bizzXceleration: Performance, Value and Profit

Economic Outlook 

Recession now certain Even before the latest squeeze in the credit markets, the U.S. economy had slipped into what could be a relatively lengthy recession, economists say. The latest data, covering activity in August and September, make it all but certain that the academic economists will eventually declare that the economy is in a recession.  The big economic forecasting firms are in the process of updating their forecasts following the release of key data on consumer spending. While the final numbers aren't available yet, forecasters say it doesn't look good.  The economy seems to be on the "edge of the abyss," said Joel Prakken, chairman of Macroeconomic Advisers, which will update its forecast on Friday. "Anyone who's wondering if there's a recession should stop wondering," said Nigel Gault, U.S. economist for Global Insight, which will release its updated forecast on Monday. "The recent data were deteriorating sharply" even before factoring in the latest impact of the credit squeeze. Global Insight doesn't think the recovery will be quick or powerful. The economy will likely contract for three quarters and then show weak growth in the second quarter next year.If the recession lasts from December 2007 until April 2009, as Gault suspects it will, it would be the longest since the Great Depression. And the recovery, when it comes, won't feel anything like a boom. Goldman Sachs Forecasts "Deeper" Recession  

• Estimating PCE Growth for Q3 2008  But in general, the two month estimate is pretty accurate. Maybe September was exceptionally strong (very unlikely from anecdotal evidence), or maybe July and August will be revised upwards, but the two month estimate suggests real PCE will decline in Q3 by about 2.4% (annual rate). Since PCE accounts for about 71% of GDP, this also suggests the change in real GDP in Q3 might be negative. This depends on exports and changes in inventories (investment will be weak).If accurate, this will be the first decline in PCE since Q4 1991. This is strong evidence that the indefatigable U.S. consumer is finally throwing in the towel.
• Be Afraid, Very Afraid: Five Things to Know About the Economy

Payrolls in U.S. Fell 159,000 in September, Biggest Decline in Five Years The U.S. lost the most jobs in five years in September and earnings rose less than forecast as the credit crisis deepened the economic slowdown. Payrolls fell by 159,000, more than anticipated, after a 73,000 decline in August, the Labor Department said today in Washington. The jobless rate, the last one reported before the presidential election, remained at 6.1 percent. Hours worked reached the lowest level since records began in 1964. The world's largest economy may be headed for bigger job losses as the worst financial meltdown since the Great Depression causes consumers and companies to retrench. A sinking labor market and rising borrowing costs raise the odds Federal Reserve policy makers will cut interest rates by their Oct. 29 meeting. ``The financial panic is a body blow to business confidence, and companies are now battening down the hatches,'' Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania, said before the report. ``We're in store for very sizable job losses across many industries. A rate cut by the Fed could come before the next meeting.'' U.S. Payrolls Plunge in Sign Economy May Enter Worst Recession in 25 Years

Managing the Lizard Brain: Beyond Crisis and Kabukit to Realities Not sure about you but re-fighting Stalingrad and watching the Kabuki dancing of the political poseurs is wearing on my nerves. Call it the triumph of the lizard-brained. That's not a pejorative btw but a technically accurate description of how our brains are wired. Instead we'd like to remind you that beyond today's credit crisis du jour are a host of real economic problems, including a Housing market that has at least two years before recovery from excess and mounting inventories. And a real economy that we warned sometime back was in an accelerating downturn and was now crossing the tipping point all on it's own. (Be Afraid, Very Afraid: Five Things to Know About the Economy) Summarized in the accompanying table which dates from around Feb (we think). (Filtering the Non-Linearities: Sorting the Risk Factors) Take a minute and read it because you'll notice that there's a lot still qued up to be worked thru. A lot indeed. The point here is not to celebrate my own prescience but to highlight the fact that that the machinery available here allows one to be prescient within divine gifts of insight. So instead we're going to focus on recent economics news, which you'll find summarized and excerpted after the break.

Gross domestic income and recessions Measures of employment growth and the unemployment rate seem to be signaling pretty strongly that the U.S. is already in a recession, whereas the GDP numbers do not. Which should we believe? Given that one can reconcile the employment and GDP inferences entirely on the basis of the known numerical value for the statistical discrepancy in the GDP numbers, it seems like a pretty clear call to me-- the U.S. economy is currently in a recession which likely began in the fourth quarter of last year. There's an important implication of this for the ongoing discussion of the current financial turmoil. The U.S. is currently in a recession, and events of the last two weeks are sure to make things worse for the next few months, even if we had some policy to bring immediate stability to financial markets. That is water under the bridge at this point. The purpose of the Paulson-Dodd proposals is thus not to prevent the economy from going into recession. The purpose is to prevent the recession from turning into a severe contraction. Last Quarter's Fundamentals..., Gross domestic income and recessions, Real GDP likely fell in Q3

Wheels  ON: Post  Rescue  Challenges

The Bailout: What It Means for You The $700 billion rescue bill that Congress finally passed will limit panic in the markets, since it gives the government vast new authority to take over sclerotic securities that have clogged the credit system and already brought down some of America's biggest companies. With the feds stepping into the bloodbath, the hemorrhaging should stop. But the economy is still in precarious shape, and unrealistic expectations about the bailout could end up disappointing consumers hoping for some kind of immediate relief. What You Need to Know About the Financial-Rescue Plan Bush Signed Into Law

• Political Kabuki: It's NOT a Bailout, It's Your Life !
• Kabuki Wheels Fall Off Wagon: Time to Quite Fing Around
• The People's Choices: Rescue vs Revenge

Libor Mystifies, Frightens Americans as a Michigan Mayor Reads `Doomsday' Americans are getting a crash course as a once obscure acronym weighs on the economy. In interviews across the country, oil workers, ministers, bank managers and politicians said they were baffled by the London interbank offered rate or fearful of its surge this week. They agreed Libor was important, even if they couldn't put their finger on why. Libor, set every morning in London, is what banks pay to borrow money from each other. That in turn determines prices for financial contracts valued at $393 trillion as of Dec. 31, 2007, or $60,000 for every person in the world, and helps set consumer interest rates on everything from home loans to credit cards. In the past week, as governments in Europe rescued five banks and the U.S. debated a bailout, the cost of one-month bank loans in euros and overnight dollar loans soared to records. In practice, that means banks are hoarding cash, raising borrowing costs and slowing economies worldwide. Today's three-month Libor for loans in dollars jumped to 4.33 percent. Still, explaining Libor can be a challenge. Explaining the LIBOR

• Understanding the TED spread

Credit Crisis, Companies, and the Economic Outlook New Greenwich Associates survey out on how credit market problems are hitting companies of all sizes, both in terms of their ability to get capital and in their economic outlook: Forty-five percent of large U.S. companies say their access to commercial paper markets has decreased as a result of the current market turmoil. More than 70% of companies say pricing on commercial paper programs has increased, including 22% that report their pricing has increased “significantly.” Forty-three percent of companies with more than $5 billion in annual sales say their access to commercial paper has been reduced, and among companies with annual sales of $500-$999 million, that share jumps to approximately two thirds. Almost a quarter of U.S. companies say these historic shifts in credit conditions have increased their needs for credit to fund ongoing operations. Smaller companies are feeling the pinch the most. One third of companies with annual sales of $500-$999 million say market turbulence has increased their need for operational funding. Among the industries with the highest proportion of companies saying they’ve experienced an increased need for operational funding are consumer goods (36%), industrial/transportation (28%) and financial institutions (26%). And then on the economic outlook: Only 4% of companies think the economy will turn positive in the next six months; 47% expect the slowdown to last for 18 months or longer. Not a single company with annual sales of less than $1 billion thinks there’s any possibility of an economic rebound in the next six months. Mid-sized companies are especially gloomy in their outlook. Among companies with annual sales of $1-$5 billion, nearly 50% say the economy will not begin to recover for at least the next 18 months. Demand for the funding of capital expenditures is slowing. Sixteen percent of U.S. companies — including a quarter of consumer products companies and almost 25% of natural resource companies — say current market conditions have led to a decrease in their need for cap-ex financing.

• Credit Default Swaps Reflect Fear, Not Reality, Industry Executives Say

Blockages in the money markets  ANY good tradesman will tell you the importance of the bits of a house that you cannot see. Never mind the new kitchen: what about the rafters, the wiring and the pipes? So it is with financial markets. The stockmarkets are the most visible: as they soar or swoon, the headline-writers get to work. The money markets, however, are the plumbing of the system. Normally, they function efficiently and unseen, allowing investment institutions, companies and banks to lend and borrow trillions of dollars for up to a year at a time. They are only noticed when they go wrong. And, like plumbing, when they do get blocked, they make an almighty stink. At the moment, these markets are well and truly bunged up. In the words of Michael Hartnett, a strategist at Merrill Lynch, “the global interbank market is effectively closed.” The equivalent of a run on banks has been taking place, without the queues of depositors seen outside Northern Rock, a British mortgage bank, last year. This stealthy run has been led by institutional investors and by banks themselves. Many banks have had to be rescued by rivals or the state. This week the Irish government felt compelled to guarantee the deposits and some other liabilities of the country’s six largest banks.

Treasurers Struggle to Keep Credit Lines as Banks Play `Hardball' on Loans Almost 100 U.S. corporate treasurers gathered for an emergency conference call yesterday to warn each other that banks are using any excuse to charge more to renew lines of credit. ``Capital is fleeing to safety,'' said Edward E. Liebert, treasurer of Rohm & Haas Co., who took part in the 90-minute call organized by the National Association of Corporate Treasurers. ``Interbank lending is not free-flowing any more,'' said Liebert, 56, chairman of the Reston, Virginia-based trade group. One bank charged a participant in the call 80 basis points to renew a routine $25 million credit line, according to Liebert, who wouldn't identify the speaker or the company. Rohm & Haas, based in Philadelphia and rated BBB by Standard & Poor's, is paying 8 basis points for a $750 million revolving line of credit provided by 13 banks, the treasurer said. A basis point is 0.01 percentage point. As the U.S. House of Representatives prepares to vote on a $700 billion bailout bill passed by the Senate, global credit markets are being squeezed by banks afraid to lend to each other and to even some investment-grade corporate clients. Treasurers are struggling to keep credit lines open so they can pay employees, fund pension benefits and purchase raw materials. ``The banks are really starting to play hardball,'' said Jeff Wallace, managing partner at Greenwich Treasury Advisors, a financial consultant in Boulder, Colorado. ``They don't want to give out any more money to people because they don't have enough capital.''

Bad credit-card debt could be next shot to rip through economy Credit-card debt is on the brink of imploding and will be the next storm to hit the fragile finance industry, an investment research firm predicted this week. According to Innovest StrategicValue Advisors, banks will charge off $18.6 billion in delinquent credit-card accounts in the first quarter of 2009 and $96 billion in all of 2009, more than double the research firm's forecast for all of this year.  Innovest projects that amount would be high enough to damage some of the biggest card issuers. Credit-card charge-offs are "defying gravity" when compared with the problems in the mortgage market, according to Gregory Larkin, senior banking analyst for Innovest. But that will change as they catch up with mortgage charge-offs, which have spiked eightfold since the third quarter of 2007. "If history is any indicator, there should be an equivalent surge of credit-card charge-offs very soon," he said, though he concedes that an eightfold increase would be very aggressive. Comparatively, charge-offs reached $4.2 billion in the first quarter of this year and $3.2 billion in the same period a year before, according to the Federal Reserve, which only reports non-securitized debt. Innovest's projections include all credit-card debt, which the firm believes is double what the Federal Reserve reports. For all of 2007, charge-offs tallied $26.6 billion, according to Innovest's calculations, and the firm estimates they will reach $41.5 billion at the end of this year. The jump in credit-card charge-offs is linked in part to the credit crisis now in play. As banks have tightened lending standards, they have mostly done away with the once-popular roll-over options -- usually at 0% introductory rates -- that allowed borrowers with delinquent accounts to get new cards elsewhere. Larkin believes all that bad credit is going to surface quickly and could have a similar impact as the mortgage crisis has had on banking.

Politics, Choices and Consequences 

Animal Instincts: Main Street Seeks Revenge on Wall Street The outrage expressed by many so-called Main Street folks over the proposed Wall Street bailout is based on more than a sense of injustice. It's about revenge, a basic animal instinct shared by humans, chimpanzees and even blue-footed boobies. And Washington politicians would be wise to listen up and stick some get-back-at-'em clauses into the bailout bill if they hope to get the support of the average American, says one behavioral economist who studies these things. In phone calls made by constituents to politicians, as well as e-mails to news organizations and other media, the public has expressed a preference for a package that helps consumers and homeowners without assisting fat cats on Wall Street. In fact, a Pew Research Center survey conducted Sept. 27 through Sept. 29 found that nearly 70 percent of Americans say they feel angry about the government's plan, and half admit they are scared. President Bush and other leaders who support the bailout warn, however, that if financial institutions are not propped up quickly and significantly with public money, the average American will pay the price. Bring it on, many people seem to be saying. Dan Ariely would agree. "People are willing to lose money to get those people [on Wall Street] to suffer" because the corporate financial leaders have violated a social contract, says Ariely, a behavioral economist at Duke University. "We need to include revenge in the bill." The bill should also include a code of punishment for exacting revenge for future financial misdeeds, Ariely said last night on "Marketplace," a radio program produced and distributed by American Public Media. However, psychologist David Schroeder of the University of Arkansas, Fayetteville, doesn't think revenge is technically the right word for what the public seeks, because it implies an urge to make others suffer at whatever cost. The public wants retribution, he says, for what is seen as a violation of the rules of the game, one they put their trust in. "Retribution involves a punitive component," Schroeder said, "and we're hoping that's going to deter these people from doing it again and we'll get them to abide by the rules in the future."

House opposition wilts  As the final high stakes vote on the bailout bill approaches Friday, Cummings is not alone among lawmakers who have found solid reasons to reconsider their vote. Whether it's the "Obama factor," or the fact that billions in new tax incentives have been added to the bailout bill, it's becoming clear that opposition is wilting to the $700 billion financial rescue plan just in time for a second House vote on Friday. After a blitz of last-minute lobbying, Republicans and the Bush administration are hoping to get in the neighborhood of 80 to 85 GOP votes on the bailout bill after garnering only 65 on Monday. And Democrats are hoping to build slightly on the 140 lawmakers who supported the bill earlier this week. The outcome still hangs on the prerogatives of a dozen or so wavering lawmakers in both parties, but congressional leaders are “cautiously optimistic” about the outcome Friday even after watching their rank and file sink the initial bill on Monday in a public revolt that shook financial markets around the world. Thursday brought another round of public – and private – reversals, with Georgia Rep. John Lewis, a prominent member of the Congressional Black Caucus, telling colleagues at a closed-door meeting that he would support the bailout plan, according to people present – Lewis wouldn’t confirm as he left the meeting, but said, “Just watch the board.” Republicans, from retiring Minnesota Rep. Jim Ramstad to Tennessee Rep. Zach Wamp, and Democrats, from Nevada Rep. Shelley Berkley to Missouri Rep. Emanuel Cleaver, all declared on Thursday they would support the current bill, according to various news sources. It's important to note that nothing is certain until the gavel falls Friday, so none of these public or private declaration means a thing until that point.

Buffett: My fix for the economy Warren Buffett suggested Thursday that the U.S. Treasury team with private investors to buy the distressed mortgage assets at the center of the controversial $700 billion Wall Street bailout, and said the price tag of the rescue plan may have to rise. Buffett, the chairman and CEO of Berkshire Hathaway (BRK.A), called the problems facing world markets "unprecedented" and warned of a "disaster" if Congress does not move faster to shore up the economy. "We had an economic Pearl Harbor hit," he said during an appearance at FORTUNE's Most Powerful Women Summit in Carlsbad, Calif. "For a couple of weeks we've been arguing about who's at fault [and] fooling around while things have gotten a lot worse." Buffett said the bill isn't perfect, but it's a crucial step in the right direction. He then warned it will take a while to work and that the economy is going to struggle even with its passage. Buffett didn't estimate how much more money would be needed to buy enough toxic mortgage investments in order to create a more stable market and get credit flowing again. But he described a plan he thought of Thursday morning on the way to the Summit that would allow Treasury and private investors to buy assets together. He said his proposal would kickstart demand for mortgage-backed securities, help find a market price for these troubled assets and make it more likely that taxpayers would be made whole or even come out ahead in the bailout. Under Buffett's plan, Treasury would lend hedge funds, Wall Street firms or any other investors 80% of the price for distressed assets. Investors would benefit from borrowing at lower rates available to the Treasury. But the government would get first claim on the sale of those assets, which means it would get its loan back plus interest and possibly turn a profit. Only then would investors see a penny. "Now you have someone with 20% skin in the game," explained Buffett. "Believe me, I won't be overpaying if I'm buying with that kind of leverage. And you have someone [the investors] to manage the assets to the extent they need to be managed." Buffett also noted that the presence of the government in the transactions would raise the price of assets above the absolute firesale levels for which they could now be sold. That would benefit the banks trying to unload them.Bailout: Will it work?
Senate Rescue Plan Vote [10-02-08 10:10 AM] Professor Jeffrey Frankel, Kennedy school of government, Harvard University, talks to BNN about the U.S. government bailout.