Blown Mortgage » Global Economy

Roubini: No confidence in government exit strategy

Morgan — Wed, 24 Jun 2009 22:34:58 +0000

In this Bloomberg segment Dr. Nouriel Roubini shares his thoughts on why pundits proclaiming the stabilization of the housing market are wrong and why the current policy path is unsustainable and likely to have a messy exit. My favorite part? The idea of our debt ballooning from 40% GDP to 80%. Lovely. Can you say bust?

Definitely worth watching:

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Deflation is real and it’s spreading

Constantine von Hoffman — Thu, 23 Apr 2009 15:10:50 +0000

So far Spain, Ireland and the UK are already seeing it and Japan is teetering on the brink.

“Ireland, struggling with a ballooning budget deficit and record unemployment, has been at the vanguard of Europe’s economic collapse. Now deflation threatens to push the country deeper into its worst recession in eight decades.” (Bloomberg)
“Britain’s statistics office says the country’s retail price index is falling for the first time in nearly fifty years.” (FoxNews)
“VALENCIA, Spain — Faced with plunging orders, merchants across this recession-wracked country are starting to do something that many of them have never done: cut retail prices.” (NYTimes)
“Japan starts with significantly greater deflation risks” than the U.S. or Europe.” (IMF report via Wall Street Journal)

All of this as the IMF predicts the global economy will shrink for the first time since 1949. The US will provide a fascinating case study on possible causes and effects of deflation. No one really knows what will happen now that we’ve flooded our economy with faux dollars. The standard behavior of more dollars chasing fewer goods is, of course, inflation. A best case scenario for us then is a collision of inflation and deflation — resulting in the ever-dreaded stagflation. I said it was a best case. I didn’t say it was a good case.

My own observation sees more things coming down (housing, clothes, consumer electronics, automobiles) than are going up (food seems to be increasing slightly).

Even more scary news from the UK: “University students could earn, rather than have to pay, interest on their student loans from September now Britain has gone into deflation.” Yes, they will pay you to borrow money. Ouch.

Constantine von Hoffman is a veteran business journalist and social media consultant. He write the blog CollateralDamage, a satirical look at marketing and business.

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“It” is Happening Already

phillenbrand — Mon, 09 Feb 2009 21:16:52 +0000

“It” is shortages of critical commodities, a worrisome example of which is the raw materials used to prepare pharmaceutical drugs. Last week a Wegmans pharmacy in upstate New York ran out of OxyContin® and several other prescription medicines. Customers were told that Wegmans’ supplier did not have the ingredients to make several medicines and did not know when they would have them. Wegmans isn’t a mom-and-pop corner store with no buying power. It’s a 71-store chain on the east coast, is one of the largest private companies in the US and had sales of $4.8 billion in 2008.

Tasmania and India are the largest producers of thebaine, the active ingredient of OxyContin®, which is one of 20 alkaloid compounds derived from the opium poppy. Alkaloids cannot be stored by law, so each year’s crop size is limited by the expected sales. However, it’s only February so the shortage in the US is not due to exporters’ supplies having run out.

There is a worldwide shortage of acetonitrile, a critical chemical ingredient used in the purification of pharmaceutical compounds. Acetonitrile is a by-product of the automotive industry and is in short supply due to the worldwide slowdown in that industry, which, in turn, has caused chemical production facilities to close.

Another drug in critical short supply is leucovorin, a generic used in the treatment of colon cancer. Its shortage, too, is due to “manufacturing” delays, according to the suppliers. In an interview with Forbes, Michael Katz, chair of a committee of patients that advises the Eastern Cooperative Oncology Group, said, “I’ve never heard of anything like it.” The ECOG group of doctors, who have played a key role in testing new cancer medicines, recently started hearing from hospitals that they were almost out of leucovorin. There is a fear that shortages will occur more frequently with generic drugs because the margins are so thin. Even worse, many of the most important cancer drugs have gone off patent, according to Katz. Further, he wonders why there is no system to catch these shortages before they harm patients or halt clinical trials. The shortage is so acute in Florida that many cancer patients are receiving lower-than-prescribed dosages or none at all.

Going forward, a number of factors will influence the availability of life-saving medicines and other critical commodities.

Supply disruptions: The majority of growers and producers of the raw materials for drugs are in Asia. You remember the cliff dive of the Baltic Dry Index last year. It was a reflection of severe disruptions in international trade, which, in large part, was caused by the unwillingness of banks to accept letters of credit.This could be the reason for the shortages of opium distillates, which are showing up in US pharmacies now.

Profitability and production stoppages: Indian pharmaceutical companies have stopped manufacturing some unprofitable drugs and they threaten to cut back on more. Their profits have been eroded by the fall in value of the rupee, which has raised their procurement costs for both packaging materials and bulk purchases of raw materials from China.

Distribution: Trucking companies across the country are both cutting back on routes and closing due less business and higher costs. This reached crisis proportions during the gas price spike last spring and summer and is continuing due to reduced demand for hauling. Bankruptcies were up more than 118% by the second half of 2008. In a Reuter’s interview, industry consultant Fred Crawford said he expects the acceleration of bankruptcies seen in the second half of 2008 to continue this year.

If demand for medicine decreases in a depression, it’s not because people aren’t sick. In fact, more people are sick, but they can’t afford medical care. If you’ve come across the crisis-preparedness list of 100 Things that Disappear First, you know that drugs are at the top of the list. Well, we are in a crisis and, sure enough, medicines are disappearing.

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Morning Quickie 04/08/2009

Morning Quickie 04/08/2009

The Hilarious Stuff Revolutions Are Made Of

phillenbrand — Mon, 26 Jan 2009 14:26:35 +0000

Don’t underestimate the man on the street. He’s smarter than you think, for one, and for two, he has a lot of time to mull things over now that he’s unemployed.

A People’s Hero has arisen in the American South. Watch his YouTube video and sympathize with the angst of the common man (warning: vulgar language, NSFW):

He comes off as the quintessential American J6P redneck. Yet, he’s knowledgeable, analytical, current, and brilliant. He watches TV and knows that a sharp increase in M1 *should* effect the money supply, he makes note of corporate policy at Microsoft, and he hit the nail on the head by calling out Thain and Geithner, the latter’s name he pronounces correctly, BTW. He’s not afraid to tell it as he sees it; he has access to the Internet, is probably armed and could be dangerous. Good thing he’s calmed by the opiate for the masses; the other opiate for the masses that is.

Given the excesses of the US’s moneyed and political classes, methinks, along with the People’s Hero, there’s something of a disconnect between their values and everyone else’s. Consider these few items from just the last several weeks: the $100 million+ presidential inaugural; Al Gore’s private-jet travel to lecture on global warming; the CEOs of US auto companies traveling in private jets to beg for taxpayer bailout money; AIG’s post-bailout, weekend-long $100,000+ party for employees; billions paid in bonuses to management of failed, taxpayer-bailed banks and securities firms; John Thain’s interior decorating at Merrill Lynch; and the penthouse/home detention of admitted Ponzi-scheming, ex-chairman of NASDAQ Bernard Madoff. And all this partying down in public view is not only in very poor form, but is the stuff that revolutions are made of.

Governments of peaceful countries can be toppled, and violently. In October 2008, there were serious rumours that the Iceland government would fall. In December, Icelanders stormed their central bank and last week they surrounded the Parliament building for several days. Their siege ended with the resignation of their prime minister and other members of his government.

Similar to Jim Cramer’s July 2007 televised meltdown telling home viewers to walk away from houses with underwater mortgages, the above six-minute rant could become a rallying call for the growing, “I’m not going to take it anymore” disaffected.

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Analyst warns of US depression & China implosion

Constantine von Hoffman — Thu, 15 Jan 2009 23:13:10 +0000

Yep, it’s so bad some companies are actually resorting to telling the truth.

Société Générale says it expects the United States’ economy to enter a depression and that China’s economy in in danger of imploding. Albert Edwards, an analyst for the European financial services giant, wrote:

While economic data in developed economies increasingly reflects depression rather than a deep recession, the real surprise in 2009 may lie elsewhere. It is becoming clear that the Chinese economy is imploding and this raises the possibility of regime change. To prevent this, the authorities would likely devalue the yuan. A subsequent trade war could see a re-run of the Great Depression.

If this sounds apocalyptic it is at the very least a needed antidote to the incessant whistling-past-the-graveyard we are hearing from so many other official sources. My current favorite comes from Philly Fed Chairman Charles Plosser:

I expect the housing sector will finally hit bottom in 2009 and the financial markets will gradually return to some semblance of normalcy.

Plosser also says he doesn’t expect unemployment to hit double digits. While I am not certain Mr. Edwards is right, I would happily bet my next mortgage payment Mr. Plosser is wrong.

Sadly I suspect Mr. Edwards isn’t that far off. I have been concerned for several years about what would happen when China learned the realities of capitalism. (Go here for a PDF of an article I wrote a couple of years ago — Learning to count in Chinese: A look at how tough it was to do business there even when the going was good) The nation’s leaders have even less compunction than our own about fiddling with statistics and regulations to reflect the reality they want instead of the one they have. (Their latest move — loosening loan requirements as a way to deal with the excess of bad loans held by Chinese banks. Suddenly Citi’s management looks smart!)

After years of being told all was well and that it would only get better, the people of China may be more than a little angry to find out that both gold and rainbow are entirely mythical.

Beijing was already facing significant trouble from people restive over grotesque pollution problems; disillusioned by the end of a once-adequate social safety-net; and totally outraged by the deaths of thousands of children in last year’s earthquake because officials were paid off to OK shoddy school construction. The only thing holding this all together was the lottery-like salvation promised by capitalism. For years the Chinese believed in the forced and fake “equality” of Communism. That belief has been replaced with faith in a particularly ugly and rapacious type of capitalism. IIt is anybody’s guess as to what happens when they find out they’ve been sold a bill of no goods.

This reminds me of an exchange between novelist Ken Kesey and Hunter S. Thompson. The ever egotistical Mr. Thompson was surprised that John Lennon had been murdered while he had not.

“I mean, I’ve pissed off quite a few citizens in my time,” Thompson said.
“But you’ve never disappointed them,” Kesey replied.

By Constantine von Hoffman, a veteran business journalist and author of the blog CollateralDamage.biz, a satirical look at marketing and business.

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Darwin Didn’t Say Quite What You Thought He Did

phillenbrand — Mon, 05 Jan 2009 11:05:51 +0000

What Darwin actually said was a lot more inspirational considering where we are now. ?It is not the strongest of the species that survives, or the most intelligent that survives. It is the one that is the most adaptable to change.? ***sigh, my hero***

Although I have never worked in retail anything, some of my best friends are retail customers and a few have asked for my opinion on others? advice, most recently Suze Orman?s.

Ms. Orman?s seminal work “The Dangers of doing nothing in 2009″, Costco Connection Magazine January 9, 2009, is now available without charge at the checkout counter. In it she recommends loading up on stocks to be positioned to ride the wave up, which she?s sure is coming, along with the spaceship, I guess.

IMO, her recommendation is irresponsible. However, she’s not alone in advising retail customers to stay in stocks, the large brokerage departments (as you remember, all the big ones went bankrupt, were absorbed by banks, or restructured and became banks themselves to get on-going bailout money) are making the same recommendation for 2009. As a matter of fact, it was their recommendation for 2008 also, which they repeated so persuasively and with such wrong-headed confidence that I?d cringe at their humiliation if I thought they felt any.

Here’s how their advice worked out:

Courtesty of Bloomberg

Caption: After the 1987 crash the Dow finished up about 2% for the year, so 2008 was far, far worse.

We see that the market finished the year up off November lows. This could be due to a bear market rally, the fourth wave up according to Elliott Wave Theory, or some other technical pattern that will correct soon. Or, according to retail brokers and advisers, it’s because the bottom is in and stocks are about to zoom up because . . . because of what? . . . because corporate profits are about to soar. ***that must be it***

Also, note that each time there?s been a substantial uptick, it?s off lower highs.

Apparently, the Fed and Treasury would like to bail out every entity listed on any of the exchanges, including the foreign banks and central banks they’ve been slipping money to under the table. They can’t save them all, for one, and for two, the money they’re giving away has to be paid back at some point. None of this benefits the economy, corporate prospects, or the stock market. After each multi-billion dollar bailout, the stock market stabilizes briefly then resumes its decline. So, stocks will continue trending lower and if prices don?t fall fast enough to reflect reality, the markets will settle things up and crash.

For investors who thought they were well diversified by owning foreign stocks, here’s what happened to their portfolios:

Courtesy of the Wall Street Journal

Whoops, they forgot the Russian stock exchange, which was down 72% and it wasn?t even open every trading day:

Caption: It?s the oil, ??????.

OMG, the humanity. . . I mean, would you look at those skid marks.

This is the worst performance since the first depression and reflects a very unhealthy world economy. There is no beneficial event of sufficient magnitude within the realm of imagination that could turn this around anytime soon.

mg dungan

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(Not) Saved by Zero

Morgan — Wed, 17 Dec 2008 03:43:30 +0000

I’m sure you’re familiar with the irritatingly-effective Toyota commerical that used the song “Saved By Zero” by the Fixx to promote car sales with 0% financing. Well Bernanke could have busted out the boom box (or Toyota ad from YouTube) and blared the “saved by zero” hook over and over today with the Fed taking interest rates to somewhere between zero and 0.25% in a last-ditch effort to save the economy.

This is the scenario that we all envisioned when we were crying that the Fed is out of bullets. Well now, the Fed has essentially fired the last salvo of traditional expansionary monetary policy. It is officially out of traditional bullets. The question becomes two-fold: 1) will it work and 2) when you get to zero where do you go from there?

The answers are fairly simple because we have a fantastic case study from which to learn – the Bank of Japan.

Back in April of this year I penned a post called “Get ready for the new media buzzword: quantitative easing” which articulated the phenomenon that led to Japan’s lost decade. To reiterate the Bank of Japan, once interest rates had hit zero, tried quantitative easing with little success:

The BOJ initially switched from the usual approach to expansionary monetary policy?namely, a reduction in the target short-term interest rate?to quantitative easing because by that time it had been pursuing a target very close to zero (0.15%). The BOJ argued that, at an interest rate so close to zero, further nominal interest rate target reductions were constrained to be small, as under normal circumstances nominal interest rates are bounded at zero. As a result, the possible stimulus obtained through further reduction in the interest rate target was likely to be limited.

Under quantitative easing, the BOJ conducts open market operations aimed at increasing the money supply and reducing long-term interest rates. The recent intensification of the program has come in a number of forms. The increase in quantitative easing involves the BOJ engaging in open market transactions aimed at increasing its balance of current bank accounts held at the BOJ.

The problem with these liquidity measures is that we are not dealing with a liquidity crisis, we are dealing with a credit and solvency crisis. Adding more money to the system as credit cannot fix the underlying fundamental problems that are associated with insolvency due to the massive debt burden that many in this country (and the country itself mind you) are carrying.

So now with interest rates at zero and with the economy still on a nasty downward trajectory we’ll get to a point where the Fed, out of interest rate cuts will switch to quantitative easing, and as we can learn from our friends across the Pacific we will settle in to a nice pattern of no growth even with 0% interest. The question will be will it last for a decade like it did in Japan?

The markets may have rallied, but the economy will not be saved by this Fed and this interest rate cut or the next injection of cash. It will be saved only by eliminating the debt burden that is tied around the neck of everyone in the country. And you do that two ways: you either pay it off, or you go bankrupt.

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The case for deflation just keeps getting stronger

Constantine von Hoffman — Tue, 16 Dec 2008 15:44:15 +0000

(A guest post from Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a satirical look at marketing and business.)

Last weekend saw Office Depot & KBToys join the ranks of Circuit City, Linens ‘n Things and Mervyn’s and other bankrupt retailers. The rush of companies liquidating their inventory after going out of business is adding more deflationary pressure on the economy. As FinancialArmageddon notes:

One of the feature that defines a deflationary downturn is the expanding array of sellers. You don’t just have the usual crowd who are looking to make a profit or to get rid of something they already own so they can buy something else. You also see more and more individuals and firms who have to sell because they don’t have enough cash on hand to meet their needs; lenders who end up with something they don’t want because borrowers have defaulted on their obligations; people who are worried about their job prospects or other concerns who want to be more liquid; and others who simply get caught up in the spirit of the times.

This all spurs a hesitation to buy things among companies and individuals as they wait and see if prices will get even cheaper. (This headline from the BBC – US inflation falls still further — begs the question, how far does inflation have to fall before the press is willing to call it something else?)

I suspect we will see a similar thing soon in mortgage refinancing. As the prime drops ever lower, people are going to wait to see how low an interest rate they can get. For those thinking the prime being at 1% can only get a little lower — well let’s hope so. The once unimaginable case of the prime going negative — that is paying institutions to borrow money in the hopes that they will lend it to others — is now far less unimaginable. (I’m not holding my breath on this, I’m just suggesting that the idea is no longer totally impossible.)

Sadly for me and other consumers, our loan rates probably won’t go down. According to Bankrate.com, the national average rate for a 48-month new-car loan stood Monday at 6.8 percent, and 7.07 percent for a 36-month used-car loan. As Kevin Hall writes:

What those numbers mean for consumers is this: Banks are willing to lend only at a premium, even after the Bush administration’s $700 billion Wall Street rescue plan directed billions to banks in a bid to spark the economy through new lending. That means the plan isn’t working.

Thank you, Kevin.

Also average humans like us aren’t getting much when we loan our money to institutions: Current highest 1 year CD rate is around 3.7%. Suddenly muni bonds — AAA insured 10 year — at 4.2% look like a great idea. Maybe not as safe as T-bills, but not bad and a lot better return ( 10 year T-bills are currently going for 2.49%, a number I expect to drop into the negatives). And if these suckers go under the system is so screwed that T-bills won’t help either.

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Commodities Reprieve Coming to an End

Morgan — Mon, 15 Dec 2008 16:54:45 +0000

A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

There’s not much question that the recession has continued to deepen and recent weeks and the resulting damage has continued to leave many by the wayside. Job loss, in particular, seems on a march upward as large firms across the nation trim their work forces in preparation for leaner times. The slacking global demand has given us some benefits as well, however. Gas prices, for example, have seen a substantial drop, sending oil prices into the low forties per barrel. Other commodities have seen significant drops as well with demand continuing to weaken. That trend, however, is due to change.

I certainly hope that alternative energy projects and developments continue despite this blip on the radar. While we should enjoy the low gas prices while they’re still around, it’s important to understand that over the long term prices will still continue to rise. The decline may even spark higher prices in the near future, as some oil fields out there aren’t nearly as cost effective at these prices. Oil companies have begun to cut back on exploration and expansion in their production in areas like the oil sands of Western Canada. If they continue to cut back and demand returns, you’ll see an even tighter supply and potentially skyrocketing pain at the pump.

Varying opinions are out there on the future of other commodities. The World Bank, for example, believes that the global recession combined with slower population growth will weaken the demand for commodities, although the extend of that weakening will depend upon economic policies, the pace of technological change, and of course other factors such as climate change…which is proving to be taking place faster than many experts originally suggested. Others argue that the recent downturn in commodity prices may actually just be a temporary adjustment before the boom once again resumes. If a ?commodity super cycle? does in fact take place..then it still should have many years to run..with plenty of volatility along the way.

Regardless I think it’s important not to get too comfortable with the prices at these levels. Even if demand doesn’t quite return to the levels it was at before, it seems likely that commodity prices (oil in particular) will continue to slowly climb higher in the near future.

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Cut the bull and call it a Depression

Constantine von Hoffman — Fri, 12 Dec 2008 16:18:53 +0000

Guest post by Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a humorous look at marketing and business.

Two weeks ago the National Bureau of Economic Research officially confirmed what we already knew: we have been in a recession for the past year. This begs the question, how long until we declare World Depression II?

The (disputed) technical definitions of Recession and Depression make them lagging economic nomenclature. Economists debate whether we are in a swamp and say nothing about the ever-increasing number of alligators. The lack of an official declaration of recession mostly just gives the chattering classes something to do while avoiding taking action.

?Is it a crisis??

?There is no crisis!?

?Is there a large, green creature eating my leg??

?There is no large, green creature eating your leg!?

Allow me to go out on a very, very sturdy limb and declare a Depression. The economy isn?t going to recover by the end of next year. There is a only a dim possibility it will recover the year after that. But no one in an ?official? position is willing to be the bearer of that piece of bad news.

Doubt that it is (or will eventually fit the technical definition of) a Depression? Look at the actual numbers.

While the official unemployment rate last month was 6.7%, everyone ? including the Labor Department ? knows that number is bullshit. On page 19 of the report, they also share their broadest estimate of the unemployment rate, which includes the total unemployed (the standard rate) plus ?all marginally attached workers, plus total employed part time for economic reasons? plus all marginally attached workers.? That rate (called ?U-6?) in November? A whopping 12.5%.

And that was the rate LAST MONTH. Before Bank of American cut 30K jobs. Before GM and Chrysler were forced to face the music. Before Bernard Madoff?s $50 billion hedge fund/Ponzi scheme came to light.Businesses continue to fire people in anticipation of how bad the economy will get, thus creating a very ugly cycle of wish fulfillment.

Although foreclosures declined last month as loan modifications bought homeowners some time, that time is going to run out in about six months. Then the tsunami returns.

Nor, of course, is that all there is. As Karl Denninger notes: ?We are doing exactly the same thing that Japan did. We are propping up zombie banks, refusing to force losses to be taken and allowing it all to be swept under the ?TARP.??

T-bills are hitting 0% because people see that a guarantee of no loss is worth the price of no return. Most businesses and state and local governments that rely on credit to cover operating costs are in a ?hope for a miracle? mode.

It is hoped that that miracle will be the next president?s economic stimulus plan. Mr. Obama is all but promising another New Deal. Problem: The New Deal was financed by a nation that wasn?t already broke.

So let?s stop calling it a downturn or a recession. It?s time to face the Depression.

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