Gary Shilling Still Looking for a Recession in 2012 Part I

Wednesday, April 11th, 2012

Gary Shilling has been more dour than most on the underlying economy the past 3-4 years, and that could be argued was a relatively good call.  Despite never before seen levels of federal government and central bank intervention, the economy continues to limp along at what I call a “meh” pace.  Normal recoveries sans massive intervention should have had some sustained periods of 4-5%+ type GDP growth; we’re happy with 2-3% nowadays.  Gary’s long U.S. Treasuries call has been against the grain, and mostly right the past few years, and he’s had quite a few other prescient calls as well.  Shilling posted 2 articles on Bloomberg, stating the case for a recession in 2012 – which is now again an outlier view.  We’ll look at part 1 today, and look at part 2 which focuses on the labor market tomorrow.

Here are some of his views as he looks at the main pillars of the economy:

• For several months, I’ve been forecasting a recession in the U.S. this year, arguing that weakened consumer spending – the key to the economic outlook — would tip the economy back into a downturn.  But what about recent positive data and markets? Do they affect my forecast?
• Consumers Are the Linchpin: The U.S. economy is being fueled these days by strong consumer spending, which increased in February by 0.8 percent, its best showing in seven months, after rising 0.4 percent in January. Retail sales rose 1.1 percent in February — the fastest pace in five months — while same-store sales advanced 4.7 percent. These numbers correlate with recent gains in consumer confidence and sentiment.
• I don’t see this pace continuing. Personal-income growth continues to be weak — up just 0.2 percent in February — meaning this recent exuberant consumer spending is being fueled largely by increased debt and tapping of savings.
• At the same time, pay per employee is rising slowly and continues to fall in real terms. So increased job growth remains the key to any increases in real household after-tax income, which declined in February for a second straight month and gained a mere 0.3 percent, compared with February 2011.
• Spending, Saving and Debt: The support that consumer spending has received from less saving and more debt appears temporary. Household debt – including mortgages,student loans, and auto and credit-card loans — has fallen relative to disposable personal income, though. In my analysis, this is largely because of write-offs of troubled mortgages. Nevertheless, revolving consumer credit, mostly on credit cards, is no longer being liquidated.
• Non-revolving consumer credit continues to rise in response to growing sales of vehicles — most of which are financed — and in student loans, as the poor job market keeps students in school or sends them back. Tuition increases encourage more borrowing, while interest costs on past-due loans mount.  [Mar 8, 2012: What Drove Yesterday's Surge in Consumer Credit? Massive Upswing in Federal Student Loans]
• It would seem, then, that contrary to my steadfast belief that consumers are being forced to save more and reduce debt to rebuild net worth, they have been doing the opposite lately.
• Consumer Retrenchment: The data so far aren’t conclusive, but evidence of U.S. consumer retrenchment is emerging. Consumer confidence has moved up recently but remains far below the levels of early 2007 before the collapse in subprime mortgages set off the Great Recession. Real personal consumption expenditures growth has been volatile in recent months and falling on a year-on-year basis. Voluntary departures from jobs, another measure of confidence, may be decreasing. And consumer spending will no doubt have a big slide if my forecast of another 20 percent drop in house prices pans out. (Mark’s note: that seems aggressive!)
• Housing activity remains depressed, with the only signs of life coming from the multifamily component, which is being driven by the appetite for rental apartments as homeownership declines.
• What Oil Threat?: Recently, there has been great concern about $4 per gallon gasoline and whether, as in 2008, those high prices will act as a tax on consumer incomes and force drastic cutbacks in other purchases.  These concerns are overblown. American consumers have reacted to rising gasoline prices as you would expect in tough times: by consuming less. Demand (DOEDMGAS) in the mid-February to mid- March four-week period was down 7.8 percent from a year earlier, mainly due to more efficient vehicles.
• As a result, the recent surge in gasoline prices has had a relatively small impact on consumer purchasing power. The $14.8 billion increase from October 2011 to March 2012, compared with the year-earlier period, amounts to about 0.3 percent of consumer spending.

Conclusion:

• Consumer spending is the only major source of strength in the U.S. economy this year. State and local-government spending remains depressed because of deficit woes and underfunded pension plans. Housing suffers from excess inventories and may face a further 20 percent drop in prices. Excess capacity restrains capital spending. Recent inventory building appears involuntary. So consumer retrenchment will tip the balance toward a moderate and overdue recession.

Tags: Bloomberg, Central Bank Intervention, Consumer Confidence, Downturn, Economic Outlook, Federal Government, Five Months, Gary Shilling, GDP, GDP Growth, Market Tomorrow, Massive Intervention, Personal Income Growth, Pillars, Recession, Retail Sales, Sentiment, Seven Months, Tapping, Treasuries
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10 Things You Should Know About The Federal Reserve

Friday, March 2nd, 2012

By Michael Snyder

What would happen if the Federal Reserve was shut down permanently? That is a question that CNBC asked recently, but unfortunately most Americans don’t really think about the Fed much. Most Americans are content with believing that the Federal Reserve is just another stuffy government agency that sets our interest rates and that is watching out for the best interests of the American people.

But that is not the case at all. The truth is that the Federal Reserve is a private banking cartel that has been designed to systematically destroy the value of our currency, drain the wealth of the American public and enslave the federal government to perpetually expanding debt. During this election year, the economy is the number one issue that voters are concerned about. But instead of endlessly blaming both political parties, the truth is that most of the blame should be placed at the feet of the Federal Reserve. The Federal Reserve has more power over the performance of the U.S. economy than anyone else does.

The Federal Reserve controls the money supply, the Federal Reserve sets the interest rates and the Federal Reserve hands out bailouts to the big banks that absolutely dwarf anything that Congress ever did. If the American people are ever going to learn what is really going on with our economy, then it is absolutely imperative that they get educated about the Federal Reserve. 

The following are 10 things that every American should know about the Federal Reserve….
 
#1 The Federal Reserve System Is A Privately Owned Banking Cartel


The Federal Reserve is not a government agency.
The truth is that it is a privately owned central bank. It is owned by the banks that are members of the Federal Reserve system.

We do not know how much of the system each bank owns, because that has never been disclosed to the American people.

The Federal Reserve openly admits that it is privately owned. When it was defending itself against a Bloomberg request for information under the Freedom of Information Act, the Federal Reserve stated unequivocally in court that it was “not an agency” of the federal government and therefore not subject to the Freedom of Information Act.

In fact, if you want to find out that the Federal Reserve system is owned by the member banks, all you have to do is go to the Federal Reserve website….

The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation’s central banking system, are organized much like private corporations–possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.

Foreign governments and foreign banks do own significant ownership interests in the member banks that own the Federal Reserve system. So it would be accurate to say that the Federal Reserve is partially foreign-owned.
But until the exact ownership shares of the Federal Reserve are revealed, we will never know to what extent the Fed is foreign-owned.
 
#2 The Federal Reserve System Is A Perpetual Debt Machine


As long as the Federal Reserve System exists, U.S. government debt will continue to go up and up and up.
This runs contrary to the conventional wisdom that Democrats and Republicans would have us believe, but unfortunately it is true.
The way our system works, whenever more money is created more debt is created as well.

For example, whenever the U.S. government wants to spend more money than it takes in (which happens constantly), it has to go ask the Federal Reserve for it. The federal government gives U.S. Treasury bonds to the Federal Reserve, and the Federal Reserve gives the U.S. government “Federal Reserve Notes” in return. Usually this is just done electronically.

So where does the Federal Reserve get the Federal Reserve Notes?
It just creates them out of thin air.

Wouldn’t you like to be able to create money out of thin air?

Instead of issuing money directly, the U.S. government lets the Federal Reserve create it out of thin air and then the U.S. government borrows it.

Talk about stupid.

When this new debt is created, the amount of interest that the U.S. government will eventually pay on that debt is not also created.
So where will that money come from?

Well, eventually the U.S. government will have to go back to the Federal Reserve to get even more money to finance the ever expanding debt that it has gotten itself trapped into.

It is a debt spiral that is designed to go on perpetually.

You see, the reality is that the money supply is designed to constantly expand under the Federal Reserve system. That is why we have all become accustomed to thinking of inflation as “normal”.

So what does the Federal Reserve do with the U.S. Treasury bonds that it gets from the U.S. government?
Well, it sells them off to others. There are lots of people out there that have made a ton of money by holding U.S. government debt.

In fiscal 2011, the U.S. government paid out 454 billion dollars just in interest on the national debt.

That is 454 billion dollars that was taken out of our pockets and put into the pockets of wealthy individuals and foreign governments around the globe.

The truth is that our current debt-based monetary system was designed by greedy bankers that wanted to make enormous profits by using the Federal Reserve as a tool to create money out of thin air and lend it to the U.S. government at interest.

And that plan is working quite well.

Most Americans today don’t understand how any of this works, but many prominent Americans in the past did understand it.

For example, Thomas Edison was once quoted in the New York Times as saying the following….

That is to say, under the old way any time we wish to add to the national wealth we are compelled to add to the national debt.

Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000 — that is what it amounts to, with interest.

People who will not turn a shovelful of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work. That is the terrible thing about interest. In all our great bond issues the interest is always greater than the principal. All of the great public works cost more than twice the actual cost, on that account.

Under the present system of doing business we simply add 120 to 150 per cent, to the stated cost.

But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good.

We should have listened to men like Edison and Ford.

But we didn’t.

And so we pay the price.

On July 1, 1914 (a few months after the Fed was created) the U.S. national debt was 2.9 billion dollars.

Today, it is more than more than 5000 times larger.

Yes, the perpetual debt machine is working quite well, and most Americans do not even realize what is happening.
 
#3 The Federal Reserve Has Destroyed More Than 96% Of The Value Of The U.S. Dollar

Did you know that the U.S. dollar has lost 96.2 percent of its value since 1900? Of course almost all of that decline has happened since the Federal Reserve was created in 1913.

Because the money supply is designed to expand constantly, it is guaranteed that all of our dollars will constantly lose value.
Inflation is a “hidden tax” that continually robs us all of our wealth. The Federal Reserve always says that it is “committed” to controlling inflation, but that never seems to work out so well.

And current Federal Reserve Chairman Ben Bernanke says that it is actually a good thing to have a little bit of inflation. He plans to try to keep the inflation rate at about 2 percent in the coming years.

So what is so bad about 2 percent? That doesn’t sound so bad, does it?

Well, just consider the following excerpt from a recent Forbes article….

The Federal Reserve Open Market Committee (FOMC) has made it official: After its latest two day meeting, it announced its goal to devalue the dollar by 33% over the next 20 years. The debauch of the dollar will be even greater if the Fed exceeds its goal of a 2 percent per year increase in the price level.

 
#4 The Federal Reserve Can Bail Out Whoever It Wants To With No Accountability


The American people got so upset about the bailouts that Congress gave to the Wall Street banks and to the big automakers, but did you know that the biggest bailouts of all were given out by the Federal Reserve?

Thanks to a very limited audit of the Federal Reserve that Congress approved a while back, we learned that the Fed made trillions of dollars in secret bailout loans to the big Wall Street banks during the last financial crisis. They even secretly loaned out hundreds of billions of dollars to foreign banks.
 

According to the results of the limited Fed audit mentioned above, a total of $16.1 trillion in secret loans were made by the Federal Reserve between December 1, 2007 and July 21, 2010.
 
The following is a list of loan recipients that was taken directly from page 131 of the audit report….
 
Citigroup – $2.513 trillion
Morgan Stanley – $2.041 trillion
Merrill Lynch – $1.949 trillion
Bank of America – $1.344 trillion
Barclays PLC – $868 billion
Bear Sterns – $853 billion
Goldman Sachs – $814 billion
Royal Bank of Scotland – $541 billion
JP Morgan Chase – $391 billion
Deutsche Bank – $354 billion
UBS – $287 billion
Credit Suisse – $262 billion
Lehman Brothers – $183 billion
Bank of Scotland – $181 billion
BNP Paribas – $175 billion
Wells Fargo – $159 billion
Dexia – $159 billion
Wachovia – $142 billion
Dresdner Bank – $135 billion
Societe Generale – $124 billion
“All Other Borrowers” – $2.639 trillion
 
So why haven’t we heard more about this?
 
This is scandalous.
In addition, it turns out that the Fed paid enormous sums of money to the big Wall Street banks to help “administer” these nearly interest-free loans….

Not only did the Federal Reserve give 16.1 trillion dollars in nearly interest-free loans to the “too big to fail” banks, the Fed also paid them over 600 million dollars to help run the emergency lending program. According to the GAO, the Federal Reserve shelled out an astounding $659.4 million in “fees” to the very financial institutions which caused the financial crisis in the first place.

 
Does reading that make you angry?
 
It should.
 
#5 The Federal Reserve Is Paying Banks Not To Lend Money


Did you know that the Federal Reserve is actually paying banks not to make loans?
It is true.
 
Section 128 of the Emergency Economic Stabilization Act of 2008 allows the Federal Reserve to pay interest on “excess reserves” that U.S. banks park at the Fed.
 
So the banks can just send their cash to the Fed and watch the money come rolling in risk-free.
 
So are many banks taking advantage of this?
 
You tell me. Just check out the chart below. The amount of “excess reserves” parked at the Fed has gone from nearly nothing to about 1.5 trillion dollars since 2008….

 
But shouldn’t the banks be lending the money to us so that we can start businesses and buy homes?
 
You would think that is how it is supposed to work.
 
Unfortunately, the Federal Reserve is not working for us.
 
The Federal Reserve is working for the big banks.
 
Sadly, most Americans have no idea what is going on.
 
Another example of this is the government debt carry trade.
 
Here is how it works. The Federal Reserve lends gigantic piles of nearly interest-free cash to the big Wall Street banks, and in turn those banks use the money to buy up huge amounts of government debt. Since the return on government debt is higher, the banks are able to make large profits very easily and with very little risk.
 
This scam was also explained in a recent article in the Guardian….

Consider this: we pretend that banks are private businesses that should be allowed to run their own affairs. But they are the biggest scroungers of public money of our time. Banks are lent vast sums of money by central banks at near-zero interest. They lend that money to us or back to the government at higher rates and rake in the difference by the billion. They don’t even have to make clever investments to make huge profits.

That is a pretty good little scam they have got going, wouldn’t you say?
 
#6 The Federal Reserve Creates Artificial Economic Bubbles That Are Extremely Damaging
 
By allowing a centralized authority such as the Federal Reserve to dictate interest rates, it creates an environment where financial bubbles can be created very easily.
Over the past several decades, we have seen bubble after bubble. Most of these have been the result of the Federal Reserve keeping interest rates artificially low. If the free market had been setting interest rates all this time, things would have never gotten so far out of hand.
 
For example, the housing crash would have never been so horrific if the Federal Reserve had not created such ideal conditions for a housing bubble in the first place. But we allow the Fed to continue to make the same mistakes.
 
Right now, the Federal Reserve continues to set interest rates much, much lower than they should be. This is causing a tremendous misallocation of economic resources, and there will be massive consequences for that down the line.
#7 The Federal Reserve System Is Dominated By The Big Wall Street Banks
 Even since it was created, the Federal Reserve system has been dominated by the big Wall Street banks.
The following is from a previous article that I did about the Fed….

The New York representative is the only permanent member of the Federal Open Market Committee, while other regional banks rotate in 2 and 3 year intervals. The former head of the New York Fed, Timothy Geithner, is now U.S. Treasury Secretary. The truth is that the Federal Reserve Bank of New York has always been the most important of the regional Fed banks by far, and in turn the Federal Reserve Bank of New York has always been dominated by Wall Street and the major New York banks.

 
#8 It Is Not An Accident That We Saw The Personal Income Tax And The Federal Reserve System Both Come Into Existence In 1913
 On February 3rd, 1913 the 16th Amendment to the U.S. Constitution was ratified. Later that year, the United States Revenue Act of 1913 imposed a personal income tax on the American people and we have had one ever since.
 
Without a personal income tax, it is hard to have a central bank. It takes a lot of money to finance all of the government debt that a central banking system creates.
 
It is no accident that the 16th Amendment was ratified in 1913 and the Federal Reserve system was also created in 1913.
They have a symbiotic relationship and they are designed to work together.
We could fill Congress with people that are committed to ending this oppressive system, but so far we have chosen not to do that.
So our children and our grandchildren will face a lifetime of debt slavery because of us.
I am sure they will be thankful for that.
 
#9 The Current Federal Reserve Chairman, Ben Bernanke, Has A Nightmarish Track Record Of Incompetence
 
The mainstream media portrays Federal Reserve Chairman Ben Bernanke as a brilliant economist, but is that really the case?
Let’s go to the videotape.
The following is an extended excerpt from an article that I published previously….
———-
In 2005, Bernanke said that we shouldn’t worry because housing prices had never declined on a nationwide basis before and he said that he believed that the U.S. would continue to experience close to “full employment”….

“We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.”

In 2005, Bernanke also said that he believed that derivatives were perfectly safe and posed no danger to financial markets….

“With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.”

In 2006, Bernanke said that housing prices would probably keep rising….

“Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”

In 2007, Bernanke insisted that there was not a problem with subprime mortgages….

“At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.”

In 2008, Bernanke said that a recession was not coming….

“The Federal Reserve is not currently forecasting a recession.”

A few months before Fannie Mae and Freddie Mac collapsed, Bernanke insisted that they were totally secure….

“The GSEs are adequately capitalized. They are in no danger of failing.”

For many more examples that demonstrate the absolutely nightmarish track record of Federal Reserve Chairman Ben Bernanke, please see the following articles….
*”Say What? 30 Ben Bernanke Quotes That Are So Stupid That You Won’t Know Whether To Laugh Or Cry”
*”Is Ben Bernanke A Liar, A Lunatic Or Is He Just Completely And Totally Incompetent?”
But after being wrong over and over and over, Barack Obama still nominated Ben Bernanke for another term as Chairman of the Fed.
———-
 
#10 The Federal Reserve Has Become Way Too Powerful
 
The Federal Reserve is the most undemocratic institution in America.

The Federal Reserve has become so powerful that it is now known as “the fourth branch of government”, but there are less checks and balances on the Fed than there are on the other three branches.

The Federal Reserve runs the U.S. economy but it is not accountable to the American people. We can’t vote those that run the Fed out of office if we do not like what they do.

Yes, the president appoints those that run the Fed, but he also knows that if he does not tread lightly he won’t get the money from the big Wall Street banks that he needs for his next election.

Thankfully, there are a few members of Congress that are complaining about how much power the Fed has. For example, Ron

Paul once told MSNBC that he believes that the Federal Reserve is now actually more powerful than Congress…..

“The regulations should be on the Federal Reserve. We should have transparency of the Federal Reserve. They can create trillions of dollars to bail out their friends, and we don’t even have any transparency of this. They’re more powerful than the Congress.”

As members of Congress such as Ron Paul have started to shed some light on the activities of the Federal Reserve, that has caused many in the mainstream media to come to the defense of the Fed.

For example, a recent CNBC article entitled “If The Federal Reserve Is Abolished, What Then?” makes it sound like there is absolutely no other rational alternative to having the Federal Reserve run our economy.

But this is not what our founders intended.

The founders did not intend for a private banking cartel to issue our money and set our interest rates for us.

According to Article I, Section 8 of the U.S. Constitution, the U.S. Congress has been given the responsibility to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”.

So why is the Federal Reserve doing it?

But the CNBC article mentioned above makes it sound like the sky would fall if control of the currency was handed back over to the American people.

At one point, the article asks the following question….

“How would the U.S. economy then function? Something has to take its place, right?”

No, the truth is that we don’t need anyone to “manage” our economy.
The U.S. Treasury could be in charge of issuing our currency and the free market could set our interest rates.

We don’t need to have a centrally-planned economy.

We aren’t China.

And it goes against everything that our founders believed to be running up so much government debt.

For example, Thomas Jefferson once declared that if he could add just one more amendment to the U.S. Constitution it would be a ban on all government borrowing….

I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on that alone for the reduction of the administration of our government to the genuine principles of its Constitution; I mean an additional article, taking from the federal government the power of borrowing.

Oh, how things would have been different if we had only listened to Thomas Jefferson.
Please share this article with as many people as you can. These are things that every American should know about the Federal Reserve, and we need to educate the American people about the Fed while there is still time.

About The Author – Michael Snyder is the founder and editor of The Economic Collapse

The views and opinions expressed herein are the author’s own, and do not necessarily reflect those of EconMatters.

Tags: American People, Banks, Bloomberg, Cartel, Cnbc, Congress, Currency, Economy, Election Year, Federal Government, Federal Money, Federal Reserve, Federal Reserve System, Feet, Government Agency, interest rates, Michael Snyder, Money Supply, Political Parties, Private Banking, Truth
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The Great Deleveraging Myth

Tuesday, January 17th, 2012

There’s been talk in the blogosphere lately about whether or not developed economies are deleveraging, i.e. winding down their debt.

Some recent posts, under headlines such as “The Age Of Consumer Deleveraging Is Over” and “Deleveraging is So 2011,” have argued that at least in the United States, consumer deleveraging appears to be a thing of the past.

My take, however, is that in many sectors of the US economy, deleveraging hasn’t happened at all. In fact, the notion that the United States is deleveraging is mostly a myth.

Now to be fair, deleveraging has occurred in at least one sector of the economy: The US financial sector, which has significantly reduced its debt. But once you move outside of the financial sector to the real economy — households, corporations and government — the great deleveraging idea evaporates.

The dirty little secret is that US non-financial debt rose by more than $5 trillion from the end of 2007 through the third-quarter of 2011. In the last year alone, the real economy has added roughly $1.4 trillion in debt to the overall US non-financial total.

It’s true that US household debt has contracted in recent years, but the contraction has been modest and is mostly due to bank write-offs. Since a debt peak in early 2008, US households have shed roughly $800 billion in debt. And as pointed out by the blog posts cited above, new US consumer credit numbers show increasing consumer debt.

At the same time, corporate debt has been rising as companies take advantage of record low yields. Since 2008, corporations have added approximately $500 billion in debt to their balance sheets.

This half-trillion increase, however, pales in comparison to the debt binge of the federal government. Publically traded or net federal debt has risen by more than $5 trillion since late 2007. As you can see in the chart below, this puts overall US non-financial debt at a bit under $38 trillion (for the purists, this arguably understates the total by $5 trillion as it ignores government debt held by the Social Security Trust Fund).

In short, it’s hard to argue that the US economy has deleveraged. Since 2009 the US debt burden has been relatively stable when compared to GDP. Essentially, nominal private sector debt has stabilized, while public sector debt has skyrocketed in an attempt to ease a collapse in consumption.

As I’ve mentioned before, this can continue for a while longer. In a world in which investors are short of safe investments, most are still willing to give the benefit of the doubt to the US government and lend long for the privilege of a safe place to park their money.

But for those who believe that debt levels are still unsustainably high — as I do — there does eventually need to be a reckoning. When this eventually happens, lending to the government for 2% may no longer seem like a safe haven.

Source: Bloomberg

Tags: Balance Sheets, Binge, Blogosphere, Consumer Credit, Consumer Debt, Contraction, Corporate Debt, Corporations, Credit Numbers, Dirty Little Secret, Federal Debt, Federal Government, Financial Debt, Financial Sector, Household Debt, Households, Myth, Notion, Purists, Tota, Trillion
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Increase in the Fed’s balance sheet – let’s be objective

Tuesday, July 7th, 2009

This post is a guest contribution by Paul Kasriel* of The Northern Trust Company.

In recent weeks two prominent economic commentators – Arthur Laffer and Alan Greenspan – have warned about the inflationary potential emanating from the unprecedented increase in the Fed’s balance sheet. Yes, as shown in Chart 1, reserves created by the Fed have increased by a staggering $858 billion in the 12 months ended May. But excess reserves on the books of depository institutions have increased by almost as much, $842 billion (see Chart 2). So, in the 12 months ended May, 98% of the increase in reserves created by the Fed has simply ended up as idle reserves on the books of depository institutions.

Yes, the bulk of the reserves the Fed has created are sitting idly on the books of depository institutions for now, but what if these institutions begin to lend them out in the future? Will this not result in an explosion of bank credit and the money supply, the raw ingredients of accelerating inflation – some might say the very definition of accelerating inflation? Why, yes, if the Fed were stand idly by.

If, however, the Fed wished to “neutralize” these excess reserves, it has the means to do so. The Fed now pays interest on reserves. If it observed an undesired “activation” of these hundreds of billions of dollars of excess reserves, it could hike the interest rate paid on excess reserves. Why would depository institutions lend more at the same loan rate when the risk-free rate they could earn from the Fed on excess reserves had risen?

They would not. So, the increase in the rate paid by the Fed on excess reserves would induce depository institutions to hike the interest rates charged on loans. All else the same, the quantity of credit demanded by the public would decrease and, therefore, bank credit and the money supply would not increase.

But what about the federal government? Its demand for credit is not sensitive to the level of interest rates. Yes, but the Fed could continue to raise the rate it pays on reserves until the quantity of credit demanded by the private sector falls sufficiently to offset the increased demand for credit by the federal government. But might this imply a substantial increase in interest rates? Yes, it might, depending on the sensitivity of private-sector credit demand and the amount of borrowing by the federal government.

Would not this “crowding out” of private sector borrowing by federal government borrowing be a negative for future productivity and economic growth? Yes. But that’s a different issue. The point I am attempting to make in this commentary is that the increase in the Fed’s balance sheet in the past year is not currently inflationary and need not lead to higher future inflation. Whether the Fed has the will or the skill to prevent the current increase in its balance sheet from manifesting itself in future higher inflation also is a different issue.

Source: Paul Kasriel, Northern Trust – Daily Global Commentary, June 29, 2009.

*Paul Kasriel is Senior Vice President and Director of Economic Research at The Northern Trust Company. The accuracy of the Economic Research Department’s forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul’s 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst.

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Tags: Alan Greenspan, Arthur Laffer, Balance Sheet, Billions Of Dollars, Depository Institutions, Economic Commentators, Excess Reserves, Explosion, Federal Government, inflation, Interest Rate, interest rates, Loan Rate, Loans, Money Supply, Northern Trust Company, Paul Kasriel, Raw Ingredients, Unprecedented Increase
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Words from the (investment) wise for the week that was (February 2 – 8, 2009)

Sunday, February 8th, 2009

Global stock markets shrugged off dire news on the US employment front, arguing that the gloomy data would hasten US lawmakers’ passage of a stimulus package. After falling for four straight weeks and recording the worst performance of the major US indices for January on record, Wall Street reversed course on the back of a stimulus-induced rally.

The US government seems on track to announce two new recovery plans next week. Firstly, Senate Democrats reached an agreement with Republican moderates on Friday regarding a fiscal stimulus package. The deal, in essence, entails about $110 billion in cuts to the roughly $900 billion legislation, according to The New York Times. Secondly, a rescue plan to inject billions of dollars into banks and entice investors to purchase toxic assets will be outlined on Monday by Treasury Secretary Timothy Geithner.

As investors’ risk appetite returned, the MSCI World Index and the MSCI Emerging Markets Index chalked up decent gains of 3.8% (YTD -5.4%) and 5.3% (YTD -1.7%) respectively. Among exchange-traded fund (ETFs), sector leaders were China (see additional comments below), Brazil and South Korea – all recording double-digit gains, according to John Nyaradi (Wall Street Sector Selector).

All the major US indices revved higher, as seen from the week’s movements: Dow Jones Industrial Index + 3.5% (YTD -5.6%), S&P 500 Index + 5.2% (YTD -3.8%), Nasdaq Composite Index +7.8% (YTD +0.9%) and Russell 2000 Index +6.1% (YTD -5.8%). Interestingly, the Nasdaq has been outperforming the Dow and S&P 500 since the beginning of December. Leadership by the technology sector is often good for the market as a whole.

Recent safe-haven trades such as US Treasuries (-0.7% in the case of 30-year bonds), the US dollar (-0.6%) and gold (-1.5%) took a back seat, as investors favored equities and commodities such as copper (+4.9%) and aluminum (+7.7%).

While pundits were speculating about when the Federal Reserve would enter the market as a buyer of US government bonds, Treasuries sold off as a large issuance of sovereign debt looms. However, German bonds gained handsomely on the perception that the European Central Bank was behind the curve with interest rate cuts against the backdrop of poor economic data.

The performance of the major asset classes is summarized by the chart below, courtesy of StockCharts.com.

Giving a glimmer of hope, the Baltic Dry Index (BDI) – measuring freight rates for iron ore and other bulk goods – jumped by 40% last week due to increased Chinese demand for iron ore. The Index has gained 125% over the past two months after plunging by 94% since its May high. The chart below illustrates the close relationship between the BDI (red line) and Reuters/Jeffries CRB Index (green line). (Not shown, the trends of the BDI and US Treasury yields also follow more or less the same path.)

As reported in my “Credit Crisis Watch” review of a few days ago, the past few months saw progress on the credit front, with a number of spreads having peaked. The TED spread, LIBOR-OIS spread and GSE mortgage spreads have all narrowed markedly since the record highs. Corporate bonds have also seen a strong improvement, but high-yield spreads remain at distressed levels. The tide seems to be turning, but the thawing of the credit markets still has some way to go before liquidity starts to move freely and confidence returns to the world’s financial system again.

Speaking of confidence, Montek Ahluwalia, deputy chairman of India’s planning commission, made the following remark at the recent Davos Forum: “Confidence grows at the rate a coconut tree grows. It falls at the rate a coconut falls.”

Back to the planned US rescue packages, and specifically Bill King’s comments: “The main problem plaguing the US economy is too much debt has been accumulated on gratuitous spending and the papering over of declining US living standards. Solons espouse a monstrous surge in debt to fund even more consumer spending. The toxin is not the cure. Inducements to save and invest in production are the remedy. But the welfare state and its ruling class are trying a last grandiose socialist [Keynesian] binge in the hope of salvaging their realm.”

Next, a tag cloud of my week’s reading. This is a way of visualizing word frequencies at a glance. Key words such as “bank”, “economy” and “market” dominated the list, whereas “China” seems to be gaining more prominence.

Stock markets have been in a “holding pattern”, or trading range, since the beginning of December. Key resistance and support levels for the major US indices are shown in the table below. The immediate upside target is the 50-day moving average (the Nasdaq and Russell 2000 are already above this line), followed by the early January highs. On the downside, the December 1 and all-important November 20 lows must hold in order to prevent considerable technical damage.

Here is Richard Russell’s (Dow Theory Letters) interpretation of the situation: “Frankly, I’m very impressed by the stubborn and continuing resistance of the DJ Industrial Average. I don’t think many analysts realize the extreme importance of the Industrial’s steady refusal to violate its November 20 low. The action of the Dow contains the answer to the trillion-dollar question – ‘Is the bear market in a halting process – or will the stock market signal a continuation of the primary bear market?’

“So here we are – at a crossroads to history. The market will issue its verdict when, and only when, it is ready. But for now – if there’s anything traders love, it’s a market rising in the face of lousy news.

“An optimistic outcome would be a continued refusal by the Industrials to close below 7,552. An obviously more bullish outcome would be the DJ Industrial Average and the DJ Transportation Average continuing to rally and ultimately (both Averages) bettering their early-January peaks.

“Clearly, the most bearish outcome would be the Industrials finally breaking below the November 20 low and thereby confirming that we are still locked in a continuing primary bear market.”

From across the pond in London, David Fuller (Fullermoney) said: “… there is a scenario which few other people are taking about. As part of our often-mentioned forecast for a ranging, reversion to the mean recovery rally first hypothesized in late October, there is a possibility that stock markets will do surprisingly well in the next few weeks. Strong rallies would eventually leave markets susceptible to partial pullbacks, including some right-hand base formation extension.

“How could strong rallies possibly occur when everyone is talking about depression? The answers can be found in sentiment and liquidity. Today, most people are either incredibly bearish or despondent, but extreme forecasts are seldom accurate, as I have mentioned before. However, there is plenty of liquidity in many portfolios and governments have significantly increased money supply in recent months. A rising stock market would force a reappraisal by bears, leading to a reversal of short positions, while long-only investors put more of their cash back into the stock market.”

My view is that stock markets, in general, are still caught between the actions of central banks furiously fending off a total economic meltdown on the one hand, and a grim economic and corporate picture on the other. While we figure out whether we are in a normal bounce or witnessing the start of something bigger, I am not averse to selective stock picking – picking out the choice morsels, so to speak.

As far as specific countries are concerned, I alluded to the Year of the Ox in my “Performance Round-up” of last week and mentioned that this is regarded as a sign of prosperity that has been very rewarding in the history of China. And what a start to the year it has been with the Shanghai Composite Index gaining 9.6% during the past week.

The chart pattern (see graph below) shows arguably one of the best base formations of the major stock market indices, followed by Friday’s breakout. Although the Index is still down by 64.2% since its high of October 16, 2007, it has moved to the top slot among global stock market performances for the year to date with returns of +19.8% (local currency) and +19.4% (US dollar terms).

For more discussion about the direction of stock markets, also see my post “Video-o-rama: Stimulus ad nauseum“.

Economy
“Global businesses remain very pessimistic. Sentiment is dark across the globe. Those that work in government are most worried, followed by businesses in financial and business services,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “Pricing power has sharply eroded, suggesting that deflation is increasingly likely. The only silver lining is that business confidence has not declined further since hitting bottom in mid-December.”

The latest US economic reports were less grim in some instances than in previous reports, with a few indicators showing that the pace of decline could be slowing down. This view is shared by Nouriel Roubini (RGE Monitor) who wrote in Forbes: “In the US … the second derivative of growth and of other economic indicators is approaching positive territory (i.e. growth is still negative, but GDP may be falling at a slowing rate).”

A snapshot of the week’s US economic data is provided below. (Click on the dates to see Northern Trust’s assessment of the various reports.)

Friday, February 6
- Employment Report: Severity of weakness will stimulate votes for fiscal stimulus under consideration

Thursday, February 5
- Initial Claims: Labor market situation is dismal
- Productivity: Advanced in fourth quarter
- Factory Orders: Inventories/shipments ratio keeps advancing

Tuesday, February 4
- ISM Non-Manufacturing Survey: Pace of deceleration is slowing

Monday, February 2
- Senior Loan Officer Survey: Includes positive aspects
- Consumer Spending: Significant reduction
- ISM Manufacturing Survey: Positive news, but more is necessary
- Construction Spending: Remains week

BCA Research added: “In nominal terms, consumer spending declined at an annualized pace of 11% in the three months to December – the largest contraction since the 1930s. For most consumers and companies it is the trend in nominal dollars that matters, not the statistical artifact of ‘real’ dollars, measured in the national accounts. The need for dramatic stimulus is obvious: declining nominal activity points to a deepening financial crisis.”

Elsewhere in the world, the Bank of England (BoE) slashed its key repo rate by 50 basis points to 1.0% (the lowest level since the BoE was formed in 1694), whereas the Reserve Bank of Australia (RBA) cut its cash rate by 100 basis points to 3.25% (the lowest level in two decades). As expected, the European Central Bank (ECB) maintained its key policy rate at 2%, but will in all likelihood reduce the rate further in coming months as economic indicators show the Eurozone still contracting and inflationary pressures easing.

Further afield, the International Monetary Fund halved its 2009 growth forecast for Asia from 4.9% to 2.7%. “Clearly the hopes that Asia would experience a mild downturn while the global economy retrenched have now been firmly dismissed,” said Glenn Maguire, Asia chief economist at Société Générale, in the Financial Times.

Japan, according to Roubini, is entering another severe slump, one that looks worse than that of other advanced economies, and the fall is still accelerating, resembling a severe case of stag-deflation.

More dire news came from the Russian economics ministry, forecasting the economy’s slide into recession in 2009. GDP growth is forecast to be -0.2% this year compared with 5.6% in 2008. Meanwhile, the ruble has slumped by 35% against the US dollar since August to its weakest level in 11 years. Concerns about the downgrading of the country’s credit rating and a $200 billion reduction of its currency stockpile weighed on sentiment.

On a more positive note, strong Chinese bank lending and manufacturing data provided signs that the government’s attempts to spend its way out of the economic slowdown are starting to show results. China may also consider tapping into its $1.95 trillion foreign reserves to help boost demand. With domestic government debt only 16.2% of GDP, the country is in a better position to do so than most major economies, according to US Global Investors.

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Source: Yahoo Finance, February 6, 2009.

In addition to Fed Chairman Bernanke’s testimony on the Central Bank’s lending programs in Washington (Tuesday, February 10), the US economic highlights for the week include the following: Wholesale Inventories on Tuesday, the Trade Balance and Treasury Budget on Wednesday, Initial Jobless Claims, Retail Sales and Business Inventories on Thursday, and Michigan Sentiment on Friday.

Click here for a summary of Wachovia’s weekly economic and financial commentary.

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.

Source: Wall Street Journal Online, February 6, 2009.

In a world faced with untold uncertainty, my concluding thought today is borrowed from Briefing.com, saying that the situation reminds them of a scene in the Oscar-winning movie Terms of Endearment where Shirley MacLaine’s character is confronted with news from a doctor that her daughter has a malignant tumor. Upon hearing this, she asks what she should do. The doctor responds that she tells family members “to hope for the best, but prepare for the worst”. To this McClain’s character responds, “And they let you get away with that?” Don’t we all feel like the doctor these days?

My bags are packed and I am ready to make my way to the airport for a ten-day visit to Europe (Dublin, London, Geneva and Ljubljana). For those not familiar with Ljubljana, it is the charming capital of Slovenia – a country situated in the heart of Central Europe (see my post “Slovenia – the best-kept secret of Central Europe“). And this country will in future be playing a very special role in my life as I have just been appointed as its Honorary Consul for South Africa. And so begins my career as a part-time diplomat …

That’s the way it looks from Cape Town.

Richard Russell (Dow Theory Letters): Survival plan for unprecedented situation
“Don’t be married to any specific scenario. Anything may happen in response to the current situation. Follow the market – the market will know what’s happening before anyone else.

“The best survival plan is to be diversified. Nobody knows who or what will be ‘the last investment standing’. Will it be Treasury paper, high-grade bonds, real estate, diamonds, T-bills, cash, top-grade corporate stocks or gold?

“T-bills are the choice of many sophisticated investors. But T-bills are denominated in dollars, and dollars are vulnerable as are bonds or any other items denominated in Federal Reserve notes (‘dollars’).

“Real estate and diamonds represent intrinsic wealth, although they are not instantly liquid, meaning that they cannot be instantly turned into cash.

“Gold has been accepted as wealth for thousands of years. When all other forms of supposed wealth crashes (deflates) or becomes suspect, the last wealth asset to stand will be gold. Gold has no counter-party nor has it any debt aligned against it. Gold needs no central bank to ensure its acceptance. Gold is accepted everywhere and in any quantity as a form of indestructible, eternal wealth.

“Today, investment money is so suspicious of the viability of any given asset that they are placing their money in an item that bears the full faith and credit of the US government – I’m referring to Treasury paper. Actually, one major worry with T-bills is a possible collapse of the dollar.

“The following are my suggestions as to where an investor might place his money.

“AIG bonds (the government has bought the preferred stock of AIG, and the bonds should rate higher). Invest with the government.

“PHK – the high-yield fund run by PIMCO – speculative, but an interesting fund that’s 60% in investment-grade bonds.

“CD’s that are backed by the FDIC up to $250,000.

“Gold (GLD or CEF) or actual gold coins if possible.”

Source: Richard Russell, Dow Theory Letters, February 3, 2009.

The New York Times: Senators reach accord on stimulus plan
“Senate Democrats reached an agreement with Republican moderates on Friday to pare a huge economic recovery measure, clearing the way for approval of a package that President Obama said was urgently needed in light of mounting job losses.

“The deal, announced on the Senate floor, was a result of two days of tense negotiations and political theater. Mr. Obama dispatched his chief of staff to Capitol Hill to help conclude the talks and reassure senators in his own party, and he called three key Republicans to applaud them for their patriotism.

“The fine print was not immediately available, and the numbers were shifting. But in essence, the Democratic leadership and two centrist Republicans announced they had struck a deal on about $110 billion in cuts to the roughly $900 billion legislation – a deal expected to provide at least the 60 votes needed to send the bill out of the Senate and into negotiations with the House, which has passed its own version.

“The pact, which is expected to be approved in the next few days, was concluded just hours after the Labor Department announced that 598,000 jobs were lost in January.

“As the negotiations were under way, lawmakers said it was time to stop quibbling about the exact parameters of the legislation – which mixes safety-net spending, tax cuts and a huge infusion of dollars into federal programs – and to begin work toward a final agreement that could be sent to Mr. Obama next week.”

Source: Carl Hulse and David Herszenhorn, The New York Times, February 6, 2009.

CEP News: President Obama says US must avoid a “trade war”
“US President Barack Obama signalled on Tuesday that a controversial ‘Buy American’ provision in his stimulus bill would be reviewed in order to prevent a global trade war.

“In an ABC news interview on Tuesday, Obama said that any clause in the stimulus bill being considered by US lawmakers that would violate World Trade Organization agreements and signal protectionism would be a ‘mistake right now’.

“‘That is a potential source of trade wars that we can’t afford at a time when trade is sinking all across the globe,’ he said. ‘We need to make sure that any provisions that are in there are not going to trigger a trade war.’

“Obama’s comments come following a chorus of criticism from leaders around the world who object to a proposed ‘Buy American’ clause in the stimulus bill that would require infrastructure projects to use only manufactured goods made in the United States.

“Canada’s Ambassador to the United States, Michael Wilson, warned earlier in the day that such a policy could spark a global trade retaliation.

“‘A rush of protectionist actions could create a downward spiral like the world experienced in the 1930s,’ Wilson wrote in a letter to Republican and Democratic Senate leaders.”

Source: CEP News, February 3, 2009.

Bloomberg: Faber – US stimulus may lead to “dire consequences”
“Marc Faber, publisher of the ‘Gloom, Boom & Doom Report’, talks with Bloomberg’s Carol Massar about the prospects for a US economic stimulus package. Faber, speaking from Hong Kong, also discusses gold prices, the appeal of US technology stocks and the outlook for the banking industry.”

Source: Bloomberg, February 6, 2009.

Yahoo Finance: Peter Schiff – stimulus bill will lead to “unmitigated disaster”
“The fiscal stimulus bill being debated in Congress not only won’t help the economy, it will make the recession much worse, says Peter Schiff, president of Euro Pacific Capital.

“Schiff scoffs at the notion the economic decline is starting to level off and concedes no government action means a ‘terrible’ recession. But the path of increased government intervention will lead to ‘unmitigated disaster’, says Schiff, who gained notoriety in 2007-08 for his prescient calls on the housing bubble and US stocks.

“The problem, he says, is the government is trying to perpetuate a ‘phony economy’ based on borrowing and spending. With the US consumer tapped out, the government is ‘now taking on the mantle’ of consumer of last resort, he continues, predicting the bond bubble will soon burst – if it hasn’t already – ultimately leading to a collapse of the dollar and an ‘inflationary depression worse than anything any of us have ever seen’.

“If nothing else, Schiff is a nonpartisan critic of American policymakers, comparing President Bush to Herbert Hoover and President Obama to FDR, and neither in a favorable way.”

Source: Aaron Task, Yahoo Finance, February 6, 2009.

Bloomberg: Gross says trillions needed to avoid “mini-depression”
“Bill Gross, co-chief investment officer of Pacific Investment Management Co., talks with Bloomberg’s Kathleen Hays about the need for a US stimulus package. Gross, speaking in Newport Beach, California, also discusses his bond picks.”

Source: Bloomberg, February 5, 2009.

Bloomberg: Volcker urges more transparency in hedge funds

Source: Bloomberg (via YouTube), February 5, 2009.

The New York Times: New plan to help banks sell bad assets
“After weeks of internal debate, the Obama administration has settled on a plan to inject billions of dollars in fresh capital into banks and entice investors to purchase their most troubled assets.

“The new financial industry rescue plan, to be outlined in broad terms on Monday in a speech by the Treasury secretary, Timothy F. Geithner, will not require banks to increase their lending. That is despite criticism that institutions that already received money from the Troubled Asset Relief Program, or TARP, either hoarded it or used the funds to acquire other banks.

“The incentives to investors could be in the form of commitments to absorb some of the losses from any assets they purchase, should their values continue to decline. The goal is to relieve the banks of their worst assets so that private investors might then provide more capital.

“Officials hope that part of the plan is not labeled a ‘bad bank’ administered by the government, although they expect that some might call it that.

“No matter what it is called, the government would assume some of the risk of declining assets at the heart of the economic crisis. But by relying on a combination of private investors and government guarantees, the administration hopes to reduce its exposure to losses and avoid the problem of having to place a value on assets that the institutions have been unable to sell.

“A central element of the plan would be a major expansion of a lending facility begun in November by the Federal Reserve Bank of New York when it was headed by Mr. Geithner. The program, which was initially financed by $200 billion in Fed money and $20 billion in seed capital from the $700 billion bailout fund, lent money to investors to buy securities backed by student, auto and credit card loans, as well as loans guaranteed by the Small Business Administration.”

Source: Stephen Labaton, The New York Times, February 6, 2009.

Bill Gross: Stop the decline in asset prices
“The current financial and economic crisis is difficult to appreciate, not only for the drop in elevation, but because of the swiftness of the declines. It’s been a Wile E. Coyote 12 months – straight down like a dead weight.

“A year ago, global equity prices were nearly twice today’s levels and recession was only a whisper on the lips of the gloomiest of economists. Today, descriptions drawing parallels to the Great Depression make it obvious that a major shift in economic growth and its historic financial model, as well as policy prescriptions for its revival, are underway. Most of the world’s connected economies and its citizens are in shock, conscious but not fully aware of the seismic shifts that will unfold in future years.

“PIMCO’s thesis for several years has held that the levered global economy long ago morphed from a banking-dominated regime to one that hid behind securitized lending and structures resembling a ‘shadow banking’ system. SIVs, hedge funds, CDOs and increasingly levered mortgage and investment banks fueled asset appreciation in all investment markets, which in turn propelled real economic growth and employment to unsustainable levels.

“But, with the US housing prices as its trigger, the deleveraging process did a Wile E. Coyote and headed over the cliff in mid-year 2007, dragging down almost all asset prices except government bonds. The real economy followed shortly thereafter, not just in the US, but globally, proving that linkages work on the ‘down’ as well as the upside.

“To PIMCO, the remedy for this deflationary deleveraging and mini-depression is simple and almost axiomatic: stop the decline in asset prices. If that can be done, the real economy will level out as well. When home prices stop going down, newly created households will be more willing to take a chance on ownership as opposed to renting. If stock prices consolidate, recently burned investors will be more willing to invest, as opposed to stuffing their 401(k) mattresses with Treasury bills. Business investment, jobs, and profits should follow quickly behind.”

Source: Bill Gross, Pimco – Investment Outlook, February 2009.

Edmund Conway (Telegraph): Recession – glimmers of hope?
“The pace of economic decline is slowing. Housing sales are picking up, even if prices are falling. Credit markets have begun to thaw.

“This is the time-honoured pattern you expect to see when the downward spiral burns itself out and the cycle slowly starts to turn, helped this time by an unprecedented global monetary and fiscal blitz. But it may equally be a false dawn.

“The Baltic Dry Index measuring freight rates for iron ore and other bulk goods has been creeping up for two months after crashing 94% in the worst fall in shipping history. Copper prices are also edging up after plunging by two-thirds from their June peak. So are lumber prices.

“The debt markets have opened like a flower in spring, at least in one sense. Companies issued $246 billion in bonds in January, the most since the credit crisis began. Blue-chip groups can borrow again.

“‘The mood is upbeat. There are swathes of cash pouring back into credit,’ said Suki Mann, a credit strategist at Société Générale. ‘The market closed down after the Lehmans collapse so there was a lot of pent-up demand, but they are having to pay materially higher spreads than pre-Lehmans.’

“So far this has not helped the rest of the corporate universe. Average yields on BBB-rated debt are a prohibitive 19.6%. ‘The market is absolutely closed. There is no trickle-down yet,’ he said.

“The interbank freeze has started to thaw, again in one sense. David Buik, from BGC Partners, said interest spreads on three-month dollar Libor have come down to 1% from the extremes above 2% at the height of the panic. ‘The cost of money is coming down, but the banks are still not lending to each other. It’s virtually moribund,’ he said.

“The US Federal Reserve’s loan survey this week showed that lending is again picking up, albeit tentatively. The number of banks expecting to tighten credit has fallen from 80% in the autumn to nearer 60%, the lowest in a year.”

Click here for the full article.

Source: Ambrose Evans-Pritchard, Telegraph, February 5, 2009.

Bloomberg: Roubini says ECB “wrong”, rate cuts too little, too late
“Nouriel Roubini, professor at New York University’s Stern School of Business, talks with Bloomberg’s Ellen Pinchuk about the global economy and European Central Bank monetary policy.”

Source: Bloomberg, February 4, 2009.

European Commission: Escalating public debt

Hap tip: Phil’s Stock World.

Financial Times: IMF cuts forecast for Asian growth
“The scale of the economic slowdown in Asia was starkly underlined on Tuesday when the International Monetary Fund virtually halved its 2009 growth forecast for the region.

“The IMF slashed its forecast to 2.7% from an estimate of 4.9% made only two months ago. The move came as both Australia and Japan announced new measures to sustain their flagging economies.

“In Australia, the government unveiled a A$42 billion ($26.5 billion) fiscal stimulus and the central bank cut interest rates to 3.25%, the lowest level since the 1960s. In Tokyo, the Bank of Japan unveiled a plan to spend up to Y1,000bn ($11.2 billion) to buy shares owned by banks amid growing concerns over the impact of falling stock prices on the financial system.

“‘Clearly the hopes that Asia would experience a mild downturn while the global economy retrenched have now been firmly dismissed,’ said Glenn Maguire, Asia chief economist at Société Générale.

“‘There is a clear realisation that this is going to be a major economic readjustment and economies that are most leveraged to the global trade cycle will be most affected.’”

Source: Raphael Minder and Christian Oliver, Financial Times, February 3, 2009.

CEP News: Obama unveils economic recovery advisory board
“US President Barack Obama unveiled a new advisory board consisting of former government officials, union members and executives from some of the country’s largest firms who will provide guidance on how the US should respond to the economic crisis.

“The Economic Recovery Advisory Board will be led by former Fed Chairman Paul Volcker, Obama announced.

“The members will include: former Securities and Exchange Commission Chairman William Donaldson, former Fed Vice-Chairman Roger Ferguson, UBS Americas CEO Robert Wolf, GE CEO Jeffrey Immelt, Yale University’s CIO David Swensen, Caterpillar CEO Jim Owens, and Service Employees International Union Secretary-Treasurer Anna Burger.
“If the US government does not act soon, the US economy will continue to lose jobs and the downturn will accelerate, Obama said as he unveiled the board on Friday.”

Source: CEP News, February 6, 2009.

CEP News: Citigroup unveils plans to lend $36.5 billion
“In an effort to pass the benefits of the TARP onto the real economy, Citigroup unveiled plans to spend $36.5 billion in a series of new initiatives to spur credit card, mortgage and other consumer and business lending operations.

“The aims of the initiatives are, ‘to help expand available credit for consumers and businesses; restore liquidity and stability to the capital markets; and support the recovery of the US economy’, according to a new quarterly publication from Citigroup detailing how it plans to spend part of the $45 billion it borrowed from the US Treasury’s Troubled Asset Relief Program.

“The firm plans to make $25.7 billion in direct loans available to homebuyers and support the mortgage-backed securities market, spend $2.5 billion in consumer and business loans, $1.0 billion for student loans, $5.9 billion in credit card lending and $1.5 billion in corporate lending activity.

“Citigroup also said it made $75 billion in loans in the fourth quarter and plans to continue its partnership with the government, ‘to increase available lending and liquidity in the US financial markets and to help put the US economy back on track,’ Citi Chief Executive Officer Vikram Pandit said.”

Source: Financial Times, February 3, 2009.

Bespoke: Cumulative job losses – getting worse with time
“While they say things get better with time, the jobs picture is at least one exception. Today’s release of monthly non-farm payrolls showed that employers cut 598K jobs during the month of January. As shown, the US economy has lost a total of 3.6 million jobs since the start of 2008 with the bulk of those declines (80%) coming during the last five months. While the magnitude of the decline in jobs has been large, the pace of downward revisions is making things even worse.

“In the chart below, we show the cumulative decline in monthly jobs using the reported figures on the day of the initial release as well as the most recently revised numbers. As shown, based on reported numbers, the US economy would have lost 2.48 million jobs since the start of 2008. However, once we take into account the negative revisions, the US economy has lost another 1.1 million jobs, representing a 44% increase in jobs lost.”

Source: Bespoke, February 6, 2009.

CNBC: El-Erian on the employment picture
“The big loss of jobs will push the Obama administration to do more, says Mohamed El-Erian, Pimco co-chief investment officer/co-CEO.”

Source: CNBC, February 6, 2009.

Asha Bangalore (Northern Trust): Significant reduction in consumer spending
“The reduction in consumer spending in the past few months is noteworthy not only because it has declined in six out of the last seven, but at the same time the savings rate has increased rapidly in an environment when income is not advancing rapidly.

“The significance of an appropriately targeted fiscal stimulus package is evident … In other words, external stimulation is necessary to offset the weakness in consumer spending because an endogenous increase is unlikely in the months ahead. A decline in consumer spending in the first quarter is nearly certain. Also, the decline will be hefty because the level of consumer spending in December was considerably large such that there is an arithmetical disadvantage also.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 2, 2009.

Asha Bangalore (Northern Trust): Factory sector – inventories/shipments ratio keeps advancing
“Factory orders fell 3.9% in December following a 6.5% drop in November, reflecting a reduction in orders of both durable (-3.0%) and non-durable goods (-4.8%). Inventories (-1.4%) and shipments (-2.9%) also declined in December.

“The most important aspect of the report is the inventories-shipments ratio which rose to 1.44 in December, up from 1.29 in September and 1.23 in December 2008. The upward trend of this ratio is consistent with the underlying weakness of the economy. The December reading is the highest since April 1996.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 5, 2009.

Asha Bangalore (Northern Trust): ISM Survey – positive news, but more is necessary
“The ISM manufacturing composite index rose to 35.6 in January from 32.9 in December. The level of the index remains below 50.0 signifying a contraction in factory activity. However, the gain of the index suggests that factory activity is contracting at a slower pace in January compared with December. This is positive news.

“Indexes tracking production, new orders, and new export orders moved up in January, the employment index held steady, inventories and supplier delivers moved down. The 10.1 point increase in the new orders index warrants watching because these large jumps are associated with the end of recessions. Additional improvement in the subsequent months will be necessary to confirm that a recovery is underway given that the composite index and sub-components are far below 50.0 still.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 2, 2009.

Asha Bangalore (Northern Trust): Second tier reports – ISM non-manufacturing survey, mortgage applications
“Second tier economic reports published today include mixed signals. The composite index of the ISM non-manufacturing survey results contained positive indications, while mortgage applications for purchase of homes fell.

“The ISM composite index of the non-manufacturing rose to 42.9 in January from 40.1 in the prior month. Although the level of the index continues to signal a contracting non-manufacturing sector, it is noteworthy because the increase suggests the pace of deceleration has slowed.

“Mortgage applications index for the purchase of homes dropped to 261.4 during the week ended January 30, the third weekly decline. The level of the index now matches the reading seen in the 2001 recession, excluding the November 2008 low.

“Although the Housing Affordability Index is at a record high, severely weak labor market conditions are holding back sales of homes.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 4, 2009.

Forbes: Roubini – is America going the way of Japan?
“William Pesek, a savvy Asia columnist for Bloomberg, reports, in his latest column, views about the structural crisis faced by Japan that I first outlined in a 1996 paper, ‘Japan’s Economic Crisis’. Thirteen years later, Japan is entering another severe slump, one that looks like even worse than that of other advanced economies. In the US, Europe and some other advanced economies, along with China, the second derivative of growth and of other economic indicators is approaching positive territory (i.e. growth is still negative, but GDP may be falling at a slowing rate). In Japan, it is still highly negative. There, the fall is accelerating, resembling a free fall – a severe case of stag-deflation.

“The sad case of Japan’s free fall is a cautionary tale of what happens when a high-flying economy has a real estate and equity bubble that goes bust, avoiding (for too long) doing the painful structural reforms and clean-up of the financial system that is necessary to avoid a lengthy, L-shaped near-depression. Japan had over a decade of stagnation and deflation, then a mild, sub-par growth recovery that lasted only three years, and is now spinning into another severe stag-deflation.

“Keep alive zombie banks and zombie corporations with balance sheets and debts that haven’t been restructured, as in Japan, and you end up in an L-shaped near-depression.

“Let me explain why the US and the global economy face the risk of an L-shaped near-depression if appropriate policy actions are not undertaken.”

Click here for the full article.

Source: Nouriel Roubini, Forbes, February 5, 2009.

BCA Research: The US economy is already in deflation
“The details of the fourth quarter US GDP data were terrible. GDP is declining in nominal terms and that is a better measure of deflation than a negative CPI rate.

“In real terms, the US economy contracted at a 3.8% annualized pace in 2008 Q4, the worst decline since 1982, but slightly better than many had expected. But the underlying picture provided no grounds for optimism. For most consumers and companies, it is the trend in nominal dollars that matters, not the statistical artifact of ‘real’ dollars, measured in the national accounts. In nominal terms, consumer spending declined at an annualized pace of 11% in the three months to December – the largest contraction since the 1930s.

“Meanwhile, total final sales to domestic purchasers also fell sharply in nominal terms in the fourth quarter. Deflation is not a risk, it is a reality. Demand, profits and asset prices are all contracting in nominal terms – which is more important than what the consumer price index is doing.

“In any case, the CPI is also in deflationary territory, down at a 13% annualized pace in the final three months of 2008. The need for dramatic stimulus is obvious: declining nominal activity points to a deepening financial crisis.”

Source: BCA Research, February 4, 2009.

CEP News: US home ownership rate falls to 7-year low
“The number of Americans who own their own home fell to a seven-year low in the fourth quarter of 2008 compared to a year ago, the Census Bureau reported Wednesday.

“The rate of home ownership fell to 67.5% in the fourth quarter, down from 67.8% during the same quarter a year ago. The report also said 2.9% of homes, excluding rental properties, were vacant and on the market, up slightly from 2.8% a year ago.

“Home ownership in the US peaked at a rate of 69.2% in 2004, at the height of the real estate boom.”

Source: CEP News, February 3, 2009.

Zillow: Americans lose $1.4 trillion in home values in Q4
“Home values in the United States fell for the eighth consecutive quarter, declining 11.6% during 2008 to a Zillow Home Value Index of $192,119, according to the fourth quarter Zillow Real Estate Market Reports, which encompass 161 metropolitan areas.

“The declines mean that US homeowners lost a cumulative $3.3 trillion in home values during 2008, with much of that loss coming in the fourth quarter.

“Homeowners lost $1.4 trillion during the fourth quarter alone; more than the $1.3 trillion lost during all of 2007. Since the housing market’s peak in 2006, $6.1 trillion in home values have been lost.

“Foreclosures made up nearly one in five (19.9%) of all transactions in 2008.”

Source: Zillow, February 3, 2009.

The New York Times: Rents are falling fast
“In this painful economic climate of layoffs and shrinking investments, there is a sliver of positive news: it’s a good time to be a renter in New York City. Prices are falling, primarily in Manhattan, and concessions like a month of free rent are widespread.

“Although it is notoriously difficult to quantify the state of the rental market, rents fell in almost every sector of the Manhattan market last year, according to the Real Estate Group, a New York brokerage. The steepest drop was in one-bedrooms, down 5.7% in buildings with doormen and 6.53% in buildings without. The only category that rose: rents for two-bedroom apartments in doorman buildings, up just a bit, by 0.61%.

“But these numbers, like most available data, represent asking rents rather than the final price. Anecdotal evidence suggests that some people are negotiating rents as much as 20% lower than the original prices asked by landlords. These figures also leave out incentives, like a month of free rent or a landlord’s paying the broker fee, which can add up to real savings.

“Fritz Frigan, executive director of sales and leasing at Halstead Property estimates that when these incentives are considered, rents are actually down some 10% to 15% since the market peak in mid-2007.”

Source: Elizabeth Harris, The New York Times, January 30, 2009.

Financial Times: S&P forecasts 200 defaults
“About 200 US junk-rated companies are likely to default this year, according to Standard & Poor’s, affecting almost $350 billion worth of debt and adding impetus to alternatives to bankruptcy, such as distressed debt exchanges.

“About half of the 17 US defaults seen in December were a result of distressed exchanges, where a company offers lenders new securities of a lesser value than the debt they are owed, usually to cut interest costs or delay principal repayment.

“Debt exchanges are becoming an increasingly common way to restructure debt outside of bankruptcy in the US – they remain rare in Europe – as US companies struggle to refinance $500 billion worth of bonds and more than $1,000 billion worth of bank loans amid the credit crunch.

“S&P said that there was a higher proportion of rated companies in the single-B category than ever before, with 800 business that make up one-third of all corporate ratings. ‘We expect nearly 200 speculative-grade companies to encounter some form of financial distress, leading to default in 2009,’ S&P said. ‘Currently, we have more than 180 companies rated B-minus or below with negative outlooks. That is where we expect many of the defaults will occur.’

“The agency added that the 185 companies most at risk had about $341 billion of debt outstanding. Outside the US, 61 junk-rated companies with another $56 billion worth of debt are also seen as highly likely to default.”

Source: Anousha Sakoui, Financial Times, February 2, 2009.

CEP News: US bankruptcies soar 33% in 2008
“More than 1.1 million Americans filed for bankruptcy in 2008, a 32% increase from the year before and the largest annual total since 2005, according to Automated Access to Court Electronic Records (AACER).

“Filings for companies were up 50% to 64,318, while individual filings were up 1.03 million.

“On September 15, 2008, the Lehman Brothers bankruptcy was the largest Chapter 11 filing of all-time. That was followed several days later by Washington Mutual, which became the biggest bank failure in US history.

“The largest increases in bankruptcy filings were in California (85%) and Arizona (81%), as those states also had the highest foreclosure rates.”

Source: CEP News, February 2, 2009.

CEP News: US credit card delinquencies at record high, says Fitch
“US credit card delinquencies reached all-time highs in January on the back of ongoing deteriorating conditions in the US economy, according to a study released by Fitch on Thursday.

“The rate of payments missed by more than 60 days advanced 0.47 percentage points to an all-time high of 3.75% in January, according to the report.

“‘US consumers continue to struggle in the face of mounting pressures on multiple fronts, from employment to housing to net worth,’ according to Michael Dean, a managing director at Fitch.

“The news comes at a difficult time for the United States with the economy shedding more than half a million jobs per month, and no signs of a turnaround in the near term.

“In addition, the Fed has pledged $200 billion in an initiative geared at backing holders of asset-backed securities including credit card debt, education and auto loans.”

Source: CEP News, February 5, 2009.

Financial Times: CDS regulation in Europe moves closer
“The prospect of legislation which would force banks and dealers in Europe to clear their deals in the huge credit default swap market centrally moved closer on Tuesday, when a top EU regulator asked parliamentarians to support the move.

“Charlie McCreevy, EU internal market commissioner, told a parliamentary committee in Strasbourg that both the European Central Bank and European regulators considered that ‘clearing of credit default swaps on a central counterparty in the EU is essential for financial stability and oversight’.

“Talking in the context of the capital requirements directive, which is currently passing through the parliament, Mr McCreevy said: ‘I would urge the parliament to support an amendment to give effect to this’.

“The commissioner’s move comes a few weeks after talks between Brussels and the industry to devise a central clearing system for the CDS market, which generally trades on a one-to-one basis between banks and dealers, broke down.”

Source: Nikki Tait, Financial Times, February 3, 2009.

Bespoke: Worst post-election day returns since 1900
“Not many people thought that running the country was going to be an easy job for President Obama, and based on the Dow’s returns since election day, the market doesn’t think so either. Below we highlight the performance of the Dow this many days past election day for all Presidential elections since 1900. As shown, the Dow’s decline of 17.78% since Obama’s election 93 days ago is the index’s biggest drop following any election in the last 108 years.”

Source: Bespoke, February 5, 2009.

CNN Money: Buffett’s metric says it’s time to buy
“According to investing guru Warren Buffett, US stocks are a logical investment when their total market value equals 70% to 80% of Gross National Product.

“Is it time to buy US stocks?

“According to both this 85-year chart and famed investor Warren Buffett, it just might be. The point of the chart is that there should be a rational relationship between the total market value of US stocks and the output of the US economy – its GNP.

“Fortune first ran a version of this chart in late 2001. Stocks had by that time retreated sharply from the manic levels of the Internet bubble. But they were still very high, with stock values at 133% of GNP. That level certainly did not suggest to Buffett that it was time to buy stocks.

“But he visualized a moment when purchases might make sense, saying, ‘If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you.’

“Well, that’s where stocks were in late January, when the ratio was 75%. Nothing about that reversion to sanity surprises Buffett, who told Fortune that the shift in the ratio reminds him of investor Ben Graham’s statement about the stock market: ‘In the short run it’s a voting machine, but in the long run it’s a weighing machine.’”

Source: Carol Loomis and Doris Burke, CNN Money, February 4, 2009.

Bespoke: Positive guidance at decade lows
“Bespoke tracks a number of indicators during earnings season, and one of them is the percentage of companies that are raising guidance. Below we highlight this guidance indicator on a quarterly basis based on the 50,000+ individual earnings reports in our Earnings Report Database. During the current earnings season, just 2.3% of companies have raised guidance, which is the lowest reading since at least Q3 ‘01. Last quarter’s reading of 3% was the lowest at the time, but unfortunately, it has gotten even worse. At least expectations are about as low as they can get, and when the time comes that companies do start besting their guidance, it should propel stocks higher.”

Source: Bespoke, February 6, 2009.

Barry Ritholtz (The Big Picture): Bad Januarys equal bad Februarys?
“Last month, the S&P 500 index dropped 8.6%, which was the worst January on record. Naturally, that has some people wondering if this month will be any better. Unfortunately, history suggests otherwise.

“Since 1928, the market has declined in the first month of the year on 29 out of 81 occasions, or 35.8% of the time. The median loss during those losing Januarys has been 3.8% versus an overall average gain of 1.6%.

“On balance, performance in the month after a weak January has also been a downer. Over the past eight decades, the follow-on February has seen the S&P 500 decline on 18 separate occasions, or 62.1% of the time, with a median loss of 1.8%. That compares to an average rise of 0.1% for all Februarys from 1928 – 2008.

“So, while I have been among those who have been anticipating a first-half recovery (before a resumption of the bear market later in the year), the historical record suggests I just might have to wait until this month blows over first.”

Source: Barry Ritholtz, The Big Picture, February 4, 2009.

Bespoke: Nasdaq outperforms
“The Nasdaq has outperformed the S&P 500 and Dow Jones Industrial Average year to date, and it is actually up on the year while the other two are down between 3.5% and 6%.

“So how does this recent Nasdaq performance affect the index’s ratio with the Dow? Below is a chart of the DJIA/Nasdaq ratio since the start of 2002. When the line is rising, the Dow is outperforming the Nasdaq, and vice versa for a falling line. After getting slaughtered versus the Dow from August 2008 to November 2008, the Nasdaq has been outperforming. And judging by the range of the ratio over the past few years, this trend could continue for some time.”

Source: Bespoke, February 6, 2009.

Bespoke: US and BRIC world market share
“Earlier today we released a report showing just how off the ‘decoupling’ theory has been during the current global bear market. During the global bull market from ‘03 to ‘07, many pundits believed that developed and emerging markets outside of the US were strong enough to not catch a cold when the US sneezed. The BRIC countries of Brazil, Russia, India, and China were probably the most talked about countries when ‘decoupling’ came up, but as we’ve all seen, these countries have in fact gotten hit much harder than the US during the downturn.

“This couldn’t be highlighted better than in the chart below that shows both the US and the BRIC countries as a percentage of world market cap since mid 2003. As global equity markets rallied across the board from ‘03 to ‘07, the US lost a huge amount of world market share, falling from about 45% to a low of 24%. At the same time, BRIC countries went from about 4% of world market cap to nearly 16%.

“Once the credit crisis hit, however, US markets fell, but the rest of the world fell even harder. And as the chart shows, the US has been steadily gaining back market share over the last year or so, while the BRIC countries have fallen. Bear market: 1, Decoupling: 0.”

Source: Bespoke, February 2, 2009.

Bespoke: Performance of country ETFs
“Below we highlight ETFs that track equity markets for various countries. For each ETF, we provide its 5-day change, how far it is trading from its 50-day moving average, and how overbought or oversold it currently is. For overbought/oversold levels, we calculate how far the ETF is trading above or below the top or bottom of its trading range (using one standard deviation above and below the 50-day moving average as the trading range).

“As shown, four countries (Brazil, South Korea, Belgium, Canada) are trading above their 50-day moving averages, and just one (Brazil) is trading in overbought territory. The Russia ETF (RSX) is trading the furthest below its 50-day moving average, followed by Italy (EWI), Spain (EWP), Mexico (EWW), and Australia (EWA). Switzerland, Australia, Mexico, Spain, Italy, and Russia are all trading in oversold territory.”

Source: Bespoke, February 4, 2009.

CNBC: Dr. Doom – Asian markets pay you to wait
“Marc Faber, Editor of The Gloom, Boom & Doom Report, feels that the US market at current levels isn’t cheap. Asian markets, on the other hand, are much more value for money – there are stocks that pay you to wait out the recession. He shares his thoughts with CNBC’s Martin Soong.”

Source: CNBC, February 6, 2009.

Eoin Treacy (Fullermoney): Chinese stock market looks promising
“I find it interesting that the more sentiment deteriorates with regard to the future prospects for growth in the USA and Europe and as stock markets continue to disappoint; the same dire conclusions are rolled out to Asia and especially to China. There is no denying that the slowing global economy is having a knock-on effect in almost every country and China is no exception.

“Major job losses in Guangdong, slowing economic output, massive declines in the stock market and a peak in the housing market are seen as justifications to support this view. In addition, a communist system is by definition corrupt because it is unaccountable and concentrates power in the hands of too few people, media is heavily censored and citizens are indoctrinated to accept the status quo from an early age. However, with China, everything is seldom as it seems.

“The decline in the wealth effect in the West has been led by the fall in house prices. It is exaggerated by the home equity withdrawals which allowed home owners to leverage up their debt on the back of house price appreciation. To the best of my knowledge this option is simply not available to Chinese residents. 100% mortgages do not exist and the norm is for large down payments. The automotive loan industry is still in its infancy and credit / debit cards are used to far less an extent than in the West. It is still not surprising for large transactions to take place in cash rather than any other means. China does not have a futures market, although one is promised, and financial leverage available to retail investors is limited.

“Following a massive decline and 4-months of ranging, there has been little to encourage new money into the market. Ranging suggests supply and demand have come back into balance, but the Shanghai A-Share market needs to sustain a move above 2200 and ideally 2500 to indicate the bulls are back in control. In the short-term, the progression of higher or equal lows from the October nadir indicates that demand is returning at incrementally higher levels.

“The argument about the pace, course and impact of China’s re-emergence has being going on for a number of years and will continue to spark powerful emotions on both sides. At Fullermoney, we will continue to give the greatest weight to the charts, and right now, China shows the best base formation development characteristics of any globally significant market.”

Source: Eoin Treacy, Fullermoney, February 3, 2009.

Bloomberg: Roubini – Russia, east Europe stocks face “massive” drop
“Russian and eastern European equities may fall further because earnings and other fundamental measures mean little in the current economic turmoil, said Nouriel Roubini, the New York University professor who forecast a US recession two years ago.

“‘In market dynamics, prices can move far below what fundamentals justify,’ Roubini said in an interview in Moscow. ‘There is still a massive downside for equities in the region.’

“‘They may stagnate there for a while, and there’s not going to be any recovery,’ Roubini said. ‘For the time being, it’s going to get ugly.’

“The Russian Trading System Index is trading at 0.5 times book value, or the net asset value of its 50 companies, lower than the 1.4 times book value for the MSCI Emerging Markets Index according to weekly data compiled by Bloomberg.”

Source: William Mauldin, Bloomberg, February 4, 2009.

John Authers (Financial Times): Are Tips pointing to a return of inflation?
“The deflation scare that hit the world last year seems almost to be over. But markets disagree over whether this is the prelude to another inflation scare.

“Last year, the ‘breakeven’ rate at which US 10-year inflation-linked bonds (or Tips) would offer the same return as fixed-income Treasuries dipped below 0.1%. This implied there would be virtually no inflation at all, on average, over the next decade. Breakeven rates also implied there would be outright deflation over the next five years. Nothing like this had happened since the Depression of the early 1930s.

“If there was any inflation at all, this meant that Tips would outperform. Many seem to have bought them on this basis, as Tips now imply an inflation rate of 1.1% for the next 10 years. This is very low, but is its highest in four months.

“Meanwhile the real yield on conventional US Treasury bonds (obtained by subtracting current inflation from the nominal yield) is 2.8%, the highest in two years. That is in part due to low headline inflation. However, this figure makes it harder to believe US bonds are in a bubble.

“The inflation rate is fundamental to the valuation of many asset classes. Higher inflation expectations should hurt bonds and boost commodities and stocks. As it implies returning consumer activity, it should help consumer discretionary stocks most.

“Looking around the markets, there are many contradictions. Gold is gaining, but other commodities are not significantly above their lows. Stocks are not doing so well.

“An explanation might be as follows. Markets recognise that last year’s deflation panic was extreme, but are still not certain that the money-printing measures will push up inflation. The Tips market is relatively inefficient, and investors took the opportunity to make money out of it – but markets could move much further if inflation returns as governments hope.”

Source: John Authers, Financial Times, February 3, 2009.

Guardian: Soros – euro may not last without global plan
“The euro may not survive unless the European Union pushes for an international agreement on toxic assets, billionaire investor George Soros told Austria’s Der Standard newspaper.

“‘One would need a type of agreement on lost capital, so that the burden is shared, and in which every country is part of, otherwise more countries will suffer,’ said Soros in an interview with the paper, which was published on its Website.

“‘The EU should do this. If they don’t do this then the euro may not survive the crisis.’

“A warning from European Central Bank President Jean-Claude Trichet that the ECB could push interest rates below 2% and use other measures to boost growth also hit the euro, as did data showing the biggest monthly jump in German unemployment in four years.”

Source: Guardian, January 29, 2009.

Bloomberg: Ruble falls to 11-year low
“The ruble slumped to its weakest level against the dollar in 11 years as investors speculated Russia will be forced to give up its currency defense after draining reserves.

“‘The pace of the move to the target is definitely going to be a source of concern to the central bank,’ said Martin Blum, head of emerging-market economics and currency strategy at UniCredit SpA in Vienna. ‘Global risk appetite is continuing to deteriorate so the pressures on the ruble will continue.’

“The ruble slumped 35% against the dollar since August as a 63% drop in Urals crude oil prices and the worst global economic crisis since the Great Depression spurred investors and Russian citizens to withdraw about $290 billion from the country, according to BNP Paribas SA.

“Bank Rossii expanded its trading range for the ruble 20 times since mid-November before switching policy to let ‘market’ forces help determine the exchange rate within a widened limit.”

Source: Emma O’Brien, Bloomberg, February 2, 2009.

Ambrose Evans-Pritchard (Telegraph): Putin calls for end of dollar stranglehold
“Russian prime minister Vladimir Putin has called for concerted action to break the stranglehold of the US dollar and create a new global structure of regional powers.

“‘The one reserve currency has become a danger to the world economy: that is now obvious to everybody,’ he said in a speech at the World Economic Forum.

“It is the first time that a Russian leader has set foot in the sanctum sanctorum of global capitalism at Davos.

“Mr Putin said the leading powers should ensure an ‘irreversible’ move towards a system of multiple reserve currencies, questioning the ‘reliability’ of the US dollar as a safe store of value. ‘The pride of Wall Street investment banks don’t exist any more,’ he said.

“Mr Putin said: ‘We are witnessing a truly global crisis. The speed of developments beats every record, and the strategic difference from the Great Depression is that under globalisation this touches everyone. This has multiplied the destructive force. It looks exactly like the perfect storm.’

“However, Mr Putin’s own government in Russia is facing mass protest as unemployment surges and austerity measures start to bite.”

Source: Ambrose Evans-Pritchard, Telegraph, January 29, 2009.

Bloomberg: Rogers says Russia may break up
“Jim Rogers, chairman of Rogers Holdings, talks with Bloomberg’s Ellen Pinchuk about the outlook for the Russian economy, the ruble and his investment strategy. Rogers, speaking in Moscow, also discusses the outlook for oil prices and emerging markets.”

Source: Bloomberg, February 5, 2009.

Richard Russell (Dow Theory Letters): Gold trade getting crowded
“An interesting article appeared in yesterday’s Financial Times. The title of the piece was ‘I Don’t Like the Big Shiny Crowds Around Gold’ by John Dizard.

“Russell comment: This sudden wide spread interest in gold has bothered me too. Ads for gold are appearing in the newspapers, articles about gold are now commonplace. Writes Dizard, ‘I don’t like crowds, and the one around gold is just too big at the present. Let’s say that Western civilization is coming to a bloody end. That won’t happen for a few months at least. So why not wait until you don’t have to pay an unjustifiable premium for something as common as a Krugerrand.’

“‘Having said all this, I agree with the gold buyers that we are in a multi-year gold bull market that will eventually take the price to an integer multiple of where it is now, not a big integer multiple. But enough to approximate now much inflation must shrink the real burdens of debt to what the developed country taxpayer and consumer can afford.’

“‘Gold is one of, if not the most, treacherous trading markets there is. Ian Shapolsky, a New York investor, who trades for his own account, and whose tactical gold trading strategy I described in his space a couple of years ago, has abandoned the metal after a reasonably successful run.’

“As he says, ‘The gold market is thinner than it was, and it seems that the larger players can push it around more than they could in the past. The larger traders are aware of the chart points (price targets) followed by the investing public; and there seems to be a lot of effort to push prices above breakout points or moving averages.’

“So stay out of the deep end, average in. Don’t buy in a panic.”

Source: Richard Russell, Dow Theory Letters, February 4, 2009.

Commodity Online: Gold accumulation plan from India Post
“Buoyed by the runaway success of its gold coins sale scheme across the post offices in the country, India Post, the postal services department of the government of India, has announced a Gold Accumulation Plan.

“India Post, in association with the World Gold Council and Reliance Money, a financial services company of the Reliance Group, on Wednesday said that the Gold Accumulation Plan (GAP) will be carried out through its wide postal networks across the country.

“As per GAP, customers can purchase gold coins from any India Post offices across nine states in the country. ‘The GAP project ensures that people have the options like the Systematic Investment Plans of investing in gold by accumulating small quantities of the yellow metal,’ Sunita Trivedi, Chief General Manager, India Post told Commodity Online.

“‘This is to promote gold investment in India. Going forward, we not only plan to further expand this service to another 100 India Post outlets but also launch our Gold Accumulation Plan to help customers make systematic investments in gold,’ she said.”

Source: Commodity Online, February 5, 2009.

Telegraph: China falls into budget deficit as spending balloons
“China’s attempts to spend its way out of economic depression led to a fiscal deficit of 111 billion yuan (£12 billion) last year.

“Despite a near 20% rise in tax revenues and a record surplus of 1.19 trillion yuan (£128 billion) in the first six months of the year, the dramatic scale of government spending in November and December was enough to plunge the entire year into deficit.

“The figures are the first indication of how quickly and forcefully China reacted to the economic crisis after it announced a fiscal stimulus package of 4 trillion yuan in November to build new roads, railways, schools and hospitals.

“Government spending in December surged to 1.66 trillion yuan, more than triple the previous month’s total and 31% higher compared to the same month last year.

“The news came as Wen Jiabao, the Chinese prime minister, said that he was mulling over another fiscal stimulus package. ‘We may take further new, timely and decisive measures. All these measures have to be taken pre-emptively, before an economic retreat,’ he told the Financial Times.

“Although Mr Wen did not mention any concrete details, it is widely believed that the Chinese government wants to put together a social benefits package, in order to encourage people to up their spending and reduce their saving.”

Source: Malcolm Moore, Telegraph, February 2, 2009.

Financial Times: MDC agrees to join Mugabe government
“Zimbabwe’s opposition has bowed to pressure and agreed to join a national unity government with President Robert Mugabe in a last-ditch effort to halt a humanitarian catastrophe.

“In spite of deep misgivings on the part of some party leaders and trade unionists, the Movement for Democratic Change (MDC) decided that it had no choice but to accept the terms of a deal negotiated by southern African leaders this week, even though its key demand – control of policing through the home affairs ministry – was not met.

“Morgan Tsvangirai, the MDC leader and winner of a first round of presidential elections last year, emerged from a party vote on the issue on Friday sounding sanguine. He will be sworn in as prime minister on February 11. MDC politicians will occupy 11 of the 31 cabinet posts, including finance, education and health.

“The scale of the humanitarian crisis that the new administration will face was underlined when the World Health Organisation warned that ‘the deadliest cholera outbreak in Africa for 15 years is gaining momentum, with 1,493 new cases including 69 deaths reported in the last 24 hours alone’. About 60,000 Zimbabweans have caught the illness and more than 3,000 have died.”

“‘We are not saying that this is a solution to the Zimbabwe crisis,’ said Mr Tsvangirai. ‘Instead our participation signifies that we have chosen to continue the struggle for a democratic Zimbabwe in a new arena.’”

Source: Tony Hawkins and Richard Lapper, Financial Times, January 30, 2009.

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Do BRICs (and Germans) Eat PIGS?

Saturday, February 7th, 2009

This post is a guest contribution by Niels Jensen*, chief executive partner of London-based Absolute Return Partners.

When the euro was introduced about ten years ago, the pessimists didn’t give it much chance of reaching its tenth anniversary. The euro, or so the argument went, was doomed from the outset because of the disparity in economic performance amongst the member countries. In this respect not much has changed. At one end of the scale you still have the highly disciplined, but also slow growing, economies of Germany and the Netherlands; at the other end you find faster growing but ill disciplined countries such as Spain and Greece. As icing on the cake, you also have countries that lack in both departments, such as Italy, making it difficult for the union to ‘gel’ – well, according to sceptics.

There is admittedly an embedded weakness in the way the European currency union is structured. In the United States, arguably the largest currency union in the world, fiscal transfers between member states allow for the federal government to adjust for variances in economic performance. There is no such mechanism within the eurozone, which explains why the member states are subject to a number of rules. These rules require strict fiscal discipline. The problem is that few countries play by the rules.

The best example of this is the huge spread in the rise of unit labour costs over the past few years. Unit labour costs measure labour (wage) costs adjusted for changes in productivity. It is probably the best measure that exists in terms of tracking the changes in competitiveness between nations. The currency union is governed by the so-called Stability and Growth Pact. There is no mention of unit labour costs in the pact which, with the benefit of hindsight, is a major mistake. Even Jean-Claude Trichet, the Head of the European Central Bank, who rarely admits mistakes, has publicly stated that if he could design the currency union all over again, he would push for a unit labour cost stability pact.

Back to the early sceptics. What they failed to realise was that Europe, together with the rest of the world, was about to enter a period of unprecedented prosperity. The good times would not only gloss over the  deeper problems, but the euro would actually go from strength to strength to a point where it now threatens to unseat the US dollar as the premier reserve currency of the world. It will be a mystery to some of you, then, why one should question the longer term viability of the euro. That is nevertheless what I intend to do.

Click here for the full letter.

* Niels Jensen has 24 years of investment banking, private banking and asset management experience. He founded Absolute Return Partners LLP and is its chief executive partner.

Tags: Absolute Return, Absolute Return Partners LLP, BRIC, BRICs, Competitiveness, Disparity, Economic Performance, Europe, European Central Bank, European Currency Union, Eurozone, Executive Partner, Federal Government, Fiscal Discipline, Fiscal Transfers, Founder, Germany, Greece, head, Hindsight, Investment Banking, Italy, Jean Claude, Jean Claude Trichet, London, Member Countries, Member States, Niels Jensen, Pessimists, Private Banking, Spain, Stability And Growth Pact, Stability Pact, Tenth Anniversary, The Netherlands, Unit Labour Costs, United States, Variances
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Words from the (investment) wise for the week that was (January 19 – 25, 2009)

Sunday, January 25th, 2009

Fears about the intensity of the global recession and renewed skepticism regarding the beleaguered financial sector fueled a flight to safety during the past holiday-shortened trading week. President Obama’s inauguration offered only a brief respite from the dreadful economic and earnings data and pounding of the stock markets.

Commentators were in agreement that Mr O commenced his tenure against the worst economic background in living memory and had his work cut out to resurrect America from its economic morass. I wish him well with this daunting task.

As investors piled into the perceived safety of gold (+6.9%), the US dollar (+1.8% in the case of the US Dollar Index) and the Japanese yen (+2.1% against the US dollar), global stock markets recorded a third straight week of losses. West Texas Intermediate Crude (+9.2%) also ended higher, joining a broader rally in commodities (+2.1% in the case of the Reuters/Jeffries CRB Index).

The MSCI World Index and the MSCI Emerging Markets Index declined by 4.7% (YTD -10.3%) and 5.7% (YTD -10.5%) respectively. Bucking the downtrend, the Shanghai Composite Index rose by 1.9% over the week and, with a gain of 9.3%, is also the best-performing global stock market since the start of 2009.

Elsewhere, the yields of long-dated government bonds in the US, UK and Eurozone rose sharply as large issuances of sovereign debt looms. For example, the yield of the US ten-year Treasury Note jumped by 28 basis points to 2.62% and that of the 30-year Treasury Bond by 40 basis points to 3.32% – the highest weekly points rise since April 1987. On the other hand, short-dated yields in a number of European countries declined as a result of expectations of further rate cuts.

The UK was a case in point with the two-year Gilt declining by 12 basis points to 1.0% on doubts about the government’s new rescue plan for the banking system and a deterioration in the country’s public finances. The pound crumbled to a 23-year low against the greenback and an all-time low against the yen.

The financial turmoil and the various actions by central banks reminded me of a quote from 1867 by Karl Marx: “Owners of capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism.”

“TARP has been an abject failure,” said Thomas Barrack Jr, billionaire and founder of Colony Capital, in BusinessWeek. “I compare the situation to a fire on a Savannah plain: Let it rip and burn, and the market will rejuvenate so much faster – try to control or impede it, and there will be more and longer suffering before renewal. Japan experienced two decades of economic paralysis by experimenting with fire control of a similar unproductive sort.”

And here is Peter Schiff’s (Euro Pacific Capital) prescription for how the US can dig itself out of the current mess, as reported by Fortune Magazine: “Shrink the government radically, cancel all bailouts immediately, take plenty of tough medicine, and let the free market do its job – however harsh it may be for, say, autoworkers in the meantime.”

According to Sheila Bair of the FDIC, as reported by The Wall Street Journal, there will soon be a new government banking agency, the Aggregator Bank, to buy troubled assets from financial institutions. For a bit of fun, I tried to register this domain last week. Alas, another aspirant banker pipped me to the post. His reselling price? $100,000! Needless to say, I swiftly terminated the negotiations.

Next, a tag cloud of my week’s reading. This is a way of visualizing word frequencies at a glance. Key words such as “bank”, “government”, “economy”, “market”, “financial”, debt” and “crisis” topped the list.

The graph below shows the performance of various S&P sector SPDRs for the year to date. With Financials having declined by 28.2%, the market’s weakness was quite strongly concentrated in one sector. In addition to Financials, only Industrials (-11.9%) and Consumer Discretionary (-8.8%) have underperformed the S&P 500 Index (-7.9%) since the beginning of the year.

“During prior declines during this bear, losses were broad based and once they become more concentrated (as they are now), it’s a sign that the market is beginning to separate the eventual winners from the losers,” said Bespoke.

Considering the outlook for the stock market, Richard Russell, 84-year-old author of the Dow Theory Letters, said: “Recently, the Transports broke below their November 20 bear market low. The Industrials have refused (so far) to confirm the Transports. Will the Industrials break down and confirm?

“No one can possibly know. But the longer the time elapses that the Industrials refuse to confirm, the more hopeful the situation. As a rule, the closer in time the two Averages, Transports and Industrials, break through preceding levels, the more authoritative the signal. The Transports broke to new lows on January 20. The longer Industrials hold above their November 20 low of 7,552, the better the odds that they will not confirm.”

Key resistance and support levels for the major US indices are shown in the table below. The immediate upside target is the 50-day moving average, followed by the early January highs. On the downside, the December 1 and all-important November 20 lows must hold in order to prevent considerable technical damage.

A number of global stock markets – Germany, France, Belgium, Finland, Ireland and Venezuela – have actually already broken below their November 20 lows. Although a retest of the lows is often a feature of base formation development, it can also be a harbinger of the resumption of a downtrend.

Donning his customary bearish outfit, Albert Edwards of Société Générale, a favorite market strategist among Investment Postcards’ readers, said: “After increasing our equity exposure at the end of October we believe that the market is set to quickly slide sharply towards our 500 target for the S&P 500.

“While economic data in developed economies increasingly reflect 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.”

According to Jeffrey Hirsch (Stock Trader’s Almanac), the December Low Indicator says that should the Dow Jones Industrial Index close below its December low anytime during the first quarter, it is frequently an excellent warning sign. This came to pass on Tuesday when the Dow closed below its December low of 8,149 (recorded on December 1).

Also of concern to Hirsch is the January Barometer, stating “As January goes, so goes the year”. Every down January since 1950 has been followed by a new or continuing bear market or a flat year. On Friday the S&P 500 closed at 832, 7.9% lower than the December 31 close.

From across the pond David Fuller (Fullermoney) commented that one could not rule out an overcorrection by the S&P 500 to 600 (as suggested by Jeremy Grantham in his latest quarterly newsletter), “although the downside move to date is still quite overstretched relative to the 200-day moving average. Fundamentals will not determine the actual low, in my opinion, whether already seen or pending. That will be determined by sentiment and liquidity, as always. Currently, sentiment is diabolical but liquidity is increasingly abundant.

“From an investment perspective, my preferred strategy would be to nibble on high-quality equities with decent and well-covered yields.”

On the back of the bullion price increasing by 6.9%, the Gold Bugs Index (+10.6%) was one of the top-performing industry groups for the week. The venerable Richard Russell said: “The [gold] market always does what it’s supposed to, but never when. Is it ‘when time’ for gold? It looks like the long erratic correction in gold is over.

“Gold is pushing up consistently now – the first upside target is to better the 900 level which will take gold above the two preceding peaks. If gold can move above the 900 level (we’re close), I think there is a good chance it will test the highs. Up until now, gold’s progress has been halted, every advance corrected. Gold appears to advance more easily now and the gold stocks are going along with the bullion.”

According to US Global Investors – Weekly Investor Alert, David Rosenberg of Merrill Lynch on Friday sent out a research note titled “The case for gold”, explaining that gold’s value is enhanced by declining bullion supply and increasing money supply.

James Montier of Société Générale added: “Gold kind of scares me because very often the people involved with it seem to be slightly insane. My other problem is I don’t know how to value it. That said, I can certainly see why gold could be considered somewhat of an insurance policy, if not an investment in its own right. Any kind of systemic economic turmoil is likely to drive gold prices higher.”

For more discussion about the direction of stock markets, also see my post “Video-o-rama: Wishing you well, Mr O“.

Economy
“Global businesses remain darkly pessimistic. Sentiment was at its worst in mid-December, but has improved only marginally since then,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “European and South American businesses are most worried, followed by North America; Asian companies are negative but less so. Pricing power has collapsed, suggesting that deflation is increasingly likely.”

The latest US economic reports also indicate that the intensity of the economic downturn shows no sign of letting up. Homebuilding descended to an unprecedented post-war low, the National Association of Home Builders (NAHB) housing market index again reached a new low, and the ABC/Washington Post Consumer Confidence Index remained near its all-time lows. Interestingly, no president has entered office with such a poor level of consumer confidence since the beginning of the Survey in 1985.

Regarding the meeting of the Federal Open Market Committee (FOMC) on January 27 and 28, Asha Bangalore (Northern Trust) said: “The policy statement will be the first following the zero interest rate policy adopted at the last meeting. The explicit hint about the Fed’s future course of action in the December 16, 2008 policy statement read as follows:

‘The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.’

“We will be paying close attention to whether the Fed will retain or rephrase this part of the policy statement. With regard to the Fed’s views about economic growth and inflation … we do not expect radical modifications of the entire policy statement.”

Elsewhere in the world, evidence mounted that the recession was spreading and deepening.

- The UK’s real GDP contracted by 1.5% in the fourth quarter, following a 0.6% decline in the third quarter. The data confirmed the first UK recession since 1991.

- China’s real GDP declined by 6.8% year on year in the fourth quarter. However, when recalculating China’s growth rate on a quarter-on-quarter annualized basis, like most other countries do, commentators are of the opinion that the Chinese economy might already be contracting.

- Japan recorded a fifth consecutive monthly trade deficit in December, marking the worst year for exports on record. Exports contracted by 35% year on year, compared with a 16% expansion as recently as July.

Summarizing the economic situation, Nouriel Roubini (RGE Monitor) said: “The US economy is, at best, halfway through a recession that began in December 2007 and will prove the longest and most severe of the post-war period. Credit losses of close to $3 trillion are leaving the US banking and financial system insolvent. And the credit crunch will persist as households, financial firms and corporations with high debt ratios and solvency problems undergo a sharp deleveraging process.

“Worse, all of the world’s advanced economies are in recession. Many emerging markets, including China, face the threat of a hard landing. Some fear that these conditions will produce a dangerous spike in inflation, but the greater risk is for a kind of global ‘stag-deflation’. We’re likely to see vulnerable European markets (Hungary, Romania and Bulgaria), key Latin American markets (Argentina, Venezuela, Ecuador and Mexico), Asian countries (Pakistan, Indonesia and South Korea), and countries like Russia, Ukraine and the Baltic states facing severe financial pressure.

“The world’s first global recession is just getting started.”

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Source: Yahoo Finance, January 23, 2009.

In addition to the interest rate announcement by the FOMC (Wednesday, January 28), the US economic highlights for the week, courtesy of Northern Trust, include the following:

1. Leading Indicators (January 26): Consensus: -0.3% versus -0.4% in November.

2. Existing Sales (January 26): Consensus: 4.40 million versus 4.49 million in November.

3. New Home Sales (January 29): Consensus: 400,000 versus 407,000 in November.

4. Durable Goods Orders (January 29): Consensus: -2.0% versus -1.5% in November.

5. Real GDP (January 30): Northern Trust: -4.5% Consensus: -5.4% versus -0.5 in Q3.

6. Other reports: Consumer Confidence (January 27); Consumer Sentiment Index and Employment Cost Index (January 30).

Click here for a summary of Wachovia’s weekly economic and financial commentary.

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.

Source: Wall Street Journal Online, January 23, 2009.

Bernard Baruch said: “If you get all the facts, your judgment can be right; if you don’t get all the facts, it can’t be right.” Hopefully the “Words from the Wise” reviews offer assistance to Investment Postcards‘ readers in compiling the facts.

That’s the way it looks from Cape Town.

Bespoke: Interesting prediction market contracts
“Prediction market website Intrade has some interesting finance-related contracts trading at the moment, and below we highlight charts of them. The first contract is whether Apple CEO Steve Jobs will depart as CEO by the end of 2009. As shown, the contract peaked when the company announced Mr. Jobs’ leave of absence earlier this month, but it has since declined a bit to its current level of 60% (traders are putting the odds at 60%).

“The second contract is whether the unemployment rate in the US will be higher than 8.5% by December 2009. The unemployment rate is currently at 7.2%, and the odds for it to be higher than 8.5% by year end are at 55%.

“Intrade also has a contract on whether the US will default on its debt on or before 12/31/09. Traders are currently putting the odds of this occurring at 3.5% on Intrade, which seems low, but is actually pretty high considering what the implications would be if this happened.

“And back in early December, Intrade traders were putting the odds of a GM bankruptcy before the end of Q1 ‘09 at greater than 60%. After government intervention for the automakers happened a few weeks later, those odds dropped sharply and now stand at just 10%.

“Liquidity in these markets is low, so making big bets is hard to do, but analyzing these contracts gives some unique insight into what some people think will or will not happen in the near future.”

Source: Bespoke, January 22, 2009.

CNBC: Barack Obama will help the economy, but don’t expect miracles

Click here for the article.

Source: CNBC, January 18, 2009.

Reuters: Soros – US stimulus not enough, TARP bailout misused
“The stimulus plan the US government is currently considering is necessary to help American citizens, but it will likely not reverse the country’s economic decline, hedge fund manager and billionaire philanthropist George Soros said on Monday.

“‘It is not enough to turn the situation around,’ Soros told the US Conference of Mayors about the $850 billion proposal to increase spending and cut taxes.

“The plan, which was introduced in the US House of Representatives last week and will likely be passed by next month, will help state and local governments balance their budgets and preserve important social services, Soros said.

“At the same time, the $700 billion financial bailout known as TARP for Troubled Assets Relief Program had been carried out in a ‘haphazard and capricious way’ and ‘without proper planning’, he said.

“‘Unfortunately it was misused and the way it was done has poisoned the well. It has created tremendous ill will toward putting up more money,’ Soros said.”

Source: Lisa Lambert, Reuters, January 19, 2009.

Casey’s Charts: What the banks did with the latest bailout
“The red line in the graph below shows that, since August, banks have built their cash position in the form of Treasuries, agencies and deposits at the Fed by $865 billion, while their loans and leases have increased by only $325 billion.

“In other words, rather than lending the billions of dollars received from the Treasury’s Troubled Asset Relief Program (TARP), as was originally intended, the recipient banks have squirreled away the bailout funds in order to shore up their balance sheets.

“Concurrently, the Federal Reserve is exchanging its excess reserves for toxic waste from the financial institutions.

“The combined affect is a ‘circular bailout’ with the Treasury borrowing … in order to lend money to banks … that then lend it back by purchasing more Treasuries. Of course, the expense of this entire bailout scheme ultimately falls onto the back of the tax-paying public.”

Source: Casey’s Charts, January 20, 2009.

Reuters: US and UK on brink of debt disaster
“The United States and the United Kingdom stand on the brink of the largest debt crisis in history. While both governments experiment with quantitative easing, bad banks to absorb non-performing loans, and state guarantees to restart bank lending, the only real way out is some combination of widespread corporate default, debt write-downs and inflation to reduce the burden of debt.

“To understand the scale of the problem, and why it leaves so few options for policymakers, take a look at the chart below which shows the growth in the real economy (measured by nominal GDP) and the financial sector (measured by total credit market instruments outstanding) since 1952.

“The solution must be some combination of policies to reduce the level of debt or raise nominal GDP. The simplest way to reduce debt is through bankruptcy, in which some or all of debts are deemed unrecoverable and are simply extinguished, ceasing to exist.

“But widespread bankruptcies are probably socially and politically unacceptable. The alternative is some mechanism for refinancing debt on terms which are more favorable to borrowers (replacing short term debt at higher rates with longer-dated paper at lower ones).

“The remaining option is to tolerate, even encourage, a faster rate of inflation to improve debt-service capacity. Even more than debt nationalization, inflation is the ultimate way to spread the costs of debt workout across the widest possible section of the population.”

Source: John Kemp, Reuters, January 21, 2009.

Financial Times: Winter bites in EU but with some bright spots
“Wintry conditions are gripping Europe’s economies as the biting winds caused by financial market storms lead to deep and protracted recessions, but regional variations are still distinguishable.

“The latest Financial Times economic weather map for Europe shows a further substantial deterioration since it was last published in October, when the devastating impact on the global economy of the collapse of Lehman Brothers, the investment bank, was only just becoming apparent.

“European industrial production collapsed in November, data this month have shown, and business confidence surveys suggest the bottom of the recession – set to be among the worst since the second world war – has not yet been reached.”

Source: Ralph Atkins and Ben Hall, Financial Times, January 19, 2009.

CNBC: Buffett & Brokaw
“Insight on the financial and economic turmoil, with Warren Buffett, Tom Brokaw, NBC News special correspondent, and CNBC’s Erin Burnett and Mark Haines.”

Source: CNBC, January 19, 2009.

RGE Monitor: Estimated $3.6 trillion loan and securities losses in US
“Nouriel Roubini and Elisa Parisi-Capone of RGE Monitor released new estimates for expected loan losses and writedowns on US originated securitizations.

“Loan losses on a total of $12.37 trillion unsecuritized loans are expected to reach $1.6 trillion. Of these, US banks and brokers are expected to incur $1.1 trillion.

“Mark-to-market writedowns based on derivatives prices and cash bond indices on a further $10.84 trillion in securities reached about $2 trillion. About 40% of these securities (and losses) are held abroad according to flow-of-funds data. US banks and broker dealers are assumed to incur a share of 30-35%, or $600-700 billion in securities writedowns.

“Total loan losses and securities writedowns on US originated assets are expected to reach about $3.6 trillion. The US banking sector is exposed to half of this figure, or $1.8 trillion (i.e. $1.1 trillion loan losses + $700 billion writedowns.)

“FDIC-insured banks’ capitalization is $1.3 trillion as of Q3 2008; investment banks had $110 billion in equity capital as of Q3 2008. Past recapitalization via TARP 1 funds of $230 billion and private capital of $200 billion still leaves the US banking system borderline insolvent if our loss estimates materialize.

“In order to restore safe lending, additional private and/or public capital in the order of $1 – 1.4 trillion is needed. This magnitude calls for a comprehensive solution along the lines of a ‘bad bank’ as proposed by policy makers or an outright restructuring through a new RTC.

“Back in September, Nouriel Roubini proposed a solution for the banking crisis that also addresses the root causes of the financial turmoil in the housing and the household sectors. The HOME (Home Owners’ Mortgage Enterprise) program combines a RTC to deal with toxic assets, a HOLC to reduce homeowers’ debt, and a RFC to recapitalize viable banks.”

Source: RGE Monitor, January 22, 2009.

Asha Bangalore (Northern Trust): Home building activity posts new low
“Starts of new homes fell 15.5% in December to an annual rate of 550,000. The annual average of new homes started in 2008 is 902,000, the lowest on record. Starts of new single-family homes dropped 13.5% to an annual rate of 398,000, the lowest on record.

“The peak-to-trough decline in housing starts, both total and single-family, is the largest on record since record keeping began for these series in 1959 (see table 1). The duration of the weakness in home construction (peak was in January 2006) is also the longest on record.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 22, 2009.

Asha Bangalore (Northern Trust): Housing Market Index spells more gloom
“The Housing Market Index (HMI) of the National Association of Home Builders fell to 8.0 in January 2009 from 9.0 in December 2008. Before the onset of the current recession, the record low for the HMI was 20.0 during the 1990-91 recession. The question now is: What is the low for the HMI? The answer is unknown, but we can say that the severity of the housing market situation grows in leaps and bounds everyday.

“The HMI is strongly correlated with sales of new single-family homes. Based on this historical relationship, it appears that a pickup in new sales in the near term is unlikely.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 21, 2009.

Shadowstats: Decline in retail sales worst since World War II
“Annual real retail sales fell by 9.09% in December, versus a 9.11% contraction in November, the steepest annual declines since 1952. On a three-month moving-average basis the December and November declines were 8.88% and 7.87%, respectively. The December annual moving-average decline was the deepest in the history of the two most recent retail series, making the results the worst of the post-World War II era. The annualized real contraction for fourth-quarter 2008 retail sales was 17.1%.”

Source: Shadowstats, January 2009.

BCA Research: US deflation – this time it’s for real
“Annual US headline CPI dipped to zero in December. Core CPI is still positive (1.7% annual growth), albeit is falling steadily.

“The decline in headline inflation is due largely to sharply falling energy (and food) prices. Underlying inflation moves with the business cycle, though it lags economic growth by several quarters. The economy decelerated steadily last year before imploding in the autumn. Thus, core CPI is on track to fall further as economic slack builds. Already, retail prices are falling.

“The current deflationary threat is much more serious than the previous episode in 2002, given the speed and magnitude of the credit and economic crunch. Thus, policymakers will need to work hard to anchor inflation expectations in positive territory, and ensure that a deflationary mindset among consumers and businesses does not set in.”

Source: BCA Research, January 19, 2009.

Paul Kedrosky (Infectious Greed): Banks are just a circle of their former selves
“Nice graphic of how the major banks are just a fraction of their former selves, at least as measured by market value.”

Click on the image below for a larger graph.

Source: Paul Kedrosky, Infectious Greed, January 21, 2009

Bespoke: Long-term charts of the financial sector
“A look at long-term charts of the S&P 500 Financial sector is downright depressing. The first chart below dates back to 1990, and as shown, the sector closed at its lowest level since March 1995 yesterday. The sector is now down 79% from its highs in 2007. A chart of the sector all the way back to 1940 shows just how much the sector has fallen in such a short period of time.”

Source: Bespoke, January 21, 2009.

Eoin Treacy (Fullermoney): Will bank indices be leading indicators?
“The downward breaks experienced by a number of Western banking indices over the last week are significant and suggest we can expect further moves by the respective governments to shore up their financial sectors. This relative weakness poses a headwind for their wider markets.

“When bank indices began to underperform in 2007, they had an incredibly large weighting in most country indices. The performance of bank shares was important both in terms of their high relative weightings and because of their status as lead indicators. However, bank sectors are now a considerably smaller weighting in most indices. This lessens the intrinsic importance of the banks sector to the performance of the wider market, but the psychological impact is undiminished.

“The performance of bank sectors is a major drag on sentiment. Dividends are being eliminated and a process of nationalisation is underway in a number of Western countries. However, one should not forget that many other companies will not need government support, will not eliminate their dividend and as such are likely to be relative performers in this environment.

“In addition, an interesting dichotomy exists between markets where banks are underperforming and where they are outperforming. Bank indices in the USA (S&P500 Banks, Philadelphia Banks, Regional Banks), Europe (DJ Euro Stoxx Banks), the UK, France, Germany, Norway, Finland, Sweden, Italy and Ireland all made new lows in the last week. Internationally, the Chinese bank index is closest to the upper side of its range. No other bank index, I know of, is showing such relative strength. All Asian bank indices remain within their ranges. The marked underperformance of the USA and much of Europe is a clear indication that this is where the bulk of financial risk is focused.”

Source: Eoin Treacy, Fullermoney, January 20, 2009.

Brian Belski (Banc of America Securities-Merrill Lynch): Liquidity is key
“US equity investors should concentrate on companies, industries and sectors that have the means to fund themselves, says Brian Belski, strategist at Banc of America Securities-Merrill Lynch.

“He notes that areas in the market exhibiting strength recently have been dominated by low-quality companies with higher debt levels. But he says fundamental conditions do not support a move to low quality. ‘If 2008 taught us anything, attempts to get ahead of an eventual stock market and economic recovery were premature and misguided.’

“He acknowledges that credit market conditions have improved but is not convinced the worst is over. ‘Remember, even though credit spreads have narrowed, they still remain considerably above the peaks exhibited during prior credit cycles which we believe is a consequence of the loss of confidence both from investors and lenders.

“‘This is particularly troubling to us because we expect US corporate bond issuance to decline in 2009, yet a significant amount of bonds are expected to mature for S&P 500 companies. As a result, areas within the market that rely on leverage to fund operations are likely to struggle in the coming year and the trajectory of corporate bankruptcy filings over the past several years certainly appears to support this notion. Therefore, investors should continue to focus on areas demonstrating strong liquidity in the form of high cash balances and free cash flow.’”

Source: Brian Belski, Banc of America Securities-Merrill Lynch (via Financial Times), January 20, 2009.

Bespoke: Volatility Index shows more complacency
“Below we highlight a chart of the VIX volatility index along with the S&P 500. One difference between the current decline and the declines in October and November is that the VIX has not spiked nearly as much. Many think of the VIX as an indication of fear in the market, and whether it’s good or bad, there seems to be more complacency during the most recent downturn.”

Source: Bespoke, January 23, 2008.

Bloomberg: Roubini, Edwards predict slump in S&P 500 on China
“Stocks will retreat around the world because of shrinking demand from China as growth in the third- biggest economy slows, said Nouriel Roubini, the New York University professor who predicted last year’s financial crisis.

“Global equities will fall 20% this year from current levels as China, which contributed 19.5% to total growth in 2007, contends with its slowest expansion in seven years, he said. Wall Street strategists predict the Standard & Poor’s 500 Index, down 8.4% so far, will rise 17% in 2009.

“Roubini, an economics professor at NYU’s Stern School of Business, said China already is in a ‘recession’ despite government data showing a 6.8% fourth-quarter growth rate, as power output declines and manufacturing shrinks.

“‘Demand is falling in China, they’re over-invested in capacity and there’s a global supply glut,’ Roubini said in a telephone interview. ‘It has very, very important implications.’

“Roubini’s view is shared by Societe Generale global strategist Albert Edwards, who was correct in forecasting in March that a US contraction would spur a bear market in equities. Edwards says the China slowdown will reduce earnings at industrial, energy and raw-materials companies, sparking a selloff in emerging and developed-market stocks that may send the S&P 500 down 40% to 500.

“‘People should be thinking really hard about this rather than sticking their heads in the sand,’ said Edwards, a London-based strategist and member of the top-ranked global investment strategy team in Thomson Extel’s surveys the past three years. ‘We’re just pointing out when the emperor doesn’t have any clothes on.’”

Source: Michael Patterson and Adam Haigh, Bloomberg, January 23 2009.

Bloomberg: Mobius to invest more in China, emerging markets
“Mark Mobius, who oversees about $26 billion in emerging-market stocks at Templeton Asset Management, said he plans to buy more shares of consumer and commodities companies in emerging markets.

“‘Valuations are attractive,’ Mobius, Templeton’s executive chairman, said at a briefing in Kuala Lumpur today. ‘We feel that this year would be a year of recovery of the stock markets in the emerging markets.’

“Mobius said rising income in China, India and other parts of Asia will spur spending on consumer goods, while commodity prices are now ‘too low’. The two nations, Brazil, South Africa and Turkey offer best investment opportunities, he said.

“‘There is an incredible build-up of foreign reserves in the emerging markets, and the increase in money supply is quite dramatic,’ the executive chairman said. ‘We’ve seen a very big increase of money coming into markets.’

“The emerging-markets gauge trades at 8.2 times its companies’ reported earnings, 36% cheaper than its average valuation last year, according to data compiled by Bloomberg. The developed measure trades for 10.8 times profit.

“The US economy and other economies will rebound in 2010, said Mobius, whose biggest holdings are in Asia.”

Source: Soraya Permatasari, Bloomberg, January 17, 2009.

Bespoke: S&P 500 Q4 ‘08 earnings now expected to fall 28.2%
“At the start of the fourth quarter, analysts were expecting S&P 500 earnings to grow by 30% versus Q4 ‘07. While this seems outlandish now, remember that growth in Q4 ‘07 was extremely poor as well, and analysts thought many companies would begin to turn the corner by Q4 ‘08. As we all know, the economy pretty much came to a halt last October. As a result, analysts quickly began to cut growth estimates for the fourth quarter after it became apparent that things weren’t going to get better anytime soon.

“Fast forward a few months, and now analysts are expecting those same Q4 ‘08 earnings to be 28% weaker than the fourth quarter of 2007. With the direction that these estimates have been heading, when all is said and done, it’s likely that this number will get even worse.”

Source: Bespoke, January 21 2009.

Bespoke: Pick your poison – stocks or bonds
“While we all know that investing in stocks has been painful, some readers may be surprised to learn that Treasuries haven’t provided a much better alternative. While the S&P 500 is down 8% so far this year, long-term Treasuries (as measured by the US Long Bond future) are down almost 6%. With the recent break below their 50-day moving average, bonds are hardly looking like a ‘safe’ alternative in the current environment.”

Source: Bespoke, January 22, 2009.

Financial Times: Barclays Capital’s Larry Kantor says keep assets liquid
“The situation in many markets and economies is so tenuous now because we don’t know what the policies are going to be. The next month or two are critical. Investors should keep an ‘arsenal of liquid assets to deploy’, at some point it is possible that there could be a very big upswing in the economy and in equities, which investors should be ready for.

“In the meantime, debt of strong companies appears to be a good investment, especially as the Federal Reserve is considering buying corporate debt, together with other assets it is already buying, such as commercial real-estate backed bonds.”

Source: Financial Times, January 18, 2009.

Bloomberg: “Time to sell” Treasuries, biggest Korean fund says
“A rally that sent US Treasuries to their best year since 1995 is coming to an end, South Korea’s National Pension Service, the country’s biggest investor, said.

“US government efforts to combat the recession will prompt the Federal Reserve to raise interest rates this year, said Kim Heeseok, who oversees $160 billion as head of global investments for the service in Seoul. The decline would snap a surge that sent the securities up 14% last year, according to Merrill Lynch & Co.’s US Treasury Master index, as investors sought the relative safety of debt.

“‘It’s time to sell US Treasuries,’ said Kim, who took over as head of investments at the start of the year. ‘The stimulus plan may cause inflation. The US will raise the benchmark interest rate.’”

Source: Wes Goodman, Bloomberg, January 19, 2009.

John Hussman (Hussman Funds): The case for TIPS
“The way to think about the relationship between TIPS yields and straight Treasury yields is that the nominal yield on a security is equal to the ‘real’ yield plus expected inflation. At present, we have extraordinarily depressed nominal yields, but relatively high real yields, which means that the inflation rate implied in TIPS is extraordinarily low. Indeed, in order for TIPS to achieve the same total return as straight Treasuries over the next decade, we would need to observe a slight but sustained deflation over that period.

“My impression is that we are not near the point where there is any real risk of inflation, and we may very well observe negative near-term inflation rates (which is why it is important to be careful with TIPS that trade at a substantial premium to par, since the apparently high ‘real’ yields on near-term TIPS can be eroded by deflation). TIPS can’t mature at less than par, but if there is a deflation, the accrued inflation adjustment on these securities can be whittled down.

“Suffice it to say that we are holding TIPS not because we anticipate a near-term resurgence of inflation, but because the real, inflation-adjusted yields available over the next decade are quite high on a historical basis, and will adequately provide for the maintenance and growth of purchasing power over time, regardless of the near-term course of consumer prices.”

Source: John Hussman, Hussman Funds, January 19, 2009.

Steve Barrow (Standard Bank): Dollar honeymoon won’t last
“The arrival of a new US president often sees an initial rise in the dollar – although the honeymoon does not always last long and it is doubtful whether this time will be different, says Steve Barrow, currency strategist at Standard Bank.

“He says it is possible that the market might buy into new hope offered by an incoming president.

“‘There’s little doubt that Barack Obama campaigned on a pledge to bring new hope to the American people. It is also possible that the Democrats’ strong position in Congress will give Mr Obama more scope to impose his will than President Bush did.’

“But Mr Barrow doubts any early dollar strength in Mr Obama’s presidency will last. He says the US budget deficit is set to balloon due to the recession and likely $775 billion stimulus plan and notes that the last president to oversee such huge deficit expansion was Ronald Reagan in 1980-1988.

“‘Dollar strength at the start of Mr Reagan’s term gave way to a downtrend that lasted until 1995. The Reagan camp initiated this weakness with dollar sales in 1985. We doubt Mr Obama will do the same, but in one respect, the new president will be seeking a weaker dollar.

“‘The Chinese renminbi remains a thorn in the side of the US trade balance. Mr Obama has vowed to continue the fight for flexibility – and hence strength – in the renminbi as initiated by President Bush. In order to see the dollar weaken against the renminbi, the dollar may have to fall elsewhere.’”

Source: Steve Barrow, Standard Bank (via Financial Times), January 19, 2009.

Jim Rogers: Sterling in peril
“The pound is a currency with no underpinning and should fall against the dollar and the euro, says Jim Rogers, chairman of Rogers Holdings and co-founder of the Quantum Fund with George Soros.

“He says his view reflects the UK’s dire economic situation: ‘It’s simple, the UK has nothing to sell.’

“Mr Rogers says the two main pillars of support for sterling have been North Sea oil and the strength of the UK financial services sector, in particular, the City of London’s role.

“But Mr Rogers says just as North Sea oil is running out, so London’s standing as a major financial centre is set to suffer.

“‘I don’t think there is a sound UK bank now, at least, if there is one I don’t know about it,’ he says.

“‘The City of London is finished, the financial centre of the world is moving east. All the money is in Asia. Why would it go back to the West? You don’t need London,’ says Mr Rogers.

“Mr Rogers thinks the pound is more vulnerable than the dollar or the euro. He says the UK housing market is arguably in a worse state than that of the US, given pockets of strength in the US and prices that are sliding across the board in the UK.

“Meanwhile, he says, the UK is in worse shape economically than the eurozone, where most countries are not big debtors and do not run huge trade deficits. ‘If the UK discovers more North Sea oil, I might change this view,’ he says. ‘But I don’t see that happening.’”

Source: Jim Rogers (via Financial Times), January 21, 2009.

Bespoke: British pound crumbles
“The US dollar is clearly back in rally mode after suffering a setback in December. As shown in the first chart below, the Dollar Index has now broken well above its 50-day moving average and appears to be heading back to its November highs. Unfortunately, rallies in the dollar have recently coincided with declines in riskier assets like equities.

“But the bigger news in currencies is the dramatic fall that the British pound has recently experienced. Today the pound is suffering another big drop, and as shown in the first chart below, the currency broke below recent support levels as well as the $1.40 mark. And the bottom chart shows just how much the pound has fallen in such a short period of time. In late 2007, the pound was trading at record highs versus the US dollar. Now it is trading very close to its lowest level since 1991. Anyone in the US that has the money to go to England can stay there on the cheapest tab in decades.”

Source: Bespoke, January 20, 2009.

Eoin Treacy (Fullermoney): Testing times for euro
“All countries in the Eurozone are now seeing their government bond spreads widen relative to German yields. This is an indication that all countries took part in the access to abundant credit made possible by the launch of the Euro and are now suffering the consequences.

“Some are being more affected than others. Spreads for Spain, Greece, Italy and Ireland have expanded most. These were some of the countries where borrowing costs had fallen most in order to join the Euro and where most use was made of the ability to access cheap credit. Without the single currency they would never have been able to borrow at such low rates, but they are now constricted by being unable to devalue their currencies in order to help them through the crisis.

“This is the first real test for the single currency. If it can survive the credit / solvency crisis without seeing some countries dropping out or its efficacy being called into question; then it stands a good chance of surviving for the longer-term as a viable entity. This may well depend on how long the crisis drags on.

“Spreads of more than 250 basis points over Bunds, for Greek government bonds are not encouraging for its long-term participation. Investors will no doubt remember there were significant questions about the Greek government’s financial probity in the figures submitted to the European Commission prior to its entry into the single currency. Time will tell, but it will be a worthwhile exercise to monitor these spreads going forward.

“It is also interesting to see that in the UK, where control of interest rates is maintained by the BOE, that the brunt of the country’s risk reassessment has been borne by the pound rather than government bonds. The spread over Bunds has been in a volatile downtrend since late 2005 and tested parity recently. The government bond spread has been contracting in line with the pound’s decline against the Euro; both appear to have turned around the same time.”

Source: Eoin Treacy, Fullermoney, January 19, 2009.

CEP News: Treasury Secretary Geithner takes hardline stance on China
“In tune with the ‘change’ mantra heard throughout the US Presidential campaign, the Obama administration signalled a new stance on China. But given the economic climate, analysts question the strategy of adopting a hardline position with the biggest purchaser of US debt.

“In comments to the Senate Finance Committee released Thursday, newly-confirmed Treasury Secretary Timothy Geithner said, ‘President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency.’ He added later that Obama will aggressively push the Asian country to change its policies on foreign exchange.

“‘The comments from the new administration suggest a more robust position on China than the former administration,’ said Shaun Osborne, chief currency strategist at TD Securities. ‘It remains to be seen what China’s response will be, but the US is in a very delicate position at the moment.’

“In September, China overtook Japan as the largest foreign holder of US debt, but that appetite may shrink as China’s growth has slowed dramatically in the global recession.”

Source: Patrick McGee, CEP News, January 22, 2009.

John Authers (Financial Times): Currency interventions looming
“Unprecendented shifts in forex markets last year is fueling rumors of currency interventions in the coming weeks.”

Click here for the article.

Source: John Authers, Financial Times, January 22, 2009.

US Global Investors: Rosenberg – the case for gold
“Gold was, of course, one of the investment world’s few bright spots in 2008, and after a slow start in 2009, it began a rally that climbed above $900 an ounce on Friday. This is gold’s highest price since early October.

“David Rosenberg at Merrill Lynch sent out a short but useful research note Friday titled ‘The Case for Gold’ that explains that gold’s value is enhanced by declining bullion supply and increasing money supply.

“‘It’s the only currency not going up in supply. Pretty simple. South African gold output declined 14% last year in the steepest decline since 1901. US production was down 2%. The leading producer in terms of growth last year was China at +3% (and global central bank selling activity dropped 42% in 2008 to 279+ tons, the lowest since 1996).

“‘Meanwhile, money supply is up more than 10% YoY in the USA (M2); +16% in Australia (M3); almost 11% in Germany (M2); 18% in the UK (M2); almost 9% in Italy (M2); 13% in Canada (M2); 14% in Korea (M2); 18% in India (M2); 12% in Singapore; and 18% in China (M2).

“‘Outside of gold, the only country where money is not being poured into the financial system as if it was water from the tap is Japan, where trends in the monetary aggregates are flat-to-negative. Be that as it may, and in view of all the problems in the US banking sector, we think the dollar is unlikely to lose its reserve currency status any time soon … Confidence in the ability of European governments to service their sovereign debt is being called into question in the debt markets (‘in the land of the blind …’ ).’”

Source: US Global Investors – Weekly Investor Alert, January 23, 2009.

Richard Russell (Dow Theory Letters): Gold – very bullish action
“During the great gold bull markets of the 1970s to 1980, gold topped out at a price of 850 per ounce. For months now, gold has been ‘testing’ the 850 level, first rallying above 850 and then sliding below 850. Currently, February gold is trading at 891. I consider this to be very bullish action. The current gold action is taking place in the second phase of the new gold bull market. The second phase has seen many hedge funds and a small segments of the public become interested in gold.
“I believe the third speculative phase of the current gold bull market lies ahead. This is the phase where the public jumps wholesale into the market. It’s the phase where I expect to see a much higher, even frenzied, gold price. This final phase of the gold bull market will be accompanied by international doubt regarding the value and viability of fiat currency.
“Fiat money is being created in great quantities by almost every central bank in the world. Imagine, the foolishness of trying to ward off insolvency by creating ever-larger quantities of paper money. The worse off the economies of the world, the more fiat currency will be created.”

Source: Richard Russell, Dow Theory Letters, January 23, 2009.

Financial Times: UK move to boost cash supply
“Britain paved the way towards unconventional monetary policy in Europe on Monday when the government gave the Bank of England authority to create money and buy a variety of private sector assets.

“Although there is no sign the Bank’s monetary policy committee wants to introduce US-style quantitative easing immediately, it now has the power to buy assets ranging from corporate bonds to asset-backed securities with newly created money.

“The policy, if introduced, seeks to ease the flow of finance to companies, driving down company borrowing costs and boosting the supply of cash in the economy. The Federal Reserve prefers the term ‘credit easing’ to describe similar moves.

“The decision comes as part of a package designed to ease pressure on lending in the UK economy and put a brake on deepening recession. On Monday, the European Commission said Britain had one of the most exposed economies in the world to the global recession, predicting its economy would contract by 2.8% this year with stagnation continuing in 2010.

“Other elements of the package were heavily trailed. An insurance scheme stands at its heart, designed to restore some certainty to banks’ finances by providing cover against catastrophic losses. This will be implemented from February on a case-by-case basis.

“From April, the government will provide guarantees to wrap around simple asset-backed securities issued by banks containing high-quality mortgage and corporate assets. Subject to state aid approval from the European Commission, it is also planning to extend its current guarantee of short-term funding for banks to the end of the year.

“For the first time since the crisis began, the Bank of England will also explicitly accept corporate credit risk when it begins a $74 billion programme of asset purchases from the private sector in return for government paper in February.”

Source: Chris Giles, Financial Times, January 19, 2009.

Financial Times: UK tries to break recessionary dynamic
“The government on Monday launched its second bank rescue package, injecting billions of pounds more of the taxpayer’s money into saving Britain’s banks. Chris Giles, FT’s economics editor, tells Daniel Garrahan that the new bank rescue package is designed to rescue the economy as well as the banks.”

Source: Financial Times, January 19, 2009.

BCA Research: Last chance for UK banks
“Measures by UK authorities to shore up the banking system brings the prospect of full scale nationalization one step closer if they fail to re-ignite lending.

“The BoE’s ability to purchase assets outright will effectively help in recapitalizing the banking system and should also provide a valuable fillip to the corporate debt market. For now, the Treasury has stopped short of setting up a ‘bad bank’ to coral all the poor quality assets, probably for fear of what this might mean for the UK’s beleaguered public finances in the event of default. Based on current government estimates the deficit will stay above 3% of GDP until the middle of the next decade.

“Bottom line: At this stage, policymakers are limiting their actions to ‘quality assets’. However, it is probable that the next step is a ‘bad bank’ and full scale nationalization, given that output is forecast to fall this year at the fastest pace since 1946 and lending is likely to stay weak for a prolonged period.”

Source: BCA Research, January 21, 2009.

James Pressler (Northern Trust): Japan – no sale!
“Two items of significance regarding the Japanese market hit the wire this morning – the end-year trade balance and the Bank of Japan (BoJ) policy meeting announcement. With the overnight call rate already down to 0.10%, another rate cut would hardly be a news-maker, but the state of Japan’s exports usually makes the front page. And unfortunately, the news was not good.

“Nobody expected the export market to make a miraculous turnaround, but some hope existed for less erosion in overseas sales or fewer imports, thereby supporting net exports. Neither occurred. December imports contracted by 21.5% on the year and were up by 7.9% for 2008 as a whole, but exports fared much worse, posting respective changes of -35.0% and -3.4%. This dragged the annual trade balance down to $20.4 billion, a level not seen since 1983 and a far cry from the 2007 tally of $92.1 billion.

“We have said it before and we will say it again – our official forecast for Q4 GDP in Japan is ‘abysmal’.”

Source: James Pressler, Northern Trust – Daily Global Commentary, January 22, 2009.

Societe Generale: Japanese exports fall 35%
“Strikingly, Japanese exports to the US were down some 37% yoy. But we cannot highlight strongly enough how truly mindboggling Japan’s collapse in exports to China are. Last July they were expanding at a 16% yoy pace. Now they are contracting at a 35% yoy rate! This is a phenomenon throughout the region. Hence despite the notoriously manipulated Chinese GDP data showing a shocking slowdown in GDP growth to 6.8% yoy. I would eat my hat if the Chinese economy was doing anything other than contracting right now.”

Source: Societe Generale, January 2009.

Nouriel Roubini (RGE Monitor): China – why 0% growth is the new size 6.8%
“The Chinese came out today with their 6.8% estimate of Q4 2008 growth. China publishes its quarterly GDP figure on a year over year basis, differently from the US and most other countries that publish their GDP growth figure on a quarter on quarter annualized seasonally adjusted (SAAR) basis.

“When growth is slowing down sharply the Chinese way to measure GDP is highly misleading as quarter on quarter growth may be negative while the year over year figure is positive and high because of the momentum of the previous quarters’ positive growth.

“Indeed if one were to convert the 6.8% y-o-y figure in the more standard quarter over quarter annualized figure Chinese growth in Q4 would be close to zero if not negative.

“Other data confirm that China was in a borderline recession in Q4 and that it may be in an outright recession in Q1: production of electricity plunged 7.9% in y-o-y basis; the Chinese PMI has been below 50 and close to 40 for five months now.

“And with manufacturing being about 40% of GDP , manufacturing is certainly in a sharp recession (negative growth) and the overall economy may be close to a recession

“So the 6.8% growth was actually a 0% growth – or possibly negative growth – in Q4; and the Q1 figures look even worse. So China is in a recession regardless of what the highly massaged official numbers claim.”

Source: Nouriel Roubini, RGE Monitor, January 22, 2009.

Bryan Crowe (Northern Trust): Brazil – 100 is the new 75
“In a surprise to the majority of forecasters, Brazil’s central bank lowered its benchmark rate by a larger-than-expected 100bps on Wednesday after an official vote of 5-3 (the three voted for a 75 bp cut), bringing the overnight Selic rate down to 12.75%. This move was justified after a subdued inflation reading for December, but the committee’s main reason for the move was a significant deterioration in domestic conditions.”

Source: Bryan Crowe, Northern Trust – Daily Global Commentary, January 22, 2009.

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Obama’s Honeymoon Faces Daunting Tasks

Wednesday, January 21st, 2009

The following paragraphs from Nouriel Roubini’s RGE Monitor provide an insightful look at the daunting economic and geo-political challenges facing President Obama.

Now that Barack Obama has taken the oath and become the 44th President of the United States, he faces great expectations at home and abroad to steer the U.S. and global economy out of the greatest post-war recession and financial crisis, to re-align the U.S. foreign policy stance and global standing on issues like financial sector regulation, climate change, trade talks and nuclear proliferation. He – and his team – enters with large amounts of political capital.

Obama’s public acknowledgment that the country’s economic woes will remain challenging in the near-term and will involve great adjustments, and his choice of a strong economic team are signs of optimism that the administration will be quick with policy measures. While the domestic economy (especially passing a fiscal stimulus package) will take most of his time in the short-term, the Israel-Gaza offensive indicates foreign policy concerns – especially in the Middle East and South Asia will also demand attention from the beginning of the Obama presidency.

Fiscal Stimulus
Significant growth contraction in Q4 2008 and Q1 2009 along with mounting job losses, declining asset incomes, corporate bankruptcies and tight credit conditions, mean Obama’s first priority will be to pass the fiscal stimulus package by February 2009. The payroll tax relief, extension of unemployment insurance and food stamps for low-income households included in the package will cushion vulnerable groups from the recession and boost consumer spending. However, these policies may do little to boost growth in the short-term. With only about US$100bn of around US$500bn in planned infrastructure spending expected to kick in within the first three months, the initiative may not be timely in spite of being potentially effective in boosting the economy during late 2009 and 2010.

While tax cuts will be timely, households facing financial pressure will save the proceeds rather than boost spending just as they did during Q2 2008, limiting effectiveness. Similarly, tax credits for businesses to hire workers and invest in new equipment will be ineffective in stimulating investment since firms forecasting a prolonged slump in domestic and export demand and high credit costs will cut capex plans.

However, given that state and local governments support greater spending and jobs than the federal government, grants for the recession- and budget-deficit hit states will be more effective in preventing cut backs in public services, infrastructure projects and jobs, and also partly offset declining tax revenues and slump in debt financing.

But given our estimated contraction in private demand of around US$700bn in just 2009 alone, the US$800bn-plus stimulus package distributed over two years (2009-10) might not be enough to offset the contraction in GDP in 2009. Also, the extent of job creation via the stimulus might be limited as infrastructure projects will, at best, absorb workers from real estate construction and low-end manufacturing while services and manufacturing in general will continue to witness hiring freezes due to low demand. Moreover, investment in infrastructure, renewable energy and R&D will simulate the economy and create jobs only in the medium to long run.

Hence, the prolonged slump and a very sluggish economic recovery might actually necessitate a second stimulus package. More importantly, unless the government addresses problems of bank capitalization and mortgage crisis, any fiscal stimulus will be ineffective in steering the economy out of this crisis.

Continued bank bailouts have signaled to the administration that further bank writedowns are imminent and the banking system as a whole might be insolvent. Capital injection on an ad-hoc basis, or even after banks write down bad debt to establish asset values, might only delay a broader solution for toxic assets while making inefficient use of the TARP funds. One possible solution would be the creation of a ‘bad bank’ that can buy toxic assets from banks to ease pressure on their balance sheets and help stimulate lending to the private sector.

An alternative might be to use the remaining TARP funds to extend government insurance to banks’ toxic assets. Obama’s economic team also has voiced concerns that the TARP funds have been inefficiently used by banks so far in order to absorb losses on their balance sheets, fund acquisitions and pay for compensation rather than fuel credit growth in the economy. The new administration will likely direct the remaining funds towards unclogging credit markets and renewing lending to households and firms by targeting consumers and municipalities – credit cards, mortgages, auto loans, students loans and muni bonds. Total loan losses are expected to hit US$1.6 trillion and additional negative feedbacks on MBSs and other ABSs are imminent, especially as the recession raises default by households and corporates.

Tight credit conditions and financial headwinds for households will continue to raise foreclosures and mortgage defaults. Increase in the excess home supply now poses the risk of over-correction in home prices thus leading to further bank losses and contraction in consumer spending. As a result, Congressional Democrats and the Obama administration will have to work on modifying the troubled mortgages and refinancing them into longer term low interest loans. But given the limited effectiveness of past government programs, the new government needs to reduce the mortgage principal to fix the problem of homeowners’ insolvency rather than just extending the maturity period or reducing the interest rate.

To encourage greater lender participation, the government will have to share the cost of modifying the loans and offer lenders a share in future home appreciation and share any losses from default on the modified loans. While Democrats favor using some of the remaining TARP funds for this purpose, estimates suggest that the cost of such a program might be as much as US$600bn to US$1 trillion, especially as home prices overcorrect downward, more homes fall into negative equity and defaults on the refinanced mortgages continue. To contain fiscal costs, the government should be the senior debt holder in the modified mortgages to benefit from future home appreciation.

Continued bank bailouts, fiscal stimulus packages and refinancing at-risk mortgages will likely push up the fiscal deficit to over US$1.3 trillion in FY2009. While these counter-cyclical spending measures are warranted to address the crisis and Obama might also delay his plan to raise taxes, the U.S. will have to consider fiscal consolidation during the recovery phase. Unless the government reforms the tax system, reduces health care costs and finances Social Security and defense needs, a structural budget deficit will continue to pose risks to the U.S. debt financing needs and the dollar for many years to come.

Trade
Global trade talks might take a backseat in 2009 as the U.S. and other economies remain occupied with domestic counter-cyclical fiscal and monetary policies. However amid slumping exports, more and more governments might impose import restrictions, offer trade distorting fiscal stimulus to domestic firms, prevent stimulus leakages via imports, bail out national champions and favor undervalued currencies. Escalating trade protectionism during the Great Depression actually worsened the global economic crisis. In such a scenario, the U.S. would need to take the lead to renew global trade talks and establish WTO guidelines to prevent countries from pursuing protectionist measures. However, this will be a longer term objective.

Meanwhile the discussion on NAFTA is likely to re-emerge in light of the President’s visit to Canada, reportedly his first foreign trip. While policy on trade agreements, the Chinese reminbi and inward-investment by foreign governments might take a backseat in the initial days of the new administration, China’s bias for an undervalued currency to support exports and the need for investments from foreign governments in the face of U.S. bank and corporate bankruptcies might rekindle these issues. Moreover, as imports and exports shrink for deficit and surplus countries respectively, U.S. will lead the world in the painful unwinding of global imbalances.

Energy and Climate Change
Although climate change is a major priority and the new members of Obama’s energy team are focused on increasing energy efficiency and the share of alternative fuels in the U.S. energy mix, coming to consensus on these issues may be difficult – and comprehensive climate change legislation might not come to the fore until 2010. In the short-term, the most significant policies to support alternative fuels may come through other economic packages – the fiscal stimulus, the terms of the support to the auto sector are some examples.

President Obama has emphasized that the fiscal stimulus will include support for ‘green jobs’ – jobs that support alternative energy and help to wean the U.S. from fossil fuels that are increasingly sourced abroad from unstable countries, but these will take time to have effect. However, political momentum globally may build as the next climate change conference approaches at the end of 2009. Steven Chu and other members of Obama’s energy team are expected to push for significant energy policy changes towards renewable and federal climate change legislation, including an economy-wide cap-and-trade program however the severity of the economic recession may make a gas tax unpalatable even if it is matched by offsetting payroll tax cuts.

Despite the fall in demand as global output contracts, there are obstacles in diversifying both the source of energy supplies and the type will be difficult, particularly in the short-term. Not only do the costs of alternative energy remain high, particularly as technologies are still being developed. Government policies might offset this gap.

The reduction in oil prices may deter some of the demand for drilling off the U.S. coastline even as it deters investment in alternative technologies. Similarly, environmentally costly fuel from Canada’s oil sands may find U.S. markets less welcoming, even if it spurs investment in carbon sequestration in the long-term. Already the fall in gasoline prices has deterred the purchases of hybrid vehicles, possibly reversing some of the behavioral changes that led to lower petroleum consumption in mid-2008.

Foreign Policy
Despite the administration’s focus on passing a fiscal stimulus and domestic policy issues, President Obama has inherited a complex set of foreign policy issues from President Bush that will occupy him, his Secretary of State Hilary Clinton and their teams. Political and security issues in the Middle East and South Asia are particularly urgent. Obama comes to power with significant political capital and a set of experienced officials determined to increase diplomatic efforts to counter global threats given the limitations of hard power to solve global issues.

The Gaza crisis pushed the Middle East and especially the Israeli-Palestinian conflict to the top of the President Barack Obama’s agenda. In particular the focus will be on trying to prevent a precarious ceasefire from contributing to regional instability. The cease-fire in Gaza could present a fresh opportunity for mediating a peace process, but Obama will be faced with a set of challenges nevertheless that may absorb a lot of U.S. political capital in the region.

The conflict had deepened a rift between the Palestinian rival political factions – Hamas and Fatah – and the lack of national unity may continue to impede the serious advancement of the Israeli-Palestinian peace process, as will divisions between Arab states. Furthermore, Israel holds parliamentary elections on Feb 10 and the commitment of the Israeli government to the peace process will vary. Finally, brokering a successful Middle East peace process involves a broad regional approach and an effort to address regional players, such as Syria and Iran and involving both tradition power brokers like Egypt, Jordan and Saudi Arabia and newer entrants like Qatar.

A set of elections in the Middle East, especially in Israel, Iraq and Iran in the first half of 2009 may provide testing times. The reduction of U.S. troops in Iraq and transfer of power to Iraqi authorities is already well under way but more details are yet to emerge regarding the exit of U.S. troops. While Obama pledged to withdraw troops from Iraq with 16 months of taking office, they might remain for some time. The President has emphasized a new approach to deal with Iran including the possibility of lower-level diplomatic engagement, but the country’s emphasis on nuclear proliferation may be difficult to shake. With the fall in the price of oil, Iran’s abilities to fund its proxies in Iraq, Lebanon and Palestine may be reduced as maintaining domestic support becomes paramount.

Regional security continues to deteriorate in South Asia with the resurgence of the Taliban in Afghanistan, growing hostilities between India and Pakistan, and a weakening alliance with Pakistan against the war on terror. Obama has regularly echoed the need for more troops to be deployed and the Senate has agreed to send additional troops almost doubling American troops on the ground. However, the daunting task of constructing a comprehensive new strategy for a region defined by endemic corruption and the lack of basic amenities remains – and the economic crisis might make it more difficult to convince fellow NATO members to also increase their military presence. By contrast, despite the persistence of North Korea’s nuclear program, East Asia is unlikely to grab as much attention. Economics will likely continue to dominate the U.S. China relationship particularly now that China’s exports are contracting and China, like the U.S. faces a hard landing.

President Obama will seek to strengthen transatlantic ties that have weakened following the Iraq war. Washington will work together with EU closely together to respond to the financial and economic crises, peace and security issues, and to stop and reverse climate change. But convincing NATO allies to increase military presence in Afghanistan may be difficult. U.S.-Russia relations have been strained by NATO’s eastward expansion, war in Georgia, gas politics, Kosovo’s independence to name a few. Despite a warning that Russia might deploy short-range missiles in the Baltic region if Washington proceeded with its missile defense shield in Eastern Europe, Moscow has signaled its willingness to reexamine relations with the U.S. under the new administration.

The U.S. and Russia may be able to make common cause regarding the nuclear threat from Iran, helped perhaps by Obama’s ambivalence about the missile defense and ruling out of a speedy NATO membership track for Ukraine and Georgia. Yet neither country will be willing to compromise on its core interests, and a divided Europe may make responding to a poorer, but still determined, Russia more difficult.

Source: RGE Monitor, January 21, 2009.

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Byron Wien: Ten Surprises for 2009

Tuesday, January 6th, 2009

Byron R. Wien, Chief Investment Strategist of Pequot Capital Management, Inc., today issued his list of Ten Surprises for 2009. Mr. Wien has issued his economic, financial market and political surprises annually since 1986. The 2009 list follows:

1. The Standard and Poor’s 500 rises to 1200. In anticipation of a second-half recovery in the U.S. economy, the market improves from a base of investor despondency and hedge fund and mutual fund withdrawals. The mantra changes from “fortunes have been lost” to “fortunes can still be made.” Higher quality corporate bonds, leveraged loans and mortgages lead the way.

2. Gold rises to $1,200 per ounce. Heavy buying by Middle Eastern investors and a worldwide disenchantment with paper currencies drive the price of precious metals higher. In a time of uncertainty, investors want something they can count on as real.

3. The price of oil returns to $80 per barrel. Production disappointments and rising Asian demand create an unfavorable supply/demand balance. Other commodities also rise, some doubling from their 2008 lows. Natural gas goes to $9 per mcf.

4. Low Treasury interest rates coupled with huge borrowing by the Treasury send the dollar into a serious downward slide. Overseas investors become concerned that the currency printing presses will never stop. The yen goes to 75 and the euro to 1.65.

5. The ten-year U.S. Treasury yield climbs to 4%. Later in the year, as the economy shows signs of recovery, economists and investors shift their mood from concern about deflation to worries about inflation. A weak dollar, rapid growth in money supply and record-setting deficits (over $1 trillion) are behind the change.

6. China’s growth exceeds 7% and its stock market revives. World leaders credit China’s authoritarian government for its thoughtful stimulus policies and effective execution during a challenging period. The Chinese consumer begins to spend more and save less and this shift is behind the unexpected strength in the economy.

7. Falling tax revenues from the financial sector cause New York State to threaten bankruptcy and other states and municipalities follow. The Federal government is forced to step in and provide substantial assistance. The New York Post screams “When will the bailouts stop?”

8. Housing starts reach bottom ahead of schedule in the fall, and house prices stabilize after dropping 15% from year-end 2008 levels. The Obama stimulus program proves effective and a slow growth recovery begins before year-end. Third and fourth quarter real gross domestic product numbers are positive.

9. The savings rate in the United States fails to improve beyond 3%, as most economists expect. The concept of thrift seems to have vanished from American culture. Peak job insecurity and negative growth drive increased savings early in the year, but spending resumes as the economic growth turns positive in the second half, making Christmas 2009 the best ever.

10. Citing concerns about Iraq’s fragile democratically elected government and the danger of a Taliban-controlled Afghanistan, Barack Obama slows his plan for troop withdrawal in the former and meaningfully increases U.S. military presence in the latter. In a hawkish speech he states that the threat of terrorism forces the United States to maintain a strong military force in this strategic area.

Mr. Wien believes these surprises, which the consensus would assign only a one-in-three chance of happening, have at least a 50% probability of occurring at some point during the year. In previous years, more than half of the elements of the list have proven correct.

Pequot Capital Management is a private investment firm.

Source: Business Wire

http://www.businesswire.com/portal/site/home/permalink/?ndmViewId=news_view&newsId=20090105005763&newsLang=en

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Words from the (investment) wise for the week that was (Dec 29, 2008 – Jan 4, 2009)

Sunday, January 4th, 2009

Changing the digits on the calendar from ’08 to ’09 may not have transformed the dire outlook for the global economy, but during the holiday-shortened New Year week investors appeared adamant to put the rout of 2008 behind them.

Although mercifully the door has been closed on 2008, let’s recap some of the unprecedented movements experienced in financial markets during the year.

Equities:
– MSCI World Index: -42.1% (worst yearly performance since start of Index in 1970)

- S&P 500 Index: -38.5% (worst annual percentage decline since 1937 and 3rd worst on record; largest quarterly [4th quarter: -298] and daily [September 29: -107] points decline ever; 6th worst daily percentage decline [October 15: -9.0%])

- Dow Jones Industrial Index: -33.8% (worst annual percentage decline since 1931 and 3rd worst on record; largest quarterly [4th quarter: -2,330] and daily [September 29: -778] points decline ever; 6th worst daily percentage decline [October 15: -7.9%])

- S&P 500 and Dow Jones: There was no point in 2008 where the indices were up for the year at the close of a trading day. Since 1900, 2008 was only the 4th year (after 1910, 1962 and 1977) where the Dow never had a single day where it closed up for the year, according to Bespoke.

- FTSE Eurofirst 300 Index: -44.8% (worst yearly percentage fall since its creation in 1986)

- Nikkei 225 Average: -42.1% (biggest annual percentage decline on record)

- CBOE Volatility Index (VIX): Historical high in November based on new calculation, but remained below levels seen during the 1987 crash based on an previous calculation.

Treasuries:
– US Treasuries: Yields dropped to lowest levels since 1950.

- US 10-year Treasury Notes: Yields fell by 182 basis points – biggest yearly points decline since 1995 and the second biggest in the last 20 years.

Currencies:
– Japanese Trade-weighted Index: +25.0% (largest annual rise since currency was allowed to float freely in 1973)

- Pound against US dollar: -26.2% (worst annual decline since gold standard was abandoned in 1971)

- Pound against euro: -22.8% (worst yearly decline since launch of single currency in 1999)

Commodities:
– Reuters/Jeffries CRB Index: -36.0% (worst annual performance since inception of Index in 1956)

The table below highlights the performance of the principal asset classes for 2008. While West Texas Intermediate Crude (-53.5%), the S&P 500 Index (-38.5%) and the Reuters/Jeffries CRB Index (-36.0%) recorded large losses, US 30-year Treasury Bonds (+18.6%) fared very well, and the US Dollar Index (+6.0%) and gold bullion (+5.5%) also provided safe havens for risk-averse investors. (The returns for indices in individual countries are given in my December 31 “Stock market performance round-up”.)

But the few trading days since Christmas Eve witnessed a strong rebound in global stock markets as investors brushed aside bleak economic data. This resulted in market participants scooping up beaten-down stocks and commodities, mending some of the bruising sustained earlier in 2008. The better spirit of equities was reflected in losses for some government bonds.

Despite a grim ISM report (see section on Economy below), the S&P 500 Index jumped by 3.2% after the release of the data, propelling many stock market indices to almost two-month highs. The MSCI World Index (+5.9%), MSCI Emerging Markets Index (+5.3%), Dow Jones Industrial Index (+6.1%), S&P 500 Index (+6.8%), Nasdaq Composite Index (+6.7%) and the Russell 2000 Index (+6.1%) all gained handsomely (albeit on thin volume) during the week straddling New Year’s day.

Source: Daryl Cagle

December also marked the first monthly gain since August for the major US indices, with the Dow Jones and S&P 500 now up by 19.6% and 23.9% respectively since the lows of November 20, 2008.

The “storm” of 2008 has undoubtedly grown quieter in December, with the CBOE Volatility Index (VIX) having declined from 80.9 in November to 39.6 on Friday. Also, the average daily swing in the Dow Jones has fallen to ~300 points compared to ~430 points in November and ~590 points in October, according to Briefing.com.

Christmas Eve trading on Wednesday, December 24 marked the start of the Santa Claus Rally period, made up of the last five trading days of December and the first two of January. With one trading day to go on Monday, the combined gain for the S&P 500 Index for the first six days was 8.0%. The absence of a rally – and one now seems highly unlikely – has often been the harbinger of a sizeable correction or a bear market in the coming year. Hence the saying: “If Santa Claus should fail to call; bears may come to Broad & Wall.”

But risks remain plentiful and Bill King (The King Report) reminds us that “just as night follows day, international conflicts follow economic crises”. Escalating violence in the Middle East and tensions between Russia and the Ukraine served as a reminder and caused a 22.9% spike in the price of West Texas Intermediate Crude on the week.

Next, a quick textual analysis of my week’s reading material (done between New Year’s celebrations). No surprises here with keywords such as “economy”, “financial”, “market”, “prices” and “rates” featuring prominently.

Readers often ask me about Richard Russell’s (Dow Theory Letters) viewpoint on the stock market. Here is his latest take on matters: “It occurs to me that this is a good time to remember my old friend Marty Zweig’s classic warnings: ‘Don’t fight the tape, don’t fight the Fed’. Well, if you are bearish on 2009, you are indeed fighting the Fed and probably the tape. Why do I say that? Because the Bernanke Fed is going all out in its effort to turn the US economy around. Bernanke says the Fed will do whatever it takes to halt the current trend to deflation and to bring back prosperity and mild inflation to the US.

“The stock market seems to have finally climbed aboard the Fed’s bullish bandwagon. All of which brings us to a very dramatic and critical juncture. If the market heads higher in early January, I believe that money on the sidelines [$8.85 trillion – 74% of US market cap] could begin to turn optimistic and even bullish,” said the R man.

From across the pond, David Fuller (Fullermoney) added: “The crucial missing ingredient for stock markets to date has been confidence. Nevertheless that could change in January, given the high levels of cash held by most institutional investors. … if stock market indices surprise the bearish consensus and start to break upwards rather than downwards from their trading ranges, institutional investors will be under increasing pressure to participate.”

What the market does over the next few days will give a clue as to the rest of the year, according to Jeffrey Hirsch (Stock Trader’s Almanac). “S&P gains during January’s first five trading days preceded full-year gains 86% of the time.” He also draws attention to the so-called “January Barometer” which states “as the S&P 500 Index goes in January, so goes the year”. “The January Barometer predicts the year’s course with a .741 batting average. 12 of the last 14 post-election years followed January’s direction,” said Hirsch. Also, the “ninth” year of decades is generally an up year for the stock market with the Dow Jones down only three times in the last twelve decades.

The table below shows the key resistance and support levels for the major US indices. With most global indices having breached the 50-day moving average (and after year-end also having taken out the December peaks), the next target is the November 4 highs, followed by the key 200-day average. On the downside, the December 1 (not shown on table) and the all-important November 20 lows must hold for the uptrend to remain intact.

In my opinion, selective buying in global markets is in order, and ’09 may turn out to be a good year for a discerning stock picker. However, make sure to separate the wheat from the chaff because many companies will fall by the wayside during the new year. (Also see my posts “Stock market internals: further headway in 2009” and “Video-o-rama: Ring out the old, ring in the new” for more discussion of the outlook for stock markets in 2008.)

Economy
“Overall business confidence improved just a bit at the close of to 2008, but remains very dark with hiring intentions and expectations regarding the outlook in mid-2009 dropping to record lows,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. The Survey results indicate that the entire global economy is solidly in recession.

Further evidence of the worldwide economic crisis came from the Semiconductor Industry Association, reporting that global sales of semiconductors declined by 9.8% in November compared with a year ago, and by 7.2% since the previous month.

Data reports released in the US during the New Year week mostly confirmed the dismal economic outlook.

- The Institute for Supply Management’s Manufacturing Index is still contracting and fell by a larger-than-anticipated 3.8 points to 32.4 in December. The index is at its lowest level since 1980, with the forward-looking details also downbeat as new orders plunged to their lowest level since January 1948.

- The S&P/Case-Shiller Home Price Indices reported record annual declines, with the 10-City and 20-City Composite Indices falling by 19.1% and 18.0% respectively.

- The Conference Board’s Consumer Confidence Index declined in December to a historic low of 38 – down by 6.6 points from November’s 44.7. With consumer confidence in a perilous state, the outlook for spending appears dismal.

- Initial jobless claims decreased by 94,000 to 492,000 for the week ended December 27. Fewer-than-expected claims were filed, but holidays have been known to be more volatile for this indicator. Overall, labor market trends suggest persistent weakening.

- The ECRI Weekly Leading Index increased from 106.8 to 108 during the week ended December 26, but does not alter the Index’s overall downward trend. The meaningful decline in the ECRI indicates a severe slowdown that could last deep into 2009.

Commenting on the implications of the worsening employment situation for the US consumer, Mark Vitner (Wachovia Economics Group) said credit availability and housing affordability were two important elements of consumer buying decisions, but that an even more important variable was consumers’ comfort about their own employment and income prospects.

“Consumers typically have to have a job if they are going to buy a home or automobile. And even if consumers have a job, they are less likely to borrow and spend if they feel their job is at risk or their income could take a hit,” said Vitner.

Elsewhere in the world, major economies remain mired in a severe slump. “Europe, Germany, France, and the UK all reported declines in indexes of purchasing managers in December,” said Asha Bangalore (Northern Trust). China’s factory sector has contracted for the fifth month running according to the CLSA China Purchasing Managers’ Index. … the Australian … Manufacturing Index has recorded readings below 50 for seven consecutive months … In sum, weak economic conditions across the world is a challenge for policy makers in the months ahead.”

Source: US Global Investors – Weekly Investor Alert, January 2, 2009.

Assessing the global economic outlook, Nouriel Roubini (RGE Monitor) posed the following questions on RealClearMarkets: “So what lies ahead in 2009? Is the worst behind us or ahead of us?

“The United States will certainly experience its worst recession in decades, a deep and protracted contraction lasting about 24 months through the end of 2009. Moreover, the entire global economy will contract. There will be recession in the Eurozone, the UK, Continental Europe, Canada, Japan, and the other advanced economies. There is also a risk of a hard landing for emerging-market economies, as trade, financial and currency links transmit real and financial shocks to them,” said Roubini.

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Source: Yahoo Finance, January 2, 2009.

In addition to the Federal Open Market Committee (FOMC) releasing the minutes of its December 16 meeting (Tuesday, January 6) and the Bank of England’s interest rate announcement (Thursday, January 8), the US economic highlights for the next week, courtesy of Northern Trust, include the following:

1. Employment Situation (January 9): Payroll employment is predicted to have dropped by 450,000 in December after a loss of 533,000 jobs in the prior month. The unemployment rate is expected to have risen to 7.0% during December from 6.7% in November. Consensus: Payrolls – -478,000 versus -533,000 in November, unemployment rate – 7.0% versus 6.7% in November.

2. Other reports: Consumer Confidence (December 30), Construction Spending, Auto Sales (January 5), Factory Orders, ISM Non-manufacturing, Pending Home Sales Index (January 6).

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.

Source: Wall Street Journal Online, January 2, 2009.

Good riddance to 2008! Let’s hope that after one of the most tumultuous years in history, conditions will calm down – as always happens after a storm. And may this compilation of news items and words from the investment wise assist in keeping our portfolios on a profitable course.

To all the Investment Postcards readers, thank you for your loyalty and support. And remember, the biggest compliment you could give us is to broadcast word about the site and encourage your family, friends and colleagues to subscribe to the e-mail updates or RSS feeds.

Here’s wishing you a blessed and calm 2009!

Source: Daryl Cagle

YouTube: Uncle Jay’s review of 2008
“It’s been a whole year since Uncle Jay has SUNG an entire episode, and here’s the reminder why! It’s the year-end review of the news, and maybe it’ll seem a little better with music.“

Source: YouTube, December 21, 2008.

The New York Times: The year in the markets
Click the image for an interactive graph.

Source: The New York Times, December 31, 2008 (hat tip: Barry Ritholtz).

Bloomberg: A recap of 2008
“A two-minute look into the year that changed the economic landscape.”

Source: Bloomberg (via YouTube), December 31, 2008.

Win Rosenfeld (The Big Money): The five worst days of 2008
“You know it’s been a bad year when you’re arguing about what the five worst days were. Between the massive market fluctuations and the biggest banks going belly up, it’s hard to know where to start. From a crowded field of contenders, here are The Big Money’s five biggest buzz-killers.”

Source: Win Rosenfeld, The Big Money, December 30, 2008.

Bloomberg: Marc Faber’s 2009 outlook
Marc Faber says the global economy is going into severe recession and emerging markets will be hit the hardest.

Source: Bloomberg (via YouTube), December 31, 2008.

Bloomberg: Jim Rogers – “I’m prepared for the worst”

Source: Bloomberg (via YouTube), December 29, 2008.

CNBC: Map of the markets
“Where to put your money in 2009, with Michael Pento, Delta Global Advisors; David Kotok, Cumberland Advisors; Diane Brady, BusinessWeek; Dave Maney, Headwaters MB; and CNBC’s Rebecca Jarvis.”

Source: CNBC, December 31, 2008.

Bill King (The King Report): Unlikely that ’09 will be as ugly as ’08
“2008 will be a year of historic imfamy. The S&P 500 declined 38.5%, the biggest drop since 1937. The Dow Jones Industrial Average declined 33.8%, the largest drop since 1931.

“It is highly unlikely that 2009 will be as ugly. But this does not suggest that it will be a ‘good’ year.

“Back in October we commented that the stock market is following a clear historic pattern. A summer folly rally amid a receding economy and percolating financial duress produced an autumn collapse.

“And an October panic did not generate a low for stocks because during recessions, like in 1907 and 1929, October panic lows yield to new lows in November.

“But then a yearned rally appears. This usually extends into the first day or two of the New Year. But then January turns ugly on anticipated horrid earnings reports that will appear during the second and third weeks of the month. Finally there is a performance gaming rally over the last few days of January.

“When bonds rally sharply in Q4, they tend to make a significant peak early in January. Bonds by then are extended, even ‘over-invested’, and corporations and governments tend to burst the dyke by issuing beaucoup bonds for financing needs in the coming year.

“However, this year will be tricky because Weimar Ben is monetizing everything in sight. Weimar Ben can continue to monetize everything and anything – until the market revolts. And the revolt will likely come from the dollar.

“Though Ben and US solons desire a lower dollar in the hope of papering over the US’s intractable structural problems, there is a line of demarcation for the dollar. If the dollar descents below that incalculable threshold, it’s checkmate, Ben.”

Source: Bill King, The King Report, January 2, 2009.

Financial Times: 2009 – predictions of some known unknowns
“The Financial Times team of pundits is back, once again, to risk its professional reputation on bold predictions of some known unknowns.

“Will the recession end in 2009?

“No, as far as the US, the UK, Spain and Ireland are concerned; possibly Yes for other European economies and Japan. Whatever happens, 2009 will not be pleasant. For all the cuts in interest rates and taxes, higher unemployment will be the dominant issue of the first half of the year, outweighing gains to real incomes from these policies and lower commodity prices. Uncertainty will be the watchword for the year, making any prediction precarious, but there is still a good chance that rising incomes will become powerful forces in the continental European and Japanese economies later in the year. For those economies that need much bigger rises in household savings rates to adjust for the recession, recoveries will be delayed. There is also a good chance the world will enter a debt-deflation trap, although I hope the authorities will do everything to avoid this. But even if we experience genuine green shoots of recovery, as I expect, 2009 will be a year to forget.”

Click here for the full article.

Source: Financial Times, December 30, 2008.

Financial Times: Survey of economists – outlook for 2009
The Financial Times polled 67 leading economists for their views on the outlook for 2009. The full breakdown of their answers is given below.

1) Recession: How will this recession develop over the next twelve months? Will we see the green shoots of recovery by this time next year?

2) Risks: What are the three main risks that could profoundly exacerbate the recession? How concerned should people be?

3) Global outlook: Which part of the world will recover first and why?

Click here for the full article.

Source: Financial Times, January 1, 2009.

Edmund Conway (The Telegraph): Global economy to shrink for first time since the Second World War
“HSBC has warned that global gross domestic product will contract in 2009, describing this as ‘an extraordinary development in the modern era’. In a comprehensive examination of the economic crisis, it predicts that next year will be the worst in peacetime both for rich countries and the wider global economy since the Great Depression.

“And in a further blow to the Chancellor Alistair Darling, the bank warned that the UK will endure its worst year of growth since the bleak winter recession of 1947, forcing the Bank of England to slash interest rates to only a quarter percentage point above zero. The gloomy forecasts are far more pessimistic than those from the Treasury or the International Monetary Fund.

“Stephen King, HSBC’s chief economist, said: ‘For a while, it was possible to pretend that the financial and economic crisis was merely a problem for the major industrialised countries.

“‘Over the last three months, however, that theory has been blown out of the water. We have made savage downgrades to our forecasts with some of the emerging markets bearing the brunt of the bad news. On the basis of nominal GDP weights, we expect global GDP to shrink in 2009, an extraordinary development in the modern era.’

“He added that the serious risk now is that families and businesses will begin to hoard cash rather than spending it, as deflation rears its head across the rich world.

“‘Stuffing cash under the mattress, however, will only end in cumulative tears,’ he said. ‘This, after all, was part of the dynamic associated with the Depression in the 1930s.’”

Source: Edmund Conway, The Telegraph, December 27, 2008.

Wolfgang Münchau (Financial Times): World economy in 2009 �”� three priorities for recovery
“It is easy and difficult at the same time to predict the economy in 2009. It is easy to predict it will be an awful year for the US, Europe and large parts of Asia. The industrialised world will be in a deep synchronised recession. Global gross domestic product will probably contract also for the first time since the 1930s. There is not a great deal we can do to prevent this.

“The difficult part of the forecast is to predict whether policymakers will succeed in preventing the recession turning into a depression and lay the foundations for a sustainable recovery in 2010. What I can predict with near certainty is that policy will matter a great deal next year.

“We know that the current driving force behind this downturn is ‘deleveraging’. Overindebted households and undercapitalised banks are adjusting their balance sheets, building up savings in the first case and restricting lending in the latter. There is no chance of a sustained economic recovery until that process is almost complete.”

Click here for full article.

Source: Wolfgang Münchau, Financial Times, December 28, 2008.

Times Online: Car production faces global fall until 2010“Car production in North America will sink to its lowest level for more than 20 years next year and output in Europe will fall to a 12-year low, with Britain hit the hardest, according to PricewaterhouseCoopers (PwC).

“The accountancy firm is forecasting a 17% drop in the United States to 10.8 million cars and a 12% fall in the European Union to 15.5 million vehicles. Asia Pacific will experience the smallest fall, with a 5% decline to 26 million cars.

“PwC expects world production to fall by 10% to levels of output last seen in 2003.

“Calum McRae, automotive analyst at PwC, said: ‘These figures demonstrate that there is further gloom to come before we can possibly see the effect of any bailouts or incentives.’”

Source: Christine Buckley, Times Online, December 30, 2008.

Financial Times: IMF argues for large stimulus packages
“Across-the-board tax cuts or bail-outs of troubled industries such as the automotive sector are likely to waste government money while doing little to stimulate the global economy, the International Monetary Fund warned on Monday.

“As governments around the world bring in tax cuts and boost spending to combat the global recession, a study by the IMF said such programs must be large but carefully designed.

“‘There is a strong case for doing too much rather than too little,’ said Olivier Blanchard, the fund’s chief economist. But, he added, tax cuts should be aimed at people likely to spend money rather than save it.

“Although the IMF said it would resist giving a running commentary on policies, Mr Blanchard said signs of the stimulus plan emerging from the camp of US president-elect Barack Obama appeared to be hopeful. ‘The size corresponds roughly to what we think is needed,’ he said.

“Mr Obama’s team is reportedly considering a fiscal stimulus worth $675 billion to $775 billion, or 5% to 6% of US gross domestic product, likely to include substantial long-term investment spending.”

Source: Alan Beattie, Financial Times, December 29, 2008.

CNBC: Martin Feldstein on the stimulus package
“Discussing the kind of stimulus that should come out of Washington, with Martin Feldstein, Harvard University professor, President Emeritus of the National Bureau of Economic Research, & Council of Economic Advisors former chairman under President Reagan, with CNBC’s Steve Liesman.”

Source: CNBC, January 2, 2009.

Financial Times: GMAC gets $6 billion injection from US Treasury
“The US Treasury department late on Monday unveiled up to $6 billion in aid for GMAC, the financial services group which is critical to part-owner General Motors‘ turnaround.

“The Treasury said in a statement it would buy $5 billion in senior preferred equity with an 8% dividend from GMAC, characterizing the investment as part of ‘a broader program to assist the domestic automotive industry in becoming financially viable’.

“It will also lend GM up to $1 billion to participate in a rights offering at GMAC in support of GMAC’s reorganization as a bank holding company.

“Diminished access to capital had forced GMAC to cut back on vehicle financing, which in turn jeopardized GM itself.

“‘With the Treasury investment, we intend to resume our automotive lending quickly,’ GMAC spokeswoman Gina Proia said.

“The aid, which is being made under the Troubled Assets Relief Program (Tarp), comes after the Treasury earlier this month said it would extend a $17.4 billion emergency loan package to GM and Chrysler.”

Source: Nicole Bullock, Henny Sender and Bernard Simon, Financial Times, December 29, 2008.

Karl Denninger (Market-Ticker): GMAC’s “money-losing strategy” makes no sense
“The government ‘buys’ preferred equity that pays an 8% coupon. GMAC must pay that 8% coupon (9% if the government exercises the warrants).

“GMAC turns around and loans out money at 0% which it has to pay 8% to acquire, and at the same time decides that it will make loans to people with credit scores significantly worse than average, when before they would make loans only to people with scores that were slightly better than average. And we wonder how we got into this mess?

“The Federal Reserve and Treasury approved an application that contained as it’s essence an intentional money-losing business strategy, enabling the literal looting of the public treasury under the false pretense of an ‘investment’.”

Source: Karl Denninger, Market-Ticker, December 31, 2008.

Financial Times: Fed pushes on with mortgage bond plan
“The Federal Reserve pushed ahead with its plan to buy mortgage bonds issued by Fannie Mae and Freddie Mac on Tuesday, saying it would start buying early next month and purchase up to $500 billion by the end of June.

“The aggressive tactics – the Fed had previously said it would buy this amount over ‘several quarters’ – highlights the central bank’s determination to hammer down the risk spreads on the mortgage bonds and thereby reduce mortgage rates.

“The Fed also announced that it had selected four asset managers – BlackRock, Goldman Sachs, Pimco and Wellington Management – to manage the process. It had agreed a ‘competitive fee structure’ but did not disclose this.

“The Fed said ‘the program is being established to support the mortgage and housing markets and to foster improved conditions in financial markets more generally’.

“The move comes as policymakers at the central bank and in both the outgoing Bush and incoming Obama administrations look to target mortgage rates in the hope that lowering them would arrest the decline in house prices and thereby support financial asset prices.”

Source: Krishna Guha, Financial Times, December 30, 2008.

Bloomberg: Barclays’s head says “worst is ahead” for US economy
“Ethan Harris, co-head of US economic research at Barclays Capital, and Richard DeKaser, chief economist at National City Corp., talk with Bloomberg’s Peter Cook about the outlook for the US economy.”

Source: Bloomberg (via Blinx), December 31, 2008.

Paul Krugman (The New York Times): The yield curve is wonkish
“I’m a little late getting to this, but … I see that economists at the Cleveland Fed are taking some comfort from the positive slope of the yield curve. Long-term interest rates are higher than short-term rates, which is usually a sign that the economy will expand.

“Not this time, I’m afraid. It’s all about the zero lower bound.

“The reason for the historical relationship between the slope of the yield curve and the economy’s performance is that the long-term rate is, in effect, a prediction of future short-term rates. If investors expect the economy to contract, they also expect the Fed to cut rates, which tends to make the yield curve negatively sloped. If they expect the economy to expand, they expect the Fed to raise rates, making the yield curve positively sloped.

“But here’s the thing: the Fed can’t cut rates from here, because they’re already zero. It can, however, raise rates. So the long-term rate has to be above the short-term rate, because under current conditions it’s like an option price: short rates might move up, but they can’t go down.

“Indeed, if we look at Japan we find that the yield curve was positively sloped all the way through the lost decade. In 1999-2000, with the zero interest rate policy in effect, long rates averaged about 1.75%, not too far below current rates in the United States.

“So sad to say, the yield curve doesn’t offer any comfort. It’s only telling us what we already know: that conventional monetary policy has literally hit bottom.”

Source: Paul Krugman, The New York Times, December 27, 2008.

Karl Denninger (Market-Ticker): Uh oh … monetary multiplier below zero

“What is this?

“I could go through the derivation of how money supply works in a fractional reserve monetary system, but won’t, because most readers would have their eyes glaze over.

“The important part of this graph is what it denotes. Bernanke has lost control of ‘N’ (or velocity), which is the actual knob that he is trying to diddle when borrowing rates are changed (and in fact its the market that sets that, despite his protests).

“In fact the most useful tool in The Fed’s box in terms of influencing monetary policy is the soapbox, that is, jawboning (whether it be by cajoling or threatening.)

“The problem with an M1 multiplier below one is that the effect of printing money is of course multiplied by the velocity. That is, if you print up $10 into the economy the impact it has on economic activity depends on how many times that $10 circulates in a given amount of time. The more it circulates the higher the impact and the more your efforts do for the economy.

“The bad news is that when the multiplier is less than one the more money you spew into the economy the worse the impact, as you get less for each additional dollar.”

Source: Karl Denniger, Market-Ticker, December 30, 2008.

John Silvia (Wachovia Economics Group): ISM Manufacturing – economy remains in teeth of the recession
“December’s ISM manufacturing index came in at 32.4, well within recession territory and consistent with levels of the 1980-82 recession period. Weakness remains in new orders, production and employment. The inventory correction is ongoing. Prices paid fell sharply to 1949 lows and suggests lower inflation ahead.”

Source: John Silvia, Wachovia Economics Group, December 30, 2008.

Standard & Poor’s: Case-Shiller – home price declines worsen
“Data through October 2008, released today [Tuesday] by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, shows continued broad based declines in the prices of existing single family homes across the United States, with 14 of the 20 metro areas showing record rates of annual decline and 14 now reporting declines in excess of 10% versus October 2007.

“The chart above depicts the annual returns of the 10-City Composite and the 20-City Composite Home Price Indices. Following the lead of the 14 metro areas described above, the 10-City and 20-City Composites set new records, with annual declines of 19.1% and 18.0%, respectively.

“‘The bear market continues; home prices are back to their March, 2004 levels.’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s. ‘Both composite indices and 14 of the 20 metro areas are reporting new record rates of decline.’”

Source: Standard & Poor’s, December 30, 2008.

Mark Vitner (Wachovia Economics Group): Consumer confidence falls to a new low“Worries about employment and income prospects were likely weighing on consumers’ minds this holiday season, contributing to a larger than expected drop in consumer confidence. The Consumer Confidence Index fell 6.7 points to an all-time low of 38.0 in December, with most of the drop in the present situation series.

“While the present situation index is responsible for most of December’s drop, the record low in the overall index is due mostly to consumers’ extremely pessimistic view of future economic conditions. The present situation index plunged 12.9 points in December to 29.4, which is the lowest reading since the aftermath of the 1990/91 recession. The future expectations component, however, remains near all-time lows, even though it declined just 2.4 points to 43.8 December and remains above its October low.

“The Consumer Confidence Index is one of the longest running measures of consumer behavior, dating all the way back to 1947. The index has a very good record of tracking the performance of overall economic activity but has a very mixed record as a leading indicator.”

Source: Mark Vitner, Wachovia Economics Group, December 30, 2008.

The Wall Street Journal: Retail sales plummet
“Price-slashing failed to rescue a bleak holiday season for beleaguered retailers, as sales plunged across most categories on shrinking consumer spending, according to new data released Thursday.

“Despite a flurry of last-minute shoppers lured by the deep discounts, total retail sales, excluding automobiles, fell over the year-earlier period by 5.5% in November and 8% in December through Christmas Eve, according to MasterCard Inc.’s SpendingPulse unit.

“When gasoline sales are excluded, the fall in overall retail sales is more modest: a 2.5% drop in November and a 4% decline in December. A 40% drop in gasoline prices over the year-earlier period contributed to the sharp decline in total sales.

“But considering individual sectors, ‘This will go down as the one of the worst holiday sales seasons on record,’ said Mary Delk, a director in the retail practice at consulting firm Deloitte LLP. ‘Retailers went from ‘Ho-ho’ to ‘Uh-oh’ to ‘Oh-no’.’

“Luxury goods, once considered immune from economic turmoil, were hardest hit, with sales falling 21.2%, compared with a jump of 7.5% a year ago, when the economy had just begun to sputter. Including jewelry sales, the luxury sector plunged by a whopping 34.5%.

“During the same period last year, overall retail sales rose a modest 2.4%, helped by late-season discounting that enticed procrastinating shoppers. But this year, after a moderate uptick in shopping activity boosted by steep promotions the Friday after Thanksgiving, shoppers closed their wallets and reopened them only cautiously, worried by job losses, a sinking stock market and a recession climbing into its second year.”

Source: Ann Zimmerman, Jennifer Saranow and Miguel Bustillo, The Wall Street Journal, December 26, 2008.

Reuters: Bush signs pension relief bill into law
“President George W. Bush on Tuesday signed into law a measure intended to help company pension plans and retirees that have been hard hit by the financial crisis.

“Despite some concerns about the legislation, Bush decided that in the current financial environment the benefits outweighed the problems, the White House said.

“Generally healthy multi-employer pension plans hurt by the stock market decline would not have to make drastic pension plan contribution increases and worker benefit cutbacks that many companies had feared.

“A multi-employer pension plan, unlike a traditional single-employer plan, covers workers from more than one company and allows workers to move from job to job and still contribute to the plan.

“People 70-1/2 years old or older would not have to take distributions from their retirement plans as required under current law, allowing them to keep savings intact and avoid a bear-market tax hit.

“White House spokesman Tony Fratto said the administration had concerns that the legislation would increase the costs of near-term claims on the Pension Benefit Guaranty Corporation and could result in some benefits lost to workers over the long term. ‘Our concerns with the legislation remain, but we do believe that, in this current economic environment and current economic circumstances, that the benefits of the legislation outweighed our objections,’ he said.”

Source: Tabassum Zakaria, Reuters, December 23, 2008.

Financial Times: Auditors urge rethink on pension
“Auditors are pressing companies to reconsider how they calculate their pension liabilities and urging them to use formulas that could give rise to much larger reported deficits than would be the case if they stayed with the current approach.
Market volatility has raised questions over the so-called ‘discount rate’ used to calculate the present-day value of a fund’s future liabilities.

“The lower the rate used, the higher the present liabilities will be. The rates currently used by companies to calculate those liabilities are roughly equivalent to those on less risky high-grade corporate bonds. However, these have soared amid the market turmoil, sharply shrinking reported fund deficits.

“Some schemes have actually reported a surplus even as the values of the stocks they hold have plunged.”

Source: Norma Cohen and Jennifer Hughes, Financial Times, December 30, 2008.

Financial Times: Money flows out of hedge funds at record rate
“Investors pulled a net $32 billion from hedge funds last month, making 2008 the first year in their recorded history that the funds have had significant outflows and ending the industry’s 18 years of asset growth.

“Money has been taken out of funds following every strategy, even those – such as macro funds – which were showing returns, according to data from fund trackers Hedge Fund Research.

“The funds enjoyed net inflows for the first part of the year, even as the financial crisis hit and traditional mutual funds began to show outflows.

“However, in September a tide of redemptions began, according to TrimTabs, another fund tracker.

“Conrad Gann, chief operating officer of TrimTabs, said: ‘We estimate outflows in November were $32 billion, and there is an additional pipeline of redemptions that have not been filled, there could be $80 billion [of redemptions] in December.

“‘There are $57 billion of redemptions that we know are in, that are not reflected yet,’ he said.

“Mr Gann said it was difficult to estimate outflows for coming months because hedge funds had different redemption cycles.

“In recent months funds have also tried to halt outflows by limiting or suspending investor withdrawals. This means that data on outflows, which reflect actual repayments to investors, understates the true picture.

“This is the first year since at least 1990 that hedge funds have seen a drop in assets.”

Source: Deborah Brewster, Financial Times, December 30, 2008.

MarketWatch: Sam Stovall bullish on 2009, his father less so
“It’s been a horrible year for stocks overall – the worst, in fact, since 1931. Oft-cited market pundit Sam Stovall of Standard & Poor’s and his father, Robert Stovall, a veteran money manager at Wood Asset Management, review the past year with MarketWatch’s Steve Gelsi.”

Source: MarketWatch, December 31, 2008.

Richard Russell: Stock crashes have look of completed declines
“Over the weekend, I reviewed the charts of hundreds of leading NYSE stocks. Many of these stocks have crashed. In almost all cases, RSI has plunged to severely oversold levels. I note that at the end of each crash, the price action has been forming a sideways pattern. These numerous crashes have the look of completed declines – declines from which bases are forming. Following a true crash, stocks and stock averages have a habit of recovering roughly 50% of the action lost in the crash.

“And I’m wondering whether these patterns are now indicating that a tradeable low has been reached by this bear market. The news continues awful, and yet these various stock bottoms, following crashes, appear to be holding.”

Source: Richard Russell, Dow Theory Letters, December 29, 2008.

Bloomberg: Leuthold – cash at 18-year high makes stocks a buy
“There’s more cash available to buy shares than at any time in almost two decades, a sign to some of the most successful investors that equities will rebound after the worst year for US stocks since the Great Depression.

“The $8.85 trillion held in cash, bank deposits and money-market funds is equal to 74% of the market value of US companies, the highest ratio since 1990, according to Federal Reserve data compiled by Leuthold Group and Bloomberg.

Leuthold, Invesco Aim Advisors, Hennessy Advisors and BlackRock, which together oversee almost $1.7 trillion, say that’s a sign the Standard & Poor’s 500 Index will rise after $1 trillion in credit losses sent the benchmark index for American equities to the biggest annual drop since 1931. The eight previous times that cash peaked compared with the market’s capitalization the S&P 500 rose an average 24% in six months, data compiled by Bloomberg show.

“‘There is a store of cash out there that is able to take the market higher,’ said Eric Bjorgen, who helps oversee $3.4 billion at Leuthold in Minneapolis. ‘The same dollar you had last year buys you twice as much S&P 500 as it did a year ago.’

“Leuthold Group, whose Grizzly Short Fund returned 83% in 2008 thanks to bets against equities, said in its December bulletin to investors that stocks offer ‘one of the great buying opportunities of your lifetime’.”

Source: Eric Martin and Michael Tsang, Bloomberg, December 29, 2008.

David Fuller: 10 tangible reasons for a rally
“I have listed and illustrated 10 tangible reasons for a rally (no cheerleading here), and also discussed a crucial missing ingredient.

1. Governments have flooded the system with liquidity. It takes time for this to filter through to the economy but it will reach the stock market more quickly.

2. Interest rates are at record lows for the US and UK, both short-term and long-term, and heading lower elsewhere. This is an ideal background for stock market recoveries.

3. Valuations are much improved, despite legitimate concerns over the earnings outlook for at least the first half of 2009. Equity yields are competitive with government bond yields, despite the near certainty of more dividend cuts than increases over the next six months.

4. Corporate bond yields peaked in October and November and have fallen significantly. They have also begun to improve their performance relative to government bonds.

5. Various measures of investor/advisor sentiment reached extreme lows in October.

6. The VIX Index peaked in October and is trending lower.

7. Commodity indices have fallen significantly, lowering inflationary pressures. Historically, equities have done best in disinflationary environments.

8. In many countries, the financial sector is showing strength relative to the broader indices. This is a key lead indicator.

9. Levels of cash are at record highs.

10. Most broad stock market indices show some evidence of base formation development. This is less clear for the DOW, but can be seen for the FTSE 100, DAX, SX5E, FSSTI and NKY, to mention a few of many.

“In conclusion, technical evidence remains more conducive to a stock market rally rather than another slump. Over the last three weeks we have repeatedly mentioned the December reaction lows. They need to hold to remain consistent with our expectations for a ranging stock market recovery extending well into Q1 2009.

“The crucial missing ingredient for stock markets to date has been confidence. Nevertheless that could change in January, given the high levels of cash held by most institutional investors. If stock markets languish in the New Year, as many expect, there will be little reason for investors to reinvest in the stock market. However, if stock market indices surprise the bearish consensus and start to break upwards rather than downwards from their trading ranges, institutional investors will be under increasing pressure to participate. Failure to do so would put them at a competitive disadvantage in terms of 2009’s performance.

“Lastly, if the global economy does not show evidence that the recession is ending by Q3 2009, in response to the stimulus programmes, stock markets will be susceptible to a significant retracement of gains achieved during the first half of the year.”

Source: David Fuller, Fullermoney, December 30, 2008.

Barron’s: Seasonal patterns for the market
“Barron’s Michael Santoli discusses what market patterns to expect in the closing days of 2008 and the beginning of 2009.”

Source: Barron’s, December 29, 2008.

Bespoke: Estimated earnings growth for the S&P 500
“Below we highlight historical earnings growth estimates for the S&P 500 for Q4 2008 and full-year 2009. As shown, EPS estimates have dropped sharply over the last few months, and analysts are currently expecting the S&P 500 to see year-over-year earnings fall by 12% in the fourth quarter.

“At the start of September, analysts were actually expecting growth of 40%, which was largely because financial companies were expected to bounce back from a very poor Q4 in 2007. Instead, these companies are struggling much more than they were at this time last year.

“Estimates for 2009 have been dropping significantly as well. Back in September, analysts were expecting 2009 earnings growth of 24.7% versus 2008. But estimates are now at just 4.5%, and judging by the current trend, analysts will be looking for negative 2009 growth in no time.

“Earnings for Materials are expected to fall the most at –63%, while Consumer Staples and Health Care are the only two sectors expected to see year over year growth.”

Source: Bespoke, December 29, 2008.

John Hussman (Hussman Funds): Prices of Treasury bonds at dangerous levels
“… bond yields at this point are vulnerable to very sharp reversals. Given the level of extension in yields, it would not be difficult for the bond market to generate losses of say 10% in the 10-year Treasury bond, and as much as 20% to 25% in the 30-year Treasury bond over a very short period of time. Straight Treasuries may have safety from default risk, but the price risk is becoming downright dangerous.

“Corporate yields are much more reasonable, but there will be more fallout in this sector, and as I’ve noted before, taking a significant position in corporate would be essentially like a ‘bottom call’ in stocks, since corporate bonds tend to trade much like stocks during periods of elevated default risk.

“For our part, we strongly prefer Treasury inflation protected securities here. Despite near term deflationary prospects, the enormous expansion in government liabilities is unlikely to be accompanied by long-term inflation rates near zero, which is essentially the level that is priced into TIPS at present.”

Source: John Hussman, Hussman Funds, December 29, 2008.

Bespoke: Economists’ interest rate projections
“Below we highlight average estimates for the 10-Year Treasury Yield and the Fed Funds Rate going out to Q1 ‘10 based on Bloomberg’s survey of more than 50 economists. As shown, economists are expecting the 10-Year Yield to increase steadily in 2009, while they don’t expect the Fed Funds Rate to move back up to 50 bps until the third quarter. By the first quarter of 2010, economists expect the Fed Funds Rate to be back up to 1.00%. It’s hard to find an economist or analyst on the street that doesn’t think Treasuries will fall after the gains they’ve had in recent months. However, just like oil’s rally from $110 to $120 to $140, asset classes can move in one direction a lot more than most people expect.”

Source: Bespoke, December 31, 2008.

Forbes: Big Brother investing
“William Gross has buying power few can match. The founder of money manager Pimco in Newport Beach, Calif. oversees $790 billion, most of it invested in fixed income. But now there’s a new bully on the block: Uncle Sam. The government is on a buying spree the likes of which has never been seen, its purchases of corporate debt held back only by the speed of the dollar printing presses.

“Many of the targets of Washington’s largesse are shaky financial outfits that Gross normally wouldn’t touch, like AIG. Its bonds trade now at 12% yield to maturity – junk level last summer. Investors may be fleeing, but Gross knows when he’s been outmuscled. In the past year the 64-year-old King of Bonds has bought $100 billion of preferred shares and senior debt of financial companies receiving taxpayer loans. His bet is that the government will throw good money after bad rather than let them fail.

“Gross may be buying what others are anxious to sell, but don’t interpret this as meaning he thinks the economy is soon recovering. In fact, he’s quite bearish. With stocks down 40% this year, he predicts Americans will shift from risk to thrift for at least a generation. He says higher savings, plus a move away from leverage by businesses and money managers, means the US economy will grow no more than 2% annually for years, a third slower than its 20-year average. Profit margins will narrow, stock gains will slow to a crawl and the government will find itself lending to the private sector for a long time.

“Gross’ theory is that the government will arrange to get itself paid back and that his investors can safely travel on the government’s coattails. Gross figures Washington is getting a return on its preferred securities, including the value of its equity warrants, of 6% annually. With investors fleeing banks, though, his yield is much higher for essentially the same securities: 10% to 13%. He says these issues are like $20 bills on the street that no one picks up because they can’t believe it’s true. ‘It’s the most incredible value I’ve ever seen,’ he says.”

Click here for the full article.

Source: Bernard Condon, Forbes, January 12, 2009.

Bespoke: High yield spreads contract 10% from December highs
“While it may be cold outside, the thaw we have been seeing in the credit markets reached a notable milestone on Friday. Based on data from Merrill Lynch indices, high yield spreads tightened from 1,979 to 1,955 basis points. From their peak reading of 2,182 basis points on December 15, high yield spreads have now contracted by 10.4%.

“While these levels are still extremely high, they are moving in the right direction. The hope now for the bulls is that this move is sustainable in the new year, when trading desks are back at fully staffed levels.”

Source: Bespoke, December 29, 2008.

BBC News: China to allow freer yuan trades
“China has said it is to allow some trade with its neighbours to be settled with its currency, the yuan. The pilot scheme was announced in a package of measures designed to help exporters hit by the global downturn.

“It means if the two parties to a trade have yuan available, they need not enter world exchange markets to pay. Most of China’s foreign trade is settled in US dollars or the euro, leaving exporters vulnerable to exchange rate fluctuations.

“The yuan is not yet a freely convertible currency.

“Officials did not say when the trial scheme would start. When it does, the yuan could be used to settle trade between parts of eastern China (Guangdong and the Yangtze River delta) and the territories of Hong Kong and Macau, and between south-west China (Guangxi and Yunnan) and the Asean group of countries (Brunei, Burma, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam).”

Source: BBC News, December 25, 2008.

Gulfnews: Single currency to increase clout
“A single currency backed by a common economic agenda and a unified monetary policy could make the Gulf a strong regional economic bloc, say economists and financial experts.

“‘The single currency is a huge opportunity for the Gulf region to make its economic clout felt in the international arena. Creation of a strong currency supported by nearly 50% of world’s oil wealth will prove to be a major stabilising factor for the regional economies,’ said Dr Nasser Saidi, Chief Economist of Dubai International Financial Centre.

“Besides attracting foreign investments, analysts say, a strong currency could become a key factor in preserving the region’s financial wealth and help recycle oil wealth within the region.

“Analysts believe the current global economic environment presents an ideal opportunity for the creation of a strong common currency that could emerge stronger than many international currencies such as the dollar, euro, yen and sterling.

“‘The Gulf common currency supported by the region’s resource wealth could become a major reserve currency attracting global reserves into the region. It could also help regional financial centres emerge as global financial centres competing with others such as New York and London,’ said Dr Saidi.

“Economists and currency experts believe the pegged currency regimes in the region and the direct link to the US monetary policy was one of the main reasons for the recent economic volatility in the region. Once the currency union is launched, the immediate priority of the Gulf Central Bank will be to launch a flexible monetary policy that ensures exchange rate stability.”

Source: Babu Das Augustine, Gulfnews, December 29, 2008.

Financial Times: Steel output set for historic drop
“The steel business faces a fall in production in 2009 of at least 10%, analysts say. This would be the biggest year-on-year fall for more than 60 years.

“According to the gloomiest projections, it could be at least four years before output returns to the levels of 2007.

“This would make the period of the expected downturn only the fifth occasion in the past century, leaving aside times of world war, when a slump in the steel industry has lasted four years or longer.

“The sector has been among those worst hit by this year’s financial storms, with share prices in many steel groups having fallen by more than two-thirds since the middle of 2008.

“Hit by a sudden reduction in orders in September and October from businesses such as construction, cars and white goods, many producers including Lakshmi Mittal’s ArcelorMittal, Severstal of Russia and Corus, owned by India’s Tata Steel, have sharply cut production.”

Source: Peter Marsh, Financial Times, December 28, 2008.

Asha Bangalore (Northern Trust): Global factory activity mired in a slump
“In Europe, Germany, France, and the UK all reported declines in indexes of purchasing managers in December.

“The overall Markit Eurozone Purchasing Managers’ Index (PMI) for the manufacturing sector declined to 33.9 in December, a record low in the 11-year history of the survey.

“The German Markit Purchasing Managers’ Index fell to 32.7, the lowest since the survey began in 1996, and the December decline marks the fifth monthly contraction in factory activity.

“The French Markit/CDAF purchasing managers’ index for manufacturing dropped to 34.9 in December versus 37.3 in November. This reading is the lowest since record keeping for this series began in April 1998.

“Britain’s manufacturing sector contracted for an eighth straight month running in December.

“China’s, factory sector has contracted for the fifth month running according to the CLSA China Purchasing Managers’ Index.

“Although the Australian Industry Group-PricewaterhouseCoopers Australian Performance of Manufacturing Index rose one point in December from November to 33.7 index points, this index has recorded readings below 50.0 for seven consecutive months, indicating an extended period of contraction in factory activity.

“In sum, weak economic conditions across the world is a challenge for policy makers in the months ahead.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 2, 2009.

International Herald Tribune: Germany resists calls to spend its way out of trouble
“With battle lines sharpening, the German government appears determined to resist calls to spend an additional €40 billion to fight its way out of the recession, according to officials attending a meeting in the Chancellery in the past week.

“Chancellor Angela Merkel is being pulled in all directions as she plans a January 5 follow-up to a meeting of German government officials, business executives and union leaders she called two weeks ago to discuss ways to counter the recession.

“The business community, leaders of German states and other European Union nations are calling for the additional spending, which would amount to $56 billion. Industry chiefs, meanwhile, are calling for tax cuts.

“Merkel, facing federal elections in September, has said the focus of any spending measures must be preserving jobs. At the meeting two weeks ago, industry lobbyists promised to go along on that point, but now they have backed away even as they exert more pressure on her.

“The European Union, while weakening its criticism of Merkel’s cautious approach to dealing with the economic crisis, still wants the German government to do more because of its size: It has the largest economy in Europe.

“Merkel, so far, has kept the lobbyists, the state leaders and the EU guessing about her final package.”

Source: Judy Dempsey, International Herald Tribune, December 26, 2008.

Reuters: Further house price declines in store for UK
“Housing prices in England and Wales fell 8.7% in 2008, bringing the average price of a house to 159,900 pounds, property consultant Hometrack said in its monthly survey on Monday.

“At 0.9%, the pace of monthly decline eased slightly from November’s 1.1% drop, although prices have now fallen consistently over the last 15 months and 9.3% since the start of the credit crunch in August 2007.

“British house prices tripled in the 10 years running up to their peak in the middle of last year, but have since fallen as much as 15% in other surveys as the global financial crisis has caused the supply of mortgages to dry up.

“‘The onset of recession and the prospect of rising unemployment over 2009 will continue to dampen confidence and in turn demand, which will inevitably lead to further house price falls over the next 12 months,’ said Richard Donnell, director of research at Hometrack.

“Two other key indicators – time taken to sell a property and proportion of the asking price achieved – demonstrate the current weak housing market.

“Hometrack found the average time to sell a property in December was 12 weeks, up from 8.3 weeks a year ago and a low of six weeks in April 2007. The proportion of the asking price being achieved reached 88.6%, down from 93.5% a year ago, and well down on the high of 95.7% seen in April 2007.”

Source: Maureen Bavdek, Reuters, December 29, 2008.

US Global Investors: China’s manufacturing PMI remains in contraction
“According to CLSA, China’s manufacturing activity, responsible for 43% of the country’s GDP, contracted for a fifth month in December though the figures were an improvement from November. A sustained de-stocking cycle in the industrial sector has pushed the employment situation to a 56-month low, a tangible menace for consumer confidence and social stability.”

Source: US Global Investors – Weekly Investor Alert, January 2, 2009.

CNBC: Expect a V-shaped recovery in China
“Sun Mingchun, senior China economist at Nomura, sees a V-shaped recovery in China, with GDP growth starting to rise in the second-quarter of 2009. He explains his optimistic outlook to CNBC’s Martin Soong.”

Source: CNBC, December 29, 2008.

Bloomberg: Japanese economy may shrink 12.1%“Japan’s economy will probably shrink at an annual 12.1% pace this quarter, the sharpest drop since 1974, as exports collapse, Barclays Capital said.

“Gross domestic product in the three months ending tomorrow will fall at almost three times the 4.1% rate previously predicted, said Kyohei Morita, chief Japan economist at Barclays in Tokyo, after reports last week showed industrial production and exports posted the biggest declines on record in November.

“‘Given the speed and the length of the contraction, this recession could be the most severe in the postwar era,’ Morita said. ‘We expect negative growth will continue for a fifth straight quarter to the April-June period of 2009.’

“A 12.1% annualized contraction would be the steepest since the first quarter of 1974, when the oil shock caused the economy to shrink 13.1%, according to Barclays.”

Source: Keiko Ujikane and Tatsuo Ito, Bloomberg, December 30, 2008.

CEP News: Singapore GDP contracts more than expected
“Singapore’s preliminary gross domestic product (GDP) contracted 12.5% in the fourth quarter, against expectations for a 3.4% quarter-over-quarter contraction and the upwardly revised 5.4% decrease seen in the third quarter, originally reported as -6.3%.

“GDP was down 2.6% year over year, against a 0.3% annual decline in the third quarter.

“The report, released by Singapore’s Ministry of Trade and Industry Friday morning said the sharpest annual declines were in the manufacturing sector, down 9.0% from one year ago. The construction sector was up 13.3% annually and the services and producing component was up 1.1%.”

Source: CEP News, January 2, 2009.

US Global Investors: Brazil’s manufacturing confidence plunges
“The Brazilian Manufacturing Industry Survey compiled by the Getúlio Vargas Foundation in Brazil revealed a significant decline in the seasonally-adjusted Industry Confidence Index, from 83.9 in November to 74.7 in December. This was the fourth consecutive decline in this leading indicator of economic activity. In December, the index fell to its second-lowest level since the data series was created in April 1995.”

Source: US Global Investors – Weekly Investor Alert, January 2, 2009.

Financial Times: Russia braced for unrest
“Russia is bracing for further unrest as the rouble on Friday slid to a new low against the euro after a succession of moves to devalue its currency.

“A cut on Friday extended six weeks of devaluations by Russia’s central bank designed to offset the impact of the global economic crisis and falling oil prices as the country’s main export commodity approached its lowest level since 2004.

“Mikhail Gorbachev, the former Soviet leader, warned Russia faced ‘unprecedentedly difficult and dangerous circumstances’ and could be ‘heading into a black hole’. ‘It is not clear what the fate of our rouble will be or if society has sufficient financial and moral resources,’ he said.

“After the depreciation, which was the eighth so far this month, the rouble declined as much as 1.2% to Rbs29.06 versus the dollar on Friday, a four year low. The rouble has now lost nearly 20% of its value against the US currency since August.

“Analysts at Barclays Capital said the best case scenario would see Russian policymakers, facing the mounting evidence of a recession, allowing a one-off depreciation of 10% or more.

“The rouble’s slide comes as the government faces scrutiny over its policies. A demonstration earlier this month in the far eastern city of Vladivostok marked the first major challenge to the Kremlin since the onset of the global financial crisis.

“Mikhail Sukhodolsky, a deputy interior minister, warned on Christmas Eve that there could be further protests. ‘The situation may be exacerbated by a growth in frustration of workers over the non-payment of wages or those threatened with dismissal,’ he said.

Source: Isabel Gorst and Anuj Gangahar, Financial Times, December 26, 2008.

The New York Times: Russia cuts off gas deliveries to Ukraine
“In the face of mounting economic troubles, Russia cut off deliveries of natural gas to Ukraine on Thursday after Ukraine rejected the Kremlin’s demands for a sharp increase in gas prices.

“A similar reduction in supplies to Ukraine in 2006 caused a drop in pressure throughout Europe’s integrated natural gas pipeline system and led to shortages in countries as far away as Italy and France.

“But with a recessionary drop in demand, ample supplies and assurances from both countries that gas would flow westward without interruption, there were few signs of the near hysteria in Europe that accompanied the 2006 cutoff.

“Even Ukraine, which says it has enough gas in reserve to last through the winter, took Russia’s action in stride, underscoring how the political potency of the Kremlin’s energy card has plunged along with the price of oil and gas.

“Gazprom, the Russian natural gas monopoly, likened its actions to a utility cutting off service to a deadbeat customer. “The message is very simple,” Ilya Y. Kochevrin, the executive director of Gazprom’s export arm, Gazexport, said in a telephone interview. ‘If you receive a product, you have to pay for it. If you don’t pay, you don’t receive it.’

“But energy experts said that the Kremlin’s decision to employ the gambit again in a pricing dispute with Ukraine was an indication as well of Russia’s deepening economic woes.”

Source: Andrew Kramer, The New York Times, January 2, 2009.

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