Category: Recession

Economics Update

No Comments

Well, I just overheard on the radio that the Baltic Dry Index, a measure of the cost of shipping, just fell to a more than 5 year low.

Ships are sitting idle as manufacturers try to reduce inventory.

We are also seeing this at the other end of the manufacturer to market equation, with retail sales falling 1.2% in September…And remember, this was before Lehman imploded.

The Federal Reserve’s Beige Book, a report of the state of the economy, is pointing down too, as is the New York Fed’s Empire State Manufacturing Survey.

In energy, crude oil ended at less than $75/bbl today…..One note, when I predicted some time back that we would never see the south side of $100/bbl, I was wrong.

Interestingly enough we are also seeing reports that Paulson can give money to banks, but he can’t make them lend it out, which would seem to imply that we need someone more interventionist at the helm.

Economics Update

No Comments

First the Institute for Supply Management’s manufacturing index just fell off a cliff, dropping to 43.5%, when the consensus was for 49.6%.

This is the lowest number since October, 2001, when manufacturers were freaking out over 911, and the biggest drop since 1984.

The fact that factory orders are down 4%, and that the
Baltic Dry Index Tanks, a survey of shipping costs are also in the tank, reinforce the idea that something is amiss, though I woul,d be remiss not to note that the Baltic Dry Index has a lot of noise in the data, and so is not particularly reliable.

Meanwhile, the marginally less noisy weekly jobless claims number have shown an increase too, up 1000, to 497K.

We also have evidence that the credit freeze up continues, with LIBOR spreads rising, and commercial paper basically going away.

In fact, the spread between two year debt swaps and treasuries hit a record, 167.25 basis points.

It doesn’t help that hedge funds are experiencing problems related to the Lehman collapse, with billions of dollars still tied up with mess, while facing a surge of withdrawals from their clients.

Furthermore, there are rumors of a major insurance company on the verge of collapse, and so borrowing costs for the major insurance companies have spiked.

Things aren’t looking great with college’s finances either, with Commonfund restricting withdrawals from its Intermediate Term Fund, which serves schools and other non-profits, because of liquidity concerns.

On the other side of the ocean, the ECB is openly talking about a rate cut, which has pushed the Euro below $1.40:€1.00.

This is all pushing commodities down in price, with Oil, Gold, and Corn falling on the expectation of a stronger dollar and a weaker global economy.

In banking and real estate, 30-year fixed-rate mortgage rates are up marginally, and Citi bought Wachovia for some magic beans (actually around $1/share), and the FDIC got preferred shares.

While not technically a bank failure, that is what it is in reality.

Oh My God Economics Update

No Comments

I normally don’t note stock market swings, but 778 points after House ‘Phants kill the Paulson bailout bill?

Surprisingly, the dollar is up and oil is down.

Money with half a brain should be fleeing in the other direction, but it appears that European banks are in real trouble too, because their governments are bailing a bunch of them out.

Not that US banks are doing much better, with Citi getting the bits of Wachovia for magic beans.

So not both the US Federal Reserve and various foreign central banks are shoveling money out the door.

Meanwhile, Iceland did what Paulson should have, when it nationalized the Glitnir bank, as has the UK, which has nationalized mortgage lender Bradford & Bingley.


Economics Update

No Comments

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

No Comments

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

No Comments

Again, as this seems, this is only the so called little stuff, because there is a lot of big stuff again

I’ve been firmly in the recession camp of the, “Is it recession yet,” dispute, and the the Leading Economic Indicators falling again reinforces that notion, though the fact that the Philadelphia Fed Factory Index rose runs counter to that, but as it is the first rise in 10 months, I put that one in the outlier category.

Meanwhile, the weekly, and this week affected by hurricanes, new filings for unemployment rose to 455K and housing starts fell to a 17 year low, even as mortgage rates continue to fall.

Of course, not too many people can get the loans these days, because all the money is fleeing to treasuries.

Gas prices tick higher – Sep. 17, 2008

Housing Starts Plummet to 17-Year Low in August – Economy * US * News * Story – CNBC.com

In energy, eased off of a bit, as did gasoline for the first time in 9 days, as the panicking over Hurrican Ike moderated.

Finally, I just want to say that Tom Toles is a bloody genius:

Economics Update

No Comments

You know that there is a problem, when I open with ratings downgrades.

We have S&P downgrading Washington Mutual to junk status, and even more significantly, AIG, the largest insurance company in the world has been downgraded by Fitch Ratings to A from AA-, and S&P and Moody’s downgraded them too, from to A- from AA- for S&P, and to to A2 from Aa3 for Moody’s.

This is ugly, and it is not surprising that the costs of corporate bond insurance has skyrocketed on what is called “counterparty risk” by the MBA types, and the belief that you are dealing with a bunch of lying bastards foo the rest of us.

It’s the same reason that the costs of overnight borrowing has gone up too, with the LIBOR more than doubling from 3.10625% to 6.43750%.

No one knows when the next shoe is going to drop, and even the additional $70 billion that the Fed dropped out of helicopters wasn’t much help.

It’s why we’re seeing Thornburg Mortgage struggle under a sudden onslaught of margin calls.

When Goldman Sachs earnings 70%, even though they hedged against the real estate crash, you know that no one is making money.

And at the end of all this the Fed decided to leave interest rates unchanged, which is not surprising, since they are already pushing on a string.

Meanwhile, the dollar is behaving like my cat when he gets outside in a rain squall, it really did not move, but you can see the conflict between fear driving people to dollars, and the fear of the US financial meltdown driving people away from the dollar.

We actually saw consumer prices fall, driven by falling energy prices (oil is now about $91.15/bbl on demand concerns from the financial meltdown)

Gasoline still went up, driven by the came hurricane refinery concerns that have driven prices over the past 4 or so days.

Economics Update

No Comments

Obviously, with Merrill Lynch ceasing to exist as an independent entity, and Lehaman ceasing to exist completely, it has been a busy day.

This update, therefore just covers the more ordinary stories, as opposed to the 767s slamming into the US financial system, though many of these stories are in fact driven by the bigger stories.

Let’s start with one that has nothing to do with Lehman or Merrill, retail gasoline is up for the 3re time in 3 days, because Hurricane Ike has closed about 20% of US refining capacity.

We’ll see how this shakes out over the next few days, but we also now have another unrelated pice of news, that the New York Fed Manufacturing Index Decreased to -7.4 in September, indicating that it’s not just those Wall Street whores getting it up the ass, it’s all of us, which is why
credit card debt and delinquencies are up the past month.

And now on to the main show:

Economics Update

No Comments

Well, I guess that the lead story has to be Lehman Brothers, which appears to be collapsing Bear Stearns style, and looking for government funding of it’s eventual sale, Bear Stearns style, so negotions with potential buyers continue apace.

The Fed and the Treasury Department appear to be seriously twisting arms to make the deal go through, though they claim that there will be “no federal money” involved.

Seriously, all we are doing here is socializing losses. Nationalize the lot of them, throw out upper management, and go after their bonuses, otherwise, we will see more of the same.

Of course the fact that WaMu just had its ratings cut….again…Means that Paulson may have two things on his “to do” list this weekend.

There are already rumors that Washington Mutual is on the auction block.

In the real economy, the one that the rest of us live in, news ain’t great. The weekly job claims fell, but the 4 week moving average and the continuing claims, continue to rise.

Additionally, retail sales fell again in August, showing a continued weakening in the economy, as does the large gain in business inventory.

Real estate is looking worse and worse too, with foreclosures continuing to increase.

This has driven the dollar down, because it points toward the Fed cutting rates.

In energy, oil is continuing on a downward trend, because of hurricane Ike, selling briefly below $100/bbl (!), though the fact that it’s heading toward refineries is driving gasoline up.

I would note that this is actually normal market behavior. Knock out refineries, and the demand for oil decreases, and the price drops, but the demand for gasoline remains the same, so prices increase.

BTW, I’m not sure what is going on in insurance, but it is clear that American International Group is getting absolutely hammered, and when the subject of the short selling is the largest insurer in the world, something is whack.

Economics Update

No Comments

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

No Comments

Well, the big news is that the US GDP rose by an adjusted 3.3% rate in Q2. The initial estimate was 1.7%, and the estimate for this, the 2nd cut on GDP numbers was 2.7%.

Of course, inflation ran at a 4.2% rate, which puts it back into negative territory, though the economists typically use the “core” rate, 2.1%, even though purchasing energy and food is included in the GDP numbers.

This is reinforced by the weekly unemployment numbers, with new claims down by 10,000 this week, but, “continued claims are now above 3.4 million for the first time since 2003.”

What is going on is that the real estate asset bubble was concealing the fact that productivity from 2000 through 2007, but middle class income fell.

We were working harder for less money, and going into debt because our houses were appreciating.

Things ain’t great in Europe either, with European retail sales falling, though German unemployment fell, even while the German economy contracted….I really don’t get that one.

We do have good news on the monoliner insurers, with MBIA getting a juicy insurance deal thanks to the help of the New York State Insurance Superintendent…..Smells like a backdoor bailout to me.

In the world of home mortgages, it appears that numbers showing a mortgage application increase may be garbage, because they do not account for multiple applications from one person, which is what tends to happen when lenders get pickier about issuing loans.

Finally, oil is down, the dollar is up, and gas prices are down again, more than 45¢ off their peak.

Economics Update

No Comments

Well, once again, we have the financial press, trumpeting so called good news, that US home prices did not fall as fast as the previous month, even though the year over year decline was 15.4%.

They are noting that home sales are up a bit, but they neglect to note how many of these sales are short sales and REO (foreclosure, basically) sales.

The numbers that I’ve seen are around 20-30%, and no one notes that inventory is still at historical highs.

On the brighter side, consumer confidence is up, largely on the fact that Gasoline has fallen over 10% over the past few weeks, as it did again today, though oil is up over concerns regarding hurricane Gustav.

Everyone is expecting a fully coupled worldwide slowdown, and so the Dollar is now at a 6 month high, even though we are seeing signs of commodities bouncing back, at least that’s what the market in copper is showing, with contracts for immediate delivery being rather higher than those for 3 months delivery.

I would also note that Fannie and Freddie are slowing the rate of mortgage purchases for their portfolio, which means two things, that mortgages will be harder to get and more expensive, and that they are “deleveraging”, which is finance speak for trying to get themselves out of the hole that they have dug.

Economics Update

No Comments

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

No Comments

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.

Bad Government Statistics: Owners Equivalent Rent

No Comments

In 1983 they stopped counting actually counting housing costs in the consumer price index (CPI) and started using something called owners’ equivalent rent.

The argument was that it gave a better picture of inflation, but in reality, it just gave a smaller picture of inflation.

Among other things, it would have had the Fed tightening sooner, because inflation would have been high enough in early 2004-2005.

Go to the link for the chart pr0n. Of particular interest is that core inflation would be negative right now if we used the old metric.

Economics Update

No Comments

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.

Economics Update

No Comments

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.