GM Anti-Jobs Bank: Nice Nonwork If You Can Get It

One issue contributing to the UAW's strike against GM is that negotiations reached an impasse regarding the future of the "jobs bank," or what the Wall Street Journal calls "GM's Anti-Jobs Bank, the company's euphemism for a post-employment limbo in which GM pays laid off members of the United Auto Workers not to work." As the WSJ points out today, it's "Nice nonwork, if you can get it."

There probably isn't a single issue that better highlights the problems facing GM and the UAW than the "Jobs Bank," which they both agreed to in 1984. Here is what the WSJ had to say about it in a 2005 editorial "GM's Anti-Jobs Bank":

If you want to know why GM's costs are too high for the number of cars it sells, here's one explanation - the Jobs Bank.

GM doesn't like to talk about the "jobs bank," to the point that it won't disclose how many idled workers are in the bank or even how much it costs the company. However, the Detroit Free Press has dug around and reported that the "bank" holds some 5,000-6,000 employees, at an annual cost of as much as $800 million a year. And that's just the beginning of the damage it does.

The jobs bank was created in 1984 at a time when it became fashionable to worry that automation would cause robots to replace workers on factory floors. So in exchange for the right to introduce productivity improvements in factories, GM, Ford and Chrysler all consented to jobs banks. The idea was that in exchange for educating themselves, doing community service or in some cases just sitting around a factory, workers would continue to collect pay and benefits until the automaker could find another job for them.

One trouble is that U.S. car makers have been shrinking more than growing in the two decades since, meaning people have stayed in the bank longer than envisioned. The commitment to find a new job for those workers only made sense in an environment in which GM's demand for labor was stable or growing. Instead, that demand has been steadily shrinking as productivity has increased and market share has decreased.

The jobs bank sends a message that downsizing is temporary, and that GM can accommodate those workers somewhere. The reality is that many of them are simply waiting out retirement.

GM has a host of problems, from the attractiveness of its product lines to the health-care costs it pays for its one million retirees. But a major one is size: It is a smaller company than it was or expected to be when it made the promises it's now trying to keep both to retirees and current workers. GM has some of the most productive industrial workers in the world, but it has too many of them for the number of cars it can sell today.

The jobs bank is both cause and symptom of that problem. We don't wish hardship on those workers, but the company's future now rests on its ability to make its payroll match its production. If the jobs bank -- and the self-deception it represents -- cannot be fixed, that millstone will continue to drag down what was once one of America's great companies.

MP: Only when and if GM and the UAW agree to eliminate the "jobs bank," will there be any hope that either will survive.

Banks and Housing Markets: Canada vs. U.S.

From the mid-2006 housing price peak in the U.S. (Case-Shiller Composite-20 Index, data here), home prices have fallen by about 30% (see chart above) through February 2009. From the mid-2008 peak in Canada (Teranet/National Bank of Canada National Composite Index, data here), prices have fallen by only 7.4% through February. Although Canada home prices may continue downward (along with U.S. home prices), it would appear so far that there was a much bigger housing bubble problem in the U.S. than in Canada.

Likewise, there was a much more significant banking crisis in the U.S. than in Canada, see bottom chart above of the S&P US Bank Index and the S&P Canada Bank Index, from January 2000 to May 2009 (data from Global Financial Data, paid subscription required). Both bank indexes peaked about the same time in early 2007, but the U.S. bank index crashed by 80% through early 2009, compared to the 40% drop in Canada's bank index over the same period. Year-to-date, both bank indexes are up about 30%.

From Nick Rowe, via Marginal Revolution, comes this list of why Canada's banks are special, or at least different enough from US banks to explain the differences above in the recent housing market and banking problems:

1. Canada has never had restrictions on interstate banking, so Canadian banks spread their assets and liabilities across Canada, and it doesn’t matter if a local housing market goes bust. (This was also a major difference during the Great Depression when about 10,000 banks failed in the U.S. vs. almost no bank failures in Canada.)

2. Canada never had Glass-Steagall restrictions separating commercial banking from investment banking, and the investment banks in Canada joined the retail banks some years ago.

3. Canada doesn't have mortgage interest deductibility for income taxes. So paying down your mortgage in Canada is a tax-free investment, and most people want to pay down their mortgages.

4. Except in Alberta, mortgages in Canada are fully recourse. You can’t just walk away from a negative equity home and hand the keys to the bank; the bank will come after you for the difference.

5. If a Canadian investor wishes to take some risk, the New York-based banks may be the most efficient means of doing that (added by Tyler Cowen).

Cost of Jobs Bank 2005-2008: $4,200,000,000

FLASHBACK to October 2005:

DETROIT NEWS -- The jobs bank was established during 1984 labor contract talks between the UAW and the Big Three. The union, still reeling from the loss of 500,000 jobs during the recession of the late 1970s and early 1980s, was determined to protect those who were left. Detroit automakers were eager to win union support to boost productivity through increased automation and more production flexibility.

The result was a plan to guarantee pay and benefits for union members whose jobs fell victim to technological progress or plant restructurings. In most cases, workers end up in the jobs bank only after they have exhausted their government unemployment benefits, which are also supplemented by the companies through a related program. In some cases, workers go directly into the program and the benefits can last until they are eligible to retire or return to the factory floor.

By making it so expensive to keep paying idled workers, the UAW thought Detroit automakers would avoid layoffs. By discouraging layoffs, the union thought it could prevent outsourcing. That strategy has worked but at the expense of the domestic auto industry's long-term viability (MP: That's why they're now asking for a handout/bailout). American automakers have produced cars and trucks even when there is little market demand for them, forcing manufacturers to offer big rebates and discounts (MP: another reason the Big 3 has been losing money and needs a handout).

"Sometimes they just push product on us," said Bill Holden Jr., general manager of Holden Dodge Inc. in Dover, Del., who said this does not go over well with the dealers. "But they've got these contracts with the union."

In Detroit's battle against Asian and European competitors that are unencumbered by such labor costs, the job banks have become a major competitive disadvantage (MP: And explains why the Big 3 is asking for a handout/bailout).

Detroit automakers declined to discuss the programs in detail or say exactly how much they are spending, but the four-year labor contracts they signed with the UAW in 2003 established contribution caps that give a good idea of the size of the expense.

According to those documents, GM agreed to contribute up to $2.1 billion over four years. DaimlerChrysler set aside $451 million for its program, along with another $50 million for salaried employees covered under the contract. Ford, which also maintained responsibility for Visteon Corp.'s UAW employees, agreed to contribute $944 million. Delphi pledged to contribute $630 million. (See chart above, showing the $4.2 billion total cost of the jobs bank.)

UPDATE TODAY:

DETROIT NEWS -- Local leaders of the United Auto Workers agreed to suspend the program where laid-off workers can get up to 95% of their wages and benefits, a concept that came to symbolize the stereotype of overpaid, underworked factory workers.

Local leaders agreed on Wednesday to immediately suspend the jobs bank, which has 3,542 workers. Suspending the program just as the automakers prepare to eliminate more workers also prevents the newly laid off from joining it in the months ahead, company officials said.

Gettelfinger said the jobs bank -- something the union has defended steadfastly in the past -- has become a lightning rod since congressional hearings two weeks ago. Top UAW officials and staff must now meet with automakers to work out the removal of workers in the jobs bank.

MP:

1) Is it any wonder that: a) "Detroit automakers declined to discuss the programs in detail or say exactly how much they are spending," and b) the Big Three is now asking for a bailout after spending more than $4 billion on an outdated "jobs bank" program over the last four years?

2) If the Big Three hadn't wasted an estimated $4 billion from 2005-2008 paying idled "workers" not to "work," what could they have done with that money? Well, they could have produced about 200,000 cars at an average cost of $20,000 or built 8 new factories at an average cost of $550 million.

3) Speculation: Without the burden of the jobs bank, and the $4.2 billion estimated cost of the jobs bank over the last four years, the Big 3 wouldn't be begging for a handout today. Even if the hourly wages of the Big Three are now comparable to wages at Toyota and Honda, and even if the productivity gap has narrowed, the cost of the job banks to Big Three is probably one of the biggest factors contributing to their competitive disadvantage and one of the biggest reasons they are facing bankruptcy today.

If the UAW had agreed five years ago to end the jobs bank, the Big Three wouldn't be in so much trouble today, and wouldn't be in D.C. today begging for a handout.

Every Major U.S. Bank Was Profitable Last Year

Jan. 22 (Bloomberg) -- With all the large writedowns and losses announced for the fourth quarter, hardly any attention is being paid to just how profitable U.S. banks really are.

That inattention has raised unnecessary concerns that the banks may be so crippled by losses that they will cut lending to the point it might undermine the U.S. economy.

Some commentators have said the banks are in the worst shape since the Great Depression. That isn't close to being correct. Every major U.S. bank was profitable in 2007 (see chart above, click to enlarge).

For example:

Citigroup: For the full year 2007, net income was $3.62 billion.

JP Morgan: For the full-year 2007, net income was a record $15.4 billion on record revenue of $71.4 billion.

Bank of America: For the full year, Bank of America reported earnings of $14.98 billion.

Wachovia: For the full year, Wachovia earned $6.31 billion.

Wells Fargo: For all of 2007, Wells Fargo earned $8.06 billion.

Sun Trust: The company had net income of $1.6 billion in 2007.

Regions Bank: For 2007, Regions earned $1.3 billion.

National City: The company reported full-year earnings of $314 million in 2007.

(HT: Marginal Revolution)

The Real Bank Bailout: Upward Sloping Yield Curve

Larry Kudlow -- Out of the blue, bank stocks mounted an impressive rally this week, jumping nearly 40% on the S&P financial list. One after another, big-bank CEOs like Vikram Pandit of Citi, Ken Lewis of BofA, and Jamie Dimon of JPMorgan are telling investors they will turn a handsome profit in the first quarter, their best money gain since 2007. This is big news. And it triggered the first weekly stock gain for the Obama administration.

But this anticipated-profits turnaround doesn’t seem to have anything to do with the TARP. It’s about something called the Treasury yield curve — a medical diagnostic chart for banks and the economy. When the Fed loosens money, and short-term rates are pulled well below long rates, banks profit enormously from the upward-sloping yield curve. This is principally because banks borrow short in order to lend long. If bankers can buy money for near zero cost, and loan it for 2, 3, or 4%, they’re in fat city. Their broker-dealer operations make money, as do all their lending divisions. So the upward-sloped yield curve is the real bailout for the banking system.

Now, turn the clock back to 2006 and 2007. In those days the Treasury curve was upside down. Due to the Federal Reserve’s extremely tight credit policies, short-term rates moved well above long-term rates for an extended period, and that played a major role in producing the credit crunch. Since interest margins turned negative, the banks had to turn off the credit spigot, and all those exotic securities — like mortgage-backed bonds and various credit derivatives — could no longer be financed.

The Fed’s long-lived credit-tightening also wreaked havoc on home prices and was directly responsible for the recession that began in late 2007. At the time, Fed head Ben Bernanke said the inverted yield curve wouldn’t matter. Gosh was he wrong.

Today, however, after about a year of a positively sloped yield curve, bank interest margins and profits are turning up. In fact, despite the perpetual pessimism, the normalized yield curve is a leading indicator of economic recovery, according to models created by the New York Fed and others.

MP: The charts above illustrate Larry Kudlow's analysis.

The top chart shows the 30-year mortgage rate and the 1-month CD rate over the last five years, and the bottom chart shows the difference between those two rates as an estimate of a typical bank's net interest margin (a slightly different measure of interest rate spreads than the 3-month to 10-year Treasury spread). The current net interest margin for banks is close to a five-year high of almost 5%, explaining the recent bank stock rally. And the historically narrow 1% spread between 30-year and 1-month rates in 2006 and 2007 reflects the credit crunch that Larry describes.

Earnings for Most Major Banks Forecast Up in 2008

A recent post reported that every major U.S. commercial bank was profitable last year. An anonymous commenter reported some 2008 earnings per share (EPS) estimates for some of the banks listed in the post. That comment inspired the table above (click to enlarge), which shows 2007 EPS (actual) and 2008 EPS estimates for 17 of the largest U.S. commercial and investment banks.

Conclusions:

1. Merrill Lynch is the only major investment bank to report negative earnings in 2007, and all other banks above were profitable last year. For 2008, $5.22 EPS is forecast for Merrill Lynch.

2. For 2008, all 17 banks are expected to be profitable, and EPS for 12 out of 17 banks are expected to increase from 2007.

EPS Source: Yahoo! Finance

Empowering Technology: Mobile Phone Access Reaches Three Quarters of Planet's Population

The World Bank and infoDev released a study yesterday titled "Information and Communications for Development 2012: Maximizing Mobile," here's an excerpt from the press release:

"Around three-quarters of the world’s inhabitants now have access to a mobile phone and the mobile communications story is moving to a new level, which is not so much about the phone but how it is used.  The number of mobile subscriptions in use worldwide, both pre-paid and post-paid, has grown from fewer than 1 billion in 2000 to over 6 billion now, of which nearly 5 billion in developing countries. Ownership of multiple subscriptions is becoming increasingly common, suggesting that their number will soon exceed that of the human population."

Here's an excerpt from the Executive Summary:

"With some 6 billion mobile subscriptions in use worldwide, around three-quarters of the world’s inhabitants now have access to a mobile phone. Mobiles are arguably the most ubiquitous modern technology: in some developing countries, more people have access to a mobile phone than to a bank account, electricity, or even clean water. Mobile communications now offer major opportunities to advance human development—from providing basic access to education or health information to making cash payments to stimulating citizen involvement in democratic processes. 

The developing world is “more mobile” than the developed world. In the developed world, mobile communications have added value to legacy communication systems and have supplemented and expanded existing information flows. However, the developing world is following a different, “mobile first” development trajectory. Many mobile innovations—such as multi-SIM card phones, low-value recharges, and mobile payments—have originated in poorer countries and are spreading from there. New mobile applications that are designed locally and rooted in the realities of the developing world will be much better suited to addressing development challenges than applications transplanted from elsewhere. In particular, locally developed applications can address developing-country concerns such as digital literacy and affordability. 

Mobile applications not only empower individual users, they enrich their lifestyles and livelihoods, and boost the economy as a whole. Indeed, mobile applications now make phones immensely powerful as portals to the online world. A new wave of “apps,” or smartphone applications, and “mashups” of services, driven by high-speed networks, social networking, online crowdsourcing, and innovation, is helping mobile phones transform the lives of people in developed and developing countries alike. The report finds that mobile applications not only empower individuals but have important cascade effects stimulating growth, entrepreneurship, and productivity throughout the economy as a whole. Mobile communications promise to do more than just give the developing world a voice. By unlocking the genie in the phone, they empower people to make their own choices and decisions." 

Here's a website with links to the full study.

MP: An amazing story of how a new technology has revolutionized the world and empowered individuals and transformed lives, especially in the developing countries.  The simple cell phone has probably done more to reduce poverty globally and promote economic growth around the planet than all of the efforts of the World Bank.  

U.S. Housing Market: The Evidence Continues to Mount That We're Past the Bottom

The Economist -- "In unsurprising but good news, Case-Shiller reported new home price data this week that showed a definitive upward move in markets across the country. From March to April, Case-Shiller's 10- and 20-city indexes rose 0.7%, seasonally adjusted. All but three of the tracked markets saw month-on-month increases. Half of tracked cities notched year-on-year price increases in April.

Price rises have looked imminent for some time. Sales figures have been trending upward and inventory numbers are at remarkably low levels. Rents have also been increasing, making home purchases look ever more attractive. There is still an ample stock of distressed and bank-owned homes to work off, but America seems to have achieved bottoms for both sales and prices. Housing markets have adjusted.

This turning point could be a source of considerable strength for the American economy. Rising prices should have a direct wealth effect for owners and should sharply limit new defaults and foreclosures. As a result, mortgage lending should begin to look much more attractive. A return to something like normal lending conditions could turn fledgling increases in sales and construction into strong increases, boosting GDP and construction employment."
 
MP: The top chart above shows the monthly FHFA House Price Index (HPI) through April, based on the purchase prices of houses financed with Fannie Mae or Freddie Mac mortgages.  The April index was 3% above its year-ago level, and 3.3% above what is apparently the cyclical low point for the HPI in March of last year.  The 3% annual gain in the HPI was the largest yearly increase since November 2006, five and-one-half years ago (see bottom chart).

This FHFA index of national home prices is more comprehensive geographically than the major metro-area based Case-Shiller index, and includes both small cities and major cities like Houston (not one of the 20 metro areas in Case-Shiller), where median home prices in May reached a new record-high level.  The HPI is also available now for the month of April, whereas the most recent Case-Shiller index is a three-month average of February-April.

Bottom Line: The evidence continues to mount that we've passed the bottom of the U.S. housing market, as we continue to see strong sales gains for new and existing homes, a two-year high for pending home sales, and gradual increases in home prices.  Look for more improvements in the real estate market going forward through the rest of the year.

FDIC Quarterly Banking Report Suggests That U.S. Banks Have Returned to Pre-Recession Conditions

The FDIC released its Quarterly Banking Profile today for the second quarter, here are some highlights:

1. U.S. banks earned a total of $34.5 billion from April through June, a 20.7% increase compared to Q2 2011 (see chart above). Almost two out of every three (62.7%) of the 7,246 FDIC-insured banks reported higher earnings than a year ago. Only 10.9% were unprofitable, down from 15.7% in Q2 2011.  The increase in profits was the 12th consecutive year-over-year increase in quarterly net income for U.S. banks starting in Q3 2009, following ten consecutive decreases from Q1 2007 to Q2 2009. 

2. The $69.3 billion bank net income for the first half of 2012 was 21% above the same period last year, and highest profits for January-June since the $72.5 billion in 2007, five years go. 

3. Banks set aside $14.2 billion in provisions for loan losses in Q2, a 26.2% decline from Q2 2011, and is the smallest quarterly total in five years.

4. Net loan charge-offs (removed from balance sheet because of uncollectibility) totaled $20.5 billion in Q2, an $8.4 billion (29.1%) reduction from Q2 2011 and is the eighth consecutive quarter that charge-offs have declined from year-earlier levels and the lowest quarterly charge-off total since Q1 2008. All major loan categories posted lower charge-offs compared with a year ago.

5. Noncurrent loan balances (loans 90 days or more past due) declined for a ninth consecutive quarter, falling by $12.9 billion (4.2%). Noncurrent levels fell in all major loan categories.

6. The number of institutions on the FDIC’s “Problem List” fell for a fifth consecutive quarter, from 772 to 732. Total assets of “problem” institutions declined from $291 billion to $282 billion.

7. Fifteen banks failed during Q2 (following 16 failed banks in Q1) which is the lowest number of failed banks in a quarter since 12 banks failed in Q4 2008. 

MP: Overall, this is a very positive report for the financial conditions of U.S. banks in Q2: profits are strong (+20.7%), provisions for loan losses are at a 5-year low, net loan charge-offs fell by 29% in Q2 to a four-year low, noncurrent loans declined for the 9th quarter, the number of "problem banks" fell and the number of failed banks fell to a three- and-a-half year low.  Along with a gradually recovering overall economy, U.S. banks have gradually recovered and the financial health of the banking system has returned t0 pre-recession conditions. 

Monetary Instability in Venezuela

From today's NY Times, an article about monetary instability in Venezuela, rising inflation (see graph above) and the resulting price controls, and the introduction of a new currency:

Inflation has been climbing rapidly since January when a sharp decline in the black-market value of the bolívar pushed up prices of imported goods. Since Mr. Chávez moved to nationalize major telephone and electricity companies in January, Venezuelans have rushed to take money out of the country, currency traders say. That exodus has caused the bolívar to weaken by about 20 percent to a level of 4,000 to the dollar on the black market, placing it among the world’s worst performing currencies this year.

First, the authorities will remove three zeroes from the denomination of the currency, the bolívar. Then he said the new bolívar, worth 1,000 old bolívars, would be renamed the “bolívar fuerte,” or strong bolívar. Finally, the central bank said this week that it would reintroduce a 12.5-cent coin, a symbol of Venezuela’s prosperity in the 1960s and 1970s before freewheeling oil booms ended in abrupt devaluations, after three decades out of circulation.

Q: What about if the Venezuelan central bank just stopped printing so much money?

Even Michigan's Showing Signs of Recovery: 4th Monthly Increase in Economic Activity Index

Comerica Bank's Michigan Economic Activity Index improved two points in September, to a level of 79. September's reading marks the fourth consecutive monthly increase in the Index, which moved to its highest level since December 2008. Compared to its May low, the Index is now up 10 points, or 14.5 percent. August's level was revised from 78 to 77.

As expected, the Michigan car sales component of our Index declined sharply in September due to the expiration of the cash-for-clunkers program, however, surging auto and steel production fully offset the drop in vehicle sales," said Dana Johnson, Chief Economist at Comerica Bank. "Overall, five components were up, two were unchanged, and two were down in September. Over the next several months, as other sectors of the Michigan economy are bolstered by improving national trends, our Index will likely continue to trend higher."

Related WSJ article:

U.S. auto sales last month delivered more concrete signs the economy is on the mend. Excluding July and August, when sales were boosted by cash-for clunkers rebates, October sales hit the highest rate of 2009—the mid 10-million range on a seasonally adjusted basis.

Replenished inventories helped car makers deliver better results than September's anemic 9.2 million rate. Many cars and trucks were in short supply in September due to the clunkers sales and major production cuts earlier in 2009 by many auto makers.

"The economy is in transition from recession to recovery," Ford chief economist Emily Kolinski Morris said on a conference call with analysts and reporters.

Cheap Oil Forever: Why Prices Will Keep Falling

One idea still has the power to capture imaginations and markets: it is that commodities like oil, copper, grains and gold are all destined to rise over time. Lots of smart people believe that last year's swoon in commodities prices represented a short pause in a long-term bull market.

It's a view rooted in powerful and real trends, like the growth of China and India, the decline in global reserves (many of the world's biggest and best oilfields are tapped out), fears over resource nationalization (independent oil firms now control only 20 percent of global reserves) and long-term underinvestment in energy and agriculture, which hampers supply.

Yet the fact is that the world has faced all these issues before, and for the past 200 years, commodity prices have been trending downwards, thanks to new technologies, greater efficiency in extraction and the substitution of one commodity for another (which explains the high correlation between commodities prices).

Bank Credit Analyst, a research firm based in Montreal, has data showing major industrial commodity prices are 75% below where they were in the year 1800, after adjusting for inflation. Despite all the worries over "peak oil," the fact is that the major bear markets in oil have been demand, rather than supply led. And when demand eventually picks up, there's usually some new alternative (nuclear energy, natural gas, green technologies) waiting to pick up some of the slack.

The real price of oil today is now at the same level as in 1976 and, before that, in the 1870s, when oil was first put to mass use in the United States. This long-term price decline is due mainly to the constant discovery of new fields and greater energy efficiency, making nonsense of the idea that the world is rapidly running out of oil. The experience of the 1980s is instructive in the current context as well.

Japan and Europe continued to grow strongly in the 1980s, and yet oil consumption remained essentially flat through that decade as both the regions strived to achieve better fuel efficiency and switched to alternative sources of energy, such as nuclear power. Similarly, 90 percent of the growth in new oil capacity since 2004 has come from biofuels, synthetic oil and natural-gas liquids. As countries get richer, their per capita consumption of commodities declines. It's a myth, then, that the boom in China and India will inexorably drive up oil and other commodity prices.

At some point, of course, commodities will spike again, but only temporarily. To date, the centuries-old slide in prices has been marked by long bear markets and short bull runs. Data from CSFB shows that the average bull market in oil has lasted from four to nine years, and the average bear market from 11 to 27 years. The bull market that ended last summer saw prices rise tenfold over nine years, mirroring the duration and magnitude of the previous bull market, which ended in 1979 (see chart above). That was followed by a bear market that lasted 20 years. If history is any guide, we're only at the beginning of another long one.

~Newsweek article "If It's In the Ground, It Can Only Go Down"

Loan Delinquency Data Suggest Commercial Banks Are Doing OK, Nowhere Close to Great Depression II

The chart above shows delinquency rates for business and agricultural loans at all U.S. commercial banks from 1987:Q1 to 2008:Q3 using recently released Federal Reserve banking data through the third quarter. In both cases, delinquency rates for agricultural and business loans are close to all-time historical lows, and especially for business loans (1.61%) far below the 3.92% peak in the second quarter of 2002 following the last recession and far below the 6% peak during the 1990-1991 recession.

Although delinquency rates will likely rise in the fourth quarter, the low rates of delinquency for non-consumer loans (business and agricultural) through the third quarter 2008 show that we are nowhere close yet to the delinquency rates for business/ag loans during the recessionary conditions of 1990-1991 or 2001. So before we start making comparisons to the Great Depression and the 1930s, maybe we should first be using the last two recessions as our benchmark comparisons.

Of course, as expected, the major weakness for bank loans is in the real estate sector, and delinquency rates for real estate loans through the third quarter reflect that weakness (see chart below). Real estate loan delinquencies are approaching 5%, which is higher than the 2001-2002 peak of 2.2%, but not yet as high as the 7.5% in 1991.

Likewise, the delinquency rate for consumer loans (see chart below) of 3.8% is below the 5% peak in 1991, and below the rates during the peak of the economic expansion of the 1990s.

Bottom Line: Delinquency rates for commercial banks suggest weakness in the real estate sector, but some relative strength and stability in the commercial loan segment for business and agricultural loans. Most importantly, we're nowhere close to the drastic banking conditions of the 1930s, which were so severe that almost 10,000 banks failed in the four-year period between 1930 and 1933, and more banks failed (4,000) in a single year (1933) than the sum total of all bank failures in the 74-year period since 1934 (3,566). Great Depression II? No way.

25 Reasons the Bull Market Recovery is Real

James Altucher in today's NY Post "Rally Believing It":

"The data suggest that the economy is starting to surge upward. Here are 25 statistics and anecdotes that suggest that the strength in the economy is real:

1. Average hourly wages are $18.90, up from $18.52 a year ago. (Before employers hire full-time, they get their workers to work overtime, resulting in higher pay).

2. Aggregate weekly hours worked is the highest it's been since June 2009 -- again, suggesting overtime. Only so much overtime can be worked before hiring begins.

3. Industrial production index up 9 months in a row after plummeting 13 percent from December 2007 to June 2009.

4. Retail sales up 10 percent year over year.

5. GDP last quarter showed 5.9 percent annual growth.

6. Initial unemployment claims have gone from a peak of 643,000 in April 2009 to 480,000 now.

7. The Greek debt crisis seems to be ending without major fallout in the form of other nations defaulting.

8. Home-improvement-related retail sales were up 3.1 percent, suggesting consumers are putting money back into their homes again.

9. Railroad traffic, a sign of interest in commodities, is up 16 percent, the highest since the recession began.

10. Rail shipments of metals were strongest as manufacturers are rebuilding inventories.

11. JPMorgan Chase and Bank of America both announced loan delinquencies were decreasing. JPMorgan also announced plans to hire 9000, their biggest hiring spree since the recession began.

12. UPS profits were 20 percent higher than expected as US shipments saw their first year-over-year increase since 2007.

13. Economists estimate that China's GDP grew by 11 percent last quarter, the most in 3 years.

14. Singapore posted GDP growth of 9 percent last quarter and South Korea had the largest unemployment rate drop in over a decade.

15. A sharp increase in M&A activity where the acquirers are using cash rather than stock to buy companies (showing confidence in their businesses).

16. Target, Kohls, TJX and Aeropostale all increased earnings guidance for the next quarter, showing retail strength across the board.

17. Auto sales are spiking. March annualized auto sales showed a 15 percent gain over February.

18. ISM non-manufacturing index (showing the strength of non-manufacturing indexes) had the highest percent increase in five years.

19. The National Association of Realtors said that pending sales of existing homes jumped 8.2 percent over last month.

20. Employers added 162,000 jobs in March, the biggest gain in four years.

21. Ford reported the best monthly sales in 25 years.

22. The government has made money on its Troubled Asset Relief Program bailouts of Citigroup, Goldman Sachs, American Express, JPMorgan, Morgan Stanley, and almost every other bank they lent to.

23. Consumer spending had its fastest increase in three years last month.

24. Intel, a barometer of the entire tech sector, saw its earnings quadruple from a year ago and said its earnings were the best ever for that period. They also reported record results for the chips used in mobile devices and said corporate tech spending was growing across the US.

25. Despite growth and low interest rates, inflation is almost non-existent with the CPI coming in at 0.1 percent last month."

China Will Lead Global Economy Out of Recession

BEIJING (WALL STREET JOURNAL) -- China's government has turned around its economy far faster than most thought possible, as officials said Thursday that growth accelerated to 7.9% in the second quarter. Even if the surge moderates in coming quarters, many analysts say China will very nearly meet its target of an 8% expansion for all of 2009. In the first quarter, gross domestic product grew 6.1% from a year earlier.

The Shanghai stock market's benchmark index has gained 75% this year (see chart above) as the Chinese outlook has improved, with factory output, bank lending and commodity imports all continuing to accelerate in the past few months. Now, authorities face increasing questions about how long this growth can last, and how quickly the world's third-largest economy can be weaned off its massive stimulus before longer-term problems take root.

"China will be among the first countries to lead the global economy out of this recession," said Hans Timmer, director of the World Bank's economic forecasting department. Developing countries such as China are becoming a bigger driver of global growth as U.S. households cut back consumption and boost savings, he said.

China's government only reports year-on-year growth estimates. But when measured in the same terms as other major economies—an annualized quarter-on-quarter comparison—China's growth in the second quarter could be on the order of 15%, some private economists estimate.

Should We End the 30-Year Fixed-Rate Mortgage?

The United States is one of the only countries in the world with 30-year fixed rates for mortgages, and Arnold Kling suggests that this is "an artifact of government intervention, and that without it we would have a simpler, safer mortgage finance system."  For example, Canadian mortgages carry a fixed interest rate for a maximum of five years, and rates are then re-negotiated for the next five years, similar to a five-year adjustable rate.  That type of five-year mortgage is much more typical around the world than the U.S. system of fixed-rates for 30 years.   

The reason the 30-year fixed-rate mortgage has to be a creation of government intervention, and not the market, is that it is a one-sided loan arrangement that bestows huge benefits on the borrower, but with almost no compensating benefits for the lender/bank/thrift, i.e. it's "pro-borrower and anti-lender."  

As Arnold points out, there is an extremely valuable pre-payment option on a 30-year fixed-rate mortgage that favors the borrower, who can re-finance the mortgage whenever it is to his/her advantage over the 30 years, i.e. when rates fall enough to justify the refinancing costs.  Lenders have no such option to renegotiate the rate when it's to their advantage - when interest rates rise.  Or to be more accurate, the pre-payment option favors the borrower when it is under-priced, which is the case in the U.S., likely as a result of government influence.   

Looking again to Canada, refinancing mortgages is allowed, but there are very stiff prepayment penalties equivalent to about three months of mortgage interest (about $1,500 for every $100,000 mortgage amount), which discourages the kind of refinancing that frequently takes place in the United States and contributed to our real estate bubble and financial crisis.  In other words, the pre-payment option under the Canadian system is probably much closer to a market-driven price than in the U.S.

The chart above shows the potential danger to banks of 30-year fixed-rate mortgages, and illustrates how they contributed to the S&L crisis.  Because S&'L's were "borrowing short and lending long," or financing 30-year fixed-rate mortgages with short-term deposits at interest rates approximated by the 1-year T-bill rate, S&Ls were "upside down" by the early 1980s. They were paying more on short-term deposits (e.g. 10-15%) than they were earning on their 30-year fixed-rate loans (e.g. 4-8%). 

Simply put, 30-year fixed-rate mortgages were a major factor in 3,000 bank failures during the S&L crisis, and this helps support Arnold's position that they have to be an artifact of government intervention because banks wouldn't willingly expose themselves to such a huge level of interest rate risk with 30-year fixed-rate mortgages with under-priced pre-payment options.  All it took was a period of rising interest rates in the 1970s and 1980s to force thousands of thrifts into insolvency, largely because their assets were so heavily concentrated in 30-year fixed-rate mortgages. 

Q1: Now that 30-year mortgage rates are below 5% and close to historical low levels, are we in danger of setting up another S&L-type crisis sometime over the next several decades?  It wouldn't take much of an increase in inflation and short-term interest rates before many banks/thrifts could see their interest margins squeezed, and short-term rates could conceivably even rise above 5% sometime in the next 30 years, which could put the banks "upside down" again and lead to failures. 

Q2: Shouldn't financial reform include putting an end to the pro-borrower, anti-lender 30-year fixed-rates mortgages in the U.S.?

Beneath Gloom, Signs of a New Economic Vibrancy

Now, after months of seemingly nonstop bad news, there are hopeful signs on the horizon. Below the surface of gloom, there are signs of a new vibrancy. They include:

• A broad rally in stocks, confirmed last Thursday, continuing into this week and led by the beaten-down financials.
• A surprising 22% surge in February housing starts to a seasonally adjusted annual rate of 583,000 units.
• A back-to-back jump in retail sales ex autos, in both January and February.
• A return to profitability at several major banks, including Citigroup, Bank of America and JPMorgan.
• A doubling in the obscure but important Baltic Dry Index, a key indicator of global trade flows.
• An upwardly sloping yield curve, which Fed research suggests all but ensures a rebound by year-end.
• A Housing Affordability Index that has hit an all-time high.
• A two-month improvement in wholesale used-car prices, measured by the Manheim Index.
• A rise in Monster's Employment Index in February, suggesting a turn in the job market may be around the corner.
• A 4 1/2-year high in the dollar against other major currencies, on a trade-weighted basis.
• A sharp increase in the money supply, as measured by M2 and M1. Weekly M2 growth has averaged 10.1% year-over-year since the start of 2009, while M1 has grown at a 14.6% rate.
• A two-month rally in the Index of Leading Indicators.
• A growing body of evidence that the "liquidity crunch" is dead. Data show nearly $14 trillion in liquidity on the sidelines of the markets, ready to boost consumer spending, credit growth or further stock market gains.

~IBD Editorial

Goldilocks or Recession? Goldilocks!

Thursday Night Lineup

DEBATE: GOLDILOCKS OR RECESSION?...Mark Perry, University of Michigan economics professor and Carpe Diem blogger will join the market panel in a look at what's ahead for the economy.

Thanks to an invitation from Larry Kudlow, I appeared on a segment of "Kudlow and Company" last night, featuring a discussion based on this recent CD post, and this CD post, with a nice presentation of the graphs from those posts.

My position is that we aren't headed for a recession for the following reasons:

1. We won't have a recession unless and until the Business Cycle Dating Committee of the National Bureau of Economic Research says so, and that committee doesn't look at the value of the dollar, oil prices, financial sector troubles, or even the stock market, when it determines that a recession has started. It looks at industrial production, employment levels, real personal income, and real manufacturing and trade sales. In the discussions about recession, too much attention is paid to the subprime crisis, the falling dollar, the stock market and oil prices, and not enough attention is paid to the 4 variables that really matter - and none of them show any weakness, see this CD post and this CD post.

2. If the serious S&L crisis in the 1980s, when almost 1,500 banks failed (about 1 out of every 10), didn't cause a recession, then a subprime mortgage crisis by itself won't cause a recession. The banking sector has never been more stable than it is today - not a single bank failed in 2005 or 2006 (out of about 8,000), and only 3 have failed in 2007. That has to be a record unmatched at any other time in U.S. history.

3. Consider that in 1987, at the peak of the S&L crisis, there were 184 bank failures (3.5 every week) AND the stock market crash in October, with a 22.6% decline in one day (October 19) and a 31% decline in a week. That would be equivalent today to a 3,000 -4,000 point drop in the DJIA. Further, the unemployment rate in 1987 was 6.2% (vs. 4.7% today) and the 30-year mortgage rate was 11.26% (vs. 6% today). If the economy of 1987 was able to survive a major banking crisis and Black Monday without going into recession, today's much stronger and more stable economy will continue its expansion. See this CD post.

4. The significant increase in derivatives trading and risk-management instruments has helped insulate the U.S. economy from recent credit shocks, oil shocks and a falling dollar. See this CD post.

5. The U.S. economy is much more energy-efficient today than ever before - energy consumption per dollar of real GDP today is about half of the level in 1980 - and can absorb high oil prices better than ever before. See this post.

6. Oil prices will probably start falling by next year - futures trading indicates a price in the low 80s by 2009. And see yesterday's WSJ article "Why $100 Oil Can't Float": "The fundamentals give a clear message: The price is too high to be sustainable." Expect falling prices.

7. The weak dollar has significant benefits for the U.S. economy: Surging, record-high exports, adding about a percentage point to real GDP, see today's trade report, showing a 13.6% increase in exports since last year.

Carpe Diem!

China Looks Set to Be the First Major Economy to Recover from the Global Meltdown

Since the first of the year, China's Shanghai SE Composite Index is up by 23.5%, and is up 36% from the early November bottom (see chart above).

Dennis Gartman discussed China's stock market in today's The Gartman Letter, and wrote:

We’ve included a chart of the Shanghai Composite Index, for since the start of this year China’s markets have led the way higher. We are convinced that this trade in China’s favor has only just begun, for China, as we have said many, many times in the course of the past two or three months, is doing more things right and more things “capitalist” than nearly any other country in the world. When it was clear that the economy was softening, and when it was clear that share prices had become too over-sold, the Bank of China moved not only to reduce interest rates, but it moved swiftly and materially to reduce reserve requirements. Other central banks moved at the edges of their money markets to push rates lower; the BOC took a 2x4 and chose to hit the mule in the centre of its forehead to get its undivided attention. That has paid off handsomely. It shall continue to pay off in the weeks and months ahead.

From Bloomberg: The benchmark Shanghai Composite Index has surged 24% this year, the world’s best performer. The rally in Chinese stocks should improve domestic consumer sentiment and encourage spending on big-ticket items such as cars and stimulate the property market.

More from Bloomberg, "China looks set to be the first major economy to recover from the current global meltdown,” said Lu Ting, an economist with Merrill Lynch & Co. in Hong Kong. “China is the only economy in the world to see significant growth in credit to corporate and household sectors after September 2008, when the financial crisis worsened to a near collapse.”

Some commodity prices signal a tentative recovery may be under way, as Chinese companies rebuild inventories. China’s imported iron ore has climbed 28% to 690 yuan per metric ton since the end of October. Hot-rolled steel has surged 41% from Nov. 13 to 4,027 yuan per metric ton. The Baltic Dry Index, a measure of shipping costs for commodities, has more than doubled since Jan. 28.

Banks Report More Signs of Stability and Growth

NEW YORK (AP) -- "Americans are starting to get their household finances in order. In an encouraging round of earnings reports, major banks say fewer mortgages are going bad, credit card defaults are down and more people are paying the bills on time.

One of the nation's largest consumer lenders, Wells Fargo, said Wednesday that 29 percent fewer loans went bad in the last three months of 2010 than the year before. And late payments on loans considered likely to default declined for the first time since 2008. Late payments on credit cards issued by Bank of America, JPMorgan Chase and Citigroup also improved at a record pace at the end of last year, according to an analysis by Barclays Capital. The reports are a sign that Americans are feeling more comfortable about their finances. 

"There are signs of stability and growth," said JPMorgan CEO Jamie Dimon.

The bank news comes after a holiday shopping season in which spending was the strongest since 2006, and auto sales grew 11 percent last year, the first gains since 2005. Taken together, the spending indicators are the "strongest showing for consumers since the peak years of the last expansion," and signal that the economy is "near a threshold of self-sustaining growth," analysts at Citi Investment Research & Analysis said in a report earlier this month."

HT: Steve Bartin