Green Shoots Roundup

Tim Cavanaugh | September 16, 2009

Need evidence for the economic recovery that your betters keep telling you about but that you don't actually see? Here are some indirect observations made by the Hubble Telescope but still not visible to the naked eye:

The consumer price index increased 0.4 percent in August.

The producer price index for finished goods increased 1.7 percent in August.

Industrial output increased 0.8 percent.

Retail sales have increased 2.7 percent, mostly on the strength of auto sales.

Gold rises, suggesting aggressive inflationary policy is finally succeeding.

Credit card company write-offs rise again, after briefly trending down. Some would say that's bad news, because it's more lost money for Citibank (though as Kramer knew, those big companies write everything off). I consider it good news because it continues the trend of brute-force deleveraging -- which is the only kind of deleveraging we're likely to see.

Comments

|9.16.09 @ 11:43PM|#

Other than Gold, which has gone crazy and truly scares me, all of the others are indeed good indicators to me (assuming you feel the same).

Now I'll retire to go through my wife's jewelry buffet.

Hugh Akston|9.17.09 @ 12:09AM|#

Retail sales have increased 2.7 percent, mostly on the strength of auto sales.

Yessir, that's growth for the longview. There certainly wasn't any sort of one-shot deals there. America is buying cars, and its going to keep buying cars. To infinity and beyond!

Jordan|9.17.09 @ 12:23AM|#

The other shoe is going to drop soon. This is a sucker's rally ala 1930.

|9.17.09 @ 12:30AM|#

Inventory restocking & contrived demand does not mean a sustainable recovery is in place.

Regards,
TDL

Suki|9.17.09 @ 12:44AM|#

The other shoe is going to drop soon. This is a sucker's rally ala 1930.

Am I allowed to call a thread winner yet?

jester|9.17.09 @ 12:49AM|#

Tim, Sorry you have insomnia like me.

I still expect a post from you by 9 am.

Ebeneezer Scrooge|9.17.09 @ 2:26AM|#

Here's a direct observation made by me, the person, I, myself, who that I am: these Hubble observed phenomenon do not factor in either the weed killer or the pre-emerge that Obama is doing his very best to spread all over the lawn.

|9.17.09 @ 5:06AM|#

The link within the link, that maybe would have explained to a non-economist like me what "brute-force deleveraging" is, has expired.

So could someone please tell me?

|9.17.09 @ 7:18AM|#

On the farm we also use bovine generated fertilizer.

ed|9.17.09 @ 7:26AM|#

This is a sucker's rally ala 1930

Market "timers" are the suckers.

|9.17.09 @ 8:16AM|#

We pumped trillions of dollars into the economy through bailouts. We'd BETTER see some economic improvement for all that loot...

But, it doesn't matter how much the economy does or does not recover, a system based on fiat money has only one logical end.

hmm|9.17.09 @ 8:24AM|#

This is a sucker's rally ala 1930

Market "timers" are the suckers.

Sucker or not most of the indicators and actions are there to give us a long, slow, painful next 10 years. There really is no reason for the market to be at 9700. Right now people are selling like a hooker selling ass on nickle night. Even options down to a month are selling, people are expecting either the top to come quickly or the fall to come quickly.

I see a slow bleed on the horizon as long as CMBS and commercial property doesn't tank, which means government forced restructuring of loans. Lets just hope the opportunity cost of C4C and other programs aren't just moving revenue into near periods and raping later periods.

Mango Punch|9.17.09 @ 8:50AM|#

You forgot about debt/ebitda & interest coverage ratios strengthening

A massive CMBS rally yesterday (which could smooth losses by allowing restructurings [although cumulative losses shouldn't change much])

A strong VC mkt prospects (2Q was ahead of expectations and while 3Q is generally slowest 4Q is projected to be strong)

Corp. defaults coming in slower than expected prompting Moody's, S&P and JPM to lower peak default estimates...


... There is definitely still pain ahead and certian sectors probably rallied more than they should have, but others remain under-valued (my $0.02)...

"I see a slow bleed on the horizon as long as CMBS and commercial property doesn't tank, which means government forced restructuring of loans"

hmm... this is asinine, are speaking of "tank" as in asset prices selling off or as in comulative losses coming in? In the first case the tank has already come and asset prices are now being supported in senior tranches by PPIP and TALF, in the second case losses and delinquencies haven't even hit yet in CMBS and wont for some time, people understand this and it's priced into the mkt with 7-15% cum losses (even post yesterday's short covering)... CMBS losses are going to be painful and lumpy w/o restructuring vs smooth with (I don't know of a gov't program to force restructuring and given how much more diverse CMBS mkts are and how there is no political capital in helping 'fat cats' I don't think there will be)... on the other hand, the recent rally in CMBS might help servicers restructure allowing losses to come sooner and be more smooth...

Dr. Bernanke|9.17.09 @ 8:51AM|#

The link within the link, that maybe would have explained to a non-economist like me what "brute-force deleveraging" is, has expired.

So could someone please tell me?

Nope.

Mango Punch|9.17.09 @ 9:17AM|#

What I think TC is refering to with "brute deleveraging" can be explained as follows:

In most environments, companies can deleverage through out-earning their interest and slowly pay down debt (possibly refinancing), hence reducing debt/equity, interest/EBITDA (or cash earnings) etc. In some cases when a company or individual is underwater (either debt>assets or interest>EBITDA) they will enter bankruptcy and change of control will occur (debt holders become the equity holders and equity goes to 0).

Companies can also enter into technical default by violating terms that they have on their debt. These are often fincancial covenants such as debt/equity ratios, interest coverage ratios, but also usually include terms such as fair disclosure and change of control provisions. In normal environments breaching covenants usually results in amending the debt (or refinancing) and paying some sort of fee and increased interest, or often amortizing the debt (paying principal down over time). However, in other environments, such as when the lender is close to their covenants or regulatory requirements (think bank and insurance companies)or when the lender (often holders of corporate notes) are capitally constrained (think hedge funds running into margins) the process might not go as smoothly, and it is often in the lender's best interest to force the borrower into default, and foreclose on assets (if secured)or force the borrower into bankruptcy. In the previous sentances I was refering to corporate debt, but similar principals hold for private debt, mortgages etc.

I believe TC is referring to brute as the later process I mentioned, where there is massive foreclosure, and assets are shifted from borrower to lender. In principal, once the deleveraging occcurs and they system is back to a sustainable debt burden, we should return to a normalized scenario. Essentially brute deleveraging would result (in theory) in a large temporary disruption in exchange for a sooner return to equilibrium. The alternative, where asset values are proped up (averting the breaching of a lot of technical covenants) or where lenders are backstopped (making it more profitable to unwind debt in an orderly fashion) a return to equilibrium is slower but the shock is lesser.

While I didn't read the actual link in the post, this is I believe the general explanation given for brute deleveraging. It's a lot like the theory of "shock" in macro-economics when a country goes from a centralized to free market.

Barack Obama|9.17.09 @ 10:16AM|#

Mango Punch, how'd you like to have a beer with me and Ben?

Invisible Finger|9.17.09 @ 10:25AM|#

all of the others are indeed good indicators to me

How the fuck can an increase in consumer prices be looked at as "good" news, in light of the fact that wages are not increasing at a same or better pace? You think losing purchasing power is good news?

Mango Punch|9.17.09 @ 11:14AM|#

BO, I'd love to have a beer, as long I don't have to arrest Ben first.

6th Digit:
Standard economic theory is that some inflation is good in that it allows "sticky" prices or expenses to adjust down, the most common example which is used is wages, (where people [and contracts] are more likely to accept below inflation wage increases than they are a wage cut)

In the current environment this extends to other "sticky" assets such as housing prices, which many speculate are required to stabilize before real economic recovery can take hold.

Generally deflation or 'too' high inflation is bad economically while a little inflation is healthy. Some would argue that higher than what is normally considered healthy inflation is in fact healthy in the current environment.

Another effect of high inflation (be it fair or not) is that it alleviates debt burdens (via reducing real interest and real debt value) at the expense of lenders.

hmm|9.17.09 @ 11:20AM|#

Why would I talk about realized asset losses and the future? It would already be a part of any security. With default rates hitting 4% again and even with losses, supposedly, being priced into the derivatives the market for commercial real estate's current condition is dismal and not getting better. There are two basic ways to go, defaults galore and the securities around them tanking, or restructuring (government forced or otherwise) which will create the same problem we had before with respect to derivatives backed by assets that are inflated with little way to effectively measure the default risk. Or a slow deleveraging of the assets and praying the market doesn't spook and magically send a finite resource backed assets to zero.

I don't see the difference from the short, acronym-less simple statement that we are most likely going to bleed out the inflated asset values over time due to restructuring and what you stated in 100 words or more.

This looks a lot like a government program to restructure commercial loans to me. Hence the rally yesterday since this was in the 16th paper. Just because it didn't get a fancy name. They are pushing restructuring which will keep the assets inflated and complicate the evaluation of risk relative to the backing asset.

|9.17.09 @ 11:40AM|#

hmm

What you wrote wasn't asinine, I miss-read you the first time and thought you were saying there would be a 'crash', as if you were saying a potential 'crash' would change your scenario... sorry about that.

Caveats:
"government forced restructuring of loans" - false

"Lets just hope the opportunity cost of C4C and other programs aren't just moving revenue into near periods and raping later periods" - agree with this, but in the case of CMBS restructuring it has the opposite impact, spreading losses to sooner periods.

|9.17.09 @ 11:42AM|#

I meant: "NOT as if you were saying..." in the above post.

Sean W. Malone|9.17.09 @ 1:02PM|#

How exactly is increase in CPI a good thing again?

And likewise, industrial output can be explained by the increase in retail sales, which are explained by the time-preference change caused by Cash for Clunkers.

If these are "Green Shoots", what are the fully sprouted money trees supposed to look like?

Sean W. Malone|9.17.09 @ 1:48PM|#

Market-Ticker blog on this news.

|9.17.09 @ 8:36PM|#

And when the economy fizzles again after showing signs of life, it will still be that free market laissez-faire enthusiast Bush's fault.

|9.19.09 @ 10:56AM|#

@ Sean W. Malone

Think Bonsai! 1/100th the tree for 100x the required care :)

Cheers!