Tuesday, April 17, 2007

Retail Sales Slowing

Data for US retail sales were reported yesterday and I have produced a chart of such sales minus gasoline and food stores, i.e. the discretionary "stuff" we buy that truly drives the economy. Sales growth is dropping and if we take into account inflation of around 2.5%, such sales are essentially stalled. The shutting down of the house-as-ATM is starting to have a measurable and clearly visible effect. I think we may also see a rise in the saving rate over the next few months.


  1. Hellasious,

    I agree consumption is starting to slow and will get much worse in the not too distant future.

    There was also an interesting article in today's WJS concerning the GSEs which I think indicate how the govt intends to bailout the subprime lenders and borrowers:

    Fannie Mae Chief Executive Daniel Mudd is expected to tell the House Financial Services Committee today that his company is expanding its products to allow subprime borrowers to refinance out of certain adjustable-rate mortgages with these low, teaser rates. Mr. Mudd is expected to say that Fannie Mae is adjusting its credit requirements so that more borrowers would qualify for this option. "Essentially, homeowners facing imminent payment shock will be able to refinance into our loans without first having to clear up unpaid bills on their credit reports," Mr. Mudd is expected to say.

    I guess we know where the toxic waste will end up in the near future. The new loan program will start in the summer. Now I know why someone is going around buying up all the subprime loans from the failed subprime lenders. We should see a nice bump up in the ABX soon.

    It's interesting that they decided to use the GSEs with an implied guarantee rather than FHA with an explicit government guarantee. Perhaps foreign central banks already saw it coming:

    Net foreign purchases of debt issued by such U.S. government-sponsored companies as Fannie Mae and Freddie Mac totaled $2.0 billion in February, down from $35.8 billion in net purchases in January.

    I wonder what this will do to fannie mae's future earnings.

  2. Mr Wang, you are into derivatives business?

  3. Alex,

    No matter how anyone tries to "solve" this problem they won't really succeed. It's not really a matter of interest rates so much, as too much principal - that's the killer. Someone will have to end up holding the bag. If it is the US taxpayer, taxes will have to go up.

    I think it will slowly dawn on people that in the end it will have to be the mortgage holders that will be taking the bath - no other way out, really. i.e. it will be all those ABS holders. But it will be a slow and painful process, not some quickie "clear out the bad loans" operation.


    Mr. Wang? Who's he? As for myself, yes, I have been involved in derivatives in my professional career - though I am not a specialized expert. What has happened in derivatives in just the past 2-3 years is simply astonishing.

  4. hellasious,

    I agree that the announced actions of fannie and freddie to purchase 20 billion worth of subprime loans is like putting a finger in the dyke to prevent the impending collapse in the credit markets. Not only are the credit problems not limited to subprime they are not limited to mortgages.

    The LBO binge will surely not end well either. LBOs and corporate buybacks financed by debt are the main things holding up stock prices as companies with poor earnings performance are now considered good LBO prospects. Investment grade corporate bond holders, even the PBoC, will not accept being tranformed into junk overnight for too much longer.

    Also nothing says fannie and freddie will be buying up existing subprime at premium prices. After all they are still for profit companies with shareholders to answer to. Something tells me they will negotiate significant discounts for existing subprime in their role as "good samaritans," i.e. bottom feeders.

    Lenders don't realize the extent to which borrowers will simply walk away from houses rather than continue to pay off mortgages if they are upside down. Regardless of opportunities to refinance at lower rates or over longer time periods, not many subprime borrowers will continue paying off on a depreciating asset with no equity. I'll go out on a limb and bet that lenders' models are skewed because they extrapolate from a history of borrowers who actually put money down during periods of price appreciation with a lot less subprime floating around.

    For now, this will take some pressure off congress to do something about the subprime problems. But a massive bailout will eventually become a political necessity.

    Democratic congressional leaders will let the fallout worsen. Then it will be clear to John Q. Public that the problems were created by a Republican administration. Then Democrats can don their "white hats." Call me a cynic.

    With this and the war it should be a very rough ride for the Republicans in 2008 particularly the presidential race.