Category: Finance

Economics Update

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the producer price index rose 1.2% in July, that comes to about 15% inflation, and the year over year rate was 9.8%.

Inflation is back….Truth be told, it was never gone, it’s just that the government statistics concealed it, and we are now running into the limits of such accounting artistry.

We also are seeing housing starts at a 17 year low, so it looks like stagflation to me.

I just hope that it isn’t an Argentina/USSR style collapse.

I would note that a lot of this inflation is commodities, and they are down.

Both oil and gasoline (33rd straight day) fell again.

That being said, the dollar was down again today. Those inflation numbers probably scared traders.

Finally it looks like Lehman may be forced to sell its money management division in order to raise capital to offset its losses.

Pension Benefit Guaranty Corp. Doubles Down

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As has been known for some time, the Pension Benefit Guaranty Corp. (PBGC) is underfunded as a result of pension obligations that it has had to assume over the past few years, and now its management is looking toward a more aggressive, and hence riskier, investment strategy.

It was 75% to 85% bonds and 15% to 25% in stocks, and it’s going to 45% stocks, 45% bonds, and 10% in “alternative investments”.

Alternative investments? What’s that, rare coins?

I’m a bear by nature, but to me it looks like this has EPIC FAIL written all over it.

Economics Update

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It looks like concerns about GSEs are roiling the markets again, so one wonders when the government will nationalize Fannie and Freddie.

It won’t happen under Bush and His Evil Minions™, needless to say, but I see it as inevitable for the next president.

Meanwhile, energy is still trending downwards, with oil falling as the path of Fay becomes clearer, and gasoline falling fo the 32nd straight day.

The dollar is down a bit, but I’m not sure if this is a pause in a rally as people take profits, or a change in direction.

In any case, it looks like labor day air travel is going to be way down, yet another sign of the slowing economy, and the fact that airlines have become so bloody awful.

Finally, home prices in the UK fell by 4.8% year over year, showing again just how well the “Anglo Saxon Model” of capitalism works when things go bad.

Nouriel Roubini Gets Profiled in the NY Times

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They call him Dr. Doom.

It’s a rather nice profile of Dr. Roubini, though I agree with Paul Krugman that his prediction of a housing crash was hardly unique, and that they missed what was special about his predictions, that there would be as Krugman says, “there would be large “knock-on” effects from the bursting bubble on the financial system”, i.e. the credit crunch as we are currently experiencing it.

Interestingly enough, it looks like the crisis will exceed Roubini’s most pessimistic projections, which is kind of scary.

Economics Update

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You know that the economy is bad when you go broke filling people’s Jones for chocolate chip cookies, but Mrs. Fields cookies is filing for reorg under chapter 11.

The dollar is down a bit, because there is concern that the Fed won’t raise interest rates soon.

Honestly, they won’t raise rates before the election, because that is what the Fed does.

Oil is up a bit, on concerns of the effects of tropical storm Fay on rigs in the Caribbean.

Economics Update

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Today has actually been a good news day, with US industrial production increasing by 0.2% in July, though one should remember that inflation is 0.8%, the the consumer sentiment index rose in Augst, though July was a 28 year low, and the New York Fed Manufacturing Index rose. (no qualifiers on this one, it really appears to be good news)

Good news on all my standard metrics too, oil down, gas down, and dollar up.

Inflation is the fly in the ointment, as Dean Baker notes, because the increased inflation means that the 3rd quarter will almost certainly be a contraction.

I would, however be remiss if I did not note that commodity prices are falling very sharply, which may bring moderation in inflation in the coming months.

In the economic scandals section, we have Wachovia joining the parade of banks and investment houses settling on auction rate securities, to the tune of $5.5 billion.

In the “It should be a scandal,” category, we have S&P deciding not to downgrade MBIA and Ambac, even though anyone with two brain cells to rub together knows that the monoliner insurers are junk

I would also note that I’m wondering if we will see a Peso rally, because Mexico’s central bank just increased rates for the 3rd straight month.

And The Onion is a national treasure:

The Big Picture From The Big Picture: False Foreclosure Bottom

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Barry Ritholtz of The Big Picture notes that the recent data showing a slowing in foreclosures is an artifact of changes in foreclosure law in a few hard-hit states:

  • California requires lenders to wait an additional 30 days after a homeowner misses the first payment before filing a default notice;
  • Massachusetts now gives homeowners a three-months grace period after they default on their mortgage before the lender can file to foreclose. (The law is credited with an 84% drop in foreclosure petitions);
  • New York passed a bill last week that requires lenders to send a preforeclosure notice to certain borrowers at least 90 days before foreclosure proceedings may be initiated;

Of course, the financial press is looking the delays caused by these changes, and running around saying, “Foreclosures are down, the housing crash has finally hit bottom.”

The only place with more false bottoms than financial Journalism is a Beverly Hills plastic surgery clinic.

The only thing that surprises me is that he links to an article that actually points out this fact, though it does have the prize quote, “Some cynics say the laws are designed to give the appearance that the housing crisis is easing ahead of the November elections.”

We cynics prefer to call ourselves the, “Reality Based Community.”

What Roubini and Meyerson Said

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Nouriel Roubini, in The Decline of the American Empire, and Harold Meyerson, in The Drums of Change, both make a very similar point: that America’s time as the sole unchallanged “hyperpower” is coming to an end.

I would have to say that Meyerson is far less interesting than Roubini, he simply notes that the Chinese are growing more powerful by the day, and that Russia is exerting its muscles in its immediate neighborhood.

Roubini, on the other hand, makes it clear that he believes that, “three factors suggest that the US has squandered its unipolar moment and that the decline of the American Empire – as the US was in effect a global empire – has started.” (emphasis mine)

His factors are:

  • Excessive reliance on hard military power, and to unilateral a foreign policy.
  • That other powers, China, a unified Europe, a resurgent Russia, and the rise of regional powers such as Brazil, South Africa, and Iran will mean that the US will find more peers and near peers in the future.
  • That the, “US squandered its economic and financial power by running reckless economic policies, especially its twin fiscal and current account deficits”, which are increasingly financed by foreign governments and foreign investors.

He notes that the movement of foreign reserves from Treasuries to sovereign wealth funds in search of better returns is indicative of the fact that those creditors are nearing a point where they will make demands.

Speaking for myself, and not the good Dr., I would also note that the American way of life, or more accurately the standards of living for the top 1% and the phony economy of Wall Street, have not been sustainable for decades, and the transformation of the US from the largest creditor nation into the largest debtor nation during the Reagan administration shows this.

Economics Update

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Let’s start with the really scary numbers that you need to know:

Meanwhile in Japan, their economy contracted at a 2.4% annual rate, once again showing that decoupling from the US economy is a failed theory.

Still, the president of the ECB, Jean- Claude Trichet is sending out signals that imply that there will be no Euro zone rate cuts, which would imply that the dollar may not have much strengthening left in it.

I would note that businesses don’t put much stock in the economy right now. Inventories increased, but at a less than ½ the rate than the rebate juiced spending by consumers in June, implying that they are expecting a major slowdown.

The saying that, “When the US economy gets the sniffles, the rest of the world gets a cold,” still applies, and so we are still seeing capital flight into the US dollar, which is why it strengthened today.

In energy, oil rose on thighter than expected inventory reports, and retail gasoline has continued its unbroken downward streak.

Was the Fix in on Bear Stearns?

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This is weird. A week before Bear imploded, someone bought $1.7 million worth of put options, 5.7 million at $30 and 165,000 shares at $25, expiring in a week.

The thing was, when he placed the put options, Bear was trading at $62.97.

Which meant that the only way that he could win was if the stock fell by more than 50% in a week:

“Even if I were the most bearish man on Earth, I can’t imagine buying puts 50 percent below the price with just over a week to expiration,” said Thomas Haugh, general partner of Chicago-based options trading firm PTI Securities & Futures LP. “It’s not even on the page of rational behavior, unless you know something.”

…

John Olagues, who started trading options 30 years ago, said he has never experienced anything like it. Olagues, who runs a New Orleans consulting company called Truth in Options, also manages more than $1 million for a client who had a stake in Bear Stearns, which plummeted 94 percent in value on March 17. The drop prompted Olagues to start poring over options trading records and call officials at the CBOE.

“In just one tick, the company’s share price lost nearly all its value, a steeper drop than Enron’s right before its de- listing in 2001,” said 63-year-old Olagues, referring to the bankruptcy of Houston-based energy trading company Enron Corp. “I’ve never seen a stock perform like that in my life.”

Olagues, who was an options market maker at the Pacific Exchange and then the CBOE from 1976 to 1984, said he knows all about so-called time decay, implied volatility, arbitrage and the complexities of options trading. The former all-conference pitcher at Tulane University, who started Truth in Options in 2003, said he has found options transactions that convince him Bear Stearns was the victim of insider trading.

“I would stake my reputation on that,” he said.

But will anyone go to jail? Of course not. Jails are for little people.

Economics Update

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Well, we are now seeing reports that the FDIC is going to have to raise premiums to cover losses from bank failures.

They should have started last year.

Meanwhile, the Chinese economy is showing signs of significant inflation, with China’s wholesale prices rising 10% year over year in July.

The problem here is that the obvious solution, the central bank raising interest rates, will server to further weaken the dollar, which will drive their exports down….Catch 22.

Meanwhile, it appears that Morgan Stanley has problems, because Moody’s just cuts its credit rating to A1 from Aa3 because of losses in the mortgage market.

Interestingly enough, even though Georgia and Russia are in something very close to a war, and the Georgian pipeline is a crucial link for Europe, oil is down, largely on the Iranians agreeing to a new round of negotiations on their Uranium enrichment program.

Gasoline is down again, for the 25th day in a row.

The dollar rose today, probably as a result of concerns about the conflict between Georgia and Russia, which tends to send money fleeing to the relative safety of the US dollar.

And in the, “Funnier if it weren’t so true” department:

And the Award for Best Use of Monty Python in the Context of a Complex Financial Instrument Goes To…

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Mark Gilbert:

CDO Market Is Dead, Not Just Pining for Fjords: Mark Gilbert

Commentary by Mark Gilbert (with apologies to Monty Python)

Aug. 7 (Bloomberg) — Hedge-Fund Guy enters an investment bank. “I wish to complain about this derivative security what I purchased not two years ago from this very boutique,” he says.

“Ah yes, the Collateralized-Debt Obligation,” says the Wall Street Banker. “What’s wrong with him?”

“I’ll tell you what’s wrong with him, my lad. He’s dead, that’s what’s wrong with him!”

Wall Street Banker: “No, no, he’s … restin’.” Hedge-Fund Guy: “Look, matey, I know a dead derivative when I see one, and I’m looking at one right now.”

“No, no, he’s not dead, he’s restin’! Remarkable investment, the CDO, isn’t it? Beautiful plumage!”

“The plumage don’t enter into it. He’s stone dead.”

…

Go read the rest, and don’t try to drink anything at the same time.

Economics Update

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Well, Fannie Mae just posted a $2.3 billion loss, cut its dividend, and is will no longer buy and resell Alt-A mortgages.

That sound you hear is the housing market seizing up, and it does look like mortages will be getting more expensive, and given that the spread between LIBOR and Treasury Bills, the so called “TED Spread”, remains at near historic highs, I don’t really see any unfreezing in the near to medium future.

However, the the US dollar is on a tear right now, and a strong dollar attracts investment, which means that there is more money out there to lend, which might make loans cheaper.

I still think that current interest rates are unsustainably low, but YMMV.

Oil and gasoline are down, as are commodities like copper, silver, and gold.

This points to declining inflation, good news, but only because there are real signs of a deep, hard recession, which is bad news.

The fact that Productivity growth has slowed points to a slowdown too.

I wonder what the moderation in commodities will do to wholesale inventory numbers, which have been up because of price appreciation in said commodities.

BTW, a monoliner insurer just went belly up. ACA Capital Holdings Inc. just terminated $65 billion in credit default contracts, and turned itself over to creditors.

BTW, as a result of the IndyMac implosion, people are starting to split their bank accounts among multiple banks, to ensure that they are all completely covered by FDIC insurance.

I think that we are seeing a generational shift in the attitudes of people about finance and investing.

The Credit Meltdown: The Problem Was Too Little Risk

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Steve Waldman at Naked Capitalism makes a very good point: the problems that led to the credit crunch were not excessive risk taking, but rather an excess of risk aversion.

Essentially, people were not looking to take risks, they were looking at good rates of return from little or no risk, so, for example, since, “Housing never declines in value,” it was safe, and prices “always” go up.

The same goes for the Yen carry trade, where people made money by borrowing in Yen, and investing in dollars, and making money off the spread.

This also gave us the various tranches of CDOs, which are now collapsing.

Investing in risk would be things like alternative energy projects, or improvements in productivity, or new ways to feed the world, and there was no investment in these areas following the dotcom boom.

All the “innovation” that we saw was merely an attempt to break the relationship between risk and return, and it failed.

Citi Settles on Auction Rate Securities Fraud Probe

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They have settled with NY State AG Andrew Cuoma by agreeing to buy back $7 billion in auction rate securities and paying a $100 million fine, and to, “Use its ‘best efforts’ to liquidate” an additional $12 billion in ARS by the end of 2009.

This is about the fact that Citi, and most of the other banks involved in the auction rate securities, sold these as being just as liquid as a money market account, and the market then froze up, locking up $300+ billion.

I would expect increased pressure for other bankers to settle too.