Track The Turnaround

Credit Demand: Thanks, But No Thanks

The credit drought might or might not be breaking, but it looks like many potential borrowers couldn't care less.

More than a year into Washington's massive effort to restore credit availability, many U.S. businesses and consumers are shunning loans.

It has been reported that the Federal Reserve's recently released loan officer survey showed credit remains tight. Less attention has been paid to weakening credit demand.

The Fed's survey suggests interest in consumer, mortage, business and commercial real estate loans is still weak and, in most cases, continues to shrink.

The survey showed more lenders reported weaker than stronger demand for C&I loans.

The report continued to show a near-record balance of lenders reporting less of a need for commercial real estate loans.

More lenders reported weaker interest in consumer loans.

The best news ("best" only in a relative sense) was that a larger percentage of firms continued to report greater rather than weaker demand for prime mortgage loans, but that balance of sentiment shifted toward weakness again in the third quarter. Firms reporting less interest in nontraditional mortages continued to outnumber those reporting more, and by a greater extent than in the second quarter.

In other words, even if credit weren't tight, fewer want it.

It's another sign the top priority now for many in the U.S. is to pay off debt, rebuild savings and restore balance sheets while adjusting to the "new normal." Borrowing to spend and expand operations -- you know, the things that make an economy grow -- doesn't seem to be much of a priority at this point.

This isn't a recovery yet. It still looks more like bottom fishing.

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^{_{*The Fed didn't have enough lenders reporting subprime lending to produce a constitent time series for all mortage loans going further back in time.}}

_{^{**The net percentage figures are calculated by taking the percentage of firms reporting stronger demand minus the percentage of firms reporting weaker demand. In other words, it shows the balance of lenders seeing stronger demand versus firms seeing weaker demand.}}

Super-Glut: Economy's Only Quarter-Way Through A Massive Inventory Correction

Some reporters took as positive news Thursday's report that U.S. business inventories fell again in June. The Commerce Department said the value of stockpiles -- at the retail, wholesale and factory level -- dropped 1.1 percent to $1.35 trillion.

That's been taken by some as good news that the inventory glut is being worked off, which is what we need to clear the path to real growth in production and the overall economy again.

How do I put this politely? Whoop-ee-doo.

The drop in inventories is meaningnless without context. The context is sales. Retailers, wholesalers and factories still have quite far to go to get their stockpiles back in sync with sales. They're still chasing a falling target and have made little headway in closing the gap.

The relevant measure is the inventory-sales ratio, which tells you where your inventories are versus sales, or how bloated your stockpiles are. That's what matters. Producers and distributors strive to keep stockpiles in line with sales through booms and busts. They try to keep supply in sync with demand or expected demand. In a recession-recovery period, it's the ratio that gives you a rough sense of how much liquidation needs to be done.

And this is what the I-S ratio is telling us: However much stockpiles have been run down, they remain very bloated against sales. Absent a miraculous jump in sales, there's more retrenchment to come...beyond the painful downsizing we've seen so far.

That's why a closer look at the updated inventory-sales ratio chart* is sobering. Very sobering.

While the ratio sank to 1.38 in June from 1.41 in May, it was still more than 5% above its pre-recession level of about 1.31.

It gets worse.

The "right" I-S ratio is a constantly moving target -- a falling target. There was at least one enduring development, one real technological advance, through all the bubble-hype of the past 20 years: I'm talking about "just-in-time" manufacturing or the drive to make lean inventories ever leaner. It means, through the best and worst of times, the "right" I-S ratio has been continually falling as companies successfully squeeze out more waste from  operations, constantly defining down the benchmark of what's considered a "healthy" inventory-sales ratio.

Here's the chart again with the trend line.

The trendline shows the I-S ratio on a generally downward path through booms and busts. The trend line is a rough guess of where the ratio "should" be at any given time, given the long-term trend.

The chart suggests the current I-S ratio is high compared to pre-recession levels. And it's very high above trend levels -- above the "right" level, or where the ratio should be.

At the very least, the bloat -- the gap between what the I-S ratio currently is (1.38) and what it should be (1.27 according to the trendline) -- remains above 8%. That means sales either have to go up more than 8% from where they were in June, inventories have to drop by roughly the same amount, or there has to be some mix in between.

To get a better feel of what kind of inventory liquidation that means, think of what an 8% drop in economic activity can feel like, just for comparison. Consider that the U.S. economy as a whole has shrunk (only) 1% from its peak so far during this two-year recession. And that's been painful enough. Consider that's about the same drop we saw through the ugly 1970's. And those are the two biggest 2-year GDP drops I can find in quarterly records going back to 1947.

On the flip-side, To get a better feel of what kind of sales boost we'd have to see to avoid that kind of retrenchment, think of what an 8% jump in overall economic activity feels like. That was China's growth rate -- at its height -- through the go-go years. America's best annual growth rates during the boom years were around 4% or so. In other words, getting rid of this glut in one year would require double the growth rate enjoyed through the boom years. Aint gonna happen.

Take one last look at the inventory-sales chart again.



It suggests we're only a quarter of the way through the inventory correction -- progress paid for with gigantic bailouts that have bought us temporary, artificial relief at future cost. The current Super-Glut, despite recent progress towards reducing it, remains more than twice as big as the inventory bloat seen during the 2001 recession.

The recession might not be over, folks. And even if it is, and we are in a recovery, it doesn't look like a return to real growth in production is around the corner.

Invest (or divest) accordingly.

You Call This "Good News"? Percentage of Americans Working Sank To 25-year Low

Forget the "good news" about the jobless rate dipping from 9.5 to 9.4%, reported Friday. That figure leaves out discouraged Americans who've given up the search and are therefore not counted as "unemployed." That statistical quirk often makes this widely-watched stat misleading during recessions (when it can understate weakness), recoveries (when it can understate strength) and turning points (when it can send false signs of a rebound).

There's an easy way to get through the noise: Take a look at the Labor Department's employment-to-population ratio, which is included in the same monthly report. It's the share of the population (16 and older) still employed. It gets to the heart of the matter, and it does not paint a pretty picture.

The ratio fell from 59.5% to a new 25-year low 59.4% in July, extending an unprecedented free fall that began more than two years ago. This chart shows the sharpest, longest plunge in this statistic ever in records going back to 1948.

In other words, it's been at least a half-century since the job market got this bad, this quickly for this large a share of working-age Americans. And the bloodletting didn't end in July. It didn't even slow much. The situation is more than just "troublesome," as some have described it.

It borders on horrific.

The unemployment rate generally grabs headlines because it helps filter out social, demographic and cultural changes that can cloud the picture of the job market's health: like more women entering the work force through the '70s, or teenagers abandoning it through the '90's.

But demographic changes like those evolve slowly over a generation or more -- not months or years. Besides, the picture doesn't look much better when you slice and dice for different demographics and especially for men (where things look even more abysmal). 

See the additional charts below. In short, it's pretty ugly out there (terrifying for men), and as of the July reporting period, the situation was still getting worse -- still in free fall.

Working-age women have fared much better than other groups, but haven't seen this fast a drop in their employment-to-population ratio since 1955.

Working-age men haven't seen this fast a drop in their ratio since the government records going back to 1948.

Working-age teenagers (16-19) have seen the steepest 1-year drop in their ratio since 1954.

L is for L-ong S-L-og

The chart below compares the aftermath of past bubbles to the current aftermath of the latest bubble. It's from "The Pragmatic Captalist" on Seeking Alpha, and it is sobering:

"L" is for Long Slog.

Between this history, the unresolved overhang of toxic "assets", Washington's unwillingness to allow the financial system to purge itself of this bad debt and plans for greater regulation of the U.S. economy and much higher taxes on small businesses and others, we're looking at an L-shaped "recovery," at best, folks.

The economy has stabilized from its free fall late last year, as I predicted when I started this blog in January, but it's going nowhere fast from here (not up at a fast clip, at least) unless the economic policy outlook changes dramatically for the better.

Roubini nails it

Dr. Doom has nailed it in laying out the case for just how weak this recovery is likely to be -- and the fact that it'll be U-shaped, maybe even W-shaped as in a "double-dip" or second contraction.

According to the Reuters article linked above a "combination of rising oil prices, rising public debt and increases in real interest rates, rising concerns about inflation and the expiration of a number of tax cuts in the United States" -- in short, government action and its consequences -- could make a mockery of the current speculation of a recovery.

an inflection point?

The stock market has jumped over the past few days, retail sales and confidence data, while weak, have come in better than expected (when economists start erring toward overpessimism from overoptimism, that's a very good sign), and Citibank has said some right things, surprisingly. We are indeed in at or already past an inflection point. But what of the future? A big problem still remains: government policy remains a significant damper on investment with a key question being, how much will Washington alter the business climate in the U.S. and reduce the after-tax rate of return investors can expect on their investments. That's the ultimate question, and will help determine whether the future recovery will be L-, U- or V-shaped.

an ongoing vote of no confidence

The stock market is down 40% over the past several months and is sinking to new bear-market lows levels not seen in 11 years. There seems to be no end to it. At least a few things are clear: The market has yet to see compelling signs of a recovery and, at best, it has no confidence that government policy in the U.S. or other major economies will arrest the rot. At worst, it reflects the collective view of the market that policy is actually worsening the rot, or expectations that policy will further worsen the rot. Until that sentiment -- and the reality fueling it -- changes, we're not going to have a recovery. Certainly not a very good one. At this point, I don't see this situation changing for the better anytime soon, but I'll post again when we again see early signs that it will.

The stock market is down 40% over the past several months and is sinking to new bear-market lows levels not seen in 11 years. There seems to be no end to it. At least a few things are clear: The market has yet to see compelling signs of a recovery and, at best, it has no confidence that government policy in the U.S. or other major economies will arrest the rot. At worst, it reflects the collective view of the market that policy is actually worsening the rot, or expectations that policy will further worsen the rot. Until that sentiment -- and the reality fueling it -- changes, we're not going to have a recovery. Certainly not a very good one. At this point, I don't see this situation changing for the better anytime soon, but I'll post again when we again see early signs that it will.

The stock market is down 40% over the past several months and is sinking to new bear-market lows levels not seen in 11 years. There seems to be no end to it. At least a few things are clear: The market has yet to see compelling signs of a recovery and, at best, it has no confidence that government policy in the U.S. or other major economies will arrest the rot. At worst, it reflects the collective view of the market that policy is actually worsening the rot, or expectations that policy will further worsen the rot. Until that sentiment -- and the reality fueling it -- changes, we're not going to have a recovery. Certainly not a very good one. At this point, I don't see this situation changing for the better anytime soon, but I'll post again when we again see early signs that it will.

...maybe...

Goldman Sachs, in its latest ECS Markets Research report, finds mixed evidence -- in factory output data and related surveys from the U.S., Europe and China -- that the global economy might be approaching a turning point:

Anecdotal evidence suggests some light on the industrial side...[there's been] an abatement in the rate at which new orders are falling [inflection point!]....inventory-to-sales ratios have tentatively turned down as new orders have bounced while inventories have remained under control or fallen....a trough in the global industrial cycle may be in sight

But the report warns final demand in the US and Europe remains pretty week; evidence of a coming industrial upturn mixed, scattered and limited, and Asian exports still in free-fall. And even if the cycle turns, "good growth is unlikely to resume for some time," the report says. Translation: a wrenching, Japan-sized L-shaped recovery is a real possibility even if a turning point is upon us.

Well, it's a start.

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More from the great Ambrose Evans-Pritchard. A great overview of these fledgeling glimmers of stabilization, and maybe recovery.

The good, the bad and the ugly

At this point, there's good news, bad news and...quite ugly news.

The housing market may have passed an inflection point. It's still sinking overall, but it's showing early signs of stabilizing -- with earlier reports suggesting overall price declines are decelerating, the pace of overall sales declines shrinking and the surge in inventories slowing. We may be approaching the new post-bubble equilibrium, absent other major shocks. That's the latest good news.

The most important bad news today is not in news sections but in the op-ed section of today's Wall Street Journal, where Professors Reinhart and Rogoff make a disturbing case that the U.S. financial crisis is, in some sense, typical and therefore subject to typical crisis traits. They find striking similarities between this crisis and Spain 1977, Norway 1987, Finland 1991, Sweden 1991, and Japan 1992, suggesting:

...the bottom won't come before the end of 2010...equity prices could still take a couple more years for a sustained rebound...the duration of the period of rising unemployment [could average] nearly five years, with a mean increase in the unemployment rate of seven percentage points, which would bring the U.S. to double digits.

The ugly news is in Washington. DC, which shows no clear indication it will avoid past mistakes or clear the way for the necessary, wrenching adjustment from the excesses of the past. The chaotic clash of mostly bad ideas and motives alone, evident in the messy debate over the so-called "stimulus" plan, only serves to aggravate uncertainty and undermine market confidence that these people know what the heck they're doing, or really have the economy's best long-term interests at heart.

Uh oh.

Gold has rebounded 30% since November in part on fear U.S. and other Western governments are spending money they don't have, making promises they cannot afford and offering incoherent "rescue" plans that won't work. A massive currency collapse, like what we've seen in Mexico, Argentina, Russia and other banana republics, could happen to the U.S. Let's hope not, but the renewed surge in the price of gold suggests the market is again losing confidence in the system, and for good reason. Government policy is the big wildcard here. Bad policy and incoherent and inconsistent execution will delay and potentially undermine the recovery.