by Calculated Risk on 9/11/2010 07:52:00 PM

Here is a new paper on EU Sovereign debt exposures. (ht Mark Whitehouse at the WSJ: Number of the Week: Hiding Europe’s Unpleasant Details)

From Blundell-Wignall, A. and P. Slovik (2010), “The EU Stress Test and Sovereign Debt Exposures”

The EU-wide stress test did not include haircuts for sovereign debt held in the banking books of banks on the grounds that over the 2 years considered default is virtually impossible in the presence of the EFSF [European Financial Stability Facility Special Purpose Vehicle], which is certainly large enough to meet funding needs of the main countries of concern over that period.

The haircuts applied to the trading book in the stress test are shown in the first block of Table 1. The trading book exposures (not reported in the stress test paper) are also shown. The EU wide loss from the haircut is around €26. bn. The contribution of the 5 countries where most of the market focus has been (Greece, Portugal, Ireland, Italy and Spain) is only €14.4bn.

Click on table for larger image in new window.

A different picture emerges when we consider the banking book. First it is important to note that the EU banking book sovereign exposures are very much larger than those of the trading book—around 83% of the total. If the same haircuts are applied to these exposures the loss amounts to €139bn, or 12% of the Tier 1 capital of the EU banks at the end of 2009 (and €165bn and over 14% of Tier 1 if trading book losses are added in). The haircuts of the 5 countries of market focus amount to €75.8bn in the banking book, and €90.2bn if the trading book amount is added in. This is around 8% of EU Tier 1 capital of stress tested banks.
...
This study has shown that most of the sovereign debt is held on the banking books of banks, whereas the EU stress test only considered their small trading book exposures. Sovereign debt held in the banking book cannot be ignored however. First, individual bank failures would see latent losses on the trading book realized, a fact that creditors and equity investors need to take into account. Second, and more importantly, the market is not prepared to give a zero probability to debt restructurings beyond the period of the stress test and/or the period after which the role of the EFSF SPV comes to an end. The main reasons for this are: the very large job ahead for fiscal consolidation in a period of weak economic growth; and the apparent difficulty of achieving structural/competitiveness reforms in some countries in a short period of time. The paper also showed that excessively exposed banks in principle can reduce their exposure by not re-financing maturing sovereign debt, with the government funding gap being met instead by the SPV. This would have the effect of transferring sovereign risk from the bank concerned to the public sector.

What happens in less than 2 years when the European Financial Stability Facility Special Purpose Vehicle is no longer providing funding?

by Calculated Risk on 9/11/2010 03:05:00 PM

From Steven Gjerstad and Vernon Smith in the WSJ: Why We're in for a Long, Hard Economic Slog (ht MrM)

In the Great Depression and in every recession since, recovery of residential construction has preceded recovery in every other sector, and its recovery has been far larger in percentage terms than the recovery in any other major sector.

Applied to the Great Recession, it appears that those who see signs of a recovery may be grasping at straws.

This is something I've been writing about since I started the blog in 2005, but it is worth repeating ... even though Residential Investment usually only accounts for around 5% GDP, it isn't the size of the sector, but the contribution during the recovery that matters - and housing is usually the largest contributor to economic and employment growth early in a recovery.

But not this time because of the large number of excess housing units.

Here is the paper from Steven Gjerstad and Vernon Smith: Household expenditure cycles and economic cycles, 1920 – 2010

This has key implications for policy. As an example, a policy (like the housing tax credit) that encourages adding to the housing stock (new home construction) is a clear mistake, whereas policies that are aimed at household creation (jobs) or at least household preservation (like extended unemployment benefits) make more sense. Also policies aimed at supporting house prices - keeping the price above the market clearing price - are counterproductive and also a mistake.

by Calculated Risk on 9/11/2010 11:49:00 AM

I saw this article at CNBC yesterday: Outlook Gloomy at Secret Billionaire Meeting

For 25 years, legendary Wall Street strategist Byron Wien, now with The Blackstone Group, has held summer meetings with high net worth individuals to get their outlook on the global economy and investing. This year’s group, totaling fifty individuals and including more than 10 billionaires, was decidedly pessimistic on the U.S. economy ...

That reminded me to check on Byron Wien's The Surprises of 2010 list.

Note: For anyone not familiar with the list, Wien tries to make predictions that are generally out of the consensus view - he has been doing this for 24 years, and usually gets more than half right.

It looks like this will be an off year for the "Surprises" list ...

A quick review of Wien's possible surprises:
1. The United States economy grows at a stronger than expected 5% real rate during the year and the unemployment level drops below 9%. ...
CR: Not Likely.

2. The Federal Reserve decides the economy is strong enough for them to move away from zero interest rate policy. In a series of successive hikes beginning in the second quarter the Federal funds rate reaches 2% by year-end.
CR: Not Gonna Happen.

3. Heavy borrowing by the U.S. Treasury and some reluctance by foreign central banks to keep buying notes and bonds drives the yield on the 10-year Treasury above 5.5%. ...
CR: Not Gonna Happen

4. In a roller coaster year the Standard and Poor’s 500 rallies to 1300 in the first half and then runs out of steam and declines to 1000, ending where it started at 1115.10. ...
CR: Missed on the high, but the general idea of a trading range has been correct so far.

5. Because it is significantly undervalued on a purchasing power parity basis, the dollar rallies against the yen and the euro. It exceeds 100 on the yen and the euro drops below $1.30 as the long slide of the greenback is interrupted.
CR: Right on the euro, wrong on the yen.

6. Japan stands out as the best performing major industrialized market in the world as its currency weakens and its exports improve. Investors focus on the attractive valuations of dozens of medium sized companies in a market selling at one quarter of its 1989 high. The Nikkei 225 rises above 12,000
CR: The Nikkei did rally to 11,200 before falling sharply, but I think this counts as a miss.

7. Believing he must be a leader in climate control initiatives, President Obama endorses legislation favorable for nuclear power development. ...
CR: Didn't happen.

8. The improvement in the U.S. economy energizes the Obama administration. The White House undergoes some reorganization and regains its momentum. ...
CR: Not likely this year.

9. When it finally passes, financial service legislation, like the health care bill, proves to be softer on the industry than originally feared. ...
CR: I think this was right.

10. Civil unrest in Iran reaches a crescendo. Ayatollah Khomeini pushes out Mahmoud Ahmadinejad in favor of a more public relations adept leader. Economic improvement becomes the key issue and anti-Israel rhetoric subsides.
CR: Sounds good, but very unlikely.

2009 was Wien's best year (he reviews 2009 here), but it looks like 2010 will be his worst.

by Calculated Risk on 9/11/2010 08:43:00 AM

Note: this is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for September 10, 2010.

Changes and comments from surferdude808:

After six additions and one removal, the Unofficial Problem Bank List includes 849 institutions with aggregate assets of $415.3 billion, up from 844 institutions with assets of $412 billion last week.

The additions include First National Community Bank, Dunmore, PA ($1.3 billion Ticker: FNCB); Pacific Mercantile Bank, Costa Mesa, CA ($1.1 billion Ticker: PMBC); Community Shores Bank, Muskegon, MI ($262 million Ticker: CSHB); First American State Bank, Greenwood, CO ($244 million); Service1st Bank of Nevada, Las Vegas, NV ($232 million Ticker: WLBC); and Bank of the Eastern Shore, Cambridge, MD ($223 million).

The removal is the failed Horizon Bank ($188 million). Next week, we anticipate for the OCC to release its actions for August.

The FDIC has only closed one bank over the last three weeks - but the additions keep coming!

by Calculated Risk on 9/10/2010 10:27:00 PM

Via Politico in October 2009 (link here if embed doesn't load)

"Number one on the list we wanted to make sure - [whisper] all the Clinton people got their jobs back - to do something to help the country."

“The unemployment rate is at 9.7% ... Have some sympathy for those people that are unemployed, because when Rahm Emanuel sees my comments from this evening, I am going to be one of them.”

by Calculated Risk on 9/10/2010 06:25:00 PM

Fading Horizon
It's reach, overextended.
Federal eclipse.
by Soylent Green is People
From the FDIC: Bank of the Ozarks, Little Rock, Arkansas, Assumes All of the Deposits of Horizon Bank, Bradenton, Florida

As of June 30, 2010, Horizon Bank had approximately $187.8 million in total assets and $164.6 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $58.9 million. ... Horizon Bank is the 119th FDIC-insured institution to fail in the nation this year, and the twenty-third in Florida. The last FDIC-insured institution closed in the state was Community National Bank at Bartow, Bartow, on August 20, 2010.

After taking two weeks off, the FDIC is back in action.

by Calculated Risk on 9/10/2010 03:08:00 PM

Hotel occupancy is one of several industry specific indicators I follow ...

From HotelNewsNow.com: STR: US hotel results week ending 4 Sept. 2010

In year-over-year comparisons, occupancy increased 7.5 percent to 57.4 percent, average daily rate was up 2.1 percent to US$94.37, and revenue per available room rose 9.7 percent to US$54.16.

This was the 13th consecutive week the U.S. reported overall ADR increases. Before this trend emerged, ADR in decreased 74 of the past 76 weeks.

The following graph shows the four week moving average for the occupancy rate by week for 2008, 2009 and 2010 (and a median for 2000 through 2007).

Click on graph for larger image in new window.

Notes: the scale doesn't start at zero to better show the change. The graph shows the 4-week average, not the weekly occupancy rate.

On a 4-week basis, occupancy is up 8.1% compared to last year (the worst year since the Great Depression) and 3.5% below the median for 2000 through 2007.

The occupancy rate is just above the levels of 2008 - but 2008 was a tough year for the hotel industry!

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 9/10/2010 01:25:00 PM

Yesterday I posted a couple of graphs of government payroll employment since 1976 as a response to some comments to Menzie Chinn's post at Econbrowser: The "Ever-Expanding" Government Sector, Illustrated

There were a few questions ... (Please remember I was just answering some question to Menzie's post - not trying to start a huge debate - but I do think data helps to define the issues.)

Q: Does this include active duty military?

A: No. The payroll data is from the BLS and is for civilian employment only.

Q: Does this include government contractors?

A: Government contractors are private employers. The headcount would be included in the BLS report, but not as government employees.

Q: The graphs show that Federal government payroll employment (ex-military) has been declining over the last 35 years - and state and local has been mostly flat. But what about the pay (including benefits)?

A: I don't have that data, but the following graph is based on BEA data and shows the Federal (and defense spending) and state and local spending as a percent of GDP. But this doesn't include any unfunded future liabilities.

Click on graph for larger image.

There has been a surge in defense spending, but Federal spending ex-defense and state and local spending has been fairly flat (but as I noted above, underfunded future liabilities - like state and local underfunded pension plans - don't show up).

I'm guessing the next question will be how the Federal stimulus spending shows up in the BEA reports. So here is the answer from the BEA:

BEA tracks the portion of federal government sector receipts and expenditures in the national income and product accounts that are affected by the provisions of the ARRA. Many of the ARRA-funded transactions—such as grants, transfers, and tax cuts—are not directly included in gross domestic product (GDP), because GDP only includes government spending on goods and services. However, these transactions affect GDP indirectly by providing resources to households, businesses, and state and local governments to fund personal consumption expenditures, business investment, and state and local government spending.

Now back to the economy.

by Calculated Risk on 9/10/2010 10:07:00 AM

From the Census Bureau:

Total inventories of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations but not for price changes, were $405.0 billion at the end of July, up 1.3 percent ...

The July inventories/sales ratio for merchant wholesalers, except manufacturers’ sales branches and offices, based on seasonally adjusted data, was 1.16.

Click on graph for larger image in new window.

Usually we focus on Manufacturers' Inventories and Manufacturers' inventory-to-sales ratio, but the wholesale inventory report shows the same thing - the inventory adjustment is over.

This increase could be spun two ways. First from CNBC:

U.S. wholesale inventories surged by the largest amount in two years in July ... in a sign firms were anticipating enough demand to boost stock this summer.

That sounds like good news.

The alternative view (my view) is that inventories are now a little too high - and that wholesalers will now cut back a little on orders.

by Calculated Risk on 9/10/2010 08:44:00 AM

From the WSJ: Goolsbee to Lead Council of Economic Advisers

President Barack Obama will name Austan Goolsbee, a longtime adviser and an architect of his campaign's economic message, to be chairman of the White House Council of Economic Advisers at a White House press conference Friday, an administration official said Thursday night.

Tanta, my former co-blogger, once wrote about Goolsbee (back in 2007): Dr. Goolsbee: I’ll Stop Impersonating an Economist If You Quit Underwriting Mortgage Loans

Tanta's post was very funny - but it isn't funny that Goolsbee demonstrated a lack of understanding about the housing market.