Thursday, August 28, 2008

Barack Obama - a new politics for a new time.

Barack Obama, Illinois

Thursday, August 28, 2008 at 08:00 PM

I get it. I realize that I am not the likeliest candidate for this office. I don't fit the typical pedigree, and I haven't spent my career in the halls of Washington.

But I stand before you tonight because all across America something is stirring. What the nay-sayers don't understand is that this election has never been about me. It's been about you.

For eighteen long months, you have stood up, one by one, and said enough to the politics of the past. You understand that in this election, the greatest risk we can take is to try the same old politics with the same old players and expect a different result. You have shown what history teaches us - that at defining moments like this one, the change we need doesn't come from Washington. Change comes to Washington. Change happens because the American people demand it - because they rise up and insist on new ideas and new leadership, a new politics for a new time.

America, this is one of those moments.
complete speech here

When the U.S. sneezes who catches a cold?

U.S. GDP for the second quarter was revised higher to 3.4 percent today. The most remarkable aspect of the components within GDP was that trade added 3.1 percentage points. Exports grew by 13.2 percent and imports fell by 7.6 percent. The U.S. economy has shifted from supply side to demand side that is it is exporting more than it is importing. This must have severe implications for trading partners and their economies.

The post-olympic slowdown in China is becoming evident but that is not all. The Euro Area economy is expecting another sluggish quarter after the second quarter turned negative. In Germany the situation is similar. Second quarter GDP was negative, albeit coming off of a very strong first quarter, and a number of leading indicators point to further problems ahead. The Ifo business climate index for August dropped to 94.8 from 97.5 in July.

According to
Northern Trust's Asha Bangalore:
"While this is still well above the lows recorded in late 2002, the last time Germany was headed into recession, the speed of the recent fall is disconcerting. Coming hard on the heels of last month’s plunge, the August fall brings the two-month decline to 7.5 points, the sharpest since reunification in 1990."

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Another closely followed forward looking indicator of EA economic growth is the Belgian National Bank business confidence index. The Belgian economy is with 75 percent of its Gross National Product in the form of exports the most open economy in the world, and therefore an excellent gauge for the EA economy as a whole. As a small ray of hope in August the confidence index nudged up to -5.9 from -7.6 in July, the manufactoring sub-component also improved slightly to -8.1. This index posted its largest ever monthly decline from 1.2 in March to -7.9 in April, and stayed negative ever since.

source: Daily Global Commentary
Asha G. Bangalore, Aug. 26

Wednesday, August 27, 2008

A day for the history books

Barack Obama is nominated for election for the office of President of the United States by acclamation!

Jackson Hole paper - much ado about nothing

Franklin Allen in his paper "The Role of Liquidity in Financial Crises" presented at Jackson Hole 2008, looked into the role of financial intermediaries and the markets in providing funds to businesses and households in the context of the 2007 financial crisis. In section II of his paper, Liquidity and the Crisis, he concludes:

"Economic growth remained slow in the first half of 2008, and the persistent weakness in the housing market together with the tightened conditions for credit of businesses and households also weakened the projections for the second half of the year."

Unfortunatelly he does not provide any data that would support the link of strained liquidity provisons from financial intermediaries to said businesses and households and the weakening economy. It is of course perfectly understood if businesses can not finance their liquididty needs by obtaining loans from financial intermediaries theses businesses will have no alternative choice other than file for bankruptcy and this would in the end effect aggregate demand. But Franklin even admits that there are no obvious lending restrictions for businesses and households at this point in time.

"Credit has remained available to the business sector so far, but household borrowing has slowed. Similar changes are occuring in the UK and Europe."

We have reffered to this in a previous post. The ECB has included the "dynamism of loans to non-financial cooperations" in their policy statemets as an argument for raising interest rates in July 2008. The "haircut" on financial debt securities that occured between May 2007 and April 2008 (as shown in the chart below) has so far not significantly impared the availability of loans outside the mortgage arena. It stand to reason that the current slowdown in the economy has its origin not in the credit market. The fact that the Federal Reserve as the only major central bank has lowered interest rates by 325 basis points to 2 percent during this financial crisis is not reason enough to believe otherwise.

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The Fed of course has argued that rate cuts were necessary to counter weakening eonomic growth. By doing so the Fed acts more like the cyclist who makes a mistake and unexpectedly sheers out of line causing his fellow bikers to trip over one another. As the only one left standing he celebrates his victory.

Weakening economic growth coupled with rising unemployment and rising bankruptcies is far more likely to be the result of high inflation than limited liquidity provisions and the Franklin paper did nothing to tilt this in favour of financial intermediaries and the Federal Reserve.

source: The Role of Liquidity in Financial Crises

Franklin Allen, Jackson Hole 2008

read also: CPI at 2% at the end of 1971 - Mr. Bernanke more pragmatism please!
Friday, August 22, 2008

Tuesday, August 26, 2008

Kucinich Wake-up America part II

Here is the video

Kucinich's Wake-up America DNC speech

Dennis Kucinich, (OH-10)

Tuesday, August 26, 2008 at 04:35 PM

It’s Election Day 2008. We Democrats are giving America a wake-up call. Wake up, America. In 2001, the oil companies, the war contractors and the neo-con artists seized the economy and have added 4 trillion dollars of unproductive spending to the national debt. We now pay four times more for defense, three times more for gasoline and home heating oil and twice what we paid for health care.

Millions of Americans have lost their jobs, their homes, their health care, their pensions. Trillions of dollars for an unnecessary war paid with borrowed money. Tens of billions of dollars in cash and weapons disappeared into thin air, at the cost of the lives of our troops and innocent Iraqis, while all the president’s oilmen are maneuvering to grab Iraq’s oil.

Borrowed money to bomb bridges in Iraq, Afghanistan and Pakistan. No money to rebuild bridges in America. Money to start a hot war with Iran. Now we have another cold war with Russia, while the American economy has become a game of Russian roulette.

If there was an Olympics for misleading, mismanaging and misappropriating, this administration would take the gold. World records for violations of national and international laws. They want another four-year term to continue to alienate our allies, spend our children’s inheritance and hollow out our economy.

We can’t afford another Republican administration. Wake up, America. The insurance companies took over health care. Wake up, America. The pharmaceutical companies took over drug pricing.

Wake up, America. The speculators took over Wall Street. Wake up, America. They want to take your Social Security. Wake up, America. Multinational corporations took over our trade policies, factories are closing, good paying jobs lost.

Wake up, America. We went into Iraq for oil. The oil companies want more. War against Iran will mean $10-a-gallon gasoline. The oil administration wants to drill more, into your wallet. Wake up, America. Weapons contractors want more. An Iran war will cost 5 to 10 trillion dollars.

This administration can tap our phones. They can’t tap our creative spirit. They can open our mail. They can’t open economic opportunities. They can track our every move. They lost track of the economy while the cost of food, gasoline and electricity skyrockets. They skillfully played our post-9/11 fears and allowed the few to profit at the expense of the many. Every day we get the color orange, while the oil companies, the insurance companies, the speculators, the war contractors get the color green.

Wake up, America. This is not a call for you to take a new direction from right to left. This is call for you to go from down to up. Up with the rights of workers. Up with wages. Up with fair trade. Up with creating millions of good paying jobs, rebuilding our bridges, ports and water systems. Up with creating millions of sustainable energy jobs to lower the cost of energy, lower carbon emissions and protect the environment.

Up with health care for all. Up with education for all. Up with home ownership. Up with guaranteed retirement benefits. Up with peace. Up with prosperity. Up with the Democratic Party. Up with Obama-Biden.

Wake up, America. Wake up, America. Wake up, America.

Ifo business climate index for Germany worsened further in August 08

As the graph below shows both current assessment and expectations for businesses in Germany have further weakened. The business cycle clock for the manufacturing industry is deep in a downswing and approaches dangerously close recessionary territory. The euro nose-dived on the news selling off more than 1 cent on the U.S. dollar.
Here is the report.
click to enlarge

source: Ifo Business Survey August 2008
Ifo Institute for Economic Research, Munich

Friday, August 22, 2008

CPI at 2% at the end of 1971 - Mr. Bernanke more pragmatism please!

This weekend the economic elite of this country meets at Jackson Hole for the Annual Economic Symposium. One year ago about the same time the topic of the gathering was "Housing, Housing Finance, and Monetary Policy", and it should surprise no one that today's topic of a speech by the chairman of the Federal Reserve, Bernanke, was about "Reducing Systemic Risk". In the introduction to his remarks he said:

"Although we have seen improved functioning in some markets, the financial storm that reached gale force some weeks before our last meeting here in Jackson Hole has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment."

The "financial storm" that swept over the country about 12 month ago is still crippling the financial services industry and the debate is now raging whether its consequences will turn out to be largley inflationary or deflationary for the economy. The recent contraction in U.S. M3 money supply, the sell off in oil and gold togehter with a significant strenghtening in the U.S. dollar are rightly interpreted as a sign that deflationary forces are winning. At least until this dynamic changes again inflation as the primary concern for market participants and policy-makers is off the table. Sure enough in his speech Bernanke included the decline in commodity prices and increased stability of the dollar as encouraging signs for the future, but to be fair with oil in the tripple digits those prices are still dangerously elevated.

By taking all this different economic currents into account I can not help but ask is it really that simple as Mr. Bernanke wants us to believe when he attributed "softening economic activity and rising unemployment" to the crisis in the financial services industry? We can only speculate about the reasons but it is true that M3 money supply, the broadest measure of money stock in the U.S., has contracted significantly from 16% to 2% in the last three month. At the same time M1 and M2 are still robust. In this context it is worth noting that these measures are notoriously volatile and it should surprise no one to see M3 jumping back up in the months ahead. If this dynamic of slumping money supply continues we of course would have a strong reason to be worried, but for now the simple recall of helicopter Ben can help soothe our nerves.

A simple look at the data for assets and liabilities of commercial banks in the United States, compiled by the Federal Reserve Bank of St.Louis, paints a completely different picture. The latest data for Commercial and Industrial loans of weekly reporting by large commercial banks are still growing at 15% in August compared to last year (see chart). Consumer loans are also up 9%. Real estate loans are only up 5% and trending lower as a result of the complete failure of the secondary mortgage market.

click to enlarge

The situation is similar in Europe. According to the President of the ECB, Jean-Claude Trichet, in his latest statement the expansion of bank credit to non-financial corporations thus far remains very robust at 13.6% compared to last year only slightly lower than the 14.2% in the previous month. Loans for households and not surprisingly for house purchase have significantly slowed down according to the ECB. Trichet concludes:

"But, if everything is taken into account, the dynamism of loans to non-financial corporations has given us an overall level of lending to the private sector that is still very dynamic and I would say again that, in that domain too, we have to be respectful and pragmatic and will have to see what the facts and the figures are."

This is the key point: to be respectful and pragmatic. For macroeconomic decision making acting on facts and figures must always be preferred over a simple hunch about the outlook for the economy. Bernanke adds insult to injury when he pads himslef on the back by apperently linking softening economic activity and rising unemployment to gale force winds of the financial storm without delivering the facts.

How difficult it is to maneuver the dangerous waters of macroeconomics can be seen from the example of China where for years the government has tried to prevent overheating of their economy and now is confronted with dangerously rising CPI inflation. Only recently has the government switched back from concerns about infaltion to growth, but this decision is faced with critizism. Michael Pettis, economics professor at Peking University's Guanghua School of Management and writer of the financial blog China Fiancial Markets, worries about the transmission mechanism from high PPI inflation to rising CPI inflation.

A recent surge of fixed assets investment in July (27.3% for the first seven months of 2008) suggests a future surge in industrial production. Faced with a slowdown in global demand this would result in an oversupply of manufactured goods in China which would put downward pressure on prices. Hence the reduction in CPI inflation might be sustainable even with last months' jump in PPI inflation. But Mr. Pettis confesses:

"But I have to confess that I have a problem – perhaps instinctual – with this line of reasoning. It is true that an excess of manufactured goods should put downward pressure on prices of those goods – or at least limit the ability of producers to raise prices – but is this enough to eliminate inflation?"

He argues that excess money growth created access demand and this still must have an impact on the average price level. This could be seen in an increase in the price of food, service sector and/or in the price of manufactured goods that are not in oversupply. The only way for inflation to disappear would be a sudden collapse in money supply caused by rising bankruptcies which put pressure on the Chinese banking system to hoard cash and stop lending. Pettis concludes:

"Unfortunately none of this makes prediction easy, but I think there is one prediction I can safely make: so many years of wild money growth must result in an adjustment and this adjustment is not going to be easy."

Just how difficult this adjustment process can possibly be is illustrated by the CPI inflation rate in the U.S. from 1960 to 1980 (see chart). This period was plagued by four major inflation spikes, one bigger than the other. The chart also reveals something else, namely how wrong policy decicions can have a devastating impact on macroeconomic developments. Thirty-seven years ago in August 1971 President Nixon imposed wage and price controls to combat rising inflation. Inflation reached a temporary peak of 6.19% in 1971 Q1, and had been declining when Nixon imposed the controls in the middle of Q3 (5.46% and 4.26% over Q2 and Q3). It continued to decline thereafter for several more months, reaching a low of 2.18% in 1972 Q2, before reversing
course and marching upwards over the next two years to hit a second temporary peak of 12.38% during the third quarter of 1974. Two more spikes followed making the seventies the worst economic period after the Great Depression.
click to enlarge

source: Reducing Systemic Risk
Ben S. Bernanke
Annual Economic Symposium, Jackson Hole, Wyoming, August 22, 2008

source: Introductory statement with Q&A

Jean-Claude Trichet, President of the ECB, Frankfurt am Main, 7 August 2008

source: Anniversary of Nixon’s price controls

By Michael Pettis, China fianncial markets

read also: U.S. Broad money M3 in sharp contraction in July 2008
Tuesday, August 19, 2008

Wednesday, August 20, 2008

Fed's Lacker on the economy, inflation and Fannie and Freddie

Jeffrey Lacker, a continued dissenter on the FOMC, weighs in on inflation, inflation expectations, the outlook for growth, health of the banking sector and Fannie and Freddie.

He certainly does not think the Federal funds rate should be any lower right now, and in his opinion interest rates are "awfully low" in real terms. He is pretty sure core inflation will go higher before it goes lower.

He thinks the second challenge facing the banking industry is broader than the housing slowdown. Certain portfolios are weakening (commercial real estate loans, consumer loans..) which looks more like a "garden variety weakening credit cycle".

Lacker dissents from Paulson and prefers the GSE's to see "demonstrably privatised". With that he joins a chorus of other prominant market commentators like Greenspan and Arthur Levitt.

click for video

source: Fed's Lacker Clashes With Paulson on Fannie-Freddie

Bloomberg video

Survey finds tightening credit conditions for farmers

Last week we reported how about 60 percent of domestic banks have tightened lending standards. The Federal Reserve Bank of Kansas City in its most recent survey of agricultural credit conditions for the second quarter points to a somewhat similar development. The Tenth District farm income index pulled back in the second quarter, so did capital spending. High input costs such as fertilizer, fuel and chemicals are outweighing record high commodity prices. The expectations for the next six month are even worse. To be fair a net percentage of bankers in the survey still expects farm income and spending to rise towards the end of the year. Not surprisingly rising input costs also boosted loan demand in the second quarter, at the same time available funds decreased. This is expected to be even more alarming in the coming quarters although a net percentage of bankers still expect funds availability to be higher. (see chart)
According to the survey the loan repayment rate has dropped sharply in the second quarter. Loan repayment rates have rebounded slightly. In the second quarter about 50% of bankers reported higher and 50% lower repayment rates. This is expected to become slightly negative in the coming quarters. On a
positive note interest rates for farm operations and real estate are sharply lower from 9 percent to about 7 percent and are almost at their lowest levels since 2000. The report also notes that collateral requirements rose slightly and the number of loans refused due to a shortage of funds held steady.
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Farm land values were flat in the second quarter but nonirrigated and irrigated farmland values are still up 18.3% and 21.6% from a year ago (see chart below). The booming energy industry contributed to rising farm land values in Oklahoma, Colorado, and Wyoming.

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Selected Comments from District Bankers:

“Outlook has changed so much in the last 90 days. While grain prices remain at record levels, operating costs, especially fuel, fertilizer, and repairs have taken away most of the profit. Late planting will affect yields. Outlook not nearly as optimistic!” –
Northwest Missouri
"Input costs continue to drive loan demand.” –
North Central Nebraska

265 banks responded to this second quarter survey in the Tenth Federal Reserve District, an area that includes Colorado, Kansas, Nebraska, Oklahoma, Wyoming, the northern half of New Mexico, and the western third of Missouri.

source: High Energy Prices Slow the Farm Boom

Second quarter Survey of Agricultural Credit Conditions - Federal Reserve Bank of Kansas City

read also: Bank lending surveys reveal further tightening in lending standards

Monday, August 11, 2008

Tuesday, August 19, 2008

U.S. Broad money M3 in sharp contraction in July 2008

The deflation - inflation debate is raging. While inflation indicators are flashing red hot warning signs, commodity prices have come down from their peak levels in early July. A world wide economic slowdown is expected to put the brakes on prices. Another warning sign comes from the growth of monetary aggregates in the U.S. Ambrose Evans-Pritchard, a writer for the Daily Telegraph, points to a sharp drop in M3.

From the Daily Telegraph:
Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.
On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.

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The US Federal Reserve took the controversial decision to stop reporting M3 in 2005 on the grounds that the modern financial system had rendered the data obsolete. Monetarists however insist that M3 still is a lead indicator for asset price moves. The data should be viewed with caution because three-month shifts in M3 can be highly volatile.

source: Sharp money supply contraction points to Wall Street crunch ahead
By Ambrose Evans-Pritchard, The Daily Telegraph

EA June 2008 trade deficit at 0.1 billion euro n.s.a. - exports still strong

EA15 exports n.s.a. grew by 5% in June 2008 compared with a year earlier. In April 2008 exports grew by 16%. In the first six month exports are still up a healthy 7% and imports up 10% from a year earlier. Within the main trading partners exports contracted 4% to the U.S. and 1% to Japan in the January to May period compared to a year earlier. Exports to the UK grew by 2% and exports to China by 15% from a year earlier. Imports from Japan were also negative at -2% in the Jan-May period compared to last year. Within member states exports contracted in the UK by -1% in the January to May period compared to last year. Exports contracted also in Ireland by -5% and Greece by -1% from a year earlier. Exports in Spain and Italy grew by 8% and in Denmark by 10% in the Jan-May period compared to a year earlier. Imports to Spain were up 9% and imports to Italy and Denmark were 7% higher compared to a year earlier. Imports contracted to the UK, Ireland Greece and Estonia.

From Eurostats: EU27 January-May 2008 detailed results:
The EU27 energy deficit increased (-148.6 bn euro in January-May 2008 compared with -102.2 bn in January-May 2007), while the surplus for machinery and vehicles rose (+59.9 bn compared with +44.0 bn).

EU27 trade with most of its major partners grew, with the exception of exports to the USA (-4% in January-May 2008 compared with January-May 2007) and Japan (-2%), and imports from Japan (-3%), the USA (-1%) and South Korea (0%). The largest increases were recorded for exports to Russia (+26%), Brazil (+21%) and China (+17%), and for imports from Russia (+27%) and Norway (+25%).

The EU27 trade surplus fell with the USA (+26.9 bn in January-May 2008 compared with +30.5 bn in January-May 2007) while it increased with Switzerland (+8.0 bn compared with +6.1 bn). The EU27 trade deficit grew with Russia (-31.2 bn compared with -24.1 bn) and Norway (-19.8 bn compared with -13.8 bn), but decreased with China (-60.6 bn compared with -61.2 bn) and Japan (-14.6 bn compared with -15.2 bn).

Concerning the total trade of Member States, the largest surplus was observed in Germany (+83.3 bn euro in January-May 2008), followed by the Netherlands (+18.3 bn) and Ireland (+10.7 bn). The United Kingdom (-50.1 bn) registered the largest deficit, followed by Spain (-41.6 bn), France (-25.6 bn) and Greece (-14.8 bn).

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source: Euro area external trade deficit 0.1 bn euro, 20.1 bn euro deficit for EU27
Eurostat, June 2008
read also: EA May 2008 preliminary trade deficit: 4.6 bn euro

Friday, July 18, 2008

Friday, August 15, 2008

Mortgage rates in the U.S. are ignoring the Fed

The Board of Governours of the Federal Reserve System have slashed interest rates by 325 bp to 2 percent since the credit crises took off in August of last year. The Treasury 10 year Note has bottomed at about 3.3 percent and currently yields 3.8 percent, still lower from the 4.7 percent a year ago. As the chart below shows mortgage rates continue to move higher. The national 30yr fixed mortgage is at 6.4 percent higher than the 6.2 at the end of August 2007. Mortgage rates are moving up on a broad basis while Treasuries are subdued and the Fed has lowered real interest rates into negative territory. It is all but clear that the Federal Reserve is powerless in providing incentives for a turn-around in the beleaguered housing market.
click to enlarge

The reasons for this are less understood, but could it be that behind all the mortgage woes lies a flawed business modell? The biggest driver in the US housing market over the last 10 years was the ability for lenders to securitize loans to borrowers and resell them to investors in the secondary market. This scheme was pursued mostly by investment banks on Wall Street
and contributed substantially to the exorbitant profits in these firms. Eventually securitization has been exposed as a ponzi-scheme and securitised mortgage products are in the heart of the perpetual drive to deleverage the balance sheet of financial institutions. A look at From 10-Q from Merrill Lynch, Lehman and Goldman Sachs reveals a stunning drop-off in cash flows received from securitization transactions within the last 12 month. As of June 27 2008 Merrill raked in only $16.9 billion in securitizations down from $128.1 billion a year earlier. Lehman manged $8.1 billion down from $43.6 billion and Goldman $3.9 billion down from $21.3 billion in securitized cash flow. The failure of the secondary mortgage market has put the brakes on the ability of the Fed to influence mortgage rates and consequently a swift recovery on the housing market.
click to enlarge



FORM 10-Q,


Wednesday, August 13, 2008

U.S. foreclosures up 55 percent in July 2008 - bank repossessions higher

Default notices, auction sale notices and bank repossessions increased 55 percent to 271.171 U.S. properties in July 2008 from same month a year earlier, according to RealtyTrac. The report also shows one in every 464 U.S. households received a foreclosure filing during the month.

From RealtyTrac:

Bank Repossessions (REOs) accounted for 28 percent of all activity during the month, while defaults accounted for 41 percent and auction notices accounted for 31 percent. That is in contrast to REOs accounting for just 16 percent of all activity in July 2007, while defaults in July 2007 were still at 41 percent and auction were at 43 percent. This shift in percentages shows that a higher proportion of properties that enter the forecosure process are ending up repossessed by lenders.

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The continued increase in bank repossessions does not bode well for a swift recovery in housing as the discount on repossessed homes continues to drive house prices lower. It is also stalling the recovery in financials by increasing the loss severity on foreclosures. Finance blogger naked capitalism looked into the relationship between loss severity and annual home price appreciation: "Now look at how high the losses are with merely 3% annual home price appreciation. Imagine what the losses look like with falling home prices."

click to enlarge


By RealtyTrac Staff
source: Quelle Surprise! Banks Taking Big Losses on Real Estate Disposals

Wednesday, August 13, 2008, naked capitalism

read also: U.S. foreclosure activity up53 percent in June 2008 vs a year ago

Thursday, July 10, 2008

That's why we need business cycles

Two unrelated stories caught my attention. One from the German newspaper Handelsblatt the other from the Austrian newspaper Witschaftsblatt. Both deal with rather small companies that are either in or close to bankruptcy.

Modell-train manufacturer Maerklin after firing its CEO is now suing international fiancial advisory firm Alix for reimbursement of millions in advisory fees. Around 6 million euros were payed to Alix in 2006 and 2007. After reducing its workforce, closing a factory and outsourcing production Maerklin is still losing money in 2008. The company was temporarlily unable to service its debt and more lay-offs are scheduled to shore up capital. Stocking manufacturer Kunert is in a similar situation. After paying a lot of money to advisory firm Alix revenues are still declining and in 2007 the company reported a deficit of 14 million euro.

Both firms now want their money back despite the fact that Maerklin owner Kingsbridge recommended Alix for an industry award in 2007, which the firm also promptly received. Klaus Reiners, head of the Bundesverband deutscher Unternehmensberater, is absolutly not aware of any incident where an advisory firm had to reimburse its clients.

CMB, a manufacturer of bio-diesel production facilities, is filing for bankruptcy because a large contractor from Spain refused to sign a letter of credit. That forced CMB into a liquidity crunch which led to the introduction of bankruptcy procedures for the company. Just a short while ago during the days of easy money the company would probably have weathered the financial storm with ease.

This is why we need business cycles. The credit cycle has turned and the chaff is now being seperated from the crop. As the above mentioned examples show, weak corporations with business modells that depend on either the wrong business with the wrong product cycle or whose financial survival depends on one single albeit large contract are in grave jeopardy of closing down. Eventually this should turn out to be a good thing, because it frees up resources which can and will be reallocated when the business cycle turns again.

source: Märklin legt sich mit Beratern an
von Sönke Iwersen,;2022646

source: Ausgleich: CMB stolpert über Spanien-Auftrag

A very very very small light at the end of the tunnel

Toll said 195 total cancellations in the third quarter of 2008 were the lowest number of cancellations for the last two years.

click for video

BoE quarterly inflation report August 2008 update gloomy

Governor Mervyn King updated his latest forecast on growth and inflation in the UK. The bank expects growth now to come in lower than from the previous forecast. The UK economy is expected to grow by just 0.1pc in the first quarter of 2009 down from 1pc at its latest May projection. Inflation is expected to fall below its 2pc target within two years according to Mr. King's report. However, the Bank also warned today that inflation is likely to hit 5pc in the coming months, rather than the 4pc peak it was expecting earlier in the year.

"It may still be summer but there is a feeling of chill in the economic air," Mr King said at a press conference today. "This adjustment to our economy cannot be avoided. As a result, inflation is rising and growth is slowing."

This is what King had to say in May:

"The 'nice' decade is behind us," he said. "The credit cycle has turned. Commodity prices are rising. We are travelling along a bumpy road as the economy rebalances. Monetary policy cannot and should not try to prevent that adjustment. Inflation will return to the target and growth will eventually recover to a sustainable rate. But we will have to be patient."
click to enlarge

source: Bank of England slashes UK growth forecasts

By Angela Monaghan, The Daily Telegraph

read also:A smidgen of reality at the Bank of England
May 15, 2008

Monday, August 11, 2008

Bank lending surveys reveal further tightening in lending standards

According to the latest bank lending survey in the Euro Area from July 2008 the net percentage of banks reporting a tightening of credit standards for loans to enterprises was 43% somewhat lower than 49% in the first quarter. The net tightening of credit standards continued to be stronger for large enterprises (44%, against 53% in the first quarter of 2008) than for small and medium-sized enterprises (SMEs; 34%, against 35% in the first quarter). The net demand for laons to enterprises continued to be negative in the second quarter at -16% against -17% in the first quarter. Loan demand was weaker for large firms at -12% vs -8% fro SMEs. The main factors in the negative net demand were M&As and corporate restructuring and a decline in financing needs for fixed investment. In addition, internal financing was another factor that contributed to lowering net demand for loans to enterprises, pointing to a robust profit situation of enterprises.
Tightening of credit standards for consumer credit increased somewhat to 24% in the second quarter from 19% in the previous quarter. Net demand for consumer credit decreased further to -21% from -13% in the previous quarter. Nevertheless, the level was considerably less negative than the level of net demand for loans for house purchase. The main factor dampening demand was a deterioration in consumer confidence according to reporting banks.

According to the latest Fed bank lending survey about 60% of domestic banks reported tighter lending standards on C&I loans to large and middle-market firms in the second quarter of 2008. About 65 percent of those institutions—up notably from roughly 50 percent in the April survey—also indicated that they had tightened their lending standards on C&I loans to small firms over the same period. About 80 percent of banks—up from roughly 70 percent in the April survey—noted that they had increased spreads of loan rates over their cost of funds on C&I loans to large and middle-market firms, and about 70 percent of respondents—a somewhat higher fraction than in the April survey—reported having widened spreads on loans to small firms. Loan demand for C&I loans weakened further in the July survey period. About 15 percent of small domestic and 25 percent of foreign banks reported weaker demand for C&I loans from firms of all sizes over the survey period.
About 65 percent of domestic banks—up notably from about 30 percent in the April survey— indicated that they had tightened their lending standards on credit card loans over the past three, months, and about the same fraction of respondents—up from roughly 45 percent in the April survey—reported having tightened standards on consumer loans other than credit card loans. Regarding loan demand, about 30 percent of respondents, on net, indicated that they had experienced weaker demand for consumer loans of all types over the past three months, up from about 20 percent in the April survey.

52 domestic banks and 21 U.S. branches and agencies of foreign banks contributed to this survey. The sample group of banks participating in the EA survey comprises 112 banks, representing all of the euro area countries, and takes into account the characteristics of their respective national banking structures.
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source: The July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices

Board of Governors Federal Reserve System


European Central Bank

Sunday, August 10, 2008

Fx: Is carry doomed?

The DailyFX Volatility Index is a composite of the implied volatility in options underlying an equally weighed basket of currencies and measures the general level of volatility in the currency market. A rising index (as seen in the lower left chart) suggest increased option premium buying and generally more active currency markets. It is also unfavorable for carry trades which underperform during high volatility. In recent weeks economic data suggest a marked slowdown in the global economy. Differentials in benchmark lending rates between the U.S. dollar and other currencies (Euro, GBP and Yen) have narrowed indicating diminished expectations for rate increases outside the U.S. The lower right graph shows reduced expectations for the Bank of Japan to raise interest rates over the coming 12 months. The yen is the main funding currency for carry trades. Not surprisingly the DailyFx Carry Trade Index has broken down.

From DailyFx:
While all eyes were on the US dollar’s major breakout effort towards the end of this past week, a look away from the majors revealed another major currency market trend change: the breakdown in the carry trade. By Friday’s close, the DailyFX Carry Trade Index closed at 27,954 after a 571 plunge from last week which brought the basket to its lowest level since April 14th. This sharp reversal officially curbed any speculation that demand for interest rate differentials could push to new highs while risk appetite faded and the potential for returns faded. Not surprisingly, the supplementary data we monitor has deteriorated along with the drop in carry. Action in the currency market drove the DailyFX Volatility Index back above the closely watched 10 percent level. At the same time risk reversals have still favored calls and seemingly beneficial USDJPY bullishness. However, this is a fundamental anomaly. Aside from the USDJPY’s advance this past week, almost every other carry sensitive pair plummeted (thereby driving the Carry Index down).

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In our opinion the breakdown in the carry trade this past week was not a sign of risk reversal but rather of reduced expectations for interest rate differentials between the U.S. dollar and other currencies. As indicated above the dollar managed to break out gains against the yen and equity markets also closed higher on Friday.

source: US Dollar Rally Masks A Severe Carry Breakdown

Thursday, August 7, 2008

German exports again strong in June 2008

Jean-Claude Trichet in his introductory statement to today's rate setting meeting referred to growth in the world economy as resilient benefiting in particular from sustained growth in emerging economies. This should support external demand for euro area goods and services according to the President of the ECB. Some indicators in the euro area economy point to a sharp slowdown in economic activity, but German exports strongly rebounded in the month of June. German exports in June 2008 were up 7.9 percent from the same month last year. Imports were also strong indicating continued strenght in external demand.

From the Federal Statistical Office:
According to provisional data of the Federal Statistical Office (Destatis), Germany exported commodities to the value of EUR 88.3 billion and imported commodities to the value of EUR 68.6 billion in June 2008. German exports of June 2008 were thus 7.9% and imports 5.3% above the respective June 2007 levels. Upon calendar and seasonal adjustment, exports and imports showed opposite month-on-month trends: Exports increased by 4.2%, while imports decreased by 0.1% on May 2008.
The foreign trade balance showed a surplus of EUR 19.7 billion in June 2008. In June 2007, the surplus amounted to EUR 16.7 billion. Upon calendar and seasonal adjustment, the foreign trade balance recorded a surplus of EUR 18.1 billion in June 2008.

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source: German exports in June 2008: +7.9% on June 2007

Federal Statistical Office,templateId=renderPrint.psml
read also: Germany's exports remained strong in May 2008
July 9, 2008

Tuesday, August 5, 2008

China's economy slowing at the worst time

The long speculated post olympic slowdown in the Chinese economy is already underway and threatens to take hold. Exports are barely growing this year and a survey of manufacturing purchasing managers showed an unusual month-over-month decline in new orders in July.

Demand is also beginning to weaken for big-ticket purchases. J. D. Power and Associates just cut its forecast for car sales in China this year to 5.95 million the previous forecast of 6.2 million. In a sign for bigger troubles for the broader economy the real estate market is also weakening with residential real estate prices dropping by 10 percent in certain desirable neighbourhoods olver the last year.

The Chinese government has already taken decisive actions after having put the brakes on the economy in the last five years to prevent inflation from overheating. But will this prevent the slowdown from taking hold is the big question for China and its trading partners around the world. In a good sign economists expect growth to slip only slightly from its recent pace of 11 percent annually to as low as 9 or 9.5 percent over the coming year.

from the NYT:
For example, after letting China’s currency rise sharply against the dollar in the first half of this year, China’s central bank has actually pushed it down against the dollar in each of the last four trading days, including a decline of 0.13 percent on Monday. This is helping to preserve the competitiveness of Chinese exporters in foreign markets, although at the risk of angering the United States and other trading partners.

In the last several days, Chinese authorities have also raised export tax refunds for garment manufacturers — an industry previously slighted by regulators, who remain more interested in promoting higher-tech industries.

Policy makers have also reportedly moved to ease lending limits on banks.

source: Booming China Suddenly Worries That a Slowdown Is Taking Hold


Is there another shoe to drop from over-mortgaged home owners?

Vikas Bajaj from the NYT thinks so. Arrear rates on alternative-A mortgages quadrupled to 12 percent in April form a year earlier and deliquencies from prime loans also doubled to 2.7 percent. The problem is not so much raising interest rates on adjustable rate mortgages but having to pay interest and principal on a special from of mortgages. Some borrowers in option adjustable-rate mortgages, which were a popular alternative for home owners during the boom years, could see their payments jump by 50 percent or more. In focus are again areas like California where the housing boom was most obvious during the boom years. This time it could be particularily hard on regional banks.

from the NYT:
Delinquencies in prime and alt-A loans are particularly challenging for banks because they hold more such loans on their books than they do subprime mortgages. Downey Financial, which owns a savings bank that operates in California and Arizona, recently reported that 11.2 percent of its loans were delinquent at the end of June, a big increase from the 6.1 percent that were past due at the end of last year.

The bank’s troubles stem from its $6.2 billion portfolio of so-called option adjustable-rate mortgages, which allow borrowers to pay less than the interest owed on their mortgage in the early years. The unpaid interest is added to the principal due on the loan, so over time borrowers can owe more than the initial loan amount. Eventually, when loans grow by 10 percent or 15 percent, the borrowers are required to start paying both the interest and principal due.
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source: Housing Lenders Fear Bigger Wave of Loan Defaults


Friday, August 1, 2008

NFP down 51k in July 2008

From the news release 'The Employment Situation in July 2008':
The unemployment rate rose to 5.7 percent, and nonfarm payroll employment continued to trend down in July (-51,000), the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment continued to fall in construction, manufacturing, and several service-providing industries, while health care and mining continued to add jobs. Average hourly earnings rose by 6 cents, or 0.3 percent, over the month.

Non seasonally adjusted employment in the service-providing industry shed 1.4 mln jobs in July from a month earlier. Seasonally adjusted this number is reduced to 5k jobs lost during the month. This is entirely due to school schedule seasonal adjustments since local government employment including education lost 1.16 mln jobs during the month of July. Employment continued to fall in a variety of service-providing industries although gernerally to a lesser degree than in education. Employment services and temporary help services shed 70k and 65k jobs respectively in July. Seasonally adjusted the job losses are smaller at 34k and 29k respectively. Health care on the other hand added 35k n.s.a. and 32.9k jobs s.a. in July.

The Finacial services industry has lost about 116k jobs in during the year to July 2008. Seasonally adjusted this industry lost 118k jobs in a year. Most of this job losses are in the credit intermediation and related activities industry. This industry has lost only 3.8k jobs during the month of July. Maybe a sign of stabilisation in the sector. The investment house Morgan Stanley yesterday announced plans for a "hiring spree". Not surprisingly the real estate industry lost about 2.4k jobs during the month and about 30k jobs in the last 12 month.

The continued uncertainty in the commercial construction business is not reflected in employment at the architectural and engineering services industry. This industry created about 10k jobs n.s.a. and about 2.1k seasonally adjusted jobs.

A disturbing sign is the increase in people working part time for economic reasons, which has increased from 5.69 mln (n.s.a.) in June to 6.05 mln (n.s.a.) in July. Seasonally adjusted 308k more people opted to work part time for economic reasons during the month of July.
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The Diffusion index is also weakening, with the 3-month span below 50 fro 7 month in a row. The 12-month difussion index is also below 50 for 3 straight month. A reading below 50 indicates that more businesses are laying off workers than hiring. This index has not reached the through levels of the 2001 recession yet, I suspect that hirings will pick up somewhat or at the very least stabilize in the second half of the year.
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The last chart compares the historic average weekly hours of production workers for different industries. In July, the average workweek for production and nonsupervisory workers on private nonfarm payrolls fell by 0.1 hour to 33.6 hours, seasonally adjusted. On a positive note goods producing and computer and electronic products are holding up very well with AWH above 40 and 41 respectively. Machinery peaked at 43 at the beginning of 2008 but has since declined to 42. Retail trade is a real negative and shows continued decline with a low of 30 in July 2008.

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In July, average hourly earnings of production and nonsupervisory workers on private nonfarm payrolls rose by 6 cents, or 0.3 percent, to $18.06, seasonally adjusted. Over the past 12 months, average hourly earnings increased by 3.4 percent.


Bureau of Labor Statistics

read also: NFP down 62k in June 2008
Thursday, July 3, 2008