Tuesday, January 31, 2012

European Unemployment - An Intransigent Problem

The Eurozone is suffering mightily from the issues facing its over-leveredged governments, but one tends to forget about the suffering of the individuals involved.  In this posting, I will take a brief look at unemployment in the Eurozone overall and a brief look at the country-by-country data.

First, here is a graph showing the number of unemployed across the euro area:

In December 2011, a new record was broken with 16.469 million euro area residents finding themselves on the wrong side of a job interview.  This is a new high since the inception of the European Community and is up from a record low of 11.431 million achieved in March of 2008, just prior to the Great Recession, resulting in an overall increase of 44.1 percent, hardly what one can term a "recovery".  This also results in a euro area overall unemployment rate of 10.4 percent.

Here is a graph showing the unemployment rate by Member State for December 2011:

You will notice right away that Spain (ES) and Greece (EL) have by far the highest unemployment rates at 22.9 percent and 19.2 percent respectively.  Among the other debt transgressing nations, we find Ireland's unemployment rate at 14.5 percent, Portugal's at 13.6 percent and Italy's at a rather surprising 8.9 percent.   

Youth unemployment is also a growing problem across the euro area, hitting 21.3 percent across the euro countries in December.  Here is a graph showing the entire picture:

Once again, the highest rates were found in Spain (48.7 percent) and Greece (47.2 percent).  Portugal's youth have an unemployment rate of 30.8 percent and Ireland's youth have an unemployment rate of 29 percent.  That certainly has to lead to a sense of hopelessness among young people in those two economies and does not bode well for the future.

Seeing this data makes us all realize how dire the situation is in Europe and how likely it is that the debt situation for several nations will be unresolvable because the economy simply is not growing.  We'd best hold onto our hats, it's going to be a rough ride ahead if these numbers are any indication of what lies in the future!

Monday, January 30, 2012

Housing Affordability in the United States - 2011

Recently, I submitted a posting that outlined the results for Demographia's 8th Annual International Housing Survey: 2012.  In that posting, I summarized the housing markets for all seven nations in the study, showing the most expensive and least expensive when measured using the concept of median multiplier which is defined as the multiple of the median household income that it takes to purchase a median house in a given market; for example, in a market with a median house price of $150,000 and a median household income of $50,000 the median multiple would be 3.0.  What I'd like to do in this posting, is pick out the markets that are most affordable and least affordable across the United States and compare the 2011 data to Demographia's past database from 2007, just before the Great Recession and collapse of the housing bubble to see how affordability has changed.

To begin, let's remind ourselves how Demographia breaks down its median multiple data into affordability brackets:

Across the United States, Demographia considers housing affordable with a national average median multiple of 3.0.  In 2011, of the 211 markets, 117 (55.5%) were considered affordable, 64 (30.3%) were considered moderately unaffordable, 16 (7.6%) were considered seriously unaffordable and 14 (6.6%) were considered severely unaffordable.  In 2007, of the 107 markets in the study, only 35 (32.7%) were considered affordable, 28 (26.2%) were considered moderately unaffordable, 17 (15.9%) were considered seriously unaffordable and a whopping 27 (25.2%) were considered severely unaffordable.  You can quite quickly see that housing affordability has certainly improved across most markets in the United States.

Here is a list of the top 20 most affordable markets in 2011:

You'll notice right away that the most affordable markets are found in the economically-challenged industrial heartland of America but, from the data in the chart, you'll also notice that the drop in median multiple from the peak was rather small (i.e. housing was quite affordable before the housing market decline), likely because the economy had already suffered from massive de-industrialization prior to the Great Recession.  It is also interesting to note the appearance of 3 "sun and sand belt" markets with Phoenix seeing the greatest affordability adjustment; in 2007, the multiple of 5.1 rendered the market severely unaffordable.  This multiple for this market has plummeted to 2.2 making it America's 20th most affordable real estate market.

Here is a list of the top 20 least affordable markets in 2011:

Honolulu comes in as the least affordable market in the United States (and fourth least affordable in the survey among the seven nations), however it is marginally more affordable than it was in 2007 when the multiple was 10.3.  Most of the remainder of the least affordable markets are in California and the New England States but it is important to note that several of these markets have suffered from severe affordability readjustments, the worst being Los Angeles.  In the case of Los Angeles, in 2007, the median multiple was a stratospheric 11.4, the highest in the six nation study.  A median home was priced at $582,000 with median household income of only $51,800.  In 2011, a median home in Los Angeles had dropped to $324,800, a downward correction of 44 percent.  San Diego also saw its median multiple fall from 10.5 to 6.1 and its median house price drop from $601,900 to a mere $270,000, a massive correction of 68 percent.  Now that's a bursting bubble!

In summary, from this data we can readily see that, on average, housing in the United States in many markets is becoming better (and probably more realistically) valued for a larger number of purchasers.  Unfortunately for the majority of Americans, these price readjustments have been accompanied by a great deal of pain; millions of foreclosures and underwater home owners can most certainly attest to that.  It is an extremely difficult way to learn that housing markets that are priced beyond a certain point are not in equilibrium are likely to correct, a lesson that will ultimately be learned by some homeowners in overheated real estate markets in countries including Canada, Australia and the United Kingdom that have yet to see a housing market correction of any significance.

Demographia International Housing Affordability Survey

Demographia has released its 8th Annual International Housing Survey, a study that I have posted on for the past two years.  Demographia looks at 325 metropolitan housing markets in 7 nations including Australia, New Zealand, the United Kingdom, Ireland, Canada, the United States and Hong Kong.  As I have noted before, I find the approach that Demographia takes to housing affordability rather unique.  Demographia uses the "median multiple" as a means of rating housing affordability; the median multiple is defined as the median house price divided by the gross (or before tax) median household income in a particular market.  Once the median multiple is calculated, each housing market is then divided into affordability categories as follows:

Looking back in time, the median multiple was very similar among all of the nations in the study (excluding Hong Kong) with median house prices generally ranging from 2.0 to 3.0 times median household income.  Such is no longer the case; price increases in certain markets continue to escalate well beyond growth in household income, making it less and less likely that those who wish to buy a home in the future will be able to afford the luxury, unless there is a rapid decline in selling prices.  Housing affordability appears to be continuing to deteriorate among the nations in the study with only two exceptions; the United States and Ireland.  Unfortunately, the realignment of prices to more affordable levels in both countries has been accompanied by huge economic repercussions, most of which are still working their way through the moribund American and Irish economies.

Looking back to last year's report, housing affordability by nation has changed very little with the most affordable housing being found in the United States, Ireland and some markets in Canada and the least affordable being found in the remaining Canadian markets (generally the larger markets), the United Kingdom, Australia and New Zealand.

Here is a table showing the distribution of housing affordability by nation for the 81 major metropolitan markets (major markets have a population in excess of 1,000,000 people):

All of the affordable markets were in the United States, 16 out of 20 moderately unaffordable markets were also found in the United States with only 3 in Canada and 1 in Ireland, despite the severe price declines in its market.  All of Australia's 5 major markets are considered severely unaffordable, 3 of Canada's 6 major markets are considered severely unaffordable and, of the 16 major markets in the United Kingdom, 8 are considered seriously unaffordable and 8 are considered severely unaffordable.  Overall, Australia has the highest national median multiple with a value of 6.7 followed by New Zealand at 6.4 and the United Kingdom at 5.0.

Here is a table showing the distribution of housing affordability by nation for all 325 metropolitan markets in the study:

The United States had the vast majority of affordable markets with 117 out of 211 (or 55 percent) of its markets being affordable for a national median of 3.0.  Only 14 markets out of 211 (or 6.6 percent) in the United States were considered severely unaffordable.  Canada had 9 out of 35 markets (or 25.7 percent) fall in the affordable category with 6 out of 35 (or 17 percent) being considered severely unaffordable for a national median of 3.5.  The United Kingdom had no markets in the affordable category and only 1 out of 33 in the moderately unaffordable category.  The United Kingdom had a rather large 20 out of 33 markets (or 60.6 percent) falling in the severely unaffordable category for a national median of 5.1.  Australia came in with the overall lowest housing affordability (excluding Hong Kong) with no markets being considered either affordable or moderately affordable and 25 out of 32 markets (or 78 percent) being considered severely unaffordable for a national median of 5.6, well into the severely unaffordable category.

Here is a chart showing the top ten least affordable markets and the top ten most affordable markets among the nations in the study along with median prices for each market (please keep in mind that while prices may look higher in less affordable markets, it means that median household gross income is also lower, raising the multiple):

Notice how the most affordable housing markets are mainly in the de-industrialized industrial belt of the United States, particularly Michigan and Ohio?  That is an extremely painful way to get any housing market back to reasonably affordable levels.

Demographia notes that the lack of housing affordability is often linked to the implementation of more restrictive land use regulations.  This is a subject that I posted on here.  As land use becomes more restricted, the prices for land are pushed artificially high as a result of false scarcity; this leads to overly competitive marketplaces for raw land.  With a lack of new developable land coming onto the market, the price of existing developable land rises well above what it should, adding an unnecessary premium to the cost of housing.  As I showed in my posting, overly regulated real estate markets have added premiums of up to $239,100 in the case of San Diego and $90,700 in the case of Washington, D.C. - Baltimore.

I particularly liked this quote from the Demographia study:

"As housing affordability has deteriorated, there has been a tendency on the part of housing industry and financial market analysts to "cheer on" abnormally high house price increases as if housing were a commodity market, like gold."

One need read no further than reports from local and national real estate boards for examples of their cheerleading, particularly from CREA in Canada, where we are continually reminded that high and rising prices are sustainable with only the smallest of corrections potentially in the offing .  What real estate boards fail to realize is that a healthy and sustainable real estate market is one in which the vast majority of households can afford to enter the housing market and remain there comfortably if interest rates rise and house values drop.  Such was not the case throughout many markets in the United States and I suspect that many markets in Canada, the United Kingdom and Australia will suffer the same fate when interest rates return to historical levels or Part 2 of the Great Recession becomes entrenched.

I find the Demographia study particularly interesting because it tells us which real estate markets are still overheated and may well foretell which markets could experience a rather hefty price readjustment.  The American and Irish situations with real estate price readjustment shows us just how painful that process can be. 

Saturday, January 28, 2012

Ireland - A Microcosm of the World's Sovereign Debt Problem

Remember way, way back in November and December 2010 when Ireland was at the head of the line in the Eurozone debt crisis?  Since all of the kerfuffle back then, the Irish have pretty much been given a pass on their debt by the mainstream media who, instead, have been focusing on Greece, Spain and now Portugal.  I thought that given the activity regarding their PIIGS partners in recent days and weeks, that it was about time for an update on Ireland's fiscal situation.

Ireland released its most recent Financial Statement in December 2011 (i.e. Budget 2012), oddly enough, on the 90th anniversary of the signing of the Treaty that restored Ireland's sovereignty.  I'll pick out a few of the salient points for you.

Let's take a quick look at some data first, starting with unemployment:

Since the beginning of the Great Contraction, Ireland's unemployment has risen from just 4.8 percent in January 2008 (remember the Celtic Tiger?) to a high of 14.6 percent in April 2011.  The most recent data release shows that the rate has not fallen by much and currently sits at a rather hefty 14.3 percent, above 14 percent were it has stubbornly remained for nearly a year.

Now, let's take a look at Ireland's debt-to-GDP ratio since 1990:

Notice that Ireland's debt was very high in the early part of the 1990s, in part, because their economy was simply not growing.  As the Celtic Tiger phenomenon developed, output (i.e. economic growth) outgrew the level of debt growth, resulting in the country’s debt-to-GDP level falling to a low of 24.8 percent in 2007.  Unfortunately, that scenario was not to last.  Ireland’s debt-to-GDP rose very, very quickly over the following three years to its current level of 96.2 percent.

In large part, Ireland's current problems stem from the implosion of the country's real estate market which, prior to the Recession, was among the fastest growing in the world.  Here is a graph showing what happened to real estate prices in Ireland over the past 20 years:

Here we thought that America's housing market readjustment was bad!  Ireland experienced the largest property price increase among Europe and North American countries with values quadrupling over the period between 1997 and the peak in 2007.  Nationally, average house prices have fallen to the same level that they were at in the second quarter of 2002.  Some statistics show that house prices in Ireland have fallen by an average of 58 percent from their peaks, one of the worst drops in residential real estate value in the world.  The drop in the value of real estate caused massive stress in the country's banking system which, as was the case in the United States, had been only too willing to lend out mortgage money.  This necessitated bank recapitalizations that totaled 32 percent of GDP, actions that the government could ill-afford as the economy ground to a halt.  In the end, funding for Ireland's banks ended up costing the ECB and Ireland's Central Bank about €150 billion.

That's enough background.  Now let's look at the present, keeping in mind that, according to the Eurostat website, since its inception, the European Commission has had in place a procedure called the Excessive Deficit Procedure (EDP) that would allow the EC to sanction nations whose budget deficit exceeded 3 percent of GDP and whose public debt exceeded 60 percent of GDP.

Back in December, Ireland's Finance Minister, Mr. Michael Noonan, predicted that Ireland's nominal GDP would grow by 2.5 percent in 2012 and states that "...all forecasters agree that growth will be significantly stronger in 2013 and subsequent years...".  Not according to the IMF!  He attributes this growth rate to Ireland's very, very low corporate tax rate of 12.5 percent and is committed to keeping it low to keep the economy strong, even though he has been under international pressure to raise it.  Here is a chart showing just how low Ireland's corporate tax rate is compared to its Eurozone partners:

Ireland's corporate tax rate is the third lowest among its fellow Member States, just below Bulgaria and Cypress (both at 10 percent) and well below the EU-27 average of 23.2 percent.  Keep that and Ireland's very high unemployment rate in mind the next time your local politician insists that your country must lower corporate income taxes so "the jobs will come".  While there are other factors that have negatively affected Ireland's economy, ultra-low corporate taxes do not seem to be a long-term job creation strategy.  It is also important to note that, as Ireland's economy imploded between 2007 and 2010, tax revenues fell by one-third, a point that should not go unnoticed by politicians around the world.

As I noted above, Ireland's real estate sector has been decimated.  The development and construction sector comprised 20 percent of GDP in the peak years and had been reduced to around 5 percent in 2011.  This implosion led to the loss of 164,000 construction sector jobs.  The decline in the value of residential real estate has also led to families saving rather than spending, further impacting the economy negatively.  To prod the real estate market back to life, in its most recent budget, the Irish government reduced the Stamp Duty on commercial property transfers from 6 percent to 2 percent but, oddly, nothing was done to change the 1 percent Stamp Duty on property transfers up to one million euros.

The Irish government has also taken steps to address the problems facing those who purchased their properties during the height of the property boom (i.e. those who both borrowed and paid too much).  For purchasers who bought their homes between 2004 and 2008, the rate of mortgage interest relief has been increased to 30 percent.  For those who wish to buy a home in 2012, first time buyers will get mortgage interest relief of 25 percent and non-first time buyers will get mortgage interest rate relief of 15 percent, both up from the proposals of the previous Government.  This program ends in 2018.

Ireland's Finance Minister estimates that the deficit for fiscal 2011 will be 10.1 percent of GDP (less than the 10.6 percent required by the EU/IMF bailout agreement), down from 11.5 percent of GDP in 2010, dropping to a target of 8.6 percent in 2012.  To reach the 2012 target, the government needs to cut an additional €3.8 billion in both expenditures and revenues.  To meet this goal, the government held fast on not raising both personal and corporate income taxes.  Back in late 2010, the previous Government agreed with the IMF and the EU that VAT would be increased by 2 percentage points by 2014.  Rather than delaying the increase, the current Government will raise the VAT by the full 2 percent in 2012, raising the rate to 23 percent so that they can increase revenues much sooner.

Here is a summary showing the fiscal balance for 2011 and 2012:

You will notice that in this summary, the budget deficit in 2012 is still projected to be 10 percent of GDP, just over three times the EU limit as noted above.  Ireland needs the additional €3.8 billion in fiscal management as I noted above, to achieve the 8.6 percent of GDP.

Here is a graph showing how the debt interest burden in Ireland has risen in recent years with the debt interest-to-GDP ratio reaching 5 percent and consuming 14 percent of all tax revenue, up from 3.5 percent in 2007, a situation that will only become worse if the world’s bond traders lose faith in Ireland’s ability to service its debt:

How much sovereign debt does Ireland have?  In 2010, Ireland's debt reached €144.4 billion or 92.6 percent of GDP.  Debt-to-GDP levels rose between 2007 and 2010 for several reasons including large budget deficits, loss of tax revenues as the economy ground to a halt, the high cost of bailing out the country's banking system and the significant fall in GDP from 2007 on.  In 2007, general government debt was a mere €47.4 billion (25 percent of GDP).  Here is a table showing the forecasted debt and debt-to-GDP figures for the period from 2011 to 2015:

Ireland’s rather stubborn debt-to-GDP ratio is projected to remain well above 100 percent of GDP over the next five years, hitting a peak of 118.3 percent in 2013, well outside of current European Community guidelines as I noted above.  As well, despite reductions in deficit spending, Ireland's overall debt will rise from €163.8 billion to €203.8 billion, an increase of 24.4 percent in just five years.

Ireland is projecting real economic growth ranging from 1.6 percent in 2012 to 3.0 percent in both 2014 and 2015.  While no one can predict what will happened four years out, it most certainly would appear that the Eurozone is heading into a recession in 2012, making the 1.6 percent growth rate a less than likely projection, particularly given that GDP growth in the third quarter of 2011 was negative 1.9 percent compared to the quarter before. To increase their imports, they are also counting on G20 economic growth for the next two years of 3.8 and 4.6 percent, another highly optimistic scenario.

When summarizing all of the projections, Ireland’s government projects that the country’s deficit will fall to a low of 2.9 percent of GDP by 2015 as shown on this table, just a smidgen under the EU limit of 3 percent:

In summary, we need to remember that Ireland has already had a massive bailout totalling €85 billion and is still showing economic numbers that are not particularly great.  Like governments around the world, Ireland is relying heavily on growing its way out of trouble, a highly risky proposition.  They are hoping that increased tax revenues resulting from an expanding economy will help reduce the gap between revenues and expenditures and that the increase in GDP will have the added benefit of decreasing the country's debt-to-GDP ratio.  With the IMF now projecting that Europe could return to recession in 2012, all of Ireland's hard fought battle with crippling debt could well be in vain and it is my guess that Ireland will require further assistance from the EFSF, IMF and EU.  Leaders of the Free World who are spending more than you are receiving in revenue, take note!  This could well be your future.

Friday, January 27, 2012

The Baltic Dry Index - A Harbinger of Bad Things To Come

Most non-professional investors may only have heard of the rather obscure Baltic Dry Index (BDI) in passing.  In this posting, I will open by giving a brief rundown on what the BDI is and how it is useful for predicting the world's economic performance followed by a look at what has happened to the BDI prior to, during and after the Great Recession.  I'll also take a closer look at what has happened to the BDI in recent months, giving readers the chance to see what may lie ahead for the world's economy in the near future.

The Baltic Dry Index is issued daily by the U.K.-based Baltic Exchange which has been in existence since 1744.  The BDI tracks the worldwide international shipping prices of major raw material dry bulk cargoes by sea including grain, iron ore coal and other fossil fuels.  The BDI measures the actual shipping costs of these raw materials for four different sizes of merchant vessels on 26 different geographic routes and averages them into one index.  As such, it is one of the very few leading, non-speculative, non-revisable economic measures, unlike GDP growth, unemployment and consumer sentiment measures, all of which are lagging indicators.  Changes in the BDI are often used by investors to measure changes in the demand for different commodities around the globe.  These changes are considered a leading indicator of future economic growth; if the BDI is rising (i.e. shipping prices are rising), there is increased demand for the shipping of commodities by various end users around the world, signalling future economic growth since most of these precursor commodities are generally linked to the eventual production of finished goods like steel and concrete.  If the BDI is falling, there is less demand for marine shipping of commodities, indicating that the world's economy is likely to contract.  Basically, the BDI measures the demand for shipping capacity versus the supply of bulk, ocean-going carriers.  Because the lead time to build carriers is quite long, small increases or decreases in demand for shipping can result in relatively large upward or downward swings in the BDI.

Now, let's take a longer term historical look at the BDI as shown on this chart:

The BDI hit an all-time high of 11793 on May 20th, 2008.  As the Great Recession became entrenched in the world's economy, the Index fell to a low of 663 on December 4, 2008 for a drop of 94 percent, reflecting a massive plunge in shipping rates as demand for shipping by sea plummeted and rates fell from $233,988 per day to less than $2800 per day.

Here is a medium term look at the BDI from January 2009 to the present:

This graph shows us that the BDI peaked at 4661 in November of 2010 as it appeared that the world's economy was firing on all cylinders after the Great Recession.  It dropped to a multi-year low of 1043 in January 2011 as the wheels started to come off the Eurozone (i.e. Portugal and Ireland debt problems).

Here is a chart showing the BDI over the last five months:

Back in mid-October 2011, the BDI peaked at 2173, up from 1252 in early August 2011 as the world debt crisis reared its ugly head and remained in a range between 1766 and 2173 until four weeks ago.  Since the beginning of 2012, the BDI has fallen very steeply (termed a "long tail down" pattern) to just below 700 (more precisely, 662), a new record low not seen since the depths of the Great Recession when the BDI hit 666.

It appears that the BDI, which has plunged 69.5 percent since its most recent peak in October 2011, is indicating that a world-wide recession is on our doorstep, something that many lay people have sensed for some time.  Yes, there could be another explanation; the drop in the index could well be reflecting a glut of shipping capacity which can be corrected by ship-scrapping, accelerated new vessel delivery and poor weather in some export markets and even the Chinese Lunar New Year (although, for the sake of consistency, such a decline did not take place in January 2010), however, we may ultimately find out that the rapid decline is, in fact, presaging a rather strong global economic slowdown as the demand for many commodities dries up.  Only time will tell us whether the world's economy is slowing up more quickly than the so-called experts are predicting.  With a three month lag between drops in the BDI and drops in the world's stock market in 2008, we should know by the end of the second quarter whether the BDI is "prescient".

Wednesday, January 25, 2012

How Does China Feel About the United States Debt Future?

Now that we're all aware of the State of the Union, I thought it would be interesting to see how another country views the issues facing America's fiscal future.  As consumers of information from the mainstream media, we tend to hear a lot about sovereign debt ratings from the major ratings agencies; S&P, Moody's and Fitch.  Most non-financial people seem quite unaware of another ratings agency by the name of Dagong Credit.  I stumbled on this agency while reading a summary of agency credit ratings for the United States and Dagong stuck out like a sore thumb by giving the United States an "A" rating, rather than the AAA or AA+ granted by most other agencies.  Interestingly, the United States Securities and Exchange Commission refuses to recognize Dagong's debt ratings because the Commission cannot supervise the Beijing-based agency!

From their website, here is a brief summary outlining who Dagong is:

"Dagong Global Credit Rating Co. Ltd. (hereinafter referred to as "Dagong") is a specialized credit rating and risk analysis research institution founded in 1994 upon the joint approval of People‘s Bank of China and the former State Economic & Trade Commission,  People’s Republic of China, and is also a key credit information and credit solution service provider in China.

As the most influential founder of China‘s credit rating industry and market, Dagong has all franchise qualifications granted by the Chinese Government, and is an official institution providing credit rating services for all bond issuers in China."

I was rather shocked to find out that the former Communist Empire had a ratings agency.  Dagong has over 500 employees, among them, 200 with Master's or Doctorate level education and 50 with post-Doctoral education.

Here is a two page screen capture showing Dagong's debt ratings system:

Now, let's see what Dagong has to say about the United States sovereign debt.  Dagong's assessment opens by noting that the United States Congress has, as of August 2, 2011, approved the bill on raising the debt ceiling of the federal government.  They then note the following:

"Though this decision enables the government to continue the practice of repaying its old debt through raising new debt, it has not changed the general trend that the increase in national debt outpaces the increase in economy and revenue, making this incident a turning point for the US government’s solvency to decline even further. Hence, Dagong decides to downgrade the local and foreign currency credit rating of the US put on the negative watch list on July 14 from A+ to A with a negative outlook." (my bold)

If you look back at Dagong's ratings system, you will see that the agency ranks American debt at third from the top, denoting expectations of relatively low default risk and vulnerability to adverse economic conditions.

I find the comment that the practice of repaying the old debt by issuing new debt most interesting, particularly, since I have observed (and posted) that governments never, ever talk about actually repaying their debt obligations, rather, as in the case of Congress, they make vague statements about cutting the growth rate of the debt.

Here are the four reasons for Dagong's downgrade:

1.)  The bipartisan struggle over the debt ceiling has exposed growing defects in the United States government's ability to resolve the debt crisis.  This means that United States’ creditors lack any sort of a guarantee from both the political and economic system of the country.  The growing difference in political views between the two Parties is preventing efficient decision-making.  Here's a quote from the assessment:

"...at this crucial juncture, neither the Democratic Party nor Republican Party has shown any consideration for the general interest in order to argue for their own partisan interest; they had a hard time making the correct choice in a timely manner leaving the world in terror, which highlights the negative role of the US political system on an economic basis. This incident will definitely exert its continuous impact on investors’ confidence in US Treasury bonds, affecting the stability of the US debt income." (my bold)

I couldn't have said it any better.  Apparently the children of Congress simply don't wish to share their toys or play well together, preferring to act like an immature class of Grade One children (my apologies to Grade One children everywhere).

2.) By raising the debt limit, the U.S. staves off default, however, by increasing the debt burden, the American debt crisis ultimately deepens further.  The solvency of the United States will continue to decline and "...the accumulation of the contradiction between the lowering solvency and the rising debt add to the inevitability of triggering a sovereign debt crisis".

3.) The pace of the proposed United States' deficit cut is far lower that the growth rate of new debt, largely as expenditure growth outstrips growth in revenue.  The deficit cut objective matches the size of the increase in the debt, however, there is an eight year difference between the two objectives.  Dagong estimates that the United States will have to cut its deficit by at least $4 trillion within the next 5 years to maintain the current debt level, a highly unlikely occurrence in this divisive political environment.

4.) The United States Congress has not come up with a substantive plan for growing the domestic economy.  This means that the Federal government cannot resolve the influence of low growth, high deficit and higher debt through an increase in wealth creation, making a decline in national solvency irreversible.  Dagong also notes that the implementation of another round of easing (the Twist?) will throw the world economy into an overall crisis which will shake the status of the United States dollar as a reserve currency.

Here's Dagong's summary:

"The radical deterioration in the state management capability, economic strength and fiscal strength that affect the government debt service capability and willingness revealed in the struggle over the debt ceiling determines the outlook of the sovereign credit rating of the US as negative."

I found this a rather profound and interesting summary of the issues facing the United States.  China has a great deal to lose in this process; with $3.18 trillion in foreign reserves including $1.13 trillion worth of United States Treasuries, they have a vested interest in assuring that the United States dollar remains the world's choice for a reserve currency as shown here:

At least until China has a viable alternative in place as shown in this Wikileaks document where China suggests that as countries around the world increase their gold reserves, the importance of the renminbi will increase at the expense of the United States dollar.

Tuesday, January 24, 2012

The State of the Union in Screen Captures - 2012 Edition

Last year, I posted a brief summary of the State of the Union using screen captures.  With your patience and, in light of the President's State of the Union speech, I'd like to update the information from last year's posting and show how much or little progress has been made on five critical sectors of the American economy.  Please note that if you click on the introductory line to each section, you will be taken directly to the source documents.

Last year's debt to the penny number was $14,062,239,904,820.69.  With the debt number for January 20th in mind as I’ve linked to above, the Obama Administration has added an additional $1.174 trillion or 8.3 percent to the debt in just 12 months.  All that, despite the kerfuffle in Washington back in July and August 2011.  Way to go D.C.!  As an added bonus, if we use the current dollar GDP for the third quarter of 2011 of $15.176 trillion as released by the Bureau of Economic Analysis, we see that the debt-to-GDP ratio has reached 100.4 percent.  Kudos again!

For the first three months of fiscal 2011, the interest owing on the federal debt was $148,238,982,913.81.   Basically, the interest owing has remained relatively constant from last year’s despite the growth in the debt. With last year's interest record of $454 billion, it certainly looks like we are on target to either meet or break the record.  We have our current ultra-low interest rate environment to thank for that.  Heaven help us all should interest rates rise to historic norms or we experience a bond run like several European nations have over the past year.  

For the first three months of fiscal 2012, Washington has run a deficit of $320 billion, down $49 billion from the deficit of $369 billion in the first three months of the previous fiscal year.  Over the quarter, about $9 billion in savings was achieved through lower unemployment insurance payments (as the long-term unemployed ran out of benefits) and outlays for Medicaid fell by $15 billion because the federal government's share of program costs dropped in July 2011.  We'll see how long those two savings last should another recession take hold and as the population ages. 

One year ago, it looked like there was a slim chance the American housing market might be coming off its multi-year lows as the Case-Shiller Home Price Index was sitting right on the zero percentage change from the previous year.  While the price drop over the past 12 months has not been as bad as it was in previous years, data through to the end of October 2011 (the most recent data available) show that the leading measure dropped by 1.2 percent from the previous month and by 3.4 percent from the previous year.  Nineteen of the twenty markets surveyed saw month-on-month price declines from October to September.  The bottom of the housing market does not appear to have arrived just yet.

The year-over-year drop in unemployment is the one "bright" spot in the State of the Union.  The headline U-3 unemployment rate has dropped from a seasonally adjusted rate of 9.4 percent in December 2010 to 8.5 percent in 2011.  While that is marvelous news for those individuals who actually regained employment, the broader U-6 rate (which includes persons that are unemployed, those who are marginally attached to the labor force and those who are working part-time for economic reasons plus those who are marginally attached to the work force) is still a rather high 15.2 percent, down from 16.6 percent one year earlier.  Part of the drop in unemployment is related to a drop in the size of the labor force, which has reached its lowest level since the early 1980s as shown here:

While the State of the Union in some sectors of the economy has improved, one would hardly call the "recovery" robust, in fact, it is among the most sector specific and weakest recoveries since the Great Depression.  Let's hope that the world doesn't slip into Part 2 of the Great Contraction, making a lukewarm economic situation become worse very quickly.