Category: Currency

Economics Update

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Yesterday, I talked about a historically high housing inventory, well, now we have the numbers, 4.67 million, an 11.2 month supply.

Mortgage applications are up this week, but not enough to indicate any sort of resurgence of the housing market.

We have seen an increase in orders for durable goods, but this is almost entirely export driven, which means that US consumption is flat, and if the dollar strengthens further, it’s mixed today we lose what is currently the only major driver of economic growth.

Of course, with the ECB policy makers all pointing in different directions, likely because Germany’s inflation rate is down, it’s not surprising that nothing much is moving in currency right now.

Banking is not looking good period, what with FDIC troubled bank list growing, “117 with $78 billion in assets – up from 90 banks, $26 billion in assets in 1st quarter.”

The credit markets are still frozen, with Merrill Lynch and Wachovia seeing their rates skyrocket as they attempt to rollover bonds, and Fannie Mae just sold short term debt with a spread of 89 basis points vs. US treasuries, which may be a record.

Also, the FDIC is now saying that the IndyMac failure will have a bigger price tag than earlier predicted…..Are we looking at the FDIC needing a bailout?

And it isn’t just banks having problems, personal bankruptcies are surging, with the number of filings in the 2nd quarter the highest since the 4th quarter of 2005, when people rushed to beat the new law.

In energy, oil is up on hurricane Gustav, and gasoline is down again.

Economics Update

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Well, once again, we have the financial press, trumpeting so called good news, that US home prices did not fall as fast as the previous month, even though the year over year decline was 15.4%.

They are noting that home sales are up a bit, but they neglect to note how many of these sales are short sales and REO (foreclosure, basically) sales.

The numbers that I’ve seen are around 20-30%, and no one notes that inventory is still at historical highs.

On the brighter side, consumer confidence is up, largely on the fact that Gasoline has fallen over 10% over the past few weeks, as it did again today, though oil is up over concerns regarding hurricane Gustav.

Everyone is expecting a fully coupled worldwide slowdown, and so the Dollar is now at a 6 month high, even though we are seeing signs of commodities bouncing back, at least that’s what the market in copper is showing, with contracts for immediate delivery being rather higher than those for 3 months delivery.

I would also note that Fannie and Freddie are slowing the rate of mortgage purchases for their portfolio, which means two things, that mortgages will be harder to get and more expensive, and that they are “deleveraging”, which is finance speak for trying to get themselves out of the hole that they have dug.

Economics Update

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The Philly Fed chief is calling for higher interest rates, because of inflation concerns.

The fact that there are now closings of marginal mines and the like would also indicate that the commodity plunge of the past 6 weeks or so is going to bottom out soon.

Though, truth be told, I’m not sure that it will make much of a difference, as the the fact that spread between LIBOR and the Fed Funds rate is 78 basis points, near an all time high, and an indicator that the Fed has largely lost control over interest rates in the rest of the economy, as well as indicating that the credit system is still frozen up.

Mean while, in real estate, we have bad news presented as good news, with stories trumpeting an increase in existing home sales in July, and soft pedaling a 7% year over year house prices.

Why is this National Association of Realtors (NAR) Bulls$#@?????

Because, Seasonally adjusted it’s ignoring seasonal adjustments July and August are always big months, particularly for parents who do not want their children to change schools mid year. It’s actually the worst seasonally adjusted numbers since 2000.

This is why 75% of Americans have negative view of economy, because the financial press is a bunch of Pollyannas, who ignore the the fact that aggregate weekly hours have been experiencing continuous negative growth on a month-to-month basis since January 2008.

Meanwhile, among the Wall Street Banks, we are now getting reports of a dead pool for Lehman CEO Dick Fuld. He’s expected to be out within a year, which does not bode well for the company as a whole.

Meanwhile, Robert Rubin is stepping down from his position chairman of the board’s executive committee, though he will remain on the board, which probably means something, but I do not know what, but considering Citi’s record, I’m assuming bad news.

Meanwhile, oil is up today, even though the Baku-Tbilisi-Ceyhan pipeline has resumed flow, but gasoline prices continues their downward course.

Thedollar is mixed today.

Economics Update

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Ummm….This is not a day for pleasant economic news.

First, the Leading Economic Indicators indicate a bigger slowdown than anticipated, dropping 3x more than expectations, and then the Philly Fed index fell for the 9th straight month.

Employment isn’t good either. While new unemployment claims fell, the 4 week rolling average rose, and in any case at 432,000 claims (seasonally adjusted, which is the elephant in the room), it’s still too damn high.

If you are a monetarist, then we have more bad news, because the growth rate for M3 has dropped off a cliff (chart pr0n below):


Note that this is a graph or the rate of growth, not the money supply, so the effect on the overall money supply is less than it appears, but, “As a rule of thumb, the data gives a one-year advance signal on economic growth, and a two-year signal on future inflation.”

The chart is a rolling 3 month average of the annual rate, and the rate for May-July is 2.1%, indicating a contraction of the M3 money supply in real terms, which would suggest downward pressure in housing and financial markets.

We also have the Reuters/Jefferies CRB Index of commodities making the biggest weekly jump in over 30 years and oil up by 6 bucks, along with the dollar falling which seems to indicate that the past few weeks might just have been profit taking…a breather before an ascent to the summit, though
gasoline is down over a dollar today.

Economics Update

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As it always is in times of crisis, we are seeing a flight to government bonds. Everything else appears too dicey, with mortgage applications at a nearly 8 year low, estimated food inflation for this year may be at a 28 year high, and home prices in high priced areas falling like a stone, even if volume is up a bit.

In energy and currency, the dollar is up a bit, as is oil, though neither are up significantly, and gasoline is down for the 34th straight day, and it’s now down about 10% from the peak.

Economics Update

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the producer price index rose 1.2% in July, that comes to about 15% inflation, and the year over year rate was 9.8%.

Inflation is back….Truth be told, it was never gone, it’s just that the government statistics concealed it, and we are now running into the limits of such accounting artistry.

We also are seeing housing starts at a 17 year low, so it looks like stagflation to me.

I just hope that it isn’t an Argentina/USSR style collapse.

I would note that a lot of this inflation is commodities, and they are down.

Both oil and gasoline (33rd straight day) fell again.

That being said, the dollar was down again today. Those inflation numbers probably scared traders.

Finally it looks like Lehman may be forced to sell its money management division in order to raise capital to offset its losses.

Unions Warn Obama on “Rubinomics”

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AFL-CIO Secretary-Treasurer Richard Trumka just cut Bob Rubin a new one:

Blaming unfettered global trade and inadequate government regulation for lost manufacturing jobs and a staggering economy, Trumka’s presentation cautions that “it will do us little good if, when the next Democrat moves into the White House, Wall Street takes command of our country’s economic policy.”

Trumka leaves no doubt that the rebuke is aimed at Rubin, Wall Street’s most prominent Democrat. It’s “hard to tell the difference” between Rubin and Republican Treasury Secretary Henry Paulson, the presentation says. Trumka’s critique reflects the concern among organized-labor officials that Rubin and like- minded Democrats may win the behind-the-scenes battle to shape Obama’s economic thinking.

“I’m hearing Rubin’s name more and more associated with the campaign’s economic policy,” says James Torrey, a top Obama fundraiser and chief executive officer of New York-based Torrey Associates LLC, a hedge-fund investor.

Further down in the article, it notes that Obama is talking up a strong dollar policy, a shibboleth of Bob Rubin.

This is a bad sign, and not just because it indicates a tilt toward Rubin. It’s also no longer sustainable, and tremendously damaging to the economy, at least if you are not a big ticket stock broker like Bob Rubin.

The fact is that much of the Clinton administrations economic policy was driven by Rubin, and it was not Democratic Party economics, it was Eisenhower Republican economics, and the credit crunch is largely a function of these policies now coming home to roost.

Economics Update

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It looks like concerns about GSEs are roiling the markets again, so one wonders when the government will nationalize Fannie and Freddie.

It won’t happen under Bush and His Evil Minions™, needless to say, but I see it as inevitable for the next president.

Meanwhile, energy is still trending downwards, with oil falling as the path of Fay becomes clearer, and gasoline falling fo the 32nd straight day.

The dollar is down a bit, but I’m not sure if this is a pause in a rally as people take profits, or a change in direction.

In any case, it looks like labor day air travel is going to be way down, yet another sign of the slowing economy, and the fact that airlines have become so bloody awful.

Finally, home prices in the UK fell by 4.8% year over year, showing again just how well the “Anglo Saxon Model” of capitalism works when things go bad.

Economics Update

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You know that the economy is bad when you go broke filling people’s Jones for chocolate chip cookies, but Mrs. Fields cookies is filing for reorg under chapter 11.

The dollar is down a bit, because there is concern that the Fed won’t raise interest rates soon.

Honestly, they won’t raise rates before the election, because that is what the Fed does.

Oil is up a bit, on concerns of the effects of tropical storm Fay on rigs in the Caribbean.

Economics Update

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Today has actually been a good news day, with US industrial production increasing by 0.2% in July, though one should remember that inflation is 0.8%, the the consumer sentiment index rose in Augst, though July was a 28 year low, and the New York Fed Manufacturing Index rose. (no qualifiers on this one, it really appears to be good news)

Good news on all my standard metrics too, oil down, gas down, and dollar up.

Inflation is the fly in the ointment, as Dean Baker notes, because the increased inflation means that the 3rd quarter will almost certainly be a contraction.

I would, however be remiss if I did not note that commodity prices are falling very sharply, which may bring moderation in inflation in the coming months.

In the economic scandals section, we have Wachovia joining the parade of banks and investment houses settling on auction rate securities, to the tune of $5.5 billion.

In the “It should be a scandal,” category, we have S&P deciding not to downgrade MBIA and Ambac, even though anyone with two brain cells to rub together knows that the monoliner insurers are junk

I would also note that I’m wondering if we will see a Peso rally, because Mexico’s central bank just increased rates for the 3rd straight month.

And The Onion is a national treasure:

Economics Update

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Weekly initial jobless claims came in higher than expected, at 450K as opposed 432K, and the 4 week moving average is 440.5K, the highest number since 2002.

At the same time, the CPI numbers are grim, with prices up 0.8% in July, and 5.6% year over year.

The Europeans are not doing much better, with GDP declining 0.2% in the 2nd quarter.

The European weakness, meant a Euro weakness, with the dollar gaining against the Euro.

These indications of a global slowdown have pushed oil prices lower, and Gasoline is down too.

Don’t expect a real estate recovery to save the economy though, foreclosures are up 8% for the month, and 55% year over year, and home prices have fallen 7.6% year over year.

What Roubini and Meyerson Said

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Nouriel Roubini, in The Decline of the American Empire, and Harold Meyerson, in The Drums of Change, both make a very similar point: that America’s time as the sole unchallanged “hyperpower” is coming to an end.

I would have to say that Meyerson is far less interesting than Roubini, he simply notes that the Chinese are growing more powerful by the day, and that Russia is exerting its muscles in its immediate neighborhood.

Roubini, on the other hand, makes it clear that he believes that, “three factors suggest that the US has squandered its unipolar moment and that the decline of the American Empire – as the US was in effect a global empire – has started.” (emphasis mine)

His factors are:

  • Excessive reliance on hard military power, and to unilateral a foreign policy.
  • That other powers, China, a unified Europe, a resurgent Russia, and the rise of regional powers such as Brazil, South Africa, and Iran will mean that the US will find more peers and near peers in the future.
  • That the, “US squandered its economic and financial power by running reckless economic policies, especially its twin fiscal and current account deficits”, which are increasingly financed by foreign governments and foreign investors.

He notes that the movement of foreign reserves from Treasuries to sovereign wealth funds in search of better returns is indicative of the fact that those creditors are nearing a point where they will make demands.

Speaking for myself, and not the good Dr., I would also note that the American way of life, or more accurately the standards of living for the top 1% and the phony economy of Wall Street, have not been sustainable for decades, and the transformation of the US from the largest creditor nation into the largest debtor nation during the Reagan administration shows this.

Economics Update

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The U.S. trade deficit unexpectedly fell in June, though I wonder how much of that will go away now that the dollar is about 6% stronger than it was that month.

I just wonder when people are going to start noticing that the Fed is printing money like a SOB with it’s aid to the financial industry.

Today’s bit of additional money comes to $25 billion with their financial toxic waste for cash exchange program, better known as the, “discount window borrowing facility”.

The dollar is down a bit today, but I see it as profit taking, as opposed to the realization that we in the US print more money than toilet paper though.

In energy, oil is down, even though BP closed its Georgia pipeline as a precaution.

Gasoline is down tow, by about $0.30 from peak.

Real estate, on the other hand, is beginning to look grim, with people finally noticing that prime mortgages are defaulting at higher rates too.

It explains why JP Morgan lost $1.5 billion on mortgage backed securities in July.

Economics Update

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Well, we are now seeing reports that the FDIC is going to have to raise premiums to cover losses from bank failures.

They should have started last year.

Meanwhile, the Chinese economy is showing signs of significant inflation, with China’s wholesale prices rising 10% year over year in July.

The problem here is that the obvious solution, the central bank raising interest rates, will server to further weaken the dollar, which will drive their exports down….Catch 22.

Meanwhile, it appears that Morgan Stanley has problems, because Moody’s just cuts its credit rating to A1 from Aa3 because of losses in the mortgage market.

Interestingly enough, even though Georgia and Russia are in something very close to a war, and the Georgian pipeline is a crucial link for Europe, oil is down, largely on the Iranians agreeing to a new round of negotiations on their Uranium enrichment program.

Gasoline is down again, for the 25th day in a row.

The dollar rose today, probably as a result of concerns about the conflict between Georgia and Russia, which tends to send money fleeing to the relative safety of the US dollar.

And in the, “Funnier if it weren’t so true” department:

Economics Update

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Well, Fannie Mae just posted a $2.3 billion loss, cut its dividend, and is will no longer buy and resell Alt-A mortgages.

That sound you hear is the housing market seizing up, and it does look like mortages will be getting more expensive, and given that the spread between LIBOR and Treasury Bills, the so called “TED Spread”, remains at near historic highs, I don’t really see any unfreezing in the near to medium future.

However, the the US dollar is on a tear right now, and a strong dollar attracts investment, which means that there is more money out there to lend, which might make loans cheaper.

I still think that current interest rates are unsustainably low, but YMMV.

Oil and gasoline are down, as are commodities like copper, silver, and gold.

This points to declining inflation, good news, but only because there are real signs of a deep, hard recession, which is bad news.

The fact that Productivity growth has slowed points to a slowdown too.

I wonder what the moderation in commodities will do to wholesale inventory numbers, which have been up because of price appreciation in said commodities.

BTW, a monoliner insurer just went belly up. ACA Capital Holdings Inc. just terminated $65 billion in credit default contracts, and turned itself over to creditors.

BTW, as a result of the IndyMac implosion, people are starting to split their bank accounts among multiple banks, to ensure that they are all completely covered by FDIC insurance.

I think that we are seeing a generational shift in the attitudes of people about finance and investing.

Economics Update

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A number of economists have suggested that the world economy has become “decoupled”, and that a recession in the US may not cause a recession elsewhere.

If the latest information coming out of Japan is any indication, these economists are wrong, as Japan seems to be heading into a recession too, though one could argue that the 1990s Japanese recession still hasn’t fully ended.

Not surprisingly, this driven the dollar up, and it hits a 7-month high vs the Yen, ¥109.56.

In the ongoing GSE soap opera, the Treasury Department has hired Morgan Stanley to look at at the financial structure of Fannie Mae and Freddie Mac.

There was a competitive bid process to select Morgan, though I still wonder if this is prudent oversight, or the fox guarding the hen house.

In either case, I think the fact that Freddie Mac has cut dividends after posting an $821 million loss, about 3 times what was expected, was a sensible move.

Dividends are for when you make a profit.

The monoliner insurers are not a soap opera though, they are farce, and the latest case is Ambac claiming a $823.1 million profit, which appears to be entirely due to an accounting change:

Ambac, once the second-largest bond insurer, reported a $1.7 billion net loss in the first quarter after a $3.3 billion loss in the fourth quarter of 2007. A rise in the risk premiums on Ambac’s own debt in the second quarter lowered the value of bond guarantees, which was allowed to be reflected as a gain under new accounting rules, resulting in the quarterly profit.

Ambac rose 35 cents, or 7.4 percent, to $5.08 at 10:08 a.m. in New York Stock Exchange composite trading.

Ambac and other financial companies are taking advantage of the accounting standard change — intended by rulemakers to expand so-called mark-to-market accounting — to report gains when market prices for their liabilities fall.

I’d appreciate a translation from accountant-speak, but it appears to me that they are profiting from the fact that no one is willing to pay face value on the debts that they owe.

In real estate, nirtgage applications rose last week, though only a little, and the week to week numbers are, as I always remind my reader(s) noisy. It’s still way down.

In energy, oil fell on reports of increased inventories to $118.58/bbl, and
retail gasoline fell again. It’s now $0.25 off of the record, so you save two bits a gallon.

Finally, we note that when the US gets a cold, Mexico catches pneumonia, particularly in rural villages, where the economy is even more dependent on remittances.

The depressing thing is that on a per capita basis, Mexico is solidly in the middle of the world in terms of wealth, and if a bit more could be pried from the top 1-2%, everyone would do better…..But I forget…that’s socialism, so we deal with hoards of economic refugees in the US instead.

Economics Update

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Well, the Fed held rates steady, and it appears from their statement that they will hold rates steady.

Honestly, I don’t expect any rate change now before the election. Changing the rates in September or October would lead to complaints of a political agenda.

The Index of Supply Management’s index of non- manufacturing businesses showed continuing contraction in July.

It was up to 49.5, which was above forecast, but anything under 50 is contraction.

For what it’s worth, it looks like Noriel Roubin’s prediction that hundreds of banks will fail as a result of the credit crunch is finally getting some ink at a major news service (Reuters).

I would suggest his blog to get more detail, particularly on his estimate that the Taxpayer will be on the hook for $1-$2 trillion for all this.

Both he, and I, think that the credit crunch will get a lot worse, and stories like former Merrill Lynch superstar Dow Kim shutting down his hedge fund before it started, because investors got skittish and pulled out, would seem to confirm this.

I would also note that delinquent loans are rising for commercial real estate, which indicates that the commercial real estate market is following the residential market down the drain.

In the normal indices, we see the dollar up a bit, and oil and gasoline down for another day.

Thursday, when the Euro Central Bank sets its rates, should be interesting.

Economics Update

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Well, the official unemployment rate climbed to a 4 year high, 5.5%, and total number of jobs fell by 51K, the 7th straight monthly drop in a row, in July.

We’re in a recession. Get over it.

Manufacturing actually did a bit better than expected in July, it was flat, though much of that was military and exports driven by a weak dollar, but I’ll take what I can get.

In the monoliner insurance follies, we have good news for AMBAC, they paid Citigroup $850 million to get out of a $1.4 billion guarantee on some collateralized debt obligations (CDO).

It’s being reported as good news for AMBAC, which says something about the qualities of said CDOs.

As bad as the job news was, it was better than expected, so the dollar strengthened in international trading.

In energy, the employment report drove oil up too, though retail gasoline is back below $3.90/gallon. Woo hoo!!

Zimbabwe Update

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Well, we now have a report that Zimbabwe: Robert Mugabe offered Morgan Tsvangirai the vice presidency, a position with no powers, in negotiations….What I expected.

It’s no surprise then that there are reports that the negotiations are deadlocked, though talks are supposed Zimbabwe’s crisis talks to resume Sunday.

One interesting development is that Botswana is threatening to boycott of the summit of the next Southern African Development Community (SADC) summit if Mugabe is allowed to attend, which indicates, I think, some level of dissatisfaction with Thabo Mbeki’s mediation efforts.

An unfortunate development is that Mugabe is considering stopping a court action on disputed parliamentary seats:

Fearing an imminent court defeat that would further increase MDC’s parliamentary majority Robert Mugabe’s military junta is considering a law forbidding the courts to invalidate his defeated Zanu (PF) party’s victories in 60 constituencies facing legal challenges, official sources say.
The MDC is challenging the results of the March 29 elections in 60 constituencies, where they say electoral fraud, violence and intimidation of voters compromised the returns.

These are not the actions of a man, or a party, willing to negotiate in good faith.

One final note, they have dropped 10 zeros off the currency, meaning that a 10 billion Zimbabwean dollar is now 1 new Zimbabwean dollar, to deal with inflation, but with inflation running at something like 15,000,000%, it will not help for long.

This may finally be what takes Mugabe and his cronies down.