Category: Economy

Economic Avalance Update: November 7 Edition

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The Dollar hit another all time low, it’s currently at $1.4645:1.0000€, oil peaked at $98.62/bbl, the Canadian Dollar briefly broke $1.10 US today and the Dow dropped 361 points.

Not only do I expect to be right on the Euro breaking $1.50 and oil breaking $100/bbl before year’s end, we may see significant moves toward moving oil to Euro denomination by next June. Iran and Venezuela are already pushing for this for political reasons, and the dollar’s decline will likely put pressure on other petro economies to go a similar way.

To quote Paul Krugman (PDF):

Almost everyone believes that the US current account deficit must eventually end, and that this end will involve dollar depreciation. However, many believe that this depreciation will take place gradually. This paper shows that any process of gradual dollar decline fast enough to prevent the accumulation of implausible levels of US external debt would impose capital losses on investors much larger than they currently expect. As a result, there will at some point have to be a ‘Wile E. Coyote moment’ – a point at which expectations are revised, and the dollar drops sharply. …..

You have to love an economist who can invoke the Warner Brothers.

Economic Meltdown News.

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With everything seeming to come apart at once, one wonders if the other economic world powers have decided that the United States is simply too dangerous to allow it to continue it’s role as the worlds sole remaining superpower.

Given that the US spends more on defense than the rest of the world combined, it would be logical to attack where this country is weakest.

In the short run, the fact that the US has rulers who appear to be insane would argue for this, and in the long run, it’s probably to their advantage too.

The dollar vs the Euro, $1.4571:1.0000€.

Oil Hits $97/bbl. Violence in Afghanistan, and a bombing of a Yemeni oil pipeline kicked everything up, as Emeril says, “another notch”.

Oil Hits $97 on Bombs, Demand Forecast: Financial News – Yahoo! Finance

Indymac, one of the largest independent mortgage lenders in the US, reported losses that were 5 times their earlier predictions. The third-quarter net loss for Pasadena, California-based IndyMac totaled $202.7 million, or $2.77 per share. IndyMac had on September 7 forecast a loss of nil to 50 cents per share.

And it appears that the financial upset is roiling the 10 year Treasury note market too.

The bloodbath in credit and financial markets will continue and sharply worsen

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The bloodbath in credit and financial markets will continue and sharply worsen

Indeed, according to a MarketWatch article from September – based on Bernstein Research – many Wall Street firms put an excessive amount of securities in the level 3 bucket that uses unreliable models for valuation. The share securities in the level 3 is:

15% for Goldman Sachs;

13% for Morgan Stanley;

8% for Lehman Brothers;

7% for Bear Stearns

and only 2% for Merrill Lynch.

So, what is a level three asset: Ummm….Basically, it’s sh#@ that you cannot sell, because there is no regular market, and your asset value is pulled out of the ether using models that no one understands.

Merrill Lynch just tanked, and its CEO was fired with just 2% of its assets being level 3, and look at where the other investment banking firms are.

It’s stuff that might be a million dollars, and it might be ten dollars, but you cannot tell until you try to sell it.

Or, to quote the Prudent Bear:

We may be about to find out. From November 15, we will have a new tool for figuring out how much toxic waste is in investment banks’ balance sheets. The new accounting rule SFAS157 requires banks to divide their tradable assets into three “levels” according to how easy it is to get a market price for them. Level 1 assets have quoted prices in active markets. At the other extreme Level 3 assets have only unobservable inputs to measure value and are thus valued by reference to the banks’ own models.

I’m beginning to think that I should put everything in gold under my mattress.*

It’s 1929 all over again.

*Not really. But perhaps moving some more assets to foreign denominated stuff would be in order.

Gisele Bündchen No Longer Trusts the Dollar

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Yes, the dollar has become so weakthat even super models know about it. Gisele Bündchen is now demanding that all her contracts be Euro denominated.

The kicker is, she’s from Brazil….They know what it’s like there to have to get your salary daily because you need to spend it because it will be worthless in a week.

US money is not good enough for her.

Though apparently US guys are (that’s Tom Brady).

Yet another reason to hate the New England Patriots.

OK, I Was Right, How Did I Do That?

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Remember when I said that “Maybe they know that there is some level of bullsh&% in the figures that they cannot trust.” In response to why the Fed would cut rates when the economy was growing at a brisk 3.9% growth rate? I also noted that the markets felt the same way too. The dow fell something like 350 points.

Well, Barry Ritholtz of
The Big Picture gives us all the specifics on what happened. It appears that a measure of inflation, “the price deflator rose a much less than expected .8% vs expectations of 2%.”

Essentially, this is a measure of inflation, and is used to separate out real growth from inflation. By lowering the price deflator, you count inflation as real growth.

The average of the price index since Q1 2004 to Q2007 was 2.98, ranging froma low of 1.7% to a high of 4.2%. Thus, if the deflator matched consensus, it would have generated a GDP of 1.9%; if it was at its recent 3 year average of 2.98%, GDP would be ~1%.

See the graph, and notice the WTF: point.

This I think, is the difference between an amateur (me) and a professional (Mr. Ritholtz). I knew in my gut that something was off, but a professional can tell where, and how.

Economic Update

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Well, the economy logged a brisk 3.9 growth rate, which is pretty stellar, particularly since it would have been about 1% higher if the housing market were not tanking, but still, the Fed cuts rates by 25 basis points.

Maybe they know that there is some level of bullsh&% in the figures that they cannot trust.

In response, the dollar tumbled. The Canadian dollar bought more than $1.06 for the first time since 1957, the Euro broke the $1.45 barrier, going to $1.4503:1.0000€, and the Sterling is now $2.0813:£1.0000.

I said that the dollar would break through $1.50:1.00€ before year’s end, and I stand by that.

As to the Chinese Yuan, it doesn’t move as much, as it it still partially pegged to the dollar,

but it has risen by about 10 % since it became more loosely pegged about 27 months ago.

I expect a run on the US dollar sooner, rather than later, perhaps before the 2008 elections.

Housing Crash: Ohhh!!!! Look at the Pretty Pictures

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Calculated Risk has the following pictures:


The total number of California notices of default


And these are notices of default as a percentage number of houses in California.

Both ways, it’s the highest ever, with about 1/30 ownde occupied houses in default. Not pretty.

The San Francisco Chronicle also has some pretty pictures:


Foreclosures are skyrocketing.

Seeing as how pictures are worth 1000 words, I think that I have written enough.

Financial News, and it is Not Good

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The dollar is at an all time low, $1.4393:1.00€, and $1.0398:$1.00CAD.

Oil is now at $92.79/bbl.

So, the question is now not just whether the fed can cut rates, but if the currency situation has already precluded any more action in that direction.

Even if the fed cuts rates, if the dollar falls significantly, and all indications are that it will, it will push up rates anyway, as the US needs the foreign dollars to function, but those lenders will demand a better return on their investment for the higher perceived risk..

September New Home Sales Up on Suspect Numbers

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I remember when this was occurring routinely with the job reports. For a while, it seemed as regular as a ticking clock, the previous numbers were revised down, and the current numbers were a big gain over the revised numbers. This slight of hand that only convinces the truly dense and economics reporters* served primarily to boost Bush’s numbers.

Well, it appears to have happened again, this time with Housing. New home sales are reported to have 4.8% to a seasonally adjusted annual rate of 770,000 from a revised 735,000 (it was originally 795000) in August. Very convenient how all those revisions work.

So, we were down by 25,000 from the first reported number, but it’s an increase because the number was corrected downward.

Anyone want to guess if this happens next month?

*But I’m repeating myself.

Mortgage Losses Worse Than Previously Believed

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It just gets better and better.

It not appears the Merrill Lynch will take losses of at least $8 billion, up $3 billion from a few weeks ago, they are predicting 2 million foreclosures, 4x the estimate of the Bush administration, and housing inventories are at their highest in 20 years.

This neglects the fact that it’s not just subprime though, so it will get worse.

This has been todays bit of sunshine.

Finally, Someone is Blaming Alan “Bubbles” Greenspan for the Current Economic Crisis

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This getting a bit of mainstream play, because it is on CNN:

But one observer, Tom Schlesinger, the founder and executive director of the Financial Markets Center, a think tank that has followed the Federal Reserve closely for the past decade, believes the blame for the crisis falls squarely on the Fed and accuses the central bank of “regulatory foot-dragging” that has harmed the public.

Schlesinger maintains the Fed’s prevailing regulatory philosophy has shifted from that of 20 or 25 years ago, which in essence was “here is the line between right and wrong, don’t cross it,” to a current underlying policy that “anything and everything that might be called financial innovation ought to be embraced.”

…

He points specifically to the opposition to government regulation that flourished at the U.S. central bank under former Fed chief Alan Greenspan and has continued unabated under his successor Ben Bernanke.

(Emphasis mine)

The article mentions Greenspan’s Randroid* inclinations as an aside though, when they are actually the source of the problem.

He found anything that created disasterous bubbles to be an artifact of man at his most noble.

*He was one of Ayn Rand’s inner circle and bought into her nutzo worldview.