Do You Care a Rap About the Business Cycle?

John Maynard Keynes was perhaps the most imposing economist of the Twentieth Century.  He is the father of macroeconomics (John Hicks might be called the midwife: indeed Hicks is probably the most influential, although his influence across the board in modern economic theory is so pervasive he is seldom cited.)

Friedrich von Hayek developed the ideas of Wicksell and the Austrian School theory of capital based on Boehm-Bawerk and von Mises into a coherent theory of the business cycle which does much to explain the mess we are in.

Keynesian economics justifies the use of stimulus programs such as are being used around the world to revive the world economy.  Nations around the world are following President Richard Nixon when he said, "We are all Keynesians now."

One should not assume Keynes would approve of current economic policy.  At a meeting of American economists shortly before he died, Keynes remarked "Perhaps I am the only non-Keynesian in the room." (as quoted in Bran Domitrovic's Econonoclasts: the History of the Supply-Side Revolution.)





Many thanks to both Ryan Pendleton and the Kansas Policy Institute who alerted me to this.

Are the Dogs of the Dow Back?

The Recovery: Write Less Off, Mail More Offers

Good News For Banks; Good News For the Postal Service

Credit card losses are down for major issuers. This bodes well for postal volumes and, as a lagging indicator, it is further confirmation that the economic recovery is well under way.  The U.S. Postal Service could use some good news with postal volumes and revenues falling at terrifying rates.

December Was Six Months Past the Bottom

My estimate is that the business cycle trough was last June.

Credit card solicitations have been a significant use of the mail over the years.  Losses reduce the ability and willingness of credit card issuers to solicit the more profitable lower credit customers , although it increases their need for higher quality customers: a plus for First-Class mail and thus USPS itself.  Higher losses mean greater capital is needed: a scarce and expensive requirement for the nations' banks. While they can borrow at virtually no cost, equity capital costs are punitive.  Think of Citi's recent dilutive offering.

Aparajita Saha-Bubna (with a little help from Joe Bel Bruno and Tess Stynes),  reported in Saturday's Wall Street Journal that delinquency rates fell off "for most credit-card issuers in December, but losses stemming from souring credit-card loans remain elevated."

Capital One:  delinquencies  5.78% down from 5.87% in November

                      write-offs       10.1% up from 9.6% in November

Discover:      delinquencies  5.49% down from 5.65% in November

                      write-offs        8.68% down from 8.98% in November (securitized assets)

American Express:  delinquencies  3.7% down from 4.1% in November

                                write-offs         7.1% down from 7.6% in November

For the quarter:       delinquencies  3.7% down from 3.9% in the third quarter

                                write-offs        7.5% down from 8.9% in the third quarter

Bank of America:  charge-offs       13.5% up from 13% in November

Chase:                write-offs  7.1% down from 8.8% in November

For the quarter:  write-offs  9.3% down from10.3% in the third quarter

Chase is a unit of J.P. Morgan Chase Co

According to the same article, JPMorgan's "Chief Financial Officer Mike Cavanagh said the recent improvement in credit-card losses mightn't continue as the U.S. economy continues to claw its way out of the financial crisis.

"Mr. Cavanagh, speaking to the media after the bank reported fourth-quarter earnings, expects a $1 billion loss for credit cards in the first and second quarters."

Dr. Hoenig, the Hawk: We Need More of Them

Dr. Thomas Hoenig, President of the Kansas City Federal Reserve Bank, has been known as a monetary policy hawk in the past. If he has been part of the Federal Open Market Committee's consensus supporting negative real interest rates, he is a dove no longer. He told the American Economics Association (AEA) meetings, “Experience both in the US and internationally tells us that maintaining large amounts of stimulus over an extended period risks creating conditions that lead to financial excess, economic volatility and even higher unemployment at some point in the future.” Amen!

Hoenig vs. Bernanke

Hoenig and our current Fed Chairman, Ben Bernanke offered opposing views of history at the AEA meetings.

As George Santayana taught us, "Those who cannot learn from history are doomed to repeat it." So at issue is what role monetary policy played in creating the real estate bubble that caused the so called Great Recession of 2007-9. To Hoenig and to me it is clear that the over-expansion of credit that inflated the bubble had as its root cause the Fed's war against the paper dragon of deflation. Negative real interest rates in 2002-2005 and much too low rates in 2006 subsidized the creation of ever more esoteric securities which was the stuff from which Wall Street's leverage binge was made.  Negative real interest rates inflate investment bankers' profits and bonuses, misdirect productive resources into speculation, cause a dangerous correlation of returns, and subsidize the ever increasing financial roundabout production we saw during the recent bubble. Short term interest rates are the price for the raw materials with which investment banks create leverage in securities markets and financial engineers manufacture designer securities.Subsidize the raw materials and increase the supply.

Bernanke is a better student of the Great Depression of the 1930s than of the recent bubble. As John Cassidy relates, that Ben Bernanke "[r]ather than conceding that he and his predecessor, Alan Greenspan, made a hash of things between 2002 and 2006, keeping interest rates too low for too long, he said the Fed’s policies were reasonable and the main cause of the rise in house prices was not cheap money but lax supervision." Cassidy is moved to wonder in the Financial Times whether Ben Bernanke is "Decended From the Bourbons?" recalling "Talleyrand’s quip about the restored Bourbon monarchs: 'They have learned nothing and forgotten nothing.'”

Requiem for the Dollar

Constantine the Great created the solidus, a gold coin that held its value well enough to be a monetary standard for seven hundred years.  The Bretton Woods monetary system survived a quarter century.  The U.S. dollar is worth maybe 5% of its 1900 value.

Jim Grant, the sage of the bond market, writes in the Wall Street Journal a lengthy, witty, thoughtful, and ultimately depressing "Requiem for the Dollar. "  He tells us, "To give modernity its due, the dollar has cut a swath in the world. There's no greater success story in the long history of money than the common greenback. Of no intrinsic value, collateralized by nothing, it passes from hand to trusting hand the world over. More than half of the $923 billion's worth of currency in circulation is in the possession of foreigners."

Yet like all great schemes it has its limits.  "But now the world is losing faith, as well it might. It's not that the dollar is overvalued—economists at Deutsche Bank estimate it's 20% too cheap against the euro. The problem lies with its management. The greenback is a glorious old brand that's looking more and more like General Motors."  Ouch!  Take away my membership in the American Economics Association before you compare me to Rick Wagnoner!

The strength of the dollar is of both economic and geopolitical significance. 

Stable monetary values make economic calculation easier and facilitates prosperity.  Unstable money gives incentives to speculate and invest capital and human energy into unproductive activities.  Diverting human and financial capital form productive activity makes society poorer.  It is one of the two legs of Robert Mundell's "policy mix," which not only won him a Nobel Prize, but also is the foundation of Supply-Side Economics as Brian Domitrovic demonstrates in his new book, The Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity." 

Our current international financial system has no anchor in the real economy.  We have floating exchange rates that float whithersoever the whims of speculators send them.  Wallace and Sargent demonstrated three decades ago that floating exchange rates have no equilibrium.  The result is uncertainty in trade, profits for banks, and the diversion of many clever folk into speculation.

President Obama's new realism (see "Is there an Obama Doctrine?" in the Economist) seems to say that we as a superpower will assert our selfs, if we can afford it.  With such an anemic dollar it is hard to say we will afford much!

The Good the Bad and the Ugly: The Weak Dollar, CIT's Bankrupcy, Aircraft Leasing

1) The economic recovery: Real GDP grew at a 3.5 percent seasonally adjusted annual rate in the third quarter after falling five of the previous six quarters. Jeff Bator in the Wall Street Journal writes, "[A]fter a bullish report on manufacturing suggested the smokestack sector is in a hiring mood., ...U.S. factory goods orders rose in September...0.9%, the Commerce Department said Tuesday, the fifth increase in six months. Orders fell an unrevised 0.8% in August."
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World trade bottomed out in April and our national economy's recovery started in June according to my best estimate.

2) The main opportunities and threats to recovery here in Wichita: the weak dollar is helping make American aircraft more competitive vis-à-vis Airbus and Embraer.  In the Wall Street Journal, Mike Spector Vanessa O'Connell and Kate Haywood reported that CIT filed for bankruptcy "in New York, listing assets about $71 billion and nearly $65 billion in liabilities." CIT's bankruptcy shows the fragile financial shape of the aircraft leasing business.  CIT Aerospace is a major aircraft lessor with aircraft worth something in the vicinity of $10 billion.

Seven aircraft leasing companies (GE Capital Aviation Services, AIG's International Lease Finance Corporation, CIT Aerospace, Royal Bank of Scotland Group PLC's RBS Aviation Capital, Bank of China's BOC Aviation, Pacific LifeCorp Inc.'s Aviation Capital Group, and Pembroke Group, a unit of Britain's Standard Chartered PLC) are big customers of the aircraft manufacturers.   Last fall, we were shocked to discover that AIG was Boeing's and Airbus' biggest customer. Daniel Michaels at the Wall Street Journal estimates that approximately 35% of the world's jetliners are owned by these lessors.  Thus these lessors' own $147 billion of the world's $417 billion worth of jets. The larger lessors are all in shaky financial shape.  This means the biggest set of customers for Airbus and Boeing (Spirit's customers) face severe financial constraints to their buying planes.

Earlier we wrote, " AIG has been trying to sell ILFC for a year. Steven F. Udvar-Hazy, chairman and chief executive of International Lease Finance Corp., is trying to work a deal whereby he and investors carve out a part of ILFC and go it alone.  The investors are supposed to be mostly from the Middle East and China." The commercial side of the aircraft industry has held steady so far.  With Wichita's unemployment rate at 8.6 percent, let us pray this is not the other shoe ready to drop.

Henrique de Campos Meirelle On Brazil's Success Through the Financial Crisis

Henrique de Campos Meirelles is the Governor of Banco Central do Brasil. Maybe Ben Bernanke could learn a thing or two from this interview with the economist:

Maybe You Prefer Pisner Urquell or Budweiser (from České Budějovice!) or Klášter, But István Szoke Thinks Staropramen Is a "Hidden Gem."

The MoneyMeisters (I can not call them breumeisters) at Anheuser Busch InBev are shuffling their portfolio.  They are selling to private equity investors, CVC, their eastern and central European operations and distribution system for $2.2 billion.  Matthew Curtin judges "CVC is paying around nine times last year's Ebitda assuming it hits its return targets, triggering another $800 million payment to ABI. CVC will fund the deal with $1 billion in debt raised from a variety of banks. The three times debt to Ebitda is well below the six times-plus multiples typical during the boom."  EBITDA is earnings before interest, taxes, depreciation, and amortization.  It is an operating cash flow approximation that is often used in valuations. Lex in the Financial Times adds, "Evolution Securities estimates $2.23bn represents about eight times 2009 earnings before interest, tax, depreciation and amortisation. That is some way below the 10 times-plus of big boom-era beer deals but for AB InBev it is respectable enough, given the potential extra $800m payments."

Matthew Dalton fills out the price: "AB InBev will receive $1.62 billion in cash for the Central and Eastern Europe assets. AB InBev will also receive a $448 million unsecured deferred payment obligation from CVC with a six-year maturity that can be extended 2 years, paying interest at between 8% and 15%. Finally, AB InBev will get $165 million in minority interests."

He tells us "The operations being sold are located in Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Montenegro, Romania, Serbia and Slovakia."  CVC gets to "brew and/or distribute Stella Artois, Beck's, Löwenbräu, Hoegaarden, Spaten and Leffe -- AB InBev's main brands in Europe" in those countries.  They acquire, among other brands, Staropramen.

InBev wants to focus on big brands in big countries.

But how good a deal is it for the buyers?  Yes they are paying less than the heady multiples of the bubble years. It looks like they have been clever in structuring it.  Interestingly, according to Martin Arnold and Philip Stafford, "István Szoke, head of CVC’s new central and east European buy-out team, told the Financial Times that Staropramen was 'the hidden gem' among the assets."

The deal turns financially on buying at the bottom and an eventual recovery in revenues as the local economies recover.  Mr Szoke told FT, "We think we are buying this business at somewhat of a trough, as we expect the [east European] region to recover and grow, which will benefit the top line of the company." The Czech Republic, a world leader in beer consumption, is like the caboose on a train in the globalized economy.  “We were surprised by how hard beer consumption has been hit in the region,” said Mr Szoke. “But beer consumption is driven by disposable income and that will recover once this crisis ends in a year or so.”  Since world trade started turning around in early spring, maybe the caboose will make back to the pub by next year.

The Rise of the Loonie

The Canadian dollar is so strong, the Bank of Canada may intervene lest a too strong Loonie stifle the recovery north of the border.