Read Mike Morgan’s essay The World’s Grandest Ponzi Scheme Unravels.
He makes Nouriel Roubini, and for that matter me, look like Panglossian optimists, though he does appear to be a short seller, which means that pessimism is his job.
I’ve shown this scare chart, but it’s time to show it again:
Pleasant Dreams.
Well, the Fed held rates steady, and it appears from their statement that they will hold rates steady.
Honestly, I don’t expect any rate change now before the election. Changing the rates in September or October would lead to complaints of a political agenda.
The Index of Supply Management’s index of non- manufacturing businesses showed continuing contraction in July.
It was up to 49.5, which was above forecast, but anything under 50 is contraction.
For what it’s worth, it looks like Noriel Roubin’s prediction that hundreds of banks will fail as a result of the credit crunch is finally getting some ink at a major news service (Reuters).
I would suggest his blog to get more detail, particularly on his estimate that the Taxpayer will be on the hook for $1-$2 trillion for all this.
Both he, and I, think that the credit crunch will get a lot worse, and stories like former Merrill Lynch superstar Dow Kim shutting down his hedge fund before it started, because investors got skittish and pulled out, would seem to confirm this.
I would also note that delinquent loans are rising for commercial real estate, which indicates that the commercial real estate market is following the residential market down the drain.
In the normal indices, we see the dollar up a bit, and oil and gasoline down for another day.
Thursday, when the Euro Central Bank sets its rates, should be interesting.
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:
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.
Well, the official unemployment rate climbed to a 4 year high, 5.5%, and total number of jobs fell by 51K, the 7th straight monthly drop in a row, in July.
We’re in a recession. Get over it.
Manufacturing actually did a bit better than expected in July, it was flat, though much of that was military and exports driven by a weak dollar, but I’ll take what I can get.
In the monoliner insurance follies, we have good news for AMBAC, they paid Citigroup $850 million to get out of a $1.4 billion guarantee on some collateralized debt obligations (CDO).
It’s being reported as good news for AMBAC, which says something about the qualities of said CDOs.
As bad as the job news was, it was better than expected, so the dollar strengthened in international trading.
In energy, the employment report drove oil up too, though retail gasoline is back below $3.90/gallon. Woo hoo!!
Linen ‘n Things and SHOEQ Shoe Pavilion, both filing Chapter 11, reorganization, as opposed to Chapter 7, liquidation.
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:
It sounds like good news, durable goods orders went higher in June, but it was almost entirely due to defense related purchases.
Real estate is pretty much bad news too, with 2nd quarter foreclosures up 120% year over year, and new home sales down, though not as crappy as expected.
Meanwhile, the National Australia Bank is writing down 90% of its mortgage backed securities, which is a realistic, if somewhat alarming valuation of these instruments.
In the world of retail, we have Rumors that Boscov’s is near collapse. They’re local, so maybe there will be some deals as a result.
More generally, oil and retail gasoline are down, and the dollar is mixed against world currencies.
While the Federal Reserve is afraid to say the word, it appears from their latest report that we are seeing stagflation.
Jobless benefit claims just spiked above 400,000, up 34,000 from last week to 406,000, the highest reading since March.
Again, let me note that the weekly numbers have a lot of noise, but this news still sucks.
What’s more we have increasing evidence that the downturn is not “decoupled”, but is effecting other economies, with consumer and corporate confidence in Europe coming in well below expectations.
Not surprisingly, the bad news out of Europe, which points to interest rate moderation there, has bolstered the dollar.
Some real estate numbers came out today, and they are not good.
home sales fell 2.6% from may, and are now at an annual rate of 4.93 million/year, the lowest rate since 1998.
If you are wondering what might happen when mortgage rates rise, you should break out the popcorn, because it looks like that show might be starting soon. Rates went up 0.37% last week to 6.63% for a 30 year fixed mortgage.
Because of all this, I am not surprised thatthe number of vacant homes has remained at more than 2.2 million.
Energy was flippity floppity today, with oil up by about a dollar, and retail gasoline prices down again.
Well, the Europeans, or at least the Germans promise to be in major freak out mode for a while, as producer prices are increasing at 6.7%, and this means that the Germans, the largest economy in Europe, will be screaming for rate hikes, because it was only 80 years ago that you needed a wheelbarrow or marks to buy a loaf of bread.
Unsurprisingly, this drove the dollar down too, though a contributing factor may be a report published in the financial times that sovereign wealth funds are looking to reduce exposure to the dollar.
There is no stampede, but people are tiptoeing toward the exits on the dollar.
I’m not sure how related it is, sovereign wealth funds hold a big chunk of GSE debt, but Freddie Mac has filed with the SEC to sell stock in order to raise new capital.
In energy, dribbled down a bit* to settle at $128.88/bbl, and retail gasoline fell about a penny.
In investment banking, Merrill Lynch lost $4.9 billion, and Citi lost $2.5 billion, though the latter was better than expected, and Citi will continue paying a dividend, which strikes me as foolish.
In real estate, evidence, in Orange County at least, that commercial real estate is comatose. A 91% drop in building, a 62% increase in vacancy, and a 2.5% decrease in rents.
It’s grim in the UK too, with mortgage lending falling 32% year over year, with near certainty of the central bank increasing rates.
The UK is beginning to look like the San Diego of Europe.
*No Apology for the pun.
Weekly unemployment filings are up 16K from last week, which is not good, but better than forecast, though, as I’ve said before, the weekly data is noisy and not very useful.
On the other hand, the Philadelphia Fed Business Outlook Survey is definitely downbeat, though not as grim as I would have anticipated.
China has problems. While its growth rate slowed to only 10.1% annually(!), inflation remained well above 7%.
Honestly, I think that the fix here is simple, let the Yuan rise some, which would decrease the relative cost of imported energy, and slow exports to cool down the economy, but I do not expect the Chinese central bank to do this.
Housing starts jumped 9.1%, only because of change in NY City building codes, allowing for more multi-residential building. Otherwise it would have been -4%, and construction of single-family homes dropped by 5.3%, hitting a 17 year low.
Seeing as how the Europeans have inflation concerns too, and are talking about ratcheting up rates, it;s not surprising that the dollar fell today.
Oil continues its slide, dropping below $130/bbl for the first time in over a month, though retail gasoline holds at yesterday’s record.
Specifically, where he relates what he said on a Bloomberg TV Interview, where he says that he expects the worst financial crisis cince the Great Depression and worst U.S. recession in decades.
No surprise to me, or his other regular readers, but if you don’t read RGE Monitor regularly, it’s a must read.
I think he’s right, though he may be too optimistic.
He predicted the housing/credit/insurance bubble collapse, but was actually more optimistic that reality.
Well, we have to open up with inflation in the producer price index, 1.8% for June, and 9.2% year over year, though the 1.8% rate actually comes closer to 22% if annualized.
The Fed ain’t cutting rates any time soon, and apparrently neither is the Japanese central bank, which is holding rates steady at ½%. (Talk about pushing on a string!)
Even so, the dollar hit a new record low against the Euro before settling a bit.
Then we have General motors announcing massive job cuts and that it would suspend its dividend, which it has not done since 1922.
So GM paid a dividend throughout the Great Depression, but will not do so now.
Not surprisingly, Bernanke was rather downbeat about the economy in testimony before the Senate Banking Committee.
On the bright side, the doom and gloom has convinced everyone that the US is headed into a severe recession, reducing our demand for oil, so oil prices fell $6.44/bbl, the largest drop since Jan. 17, 1991, when Poppy Bush pulled oil out of the strategic petroleum reserves.
Unfortunately, this has not yet translated to relief at the pump, with retail gasoline hitting a new record high.
In the world of retail, there was a sales increase of just 0.1%, which, as Barry Ritholtz notes, is a a contraction when you figure in inflation, and even worse when you pull out food and energy.
As expected, today was a busy day, we had the ECB raising its benchmark interest rate 25 basis points to 4.25%, though investors were heartened that the accompanying statement appeared to make further hikes less likely.
We also had 62,000 jobs lost in the US, though the statistical witches brew known as the official unemployment rate stayed at 5.5%.
Of course, the “adjustment” for April and May added another 52K lost jobs.
Once again, I have to point you to Barry Ritholtz, who notes that the adjustments to that number are sick:
June 2008 was 177k versus June 2007 155k
Construction Gains +29k
Professional & Business Services +22k
Leisure and Hospitality +86k
Construction gained workers? Leisure and hospitality picked up 86K jobs? When the number of people traveling is dropping?
We need a truth and reconciliation commission for our economic stats generating agencies.
I would also note, as Mr. Ritholtz does, that the number of new unemployment claims jumped to 404,000, which does not include those people who will now get an additional 13 weeks.
What’s more, the SM nonmanufacturing index fell to 48.2% from 51.7%, indicating the service sector is taking it on the chin too.
It appears, however, that investors expected worse, as the dollar actually strengthened after all this.
Behold the power of low expectations.
However, despite the dollar strengthening, oil hit a new record, hitting $145.85/bbl mid day, and retail gasoline hit a new record too.
In real estate, we are seeing home mortgage rates down for the first time in 3 weeks, and we have demand for office space shrinking.
Chart pr0n:
I’ve been saying this for a while, but as I am an engineer, not an economist, dammit,*, but still, I have to wonder why it’s taken so long for the Bank for International Settlements to see that the world economy is in serious trouble, with a possibility of a world wide recession.
When one considers spiking oil prices and a new record for gasoline prices, the news is not going to be good.
Given the dollar’s rather unclear future, along with increased Euro-Zone inflation, which implies more rate hikes, and hence downward pressure on the dollar, things are pretty twitchy out there.
The Chicago Purchasing Manager Index is up, to 49.6 from 49.1 last month, but any number below 50 still represents a contraction.
We can wait for tomorrow’s Institute for Supply Management’s June manufacturing survey to get a better picture.
*I LOVE IT when I get to go all Doctor McCoy!!!
Weekly Jobless claims hold steady at 384,000, though the less volatile 4 week moving average went up a bit, 2,250 to 378,250.
In energy, we have oil hitting a new record. It has broken $140/bbl.
Retail gasoline is flat today.
Existing home sales are up for 2nd time in 10 months, though I think that a lot of that may be short sales and REOs.
We have the latest figures for Q1 GDP, and they show that GDP increased at a 1% annual rate. Note that core inflation was 2.3%, and 1% minus 2.3% does not give one a positive number.
It’s more spending on food and fuel, not real growth.
All this news has the dollar down a bit, and I’m sure that European Central Bank President Jean-Claude Trichet strongly implying more rate hikes did hastened the decline.
Consumer confidence plunges to the 5th lowest level ever, 50.4, as opposed to the predicted 57, from 58.1 last month.
Considering that home prices are down yet again, this time the Case-Shiller index was down 1.4% from March, and 15.3% year over year, it’s natural that people won’t feel confident.
These numbers spooked the currency markets too, with the dollar trending down.
Oil prices are up again, largely because of concerns of instability in Nigeria, though retail gas prices are down $0.003 from yesterday.
And just in case you are wondering, energy inflation is hitting prices more generally, with Dow Chemical raising prices 25%, even though it raised prices 20% last month, and UPDATE: Lowe’s is seeing “unprecedented” price hikes from its suppliers.
Stagflation, here we come.
As to the “stag” part, the fact that Toyota is scaling back its sales goals because of weakness in the economy, even though there are are months long waiting lists for the Prius, would indicate that no one is making good sales right now.
In the interest of fairness though, there are reports that Toyota is cutting back on Prius shipments to the US, because they can get more money in Europe.
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.
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.
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.
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.