Category: Currency

Economics Update

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While it’s generally known that the Fed will cut rates, it is news when European Central Bank President Jean-Claude Trichet says that it’s likely that they will do the same, it is a bit of a surprise.

In terms of interest rate spreads, it’s not looking good, with the spreads for Fannie Mae and Freddie Mac hitting the highest level since March.

In real estate we have Journalistic bullsh%$ good news, with reports that new home sales increased in September, but as Barry Ritholtz of the The Big Picture notes, these are bad numbers:

One other thing to note: Note the monthly 2.7% increase was based in part on last month’s being revised downwards, making the differential look bigger (this month is also likely to be revised downwards). Annualized sales for the month was 464k; Actual unadjusted monthly new home sales are about 35-45k, down from 100-120k (before they get annualized).

Year over year, house sales fell by 33%, and prices fell by 9%.

Meanwhile, it looks like the tax payers have already sent a significant chunk of change to the banks $63 billion to 15 banks:

  • PNC Financial Services ($7.7 billion)
  • Capital One Financial ($3.55 billion)
  • Regions Financial ($3.5 billion)
  • SunTrust Banks ($3.5 billion)
  • KeyCorp ($2.5 billion)
  • Comerica ($2.25 billion)
  • State Street ($2 billion)
  • Northern Trust ($1.5 billion)
  • Huntington Bancshares ($1.4 billion)
  • First Horizon National ($866 million)
  • City National ($395 million)
  • Valley National Bancorp ($330 million)
  • UCBH Holdings ($298 million)
  • Washington Federal ($200 million)

Oh…me bad…I forgot that BB&T is in for $3.1 billion too.

Well, at least gas prices and oil prices are continuing to fall.

In currency, we have
the dollar and yen pounding the Euro and Pound to the degree that the bank of Japan is considering an intervention to keep the Yen form spiking too high.

It also looks like the Australian dollar is at serious risk of falling off a cliff, see here and here.

Economics Update

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In energy, OPEC formally announces production cuts, though the price of oil continues to fall, as does the price of gasoline.

It should be noted that even with falling energy prices, the markets are so spooked that the futures contracts triggered so called circuit breakers for the S&P 500.

It’s not just the S%P that has gone into the twilight zone. The credit meltdown has pushed the interest rate of long term interest rate derivatives to negative numbers. Basically, it’s a “safe” way to lock in an interest rate, and the market is so uncertain, that people are willing do do worse than their mattresss.

Meanwhile currency is…well…confused, with the dollar gaining against the Pound and Euro, but the Yen hit a 13 year high. No clue as to what is going on there.

In any case, even if the recession isn’t official yet, it is in the UK, where GDP fell by 0.2%.

Economics Update

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In war, it is said that amateurs talk tactics, while professionals talk logistics.

It may be the case with financial crises too, which makes the
FDIC decision to sign a lease for a lot of office space in Southern California very interesting.

Of course, the tactical developments, like investors taking losses in excess of 90% on complex financial instruments attached to Lehman and Iceland is still interesting, even if just a tactical development.

In currency, the dollar has hit a 2 year high on concerns of a coming recession.

I think that this is temporary. People are fleeing to the dollar in times of trouble out of habit which is not justified by the reality.

In any case, recession fears pushed oil to a 16 month low.

BTW, here is a very nice primer on the financial crisis:

Economics Update

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Not a great day.

Consumer confidence had the largest plunge ever, from 70.3 to 57.5, and home construction fell to a 17½ year low.

There are some indications that the credit freeze is relaxing, at least temporarily, the short term spread between LIBOR and Treasuries has dropped a bit.

I’m not sure that there is a real thaw, as evidenced by the fact that hedge funds are hemorrhaging money and investors.

The dollar, meanwhile was largely static today.

In energy, oil is back above $70/bbl, but that is likely the result of OPEC holding an emergency meeting to cut production.

Economics Update

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We are all, as Bender is wont to say, “totally boned”, and you need to look no further than the fact that :NASCAR is experiencing cash flow problems because financially strapped sponsors are bailing.

About the only good news is that collapsing demand appears to be keeping inflation in check.

BTW, the crisis just hit Phil Gramm’s bosses, as the Swiss government was just forced to bail out UBS.

Don’t expect a turn around in the real estate martket, because mortgage rates just posted their largest increase since 1987.

This might explain why the National Association of Home Builders/Wells Fargo housing market index has fallen to an all time low, 14, where a neutral reading is 50.

In the real world of manufacturing, industrial production and the Fed Bank of Philadelphia’s general economic index both plummeted to levels not seen in over a decade.

With a very strong indicatrions of a recession, commodities, in particular oil ($69/84/bbl!!!) and gasoline, continued their falls.

What takes this from an economic down turn to an apocalypse are signs of the apocalypse, and one of the is when Americans consumers save, rather than spend their money.

If you want another sign of the apocalypse, how about banks cutting back on issuing credit cards, because they need to hold additional reserves against defaults.

When banks cut back on what is probably their most profitable business, you know something is up.

Jobless claims for the week aredown, but week to numbers are noisy, and the it’s an artifact of the fact that we’ve had a hurricane free few days.

The dollar strengthened a little. I think that there are two competing pulls here: the concern that the US is no longer the financial colossus striding the world, and the habit of going into the dollar when times are uncertain.

Economics Update

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Normally, I don’t comment on normal swings in the stock market, but there is nothing normal about the Iceland Stock Market, which dropped 77% after trading resumed following a 3 day suspension.

Iceland is in for some very hard times. It’s because the past few years of their prosperity were due to the pseudo-economy of the carry trade, which makes nothing, and so now they will bear the costs of the resultant excesses.

Speaking of excesses, it looks like the Royal Bank of Scotland will be first in line to sell itself to the British government, which is unsurprising as they were at the forefront of complex financial deals and mergers.

It should be noted that U.S. banks are lining up for partial nationalization too.

Additionally, we are having confusing moves by the FDIC on Regulation. It appears taht the FDIC will guarantee, “Senior unsecured debt, such as commercial paper and transfers between banks, issued through June 30, 2009, to help banks fund operations and let the institutions convert maturing senior debt into new issues fully backed by the FDIC.”

There has to be some sort of major blow-up at the center of this, but I am not sure exactly what it is.

In the mean time, oil is down, on expectations of a deep recession and reduction in demand, and so is the dollar, on….I’m not sure, but my hunch is on the realization that Treasury Secretary Paulson is a moron.

That being said, the newly nationalized GSEs are not getting much love with the debt spreads widening on Fannie and Freddie, probably because the Treasury is directing them to buy some really awful financial instruments.

Inflation is the Solution, Not the Problem

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So, we have noted investor Julian Robertson saying that the US is looking down the barrel of a 10-15 year downturn, and we have concerns that the bank bailouts will cause a period of “hyper inflation”.

I think that these are related, but not in the way that the economic community does.

I think that inflation is the solution, rather than the problem.

The problem right now is that assets are in too many cases worth less than what is owed on them.

The problem is not that assets are currently underpriced, but that they were overvalued when they were purchased.

The solution is to devalue the currency that is owed on these loans, and the word for this devaluation is inflation.

As long as we put in a structure that ensures that wages (not income, but earned wages) for the bottom ½ or ¾ of the population keep pace, so that people can live, people will do OK, and the people at the core of this crisis, banks and entities that act like banks, will pay for their problem by a reduction in the value of their cash hoards.

Retirees and near retirees will take a serious hit, but society as a whole will do better.

I think, given the enormous amount of money pumped into the system by Alan “Bubbles” Greenspan over the past 20 years, and the positively mind boggling amount of money pumped into the system over the past few months by Bernanke and Paulson, that inflation is inevitable anyway.

With 20% inflation, prices would double in about 3½ years*.

One of the problems here is how to reign in the beast before you need a wheelbarrow of currency to buy a loaf of bread, and how you stop inflation once the problem is done.

My suggestion is to do it via legislative fiat: Instead of allowing inflation to come, simply pass a law devaluing the US dollar by 50%.

This law would necessarily ensure that the payments for existing contracts, including wages, would necessarily double, as would regulations such as the minimum wage.

Of course, I I’m an engineer, not an economist, dammit,† and I’m sure that any economist would consider my proposal batsh%$ insane.

*Rule of thumb on interest: If you divide the number 72 by the interest, you get the approximate time to double. It’s called the rule of 72.
†I LOVE IT when I get to go all Doctor McCoy!!!

Economics Update

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If there is any major difference between the US and the European response to the financial crisis, it is that the Europeans have their sh$# together relative to the US.

Britain was already taking equity stocks in banks this morning, and any sensible action by the Treasury department still appears to be weeks away, so it’s not surprising that the dollar is down relative to European currencies.

It is a vote on the confidence that investors have in the relative competencies of the governments involved.

Or maybe it’s the fact that the markets realize that the foreign exchange markets are subject to supply and demand too, and with the central banks of the industrialized world are shoveling dollars out their doors, with the Fed being the most aggressive.

I think that the goal was to lower interbank lending rates, which it appears to have done for a while, at least.

It appears that the markets are still seeing a recession, as commodities are generally down though oil ended up, above $80/bbl, today.

The bit of disturbing news is that it appears that the Treasury is
using Fannie Mae and Freddie Mac to buy $40 billion in junk mortgage securities, which is the wrong thing to do.

It’s why the even the knuckle draggers at the White House are moving from buying the sh#$pile to buying the banks that need recapitalization.

This is what the Swedes did, though they added a lot of F&^% you to bank management that we are unfortunately leaving out.

Economics Update

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Let’s start with the fact that this has been a TEOTWAWKI week.

That being said, we are seeing a huge increase in borrowing from the Fed Discount window, as a part of the Fed’s sh^%pile for cash program.

OTOH, jobless claims did fall a bit, to 475,000 though they were at 7 year highs to begin with, and job creation is lagging.

Also, Oil fell to $82/bbl, the lowest in a year and gasoline is heading down too.

Also, the dollar continues to climb, as is the Yen.

In real estate, we are seeing mall vacancies skyrocket.

Economics Update

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Well, we are seeing the 9th straight drop in monthly non-farm employment rolls (click on graphs for pretty pictures).

I find The U6 graph that I swiped from Paul Krugman to be particularly interesting.

Let’s just call it; we are in a recession.

I would also note that the credit flows have nearly shut down worldwide, which is why the Federal Reserve lending window is seeing record use from banks.

BTW, it ain’t just the Fed which is throwing money, particularly US Dollars, out the windows, it’s all of the central banks.

The obvious big news is the House passing the Wall Street bail-out, and I’m as yet unsure how the markets are reacting to this.

Oil is down down, which could either imply confidence in the US economy, or the belief that a recession is inevitable, and the dollar is mixed.

Economics Update

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First the Institute for Supply Management’s manufacturing index just fell off a cliff, dropping to 43.5%, when the consensus was for 49.6%.

This is the lowest number since October, 2001, when manufacturers were freaking out over 911, and the biggest drop since 1984.

The fact that factory orders are down 4%, and that the
Baltic Dry Index Tanks, a survey of shipping costs are also in the tank, reinforce the idea that something is amiss, though I woul,d be remiss not to note that the Baltic Dry Index has a lot of noise in the data, and so is not particularly reliable.

Meanwhile, the marginally less noisy weekly jobless claims number have shown an increase too, up 1000, to 497K.

We also have evidence that the credit freeze up continues, with LIBOR spreads rising, and commercial paper basically going away.

In fact, the spread between two year debt swaps and treasuries hit a record, 167.25 basis points.

It doesn’t help that hedge funds are experiencing problems related to the Lehman collapse, with billions of dollars still tied up with mess, while facing a surge of withdrawals from their clients.

Furthermore, there are rumors of a major insurance company on the verge of collapse, and so borrowing costs for the major insurance companies have spiked.

Things aren’t looking great with college’s finances either, with Commonfund restricting withdrawals from its Intermediate Term Fund, which serves schools and other non-profits, because of liquidity concerns.

On the other side of the ocean, the ECB is openly talking about a rate cut, which has pushed the Euro below $1.40:€1.00.

This is all pushing commodities down in price, with Oil, Gold, and Corn falling on the expectation of a stronger dollar and a weaker global economy.

In banking and real estate, 30-year fixed-rate mortgage rates are up marginally, and Citi bought Wachovia for some magic beans (actually around $1/share), and the FDIC got preferred shares.

While not technically a bank failure, that is what it is in reality.

Oh My God Economics Update

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I normally don’t note stock market swings, but 778 points after House ‘Phants kill the Paulson bailout bill?

Surprisingly, the dollar is up and oil is down.

Money with half a brain should be fleeing in the other direction, but it appears that European banks are in real trouble too, because their governments are bailing a bunch of them out.

Not that US banks are doing much better, with Citi getting the bits of Wachovia for magic beans.

So not both the US Federal Reserve and various foreign central banks are shoveling money out the door.

Meanwhile, Iceland did what Paulson should have, when it nationalized the Glitnir bank, as has the UK, which has nationalized mortgage lender Bradford & Bingley.


Economics Update

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While I am not a strict monetarist by any means, I’m an engineer, not an economist, dammit,*, I think that the fact that central banks are continuing to shovel money out of helicopters upon the financial markets will eventually create some very real, and potentially severe inflation.

In any case, if the spreads between two year interest rate swaps and treasuries hitting a record, 166.38 basis points, is any indication, all this money is not doing much anyway, except possibly pushing the dollar lower.

It’s not not doing much with real estate either, with US existing home sales falling 2.2% in August, and mortgage applications falling 10.6% last week.

This may be why S&P just cut WaMu’s credit rating again.

In energy, oil was down a bit on report of decreased demand, and retail gasoline fell for the 7th straight day.

*I LOVE IT when I get to go all Doctor McCoy!!!

Economics Update

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Once again, the big story is the bailout, which I will not cover here, it gets its own posts, though I will be dealing with some of the market effects of the proposal, which can be viewed as positive, if you are an optimist, or negative, if you are me.

First, the US dollar took it’s biggest hit vs. the Euro in 7 years, because of concerns that this bailout will end up being so expensive that it will debase the currency, and as a result, crude oil climbed the most ever, more than $25/bbl before settling at the end of the day at $120.92/bbl, up $16.37.

You can view the price in oil as a belief among traders that the economy, and hence demand, will be recovering, or you can believe that traders think that this plan will push the dollar over the edge. I think that the contemporaneous fall of the dollar indicates the latter.

The increase in prices appears to be a part of a more general rebound in commodities, though retail gasoline continued its downward path, but gasoline tends to lag oil by a few weeks, as it is actually a manufactured final product, as opposed to a raw material.

In either case, it appears that The Commodity Futures Trading Commission is not taking a close look at oil trading as a result of the volatility today.

The Chicago Fed sees more signs of a recession, reporting a drop in economic activity.

Finally, it there are indications that investors are just beginning to see US treasuries the same way that they did during the Japanese meltdown…You know…the one that lasted fifteen years.

Honestly, if that happens to the US, it will be much worse, because we lack the safety net of Japan.

Economics Update

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If you think that this crisis is over, it’s not even close, as evidenced by the fact that 40% of US money market funds posted no returns yesterday:

More than 40 percent of U.S. taxable money market mutual funds posted zero return Thursday amid persistent turmoil in the credit markets, fund tracker Lipper said Friday.

Lipper said 560 of the 1,263 classes of taxable money funds it tracks earned no return Thursday. This compared with 73 classes that posted zero return Wednesday and 63 Tuesday.

A lot of taxable money mutual funds “put up big fat zeros yesterday,” said Jeff Tjornehoj, senior research analyst at Lipper in Denver. “This is unprecedented in recent history.”

Expect to see the phrase, “unprecedented in recent history,” a lot in the next few months.

Part of this was no doubt the rather large gyrations in US T-Bills over the past few days, which went almost to 0% a on Thursday, because people were so concerned about finding safe havens. The 3 month T-Bill was at 0.22% Thursday, before heading back up to 0.91% on Friday following announcement of various rescue plans for the financial markets.

The dollar rose in response to the bailouts too, as did oil, though gasoline is down for the 3rd straight day, as that market adjusts to the realities of Hurricane Ike.

That being said, even with the rescue packages, Moody’s is still looking at cutting its ratings on monoliner insurers Ambac and MBIA.

Also, it now looks like Morgan Stanley is still looking at merging with a commercial bank, even if the news of the bailout plans may have helped.

Economics Update

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You know that there is a problem, when I open with ratings downgrades.

We have S&P downgrading Washington Mutual to junk status, and even more significantly, AIG, the largest insurance company in the world has been downgraded by Fitch Ratings to A from AA-, and S&P and Moody’s downgraded them too, from to A- from AA- for S&P, and to to A2 from Aa3 for Moody’s.

This is ugly, and it is not surprising that the costs of corporate bond insurance has skyrocketed on what is called “counterparty risk” by the MBA types, and the belief that you are dealing with a bunch of lying bastards foo the rest of us.

It’s the same reason that the costs of overnight borrowing has gone up too, with the LIBOR more than doubling from 3.10625% to 6.43750%.

No one knows when the next shoe is going to drop, and even the additional $70 billion that the Fed dropped out of helicopters wasn’t much help.

It’s why we’re seeing Thornburg Mortgage struggle under a sudden onslaught of margin calls.

When Goldman Sachs earnings 70%, even though they hedged against the real estate crash, you know that no one is making money.

And at the end of all this the Fed decided to leave interest rates unchanged, which is not surprising, since they are already pushing on a string.

Meanwhile, the dollar is behaving like my cat when he gets outside in a rain squall, it really did not move, but you can see the conflict between fear driving people to dollars, and the fear of the US financial meltdown driving people away from the dollar.

We actually saw consumer prices fall, driven by falling energy prices (oil is now about $91.15/bbl on demand concerns from the financial meltdown)

Gasoline still went up, driven by the came hurricane refinery concerns that have driven prices over the past 4 or so days.

Economics Update

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Obviously, with Merrill Lynch ceasing to exist as an independent entity, and Lehaman ceasing to exist completely, it has been a busy day.

This update, therefore just covers the more ordinary stories, as opposed to the 767s slamming into the US financial system, though many of these stories are in fact driven by the bigger stories.

Let’s start with one that has nothing to do with Lehman or Merrill, retail gasoline is up for the 3re time in 3 days, because Hurricane Ike has closed about 20% of US refining capacity.

We’ll see how this shakes out over the next few days, but we also now have another unrelated pice of news, that the New York Fed Manufacturing Index Decreased to -7.4 in September, indicating that it’s not just those Wall Street whores getting it up the ass, it’s all of us, which is why
credit card debt and delinquencies are up the past month.

And now on to the main show:

Economics Update

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Well, I guess that the lead story has to be Lehman Brothers, which appears to be collapsing Bear Stearns style, and looking for government funding of it’s eventual sale, Bear Stearns style, so negotions with potential buyers continue apace.

The Fed and the Treasury Department appear to be seriously twisting arms to make the deal go through, though they claim that there will be “no federal money” involved.

Seriously, all we are doing here is socializing losses. Nationalize the lot of them, throw out upper management, and go after their bonuses, otherwise, we will see more of the same.

Of course the fact that WaMu just had its ratings cut….again…Means that Paulson may have two things on his “to do” list this weekend.

There are already rumors that Washington Mutual is on the auction block.

In the real economy, the one that the rest of us live in, news ain’t great. The weekly job claims fell, but the 4 week moving average and the continuing claims, continue to rise.

Additionally, retail sales fell again in August, showing a continued weakening in the economy, as does the large gain in business inventory.

Real estate is looking worse and worse too, with foreclosures continuing to increase.

This has driven the dollar down, because it points toward the Fed cutting rates.

In energy, oil is continuing on a downward trend, because of hurricane Ike, selling briefly below $100/bbl (!), though the fact that it’s heading toward refineries is driving gasoline up.

I would note that this is actually normal market behavior. Knock out refineries, and the demand for oil decreases, and the price drops, but the demand for gasoline remains the same, so prices increase.

BTW, I’m not sure what is going on in insurance, but it is clear that American International Group is getting absolutely hammered, and when the subject of the short selling is the largest insurer in the world, something is whack.

Economics Update

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It’s generally not been a good year for manufacturing and construction, with the Institute for Supply Management’s (ISM) manufacturing index falling to 49.9, with any number below 50 meaning contraction, though I wonder how much inflation is being measured as “growth”, which is what I think is driving much of the US Commerce Department data showing an increase in factory orders.

I think that this is entirely export driven growth, a position that the abysmal auto sales reinforces, but these export sales are being driven by a cheap dollar, which will eventually drive interest rates higher in the US (foreigners will demand higher returns), crushing domestic consumption.

That being said, construction is clearly cratering, falling 0.6% in July, twice expectations.

Meanwhile, banking continues to look pretty heinous with the FDIC expanding office space in the expectation of a spate of bank failures, S&P downgrading two regional banks, and suggesting that 37% of regional banks will be down graded.

Additionally, when GMACis laying off thousands, you know that the industry is in dire straits.

With Euro zone inflation falling, it appears that the ECB will hold rates steady, for a while at least, which will serve to keep the dollar relatively strong, as evidenced by the US Dollar’s rise today.

Since the hurricanes in the Gulf were relatively mild, oil and gasoline have continued their downward path.