How are US Banks Doing These Days?

October 24, 2009 · Posted in General Economics · Comment

Sometimes a few charts say more than a thousand words …

(ALLL = Allowance For Loan and Lease Losses)

net charge offs

All these charts ultimately tell us :

- Banks continue to face an ocean of non performing loans
- But these non-performing loans are outpacing their ability to up the allowance for future losses
- Net loan charge offs are way past record highs and continue to shoot higher
- Return on bank assets and equity is approaching negative territory – still way too many resources are tied up in the banking sector

There is no recovery, not in banking anyway. Why? Because they made too many loans and are still facing the bitter reality that many of those will never be paid back. But why won’t they recover as a result of the recent bailout and stimulus efforts? Because those aimed at getting banks to loan out more money … which is the cause, not the cure of their predicament.

There are many more bank failures, write offs, charge offs, and foreclosures ahead of us before we can truly speak of a recovery. Especially if we keep postponing and dragging this process out from month to month.

It’s the policies from The Great Depression all over again.

Tags: bank condition, banks, charge offs, loan losses

The Freest Economy Today – The Internet

October 23, 2009 · Posted in General Economics · 2 Comments

A great piece from mises.org that gives the unenlightened believer in government a taste of how a truly free society could function:

One of the few places in the world not yet plagued by government intervention is the internet. Although some governments in certain parts of the world have infiltrated the activities of the internet to varying degrees, it remains the closest thing to a purely free economy that we can identify in the modern world.

On the internet, the beautiful aspects of human nature manifest themselves, and we see individuals and companies maximizing their talents and resources for reasons of profit, pleasure, altruism, and mere progress in itself. Given that the government neither inhibits the activities of the internet nor props up or favors any particular actors or individuals, perhaps we are witnessing the closest thing to a free market that man has ever witnessed.

Although many consider the America of the 19th century to be the closest thing to a purely free market, in fact, congressmen constantly acted in favor of certain individuals, leading in some cases to monopolistic advantages. Ironically, at the end of the century the government intervened in an attempt to break up monopolies.

So here we are in a worldwide web that connects people from all parts of the world, allowing them to exchange whatever they want with one another. It is the essence of a free market: voluntary exchange. There is no use of force or coercion on the internet. No higher authority effectively controls or dictates the way that we spend our time online or the activities that we partake in. Although some legal obstacles inhibit people from accessing certain sites and materials, given the lack of regulation or enforcement by a higher authority, users are easily able to circumvent these restrictions and achieve the things that they want.

As it evolves, we begin to witness the endless potential that exists within the internet and the unquantifiable benefits it provides to society. Although the internet currently represents freedom from both a civil and a social perspective, I shall examine it from an economic perspective.

Arguably, the human race has seen more progress and innovation through the use of the internet in the past 20 years than through the use of any innovation known in the history of mankind. As we reflect back over the last 20 years, we see thousands of amazing success stories. We see entrepreneurs from all different economic backgrounds and classes making full use of their skills, ideas, and passions. We read about success stories such as Facebook and Google, where very young people have been able to generate massive wealth while providing a cheap, convenient, and valuable new tool for everyone across the globe to enjoy. This is the beauty of a system free from government intervention.

In fact, it’s such a free market that government doesn’t even effectively enforce intellectual property and copyright protection. And what is the result? We see entrepreneurs from other countries imitating successful online programs with very little detriment to the originators. In fact, Chinese entrepreneurs have created very similar programs to both Google and Facebook. As a result, all of these companies have been able to generate profits while their users still enjoy the programs at no cost.

In turn, their Chinese competitors bring increased competition to both Google and Facebook, creating incentives for them to improve their own products and continue to innovate. This example closely resembles capitalist Americans emulating European technology in the 19th century or Japanese entrepreneurs emulating Western technology during the process of their development.

Do patent protection laws truly promote greater and faster innovation? Some companies and individuals are able to avert these government-imposed rigidities online. And the success of this less-inhibited marketplace demonstrates the lack of need for patent protection laws.

If patent-protection laws, taxes, and legal-tender laws were completely eliminated from the internet, we would then see a purely free market. Although this is not foreseeable given the world’s current political system, we can still continue to enjoy the advantages of this relatively unfettered aspect of modern society.

Technological advancements benefit society for many obvious reasons. In an unfettered marketplace, innovation reduces costs for businesses and hence prices for consumers. For example, in the past, some families spent several hundred dollars every few years just to update their encyclopedia set, even though all of the content in these encyclopedias was publicly accessible; the encyclopedia companies merely compiled the information into a more concise format.

Although these companies provided a very valuable product to society, there is now a decreased need for physical encyclopedias due to the increase of information available on the internet. Let us hope the Obama administration does not attempt to “bailout” Britannica anytime soon.

We begin to see so many things being offered on the internet not only for very cheap prices, but for free. Information that used to cost individuals and companies exorbitant fees can now be found on the internet freely, thus allowing individuals and companies to spend that money elsewhere, improving their own operations.

Before the internet took off in the 1990s, businesses across the United States spent billions of dollars every year on information. Nowadays, companies save millions of dollars per year on research, data, and inventory, which can now be spent on other areas of the business, such as rewarding employees with higher bonuses or purchasing new facilities and advanced equipment. The economy as a whole is operating more efficiently, as overall costs and expenditures have gone down.

Often the most neglected benefit of technology for society is decreased prices. During and after the time of the Industrial Revolution in the United States, we witnessed a myriad of price reductions across most industries. As prices dropped and the cost of living decreased, individuals and entrepreneurs were encouraged to identify other niches throughout the market and introduce new technologies.

Unfortunately, much of modern society has a hard time grasping the benefit of price decreases, while central banks throughout the world continue to print money, which leads to price increases.

In modern times, we can purchase almost any sort of product via the internet and can access almost any information that we desire. When we consider the vast number of people and companies throughout society that earn profits by merely providing information, we can only imagine the enormous costs that can be saved as a result of more accessible and cheaper (often free) information now available to all of society online. What is even more encouraging is that we see the providers of this information doing so for reasons other than profit — a reflection of man’s pursuit of passion and his innate sense of compassion.

Unfortunately, as has always been the case, the internet and its infinite value to society is threatened by a ubiquitous force: government. As we’ve seen throughout history, when companies become threatened by competitors, they do whatever is possible to prevent or squash competition — often through the use of government force.

In the 1930s, unions used various means for lobbying in DC in an attempt to introduce a minimum wage law, which ultimately passed. Smaller companies who could not afford to pay these increased wages were soon forced out of business.

Sure enough, various actors in DC are now lobbying to regulate the internet. In April 2009, AP began to publicize a widespread attack on Google — arguably the most successful company and widely enjoyed technology of the past 10 years. As more and more information-providing companies see their revenues dwindle as a result of better and more convenient information being provided by competitors on the internet, we can be certain that a greater number of companies will congregate in DC to propose greater regulation.

Let us hope our government is stern enough to defend the Constitution as it was written with the intent of dealing with this type of dilemma. The first amendment, freedom of the press, was most strongly emphasized by Thomas Jefferson. He stated, “Where the press is free and every man able to read, all is safe.”

The internet is a model of the free market. It represents all of the aspects of capitalism that we cannot witness in our current offline world due to the high level of government intervention that pervades our society. Online, we see widespread competition, low barriers to entry, voluntary exchange, rapid technological advancements, decreased prices, and a flowering of creativity.

Tags: free market, internet

Producer Prices Down 4.8 Percent

October 21, 2009 · Posted in General Economics · Comment

The BLS reports:

The Producer Price Index for Finished Goods declined 0.6 percent in September, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This decrease followed a 1.7-percent rise in August and a 0.9-percent decline in July. In September, at the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 0.2 percent and the crude goods index fell 2.1 percent. On an unadjusted basis, from September 2008 to September 2009, prices for finished goods fell 4.8 percent, the tenth consecutive month of year-over-year declines.

Annual PP declines are at the 2nd highest level since the crisis began.

Tags: ppi, producer price index

Federal Tax Receipts & Deficits Develop as Expected; Obama Administration on Solid Track to Post Largest Deficits Ever

October 19, 2009 · Posted in Government · Comment

Annual federal tax receipts are dropping toward the 2 trillion mark:

Meanwhile deficits reaching absolute record levels:

Here are my estimates from earlier this year which I believe our government is more or less on track to meet or even surpass:

Federal tax receipts will fall to $2.25 trillion in 2009, to $2 trillion in 2010, to $1.75 trillion in 2011, and to $1.5 trillion in 2012.
(…)
Now that we have updated figures on coming expenses it’s time to update the deficit predictions:

* $1.65 trillion for 2009
* $1.6 trillion for 2010
* $1.95 trillion for 2011
* $2.2 trillion for 2012

… record deficits everywhere and no end in sight.

Tags: deficit, federal tax receipts

Consumer Prices September 2009 – Real Prices Down 4.7%

October 16, 2009 · Posted in General Economics · Comment

The BLS reported yesterday:

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.2 percent in September, the Bureau of Labor Statistics reported today. The increase was less than the 0.4 percent rise in August. The index has decreased 1.3 percent over the last 12 months on a not seasonally adjusted basis.

The seasonally adjusted increase in the all items index was broad based, although tempered by a decline in the food index. The all items less food and energy index increased 0.2 percent in September after increasing 0.1 percent in each of the previous two months. Contributing to this increase were advances in the indexes for lodging away from home, medical care, new vehicles, used cars and trucks, and public transportation. The increase occurred despite declines in the indexes for rent and owners’ equivalent rent, the first decreases in those indexes since 1992. The energy index also increased in September, as increases in the indexes for gasoline, fuel oil and electricity more than offset a decline in the index for natural gas.

In contrast to these increases, the food index declined, falling for the sixth time in the last eight months. The index for food away from home increased, but the food at home index declined as the indexes for fruits and vegetables and for meats, poultry, fish and eggs fell sharply. Both the food and energy indexes have declined over the past 12 months. The decline in the food index is the first 12-month decrease in that index in over 40 years.

Note that there are a lot of “first time in x years” declines in the report above.

And what about real prices, meaning prices where the unrealisic owner’s equivalent rent is replaced with the decline in the case shiller (most recently 12.76%) index? If we make that adjustment, real annual price declines were actually -4.7%.

Tags: consumer price index, cpi, september 2009

Money Supply – September 2009

October 16, 2009 · Posted in Monetary Economics · Comment

The true money supply has fallen by $11 billion from August to September to now $2,133 billion:

This is the 4th monthly decline straight.

The annual growth rate has dropped to 10%:

One more noteworthy item in this month’s money supply data: The Treasury’s “Supplementary Financing Account”, after 6 months of maintaining a constant level of $200 billion, has now dropped to $191 billion. I believe this may be yet another sign that the Fed’s efforts to wind down the monetary stimulus have already begun behind the scenes.

This, along with an ongoing and accelerating credit contraction, will be forces blowing in the face of all futile attempts to reflate the bubble.

Tags: money supply, september 2009, true money supply

Deflation Reaches Social Security Administration; No Cost of Living Increases in 2010

October 15, 2009 · Posted in Government · 1 Comment

Since overall prices declined throughout 2009, the social security administration announced that there will be no cost of living increases for recipients next year:

The Social Security Administration makes it official Thursday: There will be no cost of living increase for Social Security recipients next year, the first year without one since automatic adjustments were adopted in 1975.

The announcement comes as President Barack Obama and key members of Congress call for a second round of $250 payments to more than 50 million seniors, veterans, retired railroad workers and people with disabilities.

The payments would be equal to about a 2 percent increase for the average Social Security recipient. The cost: $13 billion.

Obama called on Congress Wednesday to approve the payments, and several key members of Congress said they would.

“This additional assistance will be especially important in the coming months, as countless seniors and others have seen their retirement accounts and home values decline as a result of this economic crisis,” Obama said in a statement.

Blame falling consumer prices for no automatic increase next year. By law, Social Security’s cost-of-living adjustment, or COLA, is pegged to inflation, which was negative this year, due largely to falling energy costs.

This announcement marks a seismic shift in attitudes. “Inflation adjusted” has become “deflation adjusted”. Market participants have noticed this a while ago, but until today it had not yet reached such high government offices as the SSA.

Don’t get me wrong. Of course payments won’t drop outright for the time being. But how many people had expected these upward adjustments to keep going on as they always have? I think quite a lot. What are the implications on the net present value of all unfunded public liabilities? These liabilities are of enormous importance when it comes to getting an accurate picture of the amount of money owed in the US economy. Just one little change such as dropping COLA for even just one year can have vast implications on household attitudes and behavior.

As I noted in August when I explained how much debt there really is in the US:

Then there are unfunded social security and medicare obligations of about $43 trillion according to the Treasury’s own Financial Report for 2008:

The SOSI provides additional perspective on the Government’s long term estimated exposures and costs. However, it should be noted that the Government’s financial statements do not reflect future costs implied by any current policy, such as national defense, the global war on terrorism, and disaster relief and recovery. Table 3 shows the Government’s estimated present value of future social insurance expenditures, net of dedicated future revenues for the programs reported in the Statement of Social Insurance (SOSI), projected to be $43 trillion as of January 1, 2008 for the ‘Open Group’6. While these expenditures are currently not considered Government liabilities, they do have the potential to become liabilities in the future, based on the continuation of the social insurance programs’ provisions contained in current law.

Most importantly, back then I already asserted:

On top of that, I don’t think that people are oblivious to the fact that there is absolutely no way that all social security and medicare benefits will ever be paid. Thus it would only be reasonable to conservatively assume that the present value of those liabilities has dropped (…)

I think it is now clear, even without people yet questioning the ability of the SSA to make the minimum payments: The net present value of unfunded public liabilities has begun to fall, adding in a major way to the current record contraction in credit and loans.

Tags: COLA, cost of living adjustments, social security, unfunded liabilities

Total Credit & Loan Contraction Reaches $1.1 Trillion Since Peak; Volume Down 5.9% From 1 Year Ago

October 14, 2009 · Posted in General Economics · 4 Comments

Total credit and loan volume in the US is now contracting at a record pace and by record levels, more than at any time since the beginning of the credit crisis, and possibly even more than ever before in US history (source stlouisfed.org):

Total credit and loan volume:

Total credit and loan – annual growth:

This is a rapid and seemingly bottomless contraction at this point. Considering that market behavior and attitudes are currently are currently suggesting the exact opposite, something is bound to blow up right in our faces somewhere and at some point sooner or later.

Tags: total credit, total us credit

Barack Obama Wins Nobel Peace Price – How About Actually Making Some Peace First?

October 9, 2009 · Posted in Foreign Policy · Comment

President Obama won the 2009 Nobel Peace Price:

President Obama was awarded the 2009 Nobel Peace Prize on Friday.

The first African-American to win the White House, Obama was praised by the Norweigan Nobel Committee for “his extraordinary efforts to strengthen international diplomacy and cooperation between peoples.”

“Only very rarely has a person to the same extent as Obama captured the world’s attention and given its people hope for a better future,” the committee said. “His diplomacy is founded in the concept that those who are to lead the world must do so on the basis of values and attitudes that are shared by the majority of the world’s population.”

The committee also said Obama has “created a new climate in international politics.”

In his short time in office, Obama has acted on a wide range of issues from the economy to terrorism and wars in Afghanistan and Iraq.

Obama is the fourth U.S. president to receive the award, joining presidents Jimmy Carter, Woodrow Wilson and Theodore Roosevelt.

This year’s peace prize nominees included 172 people and 33 organizations. The committee does not release the names of the nominees.

The bottom line is, so far President Obama hasn’t made any peace. In fact, his budget proposes more military spending than war-mongering President Bush ever dared to pass. So I think to award him a Nobel Peace Price is at best premature.

You can talk about peace all you want, at some point you have to live up to it. So bring the troops back home. End the senseless war in Afghanistan, bring troops back home from Iraq. Bring them home from Germany, Japan, South Korea, and Saudi Arabia.

Maybe then Mr. Obama would be worthy of a Nobel Peace Price.

But until and unless all that happens idle talk and superficial prices have no meaning to me.

Tags: 2009 nobel peace price, president obama

Confusion Over Gold and Treasury Yields

October 8, 2009 · Posted in Investing · Comment

The following article from Marketwatch is a perfect example of how confused market participants are about the recent and current action in gold and Treasury yields:

Gold and bonds do not usually go up or down together.

But try telling that to the markets over the last two months.

Since early August, in fact, gold bullion has risen by around 10% and the Treasury’s 10-year yield, which moves inversely with Treasury prices, has fallen by nearly 15%.

These moves are substantial, in other words, and more than just day-to-day noise in the data.

What’s going on?

Consider first why gold is so strong, reaching a new all-time high this week. One explanation is that this has been caused by a weaker U.S. dollar on the foreign exchange markets. This is certainly plausible, since the dollar has been very weak lately.

Another plausible explanation for gold’s strength is that it is discounting higher inflation in coming months and years. And it is indeed hard to imagine that the trillions of dollars that the world’s central banks have injected into the financial system won’t eventually have an impact on the inflation rate.

Credible as these explanations are, however, they are hard to square with strength in U.S. Treasury securities. A weaker dollar, of course, puts more pressure on the Federal Reserve to raise rates, which would in turn cause Treasury prices to fall, not rise. The same outcome would presumably result from higher inflation, too.

We reach a similar impasse when we consider why Treasury prices have been so strong. The standard explanation is that they are discounting a weaker-than-expected economy and/or deflation, which will cause rates to stay low. But those are hardly the preconditions of a gold bull market.

Either way you look at it, then, we come to the same conclusion: Recent trends are unsustainable. Something’s got to give.

Which will it be?

Several factors are pointing to the bond market as being the more vulnerable right now:

The stock market has also performed well of late, and equities would not thrive if the economy were weaker than expected or if deflation were a bigger-than-expected threat. So, in essence, the stock market is betting that gold is right and bonds are wrong.

Bond market sentiment is at near-record levels of bullishness right now, and (according to contrarians) the consensus is rarely right. ( Read my September 15 column on bond market sentiment.)

Sentiment among gold timers is remarkably restrained, if not outright gloomy, suggesting that there is a strong “wall of worry” for a bull market in gold to continue climbing. ( Read my October 6 column on gold market sentiment.)

The bottom line?

Don’t be surprised if the bond market over the next several months is markedly weaker than gold.

All this confusion regarding gold stems from one false pretense: that gold is an inflation hedge. It is not. Gold and Treasury Notes/Bonds are, as opposed to almost all other assets, up from October 07 levels for the exact opposite reason, deflation.

Read what I have written before, for example in Gold, Silver, Treasurys – A Snapshot.

Monetary commodities, such as gold and silver should act well during a deflation. Why? Because during deflation cash is king. And gold is the king of all cash.
…

Treasury Notes and Bonds are the ultimate deflation investment. Why? Because during deflation cash is king. And Treasury securities are the safest possible claim to cash at interest. Why? Because the government can always (and will) tax and loot the people to the hill to pay off its debts if it needs to.

Read the whole article, look at the predictions I made in there and look where we are today in terms of gold, silver, and Treasury yields. Market data can only be interpreted, understood, and predicted, when you have a sound economic footing to stand on.

I would like to ask the author: What if in addition to falling yields and rising gold prices, the dollar were to start rallying? How confused would he be then?

Tags: gold, treasury yields