Wednesday, February 27, 2008

The Worst Inflation in 26 Years

Oil Spikes Above $102

Gold Surges Toward $1000, Silver at 27 Year High

Greenspan Urges Gulf States to Drop Dollar

Dollar Crashing to New Lows

Business Investment Weakens in January

FDIC Adding Staff as Bank Failures Loom

US Home Foreclosures Jump 90%

UBS Boss: The Worst Crisis Since 1929

Diebold Accidentally Leaks Results Of 2008 Election Early

Diebold Accidentally Leaks Results Of 2008 Election Early

PPI Explosion!

For those that still doubt that inflation is raging, check out the January Producers Price Index.

From Bloomberg:

"Prices paid to U.S. producers rose more than twice as much as forecast in January, pushed up by higher fuel, food and drug costs, signaling inflation may keep accelerating even as growth slows.

The 1 percent increase followed a 0.3 percent drop in December, the Labor Department said in Washington. The median forecast in a Bloomberg News survey of economists was for a 0.4 percent gain. Excluding food and energy, so-called core wholesale prices climbed 0.4 percent, the most in almost a year."

From the Bureau of Labor Statistics:

"From January 2007 to January 2008, the index for finished goods moved up 7.4 percent. Over the same period, prices for finished energy goods climbed 22.6 percent, the index for finished consumer foods rose 8.3 percent, and prices for finished goods other than foods and energy advanced 2.3 percent. For the 12 months ended January 2008, the index for intermediate goods increased 8.8 percent, and prices for crude goods jumped 31.3 percent."


These are very scary numbers but it was only a matter of time until we saw an explosion in PPI. Stagflation rears its ugly head once again.

Tuesday, February 26, 2008

11 Reasons Why Bernanke's Recession Will Last Until 2011

Home Resales, Prices Decline Nationally

Strapped Americans Raiding Retirement Accounts

Auction Rate Bonds Force Predatory Yields on Cities

Travel Booming Worldwide - Except in the US

Stop The Insanity!

The Banks are now asking Congress for a $739 Billion Mortgage bailout! This would be the biggest bailout in the history of civilization. The Banks are always arguing that the Government should stay out of their business and for the most part they have. Now that they've screwed up the fabric of the entire financial system and are headed for a meltdown, they want the Government to bail them out. How convenient!

It is up to every responsible taxpayer to oppose this with every fibre of their being. If this bailout happens, the Banks and investors will know that they can take excessive risks and always get saved by the Government. There will be no reward for being safe and prudent with your investments and excessive risk-taking will become the norm. This is the very definition of "Moral Hazard".

A confidential proposal that Bank of America circulated to members of Congress this month provides a stunning glimpse of how quickly the industry has reversed its laissez-faire disdain for second-guessing by the government — now that it is in trouble.

The proposal warns that up to $739 billion in mortgages are at “moderate to high risk” of defaulting over the next five years and that millions of families could lose their homes.

To prevent that, Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates.

“We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market,” the financial institution noted.

In practice, taxpayers would almost certainly view such a move as a bailout. If lawmakers and the Bush administration agreed to this step, it could be on a scale similar to the government’s $200 billion bailout of the savings and loan industry in the 1990s. The arguments against a bailout are powerful. It would mostly benefit banks and Wall Street firms that earned huge fees by packaging trillions of dollars in risky mortgages, often without documenting the incomes of borrowers and often turning a blind eye to clear fraud by borrowers or mortgage brokers.

A rescue would also create a “moral hazard,” many experts contend, by encouraging banks and home buyers to take outsize risks in the future, in the expectation of another government bailout if things go wrong again.

If the government pays too much for the mortgages or the market declines even more than it has already, Washington — read, taxpayers — could be stuck with hundreds of billions of dollars in defaulted loans.

But a growing number of policy makers and community advocacy activists argue that a government rescue may nonetheless be the most sensible way to avoid a broader disruption of the entire economy.

The House Financial Services Committee is working on various options, including a government buyout. The Bush administration may be softening its hostility to a rescue as well. Top officials at the Treasury Department are hoping to meet with industry executives next week to discuss options, according to two executives.

Hoofy and Boo Have Some Advice For Angelo Mozilo

Nouriel's Twelve-Step Program For An Economic Meltdown

From the Financial Times:

Step 1 is the worst housing recession in US history. House prices will, he says, fall by 20 to 30 per cent from their peak, which would wipe out between $4,000 billion and $6,000 billion in household wealth. Ten million households will end up with negative equity and so with a huge incentive to put the house keys in the post and depart for greener fields. Many more home-builders will be bankrupted.

Step 2 would be further losses, beyond the $250 billion-$300 billion now estimated, for sub-prime mortgages. About 60 per cent of all mortgage origination between 2005 and 2007 had “reckless or toxic features”, argues Roubini. Goldman Sachs estimates mortgage losses at $400 billion. But if home prices fell by more than 20 per cent, losses would be bigger. That would further impair the banks’ ability to offer credit.

Step 3 would be big losses on unsecured consumer debt: credit cards, auto loans, student loans and so forth. The “credit crunch” would then spread from mortgages to a wide range of consumer credit.

Step 4 would be the downgrading of the monoline insurers, which do not deserve the AAA rating on which their business depends. A further $150 billion writedown of asset-backed securities would then ensue.

Step 5 would be the meltdown of the commercial property market, while Step 6 would be bankruptcy of a large regional or national bank.

Step 7 would be big losses on reckless leveraged buy-outs. Hundreds of billions of dollars of such loans are now stuck on the balance sheets of financial institutions.

Step 8 would be a wave of corporate defaults. On average, US companies are in decent shape, but a “fat tail” of companies has low profitability and heavy debt. Such defaults would spread losses in “credit default swaps”, which insure such debt. The losses could be $250 billion. Some insurers might go bankrupt.

Step 9 would be a meltdown in the “shadow financial system”. Dealing with the distress of hedge funds, special investment vehicles and so forth will be made more difficult by the fact that they have no direct access to lending from central banks.

Step 10 would be a further collapse in stock prices. Failures of hedge funds, margin calls and shorting could lead to cascading falls in prices.

Step 11 would be a drying-up of liquidity in a range of financial markets, including interbank and money markets. Behind this would be a jump in concerns about solvency.

Step 12 would be “a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices”.

These, then, are 12 steps to meltdown. In all, argues Roubini: “Total losses in the financial system will add up to more than $1,000 billion and the economic recession will become deeper more protracted and severe.” This, he suggests, is the “nightmare scenario” keeping Ben Bernanke and colleagues at the US Federal Reserve awake. It explains why, having failed to appreciate the dangers for so long, the Fed has lowered rates by 200 basis points this year. This is insurance against a financial meltdown.

Friday, February 22, 2008

Economic Fears Donimate Wall Street

German State Owned Banks on Verge of Collapse

Massachusetts Foreclosures Up 128%

Ritholz: Forbes vs Peter Schiff: Petty Smackdown

Mish: Where's Waldo?

Thursday, February 21, 2008

Downward Economic Spiral Gains Momentum Faster Than Expected

Bernanke's State of the Economy Speech: You're All Dead Ducks

Stocks Set for a Massive Move - One Way or the Other

Reports Signal Further Slowdown in Economy

Time: How Bad Can the Economy Get?

Lou Dobbs - "Recession or Possibly Worse"

Wednesday, February 20, 2008

FT: America's Economy Risks the Mother of All Meltdowns

NYT: Wall Street Banks Confront a String of Writedowns

Will The Market Pass Its Retest?

Dr. Housing Bubble Interview with Mish

Kunstler: Shoes Dropping

Long Term Jobless Figure Awfully High...

Turn That Frown Upside Down, There's Always Gold

Monday, February 18, 2008

Mish: Financial Services Bloodbath

Arcane Market Is Next to Face Big Credit Test

Wall Street Banks Brace for Another Wave of Multi-Billion Dollar Losses

US Banks Borrowing Massively From Fed

Stock Market Faces Heavy Headwinds

Inflation in China Rises to 7.1%

UK Government Nationalizes Troubled Bank

Citibank Suspends Hedge Fund Redemptions

The Subprime Slideshow!

If you're confused about subprime mortgages and want a primer on how this credit market mess happened, this hilarious slideshow illustrates how it all went down!


click image to launch slideshow

Credit Market Virus!

Ron Insana went out on a limb yesterday when he discussed the credit market crisis on CNBC. He predicted that we would see a Zero Interest Rate Policy (ZIRP) in the U.S., similar to what happened in Japan.



Click Here To Play Video

Thursday, February 14, 2008

Depression Risk Might Force US to Buy Assets

Muni Bond Market Beset by Wave of Auction Failures

UBS Writes Down $13.7B, Sees Tough 2008, Stock Falls to New Low

U.S. stocks slide as Fed chief downgrades economy

Homes in Bubble Regions Remain Wildly Overvalued(w/ video)

Tuesday, February 12, 2008

Mish: Buffet's Kiss of Death

Fleck: Housing Mess Too Big For a Quick Fix

Iacono: Goldilocks Math

Mortgage Crisis Spreads Past Subprime Loans

Einstein on Subprime

I'm In Debt Up To My Eyeballs

The sad thing about this old commercial is that if the value of your house drops below the mortgage that you owe, no banks will be lining up to help "refinance" your way out of drowning debt. This has led to the reality of "Walking Away" from your house. Sad but true.

Sunday, February 10, 2008

Globalization Comes to NYC: Euros Now Accepted in USA

Data Suggests Economy Stagnating

Weakest January for Retailers in 40 Years

Buffett: Dollar Worthless if Account Deficit Persists

Warren Buffet Wisdom

Some pearls of wisdom from the "World's Greatest Investor" in a recent Canadian interview.

Wall Street Journal - "Bernanke's Dilemma"

Canada Decoupling Theory Debunked Again!

The latest bullish theory circulating the globe is that even if the U.S. economy slips into recession, they aren't that important in the context of the global economy so other countries may be able to ward off recession. Specifically, the theory is that Canada's economic fundamentals are so stong and the demand for resources is so big, that Canada will not suffer economically if the U.S. is in recession. Clearly this is pure fantasy. With 85% of our exports going to the U.S., if they catch a cold, we will catch a cold. Hopefully, it is only a common cold and not pneumonia.

Canada Economy Reels as U.S. Slowdown Cuts Factory Orders, Jobs

The impact of the U.S. housing slump is spreading in western Quebec's sparsely populated Antoine-Labelle county, where 17 plants have closed since residential construction began to plummet two years ago. The region has lost more than 10 percent of its 18,000 jobs, prompting Kanenda's former workers to buy the bankrupt facility and try to reopen it.

"We're now at a really critical juncture." said Yvon Cormier, head of a development agency for the region. "When something goes wrong with the U.S. market, we feel it immediately."

Only three months ago, the Bank of Canada's Senior Deputy Governor Paul Jenkins told a New York audience that growing demand from China and India for commodities meant the U.S. and Canadian economies "respond in different ways to certain shocks." Canada was benefiting from rising prices for its oil, metals, fertilizer and nickel. Some factories were coping with a weakening U.S. dollar by buying new equipment and cutting costs.

In December, Canada lost 33,200 factory jobs, and there's no evidence the losses have stopped. Canfor Corp., the largest producer of Canadian softwood lumber, said Jan. 18 it would shut two more mills, the latest in a series of closures that has erased almost 6,000 industry jobs since October.

Montreal-based AbitibiBowater Inc., North America's largest newsprint producer, on Jan. 31 announced an eight-week layoff of 115 mill workers in western Quebec and 325 elsewhere.

Exports of lumber and sawmill products fell 21 percent in the first 11 months of 2007, dragged down by the U.S. housing slump. In December, U.S. house prices marked the first annual decline since the Great Depression.

Babcock & Wilcox Canada, an Ontario maker of power- generation equipment and subsidiary of Houston, Texas,-based McDermott International Inc., is cutting about 75 workers as orders from its parent slow.

49% Chance of Recession - Wall Street Economists

I have often wondered if the purpose of having economists, as a profession, is to convince the world that trying to predict the markets is impossible. After all, economists spend their time evaluating massive amounts of economic data and trying to figure out what it means for the overall economy. Their predictions are wrong most of the time and when they finally realize that the've made an incorrect economic prediction, it is too late to help the individual investor.

To be fair, there are Wall Street economists and there are independent economists and their projections are often different. Wall Street economists tend to analyze information and look at the bright side of the economy as it is in the best interests of Wall Street firms to have a bull market than a bear market. Wall Street makes more money in Bull Markets. Therefore, their economic forecasts are more "Sunny" in nature. Independent economists don't serve a Wall Street Master and can be more objective in analyzing economic data. Therefore, their economic forecasts tend to be more "Cloudy" in nature.

So what are the Wall Street economists saying about the chance of a recession? According to the Wall Street Journal:

"On average, the survey's 52 respondents put the odds of a recession at 49%, up from 40% in the January survey and 23% in June. Moreover, if a recession does materialize, they gave 39% odds that it will be worse than the past two recessions . . .

On average, the economists, who were surveyed between Jan. 31 and Feb. 4, predicted the nation's gross domestic product -- or total output of goods and services -- will expand at a 0.6% annual rate in the first three months of this year; that is down from the 1.2% pace predicted in the previous survey. In fact, they lowered their growth estimates for every quarter of 2008. The economy grew a slim 0.6% in the fourth quarter of 2007, a sharp deceleration from the third quarter's 4.9%.

If there is a downturn, the economists said, there is a better than 1-in-3 chance it will be worse than the one in 2001 or the one that ended in early 1991."

The most fascinating thing about Wall Street economists: As a group, they have never forecast a recession in advance. Never. Some get it right, but overall, the group has been consistently late in recognizing contractions.

The Mainstream Minsky Moment

It's amazing to see mainstream media (MM) publications discussing "The Minsky Moment". Of course, they are always the last ones to pick up on what is really going on. The MM were celebrating the technology and housing bubbles way past their peaks and only writing about the problems that were created after it was too late for anyone to benefit from that information.

However, reading about the wisdom of Hyman Minsky and the incompetence of Alan Greenspan, in a New Yorker article, produces a sense of satisfaction to those of us who've been telling anyone that would listen for the last 3 years, that this would not end well.

Twenty-five years ago, when most economists were extolling the virtues of financial deregulation and innovation, a maverick named Hyman P. Minsky maintained a more negative view of Wall Street; in fact, he noted that bankers, traders, and other financiers periodically played the role of arsonists, setting the entire economy ablaze. Wall Street encouraged businesses and individuals to take on too much risk, he believed, generating ruinous boom-and-bust cycles. The only way to break this pattern was for the government to step in and regulate the moneymen.
Many of Minsky’s colleagues regarded his “financial-instability hypothesis,” which he first developed in the nineteen-sixties, as radical, if not crackpot. Today, with the subprime crisis seemingly on the verge of metamorphosing into a recession, references to it have become commonplace on financial Web sites and in the reports of Wall Street analysts.
...
If anybody is at fault it is Greenspan, who kept interest rates too low for too long and ignored warnings, some from his own colleagues, about what was happening in the mortgage market. But he wasn’t the only one. Between 2003 and 2007, most Americans didn’t want to hear about the downside of funds that invest in mortgage-backed securities, or of mortgages that allow lenders to make monthly payments so low that their loan balances sometimes increase. They were busy wondering how much their neighbors had made selling their apartment, scouting real-estate Web sites and going to open houses, and calling up Washington Mutual or Countrywide to see if they could get another home-equity loan. That’s the nature of speculative manias: eventually, they draw in almost all of us.

Who Will Save the Day?

Perma-Bulls always cling to the theory that someone or something will come to the rescue to save the economy and prevent a recession. Why shouldn't they feel this way? Easy Al Greenspan was always there to save the markets and inject the necessary liquidity to keep the markets going higher. Long Term Capital Management Bust...No Problem! Tech bubble burst...No Problem! September 11th...No Problem! Recession...No Problem! Now that Ben Bernanke has taken over, he seems to be "playing ball" with Wall Street but he is running out of ammunition with all the rate cuts that he's already used up.

Michael Shedlock wrote a great article today entitled Bulls Cling To Misguided Hopes which addresses all the dashed hopes and dreams of Bulls hoping to fend off the inevitable recession.
It is a MUST READ!

Highlights:

Containment Theory Escalation

-Problems are contained to subprime.
-Problems are contained to subprime and Alt-A.
-Problems are contained to residential housing.
-Problems spread to Canada, Norway, Europe, UK, Japan and anyplace else dumb enough to buy US asset backed commercial paper.
-Paulson creates Super SIV bailout proposal.
-Super SIV bailout proposal collapses.
-Containment spreads to corporate real estate.
-Realization containment theory failed.

The containment theory was followed by the "Fed Will Save The Day Theory". Let's take a glance at the progression of that theory.

Fed Will Save The Day Theory Escalation

-Fed does surprise discount rate cut.
-Fed cuts interest rates to 4.75 to 4.50 to 4.25
-Fed cuts interest rates in surprise move to 3.50
-Fed cuts interest rates again 8 days later to 3.0
-Fed will likely cut to 2.5% in March

The Decouple Theory

In conjunction with the Fed Theory we had the Decouple Theory. The idea behind the decouple theory is simple. It is a global extension to the "It's Well Contained Theory". The refinement hung on the misguided belief that problems will be contained to the United States. This theory was shattered in a Global Equity Selloff and a virtual lockup of bond markets in Europe and the UK.

The Sovereign Wealth Fund Theory

The other day in response to a reader query about sovereign wealth funds, I made this statement: "Those dollars will eventually come home to buy US assets. A piece of Pfizer, Citigroup, Goldman Sachs, Exxon Mobile. How exactly does that cause "inflation"? "

Walking Away

People are walking away from houses for two reasons

-Some because they can afford them but don't want them
-Others because they have to

Bernanke will not succeed at containing that sentiment change. The Fed can only exaggerate the current trend it cannot change the trend.

Points of Failure

-Banks are unable or unwilling to extend credit
-Consumers and businesses are unable or unwilling to borrow

We are seeing both sides of this equation now, unwillingness to lend and unwillingness to borrow.

Wednesday, February 6, 2008

Economy Fitful, Americans Start to Pay as they Go

Jim Rogers: It's Going to Get Much Worse

Mish: Bubble Economy Endgame

Japan Outlook Worsens

CEO Confidence Dives

US Service Sector in Recession

You can wait for the official recession call after two consecutive quarters of negative growth or you can pick up the signs along the way. Of course, if you choose to wait, it will be too late to do anything about it. From AP:

NEW YORK - For the first time in almost five years, the nation's services sector — including restaurants, travel, banking, construction and retail — contracted in January, stoking rising worries of a recession.

The Institute for Supply Management's report, released Tuesday, shook the stock market while bond prices surged. The Dow Jones industrial average, the Standard & Poor's 500 index and the Nasdaq composite index all fell.

"This is an absolute collapse of this index," said Nigel Gault, chief U.S. economist at Global Insight.

The Institute for Supply Management reported that its new composite index measuring the health of the service sector was 44.6 in January. A reading above 50 indicates expansion, while below 50 indicates contraction. ISM introduced the composite index on Tuesday.

ISM's measure of non-manufacturing business activity fell to 41.9 in January from a revised reading of 54.4 in December. Economists surveyed by Thomson Financial/IFR had expected a slight slowdown but had still forecast growth, with a median estimate for the index of 53.

The consensus among survey respondents was that the services sector, which accounts for about two-thirds of the economy, has "come to the end of a long-term period of growth," said Anthony Nieves, chairman of the Institute for Supply Management's non-manufacturing business survey committee.

Gault said that in March 2001, the beginning of the last recession, the index had a break-even reading of 50 and during that recession, the index hung around 48 or 49 — several points higher than January's reading.

"This is a very bad report," Gault said, in terms of convincing economists that we may be in or headed for recession. "I think it will be tipping plenty of people over the edge."

Why Monoline Insurers Are So Important

This article, The Bond Problem, The Economist, does a good job of explaining why the monoline insurers are so important.

Why are bond insurers so important? Because their failure would represent another lurch down in the credit crunch. The original business of the insurers, usually referred to as “monolines”, was to lend their names to bonds issued by municipal authorities (American state and local governments). The municipals were not strong enough by themselves to qualify for an AAA rating; the backing of the monolines reduced their borrowing costs. And since municipal bonds very rarely defaulted, everyone was happy.

Had they stuck to insuring municipals, there would be no problem. But a predictable and safe business always brings pressure to diversify, especially for quoted companies. The monolines moved into insuring collateralised-debt obligations (portfolios of bonds that are sliced and diced into tranches bearing different risk), and that got them caught in the subprime crisis.

Source Article: The Bond Problem, The Economist, February 3, 2008

http://www.economist.com/displayStory.cfm?story_id=10632953

Tuesday, February 5, 2008

A Failure of Central Banking

The Trillion Dollar Secret

Mish: Bubble Economy Endgame

Shiller: Historic Housing Bust, Possible Severe Recession

Microsoft Panics, Overpays For Yahoo

Michael Shedlock comments on the surprising Microsoft offer for Yahoo:

Microsoft blew all of its cash on hand to pick up less than 18% of the search engine market. Microsoft and Yahoo combined only have a 31.5% share compared to Google's (GOOG) 56.3% share.



One of the reasons to own Microsoft was that someday it would do something intelligent with its huge cash hoard. So far it has attempted to prop up its share price with huge special dividends, and now it is willing to part with every penny on its balance sheet to buy Yahoo!

With this offer, Microsoft has somehow decided this is the bottom for tech. I disagree. Furthermore, it is extremely unlikely that anyone else could possibly come up with $44 billion to buy Yahoo in this market climate. So what's the rush?

Heading into a consumer led recession was Yahoo!'s ad revenue going to significantly jump? No Chance! Even Google is struggling to grow.

Everyone, including Microsoft is underestimating how deep this recession is going to get and what that might do to earnings. Had Microsoft waited, it might have been able to get Yahoo! for 1/3 or even 1/4th the current offer.

The Next Bubble...Alternative Energy and Infrastructure?

I don't necessarily agree with Eric Janszen's prediction but the bigger point is that there is always another sector bubble to inflate. Money has to flow somewhere and artificial wealth must continue to grow as different asset classes are inflated. Knowing when to get involved in a sector and when to get out during the "mania stage" is the key to profitability. Many people accumulated significant wealth during the "dot-com bubble" and the subsequent "housing bubble". The smart money was already out well before the market turned.

So which sector will be inflated next? Alternative Energy? Gold and Precious Metals? Euros? Emerging Markets?...stay tuned.

Quote of The Day

"There is a fundamental and deplorable breakdown in financial responsibility in America today. I’ve been saying it for a long time now; I’m sick and tired of everyone running to bail out borrowers who simply made irresponsible financial decisions."

- Diana Olick, CNBC, February 2008

It's nice to hear rational thinking from a reporter instead of the usual robotic regurgitation of mindless facts that have no bearing on reality. The same reporters that promoted the housing bubble to it's peak and through the initial decline, are now waking up to reality. It's too late to prevent the damage which is already done but at least they are not mindlessly reporting on government bailout plans which reek of moral hazard.