Policy initiatives in place have eased the credit crisis. As Fed Governor Kevin Warsh pointed out last week: "We have had a forceful response from monetary, fiscal and financial policymakers. There are some notable signs of improvement. Short-term funding spreads are retreating from extremely elevated levels. Funding maturities are being extended beyond the very near term. Money market funds and commercial paper markets are showing signs of stabilization. And credit default swap spread of banking institutions are narrowing significantly."
Translation - the liquidity crisis, inter-bank, is over. Fine. Great. What’s it mean for us? Next to nothing. Banks won’t lend. Banks are essential but they refuse to act. As Willem Buiter puts it, "After years of excess and anything goes, the bean counters and risk controllers now rule supreme in the banking world. There is little upside to lending and taking a risk, but a lot of downside. Rolling over an old loan or extending a new one won’t help your bonus and it may cost you your job."
This is critical folks. Unless the banks start lending in normal volumes very soon, this recession could indeed become another great depression. We did not label our sketch of Oct/9 - "1929?", on a whim.
It’s not just US banks. In the UK, legal curbs may be imposed on banks if they fail to abide by a new code of practice on lending. They will also be compelled to open their books to the government so that their lending can be monitored. Whoa! But good businesses and consumers are starved of credit so why not. "I am in no doubt that the single most pressing challenge to domestic economic policy is to get the banking system to begin lending in any normal sense. That is more important than anything else at present," Bk of Eng gov Mervyn King said this week. King (the very best of all central bank gov’s, our view) also held the threat of wholesale nationalization over these banking clowns!
From Buiter, "We have no longer just a crisis in the financial system. We have gone even beyond the stage where there is a crisis of the financial system."
Getting banks to lend again is even more essential than establishing primary and secondary markets for garbage assets. In the US as elsewhere, small and medium enterprises rely overwhelmingly on banks for external finance. We all know that. Without access to bank loans, credit lines and overdraft facilities, countless small and intermediate sized businesses that would be perfectly viable with a functional financial and banking system, that are great credits, are threatened with bankruptcy. They’re innocent for goodness sake!!
What is to be done? 1) The US may have to set aggregate lending targets to the domestic non-financial business sector for each bank (last year’s total plus 7 percent, say). The banks themselves can decide who to lend to and on what terms. Any shortfall of actual lending from the target is translated dollar for dollar into some kind of tax. Since not meeting the target amounts to throwing money away, the banks will probably lend. Or, 2) nationalize those that don’t (paying as little as possible to the existing shareholders), fire the existing management and board of directors, and have the government appoint a new executive and a new board that are serious about meeting lending targets.
This is nonsense.
Robert Craven
Thursday, November 27, 2008
Tuesday, November 18, 2008
Detroit - Drop Dead
We all have witnessed the begging; it continues today before the Senate Banking Comm.. Yesterday GM took this behavior offshore, pleading for a billion-euro credit guarantee from the German government to help its Opel subsidiary. Too much.
And, we all know the story: All three vehicle companies were heavily into producing trucks and SUV's when the sharp run up in gas prices induced consumers to shift to smaller and more fuel-efficient cars. Yet the huge cost resulting from the big three’s obsequious, compliant response to UAW demands made it impossible for the companies to sell for a profit ANYTHING BUT the big cars and SUVs that, after gas prices hit $4 a gallon last spring, almost no one wanted to buy.
The only money GM for example made recently came not from car production but from its automobile credit business - GMAC. The financial crisis has dried up the money available to auto financing companies and hence eliminated the major source of their income.
From Gary Becker, Univ of Chicago econ prof and ‘92 Nobel recipient: "The main problem with American auto companies is that during the good times of the 1970s, 1980s and 1990s, they made overly generous settlements with the United Auto workers (UAW) on wages, pensions, and health benefits. Only a couple of years ago, GM was paying $5 billion per year in health benefits to retirees and current employees because their plans had wide health coverage with minimal co-payments and deductibility on health claims by present and retired employees." They caved to the UAW parasites because they could pass the cost right on to us. Now they’re broke and want $25 bln more than the $25 bln loan negotiated in September.
"Keeping the Detroit Three in their present form, with their extravagant health care benefits and the union's 5,000 pages of work rules, is an exercise in preserving in amber the America of the past," Mike Barone explains. It is not that cars cannot be produced profitably with American workers for goodness sake: the American plants of Toyota and other Japanese companies, and of German auto manufacturers, have been profitable for many years. The foreign companies have achieved this mainly by setting up their factories in Southern and border states where they could avoid the UAW and thereby introduce efficient methods of production. Their workers have been paid well but not excessively, and these companies have kept their pension and health obligations under control while still maintaining good morale among their employees.
Will taxpayers allow Pelosi, Obama and the rest to reward the UAW for its political support and permanently damage America’s economy in doing so? Will politics trump sound economics? Let us hope not. As we argued earlier, allowing GM to go bankrupt would enable the courts to order changes in the company's onerous labor and supplier contracts. Meanwhile, just as the airlines continued to fly while in bankruptcy, GM could continue to produce such cars as it might be able to sell. But the status quo clearly won’t work, and, every literate American knows it. A study by the Center for Automotive Research found that UAW compensation is 68 percent higher than the average for the U.S. manufacturing sector. And some 40 million American taxpayers who do not have health insurance, some because they can't afford it are not pleased at the prospect of watching their tax dollars finance the lavish health-care plan that the UAW extracted from a compliant General Motors in the good old days.
Finally, recall that the big three make fewer than half the new vehicles sold in the United States. If one or two were to fail the big foreign makers are established enough, many experts say, to take control of the industry and its supplier network, perhaps more quickly than is widely understood. Then the new kings of the auto industry would presumably be Toyota, Honda, Nissan, Volkswagen, Daimler, Bayerische Motoren Werke and Hyundai-Kia. (Volkswagen has not yet opened a plant in the United States, and BMW and Hyundai each have one plant.)
So sorry Big Three, it’s been good to know ya but it’s time to go. Nothing personal. There should be some decent public provision for the losers and there is: unemployment benefits, welfare. But welcome to the healthy process of creative destruction. We are a nation of risk takers and adventurers, taking our chances with life and fate. As one observer put it, when we stop being that, we become some smug, placid welfarist haven of security and egalitarianism — a big Sweden.
Robert Craven
And, we all know the story: All three vehicle companies were heavily into producing trucks and SUV's when the sharp run up in gas prices induced consumers to shift to smaller and more fuel-efficient cars. Yet the huge cost resulting from the big three’s obsequious, compliant response to UAW demands made it impossible for the companies to sell for a profit ANYTHING BUT the big cars and SUVs that, after gas prices hit $4 a gallon last spring, almost no one wanted to buy.
The only money GM for example made recently came not from car production but from its automobile credit business - GMAC. The financial crisis has dried up the money available to auto financing companies and hence eliminated the major source of their income.
From Gary Becker, Univ of Chicago econ prof and ‘92 Nobel recipient: "The main problem with American auto companies is that during the good times of the 1970s, 1980s and 1990s, they made overly generous settlements with the United Auto workers (UAW) on wages, pensions, and health benefits. Only a couple of years ago, GM was paying $5 billion per year in health benefits to retirees and current employees because their plans had wide health coverage with minimal co-payments and deductibility on health claims by present and retired employees." They caved to the UAW parasites because they could pass the cost right on to us. Now they’re broke and want $25 bln more than the $25 bln loan negotiated in September.
"Keeping the Detroit Three in their present form, with their extravagant health care benefits and the union's 5,000 pages of work rules, is an exercise in preserving in amber the America of the past," Mike Barone explains. It is not that cars cannot be produced profitably with American workers for goodness sake: the American plants of Toyota and other Japanese companies, and of German auto manufacturers, have been profitable for many years. The foreign companies have achieved this mainly by setting up their factories in Southern and border states where they could avoid the UAW and thereby introduce efficient methods of production. Their workers have been paid well but not excessively, and these companies have kept their pension and health obligations under control while still maintaining good morale among their employees.
Will taxpayers allow Pelosi, Obama and the rest to reward the UAW for its political support and permanently damage America’s economy in doing so? Will politics trump sound economics? Let us hope not. As we argued earlier, allowing GM to go bankrupt would enable the courts to order changes in the company's onerous labor and supplier contracts. Meanwhile, just as the airlines continued to fly while in bankruptcy, GM could continue to produce such cars as it might be able to sell. But the status quo clearly won’t work, and, every literate American knows it. A study by the Center for Automotive Research found that UAW compensation is 68 percent higher than the average for the U.S. manufacturing sector. And some 40 million American taxpayers who do not have health insurance, some because they can't afford it are not pleased at the prospect of watching their tax dollars finance the lavish health-care plan that the UAW extracted from a compliant General Motors in the good old days.
Finally, recall that the big three make fewer than half the new vehicles sold in the United States. If one or two were to fail the big foreign makers are established enough, many experts say, to take control of the industry and its supplier network, perhaps more quickly than is widely understood. Then the new kings of the auto industry would presumably be Toyota, Honda, Nissan, Volkswagen, Daimler, Bayerische Motoren Werke and Hyundai-Kia. (Volkswagen has not yet opened a plant in the United States, and BMW and Hyundai each have one plant.)
So sorry Big Three, it’s been good to know ya but it’s time to go. Nothing personal. There should be some decent public provision for the losers and there is: unemployment benefits, welfare. But welcome to the healthy process of creative destruction. We are a nation of risk takers and adventurers, taking our chances with life and fate. As one observer put it, when we stop being that, we become some smug, placid welfarist haven of security and egalitarianism — a big Sweden.
Robert Craven
Thursday, November 13, 2008
Still Confused?
Still Confused? We’ve taken a shot at explaining the crisis, including the heart of the matter - the Democrat’s party-line blockage of intended ‘06 Rep reform of the twins, for which only one elected Democrat has so far apologized - Arthus Davis, D-Ala. Every one of these clowns owe every one of us Americans an apology. When our friends from the left vote the ticket, it’s the same as saying - we forgive you for tanking our 401K’s.
Still, most remain confused or, in the case of the Marin County kelp eaters - willfully blind. Perhaps we were too partisan. PJ O’Rourke may be better suited as a tutor, and, takes a more practical approach. Here’s his take:
"The left has no idea what's going on in the financial crisis. And I honor their confusion. Jim Jerk down the road from me, with all the cars up on blocks in his front yard, falls behind in his mortgage payments, and the economy of Iceland implodes. I'm missing a few pieces of this puzzle myself.
Under constant political pressure...... a lot of lousy mortgages that would never be repaid were handed out to Jim Jerk and his drinking buddies and all the ex-wives and single mothers with whom Jim and his pals have littered the nation.
Wall Street looked at the worthless paper and thought, "How can we make a buck off this?" The answer was to wrap it in a bow. Take a wide enough variety of lousy mortgages--some from the East, some from the West, some from the cities, some from the suburbs, some from shacks, some from McMansions–bundle them together and put pressure on the bond rating agencies to do fancy risk management math, and you get a "collateralized debt obligation" with a triple-A rating. Good as cash. Until it wasn't.
Or, put another way, Wall Street was pulling the "room full of horse s--" trick. Brokerages were saying, "We're going to sell you a room full of horse s--. And with that much horse s--, you just know there's a pony in there somewhere."
Anyway, it's no use blaming Wall Street. Blaming Wall Street for being greedy is like scolding defensive linemen for being big and aggressive. The people on Wall Street never claimed to be public servants. They took no oath of office. They're in it for the money. We pay them to be in it for the money. We don't want our retirement accounts to get a 2 percent return. (Although that sounds pretty good at the moment.)
What will destroy our country and us is not the financial crisis but the fact that liberals think the free market is some kind of sect or cult, which conservatives have asked Americans to take on faith.That's not what the free market is. The free market is just a measurement, a device to tell us what people are willing to pay for any given thing at any given moment. The free market is a bathroom scale. You may hate what you see when you step on the scale. "Jeeze, 230 pounds!" But you can't pass a law making yourself weigh 185. Liberals think you can. And voters--all the voters, right up to the tippy-top corner office of Goldman Sachs--think so too.
Although I must say we're doing good work on our final task--attaching the garden hose to our car's exhaust pipe and running it in through a vent window. Barack and Michelle will be by in a moment with some subsidized ethanol to top up our gas tank. And then we can turn the key."
Still, most remain confused or, in the case of the Marin County kelp eaters - willfully blind. Perhaps we were too partisan. PJ O’Rourke may be better suited as a tutor, and, takes a more practical approach. Here’s his take:
"The left has no idea what's going on in the financial crisis. And I honor their confusion. Jim Jerk down the road from me, with all the cars up on blocks in his front yard, falls behind in his mortgage payments, and the economy of Iceland implodes. I'm missing a few pieces of this puzzle myself.
Under constant political pressure...... a lot of lousy mortgages that would never be repaid were handed out to Jim Jerk and his drinking buddies and all the ex-wives and single mothers with whom Jim and his pals have littered the nation.
Wall Street looked at the worthless paper and thought, "How can we make a buck off this?" The answer was to wrap it in a bow. Take a wide enough variety of lousy mortgages--some from the East, some from the West, some from the cities, some from the suburbs, some from shacks, some from McMansions–bundle them together and put pressure on the bond rating agencies to do fancy risk management math, and you get a "collateralized debt obligation" with a triple-A rating. Good as cash. Until it wasn't.
Or, put another way, Wall Street was pulling the "room full of horse s--" trick. Brokerages were saying, "We're going to sell you a room full of horse s--. And with that much horse s--, you just know there's a pony in there somewhere."
Anyway, it's no use blaming Wall Street. Blaming Wall Street for being greedy is like scolding defensive linemen for being big and aggressive. The people on Wall Street never claimed to be public servants. They took no oath of office. They're in it for the money. We pay them to be in it for the money. We don't want our retirement accounts to get a 2 percent return. (Although that sounds pretty good at the moment.)
What will destroy our country and us is not the financial crisis but the fact that liberals think the free market is some kind of sect or cult, which conservatives have asked Americans to take on faith.That's not what the free market is. The free market is just a measurement, a device to tell us what people are willing to pay for any given thing at any given moment. The free market is a bathroom scale. You may hate what you see when you step on the scale. "Jeeze, 230 pounds!" But you can't pass a law making yourself weigh 185. Liberals think you can. And voters--all the voters, right up to the tippy-top corner office of Goldman Sachs--think so too.
Although I must say we're doing good work on our final task--attaching the garden hose to our car's exhaust pipe and running it in through a vent window. Barack and Michelle will be by in a moment with some subsidized ethanol to top up our gas tank. And then we can turn the key."
Tuesday, November 11, 2008
The Week Ahead
First, a follow-up on Detroit. We wrote earlier that GM and the rest must be allowed to fail, figuring why pour good $ after bad. There is no way we taxpayers can finance their cash burn rate. Let them go into bankruptcy, taking their miserable unions with them. The world liquidity crisis is not the cause of their problem. The Three Stooges started losing billions years ago when the economy was healthy. And there is no equivalent in the scope of contagion compared to that of the just-past liquidity crisis. Naturally failure will impact the rubber, carpet, iron, glass industries, all the rest. But we are not yet Western Europe. Bite the bullet.
But wait cautions one acquaintance, be realistic. That is not politically viable. It’s not going to happen in Washington Bob. And what about owners of cars with no warrantee for example?
OK, maybe our friend has a point. A better option may be that detailed in yesterday’s WSJ: Paul Ingrassia, the paper’s Detriot bureau chief agrees that giving GM (apparently in the worst shape of the three, with the other two close behind) a blank check would be a grave mistake. "The company would just burn through the money and come back for more. Even more jobs would be wiped out in the end" (our earlier point). "Instead, in return for government aid, the board and the management must go. Shareholders should lose their paltry remaining equity. And a gov’t-sponsored receiver - someone hard-nosed and nonpolitical - should have broad power to revamp GM with a viable business plan and return it to private operation as soon as possible." Ingrassia continues, "That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others, and downsizing the company. The same basic rules should apply to Ford and Chrysler." And we might add that when in the process of restructuring, look to the so-called Detroit South where Toyota, Hyundai, and other foreign auto makers have expanded car production in recent years, although in states where unions are practically non-existent and labor is cheap.
Thus, if our plan is not politically viable, then as Ingrassia concludes, "a complete restructuring under a government overseer or oversight board has to be the price". Fine. Let’s do it. Democrats, are you listening?
The Week Ahead
World leaders will meet Nov/15. Watch the price of oil as an indicator of the odds for success. Crude is a useful tool in this regard. For example, one key reason crude rose just under 3% in after-hours trading Sun was the news that China has enacted a massive stimulus package, the view she might remain an engine for global demand. Oil is now softer, partly on today’s poor world corporate earning news which has temporarily at least, trumped that view. The price will reflect the tug-of-war between economic reality, and, hope for international cooperation to re-fire economic activity.
Friday’s Oct Retail Sales is this week’s key focus in the mind of the mkt crowd. Expectations are for a dismal figure. If there is a risk to this release, the figure may not be as bad as expected but it will be plenty bad nevertheless. Until Friday, look for more signs of corporate grief.
In the meantime, inter-bank liquidity continues to thaw, that initial crisis on the way to becoming history.
Robert Craven
But wait cautions one acquaintance, be realistic. That is not politically viable. It’s not going to happen in Washington Bob. And what about owners of cars with no warrantee for example?
OK, maybe our friend has a point. A better option may be that detailed in yesterday’s WSJ: Paul Ingrassia, the paper’s Detriot bureau chief agrees that giving GM (apparently in the worst shape of the three, with the other two close behind) a blank check would be a grave mistake. "The company would just burn through the money and come back for more. Even more jobs would be wiped out in the end" (our earlier point). "Instead, in return for government aid, the board and the management must go. Shareholders should lose their paltry remaining equity. And a gov’t-sponsored receiver - someone hard-nosed and nonpolitical - should have broad power to revamp GM with a viable business plan and return it to private operation as soon as possible." Ingrassia continues, "That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others, and downsizing the company. The same basic rules should apply to Ford and Chrysler." And we might add that when in the process of restructuring, look to the so-called Detroit South where Toyota, Hyundai, and other foreign auto makers have expanded car production in recent years, although in states where unions are practically non-existent and labor is cheap.
Thus, if our plan is not politically viable, then as Ingrassia concludes, "a complete restructuring under a government overseer or oversight board has to be the price". Fine. Let’s do it. Democrats, are you listening?
The Week Ahead
World leaders will meet Nov/15. Watch the price of oil as an indicator of the odds for success. Crude is a useful tool in this regard. For example, one key reason crude rose just under 3% in after-hours trading Sun was the news that China has enacted a massive stimulus package, the view she might remain an engine for global demand. Oil is now softer, partly on today’s poor world corporate earning news which has temporarily at least, trumped that view. The price will reflect the tug-of-war between economic reality, and, hope for international cooperation to re-fire economic activity.
Friday’s Oct Retail Sales is this week’s key focus in the mind of the mkt crowd. Expectations are for a dismal figure. If there is a risk to this release, the figure may not be as bad as expected but it will be plenty bad nevertheless. Until Friday, look for more signs of corporate grief.
In the meantime, inter-bank liquidity continues to thaw, that initial crisis on the way to becoming history.
Robert Craven
Saturday, November 8, 2008
Obama's Test #1
One more rescue and a new consciousness will be permanently embedded in the fabric of American culture. We will indeed have joined in lock step with Europe’s social democracies, where the bureaucracy has assumed most normal adult responsibilities.
"A healthy automobile manufacturing sector is essential to the restoration of financial market stability, the overall health of our economy, and the livelihood of the automobile sector's workforce,'' Pelosi and Reid said in a letter urging Paulson to use some of the $700bln for a $50bln loan to the Three Stooges. What Pelosi really meant was "Preserving an antiquated industry is essential...." Even then, her first point is false; the second point is only true if one’s horizon in measured in months; the third is true - but so what? Let them find other jobs for goodness sake. Taxpayers owe vehicle assemblers a living? Why? How are they singled out?
Sure vehicle sales are slow; we all know that. Here, auto sales are at the lowest level since 1961. Daimler sales worldwide are off something like 20%, y/y. Vehicle sales in the UK were down 23% last month from Sep. An Essex online car dealer last week offered two Dodge Avenger models for the price of one, an offer as the Guardian put it, "...is more usually seen on washing powder or packets of bacon." Change goes with the territory in a free mkt economy. It’s tough times for a lot of folk.
There can be no credible contagion argument favoring this industry. None. The same arguments supporting taxpayer repair of a world liquidity crisis do not apply. Let the unseen hand do its work. Failure, then the American phoenix of creativity. Out of this spontaneous order will spring a new invigorated vehicle industry. Out of taxpayer enabling will spring nothing but more problems, calling for an even more painful solution, end of the next cycle.
We expect Bush to hold the line. For the sake of his legacy, he better. Then it's up to Obama. A year ago in Detroit Obama assailed the US industry for failing to meet global demand for fuel-efficient cars. "The need to drastically change our energy policy is no longer a debatable proposition," he said. "It's not a question of whether, but how; not a question of if, but when. For the sake of our security, our economy, our jobs and our planet, the age of oil must end in our time." Well Mr Obama, the time has arrived. Will you adhere to this vision, or simply cave as you did with the Chicago machine? We’ll soon find out.
Robert Craven
"A healthy automobile manufacturing sector is essential to the restoration of financial market stability, the overall health of our economy, and the livelihood of the automobile sector's workforce,'' Pelosi and Reid said in a letter urging Paulson to use some of the $700bln for a $50bln loan to the Three Stooges. What Pelosi really meant was "Preserving an antiquated industry is essential...." Even then, her first point is false; the second point is only true if one’s horizon in measured in months; the third is true - but so what? Let them find other jobs for goodness sake. Taxpayers owe vehicle assemblers a living? Why? How are they singled out?
Sure vehicle sales are slow; we all know that. Here, auto sales are at the lowest level since 1961. Daimler sales worldwide are off something like 20%, y/y. Vehicle sales in the UK were down 23% last month from Sep. An Essex online car dealer last week offered two Dodge Avenger models for the price of one, an offer as the Guardian put it, "...is more usually seen on washing powder or packets of bacon." Change goes with the territory in a free mkt economy. It’s tough times for a lot of folk.
There can be no credible contagion argument favoring this industry. None. The same arguments supporting taxpayer repair of a world liquidity crisis do not apply. Let the unseen hand do its work. Failure, then the American phoenix of creativity. Out of this spontaneous order will spring a new invigorated vehicle industry. Out of taxpayer enabling will spring nothing but more problems, calling for an even more painful solution, end of the next cycle.
We expect Bush to hold the line. For the sake of his legacy, he better. Then it's up to Obama. A year ago in Detroit Obama assailed the US industry for failing to meet global demand for fuel-efficient cars. "The need to drastically change our energy policy is no longer a debatable proposition," he said. "It's not a question of whether, but how; not a question of if, but when. For the sake of our security, our economy, our jobs and our planet, the age of oil must end in our time." Well Mr Obama, the time has arrived. Will you adhere to this vision, or simply cave as you did with the Chicago machine? We’ll soon find out.
Robert Craven
Friday, November 7, 2008
Lao Tsu
The Oct Payroll figure fell more than expected (240k vs 200k consensus), unemp printed 6.5% vs expectations of 6.3%. Losses were widespread across most categories. Much of these losses (aggravated by the Boeing strike, -27k, which is now settled) are due to the collateral effects of the credit crunch, now slowly being repaired. So far in ‘08 1.18 million jobs have been lost, half those in the last 3 months.
As we predicted Nov/3, by today, the view for a full blown recession will be set in stone. It is. Our readers have known we are in a recession for a few weeks now. That is not news any more.
The Tao
Following yesterday’s loss in the US equity mkt, one news service declared, "Dow drops 443 in reaction to retail sales report." This is utter nonsense. World markets move for a whole range of reasons, too complex and complicated for any one mortal or organization to understand. After work, home and enjoying a cocktail, TV is on and the commentator assures you that this is why the mkt did this today. Fine. You go to bed secure, that must be it. This has nothing to do with insight but with selling advertising.
Lao Tsu said, "Those who know, do not speak; those who speak, do not know." Certainly Lao Tsu was not thinking of TV anchors; there were few around in his day. Instead, he was focused on core knowledge or wisdom; however, we have taken license to apply his wisdom to the mkt and why not? It works.
Whether through the medium of TV or radio or newsprint, no matter - analysts all talk to each other, and, the same sources. They all look at the same statistics and they all reach similar conclusions. Forecasters (mostly economists, ill equipped for the task) gather together for security in times of maximum price violence. The greater the uncertainty, the greater the similarity of predictions as the experts shout together in the dark. And in turn, the greater will be the collective surprise when their estimates miss the mark.
As Alan Watts noted, there is indeed a wisdom to insecurity. This is esp true in the financial world. There should be a fail safe - when we feel absolutely certain about being right there should be a gremlin assigned to the task to say, "OK, it is highly likely that you are wrong." Or, when the herd is supremely confident in one direction, it is time to take the other.
Robert Craven
As we predicted Nov/3, by today, the view for a full blown recession will be set in stone. It is. Our readers have known we are in a recession for a few weeks now. That is not news any more.
The Tao
Following yesterday’s loss in the US equity mkt, one news service declared, "Dow drops 443 in reaction to retail sales report." This is utter nonsense. World markets move for a whole range of reasons, too complex and complicated for any one mortal or organization to understand. After work, home and enjoying a cocktail, TV is on and the commentator assures you that this is why the mkt did this today. Fine. You go to bed secure, that must be it. This has nothing to do with insight but with selling advertising.
Lao Tsu said, "Those who know, do not speak; those who speak, do not know." Certainly Lao Tsu was not thinking of TV anchors; there were few around in his day. Instead, he was focused on core knowledge or wisdom; however, we have taken license to apply his wisdom to the mkt and why not? It works.
Whether through the medium of TV or radio or newsprint, no matter - analysts all talk to each other, and, the same sources. They all look at the same statistics and they all reach similar conclusions. Forecasters (mostly economists, ill equipped for the task) gather together for security in times of maximum price violence. The greater the uncertainty, the greater the similarity of predictions as the experts shout together in the dark. And in turn, the greater will be the collective surprise when their estimates miss the mark.
As Alan Watts noted, there is indeed a wisdom to insecurity. This is esp true in the financial world. There should be a fail safe - when we feel absolutely certain about being right there should be a gremlin assigned to the task to say, "OK, it is highly likely that you are wrong." Or, when the herd is supremely confident in one direction, it is time to take the other.
Robert Craven
Thursday, November 6, 2008
Update
Reflecting official concern with slowing conditions, the Bank of England and the European Central Bank both cut their base rates today (as expected). The surprise was the magnitude of the BkofEng cut - 1 ½% (150 bp’s) - intended shock treatment for that economy. Immediately after, the gov’t urged lenders to pass on all of the cut to borrowers (mortgages pegged to the base rate) and almost immediately lenders explained why they will have trouble doing so. Only Lloyds pledged to pass on the entire cut at this writing. Nevertheless, the magnitude of the cut, putting the benchmark at the lowest level since 1955, will impact positively. This is a good thing because as we highlighted earlier, UK banks (and those of the EU) have a far scarier exposure to developing credits, ongoing, than we do.
At home, this am we saw so-called Chain Store sales for Oct (representing about 10% of total Retail Sales); they were below expectations for 60% of the stores reporting. This is not really news; much of this weakness is already priced in. Tomorrow’s Oct Payroll report is key. The employment data give the most comprehensive report on how many people are looking for jobs, how many have them, what they're getting paid and how many hours they are working. The number is expected to be lower by 200,000, and unemp higher at 6.3%. This would be the 10th consecutive decline in total employment; we last saw 6.3% in 6/03, then to a cyclical low of 4.4% in 3/07, last 6.1% (Sep). At one time we could generally predict the result of this key release for our clients, vs economists’ expectations; we are a tad rusty at the moment so we’ll have to wait and see.
Violence will continue in the equity mkt - really just a freak show. We have inquiries by those who wonder - is it time to buy? We only try to close the pattern early on general fundamentals. A rule we learned the hard way is this: in the financial mkts one must be right at the right time. One’s view re a stock, or stocks in general, or interest rates, or currency or sovereign credits may be correct and for the correct reasons. Yet if the mkt crowd does not agree they can convert you to crow bait in nothing flat as they rush the other direction, then just when you are getting up, they realize you were right, and flatten you a second time. Or from another prospective - how long can you hold your breath.
Robert Craven
At home, this am we saw so-called Chain Store sales for Oct (representing about 10% of total Retail Sales); they were below expectations for 60% of the stores reporting. This is not really news; much of this weakness is already priced in. Tomorrow’s Oct Payroll report is key. The employment data give the most comprehensive report on how many people are looking for jobs, how many have them, what they're getting paid and how many hours they are working. The number is expected to be lower by 200,000, and unemp higher at 6.3%. This would be the 10th consecutive decline in total employment; we last saw 6.3% in 6/03, then to a cyclical low of 4.4% in 3/07, last 6.1% (Sep). At one time we could generally predict the result of this key release for our clients, vs economists’ expectations; we are a tad rusty at the moment so we’ll have to wait and see.
Violence will continue in the equity mkt - really just a freak show. We have inquiries by those who wonder - is it time to buy? We only try to close the pattern early on general fundamentals. A rule we learned the hard way is this: in the financial mkts one must be right at the right time. One’s view re a stock, or stocks in general, or interest rates, or currency or sovereign credits may be correct and for the correct reasons. Yet if the mkt crowd does not agree they can convert you to crow bait in nothing flat as they rush the other direction, then just when you are getting up, they realize you were right, and flatten you a second time. Or from another prospective - how long can you hold your breath.
Robert Craven
Tuesday, November 4, 2008
Optimism
We gave reason for optimism, Oct/23 and Oct/29, that the worst of the liquidity crisis may be behind us. At this writing we are further encouraged that this is so, noting for example that interbank lending rates are tumbling, 90 LIBOR last at 2.71% from 4.82% just a little over three weeks ago. As expected Australia’s central bank cut its benchmark rate. Look for the EU and Bk of Eng to follow on Thursday. The heart of the system is beating again. There is a ton of work to do, many, many unknowns (at least to us), but the free-fall is history.
Our banking system is in relatively good shape compared to some others. Be thankful we are not Europe. As we highlighted earlier, here is the next potential avalanche (but it too is at least partially priced in by now). European and UK banks are five times more exposed to emerging markets than US banks. They alone hold what one observer called "the collective time-bomb of $1.6 trillion (£990bn) in hard currency loans to Eastern Europe – now starting to detonate in Hungary, Ukraine, Romania, and even Russia." This is their very own credit bubble. This will slow the world's recovery to be sure but it will not create another free fall; a system is now in place to prevent that.
The other prime consideration for all of us of course remains the US real sector. Yesterday’s manufacturing and veh sales data were worse than expected. Here of course we see the results of contagion. For example, the seizing up of the credit markets, plus course weakness in the labor markets put vehicle sales in the out house, sales of autos down over 10% to the lowest level since 1961. We have the key Oct payroll release on Friday. It will be very weak but at this point such weakness is priced in so that it will not be a shocker, our view.
In spite of lower US eco growth, lower Treasury yields and lower employment, the $ continues to strengthen vs all other major world currencies except the Yen. Why? Much is so-called "flight-to-quality" - world institutions seeking safety in US securities (still the world’s safest). And part is the great deleveraging as it has become known - problems elsewhere. Many investors have been following a version of the "carry trade," borrowing money in a low-yielding currency. All they had to do was earn a higher return from assets in higher yielding currencies than the cost of their financing. Since the two currencies with the lowest yields over the past year have been the dollar and the yen, those were the natural ones to borrow. However, when asset prices fall in Brazil, Russia, the Ukraine, Indonesia and elsewhere, this strategy is disastrous. Investors dash to sell assets and repay their debts. Since those debts were incurred in dollars and yen, that means they have to buy back those two currencies—hence their sharp recent rises.
Robert Craven
Our banking system is in relatively good shape compared to some others. Be thankful we are not Europe. As we highlighted earlier, here is the next potential avalanche (but it too is at least partially priced in by now). European and UK banks are five times more exposed to emerging markets than US banks. They alone hold what one observer called "the collective time-bomb of $1.6 trillion (£990bn) in hard currency loans to Eastern Europe – now starting to detonate in Hungary, Ukraine, Romania, and even Russia." This is their very own credit bubble. This will slow the world's recovery to be sure but it will not create another free fall; a system is now in place to prevent that.
The other prime consideration for all of us of course remains the US real sector. Yesterday’s manufacturing and veh sales data were worse than expected. Here of course we see the results of contagion. For example, the seizing up of the credit markets, plus course weakness in the labor markets put vehicle sales in the out house, sales of autos down over 10% to the lowest level since 1961. We have the key Oct payroll release on Friday. It will be very weak but at this point such weakness is priced in so that it will not be a shocker, our view.
In spite of lower US eco growth, lower Treasury yields and lower employment, the $ continues to strengthen vs all other major world currencies except the Yen. Why? Much is so-called "flight-to-quality" - world institutions seeking safety in US securities (still the world’s safest). And part is the great deleveraging as it has become known - problems elsewhere. Many investors have been following a version of the "carry trade," borrowing money in a low-yielding currency. All they had to do was earn a higher return from assets in higher yielding currencies than the cost of their financing. Since the two currencies with the lowest yields over the past year have been the dollar and the yen, those were the natural ones to borrow. However, when asset prices fall in Brazil, Russia, the Ukraine, Indonesia and elsewhere, this strategy is disastrous. Investors dash to sell assets and repay their debts. Since those debts were incurred in dollars and yen, that means they have to buy back those two currencies—hence their sharp recent rises.
Robert Craven
Monday, November 3, 2008
The Week Ahead
Over the near term we have two fronts to monitor; that is, two economic arenas, both of which will impact our individual lives. First of course is the so-called world sub-prime crisis, the liquidity panic/now solvency crisis, birthed due to lack of proper regulation of Fannie & Freddie. A flood of less-than-prime mortgage paper, collateralized for the final investor, is all over the world. No one knows what any of it is worth. Readers recall from past postings the chronology of this event. Key - trust evaporated between major world banks. They lied to each other and to their regulators. Inter-bank lending ceased, and with it, the heart of the world’s financial system nearly stopped beating. We know that temporary dams have been erected, most major world credits, to stop the free fall. We applaud this accomplishment. Most of these mechanisms followed Darling’s lead. Banking institutions are receiving capital injections from the US taxpayer. The taxpayer is receiving preferred stock in return. In the UK and EU there are similar measures. Next, in countries without the resources to rescue their own the IMF is extracting tough terms for money lent.
Second, we have the US economy in isolation - just how weak is it; what can we do, what ammunition does the Fed have left? These then are the two prime considerations for the US consumer. Let us address this second concern first.
This week we will have two important eco releases, one on the health of manufacturing and one of the overall employment situation. Today we will see the Inst For Supply Mgmt manufacturing survey for Oct (new orders, order backlogs, prices received, employment & inventories). This is a key release; it was through the floor for Sep - far below expectations after being flat for most of the year. On Fri we will see the Employment release for Oct. Although a coincident indicator, this remains the key release for each month. It is expected to be very weak and will no doubt cooperate. By Friday the view for a full blown recession will be set in stone.
What can the Fed do? Not much. It has already injected floods of $ into the system but this is little more than pushing on a string at the moment. Impact now is mostly psychological. We must look to Washington. The assistance of a corporate tax cut to 25% and a cap gains cut to 10% will go out the door if McCain does not win; the period of recovery will then be extended.
Next, beginning Nov/15 we will gain some idea of what finance ministers have in mind for the new world financial landscape. The IMF seems to have inherited the lead role for now. Just this weekend Brown urged the Saudi’s to kick up their contribution as Iceland and others have already used up $30 bln of the IMF’s reserves, with Belarus, Turkey, Pakistan and Serbia, Hungary and Ukraine waiting in line.
Meanwhile, other policy tools are easing the liquidity panic at home. The Fed's new commercial paper facility, which began on Tuesday, helped to reignite that vital source of corporate funds. Treasury's capital injections into banks as noted above are also restoring confidence as they reach some of the struggling regional banks. And the key 90 day LIBOR rate continues to decline, last at 2.86% vs 3.50% just a week ago. This is very good news and means activity between US banks, and between US banks and other major foreign banks, continues to thaw. Look for the UK, the EU and Australia to join the global easing cycle this week (following moves in the US, Japan, HK, Norway, China, Tawain & India last week) which should push this rate even lower.
What shocks may be offered up this week? Look perhaps to emerging markets, where gathering economic woes are bound to lead to more bank losses, but primarily banks in Europe, no so much the US. An analyst at the Royal Bank of Scotland points out that European banks have more than seven times the claims on developing countries than their American rivals; in eastern Europe, the ratio is 25 to 1.
Robert Craven
Second, we have the US economy in isolation - just how weak is it; what can we do, what ammunition does the Fed have left? These then are the two prime considerations for the US consumer. Let us address this second concern first.
This week we will have two important eco releases, one on the health of manufacturing and one of the overall employment situation. Today we will see the Inst For Supply Mgmt manufacturing survey for Oct (new orders, order backlogs, prices received, employment & inventories). This is a key release; it was through the floor for Sep - far below expectations after being flat for most of the year. On Fri we will see the Employment release for Oct. Although a coincident indicator, this remains the key release for each month. It is expected to be very weak and will no doubt cooperate. By Friday the view for a full blown recession will be set in stone.
What can the Fed do? Not much. It has already injected floods of $ into the system but this is little more than pushing on a string at the moment. Impact now is mostly psychological. We must look to Washington. The assistance of a corporate tax cut to 25% and a cap gains cut to 10% will go out the door if McCain does not win; the period of recovery will then be extended.
Next, beginning Nov/15 we will gain some idea of what finance ministers have in mind for the new world financial landscape. The IMF seems to have inherited the lead role for now. Just this weekend Brown urged the Saudi’s to kick up their contribution as Iceland and others have already used up $30 bln of the IMF’s reserves, with Belarus, Turkey, Pakistan and Serbia, Hungary and Ukraine waiting in line.
Meanwhile, other policy tools are easing the liquidity panic at home. The Fed's new commercial paper facility, which began on Tuesday, helped to reignite that vital source of corporate funds. Treasury's capital injections into banks as noted above are also restoring confidence as they reach some of the struggling regional banks. And the key 90 day LIBOR rate continues to decline, last at 2.86% vs 3.50% just a week ago. This is very good news and means activity between US banks, and between US banks and other major foreign banks, continues to thaw. Look for the UK, the EU and Australia to join the global easing cycle this week (following moves in the US, Japan, HK, Norway, China, Tawain & India last week) which should push this rate even lower.
What shocks may be offered up this week? Look perhaps to emerging markets, where gathering economic woes are bound to lead to more bank losses, but primarily banks in Europe, no so much the US. An analyst at the Royal Bank of Scotland points out that European banks have more than seven times the claims on developing countries than their American rivals; in eastern Europe, the ratio is 25 to 1.
Robert Craven
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