2009 Economic Forecasts...what will happen, when?

Billy T,

Sure, the 30-year was suspended on Oct. 31, 2001 and were not re-issued until Oct. 2006. The 10-year note had replaced the bond as the most popular and quoted long term security, and it still is. Well, bonds mature 30 years after issue, barring for one exception I recently came across. Bonds and some notes can have a re-issue one month after the official issue date. So, perhaps Setser was correct when he stated China bought bonds in March. The re-issue bonds have a maturity date 29 years and 11 months after they are auctioned! BTW, the long bond was reinstated in 2006 because of demand from institutional investors and pension funds, mainly.

I will try to offer reasons why you mistaken in your 'dollar collapse' scenario.

 

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Sorry Billy, I hit enter to begin a new paragraph and my posted posted prematurely.

Why would China need to sell bonds in a depressed market? One of the reasons they buy bonds is to keep the RMB at a low exchange rate relative to the dollar. Selling bonds would defeat that purpose, causing the RMB (yuan) to rise. Second, bonds pay a fixed interest twice a year. The bond market does not affect this received interest. Think of it like a stock that you hold that pays dividends. If the value of the stock decreases in a depressed market, say from $80 to $40, but the dividend payments remain the same, would you sell the stock, take a big loss, plus lose your dividend income? IIRC, China receives over $40 billion a year in interest payments from US bonds. They will continue to receive that same interest regardless of the liquidity of the bond itself. Plus, held to maturity, they will get full face value for the bond.

China knows they are at the mercy of the suppliers if they don't have a contract. I'm sure they know of the Arab Oil Embargo that used to punish the US in 1973 for its support of Isreal. If China gets into a dispute with any of those volitile South American countries, the rest of Latin America would be likely to support their neighbors if not forced to honor a contract with China. OK, maybe that is a little far-fetched, but Latin Americans are known to be very emotional when they preceive an injustice against them, real or imagined. Those delivery contracts are only a very small percentage of their reserves and China wanted something in exchange for their loans. I think it is just good business practices, not a policy change of shifting reserves from treasuries to contracts.

I don't know what you are on about here. China is making the loans in dollars, not bonds, and the contracts are a guarantee to deliver at market prices. If the dollar were to lose significant value, Brazil would receive more dollars for the same amount of goods. It is not a hedge bet, China would still lose purchasing power with those devalued dollars and Brazil would not be hurt.

 

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kmguru,

Really, kmguru? Why don't you tell us what can be gleened from a 6-month chart? That the dollar and bonds have fallen in that time frame? I had much rather read a thousand words to gain information than look at a cartoon. Didn't you know that the dollar and US bonds were at all time highs 6 months ago, a huge bubble caused by the equity market collapse and a flight to the safety of cash and treasuries? Didn't you know that the yield on 30-year bonds has averaged between 4.5% and 5.5% for many years, during the "good times"? The bond yield is still below average. Same thing with the dollar, it is near multi-year averages.
Edit: I posted links to charts from FOREX, but the links did not reproduce the time scales necessary to be meaningful.

 

Here is an article, written today, based on a Financial Times article written today. The FT often asks me for a subscription when I try to access their articles, so I took it from my service provider's financial section.

 

They would sell for same reason anyone sells and takes a loss - the expectation that the loss will be greater later if they do not. Now with Treasury bonds and China it is more complex. To sell a bond, at a loss rather than hold to maturity, you must also expect the dollar to decline so much that the face value plus the interest received between now and maturity will not compensate for the lower purchasing power of the dollars given at maturity. (This of course is postulating that the bond issuer will not default, but that is nearly as certain as the sun rising in the US case, so long as the FED and treasury combo can "print dollars.")

Then, as you note, China does not want the RMB to rise in value so long as exports are a major part of GDP or more importantly, employ many Chinese. China is now realizing that even an undervalued Yuan, does not guarantee export markets if they people of those markets are broke. So the CCP is doing everything it can to stimulate less saving and more spending by its population, and more creative / innovative "garage based" industries by its new crop of university graduates. (Like in the US, many now graduating are having trouble finding a job, but China's banks, flush with cash, are giving them modest loans, almost or entirely interest free, to start their own business. Many will make new computer games etc. - a very big industry in China, with exports. I do not play any but understand some chinese even live by playing these games. You can learn tricks built into the games that they then sell to others!)

Thus far, in 2009, holding US bonds, even considering the interest gained (or accumulated in the price, if not yet paid) has cost you 3.9% of the capital and slightly more in terms of the purchasing power. See kmguru's just posted graphs but the 3.9% comes from my post of Bloomberg text. Also if one averages over more than a year, for several years now bonds have been a way to lose money and surely the Chinese know this too. Thus I think one is forced to conclude that China has decided to accept this modest rate of loss in purchasing power to keep "re-cycling dollars" to American, but realized that switching to bills rather than bonds for all new purchases of Treasuries will reduce the loss rate. (As you surely know, shorter maturities are less damaged by interest rate rises. - Many others, also with fear of bonds, are doing this so yield curve is growing steeper every week now. (I am a more extreme case but always see far ahead. - I sold all stock funds in my retirement plans and bought TIPs, starting about 2.5 years ago in monthly dollar cost averaging that ended ~1.5 years ago. I missed a little of the market rise at the start of switching but all of them more important fall at end of 2008.)

Yes, and suppliers are at the mercy of China, when China decides there is net gain to be had if US and EU are in depression, not buyers. China has been loading the economic gun that can send US and EU into depression for more than a decade. I expect they will not need to dump bonds to cause that depression - that GWB & republican "trickle down” economic have made it inevitable but Obama is a "wild card" that neither China nor I did not expect, so if Obama is also a "Keynesian miracle worker" China may need to fire that gun some day.

I am quite certain oil production will not permit 1.3 billion Chinese to live like 300 million Americans have. China has the means to see that they, not the USA buy most of that oil. We loaded the gun for them by two decades of living on their credit. China is now, and for the foreseeable future, the main market for car sales. India will also be competition for the resources critical to a live style on say the level of Western Europe. US's standard of living is declining and must come down to at least that level, but there appears to be now way that Asian oil and mineral demand increases will make even that level sustainable for India, China, US & EU.

Once I thought US military power might be used under some cover of "doing good" (making the world safe for democracy, etc.) to simply occupy oil producers. The experience in Iraq shows that it is too easy for a couple of men in the night with a sack of explosives to cut pipelines etc. - Iraq's oil production is still not back to pre-invasion levels. Our high tech army is ill equipped to secure oil production by occupation of oil producers. It is only good for destroying things, not protecting them, when they are 100s of km long and or spread over huge areas. China's huge man power army is better designed for that.

I think it is both. I also note that the rate of these "buy real assets" moves has greatly increased during the last 6 months. Chinese importers of ores, energy and to some extent food stocks, seem to now have a blank check for the central bank, but with the fall in commodity prices vs a year ago that too is just good business. China is filling it strategic oil reserve with cheap oil, etc.

True if the contract calls for dollar payment at "spot" prices. Many, if not most do not. Often the funds China supplies, even if it is supplying funds, will be parceled out of years. For example, Brazil just got promise of 10 billion dollars to help develop the pre-salt oil, and will pay back with 200,000 barrel of oil per day. (I don't know if the total volume of oil to be sent to China is fixed or if the the spot prices when delivered must accumulate to be 10B + interest.) If to be simple the funds come at 1B /years for 10 years and dollar purchasing power decreases during those 10 years to 1/3 of current value, and volume of oil is set in the contract, China just screwed Brazil, if the US is not in depression but with its demand and Asia's cause the price of oil to be $500/ barrel 10 years hence.

BTW, I think Brazil is stupid to be anxious to develop the "expensive-to-recover," deep, pre-salt oil now. Brazilian politicians just cannot resist getting their hands on the money with which they can effectively buy votes in simple make work jobs in rural areas. (Cut weeds along side of the dirt roads or make "sackcrete" patches of the pot holes in the paved ones that last about a year - longer fix is undesired so the pot holes can be filled again just prior to the next election. In many cases they literarily buy votes. My farm worker was a local leader in that valley. His wooden door on leather hinges was replaced by a politician with nice steel one and all he had to do was wear the politician's free T-shirt the week before elections. But I digress.)

In my post I mentioned that point (3) did depend on point (2) and the fixed or spot price if paid in dollars. Many are not even to be paid in any currency. For example, the deal that gets mineral from east Congo is paid by a new port and cranes for it plus railroad (rails, locomotive and rolling stock), to the mine areas, mining equipment, etc. all Chinese made of course. If the US & EU are not using much steel as in depression, then China will import the iron ore from Brazil and Australia cheaper from which it makes the port cranes and rails etc. to honor the contract. Often in Africa China delivers infrastructure, like dams, ports, hospitals, schools, railroads, computers, etc.

The basic idea is that China is trading skills and high value added items for supplies it needs to keep its factories busy without significant sales to the US and EU buying (as they are in depression and / or too broke to do so without Chinese loans.) As a buy-product of this, sometimes China also transfers dollar decline risk to the suppliers was my point (3) - like the above screwing of Brazil example if dollar declines over a 10 year transfer of funds and oil delivery volume of oil is fixed. When dollar decline will screw a supplier then that offsets some of China's losses on bonds it still hold thru the dollar decline. I called that "offsetting obligations" and noted in point (3) that to the extent China can structure these supply deals to transfer dollar decline risk to others they can safely hold corresponding value of bonds.

I hope what I was trying to state in point (3) is clear now.

 

Glad to hear that as I often oblige.

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I agree with your point. One can even "cheery pick" with graphs but in any period significantly greater than one year in last several years, I think bonds have been a loser, unless you too "cheery pick" and end your period with the recent high cause by flight to safety.

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Next day by edit:
Another effect of lack of bond buying:
‘… The average maturity of U.S. debt fell to 49 months in the fourth quarter {of 2008}, the lowest since reaching 48 months in the second quarter of 1983…”
FROM: http://www.bloomberg.com/apps/news?pid=20601087&sid=atBRoa83KQuE&refer=home This is from several months ago, so I bet average maturity is even less than in 1983 now.

Bloomberg is also noting the steepening of the yield cure, but uses 10 vs 2 year instead of the 30 vs 1 year I have posted.
"...The gap between yields on 10-year and two-year U.S. Treasury notes has widened to 2.56 percentage points, from 1.45 at the start of the year, in a so-called steepening of the yield curve. ..."

From: http://www.bloomberg.com/apps/news?pid=20601087&sid=aictwOE8ApeE&refer=home

I think that now no one wants to buy bonds, except pension funds and insurance companies which need them to offset fixed future obligations. They do not give a sh.. if the dollar and bonds lose 90% of their value as they will still collect the face value and pay it out to the pensioners or widdows. They need investments that are sure to pay X dollars in the future year when they must pay out X dollars. Before I would consider buying a 30 Year bond, the interest rate would need to be about 25% as my dollar collapse window open last October and closes Halloween 2014.

 

Jeff Immelt, CEO of GE, just went on record as projecting slower global growth rates with the death of the American consumer.

http://www.reuters.com/article/ousiv/idUSTRE54P1RJ20090526

 

Following concludes my three post set:

In fact, when we look globally, as in Figure 1, {below at left} the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. Similarly, while the fall in US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression (Figure 2). Again this is contrary to the impression left by those who, basing their comparison on the US market alone, suggest that the current crash is no more serious than that of 1929.

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{Same "to April 09 only" is true of these graphs. I.e. the recent recovery of stock prices is not included, but even if from the 50 point shown there were a 50% increase to 75, the stock markets are still below the blue 1929 line and for the last two days turning back down again. A huge amount of global wealth is gone, and with it the "wealth effect."}

Another area where we are “surpassing” our forbearers is in destroying trade. World trade is falling much faster now than in 1929-30 (Figure 3). This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression.

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To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. {But perhaps not yet in the fraction of labor force unemployed. - I have no data on what that was about a year into the 1929 down turn. Governments are still able to prop up many failed factories to preserve jobs. They did not do that in 1920/30 -Waited until FDR was POTUS} Focusing on the US causes one to minimise this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event. {Again I plead: Don't blame Obama. He is doing more to make my several years old, "worse than 1929 depression," predictions wrong than I thought possible. GWB, Greenspan, "we can self regulate" bankers & "trickle down" Republicans, building modern factories in China, etc. get 100% of the credit.}

Above From: http://www.voxeu.org/index.php?q=node/3421
This 4 June 09 update of April09 paper seems to be early extracts from “white paper” or book, A Tale of Two Depressions the two authors* are writing but have not yet published.

Their “Global depression” POV is more pessimistic than mine. I predicted the above also, years ago, but also predicted, as is now starting to happen, that Brazil and a few other suppliers of raw materials, food stock and energy would escape depression by becoming “economic colonies” of Asia, especially China, the new economic leader of the post second great depression world.

*Authors are:
Barry Eichengreen, Un of CA at Berkeley Professor of Economic and Political Science + Former Senior Policy advisor to IMF
And
Kevin O’Rourke, Professor of Economics at Trinity College, Dublin & CEPR Research Fellow.**

** Centre for Economic Policy Research (www.cepr.org), founded in 1983, is a network of over 700 researchers based mainly in universities throughout Europe, who collaborate through the Centre in research and its dissemination. The Centre’s goal is to promote research excellence and policy relevance in European economics. CEPR Research Fellows and Affiliates are based in over 237 different institutions in 28 countries

 

Today’s German and British industrial output (right two graphs) are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse (left two graphs).

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The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.

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Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March
{The US only POV}, is a misleading picture. The Great Depression was a global phenomenon. Even if it originated, in some sense, in the US, it was transmitted internationally by trade flows, capital flows and commodity prices. That said, different countries were affected differently. The US is not representative of their experiences.
Our Great Recession is every bit as global, earlier hopes for decoupling in Asia and Europe notwithstanding. Increasingly there is awareness that events have taken an even uglier turn outside the US, with even larger falls in manufacturing production, exports and equity prices. {Billy T notes this "red data" is only to April 09. (See only 9 red data points.) Production in both China and Brazil are growing now. In Brazil’s case car production last month was three times greater than the depressed month of December 2008!}

 

This is the first of three related posts. I hope they are in order for you. Graphs have abscissa (X-axis) in months from the start of the current downturn (red data lines) and from the one of 1929 depression (blue data lines).

Point of the article is that "green shoots" are at best a US growth surge. The world is on track or going to hell faster than in 1929. Article has several other graphs but they are mainly related to policy actions now being taken not what has happend. Except for {my inserts} all text is quoted from reference of the third post and quoting begins now:

"World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’

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World stock markets have rebounded a bit since March, and world trade has stabilized, but these are still following paths far below the ones they followed in the Great Depression.

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“… Americans filing for unemployment benefits rose more than forecast, reinforcing expectations the Federal Reserve will keep interest rates low for a long time.* Two-year note yields declined after initial jobless claims rose by 15,000 to 627,000 in the week ended June 20, from a revised 612,000 the week before, the Labor Department. The government prepared to sell $27 billion of seven-year notes, completing this week’s record $104 billion of note auctions.
“People are still losing jobs,” said Michael Franzese, head of government bond trading for Standard Chartered in New York. “Until we start getting that number down, it means the economy is not doing as well as people thought it was.” …”
From: http://www.bloomberg.com/apps/news?pid=20601087&sid=a8QUxZTSjaXg

Billy T notes:As Americans are saving now (~6,5% of income) and banks are still not lending, much of the deposits are finding their way into Treasury paper. US sold $165 billion last week, with ease but no selling at the long end of the curve either week. I think only pension funds with offsetting fixed obligations and FED buy bonds now. Thus, the US debt is growing but not stimulating much as Joe American is not buying as he did. (he was 70% of the economy.) FED is keeping interest rates low, economy from collapse, but how long can the printing presses run before this all breaks?

--------------
* As you probably know, the FED keeps interest rates low by pumping out new money so either they or investors buy Treasury's paper promisses. This demand for Treasury paper drives the price up and interest rates down. SUMMARY: Fed is admitting the dollar printing presses will run for a long time more. I told you to buy TIPs, if lacking stomach for the volitiality of Brazilian etc. bonds and stocks. It is still not too late to do so as talk of deflaction is still as common as the talk of inflation. ("Buy your straw hat in the winter." is still true.) Next auction of 10-year Treasury Inflation Protected Securities, or TIPS, is on July 6.

 

If you prefer to read the same story instead of see it graphically in posts 91, 92, & 93 then look at:
http://www.moneyshow.com/investing/articles.asp?aid=GURU-17138&iid=GURU&scode=011415
This is an different source, which also concludes that globally it is at least as bad as 1929 and in many aspects worse. (Larger and faster declines, especially in global trade.)

------
Too late to edit last post but for the benefit of most readers I did not invent:
"Buy your straw hat in the winter."
That advice comes from Bernard Baruch, who was only 30 in 1900 and already was a self-made multi-millionaire stock trader. (Back in 1900, that was "real money.")
I think it was he who also said that he did more profitable work before getting out of bed each day than most do in a life time. (I think he liked to stay in bed late, smoke cigars there, etc. and had been criticized for this habit.)

 

Well, one minor thing is nearly sure (CA's IOUs will bounce after 10 July09):

"... A group of the biggest U.S. banks said they would stop accepting California's IOUs on Friday, adding pressure on the state to close its $26.3 billion annual budget gap. ... California began issuing IOUs -- or "individual registered warrants" -- to hundreds of thousands of creditors. State Controller John Chiang said that without IOUs, California would run out of cash by July's end.
... When the IOUs mature, {Oct 2} holders will be paid back directly by the state at an annual 3.75% interest rate. ..."

With re-issued IOUs?

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:bawl: :shrug:

Quote from: http://online.wsj.com/article/SB124692354575702881.html

 

" ... The Treasury Department said Monday that the deficit in June totaled $94.3 billion, pushing the total since the budget year started in October to nearly $1.1 trillion. {first time ever!} The deficit has been propelled by the huge sum the government has spent to combat the recession and financial crisis, combined with a sharp decline in tax revenues. Paying for wars in Iraq and Afghanistan also is a major factor.

The country's soaring deficits are making Chinese and other foreign buyers of U.S. debt nervous, which could make them reluctant lenders down the road. It could force the Treasury Department to pay higher interest rates to make U.S. debt attractive longer-term. ..."
From: http://news.yahoo.com/s/ap/20090713/ap_on_bi_go_ec_fi/us_economy_deficit

 

In answer to thread's question: How about another real estate crash?

" Commercial property loans outstanding are an estimated $3.3 trillion, also roughly one-third of the $10 trillion in residential mortgages outstanding. Of the commercial real estate loans outstanding, over half are held by commercial banks, with these loans constituting a very important part of the regional banks' balance sheets. ...
As the president of the Fed Bank of San Francisco, Janet Yellen (presently a voting member of the Fed Open Market Committee, which sets interest rates), recently observed, despite being smaller in size than the residential real estate market, the further bursting of the commercial real estate bubble could constitute a significant risk to U.S. economic recovery:

The continued collapse of the market would have a serious impact on non-residential fixed investment. In the first quarter, real non-residential construction activity is estimated to have declined at a record annualized 44% rate, which subtracted approximately two full percentage points from gross domestic product growth in the quarter. Further commercial property price declines could torpedo the fragile healing process underway in the banking system by compounding U.S. bank losses. ..."

From: http://www.forbes.com/2009/07/13/ho...xford-analytica.html?partner=daily_newsletter

 

Billy T,
I just wanted to Thank You for all the time and effort you put in to this forum.I love reading your post and I assume others do to.

I do have a question for you.Are we going to see really bad times ahead here in the US? I mean when I have read articles and seen pics about the past Great Depression,it looked very bad and scary.Are we heading for that again? As I said I love reading your post but I'm a bit confused on what exactly you think is a coming.Ok then Thanks Billy.

 

What color are those “green shoots” – Here is part of why they look very brown or black to me:

“… Foreclosure filings rose more than 33 percent in June compared with the same month last year and were up nearly 5 percent from May, RealtyTrac said. "Despite all the efforts to date, we clearly haven't got a handle on how to address the situation," said Rick Sharga, RealtyTrac's senior vice president for marketing.

More than 336,000 households received at least one foreclosure-related notice in June, according to the foreclosure listing firm's report. That works out to one in every 380 U.S. homes. It was the fourth-straight month in which more than 300,000 households receiving a foreclosure filing, … that homeowners receive before they finally lose their homes. Banks repossessed more than 79,000 homes in June, up from about 65,000 a month earlier. …”
From: http://news.yahoo.com/s/ap/20090716/ap_on_bi_ge/foreclosure_rates

“… Foreclosure filings in the United States jumped to a record 1.9 million on more than 1.5 million properties in the first half of 2009, according to RealtyTrac. "Despite everybody's best efforts to date we're not really making any headway against the problem," Rick Sharga, senior vice president at RealtyTrac said in an interview with Reuters. …”
From: Money Morning customerservice@moneymorning.com Daily Email to me

And note the foreclosures on commercial real estate are now dramatically increasing – Those loans are ~1/3 of the total real estate mortgage market and the debtors are very “hard nosed” – will walk away in a hat drop when, as increasingly true, the rents do not cover the mortgage and insurance cost.

Strange how many buildings have caught fire recently. Also car fires are running at more than double the normal rate. Strange that most of them happen shortly before the cars was to be re-possessed.

Financial moral = don't invest in any fire insurance companies until the economy is moving upwards again. Their rate tables are too low as based on a history that did not have many fires set by "in over their head" property owners.

To see how false the current recovery of some bank profits are, see:
http://www.moneymorning.com/2009/07/17/jpmorgan-chase-accounting-mirage/

As this article shows /explains, it almost entirely due to changes in the accounting rules (No longer "marking to market" being one but there are many accounting tricks, including one that magically converts bad debts into 27% profits and others which make profits credited now on money "expected to be paid.")

OR, for the same conclusion, but from a different POV see:
http://www.fool.com/investing/general/2009/07/17/the-great-bank-earnings-that-really-werent.aspx

Do you mean Wall Street, Bankers, and Accountants are lying to us???? - Please tell me something new.