free checks with no minimum balance and a free safety deposit box for the first year and a 50% discount after that. It is also an interest-bearing checking account, although the 0.10% interest rate is more of an amusement than a big deal. If I keep $125 in the account, it will pay me one penny of interest each month. Still, that is better than knowing that the bank has my money for free. It also offers free cashiers checks, free money orders, and even free notary service. They also have a free, self-service coin-counting service in the branch.

So, now I have three free personal checking accounts: Capital One Bank, Sovereign Bank, and TD Bank.

I am still funneling most of my financial transactions through Fidelity, but sometimes you actually need a true "bank" bank.

Incidentally, the "TD" in TD Bank stands for Toronto-Dominion, which is the parent bank, which is located in Toronto, Canada.

-- Jack Krupansky

Tuesday, November 25, 2008

Shifting cash from Fidelity to GMAC and Capital One

Having verified that my new GMAC Bank and Capital One Bank Online Banking money market accounts are operational and properly linked to my Fidelity account, I went ahead and moved the bulk of my Fidelity cash, which had been in the Fidelity Money Market Fund (SPRXX) to these new accounts. I kept a residual amount in my Fidelity core cash account, which is Fidelity Municipal Money Market (FTEXX).

SPRXX has a yield of only 2.41%. FTEXX has a yield (federal tax free) of 0.70%. My new GMAC Bank money market account, which has full FDIC protection, currently has a rate of 3.68% or 3.75% APY. My new Capital One account, also with full FDIC protection, currently has a rate of 3.34% or 3.40% APY.

I also have another pile of cash in a Sovereign Bank money market account that has a rate of 3.20% or 3.25% APY.

GMAC clearly pays a better yield, but even with full FDIC protection I would feel a little less comfortable with all of my cash in one basket. If for no other reason than the potential for identity theft.

CDs offer rates at 4.00% and higher, but my financial situation has too much uncertainty to make any commitments of six months or longer. Or even three months.

I am still keeping most of my stock (Microsoft) at Fidelity.

I wonder if the current rate differential will continue, or if money market funds will once again overtake bank deposit accounts. For that to happen, the banking system would have to dramatically stabilize and the Federal Reserve would have to raise short rates above 4.00% again. I can see that happening in a couple of years, or maybe even a year if we see fiscal stimulus of $400 billion or greater over the coming year.

-- Jack Krupansky

Still too much Old Economy deadwood holding the New Economy back

Although President-elect Barack Obama has ambitious plans for creating millions of "green" jobs, the sad fact is that the U.S. economy is still heavily overweighed with Old Economy jobs and way too light on New Economy jobs. Jobs to rebuild infrastructure and schools will still primarily focus on keeping the Old Economy on life support. We should be trying to accomplish much more of basic education online with modern communication and social networking tools rather than creating more or simply newer so-called "class" rooms that do more to stifle creativity and enthusiasm than leverage it.

I am not sure what the answer is, but it still seems so unfortunate that the New Economy has failed so miserably at supplanting the Old Economy in the U.S. economic order.

One would have thought that pumping money into the New Economy would be the way to go rather than propping up General Motors and our endless highways that seem geared more to wasting energy rather than leveraging it.

The really sad thing is how hopelessly dependent the New Economy is on the Old Economy.

For example, I have selected a 100% "green" power option for my electricity supplier here in New York City (Energetix, 60% low-impact hydro and 40% wind power.) But, even though my raw electricity cost for this "green" power was less than $5 last month, it cost $15 for Old Economy ConEdison to "deliver" that "green" power to my apartment.

Hopefully, that dependence will gradually begin to diminish, but it may be another five years or even ten years before we actually start to see some serious light at the end of the tunnel and can finally start to contemplate a truly New Economy U.S. economy.

But for now, it is quite frustrating that "fiscal stimulus" for the U.S. economy will mostly focus on the Old Economy, even if a small fraction of the money does get "targeted" for "green" investments.

-- Jack Krupansky

Gasoline under $1.90 and headed lower

The price of retail gasoline continue to ratchet downwards, with the AAA Daily Fuel Gauge Report national average price falling to $1.885.

December RBOB unleaded gasoline futures are at $1.0970, indicating that retail prices are headed for $1.69 to $1.74 within a few weeks, about 15 cents below the current price level.

That "1" handle on the price will certainly add at least a modest degree of holiday cheer to the average consumer.

Gasoline has declined by $2.229 or -54% from its July 17, 2008 peak of $4.114. In other words, the price of gasoline is now less than half of its peak price in July.

And crude oil is now back down around $50 a barrel.

Energy commodities prices may begin to stabilize, especially if market participants begin to expect that Team Obama and massive fiscal stimulus are on the verge of turning the economy around. One scenario is that prices pop up on psychological expectations, and then reverse and head back down as people realize that even with massive stimulus a recovery will take some time.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP (or at least limiting its decline) by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

Some people are suggesting that we are seeing deflation, but the recent sharp declines on commodities-driven prices is simply the unwinding of the great speculative bubble in commodities of the past five years. If we see crude oil back down under $5 and gasoline under $1 and gold under $250, that would be an indication of true deflation. Besides, year-over-year core consumer prices rises are still above 2%. It takes more than a few months for there to be any sea-change in the price change trend. Currently, we are simply experiencing some welcome disinflation.

-- Jack Krupansky

Monday, November 24, 2008

Well, did the market really reaffirm Friday's floor on the stock market?

Although the market did respond enthusiastically to the Citi bailout, the announcement of P-E Barack Obama's economic team, and chatter about additional fiscal stimulus, it seemed a bit muted to me. That may be a good sign, since a stronger rally would have suggested more of a short squeeze and irrational eupohoria. The good news is that the response did not peter out or reverse, suggesting that market participants really are in a mood to give Team Obama a chance.

It would not be surprising to see a moderate degree of profit-taking over the next few days. Unfortunately, this is a very shortened trading week, with no trading on Thurdsay, a half-day of trading on Friday, and probably limited trading on Wednesday as well due to holiday travel, so it will be virtually impossible to judge the full market reaction to Barack's economic team this week. Still, it would be a good sign if the stock market were to end the week with a strong gain and a bad sign if the market ends with a loss or only a modest gain.

Also, regardless of the reaction to today's news, all eyes will be looking ahead to Monday and preliminary reports on holiday retail sales on Friday and the weekend. The big difficulty is that everybody "knows" that the results will be relatively poor, but the question is the extent to which people are able and willing to look past the state that the economy will be in for the next two months, out to the stimulated economy that we will be in after the innauguration.

In short, for now the bottom remains securely in place.

One key test will be on Wednesday, when we see how unemployment insurance initial claims are trending. People "know" that the report will be "bad", but we need to see if they are willing to look past it.

-- Jack Krupansky

Barack Obama's absolutely worst speech ever!

Although the leaked details of Barack Obama's new economic team were quite impressive and inspire great confidence, his announcement today was his absolutely worst speech ever! Not only was he simply reading from a written script, he was botching it left and right, stumbling even on relatively simple text. I was not sure whether to laugh or cry when he struggled with "macroeconomic." Sigh. He picked a great team, so why did Mr. Eloquence give such a poor presentation? Why did he waste so much time going into boring details about his nominees that can be found on a simple Wikipedia page? And why did he give such long-winded answers to very simple questions by reporters? Unfortunately, the obvious answer is that he simply is not comfortable with economics, finance, and economists. Fortunately, he has picked a strong team so that he can be hands-off and let them do their thing.

To be fair, this was not a speech per se. But seriously, major announcements need to be made with much more crispness and confidence, especially when the topic is of such a serious concern to all Americans.

The Dow was up almost 400 points today. I am convinced it would have been up 800 points or more if Barack had not given such a crappy speech.

-- Jack Krupansky

Gasoline falls to $1.90 and headed lower

The price of retail gasoline continue to ratchet downwards, with the AAA Daily Fuel Gauge Report average price falling to $1.908.

December RBOB unleaded gasoline futures are at $1.0778, indicating that retail prices are headed for $1.67 to $1.72 within a few weeks, about 20 cents below the current price level.

That "1" handle on the price will certainly add at least a modest degree of holiday cheer to the average consumer.

Gasoline has declined by $2.206 or -54% from its July 17, 2008 peak of $4.114. In other words, the price of gasoline is now less than half of its peak price in July.

And crude oil is now back down around $50 a barrel.

Energy commodities prices may begin to stabilize, especially if market participants begin to expect that Team Obama and massive fiscal stimulus are on the verge of turning the economy around. One scenario is that prices pop up on psychological expectations, and then reverse and head back down as people realize that even with massive stimulus a recovery will take some time.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP (or at least limiting its decline) by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

Some people are suggesting that we are seeing deflation, but the recent sharp declines on commodities-driven prices is simply the unwinding of the great speculative bubble in commodities of the past five years. If we see crude oil back down under $5 and gasoline under $1 and gold under $250, that would be an indication of true deflation. Besides, year-over-year core consumer prices rises are still above 2%. It takes more than a few months for there to be any sea-change in the price change trend. Currently, we are simply experiencing some welcome disinflation.

-- Jack Krupansky

Will the Citi bailout really help to set a floor on the stock market?

While it is likely that the news of the Citi bailout will give an early, short-term boost to the stock market, the question is whether the boost will be sustainable and firmly set a floor to the stock market for this business cycle, or whether the rally will be short-lived and unwind soon enough. Alone, the Citi bailout might not be enough to set the floor, but coupled with the formal, official announcement of members of P-E Barack Obama's economic team and talk of additional fiscal stimulus in the $500 to $700 billion range, it could do the trick.

Some scenarios:

  1. An early "pop" that fizzles and turns into another decline by the end of the day.
  2. A pop that surges into another massive short-covering "squeeze" and results in a 500 to 1,000-point rise for the day.
  3. A sharp rise today, but then a gradual erosion of that gain in coming days, ultimately leading to a new market low within a week or two.
  4. A partial-fizzle of an early pop, leaving the market with a modest to moderate gain for the day, but still having an overall weak rather than strong tone.
  5. A moderate pop that gradually "grows" on people and only gradually builds over the next week or two as the "bears" grumble about this and that and how the market never set a proper low with true "capitulation."
  6. A strong, multi-week rally that peters within a few weeks or a month as the Obama-is-coming euphoria wears off and hard-core reality sets in. We could see a new "test" of the market low a few weeks or a month from now. One scenario is that a new low gets set. Another scenario is that the current low is successfully tested and holds and kicks off a renewed rally.
  7. A strong, multi-month "Obama" rally that peters out as the Obama honeymoon wears off and hard-core economic reality sets in. We could see a new "test" of the market in the March to June timeframe. Again, there are two likely outcomes, based on either a "test" that results in a new low or a successful test that reaffirms that the low is already set and that a recovery has begun.
  8. A strong rally that is merely part of a reversal of a market stuck in a trading range (7,500 to 9,500 for the Dow). This back and forth trading action will continue until we finally start to see the recession starting to wane or worsening.

Personally, I still suspect that Friday was the market low and that "Team Obama" really is gathering momentum.

Ultimately, it is about confiidence in whether the government truly is on a track to fully grapple with the full magnitude of the full economic and financial problem. But within a few months we will need to see clear evidence that the government "plan" is really on track and actually delivering positive results.

As a side note, I am relieved that people are starting to use the abbreviated name "Citi" rather than having to struggle to figure out whether it is Citibank or Citigroup. I think it is still Citigroup, but in some contexts it is actually supposed to be Citibank. No wonder this bank or whatever it really is is having problems.

-- Jack Krupansky

Lawrence Summers is a great choice to head Obama's National Economic Council

Although Lawrence Summers was a leading contender for Secretary of Treasury, heading the president's National Economic Council is a much better fit for his background and temperament, just as Treasury is a much better fit for Timothy Geithner.

One unknown is exactly how Bernanke and Geithner (not to mention Summers) will get along since formerly Geithner was a subordinate, in a position to carry out the policy decisions of the Federal Reserve Board and the Federal Reserve Open Market Committee. He certainly has proved that he can work well with Bernanke in his current role, but now he will have a somewhat more political role for the opposite party from Bernanke. I suspect things will work out fine, but we will have to see how it evolves, especially as Obama economic and financial policy takes on a life of its own, somewhat different from the policies of President Bush.

-- Jack Krupansky

Sunday, November 23, 2008

How much will it cost to create 2.5 million new jobs?

I applaud P-E Barack Obama's commitment to create 2.5 million jobs over the next two years. Now, the question is how much that will cost. I will make several assumptions:

  1. The goal is decent-paying middle class jobs that really do make a step forward in revitalizing the decimated middle class.
  2. The jobs would pay in the $50K to $100K range, or an average of $75K.
  3. Most of the jobs should be sustainable and not go away as soon as the fiscal stimulus spigot shuts off.
  4. It will take at least two to three years of federal stimulus before the private sector picks up the slack and federally-stimulated jobs become full-fledged private sector jobs. I will assume three years, just to be safe.
  5. We will create 1.25 million jobs in the first year and another 1.25 million jobs in the second year.

In addition to the cost of salary, there are also benefits, health care, retirement contributions, corporate overhead, and the profit margin needed for the private sector to want to preserve the job once it is created. Altogether, I estimate that stimulating a single $75K job will cost about $200K, per year, for three years, or a total of $600K over three years.

We can create five jobs for $1 million a year, or 5,000 jobs for $1 billion per year, or one million jobs for $200 billion per year, or 1.25 million jobs for $250 billion per year, or 2.5 million jobs for $500 billion per year.

So, if we create 1.25 million jobs in the first year the cost will be $250 billion. Creating another 1.25 million jobs will cost another $250 billion in the second year, plus another $250 billion to sustain the new jobs from the first year. Then it will cost $500 billion to sustain all 2.5 million jobs in the third year.

Over three years that total cost will be $250 billion plus $500 billion plus $500 billion or a grand total of $1.25 trillion dollars.

Yes, I would certainly hope that the private sector would pick up the slack well before three years, but there is too much potential for unexpected difficulties to feel very comfortable with that assumption.

Also, part of the stimulus will in fact flow back to the federal government in the form of taxes, but some unknown portion of that will also be lost to tax credits, especially as corporations are likely to initially receive some tax credit to create these new jobs.

Although some of the new jobs could be created in state and local governments, it would be better for job creation at that level to be funded by an increase in local and state tax revenues from the new jobs.

I would also argue that a significant percentage of these jobs, especially infrastructure rebuilding and maintenance really should be permanently part of the federal budget and not strictly simply a one-time stimulus expense. Say, something on the order of 20% of the jobs or 500 thousand jobs or 250 billion over three years or $100 billion per year on an ongoing basis.

In summary, we need to permanently increase the federal budget by $100 billion per year to cover "normal" infrastructure rebuild and maintenance, and then spend an additional $200 billion in the first year, plus $400 billion in the second year and third years for non-infrastructure jobs. The non-infrastructure or "stimulus" total would be $1.0 trillion. The infrastructure job cost over that three years would be $250 billion. The total would be $1.25 trillion.

There should probably also need to be a sharp increase in infrastructure usage fees to help make infrastructure projects at least partially pay for themselves. Otherwise, those projects end up being funded by general tax revenue. Ultimately, that is a "social" or political question of what share of the burden of infrastructure cost should be shouldered by users versus everyone as an integrated society.

-- Jack Krupansky

Friday, November 21, 2008

Friday evening at the FDIC - U.S. Bank acquires Downey Savings & Loan Association, Newport Beach and PFF Bank & Trust, Pomona

It is Friday evening, so it is time for... the FDIC to report on which banks failed this week. Usually that means the failed bank is going to be taken over by a healthier bank. The first big question is whether uninsured deposits (in excess of the FDIC $250,000 limit) will be "assumed" by the new bank. In addition to The Community Bank, Loganville, GA, this evening the FDIC also facilitated U.S. Bank, National Association, Minneapolis, MN in acquiring the banking operations, including all deposits of two failed banks:

  1. Downey Savings and Loan Association, F.A., Newport Beach, CA
  2. PFF Bank & Trust, Pomona, CA

In other words, all deposits, including those above $250,000, were protected.

The FDIC does not give any advance notice of bank closures. In fact, it is usually a state banking regulator who does the closure and then FDIC is "named receiver" and then takes over.

The basic idea is to totally avoid old-fashioned "runs" on banks and pre-arrange the assumption of deposits by a healthy bank before the closure is even announced. In other words, there should be no disruption of service and no need for customers to lose any sleep.

There have been 22 banks that have been closed by regulators this year, which is a lot compared to a normal year, but miniscule considering that all that has happened this year and the fact that there are over 8,000 banks and savings associations in the U.S.

-- Jack Krupansky

Is that the low for the stock markets?

Now that P-E Barack Obama has apparently selected Tim Geithner as the next Treasury Secretary to the approval of the financial markets, one might suspect that the stock market has set its low for this business cycle. Sure, it all depends on how well the rest of the new administration economic team comes together and hits the ground running after the inauguration with a robust fiscal stimulus plan, but it does look as if this is indeed likely to be the case. There is no guarantee any of this, but it does appear that the incoming Obama administration is coming together nicely and starting to set the stage for the beginnings of an economic renaissance in the Spring.

That said, it is possible if not very likely that short-term speculators will run the market up sharply and then back down sharply to "test" the low, and they may do that several more times before a solid bottom can be firmly established.

We will be getting a boatload of negative economic reports for months to come (e.g., the final report for Q4 GDP comes out in late March), but some of the leading economic indicators may start to show a little life sometime in January, particularly as retailers pursue post-holiday sales and euphoria over the new administration and the new fiscal stimulus plan take off. A GM, et al bailout "bridge" loan deal in December that gets the ball rolling for dramatic restructuring of Detroit could also provide the market with support. The FDIC and the Federal Reserve are both moving forward with additional support for the banks.

The most significant leading economic indicator of all is the stock market. People who sniff out a turnabout of economic activity place their early bets in the stock market. It may take weeks or even months before unemployment claims and mortgage applications begin to show a pickup in economic activity again, or at least start to show a slowing of the decline in activity.

The tentative intraday low for the Dow for this business cycle was 7,392.27. The closing low was 7,552.29, yesterday, Thursday, November 20, 2008.

The tentative intraday low for NASDAQ for this business cycle was 1,295.48. The closing low was 1,316.12, yesterday, Thursday, November 20, 2008.

The tentative intraday low for the S&P 500 for this business cycle was 741.02. The closing low was 752.44, yesterday, Thursday, November 20, 2008.

-- Jack Krupansky

Friday evening at the FDIC - The Community Bank, Loganville, GA goes under

It is Friday evening, so it is time for... the FDIC to report on which banks failed this week. Usually that means the failed bank is going to be taken over by a healthier bank. The first big question is whether uninsured deposits (in excess of the FDIC $250,000 limit) will be "assumed" by the new bank. This evening there was only one bank that was closed by regulators:

  1. The Community Bank, Loganville, GA - all deposits will be assumed by Bank of Essex, Tappahannock, VA.

In other words, all deposits, including those above $250,000, were protected.

The FDIC does not give any advance notice of bank closures. In fact, it is usually a state banking regulator who does the closure and then FDIC is "named receiver" and then takes over.

The basic idea is to totally avoid old-fashioned "runs" on banks and pre-arrange the assumption of deposits by a healthy bank before the closure is even announced. In other words, there should be no disruption of service and no need for customers to lose any sleep.

There have been 20 banks that have been closed by regulators this year, which is a lot compared to a normal year, but miniscule considering that all that has happened this year and the fact that there are over 8,000 banks and savings associations in the U.S.

-- Jack Krupansky

Tim Geithner for Treasury?

The rumor mill has it that Federal Reserve Bank of New York president Tim Geithner will be announced as Barack Obama's appointee to be Secretary of Treasury. This is a wise choice and selects someone who has both a lot of experience and will be a fresh face in the Cabinet. The president of the NY Fed is also a permanent member of the Federal Reserve Open Market Committee, so we will be getting someone who has current experience sitting at the table in the middle of the current financial crisis. The NY Fed is responsible for carrying out all of the "market" and "system" decisions that are made by the Federal Reserve Board of Governors and the FOMC, and also it the Federal Reserve's main point of contact with Wall Street, giving Geithner access to the inside view of the crisis like no one else.

In short, I hope this rumor/leak is true. I suspect that it is.

Apparently, the stock market agrees, with the Dow up almost 500 points.

The rumor mill also says that Bill Richardson has been selected for Commerce. Another good choice.

So far, P-E Barack Obama is batting 1,000. He was a bit slow coming off the block, but is quickly coming up to speed.

-- Jack Krupansky

ECRI Weekly Leading Index indicator falls very sharply and remains deep in recession territory

The economic outlook continues to worsen and there is still no economic data pointing to an emerging recovery from the recession.

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell very sharply  to -1.97% from +0.44% last week, its worst level in 13 years, and its annualized growth rate fell sharply to -28.2, a record low for its 60-year history of data, from -27.1 last week, which is well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "With WLI growth nose-diving to yet another historical low, the outlook for the economy is worsening at the fastest pace on record."

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed and there some amount of stimulus as well as potential problems in the pipeline.

My personal outlook is that: The U.S. economy is currently in a recession that started somewhere between December 2007 and June 2008, sharply accelerated in August, and currently shows no sign of an imminent end.

Some believe that the recession started in January or even last November, but there were pockets of strength even as recently as June GDP. By the same token, there were roots of weakness popping up in June 2007 and a financial mini-crisis in August 2007 related to housing clearly indicated that at least significant portions of the economy had already begun to crumble.

Although the current economic reports show significant weakness, there is also a vast amount of potential stimulus in the pipeline that could kick-start the economy within the next couple of months. The big bank bailout may start showing some fruit within a month.

-- Jack Krupansky

Gasoline falls to $1.99 and headed lower

Finally! Gasoline is finally back down below $2, with a consumer-friendly "1" handle in the price.

The price of retail gasoline continue to ratchet downwards, with the AAA Daily Fuel Gauge Report average price falling to $1.989.

December RBOB unleaded gasoline futures are at $1.0510, indicating that retail prices are headed for $1.65 to $1.70 within a few weeks, about 30 cents below the current price level.

That "1" handle on the price will certainly add at least a modest degree of holiday cheer to the average consumer.

Gasoline has declined by $2.125 or -52% from its July 17, 2008 peak of $4.114. In other words, the price of gasoline is now less than half of its peak price in July.

And crude oil is now back down around $50 a barrel.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP (or at least limiting its decline) by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

Some people are suggesting that we are seeing deflation, but the recent sharp declines on commodities-driven prices is simply the unwinding of the great speculative bubble in commodities of the past five years. If we see crude oil back down under $5 and gasoline under $1 and gold under $250, that would be an indication of true deflation. Besides, year-over-year core consumer prices rises are still above 2%. It takes more than a few months for there to be any sea-change in the price change trend. Currently, we are simply experiencing some welcome disinflation.

-- Jack Krupansky

Thursday, November 20, 2008

What??!! Congress actually did manage to do something useful this week!?!!

Believe it or not, our lame-duck Congress actually managed to get something right this week. Today the Senate approved the extension of unemployment benefits. This is a relatively small thing, but at least it is a positive move forward on the economy.

As far as GM, it does now look as if Congress will pass at least some bandaid form of assistance for GM, et al after the Thanksgiving break, sufficient to assure people that the car companies can limp along until the big bailout in February after the new administration and Congress kick into gear.

Personally, I am fairly confident that GM, et al can limp to February without government aid, but with so many Wall Street vultures circling, a few extra billion dollars in cash with the promise of more to come will boost confidence that the companies are in fact going to survive.

I also continue believe that GM, et al need very radical restructuring, but Congress cannot dictate that in a few days. In fact, all Congress will really be able to do in February is slap a bunch of restrictions on the car companies and give them enough cash to make it through 2009, and then later in 2009 the companies will have to start the radical restructuring on their own.

So, this week is a week for Congress to rant and rave about every imaginable criticsim of Detroit. Next week they get to cool their heels and contemplate "The Abyss." And the following week they get to do the right thing, which they could have done this week if they had a commitment to progress rather than a commitment to partisan wrangling.

Incidentally, I do agree that they should not use the retooling loans for the bailout bridge funding. The retooling is all about the way forward after the big bailout. If anything, the February bailout should allocate even more dramatic retooling aid, coupled with agressive commitments to the environmental and energy agenda of the incoming administration. In fact, I would argue that we should offer Detroit as much retooling aid as it takes to completely revamp to a 100% plug-in hybrid product line within five years. Talk about being able to kill multiple birds with a single stone.

-- Jack Krupansky

PC Magazine - RIP

Wow... PC Magazine bites the dust. Mind-numbing. Actually, it is about time. I remember how satisfying it was to leaf through the magazine back in... the 1980's, but I actually cannot recall when I last looked at the magazine, and it certainly was not in the past ten years. The companion Web site, PCMag.com, will soldier on and probably do reasonably well, but it is still sad to finally see that flagship "book" go the way of the dodo bird (and BYTE Magazine.)

PC Magazine -- RIP!

Read the details.

It turns out that Ziff will continue producing PC Magazine Digital Edition, which you can continue to subscribe to, download, and print on your own. But with advertising on a downtrend, what is the point? Sure, some of the articles are worth reading, but it was always the ads that made the magazine interesting. Now, PC manufacturers such as Dell and Toshiba (and Apple) simply dump their ads in my email inbox.

-- Jack Krupansky

Job losses clearly on a deep recessionary path

Yet another weekly unemployment insurance initial claims number over 500,000 today shows that the U.S. economy is now clearly on a deep recessionary path. What's to be done about it? Fiscal stimulus is needed. Lots of it. Congress is focused on simply trying to make the current administration look bad rather than trying to do anything to moderate the recession during the lame duck session. All of the heavy lifting will wait until Barack Obama is innaugurated in late January and we have a new Congress that is heavily committed to making the administration look good.

My calculations suggest that we need to see about $80 billion of fiscal stimulus every month for four to ten months to give businesses a reason to hire employees and invest money in capital improvements.

-- Jack Krupansky

Progress with Capital One Online Savings and GMAC Bank Online Savings

The two small verification deposits from Capital One Online Savings showed up in my Fidelity brokerage account overnight, so I was able to complete the account linking verification step and initiate a first small transfer to see how everything is working before transferring a larger pile of money. The verification deposits were 32 cents and 41 cents. That is money I get to keep. I expect to fund this account next week.

I am still waiting for the verification deposits from GMAC, but they were initiated a day later than Capital One. They will probably go through tonight, so I will then do a small test transfer tomorrow, and then transfer a larger pile of money next week.

GMAC is still showing a rate of 3.68% (3.75% APY) with no minimum.

Capital One Online Savings is showing a rate of 3.34% (3.40% APY), but with a $10,000 minimum. Less money will get wou 2.40% APY.

Both of these accounts have FDIC protection, even if GM and GMAC were to go bankrupt.

Fidelity Money Market fund (SPRXX) is down to a 7-day yield of 2.59%.

-- Jack Krupansky

Gasoline barely above $2.00 ($2.02) and headed for $1.99 or even $1.75 before Christmas or maybe even Thanksgiving!

The price of retail gasoline continue to ratchet downwards, with the AAA Daily Fuel Gauge Report price falling to $2.020.

December RBOB unleaded gasoline futures are at $1.0857, indicating that retail prices are headed for $1.68 to $1.73 within a few weeks, about 30 cents below the current price level.

That means that we will be seeing $1.99 if not $1.75 retail gasoline well before Christmas, possibly even before Thanksgiving! That "1" handle on the price will certainly add at least a modest degree of holiday cheer to the average consumer.

Gasoline has declined by $2.094 or -51% from its July 17, 2008 peak of $4.114. In other words, the price of gasoline is now less than half of its peak price in July.

And crude oil is now back down at $50 a barrel.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP (or at least limiting its decline) by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

Some people are suggesting that we are seeing deflation, but the recent sharp declines on commodities-driven prices is simply the unwinding of the great speculative bubble in commodities of the past five years. If we see crude oil back down under $5 and gasoline under $1 and gold under $250, that would be an indication of true deflation. Besides, year-over-year core consumer prices rises are still above 2%. It takes more than a few months for there to be any sea-change in the price change trend. Currently, we are simply experiencing some welcome disinflation.

-- Jack Krupansky

Wednesday, November 19, 2008

Chasing yield: GMAC Bank (3.75%) and Capital One Bank Online Savings (3.40%)

My Fidelity Money Market fund (SPRXX) is now yielding only 2.61%. The Fidelity Select Money Market fund (FSLXX) is yielding 2.63%. I can get 3.20% in my Sovereign Bank money market account, but I am not thrilled about keeping too much of my money at one bank, even though there is FDIC protection. According to Crane Data, GMAC Bank (yes, that GM) is offering 3.68% and Capital One Online Savings is offering 3.34% (Crane says 3.49%, but that has already changed), both with FDIC protection. I am in the process of opening accounts for both.

Sovereign Bank does offer a 3.75% APY money market account, but only at the $75,000 level. Also, if you open a new account, even $25,000 will now only get a yield of 3.00% APY.

Sure, GM is on shaky ground, but FDIC protection is a great firewall. Besides, I find it amusing that my "investment" in a GMAC Bank account is effectively a tiny contribution to helping to bail out GM while Congress fiddles around and Obama parades around trying to look presidential.

I am presently waiting for the verification deposits to go through to link the two new accounts back to my Fidelity brokerage account which is what I funnel most of my "banking" transactions through. I expect that next week I will sell my SPRXX, put a small amount of it into FSLXX as a reserve for transactions, and then put a larger share of the remainder in GMAC for the higher yield and the remainder in Capital One for some diversification. Also, I already have a Capital One Bank account (they used to be North Fork Bank here in New York) and the Capital One checking and online savings accounts are accessible from the same login with easy transfers, so I can access the Capital One Online Savings cash very quickly if I need to.

Once these accounts are set up, I'll move some of my Sovereign Bank cash to GMAC for that higher yield. Actually, some of that cash is only temporary until January 15, 2009 when I need to make my next quarterly IRS estimated tax payment.

Normally, I would strongly advise against both "chasing yield" and putting money into shaky institutions (GM and Capital One with its risky consumer credit cards), but in this case FDIC protection easily trumps those concerns and leaves me with less risk than keeping cash in Fidelity money market funds with their temporary U.S. Treasury guarantee that expires in less than a month. I still think that Fidelity is extremely safe, but they are simply no longer competitive for yields, even when risk-adjusted.

CDs are also available for even higher yields, but my income situation (part-time freelance in technology) is such that I am not able to forecast even six weeks or six months into the future, so I have no choice to keep my cash very liquid.

I had difficulty opening the GMAC account. I went through the full process and then finally the Web site told me to call Customer Service who informed me that they were unable to open an account for me because I had two bankruptcies on my credit record. Talk about the pot calling the kettle black! Geez... I am trying to GIVE money to them to hold! Duh! I informed her that I had only one backruptcy and that it had been discharged three years ago. But, they were nice (the rep had gone through bankruptcy herself) and said that they would transfer my "pending" request to the accounts department who would examine it more closely and "they will get back to you within 3-5 business days." They in fact called this morning and said that I was all set and gave me the new account number and set up for the account linking verification and initial funding.

I also had trouble opening the Capital One Online Savings account. It would not accept my Fidelity routing info. I called them and we finally decided that I needed to try a different account, so I ended up linking it to my Sovereign Bank checking account with no problem. Oddly, I was then able to log on and add the Fidelity account using a slightly different method, so maybe they have a bug there. The Sovereign Bank verification deposits already went through, so now I am waiting for the Fidelity verification deposits. I should now be able to transfer funds from Sovereign Bank, but I need a full $10,000 to get the 3.34% rate (3.40% APY.)

Also, I just got this email notice from Capital One:

Please be aware that the first deposit made into this account, and any deposits made in the 30 days following this first deposit, will be held for ten business days (available to you on the eleventh business day). After the first 30 days following initial account funding, funds deposited into your account will be held for five business days (available to you on the sixth business day).

That should not be a problem for me, but something to be aware of.

That notice also lists the account as "MMA Savings." SO, it is definitely a money market account.

-- Jack Krupansky

Tuesday, November 18, 2008

How deep and long will the recession be?

At this point, most people accept that the U.S. economy is in a deep and long recession, but how deep and how long is total speculation at this stage. If there were no additional fiscal stimulus, the economy might begin to inch back upwards in six months to a year. With substantial fiscal stimulus the economy might begin to bounce back in three or four months.

One difficulty is that a stimulus-fueled recovery is not an indication that the economy is back to health. The real question is when the economy will be healthy on its own without significant stimulus. Otherwise, the removal of stimulus could simply result in a double-dip recession.

So, maybe the proper question is that how long the recession will last, but how long it will take before the underlying economy shows enough strength that most people would agree that the underlying recession is really over. That could be nine months, a year, eighteen months, or even two years.

Another difficulty is that virtually all government spending is effectively fiscal stimulus, so how do we really say that any particular dollar of government spending is really targeted at fighing a recession rather than a "normal" investment in a stable economy. For example, one element of fiscal stimulus is bound to be transportation construction spending for bridges and highway and the like. The Democrats would argue that we should have been doing that spending all along. So, maybe once we start that additional stimulus, it stays in place indefinitely, raising the baseline economy. In fact, one could argue that both the current and preceding recessions were due to the same cause, insufficient investment in government infrastructure.

I would also caution that military spending is also a fiscal stimulus, so any decline in military spending due to a withdrawal from Iraq (that doesn't immediately simply shift over to Afghanistan) will result in a decline in GDP unless replaced with other fiscal "investment." One unknown is the impact of returning a significant number of guard and reserve soldiers to civilian life, where their jobs are as uncertain as anybody else's.

As far as my headline question, I really do not know, but I suspect that the recession will "destroy" about 5% of GDP and that it will take another one to three months after a modest to moderate level of fiscal stimulus (starting in February?) before the underlying economy starts trending up from that "step down" in GDP. But, it is also possible that employment will continue to trend down and lag the overall GDP recovery by another six months after that.

Note that technically a recession ends as soon as the up-trend begins, which would be the month that a significant level of fiscal stimulus hits the streets. Recessions (ala NBER) are measured "peak to trough" and recoveries are measured "trough to peak." In other words, even if there is a 5% "step down" of GDP, we do not need to build back any of that 5% decline before a recovery can technically begin. This is a part of the reason why a jobs recovery typically will not kick in right away.

-- Jack Krupansky

How much fiscal stiimulus is needed? (Updated for Q4 forecast of real GDP of -3.9%)


[Updated to base estimates on the Macroeconomic Advisers estimate of -3.9% for Q4 real GDP.]

No matter how much money the government dispenses as economic stimulus, it is all for naught if it does not stimulate strong enough economic activity and expectation of future activity so that new jobs are created. So, two principles are needed: 1) commitment to continue the stimulus until the economy no longer needs it, and 2) enough money is spent each month to generate enough economic activity to force businesses to rehire or create new jobs. So, an open-ended commitment is needed, not unlike what we currently have with Iraq and the war on terror.

My best guess is that the economy is currently on a -1% to -3.5% annualized track. Given a $14.4 trillion annual economy, -1% annualized corresponds to a decline of -$12 billion per month ($14.4 trillion times 1% is $144 billion, divided by 12 is $12 billion.) A -3.5% annualized decline corresponds to a decline of -$42 billion per month.

But, getting back up to zero decline is not going to stimulate creation of jobs. We probably need to get up to +2% or even +3% so that businesses actually "feel" that the economy is "strong" enough (artificially, of course) to warrant and sustain rehiring and creation of new jobs.

So, my math says we would need a minimum of 3% (to get from -1% to +2%) to maybe up to 6.5% (to get from -3.5% to +3%.) In dollar terms that would be a range from $36 billion to $78 billion per month. That may sound like a modest amount of money, compared to say $700 billion, but that would be every month for some unknown number of months.

Again, this would have to be an open-ended commitment. I do not imagine that three or four months would be enough, but I do not imagine that more than a year would be required. That would be a range from a total of $180 ($36 billion for five months) to upwards of $780 billion ($78 billion for 10 months.) That may sound like a lot of money, but it may be what is needed to get the economy back on track.

As a nominal, initial plan, I would suggest starting with the estimate of annualized Q4 real GDP of -3.9% from Macroeconomic Advisers and pump out $83 billion per month for four months and then calibrate at that point based on actual economic activity and job creation. That would mean a nominal initial commitment to spend $332 billion.

So, that is my number for how much fiscal stimulus is needed to get the economy back on track: $332 billion. That is what Congress and the White House need to commit to once Barack Obama takes office.

-- Jack Krupansky

Monthly GDP for August fell by -0.5% (-5.3% annualized), Q4 tracking for a -3.9% annualized loss

Monthly real GDP, one of the five primary economic indicators that the NBER Business Cycle Dating Committee (NBER BCDC) uses to judge recession start and end dates, fell moderately in September (-0.5% or -5.3% annualized) , according to Macroeconomic Advisers (MA). The government does not publish GDP data at a monthly level, but the NBER Business Cycle Dating Committee says that they refer to sources such as Macroeconomic Advisers (MA) and their MGDP data series. As Macroeconomic Advisers summarized GDP in September:

Monthly GDP declined 0.5% in September.  This reflected negative contributions from nonfarm inventory investment and final sales and positive contributions from the portion of monthly GDP not covered by the published monthly source data.  The decline in final sales mainly reflected declines in consumer spending and net exports that were offset by an increase in production of capital goods.  Monthly GDP in September was 2.2% below the third-quarter average at an annual rate.  Our latest tracking forecast of a 3.9% decline of real GDP in the fourth quarter would imply average monthly declines of monthly GDP of 0.2% per month (not annualized) from October through December.

September marked a third consecutive monthly decline in real GDP off of the June peak and lower than the GDP level in December 2007.  In terms of recession dating, you could pick June as the clear peak, or maybe January if you want to discount the tax rebate stimulus as artificial.

The NBER BCDC still has not yet called the start date of the recession, but with September GDP below December 2007 GDP, it is quite clear that the U.S. economy is in a recession.

The August GDP decline was revised from -1.1% to -0.7%.

Annualized nominal GDP is running at $14.40 trillion. Annualized real GDP is running at $11.65 trillion.

If the NBER BCDC is the definitive expert on marking of recessions, MA is the definitive expert on measuring real GDP at the monthly level with their MGDP data series.

-- Jack Krupansky

Monday, November 17, 2008

Does GM really need to be bailed out before February?

Although it had seemed rather obvious last week that a GM bailout as part of a next phase of fiscal stimulus was a "slam dunk" for this week, it quickly became clear that recrimination and acrimony were much more likely and that any serious new round of fiscal stimulus for the economy would have to wait for Barack Obama to take office. The big question is whether GM in fact needs that cash before February. Some say yes, but I strongly suspect that there is enough room wiggle room for GM to squeak by until February or March or even April before they are in fact at the edge of the cliff.

I think the real, original point from the GM comments on November 7, 2008 was that they would run out of cash by June at their current burn rate. Somehow that got twisted around in the media to suggest that GM would go under before January 2009. What GM actually said was:

Cash, marketable securities, and readily-available assets of the Voluntary Employees' Beneficiary Association (VEBA) trust totaled $16.2 billion on September 30, 2008, down from $21.0 billion on June 30, 2008.

The change in liquidity reflects negative adjusted operating cash flow of $6.9 billion in the third quarter 2008, driven by the industry-wide slowdown in vehicle demand and compounding credit crisis, especially in North America and Europe. During the quarter, GM drew the remaining $3.5 billion of its secured revolving credit facility and made $1.2 billion in payments to Delphi as required by agreements between the companies as part of Delphi's bankruptcy proceedings.

GM expects adjusted operating cash flow in the fourth quarter to be much improved versus the third quarter, and more consistent with the first half of the year. Improvements in fourth quarter cash flow are largely driven by anticipated improvements in working capital in North America relating to sales allowances, and lower fourth quarter finished vehicle inventory in Europe.

Improving its liquidity position remains a top priority for the company. In response to deteriorating market conditions, GM announced today that in addition to the $15 billion in liquidity initiatives it outlined in July 2008, it has identified $5 billion of incremental liquidity actions. Cumulatively, GM has announced actions aimed at improving liquidity by $20 billion through 2009. To date, $10 billion in internal operating actions have either already been completed or are on track for full execution by the end of 2009.

Even if GM implements the planned operating actions that are substantially within its control, GM's estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business. Looking into the first two quarters of 2009, even with its planned actions, the company's estimated liquidity will fall significantly short of that amount unless economic and automotive industry conditions significantly improve, it receives substantial proceeds from asset sales, takes more aggressive working capital initiatives, gains access to capital markets and other private sources of funding, receives government funding under one or more current or future programs, or some combination of the foregoing. The success of GM's plans necessarily depends on other factors, including global economic conditions and the level of automotive sales, particularly in the United States and Western Europe.

There were some extenuating circumstances in September and even October that no longer exist, including Hurricane Ike and the freezing of the commercial paper market, so that GM may in fact actually do okay over the next few months. Granted, they may have to sacrifice on longer-term priorities in favor of short-term liquidity, but the eventual bailout will re-focus the company on longer-term issues anyway.

In summary, although GM and its supporters and its critics are all on the same page crying that GM is about to go under, but they all have vested interests, so the reality is that GM can probably shuffle its priorities a bit and easily make it through the next 3-5 months. What happens then and what they may or may not need in terms of a bailout of course depends on the fate of the rest of the economy and any new round of general fiscal stimulus, not to mention the results from ongoing actions of the Federal Reserve.

So, at this point, I say that a GM bailout can and should wait.

-- Jack Krupansky

Gasoline down below $2.10 and headed for $1.99 before Christmas or maybe even Thanksgiving!

The price of retail gasoline continue to ratchet downwards, with the AAA Daily Fuel Gauge Report price falling to $2.087.

December RBOB unleaded gasoline futures are at $1.2607, indicating that retail prices are headed for $1.86 to $1.91 within a few weeks, about 20 cents below the current price level.

That means that we will be seeing $1.99 retail gasoline well before Christmas, possibly even before Thanksgiving! That "1" handle on the price will certainly add at least a modest degree of holiday cheer to the average consumer.

Gasoline has declined by $2.02 or -49% from its July 17, 2008 peak of $4.114.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP (or at least limiting its decline) by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

-- Jack Krupansky

Sunday, November 16, 2008

ECRI Weekly Leading Index indicator recovers modestly but remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose modestly (+0.41% vs.-1.79% last week) after four consecutive weeks of very sharp decline, but its annualized growth rate fell sharply (to -25.9, a record low for its 60-year history of data, from -24.6), which is well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "With WLI growth continuing to plumb new lows, not only is no economic recovery on the horizon, but the economy is falling off a cliff at its fastest pace in at least six decades."

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed and there some amount of stimulus as well as potential problems in the pipeline.

My personal outlook is that: The U.S. economy is currently in a recession that started somewhere between December 2007 and June 2008, and currently shows no sign of an imminent end.

Some believe that the recession started in January or even last November, but there were pockets of strength even as recently as June GDP. By the same token, there were roots of weakness popping up in June 2007 and a financial mini-crisis in August 2007 related to housing clearly indicated that at least significant portions of the economy had already begun to crumble.

Although the current economic reports show significant weakness, there is also a vast amount of potential stimulus in the pipeline that could kick-start the economy within the next couple of months. The big bank bailout may start showing some fruit within a month.

Now that we are past all of the election year posturing, we will start seeing a lot more clarity in perspectives on the economy. But, it does now appear that Congress is unlikely to pass a new stimulus bill in November.

-- Jack Krupansky

Thursday, November 13, 2008

Recession continues to deepen

Weekly unemployment insurance initial claims today showed that the economic recession continues to deepen. Initial claims were above the half-million level.

That said, it is worth noting that employment continued to decline for quite a number of months beyond the end of the last recession.

On the bright side, there was a modest up-tick in mortgage applications.

Overall, the economy still has a lot of latent strength, with plenty of consumers having plenty of cash, but unfortunately there is a large enough pool of consumers with lost jobs and heavy debt burdens so as to leave the net balance pointing downwards.

Congress and the incoming administration are clearly chomping at the bit to get some industrial strenth stimulus flowing, but there simply is not very much incentive for them to do very much at all over the next two months to "save" the remains of the Bush administration. But come February, stand clear and watch the money flow.

-- Jack Krupansky

Gasoline down below $2.20 and headed for $1.99 before Christmas or maybe even Thanksgiving!

Retail gasoline price declines continue to ratchet downwards, with the AAA Daily Fuel Gauge Report price falling to $2.178.

December RBOB unleaded gasoline futures are at $1.2502, indicating that retail prices are headed for $1.85 to $1.90 within a few weeks, about 30 cents below the current price level.

That means that we will be seeing $1.99 retail gasoline well before Christmas, possibly even before Thanksgiving! That "1" handle on the price will certainly add at least a modest degree of holiday cheer to the average consumer.

Gasoline has declined by $1.94 or -47% from its July 17, 2008 peak of $4.114.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP (or at least limiting its decline) by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

-- Jack Krupansky

Wednesday, November 12, 2008

Will GM be bailed out?

Despite all of the tortured wrangling over whether the bank bailout bill can or should be used to bail out GM, it does appear that Congress is likely to step in and at least pass a partial bailout next week. Given the long list of issues involved with bailing out GM, especially the restrictions which Congress would like to place on GM, it is rather unlikely that a full-blown $100 billion bailout would sail through Congress in just a few days. But, a "bridge" bailout to give GM a little breathing room until the new administration is in office and Congress has time to hold hearings, craft a detailed bailout proposal, and then enough time to sell the proposal to the various constituencies seems more likely. Maybe something in the $25 billion range makes sense.

The bank bailout bill was originally intended to shore up banks and the rest of the financial system and not be a general economic bailout. Sure, Congress can re-legislate the bailout, but that may simply open up a can of worms for all manner of other modifications that various groups want since few people are very happy with the current state of the bank bailout. Better to craft a simple, narrow bill to bridge GM until February or March.

Or... Pelosi and Reid can simply agree to pass the Coulmbia free-trade bill and then President Bush would be much more amenable to instruct Paulson to "interpret" the bank bailout program as desired to give $25 billion to GM. The easiest way would be to "buy" part or all of GM's interest in GMAC (which would fit naturally under the bank bailout) for $25 billion or so. Or, at least do that purchase as a "repo" loan to be paid off from the eventual full bailout in the spring. Actually, GMAC is probably not worth $25 billion, but a repo could be done anyway. Or, limit the bailout to the estimated value of GM's share of GMAC. That should probably be enough to hold GM until February or March.

In any case, some form of bailout is very likely. Bush, Pelosi, and Reid would all look rather stupid without it. They are simply playing a game of political chicken to see who blinks first.

-- Jack Krupansky

Gasoline down to $2.20 and headed for $1.99 before Christmas or maybe even Thanksgiving!

Retail gasoline price declines continue to ratchet downwards, with the AAA Daily Fuel Gauge Report price falling to $2.202.

December RBOB unleaded gasoline futures are at $1.2893, indicating that retail prices are headed for $1.88 to $1.93 within a few weeks, about 30 cents below the current price level.

That means that we will be seeing $1.99 retail gasoline well before Christmas, possibly even before Thanksgiving! That "1" handle on the price will certainly add at least a modest degree of holiday cheer to the average consumer.

Gasoline has declined by $1.91 or -46% from its July 17, 2008 peak of $4.114.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP (or at least limiting its decline) by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

-- Jack Krupansky

Sunday, November 09, 2008

Why is Obama so hands-off on the current Treasury bank bailout effort?

A lot of people, especially Democrats, are not very happy with the current state of the Treasury bank bailout effort, but oddly Barack Obama has "held his fire" in either vigorously endorsing or criticizing the Treasury program. Why would he do that? Reasons I can think of include:

  • He actually isn't a hard-core Progressive and in fact has definite Centrist leanings, so he does not want to tar himself as being merely yet another partisan sniper.
  • He actually wants to defer to the congressional Democrats as a gesture of good will in return for the support that they gave him in the election.
  • This is a deliberate effort on his part to attempt to pre-configure the relationship between the White House and Congress, where the White House sets big goals and then Congress tinkers with the details to meet those goals, so that there can be a shared sense of achievement, rather than having a lot of big congressional egos feeling that they are simply being used as rubber stamps. This appraoch could enable him to tackle much bigger efforts than if he were to focus only on efforts that the White House alone could "push" through Congress.
  • This is a deliberate effort to establish a bipartisan "tone" and to refrain from needlessly bashing "the other side" simply to run up some partisan political points.
  • He does in fact actually recognize the complexity and scope of the problem and simply wants to establish his "tone" as deliberate and thoughtful rather than another knee-jerk response. In his first news conference he used the phrase "deliberate haste" and explicitly emphasized his intention to be "deliberate."
  • He does in fact recognize that the best course is to let the current bailout run its course to the point where it is either clearly working or clearly broken before jumping into the fray.
  • He wants to wait until he announces his pick for Treasury and then delegate full responsibility for handling the financial crisis to him or her.
  • Maybe he is still considering the possibility of keeping Paulson on for an interim period to get the bailout fully operational, but simultaneously wants to keep his distance to preserve "deniability" if the bailout fails in any way.
  • Maybe it is all simply too much for a fledgling administration to digest so early in the game.
  • Maybe he does actually believe that the current bailout and bailout team is about as good as it is going to get, but does not want to admit that since it would deeply offend a lot of Democrats
  • Maybe he sincerely wants to establish a "tone" of extreme hands-off where he focuses on the big picture "vision stuff" and subordinates are charged with rolling up their sleeves and doing any detail work or even criticism.
  • Ultimately, this stuff really is really hard and there are no simple answers, so off-the-cuff critiques are particularly useless. Lesser politicians would babble anyway.

In short, I suspect that Barack is being so hands-off because he intends to be extremely hands-off. Yes, he will be the ultimate decisionmaker, but he recognizes that distributing responsibility and sense of participation and ultimately sense of achievement is critical for managing a problem of this complexity.

In other words, at this stage of the game I am willing to be quite generous. Seriously, I do think he has some serious "juice" up his sleeve and that he will in fact provide excellent leadership, but that is mostly a suspicion on my part rather than a belief that is backed up by hard facts.

There is an open question of whether true leadership means that the leader must hold the hands of the "babies" every single step of the way, or whether the true leader can succeed and thrive by keeping a slight distance from the "babies" who are afraid that the sky will fall if there is not a daily press conference that explains everything in extremely fine detail. For the record, I agree with Phil Gramm that we are in fact a "nation of whiners" and that the recession is far worse in our heads (and in the media) than it is in reality.

-- Jack Krupansky

Saturday, November 08, 2008

Need for fiscal reform at the state and local level

The current economic episode is highlighting the urgent need for reform of the fiscal management of state and local governments. In theory, "the government", which includes state and local governments, should lend a hand and help out when the economy struggles and goes into recession. Unfortunately, we are seeing that not only are state and local governments not helping, but they are in fact making the problem MUCH worse by cutting spending, services, and jobs. They are in fact doing the exact OPPOSITE of what they should be doing. Somehow, state and local governments picked up on Wall Street's "disease" and revamped their fiscal policies to exploit and leverage for "boom" times and to be completely unprepared and in fact wrong-footed for "lean" times. Now, state and local governments want (and do need) the Federal government to "bail" them out. Sure, the Federal government should in fact lend a hand and bail them out, but only after extracting promises to reform the fiscal policies of state and local governments that led to the need for a bailout.

What is needed is a credit facility that would issue debt secured by the U.S. Treasury and loan money to any state or local government that requests it. That federal guarantee would make the debt as good as "normal" Treasury debt, so it should trade easily in the debt market. The interest rate for the loans should be at least 5% to assure that the Federal government will earn a profit and that the state and local governments feel at least a little pain for their fiscal misbehavior and encourage the loans to be paid off ASAP.

The reform that is needed should have two components: 1) state and local governments must agree to be net savers in boom times, so that they can self-fund from their own deep reserves in lean times, and 2) state or local constitutional balanced-budget requirements need to be set aside in "extraordinary times" such as recessions when tax receipts fall sharply enough that even savings from boom times are insufficient to cover the shortfall.

There is simply no good excuse for the current situation where the response to economic weakness and a temporary shortfall of tax receipts is a significant cut in spending, services, and jobs. It is precisely in times such as these that state and local government spending, services, and jobs are most needed and should in fact be expanded rather than contracted.

Although I encourage balanced budgets, I would be cautious about increasing taxes. If taxes need to be increased, do it in boom times to raise reserves for lean times. But raising taxes in lean times is a particularly wrong-headed approach, probably driven by balanced-budget restrictions, and will simply lead to making the problem (economic  weakness) worse by taking even more money out of the pockets of consumers and businesses.

-- Jack Krupansky

Friday, November 07, 2008

Fun things to do on a Friday evening

It is Friday evening, so it is time for... the FDIC to report on which banks failed this week. Usually that means the failed bank is going to be taken over by a healthier bank. The first big question is whether uninsured deposits (in excess of the FDIC $250,000 limit) will be "assumed" by the new bank. This evening there were two banks that failed:

  1. Franklin Bank, SSB, Houston, TX - all deposits will be assumed by Prosperity Bank, El Campo, TX.
  2. Security Pacific Bank, Los Angeles, CA - all deposits will be assumed by Pacific Western Bank, Los Angeles, CA.

In other words, in both cases all deposits, including those above $250,000, were protected.

The FDIC does not give any advance notice of bank closures. In fact, it is usually a state banking regulator who does the closure and then FDIC is "named receiver" and then takes over.

The basic idea is to totally avoid old-fashioned "runs" on banks and pre-arrange the assumption of deposits by a healthy bank before the closure is even announced. In other words, there should be no disruption of service and no need for customers to lose any sleep.

There have been 19 banks that have have failed this year, which is a lot compared to a normal year, but miniscule considering that all that has happened this year and the fact that there are over 8,000 banks and savings associations in the U.S.

-- Jack Krupansky

Who is spilling on who?

Is the financial crisis spilling out into the economy or is it economic weakness spilling into the financial system, or both? In his first press conference, Barack Obama said that "We have a current financial crisis that is spilling out into the rest of the economy." Yes, that is what we all have been saying, but when I actually read it like that, it immediately occurs to me that the direction of spillage is a little more complicated, so that simply fixing the financial system does not automatically fix the economy.

The basic problem is that the economy, for example GM and the airlines, was actually not in great shape when the financial crisis was taking root. In fact, GM and significant portions of the so-called "old economy" were really in rather sad shape back in the 1990's and basically got a free pass as a result of the rise of the "new economy" and the tech boom in the late 1990's. The dot-com boom gave the car companies and airlines the mistaken impression that "old economy" companies were doing just fine, if not great.

Then the technology and dot-com boom ended. And then 9/11 came along. Then all of the old problems with the "old economy" resurfaced.

In response, the Federal Reserve lowered interest rates in 1.00%.

That caused four problems: 1) the creation of the housing bubble (and we know how that movie ended), 2) the creation of a credit bubble that left Wall Street (especially hedge funds) thinking that they were on the top of the world, 3) the creation of a commodities bubble, and 4) the "old economy" companies got another reprieve from their structural problems and misguidedly acted as if they were in good shape rather than on the edge of a precipice.

We have been seeing the effects of the collapse of those three bubbles, but now we are on the verge of re-opening the storage vault where we had hidden all of those "old economy" structural problems for over a decade. A few billion dollars won't put very much financial "lipstick" on those "old economy" skeletons and pigs.

The car companies. The airlines. The companies that support construction. The list goes on.

Sure, we can and should have fiscal stimulus for transportation and other infrastructure construction projects, but that will not result in sustainable job creation.

After lowering interest rates to 1.00% and then watching the three bubbles grow and grow, eventually the Federal Reserve decided that inflation was a looming issue and began to raise rates.

Wall Street does not like rising interest rates.

But, I am not convinced that rising rates alone triggered the current problems, at least directly.

Rather, the housing bubble was so extreme and Wall Street's credit bubble (and the rise of the so-called "shadow banking system" was so extreme that people were willing and permitted to buy houses at any price and at any interest rate. Wall Street (and not Fannie Mae and Freddie Mac) had gotten addicted to securitization and even preferred the riskier debt due to the higher fees. And rising housing prices alone was also fueling further demand.

Then the housing market essentially hit what is known as "buying exhaustion" -- everybody who wanted to buy a house had done so. Not every last person, but the volume of demand rapidly fell off. Even though the Fed was raising its short-term target rate, mortgage rates remained quite low. The shadow banking system and Wall Street securitization were interfering with the effect of the Fed trying to raise rates.

Roughly at the same time, the demand for securitized debt rapidly fell off. This was at least partially due to rising rates (the Fed) which quickly made a lot of other investments relatively more attractive than securitized debt.

Wall Street was screwed. They were dependent on securitization for fees, but the somewhat out of sync bizarre combination of falling demand for mortgages by consumers and falling demand for securitized mortgages by investors left Wall Street holding the "bag", in particular, structured investment vehicles (SIV) holding mortgages and mortgage-backed securities, while buyers of those securities were suddenly becoming scarce.

Now the "old economy" companies were screwed. Rising interest rates were directly impacting them, and suddenly Wall Street and the so-called "shadow banking system" were unable to supply the copious amounts of super-cheap credit that the "old economy" companies were addicted to, such as GMAC and zero-percent car loans.

And once the "old economy" companies are screwed, their workers are screwed.

The result is a significant recession.

In short, a non-recessionary cooling of the economy (deflation of the housing bubble) led to a financial crisis on Wall Street. That is not the fault of the Fed for raising rates, but the fault of Wall Street for misguidedly structuring itself to be critically dependent on low rates and no longer able to cope with rising rates. Then, the financial crisis on Wall Street led to a credit crunch, which crippled both the "old economy" and even the "new economy" (venture capital is suddenly scarce.)

We can and should blame Wall Street for becoming addicted to the housing bubble, but it was in fact a slowing in at least one sector of the economy that triggered the Wall Street financial crisis.

The point is that merely putting the Wall Street Humpty Dumpty back together again does not resolve the longstanding structural problems in the "old economy."

Simply throwing money at the "old economy" companies does not magically restructure their inherent problems away.

And simply throwing money at consumers (who may be out of work) to in turn throw at the "old economy" companies does not automatically create new and sustainable jobs.

Interestingly, two of the key structural problems in the "old economy" are pension liabilities and health care costs. With the new administration having a high priority on both retirement and health care, it seems rather obvious to me that we really do need to move both retirement and health care out of the corporate structure.

In summary, we need to do a bunch of things and they need to be done in parallel. For awhile the banking system was clearly the top priority, but I do think that Ben and Hank have that firmly in hand. Now, we have two "spill" effects to deal with, the structural problems of the "old economy" and consumers and "new economy" businesses that are feeling under significant pressure due to unemployment, tight credit, and spending cuts at the "old economy" companies.

-- Jack Krupansky

What will be Obama's first big move on the economic front?

At least it is clear that Barack Obama has a "pantheon" on economic advisers, and he has promised to "confront this economic crisis head-on", but the big question is what his first big move will be. Sure, he needs to appoint a Treasury secretary. Sure, he needs to appoint a council of economic advisers (although he temporarily has his current "transition economic advisory board.") But what is he/they actually going to do?

Of course, he could simply sit back and watch as Ben and Hank continue to work their financial magic for the next two and a half months.

He could also decide to keep Paulson at Treasury for an extended transition period, say through March. I am now thinking that this would be a best bet.

Ultimately, the first question is whether Barack believes that the current bailout effort at Treasury is consistent with the direction he will want to head on inauguration day. To date, he seems to agree would the rough outlines of Treasury's financial bailout, but as he digs in further I am sure that he will refine his approach. The question is whether he will simply make a relatively minor midcourse correction or seek to radically revamp the entire bailout scheme, or something in the middle. I suspect the latter, but maybe the priority is to get the new fiscal stimulus package put together and underway, and then go back and tinker with Treasury.

For reference, read the transcript of Obama's first press conference after meeting with his transition economic advisers. It is a great counterpoint to his election-night speech. In it he says:

... we've lost nearly 1.2 million jobs this year, and more than 10 million Americans are now unemployed. Tens of millions of families are struggling to figure out how to pay the bills and stay in their homes. Their stories are an urgent reminder that we are facing the greatest economic challenge of our lifetime, and we're going to have to act swiftly to resolve it.

I am still wondering exactly what timeframe he considers "swiftly."

-- Jack Krupansky