Recession On The Horizon?

Posted on September 6, 2007 by Nirav

Despite what Bush & Bernanke say to reassure us that the economy is doing well, I don’t believe it is. Here are some news stories that support this belief.

The first is from Newsweek.

Because home sales and moves stimulate purchases of appliances, electronics and furniture, the giant chains that catered to house flippers and renovators have reported recession-like results. In the second quarter, same-store sales were down 5.2 percent at Home Depot and 4.3 percent at Sears.

Americans who were living high by taking out home-equity loans during the boom have watched their equity drop, and are now faint of heart when it comes to big-ticket discretionary purchases.

The National Marine Manufacturers Association said it expects pleasure-boat sales, down 6 percent in 2006, to fall 10 percent more in 2007, largely due to the housing woes. Boatarama in Ft. Lauderdale, Fla., had to consolidate from four locations to one, and it now sells only used boats.

Brunswick Corp., which makes Sea Ray boats, said in July that it was slashing production due to the housing situation “in Florida and California, which are two of the nation’s largest boating markets.”

And this snippet from Bloomberg.com which basically says food is going to get more expensive.

Wheat rose the maximum allowed by the Chicago Board of Trade on rising
purchases of the grain by India, the second-biggest consumer, and forecasts for a drop in global supplies to their lowest in 26 years.

Global supplies are expected to decline to 114.8 million metric tons by the end of the marketing year May 31, 2008, the lowest since 1982, the U.S. Department of Agriculture said last month. Unusual weather has hurt crops in several regions, including Europe, the U.S., Canada and Australia.

I had previously voiced my concern over whether we were going to go through an inflationary period or a recession. Looks like we’re now scheduled to have both!

American’s Better Off Than Ever Before? Yeah Right!

Posted on September 3, 2007 by Nirav

Prof. Perry of economics at the school of Management, University of Michigan has an interesting blog on economics called Carpe Diem, which roughly translated means seize the day. In a recent post, he claims “that despite what many people think, our standard of living is higher now than ever before”.

The evidence he cites is that we’re spending less on food, clothing and shelter than in 1901, and we’re spending less than citizens of “developing countries” like India or China.

We might have a better standard of living than someone in India, a country where nearly 30% of the population currently lives in poverty. Thats nearly 400 million people or MORE than the US’s entire population!!!! How is that comparison relevant? Don’t we measure up to the Canadians, British, French, Swiss, Australian, German or Japanese that we have to resort to comparing ourselves to countries that were either socialist or communist-dictatorships for the past several decades. (Incidentally, India has the only democratically elected communist-party in the world).

Also, I would be highly skeptical of anything the Federal Reserve publishes. Their assertion that the average person spends 18% of their income of housing sounds too small. I think the average person in the US spends about 25-30% on housing (although houses have become bigger and much more comfortable from 1901!).

And another factor to consider is that the average family had only 1 working member in 1901 – the male head of household.

Today you have most family with 2 income earners. So two people are now working, but they’re not living twice as well.

That doesn’t sound like an improvement to me.

However, I do agree on thing, we most undoubted have a better standard of living of anyone who lived in 1901, even maybe robber barons. But I don’t think we’re living better than ever before.

I think the late 1950s was when Americans were the richest. That was when we had a lot of manufacturing jobs and the government wasn’t wasting money on fighting wars in remote places. And the dollar was backed by a precious metal, not just an empty promise.

Its Official: Hell Freezes Over

Posted on August 15, 2007 by Nirav

Last week, hell froze. The Financial Times reports:

In a rare unplanned investor call, the bank revealed that a flagship global equity fund had lost over 30 per cent of its value in a week because of problems with its trading strategies created by computer models. In particular, the computers had failed to foresee recent market movements to such a degree that they labeled them a ‘25-standard deviation event’ – something that only happens once every 100,000 years or more.

“We are seeing things that were 25-standard deviation events, several days in a row,” said David Viniar, Goldman’s chief financial officer.

Losses in the Goldman fund could go over $1.5 billion. But heck, everyone makes mistakes. And even a great mathematician such as James Simons, founder of Renaissance Technologies, takes a loss from time to time. Simons used to do math for the Pentagon. Then, he discovered that he could make billions running a math-based hedge fund. But last week, Simons was forced to write a letter to his investors. His fund lost about 9% in the first few days of August…and now Simons says, “we cannot predict the duration of the current environment.

So apparently, math whizzes find they don’t know which way the market is going, despite all their fany financial modeling and risk calculation and mitigation through the use of derivates.

No matter what kind of math you do, sometimes things take you by surprise.

According to Nassim Nicholas Taleb’s latest best seller, The Black Swan: The Impact of the Highly Improbable , improbable events with infinitely small odds of occurrance seem to occur every so often, especially in the financial markets. And with disastrous results!

And if this wasn’t enough, Sentinel Management Group, with $1.6 Billion under “management” has frozen access to Money Market Accounts!
According to the Chicago Tribune,

“If you attempt to withdraw money from Sentinel, they will tell you they will not honor that request,” said lawyer Jeffrey Barclay, who represents some of the futures brokers and investment pools whose money is frozen at Sentinel.

With $1.6 billion under management, Sentinel had advertised itself as an ultrasafe cash manager for people in the futures industry, corporate treasurers and well-to-do individuals.

Now the company is saying nothing publicly and has taken down its Web site. “We are not taking any media calls,” said a person who answered the phone at Sentinel on Wednesday.

What is the world coming too?

Related Readings:

1. The Black Swan: The Impact of the Highly Improbable

2. Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

3. When Genius Failed: The Rise and Fall of Long-Term Capital Management

Is The US On The Verge Of Collapse?

Posted on August 14, 2007 by Nirav

According to the Financial Times.

The U.S. government is on a burning platform of unsustainable policies, and practices with fiscal deficits, chronic health care underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.

David Walker, comptroller general of the U.S.,issued the unusually downbeat assessment of his country’s future in a report that lays out what he called chilling long-term simulations. These include dramatic tax rises, slashed government services and the large-scale dumping by foreign governments of holdings of U.S. debt.

Drawing parallels with the end of the Roman empire, Mr. Walker warned there were striking similarities between America’s current situation and the factors that brought down Rome, including declining moral values and political civility at home, an overconfident and overextended military in foreign lands and fiscal irresponsibility by the central government.

Very chilling indeed!

Before you start thinking that David Walker is some crackpot lunatic, here’s his bio straight off the US Government Accountability Office website.

As Comptroller General, Mr. Walker is the nation’s chief accountability officer and head of the U.S. Government Accountability Office (GAO), a legislative branch agency founded in 1921. GAO’s mission is to help improve the performance and assure the accountability of the federal government for the benefit of the American people. Over the years, GAO has earned a reputation for professional, objective, fact-based, and nonpartisan reviews of government issues and operations.

Mortgage Lenders Squeeling Like Pigs: WAMU First To Cry Uncle

Posted on August 12, 2007 by Nirav

Despite Ben Bernanke’s optimism that the sub-prime issues wouldn’t spread to the rest the of the economy, not only is it spreading to the rest the of the economy, its become our favorite export to global economies too!

The resulting liquidity crunch has already begun. Many banks just announced that they’ll no longer accept loans through brokers. This is to reduce the additional cost of having a middle-man.

Washington Mutual also announced that its Jumbo loans would be priced at 8%. OUCH! Basically, WAMU is having a tough time reselling these loans on the secondary market (to unsuspecting pension and hedge funds) so they’ve jacked up the rates on these.

As of 2007, a jumbo loan (in most parts of the country) is a loan thats over $417,000 for a single-family residence.

Unfortunately, with the median home price in San Diego is over $500,000. (Not sure of the exact figures but its dropping from the peak). This means the average family has a jumbo loan on their median-priced home.

It was ok when rates where 4.5%, but now when rates are at 8%, the corresponding home payment will jump 43%!!!! I don’t know about you, but I’d be looking to move if my home payment rose 40%+.

I think as the rates rise and loans become more difficult to get, home prices will start falling faster than they have in the past 2 years. Many people are still in denial about dropping home prices in SoCal – but this looks like the beginning of the end. I wouldn’t be surprized if rates fall another 25% of where they are today.

China Pulls Out The Heavy Ammunition!

Posted on August 7, 2007 by Nirav

According to the Telegraph,

The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

Two officials at leading Communist Party bodies have given interviews in recent days warning – for the first time – that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress. Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China’s “nuclear option” in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

China has been subsidizing the consumption of the US consumer & homeowner to the tune of nearly $1 Trillion. They send us all kinds of stuff and in return we give them pieces of green paper that aren’t really backed by anything, except the promise to pay more of the green stuff!

And now, to appease special interest groups clamoring about loss of manufacturing jobs, our ‘faithful’ senators are trying to pass a bill enacting trade tariffs against China in retaliation for currency manipulation. The good thing about special interest groups are that they are usually represent single-agenda constituents. The politicians give them the one thing that they want, and they’re assured their vote. And if they can spread the cost of giving them the thing they desire over a large base, less people are likely complain.

In this case, the cost is higher inflation for all of us. And if China follows through with its promise, you’ll see much higher interest rates that will negatively affect the housing industry and the economy pushing us into recession.

We’re currently experiencing an economy divergence. A poor country like China is lending money to our government by buying our Treasury notes. You could say its effectively funding our government spending. This is enabling us to enjoy the low-interest environment of the past several years.

This is not a normal occurrence. Typically rich countries lend money to poor countries. This phenomena should result in a natural rebalancing of the currencies where China’s currency strengthens against the US Dollar. Given time, this will occur without any help from our politicians.

Henry Paulson, the US Tresaury Secretary, said any such sanctions would undermine American authority and “could trigger a global cycle of protectionist legislation”.

Yet another example of why the government shouldn’t interfere in economic policy. It usually never does any good, it creates friction and the burden always falls on the tax-payer.

Meanwhile, Hillary Clinton in a show of brilliance said

foreign control over 44pc of the US national debt had left America acutely vulnerable.

Great, maybe Bill can fork over the $50 million he’s made and buy up some of it.

Turning Japanese

Posted on August 6, 2007 by Nirav

Here’s some interesting info from Bill Bonner, author of Empire of Debt: The Rise of an Epic Financial Crisis

The Fed is still talking about the risk of inflation…while the risk of deflation rises daily. Deflation happens when liquidity dries up. Suddenly, money disappears. Lenders don’t lend. Spenders don’t spend. The velocity of money declines as everyone holds on to what he’s got…fearful of losing it.

When this happens even the feds can’t do much about it. They have their printing presses…but they have no good way of getting the money into the hands of people who will move it around. The usual way is through the credit markets. The Federal Reserve pushes down short-term interest rates, for example, enabling lenders to offer money at lower rates.

But when a deflationary mentality takes hold of people, the last thing they want to do is to borrow money. They’re afraid that they might not be able to pay it back. Besides, in deflation, consumer prices fall. So the money they pay back will be more valuable than the money they borrowed. Their effective, or real, interest rate will be much higher than the nominal rate they are paying.

As prices fall, consumers become even more reluctant to spend. They begin to see that they’ll get a better deal if they wait. They turn Japanese.

That is the nightmare that haunted Ben Bernanke when he took over at the Fed. It is what prompted him to announce that “the Fed has a technology…called a printing press…” with which it can print up dollars at almost zero cost…and if need be, the Fed can drop dollars from helicopters in order to get the money into circulation.

Of course, this was a fanciful description of monetary policy. Let the Fed scatter dollar bills from helicopters and the U.S. dollar would fall faster than the currency in Zimbabwe, where inflation is said to be running at 100,000% per year. Some things just have to run their course – like hyperinflation, for example. Once it begins it continues until the currency is completely destroyed. Deflation, too. Once begun, it is hard to stop…for the cure if often worse than the disease.

The Japanese economy was strong when prices began to fall in 1989. First stocks fell. Then property. Then consumer prices. All prices came down. And each falling price strengthened deflation’s grip on the Nippon economy. People hoarded money. You practically had to hold a gun to the consumer’s head to get him to spend. And business investment? Takeovers? Leveraged buyouts? All came to a stop.

But Japan could afford deflation. People had savings – lots of savings. And the economy always enjoyed a trade surplus. Nor was there any large subprime lending problem.

Can America afford a liquidity crunch…a credit contraction…a deflation? We don’t know…but if we were Ben Bernanke, we might want to make sure the printing presses and helicopters were in good running order.

Are we turning Japanese? I really think so!

Video: Cramer Frothing At The Mouth

Posted on August 5, 2007 by Nirav

Here’s an interesting video of Jim Cramer imploring Ben Bernanke to stick his head out of the Fed window and see whats happening in the markets. Pretty amazing for a 52 year old man to get so worked up over a lousy rate hike. I think he might be losing it!

I wouldn’t be surprized if he had an stroke on tv one of these days! Not sure what he was implying when he said that “they” called him off the air imploring him to do something. Were these people he’s referring to bond managers or hedge fund managers? And what is he supposed to do? Call his buddies in the white house or the Fed office and convince them to cut rates? Or was this spectacle it?

Will the Fed cut rates to help the economy?

I think they will pretty soon, but that will weaken the dollar even further (and hopefully strenghten gold). But atleast all those people who couldn’t afford to buy their homes without super-low rates and ultra-lax lending criteria and who are now faced with losing them will be able to continue the farce a little longer.

What do you guys think?

There’s Still No Inflation But Milk Is $4/Gallon

Posted on August 2, 2007 by Nirav

Today’s post is from the Mogambo Guru, who expresses his frustration at the inflation we’re seeing in basic food products. Although Bernanke has said that inflation might become a concern, the Federal Reserve is still maintaining its stance that core inflation is contained. (Just like how the subprime lending problems was contained to about $250 Billion USD and how it might potentionally disrupt the entire global economey!!!!)

BEING FED BIGGER BREAD PRICES
by The Mogambo Guru

Peter Schiff of Euro Pacific Capital writes, “In current theory, the excess cash piling up around the world is like manna from heaven. Don’t believe the hype. Liquidity is merely a euphemism for inflation. Asset prices, including stocks, are simply rising to reflect the diminished value of the currencies in which they are traded. Wealth is not being created, merely re-priced.”

Well, I don’t know where Mr. Schiff lives, but around here, it’s not wealth that is being re-priced, but poverty. As the inflation in the prices of everything continues to outstrip “income after taxes and deductions”, standards of living are being eroded because people can’t buy as much stuff as they used to; their relatively static stream of discretionary income has lost buying power against rapidly rising prices.

For example, from the Financial Times we read that inflation is finally affecting food, and that Hovis bread said it was “preparing to raise bread prices for the second time in six months. The pending increase – which the company attributed to rising wheat costs – is merely the latest in a series of price increases food and drink companies have been trying to pass on to consumers this year. The series has seen costs of making bread, beer, yoghurt and chocolate as well as dozens of others packaged food products become increasingly expensive.”

I know what you are thinking. You are thinking, “Who cares about bread? I don’t need no stinkin’ bread! I can eat pizza!”, which is wrong, whereas you would have been correct if you had instead thought “I don’t need no stinkin’ bread! I can eat the bodies of dead animals that I find alongside the highway!”

And indeed you could, as the current market price of road kill is still a very economical zero, which may explain why it is not included in the Lehman Brothers’ ingredients cost index, which “covers cocoa, coffee, oats, tea, soyabeans and milk, among other commodities and which is based on spot rates.” This index, in case you were wondering, “rose 14.9% in the first half of the year”, which “follows a 16.5% increase in the second half of 2006.” Yikes! Prices of foodstuffs are up over 30% in twelve months? Yow!

And what is the biggest gainer? “The biggest increase has occurred in powdered milk prices. These have nearly doubled compared with the same period a year ago. Barley prices have also shot up 53%, while corn prices are up 68%.”

So it is no wonder that people are complaining about prices! And you may be interested to learn the surprising fact that these afflicted people are, paradoxically, not the least bit interested in, or appreciative of, being educated that their inflation problems are all self-inflicted, as they are the same drooling morons that elected the Congressional morons that have spent us into the Hell Of Crushing Debt (HOCD) and allowed the Federal Reserve to create wildly excessive amounts of money and credit to make that grotesque orgy of spending possible!

To prove it to yourself, the next time somebody says that prices are going up and that they are having a hard time making ends meet, carefully observe their reaction when you politely and respectfully go up to them and, by way of education for their benefit, say, “Shut your damned stupid mouth, you ugly little troll! Your problems are all self-inflicted, as you are the same drooling ‘I Love Big Government Creating Perpetual Entitlements’ moron that elected the Congressional morons that have spent
us into the Hell Of Crushing Debt (HOCD) and who conveniently looked the other way while the damnable Federal Reserve created the money and credit to make that stupid, bankrupting spending possible! It’s your own fault, you ignorant little commie creep! You committed economic suicide, and in doing so have economically murdered the rest of us, you filthy piece of stupid, greedy, Leftist crap!”

He’s always good for a laugh!

Indan Rupee Likely To Get Stronger

Posted on August 1, 2007 by Nirav

According to Chris Gaffney, Vice President at EverBank.com

What do you think the best performing currency among the 10 most active currencies traded in Asia this year? If you take away the Thai Baht which is no longer freely traded, it has been the Indian Rupee which is up almost 10% since the beginning of the year. India’s central bank, who is not happy with the currencies appreciation, had no choice but to raise rates yesterday to try and stem inflation. The central bank raised rates .5% yesterday and told lenders to set aside more cash to cover deposits. These moves are designed to drain liquidity from the credit markets and try to stem the inflow of capital which is increasing inflationary pressures. India’s economy continues to grow at nearly 9 percent per year, second only to China in growth of the major asian economies.

The problem the central bank faces is similar to what has occurred in NZD over the past few months. The central bank will raise rates to fight inflation, but also wants to limit the appreciation of their currency. They have been trying to do both by raising interest rates at the same time as they are buying dollars and selling rupee to try and stem the rise of the currency. This can’t last, they just don’t have the deep pockets of China or Japan. I believe they will have to let the currency continue to increase, good news for the holders of rupee.

The Rupee has been holding steady at Rs. 40.50 for a few months now. But it looks like eventually the central bank won’t be able to continue its manipulations and the Rupee will continue strengthening against the Dollar.

In India, real estate prices have been skyrocketing and there has been high wage and price inflaion. With the weakening Dollar, will offshoring tech jobs continue to make sense? Setting up an Office building is becoming increasingly more expensive, with commercial land in minor Metros reaching $2,000/sq ft! If this continues, it’ll be cheaper to hire employees in the US! (So long as we go the Walmart route and don’t provide them with health insurance) Maybe the weakening Dollar isn’t so bad for the economy after all?

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