Important Breaking News for the Week of June 16
June 21 & 22
Brokers threatened by run on shadow bank system (June 19 – MarketWatch SAN FRANCISCO)
A network of lenders, brokers and opaque financing vehicles outside traditional banking that ballooned during the bull market now is under siege as regulators threaten a crackdown on the so-called shadow banking system.
The shadow banking system grew rapidly during the past decade, accumulating more than $10 trillion in assets by early 2007. That made it roughly the same size as the traditional banking system, according to the Federal Reserve.
While this system became a huge and vital source of money to fuel the U.S. economy, the subprime mortgage crisis and ensuing credit crunch exposed a major flaw. Unlike regulated banks, which can borrow directly from the government and have federally insured customer deposits, the shadow system didn't have reliable access to short-term borrowing during times of stress.
By early 2007, conduits, structured investment vehicles and similar entities that borrowed in the commercial paper market and bought longer-term asset-backed securities, held roughly $2.2 trillion in assets, according to the Fed's Geithner.
Another $2.5 trillion in assets were financed overnight in the so-called repo market, Geithner said. Geithner also highlighted big brokerage firms, saying that their combined balance sheets held $4 trillion in assets in early 2007. Hedge funds held another $1.8 trillion, bringing the total value of asset in the "non-bank" financial system to $10.5 trillion, he added. That dwarfed the total assets of the five largest banks in the U.S., which held just over $6 trillion at the time, Geithner noted. The traditional banking system as a whole held about $10 trillion, he said.
This is important. What’s being said here is that there is an official banking system over which the Fed presides and has some influence by setting interest rates and regulating liquidity.
But there’s also a “shadow banking system”, just as large, over which the Fed has little influence and even less insight because of a severe lack of transparency.
This is the system that fed off of the too-easy money policies of Greenspan and Bernanke and which is now imperiling the entire banking system. This shadow system can create the appearance, if not the temporary reality, of massive paper wealth because of its ability to borrow $1 billion to be used as collateral for a $10 billion loan.
As long as the system was/is expanding, then everything seems fine, if not great. Once the expansion stops we get to find out which players are insolvent.
As Warren Buffet likes to say, “When the tide goes out, that’s when you find out who was swimming naked.”
Bank takeovers often done on Fridays
In banking circles, Fridays are becoming the day of the week to really pay attention. That's the day regulators increasingly are choosing to announce bank failures - and failures are on the rise this year.
When the Federal Deposit Insurance Corp. announces a bank failure on Friday, often late in the day, it does so with an eye on preventing a run on deposits. The timing provides a weekend for people to calm down.
The extra time also allows for a more orderly changing of the guard since regulators work hard to line up a suitor bank to take over accounts at the failed institution before making an announcement.
"They want to have the least amount of disruption," said Harry Papp, a money manager at L. Roy Papp & Associates in Phoenix. "It gives the receiving bank more time to get prepared for all the phone calls they'll get on Monday morning."
Of the past 14 bank failures announced by the FDIC, 12 came on Fridays and one on a Saturday. Regulators did most of the hard work - examining bank records, finding a suitor, revoking the bank's charter and so on - in the preceding days and weeks, as secretly as possible to avoid sparking a run.
The above article explains why I strongly suggest you get your money out of any bank exhibiting weakness as soon as you detect a problem might be brewing.
Bank failures are notoriously rapid and they happen over the weekend when there’s nothing you can do about them.
Home Repossession Rates Double (June 17 – The Trumpet)
American banks repossessed twice the number of homes in May as they did a year ago as falling house prices trapped borrowers in mortgages they could not afford. A June 13 RealtyTrac Inc. report said lenders took possession of over 73,000 houses during May alone.
The Washington-based Mortgage Bankers Association reports that 2.47 percent of all U.S. homes were in some stage of foreclosure during the first quarter of this year. That percentage rate is 252 percent higher than the 0.98 percent average for the past 30 years. It is estimated that foreclosures may account for nearly a third of national home sales this year.
Foreclosures are just an early step in the process, repossessions are the last. Repos are rising strongly. The other interesting statistics I see in here are the fact that 2.47% of all US homes were in some stage of foreclosure.
I find this startling, and wonder if there hasn’t been a slight misstatement. Perhaps it’s 2.47% of all home that have a mortgage? If not, it means that 1 out of every 40 homes is in immediate financial distress.
The next part is the estimate that nearly one out of every three home sales will involve a foreclosed property. Ouch. That’s going to really drive prices down very strongly.
TRIBUTE PAID IN OIL (June 20 – FSU Editorials)
The whole world is presently feeling the first effects of the general exhaustion of world oil fields: “Peak Oil”. Unless “Peak Oil” is an imaginary problem, the price of oil is therefore going to continue rising with brutal effects upon the world economy. Not only Mexican oil production is declining; we are dealing with a decline in world production of oil.
We must note something that is of fundamental importance: neither the US nor the Eurozone are actually paying for their oil with exports of goods and services to the oil producing countries. They “pay” with bank digits, created by computers; these payments are registered in the form of credits in the computer memories of banks in the US and in the Eurozone. We should have to include Japan among the countries which are able to purchase oil with their own currency.
These bank digits are not credit instruments in favor of those who receive them, as for instance dollars were, when they were formerly redeemable in gold; they are simply numbers, because they do not incorporate a promise to deliver something to the beneficiary, the oil exporter. A credit instrument is the promise to deliver something, and a bank digit is not “something”. It is just a number and nothing more.
So we can quite correctly say that the US and the Eurozone – and other countries whose currencies are considered “reserve currencies” – are “paying” for their oil imports with nothing at all. The Romans called such an operation “Collection of Tribute from the Conquered”. This is what Mexico is doing; it is exporting precious oil from its oil fields in relentless decline in exchange for – nothing.
This is very interesting. A Mexican writer has noted the obvious; they send us the most valuable commodity ever known to man and the US sends back dollars.
Actually we send back electrons over cables that cause computers in Mexican banks to create alternating patterns of magnetic blips to appear on hard disks indicating that Mexico now has more blips in new patterns than before.
My prediction is that well before a collapse in production makes exporting physically impossible for Mexico, a political/social decision will be made to preserve Mexico’s natural wealth for its own citizens.
June 20
Citi CFO sees subprime pain easing, but still high (June 19 – Reuters NEW YORK)
Citigroup Inc (NYSE:C - News) could take substantial write-downs in the second quarter, the company's chief financial officer said on Thursday, raising concern the bank's second-quarter earnings would be weaker than expected.
CFO Gary Crittenden told investors on a conference call that many asset write-downs in the second quarter would be smaller than those in the first quarter, when it took a total of $16 billion in credit losses and charges.
But they could still be large, Crittenden said, showing investors that the credit crunch is hardly over. Citi's shares fell as much as 4.9 percent, pulling down banking stocks and briefly the broader U.S. stock market. The cost of protecting Citi's debt against default rose.
Citigroup is #2 on the derivative chart, with over $33 trillion of derivatives on the books. The only thing surprising about the write-downs here is that they are not higher.
I suspect that when the financial report comes out and I dig into it, I’ll find that their Level III and Level II ‘assets’ have mushroomed, again, to a new high.
Those assets represent pools of toxic debt that cannot be easily priced because there is no real market for it right now. If those assets were to be sold into the market, the ‘price discovery’ would be shocking; possibly as much as 20% to 80% in losses depending on the asset type.
The most recent data I have puts Citigroup’s Level III assets at 125% of total shareholder capital. In other words, if Citigroup’s Level III assets were valued at an 80% loss, Citigroup would be wiped out. And how much of a hit on their derivatives holdings would wipe them out? 0.4%.
That’s “zero point four percent”. Not much, in other words. A lot of these derivatives are linked through to the housing market. Let’s check in with the largest housing market in America (see next).
[California House] Prices plummet 30% from May 2007 peak (June 19 – Sign On San Diego)
California housing sales were at their lowest level in 13 years last month, as prices slid 30 percent from year-ago levels, San Diego-based DataQuick Information Systems reported yesterday.
The 33,024 transactions statewide were down 6 percent from April and off 10.7 percent from May 2007. It was the worst May since 1995. The statewide median price stood at $339,000, 4.2 percent below April's level and 30 percent down from the all-time peak of $484,000 in May 2007. It was the biggest year-over-year downturn for any month in 20 years of record keeping, said DataQuick analyst Andrew LePage.
Folks, a 30% yr/yr hit to house prices is not a ‘downturn,’ it is a financial shock of the highest order. Using the 30% decline in median house prices, a rough estimate tells us that in CA alone more than $2 trillion in housing ‘wealth’ has evaporated since last May.
A good portion of that is going to represent real losses at real financial institutions. And every indication is that the trend in house price declines is still accelerating to the downside, so there’s more pain in store.
U.S. Says Exercise by Israel Seemed Directed at Iran (June 20 – NYT WASHINGTON)
Israel carried out a major military exercise earlier this month that American officials say appeared to be a rehearsal for a potential bombing attack on Iran’s nuclear facilities.
More than 100 Israeli F-16 and F-15 fighters participated in the maneuvers, which were carried out over the eastern Mediterranean and over Greece during the first week of June, American officials said.
The exercise also included Israeli helicopters that could be used to rescue downed pilots. The helicopters and refueling tankers flew more than 900 miles, which is about the same distance between Israel and Iran’s uranium enrichment plant at Natanz, American officials said.
"They wanted us to know, they wanted the Europeans to know, and they wanted the Iranians to know," the Pentagon official said. "There’s a lot of signaling going on at different levels."
Ugh. Even as we struggle with high fuel costs, a shaky food situation, and the worst financial crisis ever, somehow Israel and the US have jointly decided that now is a good time to pick a fight with the #4 oil-exporting nation, which also just happens to have a controlling geographic position over the Strait of Hormuz, where fully 25% of the world’s daily oil exports pass on any given day.
Why now?
I am seriously without a grasp on the logic for this particular skirmish at this particular time. Every report either says that Iran does not have a credible military nuclear program, or, even if they do, that they are many years away from being any sort of a threat.
And even then, you’d have to believe that Iranians would be insane enough to use a nuclear warhead against Israel or the US - two countries that have thousands of nukes between them and certainly possess the will to use them in retaliation.
I simply cannot grasp this logic, so I have to assume that there is a different game with a different set of explanations in the background.
How Iran would retaliate if it comes to war (June 20 – Christian Science Monitor)
"If you attack Iran you are unleashing a firestorm of reaction internally that will only strengthen revolutionary forces, and externally in the region," says Ranstorp. "It's a nightmare scenario for any contingency planner, and I think you really enter the twilight zone if you strike Iran."
Any US-Iran conflict would push up oil prices, and though Iran could disrupt shipping lanes in the Persian Gulf, its weak economy depends on oil revenues.
But nearby US forces in Iraq, Afghanistan, and the Gulf provide a host of targets. Iran claimed last October that it could rain down 11,000 rockets upon "the enemy" within one minute of an attack and that rate "would continue." Further afield, Israel is within range of Iran's Shahab-3 ballistic missiles, and Hezbollah claims its rockets – enhanced and resupplied by Iran since the 2006 war to an estimated 30,000 – can now hit anywhere in the Jewish state, including its nuclear plant at Dimona. Closer to home, Iran has honed a swarming tactic, in which small and lightly armed speedboats come at far larger warships from different directions. A classified Pentagon war game in 2002 simulated just such an attack and in it the Navy lost 16 major warships, according to a report in The New York Times last January.
“No plan ever survives first contact with the enemy” – War college saying.
If either the US or Israel attack Iran, you can fully expect things in Iraq to go pretty much haywire. Our boys and girls are directly in harm’s way, especially those concentrated in the Green Zone, which we could easily expect to be targeted by Iran in the opening moments of a shooting war. The point here is that Iran stands no chance against the US/Israel in a conventional war, but as Iraq (and the Revolutionary war) taught us, a ‘weaker’ opponent has other options.
Farms hit as floods kill 24 in US midwest (June 20 – Guardian)
Devastation caused by week-long flooding in America's farm belt is threatening to push up food prices which are already at record highs.
The cost of corn and soya beans has peaked on the US market amid concern of a shortfall in production. The midwest, one of the world's biggest corn-growing regions, has been hit by the worst flooding for 15 years. An estimated 16% of Iowa's grain crop has been destroyed.
Food inflation is about to get a whole lot worse. This is a perfect storm (sorry for the pun) of weather, cheap money, too much money, and actual shortages collectively driving food prices higher.
One way for you to protect yourself is to simply buy more food than you need each week and put it in the pantry. Get yourself up to ~ 1 years worth, and then sit back and enjoy the fact that you get to eat food at last year’s prices.
Trust me, you will not get a better return on your money from the stock market this year.
GM says more than 18,000 take severance deals (June 19 - AP DETROIT)
General Motors said today that 18,657 of its hourly workers will leave the company by July 1 through buyout and early retirement offers.
GM expects to replace some of the workers at a new entry level wage of about $14 per hour. That's about half the rate of current production workers.
Does GM realize that their new entry level wage is too low to allow the workers to afford its own products? If every company pays its workers less than what it would cost to afford its own products, all the companies will go out of business. This is where we see a process accountants refer to as “the spiral of death.”
As workers are paid less, they can afford to spend less, so companies cut back by paying their workers less, which means the workers can afford to spend less, which means….
Gold May Reach $5,000 an Ounce on Inflation, Schroder Says (June 19 – Bloomberg)
Gold prices may reach $5,000 an ounce as investors seek to protect themselves against accelerating inflation, said Schroder Investment Management Ltd., which oversees $277 billion of assets globally.
"You could easily see for the next several years that prices rise not to $1,000 an ounce, but prices rise to $5,000 an ounce or beyond as inflation psychology becomes more and more embedded and people become desperate to have a source of value," said Christopher Wyke, London-based emerging market debt and commodities product manager at Schroder, which manages about $10 billion of commodity assets.
Investors are turning to gold for protection as two-thirds of the world's population cope with inflation rates above 10 percent, Wyke said. Cash and inflation-linked bonds are poor substitutes as low interest rates, coupled with surging inflation, erode the real value of investments, he said.
A price target for gold that I can get behind. :)
June 19
May oil demand down 0.1 pct from year ago (June 18 – Reuters WASHINGTON)
Demand for crude oil and petroleum products in May fell a slight 0.1 percent from a year earlier, and U.S. gasoline use for the January-May period dropped for the first time since 1991, as record-high pump prices dented demand, the American Petroleum Institute said on Wednesday.
Total petroleum product deliveries, excluding exports, averaged 20.614 million barrels per day, down 17,000 bpd from May 2007, the API said in its monthly oil report. Sagging gasoline and residual fuel use was nearly offset by strong demand for distillates and jet fuel, the API said.
"Gasoline demand has weakened with higher prices, but diesel demand has proved to be more resilient," said Ron Planting, an analyst at the API.
Deliveries, which are a good indicator of demand, are calculated by the API to reflect petroleum products moved from refineries and bulk storage to wholesale and retail suppliers. U.S. refineries churned out record amounts of distillate and ultra-low sulfur diesel in May, and jet fuel output rose 6.6 percent from the prior year, the API said.
Meanwhile gasoline demand in May fell by 133,000 bpd, or 1.4 percent, to 9.296 million bpd as crude oil prices rose to around $135 a barrel and pump prices climbed to near $4 a gallon nation-wide.
After all of the gnashing of teeth and wailing about changing of consumer behaviors in response to high oil prices, we are told that oil demand dropped by a nearly imperceptible amount. You have to give them style points, though.
Where they said daily petroleum use was 20.614 million barrels they then shifted the decimal point over a few places to report that this represented a drop of 17,000 bpd(!!!). I guess that was more dramatic than saying that demand had slipped from 20.631 mbd to 20.614.
What can we take away from this article? Certainly, we can conclude that oil demand is very sticky and does not fall much even in the face of steeply rising prices.
Non-OPEC oil supplies at risk of stalling this year (June 19 – Globe & Mail LONDON)
Oil supply from countries outside OPEC, source of three in every five barrels, is stalling this year and may even decline, keeping the heat under record-high oil prices.
The International Energy Agency and the U.S. government have cut forecasts for supply growth in 2008, in part due to delays at new fields and declining output at existing ones.
“There is a risk of zero non-OPEC growth,” said Mike Wittner, oil analyst at Societe Generale, who forecasts non-OPEC supply will expand by 400,000 barrels per day (bpd) this year.
“As far as our forecast is concerned, there is definitely downside to our numbers.”
While OPEC gets all the news, and one could be forgiven for thinking that OPEC produces the majority of the world’s oil, the fact is that non-OPEC countries produce 60% of the world’s oil.
This article is telling us that despite the economic stimulus of record oil prices, the majority of the world’s oil-producing countries are going to squeak out flat production this year. If we’re lucky.
So even as demand marginally nudges lower in the US (see above), supply is threatening to decline even faster.
Mexico May Raise Daily Oil Output 4.3 Percent by 2009 (June 17 - Bloomberg)
Mexico may increase crude production to 3 million barrels a day next year as state-owned Petroleos Mexicanos pumps more oil to make up for the biggest drop in output in a dozen years at its largest field, the country's energy minister said.
"Petroleos Mexicanos is taking measures internally to raise production to 3 million barrels a day by the end of this year or the start of next year," Energy Minister Georgina Kessel said in an interview in Mexico City today.
The government needs to raise Pemex's budget 66 percent to $30 billion annually to help it maintain production goals of 3 million to 3.1 million barrels a day of crude through 2012, Kessel said. The Finance Ministry, which manages Pemex's budget, set aside about $18 billion this year for the company. The 2009 increase would mean a 4.3 percent jump in output from this year's average of 2.875 million barrels a day.
Pemex's production has been falling for four years as its largest field, Cantarell, led a decline in output. Cantarell, the world's third-largest oil field, represented 63 percent of Pemex's output at its peak in December 2003.
Pemex's output is "at risk" of falling more this year, leading to further cuts in exports, Kessel said.
Mexico, the third-largest supplier of crude to the U.S., exported 1.439 million barrels of crude in April, 14 percent fewer barrels than a year earlier as production declined. Overall output fell 13 percent to 2.767 million barrels a day in April, the largest drop in 12 years. Cantarell's output fell 33 percent to 1.07 million barrels a day.
Hmmmm…there’s something fishy about this story. The facts are that Mexico’s oil production has been falling and Mexico’s internal demand for oil has been rising.
The assertion is that more investment would boost production by a planned 4%.
The problem is that these numbers don’t line up.
Here’s why.
The call is for an additional $12 billion to be invested to yield an additional 4%, which equals 115,000 barrels per day, or 40 million barrels in a year. $12 billion divided by 40 million yields a cost of $300 per barrel for this new oil. Who would spend that kind of money?
I’m going to reserve judgment on this claim of new Mexican production until I read a few more articles that make some sense.
In the meantime, it is enough to know that Mexico’s internal demand is eating into exports at a good clip, and that without a lot of new production, Mexico may become a net importer as soon as 2012.
Mexico caps price of basic foods (June 19 – BBC)
Mexico has frozen the price of 150 basic foods to curb inflation, in the government's biggest set of price controls in more than a decade.
The government on Wednesday capped prices on foods including cooking oil, beans and fruit juices, with immediate effect until the end of 2008.
Mexico's government is concerned about the impact of soaring food bills. Overall consumer price inflation was 4.95% over the past year, but food price inflation was far higher at 8%.
Price controls never work, for the simple reason that they can’t.
What price controls do is financially ruin producers and shops so they end up reducing the amount of available products, which (try to act surprised here) ends up driving up price pressures. This simple logic is perfectly resistible by politicians who love to appear as though they are ‘doing something’ about inflation.
The worst part about this is that capping prices puts on a display of economic ignorance that makes bloodletting look like a stroke a genius. Rising prices are the symptom – too much money is the cause.
If treating symptoms worked, small pox could have been eradicated with a few loofas and a decent exfoliant. I predict this effort will fail within a few months.
Free Trade in Food Is `On the Ropes' Amid Shortages, Price Rise (June 19 – Bloomberg)
Free-trade policies long advanced by World Bank President Robert Zoellick and U.S. President George W. Bush are losing favor as countries in Africa, Asia and Latin America find they can't buy enough food to feed their people.
Global food prices have spiked 60 percent since the beginning of 2007, sparking riots in more than 30 countries that depend on imported food, including Cameroon and Egypt. The surge in prices threatens to push the number of malnourished people in the world from 860 million to almost 1 billion, according to the World Food Programme in Rome.
Leaders of developing nations including the Philippines, Gambia and El Salvador now say the only way to nourish their people is to grow more food themselves rather than rely on cheap imports. The backlash may sink global trade talks, reduce the almost $1 trillion in annual food trade and lead to the return of high agricultural tariffs and subsidies around the world.
"Trade as the route to food security, that idea is on the ropes," said Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics in Washington. "If the guy who is selling it doesn't want to sell it overseas, then the guy at the other end is terribly exposed."
During a down cycle, economic protectionism can be like a whole bale of straw heaped on the camel’s back. This situation is particularly dicey because while the Western and Japanese central banks have been trying to cure the toxic effects of too much money with an even larger dose of too much money, the rest of the world has gone hungry.
The subtext to this article is that a lot of so-called ‘developing countries’ have figured out that the west just prints up gobs of extra money whenever it gets into a bind, and so they’ve started to wonder what the point is of playing by all the rules.
If money is just an abstract thing that developed countries can create when it suits them, why does money have to be such a tangible thing for the ‘poorer’ countries? And what’s the point of playing by the rules if it turns out that the West considers rules to be more like guidelines whenever things get a bit tricky?
Banks Find New Ways To Ease Pain of Bad Loans (June 19 – WSJ)
In January, Astoria Financial Corp. told investors that its pile of nonperforming loans had grown to about $106 million as of the end of last year. Three months later, the thrift holding company said the number was just $68 million.
How did Astoria do it? By changing its internal policy on when mortgages are classified on its books as troubled. The Lake Success, N.Y., company now counts home loans as nonperforming when the borrower misses at least three payments, instead of two.
Well, that’s certainly creative. Don’t like how your loans are performing? Just change the way you classify them!
“Hey Bob! Look what happens to our non-performing loan pool when I increase the missed payment variable by 50%.” Sheesh. It goes without saying that the amount reserved for bad loans should have remained the same regardless of the classification.
If the loan loss reserves went down too, then this is simply fraud.
Are We Too Gloomy? (June 19 – The Big Picture)
Anyone who makes the comparison between the stats today versus 30 years ago is revealing their economic naivete. Even if you take the headline data at face value (which you never should), you have to acknowledge the many changes in how the BLS models are constructed over the years. It becomes an apples to oranges comparison. Perhaps the fault lies not within ourselves, but within our data.
Maybe we should be asking different questions instead: "Is our press economically incompetent? What level of economic naivete is tolerable in the mass media? When did our financial media become mere stenographers? What happened to critical thought, analytical rigor or investigative journalism? Wasn't the charge of the press at one time to "afflict the comfortable?"
To be blunt, any scribe that trots out the headline data on Unemployment or Inflation as gospel are either fools or liars.
This is pulled from Barry Ritzholtz’s blog, which is an excellent source of information and news.
I happen to fully agree with his view that economic statistics are so obviously either false or flagrantly bad that any reporter who writes an article around them without questioning their veracity is either an ignorant fool or a liar.
June 18
RBS issues global stock and credit crash alert (June 18 – UK Telegraph)
The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks. "A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.
A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.
Korea Faces Specter of Multi-Nation Financial Meltdown (June 18 - Chosun)
There are warning signs of a synchronous financial crisis that could affect about a dozen countries, including the Baltic states, Vietnam, India, the Philippines, Indonesia and Argentina. These nations are seen as on the verge of slipping into a foreign currency crisis, with their economic indices worse than Korea's when it was socked by the financial crisis of 1997.
Most of these nations have achieved economic growth with easy access to loans amid a global economic boom, the result of excessive liquidity. Now they must borrow to repay their debts, but money resources have dried up as the global financial market suffers the repercussions of the U.S. subprime mortgage crisis.
To make matters worse their current account deficits are growing due to soaring raw materials prices, hurting their economic fundamentals. Many are emerging economies and major importers of Korean products. If a simultaneous financial meltdown becomes reality, Korea's exports would be dealt a severe blow. Pundits say that such a crisis would also disrupt the global financial market and trigger an exodus of foreign capital from Korea.
U.S. [Corporate] Defaults Keep Soaring (June 17 - CFO)
So far this year, 33 companies have defaulted world-wide, affecting debt worth $38.3 billion and surpassing the 22 defaults recorded in all of last year, according to Standard & Poor's. Of the globe's defaulting companies, 32 are based in the U.S., with the other in Canada.
The U.S. also leads in the number of "weakest links" — entities that are closest to the default threshold — with 117 of the 140 entities, or 84 percent of the total, according to the credit rating agency. Meanwhile, the 12-month-trailing global corporate speculative-grade bond default rate increased to a 31-month high of 1.45 percent in May from 1.29 percent the previous month.
Senate blocks debate of clean energy tax credits (WASHINGTON Reuters)
The U.S. Senate on Tuesday blocked debate of a bill to offer about $17.7 billion in tax incentives for consumers to build renewable energy sources like windmills and solar arrays, and buy plug-in cars that run on electricity rather than gasoline.
The Energy Independence and Tax Relief Act of 2008 would have extended a tax credit to build windmills by one year through December 31, 2009, and extend for three years similar credits for renewable energy sources like biomass, geothermal, landfill gas and trash combustion.
The bill failed to garner enough votes to limit debate and move to a vote, leaving the fate of the clean-energy credits uncertain.
Paulson & Co. Says Writedowns May Reach $1.3 Trillion (June 18 – Bloomberg)
John Paulson, founder of hedge fund Paulson & Co., said global writedowns and losses from the credit crisis may reach $1.3 trillion, exceeding the International Monetary Fund's $945 billion estimate.
``We're only about a third of the way through the writedowns,'' Paulson, 52, told the GAIM International hedge fund conference in Monaco today. ``There are a lot of problems out there and it will continue to be felt through the year. We don't see any signs of stabilizing.''
Paulson, whose New York-based company manages about $33 billion, made bets that subprime-mortgage debt would fall after he noticed ``bubble like'' prices. His Paulson Partners fund rose 18 percent a year since it started in 1994, and his main fund focused on subprime debt rose 591 percent last year. Banks and securities firm worldwide posted more than $395 billion in losses and writedowns since the subprime crisis started last year.
The U.S. is heading into a recession as falling home prices weigh on consumer spending, Paulson said. The second half of this year will be worse than the first as the economic slowdown continues into 2009. Signs of stress are ``accelerating'' in the housing market, he said. Paulson said he's betting on falling securities prices.
``I don't consider myself a bull or a bear,'' he told the audience at Monaco's Grimaldi Forum. ``I'm a realist.''
Grantham: the bear growls (June 17 – Globe & Mail)
Renowned value investor Jeremy Grantham knows an investment bubble when he sees one coming, and always steers well clear of the risks - sometimes at great initial cost. At the height of the Internet stock bubble in the 1990s, GMO, the Boston-based institutional money manager he founded, lost about 45 per cent of its funds under management when investors sought out firms with sexier strategies. Of course, his sound analysis and risk assessments were vindicated and his clients eventually were rewarded handsomely.
By 2006, Mr. Grantham, whose firm manages about $145-billion (U.S.), including $2.8-billion from Canadian pension funds and other institutions, was warning of the coming implosion of the global credit market. And he has seen nothing since that cataclysmic event last year to convince him the worst might be over.
You draw comparisons between what's happening today and the start of the Great Depression. We're in that 1929-30 window, where we've had a shock to the system. But the secondary effects - less consumption, lower profit margins, lower GDP, lower employment, lower global trade - are beginning to work through the system. They're steadfastly ignored because they're still quite slight. It takes a year, 18 months [or] even longer for some of these effects to show up.
So no short, shallow downturn, then? It's very hard to torture the economics, to think that you can squeeze liquidity, take a hit to your biggest capital asset, housing, mark it down 15 per cent and then maybe another 15 per cent, in an overleveraged society, without having a sustained negative effect that would last two or three years. Which I'm sure it will.
Anatomy of a Meltdown: The Bubble (June 17th – Washington Post)
Jan. 10, 2008. In his first public remarks of the year, Fed Chairman Ben S. Bernanke acknowledges that the problems that had begun in the subprime market now "affected the prospects for the broader economy."
Unemployment was rapidly rising, hitting its highest point -- 5 percent -- since November 2005. On Jan. 19, a Saturday, a weekend of urgent conference calls among Fed officials began.
Bernanke and his colleagues -- Vice Chairman Donald L. Kohn, Fed Governor Kevin M. Warsh, New York Fed President Timothy F. Geithner and others -- agreed that the central bank needed to sharply cut interest rates to stimulate the economy. But they debated whether a big cut before a routine meeting -- only a week and a half later -- would make the Fed seem as if it were simply responding to declining stock markets. Bernanke implored the group: If it's time to act, the Fed should act.
Two days later, on Martin Luther King Jr. Day, stock markets throughout the world suffered some of their largest drops since Sept. 11, 2001. Meeting by videoconference, the Fed voted to cut its key rate three-quarters of a point, the biggest single-day cut in nearly a quarter-century, and announced the move before U.S. markets opened Tuesday. The Fed continued to lower rates but couldn't stop the economy's plunge. More banks reported losses.
Meanwhile, President Bush, working with Congress, signed into law a $168 billion economic stimulus package, offering tax rebate checks.
On March 12, concern intensified about the soundness of one important financial player with heavy exposure to subprime securities: Bear Stearns. The chief executive of the 85-year-old New York investment bank, Alan Schwartz, tried to calm investors by going on television to say his firm had a $17 billion cash cushion.
Overnight, though, Bear Stearns's lenders cut off the company. Customers demanded their cash. Bankruptcy was imminent. On March 13, Schwartz called Jamie Dimon, chief executive of J.P. Morgan Chase, who answered on a special cellphone reserved for his three daughters and few others. Schwartz wanted J.P. Morgan to buy Bear Stearns. Dimon wouldn't agree to do so without more time but promised to work on the problem. He dispatched hundreds of J.P. Morgan employees back to the office to review Bear Stearns's books.
As he learned about the unfolding crisis, Bernanke feared a global economic collapse if Bear Stearns went under. Money-market funds where Americans deposit billions of dollars in savings had lent money to Bear Stearns. And the company's important role in the financial markets -- trading countless securities for big investors -- would come to a halt. Other investment banks, Bernanke worried, would be next.
June 17
Food supply fears mirror oil worries at Saudi summit (June 16 – Reuters DUBAI)
Saudi Arabia's emergency energy meeting next week brings together Western consumer countries threatened by soaring oil prices with Arab producers worried about scarce food supplies.
Record oil prices and their impact on the industrialized world will no doubt dominate the agenda, but food security could also feature as arid Middle East states worry about affordably feeding their rapidly growing populations.
Poor harvests, low stocks and rising demand have sent food prices to record highs, stoking protests, strikes and violence in Africa, Latin America, Asia and the Middle East. Dwindling water makes the issue more dramatic for the Gulf Arab region.
"We are entering a new arena here," said chief economist John Sfakianakis at Saudi-based SABB bank.
Grim Numbers For Fifth Third (June 13 - .Forbes)
Fifth Third Bancorp's stock hit a 13-year low Friday after one analyst predicted it would be the next regional bank to halve its dividend and try to raise the capital needed to cover higher-than-expected write-offs.
On Friday, BMO Capital Markets Analyst Peter Winter downgraded Fifth Third Bancorp (nasdaq: FITB - news - people ) to market perform from outperform on expectations that net charge-offs will be much higher than anticipated.
Nearly Half of Wall St. Bank Profits Are Gone (June 16 – NYT)
Only a year ago, Wall Street reveled in an era of superlatives: record deals, record profit, record pay. But a mere 12 months later, nearly half of the profits that major banks reaped during that age of riches have vanished.
Beltwaywide Financial (June 16 – WSJ)
The Countrywide Financial sweetheart loan scandal continues to grow, spreading to Senators and other Beltway potentates. We are about to find out if Congress's passion for investigating business ethics extends to conflicts of interest and cash that involve fellow Members.
Take Senator Kent Conrad, the North Dakota Democrat whose office issued a Friday statement saying that "I never met Angelo Mozilo." What he did not say then but admitted under later questioning by a Journal reporter is that, although he may not have had a face-to-face meeting with the Countrywide CEO, Mr. Conrad had called Mr. Mozilo and asked for a loan. The result was a discounted loan on his million-dollar beach house and a separate commercial loan of a type that residential lender Countrywide did not even offer to other customers, regardless of the rate.
Morgan Stanley warns of 'catastrophic event' as ECB fights Federal Reserve (June 17 – UK Telegraph)
The clash between the European Central Bank and the US Federal Reserve over monetary strategy is causing serious strains in the global financial system and could lead to a replay of Europe's exchange rate crisis in the 1990s, a team of bankers has warned.
"We see striking similarities between the transatlantic tensions that built up in the early 1990s and those that are accumulating again today. The outcome of the 1992 deadlock was a major currency crisis and a recession in Europe," said a report by Morgan Stanley's European experts.
Stage Two of the Mortgage Collapse: $500 Billion in Pay Option ARMs Meet the Piper in 2008 with 60 Percent Being in California. (June 14 – Dr Housing Bubble)
The next stage of the mortgage debacle is only starting to rear its ugly head and all early signs tell us that this is going to be even worse than the subprime mortgage collapse. We need to remember that the subprime mortgage debacle was only one facet of a global debt boom that has taken a stranglehold over the industrialized world. The United Kingdom is now starting to realize that even they are going to face a housing meltdown. Yet there is still a perception out there from pundits and those in the media that this housing meltdown was caused purely by subprime loans, which could not be anything further from the truth.
Economic stimulus payments push May budget deficit to an all-time high of $165.9 billion (June 14 – IHT WASHINGTON)
A flood of economic stimulus payments in the U.S. pushed the federal budget deficit to an all-time high of $165.9 billion in May.
The Treasury Department reported Wednesday that the May deficit was more than double the imbalance in May 2007, reflecting $48 billion in payments as part of the government's $168 billion economic stimulus effort to give the economy a jump-start and keep the country from falling into a deep recession.
For the first eight months of the budget year, the deficit totals $319.4 billion, slightly below the all-time record for this period of $346 billion, set in the 2004 budget year.
Anatomy of a metltdown: the bubble (June 15 – Washtington Post)
Although the business of structured finance grew during the 1990s, Internet companies drew the sexiest action on the Street. When that bubble popped, average Americans who had invested in the high-flying stocks saw their savings evaporate. Consumer and business spending began to dry up.
Then came the 2001 terrorist attacks, which brought down the twin towers, shut down the stock market for four days and plunged the economy into recession.
The government's efforts to counter the pain of that bust soon pumped air into the next bubble: housing. The Bush administration pushed two big tax cuts, and the Federal Reserve, led by Alan Greenspan, slashed interest rates to spur lending and spending. Low rates kicked the housing market into high gear. Construction of new homes jumped 6 percent in 2002, and prices climbed. By that November, Greenspan noted the trend, telling a private meeting of Fed officials that "our extraordinary housing boom . . . financed by very large increases in mortgage debt, cannot continue indefinitely into the future," according to a transcript.
When Gas Stations Run Out of Gas (June 17 – Business Week)
Don't be surprised to see more filling stations with empty pumps. But don't panic either. There isn't a gasoline shortage like there was in the 1970s.
What's happening is that filling stations have had their margins squeezed. Credit-card companies charge by the dollar, pushing up costs per gallon that filling stations pay to work with banks. And forget about sneaking in a few pennies' worth of profit.
Consumers are bargain-shopping like never before. The upshot: Some filling stations either can't stay in business or are just barely hanging on. Plenty of filling stations have already gone under. Last year, 3,184 of the nation's 164,292 gasoline stations closed their doors and went out of business, the biggest drop in five years, according to National Petroleum News. In the mid-1990s, there were more than 200,000 stations in the U.S. Experts think there are more closures to come.
US Coal Production Unlikely to Sate World Demand (June 17 – Reuters HOUSTON)
US coal production has room to grow, but expansion is unlikely to meet surging world demand because miners fear a boom-bust cycle, key reserves are declining, and regulation has tightened.
Despite soaring prices, the US Energy Information Administration has cut projections of US output rather than raised them, and now foresees a total of 1.166 billion short tons by 2010, barely up from a record 1.163 billion in 2006.
That is not enough to overcome what some coal officials see as a shortage of 25 million to 35 million tons this year in the 6-billion-ton world market and a shortfall of perhaps 70 million tons next year.
The message from the markets is inflation, inflation, inflation (June 16 – The National)
No surprise what the message this week from markets is: inflation, inflation, inflation.
Inflationary forces in the United States are being offset to some extent by the housing recession and slowing consumer spending, but Midwestern storms and rising utility bills could spell trouble.
Southern towns shrink, economic woes grow (June 17 – USA Today)
The USA's population history is most often a story of growth — of people moving to ever-growing metropolises and the challenges of accommodating them. The nation, which has one of the highest growth rates among industrialized countries, passed the 300 million mark in population almost two years ago and is expected to reach 400 million by 2040. But vast sections of the nation are seeing heavy, sustained population losses, a reflection of the decline of family farming and the lack of rural jobs and economic opportunities.
June 16
In Midwest Floods, a Broad Threat to Crops (June 16 – NYT NEWHALL, Iowa)
Here, in some of the best soil in the world, the stunted stalks of Dave Timmerman’s newly planted corn are wilting in what sometimes look more like rice paddies than the plains, the sunshine glinting off of pools of collected water. Although time is running out, he has yet to plant all of his soybean crop because the waterlogged soil cannot support his footsteps, much less heavy machinery.
At a moment when corn should be almost waist-high here in Iowa, the country’s top-producing corn state, more than a million acres have been washed out and destroyed.
Beyond that, agriculture experts estimate that 2 million acres of soy beans have been lost to water, putting the state’s total grain loss at 20 percent so far, with the threat of more rain to come.
“The American farmer, we feed the world,” Mr. Timmerman said. “We’re going to be short on corn and we’re going to be short on soybeans.”
Eurozone inflation hits highest rate for 16 years (June 16 - FT)
Eurozone inflation has been revised up to the highest level for 16 years and a European Central Bank official has warned that rising wage costs could add increasingly to the pressures created by soaring oil prices.
Annual inflation in the 15-country region last month was 3.7 per cent, according to Eurostat, the European Union’s statistical office. That was up from 3.3 per cent in April.
Price jolt: Electricity bills going up, up, up (June 16 – USA Today)
"Consumers now face a tough reality on electricity," says Mark Cooper of Consumer Federation of America. The increases come after rising fuel prices already have driven up utility bills nearly 30% in the past five years, the sharpest jump since the 1970s energy crisis. Fuel costs are again the main culprit. In Virginia, Potomac Edison, citing high coal and natural gas prices, plans to raise rates 29% on July 1, pushing an average monthly residential bill from about $70 to $90.
AmerenUE, Missouri's largest utility, recently asked for its first rate increase in 20 years, a 12.1% boost, mostly to cover higher fuel costs. Customers of Public Service Co. of Oklahoma were socked with a 25% rise on June 1. The price of coal, which fires half of U.S. power plants, has doubled since last year, largely because of surging energy use in countries such as China and India. Natural gas prices are up nearly 50% on high U.S. demand.
In California, drought has forced Pacific Gas & Electric to replace cheap hydroelectric power with natural gas, helping to prompt it to seek 13% rate increases.
Fuel £9 a gallon as supplies dry (June 16 - BBC)
A Devon petrol station is charging drivers more than £9 a gallon for petrol and diesel as drivers clamour for fuel. The Foxhayes station at Exwick near Exeter has put all grades of petrol and diesel up to £1.99 a litre.
The manager said the move was to conserve stocks and said he was not being mean. It follows a four-day strike by Shell tanker drivers in an industrial dispute over pay.
Saudis May Be Strapped for Oil, Close to Full Capacity (June 16 – CNBC)
Saudi Arabia's pledge to boost oil production by 500,000 barrels per day may not be achievable, a source close to the Saudi oil industry told CNBC.com.
The New York Times reported on Saturday, citing unnamed analysts and oil traders briefed by Saudi officials, that the production increase was to be announced at a meeting of oil producing and consuming countries on June 22 in the port city of Jiddah to discuss ways of dealing with soaring energy prices.
The increase would bring Saudi's oil production to 10 million barrels a day, the country's highest ever, according to reports by the New York Times and the Middle East Economic. Saudi Arabia is the world's largest oil-producing country. But the country's ability to produce more than 9.45 million barrels a day of easily refined sweet crude is reliant on the newly-discovered Khursaniyah field, which is of yet not producing to its full capacity, a source close to the industry said.
Brown Says Europe Will Tighten Iran Sanctions (June 17 – NYT LONDON)
Prime Minister Gordon Brown announced on Monday that Britain and Europe would freeze the overseas assets of Iran’s largest commercial bank, joining the United States in intensifying financial pressure against Iran over its refusal to address international concern over its nuclear activities.
Iran withdraws $75 billion from Europe (June 16 – Reuters EHRAN)
Western powers are warning the Islamic Republic of more punitive measures if it rejects an incentives offer and presses on with sensitive nuclear work, but the world's fourth-largest oil exporter is showing no sign of backing down.
"Part of Iran's assets in European banks have been converted to gold and shares and another part has been transferred to Asian banks," Mohsen Talaie, deputy foreign minister in charge of economic affairs, was quoted as saying.
Stung by Soaring Transport Costs, Factories Bring Jobs Home Again (June 13 – WSJ)
The rising cost of shipping everything from industrial-pump parts to lawn-mower batteries to living-room sofas is forcing some manufacturers to bring production back to North America and freeze plans to send even more work overseas.
Emerson, the St. Louis-based maker of electrical equipment, recently shifted some production of items such as appliance motors from Asia to Mexico and the U.S., in part to offset rising transportation costs by being closer to customers in North America.
Edward Monser, the company's chief operating officer, says logistics costs, which include all the expenses associated with moving goods, became a worry about a year ago.
"That's when it became a dominant part of the discussion," he says, adding that oil then was less than $100 a barrel. "So with oil now at $130, it's even more serious." Mr. Monser says Emerson's larger strategy is to regionalize manufacturing, producing as much as possible within the part of the world where it’s sold.
Tempers fray as Shell strike begins to bite (June 15 The Independent)
Tempers frayed and frustration rose with the lengths of the queues on garage forecourts yesterday, with people hurling insults and vehicles literally scraping past each other as motorists jostled to get to the pumps.
With striking workers continuing to blockade Shell petrol depots around the country, there were growing reports of panic buying and people travelling dozens of miles just to fill up. Supermarkets have said they struggled to meet demand, and some garages are predicting they will run out of fuel.
More lay-offs as energy crisis spreads June 15 – (Herald Sun (AU) WESTERN)
Australia's gas crisis will hit hard this week as more businesses face the decision to shut down and lay off workers because of escalating energy costs, the state government says
The WA Chamber of Commerce and Industry (CCI) has estimated 14 per cent of 83 companies it surveyed recently may halt operations because of the energy squeeze.
Apache Energy says it will be two months before gas supplies are partly resumed at its Varanus Island gas plant, where a June 3 explosion cut off one-third of the state's domestic gas supply.
Saudi Arabia May Announce Oil Output Increase June 22 (June 15 – Bloomberg)
Saudi Arabia may announce an oil output increase at a meeting it will host in Jeddah on June 22 for oil producers and consumers because customers are asking for more crude, an OPEC official said today.
State-owned Saudi Aramco said June 13 that it would start pumping oil from its 500,000 barrel-a-day Khursaniyah field within a month, a project it previously had said would start operating last December. After confirming the delay in opening the field in January, Aramco said it was ready to use its spare capacity, which included 1 million barrels of Arab Light crude, to meet market demand.
Malaysia Faces Bankruptcy If Oil Subsidy Continued (June 14 – RedOrbit HULU TERENGGANU, Bernama)
The country can go bankrupt if the government continues giving oil subsidy to the people, in order to cope with the global oil price hike, without sound measures to tackle the problem, said former Finance Minister Tengku Razaleigh Hamzah.
He said based on information from Petronas and the oil production rate of 600,000 barrels per day currently, he opined that the country's oil and gas reserves would not be able to meet the demand in the next five years.
"After this, Malaysia will have to bear a high cost and depend wholly on oil imports to meet the local demand. "If the oil subsidy continues like in the last 45 years, the country can go bankrupt. Now we are producing 600,000 barrels daily...eventually our oil wells will be dried up and we will be forced to import from Saudi Arabia.
High oil prices are based on fundamentals not speculative bubbles (June 15 – The Telegraph UK)
Oil prices have now risen seven-fold since 2001. Having surged 40 per cent since January, crude has already notched up 28 record highs this year. Even after falling slightly last week, oil still stands above $134. And a drop isn't expected soon, with crude for delivery later this year close to $135.
Anyone wanting to understand what's happening should peruse BP's excellent Annual Statistical Review of World Energy, published last week. It shows the "fundamental" problem - oil demand running ahead of supply. And that gap is far more likely to widen than to close.
Ukraine threatens to retaliate if Russia hikes gas prices in 2009 (June 13 – Thomson Financial KIEV)
Ukraine warned Friday it will raise its fees on Russian gas shipments through its territory and on underground storage services if Russia abruptly hikes gas prices in 2009.
'Be confident that Ukraine will have a strong asymmetric response if there is a question of imposing European price levels and if there is a willingness to introduce them immediately, starting from January 1, 2009,' Olexander Chaly, a deputy assistant in the Ukrainian president's office, told a press conference.
Russia on June 6 said it would double the present tariff that Ukraine pays for gas from next year as a result of the higher costs of acquiring the gas from Central Asia.
When Gas Prices Lead to Roads Less Traveled (June 15 – NYT)
What price would gasoline have to reach before it caused you to make a big change? Some people have already crossed that barrier. According to a survey by the NPD Group, a research firm, rising fuel prices have caused a small percentage of drivers to buy a more efficient vehicle or to move closer to their work. People are also making more-reversible changes, like working from home, canceling vacations, carpooling and taking public transportation.
After the credit boom comes the long and painful squeeze (June 15 – Timesonline UK).
After the credit boom comes the hangover, which will last. That is why Britain and other countries are reeling under the impact of the credit crunch. It is why – although the international financial system may have been brought back from the brink – the economic repercussions have yet to play out fully.
Worse, some of the changes will be permanent. The age of cheap food and energy is over. The days of easy credit will not return for years. A new era has started with an uncomfortable jolt – and it does not look nearly as nice as the old one.
US airline catastrophe looms under record oil prices (June 14 – AFP WASHINGTON)
The US airline industry is set to crash as record oil prices threaten to push several carriers into bankruptcy, threatening "our American way of life," an industry study said Friday.
"As a consequence of the skyrocketing price of oil, the US commercial aviation industry is in full-blown crisis and heading toward a catastrophe," said a study issued by AirlineForecasts and the Business Travel Coalition.
Farther, deeper, colder (June 14 – Globe and Mail)
Swiss investment bank UBS has estimated it could cost a staggering $600-billion (U.S.) to develop the two major subsalt fields, Tupi and Carioca.Companies: Petrobras is the principal operator/investor.
Others in Brazil's offshore include Norway's StatoilHydro ASA, Britain's BG PLC, Spain's Repsol YPF SA, and U.S.-based Exxon Mobil Corp.
