Two articles yesterday reported on new-home sales, U.S. worker jobless claims, and manufactured goods demand. The articles reported that:

• new-home sales tumbled to a record-low annual pace in January with no relief in sight as “mounting damage from the collapsed housing market pushes the country deeper into recession”. Sales of new homes were reported as falling 10.2% to a seasonally adjusted annual rate of 309,000, the worst showing on records going back to 1963 – weaker than economist’s expectation of 330,000;

• the government said it would take 13.3 months at the current sales pace to exhaust supply, which puts even more downward pressure on prices;

• the median sales price fell by a record drop of 9.9% to $201,100 in January, while the average home price dropped 9.8% to $234,600;

• the number of U.S. workers drawing jobless aid jumped to record high in mid-February with the number of people remaining on the benefits roll after drawing an initial week of assistance increasing by 114,000 to a record 5.1 million in the week ended February 14. At the same time, initial claims for state unemployment insurance benefits increased to a seasonally adjusted 667,000 last week from 631,000 the prior week, the highest reading since October 1982; and,

• new orders for long-lasting U.S. manufactured goods fell to a six-year low in January. Durable goods orders dropped 5.2 percent to $163.8 billion in January, the lowest level since December 2002, from a 4.6 percent decline in November.

My Comments: Other than to say that if you work the numbers on new home sales through you find that economist’s were forecasting an approximate 4% drop in the seasonally adjusted annual rate, not the 10.2% reported. I continue to wonder how people trained as economists continually seem to miss accurately (or at least ‘reasonably’ accurately) forecasting ‘next month’s’ results for most things. One explanation is that things are deteriorating at an escalating pace that defies forecasting based on historic modeling. At one level (that of ‘economist credibility’) one can only hope that is the explanation. Other than to say I continually look for good news on the economic front but am failing to find anything, I don’t have anything to add to the foregoing numbers. It seems to me they speak for themselves!

Read the referenced articles by clicking here, and clicking here.

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In an article yesterday, American Brad Setser (who based on my reading I consider to be one of the better ‘blog writers’ on things economic) comments on his rhetorical question ‘Who bought all the Treasuries the US issued in 2008? And who will be the big buyers in 2009?’  I think this question currently is of paramount importance – see my blog post earlier this week on Hilary Clinton’s comments made in China during her recent trip there.  Setser agrees with me on the importance of this question.  He begins his article by posing and answering the question:  ‘and just how important is China — clearly now the largest single holder of Treasury bonds — to the market?  Setser goes on to say:

•    central banks and sovereign funds, led by China, were huge buyers of Treasuries in 2008. “The work I have done with Arpana Pandey suggests that central banks bought close to $600 billion Treasuries in 2008 — with China accounting for a bit over half the total”;

•    if the marketable Treasuries that the Fed sold to finance its lender of last resort activities are counted as increase in the outstanding stock of marketable Treasuries, sales of U.S. Treasuries topped $1.6 trillion in 2008 implying (if the Pandey/Setser estimates for official purchases are right) that private investors bought more Treasuries in 2008 than did the world’s central banks;

•    with global reserve growth slowing central bank demand for Treasuries is likely to fall, implying (or so Setser thinks) that the ability of the US to finance large deficits at low rates depends far more than it has in the past on the willingness of private investors to buy Treasuries;

•    having said that, Setser then says that if China suddenly stopped buying Treasuries in the way it stopped buying Agencies last June, it would almost certainly have an impact on the market unless the Fed stepped in — “but that too would have consequences”.

•    In Setser’s view a world with $1.75 trillion US fiscal deficit and a $500 billion US current account deficit only works if Americans are willing to buy an awful lot of Treasuries. He believes the borrowing need of the US government is now far too big to be covered by the (much reduced) growth in the emerging world’s reserves;

•    Setser believes the slowdown in global reserve growth implies a slowdown in central bank financing of the U.S.;

•    in Setser’s view the overriding assumption behind the stimulus is that a rise in US household savings (linked to the fall in US household wealth) will create a pool of domestic savings that will flow, given the ongoing contraction in private investment, into the Treasury market. The rise in private savings and fall in private investment will allow the US government to borrow more even as the US economy as whole borrows less from the rest of the world; and,

•    Setser’s guess is that the Treasury market will be driven by developments in the US – not developments in China – in 2009.

My Comments:  I think readers of this post ought to read Setser’s article in its entirety.  It seems to me that if he is right in his analysis and conclusion that the U.S. is in an oxymoronic cycle that causes serious economic problems.  If I am right in my continued assertion that the U.S. consumer must spend to bring back growth in U.S. GDP – and I can’t see how I am wrong when in recent years the U.S. consumer has accounted for approximately 70% of that GDP – then how can the U.S. consumer both save and buy U.S. Treasuries, and spend on goods and services at the same time.  A better thesis might be that wealthy Americans, Investment Funds, and Hedge Funds et al might buy them, but who would want to put vast amounts of money into U.S. Treasuries with a fixed principal amount and a low yield in the economic climate.  I wouldn’t, but then again I am seriously beginning to wonder what I am missing.  I encourage your comments letting me know what it is.

Read Setser’s article by clicking here.

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An article yesterday sets out details of a new U.S. Treasury Department program pursuant to which capital injections will be made into the 19 largest U.S. banks based on a “stress test”.

In summary, the 19 banks will have six months to raise private capital after a review of their financial statements before they can be eligible for new (i.e. incremental to government advances already made) capital injections. Under this approach government regulators are looking at each financial institution’s balance sheet and evaluating how much capital will be needed over the coming two years. This process is expected to be completed by April 30. Based on its analysis, the government would let institutions exchange taxpayer-funded preferred shares for common shares when losses forecast by the stress test actually occur.

To evaluate whether banks need capital infusions, the article says the Treasury Department has designed two economic scenarios to estimate expected losses over the next two years. Apparently government officials will take into consideration a financial institution’s projected losses or profits based on a pair of alternate economic forecasts for 2009 and 2010 that look at GDP growth, unemployment rates and other factors. One forecast is expected to reflect a “deeper and longer” recession scenario. The forecast will also take into account changes to the residential house prices for 2009 and 2010. The 19 banks will be asked to analyze their loan and securities portfolios to estimate their future losses under each of the two scenarios. The banks that have received the convertible shares will be able to exchange them for common stock with regulatory approval at a price that is a 10% discount to the “prevailing level of the institution’s stock price as of Feb. 9, 2009.”

The article says existing common shareholders of the 19 banks are concerned about this plan because:

• preferred shares rank higher in the capital structure of a company than do common shares. In the event that a firm goes bankrupt and is liquidated, preferred shareholders could be in line to collect something, while common holders likely would get nothing; and,

• conversion of preferred shares into common shares would make currently existing shares worth less through dilution. In other words, the more shares of common stock outstanding, the less valuable each common share is.

My Comments: First, the concerns the article expresses on behalf of existing common shareholders of these banks are ridiculous. An inherent risk of holding common shares in any company is that if the company is unsuccessful its common shares may be worth little or nothing, and if new capital is infused common shareholders almost inevitably get diluted. If the common shareholders of these 19 banks really believe these things, and have spokesmen voicing these types of concerns, they ought to have a stiff drink and drown their sorrows in the reality of their common share ownership positions. Second, I find the concept of alternate forecast scenarios interesting. I would like to know whether there will be open disclosure of the ‘GDP growth’, unemployment rates, housing prices, and ‘other factors’ that are adopted in these forecasts. I wonder whether in all the current economic circumstances it makes any sense to forecast ‘GDP growth’ as contrasted with ‘GDP retraction’. I would also like to know whether the U.S. Administration has a contingency plan in the event the ‘worst case’ forecasts for each bank prove to be optimistic. My current thinking is that the degree of U.S. government interference in the private sector banking industry is a recipe for disaster, and is completely contrary to the ‘capitalism concept’ that served America well for many decades.

Read the article by clicking here.

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An article yesterday said Fed Chair Bernanke is confident U.S. inflation can be kept at bay. Bernanke is reported as telling the House of Representative Financial Services Committee he has an exit strategy from the U.S. central bank’s recent massive monetary expansion that will keep inflation under control as the economy recovers, and that “we are quite confident that we can raise interest rates, reduce the money supply and do that all in a timely way to avoid any inflationary consequences”.

The Fed has cut benchmark overnight interest rates almost to zero and has pumped over $1 trillion into credit markets to keep them functioning after the collapse of the U.S. housing market sparked a global credit crisis last year. Bernanke defended the Fed’s cutting of interest rates to almost zero, and its infusion of over $1 trillion into U.S. credit markets, by saying that these steps and steps by others last October resulted in what Bernanke said he seriously believes resulted in the avoidance of “a collapse of the global financial system which would have led us into a truly deep and very protracted economic crisis”. He is reported as going on to say that “It is very important for us, once the economy begins to recover — as usual, the Fed would have to begin to tighten policy — it is very important for us to begin then to unwind our monetary expansion”.

My Comments: I assume the ‘others’ Bernanke referred to are Henry Paulson and his band of Merry Men. Its good to know Bernanke has an ‘exit strategy’ from ongoing U.S. monetary expansion. It would be nice to know precisely what it is. What is going on is such a ‘moving target – literally every day’ it is hard to accept that anyone, including Bernanke has a well-developed strategy for this or pretty much anything else related to the U.S. economy. If only it was otherwise! Again, the ‘recovery’ word is prominently featured in Bernanke’s remarks. Without U.S. economic recovery and growth both from where the U.S. economy is now, and where growth in GDP was before 2008, all the steps taken to date and prospective steps that may be taken by the U.S. Administration and the Fed are simply (or so I think) throwing good fiat currency after bad fiat currency – assuming fiat currency as a medium of exchange is a good thing in the first place. If I am right in this, there better be a quick swing in the U.S. unemployment numbers, and the U.S. consumer better begin to spend quickly from here and with serious vigor. Absent these two things happening I think Humpty Dumpty (the U.S. economy) that has fallen off the wall, and will remain in a smashed and continually deteriorating state (no pun intended). Comments agreeing or disagreeing will be appreciated.

Read the article by clicking here

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