Category: Economy

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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Challenger, Gray & Christmas is reporting that planned job cuts were up 26% in July, and the Conference Board’s Employment Trends Index fell to 112.1 in July, leading the board to predict that unemployment could pass 6% in 2009.

Additionally, the board noted that U6 has now topped 10%, which is probably the best metric, and closer to the one used in EU nations, for the first time in 5 years. Quoth the Wiki:

  • U1: Percentage of labor force unemployed 15 weeks or longer.
  • U2: Percentage of labor force who lost jobs or completed temporary work.
  • U3: Official unemployment rate per ILO definition.
  • U4: U3 + “discouraged workers”, or those who have stopped looking for work because current economic conditions makes them believe that no work is available for them.
  • U5: U4 + other “marginally attached workers”, or those who “would like” and are able to work, but have not looked for work recently.
  • U6: U5 + Part time workers who want to work full time, but can not due to economic reasons.

In an article with a typically bad headline, we see that personal spending and income fell in July, the headline leads with non-inflation adjusted spending, and we also see that inflation has eaten up most of the tax rebate stimulus package.

So what the taxman giveth, the House of Saud taketh away.

Commodities are showing some moderation now, with copper and aluminum falling because of the economic slowdown, though there is a consensus that latter will rebound.

Energy is down too, both oil and retail gasoline, much for the same reasons.

The dollar is down slightly, but is likely to be a holding pattern until tommorow, when the Fed makes its decision on interest rates, and may not move much until Thursday, when the ECB does the same.

In banking, Citi is now losing money on credit card securitizations, where they take credit card debt and package it into securities (similar to mortgage backed securities).

When you lose money on this, the economy is not in good shape, or you are completely incompetent. In the case of Citi, probably both.

Finally, the finance unit of Chrysler was able to finance only $24 billion of the $30 billion it sought to renew, and it was at a higher cost than anticipated, which will likely make auto loans more expensive.

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!!

Economics Update

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Well, we have a big bit of information to lead with today, it turns out that the revised GDP numbers for the 4th quarter of 2007 show a contraction of 0.2% in the economy, which means that as numbers come in, that might very well be the start of the economy, particularly given the fact that the inflation numbers used to generate “real” GDP growth are bogus.

According to the most recent figures, the US economy grew in the 2nd quarter of 2008, but it grew less than forecast, 1.9% as versus 2.3%, but given what happens in revisions, I expect the number to get worse over time.

Employment is grim too, with weekly jobless claims up 44,000 to 448,000, though part of this is the effect of people going back on unemployment because of the 13 week extension.

While the weekly number is noisy, the trend has been toward increasing unemployment, and I agree with Calculated Risk, “Labor related gauges are at best coincident indicators, and this indicator suggests the economy is in recession.”

That’s not to say that there is no data pointing in the other direction, as the Chicago Purchasing Managers’ Index Increased to 50.8, and any number above 50 points toward expansion.

That being said, the currency market saw the clouds, not the silver lining, with the dollar falling, though the fact that Euro zone inflation hit an all time high of 4.1%, which points toward rate increases by the ECB, could be a factor in there too.

In real estate, mortgage rates fell this week, which is probably an artifact of the reduced inflation fears from moderating oil prices.

The bit I found interesting though is that Freddie Mac is doubling the payments it makes to loan servicers for foreclosure prevention activities, which strikes me as a sort of a “hail Mary” play to keep more of their mortgage backed paper from going bad.

And our old friend, “The trouble with the monoliner insurers,” is back, with Financial Guaranty Insurance Co. (FGIC) being cut to junk bond status by Fitch.

In energy, both oil and gasoline are down.

Finally, a reason, as if you needed one, not to watch the Fox Business Chennel:


This just buggers the mind.

Economics Update

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Well, you know that the economy sucks when lawyers are being laid off, in this case at Cadwalader, Wickersham* & Taft because the 70% decline in the commercial real estate market had created redundant personnel.

When you consider the fact that Citi will likely write-down its CDOs to the tune of $8 billion, following Merrill Lynch’s $5.7 B writedown of its CDOs, it’s not surprising nothing is moving.

Citi currently values its CDOs at 53¢ on the dollar, but Merrill sold at somewhere between 22¢ and 5.5¢ on the dollar (see this post), so this will be ugly for them, and for a lot of other financial institutions.

Some people are predicting writedowns of over $100 billion for Fannie Mae and Freddy Mac, but it could be worse if there is a rush to the exits.

I think that it’s also pretty likely that the credit crunch had a lot to do with Mervyns, department stores filing for bankruptcy, reorganization, not liquidation, as the straw that breaks the Camel’s back is typically the withdrawal of credit.

Still, we have a decent numbers in the ADP jobs report, which has also strengthened the dollar.

Additionally, the efforts by government institutions continue with Federal Reserve extending its loan program to Wall Street banks, “Cash for Trash,” from mid-September to January 30 and the SEC has extended its naked short-selling ban until August 17.

In energy, oil is up, and retail gasoline is down.

*Interestingly enough, I probably would not have even noticed the story, but for the fact that the name Wikersham was there. he first political story that I have any recollection about was about that ship, and the problems that developed as a result of cabotage related issues with the Jones Act, which required it to stop in Canada between American ports,

I actually rode on the ship when my family was leaving Alaska.

Economics Update

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The Bush administration is now, finally, predicting a slowing economy, with a GDP growth rate of 1.6%…though with a higher prediction of inflation at 3.8%, it’s a net contraction, which is why they are also predicting an increase in the unemployment rate.

Given this environment, it is unsurprising that home prices fell in May by 0.9%, 15.8% year over year, which is grim.

What is surprising is that Consumer confidence was up a bit, to 51.9 from 51.0, but even 51.9 is very pessimistic.

We may be seeing a bottom of consumer pessimism, which is different from seeing a bottom to the credit crisis.

The slowdown seems to be driving the price of oil down, as well as the price of retail gasoline, and falling energy prices seem to be bolstering the dollar versus foreign currencies, though the bad news on Japanese unemployment, a 2 year high, may have contributed to this.

Still, the banks are buying lots of money from the Federal Reserve to deal with the liquidity problems, $75 billion this time, so we ain’t out of the woods.

For your amusement, a cartoon:

Economics Update

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The dollar is down relative to the Euro, because the further deterioration in the credit markets makes Fed rate hikes unlikely, though the US dollar has strengthened against the Canadian dollar, because oil has been down so much recently, which means that the Canadian trade surplus to the US, they are the US’s largest external oil supplier.

It looks to me like the financial markets are continuing their slow motion car wreck.

Banks are tightening business loans and commercial paper, decreasing total lending by 3%, and requiring much higher interest rates to account for the uncertainty.

As to what foreign investors are doing, I can’t speak for all of them, but Russia has cut investment in Fannie and Freddie by 50%, and the international monetary fund sees no light at the end of the tunnel on the housing crash.

The result is fairly straightforward, much tighter money, particularly for entities like Lehman, which has seen its borrowing costs skyrocket. They are now 7.7%, 6 months ago they were 5.2% for a 5 year bond.

This is a 4.2% premium US Treasury notes, which is about double the number in early January.

In energy, oil is up about $1/bbl today, largely on Iran concerns, but retail gasoline prices have continued to fall.

Lawrence Summers Calls for Nationalization of GSEs

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He is suggesting that if the GSEs do actually need a bailout, that the government should operate them for some period of years:

We need the GSEs to be highly active in support of the housing market and financial system in the months ahead. If authorities can see a path to their being able to play such a role in a framework where their borrowing is based on confidence in their financial position, rather than primarily on federal guarantees, then this is obviously the preferred alternative. But after what we have seen, such a judgment cannot be based on the GSEs’ own claims, the understandable desire of government officials to maintain confidence and attract private capital, or the fact that the GSEs are able to borrow — which only reflects the strength of federally provided credit assurances.

If this preferred alternative is, as I fear, not realistic given the state of GSE finances, the government should use its new receivership power to protect taxpayers and the financial system. In the process, payments to stockholders, holders of preferred stock and probably subordinated debtholders would be wiped out, conserving cash for the benefit of taxpayers. The GSEs’ borrowing costs would fall considerably, helping prospective homeowners.

In this scenario, the government would operate the GSEs as public corporations for several years. They would then be in a position to extend credit where appropriate to support resolution of the housing crisis. Once the crisis has passed, the federal government would divide their functions into government and private components, the latter of which would be sold off in multiple pieces. The proceeds could be used to fund the low-income housing support activity that was previously mandated to the GSEs.

It should be noted that Fannie Mae was a federal agency from the late 1930s to the late 1960s.

Economics Update

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Wekk, retail gasoline has finally dropped below $4.00 per gallon, the first time in almost two months, oil moved very little, depending on grade, somewhere between ±$0.15/bbl.

Meanwhile, Nouriel Roubini is arguing that foreign central banks and sovereign wealth funds are increasingly less willing to take huge losses in order to bail the USA’s financial system out, and that this will lead to a systemic collapse, with, “ensuing fall of the U.S. will make this fire sale of the best U.S. private asset a true bargain basement deal: with the dollar price of these assets now imploding and with the U.S. dollar now in free fall non-residents will be able to buy most of U.S. Inc. for the cheapest bargain.”

One final note, and some information that shocked me, is the amount which short sales decreased in financial stocks as a result of the new SEC rules banning “naked” short selling: 98%.

S3 Matching Technologies is reporting that short sales in the newly regulated stocks fell by a factor of 50, which is far more than I would have expected.

Even if some of the decline in short sales was investors who were spooked by the new rules, it’s clear that the overwhelming number of short sellers are engaging in “naked” shorting.

Economics Update

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It sounds like good news, durable goods orders went higher in June, but it was almost entirely due to defense related purchases.

Real estate is pretty much bad news too, with 2nd quarter foreclosures up 120% year over year, and new home sales down, though not as crappy as expected.

Meanwhile, the National Australia Bank is writing down 90% of its mortgage backed securities, which is a realistic, if somewhat alarming valuation of these instruments.

In the world of retail, we have Rumors that Boscov’s is near collapse. They’re local, so maybe there will be some deals as a result.

More generally, oil and retail gasoline are down, and the dollar is mixed against world currencies.

Economics Update

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While the Federal Reserve is afraid to say the word, it appears from their latest report that we are seeing stagflation.

Jobless benefit claims just spiked above 400,000, up 34,000 from last week to 406,000, the highest reading since March.

Again, let me note that the weekly numbers have a lot of noise, but this news still sucks.

What’s more we have increasing evidence that the downturn is not “decoupled”, but is effecting other economies, with consumer and corporate confidence in Europe coming in well below expectations.

Not surprisingly, the bad news out of Europe, which points to interest rate moderation there, has bolstered the dollar.

Some real estate numbers came out today, and they are not good.

home sales fell 2.6% from may, and are now at an annual rate of 4.93 million/year, the lowest rate since 1998.

If you are wondering what might happen when mortgage rates rise, you should break out the popcorn, because it looks like that show might be starting soon. Rates went up 0.37% last week to 6.63% for a 30 year fixed mortgage.

Because of all this, I am not surprised thatthe number of vacant homes has remained at more than 2.2 million.

Energy was flippity floppity today, with oil up by about a dollar, and retail gasoline prices down again.

Economics Update

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Fairly slow news day: retail gasoline down, oil down, and dollar up.

In what has to be the most obvious bit of analysis this week, the Office of Federal Housing Enterprise Oversight (OFHE)) is saying that Fannie Mae and Freddie Mac may record more losses as a result of the moribund real estate market….Seriously, this could have come out of a fortune cookie, particularly since we are seeing more indicators that the housing market has not hit bottom:

Mortgage applications fell 6.2% last week, (again, note that this is a noisy number), and California foreclosures hit a 20 year high in the 2nd quarter….actually the most ever, since they didn’t start collecting the numbers until 1988.

Economics Update

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Charles Plosser, President of the Philadelphia Federal Reserve, called for rate hikes to forestall inflation. Not surprisingly, the US dollar has risen as a result.

Meanwhile, the banking meltdown continues aplace, with Wachovia losing $9.9 billion dollars and exiting the wholesale mortgage business, meaning that they will no longer offer mortgages through independent brokers, and WaMu Lost $3.3 billion too.

I would also note that federal examiners auditing the GSE’s books, though this is more a preparation for a US government bailout than it is any concern for wrongdoing.

Considering that U.S. home prices 4.8% from May 2007 to May 2008, I’d count a GSE bailout as likely.

Seeing as how tropical storm Dolly largely missed the offshore oil rigs, it’s not surprising that oil prices have fallen, and it appears that retail gasoline is doing the same.

Still, this is mostly a symptom of a slumping economy, where less oil is needed, much as UPS’s profit slump of 21% is clear evidence of a radically slowing economy.

It’s also old home week at 40 Years in the Desert, because we have some news about another monoliner insurer in trouble, this time, it’s Assured Guaranty, one of the two insurers left with AAA ratings from all three major agencies, that is taking a tumble, because Moody’s is making noises about a downgrade.