Well-Known Companies That Now Face BankruptcyAs consumers cut back, businesses are scrambling. Here are the latest popular brands to hit the skids -- including the company that makes President Obama's suits...
Full Version: Financial Turmoil
Common Ground Common Sense > Issues that Affect Our Lives > Job Market, Fiscal, and Economic Policies
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How Bad Will the Economy Get?
Really, Really Bad
By Thomas Greco, Jr.
Historically, every financial and economic crisis has been used to further centralize power and concentrate wealth. This one is no different, and in fact the moves being promoted by the Obama administration and the central banks of the Western powers will take the whole world to the pinnacle of financial despotism -- unless enough people wake up and claim their own "money power.” Continue
Really, Really Bad
By Thomas Greco, Jr.
Historically, every financial and economic crisis has been used to further centralize power and concentrate wealth. This one is no different, and in fact the moves being promoted by the Obama administration and the central banks of the Western powers will take the whole world to the pinnacle of financial despotism -- unless enough people wake up and claim their own "money power.” Continue
Can The Economy Recover?
By Paul Craig Roberts
There is no economy left to recover. The US manufacturing economy was lost to offshoring and free trade ideology. It was replaced by a mythical “New Economy.” Continue
By Paul Craig Roberts
There is no economy left to recover. The US manufacturing economy was lost to offshoring and free trade ideology. It was replaced by a mythical “New Economy.” Continue
The banks have been rescued, but the problem still sits there looking you right in the eye.
The BIS changed their method of computer valuation to value to maturity, a cartoon thereby reducing the nominal value from one quadrillion one thousand one hundred and forty four trillion to eight hundred trillion.
There is no way to list 95% of these as they have no common standards.
Other than putting twelve trillion dollars into the system to make Wall Street whole, what has been accomplished.
Mobius Says Derivatives, Stimulus to Spark New Crisis (Update2)
By Bloomberg News
July 15 (Bloomberg) — A new financial crisis will develop from a failure to effectively regulate derivatives and the extra global liquidity from stimulus spending, Templeton Asset Management Ltd.’s Mark Mobius said.
“Political pressure from investment banks and all the people that make money in derivatives” will prevent adequate regulation, said Mobius, who oversees $25 billion as executive chairman of Templeton in Singapore. “Definitely we’re going to have another crisis coming down,” he said in a phone interview from Istanbul on July 13.
The Bank for International Settlements estimates outstanding derivatives total $592 trillion, about 10 times global gross domestic product. Opaque financial products contributed to almost $1.5 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg.
The U.S. Justice Department is investigating the market for credit-default swaps, Markit Group Ltd., the data provider majority-owned by Wall Street’s largest banks, said July 13.
Mobius didn’t explain what he thought was needed for effective regulation of derivatives, which are contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather.
“Banks make so much money with these things that they don’t want transparency because the spreads are so generous when there’s no transparency,” he said.
More…
The BIS changed their method of computer valuation to value to maturity, a cartoon thereby reducing the nominal value from one quadrillion one thousand one hundred and forty four trillion to eight hundred trillion.
There is no way to list 95% of these as they have no common standards.
Other than putting twelve trillion dollars into the system to make Wall Street whole, what has been accomplished.
Mobius Says Derivatives, Stimulus to Spark New Crisis (Update2)
By Bloomberg News
July 15 (Bloomberg) — A new financial crisis will develop from a failure to effectively regulate derivatives and the extra global liquidity from stimulus spending, Templeton Asset Management Ltd.’s Mark Mobius said.
“Political pressure from investment banks and all the people that make money in derivatives” will prevent adequate regulation, said Mobius, who oversees $25 billion as executive chairman of Templeton in Singapore. “Definitely we’re going to have another crisis coming down,” he said in a phone interview from Istanbul on July 13.
The Bank for International Settlements estimates outstanding derivatives total $592 trillion, about 10 times global gross domestic product. Opaque financial products contributed to almost $1.5 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg.
The U.S. Justice Department is investigating the market for credit-default swaps, Markit Group Ltd., the data provider majority-owned by Wall Street’s largest banks, said July 13.
Mobius didn’t explain what he thought was needed for effective regulation of derivatives, which are contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather.
“Banks make so much money with these things that they don’t want transparency because the spreads are so generous when there’s no transparency,” he said.
More…
Fed not fit for oversight job, investor group says
By Rex Nutting
AMMAN, Jordan (MarketWatch) — Several large investor groups and two top former regulators are urging the creation of an independent body to examine systemic risks in the U.S. financial sector, the Financial Times reported Wednesday. The group — led by former Securities and Exchange Commission chairmen William Donaldson and Arthur Levitt — said the Federal Reserve should not get the responsibility because it’s credibility had been "tarnished" by its easy credit policies and lax regulatory oversight, which contributed to the excessive leverage that threatens the global economy. The investor group includes senior figures from Calpers, the large Californian state pension fund, and from investment firms BlackRock and Legg Mason
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By Rex Nutting
AMMAN, Jordan (MarketWatch) — Several large investor groups and two top former regulators are urging the creation of an independent body to examine systemic risks in the U.S. financial sector, the Financial Times reported Wednesday. The group — led by former Securities and Exchange Commission chairmen William Donaldson and Arthur Levitt — said the Federal Reserve should not get the responsibility because it’s credibility had been "tarnished" by its easy credit policies and lax regulatory oversight, which contributed to the excessive leverage that threatens the global economy. The investor group includes senior figures from Calpers, the large Californian state pension fund, and from investment firms BlackRock and Legg Mason
More…
To open the hedge fund books is akin to opening the Anarchist’s Cookbook
Obama wants SEC to look into hedge fund books
By Ronald D. Orol
WASHINGTON (MarketWatch) - The Obama administration on Wednesday plans to send a proposal to Capitol Hill that would require hedge fund managers and private equity managers with more than $30 million in assets under management register with the Securities and Exchange Commission and open up their books to periodic examinations, according to remarks by Assistant Secretary for Financial Institutions Michael Barr on regulatory reform. The White House proposal, which is backed by the Treasury Department, will also require hedge fund managers to disclose to regulators and investors more information about the characteristics of their hedge funds. Fund managers will need to provide more details about asset size, borrowings and any off-balance sheet exposure.
More…
Obama wants SEC to look into hedge fund books
By Ronald D. Orol
WASHINGTON (MarketWatch) - The Obama administration on Wednesday plans to send a proposal to Capitol Hill that would require hedge fund managers and private equity managers with more than $30 million in assets under management register with the Securities and Exchange Commission and open up their books to periodic examinations, according to remarks by Assistant Secretary for Financial Institutions Michael Barr on regulatory reform. The White House proposal, which is backed by the Treasury Department, will also require hedge fund managers to disclose to regulators and investors more information about the characteristics of their hedge funds. Fund managers will need to provide more details about asset size, borrowings and any off-balance sheet exposure.
More…
Economists Warn Fed Independence at Risk
JULY 15, 2009, 2:25 P.M. ET
More than 175 prominent economists warned that politicians’ attacks on the Federal Reserve are putting "the independence of U.S. monetary policy…at risk," and urged Congress to back off lest it undermine the Fed’s ability to manage the economy and thwart inflation.
The 185-word petition, initiated by a band of academic economists, reflects growing unease among professors, former Fed officials and some investors that the vehemence of the criticism from Congress of the Fed’s handling of the financial crisis suggests a readiness in Congress to weaken the freedom the Fed has to move interest rates as it sees fit
More…
JULY 15, 2009, 2:25 P.M. ET
More than 175 prominent economists warned that politicians’ attacks on the Federal Reserve are putting "the independence of U.S. monetary policy…at risk," and urged Congress to back off lest it undermine the Fed’s ability to manage the economy and thwart inflation.
The 185-word petition, initiated by a band of academic economists, reflects growing unease among professors, former Fed officials and some investors that the vehemence of the criticism from Congress of the Fed’s handling of the financial crisis suggests a readiness in Congress to weaken the freedom the Fed has to move interest rates as it sees fit
More…
BofA-Merrill tale: Paulson’s turn
Former Treasury chief Paulson heads to Capitol Hill to explain his role in controversial deal. Paulson expected to explain he wanted to save the merger.
WASHINGTON (CNNMoney.com) — Did government officials overstep their authority and force Bank of America to take over troubled Merrill Lynch at great taxpayer expense?
That’s what lawmakers plan to ask former Treasury Secretary Henry Paulson, who returns to Capitol Hill on Thursday to testify about the controversial deal struck during the height of the banking panic last fall.
Members of the House Committee on Oversight and Government Reform will do the questioning. The panel has already grilled the chiefs of Bank of America (BAC, Fortune 500) and the Federal Reserve.
Last September, Bank of America’s purchase of Merrill Lynch was trumpeted as good news — an example of the financial sector saving its own — especially when compared to the near-simultaneous bankruptcy of Lehman Brothers.
Yet, the BofA-Merrill deal later nearly collapsed and was rescued by billions of taxpayer dollars and government intervention, the full extent of which had not fully surfaced until officials started investigating earlier this year. The House Oversight hearings aim to get to the bottom of the government’s role in salvaging the deal.
More…
Former Treasury chief Paulson heads to Capitol Hill to explain his role in controversial deal. Paulson expected to explain he wanted to save the merger.
WASHINGTON (CNNMoney.com) — Did government officials overstep their authority and force Bank of America to take over troubled Merrill Lynch at great taxpayer expense?
That’s what lawmakers plan to ask former Treasury Secretary Henry Paulson, who returns to Capitol Hill on Thursday to testify about the controversial deal struck during the height of the banking panic last fall.
Members of the House Committee on Oversight and Government Reform will do the questioning. The panel has already grilled the chiefs of Bank of America (BAC, Fortune 500) and the Federal Reserve.
Last September, Bank of America’s purchase of Merrill Lynch was trumpeted as good news — an example of the financial sector saving its own — especially when compared to the near-simultaneous bankruptcy of Lehman Brothers.
Yet, the BofA-Merrill deal later nearly collapsed and was rescued by billions of taxpayer dollars and government intervention, the full extent of which had not fully surfaced until officials started investigating earlier this year. The House Oversight hearings aim to get to the bottom of the government’s role in salvaging the deal.
More…
Tab hits $95.7 billion so far for bailout of General Motors, Chrysler and auto parts suppliers
02:19 PM
In honor of General Motors beginning its first week as a new company, we thought you might like to see how much taxpayers are chipping in to save GM, Chrysler and auto suppliers.
The answer, in the chart, is: just shy of $100 billion…
More…
02:19 PM
In honor of General Motors beginning its first week as a new company, we thought you might like to see how much taxpayers are chipping in to save GM, Chrysler and auto suppliers.
The answer, in the chart, is: just shy of $100 billion…
More…
Obama’s Stimulus Plan: Failing by Its Own Measure
By STEPHEN GANDEL Tuesday, Jul. 14, 2009
The $787 billion stimulus plan is turning out to be far less stimulating than its architects expected.
Back in early January, when Barack Obama was still President-elect, two of his chief economic advisers — leading proponents of a stimulus bill — predicted that the passage of a large economic-aid package would boost the economy and keep the unemployment rate below 8%. It hasn’t quite worked out that way. Last month, the jobless rate in the U.S. hit 9.5%, the highest level it has reached since 1983.
The two advisers who wrote the paper, Christina Romer and Jared Bernstein, went on to land key jobs in the Obama Administration. Romer is the head of Obama’s Council of Economic Advisers, and Bernstein is the chief economist and economic-policy adviser to Vice President Joe Biden. And the stimulus bill that both economists championed became law in mid-February. What has not come to pass, however, is the boom in job creation that Romer and Bernstein predicted. A little over a month ago, the Administration said the stimulus bill had created or saved 150,000 jobs. That’s a far cry from the 3 million to 4 million jobs that Romer and Bernstein foresaw back in January.
Lawrence Summers, director of the White House’s National Economic Council, said last week that the stimulus bill was on track. This past weekend, the President rejected calls for a second stimulus package, saying the current stimulus needs more time to work, since only a small fraction of the money has been spent. From the beginning, the Administration has said that much of the boost to the economy from the stimulus plan would not come until the second half of this year. Administration officials have also insisted that it’s unfair to judge the effectiveness of the stimulus by projections they made back in January since the recession has turned out to be worse than what most economists predicted even just six months ago.
More…
By STEPHEN GANDEL Tuesday, Jul. 14, 2009
The $787 billion stimulus plan is turning out to be far less stimulating than its architects expected.
Back in early January, when Barack Obama was still President-elect, two of his chief economic advisers — leading proponents of a stimulus bill — predicted that the passage of a large economic-aid package would boost the economy and keep the unemployment rate below 8%. It hasn’t quite worked out that way. Last month, the jobless rate in the U.S. hit 9.5%, the highest level it has reached since 1983.
The two advisers who wrote the paper, Christina Romer and Jared Bernstein, went on to land key jobs in the Obama Administration. Romer is the head of Obama’s Council of Economic Advisers, and Bernstein is the chief economist and economic-policy adviser to Vice President Joe Biden. And the stimulus bill that both economists championed became law in mid-February. What has not come to pass, however, is the boom in job creation that Romer and Bernstein predicted. A little over a month ago, the Administration said the stimulus bill had created or saved 150,000 jobs. That’s a far cry from the 3 million to 4 million jobs that Romer and Bernstein foresaw back in January.
Lawrence Summers, director of the White House’s National Economic Council, said last week that the stimulus bill was on track. This past weekend, the President rejected calls for a second stimulus package, saying the current stimulus needs more time to work, since only a small fraction of the money has been spent. From the beginning, the Administration has said that much of the boost to the economy from the stimulus plan would not come until the second half of this year. Administration officials have also insisted that it’s unfair to judge the effectiveness of the stimulus by projections they made back in January since the recession has turned out to be worse than what most economists predicted even just six months ago.
More…
Report: Record Foreclosure Activity in First Half by CalculatedRisk on 7/16/2009 08:59:00 AM
From RealtyTrac:
From RealtyTrac:
RealtyTrac ... today released its Midyear 2009 U.S. Foreclosure Market Report, which shows a total of 1,905,723 foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 1,528,364 U.S. properties in the first six months of 2009, a 9 percent increase in total properties from the previous six months and a nearly 15 percent increase in total properties from the first six months of 2008. The report also shows that 1.19 percent of all U.S. housing units (one in 84) received at least one foreclosure filing in the first half of the year.Something to remember: questions have been raised before about the RealtyTrac numbers (see Foreclosure numbers don't add up), and RealtyTrac has only been tracking these numbers since 2005. For California, I use the DataQuick numbers for NOD activity (released quarterly), and available since the early '90s - but that is just one state.
Foreclosure filings were reported on 336,173 U.S. properties in June, the fourth straight monthly total exceeding 300,000 and helping to boost the second quarter total to the highest quarterly total since RealtyTrac began issuing its report in the first quarter of 2005. Foreclosure filings were reported on 889,829 U.S. properties in the second quarter, an increase of nearly 11 percent from the previous quarter and a 20 percent increase from the second quarter of 2008.
Weekly Unemployment Claims Decline Sharply by CalculatedRisk on 7/16/2009 08:29:00 AM
NOTE: The seasonally adjusted weekly claims numbers are being impacted by the layoffs in the automobile industry and other manufacturing sectors. Usually companies cut back production in the summer, and the numbers are adjusted for that pattern - but this year the companies cut back much earlier. This distortion is expected to last for another week or two.
The DOL reports on weekly unemployment insurance claims:
Click on graph for larger image in new window.
This graph shows the 4-week moving average of weekly claims since 1971.
The four-week average of weekly unemployment claims decreased this week by 22,500, and is now 74,250 below the peak of 14 weeks ago. It appears that initial weekly claims have peaked for this cycle.
The level of initial claims has fallen quickly - but is still very high (over 500K), indicating significant weakness in the job market.
Following the earlier recessions (like '81), weekly claims fell quickly, but in the two most recent recessions, weekly claims fell some and then stayed elevated for some time. I expect the current recession will be more like the '90 and '01 recessions, than the '81 recession.
NOTE: The seasonally adjusted weekly claims numbers are being impacted by the layoffs in the automobile industry and other manufacturing sectors. Usually companies cut back production in the summer, and the numbers are adjusted for that pattern - but this year the companies cut back much earlier. This distortion is expected to last for another week or two.
The DOL reports on weekly unemployment insurance claims:
In the week ending July 11, the advance figure for seasonally adjusted initial claims was 522,000, a decrease of 47,000 from the previous week's revised figure of 569,000. The 4-week moving average was 584,500, a decrease of 22,500 from the previous week's revised average of 607,000.
...
The advance number for seasonally adjusted insured unemployment during the week ending July 4 was 6,273,000, a decrease of 642,000 from the preceding week's revised level of 6,915,000.
Click on graph for larger image in new window.This graph shows the 4-week moving average of weekly claims since 1971.
The four-week average of weekly unemployment claims decreased this week by 22,500, and is now 74,250 below the peak of 14 weeks ago. It appears that initial weekly claims have peaked for this cycle.
The level of initial claims has fallen quickly - but is still very high (over 500K), indicating significant weakness in the job market.
Following the earlier recessions (like '81), weekly claims fell quickly, but in the two most recent recessions, weekly claims fell some and then stayed elevated for some time. I expect the current recession will be more like the '90 and '01 recessions, than the '81 recession.
Curb Your Enthusiasm: CIT & California Loom - Randall Forsyth, Barron's
The Economic Outlook Remains Very Weak - Roubini & Menegatti, Forbes
The Time Bomb in Corporate Debt - David Henry, Business Week
Fear Stagflation - Anatole Kaletsky, Times of London
The Economic Outlook Remains Very Weak - Roubini & Menegatti, Forbes
The Time Bomb in Corporate Debt - David Henry, Business Week
Fear Stagflation - Anatole Kaletsky, Times of London
Port Disaster Growing
The latest figures will be filtering out over the next couple of days from the rest of the ports, but already the Port of Lang Beach has released its June import and export report. It shows that inbound cargo from overseas is down 28.4% compared with June a year ago and that on a year to date basis, imports are down 23.5% overall.
On the export side, things were even worse in June with exports down 28.8% compared with year ago levels and that means exports for the year to date are down 26.9%
The Port of Long Beach is only the first of the Ports to come out with their report. And, Long Beach has been the most extreme case. However, as American consumers continue to see disposable incomes fall, I expect the problems of falling imports to be working their way across the country over the next couple of months.
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One reason that disposable income figures have not been falling as fast as the unemployment rate has been rising (and imports export business dropping) I suspect is in statistical methodologies. If you want something to write up a contributed article on (you can be a reporter, too, you know) just go to work on how the disposable income figures are based on things like 'housing equity' and see how much adjusting has been done there to reflect the real nearly 33% decline nationally in housing prices (S&P/Case-Schiller) since the housing bubble peaked.
Wanna make a bet there isn't some fancy footwork underway there to keep up the illusion that anyone has any free cash to go spend? Then try to sell that in a waterfront diner and let me know how you do.
The truth is becoming apparent if you work the docks, though...and while Long Beach may be dropping some due to market share, the other ports can be expected to see proportionate declines when they report over the next week or so.
The latest figures will be filtering out over the next couple of days from the rest of the ports, but already the Port of Lang Beach has released its June import and export report. It shows that inbound cargo from overseas is down 28.4% compared with June a year ago and that on a year to date basis, imports are down 23.5% overall.
On the export side, things were even worse in June with exports down 28.8% compared with year ago levels and that means exports for the year to date are down 26.9%
The Port of Long Beach is only the first of the Ports to come out with their report. And, Long Beach has been the most extreme case. However, as American consumers continue to see disposable incomes fall, I expect the problems of falling imports to be working their way across the country over the next couple of months.
---
One reason that disposable income figures have not been falling as fast as the unemployment rate has been rising (and imports export business dropping) I suspect is in statistical methodologies. If you want something to write up a contributed article on (you can be a reporter, too, you know) just go to work on how the disposable income figures are based on things like 'housing equity' and see how much adjusting has been done there to reflect the real nearly 33% decline nationally in housing prices (S&P/Case-Schiller) since the housing bubble peaked.
Wanna make a bet there isn't some fancy footwork underway there to keep up the illusion that anyone has any free cash to go spend? Then try to sell that in a waterfront diner and let me know how you do.
The truth is becoming apparent if you work the docks, though...and while Long Beach may be dropping some due to market share, the other ports can be expected to see proportionate declines when they report over the next week or so.
Tax Us to Tears
Looks like top earning people in New York may be looking for a cheaper place to live since the NY Post is headlining this morning that "DEM HEALTH RX A POI$ON PILL IN NY: Terrifying 57% tax looms for biggest earners".
This tax and spend outbreak comes at a time when we're reading about how Social Security just spent nearly three-quarters of a million dollars on a conference in Phoenix.
And while the republicorps in congress have unveiled the fruity loops org chart behind the democons healthcare plan, which looks strangely like an org-chart in a blender, we see that a hospital in Massachusetts is suing the (formerly) Commonwealth saying that basically, universal health care there doesn't really pay for the low-end folks. Now, look the other way, cough, and try to look surprised.
But wait! Before you go, want to bend over one more time and pay for poor people in Colorado to get cell phones?
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If this leaves you dazed and confused, consider one way out might be to bust up the booze lobby. Did you see where "Calif Tax Officials: Legal pot would rake in $1.4 billion?"
Looks like top earning people in New York may be looking for a cheaper place to live since the NY Post is headlining this morning that "DEM HEALTH RX A POI$ON PILL IN NY: Terrifying 57% tax looms for biggest earners".
This tax and spend outbreak comes at a time when we're reading about how Social Security just spent nearly three-quarters of a million dollars on a conference in Phoenix.
And while the republicorps in congress have unveiled the fruity loops org chart behind the democons healthcare plan, which looks strangely like an org-chart in a blender, we see that a hospital in Massachusetts is suing the (formerly) Commonwealth saying that basically, universal health care there doesn't really pay for the low-end folks. Now, look the other way, cough, and try to look surprised.
But wait! Before you go, want to bend over one more time and pay for poor people in Colorado to get cell phones?
---
If this leaves you dazed and confused, consider one way out might be to bust up the booze lobby. Did you see where "Calif Tax Officials: Legal pot would rake in $1.4 billion?"
Market Madness
I forgot to mention that Industrial Production is down 13.6% compared with year ago figures according to the latest from the (not really ) Federal Reserve (which is above auditing). Construction is down 20.7%, business equipment down 17.8% and in the major industry groups the best performance was utilities down only 3.9%.
With industrial plants running at a mere 68% of capacity now, seems sure that even with an occasional twitch of life out of the economy, that won't set off hiring because hours worked has been falling. All of which means the administration's grudging admission that unemployment will top 10% will be wrong by at least a full 1% and maybe even 4-5% on the low side - or worse since this is a Depression, dammit. Been reporting on it since 1997 and still people are in denial. Truly frigging amazing.
Look: All the Baby Boomers can't get their 'profits' it will collapse the economy. There hasn't been enough 'savings' with all the money watering down that CONgress has been doing all these years to pay for squat. That's why states like Texas keep resurrecting the NAFTA Highway plan and selling of taxpayer-paid roads to foreign corporations to run as 'toll roads' - so they can double and triple-dip the taxpayers. And the cons aren't all just in Austin...they are in every capitol where a lobbyist can find a hotel room. It's that simple and yeah, people are that dumb.
I forgot to mention that Industrial Production is down 13.6% compared with year ago figures according to the latest from the (not really ) Federal Reserve (which is above auditing). Construction is down 20.7%, business equipment down 17.8% and in the major industry groups the best performance was utilities down only 3.9%.
With industrial plants running at a mere 68% of capacity now, seems sure that even with an occasional twitch of life out of the economy, that won't set off hiring because hours worked has been falling. All of which means the administration's grudging admission that unemployment will top 10% will be wrong by at least a full 1% and maybe even 4-5% on the low side - or worse since this is a Depression, dammit. Been reporting on it since 1997 and still people are in denial. Truly frigging amazing.
Look: All the Baby Boomers can't get their 'profits' it will collapse the economy. There hasn't been enough 'savings' with all the money watering down that CONgress has been doing all these years to pay for squat. That's why states like Texas keep resurrecting the NAFTA Highway plan and selling of taxpayer-paid roads to foreign corporations to run as 'toll roads' - so they can double and triple-dip the taxpayers. And the cons aren't all just in Austin...they are in every capitol where a lobbyist can find a hotel room. It's that simple and yeah, people are that dumb.
China’s MV Overtakes Japan as World’s No. 2
- Bloomberg 7/16/2009
Economy in China Regains Robust Pace of Growth
- New York Times 7/16/2009
CP Shrinks at Record Pace Driving ConEd to Bonds
- Bloomberg 7/16/2009
Fed Saw Economy as ‘Vulnerable’ at June Meeting
- Bloomberg 7/16/2009
F'closures at Record High Despite Aid
- Reuters 7/16/2009
CIT Talks Fall Apart, Bankruptcy Looms
- Reuters 7/16/2009
Fed Sees Joblessness Drawing Out Recovery
- Washington Post 7/16/2009
Card Fees Pit Retailers Against Banks
- New York Times 7/16/2009
California IOUs Set for Trade
- Financial Times 7/16/2009
Deals Abound For Bargain Hungry Apt. Renters
- Arizona Republic
- Bloomberg 7/16/2009
Economy in China Regains Robust Pace of Growth
- New York Times 7/16/2009
CP Shrinks at Record Pace Driving ConEd to Bonds
- Bloomberg 7/16/2009
Fed Saw Economy as ‘Vulnerable’ at June Meeting
- Bloomberg 7/16/2009
F'closures at Record High Despite Aid
- Reuters 7/16/2009
CIT Talks Fall Apart, Bankruptcy Looms
- Reuters 7/16/2009
Fed Sees Joblessness Drawing Out Recovery
- Washington Post 7/16/2009
Card Fees Pit Retailers Against Banks
- New York Times 7/16/2009
California IOUs Set for Trade
- Financial Times 7/16/2009
Deals Abound For Bargain Hungry Apt. Renters
- Arizona Republic
Months
Nouriel Roubini and Christian Menegatti, 07.16.09
The U.S. economic outlook remains very weak.
The United States is in the twentieth month of a recession that has been by far the longest and most severe of the postwar period. While comparisons with the Great Depression are frequent and appropriate (especially if we look at the pace of contraction in industrial production), the aggressiveness of policy measures has significantly reduced the probability of a near-depression. Economic activity fell off a cliff in Q4 2008 and Q1 2009, with two consecutive quarters of sharp contraction--by 6.3% and 5.5% respectively--in line with our previous forecasts. The general consensus is that this recession will end sometime in the second half of 2009. While we expect more quarters of negative real GDP growth in 2009, we also expect the pace of contraction of economic activity to slow significantly. We forecast negative real GDP growth in Q2 2009 and Q3 2009, and for real GDP to remain flat in Q4. After the sharp contraction in economic activity in 2009, growth will reenter positive territory only in 2010, and then at a very sluggish rate, well below potential.
Even if economic activity stops contracting by the end of 2009, that might not mark the official end of this recession. Recessions are not measured exclusively by GDP contractions. Unemployment, industrial production, real manufacturing, wholesale trade sales and real personal income (less transfer) are all considered when it is time for the National Bureau of Economic Research (NBER) to put dates around recession periods. As reported by the NBER, this recession started in December 2007, and all the above indicators peaked between November 2007 and June 2008. U.S. real GDP will stop contracting at the end of 2009, but it is likely that many of the above indicators will not bottom out (or peak, in the case of unemployment) before mid-2010.
Improvements in real economic activity are present and visible in the reduction of the pace of job losses, in the improvement in indicators of manufacturing activity, in the stabilization of housing starts and in the improvement of financial conditions. However, we do not yet see signs of a strong and sustainable recovery.
Labor market conditions are still quite dire. More than 3.4 million jobs have been lost in 2009, and about 6.5 million have been lost since the beginning of the recession. Compare this with the 2.5 million jobs lost in the recession of 2001, 1.5 million lost in the recession of the early 1990s, 3 million in the one of the early 1980s and 2.2 million in the one of the 1970s. The pace of job losses has fallen from the 600,000-plus per month registered between December 2008 and March 2009 to about 350,000 in May and 467,000 in June; the average of monthly job losses in this recession is now at about 360,000. While the recent slowing of losses is a positive development, we have to put this in perspective: In previous postwar recessions, average monthly job losses ranged between 150,000 and 260,000. Moreover, average weekly hours in private non-farm payrolls are at the lowest since 1964, as employers have cut employees' hours. Job openings and turnover openings continue to fall and are at the lowest levels since 2000, indicating continued weakness in the economy.
The U.S. consumer is still the engine of U.S. growth and contributes over 70% of aggregate demand. While saving rates are headed for the high single digits and high oil prices together with long-term rates keep putting a dent in personal consumption, the over-leveraged consumer is finding some support in the tax breaks of the fiscal stimulus package. Yet the over-indebted U.S. consumer--whose deleveraging process has yet to start--will likely continue to put the brakes on consumption, while the savings rate continues to creep up. While this will encourage a rebalancing in the U.S. and global economy, in the medium-term it isn't likely to support strong U.S. and global growth.
Housing starts appear to have stabilized and will likely move sideways for quite some time. However, housing demand is not yet improving at a pace that can guarantee that the lingering inventory overhang will dissipate. This implies that home prices will continue to fall. We expect home prices to continue to fall through mid-2010.
U.S. industrial production has been contracting for 17 months in a row--with a short break in October 2008. Industrial production usually finds a bottom shortly after the ISM manufacturing index does. While the index probably found its bottom back in December 2008--at depression levels of 32.9--industrial production remains in a mode of contraction that started in January 2008.
Financial conditions are showing some improvement. Banks are borrowing at zero interest rates, and higher net interest margin can definitely help rebuild capital. Regulatory forbearance, changes in FASB (Financial Accounting Standards Board) rules and under-provisioning might enable banks to post better-than-expected results for a few quarters. However, relaxation of mark-to-market rules reduces the banks' incentives to participate in the Public-Private Investment Program (PPIP) and therefore reduces the likelihood that the program will succeed in clearing toxic assets from banks' balance sheets. The "muddle through" approach might be successful in a scenario in which the U.S. and global economy recover soon and go back to potential growth during 2010, but according to our forecasts, this is highly unlikely. While we might have positive surprises coming from the banking system in the next couple of quarters, the situation could turn around again after that, jarring confidence in financial markets in a way that would spill into the real economy. Increases in the unemployment rate, well beyond the rates envisioned by the adverse scenario of the recent bank stress tests, imply that recapitalization needs are larger than what the too-lenient stress test prescribed. The U.S financial system--in spite of the massive policy backstop--thus remains severely damaged, and the credit crunch remains unlikely to ease very fast.
A sharp rise in public debt burden--the U.S. Congressional Budget Office estimates that the public-debt-to-GDP ratio will rise from 40% to 80% (in the next decade), or about $9 trillion--will also put a dent in growth. If long-term rates were to increase to 5%, the resulting increase in the interest rate bill alone would be about $450 billion, or 3% of GDP. The implication is that the fiscal primary surplus will have to be permanently increased by 3% of GDP, which could constitute further pressure on the disposable income of the U.S. consumer.
Not only does the U.S. economy face downward risks to growth in the medium term, but potential growth might fall as well. The U.S. population is aging. With employment still falling--and another jobless recovery on the horizon--the rate of human capital accumulation will fall. Moreover, workers who remain unemployed for a long period of time lose skills, while young workers that enter the workforce, but don't find a job, don't acquire on-the-job skills. Reduced investments in worker training and education, coupled with lower capital expenditure, are a recipe for lower productivity ahead.
Deflationary pressures are still present in the U.S. economy. Demand is falling relative to supply, and excess capacity is still promoting slack in the goods markets. Moreover, the rising slack in labor markets, which is pushing down wages and labor costs, implies that deflationary pressures are going to be dominant this year and next year. This suggests that the Fed will keep monetary policy loose for a while longer. However, discussion of an exit strategy has to start now as investors' concerns about the Fed's ballooning balance sheet and expectations of inflation both mount.
There are also signs that a double-dip recession could materialize toward the second half of next year, or in 2011. If oil prices rise too much, too fast and too soon, that's going to have a negative effect in terms of trade and real disposable income in oil-importing countries. Also, concerns about unsustainable budget deficits are high and are pushing long-term interest rates higher. If these budget deficits are going to continue to be monetized, eventually, toward the end of next year, there is a risk of a sharp increase in expected inflation that could push interest rates even higher. Together with higher oil prices, driven up in part by this wall of liquidity rather than fundamentals alone, this could be a double whammy that would push the economy into a double-dip or W-shaped recession by late 2010 or 2011.
In conclusion, the outlook for the U.S. economy remains very weak. The recent rally in global equities, commodities and credit may soon fizzle out as worse-than-expected earnings and financial news take their toll on this rally, which has gotten ahead of improvements in actual macroeconomic data.
Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics (RGE), is a weekly columnist for Forbes. Read more of his columns here.Christian Menegatti is head of global economic research at RGEMonitor.com.
Nouriel Roubini and Christian Menegatti, 07.16.09
The U.S. economic outlook remains very weak.
The United States is in the twentieth month of a recession that has been by far the longest and most severe of the postwar period. While comparisons with the Great Depression are frequent and appropriate (especially if we look at the pace of contraction in industrial production), the aggressiveness of policy measures has significantly reduced the probability of a near-depression. Economic activity fell off a cliff in Q4 2008 and Q1 2009, with two consecutive quarters of sharp contraction--by 6.3% and 5.5% respectively--in line with our previous forecasts. The general consensus is that this recession will end sometime in the second half of 2009. While we expect more quarters of negative real GDP growth in 2009, we also expect the pace of contraction of economic activity to slow significantly. We forecast negative real GDP growth in Q2 2009 and Q3 2009, and for real GDP to remain flat in Q4. After the sharp contraction in economic activity in 2009, growth will reenter positive territory only in 2010, and then at a very sluggish rate, well below potential.
Even if economic activity stops contracting by the end of 2009, that might not mark the official end of this recession. Recessions are not measured exclusively by GDP contractions. Unemployment, industrial production, real manufacturing, wholesale trade sales and real personal income (less transfer) are all considered when it is time for the National Bureau of Economic Research (NBER) to put dates around recession periods. As reported by the NBER, this recession started in December 2007, and all the above indicators peaked between November 2007 and June 2008. U.S. real GDP will stop contracting at the end of 2009, but it is likely that many of the above indicators will not bottom out (or peak, in the case of unemployment) before mid-2010.
Improvements in real economic activity are present and visible in the reduction of the pace of job losses, in the improvement in indicators of manufacturing activity, in the stabilization of housing starts and in the improvement of financial conditions. However, we do not yet see signs of a strong and sustainable recovery.
Labor market conditions are still quite dire. More than 3.4 million jobs have been lost in 2009, and about 6.5 million have been lost since the beginning of the recession. Compare this with the 2.5 million jobs lost in the recession of 2001, 1.5 million lost in the recession of the early 1990s, 3 million in the one of the early 1980s and 2.2 million in the one of the 1970s. The pace of job losses has fallen from the 600,000-plus per month registered between December 2008 and March 2009 to about 350,000 in May and 467,000 in June; the average of monthly job losses in this recession is now at about 360,000. While the recent slowing of losses is a positive development, we have to put this in perspective: In previous postwar recessions, average monthly job losses ranged between 150,000 and 260,000. Moreover, average weekly hours in private non-farm payrolls are at the lowest since 1964, as employers have cut employees' hours. Job openings and turnover openings continue to fall and are at the lowest levels since 2000, indicating continued weakness in the economy.
The U.S. consumer is still the engine of U.S. growth and contributes over 70% of aggregate demand. While saving rates are headed for the high single digits and high oil prices together with long-term rates keep putting a dent in personal consumption, the over-leveraged consumer is finding some support in the tax breaks of the fiscal stimulus package. Yet the over-indebted U.S. consumer--whose deleveraging process has yet to start--will likely continue to put the brakes on consumption, while the savings rate continues to creep up. While this will encourage a rebalancing in the U.S. and global economy, in the medium-term it isn't likely to support strong U.S. and global growth.
Housing starts appear to have stabilized and will likely move sideways for quite some time. However, housing demand is not yet improving at a pace that can guarantee that the lingering inventory overhang will dissipate. This implies that home prices will continue to fall. We expect home prices to continue to fall through mid-2010.
U.S. industrial production has been contracting for 17 months in a row--with a short break in October 2008. Industrial production usually finds a bottom shortly after the ISM manufacturing index does. While the index probably found its bottom back in December 2008--at depression levels of 32.9--industrial production remains in a mode of contraction that started in January 2008.
Financial conditions are showing some improvement. Banks are borrowing at zero interest rates, and higher net interest margin can definitely help rebuild capital. Regulatory forbearance, changes in FASB (Financial Accounting Standards Board) rules and under-provisioning might enable banks to post better-than-expected results for a few quarters. However, relaxation of mark-to-market rules reduces the banks' incentives to participate in the Public-Private Investment Program (PPIP) and therefore reduces the likelihood that the program will succeed in clearing toxic assets from banks' balance sheets. The "muddle through" approach might be successful in a scenario in which the U.S. and global economy recover soon and go back to potential growth during 2010, but according to our forecasts, this is highly unlikely. While we might have positive surprises coming from the banking system in the next couple of quarters, the situation could turn around again after that, jarring confidence in financial markets in a way that would spill into the real economy. Increases in the unemployment rate, well beyond the rates envisioned by the adverse scenario of the recent bank stress tests, imply that recapitalization needs are larger than what the too-lenient stress test prescribed. The U.S financial system--in spite of the massive policy backstop--thus remains severely damaged, and the credit crunch remains unlikely to ease very fast.
A sharp rise in public debt burden--the U.S. Congressional Budget Office estimates that the public-debt-to-GDP ratio will rise from 40% to 80% (in the next decade), or about $9 trillion--will also put a dent in growth. If long-term rates were to increase to 5%, the resulting increase in the interest rate bill alone would be about $450 billion, or 3% of GDP. The implication is that the fiscal primary surplus will have to be permanently increased by 3% of GDP, which could constitute further pressure on the disposable income of the U.S. consumer.
Not only does the U.S. economy face downward risks to growth in the medium term, but potential growth might fall as well. The U.S. population is aging. With employment still falling--and another jobless recovery on the horizon--the rate of human capital accumulation will fall. Moreover, workers who remain unemployed for a long period of time lose skills, while young workers that enter the workforce, but don't find a job, don't acquire on-the-job skills. Reduced investments in worker training and education, coupled with lower capital expenditure, are a recipe for lower productivity ahead.
Deflationary pressures are still present in the U.S. economy. Demand is falling relative to supply, and excess capacity is still promoting slack in the goods markets. Moreover, the rising slack in labor markets, which is pushing down wages and labor costs, implies that deflationary pressures are going to be dominant this year and next year. This suggests that the Fed will keep monetary policy loose for a while longer. However, discussion of an exit strategy has to start now as investors' concerns about the Fed's ballooning balance sheet and expectations of inflation both mount.
There are also signs that a double-dip recession could materialize toward the second half of next year, or in 2011. If oil prices rise too much, too fast and too soon, that's going to have a negative effect in terms of trade and real disposable income in oil-importing countries. Also, concerns about unsustainable budget deficits are high and are pushing long-term interest rates higher. If these budget deficits are going to continue to be monetized, eventually, toward the end of next year, there is a risk of a sharp increase in expected inflation that could push interest rates even higher. Together with higher oil prices, driven up in part by this wall of liquidity rather than fundamentals alone, this could be a double whammy that would push the economy into a double-dip or W-shaped recession by late 2010 or 2011.
In conclusion, the outlook for the U.S. economy remains very weak. The recent rally in global equities, commodities and credit may soon fizzle out as worse-than-expected earnings and financial news take their toll on this rally, which has gotten ahead of improvements in actual macroeconomic data.
Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics (RGE), is a weekly columnist for Forbes. Read more of his columns here.Christian Menegatti is head of global economic research at RGEMonitor.com.
The National (Abu Dhabi)
July 12, 2009
By: Stephen Glain
July is shaping up to be a great month for contrarians and the cruellest month to date for Barack Obama, the US president. Seldom have so many economists, money managers, business owners, investors and even politicians converged on the side of the same dreary prognosis.
Green shoots? That happy talk wilted along with the announcement that the US jobless rate had risen to 9.5 per cent last month, the highest level in a quarter of a century. Unemployment in the world's largest economy has doubled in only 16 months and economists now expect it to reach 11 per cent by next year.
To make matters worse, wage growth is stalling and may be on the verge of decline. High unemployment and diminished household income dims the outlook for consumer spending, which had been recovering from its collapse last year. Less spending means weak retails sales, which leads to more lay-offs and an end to that illusory fourth-quarter recovery.
This would be bad enough for an economy on a sound financial footing. For the US, which now expects trillion-dollar budget deficits every year for the next decade, the prospect of anything less than a robust recovery amounts to a threat. According to a recent report from the Congressional Budget Office (CBO), the burden of US borrowing will reach 82 per cent of GDP by 2019, about double what it was just last year. Having spent US$700 billion (Dh2.57 trillion) in rescue packages for Wall Street and troubled industries such as the car sector, in addition to a $787bn economic stimulus package, America's rate of indebtedness is growing faster than economic output. Soon, the US government will owe more money than at any point since the early 1940s, when it was busy helping the British make the world safe from Nazi Germany and Imperial Japan.
The combination of lost jobs, record deficits and the prospect of a long, shallow recovery has fuelled talk in Washington and Wall Street about the need for a second stimulus package. Mr Obama sold his first spending bill, which became law in February, on the assumption it would restrict the unemployment rate to about 8 per cent. Since then, 2.5 million labourers have been laid off. While some economists and politicians credit the stimulus for preventing an economic collapse, others say its effects will have been exhausted by the end of this year, just as the tax cuts from the previous president, George W Bush, are scheduled to expire.
The last thing Mr Obama needs is to invest more political capital in a second package. Though most economists acknowledge deficit spending was the only alternative for a president who inherited an economy on life-support - his spending on initiatives is equal to about only 10 per cent of the total debt - Americans are understandably nervous about the sustainability of Washington's fiscal policy.
Mr Obama's own party is divided over the need for another rescue package. Laura Tyson, a member of the White House Economic Advisory Board, said last week the first programme was too small, while Democrats leaders in Congress, sensing grass-root alarm over the public debt, disagreed. Last week, Mr Obama was obliged to respond defensively to remarks from Joe Biden, his vice president, that the White House "misread" the depths of the crisis. In some parts of the country, Mr Obama's approval ratings have dropped below 50 per cent.
For now, the White House is trying to allay fears of a looming "debt trap" by pledging to cut the deficit in half by next year and to write a healthcare reform bill that will pay for itself.No one believes this, particularly not the Chinese government, which is talking down the dollar again. Last Thursday, Dai Bingguo, a member of China's delegation at last week's Group of Eight industrialised nations summit, called for "a diversified and rational international reserve currency system". It was a clear swipe at America's onerous public debt and its long-term consequences for the US currency. As the world's top buyer of US treasuries, China is Washington's most important banker and custodian to $2tn worth in mostly dollar-denominated foreign exchange reserves.
Mr Dai's comment followed news last week that Beijing would allow companies to invoice and settle transactions in local currency, an important step in the internationalisation of China's financial system.Although Beijing knows the dollar will remain the world's reserve currency for some time, it is, through currency liberalisation and the occasional raspberry at high-level summits, signalling that its patience for America's debt addiction is wearing thin.
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July 12, 2009
By: Stephen Glain
July is shaping up to be a great month for contrarians and the cruellest month to date for Barack Obama, the US president. Seldom have so many economists, money managers, business owners, investors and even politicians converged on the side of the same dreary prognosis.
Green shoots? That happy talk wilted along with the announcement that the US jobless rate had risen to 9.5 per cent last month, the highest level in a quarter of a century. Unemployment in the world's largest economy has doubled in only 16 months and economists now expect it to reach 11 per cent by next year.
To make matters worse, wage growth is stalling and may be on the verge of decline. High unemployment and diminished household income dims the outlook for consumer spending, which had been recovering from its collapse last year. Less spending means weak retails sales, which leads to more lay-offs and an end to that illusory fourth-quarter recovery.
This would be bad enough for an economy on a sound financial footing. For the US, which now expects trillion-dollar budget deficits every year for the next decade, the prospect of anything less than a robust recovery amounts to a threat. According to a recent report from the Congressional Budget Office (CBO), the burden of US borrowing will reach 82 per cent of GDP by 2019, about double what it was just last year. Having spent US$700 billion (Dh2.57 trillion) in rescue packages for Wall Street and troubled industries such as the car sector, in addition to a $787bn economic stimulus package, America's rate of indebtedness is growing faster than economic output. Soon, the US government will owe more money than at any point since the early 1940s, when it was busy helping the British make the world safe from Nazi Germany and Imperial Japan.
The combination of lost jobs, record deficits and the prospect of a long, shallow recovery has fuelled talk in Washington and Wall Street about the need for a second stimulus package. Mr Obama sold his first spending bill, which became law in February, on the assumption it would restrict the unemployment rate to about 8 per cent. Since then, 2.5 million labourers have been laid off. While some economists and politicians credit the stimulus for preventing an economic collapse, others say its effects will have been exhausted by the end of this year, just as the tax cuts from the previous president, George W Bush, are scheduled to expire.
The last thing Mr Obama needs is to invest more political capital in a second package. Though most economists acknowledge deficit spending was the only alternative for a president who inherited an economy on life-support - his spending on initiatives is equal to about only 10 per cent of the total debt - Americans are understandably nervous about the sustainability of Washington's fiscal policy.
Mr Obama's own party is divided over the need for another rescue package. Laura Tyson, a member of the White House Economic Advisory Board, said last week the first programme was too small, while Democrats leaders in Congress, sensing grass-root alarm over the public debt, disagreed. Last week, Mr Obama was obliged to respond defensively to remarks from Joe Biden, his vice president, that the White House "misread" the depths of the crisis. In some parts of the country, Mr Obama's approval ratings have dropped below 50 per cent.
For now, the White House is trying to allay fears of a looming "debt trap" by pledging to cut the deficit in half by next year and to write a healthcare reform bill that will pay for itself.No one believes this, particularly not the Chinese government, which is talking down the dollar again. Last Thursday, Dai Bingguo, a member of China's delegation at last week's Group of Eight industrialised nations summit, called for "a diversified and rational international reserve currency system". It was a clear swipe at America's onerous public debt and its long-term consequences for the US currency. As the world's top buyer of US treasuries, China is Washington's most important banker and custodian to $2tn worth in mostly dollar-denominated foreign exchange reserves.
Mr Dai's comment followed news last week that Beijing would allow companies to invoice and settle transactions in local currency, an important step in the internationalisation of China's financial system.Although Beijing knows the dollar will remain the world's reserve currency for some time, it is, through currency liberalisation and the occasional raspberry at high-level summits, signalling that its patience for America's debt addiction is wearing thin.
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Foreclosure Filings in US Reach Record 1.5 MillionBloomberg - Dan Levy - July 16 (Bloomberg) -- US foreclosure filings hit a record in the first half, a sign that job losses and falling property prices deepened the housing recession, according to realtytrac Inc. More than 1.5 million properties received a ...
Harley, Polaris warn on motorcycle demand Reuters - James B. Kelleher, Andre Grenon - By James B. Kelleher CHICAGO (Reuters) - Harley-Davidson Inc (HOG.N) and Polaris Industries Inc (PII.N) said on Thursday that cash- strapped consumers steered clear of their big, high-end motorcycles in the second quarter and warned demand would likely ... Video: Harley cutting another 1,000 jobs Video: Harley cutting another 1,000 jobs 
WLUK Less Hogs On The Road Forbes
WLUK Less Hogs On The Road Forbes
Derivatives Crisis: More Bailouts On Deck?
15 JULY 2009
The derivatives market is about as ugly as it gets, and puts a new edge on ‘too big to fail, to big to exist."
The banks want to keep the game going because it suits their current model of taking risks, making huge bonuses, and writing off the losses to the public.
It remains to be seen if the Obama Administration has what it takes to regulate and rein in the banks. While Larry Summers and Tim Geithner are on the team the answer is probably ‘no.’
One thing which strikes us as odd in this Bloomberg article is the emphasizing of stimulus as a source of future crisis. All things considered two trillion in stimulus across the globe is a relative drop in the buck-et compared to what the bank bailouts are costing in direct and indirect taxation on the real economy. Bloomberg seems to be crusading against anyone but the bigh banks getting public money, so perhaps it is not surprising.
As you know, CIT is deeply troubled, and most likely heading towards some sort of managed bankruptcy. The company is said to be holding counter party risk with many banks including Goldman Sachs. The rally may be based on strong rumours of an imminent bailout for CIT. The word on the Street is that Geithner and Summers caved again after a few key phone calls.
Let’s see how the Obama Administration handles yet another financial institution brought low by bad risk management in pursuit of outsized profit.
Wall Street and their demimonde in the government and the media hate stimulus packages designed to assist the ordinary Joe, even if all it does is ease the pain during a steep downtrend (which was caused by the financial sector). They hate it, unless there is a way to charge fees in its distribution, and turn it into a profit-making venture for them where they derive most if not all of the benefits.
The dollar and the US bond are taking it repeatedly on the chin. As are most of the US public and the holders of its debt.
The timeframe Mr. Mobius has for the next major crisis is way out on the far edge of any projection we think is probable by quite some distance. Its not clear that it really matters, given the significant hurdles facing the economy this year.
Let’s see how the Boys handle the burgeoning Commercial Real Estate, Pension, and Stage Government crises. I think they may very well precede the derivatives coup de grace, and several of them are big enough to be show-stoppers, if not triggers for a larger systemic meltdown.
Until the banks are restrained, and the financial system is reformed, and balanced is restored to the economy, there will be no sustained recovery.
The Obama team is incompetent, and probably worse. Its a great disappointment. They are showing all the wrong moves on the economy.
All the charts included here are from our friends at ContraryInvestor.
15 JULY 2009
The derivatives market is about as ugly as it gets, and puts a new edge on ‘too big to fail, to big to exist."
The banks want to keep the game going because it suits their current model of taking risks, making huge bonuses, and writing off the losses to the public.
It remains to be seen if the Obama Administration has what it takes to regulate and rein in the banks. While Larry Summers and Tim Geithner are on the team the answer is probably ‘no.’
One thing which strikes us as odd in this Bloomberg article is the emphasizing of stimulus as a source of future crisis. All things considered two trillion in stimulus across the globe is a relative drop in the buck-et compared to what the bank bailouts are costing in direct and indirect taxation on the real economy. Bloomberg seems to be crusading against anyone but the bigh banks getting public money, so perhaps it is not surprising.
As you know, CIT is deeply troubled, and most likely heading towards some sort of managed bankruptcy. The company is said to be holding counter party risk with many banks including Goldman Sachs. The rally may be based on strong rumours of an imminent bailout for CIT. The word on the Street is that Geithner and Summers caved again after a few key phone calls.
Let’s see how the Obama Administration handles yet another financial institution brought low by bad risk management in pursuit of outsized profit.
Wall Street and their demimonde in the government and the media hate stimulus packages designed to assist the ordinary Joe, even if all it does is ease the pain during a steep downtrend (which was caused by the financial sector). They hate it, unless there is a way to charge fees in its distribution, and turn it into a profit-making venture for them where they derive most if not all of the benefits.
The dollar and the US bond are taking it repeatedly on the chin. As are most of the US public and the holders of its debt.
The timeframe Mr. Mobius has for the next major crisis is way out on the far edge of any projection we think is probable by quite some distance. Its not clear that it really matters, given the significant hurdles facing the economy this year.
Let’s see how the Boys handle the burgeoning Commercial Real Estate, Pension, and Stage Government crises. I think they may very well precede the derivatives coup de grace, and several of them are big enough to be show-stoppers, if not triggers for a larger systemic meltdown.
Until the banks are restrained, and the financial system is reformed, and balanced is restored to the economy, there will be no sustained recovery.
The Obama team is incompetent, and probably worse. Its a great disappointment. They are showing all the wrong moves on the economy.
All the charts included here are from our friends at ContraryInvestor.
Obama's New Tax Plan Threatens U.S. Recovery - John Chen, Fortune
States: More Record Unemployment Rates in June by CalculatedRisk on 7/17/2009 11:10:00 AM
Note: the BLS started keeping state records in 1976.
From the BLS: Regional and State Employment and Unemployment Summary
Note: the BLS started keeping state records in 1976.
From the BLS: Regional and State Employment and Unemployment Summary
Michigan again reported the highest jobless rate, 15.2 percent, in June. (The last state to have an unemployment rate of 15.0 percent or higher was West Virginia in March 1984.) The states with the next highest rates were Rhode Island, 12.4 percent; Oregon, 12.2 percent; South Carolina, 12.1 percent; Nevada, 12.0 percent; California, 11.6 percent; Ohio, 11.1 percent; and North Carolina, 11.0 percent. The Nevada, Rhode Island, and South Carolina rates were the highest on record for those states. Florida, at 10.6 percent, Georgia, at 10.1 percent, and Delaware, at 8.4 percent, also posted series highs.
GE Conference Call Comments by CalculatedRisk on 7/17/2009 09:39:00 AM
Some comments from the GE Conference call (comments from Brian):
GE: If you look at the environment and the global landscape not much has changed from how we saw it at EPG [investor presentation?]. We're seeing growth in selected markets. Parts of the globe are still robust. China and the middle east, India, places like that. Deflation is helping our margins.
just talking about orders and backlog, we had about $18 billion of second quarter orders, slightly below first quarter and down about 23% FX adjusted versus last year. We're down about 16% year to date. The backlog remains strong. The orders were about the same level as '06 and '07. Backlog remains very strong at $169 billion. If you just look at the orders in some context we had a record first half of '08. That was really the peak of what we saw for major equipment orders. We built $30 billion of backlog over the last four years so we really expected orders to be down even without the recession. A couple positives with major equipment, cancellations are very low. Cancellations are like $100 million…If you look at our backlog conversion rate and current orders and look forward, maybe 12 months, and you think about the fact that about two-thirds of any given year's revenue convert from backlog, and the other third represent current year orders, we look at a rough estimate for 2010 at about, with equipment revenue down about 10 to 15%, some where in that range.
Quick update on stimulus and global growth. First with stimulus. We talked about at EPG having about $190 billion potential from a stimulus standpoint. Almost nothing has come out from this so far. The major buckets are clean energy, affordable healthcare, and then a scattering of other projects. We're seeing some early wins in smart grid with orders up 70%. As we said, the wind tax credits have been clarified. China spending is very strong. We're starting to get some bidding on health information changes and seeing some decent activity around the nuclear business. If you look at it from a global standpoint, some of the global regions are still extremely strong. China was up 31%, India up 46%, Middle East up 10% despite the fact that we're only beginning the Iraq shipments and order completion.
GE Capital
Delinquencies – Equipment and Real Estate [US improved and Asia is worse????]
Next is an update on our delinquencies in non earnings. On the left side is the commercial equipment finance data. You can see the 30 plus day delinquencies for equipment are down six basis points in Q2 versus Q1. That was driven by a decline in delinquencies in the Americas where 30 plus went from 2.81% to 2.45%. So we're very interested in watching this trend and seeing how this develops as we go through the year. That was partially offset by, we had some increased delinquencies in our Asia and European equipment books. We continue to see pressure on non earnings, up 18 basis points versus the first quarter but again the pace of that growth has also leveled off a bit. It's driven by senior secured loans where we're well collateralized. In terms of real estate, which is not in the delinquency for the equipment bar up above, delinquencies increased up to 4% [up 178BP Q/Q] on the real estate book and non earnings are up to 2.9% [up 166BP Q/Q]. You can see we continue to see pressure in the commercial real estate book,
Click on graph for larger image in new window.
From the GE Investor Presentation material.
Delinquencies – Consumer
On the right side, consumer data, and this is really developing into the two different categories by type of exposure. We broke out mortgage, global mortgage, and nonmortgage because loss dynamics are so different. You can see the improvements in the non mortgage delinquency as the delinquency went from 6.02 in the first quarter down to 5.92 in the second quarter and that's driven by North America . North American delinquencies are down 14 basis points to 6.96%. We're seeing better entry rates in delinquency. We're seeing improved late-stage collection effectiveness. The non earnings balance was flat to the prior quarter, and the reason the rate increase a little bit is because the balance is down. So as a percent it's a little higher, but we are getting the benefit of all the underwriting actions that we took last year as well as some seasonality benefits. And then the second category are the global mortgage assets. We continue to see growth in 30 plus delinquencies and non earnings. UK mortgage book drives most of the changes
Reserves
Next is an update on how we think about the non earning assets and our reserve coverage. The left side is commercial. Non earnings ended the quarter at 6.4 billion. It's up 1.9 billion from Q1. This represents 2.9% of financing receivables. The bars show the benefit of being senior secured lender. We expect 1.9 billion of non earnings to have 100% recovery. We have another 1.2 billion some type of workout where we expect full recovery. We'll have a renegotiation, some changes to the documents and terms, and then we have another 1.9 billion where we're protected by collateral value. At the end of the day that leaves with you 1.4 billion of estimated loss exposure today. You can see we have 173% coverage with our reserves. [To summarize, they are expecting a 78% recovery on what is largely a junk grade portfolio albeit in a senior secured position]
On the right side of the consumer non-earning assets of $6.6 billion and they were up over Q1, represent about 4.7% of the financing receivables. The consumer dynamics are very different between the mortgage and the nonmortgage assets so the green bar represents our non mortgage non earning assets, principally the US retail business, the credit card business and retail sales finance. We have 1.7 billion dollars of non earnings in that book. And we have 3.3 million of reserves against it, 189% coverage. And then the remainder of the non-earning assets on the global mortgage book we expect 1.5 billion of that to cure. With our underwriting positions we expect to recover $2.9 billion of exposure based on loan to value position. We underwrite at about 70 to 75% loan to value. Today they're at about 85% loan to value as house prices have declined. We have some mortgage insurance we expect to recover on leaving with expected loss of $500 million, 173% coverage without that. We believe we're appropriately reserved for non-earning loss exposure. We'll cover more in detail on the 28th meeting. [To summarize, they expect 30% of their non performing mortgage assets to cure, the value of the underlying assets in their mortgage book are down 12-18% from origination, they expect a 15% loss severity rate (including a modest benefit from mortgage insurance) - these guys must the gods of mortgage underwriting – if anyone wants to bet on the trend of future loss estimates, I'll take the over – their corporate motto "Imagination at Work" seems fully appropriate here )
Some comments from the GE Conference call (comments from Brian):
GE: If you look at the environment and the global landscape not much has changed from how we saw it at EPG [investor presentation?]. We're seeing growth in selected markets. Parts of the globe are still robust. China and the middle east, India, places like that. Deflation is helping our margins.
just talking about orders and backlog, we had about $18 billion of second quarter orders, slightly below first quarter and down about 23% FX adjusted versus last year. We're down about 16% year to date. The backlog remains strong. The orders were about the same level as '06 and '07. Backlog remains very strong at $169 billion. If you just look at the orders in some context we had a record first half of '08. That was really the peak of what we saw for major equipment orders. We built $30 billion of backlog over the last four years so we really expected orders to be down even without the recession. A couple positives with major equipment, cancellations are very low. Cancellations are like $100 million…If you look at our backlog conversion rate and current orders and look forward, maybe 12 months, and you think about the fact that about two-thirds of any given year's revenue convert from backlog, and the other third represent current year orders, we look at a rough estimate for 2010 at about, with equipment revenue down about 10 to 15%, some where in that range.
Quick update on stimulus and global growth. First with stimulus. We talked about at EPG having about $190 billion potential from a stimulus standpoint. Almost nothing has come out from this so far. The major buckets are clean energy, affordable healthcare, and then a scattering of other projects. We're seeing some early wins in smart grid with orders up 70%. As we said, the wind tax credits have been clarified. China spending is very strong. We're starting to get some bidding on health information changes and seeing some decent activity around the nuclear business. If you look at it from a global standpoint, some of the global regions are still extremely strong. China was up 31%, India up 46%, Middle East up 10% despite the fact that we're only beginning the Iraq shipments and order completion.
GE Capital
Delinquencies – Equipment and Real Estate [US improved and Asia is worse????]
Next is an update on our delinquencies in non earnings. On the left side is the commercial equipment finance data. You can see the 30 plus day delinquencies for equipment are down six basis points in Q2 versus Q1. That was driven by a decline in delinquencies in the Americas where 30 plus went from 2.81% to 2.45%. So we're very interested in watching this trend and seeing how this develops as we go through the year. That was partially offset by, we had some increased delinquencies in our Asia and European equipment books. We continue to see pressure on non earnings, up 18 basis points versus the first quarter but again the pace of that growth has also leveled off a bit. It's driven by senior secured loans where we're well collateralized. In terms of real estate, which is not in the delinquency for the equipment bar up above, delinquencies increased up to 4% [up 178BP Q/Q] on the real estate book and non earnings are up to 2.9% [up 166BP Q/Q]. You can see we continue to see pressure in the commercial real estate book,
Click on graph for larger image in new window.From the GE Investor Presentation material.
Delinquencies – Consumer
On the right side, consumer data, and this is really developing into the two different categories by type of exposure. We broke out mortgage, global mortgage, and nonmortgage because loss dynamics are so different. You can see the improvements in the non mortgage delinquency as the delinquency went from 6.02 in the first quarter down to 5.92 in the second quarter and that's driven by North America . North American delinquencies are down 14 basis points to 6.96%. We're seeing better entry rates in delinquency. We're seeing improved late-stage collection effectiveness. The non earnings balance was flat to the prior quarter, and the reason the rate increase a little bit is because the balance is down. So as a percent it's a little higher, but we are getting the benefit of all the underwriting actions that we took last year as well as some seasonality benefits. And then the second category are the global mortgage assets. We continue to see growth in 30 plus delinquencies and non earnings. UK mortgage book drives most of the changes
Reserves
Next is an update on how we think about the non earning assets and our reserve coverage. The left side is commercial. Non earnings ended the quarter at 6.4 billion. It's up 1.9 billion from Q1. This represents 2.9% of financing receivables. The bars show the benefit of being senior secured lender. We expect 1.9 billion of non earnings to have 100% recovery. We have another 1.2 billion some type of workout where we expect full recovery. We'll have a renegotiation, some changes to the documents and terms, and then we have another 1.9 billion where we're protected by collateral value. At the end of the day that leaves with you 1.4 billion of estimated loss exposure today. You can see we have 173% coverage with our reserves. [To summarize, they are expecting a 78% recovery on what is largely a junk grade portfolio albeit in a senior secured position]
On the right side of the consumer non-earning assets of $6.6 billion and they were up over Q1, represent about 4.7% of the financing receivables. The consumer dynamics are very different between the mortgage and the nonmortgage assets so the green bar represents our non mortgage non earning assets, principally the US retail business, the credit card business and retail sales finance. We have 1.7 billion dollars of non earnings in that book. And we have 3.3 million of reserves against it, 189% coverage. And then the remainder of the non-earning assets on the global mortgage book we expect 1.5 billion of that to cure. With our underwriting positions we expect to recover $2.9 billion of exposure based on loan to value position. We underwrite at about 70 to 75% loan to value. Today they're at about 85% loan to value as house prices have declined. We have some mortgage insurance we expect to recover on leaving with expected loss of $500 million, 173% coverage without that. We believe we're appropriately reserved for non-earning loss exposure. We'll cover more in detail on the 28th meeting. [To summarize, they expect 30% of their non performing mortgage assets to cure, the value of the underlying assets in their mortgage book are down 12-18% from origination, they expect a 15% loss severity rate (including a modest benefit from mortgage insurance) - these guys must the gods of mortgage underwriting – if anyone wants to bet on the trend of future loss estimates, I'll take the over – their corporate motto "Imagination at Work" seems fully appropriate here )
Nine Reasons the Economy is Not Getting Better
Roubini: Views on Economy Unchanged Despite Reports
The Joy of Sachs
$20 oil? You bet, says one expert
Foreclosure Filings in U.S. Reach Record 1.5 Million
World Bank warns of deflation spiral
CIT Group's 'Capital' Was All Talk, No Trousers
S&P 500 Rally Poised to End
Roubini: Views on Economy Unchanged Despite Reports
Part-Time Workers Mask Unemployment Woes
U.S. MISSION: SAVE LENDERS, WOO INVESTORS
Subprime debt's new threat to housing
Market to Hit New Lows While We Wait for Next Year's Economic Recovery
Chutzpah on Steroids
The Economy Is Even Worse Than You Think
U.S. Producer Prices Rose in June as Gasoline Surged
U.K. Inflation Slows Below Bank of England 2% Target
Even the Employed Lose with Hour and Wage Cuts
CIT Group Says Its Failure Risks Demise of Customers
What's killing banks on Main Street? 9 Core machinery orders at record lows, bankruptcies still soaring
Looking for the Lenders' Little Helpers
Europe digs its economic grave while the ECB answers to no one
CIT Group shares dive as government aid uncertain
Market, State Unemployment, Fed Balance Sheet by CalculatedRisk on 7/17/2009 04:00:00 PM
A few graphs ...
Click on graph for larger image in new window.
The first graph shows the high and low unemployment rates for each state (and D.C.) since 1976. The red bar is the current unemployment rate (sorted by the current unemployment rate).
Sixteen states now have double digit unemployment rates.
Missouri, Washington, New Jersey and West Virginia are getting close.
Eight states are at record unemployment rates: Rhode Island, Oregon, South Carolina, Nevada, California, Florida, Georgia, and Delaware.
The Atlanta Fed is now posting Economic Highlights and Financial Highlights weekly.
I cover most of the economic data as it is released, but these are good summaries.
This graph shows the composition of the Fed's assets. From the Atlanta Fed:
And on the market ...
This graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".
Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.
A few graphs ...
Click on graph for larger image in new window.The first graph shows the high and low unemployment rates for each state (and D.C.) since 1976. The red bar is the current unemployment rate (sorted by the current unemployment rate).
Sixteen states now have double digit unemployment rates.
Missouri, Washington, New Jersey and West Virginia are getting close.
Eight states are at record unemployment rates: Rhode Island, Oregon, South Carolina, Nevada, California, Florida, Georgia, and Delaware.
The Atlanta Fed is now posting Economic Highlights and Financial Highlights weekly. I cover most of the economic data as it is released, but these are good summaries.
This graph shows the composition of the Fed's assets. From the Atlanta Fed:
While the overall size of the Fed's balance sheet has been shrinking slightly over the last two months, the composition of the balance sheet has changed.
<li> There have been sizeable declines in short-term lending to financials and lending to nonbank credit markets. For example, combined, TAF credit, currency swaps, and the CPFF have fallen by about one-half from over $1 trillion on April 8 to just under $500 billion on July 8.
<li> Offsetting these declines have been increases in holdings of agency debt, agency mortgage backed securities (MBS), and U.S. Treasury securities. Combined, these three categories have increased by about $430 billion since April 8.
And on the market ...This graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".
Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.
The privately owned Federal Reserve runs our CountryUnemployment on the rise- by Bob Chapman - 2009-07-16
Report: Record Drop in State Tax Revenues by CalculatedRisk on 7/17/2009 08:08:00 PM
No surprise ...
From the NY Times: State Tax Revenues at Record Low, Rockefeller Institute Finds (ht Ann)
And it looks much worse in Q2:
No surprise ...
From the NY Times: State Tax Revenues at Record Low, Rockefeller Institute Finds (ht Ann)
The anemic economy decimated state tax collections during the first three months of the year ... The drop in revenues was the steepest in the 46 years that quarterly data has been available.Here is the report: State Tax Decline in Early 2009 Was the Sharpest on Record
Over all, the report found that state tax collections dropped 11.7 percent in the first three months of 2009, compared with the same period last year.
...
All the major sources of state tax revenue — sales taxes, personal income taxes and corporate income taxes — took serious blows ...
And it looks much worse in Q2:
Early figures for April and May of 2009 show an overall decline of nearly 20 percent for total taxes, a further dramatic worsening of fiscal conditions nationwide.Note: an earlier report was on state pesonal income taxes - this is all state taxes.
GE Results Validate Theory: Severe Economic Contraction by Karl Denninger
Many Predict US Financial Collapse in September
July 18, 2009
by Charles (A Reader) Let us contemplate the day in the near future when the consequences of financial chicanery finally outpace the ability of the governments, central banks and big media to cover up and obfuscate the truth. Many respected voices have now gone on record that September 30 or thereabouts will be that day.
Bob Chapman [Internationalforecaster.com] revealed that the US State Dept has advised embassies worldwide to stock up on a year's worth of the local currency in anticipation of collapse of the US dollar. Look for a temporary banking shutdown timed for around September 2009. As under Roosevelt, some banks won't reopen. 96% of bank reserves are currently held with the Federal Reserve who tells the banks not to loan the money, but rather to save it for further banking acquisition and consolidation. Chapman foresees a bank holiday lasting 4-5 days. Chapman thinks this first bank holiday presages a much more significant bank holiday months to years later which will involve simultaneous devaluations of multiple currencies as well as other significant changes in the banking system.
Harry Shultz [as quoted in marketwatch.com] says "Some U.S. embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of U.S. cash to purchase currencies from those governments, quietly. But not pound sterling. Inside the State Dept., there is a sense of sadness and foreboding that 'something' is about to happen ... within 180 days, but could be 120-150 days."
Benjamin Fulford [http://benjaminfulford.typepad.com/benjaminfulford/] states that for almost a century the US Treasury Dept has been issuing specialized debt instruments to countries with which the US has had a trade surplus. These complex debt instruments are tailored by complex treaties. Unfortunately, the recent US Treasury funding needs exceed the willingness of these creditor nations to extend additional credit. Fulford writes, "The problem is that after nearly a century of issuing these debt instruments, the chickens are coming home to roost. President Obama tried at the recent G8 plus 5 meeting in Italy to borrow more money than George Bush junior did in 8 years. He was told a resounding no. The result should be total economic chaos in the U.S. by September 30th . "
Jim Willie [goldenjackass.com] writes of an Asian led initiative ending dollar hegemony beginning this weekend. Willie suspects that the Fed/Treasury is covertly loaning foreign central banks the money with which the central banks are now using to buy US debt. Increasingly, US debt is being bought by foreign central banks taking up the slack of investors abandoning US Treasury debt. Willie confirms Chapman's comments and says he solicited and received "multiple confirmations." He adds, "CHAOS WILL PREVAIL WITHIN SEVERAL MONTHS, PERHAPS A YEAR AT MOST{his emphasis}."
Jim Sinclair [jsmineset.com] has recently visited China meeting with its leaders. He states that China is increasingly more willing to take on the United States in its apparent maneuvers to inflate its way out of its debt crisis. In early July Sinclair started a 120 day countdown till breakdown of the US dollar ends market manipulation and all those sour economic chickens come home to roost.
OUT OF TRICKS
Seemingly the Federal Reserve/US Treasury have exhausted their bag of tricks. The Fed is fighting rising interest rates, a difficult task given the hyperinflationary debt financing it is now doing. Once rising pressure on interest rates become too much for the Fed to control, there will probably be several sudden economic and financial surprises cascading with currently known dilemmas: crashing dollar; increasing home mortgage defaults; commercial mortgage defaults reaching critical mass; falling bond and stock markets extending insolvency of pension funds; defaults on debt by state and local governments. And don't forget derivatives and further exposure of corruption and criminality on Wall Street. Bernie Madoff may soon have lots of company.
Unable to produce any more financial wizardry, the cynical federal government is arrayed in full battle dress uniform: 1] Mass forced swine flu vaccinations scheduled this fall performed under the specter of martial law; 2] Rumblings of extending the wars in Asia into Iran and Pakistan; 3] Rekindling the Korean conflict may also be in the cards. Of course, don't forget that both Iran and North Korea are client states of the British World Order. All the recent saber rattling involving Iran and North Korea is wholly orchestrated. We need the distractions from the economic crisis, so our clients Ahmadinejad and Kim provide us with the necessary theater. So what will come first, further banner headlines of dollar collapse and market crashes or the distracting theater of more war or 911 type events?
What will this fall really bring? It is not too far away so we shall soon know. Unfortunately, it may make last fall look pretty tame. When the government answers economic distress by preparing for the worst, then the worst may very well be what happens.
----
Related: "Western World Faces Fiscal Ruin"
http://www.telegraph.co.uk/finance/comment...ld-beckons.html
Fiscal ruin of the Western world beckons
For a glimpse of what awaits Britain, Europe, and America as budget deficits spiral to war-time levels, look at what is happening to the Irish welfare state.
Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.
A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.
Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go. "The attacks outlined in this report would represent an education disaster and light a short fuse on a social timebomb", said the Teachers Union of Ireland.
Nobody is spared. Social welfare payments must be cut 5pc, child benefit by 20pc. The Garda (police), already smarting from a 7pc pay cut, may have to buy their own uniforms. Hospital visits could cost £107 a day, etc, etc.
"Something has to give," said Professor Colm McCarthy, the report's author. "We're borrowing €400m (£345m) a week at a penalty interest."
No doubt Ireland has been the victim of a savagely tight monetary policy e_SEmD given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.
As the International Monetary Fund made clear last week, Britain is lucky that markets have not yet imposed a "penalty interest" on British Gilts, given the trajectory of UK national debt – now vaulting towards 100pc of GDP – and the scandalous refusal of this Government to map out any path back to solvency.
"The UK has been getting the benefit of the doubt, both in the Government bond market and also the foreign exchange market. This benefit of the doubt is not going to last forever," said the Fund.
France and Italy have been less abject, but they began with higher borrowing needs. Italy's debt is expected to reach the danger level of 120pc next year, according to leaked Treasury documents. France's debt will near 90pc next year if President Nicolas Sarkozy goes ahead with his "Grand Emprunt", a fiscal blitz masquerading as investment.
There was a case for an emergency boost last winter to cushion the blow as global industry crashed. That moment has passed. While I agree with Nomura's Richard Koo that the US, Britain, and Europe risk a deflationary slump along the lines of Japan's Lost Decade (two decades really), I am ever more wary of his calls for Keynesian spending a l'outrance.
Such policies have crippled Japan. A string of make-work stimulus plans e_SEmD famously building bridges to nowhere in Hokkaido e_SEmD has ensured that the day of reckoning will be worse, when it comes. The IMF says Japan's gross public debt will reach 240pc of GDP by 2014 e_SEmD beyond the point of recovery for a nation with a contracting workforce. Sooner or later, Japan's bond market will blow up.
Error One was to permit a bubble in the 1980s. Error Two was to wait a decade before opting for monetary "shock and awe" through quantitative easing.
The US Federal Reserve has moved faster but already seems to think the job is done. "Quantitative tightening" has begun. Its balance sheet has contracted by almost $200bn (£122bn) from the peak. The M2 money supply has stagnated since January. The Fed is talking of "exit strategies".
Is this a replay of mid-2008 when the Fed lost its nerve, bristling over criticism that it had cut rates too low (then 2pc)? Remember what happened. Fed hawks in Dallas, St Louis, and Atlanta talked of rate rises. That had consequences. Markets tightened in anticipation, and arguably triggered the collapse of Lehman Brothers, AIG, Fannie and Freddie that Autumn.
The Fed's doctrine – New Keynesian Synthesis – has let it down time and again in this long saga, and there is scant evidence that Fed officials recognise the fact. As for the European Central Bank, it has let private loan growth contract this summer.
The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us.
My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.
Fiscal ruin of the Western world beckons
For a glimpse of what awaits Britain, Europe, and America as budget deficits spiral to war-time levels, look at what is happening to the Irish welfare state.
Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.
A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.
Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go. "The attacks outlined in this report would represent an education disaster and light a short fuse on a social timebomb", said the Teachers Union of Ireland.
Nobody is spared. Social welfare payments must be cut 5pc, child benefit by 20pc. The Garda (police), already smarting from a 7pc pay cut, may have to buy their own uniforms. Hospital visits could cost £107 a day, etc, etc.
"Something has to give," said Professor Colm McCarthy, the report's author. "We're borrowing €400m (£345m) a week at a penalty interest."
No doubt Ireland has been the victim of a savagely tight monetary policy e_SEmD given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.
As the International Monetary Fund made clear last week, Britain is lucky that markets have not yet imposed a "penalty interest" on British Gilts, given the trajectory of UK national debt – now vaulting towards 100pc of GDP – and the scandalous refusal of this Government to map out any path back to solvency.
"The UK has been getting the benefit of the doubt, both in the Government bond market and also the foreign exchange market. This benefit of the doubt is not going to last forever," said the Fund.
France and Italy have been less abject, but they began with higher borrowing needs. Italy's debt is expected to reach the danger level of 120pc next year, according to leaked Treasury documents. France's debt will near 90pc next year if President Nicolas Sarkozy goes ahead with his "Grand Emprunt", a fiscal blitz masquerading as investment.
There was a case for an emergency boost last winter to cushion the blow as global industry crashed. That moment has passed. While I agree with Nomura's Richard Koo that the US, Britain, and Europe risk a deflationary slump along the lines of Japan's Lost Decade (two decades really), I am ever more wary of his calls for Keynesian spending a l'outrance.
Such policies have crippled Japan. A string of make-work stimulus plans e_SEmD famously building bridges to nowhere in Hokkaido e_SEmD has ensured that the day of reckoning will be worse, when it comes. The IMF says Japan's gross public debt will reach 240pc of GDP by 2014 e_SEmD beyond the point of recovery for a nation with a contracting workforce. Sooner or later, Japan's bond market will blow up.
Error One was to permit a bubble in the 1980s. Error Two was to wait a decade before opting for monetary "shock and awe" through quantitative easing.
The US Federal Reserve has moved faster but already seems to think the job is done. "Quantitative tightening" has begun. Its balance sheet has contracted by almost $200bn (£122bn) from the peak. The M2 money supply has stagnated since January. The Fed is talking of "exit strategies".
Is this a replay of mid-2008 when the Fed lost its nerve, bristling over criticism that it had cut rates too low (then 2pc)? Remember what happened. Fed hawks in Dallas, St Louis, and Atlanta talked of rate rises. That had consequences. Markets tightened in anticipation, and arguably triggered the collapse of Lehman Brothers, AIG, Fannie and Freddie that Autumn.
The Fed's doctrine – New Keynesian Synthesis – has let it down time and again in this long saga, and there is scant evidence that Fed officials recognise the fact. As for the European Central Bank, it has let private loan growth contract this summer.
The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us.
My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.
Greetings from RGE Monitor!
Check out all the great contributions that were published during the past week on RGE’s Nouriel Roubini's Global EconoMonitor, RGE Analyst’s EconoMonitor, Finance & Markets Monitor, Peterson Institute for International Economics Monitor, Global Macro EconoMonitor, U.S. EconoMonitor, Emerging Markets Monitor, Asia EconoMonitor, Latin America EconoMonitor and Europe EconoMonitor.
This week on Nouriel Roubini's Global EconoMonitor, Nouriel reports that the condition of the U.S. job market is not improving and the raw figures on job losses actually understate the weakness in world labor markets. He then discusses five important negative consequences for the economy and financial markets as a result of the sharp contraction in jobs and labor income, and concludes that barring a sensible medium-term exit strategy for monetary and fiscal policy by policy makers, we may find ourselves in deep manure. Read Mounting Job Losses Will Hurt Consumption, Housing, Banks’ Balance Sheets, Public Finances and Lead to Protectionist Pressures
Check out the video of a Bloomberg panel in which Nouriel discusses the state of the U.S. economy. See Roubini on a Bloomberg Panel: Recession will Last Another Six Months and the Recovery will be Shallow
And don’t miss the latest Roubini Statement on the U.S. Economic Outlook.
On the RGE Analyst’s EconoMonitor, Rachel Ziemba previews the RGE economic outlook for China. Despite the growth acceleration in Q2, which stems from Beijing’s aggressive policy response to the economic crisis, RGE still believes that China will grow well below trend in both 2009 and 2010, given the sluggishness of the global economy and the risks posed by China’s own fiscal and monetary stimulus. She also tracks the explosive growth in Chinese foreign exchange reserves in Q2, suggesting that hot money inflows have returned to China. See Chinese Reserves: Boiling Over Again?
In China’s GDP Growth and Electricity Contraction: Not a Contradiction After All? Adam Wolfe and Rachel Ziemba analyze that Chinese GDP and electricity production moved in a highly correlated and predictable pattern until the end of last year, when electricity production contracted while GDP continued to expand. Still, reported GDP rates are within the margin of error from a regression against electricity production, and the reported rates are entirely possible according to this analysis.
On the Finance & Markets Monitor, Edward Harrison discusses Goldman’s second quarter record profits and points out that while the focus may be placed elsewhere, most of the revenue and profit came from fixed income. Read: Goldman Crushes Earnings Estimates
In Goldman's Back, and Why We Should Be Worried, Robert Reich reacts to Goldman CFO’s comments, “our model really never changed, we’ve said very consistently that our business model remained the same”, and questions whether the rest of us will be forced to pick up the pieces again in the future.
In Bair and Bernanke Back Size Disincentives for Banks Yves Smith looks at the play between Bair and Bernanke to see whether legitimate moves are being made to rectify “too big to fail”.
Also on the Finance & Markets Monitor:
On the Peterson Institute for International Economics Monitor, Steve Weisman sits down with Gary Clyde Hufbauer for a discussion about the obstacles stalling the Panama free trade agreement, which raise interesting and relevant questions about free trade in general. See A Snag for the Panama FTA
For a better understanding of what makes this financial crisis unique and consequently what policy is appropriate, see Policy Responses to the Global Financial Crisis by Edwin Truman.
On the Global Macro EconoMonitor, Jeffrey Frankel looks at the trends and culture of saving and doesn’t see a major permanent change in American’s anti-saving culture. Read A Return to Saving
In Great Walls of Cash, Models & Agents takes issue with the argument that as fear subsides, investors will put their excessive cash holdings back into equities and higher-yielding assets even if economic data doesn’t significantly improve.
In World Economic Reports (July 3-10): Finding Some Turning Points, Rebecca Wilder analyzes world economic reports for the week and determines that the global economy is likely at the stabilization phase of the business cycle.
Also on the Global Macro EconoMonitor:
On the U.S. EconoMonitor, James Picerno looks at the consumer prices for June, which suggest that the fear of deflation might have passed, but he is quick to point out that the post-financial crisis era is far more nuanced and complicated, making determinations that much more difficult.
Read A Hint of Things to Come?
In Is a college education worth a million dollars?, Fabius Maximus addresses this question and calls attention to the crucial difference between an average and a median (which is usually taught in grade school).
In light of California issuing IOUs, Mark Thoma discusses the advantages and disadvantages of states having individual currencies versus a currency union. Read Money Monopoly
Also on the U.S. EconoMonitor:
On the Emerging Markets Monitor, Michael Pettis discusses the huge explosion in new Chinese lending, which has been reported this month at an astonishing 1.53 trillion yuan – the third biggest month in history – and raises the issue of an enormous amount of potential bad loans. Read RMB 1.5 Trillion in New Chinese Lending — Can We Turn this Thing Off?
In Back to Global Imbalances? Augusto de la Torre, Sergio Schmukler, and Luis Serven analyze the global imbalance dynamic both before and after the financial crisis and suggest that while the economy recovers and global imbalances are restored in part, the likelihood of reproducing the former distributions of imbalances and sustaining them are slim.
In GCC Sovereigns: A Little Better Off, Rachel Ziemba provides detailed analysis on estimating asset accumulation by the GCC and its neighboring countries, and considers the effects of asset allocation and the price of oil.
On the Asia EconoMonitor, Nirvikar Singh presents a spectrum of views from prominent thinkers regarding India’s proposed budget and offers his own optimistic reaction. Read India’s Budget: the Good, the Bad and the Ugly
In A New Resource in Indian Business Cycle Measurement, Ajay Shah speaks of the challenges of producing business cycle measurements, and how to better handle this issue.
On the Latin America EconoMonitor, Herman Kamil, Bennett W. Sutton, and Chris Walker look at Latin American companies and the challenges they have faced over the past decade. While the lessons learned from currency swings have lead to new techniques of protection, there are still vulnerabilities as financial derivatives become more sophisticated and complex. Read A Hedge, Not a Bet
On the Europe EconoMonitor, Edward Hugh provides updates on the Latvian financial crisis as the IMF Imposes New Conditions on Latvia.
In Tear up the Rule-Book: It's All about Borrowing, David Smith discusses the changes in the economic policy landscape as monetary policy is expanding and becoming more intertwined with financial stability policy.
In A Strange Set of Job Market Figures, David Smith looks at employment figures that seem at odds with each other and concludes that employment has finally taken a big hit.
Check out all the great contributions that were published during the past week on RGE’s Nouriel Roubini's Global EconoMonitor, RGE Analyst’s EconoMonitor, Finance & Markets Monitor, Peterson Institute for International Economics Monitor, Global Macro EconoMonitor, U.S. EconoMonitor, Emerging Markets Monitor, Asia EconoMonitor, Latin America EconoMonitor and Europe EconoMonitor.
This week on Nouriel Roubini's Global EconoMonitor, Nouriel reports that the condition of the U.S. job market is not improving and the raw figures on job losses actually understate the weakness in world labor markets. He then discusses five important negative consequences for the economy and financial markets as a result of the sharp contraction in jobs and labor income, and concludes that barring a sensible medium-term exit strategy for monetary and fiscal policy by policy makers, we may find ourselves in deep manure. Read Mounting Job Losses Will Hurt Consumption, Housing, Banks’ Balance Sheets, Public Finances and Lead to Protectionist Pressures
Check out the video of a Bloomberg panel in which Nouriel discusses the state of the U.S. economy. See Roubini on a Bloomberg Panel: Recession will Last Another Six Months and the Recovery will be Shallow
And don’t miss the latest Roubini Statement on the U.S. Economic Outlook.
On the RGE Analyst’s EconoMonitor, Rachel Ziemba previews the RGE economic outlook for China. Despite the growth acceleration in Q2, which stems from Beijing’s aggressive policy response to the economic crisis, RGE still believes that China will grow well below trend in both 2009 and 2010, given the sluggishness of the global economy and the risks posed by China’s own fiscal and monetary stimulus. She also tracks the explosive growth in Chinese foreign exchange reserves in Q2, suggesting that hot money inflows have returned to China. See Chinese Reserves: Boiling Over Again?
In China’s GDP Growth and Electricity Contraction: Not a Contradiction After All? Adam Wolfe and Rachel Ziemba analyze that Chinese GDP and electricity production moved in a highly correlated and predictable pattern until the end of last year, when electricity production contracted while GDP continued to expand. Still, reported GDP rates are within the margin of error from a regression against electricity production, and the reported rates are entirely possible according to this analysis.
On the Finance & Markets Monitor, Edward Harrison discusses Goldman’s second quarter record profits and points out that while the focus may be placed elsewhere, most of the revenue and profit came from fixed income. Read: Goldman Crushes Earnings Estimates
In Goldman's Back, and Why We Should Be Worried, Robert Reich reacts to Goldman CFO’s comments, “our model really never changed, we’ve said very consistently that our business model remained the same”, and questions whether the rest of us will be forced to pick up the pieces again in the future.
In Bair and Bernanke Back Size Disincentives for Banks Yves Smith looks at the play between Bair and Bernanke to see whether legitimate moves are being made to rectify “too big to fail”.
Also on the Finance & Markets Monitor:
- The Fall of the Toxic-Assets Plan by Lucian Bebchuk
- No Financial Villains...? by Barry Ritholtz
- How Should We Interpret Goldman Sach's Unexpectedly Large Earnings? by Mark Thoma
- Confidence, the Economy, and the Fed Balance Sheet by Jeffrey Miller
On the Peterson Institute for International Economics Monitor, Steve Weisman sits down with Gary Clyde Hufbauer for a discussion about the obstacles stalling the Panama free trade agreement, which raise interesting and relevant questions about free trade in general. See A Snag for the Panama FTA
For a better understanding of what makes this financial crisis unique and consequently what policy is appropriate, see Policy Responses to the Global Financial Crisis by Edwin Truman.
On the Global Macro EconoMonitor, Jeffrey Frankel looks at the trends and culture of saving and doesn’t see a major permanent change in American’s anti-saving culture. Read A Return to Saving
In Great Walls of Cash, Models & Agents takes issue with the argument that as fear subsides, investors will put their excessive cash holdings back into equities and higher-yielding assets even if economic data doesn’t significantly improve.
In World Economic Reports (July 3-10): Finding Some Turning Points, Rebecca Wilder analyzes world economic reports for the week and determines that the global economy is likely at the stabilization phase of the business cycle.
Also on the Global Macro EconoMonitor:
- Global Financial Stress by Menzie Chinn
On the U.S. EconoMonitor, James Picerno looks at the consumer prices for June, which suggest that the fear of deflation might have passed, but he is quick to point out that the post-financial crisis era is far more nuanced and complicated, making determinations that much more difficult.
Read A Hint of Things to Come?
In Is a college education worth a million dollars?, Fabius Maximus addresses this question and calls attention to the crucial difference between an average and a median (which is usually taught in grade school).
In light of California issuing IOUs, Mark Thoma discusses the advantages and disadvantages of states having individual currencies versus a currency union. Read Money Monopoly
Also on the U.S. EconoMonitor:
- How the U.S. Beat a Suspected Tax Cheat into Submission by Edward Harrison
- When Will The Recovery Begin? Never. by Robert Reich
- Paul Krugman: The Stimulus Trap by Mark Thoma
- Monthly Foreclosure Rate 8% Higher Than Last Year; Homeowner's Strategically Walking Away by Rebecca Wilder
- Ed Lazear on the Stimulus Package by Menzie Chinn
- The Week Ahead in the Dismal Science... by James Picerno
- Why has the Worst Recession Since the 1930’s had Such a Mild Effect on America? by Fabius Maximus
- An Attempt to Offset Some of the Frictional Unemployment by Rebecca Wilder
On the Emerging Markets Monitor, Michael Pettis discusses the huge explosion in new Chinese lending, which has been reported this month at an astonishing 1.53 trillion yuan – the third biggest month in history – and raises the issue of an enormous amount of potential bad loans. Read RMB 1.5 Trillion in New Chinese Lending — Can We Turn this Thing Off?
In Back to Global Imbalances? Augusto de la Torre, Sergio Schmukler, and Luis Serven analyze the global imbalance dynamic both before and after the financial crisis and suggest that while the economy recovers and global imbalances are restored in part, the likelihood of reproducing the former distributions of imbalances and sustaining them are slim.
In GCC Sovereigns: A Little Better Off, Rachel Ziemba provides detailed analysis on estimating asset accumulation by the GCC and its neighboring countries, and considers the effects of asset allocation and the price of oil.
On the Asia EconoMonitor, Nirvikar Singh presents a spectrum of views from prominent thinkers regarding India’s proposed budget and offers his own optimistic reaction. Read India’s Budget: the Good, the Bad and the Ugly
In A New Resource in Indian Business Cycle Measurement, Ajay Shah speaks of the challenges of producing business cycle measurements, and how to better handle this issue.
On the Latin America EconoMonitor, Herman Kamil, Bennett W. Sutton, and Chris Walker look at Latin American companies and the challenges they have faced over the past decade. While the lessons learned from currency swings have lead to new techniques of protection, there are still vulnerabilities as financial derivatives become more sophisticated and complex. Read A Hedge, Not a Bet
On the Europe EconoMonitor, Edward Hugh provides updates on the Latvian financial crisis as the IMF Imposes New Conditions on Latvia.
In Tear up the Rule-Book: It's All about Borrowing, David Smith discusses the changes in the economic policy landscape as monetary policy is expanding and becoming more intertwined with financial stability policy.
In A Strange Set of Job Market Figures, David Smith looks at employment figures that seem at odds with each other and concludes that employment has finally taken a big hit.
FOR IMMEDIATE RELEASE
July 16, 2009
STATEMENT ON U.S. ECONOMIC OUTLOOK BY DR. NOURIEL ROUBINI
The following is a statement from Dr. Nouriel Roubini, Chairman of RGE Monitor and Professor, New York University, Stern School of Business:
“It has been widely reported today that I have stated that the recession will be over “this year” and that I have “improved” my economic outlook. Despite those reports - however – my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.
“I have said on numerous occasions that the recession would last roughly 24 months. Therefore, we are 19 months into that recession. If as I predicted the recession is over by year end, it will have lasted 24 months with a recovery only beginning in 2010. Simply put I am not forecasting economic growth before year’s end.
“Indeed, last year I argued that this will be a long and deep and protracted U-shaped recession that would last 24 months. Meanwhile, the consensus argued that this would be a short and shallow V-shaped 8 months long recession (like those in 1990-91 and 2001). That debate is over today as we are in the 19th month of a severe recession; so the V is out of the window and we are in a deep U-shaped recession. If that recession were to be over by year end – as I have consistently predicted – it would have lasted 24 months and thus been three times longer than the previous two and five times deeper – in terms of cumulative GDP contraction – than the previous two. So, there is nothing new in my remarks today about the recession being over at the end of this year.
“I have also consistently argued – including in my remarks today - that while the consensus predicts that the US economy will go back close to potential growth by next year, I see instead a shallow, below-par and below-trend recovery where growth will average about 1% in the next couple of years when potential is probably closer to 2.75%.
“I have also consistently argued that there is a risk of a double-dip W-shaped recession toward the end of 2010, as a tough policy dilemma will emerge next year: on one side, early exit from monetary and fiscal easing would tip the economy into a new recession as the recovery is anemic and deflationary pressures are dominant. On the other side, maintaining large budget deficits and continued monetization of such deficits would eventually increase long term interest rates (because of concerns about medium term fiscal sustainability and because of an increase in expected inflation) and thus would lead to a crowding out of private demand.
“While the recession will be over by the end of the year the recovery will be weak given the debt overhang in the household sector, the financial system and the corporate sector; and now there is also a massive re-leveraging of the public sector with unsustainable fiscal deficits and public debt accumulation.
“Also, as I fleshed out in detail in recent remarks the labor market is still very weak: I predict a peak unemployment rate of close to 11% in 2010. Such large unemployment rate will have negative effects on labor income and consumption growth; will postpone the bottoming out of the housing sector; will lead to larger defaults and losses on bank loans (residential and commercial mortgages, credit cards, auto loans, leveraged loans); will increase the size of the budget deficit (even before any additional stimulus is implemented); and will increase protectionist pressures.
“So, yes there is light at the end of the tunnel for the US and the global economy; but as I have consistently argued the recession will continue through the end of the year, and the recovery will be weak and at risk of a double dip, as the challenge of getting right the timing and size of the exit strategy for monetary and fiscal policy easing will be daunting.
“RGE Monitor will soon release our updated U.S. and Global Economic Outlook. A preview of the U.S. Outlook is available on our website: www.rgemonitor.com”
July 16, 2009
STATEMENT ON U.S. ECONOMIC OUTLOOK BY DR. NOURIEL ROUBINI
The following is a statement from Dr. Nouriel Roubini, Chairman of RGE Monitor and Professor, New York University, Stern School of Business:
“It has been widely reported today that I have stated that the recession will be over “this year” and that I have “improved” my economic outlook. Despite those reports - however – my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.
“I have said on numerous occasions that the recession would last roughly 24 months. Therefore, we are 19 months into that recession. If as I predicted the recession is over by year end, it will have lasted 24 months with a recovery only beginning in 2010. Simply put I am not forecasting economic growth before year’s end.
“Indeed, last year I argued that this will be a long and deep and protracted U-shaped recession that would last 24 months. Meanwhile, the consensus argued that this would be a short and shallow V-shaped 8 months long recession (like those in 1990-91 and 2001). That debate is over today as we are in the 19th month of a severe recession; so the V is out of the window and we are in a deep U-shaped recession. If that recession were to be over by year end – as I have consistently predicted – it would have lasted 24 months and thus been three times longer than the previous two and five times deeper – in terms of cumulative GDP contraction – than the previous two. So, there is nothing new in my remarks today about the recession being over at the end of this year.
“I have also consistently argued – including in my remarks today - that while the consensus predicts that the US economy will go back close to potential growth by next year, I see instead a shallow, below-par and below-trend recovery where growth will average about 1% in the next couple of years when potential is probably closer to 2.75%.
“I have also consistently argued that there is a risk of a double-dip W-shaped recession toward the end of 2010, as a tough policy dilemma will emerge next year: on one side, early exit from monetary and fiscal easing would tip the economy into a new recession as the recovery is anemic and deflationary pressures are dominant. On the other side, maintaining large budget deficits and continued monetization of such deficits would eventually increase long term interest rates (because of concerns about medium term fiscal sustainability and because of an increase in expected inflation) and thus would lead to a crowding out of private demand.
“While the recession will be over by the end of the year the recovery will be weak given the debt overhang in the household sector, the financial system and the corporate sector; and now there is also a massive re-leveraging of the public sector with unsustainable fiscal deficits and public debt accumulation.
“Also, as I fleshed out in detail in recent remarks the labor market is still very weak: I predict a peak unemployment rate of close to 11% in 2010. Such large unemployment rate will have negative effects on labor income and consumption growth; will postpone the bottoming out of the housing sector; will lead to larger defaults and losses on bank loans (residential and commercial mortgages, credit cards, auto loans, leveraged loans); will increase the size of the budget deficit (even before any additional stimulus is implemented); and will increase protectionist pressures.
“So, yes there is light at the end of the tunnel for the US and the global economy; but as I have consistently argued the recession will continue through the end of the year, and the recovery will be weak and at risk of a double dip, as the challenge of getting right the timing and size of the exit strategy for monetary and fiscal policy easing will be daunting.
“RGE Monitor will soon release our updated U.S. and Global Economic Outlook. A preview of the U.S. Outlook is available on our website: www.rgemonitor.com”
US Market
- Markets Reverse Back to Top of Trading Range by John Nyaradi
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- U.S. Indices: YTD Stats, Current Moving Averages (July 17 Close) by The Inflection Point
- Economics Is a Useless Profession, At Least for Now by Brad DeLong
- Krugman Is Right; The Economist Is Off by Brad DeLong
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Ritholtz: "Why are people calling a bottom for Real Estate?" by CalculatedRisk on 7/18/2009 03:19:00 PM
I'm working on a housing start post, but first ...
Barry Ritholtz presents the following graph and asks:
Well I'm one of the people who wrote yesterday that a bottom for single family housing starts might have happened:
If single family housing starts bottomed in January, on a seasonally adjusted annual rate (SAAR) basis, the 12 month moving average of unadjusted data won't bottom until October or so (depending on the shape of the recovery). Using this method adds a lag to the analysis.
<li> Barry also conflates calling a bottom in housing starts with: 1) "a bottom in Real Estate" and 2) "a snap back".
First, there will probably be two bottoms for Residential Real Estate. The first will be for new home sales, housing starts and residential investment. The second bottom will be for prices. For more on this, see: More on Housing Bottoms
Most people think prices when they hear the word "bottom", and the bottom for prices usually trails the bottom for housing starts - sometimes the two bottoms can happen years apart!
Second, looking for a bottom in housing starts doesn't imply "a snap back" in activity. As I noted yesterday, "I expect starts to remain at fairly low levels for some time as the excess inventory is worked off."
I'll have more on why the housing start report is somewhat good news soon.
I'm working on a housing start post, but first ...
Barry Ritholtz presents the following graph and asks:
"I cannot figure out why people continue to call for a bottom in Real Estate — as if there is going to be this snap back any day now."
Well I'm one of the people who wrote yesterday that a bottom for single family housing starts might have happened:
It now appears that single family starts might have bottomed in January.A few quick points:
If single family housing starts bottomed in January, on a seasonally adjusted annual rate (SAAR) basis, the 12 month moving average of unadjusted data won't bottom until October or so (depending on the shape of the recovery). Using this method adds a lag to the analysis.
<li> Barry also conflates calling a bottom in housing starts with: 1) "a bottom in Real Estate" and 2) "a snap back".
First, there will probably be two bottoms for Residential Real Estate. The first will be for new home sales, housing starts and residential investment. The second bottom will be for prices. For more on this, see: More on Housing Bottoms
Most people think prices when they hear the word "bottom", and the bottom for prices usually trails the bottom for housing starts - sometimes the two bottoms can happen years apart!
Second, looking for a bottom in housing starts doesn't imply "a snap back" in activity. As I noted yesterday, "I expect starts to remain at fairly low levels for some time as the excess inventory is worked off."
I'll have more on why the housing start report is somewhat good news soon.
Slip Sliding Sideways by CalculatedRisk on 7/18/2009 10:53:00 AM
Here is a graph from Jan Hatzius at Goldman Sachs (no link):
Click on graph for larger image in new window.
The graph shows the end of cliff diving for retail sales, auto sales, home sales, and capital goods orders - but so far no recovery.
But GDP can still turn slightly positive.
Here is a speech from San Francisco Fed President Janet Yellen in March: The Uncertain Economic Outlook and the Policy Responses.
Here is a graph from Jan Hatzius at Goldman Sachs (no link):
Click on graph for larger image in new window.The graph shows the end of cliff diving for retail sales, auto sales, home sales, and capital goods orders - but so far no recovery.
But GDP can still turn slightly positive.
Here is a speech from San Francisco Fed President Janet Yellen in March: The Uncertain Economic Outlook and the Policy Responses.
[I]t takes less than many people think for real GDP growth rates to turn positive. Just the elimination of drags on growth can do it. For example, residential construction has been declining for several years, subtracting about 1 percentage point from real GDP growth. Even if this spending were only to stabilize at today's very low levels—not a robust performance at all—a 1 percentage point subtraction from growth would convert into a zero, boosting overall growth by 1 percentage point. A decline in the pace of inventory liquidation is another factor that could contribute to a pickup in growth. Inventory liquidation over the last few months has been unusually severe, especially in motor vehicles—a typical recession pattern. All it would take is a reduction in the pace of liquidation—not outright inventory building—to raise the GDP growth rate.This is a very important point for forecasters - to distinguish between growth rates and levels. Even if the economy has bottomed, it is at a very low level compared to the last few years, and the recovery will probably be very sluggish.
emphasis added
Jim Sinclair's Commentary
The war between the present Administration and the Federal Reserve has to do with the level of QE or simply how many bonds the Fed will purchase from the US Treasury.
Bernanke either vigorously steps up buying of US Treasuries or the next and new Chairman will.
Bernanke either ratchets up buying of US Treasury paper by the Fed "to all and every" not otherwise subscribed to at present interest levels or the Fed will be made a toothless regulator by act of Congress.
Remember, Bush gave birth to Bernanke so therefore Bernanke becomes a present Administration team player or he is not a player at all.
Forget this independent Fed crap. It does not float in a MOPE world.
Will Bernanke make case for more asset purchases?
Fed chief may offer an expansion plan rather than an exit strategy
Jul 17, 2009, 6:10 p.m. EST
By Greg Robb, MarketWatch
WASHINGTON (MarketWatch) — One key question ahead of Federal Reserve chairman Ben Bernanke's testimony to Congress next week is whether he has the guts to makes the case for more, not fewer, purchases.
Although there has been much talk recently has been about an exit strategy, some economists think an expansion plan may be the order of the day.
Private and public economic forecasts are converging on the view that unemployment will remain at high levels for years.
In the words of Nouriel Roubini, chairman of RGE Monitor and professor at New York University's Stern School of Business, the U.S. appears headed for a "shallow, below-par and below-trend recovery where growth will average about 1% in the next couple of years when potential is probably closer to 2.75%."
The Fed's central forecast now sees the unemployment rate rising as high as 10.1% in 2009. It projects it will remain above 9.5% in 2010 and only falling to 8.6% in 2011.
More…
The war between the present Administration and the Federal Reserve has to do with the level of QE or simply how many bonds the Fed will purchase from the US Treasury.
Bernanke either vigorously steps up buying of US Treasuries or the next and new Chairman will.
Bernanke either ratchets up buying of US Treasury paper by the Fed "to all and every" not otherwise subscribed to at present interest levels or the Fed will be made a toothless regulator by act of Congress.
Remember, Bush gave birth to Bernanke so therefore Bernanke becomes a present Administration team player or he is not a player at all.
Forget this independent Fed crap. It does not float in a MOPE world.
Will Bernanke make case for more asset purchases?
Fed chief may offer an expansion plan rather than an exit strategy
Jul 17, 2009, 6:10 p.m. EST
By Greg Robb, MarketWatch
WASHINGTON (MarketWatch) — One key question ahead of Federal Reserve chairman Ben Bernanke's testimony to Congress next week is whether he has the guts to makes the case for more, not fewer, purchases.
Although there has been much talk recently has been about an exit strategy, some economists think an expansion plan may be the order of the day.
Private and public economic forecasts are converging on the view that unemployment will remain at high levels for years.
In the words of Nouriel Roubini, chairman of RGE Monitor and professor at New York University's Stern School of Business, the U.S. appears headed for a "shallow, below-par and below-trend recovery where growth will average about 1% in the next couple of years when potential is probably closer to 2.75%."
The Fed's central forecast now sees the unemployment rate rising as high as 10.1% in 2009. It projects it will remain above 9.5% in 2010 and only falling to 8.6% in 2011.
More…
You have no idea how critical this is.
This writer understates it badly. Does the central planning committee want to launch the Lehman Brother syndrome into the real economy?
If CIT goes MOPE concerning the fat cat’s purchasing of some of CIT’s divisions this will not stop the avalanche of unemployment inherent is this poor decision.
Looking back from a 43% approval rating for the present administration will show the walk away from CIT as the catalyst. Nothing will repair this error for the present administration. This is the present Administration’s Battle at Waterloo and Obama is not Wellington.
Saving the fat cats and dumping the average guy (CIT failure) will be remembered for a millennium.
Armstrong is dead right that this is a one term Administration with the rise of a third party to victory.
Change the title below taking the word "could" out and put "WILL" in its place.
CIT failure could unleash slew of bankruptcies
Andrew S. Ross
Friday, July 17, 2009
Move along. Nothing to see here. That appears to be the view of the Obama administration as it allows CIT Group Inc. to desperately look for other financing, or slide quietly into bankruptcy, possibly as early as today.
This is not Lehman Bros. Part 2, and besides, another bailout is a political nonstarter, go the assumptions. The damage, even to those businesses that rely on CIT for regular infusions of cash, will manage, according to much of the financial punditocracy. And isn’t the administration planning to pump billions more dollars into small-business loans anyway?
Lloyd Chapman, president of the Petaluma-basedAmerican Small Business League, is not so cheery. "I fear an avalanche of bankruptcies," which may hit California hard because of the concentration of retail and import clothing businesses in the state tied to CIT, Chapman said. As to the supposed ease of replacement, many of the loans are long-term credit lines given to business owners "that had been turned down repeatedly by other lenders." The Obama administration, he added, is going to have come up with a "much bigger pot of money" than is currently on offer to replace what businesses will lose with CIT’s disappearance.
Noting that Goldman Sachs Group Inc., which reported boffo quarterly profits this week, benefited from a Federal Deposit Insurance Corp. program guaranteeing newly issued debt that was denied to CIT, Chapman added, "I’m not predicting it, but I wouldn’t be surprised if Goldman Sachs somehow benefits from this."
More…
This writer understates it badly. Does the central planning committee want to launch the Lehman Brother syndrome into the real economy?
If CIT goes MOPE concerning the fat cat’s purchasing of some of CIT’s divisions this will not stop the avalanche of unemployment inherent is this poor decision.
Looking back from a 43% approval rating for the present administration will show the walk away from CIT as the catalyst. Nothing will repair this error for the present administration. This is the present Administration’s Battle at Waterloo and Obama is not Wellington.
Saving the fat cats and dumping the average guy (CIT failure) will be remembered for a millennium.
Armstrong is dead right that this is a one term Administration with the rise of a third party to victory.
Change the title below taking the word "could" out and put "WILL" in its place.
CIT failure could unleash slew of bankruptcies
Andrew S. Ross
Friday, July 17, 2009
Move along. Nothing to see here. That appears to be the view of the Obama administration as it allows CIT Group Inc. to desperately look for other financing, or slide quietly into bankruptcy, possibly as early as today.
This is not Lehman Bros. Part 2, and besides, another bailout is a political nonstarter, go the assumptions. The damage, even to those businesses that rely on CIT for regular infusions of cash, will manage, according to much of the financial punditocracy. And isn’t the administration planning to pump billions more dollars into small-business loans anyway?
Lloyd Chapman, president of the Petaluma-basedAmerican Small Business League, is not so cheery. "I fear an avalanche of bankruptcies," which may hit California hard because of the concentration of retail and import clothing businesses in the state tied to CIT, Chapman said. As to the supposed ease of replacement, many of the loans are long-term credit lines given to business owners "that had been turned down repeatedly by other lenders." The Obama administration, he added, is going to have come up with a "much bigger pot of money" than is currently on offer to replace what businesses will lose with CIT’s disappearance.
Noting that Goldman Sachs Group Inc., which reported boffo quarterly profits this week, benefited from a Federal Deposit Insurance Corp. program guaranteeing newly issued debt that was denied to CIT, Chapman added, "I’m not predicting it, but I wouldn’t be surprised if Goldman Sachs somehow benefits from this."
More…
Nothing has been solved. Nothing has been changed. This is what scares the absolute hell out of me. The major problem hasn’t even been touched. Outside of gold is there any future?
The Top 5 International Banks Are Keeping The Derivatives Beast Alive
JULY 17, 2009…3:27 PM
Time to revisit the Derivatives Beast. It hasn’t been growing rapidly for the last year but is poised to balloon even bigger. This is due to the near total lack of any regulation on the part of governments. The central bankers conspiring with the top 5 banking houses are keeping this business going. They do NOT want the derivatives market controlled. This is a source if immense income flows for them. They want all the risks of the derivatives markets to move effortlessly to government ledgers so the public eats any losses. The lastest OCC derivatives report is an eye-opener.
.AIG Swaps May Take Decades to Expire Leaving a ‘Toxic Pool’ – Bloomberg.com
European banks including Societe Generale SA and BNP Paribas SA hold almost $200 billion in guarantees sold by New York-based AIG allowing the lenders to reduce the capital required for loss reserves. The firms may keep the contracts to hedge against declining assets rather than canceling them as AIG said it expects the banks to do, according to David Havens, managing director at investment bank Hexagon Securities LLC.
More…
The Top 5 International Banks Are Keeping The Derivatives Beast Alive
JULY 17, 2009…3:27 PM
Time to revisit the Derivatives Beast. It hasn’t been growing rapidly for the last year but is poised to balloon even bigger. This is due to the near total lack of any regulation on the part of governments. The central bankers conspiring with the top 5 banking houses are keeping this business going. They do NOT want the derivatives market controlled. This is a source if immense income flows for them. They want all the risks of the derivatives markets to move effortlessly to government ledgers so the public eats any losses. The lastest OCC derivatives report is an eye-opener.
.AIG Swaps May Take Decades to Expire Leaving a ‘Toxic Pool’ – Bloomberg.com
European banks including Societe Generale SA and BNP Paribas SA hold almost $200 billion in guarantees sold by New York-based AIG allowing the lenders to reduce the capital required for loss reserves. The firms may keep the contracts to hedge against declining assets rather than canceling them as AIG said it expects the banks to do, according to David Havens, managing director at investment bank Hexagon Securities LLC.
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The Dark Years Are Here
Egon von Greyerz
Matterhorn Asset Management AG - July 17, 2009 Newslettter
EMPIRES ARE BUILT ON THEFT PILLAGE, SLAVE LABOUR AND FINALLY MONEY PRINTING
Let us first go back in history and analyze what creates an empire and the prosperity that comes with it.
The British Empire started in the 17th century and reached its peak in the 19th century during Queen Victoria's reign. By the end of the 19th century The British Empire included nearly 20% of the land surface of the world and 25% of the world's population. So Britain which is less than 0.5% of the world's land surface area controlled an empire which was more than 50 times greater. So by using slave labor and by stealing the resources of 20% of the world, it is no wonder that Britain was the wealthiest nation for several centuries. But like all empires, Britain carried the seeds of its own destruction. All empires - e.g. Mongolian, Roman, Ottoman or British etc. - eventually overstretch their resources both militarily and financially. This combined with decadence and illusions of grandeur eventually leads to the collapse of an empire.
The US empire was slightly different from the point of view that it never conquered the world although the US was itself a colony conquered from its original inhabitants. But the US has intervened in many areas (e.g. Korea, Vietnam, Afghanistan, Iraq etc.). Also, there are US military bases in 120 countries. Initially the US was an economic superpower based on an entrepreneurial spirit and a very strong production machine backed by fierce military power. But after the Vietnam war the US had overstretched its resources and by 1971 Richard Nixon abolished the gold standard in order to be able to start money printing in earnest. The money printing phase is normally the last stage of an empire before it collapses and this is where the US is now. The US dollar became the reserve currency of the world when the US was strong economically. But as the US economy started to weaken in the 1960-70's the US government found a much better method for maintaining a strong economy. It started to print paper that it sold to other nations or exchanged for goods and services. For almost 50 years this has been the most clever way ever devised of maintaining the living standards of an economically deteriorating nation without even having to spend any resources on building an empire. It is a Ponzi scheme which has worked for several decades but slowly the world is now waking up to the fact that they are holding worthless paper printed by the US Government. (We realize this is a much simplified version of empire building and destruction but it is nevertheless an accurate analysis).
THE US GOVERNMENT IS IN DENIAL
The US is hemorrhaging financially and economically. It has lent or committed almost $13 trillion in the last 18 months to prop up the financial system. The estimated government deficit in the current year is almost $2 trillion or 50% of the budget. All the money committed so far has only achieved two things: Firstly it has created some short term hope which together with totally illusionary sightings of green shoots have generated a small stock market correction (which we forecast in our January Newsletter) and some belief that the crisis is ending. Secondly, all the funds printed so far to save the system have gone to Wall Street but has done nothing whatsoever for the real economy. Every single sector of the real economy is deteriorating whether it is production, unemployment, corporate profits, real estate, credit defaults, construction, federal deficits, local government and state deficits etc.
And what is the government doing about it. They are doing the only thing they know which is to print more money. This is total lunacy! How can any intelligent person believe that printed pieces of paper can solve an economic catastrophe? If that were the case we could all go home and write out pieces of paper or use Monopoly money to spend in the shops or repay our debts.
How can the US government, the UK government and most other governments not understand that the only way to run an economy is to cut your coat according to your cloth. This is why the emperor had no clothes because the country had run out of gold thread to make the cloth. Until now the US as well as other countries have been able to buy the cloth because the world has been foolish enough to accept worthless pieces of paper as payment. But this is coming to an end very soon and many countries will be without both coats and cloth.
What governments are doing with people's money is to totally destroy its value. Purchasing power in the US and many other countries has declined more than 95% in the last 100 years. While it might buy votes short term it will only generate massive misery long term. And this is what many countries are starting to experience now. But sadly it will get a lot worse. We are still only in the first phase of this tragic saga. The second phase is likely to start in the next 6 months.
With 20% unemployment in the US we are already approaching the levels in the 1930's when peak total unemployment reached 25%. The 20% current level is the non-farm unemployed and is still a lot lower than the non-farm peak figure in the 1930's which was 35% unemployed.
Since we are still in the early stages of this crisis, it is our firm opinion that non-farm unemployment levels will reach 35% at least in the US in the next few years.
But even the current figure of 30 million unemployed is a catastrophe. Adding dependants to every unemployed person there are currently 100 million people affected by unemployment in the US. In the next three months 3 million unemployed will fall out of the social security safety-net. These are the people who were laid off in the second half of 2008. Including their families this means that around 10 million people will become destitute between now and September with no social security and no savings. If we then add the 4 million that were made redundant in the first half of 2009 that will result in an additional 13 million people including families will become destitute around Christmas. This is a disaster of unimaginable consequences that will affect the whole fabric of American society.
The consequences will be social, political, financial and the effects on the US economy will be of a magnitude which is substantially greater than during the Depression of the 1930's. We must remember that none of the problems in the financial system have been resolved but only put on a very temporary hold. The rise in unemployment combined with the reduction in consumption will lead to the next and much more severe banking crisis.
During the next 6-9 months unemployment will severely affect most parts of the world including China, Asia and Africa. Never before has there been a global unemployment crisis affecting the world simultaneously. This will not only mean a massive decline in consumption and world trade leading to a recession or depression worldwide but also poverty, famine and social unrest.
THE BANKERS ARE STILL RUNNING THE SHOW
The masters of the financial circus are the bankers. Not only did they reap the benefits from manufacturing toxic financial products to the extent of receiving bonuses and stocks in the $trillions during the last 15-20 years. But they are also the only beneficiaries of the trillions of dollars that have been printed by governments to rescue the financial system. Why are the bankers benefiting from the rescue of their own banks? Because they are the ones controlling the government, advising the government and making major contributions to the politicians.
Bonuses are back
Yes, many banks are paying higher bonuses in 2009 than 2008. Goldman Sachs is on course to pay bonuses of $20 billion or $700,00 per employee and Morgan Stanley a 30% increase from average per employee of $262,000 last year to $340,000 this year. JP Morgan's bonus pool for the first quarter of 2009 is up 175% to $3.3 billion and the new chief executive of RBS, the nationalized UK bank is getting an incentive package worth £10 million! Similar bonuses are being paid by many other banks. Barclays Capital for example is on a massive spending spree recruiting executives with golden hellos and guaranteed bonuses of millions per employee.
Central banks and governments worldwide have spent trillions of dollars temporarily propping up a totally bankrupt financial system and now a few months later the bankers are back earning absurd money within a banking system which hasn't been mended and is still bankrupt. This is scandalous.
Toxic Structures are back
But not only that, they are also back to creating new securitization programs in order to reduce capital requirements and increase leverage. Goldman Sachs, and Barclays Capital are doing this already and many other banks will follow. It is exactly these types of programs that created the financial crisis in the first place and now the bankers are back at it again. This is totally disgraceful and irresponsible behavior by bankers who have learnt nothing from their disastrous freewheeling actions except how to milk the system to the maximum again.
As we have pointed out before, none of the problems in the banking system have been resolved. The system still has a leverage of 25-50 times, it is still full of toxic debt and derivatives, loan books are deteriorating daily, it still has worthless paper assets valued at fantasy prices and most banks are run by the same bankers who created the problems in the first place. For a typical bank, a 4% drop in asset value wipes out the equity. This is what we call a recipe for disaster.
In the meantime governments are making feeble attempts at preventing a future crisis by planning new regulations. But these regulations will only deal with known and historic problems. The bankers will again run rings around the authorities in creating new structures to circumvent the new rules.
ACCELERATION OF THE DOWNTURN IS ABOUT TO START
The next phase of this tragic saga will soon start.
Compared to the of the 1930's we are already in a worse position today than at the same stage of the Great Depression. Industrial production is worse in many countries. World trade is worse and the stock market fall is greater than at the same stage in the corresponding period of the Depression and both government and private debt is a lot worse.
So what is likely to happen next?
- Unemployment will increase government deficits
- Next phase of bank problems
- Government paper will collapse - first in the US and UK
- Hyperinflation is a currency driven event
Many other nations will also experience hyperinflation such as the Baltic States, certain Eastern European and Asian Countries. Many more countries will have high inflation.
THE DARK YEARS
In the next few months we will see the start of the Dark Years. For the first time in the history of the world there will be a synchronized downturn affecting all nations (although some a lot worse than others).This is the culmination of the world and especially the Western world, living above its means for decades in a mania of credit bubbles, asset bubbles, real estate bubbles as well as excesses leading to decadence and a society with very weak moral and ethical values. (Of course no society recognizes this as it is happening but only afterwards). Governments have fuelled this process by printing unlimited amounts of paper thus destroying the money and purchasing power of most nations.
The Dark Years will be extremely severe for most countries both financially and socially. In many countries in the Western world there will be a severe depression and it will be the end of the welfare state. Most private and state pension schemes are also likely to collapse. It will be a worldwide depression but some countries may only have a deep recession. There will be famine, homelessness and misery resulting in social as well as political unrest. Different type of government leaders and regimes are likely to result from this.
How long will the Dark Years last? There is a book called "The Fourth Turning" written by Neil Howe. He has identified a pattern that repeats itself every 80 years. The pattern has been extremely accurate in the Anglophile world. We have recently entered the Fourth Turning which is the final 20 years of the cycle. According to Howe we are in the early stages of a 20 year period of economic and institutional upheaval. This is a period of Crisis when the fabric of society will change dramatically. Previous Fourth Turnings have been the American Revolution, Great Depression and World War II. According to Howe the Crisis will be substantially worse before it is over and it will last for another circa 20 years.
All of this is not good news and we hope that we and Howe are wrong regarding the severity and length of this crisis. But we fear that we are both right. We must stress again that never previously has the the whole world entered a downturn simultaneously in such a fragile state both financially and economically which is why the Dark Years are likely to be so devastating and long lasting.
FINANCIAL MARKETS
Stockmarkets
The correction up in stockmarkets has probably finished but there is a possibility that it will continue for another couple of months. What is important is that it is a correction (we predicted it already back in January) and it will soon lead to a strong resumption of the downtrend. In the Dow Jones, a break of the trend line at 6400 would lead to a projected decline of at least 90% from the top. Almost all major world markets point to similar declines. This sounds incredible but bearing in mind that the Dow Jones fell 90% in the 1930's and bearing in mind our discussion in the Dark Years paragraph above, this kind of target is not impossible.
Some commodity stocks as well as gold and silver mining shares will be major beneficiaries from the Crisis.
We forecast at the beginning of the year that US long rates would go up and they have almost doubled since. But this is only the beginning since we expect US and UK long rates to reach at least the mid teens in the next 2-3 years. Interest rates in all countries will go up substantially in the next few years.
Currencies
The dollar and the pound will have very substantial falls in the autumn of 2009. At some later stage the Euro will also weaken as a result of certain countries breaking away from the Euro area.
Gold
The currency which will be the major beneficiary from the Crisis is Gold. We have invested in gold since 2002 when we saw the Crisis coming. Gold has trebled since then. But this is just the beginning. The next major move will take place in the coming 4-5 months and it will be major. Gold for wealth preservation purposes should be held directly by the investor and stored outside the banking system in his name. Holding gold in ETF form, futures or owning part of gold bars that you don't have personal access to is not wealth preservation.
There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
Ludwig von Mises
Ludwig von Mises
EGON von GREYERZ
MATTERHORN ASSET MANAGEMENT AG
- The Bond King: Americans Have Lost $15 Trillion by Matthew Rafat
- Why Housing Hasn't Bottomed Yet by Michael Panzner
- The Seven Immutable Laws of Bubbles by Andrew Butter
- The Implications of Russia's Declining U.S. Debt Purchases by Brian Kelly
- William Greider on Defanging the Fed: Why It Needs Less Power, Not More by Paul Kedrosky
- Pennsylvania: Another State Descends into Financial Crisis by Jeff Nielson
- Dollar and Yen Fall on Risk Seeking Trend by Cornelius
Port Data: Green Shoot or Weed? by The Macro Trader
Psychology Explains Banking's Collapse - Malcolm Gladwell, New Yorker
Why Toxic Assets Are So Hard to Scrub - Kenneth Scott & John Taylor, WSJ
The U.S. Is Not Yet Free of Economic Peril - Gary Duncan, Times of London
Obama's Squandered Stimulus Plan - Robert Samuelson, Washington Post
Fiscal Ruin of Western World Beckons - A Evans-Pritchard, Daily Telegraph
President Obama's Donut Economics - Peter Morici, RealClearMarkets
Do Intel's Numbers Spell Recovery? - Bill Fleckenstein, MSN Money
Clean Coal:An Unsustainable Political Myth - Bill Frezza, RealClearMarkets
Ending America's Deadly Coal Addiction - Robert Kennedy, Financial Times
The NAFTA Disaster: Mexico 15 Years Later - Jeff Faux, The Nation
U.S., China and a Protectionist Vortex - Irwin Stelzer, The Weekly Standard
A Deal Between the Fed and Bank of China? - David Marsh, MarketWatch
Barack Obama Shouldn't Reappoint Ben Bernanke - John Tamny, Forbes
Jamie Dimon: Banking's Most Credible Voice - J. Calmes & L. Story, NYT
Why Toxic Assets Are So Hard to Scrub - Kenneth Scott & John Taylor, WSJ
The U.S. Is Not Yet Free of Economic Peril - Gary Duncan, Times of London
Obama's Squandered Stimulus Plan - Robert Samuelson, Washington Post
Fiscal Ruin of Western World Beckons - A Evans-Pritchard, Daily Telegraph
President Obama's Donut Economics - Peter Morici, RealClearMarkets
Do Intel's Numbers Spell Recovery? - Bill Fleckenstein, MSN Money
Clean Coal:An Unsustainable Political Myth - Bill Frezza, RealClearMarkets
Ending America's Deadly Coal Addiction - Robert Kennedy, Financial Times
The NAFTA Disaster: Mexico 15 Years Later - Jeff Faux, The Nation
U.S., China and a Protectionist Vortex - Irwin Stelzer, The Weekly Standard
A Deal Between the Fed and Bank of China? - David Marsh, MarketWatch
Barack Obama Shouldn't Reappoint Ben Bernanke - John Tamny, Forbes
Jamie Dimon: Banking's Most Credible Voice - J. Calmes & L. Story, NYT
A Turning Point in the Financial Crisis? - Felix Salmon, Reuters
When Will Obama Start 'Saving' Jobs? - Mish's Global Economic Analysis
Strip Tax Expenditures to Reduce Tax Rates - Ralph Bristol, Ralph's Rant
The Most Misunderstood Man in America - Michael Hirsh, Newsweek
Jamie Dimon vs. Larry Summers - Simon Johnson, Baseline Scenario
Paulson: A Colossal Lack of Judgment - Joseph Calhoun, Alhambra Inv.
When Will Obama Start 'Saving' Jobs? - Mish's Global Economic Analysis
Strip Tax Expenditures to Reduce Tax Rates - Ralph Bristol, Ralph's Rant
The Most Misunderstood Man in America - Michael Hirsh, Newsweek
Jamie Dimon vs. Larry Summers - Simon Johnson, Baseline Scenario
Paulson: A Colossal Lack of Judgment - Joseph Calhoun, Alhambra Inv.
Key Lender CIT Works Weekend To Avoid Bankruptcy - USA Today
A Second Act Begins in the Mortgage Disaster - New York Times
Some Fear N.Y. Fed Too Influenced by Wall Street - Washington Post
Bombings, Business and the Future of Indonesia - Los Angeles Times
A Second Act Begins in the Mortgage Disaster - New York Times
Some Fear N.Y. Fed Too Influenced by Wall Street - Washington Post
Bombings, Business and the Future of Indonesia - Los Angeles Times
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