Category: Currency

Economics Update

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First, the Euro just hit an all-time high, $1.5968:€1.0000 (see also here)

I don’t think that it’s going to get better either, because its clear that Bernanke is not going to raise rates any time soon, because Euro zone inflation just hit an all time high of 3.6%, which means that the ECB will raise rates, as their only official duty is to prevent inflation, as opposed to the Feds dual roles of both price and employment stability.

This seems to be reinforced by the statements of Jean-Claude Trichet, the president of the ECB, who is saying that the European Central Bank is still focused in inflation, and that there is, “a strong belief that a solid anchoring of inflation expectations is of the essence”.

US inflation was pretty much in line with forcasts in March, 0.3% for the CPI, and 0.2% for the so called “core rate”

Finally, oil broke the $115/bbl barrier, hitting $115.07/bbl.

Oops! Wholesale Prices Surge

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Wholesale prices rose by 1.1% in March, analysts had been predicting .4%, and over the past year, it has been 6.9% (I’m not doing the core rate bull sh@# for a 1 year reading, that’s enough time to smooth out the noise)

This means that there is more pressure to raise rates:

  • Lower interest rates make it cheaper to accumulate stock piles of raw materials and keep them off the market.
  • Inflation fears drive the dollar down.
  • Low interest rates drive the dollar down.

I don’t expect any interest rate increases in the next couple of months, but we might have seen the end of rate cuts, which have pretty much stopped working anyway.

Economics Update

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Jobless claims are back below 400,000, down to 357,000. This is a noisy number, and it appears that the Easter holiday may have effected this somehow.

In high finance, we are starting to see some of the sh%$pile being liquidated at steep discounts, with Goldman Sachs selling ½ billion of Chrysler debt at about 63¢ on the dollar, which comes to about a $185 million dollar haircut, and it has been revealed that Lehman liquidated about $1 billion in funds.

You can view this as an orderly unwinding of these highly uncertain financial instruments, or the first steps towards a rush to the exits. I’m not sure which, though the fact that the LIBOR-OIS and the TED spreads are up again.* might indicate that it is a rush to the exits.

Basically, the spread, or difference in interest rates, between what banks demand when they lend to each other is a measure of how skittish people are about debt. The higher the number, the worse fear.

After dropping briefly following the Bear bailout, the spread is heading back up, implying that there are a lot of people who don’t want to buy someone else’s debt.

In international trade, the Dollar hit a record low vs the Euro, $1.5912:€1.0000, and the Yuan strengthened to below 7 to the dollar for the first time ever.

On the brighter side, the trade deficit rose in February, which might indicate that the economy is strengthening somewhat, though it isn’t in the UK apparently, because the Bank of England cuts key British interest rate 25 basis points, to 5 percent.

The continental Europeans appear to be more worried about inflation though, as the European Central Bank left rates unchanged, which will put some more downward pressure on the dollar.

Seriously though, I really can’t make a whole bunch of sense in today’s data, there is too much noise in opposite directions, which is why a fair man is not too hard on economists, who deal with this all the time.

Luckily, I’m not a fair man, so to all you economists, Go away, or I shall taunt you a second time.

*As Paul Krugman puts it, “One is the spread between Libor and Treasuries, the other the spread between Libor and the futures price of the Fed funds rate; I tend to prefer TED spread, because fears of bank defaults should affect Fed funds as well as Libor; but I know that Fed officials prefer OIS. Anyway, both pointing in the same direction.”

Economics Update

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Well, Citi looks headed for a wild ride, with predictions of $17 billion in write-downs for 1Q 2008, and rumors that it is in talks to sell $12 billion of dubious loans at a significant discount.

They were paper sold as part of LBO activity which they could not resell.

Insurers are sure to take a beating on S&P downgrading 4 of them, MGIC Investment Corp., Old Republic International Corp., PMI Group Inc., and Radian Group Inc.

In energy, oil is trading near an all time high on weak inventories, and in currency, the dollar is down, because the market expects further rate cuts.

Why We Need Real Financial Regulation

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Because people like this wreck national economies for sport.

The Financial Times reports on how a booze soaked get together of international hedge fund managers was organized by Bear Stearns laid the groundwork for a conspiracy to destroy the Icelandic currency and economy.

Of interest is that Iceland made itself vulnerable to this as a part of its aggressive transition from a resource extraction (fishing, once more than 1/6 of the economy) to a banking economy, and right now they have 8.7% inflation, and the central bank has set rates at 15%, so fishing may stage a comeback.

It should be noted that Iceland is actually in a pretty good position. It’s banks are well capitalized, and it has been running budget surpluses for some time, though its current account deficit is large.

One wonders if JP Morgan might be left holding the bag on this.

Economics Update

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First, we have a new peak in Jobless claims, 407,000, the highest level since Katrina hit New Orleans (here and here). Note, as always, that weekly jobless numbers are just a snap shot of a single week, and as such, there is a lot of noise, but this did not stop the dollar from retreating in response.

That being said, the fact that the IMF is predicting a global slowdown ain’t a good sign either.

Given that we have a consumer driven economy, the fact that people are falling behind on their debts at the highest rate in 15 years is a good indicator that we are already in a recession.

In energy, was down a buck, and gasoline hit a new record. Assuming that we are not at peak oil, there might be some moderation as the economy cools.

The markets are seeing a cooling economy too, driving Treasuries higher, because investors are looking for safe havens.

In real estate house prices fell in 21 metro areas, and foreclosures rose to record levels. Same old same old.

Finally, I’m beginning to feel like Keith Olbermann and Bill O’Reilly. I can’t make through a week without some insurer disaster intruding. In this case, it’s Triad Guaranty Inc., which is considering, “a plan to stop writing new business”, called a “run-off” in the insurance. Note that it’s business is mortgage insurance, as opposed to monoliner bond insurance.

Too many people defaulting on mortgages.

Economics Update

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Let’s see, we have Bernanke, testifying before the Congress’s Joint Economic Committee, saying that there is just the slightest possibility that the US Economy might possibly be slipping into a recession, which is Fed speak for, we are totally boned.

Not surprisingly, the US dollar tumbles, because recession=further rate cuts.

Truth be told, given the current nature of the credit markets, the Fed could lower interest rates to zero and it wouldn’t lower short term rates. They are pushing on a string, and people are unsure about the amount of risk, so rates won’t go down.

On quick numbers, we have new mortgage applications falling 29% (refi is way down too), oil prices rising, up to about $101.20/bbl, and gas prices at a record high, $3.287/gal.

On the good news side, ADP’s private report is showing an increase in private sector payrolls, though I would rever the reader to this article on underemployment, which points to growing numbers of people working part time jobs, a sign of employment weakness, for some context:

Keith Hall, the commissioner of the Bureau of Labor Statistics, which prepares the monthly jobs reports, said in Congressional testimony last month that this broader measure [underemployment report] stood at 8.9% in February, up from 8.1% a year ago.

“We’ve clearly had a broad weakening in the labor market,” Hall said.

My perspective, and I am an mechanical engineer, which means that I value tangible goods in my world view, is that the fact that factory orders are still declining, -2.5% in January, and -1.3% in February, is a better indicator, though I also consider the fact that car sales tanked last month, including Toyota, significant too.

Of course, economists, and other such folks, tend to look at consumer spending, so the fact that Discover Financial Services reported that its consumer spending confidence index is down might be a bigger deal for them.

In real estate, we have Manhattan condo and Co-op sales collapsing. It appears that the market is now crushing, “location, location, location”.

And on the more surreal side of real estate, we are finding an epidemic of copper pipe theft from abandoned homes. The hed is a real eye catcher, “ Some homes worth less than their copper pipes“.

This makes the USA sound like it’s suffering from Baghdad level looting.

The Role of Hedge Funds in Economic Collapse

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Paul Krugman blogs today and wonders if, “Iceland the victim of a financial conspiracy. Really, seriously.

There are reports that hedge funds are trying to break the bank of Iceland for a few bucks.

As Krugman notes:

Such things really do happen. During the 1997-1998 financial crisis there was, almost certainly, a financial conspiracy against Hong Kong. According to the Hong Kong Monetary Authority, several major hedge funds engaged in a “double play”, shorting both the city-state’s stock market and its currency. The alleged plan was to put the HKMA in a double bind: it would be forced either to raise interest rates to defend the Hong Kong dollar — driving stocks down — or to devalue the currency. Either way the hedge funds thought they’d make a killing. They were, however, caught in a bear trap when the HKMA did the unexpected and bought up a large fraction of the HK stock market.”

According to Krugman, who is in a position to know, Bear Stearns figures prominently in what is going on in Iceland.

I would not be surprised if Bear were also involved in the 1997-8 machinations too. They have always had a rep as being the most brutal of the large investment banks.

This is yet another case for greater regulation of the financial markets.

A tax on currency transactions might be a bad idea either. Even a tax of less than 1/10% would eliminate much of the currency speculation that leaves a path of poverty and destruction around the world.

We Have Reached the Tipping Point on the Dollar

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Small local money changers in Holland are refusing to exchange the dollar, since they don’t typically exchange money back to Euros at the close of business each day, they think that the risk of a significant loss is too great.

And the South Korean pension fund that I mentioned yesterday are part of a trend which will likely see the end of the US dollar as the major reserve currency sooner than most people expect.

Economics Update

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South Korea’s National Pension Service will no longer invest in US Treasuries. They are saying that the rates of return are too low.

Note that this is the 5th largest pension fund in the world, so this is a decision with consequences.

I have noted on a number of occasions that the Fed would find itself torn between keeping the economy afloat, and keeping the dollar strong, and this is the first leak in the dam.

This does not necessarily mean that they won’t be investing in the US though. While the rates treasuries are low, other interest rates are rising, with the London interbank offered rate (LIBOR) up about 1%. Mortgage rates are also not responding to Fed Rate cuts.

Search for the term “pushing on a string” in my archives. It’s a quote from Keynes.

The weekly jobless claims numbers are less than were expected, which is good news, but there is a lot of noise week to week, so I’m more concerned about Commerce Department’s final GDP numbers, which show the inflation adjusted growth of the GDP being 0.6% annually.

Additionally, investors initial reaction was to flee long term treasuries following the unemployment numbers, which implies an expectation of increasing inflation.

In terms of the market recovering trust, not so much, with asset backed commercial paper, short term asset backed debt, falling. There are no buyers for it.

Finally, Merrill will write down $4.5 billion on CDOs (collateralized debt obligations), and post a loss in Q1.

More Toxic Exports

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We are not talking Chinese toys, or Mexican lettuce, we are talking about “Anglo-Saxon” financial products.

Increasingly the rest of the world is looking at the US and UK system of regulation, more accurately a system of no regulation, and seeing the downside, and becomind disenchanted with the US-UK model.

Henry Farrel cites articles by Wolfgang Münchau, and Steve Clemons about the change in attitude.

They both make the point that this is an ongoing, and IMHO accelerating, loss of power for the US, though Münchau is rather more stark, first because he has been an unabashed fan of what I call US style klepto-capitalism, but also because of his the points that me makes:

  • The Euro would replace the dollar as the world’s largest reserve currency within the next 10 or 15 years. (I rather believe that it will be in 5-10 years, but I’m not an economist)
  • If yours is a global reserve currency today, it is likely to be one tomorrow too. But this works only up to a point – a tipping point.
  • But the Euro is a real alternative. [to the dollar as a reserve currency]
  • This has been a crisis of Anglo-Saxon transaction-based capitalism.
  • Losing the dollar as the world’s leading international currency not only leads to a loss of political power. It constitutes loss of power.

What happens when your bank starts demanding Euro denominated mortgages?

Economics Update

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People are not feeling confident right now, Conference Board’s consumer confidence index fell to 64.5, and the expectations index fell to 47.9, the latter being the lowest since December 1973.

Not surprisingly, the dollar is down as a result, though the fact that the Federal Reserve continues to run those printing presses like they were making toilet paper for rancid burrito day may have contributed.

In real estate, Freddie is seeing mortgage delinquencies increasing.

We are also seeing an explosion in payday loans, which means people are being abused by the system just as Bear shareholders are getting a freebie courtesy of the Federal Reserve.

Economics Update

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Oil is holding steady, and the dollar has strenghtened, but Gasonine has hit a new record.

My predictions, which are usually wrong, Oil is pretty much permanently above $100/bbl, the dollar has a way to go down still, probably settling sell south of $1.75:€1.00, and Gasoline prices will break $4.00/gal in a year, and that there will be overshoots on all of them.

But my predictive record sucks wet farts from dead pigeons.

It looks like the Federal Home Loan Banks will be performing the way that God and Herbert Hoover* intended, in that will be making things much worse by bailing out investors in bad mortgage bonds to the tune of $150 billion.

Hoover was a stalwart supporter of doing the wrong thing, back to his days in China, where he supporter what came very close to murder in Chinese mines.

Oh….JP Morgan blinked, and upped their offer on Bear Stearns to $10/share. This is a bailout of two groups of people:

  • The Bear Stearns employees who f&%$ed up the place to begin with.
  • The investors who saw the mess, and said, “Give me some of that.”

They both deserve to lose, and, of course, those people who bought at $5/share just made out like raped apes.

*Hoover created the FHLB system.

Economics Update

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It’s Purim, so let’s lead off with currency.

First, the dollar is a bit stronger vs the yen, but I think that the trend, and the underlying fundamentals, are in the other direction. No secrets here, just the combined federal and balance of payments deficit, along with the rise of the Euro as a reserve currency (brief primer here on what a reserve currency is), will push the dollar down.

There is an article in CNN Money about why there will be no bailout of the greenback by other nations central banks, but it misses an important point, that this bailout has been ongoing for over a decade.

The dollar is now falling in spite of the best efforts of the central bankers.

And in the “economists are always late to the game” news, the Economic Cycle Research Institute (ECRI) says that we are definitely in a recession.

Not to worry though, as majority of Americans think economy will turn around in 2009. I expect that the predictive powers of the American public will not be as good as mine.

We are looking at a deep and long recession, as credit contracts, and the stagnant wages of the past 30 years catches up with us. This will be worse than 1982, when unemployment broke 10% (Ronnie added the military to the count to keep the number below 10%), and real (i.e. subtracting inflation) interest rates in excess of 6%.

I think that it will be worse.

In the short term, the Visa IPO that I erroneously derided seems to have given a lot of banks some breathing room. It’s generated a significant amount of cash, which should help with upcoming liquidity issues….for a while, at least.

Still, banks will be leery of making loans even to exemplary credit risks, for some time to come.

In the world of companies in trouble, S&P is considering downgrades to Goldman and Lehman, and it has downgraded National City’s outlook rating.

However, this is all pretty mild compared to where Thornburg Mortgage which, in order to prevent margin calls (people demanding their loans be paid back now) for the next year, gave its creditors the following:

  • To generate liquidity, it will issue “convertible bonds paying 12 percent annual interest”.
  • The bonds can be converted to stock at about $0.72/share.
  • This means that existing stockholders will have their equity diluted by a factor of 9.
  • Without conversion, the interest rate would be in the 25% range (!!!)
  • The assets that it is protecting through these bonds yield somewhere around 6%, but they cannot be sold now. They hope that the market will improve in a year.

Economics Update

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First, news of the stupid, Office of Federal Housing Enterprise Oversight has reduced the reserve capital requirements for the GSEs, so Fannie Mae and Freddie Mac will be able to loan another 200 billion out.

The problem is blow back from too much leverage, so you are allowing more leverage?

There are people walking away from their homes now because they realize that it will be 10+ years before they have any equity at all in their homes, and you want more exposure to the 2nd and 3rd largest borrowers in the world?

BTW one of the interesting points about yesterday’s rate cuts was that the dollar strengthened, which really runs counter to the normal motion. The analysts say that this was because it indicated that the Fed was really going to keep the economy out of recession.

Well, that lasted about 24 hours (here and here)

Of course no bit of economic news is complete without the performance art/low humor known as a press release from one of the monoliner insurers, in this case
Ambac claiming that it had “no material exposure” to the Bear Stearns debacle.

Yeah, sure. I may not be an economist, but I know weasel words when I hear them.

BTW, one of the CEOs of the big 3 auto makers are expecting sales to be poor this year. Such insight. That must be why they get paid 7 figures a year plus bonus.

Mortgage application volume fell 2.9% last week. No one is lending, and no one is buying.

Finally, we have Goldman Sachs and Lehman Brothers conducting a fire sale on some of their dicier oinvestments fire sale on debt associated with leveraged buy-outs and private equity deals.

This is considered a good thing, which locally, it is. If you pump radioactive waste out of your basement, into the town reservoir, you are doing better personally.

Economics Update

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Any time that the Fed cuts rates, it’s the lead economic story, and today the Federal Reserve huts its discount rate by 75 basis points to 2.25%.

There is not a whole bunch left for the Fed to do. At the rate that they have been cutting this year, they will be at zero some time in July.

We are in a pickle, and Paul Krugman is right when he says that at best we are almost in a liquidity trap, if we aren’t already there. The Fed cutting rates has very little effect on interest rates for the rest of the economy right now.

As a result of the rate cuts, and the inflationary pressures involved, Oil appears to be heading back up.

Additionally, low interest rates tend to push the dollar down. The dollar spent most of today above $1.58:€1.00, though it’s now strengthened to a bit less than $1.57, about 1% below the all time low of $1.5904:€1.0000 reached on Monday.


Our economy in 1000 words.

Of course the real economy, the one that most of not on Wall Street live in, had a few statistics too, with Industrial output dropping 0.5% in February and inflation on the move, with the core producer price index increasing by 0.5% in February.

And it’s not just our economy, it’s both pillars of “Anglo-Saxon Hypercapitalism”, with banks the Bank of England’s emergency 3 day loans totalling £5 billion obeing oversubscribed by almost 500%.

It also looks like Lehman may be the next brokerage to have to deal with a run on its accounts. It’s shares were down 39% in early trading Monday, though it had largely recovered today.

One source of revenue for the various financial houses, private equity buyouts and other forms of leveraged merger and acquistion activity, appear to be drying up. No one wants to lend right now.

It probably does not help that we have it looks like a new star is born in the ppathetic theater that is the monoliner insurance debacle, FGIC, which posted a $1.89 billion loss. If people cannot trust the insurers to pay off if you default, then maybe they don’t want to fund your ill conceived takeover scheme.

This applies to foreigners, who not only are not interested in investing in American businesses, but are avoiding what used to be the safe haven of US Treasuries.

Finally, housing starts hit a 17 year low, though the article optimistically states that it is “above forecast”.

A pox on economic reporters. A little truth a little earlier, and perhaps housing starts would not be the lowest since Poppy Bush was in the White House.

Bear Stearns, I May Have Gotten a Prediction Right

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On August 2 of last year, I said that within a year, Bear Stearns would cease to function as an independent entity.

I’m not right yet, but I don’t see how I won’t be right in the next 5 months.

Dr. Peter Venkman: This city is headed for a disaster of biblical proportions.
Mayor: What do you mean, “biblical”?
Dr Ray Stantz: What he means is Old Testament, Mr. Mayor, real wrath of God type stuff.
Dr. Peter Venkman: Exactly.
Dr Ray Stantz: Fire and brimstone coming down from the skies! Rivers and seas boiling!
Dr. Egon Spengler: Forty years of darkness! Earthquakes, volcanoes…
Winston Zeddemore: The dead rising from the grave!
Dr. Peter Venkman: Human sacrifice, dogs and cats living together… mass hysteria!

And it would seem, that I actually get a prediction right, which is another sign of the apocalypse.

Just yesterday, the Bear Stearns CEO said that there were no liquidity issues, but today, JPMorgan Chase and the New York Fed have gotten together to bail them out.

Basically, the Fed can’t bail out Bear Stearns, it’s out of its authority, but it can guarantee JP Morgan’s loans to the embattled investment bank, which it did.

Actually, a closer reading makes it even more extraordinary. The Fed directly lent money to Bear Stearns, using an authority last used in the 1960s, which required a vote of the Fed’s Board of Governors.

Typically, the Fed is only supposed to lend to banks, and Bear is not a bank, but an investment house.

As to the statements of the CEO yesterday, I would call them a bald faced lie, but I don’t have a Harvard MBA, so I don’t know the fancy term for blowing smoke up everyone’s ass.

Of interest is some potential insider trading, specifically, someone traded 55,000 Bear Stearns puts Tuesday. (A “Put Option” is basically a bet that the stock will decline in value.)

One of the results of all of this is that money has been fleeing to Treasuries, or fleeing the US entirely, with the dollar down.

One of the things you have to understand is that Bear Stearns is a pretty small player in all this, with a market capitalization of “only” about $15 billion dollars, and we’ve got the markets jumping out windows.