No matter what you believe, recessions are never fun. Beneath all the statistics and data are real people facing real challenges. The unemployment rate, now 6.7%, is headed to about 8% by late 2009. In the fourth quarter, real GDP will drop the most since the brutal recession of 1981-82 when, over the course of only two years, Paul Volcker reversed 20 years of inflationary monetary policy.

But it is not just the speed of the collapse that is so scary; it is that our current generation has little experience with economic pain. Between 1965 and 1982, the US economy was in recession one out of every three years, inflation hit double digits and the unemployment rate peaked at 10.8%.

Since 1982, the US has been in recession just one out of 16 years, the unemployment rate bottomed at 3.8% in early 2000 and then at 4.4% in early 2007. In other words, a wobbly economy today feels much worse to the average American and politician than it did 30 years ago.

So we have a real schizophrenia today. People are going to the mall for holiday shopping, parking hundreds of yards away and waiting in long lines to check out. But then, these same people go to parties and argue about whether the Obama economic stimulus plan should be $500 billion or $1 trillion. It feels so bad that President Bush is justifying his economic intervention by saying that “I’ve abandoned free market principles to save the free market system.”

What’s important to recognize is that even at the bottom of the current recession, sometime in mid-2009, the living standards of the typical American will still be amazingly high. In fact, even an aggressive contraction in real GDP will leave per-capita real GDP above 2005 levels.

Now, we did not have 8% unemployment back in 2005, but that kind of jobless rate is not unusual for recessions. The unemployment rate peaked at only 6.3% in the recession early this decade but peaked at 7.8%, 10.8%, 7.8%, and 9.0% in each of the previous four recessions, respectively, dating all the way back to the 1973-75 recession.

Meanwhile, most of the lessons of the Great Depression and stagflationary 1970s have been learned. Rather than shrinking as in the Depression, the money supply is growing, which will prevent persistent deflation. And the Fed promises to reverse course before inflation sets in. Protectionist policies are highly unlikely to be adopted. Tax rates may eventually go up, but are unlikely to skyrocket as they did under Presidents Hoover, Roosevelt, Nixon or Carter.

Unfortunately, one policy of the Great Depression – mark-to-market accounting – has yet to be suspended. But, given the savvy with which President-elect Obama has shown in picking economic policy-makers, we hold out hope that mark-to-market will be suspended (or significantly changed) early in 2009.

Even the original manifestation of the economic problem – the massive overbuying and overbuilding of residential real estate – will eventually generate benefits once the economy starts to recover. Think about the young worker or family just starting out in 2005. Now think about a similar worker in 2010. The future worker/family will pay less for housing, and not because they get “teaser” interest rates on loans for houses they end up unable to afford. In addition, these very same investors have a chance to buy equities at extremely attractive valuations.

Most importantly, for the long run, we still live in a country blessed with a Constitution that limits the power of would-be tyrants and a culture that attracts and encourages entrepreneurs like no other place on earth.
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NAR’s forward-looking pending home sales index eased against a deteriorating economic backdrop but remains in a stable range, the association says.  The index, based on contracts signed in October, slipped 0.7 percent to 88.9 from an upwardly revised reading of 89.5 in September, and is 1.0 percent below October 2007, when it was 89.8.  ”Despite the turmoil in the economy, the overall level of pending home sales has been remarkably stable over the past year, holding in a generally narrow range,” says Lawrence Yun, NAR chief economist.  ”We did see a spike in August when mortgage conditions temporarily improved, which underscores two things: there is pent-up demand, and buyers will enter the market when they have access to safe, affordable mortgages.”

Dec. 16 (Bloomberg) — The Federal Reserve cut the main U.S. interest rate to as low as zero and said it will buy debt as the next step in combating the longest recession in a quarter-century and reviving credit.

The Fed “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Federal Open Market Committee said today in a statement in Washington. “Weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

Treasury notes rallied in anticipation the Fed will buy the securities to force borrowing costs for consumers and companies lower. Nine rate cuts in the prior 14 months and $1.4 trillion in emergency lending failed to reverse the economic downturn. Today, the Fed said it will target a federal funds rate of between zero and 0.25 percent.

“The focus of the committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level,” the FOMC said.

The dollar tumbled against the euro and yen. Stocks climbed, pushing the Dow Jones Industrial Average up 216 points, or 2.6 percent, to 8797.12 at 2:53 p.m.

Printing Money

“The Fed is sending a message that it will print money to an unlimited extent until it starts to see the economy expanding,” William Poole, former president of the St. Louis Fed and now a senior fellow at the Cato Institute in Washington, said in an interview with Bloomberg Television. Poole is also a contributor to Bloomberg News.

The statement noted that the Fed has already announced it will purchase the debt issued or backed by government-chartered housing finance companies, and said the Fed is ready to expand the program. The central bank said it continues to weigh the potential benefits of buying longer-term Treasury securities.

The deepening economic slump pushed unemployment to 6.7 percent last month, the highest level since 1993, while builders broke ground on the fewest new homes since record-keeping began in 1947. Deflation is also emerging as a risk: consumer prices fell the most on record in November, the Labor Department said earlier today.

No Dissent

Today’s vote was unanimous. In a related move, the Fed lowered the rate on direct loans to banks and securities dealers to 0.5 percent. It set the payment on the reserves that commercial banks hold at the Fed at 0.25 percent, down from 1 percent.

Fed policy makers twice pared the federal funds rate, or overnight lending rate, to 1 percent since adopting it as the main tool of monetary policy in the late 1980s. The 1 percent rate held from June 2003 to June 2004, and again from the end of October to today.

The Bank of Japan has been the only major central bank in modern times to mix a policy of steep rate reductions with quantitative easing, or the strategy of injecting more reserves into the banking system than needed to keep the target rate at zero.

Japan’s central bank kept its main rate at zero from 2001 to 2006 while flooding the banking system with extra cash to encourage lending, spur growth and overcome deflation. The abundant funds failed to prompt lending by commercial banks, which expanded their reserves at the central bank almost nine times by early 2004.

Emergency Loans

Bernanke, acting with New York Fed President Timothy Geithner, has set up emergency loan programs aimed at averting a collapse of the nation’s credit markets. Geithner is President- elect Barack Obama’s pick for Treasury secretary and didn’t attend today’s meeting.

The Fed has enlarged bank reserves, supported issuance of commercial paper and provided liquidity to government bond dealers. It is also swapping dollars with the European Central Bank and its other counterparts to supply banks in other countries.

The moves have swelled the Fed’s balance sheet to $2.26 trillion from $868 billion in July 2007. That’s in addition to the $700 billion Troubled Asset Relief Program, which the U.S. Treasury has used since October to channel about $335 billion of capital injections into banks and other financial companies.

Still, the economy has crumbled, with employers cutting 533,000 jobs from payrolls in November for a total loss this year of 1.9 million, which more than erases the 2007 gain of 1.1 million.

Credit remains scarce in many markets and major financial institutions worldwide continue to report losses and writedowns totaling $994 billion.

Shrinking Economy

Macroeconomic Advisers LLC, a St. Louis-based consultant, says the economy is probably shrinking at a 6.5 percent annual pace this quarter, which would be the biggest drop since 1980.

The firm forecasts a 4.2 percent annual contraction rate in the first quarter, returning to no growth in the second quarter and a 2.3 percent expansion rate in the second half of 2009.

Early this month, as a panel of leading U.S. economists declared the recession began in December 2007, Bernanke signaled he was ready to dig deeper into the central bank’s toolkit. He said he may use less conventional policies, such as buying Treasury securities, because his room to lower the main U.S. rate from the current 1 percent level was “obviously limited.”

Fading Relevance

The federal funds target rate has weakened as a monetary policy tool because the Fed’s flood of funds has caused the average daily rate to trade below the policy goal every day since Oct. 10.

The gap between the target and the effective rate, or average daily market rate, has averaged about a half point since Sept. 12. The gap averaged just above zero from the start of this year through Sept. 2.

The central bank is trying to lower mortgage rates by purchasing up to $100 billion of debt issued by housing-finance providers Fannie Mae and Freddie Mac and $500 billion of mortgage-backed securities guaranteed by the companies.

The Fed’s counterparts around the world have staged their own interest-rate cuts. The ECB has lowered its main rate to 2.5 percent this month from 4.25 percent in July, while the Bank of England reduced its rate to 2 percent this month from 5.75 percent in July.

ECB President Jean-Claude Trichet said yesterday there’s a limit to how far the bank can cut interest rates and signaled policy makers may pause in January. “Do we have a feeling there is a limit to the decrease in rates? At this stage certainly yes,” Trichet told journalists in Frankfurt.

While the Fed can’t push interest rates below zero, “the second arrow in the Federal Reserve’s quiver — the provision of liquidity — remains effective,” Bernanke said in a Dec. 1 speech.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Craig Torres in Washington at ctorres3@bloomberg.net;

Last Updated: December 16, 2008 15:15 EST

We are frequently asked; “what is the ‘catalyst’ for a recovery?” What force (external or internal) will break the downward cycle of job losses? How does it ever end?

Taking this thought process to its conclusion clearly shows that something is missing. If job losses beget less spending and more job losses, then recessions would never end. On the other hand, if job gains beget more spending and more job gains, then expansions would never end.

But, a cursory look at history shows that this can’t be true. Since 1854, the US economy has gone through 32 business cycles (recessions and recoveries). In other words, the direction of economic activity eventually changed.  Many times in these past cycles, the economy started to recover well before employment turned up.

There are a number of reasons for why this is true. The first reason is that the combined decisions we make as independent members of a free society tend to generate economic growth. When people lose their jobs, it does not mean they lose their ability to be productive. It may take time for them to find a new position that matches their skill set, but as long as they have worthwhile abilities, they will eventually get another chance to produce.

In the meantime, companies can use layoffs to increase efficiency, laying the groundwork for future increases in profits and wages for their remaining workers. What that means is that a 1% loss in jobs results in a smaller than 1% loss of production. And using assets more productively frees up resources to do “new” things. We have lost millions of farming jobs over the decades and centuries, but the nation as a whole is more prosperous as a result, not less.

In addition, if a recession is partly caused by over-investment in a particular sector, two forces drive down jobs in that sector, but one is temporary. For example, home building exceeded demand, and those extra jobs were unnecessary. But, by reducing inventories of homes, employment will fall even further. Once excess inventories are worked off, the industry will be adding jobs, even if it does not ramp up to the previous peak in production.

Nonetheless, some still look for a catalyst to end the panic that started this Fall. Consumers and businesses have pulled back, basically hoarding cash, to the point of driving down the T-bill interest rate to zero. Part of this was because many people lost faith in the banking system, but the end result was a sharp decline in the velocity of money. Only once in history has something like this spread in a long-term downward spiral and that was in the Great Depression.

But, in the Depression, the real problem was that the Fed let the money supply collapse, which in turn shut down aggregate demand. This is not happening now. The Federal Reserve is making sure a persistent deflation will not take hold and is adding liquidity to the system as rapidly as it can. As a result, we expect both money growth and a turnaround in velocity to start healing in the months ahead. In fact, given the unexpected increase of 0.5% in “core” retail sales in November, this may already be happening.

In other words, the catalyst for recovery is attached to the very eyes that are looking for it. As long as human beings attempt to better themselves and improve standards of living, and as long as policy-makers don’t compound problems, the natural course of growth will return in its magical and mysterious way.
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As the government strives to offset the current weakness in the economy, its actions have exerted a much stronger than usual influence on mortgage rates. Programs to purchase mortgage-backed securities and to provide capital to financial institutions have been favorable for mortgage rates, while a bill introduced in Congress this week could have the opposite effect if passed. The bill would permit bankruptcy judges to modify troubled mortgages by reducing the principal and payments. The goal would be to help prevent foreclosures, which is a worthy objective. However, opponents of the plan are concerned that inve! stors may require higher mortgage rates to compensate for the increased risk that loan contract terms may be changed. At this point, it’s not certain when the bill will come up for a vote.

The big news next week will be Tuesday’s Fed meeting. Expectations are for a 50 or 75 basis point rate cut, and the accompanying statement will provide the Fed’s latest views on the state of the economy and the financial system. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will also come out on Tuesday. CPI looks at the price change for those finished goods which are sold to consumers. Industrial Production, an important indicator of economic activity, will be released on Monday. Housing Starts is scheduled for Tuesday. The regional manufacturing indexes will also be released next week.
Copyright @ 2008 MBSQuoteline

The Fed and the Treasury are looking at additional programs to boost the economy. On Wednesday, the Treasury confirmed that it is considering a plan which would offer below-market mortgage rates for select loans used to purchase homes. The lower rates would not be available for refinancing loans. At this point, it’s not certain if, when, or in what form this latest idea will be acted upon. As we have seen recently, most notably with the $700 billion TARP rescue plan, government programs often change significantly before their implementation.

On the economic front, the November Employment data was even worse than expected. The economy suffer! ed the largest monthly loss of jobs since 1974. In addition, the figures from October and September were revised sharply lower. The Unemployment Rate rose from 6.5% to 6.7%, the highest level since October 1993. The manufacturing and construction sectors continued to shed jobs, and the service sector was hit hard as well. The weak report makes additional fiscal stimulus programs more likely.

During the first half of next week, Pending Home Sales on Tuesday will be the only economic data. Import Prices and the Trade Balance will come out on Thursday. Friday will be the big day with the PPI inflation data, Retail Sales, and Consumer Sentiment. The Producer Price Index (PPI) focuses on the increase in prices of “intermediate” goods used by companies to produce finished products. The Retail Sales report is a major indicator of spending levels by consumers, who account for about 70% of economic activity. Treasury auctions and Fed speakers may also have an impact next week! .
Copyright @ 2008 MBS Quoteline

Last week, the Treasury Department signaled that they were in the process of buying up to $100 million in Fannie/Freddie securities, thus injecting a massive amount of liquidity into the mortgage market.  As a result, the 30-year rate took a massive dive…from 6.375% to 5.25%, a rate that hasn’t been seen for at least 2 years.  The market moves daily and today the 30-Year rate is hovering around 5.5%.

These rates open up opportunities for refinancing, which may help some of us lower our monthly costs.  The question is: when is it right to refinance?  Simply put, if you can pay back the costs of refinancing in 30 months or less, it is a good investment.  Here’s the calculation:  multiply your outstanding balance by your existing rate; then multiply the same balance by the new rate (I’d shoot for 5.375%); subtract the new interest amount from the old amount and divide by 12.  This is your monthly savings.  Then divide this into the cost of refinancing; I’d use $3300.  If your answer is less than 30, go for it.

Here’s an example for a $325,000 mortgage.    $325,000* 6.25% = $20,312; $325,000*5.375% =$17,468   (20,312-17,468) divided by 12 = $237/month savings.  The cost of $3300 divided by 270 is 12.  You will pay back the cost of the refinancing in 11 months.  If your calculation is close to this, call me!

I have found that in most current refinancings, where credit scores are above 720 and the loan to value is below 70%, underwriting is not asking me for any income or asset documentation.  By the way, the only rate that seems to have dropped so precipitously is for a 30-Year Amortizing loan; everything else seems to be more expensive and out of balance with normal rate relationships.

This time around, the recession is not due to tight monetary policy, higher tax rates, or protectionism. It’s due to a sudden and sharp plunge in the velocity of money – what we have been calling “risk aversion hysteria” – where the speed with which money moves its way through the economy slows down as both consumers and businesses decide they want to increase their cash holdings.

Idiotic mortgage loans started the financial fire and overly stringent mark-to-market accounting rules acted as an accelerant, forcing financial firms to write down the value of their assets even when underlying mortgage cash flows are likely to grossly exceed fire-sale prices for mortgage securities.

But fresh data on what’s been happening on Main Street the past few days suggest the plunge in velocity may be either coming to an earlier end than most analysts expected or perhaps velocity may even be accelerating.

The National Retail Federation (NRF) says the number of shoppers either in stores or accessing on-line retailers, from Black Friday through yesterday, was up 17% versus last year and that the average amount spent was up 7.2%. According to the NRF, shoppers were busy buying up clothes and electronics. Meanwhile, ShopperTrak, which monitors sales at shopping centers and malls around the country, says Black Friday sales were up 3% versus last year.

Obviously, these figures should be greeted with caution. The NRF numbers are based on a poll of consumers, not actual sales volumes, and the ShopperTrak data is for Black Friday only. It is plausible that, with relatively few shopping days this year between Thanksgiving and Christmas, consumers are buying more on a per day basis but will not buy more during the holiday season as a whole.

However, going into Black Friday, retailers and analysts were overwhelmingly bearish, compounding the doom-and-gloom outlook pervading the media and much of the investing public. Now, consumers, who usually lag other economic indicators, may be an early sign that the bearishness went way too far.
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This information contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.

Which was part of the reason we ended up there last weekend, sniffing the pinon, circling the plaza in the clear, soft desert light, and looking for something good to eat.

It wasn’t as easy as the inflated press suggested, a decade ago, when Santa Fe was the travel glossys’ It girl. But a concentrated culinary culture still thrives in Santa Fe and while we never had a great, sustained meal we had fragments of one. Locals can offer their own more seasoned suggestions (I’m keeping a  list of what I missed for the next visit). But if I was going to piece together one great Santa Fe meal, based on our grazing marathon last week, it would consist of the following dishes.

Appetizers: Geronimo’s ex-chef Eric DiStefano has taken over the kitchen at the revived Coyote Cafe, which removed the howling coyotes but won back its big, howling crowds. The menu is thick with theatrically rich dishes but the best may be the Cafe’s long-standing signature starter: a stack of sweet shrimp sandwiches between actually fluffy griddle cakes. Our most eye-opening appetizer, though, was at the Fuego restaurant, in La Posada hotel, where chef Mary Nearn serves a dish of very tender, shredded, braised red chile beef cheeks, topped by a little crown of manchego cheese and sitting on a crisp disk of blue corn tortilla. Get two orders of this, or maybe three, and you’ll have the best meal in town.

Entrees: Cafe Pasqual’s, as much of a local culinary landmark as Coyote, never needed a revival because its food never flagged, and the line for lunch still snakes out the front door almost every day. Its chicken mole enchilada is a perfect dish; the dark chocolate brown, almost inky, black mole is dusky, deeply flavored, and just a shade shy of sweet, and the free-range chicken comes wrapped up tight in white corn tortillas. (You can get a mole-less version of the enchilada, topped with red and green chile, that’s just as good, pictured above). The Inn of the Anasazi’s dining room, headed by British chef Oliver Ridgeway, serves a surf and turf plate of velvety scallops and equally velvety pork belly cubes. And Geronimo, where local favorite son Martin Rios has taken over from DiStefano, saves the ubiquitous salmon (the creme brulee of entrees) by pairing it with a very seductive truffle beurre fondue.

Desserts: Almost all the more formal kitchens in town seem seized by the creme brulee-panna cotta-flourless chocolate cake mantra. Get something more interesting, and truer to Santa Fe, at the Todos Santos chocolatier, where the silver and 23 karate gold leaf chocolate saints and milagros are too pretty to eat, unless you get really hungry, and then it’s a fight between your appetite and your aesthetics. The other option is the Saturday morning Santa Fe Farmer’s Market, at the new Railyard, where hippie cowgirls sell raspberry red chile ginger jam to spread on the apricot peach bread rolls, and the danishes, sold by a line-up of bakers.

Oddly, of course, what’s missing from a lot of the name restaurants is a real sense of New Mexican flavor. For reliable, cheaper meals that evoke some actual local color, as satisfying as the whiff of pinon, try the Tune-Up Cafe, where the kitchen mixes New Mexican and Salvadoran dishes, and Felipe’s Tacos, which is as good as it sounds.

by Raphael Kadushin, Epicurious.com