Category: Currency

Economics Update

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The employment data is done for the week, so we have energy news, where Oil, after breaking $135/bbl then settling around #131, is now back above $132/bbl, and gas prices are trending up again, though some of the latter is no doubt due to the upcoming 3 day weekend.

The dollar is trending down against all major currencies, hitting $1.5755:€1.0000, a bit below the $1.60 record, but not by much.

In real estate, we have existing home sales falling 1% in April, no signs of the foreclosure rate abating, and inventories soaring.

Is it any wonder that mortgage lenders are tightening standards to where they were a few deccades back?

This credit tightening is going to take an economy already in recession*, and throw it down a well.

On the brighter side, it appears that the municipal bond market has finally shaken itself out a bit, recovering from the auction rate security implosion of a few months back.

*Yes, I know that it’s not official yet, but we know the reality when it bites us on the ass.

Economics Update

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Obviously the economic news of the day, hell the news of the day period, was oil surging to above $135/bbl, though they settled about $4 lower.

Retail gasoline hit a new record, the 15th straight, $3.831/gallon.

Dollar has taken a hit too, which is common when oil surges.

In employment news, US initial jobless claims fell, though the number of people collecting benefits remains at a 4 year high, so it appears that the unemployed are not finding new jobs.

In real estate, the OFHEO reports that house prices fell 1.7% in Q1 of 2008, (PDF) the sharpest decline in since records began to be kept in 1991.

Federal Court Rules US Paper Currency Violates the Rehabilitation Act of 1973

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Basically, there are no tactile differences between the bills, and U.S. Court of Appeals for the District of Columbia Circuit has ruled that this is in violation of the law.

Among other things, they said that the government did not shot that fixing this would be an undue burden.

When you consider the stuff that they’ve done lately, putting a bit of texture on the bills has got to be cheaper than the holographic inks, etc. that they are using/

The case is American Council of the Blind v. Paulson.

Economics Update

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In inflation, it appears that producer prices may be a problem (also here), with the overall rate going up by .2%, and the core rate going up by 0.4%.

Of interest is that the first link, from Bloomberg, basically casts it as a “low inflation” story, and the second link casts it as a “high inflation” story. I’ll explain why the latter is wrong in a bit.

In any case, the market saw the rate as low, which drove the dollar down in expectation of further rate cuts in the US, and the expectation of rate hikes in the Euro zone.

In energy, we have crude hitting another record, above $129/bbl, and gas prices at the pump hitting a new record for the 13th straight day.

Economics Update

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The CPI rose less than expected 0.2%, though there was a huge delta in food, about 0.9%, 2.5% and 11% annually rates.

Look at my earlier posts on this issue, and you’ll see that the real inflation is far closer to 11% than it is 2.5%.

This has, for reasons unclear to me, led to the UD dollar strengthening in overseas markets.

Year over year foreclosures in the US are up 65%, and between the banks discounting these properties, and the builders discounting new homes, we have a way to go to bottom.

In investing, the dispute between Clear Channel, which had a deal to sell itself to a private equity firm, and the banks, who were trying to get out because they had no expectation of being able to resell the debt, has been settled. The buyout is now at 36$/share, as opposed to the earlier $39.20/share, so both sides took a haircut to get the deal done.

Still this indicates that the credit markets are still frozen.

Finally, we are back to the monoliner insurers. with MBIA and Ambac’s losses making the ratings agencies nevous.

If the ratings process was an honest one, they would have lost their AAA status over 6 months ago.

U.S. Lobbying G7 to Prop Up Dollar

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It looks like Henry Paulson and other members of the Bush administration are finally beginning to realize that the falling dollar may be a problem:

The Bush administration is leading the international effort to put a floor under the falling dollar.

The conventional wisdom holds that the Europeans, worried that the mighty euro is making their companies less competitive, prodded Treasury Secretary Henry Paulson and other group of seven finance ministers last month into signaling their joint disapproval of the dollar’s plunge. Canada has also been troubled by the strong loonie.

But a senior U.S. Treasury official says that the move actually came at the behest of the American side.

The problem with the dollar is not a speculative artifact, it is a result of two things, that the dollar is objectively overvalued when one looks at the fundamentals of the American economy, and that the Euro has become a reasonable alternative as a reserve currency.

The dollar will continue to trend down until some sort of equilibrium is reached in the best case.

More likely, we will see a stampede of the speculators and a significant downside overshoot.

Economics Update

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We have another sign of recession, imports falling sharply in March, which indicates a decrease in consumer demand.

It also appears that the decisions by the Bank of England and ECB to target inflation may be putting an end to the brief dollar rally.

In energy, we have Oil settings new record, $126.20/bbl, and gas hitting a new record, $3.671/gal.

It should be noted that much of our trade deficit is oil, but the number dropped even with increasing oil prices. Things are slowing down a lot.

I would note that there are signs that the credit crunch is no spreading to insurance, with AIG posting a 1st quarter loss of $7.8 billion, and making plans to issue more stock to raise needed capital.

If the insurance industry goes balls up in any significant way, it’s going to be effecting a lot more people.

Finally, we have housing inventories continuing to rise, 3.5% in April, and 6% year over year.

Economics Update

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Tanta of Calculated risk notes that continuing unemployment claims are now above 3 million. Note that, unlike the weekly new claim figures, this one tends to show trends much better.

You may recall that recently the weekly data is showing a decline, the fact that the numbers are still rising means that people are spending more time on unemployment.

Because of inflation concerns, both the Bank of England and ECB leave rates steady have decided not to follow the Fed’s example and cut rates. Which has left the ECB rate at a 6 year high.

Normally, this would suggest a weaker dollar, but the dollar is doing pretty well against the Euro. No clue as to what is going on here.

Finally, another day, another record high in oil, $123.53/bbl at closing.

Economics Update

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Gee, Alan “bubbles” Greenspan is now saying that we are having an, “awfully pale recession.” Well, I guess he can still afford to eat at the Four Seasons, so it’s someone else’s problem…Neh?

Actually, I’m surprised that he did not use the unexpected growth in the service sector, with the ISM numbers rising to 52 from 49.6 (50 indicates growth).

His goal has always been more to prevent government intervention than giving an accurate assessment anyway, because he believes that preventing government action is the only thing that he can do of value.

Of course, the fact that oil busted the $120 barrier, hitting $120.21/bbl doesn’t bode well for the economy anyway.

Oil is up on supply fears from potential attacks in Nigeria and Kurdistan, along with the dollar weakening because of the Fed rate cuts.

Interest rates in the private sector, however, appear to be on the way up, with 30-year mortgages rates rising despite the Fed rate cuts. Additionally, the Fed is reporting that banks are tightening up on their lending at a historically high rate.

The fact that consumer bankruptcies are up almost 48% year over year in April might have something to do with this, or perhaps the other way around. It’s a chicken egg thing to me.

However, the fact that S&P has decided to stop rating bonds backed up by second mortgages seems to indicate that this still has a way to go on the way down.

The fact that companies cannot refi right now may very well take down ResCap, the 8th largest mortgage lender wing of GMAC:

ResCap, the eighth-largest U.S. residential lender in 2007, today began offering as little as 80 cents on the dollar to exchange or buy back $14 billion of bonds to extend maturities and stave off bankruptcy. To finance the debt restructuring, ResCap is seeking a new $3.5 billion credit line from its parent GMAC, which is owned by General Motors Corp. and an investor group led by Cerberus Capital Management LP.

“There is a significant risk that we will not be able to meet our debt service obligations, be unable to meet certain financial covenants in our credit facilities, and be in a negative liquidity position in June 2008,” Minneapolis-based ResCap said in a filing to the Securities and Exchange Commission today.

With all this going on, it’s not surprising that UBS is looking at cutting 8000 jobs.

Economics Update

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Well, we just got a jobs report that shows just how screwed up our statistics have gotten, with non farm jobs falling by 20,000 but the unemployment rate went down, which just does not work.

Additionally, the so called birgh death corrections are completely bogus:
+45k construction jobs v 37k April 2007
+8k jobs were added in financial activities versus 1k last April.
+72k in professional/business services versus 48k last April.
+83k in leisure/hospitality (95k last April).

The idea that construction and financial added 53,000 jobs in April comes from somewhere west of the planet Skaro.

The financial press is uncritically applauding, of course.

In energy, oil is upto over $116 for the first time in a few days, but gasoline is down, not hitting a new record for the first time in 17 days.

Meanwhile, the Fed and other central banks are pouring yet more money into the frozen financial system. The Fed is allowing more types of bonds in its trash for cash auctions, but it does not appear to help. The LIBOR, from which much of the adjustable rate loan rates are derived has been largely unmoved.

It’s pushing on a string, as I’ve said before, because it’s a solvency crisis, not a liquidity crisis, as I’ve also said before.

The is still strengthening a bit, but I’m a bear long term, but I’m a bear on everything.

In more pushing on a string news, the US treasury is offering 0% on its inflation protected savings bonds.

A small distinction, mypost of 4 March had was about TIPS, not inflation protected savings bonds, just in case you are wondering if I’m repeating stuff.

Finally, in real estate, 63% of home sales in San Diego are short sales and REOs, which means that either the owner has sold for less than they owe, or it’s been foreclosed on.

Economics Update

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First, initial unemployment insurance claims increase, ba by 35K to 380K. Note that this is an inherently noisy figure, but it’s been bad for over a month, which indicates a trend.

Becasue of the Fed’s signals regarding future rate cuts, as na ga na do it, the dollar has strengthened, and oil has fallen a bit.

That being said, the Euro zone appears to be under increasing stress from the different economic trajectories of its members.

Citi appears to need more money, so it’s raising it through a $4½ billion stock offering, further diluting its stock holders equity.

Seriously, it’s like a dog chasing its own tail…down the drain.

We have a number out of San Diego, with house prices off dropping 19.2% since February 2007.

This means that if someone bought a 30 year fixed mortgage, with 20% down, that they would be under water on the loan if closing and broker costs are included.

Economics Update

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I think that the best indication that we are well into a recession is that unpaid utility bills, as well as service cutoffs, are going through the proverbial roof. People can’t afford the mortgages, or the utilities, or so it seems.

BTW this is a very good pictorial representation of the credit freeze:

Click pic for PDF. (H/t econobrowser)

Oil hit an all time high, less than a dime less than $120/bbl, which means that inflation is still a problem, but don’t tell helicopter Ben, because the markets have already priced in another rate cut from the Fed.

As I’ve said before, it won’t matter, the fed is pushing on a string, but the fact that the Euro zone looks to be in for a round of slow growth and inflation, aka stagflation, with inflation of over 3% (their goal is 2%), so they will likely raise rates, as the ECB does not have maintaining employment as a part of its charter, just controlling inflation.

Rates going up in Europe should push the dollar down, which is why I find it confusing that the done better against the Euro in the past three days than it has since 2005, but I’m not sure how long this will last, as Japanese investors are moving away from US treasuries, which is significant, as they are the largest holders of US treasuries.

In real estate we have a new record for vacant homes in the US, 2.9%, the highest level since record keeping began in 1959.

Note that this does not include rental properties, and it’s pretty grim.

For those of you who are considering picking up something cheap in foreclosure, be warned, trash outs are way up Trashouts, here are stories from Massachusetts and Nevada.

We are talking serious stuff, sinks and bathtubs ripped out, and in some cases, vandalism along the lines of cement down the pipes. Factor that into a sales price.

I would also argue that it’s likely that we may shortly start seeing violence against people who purchase at auction, so do not enter into this likely.

Economics Update

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The dollar is doing better now, $1.5613:€1.0000, as I type this, which is about 3% stronger than when it was above $1.60.

I put down most of the movement over the past week to people betting on what the Fed will do in interest rates, and the consensus that it will not cut.

Oil, however, just went up again, as did gasoline, because of reports of a pipeline attack in Nigeria. The reality is that supplies are so tight that even a minor disruption causes a minor panic.

The New York Times has discovered that the housing crisis has moved to tony Greenwich, CT. And so they cover it with wringing hands, because it interests their readers.

For the rest of us, the fact that the mosts states are having financial meltdowns, and many are near broke, because of falling tax revenues, are a matter of greater concern.

Also, Consumer confidence is at a 26 year low. That’s as in 1982, when we were at 10% unemployment, and so consumers are scaling way back on spending.

In a sign of the apocalypse, Moody’s is downgrading some more of the Alt-A mortgage backed slop. Who knew that a ratings firm would actually do its job.

It’s been a busy day for AMBAC, the monoline insurer, with a report that it may need to seek more capital after posting a $1.66 billion dollar loss for the quarter. Further confirming this report is the fact that their interim CEO is saying that there are no liquidity issues and that its ratings are solid.

S&P is back stopping Ambac on this explicitly stating that the loss will not lead to a downgrade.

Of course if the ratings agencies, or for that matter the financial markets, were at all honest, most the monoliners would already be rated as junk.

Economics Update

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Unemployment claims fell again, note my standard caveat about noisy measures though.

Note also that new-home sales are unbelievably grim. An 8.5% drop month to month is falling off a cliff, but this is following the numbers being revised downward for the month of February.

If that doesn’t scare you, there is a Credit Suisse research report that suggests that there will be 6.5 million foreclosures by 2012:

The foreclosures could put 12.7 percent of all residential borrowers out of their homes, Credit Suisse analysts, led by Rod Dubitsky, said in the report. That compares with a foreclosure rate of 2.04 percent in the last quarter of 2007, they said, citing Mortgage Bankers Association data.

That is one out of 8 residential borrowers.

That’s too bearish for even me, and I’m the biggest bear out there.

In terms of non-residential real estate measures, we have the Architecture Billings Index (ABI) dropping to its lowest level ever, suggesting that commercial real estate’s about to tank too, and orders for durable goods, items expected to last 3 or more years, fell 0.3% from February, worse than expected.

The drop in unemployment claims triggered a drop in treasuries and a strengthening of the dollar, because it makes it less likely that the Fed will cut rates at its next meeting.

Truth be told, the Fed cutting rates won’t do much anyway, as is shown by mortgage rates continued upward path.

The Fed has lowered rates below the effective inflation rate, and so their rates have decoupled from the commercial rates.

Economics Update

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Today, since they’ve been off the update for a while, I’d like to welcome back a monoliner insurer, specifically AMBAC which lost even more money than forecast, $3.6 billion.

However, they are looking to turning things around. Specifically, they have their “lawyers and forensic experts”looking at 17 big money losing contracts, targeting (it appears) Bear Stearns and First Franklin. The max losses were originally seen at 10-12%, and now they are staring down the barrels of over 80%, so they may have a good case.

We’ll be seeing a lot more of this, and insurers won’t be paying out in the near term without this sort of teardown of the contract and investment looking for evidence of deception of some sort.

In related news, bondholders recovery on bankruptcy has plunged, with B+ bonds going from around 42¢ on the dollar to less than 10¢.

This is not a liquidity crisis. It is an insolvency crisis.

The Fed, however, is still treating this as a liquidity crisis, because there is no cure for an insolvency crisis but the dissolution of the entities involved, and it will auction another $75 billion in Treasuries in exchange for pieces of the big sh%$pile.

Speaking of the sh%$pile Moody’s just downgraded 1,923 residential mortgage backed securities in the past to days.

It’s likely to get worse. Robert Shiller, who is one of the creators of Case-Shiller housing index, believes that house prices will fall more than 30% from their high, and likens this to the slump associated with the Great Depression.

In terms of the more general economy, we have UPS saying that it’s seeing a dramatic slowing in the U.S. economy, and in its business, and Target’s write offs on its credit card sales are soaring. They are at an annualized rate of 8.1% for March (ouch) up from a rate of 6.8% in February (ouch x2).

In currency, we already know about the Dollar cracking the $1.60 barrier, but now we are seeing a price hike driven by this, with Airbus raising prices on its planes.

We’re going to see a lot more currency driven inflation.

Economics Update

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It’s official, we’re in a recession, because Bush is denying that we are in a recession – Apr. 22, 2008.

For more direct evidence of a recession, we have American drivers cutting back on driving and gasoline usage. When Americans stop driving, it means that the recession is here…big time.

In energy, oil broke $119/bbl, $110/bbl now appears to be the new $100/bbl

Across the border, Canadian Central Bank cut rates by 50 basis points, but even so, the Canadian dollar is still above parity with the US dollar, but they are definitely seeing the fallout from the US downturn.

In other currency matters, the dollar weakened to above $1.60:€1.00, though it’s now about $1.5992.

At the beginning of the year, it was $1.48 or so.

In things related to banking and real estate, we have to start with the elephant in the room, that GSEs Fannie Mae and Freddie Mac are looking increasingly at risk, and a potential bailout would run to over $1 trillion, which might threaten the US government’s AAA rating.

Generally, bank profits are tanking, so it should come as no surprise that banks are retrenching.

Notably, Bank of America will be ending subprime operations, and tightening generally on mortgage standards, which makes it hard to understand why it’s buying Countrywide.

Citi needs more capital, so it’s offerring $6.2 billion in hybrid bonds, at 8.4%, with an A2 rating.

Hybrid bonds are….are….Ummm, a sort of hybrid between preferred stock and bonds…I’m confused, and they are described as “innovative”. I’ll try to get more information, but in the meantime, run away.

Finally, the Fed bailout of banks continues apace, reaching $360 billion with the sale yesterday.

Economics Update

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Clickable Image

In terms of economic indicators, we have 4 today, one up, and three down.

FWIW, the Jobless claims are noisy, but overall the numbers are trending up, and the LEI typically does not mean anything until you get three in a row.

The Dollar hit a new low vs. the Euro, $1.5982:€.

As an aside, I spend a fair amount of time on currency, because I believe that it will be the final nail in the proverbial coffin, much like it was in the Asian and Argentine financial crises.

In banking, investment and otherwise, we have
Merrilly Lynch announcing a $6.5 billion write down and massive layoffs.

Across the pond, we have the Bank of England announcing that it had three times as many bids for its cash auction as it was offering, implying that credit is still pretty frozen, and the prospect of massive bank failures in Germany as a result of the subprime crisis, which truth be told extends well into the prime mortgages too.

Finally, in another sign of the apocalypse, my predictions regarding the countrywide sale, that Bank of America was throwing good money after bad, appear to be coming true, as , “Continued credit deterioration at Countrywide Financial Corp. could raise concern among investors about the final sale price of the mortgage lender to Bank of America Corp., a Lehman Brothers analyst said Thursday.”