Category: Inflation

Economics Update

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Well, it looks like the credit crunch is thawing a bit, as the dollar LIBOR and the TED Spread have both dropped over the past few days.

Of course, banks are still not lending to anyone other than each other, though.

Yesterday, I mentioned the ISM’s manufacturing index falling. Well today, it’s the full report from the Commerce Department, with factory orders falling 2.5%, seasonally adjusted, which was more than 3 times the predicted number.

In the mean time, the dollar fell the most against the euro since 1999, 2.7%, which is kind of odd, since the stock market was up strongly, in what I call the “No More Bush Rally”.

I think that this is all election arbitrage, kind of a financial rain dance, as is today’s bump in oil prices.

In any case, I would expect that the ECB will be cutting rates soon, which should further buttress the dollar, as their producer price inflation numbers came in below expectations.

Still, we are not out of the woods, as evidenced by soaring bankruptcies in October.

Economics Update

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I guess the news from the central banks is as good a place to start as any.

It looks like the the Federal Reserve’s initiative to buy commercial paper is bearing fruit, to the tune of $145.7 billion between October 27 and October 31….Annualize it out, it’s about 7.6 trillion a year.

I also must note that the Bank of Japan cut rates for the first time in 7 years.

It also looks like the ECB will be cutting rates at their next meeting, because Euro Zone inflation numbers were low.

I’m not sure that it’s going to help when consumer spending is falling, by 0.3% in September.

Remember, even though it seems a very long time ago, the Lehman collapse was on September 15, halfway through the month, so the October will likely be worse.

In real estate, one of the leading indicators, the Architecture Billings Index, which presages construction by 9-12 months just dropped off a cliff.

This ain’t no ‘V’ shaped recession.

In any case, the oncoming recession has significantly lowered commodities prices in October, even oil, which posted a record drop, though it was up yesterday to $67.81/bbl.

GMAC is looking at becoming a bank and restructuring extensively.

Finally some historical chart pr0n, graphs or recent market crashes:

VERY scary image courtesy of Calculated Risk.

Click image for full size graphic.

Can Central Banks MAnage Asset Bubbles

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Alan “Bubbles” Greenspan said that it was impossible, so all that could be done was to clean up afterwards, though it’s clear that Ben Bernanke is s looking at ways for the Federal Reserve to intervene before bubbles get too frothy.

He’s also looking at how excessive consolidation in banks made the current troubles worse.

This is a clear repudiation of Greenspan’s policies and philosophies.

Kevin Drum nails the problem clearly, at least with respect to housing, when he asks when do asset bubbles become inflationary.

While it is hard to claim that the Dot Com boom was inflationary, it’s clear that the housing bubble was. These were not abstract financial assets, they were essentials of life that people pay for, but the Fed, and the BLS, specifically gamed the inflation data so as not to have to count double digit increases in the cost of shelter as inflation.

Of course Alan “Bubbles” Greenspan, who hates wages, but loves unearned income, would never subscribe to the idea that this was inflationary, but he’s a complete wanker.

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.

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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With upwards of 70% of the US Economy being consumer spending driven, it’s not good news that the final for consumer confidence missed expectations, 70.3, as opposed to the forecast 71.0, but it does reflect the fact that the final number for economic growth in the 2nd quarter was revised downward.

The fact that August new home sales are the lowest since 1982, which was not a great year for the economy either, points to the fact that the economy sucks in the real world too.

Of course, while all this is going on, Congress is still fighting over bailing out Wall Street, which has lead to a muddled picture for the dollar.

That beins said, it’s clear that the energy markets are banking on a recession with both oil and retail gasoline heading lower.

All this uncertainty is why 30 year mortgage rates exploded this week, going from 5.78% last week, to 6.09% this week.

31 basis points in a week….Ouch.

FWIW, the central banks are shoveling cash out the door, which will eventually start devaluing the currency (inflation).

Economics Update

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While I am not a strict monetarist by any means, I’m an engineer, not an economist, dammit,*, I think that the fact that central banks are continuing to shovel money out of helicopters upon the financial markets will eventually create some very real, and potentially severe inflation.

In any case, if the spreads between two year interest rate swaps and treasuries hitting a record, 166.38 basis points, is any indication, all this money is not doing much anyway, except possibly pushing the dollar lower.

It’s not not doing much with real estate either, with US existing home sales falling 2.2% in August, and mortgage applications falling 10.6% last week.

This may be why S&P just cut WaMu’s credit rating again.

In energy, oil was down a bit on report of decreased demand, and retail gasoline fell for the 7th straight day.

*I LOVE IT when I get to go all Doctor McCoy!!!

Economics Update

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Once again, the big story is the bailout, which I will not cover here, it gets its own posts, though I will be dealing with some of the market effects of the proposal, which can be viewed as positive, if you are an optimist, or negative, if you are me.

First, the US dollar took it’s biggest hit vs. the Euro in 7 years, because of concerns that this bailout will end up being so expensive that it will debase the currency, and as a result, crude oil climbed the most ever, more than $25/bbl before settling at the end of the day at $120.92/bbl, up $16.37.

You can view the price in oil as a belief among traders that the economy, and hence demand, will be recovering, or you can believe that traders think that this plan will push the dollar over the edge. I think that the contemporaneous fall of the dollar indicates the latter.

The increase in prices appears to be a part of a more general rebound in commodities, though retail gasoline continued its downward path, but gasoline tends to lag oil by a few weeks, as it is actually a manufactured final product, as opposed to a raw material.

In either case, it appears that The Commodity Futures Trading Commission is not taking a close look at oil trading as a result of the volatility today.

The Chicago Fed sees more signs of a recession, reporting a drop in economic activity.

Finally, it there are indications that investors are just beginning to see US treasuries the same way that they did during the Japanese meltdown…You know…the one that lasted fifteen years.

Honestly, if that happens to the US, it will be much worse, because we lack the safety net of Japan.

Economics Update

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Things have seemed pretty hectic today.

Normally I don’t mention this, I think that it is just noise, but all three major stock indices are down 3%+, so while it’s not yet raining Katz and Lehmans, it’s pretty ugly.

Note that this is my economic update post, so I’m not going to claim that a certain VP pick’s speech caused anything, and instead point at jobless claims spiking unexpectedly by 15,000, though truth be told, it should not cause that sort of reaction: the weekly data is simply too noisy for any rational investor to act upon the basis of those numbers.

But this isn’t “rational investors” this be Wall Street, so it could have been the Lehman CEO’s choice of shoes today.

The rest of the financial news is no where near as definitive, and even Federal Reserve officials are publicly disagreeing on whether the concern is recession or inflation.

Meanwhile, even though the Bank of England and the ECB kept rates steady, the cost of money in Europe went up, because the ECB has significantly tightened requirements to lend to banks.

In any case, the lack of rate hikes strengthened the dollar.

Mortgage rates are down this week, which would ordinarily be good news, but I think that “the markets” (and I) see this as a sign of a weakening economy, just as “the markets” (and I) see declining oil prices and declining gas prices as signs of a weakening economy.

Even so, the numbers for the service sector were good, so the blood on the street today is a bit odd.

Of course, it sucks to be a bank right now, with Community National Bank of Sarasota looking to be on the FDIC’s Friday afternoon press releases, and Lehman floating the idea of creating a “bad bank” to shift bad assets to.

Someone needs to explain the concept to me, because it seems to suffer from the, “We’ve run out of gullible idiots,” problem.

In any case, it appears that insurance giant AIG is considering something similar.

I’m not sure how piling crap in a separate pile really helps anything.

Economics Update

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It’s generally not been a good year for manufacturing and construction, with the Institute for Supply Management’s (ISM) manufacturing index falling to 49.9, with any number below 50 meaning contraction, though I wonder how much inflation is being measured as “growth”, which is what I think is driving much of the US Commerce Department data showing an increase in factory orders.

I think that this is entirely export driven growth, a position that the abysmal auto sales reinforces, but these export sales are being driven by a cheap dollar, which will eventually drive interest rates higher in the US (foreigners will demand higher returns), crushing domestic consumption.

That being said, construction is clearly cratering, falling 0.6% in July, twice expectations.

Meanwhile, banking continues to look pretty heinous with the FDIC expanding office space in the expectation of a spate of bank failures, S&P downgrading two regional banks, and suggesting that 37% of regional banks will be down graded.

Additionally, when GMACis laying off thousands, you know that the industry is in dire straits.

With Euro zone inflation falling, it appears that the ECB will hold rates steady, for a while at least, which will serve to keep the dollar relatively strong, as evidenced by the US Dollar’s rise today.

Since the hurricanes in the Gulf were relatively mild, oil and gasoline have continued their downward path.

Economics Update

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Yesterday, I talked about a historically high housing inventory, well, now we have the numbers, 4.67 million, an 11.2 month supply.

Mortgage applications are up this week, but not enough to indicate any sort of resurgence of the housing market.

We have seen an increase in orders for durable goods, but this is almost entirely export driven, which means that US consumption is flat, and if the dollar strengthens further, it’s mixed today we lose what is currently the only major driver of economic growth.

Of course, with the ECB policy makers all pointing in different directions, likely because Germany’s inflation rate is down, it’s not surprising that nothing much is moving in currency right now.

Banking is not looking good period, what with FDIC troubled bank list growing, “117 with $78 billion in assets – up from 90 banks, $26 billion in assets in 1st quarter.”

The credit markets are still frozen, with Merrill Lynch and Wachovia seeing their rates skyrocket as they attempt to rollover bonds, and Fannie Mae just sold short term debt with a spread of 89 basis points vs. US treasuries, which may be a record.

Also, the FDIC is now saying that the IndyMac failure will have a bigger price tag than earlier predicted…..Are we looking at the FDIC needing a bailout?

And it isn’t just banks having problems, personal bankruptcies are surging, with the number of filings in the 2nd quarter the highest since the 4th quarter of 2005, when people rushed to beat the new law.

In energy, oil is up on hurricane Gustav, and gasoline is down again.

Economics Update

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The Philly Fed chief is calling for higher interest rates, because of inflation concerns.

The fact that there are now closings of marginal mines and the like would also indicate that the commodity plunge of the past 6 weeks or so is going to bottom out soon.

Though, truth be told, I’m not sure that it will make much of a difference, as the the fact that spread between LIBOR and the Fed Funds rate is 78 basis points, near an all time high, and an indicator that the Fed has largely lost control over interest rates in the rest of the economy, as well as indicating that the credit system is still frozen up.

Mean while, in real estate, we have bad news presented as good news, with stories trumpeting an increase in existing home sales in July, and soft pedaling a 7% year over year house prices.

Why is this National Association of Realtors (NAR) Bulls$#@?????

Because, Seasonally adjusted it’s ignoring seasonal adjustments July and August are always big months, particularly for parents who do not want their children to change schools mid year. It’s actually the worst seasonally adjusted numbers since 2000.

This is why 75% of Americans have negative view of economy, because the financial press is a bunch of Pollyannas, who ignore the the fact that aggregate weekly hours have been experiencing continuous negative growth on a month-to-month basis since January 2008.

Meanwhile, among the Wall Street Banks, we are now getting reports of a dead pool for Lehman CEO Dick Fuld. He’s expected to be out within a year, which does not bode well for the company as a whole.

Meanwhile, Robert Rubin is stepping down from his position chairman of the board’s executive committee, though he will remain on the board, which probably means something, but I do not know what, but considering Citi’s record, I’m assuming bad news.

Meanwhile, oil is up today, even though the Baku-Tbilisi-Ceyhan pipeline has resumed flow, but gasoline prices continues their downward course.

Thedollar is mixed today.

Economics Update

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Ummm….This is not a day for pleasant economic news.

First, the Leading Economic Indicators indicate a bigger slowdown than anticipated, dropping 3x more than expectations, and then the Philly Fed index fell for the 9th straight month.

Employment isn’t good either. While new unemployment claims fell, the 4 week rolling average rose, and in any case at 432,000 claims (seasonally adjusted, which is the elephant in the room), it’s still too damn high.

If you are a monetarist, then we have more bad news, because the growth rate for M3 has dropped off a cliff (chart pr0n below):


Note that this is a graph or the rate of growth, not the money supply, so the effect on the overall money supply is less than it appears, but, “As a rule of thumb, the data gives a one-year advance signal on economic growth, and a two-year signal on future inflation.”

The chart is a rolling 3 month average of the annual rate, and the rate for May-July is 2.1%, indicating a contraction of the M3 money supply in real terms, which would suggest downward pressure in housing and financial markets.

We also have the Reuters/Jefferies CRB Index of commodities making the biggest weekly jump in over 30 years and oil up by 6 bucks, along with the dollar falling which seems to indicate that the past few weeks might just have been profit taking…a breather before an ascent to the summit, though
gasoline is down over a dollar today.

Economics Update

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As it always is in times of crisis, we are seeing a flight to government bonds. Everything else appears too dicey, with mortgage applications at a nearly 8 year low, estimated food inflation for this year may be at a 28 year high, and home prices in high priced areas falling like a stone, even if volume is up a bit.

In energy and currency, the dollar is up a bit, as is oil, though neither are up significantly, and gasoline is down for the 34th straight day, and it’s now down about 10% from the peak.

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.

Economics Update

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Weekly initial jobless claims came in higher than expected, at 450K as opposed 432K, and the 4 week moving average is 440.5K, the highest number since 2002.

At the same time, the CPI numbers are grim, with prices up 0.8% in July, and 5.6% year over year.

The Europeans are not doing much better, with GDP declining 0.2% in the 2nd quarter.

The European weakness, meant a Euro weakness, with the dollar gaining against the Euro.

These indications of a global slowdown have pushed oil prices lower, and Gasoline is down too.

Don’t expect a real estate recovery to save the economy though, foreclosures are up 8% for the month, and 55% year over year, and home prices have fallen 7.6% year over year.

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.

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, 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.