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Financial Skeptic Bulletin, June 2008

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The new round of financial crisis hit rather suddenly and bonds joined stocks in decline.

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Old News ;-)

History is indeed little more than the register of the crimes, follies, and misfortunes of mankind.

Edward Gibbon

"If banks feel they must keep on dancing while the music is playing and that at the end of the party the central bank will make sure everyone gets home safely, then over time the parties will become wilder and wilder. That might not matter were the consequences limited to the partygoers. But they are not."

Mervyn King, Governor of the Bank of England, June 2008

Since President Bush came to office, our national savings have gone from 6 percent of gross domestic product to 1 percent, and consumer debt has climbed from $8 trillion to $14 trillion.

Thomas Friedman

[Jun 30, 2008] Lehman Down 11%, Closes Below $20 As Rumors Intensify

"The rumors around are that there are some firms making discount offers for Lehman''

Lehman's days are looking numbered as the crisis of confidence continues, measured both in its stock and credit default swaps prices. The reason is simple: Lehman, despite its protestations otherwise, needed either to shrink its balance sheet more or raise more equity. Despite its claims that its $28 dollar stock sale was oversubscribed, we heard stories that quite a lot of arm-twisting was needed to get funding done. The recent performance of the shares would seem to bear that out.

[Jun 30, 2008] BIS Warns of Deepening Contraction (Not for the Fainthearted)

This a unique eye opening post that is reproduced verbatim from Naked Capitalism in a home that more people will read it and start reading systematically Yves Smith's excellent blog ( pleas do not forget to click on commercials -- platonic love for knowledge does not feed this fine author). Here's a link to the full report:

The newly-released annual report of the Bank of International Settlements sounds as if it is unusually lively reading. Most official documents strive for an anodyne tone, while this one appears to be unusually blunt. However, while some reporters have their hands on it, the report is not yet up on the BIS website, so those of us among the great unwashed will have to wait a day or two.

In the meantime, we'll turn to Ambrose Evans-Pritchard's write-up at the Telegraph, and assuming his summary is faithful, the BIS author, Bil White, is a man after my own heart. There is a lot of meaty stuff in the BIS report: criticism of bubble-enabling central banks, a forecast of a burst of inflation followed by nasty deflation, and skepticism about the wisdom and viability of fiscal stimulus (explicit and implicit government obligations are already too high). The BIS also charges the regulators (the Fed appears particularly guilty) with having excessively low policy rates and being asleep at the switch as the shadow banking system grew in size and importance.

Not even goldbugs can take cheer from this survey. From the Telegraph:

A year ago, the Bank for International Settlements startled the financial world by warning that we might soon face challenges last seen during the onset of the Great Depression. This has proved frighteningly accurate.

The venerable body, the ultimate bank of central bankers, said years of loose monetary policy had fuelled a dangerous credit bubble that would entail "much higher costs than is commonly supposed".

In a pointed attack on the US Federal Reserve, it said central banks would not find it easy to "clean up" once property bubbles have burst.

If only we had all listened to the BIS a long time ago. Ensconced in its Swiss lair, it has fired off anathemas for years, struggling to uphold orthodoxy against the follies of modern central banking.

Bill White, the departing chief economist, has now penned his swansong, the BIS's 78th Annual Report, released today. It is a disconcerting read for those who want to hope the global crisis is over.

"The current market turmoil is without precedent in the postwar period. With a significant risk of recession in the US, compounded by sharply rising inflation in many countries, fears are building that the global economy might be at some kind of tipping point," it said.

"These fears are not groundless. The magnitude of the problems yet to be faced could be much greater than many now perceive," it said. "It is not impossible that the unwinding of the credit bubble could, after a temporary period of higher inflation, culminate in a deflation that might be hard to manage, all the more so given the high debt levels."

Given the constraints under which the BIS must operate, this amounts to a warning that monetary overkill by the Fed, the Bank of England, and above all the European Central Bank could prove dangerous at this juncture.

European banks have suffered worse losses on US property than American banks. Their net dollar liabilities are $900bn, mostly short-term loans that have to be rolled over, a costly business with spreads still near panic levels. Mortgage and consumer credit has "demonstrably worsened".

The BIS cautions the ECB to handle its lending data with great care. "The statistics may understate the contraction in the supply of credit," it said.

The death of securitisation has forced banks to bring portfolios back on to their balance sheets, while firms in need are drawing down pre-arranged credit lines. This is a far cry from a lending recovery.

Warning signs are flashing across Eastern Europe (ex-Russia) where short-term foreign debt is 120pc of reserves, mostly in euros and Swiss francs. Current account deficits are 14.6pc of GDP.

"They could find it difficult to secure foreign funding if global financing conditions were to tighten more severely," it said. Swedish, Austrian and Italian banks have drawn on wholesale markets to lend heavily to subsidiaries across the region. This could "dry up".

China is not immune, although the BIS has dropped last year's comment that growth is "unstable, unbalanced, unco-ordinated and unsustainable".

The US accounts for 20pc of China's exports, but that does not capture the inter-links across Asia that ultimately depend on US shopping malls. "There is a risk that China's imports overall could slow down sharply should the US economy weaken further," it said.

Global banks - with loans of $37 trillion in 2007, or 70pc of world GDP - are still in the eye of the storm.

"Inter-bank money markets have failed to recover. Of greatest concern at the moment is that still tighter credit conditions will be imposed on non-financial borrowers.

"In a number of countries, commercial property prices are beginning to soften, traditionally bad news for lenders. These real-financial interactions are potentially both complex and dangerous," it said.

Do not count on a fiscal rescue. "Explicit and implicit debts of governments are already so high as to raise doubts about whether all non-contractual commitments will be fully honoured."

Dr White says the US sub-prime crisis was the "trigger", not the cause of the disaster. This is not to exonerate the debt-brokers. "It cannot be denied that the originate-to-distribute model (CDOs, CLOs, etc) has had calamitous side-effects. Loans of increasingly poor quality have been made and then sold to the gullible and the greedy," he said.

Nor does it exonerate the watchdogs. "How could such a huge shadow banking system emerge without provoking clear statements of official concern?"

But there have always been excesses in booms. What has made this so bad is that governments set the price of money too low, enticing the banks into self-destruction.
This is Greenspan's Fed fallacy and our glorious Maestro needs to burn in hell for the rest of human history

"The fundamental cause of today's emerging problems was excessive and imprudent credit growth over a long period. Policy interest rates in the advanced industrial countries have been unusually low," he said.

The Fed and fellow central banks instinctively cut rates lower with each cycle to avoid facing the pain. The effect has been to put off the day of reckoning.

They could get away with this as long as cheap goods from Asia kept a cap on inflation. It seduced them into letting asset booms get out of hand. This is where the central banks made their colossal blunder.

"Policymakers interpreted the quiescence in inflation to mean that there was no good reason to raise rates when growth accelerated, and no impediment to lowering them when growth faltered," said the report.

After almost two decades of this experiment - more or less the Greenspan years - the game is over. Debt has reached extreme levels, and now inflation has come back to life.

The easy trade-off has metamorphosed into a vicious trade-off. This was utterly predictable, and was indeed forecast by the BIS, which plaintively suggested in this report that central banks might like to think of an "exit strategy" next time they try such ploys.

In effect, this is an indictment of rigid inflation targets (such as Britain's), which prevent central banks from launching a pre-emptive strike against asset bubbles. In the 1990s, they should have torn up the rule-book and let inflation turn negative in light of the Asia effect.

The BIS suggests that a mix of "systemic indicators" should be used. The crucial objective is to slow credit growth and make sure that the punchbowl is taken away before the drunks run riot. "We need policy measures to lean against credit-drive excess," it said.

If there are going to be more bail-outs on both sides of the Atlantic - as there will be - the "socialised risks" should be taken on by political systems, and not dumped on the books of central banks.

"Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.

"To deny this through the use of gimmicks and palliatives will only make things worse in the end," he said.

Let us all cheer Dr White off the stage.


David Pearson said...

The forecast of deflation presupposes the governments' response to the crisis. Deflationists assume that falling credit leads to falling prices, but the truth is more complicated. The Latin American experience shows, over and over, that central banks respond to falling credit with easy money. They step down a road marked with discrete decisions: "what should we do about this bank failure?"; "what's our response to this unemployment report?"; "they rioted in the streets, so now what?". Each step leads to the destination of the central bank monetizing ballooning fiscal deficits, debasing the currency, and creating double-digit inflation.

On the side of the "governments cause inflation in response to debt crises", we have, historically, virtually every Latin American country, Turkey, Italy, Germany, England, China, Japan and others.

On the side of, "governments are powerless to stop deflation," we have modern day Japan and the Great Depression.

Which central banks did Ben Bernanke choose to criticize in his life's work for choosing the wrong path

Anonymous said...
"If there are going to be more bail-outs on both sides of the Atlantic - as there will be - the 'socialised risks' should be taken on by political systems, and not dumped on the books of central banks."

HUH? Why should central bankers -- after making the grotesque errors of excessive credit expansion which the BIS so lovingly details -- be able to foist off their mistakes on the taxpayer?

Unlike Bear Stearns, a central bank is unlikely to suffer a run, since its liabilities (mostly currency) aren't redeemable for the debt securities which "back" them. However, it is certainly imaginable that the Federal Reserve's trashed balance sheet could show negative equity, if its junk assets are marked to market.

Furthermore, it is also conceivable that the Fed's illegal and dangerous $2.3 trillion slush fund called the "custody account" could suffer a run. Such a run would not directly threaten the Fed, as the custody account is off-balance sheet. But it could certainly roil the Treasury market, and end the "Greenspan conundrum" of inexplicably low nominal yields during an inflationary period.

Should the Federal Reserve slip into negative equity, I would dearly love to see a group of concerned citizens file an involuntary Chapter 7 bankruptcy petition to liquidate it.

[Jun 29, 2008] Energy as a share of nominal consumer spending

Just to put things in perspective. This is through the first quarter so it does not reflect the last pop in energy prices.

It is now 6.6% as compared to a low of 4.2% at the double bottom and the 1970s low of 6.2%.
The peak was 9.3%.

***** [Jun 29, 2008] Envisioning a world of $200-a-barrel oil - Los Angeles Times

Although white-collar workers may be able to telecommute, they could also take a serious financial hit because soaring energy prices tend to wreak havoc on the stock market. The explosion of 401(k) plans and similar retirement accounts in the last few decades -- and the decline of traditional pensions with guaranteed payouts -- have tied workers' financial futures more closely to stocks than they were during the 1970s oil shocks. A prolonged Wall Street downturn could mean a no-frills retirement, or none at all.

[Jun 28, 2008] Ethanol and food prices

Angry Bear It is my understanding that the major byproduct of ethanol is distillers grains that are used as feed for cattle, hogs and chicken with essentially the same nutritional value as feed grains that have not had ethanol distilled out of them. All distilling ethanol does is remove the starch from the food grains and leaves the protein, etc, that animals need to grow.

.... I ran across a very good article by Richard Perrin at the University of Nebraska on Ethanol and Food Prices

Food prices in the U.S. rose dramatically in 2007 and early 2008. Given the integration of the world markets for foodstuffs, prices increased around the world as well, leading to riots in a number of countries in early 2008. The popular press has tended to attribute these food price increases to demand for corn by the ethanol industry. Grain prices are one determinant of food prices, but they constitute less than 5% of food costs in the U.S.(a higher percentage elsewhere.) This paper focuses on the likely relationship between ethanol and food prices, ignoring the potential role of other important contributors. It finds that ethanol is responsible for no more than 30-40% of the grain price increases of the last 18 months. Food prices in the US increased about 16% over the last five years,7% over the past 18 months, but rising grain prices have contributed only about a 3% cost increase over these periods. It is reasonable to conclude that ethanol is responsible for increases in US food prices about 1% in the last two years – a relatively small proportion of actual of U.S. food price increases. In food-insecure areas of the world, however, the impact of ethanol on food prices has been higher, perhaps as much as a 15% increase, simply because the typical food basket in those areas contains more direct grain consumption.

so I sent him an email with my question and he was nice enough to respond with this:

You are right. One-third of the corn processed for ethanol is expelled as distillers grains and solubles (DGS.) (One third is ethanol, one-third CO2.) DGS has slightly higher feed value than corn when it's fed to ruminants (I have a publication with an animal scientist on this issue, if you become deeply interested, and could direct you to some others.) Since DGS can be directly substituted for corn, putting a ton of corn into an ethanol plant really only extracts 2/3 ton from the animal feed supply, so it would have been reasonable for me to assert that ethanol has accounted for only 30% of new net withdrawals of the world's coarse grains since 2000 (rather than 40%.) China, Sub Saharan Africa, and South America are each responsible for about 15%.

So the standard treatment of ethanol in the press and blog is significantly misleading.


Reading the brochures on the subject from various land grant universities in corn country suggest that distillers grain can be used for 10-20% of the feed volume for beef, pork or poultry. So the analysis is more complicated. For example, if corn was 50% of the feed volume before, ethanol-related demand has resulted in a doubling of corn prices, and distillers grain is free but can only replace less than half the corn in the diet, then the total cost of feeding the livestock has still increased.

As others have pointed out, corn starches are the starting point for large quantities of other ingredients that are heavily used -- eg, corn syrups for sweeteners -- and distillers grains are worthless for those applications.
Michael Cain | 06.28.08


Food is one of the most energy intensive sectors of the economy. I trying to remember this from the 1970s, but it ranks about fourth or fifth after energy, chemicals and transportation.
spencer | 06.28.08


wish I could give you numbers. We raise steers on our small pasture. They are supposed to be grass eaters, as someone noted above. The guy we buy our boys from has a racket he loves. His herd is grass fed but he hauls off the mash left from a small microbrewery that moved to town. It is free to him and a deal for the brewery because it is waste. He does agree his cows grow bigger eating this mash. ps he's a veterinarian.

A question I think is appropriate to your inquiry is how much mash is recycled like this. I think the point of view you're arguing with states the grain is taken OUT of the feed chain.

Sorry, I'm contributing what I know, but now you have 2 unknown numbers-how much beef you can grow with mash and how much mash is recycled as feed. What does Anheuser Busch do with their mash?
Laurie | 06.28.08


According to the University of Minnesota some 8 million metric tonnes of distillers grain were used in 2006 and it could reach 10 to 14 million metric tonnes within a few years. It has become a very big deal in the relevant markets..
spencer | 06.28.08


***Rather the Department of Agriculture and/or Bush Administration argument that ethanol production plays an insignificant role in the current run up in food prices is correct.*** Spencer

First of all, it's the Bush administration, so the odds on bet is that they are dead wrong.

Second, The Law Of Conservation of Energy and Kirchoff's Laws analogs (basically, what goes in must come out) have not been repealed. Every calorie/kilocalorie/BTU/Joule that ends up in ethanol does not end up fueling livestock or people.

A little quick Googling tells me that a bushel of corn contains 314000 BTU and will generate 2.16 gallons of ethanol with 84000 BTU each. That says that assuming no waste heat or anything (unlikely), the most energy that can be contained in the unconverted waste from ethanol production is 314000 - 2.16*84000 = 132560 BTU. Further, the stuff that gets converted into Ethanol is presumably the stuff that is easy to handle -- fructose and starch. I can't imagine that cows don't process those as efficiently as omnivores like ... well ... us. So the 132560 BTU probably contains a relatively high percentage of stuff so indigestable that not even a cow can break it down.

Conclusion: The idea that the waste from ethanol production is anywhere near as nutritious as the corn that goes in sounds pretty unlikely.

BTW, the economics of corn look to be quite complex. More complex than I want to tackle. But my bet would be that the idea that ethanol is not a significant contributor to the run up in food prices strikes me as likely being a crock.
vtcodger | 06.28.08

[Jun 27, 2008] The Impact of $200 Oil

The LA Times has a story on the impact of $200 oil: Envisioning a world of $200-a-barrel oil. The story discusses some possible impacts of higher oil prices on consumer behavior, transportation, trade and the workplace (more telecommuting, fewer work days, etc.)

On housing:

As for the ... beleaguered housing market, prices are falling faster in areas requiring long commutes -- such as Lancaster and Palmdale -- than in neighborhoods closer to job centers.

Sky-high gas prices "would basically reorient society to where proximity would be more valuable," said Tom Gilligan, finance professor at USC.

For trade:
"To put things in perspective, today's extra shipping cost from East Asia is the equivalent of imposing a 9% tariff on East Asian goods entering North America," said Rubin of CIBC World Markets. "At $200 per barrel, the tariff equivalent rate will rise to 15%."
All the same arguments have been made for $140 oil...

[Jun 27, 2008] Nouriel Roubini Warns of Another Broker-Dealer Run

naked capitalism

The first part of the post inveighs against the so-called delusion of the last few months that the credit crunch is on the mend. We've been firmly in that camp, and true to form in the credit contraction, events have proven Roubini correct.

Suppose that a run – triggered by concerns about illiquidity and solvency – occurs against a major broker dealer (say Lehman) would the Fed come to the rescue again? The answer is not sure: such broker dealer has access to the PDCF but sharply borrowing from this facility would signal that the institution may be bleeding liquidity and be in trouble; thus large access to the Fed facility may cause the run on the liabilities of such financial institutions to accelerate rather than ebb. The reason is as follows: if creditors of the broker dealers knew with certainty that the Fed liquidity tab is open and unlimited the existence of the facility would stop the run. But if there is any meaningful probability that the amount that the Fed would be willing to lend to an institutions using that facility is not unlimited and is not unconditional then use of the facility may accelerate the run – as those first in line would have access to the liquidity provided by the Fed lending to the broker dealer in trouble while those waiting may be stuck once the lending stops. This is akin to a currency crisis in a pegged exchange rate regime triggered by a run on the forex reserves of a central bank. Once the reserves are running down and investors expect that the central bank will run out of reserves the run accelerated and the collapse of the peg occurs faster.

So why the Fed would not provide unconditional and unlimited liquidity to a broker dealer in trouble and thus allow the run to occur? Several reasons: the Bear Stearns actions were borderline illegal; the Fed cannot keep on bailing out any major broker dealer in trouble; the Fed may be running out of Treasuries to swap for illiquid/toxic securities; the Fed is starting to face credit risks from swapping and holding toxic assets (the $29 billion given to Bear, the hundreds of billions swapped via the TAF and TSLF); the authorization for the PDCF expires in the fall; the Fed should not bail out – with risks to its own balance sheet institutions that may be insolvent on top of being illiquid.

Certainly the rising financial tsunami ahead as the economic contraction gets worse, the financial/credit losses mount, the credit and liquidity crunch gets worse will test both the ability and the political willingness of the Fed to further bail out major financial institutions that are in serious trouble. So the worst is well ahead of us – not behind us – for the real economy and financial markets.

[Jun 27, 2008] "Why the Stock Market Had a Terrible Day"

Economist's View

I think the Fed made the right move at its last rate setting meeting when the target rate was held constant, but Robert Reich doesn't share that view. He wants action on both the monetary and fiscal policy fronts to prevent a downturn, rebuild infrastructure, and implement green technologies. I don't think we need the threat of a recession to justify spending more on infrastructure and the environment, so I'd support that in any case:

Why the Stock Market Had a Terrible Day, by Robert Reich: The big surprise is why anyone should be surprised the stock market dropped 3 percent today. The immediate trigger was the price of oil moving above $140 a barrel for the first time. A secondary trigger was yesterday's decision by the Fed not to reduce interest rates. (Some conservatives maintain it was the Fed's failure to RAISE them that caused today's ruckus on Wall Street... They're wrong. The recession is the biggest worry for everyone...) Another was the implosion of the US autos sector, and additional writedowns by major Wall Street banks.

But behind all of this is the one fundamental fact that economic analysts would rather not dwell on: American consumers are at the end of their ropes. High energy prices have contributed to it, as have high food prices. Consumer confidence is plunging. Housing prices are still dropping, which means the piggy banks of home equity and refinancing are closing.

But without consumers, there's no one to buy all the goods and services we create. Sure, big American companies are doing fine abroad, but foreign sales can't sustain them. Nor can exports. Hence, bond defaults by companies are up. Earnings are down.

What to do? Two things. We need an expansive fiscal policy that stimulates the economy with infrastructure spending -- especially mass transit, levees, and bridges, as well as investments in green technologies.

We also need a more progressive tax system that puts more money into the hands of the middle class and working class -- which will spend it. ...


Never Learn says...

It seems only the final collapse of the monetary system predicted by Mises will satisfy the Reich's of this world. They can't imagine the possibility that easy money caused this, and more easy money will not fix it.

Consumption is not the economy. Somehow many smart people seem to have equated the two. It's akin to judging your neighbors wealth by how much they spend. Can be very misleading.

[Jun 26, 2008] Commodities Spike, Scarce Credit Hitting LBO Companies Hard

naked capitalism

The Financial Times reports on a new, troubling credit crunch phenomenon. Companies carrying a lot of LBO-related borrowings walk a tightrope since the high debt burden gives them little room for error.

But in this downturn features an unanticipated rises in raw materials, plus in some cases, cuts in credit facilities that were important buffers. The combination may lead to an unprecedented level of defaults in LBOs.

In past credit cycles, junk bond default rates peaked at a bit over 15%. But original issue junk bonds were the invention of Michael Milken; prior to him, the only junk bonds were investment grade companies that fell on hard times. The 1990-1991 recession, which followed another corporate buyout binge, was a short, sharp contraction without commodities price pressure. The painful early 1980s slump had both high commodities prices and punitive interest rates, but corporate balance sheets showed much lower gearing than today.

Another departure form the early 1990s: overlevered companies with sound businesses could typically restructure their debt. The FT suggests that companies whacked by input price rises and a funding crisis may wind up being shuttered, which means that aggressive financing won't hurt only the private equity firms who concocted the deal, but employees and communities as well.

From the Financial Times:

The rise in oil prices has struck with increasing severity in the past two quarters. Even two months ago, the industry was forecasting vehicle sales of 15m. Today, that figure has been slashed to 12.5m. The very speed of this change in economic circumstances combined with the contraction in credit means that companies have far less flexibility in avoiding bankruptcy court.

That suggests a new stage in the credit crunch. "Companies are running out of cash because of higher costs and the banks are cancelling revolvers wherever they can," those close to the restructuring said. Moreover, in the absence of financing, the chances are far greater that a company might be forced to enter into a fire sale of assets.

[Jun 26, 2008] The Short View: Credit fears resurface

"Fears are mounting that conditions are set to deteriorate markedly in credit markets."

Fears are mounting that conditions are set to deteriorate markedly in credit markets.

Lehman Brothers warned this week that spreads on credit default swaps, which track the cost of insuring corporate debt against default, could soon spike beyond the levels seen at the time of the Bear Stearns rescue in March.

[Jun 26, 2008] In Reversal, Older Employees Keep Working in Downturns

naked capitalism

Economic Policy Institute discusses a troubling pattern. Historically, when the economy went south, a larger proportion of workers retired early. It isn't clear whether they were offered packages, were sacked, or left for other reasons (say their job was redefined and they no longer enjoyed it), but the point is they left the workforce.

Now we see a change: the laborforce participation of older workers increases in bad times. And since underemployment still counts as employment, some of this cohort no doubt includes individuals who lost their jobs and still need a paycheck, but are bringing in less income than before.

From Monique Morrissey at Economic Policy Institute: ...

[Jun 25, 2008] FOMC: Upside Risks to Inflation by Barry Ritholtz

It looks like the U.S. needs to deal with a systemic financial crisis and, simultaneously, rising prices in resources that were once priced very low: energy (you need to add 50% of defense spending to the oil bill to get closer to real cost), raw materials, to a certain extend, food, and, possibly, water.

The well-parsed FOMC statement remains too cheery on growth, not concerned enough about inflation -- and is totally irrelevant.

What matters is whether the Fed can tighten or loosen rates or not -- and they apparently cannot. The Fed has painted themselves into a box, with a recession, housing collapse and credit crunch on one side, and $140 Oil, rampant food and other inflation on the other.

What's a jawboning Fed Chair to do? As little as possible . . .

American Express sees worsening credit conditions Financial News - Yahoo! Finance

Many investors remain worried about consumer debt trends.
Business conditions continue to weaken in the U.S. and so far this month we have seen credit indicators deteriorate beyond our expectations," said AmEx Chief Executive Kenneth Chenault in a statement.

The rocky consumer climate comes amid a tough legal period for credit card companies, which are battling among themselves and with federal authorities around the world over various rules and fees. Wednesday's settlement was seen by industry experts as positive for both companies -- mainly because the $1.8 billion figure was close to expectations, and because the two companies can now put the litigation behind them.

Back in January, AmEx CFO Daniel Henry predicted the write-off rate in the company's U.S. segment would peak at 5.1 percent to 5.3 percent in 2008. But the write-off rate in U.S. card services -- including both on-balance sheet cardmember loans and off-balance sheet securitized cardmember loans -- by March had already reached the 5.3 percent level.

Now, it's June, and delinquencies and defaults are still rising.

The big catalysts are falling home prices, rising commodities costs and the shaky job outlook. Economic data has been coming in weak: on Tuesday, one report showed consumer confidence at its lowest level since 1992 and another showed the average U.S. home price at its lowest level since 2004. And next week, economists anticipate the Labor Department will report the sixth straight month of jobs losses in June.

Keefe, Bruyette & Woods analyst Sanjay Sakhrani noted that AmEx will probably have to lower its prediction of earnings-per-share growth of 4 percent to 6 percent for 2008, which would amount to $3.51 to $3.61.

If AmEx does meet its own earnings guidance -- which it reiterated only a few weeks ago -- it would be mostly due to the MasterCard settlement, according to Citigroup analyst Bradley Ball. Ball also noted that it appears AmEx will likely hold off on business-building initiatives until conditions get better.

The informal warning from American Express -- which reports second-quarter financial results next month -- arrived a day ahead of Discover's earnings for the quarter that ended May 31.

[Jun 25, 2008] Mish's Global Economic Trend Analysis Things That Have Not Yet Happened

Here's my take: Before we can say the worst is over or the danger has passed, the storm has to reach shore first. With that in mind I thought it might be interesting to look at a few headlines of things that are going to happen but have not happened yet.
  1. Bank Failures: Bigger U.S. bank failures may be coming – FDIC
    Future U.S. bank failures linked to the downturn in the real estate market may include "institutions of greater size" than in the recent past, Federal Deposit Insurance Corp Chairman Sheila Bair said on Thursday.
    I talked about the expected wave of bank failures in Too Late To Stop Bank Failures.
  2. Monoline Fallout: Citi, Merrill, UBS Face Monoline Losses, Whitney Says We have yet to see the fallout from the downfall of the monolines (Ambac (ABK) and MBIA (MBI)) but we will.
  3. $500 Billion Option ARM Crisis Coming Up : Option Arms - The Next Real Estate Crisis
    By April, 2009, hundreds of thousands of option ARM mortgages will begin resetting, bringing on a fresh wave of foreclosures. According to Credit Suisse (CS), monthly option recasts are expected to accelerate starting in April, 2009, from $5 billion to a peak of about $10 billion in January, 2010. Today, outstanding option ARM loans in the U.S. total about $500 billion, about 60% of which were sold to California homeowners, according to Credit Suisse. Option ARMs were especially popular in the state, where they were heavily marketed during the boom by such companies as Countrywide Financial (CFC), Washington Mutual (WM), and Wachovia (WB). "Most of the public is thinking that the subprime thing is over, but this is another thing waiting," [said Chandrajit Bhattacharya, vice-president and mortgage strategist at Credit Suisse Securities].
    By the way, that article is not contrary to what I presented in Greenspan Conundrum In Reverse. The problems with Pay Option ARMs are negative amortization, falling home prices, and payment shock. Those are far bigger problem right now than the risk of rising interest rates on regular ARMs that are about to reset.

    Bernanke has minimized the fallout from ARM resets by slashing interest rates. Negative amortization, falling home prices, and payment shock problems are another matter altogether. I have expected an acceleration of Pay Option ARM problems for quite some time. The storm is about to hit.

  4. Additional Problems:
    • A rising unemployment rate. I expect 6% by the end of the year and 7% or higher in 2009-2010.
    • An imploding commercial real estate.
    • Rising junk bond defaults.
    • Rising numbers of foreclosures and bankruptcies.
    • Rising credit card defaults.
  5. Economic Picture Worsening. The economic picture is worsening across the board. And not just in the US but in the UK and Europe as well. A housing bust is now underway in the UK. Inquiring minds may wish to consider UK Housing Market Seizes Up. In the meantime, Until Things That Have Not Happened Yet Do Happen, it defies credibility to suggest that danger has faded.
  6. Impact of the Highly Improbable: The above is a discussion of "the known". There is also a huge risk factor from a Black Swan Event.
    Last May, Taleb published The Black Swan: The Impact of the Highly Improbable. It said, among many other things, that most economists, and almost all bankers, are subhuman and very, very dangerous. They live in a fantasy world in which the future can be controlled by sophisticated mathematical models and elaborate risk-management systems. Bankers and economists scorned and raged at Taleb. He didn't understand, they said. A few months later, the full global implications of the sub-prime-driven credit crunch became clear. The world banking system still teeters on the edge of meltdown. Taleb had been vindicated. "It was my greatest vindication. But to me that wasn't a black swan; it was a white swan. I knew it would happen and I said so. It was a black swan to Ben Bernanke [the chairman of the Federal Reserve]. I wouldn't use him to drive my car. These guys are dangerous. They're not qualified in their own field."

    In December he lectured bankers at Société Générale, France's second biggest bank. He told them they were sitting on a mountain of risks – a menagerie of black swans. They didn't believe him. Six weeks later the rogue trader and black swan Jérôme Kerviel landed them with $7.2 billion of losses.

    So not only is there the risk of the known, there is also risk of the unknown. Bernanke and Paulson have factored neither into their Pollyannaish statements. Talk from both of them is getting more ridiculous by the minute.

[Jun 25, 2008] Orders for U.S. durable goods were unchanged in May

It looks like slowdown continues unabated, inflation pressures rise dramatically and stagflation is no longer just a possibility...
June 25 (Bloomberg) -- Orders for U.S. durable goods were unchanged in May as companies trimmed investment plans, signaling the economy may keep slowing.

Bookings for goods meant to last several years totaled $213.6 billion, the Commerce Department said today in Washington. April orders were revised to show a 1 percent drop that was larger than previously estimated. Excluding demand for transportation equipment, which tends to be volatile, orders declined 0.9 percent, the first drop in three months.

The figures indicate that the domestic slowdown, spurred by the housing recession and weaker consumer spending, offset the benefit of record exports. That pattern probably continued in June, as reports from the New York and Philadelphia Federal Reserve banks last week showed manufacturing in their regions shrank at a faster pace this month.

[Jun 25, 2008] Case Shiller Futures Suggest 2010 Housing Bottom

"TC" writes:
Mish, it's TC here and it's now been 2 months since I last provided you with a Case-Shiller update. Here is the latest data based upon the today's futures market and today's Case-Shiller data release.

As you've now seen in the media press releases, prices have continued lower and we're now back to late 2003/early 2004 prices in many areas. What you may not hear in the media however is the pure dollar amounts of the losses (e.g. $270k in LA) and that the futures market is increasingly making a bet that mid to late 2010 will mark the housing bottom.

This is in stark contrast to the bets of just 4 months ago when a bottom forecast for 2013. An interesting fact about this market timing change is that projected percentage decline has not changed. In other words the futures market is pricing in an identical magnitude loss, but just for it to happen much faster.

[Jun 25, 2008] Can Battery Technology Save GM

Everyone is underestimating how bad this recession is going to be. Unemployment is going to soar. I am sticking with the call I made in Case for an "L" Shaped Recession.

Unemployed people do not buy cars, and many will be struggling to make payments on the cars they have. Repossessed SUVs are not going to command a very good price. GM is bleeding cash badly and will continue to bleed cash badly, and at a rate far greater than the industry expects in my opinion.

[Jun 23, 2008] New Crisis Threatens Healthy Banks -

Late Loan Payments Hurt Smaller Lenders That Dodged Subprime Mess

By David Cho Washington Post Staff Writer
Sunday, June 22, 2008; Page A01

Increasing struggles by consumers and businesses to make payments on a variety of loans, not just mortgages, are setting off a new wave of trouble in the financial sector that is battering even institutions that had steered clear of the subprime-home-loan debacle.

Late payments on home-equity loans are at a record high, according to fresh data from the Federal Deposit Insurance Corp. The delinquency rates on loans for cars, small businesses and construction are spiking to levels not seen in a decade or more.

Unlike last year, when soaring mortgage defaults sparked a crisis of confidence in the financial system, the root of these problems is the downturn in the broader economy. Simply put, consumers and businesses are strapped for cash with job losses growing and retail sales falling, economists said.

"We are not finished with the mortgage problem, but you are starting to see increased delinquencies in other forms of consumer debt," said Paul Kasriel, an economist at Northern Trust Securities. "We are in the eye of the hurricane. We had the first wave of the credit crisis, and it was quite damaging. But there's another wave coming, and it's likely to be as destructive."

[Jun 23, 2008] Many Hurricanes, Many Eyes

See also $2 Trillion Reduction In Credit Card Lines Coming Up

Often times it is not the leading front of the hurricane that does the most damage, it is the backside. Here is the three stage pattern of hurricane damage.

The "calm" Bernanke thinks we are in, is nothing more than the prelude to the back side of a hurricane. My post, Things That Have Not Yet Happened, is essentially about the backside of the hurricane.

[Jun 22, 2008] Oil Currency Hypocrisy by Kenneth Rogoff

"The administration's multi-pronged effort to postpone pain to US consumers, including super easy monetary and fiscal policy, only risks a greater crisis in the not-too-distant future."
Project Syndicate

CAMBRIDGE – Does it make sense for United States Treasury Secretary Hank Paulson to be touring the Middle East supporting the region's hard dollar exchange-rate pegs, while the Bush administration simultaneously blasts Asian countries for not letting their currencies appreciate faster against the dollar? Unfortunately, this blatant inconsistency stems from the US's continuing economic and financial vulnerability rather than reflecting any compelling economic logic. Instead of promoting dollar pegs, as Paulson is, the US should be supporting the International Monetary Fund's behind-the-scenes efforts to promote de-linking of oil currencies and the dollar.

Perhaps the Bush administration worries that if oil countries abandoned the dollar standard, today's dollar weakness would turn into a rout. But the US should be far more worried about promoting faster adjustment of its still-gaping trade deficit, which in many ways lies at the root of the recent sub-prime mortgage crisis. The administration's multi-pronged effort to postpone pain to US consumers, including super easy monetary and fiscal policy, only risks a greater crisis in the not-too-distant future. It is not at all hard to imagine the whole strategy boomeranging in early 2009, soon after the next US president takes office.

...To be sure, there are important differences between the oil exporters and the Asian economies. With world energy prices at record highs, it makes sense for oil economies to run surpluses, thereby saving for when oil supplies eventually peter out. But flexible exchange rates are still the right way for the region to develop a more balanced economic and financial base. As for the US, it makes little sense to support dollar currency pegs in any large emerging market, at least until its trade balance normalizes. This is no time for oil currency hypocrisy.

[Jun 22, 2008] The Specter of Global Stagflation by Nouriel Roubini

Project Syndicate

The world has come full circle. Following a benign period of a positive global supply shock, a positive global demand shock has led to global overheating and rising inflationary pressures. Now the worries are about a stagflationary supply shock – say, a war with Iran – coupled with a deflationary demand shock as housing bubbles go bust. Deflationary pressure could take hold in economies that are contracting, while inflationary pressures increase in economies that are still growing fast.

Thus, central banks in many advanced and emerging economies are facing a nightmare scenario, in which they simultaneously must tighten monetary policy (to fight inflation) and ease it (to reduce the downside risks to growth). As inflation and growth risks combine in varied and complex ways in different economies, it will be very difficult for central bankers to juggle these contradictory imperatives.

[Jun 22, 2008] High oil prices ? Weak dollar ? Blame Bush By MARTIN FROST

"The immediate cause of rising oil prices is the weak dollar. "
6/10/08 |

Few issues focus the public's attention on politics like the price of gasoline. It keeps going up, the public wants relief, and politicians are held accountable for not fixing the situation. Yet to solve the problem, you first need to know the cause of the illness.

Why do gasoline prices keep going up? Is it because Congress and President Bush have not fashioned energy policies to reduce our dependence on foreign oil? Clearly that's part of the answer. Our government can do more to reduce demand and increase supply through conservation, auto fuel efficiency standards, tax breaks and subsidies for development of alternative energy sources, and incentives to drill more in the U.S.

But that's not the entire story.

The immediate cause of rising oil prices is the weak dollar. Oil-producing countries are requiring more dollars to purchase the same barrel of oil because the dollar is worth less today than it was a few years ago. Anyone who travels abroad knows about the weak dollar. In 2000, it took $1 to purchase one euro.

Today, it takes close to $1.60 to purchase a euro. A Canadian dollar is now worth the same as a U.S. dollar, whereas eight years ago it was worth considerably less than an American dollar.

And why do we have a weak dollar?

You can start with the economic policies followed by the Bush administration. During Bush's 7½ years in office, we have maintained large trade deficits with the rest of the world and run up large domestic budget deficits to pay for our misadventure in Iraq and large tax cuts for the wealthy. Also, according to a monograph recently issued by the Center for American Progress, the Federal Reserve's low-interest policy has caused a 14 percent decline in the value of the dollar since last September.

The center estimates that "nearly 40 percent of the increased price American consumers are paying for oil is attributable to the weak dollar," even after factoring in the effects of increased global demand from countries such as China.

So what are we to do?

First, the public should demand that Congress pass comprehensive energy policy that adequately addresses both the demand side and the supply side of the issue. Republicans controlled both Congress and the executive branch for most of the first six years of the Bush presidency, and yet nothing was done. So you can't just blame the Democrats for lack of action on the legislative front - even though pre-1995 Democratic Congresses didn't take significant action, either.

Secondicies that shore up the value of the dollar rather than run up big trade and budget deficits. Foreign producers will continue to raise the price of oil as long as the value of the dollar continues to drop. It was Democratic President Bill Clinton who last balanced the federal budget, and it may take another Democratic president to do this again.

Some may want to beat up on Congress for not acting more boldly now on energy policy. But don't forget it's "the man behind the curtain" and his Republican allies in Congress who pursued economic policies that have devastated the value of the U.S. dollar. When the history of this disastrous administration is written, the weak dollar should join the war in Iraq and Hurricane Katrina on the list of the effects of abysmal policy failures.

Martin Frost represented the Dallas-Fort Worth area in Congress from 1979 to 2005. He rose to caucus chairman and head of the Democratic Congressional Campaign Committee. He is now an attorney with Polsinelli Shalton Flanigan Suelthaus in Washington and serves as president of America Votes, a grass-roots voter mobilization and education effort.

[Jun 21, 2008] bear indictment

Pretty educating read...

[Jun 21, 2008] $2 Trillion Reduction In Credit Card Lines Coming Up

"...many of the debt slave provisions of the bill to be undone after Obama is elected"

Mish's Global Economic Trend Analysis

Credit is drying up everywhere. Banks are now concerned (finally), about rising credit card debt. They have every reason to be. The bankruptcy reform act of 2005, which encouraged such reckless lending is now blowing up in lenders' faces.

Banks and credit card companies wrote that bill. They got everything they wanted. It goes to show you two things:

1) Be careful of what you ask, you might get it.
2) Greed kills.

Furthermore, I expect many of the debt slave provisions of the bill to be undone after Obama is elected. That will increase defaults. Even if an unwinding of that "reform" does not happen, the writing is on the wall for lenders for the simple reason "You cannot get blood out of a turnip".

Regardless of what the law says, unemployed people are not going to be paying credit card bills. A second point is that someone unemployed, with no income, will meet the strict guidelines for wiping away all their debt.

[Jun 21, 2008] Bankers and Patriots

Capital has no motherland...

naked capitalism

Uwe Reinhardt is a professor at Princeton whose son (the Marine mentioned below) served in Iraq. This piece first appeared in the Princetonian in April; I thank Willem Buiter for reproducing it on his blog.

As the Fed and the Treasury once again staff the shovel brigade behind one of Wall Street's periodic asset-bubble parades - lest the foul economic odor in its wake seep too deeply into the rest of the economy - my mind wanders back to spring 2002, when the previous asset bubble had burst.

... ... ...

At their best, our financial markets play a pivotal role in enhancing human welfare. They then channel the savings of households, business firms and governments anywhere in the world efficiently to their most productive uses anywhere else in the world and allocate financial risk from those unable or unwilling to bear it to those who can tolerate it. Many of the recent innovations in these markets such as structured securities, currency- and interest-rate swaps, credit default swaps, and so on, have made these important functions ever more efficient.

But when investment banks seek profits by recklessly concocting hundreds of billions of mortgage-backed securities that are anchored in shaky mortgages whose quality no one has bothered to check, sell these dodgy derivatives to others, and even risk their own institution's equity cushions by borrowing billions of dollars to invest in junk securities themselves, they are not making their country stronger. Instead, they act like reckless laboratory scientists who concoct toxic substances that can infect not only them, but also millions of innocent bystanders.

When investment banks sell multiple credit default swaps to buyers who do not own the underlying bond, but merely want to bet on its default, the banks stray into pure Las Vegas-style gambling. Productive risk taking is the central driver of efficient capitalism, but how does helping person A gamble on the default of a bond held by person B strengthen the American economy? Why not sell bets on the weather as well? No one seems to have a clear idea of the net financial exposure our banks have to the $45 trillion or so of notional credit-default swaps currently reported to be outstanding. In an era of widespread credit defaults, such multiple credit-insurance contracts on given bonds could confront some banks with huge claims that their equity cushions might not be able to absorb, forcing the Fed and the Treasury yet again to mobilize their shovel brigade, at taxpayers' expense.

Finally, when, for handsome fees, smooth-talking investment bankers persuade unsophisticated treasurers of local school districts or small endowments to enter into highly risky and opaque interest-rate swaps, or into investing their limited funds in the so-called "toxic waste" tranches of complex structured securities, they are not making America stronger. They risk driving important local institutions to the brink of bankruptcy. An innate professional ethic deters the overwhelming fraction of our physicians from exploiting their patients' clinical ignorance as no set of explicit regulations ever could. Does an analogous ethical anchor - a financial Primum Non Nocere - constrain Wall Street as well?

This is not an idle question. American leaders of finance now promise to practice self-discipline guided merely by regulatory principles rather than by explicit rules. That would be a sensible approach, but only in markets whose agents are ethically principled and, yes, patriotic - like, say, 18-year old sailors, soldiers and Marines.

[Jun 21, 2008] US corporate earnings expected to fall

Does this mean S&P 500 might return again to 1000 level ? - In depth

Second-quarter earnings for S&P 500 companies are forecast by analysts to fall 9%, according to Thomson Reuters.

The bulk of the latest quarterly decline in profits is led by financials, seen falling 53%, and consumer discretionary groups, forecast to slide 14%.

In contrast, energy companies are expected to boost earnings growth by 22% during the quarter as oil remains near a record $140 a barrel.

Doug Peta, strategist at J&W Seligman, said: "It remains to be seen whether companies have pricing power. If they do, that will squeeze consumers even more and preserve profit margins at the expense of higher inflation."

Given the weak economic backdrop, economists doubt that companies can fully pass along their higher production and service costs to consumers.

In spite of recent stimulus cheques being sent to many consumers, corporate profit margins look vulnerable.

On Wednesday, FedEx was the latest company to lower its earnings outlook amid higher fuel costs.

Stephen Stanley, chief economist at RBS Greenwich Capital, said: "In a weak economic environment, cost-push inflation tends to be contained by soft final demand. Firms try to pass along their cost increases, but customers balk, and consumer prices can stay benign."

Good news on consumer inflation may not bode well for corporate profits.

Mr Peta said: "The economy will dodge a bullet as inflation eases, but companies will have to eat higher production costs and the trajectory of S&P earnings growth will weaken."

[Jun 21, 2008] MF says US economy is set to 'stagnate'

"We anticipate the economy will slow to virtual stagnation in the second half of the year." The IMF is now forecasting no growth at all in the US this year, measured from the final quarter of 2007 to the final quarter of 2008.

The IMF said continued economic weakness would result in inflation risk going down, not up, in the coming months, and urged the Federal Reserve to keep interest rates on hold for the time being – challenging market expectations that rate increases will soon be required. The IMF also suggested that the dollar had declined to a level at which it was closer to, if not at, its medium-term equilibrium value, on a broad trade-weighted basis.

John Lipsky, second-ranking IMF official, said: "We anticipate the economy will slow to virtual stagnation in the second half of the year." The IMF is now forecasting no growth at all in the US this year, measured from the final quarter of 2007 to the final quarter of 2008.

Mr Lipsky said the IMF does expect that growth will start to pick up in 2009 but said that recovery will be "gradual rather than aggressive".

[Jun 20, 2008] Economist's View Calvo Exploding Commodity Prices, Lax Monetary Policy, and Sovereign Wealth Funds

Storage Cost is Zero says...

"But allocating into less liquid, unfamiliar categories of assets is slow work if you want to do it well. Perhaps current oil revenues outstrip oil producers' capacity to find good investment opportunities, and they view oil-in-the-ground as a better second-best asset than dollars in the bank."

Storage costs for leaving oil in the ground is essentially zero. From the point of view of a national oil company, why trade a depleting asset for paper that will just be inflated away? Pump just enough to meet current needs, and what can be efficiently invested in inflation hedges.

[Jun 20, 2008] Corporate Democracy is a Myth by Carl Icahn

The Icahn Report™
Recently, there has been a great deal of outrage concerning the huge pay and severance packages awarded to a number of CEOs. There has been much criticism of the fact that CEOs earn 520 times that of the average worker. A great deal has been made of the scandalous actions of a number of CEOs and boards concerning the backdating of options. Sadly, a much deeper, more pernicious, more threatening problem of the future of our economy exists at today's corporations: many corporate boards and managers are doing an abysmal job. The lack of competent leadership makes our companies less competitive day by day, causing an upward spiraling trade and current account deficit, as well as a near meltdown of the financial sector. The buildup of incompetent boards and managers is the result of poor corporate governance. Poor corporate governance now threatens more than just potential shareholder value; it threatens this country's very economic survival.

To paraphrase Winston Churchill, "democracy might not be the greatest system there is but it is the greatest system mankind has invented so far." Many American corporations are dysfunctional because corporate democracy is a myth in the United States. They run like a decaying socialistic state. Our boards and CEOs exist in a symbiotic relationship where the boards nourish the CEO with massive stock options that are re-priced downward if the companies stock declines - making them forever valuable. They reward the CEO with pay packages and bonuses when the stock is floundering or the CEO is leaving the company. Corporate performance and the shareholders welfare seldom enter the picture. What kind of democracy is this? There is no accountability.

The inherent quid pro quo is to pay the board huge retainers for attending several meetings per year and rubber stamp ill conceived CEO proposals. In turn, a CEO can fly around the world on the company's private jet on the "business" of visiting all the world's greatest golf courses while he runs the company – and the value of your stock – into the ground. The average shareholder can do nothing about it. A great example is the subprime mortgage mess that has cost our economy and the populace untold billions of dollars and personal hardship. These losses did not stop boards from awarding huge severance packages to the CEOs most responsible for the current carnage.

It is the board's responsibility to hold a CEO accountable, and remove the CEO if he or she is not producing results. But exacting such a measure requires effort and strategic consideration, and boards are often too lazy and/or passive to rock the boat, especially since the company will continue to pay and pamper and even indemnify them under almost any circumstances. Board members receive expensive tickets to important sporting events, the theatre, and are also treated to use of the company's fleet. Worst of all, the board itself is not made accountable because corporate board elections are generally a joke.

Board meetings are often a complete travesty. I know because I have sat and do sit on a number of boards where I am in the minority. Because of this, today our economy is in a major crisis. Many of our companies are incapable of competing. Additionally our banking system has issued mortgages that cannot and will not be paid back. We are in this situation because there is no leadership in the executive suite. Why did we get here? Because in corporate America there are no true elections. It is tyranny parading as democracy. It's a poison running through the blood of corporate America. Perhaps, with enough public support, the lawmakers and regulators will take note.

When you rid a company of a fruitless board, the rewards are often enormous because the underlying company and its employees can be excellent. It is the top level management that hangs like an albatross around the company's neck. Years from now historians will marvel why we the shareholders – the legitimate owners of companies – did not do something effective about removing terrible managements. We can do something about the current situation. I will discuss in future entries how simple it can be and what has constrained us from taking action.

[Jun 20, 2008] SoCal home woes could mean 50% price drop

"homallucinations," or the ability to convince oneself that while the price of everyone else's home will fall, your neighborhood is clearly different.

[Jun 19, 2008] News are bad enough; recovery or at least slight bounce back looks more feasible. the question is in what year will it start?

The real question now is how long and deep the economic slump will be.

From The Fed And The Henhouse

[Jun 19, 2008] Paulson Pushing Harder for Fed As Financial Stability Regulator

Too little too late...

Absent some seasonal adjustments that BreakingViews($) deemed "dubious" the last three months inflation would have reached an annualized rate of 8.3%. Similarly, many analysts have started looking past headline unemployment, and find the trends in broader measures even worse. U-6, the broadest measure of unemployment, stands at 9.7%, up from 8.3% a year ago (while U-3, the official unemployment rate, was 5.5% this May versus 4.5% the May prior). And we don't need to discuss the health, or rather, the flagging-even-while-on-life-support status of the banking system.

[Jun 18, 2008] RBS issues global stock and credit crash alert - Telegraph

Hat tip to naked capitalism RBS Publishes Global Stock and Bond Crash Alert


The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks. "A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist...

... ... ...

"Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.

...The authorities cannot respond with easy money because oil and food costs continue to push headline inflation to levels that are unsettling the markets.


Yves point about the Heisenberg uncertainty principle is spot-on. The very essence of a "crash" (aka a black swan) is that you can't predict it. 9/11, the 1987 portfolio insurance run and LTCM couldn't be seen until after the fact.

btw..."focus on quality...non-cyclical...names"...

Isn't that be true in any environment? Put another way, does the note to clients really have to drop a "crash" bomb to convince them of this?

[Jun 18, 2008] GM's Last Fatal Mistake

Truck Trend is talking about GM's and Ford's inability to spot trends.
Detroit's automakers might not have been able to predict today's $4 to $5 per-gallon gasoline and diesel prices, but sales of truck-based SUVs have been sliding for the past three or four years. In its heyday, Ford sold something like 450,000 Explorers per year. Last year, it was about 179,000. Last month, Ford sold 8,122 Explorers, which is an annual rate of about 97,000 units. I'm guessing it won't sell as many as 8k Explorers this month.

SUV sales have dropped so much that CNW Research's Art Spinella says finance companies (I'm looking at you, GMAC), banks, credit unions and independent lessors will lose billions on leased truck-based sport/utilities returned over the next few years because they won't meet their residual values. The tab, he says, will approach $4.9 billion in 2008, $5.24 billion in '09 and $4.74 billion in '10, thanks to residual values off by more than $6,000 per SUV. That means General Motors, which owns 49 percent of GMAC, will continue to lose money on its non-automotive operations. It also will affect Chrysler's private equity owners, Cerberus, which owns the other 51 percent.


maxed_out Wednesday, June 18, 2008 4:07:46 AM

There is probably at least 30 million adult Americans with job skills of no use whatsoever anymore. 30 percent of US GDP is based on production, 4.2 trillion dollars. The rest is consumption.

Strip away useless military, that is maybe down to 3.5 trillion. That can support another 3.5 trillion of consumption economy, like it is in another countries (50-50). The worst case scenario is that whopping 50 percent of US GDP (7+ trillion) is going to simply disappear...

The numbers simply are much much worse than it was 1929. It is completely different to take a serious beating when you have been boxing for years (like 1930's workers) and you are in great shape than when you are a fat slob sitting on a sofa.

[Jun 17, 2008] Wachovia Still Does Not Understand Pay Option ARM Risk

Wachovia might be on the ropes due to Golden West acquisition and joins Lehman and Citi in the "financial lemons" club... Right now it is costing Citigroup and Lehman 9%+ to raise cash. The mess in pay option ARMs is starting to accelerate and it will hit Wavchovia and Washington Mutual hard. Investors should be wondering if those companies will even survive. Goldman Sachs warned that banks may need to raise an additional $65 billion, stoking worries about further fallout from the mortgage crisis. Goldman said the global credit crisis will not peak until 2009 and lowered its price targets for 14 banking companies.

In an interesting twist of irony, Wachovia is Taking New Steps to Assure Borrower Understand Loans.

Wachovia and lenders including Countrywide Financial Corp. and Washington Mutual Inc. have been burned by delinquent option adjustable-rate mortgages, often called option-ARMs. Wachovia is led by interim Chief Executive Officer Lanty Smith who replaced Kennedy Thompson on June 2, two years after the bank's $24 billion purchase of Golden West Financial Corp. at the peak of the housing boom.

"Stepping so much into the underwriting process is very unusual and almost unprecedented," said consultant David Lykken of Mortgage Banking Solutions in Austin, Texas. Wachovia spokesman Don Vecchiarello confirmed the new policy, which took effect this week.

Golden West was the market leader in option-ARM mortgages, with about $120 billion of the loans when it was acquired by Wachovia. The loans, termed Pick-a-Payment by Wachovia, allow borrowers to make lower initial payments that don't even cover the accrued interest. Almost 70 percent of Wachovia's borrowers choose to pay as little as possible.

Wachovia on April 14 said losses on its option-ARMS may reach $1.7 billion this year and $2.8 billion in 2009. That estimate may be optimistic with the bank potentially setting aside almost $17 billion to cover losses, CreditSights Inc. analyst David Hendler wrote in a June 2 report.

... ... ...

About 60 percent of Wachovia's home loans are in California, among the states hardest hit as housing prices slide.

Wachovia set aside $2.8 billion for credit losses in the three months ended March 31, mostly because of deteriorating housing markets in California and Florida. The bank wasn't collecting payments on $8.4 billion of loans, or 1.7 percent of its total loans, quadruple the level a year earlier.

Through February about 14 percent of the bank's option-ARM portfolio had loan-to-value rates of 100 percent or more, with 85 percent of those loans in California and Florida. When loan amounts exceed the value of a home, borrowers may stop paying...

... ... ...

The market clearly does not think Wachovia knows what it's doing, and neither do I.

[Jun 17, 2008] The world gets bigger - Paul Krugman - Op-Ed Columnist - New York Times Blog

Transportation costs will redefine globalization...

Now, the fuel price increase doesn't have that large an effect - at least not yet. But a very back-of-the envelope calculation using CIBC estimates of the fuel cost effect gives me a 17% contraction in trade if oil prices stay at current levels for a long time.

Business travel will also be affected. Via Felix Salmon, airlines are starting to cut long-distance nonstops.


Perhaps this is a salutary brake on some aspects of excessive globalization. Chasing low labor costs at the expense of national self-sufficiency is not good. I have been wondering when the Army is going to start importing their tanks and heavy weapons from China and Russia. We have lost a lot of manufacturing, and part of that which remains has shown itself very slow to adapt to realities: eg. GM making SUVs and gas guzzlers while killing their first electric car.
Closing SUV plants by US automakers is a great result and might eventually affect the people who decided that fuel efficiency does not matter to them since they can afford it at any price.
Will Congress increase the CAFE levels soon?
Will nuclear energy come back for the US so we can generate 80% of our power with it, like France?
Will people learn or will prejudice and false and fearful information still rule the day?

I find higher fuel prices a good effect to wake up people and government. We must increase that effect by taking away all lawmakers government vehicles and gasoline credit cards. They should feel the pain and let it affect their thinking.

- Posted by Gunther St

[Jun 16, 2008] Capacity Utilization and Industrial Production Decline

The Federal Reserve reported this morning that industrial production declined 0.2% in May.
Industrial production declined 0.2 percent in May after having fallen 0.7 percent in April. ... The rate of capacity utilization for total industry declined 0.2 percentage point, to 79.4 percent, a level 1.6 percentage points below its average for 1972-2007.
A decline in industrial production is one of the indicators of a recession (see quote at bottom). The following graph shows capacity utilization and recessions for the last 40 years.

[Jun 16, 2008] Central Banks Clash Over Monetary Policy

It looks like Greenspan's also was cheer leading ARMs over fixed rate mortgages (at the time when he should be taking away the punchbowl)... His sellout in the question of the tax cut for four more years at the office was the last stage of degradation.

Greenspan guessed wrong to bail out banks in the wake of LTCM, guessed wrong about a completely absurd Y2K scare when he poured on liquidity fueling the dotcom bubble, and guessed wrong in Spring of 2000 when he said the risk of inflation was to the upside. A few month later Greenspan overreacted, and eventually guessed wrong again by slashing rates to 1% and holding them too low too long, fueling a housing bubble. Greenspan specifically, and central bankers in general, guess wrong at every critical juncture.

[Jun 16, 2008] Why higher prices are here to stay - MSN Money

Don't expect to see any drop in the prices you pay at the pump -- or at the grocery store or anywhere else -- from any decline in the price of commodities. The price of gas at the pump actually climbed to a new high at $3.983 a gallon last week, according to automobile club AAA, even as the price of oil was falling. (And it kept on climbing, to $4 a gallon, on June 8 after a two-day rally in crude oil prices.)

You can expect the same from other commodities that have tumbled in price. Consumer prices will stay high even as commodity costs come down. Wheat prices are down. From a record $13.95 a bushel on Feb. 27, the most actively traded contract on the Chicago Board of Trade had dropped 42% to $7.78 a bushel on June 5. The prices of most other commodities -- well, except for corn, which has soared as heavy rains have held up planting -- have tumbled in recent weeks. See any drop in the price of bread or in a meal at your favorite restaurant?

[Jun 16, 2008] Oil shock is not coming, it is under way Lee J. Miller

June 16 | Bloomberg

Gazprom Aims for $1 Trillion Club on $250 Oil: Chart of the Day

OAO Gazprom Chief Executive Officer Alexei Miller made two forecasts last week that, if they come true, indicate more pain for consumers and a boon for Russia's government.

Oil will reach $250 a barrel ``in the foreseeable future,'' about 85 percent more than the current price, he said at a strategy briefing in Deauville, France, adding that the market value of state-run Gazprom will triple to $1 trillion as early as 2015.

Gazprom wouldn't be the first to reach the latter milestone. PetroChina Co. became the world's first trillion-dollar company on Nov. 5, when Class-A shares tripled on their Shanghai trading debut. PetroChina has since plunged 62 percent.

The chart of the day shows the market capitalization of the top three energy companies by value, Exxon Mobil Corp., PetroChina and Gazprom, since Jan. 23, 2006, when the Russian company began trading on the Micex Stock Exchange. Exxon's day-end peak was $527.2 billion on Oct. 18. The chart also shows the price of crude oil.

``These staggering figures may have been a shock tactic to stress one of the key themes of the day -- that Europe should accept a growing role for Gazprom,'' Morgan Stanley said in a report on June 11. Miller's comments ``seemed to us less a formal prediction than a point to highlight that oil and gas markets were undergoing structural changes,'' the report said.

To contact the reporter on this story: Lee J. Miller in Bangkok at

[Jun 16, 2008] U.S. Economy: Manufacturing in New York Contracted (Update3)

June 16 | Bloomberg

The Federal Reserve Bank of New York's general economic index dropped to minus 8.7 from minus 3.2 a month earlier, the bank said today.

... ... ...

``Unfortunately, further declines are likely in the months ahead,'' said Steven Wood, president of Insight Economics LLC in Danville, California. ``Demand was moribund even with robust exports

... ... ...

The New York Fed's new orders index declined to minus 5.5 from minus 0.5, today's report showed. Shipments dropped to minus 6.5 from 4.6. A gauge of unfilled orders decreased to minus 10.5 from minus 4.4. The index of inventories improved to minus 2.3 from minus 6.5.

The report showed raw-material costs continue to hamper business. The index of prices paid eased to 66.3 from a record 69.6. The gauge of prices received increased to 26.7, the highest since January 27.4, from 15.2.

`Ominous Sign'

The increase in prices is ``an ominous sign if it proves to be general and particularly if it extends to the retail sector,'' economists at Goldman Sachs Group Inc. in New York, said in an e-mail to clients.

[Jun 16, 2008] Fisher- Silly interest rate talk


Wouldn't bother me if the Fed raised rates. Something north of 8% is probably close to neutral. That would fix a lot of the crap going on in a hurry. Wouldn't bother me if the Fed dropped rates to zero. Got enough PM and hard asset exposure to weather the inflation. It's basically like Jim Rogers said, the Fed has become irrelevant.

Anonymous said...

"One would expect gradualism." You mean gradual as in taking rates down 300 bps over a 7 month span. Oh yeah, I forgot down doesn't count. If that wasn't a happy trigger finger I don't know what is.

This is the most obvious bluff in the history of monetary policy. One that the energy markets seem intent on calling.

[Jun 16, 2008] $140 oil

June 6, 2008

Jim Hamilton is right: this looks like a major oil shock. At $140, oil would be twice its average level in 2006.

$140 oil for the rest of the year implies an average oil price for 2008 of around $120 (maybe a bit higher)

Concretely, a rough calculation would suggest that this implies that the US will spend about $250 billion more on oil imports this year than last year. I don't quite see how the US trade deficit can improve in the face of that kind of shock.

[Jun 16, 2008] Fiscal Poison Pill, by Paul Krugman, Commentary, NY Times

A poison pill, in corporate jargon, is a financial arrangement designed to protect current management by crippling the company if someone else takes over. ...

[T]he tax cuts enacted by the Bush administration are, in effect, a fiscal poison pill aimed at future administrations.

True, the tax cuts won't prevent a change in management - the Constitution sees to that. But they will make it hard for the next president to change the country's direction.

[Jun 15, 2008] Lehman Raises $6 Billion, Discusses Financials

After spending 11 billion of stock repurchases in 2007 the king is naked. Standard for classic Greek tragedies sequence of event unfolds: the greed and hubris lead the hero to peril. "The unwind of leverage takes no prisoners and this is a top-down unwind complicated by a bottom-up unwind with consumers. Bad times ahead. The pressure on the govt for further bailouts will mount making it hard to be short the credit of banks but by all means be short the equity as dilution lies ahead." Many people have the distinct impression that Lehman is hiding something in level 3 assets marked to fantasy.

Note that there is also some reporting that is missing the implications of Lehman's moves today. The firm, as noted by Bloomberg, for instance, sold $130 billion of assets. However, as reader S mentioned and is indicated in a press release, that $130 billion is gross assets. The figure that counts in terms of the firm's leverage is the $60 billion reduction in net assets disclosed. Similarly, note that the reported 35% reduction in acquisition-related-finance assets may include sales financed by Lehman; the press release did not provide sufficient detail to know either way. Guess we'll have to wait for the quarterly earnings filing.

In addition, the commentary from analysts appears to be turning more jaundiced. Moody's lowered the outlook on its debt rating to negative. Some additional comments suggest doubts about management credibility:

``It's kind of sobering for people who have been listening to the company these last six to nine months that they had everything under control,'' said Davide or selling the firm because there's just not enough business to go around.''

[Jun 14, 2008] High and Low Finance - Good Times Left Lehman Unprepared for the Bad -

"The embattled brokerage house...fighting to persuade the financial markets that it will not be the next Bear Stearns."
There was no sign of institutional humility, no admission of the obvious fact that Lehman had not anticipated the market conditions that now bedeviled it, or that it was possible that it might once again have underestimated the problems it faced.

...There are prominent short sellers who have made clear they think Lehman has not marked its securities down as far as it should. Short of disclosing actual marks - which analysts could then compare with their own views - how can the firm reassure the doubters?

Banks are not like other businesses. Beer drinkers do not know or care whether the company that sells Budweiser is in better shape financially than the one that sells Coors. But customers of investment banks are trusting them with their money, and relying on their financial advice.

[Jun 13, 2008] Bad Cow Disease by Paul Krugman


"Mary had a little lamb / And when she saw it sicken / She shipped it off to Packingtown / And now it's labeled chicken."

That little ditty famously summarized the message of "The Jungle," Upton Sinclair's 1906 exposé of conditions in America's meat-packing industry. Sinclair's muckraking helped Theodore Roosevelt pass the Pure Food and Drug Act and the Meat Inspection Act - and for most of the next century, Americans trusted government inspectors to keep their food safe.

Lately, however, there always seems to be at least one food-safety crisis in the headlines - tainted spinach, poisonous peanut butter and, currently, the attack of the killer tomatoes. The declining credibility of U.S. food regulation has even led to ... mass demonstrations in South Korea protesting the ... decision to allow imports of U.S. beef, banned after mad cow disease was detected in 2003.

How did America find itself back in The Jungle?

It started with ideology. Hard-core American conservatives have long ... wanted a restoration of the way America was "up until Teddy Roosevelt, when the socialists took over. The income tax, the death tax, regulation, all that."

The late Milton Friedman ... call[ed] for the abolition of the Food and Drug Administration. It was unnecessary, he argued: private companies would avoid taking risks with public health to safeguard their reputations and to avoid damaging class-action lawsuits. (Friedman, unlike almost every other conservative I can think of, viewed lawyers as the guardians of free-market capitalism.)

Such hard-core opponents of regulation were once part of the political fringe, but with the rise of modern movement conservatism they moved into the corridors of power. They never had enough votes to abolish the F.D.A..., but they ... did ... deny... these agencies enough resources to do the job. For example,... the F.D.A. has ... a substantially smaller work force now than ... in 1994, the year Republicans took over Congress.

Perhaps even more important, however, was the systematic appointment of foxes to guard henhouses.

Thus, when mad cow disease was detected in the U.S. in 2003, the Department of Agriculture was headed by Ann M. Veneman, a former food-industry lobbyist. And the department's response to the crisis -... downplaying the threat and rejecting calls for more extensive testing - seemed driven by the industry's agenda.

One amazing decision came in 2004, when a Kansas producer asked for permission to test its own cows, so that it could resume exports to Japan. You might have expected the Bush administration to applaud this example of self-regulation. But permission was denied, because other beef producers feared consumer demands that they follow suit.

When push comes to shove, it seems, the imperatives of crony capitalism trump professed faith in free markets.

Eventually, the department did expand its testing, and ... most countries ... have allowed [US beef] back into their markets. But the South Koreans still don't trust us...

The ironic thing is that the Agriculture Department's deference to the beef industry actually ended up backfiring: because potential foreign buyers didn't trust our safety measures, beef producers spent years excluded from their most important overseas markets. ...

The moral of this story is that failure to regulate effectively isn't just bad for consumers, it's bad for business.

And in the case of food, what we need to do now - for the sake of both our health and our export markets - is to go back to the way it was after Teddy Roosevelt, when the Socialists took over. It's time to get back to the business of ensuring that American food is safe.

[Jun 13, 2008] Hayward and Butler on speculation in oil markets

The Mess That Greenspan Made

There are two new views today on who to blame (or who not to blame) for the recent run up in oil prices that has galvanized the country and the world, citizens across the globe prodding their lawmakers to take action, to do something - anything - to stop energy prices from rising.

In conjunction with the release of their Statistical Review of World Energy, BP chief executive Tony Hayward characterizes the blaming of speculators for pushing crude oil prices higher as "a myth".

He says it all comes down to supply and demand - too much demand and too little supply.

According to the annual review, total production fell by 130,000 barrels per day last year paced by production cuts of 350,000 barrels a day by OPEC. This was a decline of 0.1 percent, the first drop in production since 2002.

[Jun 13, 2008] OPEC wants to talk about oil prices

This story is just in from the AFP (Agence France-Presse) - the June 22nd meeting in Saudi Arabia to discuss record-high oil prices is to be at the "head-of-state" level and Wall Street investment banks and hedge funds are invited too.
OPEC Secretary General Badri would not be drawn on which heads of state would attend the one-day gathering announced by Saudi Arabia on Tuesday, which was less than a week after the price of crude struck a record high 139.12 dollars a barrel.

The Organization of Petroleum Exporting Countries (OPEC) maintains that the oil market is well supplied and that current prices do not reflect market fundamentals of supply and demand.
"The price has nothing to do with a shortage of oil. There's a lot of oil on the market. It's because of speculation and OPEC cannot control speculation," he added.

If the oil market was well supplied, it would produce more than is consumed (which is not the case) and, as for the role of speculators, would there really be any sort of market without speculators?

That's their purpose - to set the market price.

From Wikipedia:

When a harvest is too small to satisfy consumption at its normal rate, speculators come in, hoping to profit from the scarcity by buying. Their purchases raise the price, thereby checking consumption so that the smaller supply will last longer. Producers encouraged by the high price further lessen the shortage by growing or importing to reduce the shortage. On the other side, when the price is higher than the speculators think the facts warrant, they sell. This reduces prices, encouraging consumption and exports and helping to reduce the surplus.

[Jun 13, 2008] Inflation (statistics) remain contained

The Mess That Greenspan Made

Consumer prices soared in May, but inflation remained well contained within the Bureau of Labor Statistics Consumer Price Index (CPI). The Labor Department reported prices rose 0.6 percent in May, paced by a 4.4 percent increase in energy but, on a year-over-year basis, inflation measured just 4.2 percent.

Aside from the euro-area, the U.S. has one of the lowest inflation rates in the world (see The Economist for a handy comparison of inflation rates around the globe).

[Jun 13, 2008] Fed's Plosser pushes for quick rate hikes

"We need to take steps to insure that inflation does not get out of control," [Federal Reserve President Charles Plosser] said in an interview on the CNBC television network. "We need to act preemptively."
Plosser said Thursday the inflation threat facing the U.S. economy "is serious."

"Inflation has been gradually been creeping up and more than just in oil and food," he said. "The base of inflation is broadening."

[Jun 13, 2008] Wild Ride In Lehman, Financials

Yet Another Bear Sterns in making?

There was interesting commentary today about yields on Minyanville between Todd Harrison (Toddo) and Mr. Practical.

Oh that smell. Can't you smell that smell?

I was just pinging with Mr. Practical and we had the following exchange. We share it with ye faithful in the spirit of community.

Mr. Practical: Yields are upticking. Fed Fund Futures are implying a rate hike in September.

Toddo: Yeesh, talk about a death knell. That has "foreign influence" written all over it.

Mr. Practical: Central banks may have given notice to Ben that if he doesn't raise rates, the dollar is toast. We should remind Minyans to read The Pin Prick. It's as relevant today as it was then. Instead of foreign central banks abandoning the auction, they're giving him fair warning.

[Jun 12, 2008] Bill Gross to Bond Investors: Run Away!

PIMCO Total return increased holding of AA- and A- bonds, and probably slightly increases yield

Gross said on CNBC, "I think Treasuries are the most overvalued asset in the world, bar none." He went on to say that he and his team were moving out further on the credit spectrum and buying AA- and A-rated bonds, although it was too soon to move into the high-yield arena.

He argued that it was difficult to justify investing in Treasuries, given expected levels of inflation.

[Jun 11, 2008] Banks face $10bn monoline charges by Gwen Robinson

Citigroup, Merrill Lynch and UBS, the banks most exposed to Ambac and MBIA, could face further writedowns of up to $10bn after the bond insurers last week lost their fight to retain their triple A credit ratings and were downgraded by Moody's and S&P, reports the FT.

The banks have used the bond insurers to hedge holdings of complex bonds such as CDOs and MBS. Wall Street executives said they had not expected rapid action from the rating agencies after they affirmed the triple A ratings of Ambac and MBIA in February and March. The prospects of further writedowns related to bond insurers, or monolines, could deepen concerns over banks' financial health.

[Jun 9, 2008] Junk Bond Defaults Rise for Sixth Straight Month, Moody's Says By Pierre Paulden

June 9, 2008 | Bloomberg

Companies with high-yield, high-risk debt defaulted at an annual rate of 2 percent in May compared with 1.7 percent in April, the sixth consecutive month of increases, according to Moody's Investors Service.

The global default rate may rise ``sharply'' to 5 percent by the end of 2008 and 6.3 percent a year from now, according to a report written by Kenneth Emery, Moody's director of corporate default research in New York. Worldwide

Futures on the Chicago Board of Trade showed a 58 percent chance yesterday the Fed will raise its 2 percent target rate for overnight lending between banks by at least a quarter point at its Aug. 5 meeting, compared with 32 percent the previous day. The contracts showed a 96 percent chance the Fed will increase the rate by December, up from 60 percent odds a week ago.

Japan - Fundamentals Warrant Oil Only at $60 a Barrel

Reader Michael e-mailed us this story from Platts. Note that by Japanese standards, this is an unusually pointed discussion:

Japan's vice minister for economy, trade and industry, Takao Kitabata, said Monday that current oil market fundamentals only supported a crude price of $60/barrel, less than half current levels.

Speaking to reporters, Kitabata said current oil prices could not be explained by fundamentals and blamed speculative funds for pushing up prices, according to a transcript of his press conference in Tokyo...

"About three weeks ago Goldman Sachs said crude oil prices would exceed $140/b, and prices shot up by $10/b from levels of around $120/b. Then Morgan Stanley said oil prices would reach $150/b during the driving season by US independence day [July 4]," Kitabata told reporters.

"Oil prices rose to above $130/b after the Goldman Sachs announcement, but retreated to $120/b levels after the US Commodity Futures Trading Commission's announced investigation."

"However, prices have risen by $10/b after Morgan Stanley's announcement," Kitabata added. "I said [three weeks ago] that it was hard for us to define the cause [of high oil prices], however I must express anger [over the movements]."

The vice minister said the rise of oil prices above levels than can be explained by fundamentals would lead to oil-producing countries receiving more money than they need for their exports, while at the same time hurting consuming countries, especially developing countries without their own oil production.

"We believe producing countries' economies will function if oil prices hover more or less at $60/b," Kitabata said. "Despite the weakening of the US dollar, we believe Saudi Arabia's [economy will function] if oil prices are at $45/b and Kuwait's [economy will function] if oil prices are at $55/b," Kitabata added.

When asked why energy ministers from the G8 -- the US, Japan, Canada, the UK, France, Germany, Italy and Russia -- failed to have sufficient discussion at their July 7-8 meeting on the link between high oil prices and flows of money from investment funds into the oil market, Kitabata argued that the ministers had had "spirited discussion on the matter."

[Jun 9, 2008] Citigroup, Merrill, UBS Face Further Writedowns, Whitney Says

Citigroup Inc., Merrill Lynch & Co. and UBS AG may post further writedowns of $10 billion on their debt holdings after the two biggest bond insurers were stripped of their AAA rankings, according to Oppenheimer & Co. analyst Meredith Whitney.

MBIA Inc. and Ambac Financial Group Inc., the world's largest bond insurers, had their AAA financial strength rankings reduced by Standard & Poor's June 5, taking with them the ratings on more than $1 trillion of securities they guaranteed.

Whitney, who correctly predicted in October that Citigroup Inc. would cut its dividend, boosted her estimate for losses tied to the so-called monoline insurers from a January forecast of $40 billion.

``Without the top credit ratings, monolines will have a more difficult time generating new business. The limited earnings potential of monolines poses a risk to the value of the insurance and hedges on the subprime related securities provided to the banks and brokers,'' the New York-based analyst wrote.

Whitney rates both Citigroup, the biggest U.S. bank, and Merrill, the world's biggest brokerage, at `` underperform.'' She doesn't cover UBS, the European bank hardest hit by the U.S. subprime contagion.

To contact the reporter on this story: Jeff Kearns in New York at

[Jun 08, 2008] - Companies - Transport - Soaring shipping costs fuel inflation

By David Oakley and Robert Wright in London

Published: June 8 2008 19:38 | Last updated: June 8 2008 19:38. The cost of renting ships that transport key raw materials such as iron ore and coal have risen to all-time highs and put further pressures on inflation and the global economy.

With oil at record levels, food prices at highs and warnings from central bankers over inflation risks, it is another danger signal for companies and consumers as price pressures force up overheads and jeopardise growth.

The cost of renting a Capesize ship, used to transport iron ore and coal, rose to $233,988 a day at the end of last week – a near 200 per cent jump since the start of the year when the cost stood at $80,000.

[Jun 7, 2008] Wealth Evaporates as Gas Prices Clobber McMansions, SUV Makers

Suburbia houses prices (and the current way of life) depend on the price of gas. Commuting time cost is one thing but financial hit for those who commute 50 miles each way in SUV or track is now very real. Spending $1000 a month on gas for a family of two is not that exiting. That means houses in this areas has additional decelllerator. Any lifestyle dependent on low gas prices is becoming uneconomical. For those that own a home in a remote location this must be like a depression.
"At $4 per gallon gas, $125 per barrel oil and $10 per million Btu natural gas, a lot of activity becomes uneconomical,'' says Mark Zandi, chief economist at Moody's ...

The lifestyle of the exurban commuter may be one casualty.

Emerging suburbs and exurbs -- commuter towns that lie beyond cities and their traditional suburbs -- grew about 15 percent from 2000 to 2006, nearly three times as fast as the U.S. population, as Americans moved further out in search of more affordable houses or the bigger ones that are sometimes derided as McMansions.

``It was drive until you qualify'' for a mortgage, says Robert Lang, director of the Metropolitan Institute at Virginia Tech in Alexandria, Virginia. ``You can't do that anymore. Your cost of transportation will spike too much.''

[Jun 7, 2008] "Real-Estate Woes of Banks Mount"

Looks like opening shorts of "the second leg of the credit crunch, this time dragging down regional and local banks, is underway. And Wall Street has not hit bottom either."

The prospect of a new wave of losses worries federal regulators, given the large proportion of loans to housing developers held by many banks and thrifts. The problems are worse at small banks that can't easily absorb losses, and at banks with big exposure in states hit hard by the housing crisis. Banks in Arizona have 36% of their total loans tied to construction and development. In Georgia that number is 34%, and in North Carolina it's 28%. Zelman said construction and development loans, as a percentage of total loans, are at their highest levels since at least 1975.

[Jun 7, 2008] WSJ- National City "On Probation"

Banking institutions to continue to face deteriorating loan quality. Banks in states most affected by housing slump are in danger due to overexposure to construction loans.

It is possible that National City will resolve these issues, but I can't help but think of FDIC Chairman Sheila Bair's comments today: "There is also the possibility that future failures could include institutions of greater size than we have seen in the recent past."

... ... ...

See also FDIC's Bair: "Institutions of greater size" May Fail by CalculatedRisk

From Reuters: Bigger U.S. bank failures may be coming - FDIC (hat tip Ed)

An increasing number of banks face high exposure to deteriorating conditions in commercial real estate and construction lending, [Federal Deposit Insurance Corp Chairman Sheila Bair] told a Senate Banking Committee hearing on the state of the banking industry.

"There is also the possibility that future failures could include institutions of greater size than we have seen in the recent past," Bair said. "Uncertainties in today's economic environment continue to pose significant challenges for the banking industry, households, and bank regulators."

The coming bank failures are no secret:

Note: The largest bank to fail this year was ANB Financial with $2.1 billion in assets.

[Jun 7, 2008] Jobs- Unemployment Rate Jumps to 5.5%

by CalculatedRisk

The unemployment rate rose from 5.0 to 5.5 percent in May, and nonfarm payroll employment continued to trend down (-49,000), the Bureau of Labor Statistics of the U.S. Department of Labor reported today.

[Jun 7, 2008] Hamilton- The Oil Shock of 2008

Calculated Risk

The graph above shows that the real price of oil is now above the levels of the previous oil shocks.

Hamilton points out that American businesses and consumers are now clearly changing their behavior based on the price of oil. (see his post for more graphs)

[Jun 6, 2008] Lehman May Raise $5 Billion of Capital, Person Says (Update5)

Recent reports suggest the secondary phase of financial crisis is now unfolding. It might claim new victims. Banks is "subrpime disaster zones" (florida, california, Nevada, etc) that aren't diversified, or those with high exposures to residential construction and development, are of particular concern.

See also Is Lehman the next ?

Lehman Brothers Holdings Inc., which some analysts expect will report its first quarterly loss since going public in 1994, may raise as much as $5 billion in capital by early next week, a person with knowledge of the matter said.

... ... ...

Sanford C. Bernstein & Co. analyst Brad Hintz reiterated his ``market perform'' rating yesterday on Lehman. While the company won't face ``a life-threatening funding run,'' investors should ``remain on the sidelines until the firm demonstrates a reduction in leverage and lowers its exposures to troubled asset classes,'' he wrote in a report.

[Jun 2, 2008] Financial Worries on Front Burner- S&P Downgrades Big Brokers, Says Outlook "Predominantly Negative"

This is not just that "The outlooks on the large financial institutions sector in the U.S. are now predominantly negative". The whole services sector is now in jeopardy.

The theory that the recent calm in the financial sector was the eye of the storm, rather than a sign of turbulence clearing for good, seems to be getting support. The stock market reacted badly to the ouster of Wachovia CEO Kennedy Thompson, seeing it as a harbinger of a report of losses for the second quarter.

But the second dose of bad news was far more significant. Standard & Poor's downgraded the debt of Merrill Lynch, Morgan Stanley, and perhaps most important, recently on the ropes Lehman. While Goldman was affirmed at AA-, the outlook for all four is negative. While the the S&P report took care not to sound undue alarm, this move, not surprisingly, has implications for profits.

[Jun 2, 2008] Fed On Hold Till the Fall (Despite Calls to Raise Rates)-

"...despite the central bank's new found hawkishness, it will probably stand pat until at least the fall. " They run out of ammunition too early. As Wolfgang Munchau tells us in the Financial Times, for the first time in modern memory, a foreign central bank's stance, in this case, the ECB's, is limiting the Fed's scope of action. "The policy goal of the Fed appears to be avoidance of recession and minimizing distress in the financial system. Price stability, which also ranks as one official goal in the Fed's mandate, seems to be pursued by means of sanctimonious speeches, rather than policy action. ... As monetary policy of the world's two largest economies moves in starkly opposite directions, interesting possibilities are opening up. One is whether the dollar will decline prematurely as a global currency – an issue on which economists are divided. Differential inflation rates could plausibly trigger such a shift. As US inflation rises, more and more countries may unpeg from the dollar to avoid imported inflation. If this trend persisted, the US would risk losing its exorbitant privilege – the ability to live beyond its means thanks to a globally domineering currency."

...since the excesses were confined mainly to the financial sector and, in the US and some European countries, the household sector, it should have been possible to limit the spillovers over from the crisis beyond the financial sector and the housing sector without macroeconomic heroics. Measures directly targeted at the liquidity crunch should have been sufficient.

... ... ...

Dow Chemical's decision to raise prices by as much as 20% will also be seen as a possible turning point in the inflation story as it signals limitations in trying to absorb steeply higher raw materials costs via lower margins or higher productivity.

Widespread price increases, however, would need to trigger corresponding wage increases to definitively lock in higher inflation expectations. On this front, the sluggish job market is clearly in the Fed's favor....

Menzie Chen notes that per capita GDP growth has fallen into negative territory. Even though the pie is growing, the individual pieces are shrinking.

[Jun 1, 2008] Pensions' Dollars Shorted by Hedge Funds Have History on Side

``The dollar may be getting to an inflection point,'' MacKinnon said. ``Its dangerous to ignore that.''

[Jun 1, 2008] Worldwide Payrolls Probably Fell for Fifth Month: U.S. Economy Preview By Shobhana Chandra

Stagflation ?
June 1 (Bloomberg) -- The U.S. lost jobs for a fifth month in May and manufacturing contracted, signaling the economy is stagnating, economists said before reports this week.

Payrolls probably dropped by 60,000 workers, according to the median estimate of economists surveyed by Bloomberg News before the Labor Department's June 6 report. Figures tomorrow may show the Institute for Supply Management's factory index fell to 48.5 in May.

...Payroll declines will further weaken consumer spending.''

...The Tempe, Arizona-based ISM group's manufacturing index would follow an April reading of 48.6. Fifty is the dividing line between expansion and contraction.

...Weekly claims have averaged 357,500 so far this year, compared with 321,000 in 2007, when the economy generated an average of 91,000 new jobs a month.

[Jun 1, 2008] Consumers Lean on Rebate Checks for Bills and Gas -

The federal government is showering households with tax rebates to spur spending and invigorate a troubled economy. But many Americans are so consumed with debt and the soaring price of gasoline that they are opting to save the money or use it to pay bills, according to surveys, sales data and interviews with people from Florida to California.

Between late April and the end of last week, the Treasury handed out more than $50 billion of the $100 billion in tax rebates

... ... ...

"They think they give you a check to go out and spend some money, but it's not enough," said Mr. Gonzalez. "The dollar doesn't buy anything anymore. The way the economy is going, people are too scared to spend."

Economists emphasize that the data remains preliminary, making it too early to assess the effectiveness of the rebates. And those who are paying off bills are potentially clearing the path for more spending later on.

Most experts assume that over the next six months, Americans will spend somewhere between 20 and 50 percent of their tax rebates, much like the last time the government took out its checkbook in such fashion, in 2001. That would mean $20 billion to $50 billion in fresh spending washing through the economy.

... ... ..

But by late in the year, experts say, the effects of the rebates will wear off, leaving the economy grappling with the same ills gnawing at it now: tight credit, making it hard for businesses to expand and consumers to borrow; a deteriorating job market, which is eroding paychecks; and falling real estate prices.

"We don't think this will fundamentally cycle up the economy," said Andrew Tilton, a senior economist at Goldman Sachs. "For a few months, you will see a noticeable uptick, but as you get to the fall and winter that goes away, and then you're looking at all these unresolved problems."

The most immediate question is whether the short-term gains will materialize - whether Americans will retain their willingness to consume, even in the face of economic strain.

[Jun 1, 2008] Dow Chemical CEO: US Underestimating Inflation


Dow Chemical Chief Executive Andrew Liveris made a high-profile announcement that Dow would increase its prices by as much as 20%, starting June 1. Dow, the top U.S. chemical company, said the plan was necessary to offset the impact of rising costs for energy and related raw materials. Over the past year, Dow has already increased its price by about 12%, but those price changes have been phased in gradually rather than implemented all at once.

In the interview, Liveris said he thinks the U.S. is underestimating the level of inflation in the economy and he expects the rise in energy costs is beginning to destroy demand.

Inflation outlook makes consumers' mood grim Reuters

David Wyss, chief economist at Standard & Poor's: "We are not going to see the economy getting better any time soon. We are still in the early stages of the recession."

NEW YORK (Reuters) - U.S. consumer confidence fell to a 28-year low in May, a survey showed on Friday, as soaring prices for food and fuel soured sentiment and pushed long-term inflation expectations to the highest in more than a decade.

The rising expectations conflicted with a government report showing price growth moderated last month. Together, the reports heighten the challenge facing the Federal Reserve, which wants to avoid inflation perceptions becoming reality.

The Reuters/University of Michigan Surveys of Consumers confidence index fell to 59.8 in May, the lowest since 58.7 in June 1980. Its gauge of five-year inflation expectations rose to 3.4 percent, the highest since April 1995.

"Consumers are running scared. These price data are bad for consumers and businesses," said David Wyss, chief economist at Standard & Poor's Ratings Services in New York.

"We are not going to see the economy getting better any time soon. We are still in the early stages of the recession."

The Reuters/University of Michigan index was below April's 62.6 but slightly above Wall Street's median expectation of 59.5 in a Reuters survey of economists.

Its general picture of weakness meshed with a regional barometer that showed business activity in the U.S. Midwest contracted in May for the fourth consecutive month, according to the National Association of Purchasing Management-Chicago.

US House Prices Falling Faster Than During The Great Depression

Unbelievable that 95 percent of so called "Experts" didn´t see this coming....... These are often the same that are now calling for the bottom and are declaring the recession that never was is already over......

Economist America's house prices are falling even faster than during the Great Depression

This shows that the latest fall in nominal prices is already much bigger than the 10.5% drop in 1932, the worst point of the Depression.Today inflation is running at a brisk pace, so property prices have fallen by a staggering 18% in real terms over the past year.

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Groupthink : Two Party System as Polyarchy : Corruption of Regulators : Bureaucracies : Understanding Micromanagers and Control Freaks : Toxic Managers :   Harvard Mafia : Diplomatic Communication : Surviving a Bad Performance Review : Insufficient Retirement Funds as Immanent Problem of Neoliberal Regime : PseudoScience : Who Rules America : Neoliberalism  : The Iron Law of Oligarchy : Libertarian Philosophy


War and Peace : Skeptical Finance : John Kenneth Galbraith :Talleyrand : Oscar Wilde : Otto Von Bismarck : Keynes : George Carlin : Skeptics : Propaganda  : SE quotes : Language Design and Programming Quotes : Random IT-related quotesSomerset Maugham : Marcus Aurelius : Kurt Vonnegut : Eric Hoffer : Winston Churchill : Napoleon Bonaparte : Ambrose BierceBernard Shaw : Mark Twain Quotes


Vol 25, No.12 (December, 2013) Rational Fools vs. Efficient Crooks The efficient markets hypothesis : Political Skeptic Bulletin, 2013 : Unemployment Bulletin, 2010 :  Vol 23, No.10 (October, 2011) An observation about corporate security departments : Slightly Skeptical Euromaydan Chronicles, June 2014 : Greenspan legacy bulletin, 2008 : Vol 25, No.10 (October, 2013) Cryptolocker Trojan (Win32/Crilock.A) : Vol 25, No.08 (August, 2013) Cloud providers as intelligence collection hubs : Financial Humor Bulletin, 2010 : Inequality Bulletin, 2009 : Financial Humor Bulletin, 2008 : Copyleft Problems Bulletin, 2004 : Financial Humor Bulletin, 2011 : Energy Bulletin, 2010 : Malware Protection Bulletin, 2010 : Vol 26, No.1 (January, 2013) Object-Oriented Cult : Political Skeptic Bulletin, 2011 : Vol 23, No.11 (November, 2011) Softpanorama classification of sysadmin horror stories : Vol 25, No.05 (May, 2013) Corporate bullshit as a communication method  : Vol 25, No.06 (June, 2013) A Note on the Relationship of Brooks Law and Conway Law


Fifty glorious years (1950-2000): the triumph of the US computer engineering : Donald Knuth : TAoCP and its Influence of Computer Science : Richard Stallman : Linus Torvalds  : Larry Wall  : John K. Ousterhout : CTSS : Multix OS Unix History : Unix shell history : VI editor : History of pipes concept : Solaris : MS DOSProgramming Languages History : PL/1 : Simula 67 : C : History of GCC developmentScripting Languages : Perl history   : OS History : Mail : DNS : SSH : CPU Instruction Sets : SPARC systems 1987-2006 : Norton Commander : Norton Utilities : Norton Ghost : Frontpage history : Malware Defense History : GNU Screen : OSS early history

Classic books:

The Peter Principle : Parkinson Law : 1984 : The Mythical Man-MonthHow to Solve It by George Polya : The Art of Computer Programming : The Elements of Programming Style : The Unix Hater’s Handbook : The Jargon file : The True Believer : Programming Pearls : The Good Soldier Svejk : The Power Elite

Most popular humor pages:

Manifest of the Softpanorama IT Slacker Society : Ten Commandments of the IT Slackers Society : Computer Humor Collection : BSD Logo Story : The Cuckoo's Egg : IT Slang : C++ Humor : ARE YOU A BBS ADDICT? : The Perl Purity Test : Object oriented programmers of all nations : Financial Humor : Financial Humor Bulletin, 2008 : Financial Humor Bulletin, 2010 : The Most Comprehensive Collection of Editor-related Humor : Programming Language Humor : Goldman Sachs related humor : Greenspan humor : C Humor : Scripting Humor : Real Programmers Humor : Web Humor : GPL-related Humor : OFM Humor : Politically Incorrect Humor : IDS Humor : "Linux Sucks" Humor : Russian Musical Humor : Best Russian Programmer Humor : Microsoft plans to buy Catholic Church : Richard Stallman Related Humor : Admin Humor : Perl-related Humor : Linus Torvalds Related humor : PseudoScience Related Humor : Networking Humor : Shell Humor : Financial Humor Bulletin, 2011 : Financial Humor Bulletin, 2012 : Financial Humor Bulletin, 2013 : Java Humor : Software Engineering Humor : Sun Solaris Related Humor : Education Humor : IBM Humor : Assembler-related Humor : VIM Humor : Computer Viruses Humor : Bright tomorrow is rescheduled to a day after tomorrow : Classic Computer Humor

The Last but not Least Technology is dominated by two types of people: those who understand what they do not manage and those who manage what they do not understand ~Archibald Putt. Ph.D

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