Tuesday, January 18, 2011

notes on the week ended Jan 15th

i usually dont follow closely the few economic releases that were out this week: industrial production and capacity utilization were both up, but we've had a fairly steady rise in those numbers & and 18 month run in positive ISM manufacturing numbers without impacting factory employment, so until those numbers start to indicate more than potential corporate profits, they're nothing to get too excited about...retail sales were up slightly to a new record, but since it was driven by double digit increases at tiffany's, saks fifth ave, louis vuitton, nordstrom and other high end retailers, punctuated by increases of 35% in sales of cadillacs and 29% in porsches, it appears that was all driven by the same top 1% who will be getting the big obama tax cuts...

QE2 or other monetary policy options arent even being discussed or defended anymore...and only one area where fiscal policy might be impacted garnered much ink, that being the artificial federal debt ceiling, which most expect will be exceeded about March...incoming House freshmen, having campaigned on cutting spending, are rumored to be planning to hold the country hostage, hoping negotiate some non specific cuts...some were worried about the US defaulting on its debt, but it's become clear that the worse that could happen is some vendors may not be paid on time, some benefit checks may be held up, and maybe the troops in afghanistan would have to go without ammo for a while; certainly there would still be enough revenues to pay the interest on the debt and forestall a default...associated with that debate, there were interesting results when two major news organizations, reuters & CBS, polled the public about what should be done; they "overwhelmingly opposed" raising the debt limit even at the risk of raising borrowing costs, moreover, the people also opposed spending cuts to the benefit programs that account for half federal spending, and also opposed any tax increases to balance the budget...foreign aide, at 1% of the budget, was the only cut most people were willing to make...

there were some interesting revelations from the release of old transcripts of the Fed's FOMC meetings in 2005...of what i read, i was struck by greenspan's disinterest in anything that spoke of crisis, often attempting to deflect it with inappropriate jokes that everyone had to laugh at, as he was, after all, the maestro chairman at the time; for instance, in talking about greek interest rates, he asked "can we borrow from the greeks?", or joking about the condition of bear sterns and lehman well before they precipitated the crisis...at one FOMC meeting hearing where the Fed was being warned about the bubble by the Atlanta chairman, who talked about people flipping houses in florida, greenspan abruptly cut him off by calling for a coffee break..

the Fed is planning to conduct another round of bank stress tests relating to their ability to withstand more real estate related writedowns, but plan on keeping the results secret this time...several reports are out that the banks have a lot to worry about with the Ibanez decision, the Massachusetts supreme court decision of last week that returned foreclosed homes to the delinquent owners...moodys also reported that CMBS delinquencies rose 79% in 2010, and commercial loan delinquencies continued to increase...RealtyTrac reported that there were 2.87 million foreclosure filings in the year just ended and opined that properties receiving foreclosure filings would have easily exceeded 3 million in 2010 had it not been for the fourth quarter drop in foreclosure activity due to the robo-signing scandal and associated foreclosure moratoriums; nonetheless, 9% of all homes in Nevada and nearly 11% of the home in clark county (las vegas) already had a foreclosure filing this past year...

one blogger broke out labor participation for men by age group (see chart) and found that it had fallen below 80% for men aged 25-34, and was a dismal 45% for men under 24; furthermore, only one in three young black men have been able to find work...of the jobs that have been created since the recession started, 60% were in the low paying categories of temporary help, leisure trade, retail, and temporary help...

state budgets solutions again provided a study in contrasts this week, with california closing a $25 billion budget gap by cutting a number of programs, including welfare & cuts to the university budgets, and offloading other programs on the counties, leaving LA county in a $2 billion hole, texas dealing with their $27B gap by laying off 8000 workers and cutting medicaid & education, and illinois raising their personal income tax from 3% to 5% and their corporate rate from 7.3% to 9.5% to close a $13 B budget deficit deficit; contrast that with new jersey and florida who both cut corporate taxes even while cutting programs...governors of both wisconsin & indiana both responded to the illinois increases by inviting illinois businesses to cross state lines to take advantage of lower taxes...with the end of the stimulus program that gave the states interest-free loans to pay unemployment benefits, the states will now have to start paying interest on their massive unemployment borrowing, and in another hit to the cash-strapped states, the ending of the build america bond program bond led mutual fund giant Vanguard to scrap plans to roll out 3 new muni funds and forced new jersey to cut a planned bond offering in half, and caused a wisconsin debt issue to cost 3.75% instead of 2.24%...AAA muni-bonds topped 5% for the first time in two years..

commodities were in the news again this week, especially food & energy, elements which the Fed believes it can ignore in the measures of inflation they track when setting monetary policy...the headline news that drove corn and soybean prices to new cycle highs was a report out of the USDA revising the estimates for the feed & grain crops in the US & worldwide; prices of both jumped 4% when the report was released, with corn futures up 94% from their lows, soybeans up 51% and wheat up 80%...the worldwide supply deficit of wheat, already impacted by the russian fires and pakistani floods this summer, has gotten worse, as virtually the entire winter wheat crop in australia was destroyed by widespread flooding over most of the arable part of the continent...there were food-price related riots in tunisia, algeria, morrocco & mozambique, and the Indian cabinet met in a special session to consider how to deal with the rising price of onions (much to my surprise, ive learned that two previous indian goverments were toppled by unrest over onion prices; similar situations exist in sri lanka with dependence on coconuts, and indonesia with chili peppers) the financial times is covering the global food crisis in depth with dozens of articles, but since FT is a pain in the butt to copy ill just link to it here http://www.ft.com/foodprices the energy price rises were attributed to cold weather, as heat oil ended the week at a 27 month high and brent crude in europe touched $99 dollars, but possibly contributing was the shutdown of the aleyska pipeline, 12% of our domestic supply, due to a leak...riots over fuel prices were reported in bolivia & chile, with two deaths in chile...the US dept of Energy forecast that gasoline could top $4 gallon again this summer; curiously, this all followed an forecast early in the week by the US EIA that oil would hit $99 by the end of 2012...

after the year just past saw the worst heatwave in russian history, once in a century heatwaves in a dozen other countries, and once in a century flooding in pakistan and elsewhere, both NOAA & NASA released data showing that it was indeed the wettest year in history, and tied 2005 for the hottest year ever...meanwhile, the once in a century flooding in australia continued with more heavy rains this week, and an area of the country bigger than texas and california combined was declared a disaster...there was also once in a century flooding in brazil, with a death toll well over 500 making these rain caused mudslides brazil's worst weather related disaster in history...an international study concluded that a meltdown of greenland is now close to inevitable, and a canadian study predicted that the results of greenhouse gases already in the atmosphere would result in warming that could not be reversed for centuries...

the european crisis looked like it was heading for a replay of the ireland bailout with germany and france pressuring portugal to accept aid from the EFSF at the beginning of the week, with portugal facing a major refunding with interest rates over 7% and rising, and rising costs to insure greek, irish, belgian, & portuguese debt pushing an index of western europe swaps to a record high...but the ECB (euro-Fed) stepped in and started buying portuguese debt, and following commitments by both china and japan to also buy euro debt, the portuguese bond auction was successfully completed at 6.7%...now it's just a matter of seeing how many of such successes they can take, as european attempts to raise the funding of the EFSF (financial stability fund) are still being blocked by germany...a few links are included here, or you can get the entire blow by blow at the end of this weeks blog post...according to the Peterson Institute for International Economics, China has now overtaken the US by purchasing power parity; but similar measures by the CIA & the Economist Intelligence Unit still have the US as #1...

the above are my weekly comments that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me...

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