Category: Economics & Business

“So where did the auto-bailout negotiations break down? Over the demand by anti-union Southern Republican senators that domestic automaker workers be forced to accept immediate wage cuts, and the loss of benefits. I’m with Barney Frank on this one: No one asked the rank-and-file employees of Citigroup or AIG or Morgan-Stanley to cut their salaries in exchange for government handouts. Assembly-line workers at GM and Chrysler, on the other hand, must tighten their belts.”

Andrew Leonard

Even Cheney supported relief for the automakers.

This time, GM Chief Rick Wagoner will drive a company car to Washington instead of flying by corporate jet as he seeks a government bailout, a spokesman says.

Wagoner will drive in a Chevrolet Malibu hybrid sedan when he makes the 520-mile trek from Detroit to Capitol Hill, General Motors Corp. spokesman Tony Cervone said Tuesday.

AP via Yahoo! Finance

Poor bastard. Next time he’ll probably be on a Greyhound bus.

It appears from various news reports that this recession, likely to be the most sustained since The Great Depression of the 1930s, will be called “The Great Recession.”

Someone you’ve probably never heard of has died and left the world a poorer place.

Tanta’s passing has been noted by many last night and today. Me too.

Because we consumers no longer can (many of us).

We can’t get home equity loans to spend, because housing prices have dropped and many of us don’t have any home equity to borrow against.

We can’t spend the dividends or gains from our stock portfolios because stocks have dropped 45% in 13 months, companies are reducing dividends — and no one should sell their stocks at these prices just to buy stuff.

Some of us, of course, don’t have jobs, or fear losing them.

And now, our credit cards are going away:

(Reuters) – The U.S. credit card industry may pull back well over $2 trillion of lines over the next 18 months due to risk aversion and regulatory changes, leading to sharp declines in consumer spending, prominent banking analyst Meredith Whitney said.

The economy consists of four parts — consumption, investment, exports minus imports, and government. Consumption is down for the reasons we see above. Most expect it to continue to decline well into 2009. Investment is down because companies don’t expand when they can’t sell — and they can’t get credit to expand anyway because of the banking crisis. (And no one of sound mind is building any houses.) Exports are dropping because the dollar is 20% stronger, which means our products are more expensive in the rest of the world.

You don’t have to be John Maynard Keynes to realize that government is the only buyer left.

And so the talk of a stimulus package, one hopes this time in the form of infrastructure — bridges, schools, rail.

If we add in the Citi bailout, the total cost [of the bailouts] now exceeds $4.6165 trillion dollars. People have a hard time conceptualizing very large numbers, so let’s give this some context. The current Credit Crisis bailout is now the largest outlay In American history.

Jim Bianco of Bianco Research crunched the inflation adjusted numbers. The bailout has cost more than all of these big budget government expenditures – combined:

• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
• Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
• Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
• S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
• Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
• The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
• Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
• Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
• NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion

TOTAL: $3.92 trillion

The Big Picture

So, in less than two months, more money than the combined costs of our major expenditures over 200 years (major wars excepted).

Thanks to Bob for the link.

We have just completed two consecutive trading days when the Standard & Poor’s 500-stock index rose more than 6 percent each day — the first time that happened since 1933. They followed the first two consecutive 6 percent declines since 1933.

For the four days, the S.& P. is down 0.9 percent.

Floyd Norris Blog

Nov. 24 (Bloomberg) — The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

Bloomberg.com

A trillion here, a trillion there, and pretty soon you’re talking real money.

The S&P 500 index fell by more than six percent Wednesday and Thursday. The last time it fell more than six percent on two consecutive days was July 20 and 21, 1933.

Eighteen trillion dollars of wealth has been lost in global equities in only seven weeks.

This week Citigroup’s already depressed shares have lost half their value, and shares of Bank of America and JPMorgan Chase are down 30 percent.

Target shares have lost more than half their value since Lehman failed, and that is much better than many of its competitors have done. Shares in Macy’s, Sears, Saks, Nordstrom, AnnTaylor and Dillard’s are down more than 70 percent as this holiday season approaches.

In late October, the Federal Reserve board staff concluded that the unemployment rate was likely to rise as high as 6.5 percent by the end of this year. A few days later, the Labor Department reported it was already there, with two months left to go.

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P.S. As I’ve noted, I am a disaster junkie. I am also an obsessive — I wouldn’t have been doing a blog like this for more than five years if I weren’t. That said, I’m not trying to scare you any more than you might already be about the economy. I just find it fascinating in a train wreck kind of way.

Remember seven weeks ago when it got a splash that Warren Buffett (Berkshire Hathaway) was putting $5 billion into Goldman Sachs?

He’s lost half of it as of yesterday. Goldman Sachs is down more than 50% since he bought.

Update: Goldman Sachs closed around $125 on September 23rd. Today it closed at $52. That’s down 58%, a loss of $2.9 billion.

Timothy Egan takes yet another look at the bailouts and who gets rescued. Provocative.

You should read it all, but here’s some flavor:

Years ago, when a close friend of mine lost his 75-year-old family retail business in Pittsburgh with the collapse of the steel industry, the federal government was nowhere to lend a hand to small business owners.

When aluminum factories in Spokane, Wash., folded after a corporate raider picked them to the bone, destroying the best middle-class jobs for blue collar workers in the city where I grew up, the government’s advice to people losing their homes, cars and dignity was: Learn how to say, “You want fries with that?”

“As of 14 November 2008, Zimbabwe’s annual inflation rate was 89.7 Sextillion (10²¹) percent.”

Zimbabwe Inflation

Calculated Risk has a chart showing the four stock market crashes of the past 35 years.

Update: Calculated Risk now has a later chart showing the Four Bad Bears, the stock market crashes of 1929-1932, 1973-1974, 2000-2002, and 2007-present. The chart uses the S&P 500 for the three most recent events, the Dow Jones Industrials for the the 1929-1932 crash. Click image for larger version.

They also had this line, allegedly heard on the NY Stock Exchange floor at closing today:

“This is like a half off sale at Nordstrom … it is still overpriced!”

[My friend Donna calls me Mr. Doom & Gloom. I prefer to just think of myself as a disaster junkie.]

So now we have deflation.

It seems the consumer price index dropped one whole percent last month, the most in one month since NewMexiKen was a toddler.

Now anybody that drives a car or truck knows that a big part of that — indeed most of it — was the drop in fuel prices. They’re half what they were four months ago — and still going down.

But even when food and fuel — the most volatile costs — are factored out, the index still dropped one-tenth of a percent and there is no reason to think it won’t drop again in November.

Great, prices are lower. Hip hip hooray.

Except.

Say they continue to drop so that a year from Social Security recipients get a cost-of-living decrease instead of that annual increase for inflation they’ve come to expect. Say your bosses decided to lower your wages because things cost less and they aren’t making as much money either.

Will your car loan get lower? Will your mortgage go down? Will the property tax assessors keep up with the curve? Will health care costs go down? Will the things you bought last year cost any less on your credit card balance? Not likely.

And there aren’t many remedies for deflation like there are for inflation. Even if the Fed decreases interest to stimulate investment, who is going to invest in a new factory when demand is going down?

But what do I know.

“The market for debt used to finance hotels, offices and shopping malls tumbled Tuesday on worries that the long-feared rise in defaults for commercial mortgage-backed securities had begun, possibly ushering in the next phase of the financial crisis.”

Wall Street Journal

Here’s how scary. On this chart up is bad (it measures a spread). Each segment is six weeks.

Explanation: A significant fraction of loans for commercial development are funded on the Commercial Mortgage-Backed Security market. That means the loans are bundled together and sold as securities in much the same manner and to the same buyers as the now infamous sub-prime loans. The chart indicates the difference between the 10-year Treasury rate and rate that makes the security attractive. In other words, the line (the spread) indicates the perceived risk.

Of the 500 stocks that make up the S&P 500 (a better indicator of broad stock market values than the Dow Jones Industrials), only 16 are up for the year to date. They are:

1. Family Dollar, up 40 percent. Cheap goods sell better this year.
2. Rohm & Haas, up 35 percent. All-cash takeover by Dow Chemical is pending. Since the deal was announced in July, Dow is down 40 percent. This may be the worst-timed deal of the year from the buyer’s perspective.
3. Anheuser Busch, up 31 percent. Another cash takeover. That deal was completed today, so Busch won’t be around to help the full-year breadth numbers.
4. Celgene, up 27 percent. A biotechnology stock has been helped by test failure of drug from competitor.
5. UST, up 25 percent. Snuff leader being bought by Altria, the cigarette company, again for cash.
6. Barr Pharmaceutical, up 22 percent. Generic drug maker won patent fight.
7. Amgen, up 21 percent. Drug performs well in tests.
8. Hudson City Bancorp, up 15 percent. A bank is up? This bank, based in New Jersey, kept good underwriting standards and stayed out of the securitization game. It also failed to expand into formerly hot markets like California and Florida. Now it has turned down bailout cash, saying it did not need the money.
9. General Mills, up 15 percent. You have to eat, and Wheaties maker is doing well.
10. Southwestern Energy, up 12 percent. Gas company rode prices up, and has not given up all its gains.

The others that are up are Wal-Mart (9 percent), Campbell Soup (5 percent), Cephalon (3 percent), People’s United (3 percent), Kroger (less than 1 percent), and Baxter International (less than 1 percent).

Some 200 of the 500 stocks have lost half or more of their value since the end of last year.

Source: Floyd Norris Blog – NYTimes.com

Here’s a list of the 500 stocks that make up the index.

“The New York Times told readers that GM’s autoworkers are paid $70 an hour…. This is not true. The base pay is about $28 an hour.”

Beat the Press

$70 may be the amount if all labor costs including legacy costs (retiree pensions and healthcare) are divided by the current number of workers, but that is a decidedly inaccurate picture of the current workforce.

In 2006, the federal government spent more than sixty billion dollars on aircraft manufacturers. Boeing received $20.8 billion, according to Government Executive magazine. (Lockheed-Martin received $27.3 billion, and Northrup-Grumman $16.7 billion.)

Why does the United States have one of the most sophisticated, innovative electronics industries in the world? Raytheon’s take from the Pentagon in 2006: $10.4 billion; Computer Sciences, $2.7 billion. And so on. General Motors received $806 million dollars that year, mostly from the Army, enough to make it the fortieth largest defense contractor on the list, just ahead, startlingly, of Johns Hopkins University, which received more than seven hundred million dollars, most of it from the U.S. Navy.

Think Tank: Steve Coll

Just the companies listed add up to $80 billion (in one year). That puts some perspective around the bail out numbers.

The Securities and Exchange Commission said Monday that it had charged Mark Cuban, the billionaire Internet entrepreneur and owner of the Dallas Mavericks basketball team, with insider trading for selling 600,000 shares of an Internet search engine company.

The S.E.C. said Mr. Cuban sold the stock in the company, Mamma.com, based on nonpublic information about an impending stock offering. The commission asserted that Mr. Cuban avoided losses in excess of $750,000 by selling his stock prior to the public announcement of the offering.

DealBook – New York Times

Update: Insider Trading, or Political Persecution?

It is a truth that forecasters have learned over and over again. Never bet against the American consumer. No matter how indebted, consumers will consume.

Until now.

Floyd Norris Blog – NYTimes.com