Monday, May 30, 2011

the oil crunch - civilization running on fumes...

ABC Catalyst travels from Paris, to London, to the world that is deep sea drilling, to find out where we stand with our oil supply
Transcript available at: http://www.abc.net.au/catalyst/stories/3201781.htm

Hear the extended interviews from the program on YouTube:

Peak Oil - just around the corner - Part 1

Peak Oil - just around the corner - Part 2

 

notes on the week ending May 28th

Delinquency Rate

you may have seen a headline this week to the effect that sales of new homes rose in april; if it was from one of the shill news sources the story likely didnt even tell you that sales normally rise in april over march and they'll likely rise again in may & june...what such an article probably didnt tell you that this april tied april 1982 for the least new home sales of any april on record at 32,000, which doesnt come close to the 116,000 new homes sold in april 2005...signed contracts for existing home sales, which were expected to be flat, "unexpectedly" crashed 11.6% to a 7 month low of 81.9 in april from a revised 92.6 in march, which had first been reported at 94.1; the reasons given by the NAR were higher gas prices & above normal rainfall...the WSJ economics blog reports that 14.3 million homes are now vacant year round, and estimate that at todays pace, it will take 13 years to clear the glut, a much longer time than i've seen for other such inventory estimates... LPS, the firm that tracks mortgage performance, reports that 7.9% were delinquent in april, up slightly from march but below levels hit earlier; an additional 4.14%, or about 2.2 million homes, were in the foreclosure process...of those reported delinquent, 40% had not made a house payment in over a year; in a foreclosure pipeline LPS described as "bloated", 31%  of those in foreclosure have been in the process for over two years (click adjacent chart)

the most widely followed index for commercial property, moody's, reported that prices for commercial real estate fell to a post-recession low in march; 4.2% lower than february prices, and they're now averaging 47% off the late 2007 highs...almost a third of all sales of such property (office buildings, malls, & the like) were considered distressed, meaning the owners were facing foreclosure or had stopped making payments; subsequently fitch ratings said they expected defaults in CMBS (commercial mortgage backed securities) to hit a new new record this coming year, after a 20% jump of such defaults in 2010...coincidental to those reports, the FDIC reported that the number of "problem banks" rose to 888 in the first quarter (the unofficial problem bank list is at 997 as of 5/27); as we've discussed previously, community banks are heavily invested in commercial property loans, so the spate of bank closings on "FDIC fridays" are far from over...

we continue to see weak data out of other economic reports as well; the chicago Fed index of the nation's economic activity sunk in april to its lowest reading since last august; first time claims for unemployment, which were hoped to fall back below 400K, came in at 424,000, and most of the excuses for the "temporary" higher numbers have already been used; and GDP growth for the first quarter was unrevised at 1.8% annually, when a rise to 2.2% had been expected...the alternate measure, GDI, tells us that GDP grew by only 1.2%, which leaves us still below pre-recession levels...furthermore, oft quoted MacroAdvisors revised their forecast for the 2nd quarter down from 3.2% to 2.8%; most economists believe that a 3% growth in GDP is needed to decrease unemployment...

joe biden is apparently leading the white house negotiations on raising the debt ceiling (make no mistake, it must be raised) but if the parties are any closer it hasnt been evident in the rhetoric coming from congress...the GOP has introduced a bill in the house to raise the debt ceiling which will be voted on next week, but that is widely seen to be theatrical, as they all plan to vote against it...although the governments borrowing costs remain low (yields on treasuries were down further), there has been a spike in credit-default swaps used to hedge against a government default...

since the Fed has been buying the lions share of newly issued government debt since QE2 began, and since QE2 will be ending in june, there has also been some discussion as to whether the Fed would initiate another round, or a QE3; however, at the april FOMC meeting most of the discussion was around how to undo the quantitative easing that's already been done; i was remiss in not mentioning it last week, but there are several links discussing the "exit strategy" right at the beginning of last weeks post...as i pointed out when QE2 started, this is where the difficulty comes in; monetary easing of this nature and to this degree has never been attempted before, and how to undo this tripling of the Fed's assets without reversing the positive effects QE2 is alleged to have had will be moving into uncharted monetary policy territory...

this week the CFTC charged a US commodities trader, parvon energy, and it's swiss and british affiliates, with manipulation of oil prices in early 2008; this story seems to have created a lot of confusion in the press, because everyone wanted to report that the speculators had made money driving oil prices up, where in fact the opposite had happened; what the traders are alleged to have done is accumulated a commanding position (2/3rds) of the forward contracts for physical WTI inventory in Cushing OK, creating an impression of a tight market...at the same time they had a much larger short position in the futures market; thus when they dumped their physical inventory at a loss of $15 million, their short position paid off $50 million on the declining oil price (ie, those speculators who were betting on a higher price because they believed supplies were tight lost their bets)...as i pointed out when i first discussed speculation, in the futures market, there always has to be equal numbers of contracts betting that oil would go down from any set price as there are betting that it would go up; the only way to truly drive prices is to manipulate physical inventory, whether it be by holding tanker loads of oil off the market, keeping your oil in the ground, or as in last years wheat price run up, spooking governments into hoarding more grain than they would immediately need...

  what does strike me as odd about this is that the two traders charged, Wildgoose and Dyer, are really small fish, and their UK affiliate arcadia is nowhere the size of a major manipulator such as BP; i wonder if they were taken down because they stepped on the toes of a big oil player, such as BP, goldman or glencore...but its likely we'll never know, because the house has voted to cut the CFTC budget just as the investigation into the wild oil price swings of '08 is getting underway...

much as observers have been saying all along, TEPCO finally confirmed that fukushima reactors 2 and 3 had also melted down, also probably within hours of the quake; so we now have at least 3 nuclear reactors without solid containment leaking radioactive water into the groundwater and hence into the ocean; a japanese study found the soil contamination in the evacuation zone at a level comparable to chernobyl, so although there are significant differences in the 2 nuclear accidents which make direct comparisons difficult, it now seems we have another disaster on or near the same level which has made a large area of Ukraine uninhabitable...the latest plan i've seen for containment is still to erect a steel framework around the site and place a giant polyester tent-like cover around the reactor buildings, which they hope to finish by the end of the year...the wisdom of that plan may yet be called into question, with the strong category 4 typhoon Songda bearing down on the open reactors as i write this...

Euro Bond Spreads the rifts in europe continued to widen this week; first, with 21% unemployment and most cities occupied by austerity protesters, the spanish socialists were defeated by the peoples party; in german elections, the anti nuclear greens placed second in a regional election in which merkel's party placed third; then greece was again downgraded by fitch & S&P warned on italy...IMF is now refusing to release the next loan tranche for greece unless the EU agrees for a years worth of funding into 2012, which the dutch, finns and germans wont agree to...as of friday nothing seemed settled, and peripheral borrowing cost continued to hit new highs (click adjacent chart)...if you want a play by play of the weeks events in europe, which moved as fast as i could track them, check the last 4 or 5 dozen articles linked in this weeks blogpost...

the above is my weekly commentary 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...

Sunday, May 22, 2011

notes on the week ended May 21st

as predicted, we hit the federal debt ceiling monday...subsequently everyone from tim geithner to jamie dimon predicted the world would come to an end if the ceiling isnt raised soon, and the other parties in congress put their non-negotiable demands for draconian spending cuts on the table in order for them to pass that; in the face of this apparent impasse, the treasury's 10 year borrowing costs fell to near term lows, and short term rates were near record lows...geithner says he can postpone the day of reckoning till august 2nd by borrowing from federal workers pension funds and other fiscal chicanery...what i thought was supposed to happen as the result of this ceiling being hit would be that, by law, the treasury would quit borrowing; but they just announced $110 billion in new bonds, notes & bills to be issued over the next week; certainly some of that is to replace maturing debt, but according to zero hedge, at least $45 billion of it is over that amount...

at any rate, irregardless of whatever budgetary legerdemain allows the treasury to continue borrowing over the apparent ceiling, if this goes on long enough some of the already budgeted government spending will be curtailed; more than likely they'd start by delaying payment on some bills; ie, not paying a military contractor on time wouldnt seem to be as intolerable as neglecting social security checks or the like, & as the last item on the list would be the interest on the debt, i cant see how a technical default could come about...but nonetheless, a reduction of government spending of any magnitude will have deleterious effects on the economy; according to estimates by the wall street journal, reducing government spending to the level of receipts without borrowing for just 95 days will entirely wipe out this entire year's expected GDP growth...& by my reading of the WSJ analysis, they dont even account for the known multiplier effect of government spending, which most economists agree is north of 1.5X during a downturn...

one area of our economy that was doing better than others has been manufacturing, but it hit an earthquake induced speed bump this past month; manufacturing fell 0.4% after rising for nine consecutive months; this was largely on the back of a decline in auto assemblies from 9 million in march to 7.9 million units in april, resulting from the parts shortage...as a result, total industrial production figures were flat, and capacity utilization fell...march figures were revised downward as well, so both were effectively declines from the previous month...as ive pointed out before, manufacturing jobs once were of the type one could support a family on; $20 / hr was not uncommon even 20 years ago; but now new non-union assembly line jobs reportedly start at just two bits over minimum wage...

    a rutgers study released wednesday highlighted the employment problems of newly minted college graduates, which was written about in an article & a series of columns by NYT economix editor catherine rampell & subsequently picked up by several bloggers...for those who have jobs, starting salaries are down 10% from before the recession (06-08) and just over half are working in a job related to their education; meanwhile, this years graduating class is expect to be the most indentured ever, with an average of nearly $23,000 per capita to work off...as a result, 85% of this years grads are expected to move back in with their parents after graduation...

MBA Delinquency by Periodthe MBA (mortgage bankers assoc) reported total delinquent and foreclosed mortgage loans for the first quarter this week, which came in at 12.84%, and chartmeister bill mcbride at calculated risk produced an interesting series of charts from that report,  so i'll point them out here...this first one ive included here shows the percentage delinquent loans by length of time delinquent and by state (click on it for a larger image)...in the same post, he has a similar chart with the total number of loans thus affected...he followed that post with two more posts with charts, the first one taking the ten worst states, showing the same data before the crisis, at the peak and for the current quarter, then followed it with another for the other 40 states with the same data...worth taking a look at the set if you're at all interested, as its a case where the pictures are certainly worth a thousand words...

in an "if you have a hammer, everything looks like a nail" series of posts, three macroeconomists noticed Google's issuance of $3 billion of long term bonds even tho they were sitting on $37B in short term cash and thought it an unwise interest rate bet; mankiw, delong, & tyler cowen all looked at Google's borrowing in isolation, as if they were betting on interest curve changes...apparently it never occurred to them that they are likely borrowing to have a war chest for acquisitions, not playing the treasury market...mankiw, who was chairman of bush's council of economic advisors, also looked at the obama's asset allocation, and discovered that they only had 10% in stock, which he interpreted as a bet against the future of the economy...

as expected, the morganza spillway in louisiana was opened to save new orleans & baton rouge from the mississippi flooding, choosing instead to flood 300,000 acres of rural towns and farmland...from reports yesterday, i gather that the mississippi has now crested along its length at record heights, and is not expected to rise further, although some areas will remain at flood stage for a month, and the southern stretch may still be flooded when hurricane season arrives...first guestimates of the economic damages are running between $6 and $9 billion, which would make it the most expensive flood in US history, and high on the list of billion dollar weather disasters (see pdf map) ... elsewhere, abnormal weather continues to impact agriculture around the country & the globe, with wheat in the southern plains, europe & china under drought & heat stress, canadian wheat only 3% planted due to cold & wet conditions, & corn & soy plantings in the midwest still well behind schedule; although other parts of the corn belt may be drying out, most of ohio is not yet; my rain gage recorded over 4 inches in the week ending thursday, which is more than is expected in the entire month...

we received our first read on how japan's triple disaster is affecting their economy and it wasnt good; they experienced a 3.7% contraction in the first quarter, which only included 20 post earthquake days; since their 4th quarter was also revised to a negative 3%, they're officially in a recession, with their GDP now approaching a 20 year low; apparently that, combined with the continual tightening in china, has had its first effect on australia's resource driven bubble economy, as their currency weakened as their labor force participation rate fell to 65.6% in april from 65.8% a month earlier; in europe, since the imposed austerity has left greece even less able to meet the terms of the earlier bailout, the EU seems to be trying to find terminology to repackage a new bailout as either a "soft restructuring" or a “re-profiling” of Greek debt, while the ECB is ruling out anything of the kind...solving that internecine dispute will not be any easier with the resignation of IMF managing director Dominique Strauss-Kahn after rape charges were filed against him in new york...finding a replacement of his international stature wont be easy; under a post war agreement between the US & the old colonial powers in europe, they select the head of the IMF, essentially cutting off 93% of the worlds population from the process; although emerging market countries are lobbying for various candidates of their own, french finance minister christine lagarde seems to have the inside track on the position...meanwhile, spanish youth seem to be taking a cue from the egyptians, as they've occupied the central square in madrid all week, with more arriving from the countryside each day, protesting against planned austerity measures...

Sunday, May 15, 2011

notes on housing, mississippi flooding, et al…

it isnt news to those of you who are using google's blogger that it started having problems on thursday and went offline that afternoon to stay unavailable until friday afternoon...all 3 1/2 million blogs were affected...apparently they had installed some kind of redesign package on wednesday which had a bug, & it took a while for them to catch it; as a result, all posts & comments from the time of the install, 7:37am PDT on Weds 5/11, were temporarily removed while they worked on it; so some economic posts which were linked elsewhere disappeared in the interim; it made for a hectic couple days, as posts & comments were restored piecemeal, but i believe by my final GGO update yesterday afternoon i had picked up the economic posts which had gone missing...

we had several home price indexes out this week which, taken together, corroborate that the second leg of the housing downturn is now underway; first, zillow reported its home price index fell 3% in the first quarter vs the 4th quarter, and was now down 8.2 percent year-over-year; then corelogic, the home price index used by the Fed, reported a 1.5% decline in march, which put their index 4.6% below the 2009 lows; then the NAR (natl assoc realtors) reported prices have fallen 7% YTD...these follow on the heels of the clear capital index, which had declared an official double dip the week before last, after their index fell 4.9% from the previous quarter and 5.0% YoY...the zillow database further showed that 28.4% of mortgages were underwater, ie, that the mortgagee owed more on the house than zillow figured to house to be worth; in some large MSAs, the negative equity figure topped 50%...the average house declined $15,000 in price since last year, which means that the typical home buyer who took advantage of the $8000 tax credits which were being offered to temporarily support prices early last year has now lost more than twice in home value than what they saved on taxes from the credit...participants in the earlier interest free federal home loans fared even worse; by zillow’s calculations, a typical home has lost $48,000 in value since march 2008...a survey of over 3000 brokers showed that over 1/3 of houses are now being bought by speculators with cash, and anecdotally many are reported to be foreign buyers...apparently, these price declines are not affecting florida real estate as much as thought; their legislature rolled back land use regulations to give home builders freedom to develop more tract housing as willy nilly as they deem necessary...

it seems the banks no longer want to take possession of much more home inventory, either, as foreclosures of homes which are delinquent have now slowed to the slowest pace since 2007; although part of the slowdown in the process could be attributed to the fact that the banks are being a bit more careful in handling the procedure than they were last year when robosigners were signing several hundred affidavits a day...the average time nationally between delinquency and foreclosure has now widened to over 400 days; but in some backlogged states (ie new york & new jersey) a homeowner can count on living in his home an average over 900 days after he or she quits paying on the mortgage; further complicating the procedures for the GSEs is that half of the mortgages they own or guarantee are registered in MERS (Mortgage Electronic Registration Systems) name; Fannie, Freddie & other lenders have prohibited their servicers from initiating foreclosures in MERS name; Fannie reported it lost $8.7 billion dollars in the quarter just ended, and requested an additional taxpayer bailout of $8.5 billion to cover that loss...

on the matter of foreclosure fraud, the 50 state attorneys seem to have given up the ghost of their investigation, leaving the banks to offer a measly $5 billion to settle the robosigning and forgery issues, instead of the $20 billion mentioned earlier (which some critics thought should be more than 10 times that much), with not much in the way of recourse for the homeowners who were wrongly foreclosed on; it was also reported that only 100 foreclosure files were were reviewed in the combined investigation by the Fed, the treasury and the OCC before the consent decree was issued; as part of that, the banks will hire firms of their own choosing to review their foreclosure procedures and give them a clean bill of health...nothing to see here, move on...

based on the amount of the treasury auctions of tuesday & wednesday this week, we’ll be going over the federal debt ceiling when the notes settle tomorrow; the treasury expects it will be able to cook the books at least until july or early august to avoid a US default...as of the most recent comments i’ve seen, the parties are still intransigent, with boehner insisting on $2 trillion in spending cuts, and some of the more radical in his party asking for as much as $6 trillion; all seem to insist on a medicare overhaul of one sort or another; meanwhile, everyone from bernanke to wall street is warning of the danger of using the debt ceiling as a bargaining chip; even the conservative chamber of commerce insists that congress should raise the debt ceiling “as expeditiously as possible.” ...the obama administration has asked congress to "fast track" the sale of government real estate, proceeds of which will be earmarked 60/40 to pay down the debt and to cover expenses, a proposal which seems to have bipartisan support...

the flooding on the mississippi will likely go into the record books as the worst since 1927, if not the worst in history, as the final volume of water is yet to be determined; however, we now do have the official stats for our record breaking april rainfalls which contributed to it (map to the right)...6 states (OH, IN, IL, KY, WV, & PA) had their wettest april in the 117 year record; additionally, michigan had its second wettest april ever, and NY & TN had their 3rd wettest; three other states (AK, MO, & VT) had rainfall totals among their 5 wettest aprils in history; moreover, 9 states had the wettest february to april ever...a combination of several climate factors, including a weakening la nina and a positive arctic oscillation left the storm stuck in the mississippi/ohio valley area, where it repeatedly tapped moisture from the gulf; as a result some areas received over 20 inches, or half their normal annual precipitation, in april alone...and that same weather pattern blocked moisture from reaching the southwest, so areas of texas, oklahoma, & NM now are experiencing extreme drought conditions, with the entire state of texas now having the driest 7 months in its history...

the river floodcrest is now expected to hit greenville, MS, early this week, and vicksburg by thursday; when it reaches the morganza floodgates, the spillway will be opened for the 2nd time in history to save the populated areas of louisiana around baton rouge and new orleans, but flooding instead morgan city and several LA gulf coast refineries with as much as 20 ft of water; as much as 14% of US refining capacity could be affected by flooding...the crop losses from flooding, including midwest corn wheat, & soybeans, and southern rice & cotton, could total $2 billion...and there's also a major impact to transportation in the country's midsection as well, since barge traffic even on rivers such as the tennessee that are not at flood stage has remained bottled up...

the japanese government finally admitted this week that unit one at fukashima had experience a full meltdown, something most experts had been saying all along; they're still pouring water on the remains of the unit, but it's leaking out as fast as it's added, so no further progress in containment has been made...similarly, no further progress has been made in containment of the meltdown of the eurozone, and i mustve collected more than four dozen links to the ongoing troubles in greek and ireland for this weeks blog post...

the above is my weekly commentary 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...

Sunday, May 8, 2011

notes on the week ending May 7th

as is always the case, the focus of the first friday of the month in the econosphere is the unemployment report...this week's report seemed to even out some of the discrepancies between the two BLS surveys which we've noted in the previous reports, wherein the unemployment rate from the household survey went down in the face of anemic job creation reported by the establishment survey...this week the latter reported an addition of 286,000 private jobs, which, less the cutbacks in govt employment, resulted in a non-farms payroll increase of 244,000...and except for government & construction, all sectors added jobs...yet the headline unemployed number taken from the household survey increased from 8.8% to 9%, showing a drop of 190,000...adding those working part time who want full time work to that, the U-6 number increased to 15.9%...using the establishment survey as a more reliable indicator, as i have in previous months, we've now added 768,000 jobs year to date, or about 168K over what we need to accommodate net working age population increases...considering that there were over 7 million jobs lost since the beginning of the recession, and the size of the working age population has grown another 4 million, we would have to add over 11 million jobs just to get back to the "normal" we experienced last decade..

DESCRIPTION

<<< employment-population ratio for Americans aged 25-54 (graphic from BLS)

other employment numbers werent so good; the weekly new claims, which i highlighted with a chart last week, jumped to 474,000, an 8 month high, raising the 4 week moving average over 431,000, convincingly reversing the improving series of sub 400K reports we were seeing in february & march...although the labor force participation rate remained flat, the absolute number of persons not in the labor force hit a new all time record of 86,248,000...and according to research by the WSJ, the number of those who are unemployed and have exhausted their benefits will soon hit 5 1/2 million; & as if to add insult to injury, a bill proposed by the house GOP would allow states to use the unemployment funds extension received from the Federal government (as part of the mcconnell-obama tax cuts for the rich deal worked out late last year) for other purposes as to be determined by the state legislatures...

since the debate over the deficit is still ongoing & the debt ceiling is already starting to affect borrowing by state & local governments thru the treasury, i also want to use the chart i've included to illustrate the origin of the cyclical portion of our current deficit problem; according to the recent BLS release, the average income is over $800 a week, or over $40,000 a year...the question i want to ask is how much tax revenue would we generate if the employment ratio were brought back to 80% with median wage jobs? & how much less would the safety net payouts be if that were true? its obvious that just adding 10 million more taxpayers would go a long way towards closing the budget gap...we were in balance before 2000, before the wars in the middle east and before the tax cuts for the rich; there's no reason we cant approach that again if we had full employment, let the tax cuts expire, & bring the troops home...

i found it pretty hard to believe how much the alleged killing of osama bin laden dominated the news this week; i had assumed he was already dead or at least rendered harmless anyway, and hadnt seen his name mentioned in relationship to our involvement in the middle east recently either (there's even some who believe al qaeda is a bogeyman created by our government to keep the game going)...but assuming we buy into what we've been told, it's clear who won; the total cost of the trade center bombing was 12 boxcutters (their airline tickets were charged & never paid for) and we've been paying for it from the first day we started slamming million dollar tomahawk missles into mountains in afghanistan...ezra klein at the WaPo has attempted to quantify our total costs; by some accounting, even the depth and severity of our financial crisis can be connected to our response to that original provocation...

if you were anywhere near financial news, you couldnt have hardly missed the crash in commodity prices that occurred midweek...im not going to pretend i have a special insight into the causes, but the way i saw it start was with the COMEX increasing margin requirements for trading silver futures contracts a few days earlier...silver slipped substantially first, then, almost coinciding with the release of the surprising weekly claims report, following on the heels of poor showings ISM the selling spread first to those commodities associated with a strong economy, notably oil & industrial metals, and then agricultural as well...at the end of the week, WTI was down around $15 at $97, and Brent rebounded to near $112 after falling $10 on thursday & testing $108...even with oil prices down, however, gas prices continued to rise at retail, apparently due to production problems at two midwestern refineries and tornado-driven power outages at seven other southern refineries...

since im still stuck in the mud here, i've continued to follow the rainfall totals and forecasts in the midwest, and the attendant flooding on the ohio & mississippi rivers; although cairo illlinois was inadvisedly saved by blowing up a levee south of the town, it now appears that stations south of those two river's junction are facing flooding which will top the record floods of the 1930s, in some cases in mississippi by as much as 6 feet; moreover, with runoff from the arkansas contributing (parts of that basin recently had a 7 inch rain), the flooding is expected to continue all the way thru drought stricken areas of loiusiana and threaten new orleans levees later this month...the flooding on these rivers has also curtailed barge traffic, which contributed to record gasoline prices of well over $4 in ohio, indiana, illinois, & michigan this week...

following up on the muddy corn planting conditions i dug into last week, as of the most recent USDA report (monday), only 13% of the intended acreage was planted, vs. 66% the same date in 2010...all that progress seemed to be in iowa & nebraska; planting in indiana & ohio was negligible; to reiterate: corn planted after the first week in may is likely to yield less than the optimum, & "mudding the seed in” too early is even worse...and, during the same time the midwest has been getting too much rain, wheat growing regions of kansas and points south continue to suffer from crop damaging drought, with one station in oklahoma not having seen a soaking rain for over 222 days; in addition to these US crop difficulties, the la nina is expected to keep rain from reaching the drought stricken chinese wheat growing regions, & the european wheat harvest is also expected to fall this year as drought cuts yields in france, england & poland...

it was an interesting week in the eurozone economic news as well...after sunday started with major worker demonstrations in portugal against the expected imposed social program cuts, the portuguese prime minister Socrates went on a PR offensive, bragging that he got a better deal than greece & ireland; surprisingly, most of the media took him at his word and duly reported his spinning of the deal as fact...but as more details of the $115 bailout package were released, it became obvious that the austerity imposed by the IMF & EU was just as tough if not worse than that imposed on the greeks & irish; pay freezes, pension cuts, tax increases, and divestiture of national assets, including the electrical grid, the state airline & their biggest oil company, et al; the portuguese economy is now expected to contract at least 2% under the terms...then, midweek, details of the earlier negotiations between the IMF & ireland were leaked in ireland; instead of a full bailout & attendant austerity, it was first agreed that the unguaranteed bank bonds would take a hit; but in a G7 meeting to ratify the deal, it was vetoed by geithner, and the pain was ultimately shifted from the banks to the irish taxpayers...finally, at the end of the week, the german paper Der Spiegel broke the story that greece would abandon the euro and introduce its own currency; although the story was quickly denied, european commission crisis meetings were still ongoing on saturday, & most pundits seem to think where there's smoke, there's fire...

an afterthought; since i mentioned geithner intervening in ireland on behalf of the banks, i ought to at least point out that he was also active on their behalf in the US as well...geither exempted foreign exchange swaps and forwards from regulation as specified under the dodd-frank financial reform; FX forwards and swaps represent an unregulated market with about $50 trillion in nominal value; part of that derivative market that as i've noted previously, is nominally 57 times the size of the main street economy; in writing about the deal, even paul krugman was rather blunt, titling his article money talks, regulation walks...

the above is my weekly commentary 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...

Sunday, May 1, 2011

notes on the week ended April 30th

the first ever press conference by a Fed chairman this week ate up a lot of what could have otherwise been useful & productive economic cyberspace this week...in a sense, one can understand that the participating media might get as excited as a commoner at a royal wedding, but to see that hardened econobloggers would actually think some new policy direction would result from a reporters question is a bit much...so they were all predictably let down, and each & every had at least one post to that effect after said press conference...there were really no tough questions, and Bernanke's responses werent really different than his previous speeches & what's been already outlined in the monthly FOMC statements...the highlights can be summarized by noting what the Fed cant or wont do anything about; unemployment, rising gas prices, & stagnating GDP growth…you can find a couple dozen links to this story or responses/complaints about it from the blogosphere right after the usual Fed links at the beginning of this week's blog post..

we also got the preliminary report on first quarter GDP from the BEA this week, and even though forecasts for it had been falling from the first guesstimates of around 4%, the 1.8% stall speed growth rate still came in below most expectations...although its not something i'd normally look at, the component numbers that made up the report almost all seemed to be unusual outliers...for instance, federal government spending was down 7.9%, with the defense component of that down 11.7%, hardly something one could blame on harsh winter weather, as some MSM reports did; but no one reporting the numbers offered any further explanations...while residential & commercial construction spending were down as expected, equipment & software spending was up 11.6%, exports were up 4.6%, & the change in inventories added 0.93% to the first-quarter change in real GDP...with state & local spending down 3.3%, the total hit to government spending was down 5.2%...GDP growth at this level is not expected to add jobs, and a further confirming sign of weakness came in the unemployment first claims report, which at 429,000 was the highest since january...most forecasts of GDP for the remainder of the year are higher, in the 2 1/2 to 3% range, but at even that rate doesnt bode well for a robust recovery...

macroadvisors, an oft-sited consulting firm led by former fed governor larry meyers, believes the growth in the US labor force could be faster than expected by other forecasters, and we got the first sign that they might be right this week...while most had taken the McDonalds hiring plans to be 50,000 as previously announced, they got so many applications from overqualified workers they decided to add 62,000 new minimum wage, mostly part time workers...with over a million applications submitted by 2010 graduates and laid off school teachers, McDonalds is now looking to have the most highly educated crew of hamburger helpers in the fast food business...

Real House Prices <<<click on chart / much of the media reported an increase in new home sales, which at 300,000 was up from 270K in february; but it was still the worst march new home sales on record...also this week, case shiller reported their 20 cities home price index for the 3 months ending february and it was down only 0.2%, slightly less than it's been slipping previously... although it's now 31.7% off the peak, it remains one of the few home price indexes which is still above the early 2009 lows, although it's not either when adjusted for inflation, as the adjacent chart shows...lender processing services (LPS) also reported stats on delinquencies and foreclosures, and new delinquencies continue to shrink, with the total down 12% from a year ago...of the 6.33 million troubled home loans, 2.12 million loans are less than 90 days delinquent, 1.99 million are over 90 days delinquent, & 2.22 million are in foreclosure...of those in foreclosure, 31% have not made a payment in over 2 years...with 3 times more homes entering the foreclosure process each month than are being sold out of it, foreclosure inventory continues to increase and is now over 8 times the historical norm...

while there has been extensive coverage of the flooding on the mississippi and the ohio rivers, as well as the worst april tornado outbreak since 1974 (havent seen final confirmed figures), there is a weather story which has slipped under the media radar...rainfall for april has set records from southern illinois to ohio (ie, cleveland, columbus & cincinnati set records), leaving most of the fields in the eastern cornbelt saturated and puddled...as most of you know, i usually have a large garden, and with my friable sandy loam it's not uncommon for me to be able to start early crops in march...this is the first year in 39 years when i have been unable to till all april because of saturated ground; nor have i seen a tractor out anywhere in my county...so i did some looking at conditions in other states, and found that as of the latest USDA report (the 24th) only 2% of indiana corn was in, compared to 50% same date last year; only 10% of illinois is planted, compared to 67% last year; only 3% of iowa corn is in, compared to a normal 28%, and only 1% of ohio's corn has been planted...my thinking is that even some of what is already planted may rot, as i watched live radar all week, and heavy thunderstorms persisted until thursday...as any corn grower will tell you, total yields decrease the later your corn is planted, so this does not bode well for supplies, with corn stocks 15% already below last years, and 40% of our corn going to ethanol...this could change with a couple weeks of warm dry weather, but it bears watching, especially in light of the agricultural disasters worldwide last summer...

oil prices closed the month with their 8th consecutive gain, with WTI over $113 and brent touching $127 before closing lower...with the spread between brent and domestic crude showing no signs of abating, private barges are starting to move cheap crude down the mississippi to take advantage of that differential (louisiana sweet is also $127)...two private companies also announced plans to build a pipeline from cushing to houston... possibly due to a seasonal blend change (my speculation), gas prices shot up in ohio on friday, with columbus topping the 2008 record of $4.08 and most other cities posting 17c price hikes...

even though its been pushed into the background by US media, the nuclear crisis at fukashima continues to worsen...robots sent into the #1 unit early this week took the highest radiation readings since the crisis began, new data shows ongoing criticalities at Unit 2, and the Union of Concerned Scientists was sent photographic proof that the reactor core exploded at unit 3...the first economic stats after the triple disaster were out this week too, with march japanese retail sales down 8.5%, and industrial production down 15.3% from february...toyota's domestic output crashed 63%, and with GM ramping up production in china, they're now expected to reclaim the position of world's #1 auto maker...echoing last week's action against the US, S&P cut japan's outlook from stable to negative on high reconstruction costs...i almost expect some pundit to suggest that maybe they shouldnt rebuild after the earthquake, to keep their credit rating intact...

it was also another week of watching borrowing costs in europe climb, as 2 year rates for greece moved steadlly above 25%, irish 2 year rates topped 12%, and portugal's hit 11 3/4%, all records...with the EU enforced spending cuts, greece's deficit came in much worse than expected at 10.5% of their GDP...with self-imposed austerity, spain's unemployment rate climbed over 21%, and their retail sales crashed...and the austere conservative government of the UK also reported poor GDP numbers, with zero growth now extending over the last 6 months...businessinsider produced a slideshow of which country's banks stand to get hurt the most in "the inevitable greek restructuring"; bottom line, everyone is affected, but it's german & french banks that take the worst hit...

the above is my weekly commentary 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...