Category: Currency

Economics Update

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The gross domestic product (GDP) fell at an annual rate of 3.8% in the 4th quarter of 2008, the biggest drop since the first quarter of 1982.

This is better than expected, but probably worse than it sounds.

First, the Fed Funds rate had peaked at almost 20% in 1981, and was still at 15% in early 1982. The Fed was trying to create a recession to short circuit inflation. (See graph pr0n)

Also, I agree with Barry Ritholtz of The Big Picture when he says, “The advance GDP data was released. I expect the revisions will make this even worse.”

Meanwhile, Calculated Risk’s Credit Crisis Indicators are showing improvement, most notably with treasury yields increasing, which implies that there is more competition for that money from other borrowers and lenders.

That being said, we are in a very weird place economically when an increase in interest rates is good news.

There are some dark spots in the indicators, the Chicago Purchasers’ January Index fell to 33.3, the lowest level since March, 1982….There it is again…..1982, and the Restaurant Performance Index (RPI) fell to a record low in December, which means that we aren’t seeing much buying on a wholesale or a retail level.

In energy, oil is up on concerns about the refinery strike, and in currency, the dollar is up on low Euro Zone inflation numbers, which suggest that the ECB might cut rates again.

Economics Update

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Well, the FOMC meeting ended, and they relased statement saying that they will stay at zero interest rates for some time.

Additionally, they are looking at, “Unconventional Measures,” which appear to include buying longer term Treasuries.

It appears that one of those steps is that they will write down a significant of the mortgage backed securities that they picked up in the Bear and AIG bailouts, a sort of voluntary “cram down”.

Europe seems to have stabilized, at least for now, with consumer sentiment steadying.

Meanwhile, mortgage applications fell sharply, as interest rates have risen, from 4.88% at the beginning of the year to 5.22% now, in anticipation of ballooning deficits.

Of course, if reports that Moody’s is considering cutting GE’s triple-A credit rating, are true, we’re in for another big shock.

Both oil and the dollar inched up today.

Economics Update

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The lede on most business sections was good news, that home sales rose in December, as you can see on the top chart, but as the bottom chart clearly shows, home prices continue to fall.

Prices are down 15.3% year over year, and sales in 2008 are down 13% from 2007 sales.

The real question is how much of this is foreclosures and other REOs creating a market for bottom feeders, because the percentage of foreclosures relative to sales is way up.

Of course, interest rates have gone up a bit for mortgages, as they have in Treasuries, and this might further reduce home sales.

We also have the Conference Board’s index of leading economic indicators rising for the first time in 6 months, but it appears that this is entirely because of increasing money supply, as the Fed cranks up the presses.

The National Association of Business Economics’ (NABE) quarterly industry poll shows a far more pessimistic view of the path forward, with the worst numbers since they started the survey in 1982.

Israel’s central bank cut its benchmark rate by 75 basis points to 1%, on indications of a recession there.

In currency, the dollar fell, largely on good news on UK bank bailouts, and in energy oil was down about 6 bits, on reports of high inventories.

Economics Update

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Consumer confidence just fell again, and hit an all time low, 37.7, the lowest number since the Conference Board started keeping records in 1967.

What with the Case-Shiller index showing a November home price drop of 18.2% year over year, and California home prices falling a staggering 42% year over year along with word of that there have been 519,895 job cuts announced since election day.

It’s all a major bummer.

We do have a report that Obama will direct his TARP funds toward consumers, as opposed to the corruption orgy under Bush and His Evil Minions™, which is good news, but it looks like Fannie Mae will need another $16 billion of that.

Meanwhile, Sweden, which handled its early 1990s banking crisis about as well as anyone, it was able to wrap up its intervention years ahead of schedule and with a profit, is looking at injecting cash into its banking system again.

Russia is looking at doing the same for its banks.

In any case, the lousy consumer confidence numbers have had the effect of driving oil down, and scaring people into fleeing to the safety of the dollar, which drove the buck up.

Economics Update

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Well, it’s official now for the British, they are in recession too.

Not surprisingly, the Pound has tanked and the dollar is generally up on this news.

The Ruble further weakened too.

We also now have ING warning that France’s AAA sovereign debt rating is at risk.

Meanwhile, on this side of the pond, the New York Stock Exchange has lowered its market capitalization requirement for companies on the exchange.

They delisted a record 53 companies last year, and my guess is that they are worried about breaking 100 this year, so they changed the requirement to account for a tanking market.

A more general indicator of economic activity, the rail freight traffic, has fallen sharply.

Generally, the high energy prices of 2008 favored the industry, but when total economic activity falls, so does rail traffic, even as it grows relative to trucking. (H/T Calculated Risk: Rail Freight Traffic Off Sharply in 2009)

In the intersection of banking and real estate, it appears that the regulators of Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLB) are seriously tightening up regulations because they are still engaging in risky activity.

I just want to note that I suggested that this might be an issue in March of last year.

Also, it appears that the inventory and foreclosure numbers are worse than you think.

Banks are not wanting to flood the market, so they are holding back on placing some of their foreclosures on the MLS and delaying foreclosures on properties in default, so there is a “ghost inventory” out there that is not showing up in the numbers.

In energy, oil was up today.

Economics Update

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The weekly new claims for unemployment jumped last week by 62,000 last week, to 589,000, the highest level since 1982, and more than predictions.

The 4 week average was flat, and continuing claims were worse than predictions too, at 4.607 million.

If that weren’t enough housing starts fell by 15.5% to 550,000, which, according to Calculated Risk,is, “by far the lowest level since the Census Bureau began tracking housing starts in 1959.”

Mortgage applications fell by 9.8% last week, because interest rates bumped by 0.37%, and most of the action right now is ReFi.

Over in Asia, the Bank of Japan is buying corporate bonds, because the credits markets have frozen there, and China’s economic growth fell to a 7 year low for the 4th quarter.

Meanwhile, it looks like the humongous loss phenomenon is moving from the banking giants to the regional banks, which may have a larger effect on business output, since they do a lot less of the high finance and a lot more lending to mom and pop businesses.

In commodities, steel production fell 1.2% in 2008, the first annual drop in a decade, while oil was up a few pennies today.

In currencies the dollar was down vs. the Euro and Yen, but up against the Pound…but then again, everything is up against the pound.

Economics Update

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Most of the news today seems to involve currency and other nations, with the dollar rising against all major currencies, particularly the British Pound, which fell to its lowest level since 1985.

Considering the fact that the U.K. jobless rate and budget deficit has grown significantly, this should be no surprise.

On the other side of Europe, Russia is pulling back from Ruble support, engaging in what is called a “dirty” float, because they are burning through their currency reserves.

Meanwhile, S&P cut Portugal’s debt rating 1 step, from AA- to A+.

If you want to know the effect of this, you need only look at Greece, where the the rates that they have to pay on their bonds jumped following a similar downgrade. The spread over similar German debt went from 55 basis points (0.55%) to 325.1 basis points (3.251%).

In US real estate, the NAR index of builder confidence fell to 8, below the prediction of 9, with 50 being neutral. (!)

In energy, Oil is up.

Economics Update

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The US dollar posted big gains today, driven in part by the inauguration, but more so by bank of Canada slashing its benchmark rate by 50 basis points (½%), to an all time low of 1%, and the Bank of England making noises that sound suspiciously like cranking up the printing press.

In real estate, the National Multi Housing Council’s Market Tightness Index fell to 11 in the 4th quarter, down from 23 in the 3rd quarter, so there is downward pressure on rental properties too.

Oil was up, but this was the last day for trading on this contracts for February delivery, which, coupled with the markets being closed for yesterday’s MLK holiday, puts a lot of noise into the number.

Economics Update

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It really is beginning to look like the UK is going to be hit worse by this than the US, with Gordon Brown unveiling a new bank bailout, one which, shocker, requires the banks to lend the money out again, imagine that.

I would imagine that the catalyst for this action was that Royal Bank of Scotland posted a £ 28 billion loss for 2008.

Even more than the US, the UK seems to have banked on (pun not intended) finance being the future of their economy, and they are suffering as a result.

Spain, which created a boom on real estate, is doing worse with S&P cutting the rating on its debt from AAA to AA+.

The downgrades to countries like Spain, Portugal, Italy, Greece, and Ireland are throwing a monkey wrench into the vision of the Euro Zone as a unitary institution:

Diverging bond yields hurt [Euro Central Bank President] Trichet’s argument that the ECB’s inflation-fighting mandate ushered in an era of stability for nations that once suffered rampant price growth. They also make it tougher for the ECB, which cut its key rate to a record yesterday, to set one benchmark for all 16 euro nations. That may delay recovery as governments try to fund stimulus plans.

Autos are not great either, with France talking about a partial takeover its car makers in order to bail them out, and GM at risk of defaulting on its recent government loan, because it cannot find enough debtors to swap debt for equity.

Likely, the sticking point here is PIMCO, the worlds largest bond fund, which has just been hired to manage a Federal Reserve facility, so they are extorting GM, while at the same time, they are being paid to manage the Fed’s attempt to fix the problem of frozen credit.

It’s nice when you can generate demand for your services without having to deal with the market, I guess.

Meanwhile, in currency, the dollar was stronger today, largely on the UK bank rescue, and the Ruble continues its slide.

In energy, oil is down, largely on the end of Gaza fighting and the Russian-Ukranian gas deal, and retail gasoline is up again today.

I don’t expect it to go above $4/gal soon, but I think that sub $2/gal gasoline will be gone shortly.

Economics Update

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You know that old saying about releasing bad news on a Friday, because everyone is looking toward the weekend?

It’s one of those Fridays.

Let’s start with Ireland, where the Anglo Irish Bank, the 3rd largest in that country has been declared insolvent and nationalized. I’m beginning to think that the “Celtic Tiger” is on its way back to poetic poverty, particularly now that places like Poland and Slovakia are cheaper labor markets.

In the world of recession/deflation, we have the CPI falling 0.7% and industrial production falling 2% in December.

I’m beginning to think that the US will start to resemble Ireland…Without the Poetry bit.

We also have a couple of updates courtesy of Calculated Risk, with Los Angeles Area Port Traffic falling sharply and office vacancy rate rising in Q4.

Note that there are predictions of a 30% drop in office rents, and that exports are dropping more than imports, so this is not a turn around on the deficit.

In retail, we have Toyota North America announcing cuts in production, and Circuit City is going to liquidate, as in, no more Circuit City, no kidding.

In currency, more bailouts to banks means more concerns about the dollar, so it fell today.

In energy, oil was up slightly today, but down most of the day, after the IEA predicted that demand would continue to fall, and retail gasoline was up again, which means that it’s gone up around $0.20/gal since New Years day.

Economics Update

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Well, weekly first time jobless claims at rose to 524,000, and the 4 week moving average was down 8000 to 518,500, and continued claims fell slightly, from 4.6 to 4.5 million. (Scary graph pr0n on right)

I’m not sure how much of this is being effected by the short weeks of Christmas and new years, but it should sort out in the next few weeks.

Not unsurprisingly, the Federal Reserve’s Beige Book, a collection of anecdotal economic information reported by the various Federal Reserve banks, was really quote grim.

Unsurprising, considering that foreclosure filings rose 81% in 2008 over 2007.

Housing is not recovering in the near term, even with mortgage rates hitting another record low.

One of the reasons that there will not be a recovery is that commercial real estate is imploding right now, with the volume of loans for office space and rental properties defaulting or becoming delinquent expected to triple in 2009.

In international finance, S&P downgraded Greek sovereign debt, from A to A-, and the ECB cut its benchmark rate to 2%, an all time low.

Not surprisingly, both of these pushed the dollar up today.

The juxtaposition of economic weakness with a stronger dollar drove oil down too.

Economics Update

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Scary Picture of the Day:
Industrial Output Cliff Diving

The U.S. trade deficit fell by 28.7% in November, not because we are exporting more, but because consumption is falling so quickly. This is why you don’t see decoupling in the world economies (see chart pr0n)

While we are on the topic of international capital flows, it appears that Standard and Poor’s is threatening to downgrade the debt of Spain and Portugal because of increasing deficits.

Of course, and I am not a deficit hawk right not, it does beg the question about what to do with the US government shortfall, as it was $485.2 billion in the first quarter of fiscal year 2009 (October 1, 2008 – December 31, 2008), which is more than the deficit for all of FY 2008.

When is S&P going to warn us, and when is S&P going to be prosecuted for its recent fraud on the public? After the meltdown of various instruments that S&P saw fit to declare AAA, one wonders why. I would not employ any of the major ratings agencies as pastry chefs.

We have some good news though, the TED spread fell to 98 basis points (0.98%), dropping below 1% for the first time since August 15.

The TED spread is the difference between 3 month treasuries and 3 month interbank loans, and the spread goes up as uncertainty about getting your money back goes up.

BTW, homes won’t be turning around any time soon, Beazer Homes is reporting a 53.2% drop in home sales Q4 2007 to Q4 2008.

So with all of this uncertainty, people are pulling money out of palces like Spain and Portugal and putting it in the US, which drove the dollar up today.

Oilrose too, largely on promises of large production cuts by the House of Saud.

Economics Update

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Well, it looks like cutting defense spending to help the economy may not work, S&P is threatening to downgrade New Zealand’s AA Credit Rating.

By the time this is over, I would not be at all surprised if we see a number of countries out there like Australia and New Zealand with rating in the “B”s.

Well, we’ve got another retailer bankruptcy, Shane Co., a Jeweler with 23 stores in 14 states….We’ll see a lot more of this.

The Dollar rose, because traders are expecting the ECB to cut rates.

Also, Oil is back below $40/bbl.

Economics Update

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The big news was the employment data, which I blogged on earlier, but here is the rest:

Wholesale inventories, and wholesale prices fell sharply in November. Even so, the “stock-to-sales ratio” rose because of less buying.

Looks like wholesale deflation to me.

Oil fell on the jobs news, because the unemployed don’t consume much oil.

The Dollar was mixed, losing against the Pound and Yen, and gaining against the Euro.

Economics Update

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Well, real estate sucks, with pending home sales falling by 4% (BTW, Manhattan apartment prices fell 4% too, so ain’t nothing going up.)

Manufacturing data is out too, and it’s grim, with factory orders falling twice what was forecast in November, and Toyota deciding to idle its plants for 11 days over February and March.

The last time Toyota did this was in the early 1990s recession, and they did it for one day.

Services did better than expected, with the Institute for Supply Management’s (ISM) non-manufacturing index rising. The prediction was that it would fall from 37.3 to 37 in November, but it rose to 40.6.

Better than expected, but any number below 50 still counts as contraction.

A bit of up news is that Calculated Risk’s Credit Crisis Indicators are showing improvement today.

But with all this going on it is no surprise that consumer bankruptcies rose by nearly a third in 2008.

The problem with the 2005 act was that people don’t declare bankruptcy on a whim, they declare bankruptcy when they fall of the tight rope that is middle class existence in the United States, and there is no safety net to catch them.

In currency, the dollar rose against the Euro, largely on the expectations of further rate cuts by the ECB.

In energy, oil finished the day down, but it spent part of the day above $50/bbl for the first time in about a month.

Canary in a Coal Mine?

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When I started predicting a financial meltdown 5 years ago, I didn’t know a CDO, CDS, or MBS from a hole in the wall.

Truth be told, I’m only barely past that now.

What I was predicting was a real-estate crash followed by a recession, followed by a loss of status as a reserve currency, which would drive the dollar down and interest rates up.

So, I was really only right on one thing, the real estate crash, at least for now, which I figure is pretty good for someone with one economics course under his belt.

That being said, the recommendation by Akio Mikuni, president of the Japanese credit ratings agency Mikuni & Co., that Japan should unwind its holding in US Treasuries could be seen as a first step for the rest of the sequence:

The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes “drastic measures” to help bail out the U.S. economy, Mikuni said. Treasury yields, which are near record lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said.

Interestingly enough, Mikuni is not suggesting flight from the US market, but rather that, “Japan should also invest in U.S. roads and bridges to support personal spending and secure demand for its goods as a global recession crimps trade.”

He’s talking about a Marshall Plan for America.

I’m wondering if this is just one (rather influential) guy spouting off, or the first few steps in a rush to the exits.

Economics Update

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Just so you know, the whole auto industry is in a tailspin.

All the auto manufacturers are seeing sales fall by more than 30%, with Chrysler falling by a whopping 53%, year-over-year.

My guess as to Chrysler is that the American public realizes on some unconscious level that Cerberus is a pump and dump operation that cannot be trusted.

In real estate, construction spending was down by 0.6% from October to November, which was better than the consensus estimate of 1.4%, which to my mind is a serious WTF number. 1.4% a month is Sta-Puft Marshmallow man time.

In central-bank land, we have reports that the Federal Reserve and the ECB are working together to avoid deflation, which indicates that central bankers on the both sides of the pond are scared.

The ECB’s only charter is to control inflation, but now they are trying to figure out how to get inflation back into their economies.

No surprise that we are still seeing a flight to safety that is driving the dollar up against both the Euro and Yen.

In energy, oil is up again, largely on concerns about the Middle East, and retail gasoline was up 1.4¢/gal, the 6th straight day in a row, which seems to indicate that gas prices will be rising in the near future.

Finally, here is a pretty picture:

It’s a measure of the ISM Manufacturing index (I mentioned this last week). The graph is courtesy of The Bonddad Blog, and he accurately describes this as “cliff diving”.

Economics Update

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Well, the Institute for Supply Management, released its manufacturing index: 32.4 in December, a 18 year low. Europe , Russia, China, and Australia had similar declines in similar indices.

In currencies, the dollar strengthened against both the Euro and Yen, while the Pound continued its slide.

Meanwhile, in energy, oil is above $46/bbl, and retail gasoline prices rose for the 3rd straight day.

An interesting side note to this is that they are adding 12 million to the strategic petroleum reserve, which implies to me that someone there thinks that we are near bottom, and that it is a good time to buy.

Economics Update

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It’s the last day of the year, and we are finally getting a picture of how retail did during the holiday season, and it is not pretty.

ShopperTrak is revising its original holiday sales figures downward, from a sales increase of 0.1% and a traffic drop of 9.9%. which was already pretty grim, to a sales decrease of 2.3% with a 16% drop in traffic.

The estimates now are that 2009 is not going to be good either and that over ¼ of all retailers are at significant risk for bankruptcy (see graph pr0n above), which will hose suppliers too.

The unemployment claims numbers from last week were better than recent reports, 492,000 new applications, down 94,000 from the last week’s 586,000, and the 4 week moving average fell by about 1%.

I would note, however, that there are two things that make this news less good than it sounds, first, we are talking about the week of Christmas which means that everything was shut down on last Thursday, and, perhaps more significantly, continuing jobless claims continued to rise, hitting a 26 year high of 4.5 million.

Real estate still appears grim, with Manhattan office rents down about 25% (h/t Calculated Risk), though mortgage application activity remains at a 5 year high.

My real question though would be as to the number of mortgages granted, not the number of applications, which are likely multiple refi applications driven by even lower mortgage rates.

Additionally, the Federal reserve is to start buying mortgage backed securities, so they are going even deeper into the sh&%pile.

In currency, the dollar is up, and infact it’s up against the Euro this year, the first time 2005 that this has happened.

I guess that investors still think of the US Dollar as a safe haven, though the same cannot be said about the Ruble, which is down again.

In the stock market the VIX, the Chicago Board Options Exchange Volatility Index, fell below 40 for the first time since October 2, to 39.9, which indicates that traders are a bit less twitchy.

But that’s only a bit, because before the Lehman collapse, it was around 25, and a year and a half ago, it hung around 10-15.

In energy, oil rose about 5½ bucks/bbl, to settle at $44.60/bbl.

Economics Update

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It’s a heavy news day. I know this because I was not sure whether or not consumer confidence falling to its lowest level ever recorded, and the Conference Board’s sentiment index began in 1967.

Economists were predicting an increase from 44.9 to 45.5.

This probably explains why the International Council of Shopping Centers says that this has been the weakest holiday sales season since 1970.

Well, the Standard & Poor’s/Case-Shiller home price index fell 18% from October 2007 to October 2008, so the index is now at March 2004 levels, and by all indications, it’s still headed down.

Will the last realtor please turn off the lights?

Finally, in 4th place in the competition for which story should be the lede, we have
assets in mutual funds falling 3% in November, they are down 22.7% since December 2007.

What we are seeing here is a slow run on mutual funds by investors who are fleeing to quality.

Banks are fleeing to quality too, with banks cutting lending this year by 55%, to the lowest level since 1994.

In currency, Russia has devalued the ruble again, it’s now down about 18.6% from its peak.

The dollar fell again against the Yen and Euro, though it rose against the Pound, largely because the UK appears to be in worse shape than the US.

I wonder if this might give additional impetus for the UK to move from the Pound to the Euro.

The fall of both the USD and the Pound are largely because of “quantitative easing”, otherwise called printing money, by the central banks.

One bit of financial news that surprises me is that the
Israeli Shekel just had it’s biggest pop vs. the dollar in 10 years, and this was despite the fact that the central bank cut its benchmark rate by 75 basis points (¾%).

The claim is that it’s year end repatriation of profits that drove the Shekel up, but my guess is that it’s people who think that the current fighting will calm things down in the short term (3-18 months) and are trying to flip the currency for a quick buck.

In energy, both oil and retail gasoline were down today, and this picture is from today. (Click picture for link)