The devil and his details

We begin with the idea that this is a recovery, however an exceptionally heterogeneous recovery that may simultaneously surprise us by the strength of the positives (we think these may show up as earnings surprises in the manufacturing sector) and the depths of the negatives, by which we mean entire swaths of the American population who are effectively hung out to dry.

This is further complicated by the undeniable fact that Afghanistan and its environs is taking on a Viet Nam flavor, the generation that was in its youthful prime in the real Viet Nam era is slowly riding off into the sunset, to be replaced by a less populous generation who have no real memory of Lyndon Johnson, Da Nang harbor, the Tet offensive, the DMZ, Jane Fonda and Tom Hayden, the SDS, or the Cultural Revolution. In a nutshell, they don’t have a living memory of just how horrendously wrong things can go as a nation is pulled deeper and deeper into a vortex of uncontrollable events. Nor how incredibly expensive these misadventures inevitably will be.

On the positive side, some components of manufacturing America are gathering momentum, benefiting from an extended period of inexpensive money, a very lean labor force, inventory liquidation, and an entire economy feeling the effects of a deferred demand for about two and one half years.

We’ve calculated the average yield on corporate bonds spanning Aaa to Baa in the following chart from 1919 to the present, which would be roughly 6% today, rolling us back to 1967 to find an equivalent cost of borrowing.

avg corporate bond yield

If you consider the dramatic collapse in Baa minus Aaa yield spreads, this further supports the thesis that risk appetite has significantly increased in the past months, and investors intend to put money to work instead of parking it in low risk reservoirs.

Baa-Aaa yield spread

The latest developments in the Eurozone have understandably provoked a flight to safety and an exit from the lowest quality debt ranges. The depth of the potential crisis is debatable, but EU’s total GDP is slightly greater than the USA’s, so the greater probability is that this will be a drawn out drama where the southern economies and the northern economies will engage in high political drama, cryptic brinkmanship, and hidden power struggles on many levels until they can put a public face on how they sort out a new arrangement.

gross world product

More striking is the Prime Rate which takes us back to the mid 1950s to find an equivalent level of generosity.

And of course, the Fed Funds rate which is basically the overnight rate, is effectively zero, for now.

Durable goods orders would appear to have reached the bottom of a natural trough and may be beginning to work their way up. Maybe.

durable goods orders

So far we have all the ingredients for a nice recovery pop. Hungry workforce. Cheap money. Worn out stuff that needs to be fixed. Fear abating and avarice returning. Chances are very good that we’ll see one or more above average quarters in upside earnings surprises. However, as we alluded in the title, there is devilment in the recovery. One is how exceptionally uneven it is for the consumers (who, after all, are 70% of the purchasing power in this economy) and their exceptionally uneven finances.

The Board of Governors of the Federal Reserve system has prepared sector maps of the United States which look at specific measures of financial condition on a county by county basis. These show various measures of delinquency of certain types of debt overdue by three months or more. Lighter means lower and darker means higher percentage of delinquent accounts seen through three measures. First is delinquency by credit cards. Seen through this optic, some regions are in terrible shape and others relatively unaffected. Those dark blue areas probably represent entire regions who had been surviving on credit cards until those too gave out.

bank cards delinquent

Second is student loans delinquent. Regionally this is a slightly different picture, however the new South and the Southwest are particularly badly affected. We see this as indicative of a young generation already becoming entrapped in a  cycle of unpayable debt. Does anyone remember Indentured Servitude ? A fine old American tradition.

student loans delinquent

Mortgages delinquent shows an exceptional concentration in California, Florida, Georgia, South Carolina, tracts along the Mississippi River, Michigan, chunks of Arizona and Nevada for example. The intense concentration in these areas seems to indicate that they were cases of particularly egregious lending practices and now have the financial stability of high class banana republics.

mortgages delinquent

What might we infer from this piebald variegation of economic heterogeneity? The fist point is that any general characterization of the American economy is fully missing the point. At the moment there is not one uniform descriptor of what the economy is or how it is performing. Some regions and the industries located in them will probably rocket out of the low phase with surprising intensity, and other regions appear to be set for a long grind of reduced expectations, low horizons, lost social capital, and furious political debate and dishonesty.

Tags: Baa-Aaa yield spread, bank cards delinquent, corporate bond yield, durable goods orders, Fed Funds rate, mortgages delinquent, Prime Loan Rate, student loans delinquent

This entry was posted on February 15, 2010 at February 15, 2010 and is filed under Economy, Featured, News. You can follow any responses to this entry through the RSS 2.0 feed.