Unemployment in the US: who's to blame?

In a survey of people who have lost their jobs, unemployed Americans apportioned the blame for the high unemployment rate as follows:

26% -- President Bush

12% -- banks

8% -- jobs going overseas

8% -- politicians

3% -- President Obama

That 8% of the unemployed blame job flight is bad news for free trade. See the article on the impact of unemployment in the following link:

www.nytimes.com/2009/12/15/us/15poll.html?th&emc=th

Mexico's share of US imports picks up

In the first ten months of 2009, Mexico's exports accounted for 11.2% of US imports, a percentage point more than in the same period of 2008. China's share rose 3.5 percentage points, to 19.1%.

The US imported more vehicles and autoparts to the US (by value) in the first ten months of this year than any other country: nearly one out of every four dollars (23.9%) spent by Americans on imported vehicles and autoparts went to Mexico. Canada was close on Mexico's heels (US$28.2 billion compared to Mexico's US$29.5 billion), followed by Japan (US$25.9 billion). More than two-thirds (67.8%) of US vehicle and autoparts imports came from the three countries in the first ten months of 2009.

Mexico's exports to the US are heavily tilted towards autoparts, which are almost four times as large as the value of exported vehicles. Japan was the largest exporter of cars (US$18.2 billion), followed by Canada (US$17.4 billion), Germany (US$8.5 billion), with Mexico in fourth place (US$7.5 billion).

Changes...

Today President Calderon nominated Finance Minister Agustin Carstens to replace Guillermo Ortiz, whose term as Governor of the central bank (Banxico), ends on December 31. Carstens' nomination was well received.

Ernesto Codero, who was head of Sedesol (the Ministry of Social Development) until today, will replace Carstens in Hacienda. There's the rub. The President knows Cordero well but the markets don't.

Furthermore, putting Hacienda in the hands of a man so closely identified with the PAN and the President virtually ensures that the fiscal reform on tap for 2010 will be dead on arrival when it gets to Congress.

Disinvestment

For the first time in some thirty years (the second quarter of 1967), there was a US$0.64 billion OUTFLOW of direct foreign investment (DFI) in the third quarter of this year. Banco de Mexico, the central bank, tells us it was the result of a single company's repatriation of capital. New DFI was negative to the tune of US$1.06 billion between July and September; reinvested profits totaled US$0.07 billion; and parent companies extended US$0.34 billion in debt to their subsidiaries.

Another figure in the capital account -- the portfolio investment number -- was disturbing. Foreigners increased their net position in Mexican equities and fixed income obligations by US$4.34 billion in the third quarter. The inflow been larger in only four quarters since 1989, when portfolio investment was first broken out. Those quarters were: the first and last quarters of 1993 (US$4.99 billion and US$6.72 billion, respectively); the fourth quarter of 1994 (US$4.93 billion); and the first quarter of 2006 (US$4.34 billion).

Given the magnitude of the portfolio investment in the third quarter, is the strength of the peso a surprise? However, portfolio investment is a shaky base upon which to rely...

How much direct foreign investment has there been in Mexico this year?

When the central bank published the balance of payments statistics for the second quarter almost three months ago, it reported that direct foreign investment (DFI) totaled US$9.98 billion in the first six months of the year. Now, the Ministry of the Economy tells us that DFI in the first nine months of 2009 totaled US$9.75 billion.

Was there an outflow of DFI in the third quarter? Was DFI "overcounted" or double counted in the first part of the year?

Remember what a surprise the second quarter numbers brought? In May, DFI in the first quarter was reported to be US$2.66 billion. Three months later, when the second quarter numbers were published, DFI in the first quarter was revised: what had been US$2.66 billion more than doubled, to US$5.53 billion. Will the third quarter figures contain downward revisions for the first half of the year?

Here's the link to a concise analysis by the governor of Mexico's central bank, Guillermo Ortiz, of the causes and consquences of the crisis, along with his assessment of some of the measures proposed to prevent its repetition.

www.banxico.org.mx/publicaciones-y-discursos/discursos-y-presentaciones/discursos/%7B6D43C45D-EB35-C606-5CDC-F172DEEDCCEE%7D.pdf

Politics Makes Strange Bedfellows

After PRI Senator Manlio Fabio Beltrones' break with his party's position in favor of President Calderon's modified Income Law (LIF), it might be surprising to see Beltrones making common cause with the PAN on the Expenditures Law (PEF). The answer to the riddle is to be found in the distribution of expenditures between the federal government and the states.

PRI governors want the states to gain more control over spending. The PAN wants the present tilt conserved. The Oportunidades program is a battleground. Had the Administration's proposed 2% "contribution to combat poverty" been approved, some of the funds raised would have gone to Oportunidades, an effective program administered by Sedesol. As it turns out, the trade-off the PRI has presented the PAN is either to reduce the proposed funding for Oportunidades or allow the states to administer the program. According to news reports, the PAN has opted for the former.

By law, the PEF has to be approved by November 15. Congress does have the option to extend the deadline to December 31. What happens if Congress approves a budget which President Calderon vetos? If Congress does not pass a new budget, one acceptable to the President, by December 31, the 2008 budget will remain in force.

Stock Market Returns in the US

Here's an interesting fact....

Annual real returns (including dividends) on the S&P 500 under the previous four US presidents are as follows:

Reagan 10.08%
Bush I 10.16%
Clinton 14.35%
Bush II - 5.81%

Pemex's investments: in or out of the budget?

This year, Pemex's investments are included in the public sector finances, which explains why we've seen increases on the order of 75% in real terms in public sector investments at the same time that companies complain that the infrastructure program hasn't taken off. However, the section on expenditures in the 173 page "Perspectives and Economic Agenda for 2010-2015" document that complemented the 2010 budget presented to Congress last night consistently cites expenditures excluding Pemex's investments.

Net: Read the definitions closely. The government includes Pemex's investments when it wants to emphasize that it's implementing an expansionary fiscal policy. When the deficit will be uncomfortably large, as is the case in 2010, the numbers the government presents excludes investments by Pemex. Voila! A public sector borrowing requirement of about 4% of GDP is a deficit equal to 0.5% of GDP. Both statements are true: the former includes borrowing for Pidiregas and Pemex's investments; the latter does not.

Consistency?

The contrast between President Calderon's third Informe and the budget proposal presented to Congress six days later is striking. The 2010 budget proposal combines higher taxes and flashy expenditure cuts that don't attack the root of the problem with a deficit -- hardly a signficant reorientation of the public sector finances or the dramatic call for action of the Informe.

President Calderon laid out his Administration's "top ten" priorities for the remainder of his six-year term yesteray in his third Informe. It's clear he's aware of what needs to be done to boost Mexico's sustainable long-term growth rate. Can he do it?

Following is Banamex's summary of the 10 points.

1. Concentrar la fuerza y recursos del Estado para combatir la pobreza;
2. Universalizar la cobertura de servicios de salud en el ámbito nacional;
3. Promover una educación de calidad para garantizar una salida definitiva de la pobreza;
4. Llevar a cabo una profunda reforma de la hacienda pública que sustituya los decrecientes ingresos petroleros con fuentes alternativas de ingreso, que racionalice el gasto, amplíe la base gravable de manera sustentable y combata la evasión fiscal;
5. Reformar la estructura de la economía nacional para volverla más competitiva y fortalecer su capacidad generadora de empleo. Esto implica emprender una profunda modernización de las empresas del sector energético, que ya requieren una segunda generación de reformas y mayor firmeza para actuar contra intereses corporativos;
6. Reformar también el sector telecomunicaciones para hacer realidad la convergencia y abrir paso a una mayor competencia;
7. Modernizar el marco legal del empleo para promover una mayor productividad sin afectar derechos adquiridos de los trabajadores;
8. Desarrollar una reforma regulatoria de fondo para que el gobierno tenga una regulación base cero, que elimine costos de transacción tanto para los ciudadanos cuanto para las empresas;
9. Profundizar y ampliar la lucha contra el crimen organizado mediante el fortalecimiento del Estado de derecho pero también apelando a la participación coordinada de ciudadanos y gobiernos estatales;
10. Emprender una nueva reforma del sistema político para pasar del objetivo de “sufragio efectivo” a otro de “democracia efectiva”, donde la pluralidad no implique parálisis.

Income Distribution in the US

Here's the link to a study on the evolution of income distribution in the US. 2007 was a good year for everyone, especially for the super rich, the top 0.01% of the income distribution (almost 15,000 families whose income was at least US$11.5 million).

http://elsa.berkeley.edu/~saez/saez-UStopincomes-2007.pdf

PRI redux

Since 1997, the president's party has lost the mid-term elections. This year was no exception. President Calderon's personal popularity didn't translate into a vote for the PAN.

The magnitude of the PRI's victory was startling. The PRI not only is expected to more than double its number of seats (from 106 to 233-237), it won five of the six gubernatorial races. The PRI's gains came at the expense of the PRD, which lost 55 seats, and the PAN, which lost 64 seats. Although the Greens picked up 4 seats, the other small parties lost 17.

The correlation of forces in the new Chamber of Deputies will be radically different. The PRI replaces the PAN as the largest single party. If the PRI can count on the votes of the Greens, it will have an absolute majority. The PAN will not even have the votes to sustain a presidential veto in the Chamber, which controls the budget. The election results boot the PRD out if its second force" slot into a distant third, with half the number of seats (72) as the PAN's 143.

Abstention was high -- 55.3%. Three out of five Mexicans (60.9%) opted out, if those voters who cast blank ballots are included. Almost as many Mexicans chose to cast a blank ballot (5.6%) as voted for the PT and Convergencia combined (6.2%).

Will the PRI's victory make the passage of the much-needed reforms more or less likely? That depends on how the party's leaders read the costs and benefits of enacting reforms in the 2012 elections. If the PRI believes that voters will blame Calderon and the PAN for unpopular reforms such as a levying value-added tax on food and medicines, then we could see the fiscal reform for which technocrats have waited so long. Otherwise, we'll be in a holding pattern until Mexico's next president takes office 3 1/2 years from now.

Are Cabinet changes in the offing? Probably, considering the PAN's dismal performance at the ballot box and that pre-election polls gave the Cabinet only a 35% approval rating.

1937, redux?

The years of the Great Depression weren't uniformly depressing in the US. An interesting article looking at the evolution of the US economy between 1933 and 1937...

http://www.economist.com/businessfinance/displaystory.cfm?story_id=13856176.

Of polls and politics...

President Calderon continues to receive good marks for his performance: the results of a poll carried out in the last week of May indicate that 52% of Mexicans approved of how the president is handling his job while 40% did not. The same cannot be said of his Cabinet: only 35% approved of the Cabinet’s performance; over half – 52% -- did not. Still, the President’s approval ratings are down significantly in the last year: in May 2008, a hefty two-thirds of Mexicans approved the President’s performance; only 29% did not.

A result with disturbing implications for Mexico’s democracy is that the credibility of the Federal Electoral Institute (Instituto Federal Electoral or IFE) is at its lowest point ever. The IFE’s credibility was ten percentage points less than in August of 2006, when Mexico City’s Paseo de la Reforma was filled with the tents of protestors camping out on the street to demonstrate against the “fraud” committed by the IFE when announced that Felipe Calderon had more votes than Andres Manuel Lopez Obrador.

How people intend to cast their ballot on July 5 changed between November 2008 and the end of May and June 2009. The percentage of respondents who said they would vote for the PAN rose from 24% last November to 31%a month ago. The PRI’s share dipped two percentage points (from 31% to 29%). Only 12% of people polled intended to vote for the PRD, a dramatic drop from 2000 when that party’s candidate was nearly elected president.

The parties are attracting their voto duro, their “hard vote” of committed followers. The PAN seems to be best at expanding its reach. In November, three out of ten voters were “undecided”. At the end of May, the percentage of “undecided” voters fell to 23%. The seven percentage point drop in “undecideds” matched the seven percentage point increase in the intended vote for the PAN, suggesting that as voters made up their minds, they opted for the PAN.

Things changed a bit in June, according to a poll carried out between the 25th and 28 th. At the end of May, turnout was expected to be very low -- only 36%. A month later, projected turnout rose to 41%.

Low turnout suggests voters are apathetic and/or disillusioned. In addition there’s a raging debate amongst the intelligentsia about casting a blank ballot (voto nulo) to express dissatisfaction with the political system, the candidates nominated by the parties, the curtailing of the IFE’s autonomy, and the parties’ increasing intervention oversight of the electoral process.

The way ballots are classified and counted makes it hard to distinguish between improperly cast ballots and protest votes, which will undermine the efficacy of the voto nulo campaign. Nonetheless, the campaign seems to have been effective: of those voters who have decided to vote, the percentage saying they would cast a blank ballot, which stood at 3% between November and May, rose to 5% last week.

Low turnout and the voto nulo campaign are warning signals for those concerned about the future of democracy in Mexico. They suggest that the “electoral reform” designed by the parties and passed during this Administration (the political price for other reforms) have not convinced the public.

The PAN holds the largest number of seats in the outgoing Chamber of Deputies – 207. Based on the end-May poll results, GEA predicted that the PAN would pick up seven more seats, making it the largest single party in the new Congress. Last week’s poll results suggest the PAN will end up with 175 seats, 32 less than in the outgoing Congress.

The PRI is poised to be the big winner in the upcoming election. The PRI is expected to more than double the number of seats it holds, from 106 to 212. The latest poll results suggest that the number of seats the PRI is projected to win dipped by only one. With the seats its Green Party allies win, the PRI coalition will be by far the largest force in the Chamber of Deputies.

The big losers will be the PRD and the small parties. The PRD is projected to lose its spot as the second largest party in the Chamber, dropping from 127 seats to 95. However, the PRD has come on strong in the last month. Projections based on the end-May polling results put the number of PRD seats at just 47, which means that in the last month, the party doubled the number of seats it is projected to win.

The small parties, which had 60 seats in the Chamber of Deputies elected in 2006, are likely to have only eighteen in the new Chamber of Deputies. The Green Party (PVEM) and the Workers’ Party (PT) are each projected to capture 4% of the votes of those voters who say they’ve decided how to vote. Last week’s poll gives Convergencia, Nueva Alianza, and the Social Democrats each 1% of the vote of “decided” voters. They are in danger of losing their registrations and the prebends that go with them.

Because all of Mexico’s 128 senators are elected to a six-year term in the same year the president is elected, the extent to which mid-term elections can change the balance of power is limited. Even more than in the US, mid-term elections serve as a gauge of the president and his party’s popularity. However, if the pollsters’ findings accurately captured voters’ intentions and if voters behave as they said they intend to, the PRI will be more important than ever to the success of President Calderon’s legislative proposals.

If you thought Q1 GDP was bad...

The drop in Mexico's headline GDP in the second quarter will exceed the first quarter's 8.2% plunge. The triple whammy -- recession, an adverse Semana Santa effect, and the flu -- ensure that the year over year drop (the way the headline figure is reported) will be greater in the quarter ending this month than in the first three months of the year. We could easily be looking at a 9% drop.
Measured against the previous quarter, however, we might see that the economy has bottomed out. In the third quarter, we'll see both a smaller year over year rate of contraction and an advance against the second quarter.

1st quarter GDP: ouch

Mexico's GDP contracted 8.2% (year over year) in the first quarter. On an annualized basis, that 21.5% -- ouch. The bloodbath was pretty much across the board in the tertiary sector and manufacturing. The worst in each sector were commerce, which contracted 17.2%, and the manufacture of transportation equipment contracted 38.3%.

The second quarter will be about as bad as the first. Things should look better in the second half of the year, in the sense that the contraction won't be as steep.

CEOs: the recipe for success

“Which C.E.O. Characteristics and Abilities Matter?”is the subject of a study by Steven Kaplan, Mark Klebanov and Morten Sorensen. Their conclusion: execution and organizational skills make a CEO successful. Attention to detail, persistence, efficiency, analytic thoroughness and the ability to work long hours mattered more than being good at listening and building teams, or being an enthusiastic colleague and a great communicator.

For a summary of the findings, see:

http://www.nytimes.com/2009/05/19/opinion/19brooks.html?th&emc=th

1995?

2009 won't be 1995 all over again. In some ways, it will be worse.
Between the most recent data that's been published on the Mexican economy (which tells us what was happening three months ago...) and the AH1N1 virus, the contraction this year will be close to the 6.2% nosedive the economy took fourteen years ago.
Why worse? Because even in 1995, not all of the economy contracted. Exports grew, creating jobs and mitigating the economy's fall. This year, exports are plunging and, worse yet, no one expects an export boom next year. The domestic economy hasn't been -- and won't be -- able to complement exports as Mexico's "motor of growth". So, if we don't have export-led growth, we're not likely to have much growth at all.
Deborah Riner

Small is beautiful...

The Obama Administration is undertaking a major policy change with its decision to reverse the Bush Administration's policies on monopolies. The new policy, which will be the subject of a speech by the head of the Justice Department's Antitrust Division at the US Chamber of Commerce on Tuesday, May 12, will initiate a government policy designed to end practices that limit competition. Sectors of the economy that are likey to be affected include: agriculture, energy, health care, technology and telecommunications companies as well as some firms in financial services.

Stress test results are out...

The good news for the 19 US banks (some, like GMAC and Goldmam Sachs), of recent creation) subjected to the stress tests is that they only need to raise US$75 billion in additional capital between them. The 19 hold 2/3 of all deposits in banks in the US.

The bad news is that "Under regulators’ worst-case assumptions, the 19 banks might suffer $600 billion in losses through 2010, on top of the hundreds of billions that have already vaporized in this financial crisis. About 9 percent of all loans might sour — a figure that is even higher than it was during the Great Depression. One in five credit card loans could go unpaid, more than double the typical loss rate. Approximately one in 10 mortgages could sour. " (New York Times, May 8, 2009)

From bad to worse...

It’s too early to say with any certainty how much the outbreak of the new influenza virus, AH1N1, and the measures to control it will accentuate the economic contraction this year but there’s no doubt it will. On May 5, Hacienda advanced an estimate that AH1N1 will cut growth by 0.3 – 0.5 percentage points this year. Other estimates go as high as a full percentage point.

It’s important to put the estimates of the impact of AH1N1 in a broader context: even before the outbreak of AH1N1, economists, public and private, were revising their projections to predict a larger drop in GDP in light of the data that’s been published on the economy’s evolution in the first months of the year. The IGAE, the monthly indicator of economic activity which gives us a preliminary read on GDP, contracted in January and February at rates that can only be described as shocking. Published on April 28, when the uncertainty about the extent and danger posed by AH1N1 was at its height, INEGI reported that February’s IGAE dropped 10.8% (compared to February 2008). The secondary (industrial) sector of the economy plunged 13.2% and the primary sector (agriculture) fell 7.1%. The tertiary (services) sector dropped 9.6%. With the secondary and tertiary sectors accounting for all but 4% of GDP (35% and 63%, respectively), the outlook for the first quarter is bleak indeed: Hacienda is projecting a 7% drop in GDP in the first quarter.

The impact of the AH1N1 influenza virus will show up in the second quarter growth figures, when the growth rate will also suffer from the Semana Santa comparison. (Semana Santa fell in March of 2008 and in April this year.) The first half of this year will be disastrous, in terms of growth.

On April 29, Banco de Mexico (Banxico), the central bank, projected that GDP will fall 3.8% to 4.8% this year – without taking into account the impact of AH1N1. Hacienda is projecting a drop of 3.8% to 4.0% -- pre-AH1N1. The contraction this year should still not be as bad as in 1995, but we’re getting uncomfortably close…

On May 5, Hacienda announced an “anti-epidemic stimulus program”. Of the $18.8 billion, $10.0 billion consists of tax income the government won’t receive and for which the government won’t compensate by cutting other expenditures or raising taxes. The rest – $8.8 billion – is less than 0.1% of GDP.

The “anti-epidemic stimulus program” demonstrates the government’s awareness of the damage AH1N1 is wrecking on the economy. But, as far as mitigating its impact goes, the program’s importance is symbolic.

An unsavory aspect of the bilateral relationship...

"If you wanted to create a system that is basically legal but designed to facilitate gun trafficking, you couldn't have a better system than you have here."
- TOM DIAZ, a researcher with the Violence Project in Washington, on the flow of guns from the United States to Mexican drug cartels. (from the New York Times, April 15, 2009)

Legacy assets and accounting for distress sales...

While it might be true that a rose by any other name smells as sweet, re-naming toxic assets "legacy assets" and changing the accounting treatment for sales of distressed assets seems to have changed the direction of stock markets.

Today, the same day FASB announced three changes in the rules governing how banks account for the value of mortgage securities on their books, the US and Mexican markets rose for the third consecutive day. The changes, which give banks greater discretion in reporting the value of mortgage assets, essentially allow management to value the assets at more than markets are willing to pay.

The IMF brandishes new tools too...

Today, eight days after the IMF approved its new, condition-free loan facility, the Flexible Credit Line, Mexico announced that it will ask the IMF for a US$47 million line of credit, the maximum for which the country is elegible. The renewable credit line, which Mexico can draw on or not as it chooses, has a one year term.

The purpose of the line, equal to 59.5% of Mexico's reserves as of March 27, is to reassure markets that Mexico has plenty of reserves with which to meet its foreign debt obligations.

The Fed's new role: the Mexico variation...

We're seeing an expansion of the Fed's role in the international financial system through the use to which Banco de Mexico (Banxico) is putting its US$30 billion swap agreement with the Fed. Banxico will use the swap line to fund short-term loans to private companies, which will be accessed through banks.

Chapter 9...

"Chapter 11" is the all too familiar shorthand for corporate bankruptcies. A rarity, "Chapter 9", is what US municipalities, like Vallejo, California, invoke when they declare bankruptcy. In Vallejo, the city is using Chapter 9 to rewrite labor contracts.

Jefferson County, Alabama is facing a different problem. The local government bought interest rate swaps which "broke down" last year (presumably, Lehman Brothers was the counterparty), leaving Jefferson County with US$3.2 billion in debt it can't pay and can't refinance. If Jefferson County opts for Chapter 9, it will test whether bonded debt, like labor contracts, can be re-structured when a local government files for bankruptcy. Alabama's governor has written to Treasury and the Fed asking for their help in stretching out the debt in an effort to avoid repudiating it.

State governments in the US defaulted on debt in the mid-nineteenth century, to the chagrin of their foreign creditors. If the financial crisis isn't contained and if the economy doesn't bottom out, it's conceivable that Vallejo won't be the only city to seek Chapter 9 protection.

Financial crisis: how we got here...

The link below takes you to a good explanation of the genesis of the financial crisis. Thank-you, Michael Rock for the link!

The explanation focuses on mortgages. Be sure to add credit card debt, car loans, etc. to get a full picture of the magnitude of the debacle.

http://www.crisisofcredit.com/

US - Mexico relations

Let's hope that Secretary Clinton's visit cools down the rising tempers in the two countries.

Let's hope, too, that the US finally puts a stop to the arms sales that are fuelling the narco-violence. According to the US Bureau of Alcohol, Tobacco,, Firearms and Explosives, a whopping 90% of the guns the Mexican drug cartels use came from the US.

Another mutually beneficial topic to put on the bilateral agenda would be integration of health care in the two countries.

The new wisdom...

The beauty of hindsight can be appreciated in the following link....

http://money.cnn.com/galleries/2009/moneymag/0903/gallery.financial_rules.moneymag/index.html

An interesting -- and overlooked -- fact about housing prices in the US... A 2005 analysis by Yale University economist Robert Shiller (of the Case Shiller index) found that real estate appreciation in real (after inflation) terms has been "unimpressive" since 1890 with two spectacular exceptions. The first was the post-World War II boom and the second began in 1998. Guess we know when it ended...

Secrets are hard to keep...

Irate Senators are demanding the names of the counterparties to the CDO trades that are reponsible for AIG's growing cash needs. The Fed, which had refused to reveal the names of the institutions that would lose big if the CDOs aren't honored, is now considering releasing them.

Meanwhile, a list "from a reliable source" has been leaked to Fortune magazine. The names are:

Société Générale (France)
Goldman Sachs (GS, Fortune 500)
Merrill Lynch International
Deutsche Bank (Germany)
Calyon, Crédit Agricole (France)
UBS (Switzerland)
Barclays (England)
Coral Purchasing, DZ Bank (Germany)
Bank of Montreal (Canada)
Rabobank (the Netherlands)
Royal Bank of Scotland
Bank of America
Wachovia
HSBC (England)
Barclays Global Investors

Relative values...

Citi's share price closed at US$1.03 today, giving the financial group a market capitalization of US$5.5 billion -- less than half what Citi paid for Banamex in 2001...

Bernanke on AIG...

This is what Fed Chairman Ben Bernanke had to say about AIG when he appeared before the Senate Budget Committee:

“If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one." AIG “exploited a huge gap” in the regulatory system: it became a “hedge fund, basically, that was attached to a large and stable insurance company” and made “huge numbers of irresponsible bets.”

Bernanke, a Republican appointed by former President Bush, tacitly endorsed a Keynesian approach: lots of government spending with the trillion dollar deficits that imples are necessary to get through the economic crisis.

A liquidity or a solvency problem?

Calculated Risk has this to say about the Treasury's latest plan to deal with financial institutions' toxic assets, by making low interest, non-recourse loans to private investors to buy bad assets:

"By offering low interest non-recourse loans, these public-private entities can pay a higher than market price for the toxic assets (since there is no downside risk). This amounts to a direct subsidy from the taxpayers to the banks. It is amazing how many different ways they’ve tried to recycle the same bad idea."

And from Tim Duy's Fed Watch:

"For Bernanke and Geithner, there are no bad assets. Only misunderstood assets."

If, as increasingly seems to be the case, for some financial institutions this is a solvency, not a liquidity problem, the solution is not about overpaying for toxic assets.

What's been spent so far

to "smooth the movements of the exchange rate"...

October US$13'096 million
November US$ 1'285 million
December US$ 797 million
January US$ 988 million
February 1-20 US$ 2'307 million

that's US$18'473 million, more than a fifth of Mexico's international reserves on December 31, 2008.

Mexico's balance of payments for 2008

It's out! The annual figures don't look bad, but !ojo! with the fourth quarter numbers. What you see in the fourth -- which is a better guide to the present -- but not in the annual figures are two especially significant changes:

1) Massive outflows of portfolio investment in the fourth quarter. Foreigners fled both equities and money markets.

2) Substantial repatriation of assets held abroad in the fourth quarter, a sharp contrast to the first three quarters when assets held abroad continued to climb.

Bad and getting worse...

At 25, February's consumer confidence reading in the US is the lowest recorded since the inception of the index in 1967.

As bad as things are, consumers only expect them to get worse. Almost half (47%) of people surveyed expect fewer jobs over the next six months; that's up ten percentage points from January's read. Over two-fifths of those surveyed expect business conditions to deteriorate over the next six months, up from last month when 31% expected conditions to worsen.

More on the "N" word...

Alan Greenspan, former chairman of the Federal Reserve: “It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.”

The "N" word...

The idea that nationalization is the most effective way to contain the financial crisis is gaining ground in the US. An editorial in the New York Times today argues that "it looks as if the best way to get from here to there [a sound privately owned banking system] is for some of the banks to spend some time in the government’s hands."

As the financial crisis drags on, the unthinkable is becoming "thinkable".

http://www.nytimes.com/2009/02/22/opinion/22sun1.html?th&emc=th

Banco de Mexico cuts Mexico's reference rate

As expected, the central bank cut the Mexican reference rate this morning. What wasn't expected was that the reduction was only 25 basis points (1/4% point) instead of 50 basis points. Banco de Mexico justified the reduction to 7.5%, arguing that growth is more of a problem than inflation.

The US$787 billion stimulus package

Larry Summers, the White House's chief economic adviser, started out describing the stimulus as “timely, targeted and temporary”. He now describes it as “speedy, substantial and sustained.”

Banks fail, if not all the time, with some regularity

In 2008, 25 banks failed in the US, up from 3 in 2007. So far this year, 13 banks have failed -- 4 last Friday night.

Last year, about US$15 billion -- 4% -- of the assets of foreclosed banks were bad.

What Adam Smith had to say...

"When the profits of trade happen to be greater than ordinary, overtrading becomes a general error." Furthermore, "the rate of profit is always highest in the countries that are going fastest to ruin."

From the head of the IMF...

From the IMF Survey Magazine (February 7, 2009), taken from a speech by the IMF's Managing Director, Dominque Strauss-Kahn:

"The United States and Western Europe could learn from the previous experience of countries like Korea, Malaysia, Thailand, and also Sweden, which set up public resolution agencies, and often recovered a lot of public money."

Sweden's "public resolution agency" nationalized those banks that couldn't make it, cleaned them up, then re-privatized them.

http://www.imf.org/external/pubs/ft/survey/so/2009/NEW020709A.htm

Oops

Treasury Secretary Geithner's long-awaited announcement didn't convince the markets, which see two major stumbling blocks. First, the money pledged isn't enough. Second, just how will the plan's different features be implemented? For example, what will bring private money into the public-private partnership part of the plan?

What's that asset worth? (continued)

The Congressional Oversight Panel, which was set up by Congress to monitor the use of TARP funds (aka, the bank bailout), released a report Last Friday. It concludes that the government overpaid for the equity it received in banks. The Oversight Panel "estimated the Bush Treasury Department spent US$254 billion to buy assets actually worth only $176 billion". That's a US$78 billion gift to stockholders.

What are those assets worth?

Is the question that no one knows what those toxic assets are worth or that they don't like the price?

Way back last July -- before things got ugly and before the government stepped in -- Merrill Lynch sold US$31 billion in securities on its books to Lone Star, a group of private quity funds. Lone Star paid US$0.22 on the dollar. There was more to the deal. Lone Star had to make a down payment equal to 25% of the purchase price but had the right to walk away from the deal if it turned out that the securities were worth less than the agreed price. If Lone Star walked, it would forfeit only the down payment.

Values in the financial sector

When Bank of America and Merrill Lynch inked their deal back in September, BofA agreed to pay US$50 billion in stock for Merrill. The market value of the combined companies then was US$176 billion. Now, it's about US$39 billion. And this, after the US Treasury committed US$20 billion more in capital to BofA a few weeks ago.

Treasury Secretary Geithner should announce the new Administration's strategy for attacking the financial crisis in a few days. The announcement was to be made tomorrow, Monday, February 9, but it looks like it has been postponed until the 10th. It's a very sticky political problem and, as events have demonstrated, there's no guarantee it will end the carnage.

How low can they go?

November auto sales were bad, December's were worse, and January's were just plain horrible.
"The heads of sales analysis for both GM and Ford said that the total industry will end with seasonally-adjusted annual sales rate, or SAAR, below the 10 million mark for the first time in more than 26 years. GM's Mike DiGiovanni said that January will mark the first month on record that auto sales in the United States trailed sales in China."

For comparison's sake, sales between 2005 and 2007 were running about 17 million new vehicles a year.

http://money.cnn.com/2009/02/03/news/companies/auto_sales/index.htm?postversion=2009020314

What is that asset worth?

An example of how an asset might be valued...

"The financial institution that owns the [mortgage backed] bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S.& P. estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors."

So, which price should the government pay (or guarantee) if it opts to buy (or guarantee) loans from banks?

Source of quote: http://www.nytimes.com/2009/02/02/business/economy/02value.html?th&emc=th

Fourth quarter GDP...

US GDP was expected to drop by more than 5% in the fourth quarter. By that measure, the 3.8% fall doesn't look so bad. Don't be lulled into thinking that recovery is in sight anytime soon, though: the Fed's statement at the conclusion of its meetings this week paint a grim picture, both in terms of the level of economic activity and of the success of monetary policy efforts to date.

In Mexico, we won't get the fourth quarter GDP figures for another three weeks. The November IGAE, published two days ago, presages a contraction in the fourth quarter that will pull the 2008 growth rate down from the projected 1.9% to 1.2% - 1.5%. In other words, the Mexican economy fell off the cliff in the fourth quarter of last year.

What FDR faced when he took the oath of office

"In 1933, the United States economy had shrunk by one-third in real terms since 1929. Industrial production had fallen by 40 percent. Unemployment had soared to 25 percent, from 3 percent in 1929."

FDR did not really understand or endorse Keynesian economics. "Yet despite New Deal programs and some aid to the states, total government spending — federal, state and local — as a share of the economy throughout the 1930s remained at just under 20 percent. (Today, total government spending is more than 35 percent, a larger buffer against weakness in the private sector.)" It took World War II for the Keynesian dictates to be put into practice: "By 1942, total government spending as a share of the economy rose to 52 percent, and peaked at nearly 70 percent in 1944, when unemployment fell to 1 percent."

From the New York Times, January 27, 2009

Bankruptcy as a step to solvency

The title of an article in the New York Times, which analyzes why bankruptcy can be the rational choice for debtors. One of the consequences of a credit bubble...

http://www.nytimes.com/2009/01/24/your-money/24cost.html?8mon&emc=ym

netbooks, cloud computing and virtualization

The future of IT, it seems...

http://www.nytimes.com/2009/01/26/technology/26spend.html?th&emc=th

And the single largest shareholder is.....

The US Government is the single largest shareholder in both CitiBank and Bank of America, with 7.8% of equity and 6.0%, respectively. "Nationalization" is a term that's starting to crop up in policy debates in Washington. Here's an article:

http://www.nytimes.com/2009/01/26/business/economy/26banks.html?pagewanted=2&_r=1&th&emc=th

John Rogers's article on bankruptcy in the US and Mexico

Here's the link...

http://docs.google.com/gview?a=v&attid=0.1&thid=11edc00903fac4d7&mt=application%2Fpdf&pli=1

The Swedish Solution

Back in the early 1990's Sweden had a severe financial crisis. The center-right Swedish government nationalized the banks, cleaned them up, then privatized them. According to the New York Times, "Former Swedish officials said that [the US government's failure to acquire voting equity and dilute existing shareholders] was a mistake, for political reasons if nothing else, because owners of bank stocks did so well in the boom years early in the decade."

The story can be found at:
http://www.nytimes.com/2009/01/23/business/worldbusiness/23sweden.html?th&emc=th

China: 2008 ends five years of double-digit growth rates

China's growth rate dropped to 6.8% in the fourth quarter, putting growth for 2008 at 9%. The Chinese authorities are projecting 8% growth this year but economists are skeptical, projecting 5% - 6% growth even with the US$585 billion stimulus package.

What Americans think about the economy

Hilights of the results of a CNN survey...

Only 13 percent think economy will recover within a year
Half of those polled think the economy is in very poor shape
74 percent say economy is most important issue facing the country
Top economic issue among those polled is unemployment

http://edition.cnn.com/2009/POLITICS/01/21/poll.recession/index.html

Bank stocks

You'll find a graph of the evolution of bank stock prices this year at the following link. Let's just say the slope is very steep, with the S&P Bank index down 31% this year.


http://money.cnn.com/2009/01/20/news/companies/banks_stocks/index.htm

Now comes the hard part...

The 44th president of the US took the oath of office a few hours ago. Now, let's see if the Senate approves his candidate for Treasury Secretary, Tim Geithner. His confirmation hearing starts tomorrow (Wednesday, January 21) morning.

President Obama and his team have a lot of work in front of them. Although Congress released the second tranche of the TARP (another US$350 billion), it's not clear how the funds will be used. It is clear that the first tranche didn't produce the desired results.

Three alternatives are receiving a lot of attention: 1) guarantee debt in exchange for warrants (the strategy used with Citibank in late November and with Bank of America last week); 2) buy toxic assets (the original TARP proposal); and 3) create a "bad bank" in which to stuff the toxic assets.

Fobaproa used a combination of capital injections and purchase of bad loans. Let's see if "Fobaproa Americana" ends up doing the same.

Hedge funds: returns were great, until they weren't...

An interesting graphical presentation of the growth and returns of hedge funds since 1998, done by the New York Times...
http://www.nytimes.com/imagepages/2009/01/17/business/20090118_HEDGE_GRAPHIC.html

Want to see what the incoming US President's advisers look like?

Pictures at the following link...

http://www.nytimes.com/packages/html/magazine/2009-inauguration-gallery/index.html?nl=pol&emc=pol

And consumer prices fall for the third consecutive month...

Alas, not in Mexico: it's in the US, where the CPI in 2008 was all of 0.1%. Mexico's inflation, in contrast, was 6.53% last year.

That did not stop Banco de Mexico (Banxico) from cutting the Mexican reference rate 1/2 of a percentage point, from 8.25% to 7.75%, this morning. Banxico hopes/expects (they use that lovely verb, esperar, that has both meanings) that December was the high point for price increases in Mexico. Banxico also points out that the trajectory of the exchange rate can affect that: in other words, if the peso doesn't come back a bit, we'll get more inflation from the depreciation.

And, yes, Virigina, there is still a "pass through" effect. When the peso falls substantially, as it has since October, peso prices rise to compensate partially.

Wouldn't it be nice if prices fell in Mexico too?

The US Bureau of Labor Statistics reports today that:

"The Producer Price Index for Finished Goods fell 1.9 percent in December, seasonallyadjusted. This decrease followed a 2.2-percent decline in November and a 2.8-percentdrop in October. Prices for finished goods other than foods and energy rose 0.2 percentin December compared with a 0.1-percent increase in the preceding month."

Americans spend more of their income on health care than on food -- and the % is rising...

The Post health and science reporter David Brown reports the following in "We All Want Longer, Healthier Lives. But It's Going to Cost Us.

"Americans spend a little less than 10 percent of their income on food, which is down from 25 percent in 1930. We spend twice as much -- 21 percent -- on shelter. Last year, 16 percent of the nation's gross domestic product went for health care. If health care costs grow at its present rate through the first three-quarters of this century, it will consume 38 percent of the GDP by 2075."

The more we learn, the worse it looks

In his remarks in London yesterday, Fed Chairman Bernanke made it clear that the banking system is still in very bad shape. Here's a link to a chart showing how the first US$350 billion of TARP funds have been allocated and the ratio of non-performing loans to cash on hand of the banks that received TARP capital. Ouch.

http://projects.nytimes.com/creditcrisis/recipients/table

Immigration reform is necessary now

From a New York Times editorial today:

"But the United States cannot afford to put immigration on a back burner and merely continue with the existing enforcement regime. The costs are too high for the country’s values. And they are too high for the economy. "

http://www.nytimes.com/2009/01/13/opinion/13tue1.html?th&emc=th

A different twist to the immigration - crime equation

From the New York Times:

"Federal prosecutions of immigration crimes nearly doubled in the last fiscal year, reaching more than 70,000 immigration cases in the 2008 fiscal year, according to federal data compiled by a Syracuse University research group. The emphasis, many federal judges and prosecutors say, has siphoned resources from other crimes, eroded morale among federal lawyers and overloaded the federal court system. Many of those other crimes, including gun trafficking, organized crime and the increasingly violent drug trade, are now routinely referred to state and county officials, who say they often lack the finances or authority to prosecute them effectively."

"United States attorneys on the Southwest border, who handle the bulk of immigration prosecutions, usually decline to prosecute drug suspects with 500 pounds of marijuana or less — about $500,000 to $800,000 worth. "

Here's the full story:
http://www.nytimes.com/2009/01/12/us/12prosecute.html?th&emc=th

Somebody knew about Madoff...

That it took Bernard Madoff's own confession to bring down his Ponzi scheme is especially shocking, given that it was laid out in a memo sent to the SEC in 2005. Read the memo in the following link:

http://www.slideshare.net/hblodget/markopolos-madoff-complaint-presentation/

Happy New Year: may it not be depressing

We're in a new realm of economics. This is what the 2008 Nobel Prize winner in Economics, Paul Krugman, has to say:

"the analysis of John Maynard Keynes, who argued that monetary policy is ineffective under depression conditions and that fiscal policy — large-scale deficit spending by the government — is needed to fight mass unemployment."

Martin Feldstein, Chairman of the Council of Economic Advisers under President Reagan, agrees on the urgent necessity of a large fiscal stimulus. Feldstein wants to see a stimulus of US$200-300 billion a year in each of 2009 and 2010.