Category: Economy

Economics Update

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I’m lazy, so let’s just say, Oil up, retail gasoline up, and dollar down.

I’m beginning if I should stop covering the above swings daily….day-to-day has too much noise to signal.

On the other hand, the rumors of massive writedowns at Citi over mortgages, LBO loans, CDOs, etc. is probably more significant, as is the fact that Moody’s finally cut MBIA’s credit rating.

Moody’s Investors Service on Thursday stripped the insurance arms of Ambac Financial Group and MBIA of their AAA ratings, citing their impaired ability to raise capital and write new business.

….

Moody’s cut Ambac Assurance three notches to “Aa3,” the fourth highest investment grade, and downgraded Ambac Financial three notches to “A3,” the seventh highest investment grade, from “Aa3.”

MBIA Insurance was cut five notches to “A2,” the sixth highest investment grade, and MBIA Inc was cut five notches to “Baa1,” three steps above junk, from “Aa2.”

This is actually more significant than just making their borrowing money more expensive, it means that some of the holders of insurance contracts the right to terminate or require the additional collateral from the company.

It’s what Atrios calls, “Another Jenga Piece” coming out.

Economics Update

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Weekly unemployment claims fell 5000 to 381,000 from the week before, though predictions had been for 375,000. It’s noisy, but the number is still too damn high, even if the leading indicators are up for the 3rd straight month (though not by much).

I would be more concerned that the Philadelphia Business Outlook Survey by the Federal Reserve went down when the experts predicted an improvement. (As Philly goes, so goes the nation’s economy, at least that’s how the Fed sees it).

Energy news was generally good though. Oil dropped because the Chinese are going to stop subsidising retail gasoline and diesel purchases, which should reduce demand considerably, and retail gasoline prices fell for the 3rd day in a row to $4.073 a gallon.

For some reason, the dollar fell too, though conventional wisdom would say that it should have risen.

On a day to day basis, there is more noise than data, you get a better picture on (at least) a weekly look.

In any case, I would not be hoping for a quick real estate turn around. Mortgage rates just hit a 9 month high, and all indications are that it will go higher, particularly since Triad Guaranty’s mortgage insurance subsidiary is shutting down, which is the first time that I’ve heard about a mortgage insurer shutting down.

If this becomes more common, it will force mortgage rates up, and home sales and prices further down.

But it wouldn’t be fair for me to talk about insurers without talking about the monoline insurers, who are insolvent, but still have AAA ratings from the agencies…at least from some of the agencies.

Ambac Financial, the second largest of the monoline insurers, is terminating its contract with Fitch Ratings, because Fitch dropped their ratings.

They are the 4th monoliner to drop a ratings agency because they don’t like the truth, and it screams out for meaningful regulation.

Economics Update

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Well, I’d be worried if I had to job search, because about 1/3 of employers surveyed by the Business Roundtable expect layoffs in the next 6 months.

Needless to say oil heading back up, and the dollar heading down would indicate that those 1/3 of executives surveyed are being prudent, even if retail gasoline prices fell for the 2nd day in a row, which hasn’t happened in quite a long time.

Currency gets even more interesting when one realizes that the Chinese Yuan has gained 20% vs the dollar since it’s been allowed to “kind of sort of float” against the dollar by pegging to a basket of currency, it’s gone from 1 Yuan= $0.1208 to 1 Yuan=$0.1453.

What’s more, it looks like a strong Yuan may be the only way for the Chinese to keep their inflation down, by cooling off exports and lowering the cost of imports, particularly food and fuel, so they may continue to take actions to strengthen their currency, essentially exporting their inflation to us.

Real estate continues to suck too, with mortgage application volume falling last week and the Architecture Billings Index dropping two points.

A Counter-Intuitive Point on the Food Criss

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George Monbiot notes that smaller farms actually produced more food per acre than large ones.

He notes that he agrees with Robert Mugabe is right, that land reform is crucial in agricultural production and food security, and then further notes:

Of course the old bastard has done just the opposite. He has evicted his opponents and given land to his supporters. He has failed to support the new settlements with credit or expertise, with the result that farming in Zimbabwe has collapsed. The country was in desperate need of land reform when Mugabe became president. It remains in desperate need of land reform today.

Which is, of course, completely true.

In his extensively footnoted essay, which also appeared in the The Grauniad*, he notes that in nearly every case where it has been examined, smaller farms outperform larger ones.

Of course, the developed world is working against this reality:

Big business is killing small farming. By extending intellectual property rights over every aspect of production; by developing plants which either won’t breed true or which don’t reproduce at all, it ensures that only those with access to capital can cultivate. As it captures both the wholesale and retail markets, it seeks to reduce its transaction costs by engaging only with major sellers. If you think that supermarkets are giving farmers in the UK a hard time, you should see what they are doing to growers in the poor world. As developing countries sweep away street markets and hawkers’ stalls and replace them with superstores and glossy malls, the most productive farmers lose their customers and are forced to sell up. The rich nations support this process by demanding access for their companies. Their agricultural subsidies still help their own, large farmers to compete unfairly with the small producers of the poor world.

Obviously, as he concludes, the moves of people to buy into “fair trade” agricultural practices do more than lift small farmers out of abject poverty. They actually produce more food for everyone in the end.

It is remarkable just how destructive, and just plain evil the agricultural practices of the Western World are.

*According to the Wiki, The Guardian, formerly the Manchester Guardian in the UK. It’s nicknamed the Grauniad because of its penchant for typographical errors, “The nickname The Grauniad for the paper originated with the satirical magazine Private Eye. It came about because of its reputation for frequent and sometimes unintentionally amusing typographical errors, hence the popular myth that the paper once misspelled its own name on the page one masthead as The Gaurdian, though many recall the more inventive The Grauniad.”

Economics Update

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We now have the Fed’s report on national industrial activity, and the may disappoints, with activity falling 0.2% when an 0.1% increase had been predicted by economists.

I’m not sure if it factors in inflation, but if it does not, then those numbers are absolutely horrific, as the producer price index rose 1.4% in May, which is grim….Over the last year, the PPI has gone up 7.2%.

Note that this is going on while housing starts fell 3.3%, which is the lowest rate since March of 1991, 17 years.

No wonder that the builders’ confidence survey just hit a record low, matching the record established in December of last year.

Of course, that doesn’t take into account that the National Association of Realtors isn’t getting the numbers that they report right. They claimed that NJ home sales were up 4% in the Q1 when they were down 30%….that’s a hell of a “mistake”.

It’s no wonder that Goldman Sachs is suggesting that banks may need to raise another $65 billion to cover mortgage losses.

It’s even less of a wonder that investors are waiting for more dividend cuts from banks. No profit should mean no dividends.

Of course, the Fed is continuing to let banks get free money for sh%$ pile assets, this time to the tune of $75 billion.

There is good news in energy though, with both oil and retail gasoline coming down a bit today.

The standard wisdom would suggest that this was because of a strengthening dollar, but the greenback fell today.

Economics Update

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The Empire State Manufacturing Index droppeed 5 points, to -8.7 (0 is neutral), indicating further weakness.

Oil is down for the day by a quarter, but it hit a new record of $139.89/bbl before settling, and retail gasoline hit another record, now having hit a record on something like 25 days of going back a month.

It’s not surprising that the dollar was down today, though I’m not sure if this drove oil, or oil drove this.

In banking, we have Barclays looking at selling shares to raise capital to cover losses in the US mortage market, and Lehman had some sort of hush-hush weekend meeting, which might indicate some problems, though it’s reassuring that they reduced their mortgage holdings by 20%, which indicates a bit of common sense.

Econ 101: Free Trade Does Not Necessarily Bring Lower Prices

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Dani Rodrik has a good analysis:

Advocates of globalization love to argue that free trade lowers prices, and the argument seems sensible enough. Think of all the cheap goods from China that we can buy at Wal-Mart. But anyone who understands comparative advantage knows that free trade affects relative prices, not the price level (the latter being the province of macro and monetary factors). When a country opens up to trade (or liberalizes its trade), it is the relative price of imports that comes down; by necessity, the relative prices of its exports must go up! Consumers are better off to the extent that their consumption basket is weighted towards importables, but we cannot always rely on this to be the case.

Consider your typical Argentinian for example, who consumes a lot of wheat and beef. Since these are export products for Argentina, free trade implies a rise in the relative price of the Argentine consumption basket. (The gains from trade are still there, of course, but they derive from the usual allocative efficiency improvements, not from lower prices across the board.) And in the U.S., the Wal-Mart effect has to be qualified to take into account the fact that the relative price of the goods that the U.S. exports (including for example agricultural commodities) is higher than it would have been absent trade. Similarly, when the U.S. gets better market access abroad for its agricultural exports (a key demand under the Doha round), you can be sure that this will raise domestic prices for these goods, not lower them.

Highly recommended.

Economics Update

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Well, we now know that in May, foreclosure was up 48% over a year ago, which is why we are seeing stories about places where foreclosures are a majority of sales, and banks are becoming more flexible on prices on the property that they have assumed.

Increasingly, it looks like the bump in house sales was just a bump in sales of lender own properties.

If interest rates go up, this will get worse, and May data points to increased inflation. It exceeded expectations again.

That’s why Fed Governor Plosser is calling for a quick rate hike. He is worried about the dreaded stagflation.

Economics Update

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Well, retail sales increased by 1% last month, about twice as much as expected. When gas if figured out, it drops to 0.8%, and then there is the question of how much food contributed.

Additionally, we have businesses expanding their inventories, though one has to wonder if this because they are hedging against inflation, or if they are expecting an uptick in business?

I tend to go with a bearish, and it appears that the outgoing head of the National Bureau of Economic Research (NBER) thinks so too.

He sees the economy slipping into recession, and possibly stagflation.

Certainly, inflation concerns are rising world wide, with the South African central bank raising rates, ½% to 12%. (Ouch)

Employment is not looking good either, with initial jobless claims rising to 384,000 last week, though one always the caveat that week to week changes can just be noise, as opposed to signal.

Then again, with mortgage rates rising, they are now at an 8 month high, I don’t see construction leading any recovery.

In energy, we had oil down as the dollar strengthened, though retail gasoline hit a new high…again.

Economics Update

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Well, the Federal Reserve’s beige book is reporting that economic growth is generally weak, though better than the last one two months ago, but James Bullard, President of the Federal Reserve Bank of St. Louis is saying that inflation is their primary worry right now, joining Bernanke and Federal Reserve Bank of New York president Timothy Geithner.

Canada is concerned about inflation too, with their central bank holding rates steady instead of lowering rates, as was expected, which pushed the Canadian dollar up.

I think that it’s likely that we will see inflation concerns in Japan driving central bank policy there too, as they just raised their 1Q GDP estimate to 4%, which is high enough to raise inflation concerns.

This would imply interest rates going up in the relatively new future, which would undoubtedly force another dip in house prices.

Of course, the resets coming in option ARMs may do this before rates get raised:

This is a scary picture.

There is some not bad news in real estate, Mortgage applications rose 10.9% last week, though one wonders how much of this is driven by bargain hunters REOs*, which was what drove the recent increase in existing housing sales.

More generally, the lack of confidence is not limited to real estate, as evidenced by the concerns that the LIBOR† is still not trusted, and that the proposed changes to it are largely viewed as inadequate.

In brighter news, rates are falling onauction rate securities, those financial instruments that were supposed to be as good as a cash account, but have locked up investor money.

This implies that some confidence in the auctions is returning to the market, and as a result, governments are redeeming fewer of the bonds, about $2 billion a week, down from over $5 billion/week for the past few months.

Still, we have problems in energy, with oil prices up over $5/bbl, and gasoline hitting a new record, $4.052/gallon.

*Real Estate Owned. Property which is in the possession of a lender as a result of foreclosure or forfeiture.
†London interbank offered rate, a critical measure used to do things like set credit card rates and mortgage rates adjustments.

Economics Update

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China, in response to inflationary pressures, and the fact that a number of their banks are insolvent by western standards, just hiked their reserve requirements, meaning that they have to keep more in reserve, and lend less out of their deposits, which, not surprisingly has tanked Asian markets.

Given that the US trade deficit widened under the pressure of rising oil prices, there may be another purpose: to slow things down before US demand drops off a cliff, particularly when Ben Bernanke is signaling rate hike strongly.

In any case, oil fell a bit, but gasoline is still hitting new records, which implies that a lot of money is still going to petro-economies.

It looks like the British Bankers Association may be taking steps to fix the problems with LIBOR reporting, where this critical rate looks increasingly to have been gamed by member banks, by tightening scrutiny on the transactions, though they are still whining about how it will hurt, “What we do here in the U.K. must match others … maintaining competitiveness is essential to the U.K. industry.”

If you crank out phony numbers, it will hurt your bank more than any other thing that you can do.

Meanwhile, back in the good old USA, Q1 delinquencies rose 62% over a year ago.

Economics Update

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The big news, though I’m not sure if it’s significant, is that, “The index of pending home resales rose 6.3 percent to 88.2, the highest level in six months.”

We are starting to see bargain hunters, but prices are still falling, and that is at the core of the housing bubble collapse. People are under water, and can’t sell to get out from under.

Review this article on , the price collapse of exurban McMansions. There is still a lot of pain to go, particularly since many of these homes are poorly built.

I wonder how many will end up multi-residential dwellings.

The dollar is down today, which implies further energy price increases and, eventually, higher interest rates.

Oil fell $4.19 today, which is not surprising after Friday’s spike, but retail gasoline prices rose again, to above $4.00/bbl. I filled up on the weekend at $3.93….I never knew that I lived in a low cost gas area.

Finally, Lehman lost $2.8 billion in Q1 of 2008, so this investment banks have a long way down to go.

Economics Update

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After 5 straight months of non-farm payroll job cuts, we are finally seeing an increase in the unemployment rate, ½% to 5.5%. It’s the biggest rise in 22 years, and it appears that the we’ve run out of discouraged workers, who are not counted as unemployed, to keep the rates low.

Oil, which had been trending down since May 22, reversed itself and hit a new record, peaking at $138.36/bbl. Retail gasoline, however, finally fell a bit (scroll down), down to $3.986 yesterday’s record of $3.989.

That’s the first time that gasoline prices have fallen in nearly a month.

Not surprisingly, all this has pummeled the dollar which has weakened to $1.5751 from $1.5592 yesterday to the Euro.

BTW, it’s not just monoliner insurers that are hurting, Fitch has downgraded mortgage insurers MGIC and PMI ratings, two of the larger mortgage insurers to to BBB+ from A.

If they go under, millions of people will technically be in default on their mortgage until they find another insurer.

Given all this, it’s no surprise that Federal Deposit Insurance Corp Chairman Sheila Bair is saying that we may see some failures of larger banks.

Economics Update

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Weekly initial unemployment claims were less than expected, though the 4 week moving average of people receiving unemployment benefits was up.

If there is a “wealth effect”, then this might be the side effect of the not wealth effect, as household net worth dropped by $1.7 trillion in 2Q of 2008.

A lot of this drop is due to the real estate market, where there were over a million homes in foreclosure in Q1 of 2008, 2.5% (one in 40 for the mathematically challenged) of all loans being serviced by the Mortgage Bankers Association, which explains why Federal Reserve Vice Chairman Donald Kohn expects to see more write-downs and losses for banks.

Another day, another record for retail gasoline, $3.989/gal, and oil rose to $125.05/bbl, largely on the European Central Bank holding its interest rate at 4%, and it’s president publicly worrying about inflation, which implies rate hikes and a weaker dollar, which tends to push oil prices up.

Finally, monoline insurers MBIA and Ambac are delaying attempts to try and raise capital because of the prospect of a rate cut by Moody’s.

Federal Accounting Standards Board to Invalidate Off Books Qualified Special-Purpose Entities

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The qualified special-purpose entities (QSPE) is an off the books accounting structure similar to the ones that Enron used to conceal its losses, and now it looks like the FASB will be instituting a revised rule, FAS 140, to eliminate them.

Basically, this means that billions, and perhaps trillions of dollars of exotic financial instruments would have to move to the balance sheet, which would show many banks to be undercapitalized or even insolvent.

Economics Update

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ADP’s private report suggests 40,000 new jobs, though it should be noted that , “U.S. companies’ planned layoffs rose 15 percent in May from April to the highest monthly total since December 2005” it has been noted that, “ADP has been inaccurate of late, overpredicting payrolls,” so I would wait for the government figures.

On the other hand, productivity rose more than predicted in Q1 of 2008, though all indications is that this was not more stuff to do, but simply less stuff doing it, “Aggressive cuts in worker hours will help shield corporate profits and keep wage-related cost pressures under control, helping to reassure the Fed.”

Personally, I’m inclined to take the pessimistic assessment of this, because the Institute for Supply Management’s (ISM) non-manufacturing index fell to 51.7, indicating a softness in the service sector.

Additionally, we have the forecasting a world wide growth rate of only 1.8% this year, and weekly mortgage applications fell to a 6-year low.

Inflation worries are now weighing down the dollar, though oil prices are down a bit more to $122.48/bbl, but retail gas prices rose to a new high again, $3.983/gal.

Lastly, we have a visit from our old friends, the monoline insurers, with Ambac and MBIA getting hammered because Moody’s is finally considering a downgrade on their debt.

Texas Observer Takes Down Phill Gramm

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It’s a very good article, which places Gramm foursquare at the center of every major financial meltdown of the past decade.

My favorite quote:

Says Greenberger, “I am quite confident Phil Gramm didn’t understand what his legislation did. It was written by the banks and hedge funds.”

Note that Gramm was originally an economics professor.

It’s a good, and frightening, read on McCain’s economics guru.

Economics Update

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Well, retail gas prices set a new record high again, $3.978/gallon, making 26 new records in 27 days, and yesterday was flat, even though oil fell just under $4 to $123.99/bbl, and it’s $11.19 lower than the record on May 22.

Lehman is expected to post a loss of around 1/3 billion, and is making noises about selling more stock to raise about $4 billion in capital, which has driven the dollar down a bit.

The fact that the dollar has fallen today is odd, given that Bernanke has said that he is concerned about the weak dollar and that further rate cuts are unlikely, both of which should serve to strengthen the dollar, at least in the short term.

In the mean time the Fed shoveled another $75 billion to banks as a part of their sh&^pile for cash scheme, so perhaps someone is noticing the sound of printing presses at the Bureau of Engraving and Printing going to warp 9.

Finally, we have Thornburg Mortgage delaying its earnings report to the SEC, which in these times almost always means bad news.

Another Corporate Voice Challenges Employment Stats

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This time, it’s Dow Chemical CEO Andrew Liveris, who made news last week when they announced across the board price increases, says that, “he thinks the U.S. is underestimating the level of inflation in the economy and he expects the rise in energy costs is beginning to destroy demand.”

The “demand destroying” will become even more true when interests rates finally rise.

Another part of the unsustainably low rates that created the mess that Alan “Bubbles” Greenspan made.