Category: Economy

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%.

Argentina Plans to Renationalize Pensions

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Of course, Moody’s investor’s services hates the idea.

I will make a note on the bigger picture: When Argentina privatized its pension system over a decade ago, it set the stage for its brutal economic implosion in the first place, because it stripped the government of all reserves in the process.

In response to the reports of the plans the Argentina markets dropped like a stone (13%).

I will note Brad Delong’s blog, and this quote:

The private retirement system, set up in 1994 to help bolster capital markets, owns about 5 percent of companies listed on the Buenos Aires stock exchange and 27 percent of shares available for public trading, data compiled by pension funds show.

The market crash was inevitable. It would either happen now, or when the population cohorts start sellling stocks when they retire.

This should have been done sooner.

Economics Update

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I think that the first story is a real biggie, the Insurance Bureau at the Financial Supervisory Commission of Taiwan has forbidden Insurance companies in that nation* from buying mortgage backed securities from the GSEs, Fannie Mae, Freddie Mac and Ginnie Mae.

The scare quote of the article is, The FSC has not only limited insurance company exposure to Fannie, Freddie and Ginnie bonds and mortgage-backed securities, but has decided that existing credit ratings are meaningless.“

Taiwan is not huge in relation to world GDP, but it’s a lot bigger than Iceland….We may be seeing the first furtive steps toward an exit that will likely end in a stampede.

If I’m wrong about a stampede away from US securities, it’s clear that there
is a stampede away from hedge funds…Makes sense, why pay these guys something like 20% when they are losing money.

In the real world or ordinary people and work, the weekly US jobless claims were worse than forecast, 478,000. The standard caveat about this being a noisy metric applies.

I would be remiss in not noting that the 4 week moving average fell, to 480,250 from 484,750.

BTW, it looks like the credit crunch is not near over, because very little let up on interest rate spreads. (H/T Calculated Risk.)

For what it’s worth, Oil prices were up a bit, because there are indications that OPEC might actually make a small supply reduction stick amongst its members.

The thing that really scares me is the fact that Washington Mutual’s Credit Default Swaps will be sold at 57¢ on the dollar, and this is considered a relief to investors.

Even scarier is the little note at the bottom that losses in the Lehman debacle, when investors got 8¢ on the dollar ended up losing less money than expected, because it was a small group who all sold in a big circle to each other.

What happens when one of the members of this circle jerk goes down in flames?

*Or whatever the frack the Taiwan’s status is right now.

They are Lucky that they are White Folk

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Because we now have a report that Iceland is going to accept an IMF bailout in the amount of $6 billion, about $18,740.10 per person living there, and about 1/2 of the island’s GDP.

Luckily for them, they are white, because the “strict measures” to be demanded by the IMF will be along the lines of, “a stipulation that Iceland quickly deleverage its three nationalized banks Kaupthing, Landsbanki and Glitner.”

If they were more darkly complected, you would likely see things demanded like a reduction of the minimum wage, the abolition of free primary schooling, the abolition of the government health care system, higher sales taxes and lower income taxes to favor investors, the sale of public utilities to foreign investors, a roll back of labor rights and employment protections, and aggressive measures to depress domestic consumption at because it would theoretically benefit exports.

BTW, that the last one is called creating poverty, which is fine for the n*gg*rs, but just wouldn’t do for the pale skinned blue eyed folk.

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:

Signs of the Apocalypse: ECB Drops Inflation as Priority

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We now have a report that the European Central Bank, the entity that serves in the role held by the Federal Reserve in the Euro Zone, has decided to set aside all inflation concerns for the moment:

The European Central Bank’s main task is to keep inflation down. But over the past month, it has thrown caution to the wind in trying to prevent financial system and integrated economy of Europe from falling apart.

When you consider the fact that the charter of the ECB was only to deal with inflation, because of German experiences with hyperinflation in the 1920s (wheelbarrows of cash for a loaf of bread).

Unlike the Fed, the ECB has no mandate to maintain stable employment….It’s only role is to keep inflation low, and they are freaking out.

Krugman Nails It

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He hasn’t let the Nobel go to his head.

Read his Op-Ed.

He is saying that there is not much that the Fed can do by lowering interest rates, they are already at 1%, after all.

He is saying that they have shot their monetary wad, the classic phrase is “pushing on a string”, and that Congress needs to go with fiscal stimulus, meaning that Congress needs spend money on things like infrastructure, etc.

Think New Deal and the WPA.

Go read the shrill one.

Ph’nglui mglw’nafh Krugman R’lyeh wagn’nagl fhtagn!

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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Well, I just overheard on the radio that the Baltic Dry Index, a measure of the cost of shipping, just fell to a more than 5 year low.

Ships are sitting idle as manufacturers try to reduce inventory.

We are also seeing this at the other end of the manufacturer to market equation, with retail sales falling 1.2% in September…And remember, this was before Lehman imploded.

The Federal Reserve’s Beige Book, a report of the state of the economy, is pointing down too, as is the New York Fed’s Empire State Manufacturing Survey.

In energy, crude oil ended at less than $75/bbl today…..One note, when I predicted some time back that we would never see the south side of $100/bbl, I was wrong.

Interestingly enough we are also seeing reports that Paulson can give money to banks, but he can’t make them lend it out, which would seem to imply that we need someone more interventionist at the helm.

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.