The Tasgall Group

The Economic Policy Institute just launched their Economy Track website… and it looks pretty. They have nice charts that show how screwed we are the economy is going.

One amusing chart… the Job Openings and Labor Turnover chart — it looks like the ratio has literally gone off the charts.

Food for thought…

From Barry Ritholtz, a very important distinction on what is toxic…

I keep hearing people discuss Toxic Assets.

This is actually a misnomer of sorts; its not the Assets that are fatal, toxic, deadly, etc — its actually the Pricesthat are TOXIC.

Assets that are substantially mispriced are damaging to their holders’ balance sheets. Its much more accurate to think about these not as assets that are toxic — but as pricing that is toxic.

EXAMPLE 1: Bank A has $ 22 billion of mortgages on their books at 100 cents on the dollar,
– but we have since learned that: a) 7% percent are 30 days late; b) 12% are delinquent (60 days past due); c) 6% of these mortgages have defaulted and are in foreclosure;

These assets are certainly not worth nothing — but neither are they worth 100 cents on the dollar. They are considered toxic because there is a huge billion dollar write-down coming.

EXAMPLE 2: Bank A sells these assets to Private Equity firm Z for 46 cents on the dollar.
After the defaults and foreclosure writedowns, Bank Z calculates it is worth 67 cents on the dollar.

Not Toxic!

Same assets, different pricing, different outcome.

The toxicity is a function of pricing — not the assets themselves.

Here’s a fascinating interview on CNBC with Jim Rickards where he discusses what the Fed is trying to do with a gradual decline in the US Dollar.

Via Zero Hedge.

Here’s a quick blurb from the latest Hussman Weekly Commentary…

With mortgage delinquencies and foreclosures still pushing new records, and little reason from employment data (and particularly temporary hiring) to suggest a turnaround in job creation, it appears very likely that we will observe further deterioration in the balance sheets of major financials over the coming quarters. My impression is that significant balance sheet losses are already mounting unreported (but don’t show up in gleeful “operating profits” because of weakened mark-to-market rules earlier this year). Eventually, push will come to shove, but it’s not clear when, so it’s not particularly useful to sit at the edge of one’s seat waiting for the other shoe to drop. It might very well take until next year. In any event, the likelihood is strong in my view that the credit crisis is not over. I believe it is a large mistake to treat current economic conditions as if we are in a typical post-war economic recovery.

Two very important points… we’re not out of the woods yet, and it may take a loooong time for the next shoe to drop.

This should put things in perspective…

To try to exorcise the Great De- pression, President Herbert Hoover deployed fiscal and monetary stimulus equivalent to 8.3% of gross domestic product (i.e., GDP for 1933, the year the Depression officially ended). To banish the demons of 2008-9, successive administrations have spent, or encouraged to be printed, the equiva- lent to 28.9% of GDP. A macroeconomist from Mars, judging by these data alone, would never guess how much more severe was that depression than this recession. The decline in real GDP from August 1929 to March 1933 amounted to 27%; that from December 2007 to date, just 1.8% (“just 1.8%” is the phrase to use if one is still employed). So for a slump 1/15th as severe as the Depression, our 21st century economy doctors have admin- istered a course of treatment more than three times as costly.

From Grant’s Interest Rate Observer.

I was just reviewing an old post on liquidity analysis, and I thought it would be worth re-visiting the topic with some updated graphs.

First, the context… from that post back in October 2006:

…there is a 4 step hierarchy in terms of what drives markets. The first step is liquidity, then flow of funds, sentiment, and microstructure indicators (i.e., microeconomics or technical analysis). The basic idea is that everything flows from liquidity, and that liquidity is the largest of all influencers. The liquidity environment (expansion or contraction) is the mother-trend and is the “rising tide that raises all ships” when expanding.

…A falling value on the chart of the yield-spread indicates liquidity expansion as the yield on the 10 year gets closer and closer to the 3 month. Inversion occurs when the value on the StockCharts graph is below 1.0. A rising value indicates liquidity contraction.

Here were the two charts presented in that post:

Now, on to the current situation. Suffice it to say, we’ve experienced quite a liquidity contraction, with interest rates dropping like crazy.

Let’s first look at the last 20 or so years… (click for detail)

One quick note — the post in 2006 was written with yield spread inversion in mind. As we can plainly see, that inversion did not last long (6 months?), and the resulting rise in the yield spread obviously corresponds to the vanishing liquidity that we have endured since then.

It’s very interesting to note that the current spread between the 10 year and 3 month yields is back up to the same approximate levels as in 1991 as well as in 2001-2004, certainly both times of economic stress. Is this a natural stopping point for the yield spread? I’m not sure, but it will be interesting to watch. An argument could certainly be made that we have gone as far as we are likely to go in liquidity contraction, if things hold to the norms of the past two decades. (Note that any good statistician will tell you a sample size of 2 means nothing…)

Just as when the yield curve was inverted, it is important to wait for evidence of a trend change before passing any final judgement.

Nice animated, graphical work over at Tip Strategies to cover unemployment across the US over the last few years…

It’s worth revisiting the inflation vs. deflation argument as things have been changing quite a bit over the last few months. Below is the chart of TIP:TLT that is my measure of inflation expectations. Going into the end of 2008, we saw a rather significant deflation scare. Anecdotal evidence abounds for prices and wages falling, and indeed it may be more than just a scare.

You might notice that the ratio has rebounded strongly in 2009, indicating that the investing masses may have a relative preference for TIPs over normal bonds. Despite the message the market is sending (as observed by the ratio), I haven’t heard much rumbling about inflation, except from the contrarian camp.

The real question is whether we’re returning to a “normal” expectation of inflation, or if people are just not as convinced about deflation as they were during the crash of 08.

Obviously time will tell, but if the ratio were to reverse strongly, that would be a good indication of another deflation scare. Likewise, it will be interesting to see where the new trading range is as the market figures out the “new normal”.

Hear that giant crashing sound? That was the sound of the US Dollar dropping 2.5% today when the Fed announced it will be buying treasuries.

Here’s the 30 minute chart. I’ll let you guess when the FOMC meeting was:

That’s a big single-day move, sure to be felt like an earthquake all around the world… let the race of currency devaluation begin continue!