Thursday, October 29, 2009

Distortion of Economic Information

If you run a blog on blogspot, you may have noticed the item "Blogs of Note". This feature picks out one blog from the masses and highlights it with a link. I always check them because I am inquisitive, but here is what i have put together:
-45% of blogs selected are sites that feature never ending picture submissions of usually uninteresting landscapes, animals, or cities
-45% of those selected are about food; either consumption of food or just never ending picture pages of food items
-10% are unique or interesting in some way, at least to me
Anyone else notice this?

GDP Inflator
One of the bad things about getting to writing late day is that all the action has already happened. Today's big news was the monster GDP number and it's effect on asset prices which were free to run after the bond sales finished up. This may have surprised some, but not if you read this site this week. The entire weeks losses were about recouped in one day. If it seems almost scripted, then you must be crazy!

A quick recap of the GDP number.
Headline number and some reaction:
Stocks jump as better-than-expected GDP report rouses investors; Dow industrials jump 200
Details the 3.5% number, how it blew away the 3.2% estimate (and Goldmans call for 2.7%!) and that the economy is awesome.

Of course there are numbers, and then things that make up the number. Some excerpts from sharp minds across the net;

Clusterstock chimes in with:
Cash-For-Clunkers MASSIVELY Distorted GDP
If anyone mentions the just-released 3.5% U.S. third quarter GDP growth, just throw this chart in their face. Cash for Clunkers clearly distorted the U.S. economic figures in an unsustainable fashion.

According to the Bureau of Economic Analysis (BEA), motor vehicle output spiked a seasonally-adjusted 157.6% quarter on quarter. This is completely unprecedented. Vehicle output is clearly going off a cliff next quarter. The question will be how low can the blue line below go.

To put this into GDP terms, according to the BEA the spike you see below added 1.66% to the U.S. GDP growth figure reported. Thus without it, GDP growth would have been only 1.89% (3.5% - 1.66%) in Q3.
I will have more about the automotive aspect below.

I am always careful when phrases like "completely unprecedented" are used!

The guys at Clusterstock are not done yet (I told you they write alot!):
How The Home Buyer Tax Credit Inflated The GDP Number
Our chart of the day shows how the government's cash for clunkers program added 1.66 percentage points to the GDP, boosting it from a pathetic 1.89% gain to 3.5%. Add to that at least a portion of the huge gain in residential spending activity. This number jumped a seasonally adjusted 23.4% and was responsible for more than a half-percent to GDP.

How much of that was due to the home buyer tax credit? The National Association of Realtors says that nearly half of the jump in home sales this year was directly attributable to the tax credit. So we probably need to shave at least another 0.25% off GDP.
Addition by subtraction perhaps.

At this point GDP number is running at 1.64%. Still wonderful.

Mish reads all the hard data and offers:
Cheering Over Ugly Report
Today the market is cheering over what is actually an ugly report.

A misguided Cash-for-Clunkers added a one-time contribution of 1.66 percentage points to GDP. Auto sales have since collapsed so all the program did is move some demand forward.

Government spending increased at 7.9 percent in the third quarter which is certainly nothing to cheer about.

Personal income decreased $15.5 billion (0.5 percent), while real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent last quarter. Those are horrible numbers.

The savings rate is down, which no doubt has misguided economists cheering, but people spending more than they make is one of the things that got us into trouble.
Not inspiring, but the market is up and is looking forward and is never wrong, so why dwell on the negatives?

Alphabet Soup
Tim Iacono is back in action after a vacation and he is as good as ever. Tim, the author of The Mess That Greenspan Made, catches an awesome mix of alphabet letters which show you yet another aspect of how government influence is all things in the market place right now:
When Junk is Not Junk
Just eighteen months ago, you would have expected to see a story like the one excerpted below in The Onion, the satire news outfit that bills itself as "America's Finest News Source". But, this being 2009, this report($) along with others like it now appear in the Wall Street Journal, the nation's most widely read daily paper, recently surpassing USA Today:
GMAC Offers $2.9 Billion in Debt
Troubled consumer lender GMAC LLC came to the debt market with a $2.9 billion offering of three-year bonds backed by the government Wednesday.

GMAC is the only financial company with a junk credit rating to receive support under the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program. Moody's Investors Service has the company rated at Ca, two notches above default. The FDIC backing, however, means these bonds will be rated triple-A.
The offering came as GMAC was in discussions to take another $2.8 billion to $5.6 billion of fresh capital in the form of preferred stock from the government. The Treasury already has pumped $12.5 billion into the company, which lost $3.9 billion last quarter and will post its third-quarter results next week.

"This offering further strengthens GMAC's liquidity position, which will support the company's ability to extend credit to consumers and businesses," the lender said in a statement.

No, that wasn't some made-up quote by a writer at The Onion - that was a real quote from a real spokesman at GMAC, the finance arm of General Motors and Chrysler that converted into a bank holding company last year so that it could better access government aid. This came a few months before both GM and Chrysler began what were two of the largest, shortest bankruptcy proceedings in history.
This is bordering on the unreal. FDIC Backing? They do not even have enough money to close failed banks, why are they in on the GMAC deal? (Hint see GDP distortions above and know GMAC finances cars and homes. Nuff said.) Nice catch Tim!

2 Years is a Long Time
The US Congress is looking to extend once again the unemployment benefits package. This newest extension (and not the last) means one can collect unemployment (UE) for about 2 years. I bring this up not to debate the merits of such a program, but what it means.

There exists right now many skilled, educated, and motivated people in this country that may be using UE for two years of their career. Two years! In an ultra competitive market, two years "on the shelf" is a very long time. This can and will impact future job prospects, and impair earnings for that individual for some time.

Think about how long two years is career wise. Two years ago I was a full level below where I am now and about 15% lower in earnings. I finished a major success just last year which was the driving force behind a promotion. Two years is a long time indeed.

I think especially hard hit will be those in their later years looking for that last position before retirement. A 50-53 year old may never get full time employment with full benefits again after a 2 year stint on UE. Temporary contracts may be all there is available.

So while GDP is massaged to look great, understand that the reality on the ground is very different. 2 years is a long time.

So now to tie it all together...

Distortion of Economic Information
from Wikipedia:
A distortion is the alteration of the original shape (or other characteristic) of an object, image, sound, waveform or other form of information or representation. Distortion is usually unwanted.

If you are the kind that can view the clear information above (along with the myriad of other items covered here over the past 2 years, see it is a long time!) and still think that GDP is strong, unemployment is a useless indicator, and rates of all kinds are not heavily influenced by the US arms of finance, then please move along. Go back to your ivory tower and pretend someplace else. And say hello to Paul Krugman while you are there.

Data of all kinds have been targeted for distortion since the very beginnings of this episode. Let me take two samples to show what I mean and what these distortions may cause.

Cash for Clunkers Program
The purpose of this program was to throw aid to the floundering US automotive sector, and by extension the firms that make car loans. In an ironic twist, foreign auto makers won a majority of the sales, but the effect here in the US was still very large.

A short term goose to car buying added perhaps as much as 1.6% to the GDP number and plenty of taxes on the new car sales to local governments. The spike is sales caused a distortion, one which some adjusted to and some did not.

The Distortion: A spike in auto sales may have caused premature decisions about production and hiring to occur.

Results: GM and other US auto makers ramped up production, even hiring back laid off workers, to make more cars even though dealer lots were full of autos. This distorted the very real correction and wind down of the US auto industry and will cause another huge disconnect between reality and what the unions think they are going to get. In another irony; Japanese auto makers, no stranger to government pump jobs, never increased production but prepared for the downturn to resume.

Future Issues of Distortion: GMAC needs more money already. The auto makers will flood the markets with cars at deflated prices (Deflation, oh noooooo!). Lastly, a 1.5% pump to GDP is too much to leave on the table so yet another program like this will come. Causing more distortions.....

Mortgage Rates at Unrealistic All Time Lows
In an effort to get as many homedebtors into loans they may be able to pay for at least a few months, and to encourage new buyers to "buy now or be priced out forever" the FED has targeted mortgage rates and distorted them to the lowside. FED MBS purchases, FHA loans, and FNM/FRE are fully 100% of the mortgage market right now.

The Distortion: Through the purchase of the worst of mortgage assets, the FED had hoped to reignite lending. Instead they were inundated with sellers looking to offload MBS, and the banks never returned to the market. The FED used all the tolls available to maintain all time low rates for mortgages even though the real rate is much, much higher.

Results: Even in the face of this kind of effort, the results have been weak at best. Sales are still poor and only yet another program, the home buyer tax credit, was able to generate much interest. Underwater homedebtors are doing the smart thing and giving up, not rolling into a low rate mortgage set up for 50 years on a home they are under water on.

Future Issues of Distortion: There are many, so a list is in order.
-The FED's 1.5 (or whatever) Trillion dollar MBS purchase program has been credited by many bloggers I respect dearly (Calculated Risk among them) with lowering mortgage rates about .30 bps. So if the FED helped rate is say 4%, with out the program mortgage rates, by their thinking would be 4.3%. I reject this outright as insane. If true then two things are also true:
-the use of this money was an poor waste of taxpayer funds and increases risk for the FED exponentially
-there was no real gain; .3% will not make one iota of difference in the long run. Not one bit of difference. At all. They clearly have lost it.

With banks charging 30% annually for credit cards, I have no idea what a Citi mortgage may cost. I think it may be a hair over 4% though. What this boils down to is that the FED will be hard pressed to exit this program.

If mortgage rates moved up from the federal sweet deal of 4-6%, up to banking world rates of 7-9% (low end IMO) this will wipe out 20-30% of a homes price right off the top. Whether you think home prices are rising or not, they are not rising enough to cover that spread should rates return to anything near normal. This is a key point.

The FED has been playing "pretend and extend" but their clock is running out and they are way behind. There is no possibility by next March (supposed FED exit) home prices will be 10,20,30% higher which is the needed breathing room for normalized mortgage rates.

The future distortion that I see is folding FNM/FRE/FHA and the MBS assets of the FED into a "bad bank". New purchases will be funded by the newly created Federal Office of Mortgage Issuance with a 4% rate for all. This will be funded on the bond market with shortfalls made up with taxpayer money. Do not worry, this program will be short term with an exit strategy planned for 5 years before our Sun goes Red Giant.

Two Items for Review
Out of time, but these two article were too wonderful to pass on.

From Jesse's Cafe Americain:
About the Jobless Recovery......
If you think this explosion of Federal debt will facilitate a stronger US dollar you might be suffering from ideological myopia or some other delusion.
Get your eyes checked. Regularly.

Kevin Depews latest "5 Things":
Five Things: The Debt Crisis Is Not a Conspiracy
The whole piece is required reading, but just a taste:
If the dollar does bottom, then it will become quite clear that reflation attempts have failed, and then we face the heart of the debt deflation where the swelling of the dollar competes simultaneously with debt destruction and where debt levels increase in dollar terms faster than they can be paid down.
Make no mistake, debt-deflation will conclude with an inevitable sharp rise in inflation as monetary policies designed to battle deflation remain in place even as excessive debt is eventually destroyed, but the outlook for the dollar says that isn't today's business. Be careful which scenario you're preparing for because those who anticipate inflation before the debt-deflation has fully run its course will find themselves digging out of a deep and painful hole.
I may not agree with everything here, but well worth thinking about. A lot.

Tomorrow night is Halloween eve, and I had it in mind to hold a sort of contest in place of the usual entertainment. I know what I would like to do, but I do not want any leading study going on.

Prizes I am thinking about for the winner (or winners):
-Barry Ritholtz book "Bailout Nation"
-Christopher Steiners novel "$20 Per Gallon"
-Poul Andersons "Tau Zero"
-Robert Heinlein's "The Moon Is a Harsh Mistress"
-A free 1 year subscription to Economic Disconnect
-I have been known to locate a silver bullion ounce from time to time
-A guest post spot for a blog

Let me know if any of these things (or other items within reason!) may inspire you to take part in a contest.

Have a good night.


watchtower said...

"Let me know if any of these things (or other items within reason!) may inspire you to take part in a contest."

Would a 1969 Camaro Z28 be within reason? No? Ok, Ok, I guess that one year free subscription to Economic Disconnect will have to do.

getyourselfconnected said...

Why not a Zl-1 all aluminum 427 Camaro? HA!

The free sunscription is truly priceless I agree....oh wait.

Dave in Denver said...

How about 24 hrs with Erin Andrews?

getyourselfconnected said...

I said within reason!

I would go for 1 hour with Lil Kim myself, but thats me!

Dave in Denver said...

LOL...even though she's not spectacular, Suzy Kolber has always gotten my testosterone going.

getyourselfconnected said...

after spending time at the Calculated Risk site today, and on the comments section, I have deleted it from the blog roll. If you compare my post with CR's on GDP it is obvious we see things very different. So sad,really.

No prob if readers go there, but fundamental differences thats all.

getyourselfconnected said...

Grethen Carlson on FOX is weirdly hot as well. We both need to get out more I think. You should visit Boston, we could have a ripper time, let me know if you are in the area.

getyourselfconnected said...


Some think compiling data and just saying "here is the data" is enough. It is not. Without context, without detailing motivation, without context that is Yahoo finance, or Bloomberg, not the CR I know. Without commentary and principles this kind of thing is useless. More tommorrow.
Riled up now.

Anonymous said...

Good post but a better tittle would have been "Government by Goebbels"

GawainsGhost said...

Speaking of cars, I have to say that the RX-8 is one fine ride. Drove it to Dallas last weekend, first time I've taken it out for an extended trip, and smooth is not the word to describe it. More like silky.

Now that I've made the journey, of over 500 miles one-way, and know how to get to where I need to go, I can easily make it to Dallas in a little over eight hours, provided I only stop for gas and coffee.

It takes 2 1/4 tanks to get from here to Dallas, but that's because the Mazda has a small gas tank. And it does use premium unleaded 93, the most expensive gas. But that's a small price to pay for the ride.

Quick acceleration, easy handling, comfortable suspension, this car rides like a Lexus. There was one of those high-end Mercedes sports coupes parked at the hotel. I asked my friends, "How does that car compare to mine?" They all said, "Well, that's a luxury car, and it probably costs four times what yours does. It's also about 1000 lbs heavier. But if you want a sports car, the Mazda can take it on the highway." That's what I'm talking about.

I didn't want the navigation system initially, but now I'm glad I have it. Talked me out of Dallas quick with no problem. Not that I'm a fan of talking computers--they remind me of Hal--but this one came in handy. I turned it off once I got on South 35, because I knew the stupid computer would direct me to stay on 35 and go through downtown San Antonio in the middle of rush hour. It doesn't know to take Loop 410 around the city, then exit South 37 and drive straight home, avoiding all the small towns in between. Shaves about 100 miles off the trip, saves time and gas.

Navigation systems are useful when you're in unfamiliar territory. Otherwise, they're ineffectual. However, they are nice to have.

But the ride, oh, the ride. So effortless, so luxurious. I am very happy with this car.

getyourselfconnected said...

sounds very smooth indeed! There is nothing like a great car. I take the lowe end on most things (Tv's electronics, etc) but I never scrimp on food or my automobile. Glad you love the car, I do knwo the feeling!

watchtower said...

LMAO when my brother sent me this link:

It's only 49 seconds long and there are some really cool cars as the guy is leaving the burger drive-in.
And yes the VOE (vacuum operated exhaust) really was an option that could be ordered back then.
You just pull that knob and 'voila' your GTO is instantly talkin' smack : )

getyourselfconnected said...

awesome find! Love the old advertising. They say today is all about sex, but that ad was selling sex, so whatever.

Is the VOE just a mechanical choke? It looked like one and had the same effect, do you know?

Check in later for the contest.

watchtower said...

That's the way I understood it, pull the knob and it bypassed a baffle in the muffler.

chang said...

i like ur website. thanks for this comment posting...