Man on the Street 64

Do we need Tarp II and Tarp III?

2009-01-09T10:47:00.000-05:00

Anecdotal evidence from American Apparel to natural gas pipeline operator El Paso Corp. suggest that banks are reluctant to lend. There are still plenty of problematic assets on banks' balance sheets.Big banks may face another wave of losses from credit cards, commercial real estate and traditional home mortgages. Credit losses will top $2 trillion, up from around $1 trillion today, according to Nouriel Roubini of New York University's Stern School of Business. Some are already calling for Tarp II and even Tarp III.

From BusinessWeek:
American Apparel (APP) executives should have been focused on the sales of their leggings and T-shirts this holiday season. Instead, management spent most of the critical shopping period worrying about $125 million of debt due on Dec. 19. After weeks of intense meetings with major banks, the trendy retailer landed a last-minute extension on a loan. The onerous strings: a $2.3 million fee and limits on capital spending. "The credit markets are still frozen," says Chief Financial Officer Adrian Kowalewski. "Even companies that are performing well can't get loans at reasonable terms."

....Despite all the government's best efforts in recent months, big banks still aren't lending money freely. One sign of the crunch: New loans to large companies slumped 37% in the three months ending Nov. 30 from the preceding three months. "Banks are being extremely cautious," says Edward Wedbush, chairman of the Los Angeles brokerage Wedbush Morgan Securities.

source: Why Banks Still Won't Lend
BusinessWeek, January 7, 2009
http://www.businessweek.com/magazine/content/09_03/b4116020094458.htm

The Worst Predictions About 2008

2008-12-29T12:56:00.000-05:00

From Jim Cramer's "No! No! No! Bear Stearns is not in trouble", said on CNBC on March 11, 2008, to "I think you'll see (oil prices at) $150 a barrel by the end of the year" by T. Boone Pickens on June 20, 2008.

1. "A very powerful and durable rally is in the works. But it may need another couple of days to lift off. Hold the fort and keep the faith!" -- Richard Band, editor, Profitable Investing Letter, Mar. 27, 2008

At the time of the prediction, the Dow Jones industrial average was at 12,300. By late December it was at 8,500.

2. AIG "could have huge gains in the second quarter." -- Bijan Moazami, analyst, Friedman, Billings, Ramsey, May 9, 2008

AIG wound up losing $5 billion in that quarter and $25 billion in the next. It was taken over in September by the U.S. government, which will spend or lend $150 billion to keep it afloat.
continue reading

source: The Worst Predictions About 2008
BusinessWeek, Monday December 29, 10:46 am ET
By Peter Coy
http://biz.yahoo.com/bizwk/081229/dec2008db20081224028134.html?printer=1

Anglo-American bankers want more power

2008-12-22T09:14:00.003-05:00

First we screw up and as a reward we want more power! - That is the ridiculous plea of leading central bankers in London and Washington. In some parts of the world CEOs of corporations that went bankrupt were asked to commit suicide, but that is not part of the thinking amongst the anglo-american elite. They just want more power.

BoE Deputy Governor Gieve:
"This is a major storm we have not seen the like of for a hundred years. It would be very surprising if we were not learning some lessons from it."

Please do, but first it would be nice to see your resignations.

click for video

Martin Feldstein - a very long and very damaging downturn

2008-12-18T09:41:00.002-05:00

A depressing outlook on the economy with Martin Feldstein, former Council of Economic Advisors chairman/National Bureau of Economic Research president emeritus. Double digit unemployment rate possible!
click for video

source: Digging Out of the Recession
CNBC video with Martin Feldstein
http://www.cnbc.com/id/15840232?video=970465549

The party is over for the next 20 years says BCG

2008-12-09T09:40:00.001-05:00

Boston Consulting Group, one of the leading global management consulting firms, warns corporate banks of the "new normal" in the form of slower economic growth, higher loan losses and scarce liquidity.

“The speed with the adjustment that’s happening now is quite surprising,” said Juergen Schwarz, a senior partner at the Boston Consulting Group who wrote the report, said in an interview. “We will revert back to the ‘new normal’ over the next two years and it will stay there for at least the next 10 to 15 to 20 years.”

source: Corporate Banks Face ‘New Normal’ After Slowdown, Report Says
Bloomberg, 12/9/08
http://www.bloomberg.com/apps/news?pid=20602007&sid=a_hGusUTIcEk&refer=govt_bonds

Roubini on the economic outlook

2008-12-04T13:04:00.003-05:00

The man who saw it all coming, Nouriel Roubini, economics professor at NYU Stern School and chairman of RGE Monitor, warns of a severe recession with a global deflationary risk.
click for video

source: 2009 Recession Will Be Severe: 'There Is a Global Deflationary Risk,' Roubini Says
Posted Dec 04, 2008 12:18pm EST by Aaron Task in Newsmakers
http://finance.yahoo.com/tech-ticker/article/138999/2009-Recession-Will-Be-Severe-%27There-Is-a-Global-Deflationary-Risk%27-Roubini-Says?tickers=^dji,^gspc,TLT,UDN,UUP,GLD,SPY

ECB lowers rates by 75 basis points to 2.5 percent in December 2008

2008-12-04T10:04:00.004-05:00

From the introductory statement:
Looking further ahead, on the basis of our current analysis and assessment, we see global economic weakness and very sluggish domestic demand persisting in the next few quarters. ...Eurosystem staff project annual real GDP growth of between 0.8% and 1.2% for 2008, between -1.0% and 0.0% for 2009, and between 0.5% and 1.5% for 2010. These figures represent substantial downward revisions relative to the previous ECB staff projections for 2008 and 2009 published in September.

Consistent with this assessment, the December 2008 Eurosystem staff projections foresee annual HICP inflation of between 3.2% and 3.4% for 2008 and declining to between 1.1% and 1.7% for 2009. For 2010, HICP inflation is projected to lie between 1.5% and 2.1%. The HICP inflation projections for 2008 and 2009 have been revised downwards substantially in relation to the September 2008 ECB staff projections, reflecting mainly the large declines in commodity prices and the impact of weakening demand on price developments.
Looking through the shorter-term volatility in headline HICP inflation rates, risks to price stability at the policy-relevant horizon are more balanced than in the past.

On monetary analysis:
It should be recognized that the intensification of the financial market turmoil since mid-September marks a potential watershed in the evolution of monetary developments. The most recent money and credit data indicate that this intensification has had a significant impact on the behavior of market participants. Thus far, such developments have largely taken the form of substitution among components of the broad aggregate M3, rather than sharp changes in the evolution of M3 itself.

The latest available data, namely up to the end of October, reveal a continued moderation of the growth rate of loans to the non-financial private sector. At the same time, for the euro area as a whole, there were no significant indications of a drying up in the availability of loans. The annual growth rate of loans to households also moderated further, in line with the weakening of economic and housing market prospects and tighter financing conditions. The data do signal an impact of the intensification of the financial turmoil on bank behavior. Looking forward, more data and further analysis are necessary to form a robust judgment.

A few thoughts from JCT's press conference:
"situation in money markets is tense"
"it is a global phenomenon"

"bank lending surveys clear indicate hardening (conditions)"
"published figures show loans to non financials 11.9 pc increase in Oct08 vs 12.1 in Sep08. Growth remains very impressive. But acceleration of previously committed credit lines and (other factors) are important."

Trichet makes the distinction between deflation and disinflation:
"Today we are not in a deflationary period."

click for video

source: Introductory statement
Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Brussels, 4 December 2008
http://www.ecb.int/press/pressconf/2008/html/is081204.en.html

Krugman on wages and employment in the 1930s

2008-12-03T10:28:00.003-05:00

Nobel laureate Paul Krugman has some interesting thoughts on the effect of wage increases during a period of very low interest rates. At the margin low interest rates can lead to liquidity trap conditions, as experienced for example in the US in the 1930s and Japan in the 1990s. During those times nominal wage increases were generally believed to decrease output and employment (Y). Economists determine an aggregate supply curve (S) that depends on the ratio of the aggregate price level (P) to the wage rate (W):

Y = S(P/W)

Macroeconomic equilibrium is determined by the intersection of the aggregate supply (AS) curve with the aggregate demand (AD) curve, representing the demand side of the economy. By increasing nominal wages the AS curve is shifted upwards, which leads to a higher price level and lower output (see left panel on the chart below).

Krugman challenges this assumption:
"Well, in normal times the AD curve slopes down, we think, because other things equal a higher price level increases the demand for money, which drives up interest rates, which reduces desired spending. (In terms of IS-LM analysis, higher P leads to lower M/P which shifts LM left.) But in liquidity trap conditions, the interest rate isn’t affected at the margin by either the supply or the demand for money – it’s hard up against the zero bound."

click for chart

According to Krugman during liquidity trap conditions there is no adverse effect of a wage increase on output.

source: NOTES ON NOMINAL WAGES AND EMPLOYMENT Paul Krugman 12/2/08 http://www.princeton.edu/~pkrugman/nominal_wage.pdf

Peter Schiff was right

2008-12-01T23:09:00.002-05:00

sooo many other s.c. experts were plain stupid and wrong! Laffert and Stein are two of them.

click for revealing video

Plate tectonics - a shift from paper assets to real assets

2008-11-26T10:20:00.002-05:00

Renee Haugerud, founder and principal of commodities global macrofund Galtere recently was ranked number two HF manager in the world by Trader monthly magazine. She suggests a tectonic shift away from paper assets (equities) to real assets (commodities) is taking place and although the fund is mostly deleveraged she expects a second chance for commodity investments.

"The first sign that you get that deleveraging is over is when the US dollar decouples a bit from the equity market. We have seen some signs of this in the last couple of weeks."

"This is like plate tectonics. This is a shift from paper assets to real assets. This new cycle could last a couple of decades."

She admits that she never was "a big gold bug", but foresees good times for the metal in the future:
"For the first time in a long time I think that gold could be a repository of value going forward."
click for video

source: Hedge Clippings
CNBC, Renee Haugerud, Galtere Ltd. principal/founder
http://www.cnbc.com/id/15840232?video=940553955

Why isn't anyone in jail yet?

2008-11-21T13:54:00.001-05:00

William Black, Associate Professor of Economics and Law at the University of Missouri — Kansas City and a former federal regulator.

Black, who was counsel to the Federal Home Loan Bank Board during the S&L Crisis and blew the whistle on the "Keating Five" in 1989, says investigations have shown fraud incidence of 50% at (once) major subprime lenders like IndyMac and Countrywide.

El-Erian says fix everything and fix it now

2008-11-21T11:24:00.005-05:00

El-Erian and Marc Faber, both astute investors, think the whole economic system is broken (at least in the US, possibly World). Only the government can fix it, and they have to act urgently now. If a recovery does not happen soon the economy will be worse than in the Great Depression.

El-Erian thinks this is a crisis "of the system" not "in the system":
"This is a crisis of the system, which means it morphs and is ahead of the policy makers still", he says.

A few more thoughts from his interview in CNBC:
"The bond market is telling you this is beyond a flight to quality, this is a flight to liquidity," El-Erian said. "There's damage to the system, and what you're seeing is a reaction to that and a reaction in the yield curve."

"TARP II would be done both with capital injection and asset purchases, dealing with impaired assets."

"There is a desire to say well lets choose between this (asset) and that (asset). This is not about local optimization, ...this is about attacking the problem holistically and urgently, otherwise you have to do the same thing again and it costs you a whole lot more."
click for video

Marc Faber, also called Dr. Doom, sees a strong rally happening very soon, because of all the money that governments are throwing at the broken system. He also thinks if the rally does not happen the economic downturn will be worse than the Great Depression.

Marc Faber said on CNBC Friday:
But "I assure you if you throw enough money at the system, eventually you can reflate, especially in the United States," Faber added.

Statistically a rebound should happen, but if it doesn't "the air is out" and the world faces an economy "worse than the depression of '29 to '32," he said.

source: El-Erian on the Markets
CNBC
http://www.cnbc.com/id/15840232?video=935557926

source: Strong Rebound Coming in Next 3 Months: Dr. Doom
CNBC
http://www.cnbc.com/id/27834889

Poole at The Cato Institute's Annual Monetary Conference

2008-11-19T16:33:00.005-05:00

William Poole, Senior Fellow at the Cato Institute, and Former President Federal Reserve Bank of St. Louis, is speaking at a panel during the Cato Institute 26th Annual Monetary Conference on Lessons from the Subprime Crisis and The Way Forward. He identifies excessive leverage at the private sector as the main culprit for the financial crisis and warns of overreaction in the form of over-regulation which is undesirable in his view.

Poole is suggesting to tackle the tendency of excessive leverage by the private financial sector by changing the tax code (I kid U not) and give fiscal incentives to participants who lower their leverage ratios. What a crazy suggestion. There's no method in this madness since this libertarian think tank obviously resorts to tax cuts whenever there is trouble on the horizon and fails to recognize the obvious: changing the statutes of the Federal Reserve, who's misguided monetary policy is responsible for the current crisis, can help to solve it.

source: Cato Institute 26th Annual Monetary Conference, Lessons from the Subprime Crisis
Cato Institute
http://www.cato.org/events/monconf2008/index.html

The Big Three - another break in the bailouts

2008-11-19T14:45:00.003-05:00

Volatility is returning into the EUR/USD exchange market as a bailout of the auto industry becomes increasingly elusive. Senate majority leader Harry Reid acknowledged that congressional efforts to rescue Detroit's Big Three might falter. The White House also quickly denied any desire to step in. In that case it would be up to the new administration to take action.

It is hard to see how in this climate of multibillion dollar bailouts of Wall Street banks, a $25 billion cash infusion into the auto industry seems to be an overreach. After all Washington is populated with monetarists these days. After Lehman this could become the second assault on global financial markets (in particular financial markets in Europe) which inquisitive minds could view as Washington's financial equivalent of declaring war on the Euro currency. Maybe to trash a potential rival reserve currency is the only way out for a beleaguered US dollar!

click to enlarge

source: Democrats seek to lower expectations for bailout
AP, Wednesday November 19, 2:06 pm ET
http://biz.yahoo.com/ap/081119/congress_autos.html

Japan tackles hot topic - Tbonds denominated in foreign currencies

2008-11-19T12:02:00.007-05:00

Yesterday, we got the Treasury International Capital (TIC) flow numbers which underscores an interesting development in recent weeks and months. In all this upheaval of the financial crisis all asset classes declined except the USD and US short and long dated government bonds, which actually increased in value. Brad Setser in his excellent blog for the Council on Foreign Relations (CFR) breaks down the numbers and concludes that "foreign demand for any US bond with a smidgen of credit risk has disappeared".

"Normally, this kind of fall-off in foreign demand would be associated not just with a credit crisis but also with a currency crisis. ....The US, though, isn’t a normal country. The fall in demand for risky US assets was offset by a rise in demand for Treasuries and the sale of foreign assets by Americans."

To illustrate the point click to enlarge the chart

Granted Treasuries are perceived as risk free, yet even Setser admits that "holders of long term Treasuries are clearly holding a lot of currency risk". In this context Yves Smith from the excellent blog "naked Capitalism" picks up an interesting piece of news coming form Japan.

Japanese economists are increasingly concerned with the ability of the United States to finance its enormous deficits. Credit default swaps on the benchmark 10-year contracts on Treasuries have risen to 42 basis points from below two basis points at the start of the credit crisis in July 2007. While Setser still calls this an Armageddon trade foreign officials are not taking it in stride.

Many believe that the dollar looked strong in recent weeks for technical reasons. Money that US financial firms had invested abroad are being repatriated which caused a demand for dollars. Once this subsides there could be a run on the currency. Even if this is exaggerating the situation and we only see a substantial devaluation of the USD, foreign officials will not like to see their Treasury holdings decline in value. This is why economists in Tokyo are now calling for the new administration "to issue US Treasuries denominated in yen and other currencies".

The inevitable consequence of a lack of trust in US financial assets could be that Japan, China and other emerging market central banks will eventually reduce their holdings of US Treasuries. The so called sovereign wealth funds (SWFs) contributing to global capital flows is also increasingly unlikely since those countries will have to fight their own demons on their own turf. The only way to reduce foreign currency risk for the financiers of the US current account imbalances seems to come from US Treasury bonds denominated in foreign currencies. This will not change until the US and global economy are on a clear trajectory to recovery which might not occur for another year or two...and even then it is far from certain that investors will again bestow their trust in US financial leadership.

Yves Smith also delves into the interesting issue of motivation for Japan to tackle this hot topic, after all the author writes, "if America's good buddy and military protectorate is making noises about foreign currency Treasuries, it is hard to dismiss the idea out of hand".

source: You know it is a crisis when the trade deficit could have been financed just by selling t-bills to China and European banks
CFR, by bsetser, posted on Tuesday, November 18th, 2008
http://blogs.cfr.org/setser/2008/11/18/you-know-it-is-a-crisis-when-the-trade-deficit-was-financed-by-selling-t-bills-to-china-and-european-banks/

source: Japanese Float Idea of the Treasury Selling Yen-Denominated Debt
naked capitalism, Wednesday, November 19, 2008
http://www.nakedcapitalism.com/2008/11/japanese-float-idea-of-treasury-selling.html

original news source: Japan economists call for 'Obama bonds'
By Kosuke Takahashi, Asia Times
http://www.atimes.com/atimes/Japan/JK19Dh01.html

How far will the S&P500 fall?

2008-11-18T16:12:00.001-05:00

The first phase in the corrective trend in Elliott wave movements has bottomed. A second wave is about to start once the severity of the current recession will be realized.
click to enlarge

President-elect addresses the nation via YouTube

2008-11-15T08:59:00.003-05:00

President-elect Barack Obama in his weekly address to the country has broken new ground again. 75 years after FDR used a new medium to reach out to his fellow citizens the new president has chosen a new messenger, more appropriate for the 21st century, the video sharing website YouTube.

Today's address concerns the current economic crisis:

Merrill CEO Thain recalls 1929!

2008-11-11T13:43:00.001-05:00

The man who won praise as Wall Street's Mr. Fix-It , Merrill CEO John Thain, says that the current economic environment more closely resembles 1929, the year of the start of the Great Depression. He become CEO of the battled Wall Street firm Merrill Lynch in September 07 and was one of the very few who early on recognized the severity of the downturn. Now he predicts a long and severe recession unlike anything we have seen in recent past.

"Although things are starting to improve, this is going to be a long process, and this is not going to get better quickly," he added. "It is not like '87, it is not like '98, it is not like 2001."

source: Merrill CEO says economic environment recalls 1929
Reuters, Tuesday November 11
http://biz.yahoo.com/rb/081111/business_us_merrill_thain.html

Will China's $586 billion dollar stimulus plan work?

2008-11-11T10:01:00.003-05:00

China is jumping on to the stimulus train with a massive economic stimulus package. The government announced last Sunday that it would boost its economy with a RMB 4 trillion ($586 billion) capital injection. Stock markets around the globe cheered with the SSE Composite surging more than 7%. Though excitement was short lived and markets were again in the red the following day.

Some analysts see the impact of the stimulus plan between 1 and 2 percent of GDP in 2009 (see Pettis, Nov. 11) and others have criticized it outright as being not effective enough. Among those is Mr. Pettis, economics professor at Peking University's Guanghua School of Management. Prof. Pettis is an expert in Chinese financial markets and he protests the argument of the Chinese government that the fiscal stimulus plan is intended to offset flagging external demand similar to the successful 1998 fiscal expansion. In his opinion the Chinese economy has dramatically changed since 1998 rendering the current plan less effective.

Pettis, Nov 11:
But, as I argue in Sunday’s entry, conditions have changed dramatically. First, China’s GDP is about 2.5 times bigger today than it was back then, and exports have grown much faster than GDP, so China is far from being a “smallish” country. More importantly, the world is looking for more demand right now, not more supply. In a global system with so much excess capacity, and with a marked tendency to excess savings (Americans have to save more, Asians don’t want to consume more), I am a lot more pessimistic about the domestic impact of China’s fiscal expansion, especially if the goal is to increase investment. The world will not simply absorb a lot more Chinese capacity. This package is only useful to the extent that it boosts real demand, especially if it boosts household demand, but that doesn’t seem to be in the cards.

The rush of Chinese officials to implement the plan is also of concern for Mr. Pettis. He suspects it is partly intended as "a shock to confidence" because the economy might be actually in worse shape than the numbers seem to suggest. Another reason might be the upcoming G20 meeting where China faces additional challenges. For a pragmatist like me this is naturally on top of the list. In any case we have no crystal ball and we have to wait and see how it plays out. The odds are certainly not in favor of this massive stimulus package rescuing the Chinese and the global economic malaise.

Pettis, Nov 11:
Of course part of the rushed timing is probably to head off potential trouble at the upcoming G20 meeting. By announcing such a large headline package, China can argue that it is contributing both to the global monetary easing as well as to global fiscal expansion. This will take the pressure off other demands – for example one way China can contribute to global expansion is by a more radical reforming of the currency regime, and it clearly does not want to do that. October’s trade surplus – announced today – was 20% higher than September’s all-time record. This won’t make it easier to argue that they desperately need to keep the RMB from rising too much.

source: The RMB 4 trillion fiscal engine seems to be losing steam (My Blog)
By Michael Pettis, Nov 11
http://piaohaoreport.sampasite.com/china-financial-markets/blog/The-RMB-4-trillion-fiscal-packag.htm

ECB cut IR by 50 bp - is not precommitted

2008-11-06T09:51:00.007-05:00

ECB cut IR by 50 bp and lowers outlook for growth and inflation. In the QaA Trichet continues to point the way for 21st century central banks with a pragmatic approach to the level of IRs to guarantee macroeconomic stability.

The Federal Reserve has to follow the ECB by approaching interest rate decisions with more pragmatism and less preemptive precommitment. It will become the new paradigm for all central banks!

Q, On the question if the governing council is now trying to get ahead of the curve by slashing interest rates:
We are pragmatic and we look at facts and figures. (Trichet was referencing to ULC and employee compensation costs which have much increased over the last years) We are doing what is good at any given time without being hampered by being precommitted.

Q, on the role of central banks in general:
We are all doing what is expected under this exceptionally difficult circumstances

Q, Is there more discipline in macropolicy necessary?
We have to take into account to introduce a new framework that would permit to avoid the persistence of very big imbalances both domestic and external. An appropriate level of surveillance and discipline is lacking and has to be reintroduced.
click for QaA

From the introductory statement:
Looking forward, recent sharp falls in commodity prices, as well as the ongoing weakening in demand, suggest that the annual HICP inflation rate will continue to decline in the coming months and reach a level in line with price stability during the course of 2009. Depending, in particular, on the future path of oil and other commodity prices, some even stronger downside movements in HICP inflation cannot be excluded around the middle of next year, particularly due to base effects. These movements would be short-lived and therefore not relevant from a monetary policy perspective. Looking through such volatility, however, upside risks to price stability at the policy-relevant horizon are alleviating.

There is also some evidence in the September data that the recent intensification of the financial tensions has triggered a slower provision of bank credit to euro area residents, mostly taking the form of smaller holdings of securities. At the same time, for the euro area as a whole, up to September there were no indications of a drying-up in the availability of bank loans to households and non-financial corporations. In particular, the maturity composition of loans suggests that non-financial corporations continued to obtain funding, also at relatively long maturities. However, more data and further analysis are necessary to form a robust judgment.

To sum up, the intensification and broadening of the financial market turmoil is likely to dampen global and euro area demand for a rather protracted period of time. In such an environment, taking into account the strong fall in commodity prices over recent months, price, cost and wage pressures in the euro area should also moderate. At the same time, a cross-check of the outcome of the economic analysis with that of the monetary analysis confirms that the underlying pace of monetary expansion has remained strong but has continued to show further signs of deceleration. Hence, when taking all information and analysis into account, there is a further alleviation of upside risks to price stability at the policy-relevant medium-term horizon, even though they have not disappeared completely. At this juncture, it is therefore crucial that all parties, including public authorities, price-setters and social partners, fully live up to their responsibilities. The level of uncertainty stemming from financial market developments remains extraordinarily high and exceptional challenges lie ahead. We expect the banking sector to make its contribution to restore confidence. The Governing Council will continue to keep inflation expectations firmly anchored in line with its medium-term objective. In so doing, it supports sustainable growth and employment and contributes to financial stability. Accordingly, we will continue to monitor very closely all developments over the period ahead.

source: Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Frankfurt am Main, 6 November 2008
http://www.ecb.int/press/pressconf/2008/html/is081106.en.html

http://www.thomson-webcast.net/de/dispatching/?ecb_081106_stream_video

The Speech - Change has come

2008-11-05T09:00:00.002-05:00

favorite quote:
"And to all those who have wondered if America's beacon still burns as bright tonight we proved once more that the true strength of our nation comes not from our the might of our arms or the scale of our wealth, but from the enduring power of our ideals: democracy, liberty, opportunity, and unyielding hope."
read the f ull transcript here

source: FULL TRANSCRIPT: Sen. Barack Obama's Victory Speech
Sen. Barack Obama Delivers Victory Speech from Grant Park in Chicago
Nov. 4, 2008
http://abcnews.go.com/print?id=6181477

Obama's historic victory!

2008-11-05T00:22:00.000-05:00

Taxpayers to the rescue for local communities - No thanks

2008-11-04T09:08:00.001-05:00

Americas state and local governments and municipalities are asking voters to approve record borrowing to fund schools, sewers and other public projects. The approval of $66 billion of public money is needed but most of it might get rejected. Taxpayers are not as receptive this year with a slumping economy and weakening job market. During the general election of 1990, a time when the economy was also slumping, only 41 percent of the taxpayer funded proposals were approved. We wrote about a similar situation in Denmark where community life is deeply impacted by a lack of funding due to the financial crisis. On both sides of the pond taxpayers will have to cover funding shortfalls and they won't like it a bit.

from Bloomberg:
California leads U.S. state and local governments asking voters to approve $66.4 billion in borrowing for schools, sewers and other public works today as a contracting economy and higher costs damp taxpayers' appetite for new debt.

Voters in 41 states from Rhode Island to Alaska are weighing the second-biggest slate of bond measures after November 2006's $78.6 billion, according to Ipreo, a New York-based financial data provider. California has the largest referendum, $9.95 billion in funding for a high-speed rail network, with proposals around the state totaling almost $42 billion.

Taxpayers, who approved an average 82 percent of bonds on local ballots the past decade, may not be as receptive this year. Wall Street upheaval drove interest rates on tax-exempt debt to record highs, hurt consumer spending, increased unemployment and prompted emergency federal government action to shore up the financial system.

``With voters tightening their own belts right now, I would think they would want government to do the same thing and not take on the new debt,'' said John Matsusaka, president of the University of Southern California's Initiative and Referendum Institute in Los Angeles.
continue reading

source: California, Schools Seek Approval for $66 Billion of Muni Bonds
Bloomberg
http://www.bloomberg.com/apps/news?pid=20602007&sid=aYHheYymc6Hc&refer=govt_bonds

source: A crisis' real world example in Denmark's small communities
Monday, November 3, 2008
http://manonthestreet64.blogspot.com/2008/11/crisis-real-world-example-in-denmarks.html

Let the sun shine on credit derivatives

2008-11-04T08:27:00.001-05:00

Starting today the Depository Trust & Clearing Corp. (DTCC) will publish data on CDS contracts which are still traded over the counter. This will bring much needed transparency to a huge market that has cast its shadow over the financial system in the last 12 month. The market is so opaque that nobody knows the actual size of it. The notional value of outstanding contracts varies from $35 trillion to $62 trillion. Some representatives of the industry claim misinformation for discrediting the credit derivative market, but policy makers are wary of such claims after the financial system had to be bailed out with public money to avoid a financial meltdown similar to the Great Depression.

from Bloomberg:
The Depository Trust & Clearing Corp. will publish details of the top 1,000 credit-default swaps today, bowing to regulatory pressure for more transparency in the $47 trillion market.

The data from the DTCC, which operates a central registry, will for the first time offer a clearer picture of the amount wagered on the creditworthiness of the world's companies and governments.

The industry has stepped up efforts to counter critics among U.S. lawmakers and regulators who say the lack of transparency in the market exacerbated the financial turmoil. The collapse of Lehman Brothers Holdings Inc. contributed to a decline in financial markets last month because no one knew how many contracts were outstanding on the securities firm, or who had held them. Estimates ranged as high as $400 billion, though the actual amount turned out to be $72 billion, the DTCC said.

The industry should ``get the word out about the small size of these risks compared to the notional amounts on which the contracts are based,'' said Mark Brickell, chief executive officer of Blackbird Holdings Inc., which provides an electronic trading system for derivatives, and former chairman of the International Swaps and Derivatives Association.

After subtracting redundant trades, only $5.2 billion had to actually change hands, DTCC said last month in what was its first release of data from the warehouse.
continue reading

source: Depository Trust to Provide Credit-Default Swaps Data
Bloomberg
http://www.bloomberg.com/apps/news?pid=20602007&sid=a3sNLNa70g.4&refer=govt_bonds

A crisis' real world example in Denmark's small communities

2008-11-03T09:04:00.002-05:00

This Bloomberg article addresses the impact the credit crisis has on community life in Denmark, where local banks traditionally provided funds to sponsor sports and cultural centers. The country has more banks than any other country in the EU. On average 33 lenders serve 1 million residents. This is changing rapidly in the current crisis and smaller banks get swallowed up. Funds for sports and cultural centers, swimming clubs, local fishing clubs, sailing and soccer clubs are now drying up.

from Bloomberg:
When Danish bank Ebh Bank A/S succumbed to the financial crisis six weeks ago, the fallout didn't just affect customers and clerks. Artists, musicians and swimmers also suffered.

On the day Denmark's central bank was forced to bail out the 110-year-old lender, Ebh Bank yanked sponsorship of a proposed sports and cultural centre in its home town of Fjerritslev, a few miles inland from the North Sea.

``We put the project on hold immediately,'' said Egon Korsbaek, chairman of Ebh, based 150 miles northwest of Copenhagen. ``We've supported large and small projects. We don't think we'll be able to continue with the bigger ones.''

Danes have three times more banks than the average European and the institutions are the biggest backers of sports arenas, fishing clubs and museums in small towns. Sponsorship is now under threat as Denmark becomes the first European economy to enter a recession. Eight banks have collapsed or were rescued or bought since the seizure in credit markets started last year.

Roskilde Bank A/S, rescued by the central bank in August in Denmark's first such bailout in more than a decade, will allow 25 ``major'' sponsorships to run out, spokesman Stig Bo Jensen said.
continue reading

source: Ebh Bank, Sydbank Desert Denmark's Athletes Amid Credit Crisis
Bloomberg
http://www.bloomberg.com/apps/news?pid=20601109&sid=a8SbB1dEzIsQ&refer=news

In Iceland a call for revival of the class struggle

2008-11-02T17:05:00.002-05:00

The people of Reykjavik had enough, now they are marching. In Iceland a call for revival of the class struggle has become louder. The means of the class struggle, the unions, the political parties have been practical inactive for the last 15 to 20 years says one demonstrator.
click for video

SPX off 25% since Lehman bankruptcy

2008-10-31T10:11:00.001-04:00

click to enlarge

Quote of the day - its the c-banks fault!

2008-10-30T10:15:00.007-04:00

European Central Bank Governing Council member Miguel Angel Fernandez Ordonez said Thursday the world's developed economies face a deep slowdown. In his opinion the world's central banks are to blame for the global financial crisis. I guess we all know the major recipient of his message!
Does he think that low interest rates rather than lack of regulation are to blame? There is at least one smart central banker.

"This global, accommodative period, the risks of which were highlighted by some economists at the Bank of International Settlements, surely was the most important factor contributing to the crisis".

CDS settlement and Lehman - the eye of the storm

2008-10-29T11:42:00.003-04:00

CDS settlements are pivotal if one strives to understand the current capital market crisis caused by a severe debt crisis. Yves Smith, creator of the most excellent blog "naked capitalism" sheds light on an interesting link between credit default swap settlements and interbank market rates like LIBOR by referencing a discussion in the current issue of the Institutional Risk Analytics. One of the few positive news in the last couple of weeks coming from Don Donahue, CEO of DTCC, is being challenged. To refresh memory, the DTCC claimed that the net payments on Lehman contracts were a mere $6 billion. This is only part of the truth according to the article since a large number of total holders of CDS for Lehman do not wish to take cash settlement and are expecting to receive the underlying bonds instead. The actual funding needs for CDS contracts linked to Lehman debt might therefore have been closer to the initially suggested $300 billion. This horrible number makes much more sense in light of the devastating effect in interbank lending markets after the surprised Lehman collapse. In the wake of the bankruptcy European Central Bank President Jean- Claude Trichet said U.S. lawmakers must pass a $700 billion rescue package for banks to shore up confidence in the global financial system. ``It has to go, for the sake of the U.S. and for the sake of global finance,'' Trichet said quoted by Bloomberg.

Here are the key passages:
This process of funding the CDS is reportedly a factor behind the high rates of dollar LIBOR in London and illustrates how cash settlement derivatives actually multiply risk without limit. Through the wonders of cash settlement, the derivative-happy squirrels at the Fed, BIS and ISDA created a liquidity-sucking monster in OTC derivatives that multiplies risk many times, for example, above the amount of underlying debt of Lehman Brothers.

We hear that there are more than a few EU banks which wrote CDS on Lehman over the past several years, CDS which were written at relatively tight spreads. These banks did not participate in the DTCC auction and instead have chosen to take delivery on the Lehman debt, forcing them to fund a nearly 100% payout on the collateral. A certain German Landesbank, for example, took delivery on $1 billion in Lehman bonds that are now worth $30 million, and had to fund same. Does this example perhaps suggest a reason why the bid side of dollar LIBOR in London has been so strong?

....the normal operation of the OTC derivatives markets is creating a cash position that must be funded in the real world and is thus distorting these benchmark cash markets such as LIBOR. This distortion is magnified by the dearth of liquidity due to the breakdown in the rules regarding valuation and price. So far, the Fed and other central banks have addressed the on-balance sheet liquidity needs of global banks. But as retail and corporate default rates rise, funding the trillions of dollars in notional off-balance sheet speculative positions in CDS, which become very real and require funding when a default occurs, could prolong the economic crisis and siphon resources away from the real economy.

On September 15 Lehman filed for bankruptcy. A look at the EURUSD exchange rate might help to understand. Decoupling has been put to rest once and for all.
click to enlarge

source: How Credit Default Swap Settlements Are Draining Liquidity From Interbank Market
Yves Smith, naked capitalism, Oct 29, 2008
http://www.nakedcapitalism.com/2008/10/how-credit-default-swap-settlements-are.html

source: In the Fog of Volatility, the Notional Becomes Payable, A Black Hole for Liquidity?
IRA, October 27, 2008
http://us1.institutionalriskanalytics.com/pub/IRAMain.asp

CBOE volatility index at all time high!

2008-10-28T09:18:00.002-04:00

A prominent fear gauge, the CBOE volatility index (VIX) reached 89.53 last week and demonstrates how a high level of uncertainty has infused capital markets. Put buyers are committed to pay outsized premiums to protet their investments. Other volatility indicators are also elevated. VIX's predecessor, CBOE's VXO, which tracks projected volatility for the S&P 100 index .OEX options, surged 15.75 percent to 79.36. But it was well below the 150.19 reading set during the 1987 crash.

click to enlarge

A market veteran's view

2008-10-27T16:04:00.002-04:00

A market veteran who obviously was a witness to the 1929 market crash and the following depression years thinks that the "market will turn around in a week or so". Let's see if he gets it right.

click for video

source: On the verge of a new bull market?
Fox Business News
http://cosmos.bcst.yahoo.com/up/player/popup/index.php?cl=10403449

Global financial rescue plan - a drop in the bucket

2008-10-12T17:50:00.002-04:00

Willem Buiter, Professor of European Political Economy @ the London School of Economics and Political Science, submits following "rather specific" action plan to solve the financial crisis:

(1) Public guarantees of interbank lending between banks in different national jurisdictions. This could be implemented by national central banks acting as counterparty of last resort in the (unsecured) interbank markets.

(2) International agreement on limits on public guarantees for other bank liabilities and for liabilities of other highly leveraged institutions. This includes agreements on terms and conditions attached to such guarantees.

(3) International agreement on recapitalisation of banks with significant cross-border activities.

(4) Fiscal bail-outs of countries whose systemically important banks have a solvency gap that exceed the government’s fiscal capacity.

(5) International agreement on mandatory debt-to-equity conversions for banks and other highly leveraged institutions.

(6) International agreement on avoiding a moral hazard race to the bottom for deposit insurance through limits on deposit insurance (this is really as special case of (2)).

(7) International agreement on common access rules and common methods for valuing illiquid assets in different national TARP-like structures.

(8) International agreement to adhere rigorously to mark-to-market accounting and reporting principles and on common rules for relaxing regulatory requirements attached to marked-to-market valuations.

Buiter comes up with a great action plan, but I am not sure if it would solve the problem. In order to do just that first we have to understand what the problem is. Nouriel Roubini calls it the "mother of all bank runs", a run on the shadow banking system of over the counter derivative contracts called credit default swaps (CDS). The size of this unregulated market was $62 trillion at the end of 2007. It therefore by far exceeds all government measures combined.

Last Friday CDS contracts with bankrupt Lehman were auctioned at less than 10 cent on the dollar, which means that counterparty obligations are more than 90 cents on the dollar. Now everybody wants to get out and CDSs are sold at fire sale prices. This is eroding the capital of banks and drives them into bankruptcy. All the government actions combined cannot stop it because the capital injections are insufficient.

Instead of focusing only on capital injections we should also convene a global international banking conference, where CDS contracts will be mutually canceled. After all they have been agreed upon over the counter, it should be possible to cancel them the same way. The number of banks could be limited too, since only large banks are system relevant. Nevertheless every bank should be allowed to participate and CDS should be worked off contract by contract.

We all witnessed the carnage on the balance sheets of banks when subprime securitzed mortgage loans were sold at fire sale prices. The subprime market was $1.5 trillion. Now we are in the middle of face two, the selling of CDS contracts at fire sale prices. Only this time the market is about 50 times larger. Without global agreement on canceling this contracts the meltdown will continue.

source: Action plan - my foot
Financial Times, Maverecon Blog, Willem Buiter
http://blogs.ft.com/maverecon/2008/10/action-plan-my-foot/#comment-5245

RGE monitor
Nouriel Roubini
http://www.rgemonitor.com/

You Know times are different

2008-10-10T13:30:00.002-04:00

when villains try to become saints. Criminal narrator boosting crude, aka CNBC, is pleading to CEOs of financial firms to become clean and tell the truth. "It is your duty", says the anchor. Where were those converts when we needed them.
Witness this holy conversion on video here

source: An Open Invitation
CNBC managing editor Tyler Mathisen sends an open invitation to fund managers and other financial leaders to come on CNBC and discuss what's going on right now. http://www.cnbc.com/id/15840232?video=884904528

A day of reckoning for financial counterparties

2008-10-10T08:38:00.006-04:00

From dailyfx.com:
"The auction of Lehman CDS contracts will be a major event today as it will determine the level of what will be the biggest CDS payout to date. The proximity of this may have been a big reason why credit markets have remained frozen despite the considerable policy interventions. Counterparty losses could be considerable; Lehman's $128 billion of bonds were trading on Thursday at an average of 13 cents on the dollar, suggesting credit swap sellers may have to pay 87 cents on the dollar to the buyers of default protection. More than 350 banks and investors have signed up to settle credit-default swaps tied to Lehman. Earlier this week the value for bonds of Fannie Mae and Freddie Mac were priced as low as 8.5 cents on the dollar, at most, because the debt is backed by the government."

update Oct.10 4:19 p.m.: What a day in the markets!
Bloomberg reports :
Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have to pay holders 91.375 cents on the dollar, setting up the biggest-ever payout in the $55 trillion market. Based on the results, sellers of protection may need to make cash payments of more than $270 billion, BNP Paribas SA strategist Andrea Cicione in London said. The potential payout is higher than the 90.25 cents indicated by initial results from the auction earlier today. Lehman bonds traded yesterday at 13 cents on the dollar, suggesting a payout of about 87 cents was expected.

The auction started at 10:30 a.m. and ended at 2:00 p.m. NYT. Here are a few charts that illustrate the disappointment and the relief-rally which underscores tremendous volatility and uncertainty in the markets. The clearing of Lehman's credit default swaps is an encouraging sign but it is only a first step towards functioning credit markets.
click to enlarge

The global credit crisis might be on the mend, at least for now. "Lehman credit default swap sellers posted collateral and no firms failed", according to a statement from the International Swaps and Derivative Association.

source: Lehman Credit-Default Swaps (CDS) Auction on Tap - Debt Insurers Expect Losses
dailyfx.com, Friday, 10 October 2008 07:19:43 GMT
http://www.dailyfx.com/story/market_alerts/fundamental_alert/Lehman_Credit_Default_Swaps__CDS__Auction_1223623206912.html

source: Lehman Credit-Swap Auction Sets Payout of 91.38 Cents on Dollar
By Shannon D. Harrington and Neil Unmack, Bloomberg, 10/10/08
http://www.bloomberg.com/apps/news?pid=20602007&sid=aLkOZnNcDmSQ&refer=govt_bonds

Warren Buffett's usual suspects - the three "I"s

2008-10-02T00:15:00.005-04:00

Warren Buffett in his fine, crafty style demonstrates again why he is the most successful investor in the history of capital markets. In his conversation with Charlie Rose he is on the beat at the current crisis and he offers three "I"s as his usual suspects:

"The innovators, the imitators, and the idiots"

Keywords during the conversation:
bailout, credit crisis, philanthropy, wall st., Berkshire Hathaway, Melinda Gates, Bill and Melinda Gates Foundation, Warren Buffett, economy

click for video

source: An exclusive conversation with Warren Buffett
Charlie Rose on PBS, 10/01/2008
http://www.charlierose.com/shows/2008/10/01/1/an-exclusive-conversation-with-warren-buffett

Wesbury the Anti-Roubini

2008-09-30T18:10:00.005-04:00

I always defended Brian Wesbury because I thought that his outlook for the economy was spot on. Wesbury, chief economist at First Trust Advisors, insists that the troubled US economy will avoid a recession which is a fairly lonely position these days even among economists. Though his view on FASB 157, SEC imposed fair-value accounting rules, misses the point.

"Things would heal very rapidly in this market", if the SEC would suspend fair value accounting rules, opines Wesbury. Fair-value accounting has made things worse for banks. The real value of troubled assets on the balance sheet of banks is much higher as these rules suggest because 75 percent of subprime mortgage payments are still current and on time.

Asked about the fact that the market should set the price for this hard to value assets and financial institutions should be honest about it, he maintains that the rule is bad. The bid on the table (market to market) counts only if you have to sell. "Even if you don't sell you will have to take the loss, that's why the rule is bad", says Wesbury. What he does not seem to understand is that banks use assets on their balance sheet as collateral for doing business. Hence market to market accounting is a necessity.

As everyone except Wesbury knows "Enron accounting" is illegal and banks had to reroute risky assets (from ABS to credit derivatives) from off shore accounts and SIVs onto their balance sheets. The banks are now stuck with these assets because there are no bids on the table or the bids are so low that they would bankrupt the balance sheet. A suspension of FASB 157 would therefore do nothing to alleviate the solvency problem of financial institutions caused by erosion of their capital. Only a massive injection of capital can avert a financial implosion. To his credit Wesbury is in favor of the $700 billion bail out plan, which would help to recapitalize financial institutions.

If he is dead wrong on this critical issue of solvency I suspect that his outlook for the economy is loosing its merit too. Below is the complete CNBC interview.
click for video

source: Attention Turns to the Fed
CNBC
http://www.cnbc.com/id/15840232?video=873327293

source: SEC And FASB: Clarifications on Fair Value Accounting
SEC
http://www.cnbc.com/id/26961218/site/14081545/

Republicans are building a new house when the hurricane hits

2008-09-26T13:45:00.007-04:00

"WaMu becomes biggest bank to fail in US history". That is just one of the headlines flashing from news tabloids. House Republicans under the influence of their aspiring presidential candidate John McCain are retreating from a $700 billion rescue package for troubled financial institutions, proposed by their own Bush administration. By many this is conceived as nothing but political posturing by the Republicans and McCain, counting on a broad based public resistance to the administration's plan.

After years of agreeing to the bail-outs on Wall Street perfected under ex Fed-chairman Alan Greenspan, the Republicans seem all so sudden to become moralists and want to rely on the free market to solve the situation. In their opinion the free market approach is working and they point to JPMorgan's takeover of Wahington Mutual, the beleaguered mortgage lender, as an example.

The bank eventually failed in what has become the biggest bank failure in US history. A common thought is that JPMorgan Chase made a killing in this deal after all they had only to pay $1.9 billion for the thrift's banking assets. Other bidders for WaMu did not seemed to be that enthused. In the open bidding process there were evidently no bids for the troubled bank. JPMorgan is also expected to write down $31 billion of WaMu's loan portfolio. Another troubling aspect is the secret bidding process that obviously led to the final sell, and the way how it rushed through in an obvious attempt to avoid a general run on the bank that could have spread to other financial institutions. One can't help but ask is it really the free market that is working here or more likely panic that has befallen Wall Street and Washington alike?

Yet some Republicans under John McCain seem to suggest that the free market is working, contrary to all the indicators that point towards a banking system that is in a nuclear freeze. Diverse money market indicators, like the TED spread or LIBOR, have blown out, and corporate default swaps to insure debt obligations from Goldman Sachs and Morgan Stanley seemed to suggest imminent failure. Either the Republican aspirant for the Office of President is delusional about the current state of the financial markets or he is gambling the world's economic potential for political posturing.
click to enlarge

Clearly there is a sense of despair in Washington and Wall Street that is not unlike the one that ushered in the Great Depression in the 1930s. Then Secretary of the Treasury Andrew Mellon advised President Hoover to resort to a shock treatment. This famous quote ushered in the Great Depression: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.... That will purge the rottenness out of the system....". Purging it did but it also contracted GDP by almost 30 percent from 1929 to 1933.
click to enlarge

Jack Burman, a Republic Strategist, walks with Mellon's shoes when he opposes the bail-out plan and asks the question why are recessions important? "You need to sweep away the crooks, the bums, the inefficient..." He has also an answer to the possibility of a deep recession. "Its not the government's job to worry how deep the recession gets."

This sounds awfully lot like shock treatment and it does not resemble anything the followers of Keynes have stood for in the last 30 years. While I could certainly see a need to debate this issues I think this is not the time to do it. You don't change your strategy during a crisis. You do it either before or after.
click for video

source: Great Depression
From Wikipedia, the free encyclopedia
http://en.wikipedia.org/wiki/Great_Depression

source: Wachovia Credit-Default Swaps Soar to Record After WaMu Failure
Bloomberg
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aRTfhWFopT0E

source: The Bailout's Benefactors
CNBC
http://www.cnbc.com/id/15840232?video=868700977

In Germany Recession is closing in - Ifo September 2008

2008-09-24T10:56:00.002-04:00

The Ifo Business Climate for industry and trade in Germany has again cooled in September.

click to enlarge

source:Ifo Business Survey September 2008
Ifo Institute for Economic Research, Munich
http://www.cesifo-group.de/portal/page/portal/ifoHome/a-winfo/d1index/10indexgsk

Why are Broker/Dealers dropping like flies?

2008-09-24T09:39:00.005-04:00

The chart below offers a perfect explanation. Broker/Dealers are faced with the challenging task to roll over a quarter of their assets every night. When crisis hit short term financing is harder to obtain and the roll over stops. In order to stay solvent they have to sell assets at fire sale prices (if they can sell them at all). Hence the margin/haircuts erode their capital base and equity shrinks. If they cannot get a capital infusion (volatility is high, equity is low and the dilution effect is high) they are forced to sell even more assets at fire sale prices. This creates a "loss spiral" that will eventually drive them into bankruptcy.

That's why it is crucial that the government steps in and buys up assets at a premium price (according to Bernanke testimony close to maturity). The idea this would stop the "loss spiral". The question being are 700 billion dollar enough or do we need another capital infusion of this magnitude? This could very well overwhelm authorities and make a financial meltdown unavoidable. The Austrian's Mises and Hayek might eventually be proven correct and the neoclassical concept of economics need revision.
click to enlarge

Unfortunately the chart does not include commercial banks. The situation might be similar. It would be interesting to see how much of their assets are financed in the overnight repomarket.

source: Thoughts on a New Financial Architecture Markus Brunnermeier,
Crisis on Wall Street Panel Discussion - September 23, 2008
http://econ.princeton.edu/news/crisis-panel.html

source: Statement of Ben S. Bernanke before the Committee on Banking, Housing, and Urban Affairs
September 23, 2008
http://banking.senate.gov/public/_files/BERNANKEStatement092308_SenateBankingCommittee.pdf

source: Austrian School
Wikipedia.org
http://en.wikipedia.org/wiki/Austrian_school_of_economics

Who's afraid of Lehman Brothers?

2008-09-15T17:31:00.003-04:00

When Lehman filed for chapter 11 on 01.45 a.m. Monday morning, it included a list of the 30 largest counter parties to the firm. On top of the list is Citibank with approximately 138 billion USD of unsecured claims as of July 2, 2008. Other counter parties are Bank of NY Mellon, a number of Japanese banks, BNP Parisbas, Svenska Handelsbanken and the Belgian KBC bank.

click for the full list

source: 30 Largest Unsecured Claims (Excluding Insiders)
Lehman Brothers Holdings
http://www.wirtschaftsblatt.at/images/uploads/9/c/f/342479/Lehman_Glaeubiger20080915172545.pdf?_vl_backlink=/home/boerse/binternational/342479/index.do

New Jersey Governor Corzine on financial performance

2008-09-15T12:57:00.002-04:00

click for video

Bill Gross on Lehman

2008-09-15T12:53:00.002-04:00

"We at PIMCO know exactly what our counter parties are, we know exactly how much we have on with Lehman.
There are 10s of billions of positions that have to be re initiated."

"What is missing from this rescue plan is the addition of capital as opose to liquidity, so the market awaits that in order to support prices."

"They (the Fed) will consider interest rate cuts down the road."

"AIG is a solvent company and the stock does not reflect that solvency."

"We need an additional balance sheet to prevent asset liquidation. We need a buyer of assets."

click for video

Once-in-a-century type of event

2008-09-14T20:06:00.003-04:00

Here is a quote from the "Maestro" himself. It takes a lot of guts or greenness coming from the one person who bears the brunt of the responsibility of this mess.

"Let's recognize that this is a once-in- a-half-century, probably once-in-a-century type of event" -- the worst "by far" in his career, Greenspan said.

Will the Fed cut rates next week?

2008-09-12T18:48:00.003-04:00

Currency strategists at dailyfx.com point out an interesting fact. Fed funds futures are now beginning to price in a slight chance of a rate cut as early as next week when the Fed meets and decides on interest rates. Futures are seeing a 14% chance of a 25 basis point rate cut up from 0% a week ago (see chart below). This constitutes a complete turn-around of expectations since a rate increase was priced into the fed funds futures market at the end of July. The Federal Reserve had declared inflation a concern and is therefore expected to keep interest rates unchanged for some time. In light of challenging developments in the financial services industry these expectations seemed to be revisited.
click to enlarge

source: US Dollar Down Over 2% vs British Pound as Markets Price In Fed Rate Cut Next Week Written by Terri Belkas, Currency Strategist, Friday, 12 September 2008 19:22:02 GMT http://www.dailyfx.com/story/market_alerts/fundamental_alert/US_Dollar_Down_Over_2__1221247469051.html

EA industrial production down again in July 2008

2008-09-12T08:55:00.003-04:00

click to enlarge

Industrial production in the Euro Area, EA15 and EA27, contracted in July 2008. In EA15 countries IP for the total industry was down 1.7 percent on a working day adjusted basis compared to the same month last year. That is the third month that IP contracted on a year over year basis. Durable consumer goods contracted 5.7 percent and intermediate goods 2.3 percent. Two examples of member states with total industry growing are Bulgaria up 2 percent and Denmark up 1.1 percent. IP was contracting in Germany, Italy, France and Spain by 0.5, 3.2, 2.8, 4.4 percent respectively in July 2008 compared to last year.

click to enlarge

source: July 2008 compared with June 2008 Industrial production down by 0.3% in both euro area and EU27
Eurostat news release
http://epp.eurostat.ec.europa.eu/pls/portal/docs/PAGE/PGP_PRD_CAT_PREREL/PGE_CAT_PREREL_YEAR_2008/PGE_CAT_PREREL_YEAR_2008_MONTH_09/4-12092008-EN-BP.PDF

The European economy and German exports

2008-09-10T13:20:00.007-04:00

Oil prices keep falling despite a hurricane moving into the Gulf of Mexico and OPEC's 520 thousand barrel output cut. At its meeting today in Vienna the cartel stated that the oil market was oversupplied. Now that fundamentals seemed to creep back into the oil market its worth noting that economic growth outside the U.S. has dramatically slowed down. Last week the president of the ECB during the press conference and the introductory statement to the council's rate decision "confirmed the weakening of real GDP growth in mid-2008". During that meeting the ECB also released its updated growth projections in the EA for the second half of 2008 and 2009. Real GDP growth for the remainder of 2008 is now expected to be between 1.1 and 1.7 percent, down from 1.5 to 2.1 percent in the June projections (see table below).
click to enlarge

The European Commission cut its growth estimate for the euro area this year and predicted a recession for the German economy. Business and consumer confidence keeps plunging in Europe's largest economy, yet inflation has stayed stubbornly high in part due to fairly tight resource utilization. The unemployment rate in Germany is at record low levels. Companies have so far not followed the U.S. example but market participants clearly expect layoffs to pick up in the future. One glimmer of hope for avoiding this unpleasant recession scenario is foreign trade in the form of exports which has so far held up pretty well. The latest export figures in Germany for July 2008 show a decline of 1.7 percent from the previous month. Exports in June were up a strong 4.1 percent. Compared to July of 2007 exports have increased by a healthy 7 percent (see chart below).
click to enlarge

Economic slowdown in the U.S. and China have as of yet not materially impacted export growth in Germany. The report did not specify the amount of trade with individual countries outside the European Union, but released the statistics for exports to "third countries" which were up 10 percent compared to July of last year:

"Germany exported commodities to the value of EUR 32.2 billion to and imported commodities to the value of EUR 26.2 billion from countries outside the European Union (third countries) in July 2008. Compared with July 2007, exports to third countries were up by 10.0% and imports from those countries by 19.6%."

read also: German exports again strong in June 2008
Thursday, August 7, 2008
http://manonthestreet64.blogspot.com/2008/08/german-exports-again-strong-in-june.html

source: German exports in July 2008: +7.0% on July 2007
Press release No. 337 / 2008-09-09
http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2008/09/PE08__337__51,templateId=renderPrint.psml

source: Introductory statement
Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Frankfurt am Main, 4 September 2008
http://www.ecb.int/press/pressconf/2008/html/is080904.en.html

source: ECB STAFF MACROECONOMIC PROJECTIONS FOR THE EURO AREA
ECB
http://www.ecb.int/pub/pdf/other/ecbstaffprojections200809en.pdf

How the financial crises engulfs Russia

2008-09-02T22:03:00.012-04:00

Exacerbated by the military crisis in Georgia Russian cooperations encounter difficulties in accessing international capital markets. The German newspaper Handelsblatt notes that Russian firms placed only $80 million bonds in August according to data from US investmentbank JP Morgan. In April to July period between $4.1 and $5.4 billion were placed.

According to Reuters Russian firms have issued 73 billion Rubel denominated bonds (2.02 billion euro) in the last 5 weeks with interest of about 13 percent. According to the Handelsblatt article, citing a dealer in Moscow, two thirds of smaller firms had to pay even higher interest rates.

Russian banks are joining other financial institutions around the world in some sort of capital squeeze. Yesterday the Russian Central Bank injected 149.1 billion Rubel (around 4 billion euro) into the market. Citing Natalja Orlowa, chief economist of Moscow's Alfa bank, Handelsblatt argues that the amount of money injected is twice as much as expected. In addition reserves deposited at central banks accounts by about 1300 Russian banks are with 700 billion Rubel at a record low.

In addition to slowing global growth, high inflation and high energy prices this poses just another challenge. Firms that have to refinance loans in the months ahead will have to pay a high price. This seems certainly true for Russia but these days it is truly a global phenomenon.

click to enlarge

source: Russische Firmen kommen nur noch schwer an Kapital
von Andrea Cünnen, handelsblatt.de http://www.handelsblatt.com/politik/international/russische-firmen-kommen-nur-noch-schwer-an-kapital;2031168

Barack Obama - a new politics for a new time.

2008-08-28T23:41:00.003-04:00

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?

2008-08-28T21:19:00.004-04:00

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."

click to enlarge

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 http://mediaserver.fxstreet.com/Reports/c9c6414b-2317-4ebc-8734-4b6d7f422fef/1e5c0f31-e9de-436e-8977-d8efbc6eb128.pdf

A day for the history books

2008-08-27T19:09:00.004-04:00

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

Jackson Hole paper - much ado about nothing

2008-08-27T13:06:00.003-04:00

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.
click to enlarge

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 http://www.kc.frb.org/publicat/sympos/2008/AllenandCarletti.08.04.08.pdf

read also: CPI at 2% at the end of 1971 - Mr. Bernanke more pragmatism please!
Friday, August 22, 2008
http://manonthestreet64.blogspot.com/2008/08/cpi-at-2-at-end-of-1971-mr-bernanke.html

Kucinich Wake-up America part II

2008-08-26T21:57:00.008-04:00

Here is the video

Kucinich's Wake-up America DNC speech

2008-08-26T21:57:00.001-04:00

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

2008-08-26T13:59:00.006-04:00

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 http://www.cesifo-group.de/portal/page/portal/ifoHome/a-winfo/d1index/10indexgsk

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

2008-08-22T21:53:00.010-04:00

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 Chairman
Ben S. Bernanke Annual Economic Symposium, Jackson Hole, Wyoming, August 22, 2008 http://www.federalreserve.gov/newsevents/speech/bernanke20080822a.htm

source: Introductory statement with Q&A
Jean-Claude Trichet, President of the ECB, Frankfurt am Main, 7 August 2008 http://www.ecb.int/press/pressconf/2008/html/is080807.en.html

source: Anniversary of Nixon’s price controls
By Michael Pettis, China fianncial markets http://piaohaoreport.sampasite.com/china-financial-markets/blog/Anniversary-of-Nixon2019s-price.htm

read also: U.S. Broad money M3 in sharp contraction in July 2008
Tuesday, August 19, 2008 http://manonthestreet64.blogspot.com/2008/08/us-broad-money-m3-in-sharp-contraction.html

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

2008-08-20T16:52:00.013-04:00

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

2008-08-20T16:52:00.006-04:00

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.
click to enlarge

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.
click to enlarge

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 http://www.kansascityfed.org/Agcrsurv/AGCR2Q08.pdf

read also: Bank lending surveys reveal further tightening in lending standards
Monday, August 11, 2008 http://manonthestreet64.blogspot.com/2008/08/bank-lending-surveys-reveal-further.html

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

2008-08-19T08:26:00.018-04:00

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.

click to enlarge
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 http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/19/cnusecon119.xml

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

2008-08-19T08:26:00.011-04:00

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).
click to enlarge

source: Euro area external trade deficit 0.1 bn euro, 20.1 bn euro deficit for EU27
Eurostat, June 2008 http://epp.eurostat.ec.europa.eu/pls/portal/docs/PAGE/PGP_PRD_CAT_PREREL/PGE_CAT_PREREL_YEAR_2008/PGE_CAT_PREREL_YEAR_2008_MONTH_08/6-18082008-EN-AP.PDF
read also: EA May 2008 preliminary trade deficit: 4.6 bn euro
Friday, July 18, 2008 http://manonthestreet64.blogspot.com/2008/07/ea-may-2008-preliminary-trade-deficit.html

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

2008-08-15T10:44:00.008-04:00

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

source: MERRILL LYNCH & CO., INC. QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 27, 2008
http://ir.ml.com/sec.cfm

source: LEHMAN BROTHERS HOLDINGS INC. FORM 10-Q,
FOR THE QUARTER ENDED May 31, 2008
http://www.lehman.com/shareholder/10k10q/#

source: THE GOLDMAN SACHS GROUP, INC. QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED MAY 30, 2008 http://www2.goldmansachs.com/our-firm/investors/financials/current/10q/10-q-2-quarter-2008.pdf

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

2008-08-13T23:06:00.014-04:00

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.
click to enlarge

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

source: FORECLOSURE ACTIVITY INCREASES 8 PERCENT IN JULY
By RealtyTrac Staff http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=5041&accnt=64847
source: Quelle Surprise! Banks Taking Big Losses on Real Estate Disposals
Wednesday, August 13, 2008, naked capitalism http://www.nakedcapitalism.com/2008/08/quelle-surprise-banks-taking-big-losses.html

read also: U.S. foreclosure activity up53 percent in June 2008 vs a year ago
Thursday, July 10, 2008 http://manonthestreet64.blogspot.com/2008/07/us-foreclosure-activity-up53-percent-in.html

That's why we need business cycles

2008-08-13T23:06:00.004-04:00

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, Handelsblatt.de
http://www.handelsblatt.com/unternehmen/industrie/maerklin-legt-sich-mit-beratern-an;2022646

source: Ausgleich: CMB stolpert über Spanien-Auftrag
Handelsblatt.at
http://www.wirtschaftsblatt.at/home/oesterreich/unternehmen/steiermark/338634/index.do?_vl_backlink=/home/index.do&_vl_pos=9.2.DT

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

2008-08-13T23:06:00.001-04:00

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

2008-08-13T09:45:00.004-04:00

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 http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/13/bcnboe213.xml

read also:A smidgen of reality at the Bank of England Thursday,
May 15, 2008 http://manonthestreet64.blogspot.com/2008/05/smidgen-of-reality-at-bank-of-england.html

Bank lending surveys reveal further tightening in lending standards

2008-08-11T22:44:00.004-04:00

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.
click to enlarge

source: The July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices
Board of Governors Federal Reserve System http://www.federalreserve.gov/boarddocs/SnLoanSurvey/200808/fullreport.pdf

source: THE EURO AREA BANK LENDING SURVEY - JULY 2008 -
European Central Bank
http://www.ecb.int/stats/pdf/blssurvey_200807.pdf

Fx: Is carry doomed?

2008-08-10T21:49:00.007-04:00

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).
click to enlage

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
DailyFx.com http://www.dailyfx.com/story/trading_reports/dynamic_carry_trade_basket/US_Dollar_Rally_Masks_A_1218239290636.html

German exports again strong in June 2008

2008-08-07T21:23:00.004-04:00

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.

click to enlarge

source: German exports in June 2008: +7.9% on June 2007
Federal Statistical Office http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2008/08/PE08__282__51,templateId=renderPrint.psml
read also: Germany's exports remained strong in May 2008 Wednesday,
July 9, 2008 http://manonthestreet64.blogspot.com/2008/07/germanys-exports-remained-strong-in-may.html

China's economy slowing at the worst time

2008-08-05T13:52:00.005-04:00

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
NYT http://www.nytimes.com/2008/08/05/business/worldbusiness/05yuan.html?_r=1&ref=business&pagewanted=print

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

2008-08-05T12:51:00.004-04:00

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.
click to enlarge

source: Housing Lenders Fear Bigger Wave of Loan Defaults
By VIKAS BAJAJ, NYT http://www.nytimes.com/2008/08/04/business/04lend.html?em=&pagewanted=print

NFP down 51k in July 2008

2008-08-01T17:53:00.009-04:00

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.
click to enlarge

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.
click to enlarge

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.
click to enlarge

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.

source: THE EMPLOYMENT SITUATION: JULY 2008
Bureau of Labor Statistics
http://www.bls.gov/news.release/empsit.toc.htm

read also: NFP down 62k in June 2008
Thursday, July 3, 2008 http://manonthestreet64.blogspot.com/2008/07/nfp-down-62k-in-june-2008.html

Interesting take on inflation by Jeff Rubin

2008-07-31T08:51:00.005-04:00

Jeff Rubin, CIBC World Markets Chief Economist discusses why he feels we will see a 6% inflation rate soon. His argument, "this labor outsourcing story to the cheap labor markets in Asia is over" thanks to triple-digit oil prices. The result will be even higher prices. He also asks, "how much longer can the fed funds rate remain where it is when inflation is at 6%?"

click for video

source: 6% inflation ahead?
Jeff Rubin on Fox business news
http://cosmos.bcst.yahoo.com/up/player/popup/index.php?cl=9066592

EURUSD speculative sentiment net long

2008-07-31T08:51:00.002-04:00

From DailyFx.com:
Retail sentiment has once again shifted; and this time, speculative traders are positioning for the EURUSD’s long-term trend to remain intact. Over the past week, the Speculative Sentiment Index ratio jumped to its highest reading since last October - though this shouldn’t be too surprising considering the retail sector’s affinity for prominent technical levels. Today, the pair’s ratio stands at 1.59 with nearly 61% of the market group holding a long position.

click to enlarge

source: Rising Long Interest Threatens A Euro Breakdown
DailyFx.com http://www.dailyfx.com/story/strategy_pieces/fxcm_speculative_sentiment_index/Rising_Long_Interest_Threatens_A_1217499461113.html

State of the housing market - another fascinating chart

2008-07-30T10:24:00.003-04:00

How delinquency rates and home prices have changed in 200 U.S. metropolitan areas in the move from boom to bust.
click for interactive chart (or link below)

source: Shrinking Prices, Rising Delinquencies
WSJ
http://online.wsj.com/public/resources/documents/retro-MORTGAGE0807.html

Housing inventory is the key to recovery

2008-07-30T09:30:00.006-04:00

This very interesting chart comes from the WSJ and highlights the current plague that torments the housing market in the U.S. While there are some improvements in unsold housing inventory in certain metro areas ("...supply of homes listed for sale declined from a year earlier in 19 of 28) others continue to pile on in part due to a growing glut of foreclosed homes. According to Barclays there are about 721,000 foreclosed homes on the market nationwide, up from 112,000 two years ago.

From the WSJ:
Housing markets generally are considered roughly in balance when the number of homes listed for sale is enough to last about six months at the current sales rate. Based on the average sales rate over the past year, The Wall Street Journal survey shows that supplies are enough to last about 13 months in the Atlanta and Phoenix areas, 15 months in Chicago, 19 months in Las Vegas, and 37 months in Miami-Fort Lauderdale. For condominiums alone in Miami-Dade County, the supply is enough to last 51 months.

click for interactive graphic (problems click link above)

source: Amid Housing Slump, Glut Eases Slightly
By JAMES R. HAGERTY, July 29, 2008; WSJ http://online.wsj.com/article/SB121727861946290899.html

David Simon of Simon Property: worst of the economic downturn in 2009

2008-07-28T20:59:00.004-04:00

Simon Property Group, a real estate investment trust (REIT), that owns real estate properties primarily of regional malls, Premium Outlet centers, The Mills, and community/lifestyle centers in the U.S. and abroad (Europe, China, Japan) announced second quarter FFO topping Wall Street expectations. Despite the good results occupancy rates in the mall portfolio was down during the quarter. CEO David Simon sees the worst of the economic slowdown manifest in 2009.

Here is what David Simon, Chairman and Chief Executive Officer had to say during the call: Occupancy in the mall portfolio was down 20 basis points as compared with the year earlier period. Square footage lost to bankruptcy for the first six months of 2008 totaled 151,000 square feet as compared to 30,000 square feet during the first six months of 2007.

As we discussed in the first quarter, the decline in the premium outlet occupancy is primarily due to lease terminations or bankruptcies of four tenants comprising about a dozen spaces and the late March 2008 openings of Houston premium outlets and Phase 2 of Rio Grande premium outlets, we expect occupancy within the premium outlet portfolio to return to previous levels.

David Simon:
I’d just, Paul, though, it is, we’re going to have more store closings in ’08 and in ’09 than we did in ’06 and ’07. I mean there’s no ambiguity about that. Now again, we still think the way we operate and the way we’ll still be bale to grow our cash flow, but we’re going to deal with more store closings in ’08 and ’09 than what we have at least in the last couple years.

Now the one thing I will say at this point, the cycle that we’re in doesn’t feel like or seem like anything different from a retail perspective that we haven’t already dealt with previously unfortunately numerous times. So at this point, it feels like/seems like kind of something we’ve done. I’d say a déjà vu all over again, but we’ve seen it.

David Simon:
Well, I think it’s tough because we’re I think kind of in the… We’re in the first half of the downturn let’s say, okay. It’s a very tough judgmental call. I do think we’ll see the worst of it manifest itself in ’09, not ’10. But a lot of the story hasn’t been written and clearly the trend of better properties getting better and worse properties getting worse is only going to accelerate in a tough economic environment.

source: Simon Property Group, Inc. Q2 2008 Earnings Call Transcript
Seeking Alpha http://seekingalpha.com/article/87498-simon-property-group-inc-q2-2008-earnings-call-transcript?source=yahoo&page=-1

Manhattan real estate prices

2008-07-28T13:31:00.007-04:00

This map of Manhattan real estate prices comes from The Daily Chart blog.
click to enlarge

source: The Daily Chart
Trulia (Home)
Posted by Cranky at 10:55 PM
http://thedailychart.blogspot.com/

Bill Gross IO for August 2008 - inflation/deflation conundrum and home prices

2008-07-28T13:31:00.002-04:00

Bill Gross' new IO for August as always is a joy to read and again he hits the nail on the head. This time he tackles the risk for asset price deflation which in his opinion rests entirely with home prices. "Let's blame it on the barn, or if you must, home prices." Falling home prices put some 25 million homes, purchased in 2004 and beyond, at risk for negative equity which could eventually lead to a cumulative loss of 1 trillion dollars on the balance sheets of financial institutions according to Gross. If not matched by raising capital that loss necessitates a sale of assets and a general reduction of lending. There you have it "deflation", but to be sure we are not there yet. Capital raising so far has been very succesfull and the world is still awash in cash. Not all financial institutions have entirely lost its earnings prowess or so it seems. Last weeks gains in stock indeces was in part due to better than expected earnings for the second quarter from some of the major financial institutions in the U.S. C&I loans and consumer loans at US financial institutions are still growing according to data from the Federal Reserve Bank of St.Louis. All this for the moment argues against a major asset price deflation threat but if home prices continue to slide this possibility might become the next nightmarish reality and this time for the real economy.

Bill Gross' Mooooooo:
An asset deflation in turn becomes a debt deflation, as subprimes, alt-As, and finally prime mortgages surrender to the seemingly inevitable tide. PIMCO estimates a total of 5 trillion dollars of mortgage loans are in risky asset categories and that nearly 1 trillion dollars of cumulative losses will finally mark the gravestone of this housing bubble. The problem with writing off 1 trillion dollars from the finance industry’s cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both that in turn begins to affect economic growth, creating what Mohamed El-Erian fears as a “negative feedback loop.”

Financial asset prices, as well as those for homes, are really the discounted present value of what investors believe those assets will be worth far into the future. When the discount rate – in this case a 30-year mortgage – rises faster than the expectations for home prices themselves – then the price of a home falls. 7% + “all in” yields for current home financing, in contrast to prior periods of monetary easing, are lowering, not raising the discounted present value of an existing home. Blow them up? Well, yes, I suppose if we could. But absent that, lowering the cost of mortgage credit via the omnibus housing/GSE bill now placed before the Congress and the President is the best way to begin the long journey back to normalcy.

To return the housing, cow milking, asset price deflating metaphor to its broader context, the increasing price of credit is a common denominator worldwide in the delevering process which it drives, or in turn, is driven by. If the cost of credit – the discount rate for present value – would go down, then asset prices would be better supported. Stocks wouldn’t sink so fast, commercial real estate wouldn’t wobble so, ..But the cost of credit is going up, not down, in contrast to prior cycles, because astute investors recognize the myriad of global imbalances that threaten future stability. In addition to home prices, $130 a barrel oil and their resultant distortion of global wealth and financial flows head that list. For now, investors should remain in high quality assets – until – until, well…until the prospect for home prices points skyward or until the cows come home, whichever one’s first.

source: Mooooooo!
Investment Outlook, Bill Gross | August 2008
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/Investment+Outlook+Bill+Gross+Mooooooo+August+2008.htm

read also: Consumer loans and C&I loans at commercial banks are still growing
Wednesday, July 16, 2008
http://manonthestreet64.blogspot.com/2008/07/consumer-loans-and-c-loans-at.html

U.S. projects record budget deficit for 2009

2008-07-28T12:09:00.001-04:00

AP reports a budget deficit for 2009 approaching $490 billion. That is the largest deficit on record after the U.S. government inherited a record budget surplus in 2000. Bill Gross in his July IO projected an all time budget deficit record of $1 trillion for the next government.

From the AP:
In fact, the White House had included cost estimates for an economic stimulus bill in its earlier projections, so the new figures represent a considerable deterioration in the government's fiscal health.

The White House had predicted in February that next year's deficit at $407 billion, which means the increase in the projections since then would approach $80 billion or so. Figures for the 2008 budget year ending Sept. 30 may also set a record.

The numbers represent about 3 percent of the size of the economy, which is the deficit measure seen as most relevant by economists. That's considerably smaller than the deficits of the 1980s and early 1990s, when Congress and earlier administrations cobbled together politically painful deficit-reduction packages.

Still, the new figures are so eye-popping in dollar terms that it may restrain the appetite of the next president to add to it with expensive spending programs or new tax cuts. In fact, pressure may build to allow some tax cuts enacted in 2001 and 2003 to expire as scheduled at the end of 2010, with Congress also feeling pressure to curb spending growth.

The deficit for 2007 totaled $161.5 billion, which represented the lowest amount of red ink since an imbalance of $159 billion in 2002. The 2002 performance marked the first budget deficit after four consecutive years of budget surpluses.

source: Bush administration projects record 2009 deficit
AP, Monday July 28,
http://biz.yahoo.com/ap/080728/budget_deficit.html

read also: Bill Gross sends letter to the future President
Tuesday, July 1, 2008
http://manonthestreet64.blogspot.com/2008/07/bill-gross-sends-letter-to-future.html

Germany Ifo business climate worsenes in July 2008

2008-07-24T08:34:00.005-04:00

From the survey:
The Ifo Business Climate Index for industry and trade in Germany has fallen again significantly in July following a clear worsening in the previous month. The firms are much more dissatisfied with their current business situation and they are clearly more reserved regarding the six-month outlook. These results suggest that the economic upswing is coming to an end.
click to enlarge

source: Ifo Business Climate Index Falls
Ifo Business Survey July 2008 http://www.cesifo-group.de/portal/page/portal/ifoHome/a-winfo/d1index/10indexgsk

Arrear rates 2.5x higher on US subprime than British buy-to-let

2008-07-23T21:38:00.001-04:00

Bradford & Bingley, the beleaguered British buy-to-let mortgage lender( British version of subprime), has successfully raised about $5 billion in its first securitization of the year. B&B has bought parts of GMAC's U.S. mortgage book last year and is now faced with loan losses from its own book and that of GMAC's. This new securitization is good news after a credit rating downgrade earlier this month to just two notches above junk.

In an interesting remark The Daily Telegraph cites arrear rates for both the U.S. GMAC book and B&B's origianted loans. Based on the assumption that GMAC's mortgage book is purely U.S. domestic (I can not confirm this at this point!) it appears that arrear rates are 2.5 times more frequent than B&B's originated loans.

The arrears rates on the GMAC book, from which it is obliged to buy £350m of mortgages every three months until 2009, are running at 5pc, against 1.9pc of the loans B&B originated itself.

source: Bradford & Bingley's £2.5bn deal proves ability to access funding
By Philip Aldrick, The Daily Telegraph
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/07/24/cnbrad124.xml

How did the major stock indices perform since August of last year?

2008-07-22T12:14:00.004-04:00

click to enlarge

Plosser speech on the outlook for the U.S. economy and inflation

2008-07-22T10:28:00.005-04:00

Charles Plosser, President of the Philly Fed, delivers a speech about his outlook for the economy and inflation. It is interesting to see that not everyone at the Board of Fed Governors is compromised by unflinching support for ailing Wall Street.

on inflation:
The consequence of our easing of monetary policy is that the inflation-adjusted — or real — interest rate on federal funds is now negative — between minus 1 percent and minus 2 percent. The last time we saw such a negative real fed funds rate was in 2003-2004. But the environment then was much different than it is now. Back then, the Fed was concerned about the threat of deflation. Today, as we all know, this is not the case. Many of us are concerned about rising inflation rates.

Keeping policy too accommodative for too long worsens our inflation problem. Inflation is already too high and inconsistent with our goal of — and responsibility to ensure — price stability. We will need to reverse course — the exact timing depends on how the economy evolves, but I anticipate the reversal will need to be started sooner rather than later. And I believe it will likely need to begin before either the labor market or the financial markets have completely turned around.

I want to make clear that the rise in inflation expectations in the 1970s was not caused by a wage-price spiral. That story has things backwards. The wage-price spiral was a consequence of the inflation and the unanchoring of expectations of inflation, not the other way around. And the unanchoring of inflation expectations was caused by the public’s loss of confidence in the Federal Reserve’s resolve to bring inflation back down. The credibility of the Fed’s promise to deliver price stability was lost.

In recent months I have heard some analysts suggest that the current economic situation is not like the 1970s because unions are less prevalent and there is no evidence as yet of a wage-price spiral. Thus, a weak economy, with rising unemployment and declining payroll employment, will presumably prevent workers from demanding higher wages. But, again, that story has things backwards. It is not demands for higher wages that kick off the spiral, but the loss of confidence that the central bank will keep inflation controlled, which, in turn, leads to a rise in inflation expectations. The wage-price spiral is not the cause of the inflation, but the result.

I want to emphasize that what we have been seeing in the economy this past year, and in my own outlook going forward, is very different from the 1970s, because I see the Fed as committed to keeping inflation expectations well-anchored. I agree with a statement Fed Chairman Bernanke made in June that the Fed will strongly resist an erosion of longer-term inflation expectations, because an “unanchoring” of those expectations would be destabilizing for economic growth as well as inflation.

Since energy price increases have been so persistent in recent years, I do believe more attention should now be paid to measures of headline inflation in setting monetary policy. I don’t believe we can be sanguine that the behavior of core inflation will keep the public’s inflation expectations well-anchored in the face of persistently high headline inflation. To keep inflation expectations anchored means that monetary policymakers will have to back up their words with action.

source: Perspectives on the Economy, Inflation, and Monetary Policy
Presented by Charles I. Plosser,
President and Chief Executive Officer, Federal Reserve Bank of Philadelphia
http://www.philadelphiafed.org/publicaffairs/speeches/plosser/2008/07-22-08_philadelphia-business-journal.cfm

EA May 2008 preliminary trade deficit: 4.6 bn euro

2008-07-18T18:16:00.009-04:00

The EU released its preliminary trade data for May 2008:
The first estimate for the euro area1 (EA15) trade balance with the rest of the world in May 2008 gave a 4.6 bn euro deficit, compared with +1.4 bn in May 2007. The April 20082 balance was +2.5 bn, compared with +2.0 bn in April 2007. In May 2008 compared with April 2008, seasonally adjusted exports fell by 3.4% and imports by 1.3%.
The first estimate for the May 2008 extra-EU271 trade balance was a deficit of 21.5 bn euro, compared with -14.7 bn in May 2007. In April 20082, the balance was -15.4 bn, compared with -12.9 bn in April 2007. In May 2008 compared with April 2008, seasonally adjusted exports fell by 4.0% and imports by 1.3%.
click to enlarge

source: Euro area external trade deficit 4.6 bn euro, 21.5 bn euro deficit for EU27
Eurostat, May 2008
http://epp.eurostat.ec.europa.eu/pls/portal/docs/PAGE/PGP_PRD_CAT_PREREL/PGE_CAT_PREREL_YEAR_2008/PGE_CAT_PREREL_YEAR_2008_MONTH_07/6-18072008-EN-AP.PDF

read also: EA April 2008 preliminary trade surplus: 2.3 bn euro
Wednesday, June 18, 2008 http://manonthestreet64.blogspot.com/2008/06/ea-april-2008-preliminary-trade-surplus.html

Are we in a recession yet?

2008-07-18T13:39:00.004-04:00

Citi says yes, at least according to credit trends in their NA card business.

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Citis's second quarter better than feared

2008-07-18T13:02:00.008-04:00

Citi's second quarter earnings results were bad but not as bad as expected. NA Consumer banking in res. real estate net credit losses were $1.09 billion up from $216 million a year ago. Loans 90+ DPD were at $6.46 billion up from $2.91 billion a year ago (loan losses are also higher sequentially). CRE loans net credit losses were only $16 million, 33% lower than a year ago. Auto loan delinquencies (90+ DPD) were 51% higher at $265 million compared to $176 million a year ago. Net credit losses at Personal loans & other were 63% higher at $444 million from $273 million a year ago (credit losses in this category are also up sequentially). Loan delinquencies in this category are 45% higher compared to a year ago.
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Consumer loan delinquencies by region were at $9.03 billion (2.43% ratio) in NA and $840 million (1.17% ratio) in EMEA (Europe, Middle East and Africa). Net credit losses were at $2.45 billion (2.55% ratio) and $431 million (2.49% ratio) in NA and EMEA respectively. The biggest contributor was consumer banking with net credit losses of $1.76 billion (2.33% ratio) and $266 million (2.51% ratio) in NA and EMEA respectively. Global Cards net credit loss ratio was 6.46% or $687 million in NA and only 3.9% or $166 million in EMEA.
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Institutional clients group (ICG) saw debt underwriting reporting a loss of $277 million substantially less than $2.08 billion loss reported in the first quarter of 2008. Fixed income reported a loss of $633 million that is substantially less than $7.023 billion in the first quarter of 2008 and $16.105 billion loss reported in the fourth quarter of 2007. Write-downs in the fixed income segment were $3.4 billion on subprime related direct exposure, $2.4 billion related to exposure of monolines and an additional write down of $0.5 billion on CRE positions. Off setting the steep write-downs were record revenues in interest rates, currency and commodities, mainly oil, the company stated during the conference call.
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Fixed income reported a loss of only $633 million despite a combined write-down in this segment of $6.3 billion! underscoring the off setting effect of commodities trading. This is a direct result of an accommodative Federal Reserve, and there is little hope for change as long as this dynamic of massive loan corrections continues. This is my base case for higher commodity prices over the near to medium term.

source: Second Quarter 2008 Earnings Review
Citi, July 18, 2008 http://library.corporate-ir.net/library/97/970/97076/items/300831/slidesv3.pdf

Euro fails to take 1.60 - extreme SSI eases

2008-07-17T10:34:00.002-04:00

From DailyFx.com:
EURUSD – Speculative positioning in EURUSD normalized after a significant dollar rebound marked the end of a dramatic run on 1.60. Since last Friday – when the Speculative Sentiment Index Ratio hit a near 10-month low -3.17 – the pair’s bullish advance was steadily tempered with the extreme sentiment reading capitulating. Today, the euro’s SSI reading stands at -1.39 with 58% of the group short. This reading happens to sustain a steadily diminishing, weekly trend following the -1.71 figure from last Thursday and the -2.48 print from two week’s ago. The indicator’s details confirm the ratio’s move back to parity. Long positions were a modest 0.5% weaker than yesterday, but a significant 26.6% stronger than last week. Showing the lack of interest in the pull back, shorts were only 0.6% above Wednesday’s levels and 6.6% weaker than last Thursday. Overall, the dramatic price action hasn’t drawn many volatility seekers as open interest has grown only 4.3% over the week and now stands 3.1% above the monthly average.
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source: Euro SSI Extreme Eases After The Currency Fails To Take 1.60 DailyFx.com, Thursday, 17 July 2008 http://www.dailyfx.com/story/strategy_pieces/fxcm_speculative_sentiment_index/Euro_SSI_Extreme_Eases_After_1216290636819.html

The dollar-crude arbitrage trade

2008-07-16T17:55:00.004-04:00

Bernanke under oath testified before Congress that in his opinion the high price of oil is caused by supply and demand. The extend to which the value of the U.S. dollar influences the price of oil is highly complex and difficult to understand, so he sayed. Well Mr. Bernanke let me help you out. As the chart below shows the price of oil fell 10 percent in the last 48 hours in two separate five minute episodes. This resulted in a decline of the NYMEX CL August08 forward contract from peak ($146.73) to trough ($132.0) of $14.73. At the same time the EUR/USD cash contract declined from 1.6018 to 1.5897 between 10:00 and 11:20 a.m. on Tuesday and from 1.5890 to 1.5816 between 10:30 and 10:50 a.m. on Wednesday. As the chart below demonstrates a gain of 102 bp or 0.64% of the USD perfectly matched with the decline in the NYMEX CL August08 forward contract for crude oil.

The reason why crude oil future contracts plunged 10 percent are somewhat elusive but option expiration at the August 2008 contract on Thursday July 17 may have played a role. In addition the actual August future contract is about to expire on Tuesday July 22. The reasons for the concomitant decline in the U.S. dollar are less nebulous. It is simply the fact of an arbitrage trade or otherwise known as a "riskless profit" trade that is in play here. In other words being long crude oil and short the dollar is part of a speculation holiday for most trading desks on Wall Street. Mr. Bernanke if you and your colleagues could bring yourself to support the nations currency not only with lip service but with real action in form of a substantially higher fed funds rate, more inline with your real mandate, I predict oil prices would come down to $70 within a matter of weeks.

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U.S. industrial production advanced 0.5 percent in June 2008

2008-07-16T14:04:00.004-04:00

The chart below speaks for itself. There is not much to add to it other than CapUt is down at the primary, semi-finished and finished processing level and up only on the crude processing level. In our opinion this is a direct result of high oil prices and not of a marked slowdown in the economy. A good example is Andrew Liveris, Dow Chemical CEO, who is ideling capacity in his plants to cover cash costs. On June 24 he said on CNBC:

"When you can't run the plant to make policy of cash costs you just have to bring it down. Let's call it managing the assets so we don't make negative margins. We are trying to maintain our earnings."

Indeed, the economy is barely slowing down (see Brian Wesbury yesterday), as seen in IP data for non-durable consumer goods, business equipment and non-energy industrial materials which are still up 10% to 30% respectively from their 2002 base levels.

from the release:
Industrial production advanced 0.5 percent in June after having fallen 0.2 percent in May. Industrial production for the second quarter as a whole dropped 3.1 percent (annual rate) from the first quarter. Manufacturing output gained 0.2 percent in June and was boosted by a jump of 5.4 percent in the output of motor vehicles and parts; activity resumed at motor vehicle parts and assembly plants that had been idled by a strike that began in late February and ended in late May. Excluding motor vehicles and parts, factory output edged down 0.1 percent. Outside of manufacturing, the output at mines increased 1.1 percent, and the output at utilities was up 2.1 percent. At 111.7 percent of its 2002 average, total industrial production was 0.3 percent above its level of a year earlier. In June, the capacity utilization rate for total industry moved up to 79.9 percent, a level 1.1 percentage points below its average for 1972-2007.

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source: INDUSTRIAL PRODUCTION AND CAPACITY UTILIZATION
Federal Reserve Statistical Release G.17 http://www.federalreserve.gov/releases/g17/current/

read also: Wesbury sees close to four percent growth in the second quarter
Tuesday, July 15, 2008
http://manonthestreet64.blogspot.com/2008/07/wesbury-sees-close-to-four-percent.html

read also: The rude cause of inflation raises the specter of recession
Tuesday, June 24, 2008
http://manonthestreet64.blogspot.com/2008/06/rude-cause-of-inflation-raises-specter.html

Consumer loans and C&I loans at commercial banks are still growing

2008-07-16T12:40:00.010-04:00

One of the main arguments in the corner of the deflationistas is restricted supply of credit to industry and consumers. The most extreme call this period "peak credit". The culprits for that alleged credit crunch are the recent multi billion dollar losses at financial institutions world wide and their supposedly depleted capital base.

The Federal Reserve bank of St.Louis releases timely data (on a monthly and weekly bases) concerning the amount of credits loaned out from U.S. commercial banks in the form of H.8 assets and liabilities of commercial banks. On that level it should surprise at least those on the deflation train to learn that C&I loans reported on a weekly basis are still growing at a $110 billion to $140 billion range compared to a year ago. The most recent weekly data (July 2, 2008) for that loan group are growing close to $120 billion compared to the a year ago (see right side panel of chart 1).
chart 1, click to enlarge

A similar scenario is being played out for another important loan group. Consumer loans from all commercial banks recorded on a monthly basis are still growing by about $65 billion dollar by June 1, 2008 compared to the same month last year (see left hand panel on chart 2). That is close to a record and up from about $20 billion at the beginning of the credit crises.

Not surprisingly another loan group, real estate loans at all commercial banks, continues its decline. On a monthly basis the growth rate was $180 billion on June 1, 2008 compared to last year. That is down significantly from a peak of about $450 billion at the beginning of 2007 (see right hand panel of chart 2 and chart 3). This is hardly surprising given the state of the housing market and the persistent failure of the securitization market. We will not expect significant recovery in this loan group for the foreseeable future. Even with real interest rates being negative we have not seen mortgage rates coming down, to the contrary are going higher, mainly because of the problems in the secondary mortgage market.
chart 2, click to enlarge

At this time so called "peak credit" is only obvious in real estate loans. The deflation scenario is not applicable to the rest of the economy as this data series clearly demonstrates. The loss of about $300 billion in total loan growth and investments at all commercial banks from the beginning of this year to June 1, 2008 compared to the same time period last year can be attributed primarily to the loss in real estate loans (see chart 3).
chart 3, click to enlarge

Moreover Jean-Claude Trichet, President of the ECB, said the following at his latest policy statement on June 5 2008:
However, the growth of loans to non-financial corporations has remained very robust. While some moderation can be expected in the future in the light of tightening financing conditions and slower economic growth, bank borrowing by euro area non-financial corporations grew at an annual rate of 14.9% in April 2008, and the flow of loans in recent months has been strong.

source: Release: H.8 Assets and Liabilities of Commercial Banks in the United States
The Federal Reserve bank of St.Louis http://research.stlouisfed.org/fred2/release?rid=22&soid=1

source: Introductory statement
Jean-Claude Trichet, President of the ECB, Frankfurt am Main, 5 June 2008 http://www.ecb.int/press/pressconf/2008/html/is080703.en.html

read also: What credit crisis? - Commercial and Industrial Loans are still growing
Friday, April 25, 2008 http://manonthestreet64.blogspot.com/2008/04/commercial-and-industrial-loans-20-year.html

Wesbury sees close to four percent growth in the second quarter

2008-07-15T21:30:00.003-04:00

Usually I don't care much about Washington consensus pundit L.K., but on the issue of the dollar and Fed's Bernanke we see eye on eye. In this interview he has an interesting crowd with Laffer as the inflation dove and Wesbury as the inflation hawk.
Wesbury sees at least 3 percent or higher (close to four percent) growth in the second quarter!

click for video

source: Bernanke's Next Move
Assessing Fed chief Ben Bernanke's outlook on the economy, with Art Laffer, Laffer Investments; Michelle Girard, RBS Greenwich Capital; Brian Wesbury, First Trust; and CNBC's Larry Kudlow.
http://www.cnbc.com/id/15840232?video=794295252

On trend to one million foreclosures by year end

2008-07-15T11:53:00.004-04:00

HW comments on the disturbing increase on nationwide foreclosure filings as reported by real estate information service ForeclosureS.com:

Almost a half-million Americans lost their homes to foreclosure in the first half of the year, nearly double the same time a year ago. That’s six of every 1,000 households nationwide repossessed by the bank following foreclosure so far in 2008, according to real estate information service ForeclosureS.com.

“If the trend continues, we could see one million properties lost to foreclosure across the country by year-end,” says Alexis McGee, expert, educator, and president of ForeclosureS.com.

REO filings for June — all 87,465 of them — were up 5.35 percent over May and up 15.8 percent quarter over quarter, McGee said. Not surprisingly, REO volume has been centered inc California, Florida, and Arizona; California alone has seen 116,857 REO properties come online this year, representing 10.2 of every 1,000 households in the state.

source: Nearly Half-Million Foreclosures in First Half of 2008: Report
By: AMY MCALISTER
http://www.housingwire.com/2008/07/15/nearly-half-million-foreclosures-in-first-half-of-2008-report/

Cal bank IndyMac announces bankruptcy

2008-07-14T11:32:00.002-04:00

This interesting video comes from Barry Ritholtz's blog "The Big picture"
IndyMac Bank CEO Michael Perrym in an interview on CNBC in September 2006. On Friday 11, 2008 the company filed for chapter 11, marking the second largest bank failure in the US since Continental Illinois.

September 20, 2006:

source: Video: IndyMac CEO Interview on CNBC
Posted by Barry Ritholtz, The Big Picture blog
http://www.youtube.com/watch?v=inzm6nwbii0

Regional banks in the cross-hair of the real estate downturn

2008-07-14T10:54:00.002-04:00

Associated Banc-Corp reported declining second quarter earnings. The company said that six housing-related commercial real estate loans accounted for the majority of the big loan losses. One glimmer of hope: Regional bank Associated Banc-Corp said Monday its board of directors declared a regular dividend of 32 cents.

The Business Journal of Milwaukee:
The Green Bay-based parent of Associated Bank (NASDAQ: ASBC) said Monday its second-quarter net income was $47.4 million, or 37 cents per share, compared with $75.8 million, or 59 cents per share, for the second quarter of 2007.

Associated executives said the bank’s provision for second-quarter loan losses was $59 million, or approximately 30 cents per share after tax, compared with $23 million for first quarter, or approximately 12 cents per share after tax. Net charge offs were $37 million for the second quarter, which ended June 30, compared with $16 million for first quarter.

The company said that six housing-related commercial credits accounted for $21 million of the quarter’s $37 million in net charge offs. The allowance for loan losses to total loans ratio increased to 1.42 percent at June 30, compared to 1.32 percent as of March 31.

Associated’s nonperforming loans increased $81 million during the quarter to $289 million, which bank executives attributed primarily to six commercial credits all related to the housing industry, including five construction credits totaling $51 million and a $20 million commercial credit.

source: Housing, real estate woes sink Associated’s 2Q profit
The Business Journal of Milwaukee
http://milwaukee.bizjournals.com/milwaukee/stories/2008/07/14/daily4.html?ana=yfcpc

EA industrial production weakened further in May 2008

2008-07-14T10:19:00.005-04:00

Industrial production (excluding construction) in the EA weakened further in May 2008. IP working day adjusted (not seasonally adjusted data series) compared to May 2007 was down more than neg. 5% in Estonia, Greece, Spain, Latvia, and Portugal. It was down less than neg. 5% in France, Italy, Sweden and UK. Production indices working day adjusted were below 100 (base year 2000) only in Greece, Italy, Portugal and UK and close to base year in Spain and France.
From this it is clear that IP (less construction) has slowed significantly in the EA but remains strong in most Eastern European countries and Germany.

from Eurostat:
In May 2008 compared with May 2007, production of capital goods increased by 2.2% in the euro area and by 1.9% in the EU27. Intermediate goods fell by 0.6% in both zones. Energy dropped by 1.2% in the euro area and by 1.1% in the EU27. Non-durable consumer goods declined by 3.2% and 2.8% respectively. Durable consumer goods decreased by 5.2% in the euro area and by 2.6% in the EU27.
Among the Member States for which data are available for May 2008, industrial production rose in twelve and fell in nine. The highest increases were registered in Ireland (+9.2%), Bulgaria (+8.6%) and Denmark (+7.4%), while the most significant decreases were recorded in Latvia (-8.1%), Estonia (-6.7%) and Greece (-6.6%).
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source: Industrial production down by 1.9% in euro area Down by 1.4% in EU27 Eusrostat newsrelease http://epp.eurostat.ec.europa.eu/pls/portal/docs/PAGE/PGP_PRD_CAT_PREREL/PGE_CAT_PREREL_YEAR_2008/PGE_CAT_PREREL_YEAR_2008_MONTH_07/4-14072008-EN-AP.PDF

2008-07-13T20:11:00.003-04:00

Today 43 nations from Europe, Afrika and the Middle East founded the Union of the Mediterranean.

The US government payed $106.28 for crude oil in May 2008

2008-07-11T18:06:00.003-04:00

The U.S. Bureau of Economic Analysis published data for imports of energy related petroleum products, including crude oil, for May 2008. Crude oil consumption was at 9.48 thousand bpd down from 10.1 thousand bpd in April 2008. According to the data the U.S. paid $106.28 per barrel of crude in May 2008, that is substantially lower than the average forward price of $122.17 for the same month. This illustrates clearly a disconnect between the physical crude oil market and the forward pricing mechanism in the futures market.

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source: U.S. INTERNATIONAL TRADE IN GOODS AND SERVICES
U.S. Census Bureau, U.S. Bureau of Economic Analysis, May 2008 http://www.bea.gov/newsreleases/international/trade/2008/pdf/trad0508.pdf

In May 2008 exports up a healthy 0.9 percent

2008-07-11T16:36:00.010-04:00

Bottom Line no marked slowdown in the US economy according to US trade data released today from the U.S. Census Bureau. In general exports are outpacing imports by a small margin helping to shrink the trade deficit. Both exports and imports remained strong in the month of May 2008. Not surprisingly imports and trade deficit from OPEC countries Saudi Arabia and Venezuela continued to increase. Imports from NICS (Hong Kong, Korea, Singapore and Taiwan) were at $45.38 billion in January to May 2008 period, down slightly from the same period a year ago at $46.04 billion (the numbers are n.s.a.). With all other major trading partners import-growth remained positive this year compared to last year. The largest trade deficit with a single nation was with China at $96 billion YTD.

Real imports chain-weighted in U.S. dollars were down in May 2008 which points towards a mild slowdown in the domestic economy. The total census basis of $133.69 billion was down from $136.14 billion in April 2008 and down from $136.87 billion in May 2007. Most of this decline in imports is due to the category "Residual" which was a negative $4.92 billion in May 2008 and only a negative $1.9 billion in May 2007. The Census Bureau defines this category as the difference between total imports and the sum of the components in the table. The major import categories, capital goods and consumer goods, actually increased slightly on a monthly and yearly basis.

Real exports chain-weighted in U.S. dollars remained vibrant in May 2008 at $90.1 billion compared to $81.6 billion in May 2007. That bodes well for the global economy which remained strong and healthy in the month of May. Real exports in May 2008 for capital goods were at $39.5 billion compared to $40.1 billion in April 2008, and for consumer goods at $12.2 billion the same as in April 2008. Real exports were up across all categories compared to same month last year.

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Among EA countries Ireland saw a marked decline in U.S. exports $812 million to $528 million from April to May 2008. Exports to Switzerland declined from $2.3 billion to $1.79 billion, exports remained stable to Germany, Italy, Spain and France in the same time period.

See the full report here.

click to enlarge

source: U.S. INTERNATIONAL TRADE IN GOODS AND SERVICES
U.S. Census Bureau, U.S. Bureau of Economic Analysis, May 2008 http://www.bea.gov/newsreleases/international/trade/2008/pdf/trad0508.pdf

U.S. import prices up a devastating 20.5 percent y/y in June 2008

2008-07-11T10:37:00.003-04:00

Here is what Barron's Econoday had to say:
Econoday's reports should be more than just a list of percentage changes but in this case the increases are so elevated and so widely spread that a simple list serves the purpose of relaying the news: businesses are being hit by the greatest input cost pressure in memory. So far, businesses have been able to absorb these costs through productivity gains and by paring down their workforces. How long the consumer will remain insulated, that is not paying significantly higher prices for non-energy non-food goods, is arguably the greatest question facing the global economy and global economic policy makers.

click to enlarge

source: Barrons Econoday
http://online.barrons.com/public/page/barrons_econoday.html

GE's reports second quarter earnings in challenging domestic environment

2008-07-11T09:56:00.003-04:00

GE's second quarter earnings report came in line with expectations. The overall picture is one of a continuing difficult domestic environment, offset in large parts by global growth. At least for the first half of 2008 global growth remains exceptionally strong. Given the inflationary environment that is squeezing the margins (down 40bp for GE) for businesses the overall environment remains challenging. "Many markets and industries remain healthy, while the U.S. economy is challenged," GE Chief Executive Jeff Immelt said in a statement. The company also gives a somewhat disappointing outlook for the third quarter with profits flat to down in all its business segments.

GE 2Q 08 earnings highlights:
Industrial segments profit was down 32 percent on a challenging and difficult domestic environment (housing). US orders in this segment are down 7 percent offset by growth in Asia up 19%, Europe up 21% and Latin America up 15%. U.S. industrial revenues are down 1% offset by strong global growth in Asia up30%, Latin America up25% and Europe up21%.

GE's operating profit margins are down 40bp with C&I down 60bp equipment/service down 30bp, partially offset by price/DM inflation up 20bp.

GE's financial services business continues to experience a challenging environment with segment profits down 9%. This despite profit outside the Americas is up 5%. GE reports that US delinquencies on its loan portfolio were higher 105bp at 5.55% in 2Q08.

click to enlarge

source: GE 2008 second quarter performance
July 11, 2008 http://www.ge.com/files/usa/company/investor/downloads/webcast_07112008/earnings_main_presentation_07112008.pdf

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

2008-07-10T08:20:00.007-04:00

U.S. foreclosure activity in June decreased 3 percent from the previous month but was still up 53 percent from June 2007, according to the RealtyTrac U.S. Foreclosure Market Report released today.

from Realty Trac:
One could argue that this chart shows that the bulk of the properties that were at risk for foreclosure have migrated through the process and are now being repossessed by the foreclosing lenders. There is not a continued massive surge in defaults and auction notices, so once the lenders have disposed of their REO inventory, the real estate market can start to return to normal. On the other hand, some might argue that many properties are still at risk for falling into foreclosure, but the default notices against those properties may have been delayed by artificial means -- for example laws in Colorado, Maryland and Massachusetts requiring lenders to give homeowners more time before initiating foreclosure. Those artificial means may just temporarily be forestalling another wave of defaults that we'll see sometime in the coming months.

click to enlarge

From HW comes this nice summary "Where the metros are":
For the third month in a row, California and Florida cities accounted for nine out of the top 10 metropolitan foreclosure rates among the 230 metropolitan areas tracked in the report.

Seven California metro areas were in the top 10, and the top three rates were in California: Stockton, with one in every 72 households receiving a foreclosure filing; Merced, with one in every 77 households receiving a foreclosure filing; and Modesto, with one in every 86 households receiving a foreclosure filing. Other California metro areas in the top 10 were Riverside-San Bernardino at No. 5; Vallejo-Fairfield at No. 7; Bakersfield at No. 8; and Salinas-Monterey at No. 10.

The top metro foreclosure rate in Florida was once again posted by Cape Coral-Fort Myers, where one in every 91 households received a foreclosure filing — fourth highest among the nation’s metro foreclosure rates. The foreclosure rate in Fort Lauderdale, Fla., ranked No. 9.

Las Vegas continued to be the only city outside of California and Florida with a foreclosure rate ranking among the top 10. One in every 99 Las Vegas households received a foreclosure filing in June, more than five times the national average and No. 6 among the metro areas.
source: Foreclosure Activity Deflating or Just Deferred?

source: Foreclosure Activity Deflating or Just Deferred?
RealtyTrac, Thursday, July 10, 2008 1:59 AM http://www.foreclosurepulse.com/archive/2008/07/07/82379.aspx

source: Where the metros are
HW
http://www.housingwire.com/2008/07/10/foreclosures-surge-53-percent-in-june/