US Economy

[muskrat89]

And if Andrew Jackson isn't the voice of reason, how about Ted Nugent? 

http://arizonahuntingtoday.com/desertrat/2008/09/27/ted-nugent-on-the-bailout/

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail, is another article which explains what might – likely will – happen to Canada as a result of this US housing/credit crisis:

http://www.reportonbusiness.com/servlet/story/RTGAM.20080929.wbankseconomy30/BNStory/Business/home

Canadians brace for 'bloodbath' as credit tightens, money dries up

KEVIN CARMICHAEL and ANDY HOFFMAN AND GREG KEENAN

Globe and Mail Update
September 29, 2008 at 10:31 PM EDT

OTTAWA and TORONTO — Away from Wall Street and Bay Street, the economic engines that power the North American economy are sputtering for lack of fuel and lubricant.

The failure of U.S. politicians to secure a financial rescue Monday and the stock-market collapse that ensued now threaten to make life in the real North American economy even worse.

For the banks, the cost of short-term cash – the foundation of their consumer and business lending – was already at record levels. Now uncertainty about whether the $700-billion (U.S.) plan can be saved is likely to make credit markets even tighter, with negative implications for companies in Canada as well and the prospect of a broader retrenchment in consumer spending.

As U.S. banks tighten lending, an ongoing massive loss of wealth from the meltdown in stocks risks shattering the fragile confidence of the world's most powerful consumers. They had already been curtailing spending amid the worst financial crisis since the Great Depression, and Monday's tumble alone erased more than $1-trillion in American investor savings.

And while the centre of the storm remains on Wall Street, Canadian companies are already feeling the effects.

“There is no money available for even good companies,” said Kacee Vasudeva, chairman and chief executive officer of closely held Maxtech Manufacturing Inc., a maker of automobile parts in Waterloo, Ont. “If this bailout fails, there will be a bloodbath.”

Most economists say the U.S. economy was already on its way to recession before the historic plunge in the Dow Jones Industrial Average led it to shed 777.7 points, or 6.9 per cent. The drop was 840.9 points for Toronto's benchmark index, also a 6.9-per-cent loss.

“My personal concern is that people are going to act so conservatively that it becomes a self-fulfilling prophecy,” said Jack McDonald, who runs Leeza Distribution, a Montreal-based company that stockpiles and delivers countertops. “We're certainly rationalizing our inventory.”

Lenders aren't likely to do anything to encourage Americans to return to the box stores or buy a home any time soon.

Banks around the world are hoarding cash out of fear of lending to the next financial institution to be brought down by exposure to toxic assets linked to subprime mortgages.

The bailout plan conceived by U.S. Treasury Secretary Henry Paulson was intended to restore confidence in markets by using taxpayers' money to remove bad debt from the balance sheets of financial institutions.

There is a real risk the uncertainty will cause more banks to fail, making credit even harder to come by.

“I am dead scared,” said David Laidler, a professor emeritus of economics at the University of Western Ontario and a former adviser at the Bank of Canada. “My guess is the financial system is really going to start coming apart in a big way and it's going to happen quickly.”

Maxtech's Mr. Vasudeva said credit has been unavailable for auto-parts makers for six to eight months. The company has developed new joints for automotive exhaust systems that could save auto makers as much as $15-million a year – except Mr. Vasudeva can't get anyone to lend him the money to develop the idea.

“If you can't develop the innovation and take it to the marketplace, you will die a natural death,” he said.

Less than a year ago, Canada's mining industry was basking in what was being called the greatest resource boom in half a century. Now, the financial chaos has investors fleeing the once red-hot sector.

“There is no access to capital right now, zero,” said Ian Delaney, a stock-market veteran and the chairman of Toronto-based resource producer Sherritt International Corp., which has coal-mining operations in Western Canada and oil assets in Cuba.

Mr. Delaney said he had “never seen it like this, as consistently and as dangerously, in my life.” Sherritt has sought to “avoid economic calamity” by keeping debt off its balance sheet and streamlining operations, Mr. Delaney said.

In Saskatoon, Jerry Grandey, the chief executive officer of Cameco Corp., the world's largest uranium producer, said the financial crisis has prompted the notoriously prudent company to reassess its capital expenditures.

As grim as things are, Canada likely will avoid a recession, said George Vasic, chief economist at UBS Securities in Toronto. While the U.S. economy will contract over the second half of the year, Canada's gross domestic product likely will shrink in only one of the final two quarters of the year, Mr. Vasic is forecasting.

For Leeza's Mr. McDonald, this may be a challenging time in terms of consumer demand but he's looking at expansion and riding through it.

Most of the company's sales are in Canada, where the housing market has mostly held up, supporting demand for the countertops it distributes. Leeza has just secured fresh credit at reasonable terms and is thinking about preying on some of its distressed competitors in the U.S. northeast.

“There might be some companies to pick off,” Mr. McDonald said. “If you can pick up some infrastructure down there, you do it.”

It may be a Wall Street problem but it will sideswipe every Main Street in Canada and the USA before its is solved.

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s National Post, is another piece with which I fundamentally agree:

http://www.nationalpost.com/news/story.html?id=847962

Financial markets go up and down as they should

Terence Corcoran, National Post

Published: Monday, September 29, 2008


In 1907, J.P. Morgan almost singlehandedly rescued the United States and the world from a financial panic and possible depression. He did it by personally overseeing a series of bailouts of failing or troubled businesses. Of his efforts, the famed art critic Bernard Berenson (who had an affair with Morgan's librarian) wrote: "Morgan should be represented as buttressing up the tottering fabric of finance the way Giotto painted St. Francis holding up the falling Church with his shoulder."

No saints or J.P. Morgans were in evidence yesterday in Washington as the U.S. Congress, a den of economic atheists, failed to rescue the secular church of capitalism. By narrowly voting against the Economic Emergency Stabalization Act, the House of Representatives appeared to have thrown the world's financial markets into deeper turmoil, with the Dow Jones Industrial ending the day down by 777 points, a lucky number but unfortunately the largest point and market-cap decline in history.

But it would be unwise to read too much into the Dow plunge, or to link it exclusively to the political circus in Washington. Stocks appeared to be heading lower no matter how Congress voted. Indeed, from the moment congressional leaders announced Sunday they had a deal, filled with anti-market schemes and regulation, stock prices began falling in Asia and Europe. Early yesterday, when it was expected the bailout would be approved, the Dow was down 500 points.

Bailout or no bailout, the stock markets were heading lower as financial markets continue to undergo massive asset revaluations. No matter what elaborate new rescue packages Congress, the Bush administration and the U.S. Federal Reserve bring to the party, the market is going to continue marking stock prices and other assets down until values reach realistic levels.

This is not, nor can it be, the beginning of the end of the U.S. or world financial system. It's simply how the financial market works, how it should work. And it is working, whatever the games being played out in Washington and whatever their belief that governments can resolve the crisis.

Banks all over the world are being knocked down, their stock prices falling and their balance sheets under revision. Troubled institutions are being taken over - Citigroup is taking over Wachovia, AIG is being sold in parcels to groups all over the world, Bank of America bought Merrill Lynch, Lehman is in bankruptcy, Washington Mutual is being taken over by the namesake of the man who held capitalism on his shoulders back in 1907 - JP Morgan Chase. The Japanese banking giant, Mitsubishi, yesterday bought 20% of Morgan Stanley.

None of these deals or markdowns could, would or should have been avoided under Washington's so-called bailout law. By the time any new version of the law is passed in the days or weeks ahead, more such transactions and takeovers will have taken place.

Doomish comments typically follow such deals. "It just seems that there are only going to be two types of banks in existence now," said one portfolio manager, "the ones that survive and get market share, or the ones that get gobbled up and have to be euthanized." That's true enough, but not much help.

Allowed to run their course over time, these market workouts would eventually render the bailout package redundant. As George Bush said of the congressional legislative process, watching markets revalue assets "isn't pretty." Markets, over time, will do a much better job of reaching sustainable and realistic values more quickly than any giant state-run rescue effort backed by however many trillions of taxpayers dollars.

The sooner the markets adjust to the new values, the sooner the credit logjam will break. Clearly some big players - Citigroup, Bank of America, Mitsubishi - are preparing to cash in, J.P. Morgan style - when the markets turn around. Canadian banks, better capitalized, are also hunting for assets.

Many of the deals are also the product of long-existent corporate expansion strategies. Citigroup has had its eye on Wachovia's banking assets for some time, just as JP Morgan Chase tried to buy Washington Mutual assets long before the mortgage crisis. Now they get these assets cheap, fulfilling their strategies in preparation for the next spin of the economic cycle.

What nobody can rightly claim to know is how far these market adjustments might spin into dangerous territory. The economy can easily survive a short-term freeze-up in credit markets while prices of assets and companies are adjusted. What the economy - corporations, small businesses, consumers - cannot survive is a prolonged war of attrition, dragged out for months and years while U.S. politicians re-enact their partisan battles day after day.

Congress and the administration produced a bill that went on for more than 100 pages. It was stuffed with provisions - many of them worthless claims (executive salary curbs, for example) or dubious initiatives (mortgage modification powers) - cobbled together to satisfy the election-year needs of Republicans and Democrats alike. Facing an angry electorate, politicians from both parties voted in large numbers against the bill. Perhaps they were hoping to pass the bill, while claiming to oppose it.

It was a classic piece of Washington political theatre. In the end, Republicans blamed Democratic Speaker Nancy Pelosi, who delivered a Bush-bashing partisan rant just before the vote. "When was the last time someone asked you for $700-billion?" Pelosi asked House representatives. "It is a number that is staggering, but tells us only the costs of the Bush administration's failed economic policies - policies built on budgetary recklessness, on an anything-goes mentality, with no regulation, no supervision and no discipline in the system."

So much for non-partisan co-operation to save the United States from what was being described all day as total financial system breakdown.

Now wonder investors were bailing out on the bailout. They had better things to do, such as trying to figure out what the world's banks and financial institutions are really worth - without getting any help from government.

I think the bailout is designed to help ease the (inevitable) pain that will be felt on Main Street in Canada and the USA. Believe it or not, multi-millionaire Goldman Sachs insider Hank Paulson IS on the side of the little guy. But the ‘little guy’ says (s)he doesn’t want help, and (s)he doesn’t, yet, because the pain hasn’t made it to her/him, yet. And investors are, as Corcoran suggests, worried about big things like the ‘real’ value and worth of their investments and, beyond that, many suspect that $700 Billion is waaaaay too little to do much good – but they aren’t sure what, if anything, will do ‘good’ for the markets.

 

[Kirkhill]

I find myself wondering if there aren't commonalities between this current financial crisis and Global Warming.

At least in terms of attitudes.  There are those that argue a proactive response and those that argue a reactive response. One group wants to prevent change. The other group is inclined to accept change and deal with the consequences.

I think I find myself in the latter group.  I am not convinced that in a global market of many, undefined and undefinable trillions, that 700 billion is really going to make any kind of long term impact.  Also, the longer this crisis goes on, with the market making its own sputtering adjustments the harder it is for me to define this as a crisis.

If the market dislikes uncertainty (except for those traders that thrive on uncertainty) how much more damaging must it be for the prospect of a 700 billion intervention to be hanging fire?  Would it not be more defensible to announce the end of the intervention,  watch how the chips start to fall and then act to deal with the real, actual and measurable effects?

 

[chanman]

Not everyone can afford to be so philosophical. Those were the people President Bush and Hank Paulson were trying to help but those were the same people who said “No!” to bailing out Wall Street. Well, now they will reap what they sowed.

I wonder if that attitude will change when pension funds start to disclose their losses.  Given the interest rate those need to produce, they can't be parked in the safest of investments.  Are they insured in any way?

 

[Edward Campbell]

I find myself wondering if there aren't commonalities between this current financial crisis and Global Warming.

At least in terms of attitudes.  There are those that argue a proactive response and those that argue a reactive response. One group wants to prevent change. The other group is inclined to accept change and deal with the consequences.

I think I find myself in the latter group.  I am not convinced that in a global market of many, undefined and undefinable trillions, that 700 billion is really going to make any kind of long term impact.  Also, the longer this crisis goes on, with the market making its own sputtering adjustments the harder it is for me to define this as a crisis.
...

But there’s a third group, I think, that opposes this response (the bailout) because they perceive it to reward those they blame for the crisis. This same group, however, will want demand scream for a bailout when the crisis, inevitably impacts them.

I’m inclined to join Kirkhill in the second group (must be those mean, hard Scots hearts) but I understand, I think why President Bush and Secretary Paulson want us all in the first group: they want to prevent the anguished screams and the bigger bailout the third group will require.

 

[GAP]

Lets not lose sight of what caused this.....Clinton (Democrat)wanting all Americans to be able to buy a home and have a chicken in every pot (oops...not him)....

He initially put the idea and legislation forward that it would be OK, and the Republicans and Democrats both passed legislation loosening laws and regulations. Kinda like putting cheese in a mouse trap.

The mice (homebuyers) went for it, in a big way.....look at the escalating prices of homes that were selling for 4 and 5 hundred thousand, when the realistic price should have been maybe 70-80 thousand (if you were generous....have you seen some of these dumps?)

Greedy little bankers and their ilk dove in  and then offloaded the mortgages, thinking the other guy would pay the price..

There are so many players all trying to get their piece of the pie, that the slap down is just deserts....

 

[a_majoor]

Given the various manipulations in the proposed bailout plan, as well as the rather cynical attempt to get the GOP on board for political cover when the thing blows up, I am more firmly in the stand back and let this clear naturally camp. Remember, attempts to play with the federal reserfve caused the great crash of 1929, and the "New Deal" extended the Great Depression by increasing government manipulation of the markets for capital, labour and credit.

Yes, there will be shocks to every element of the economy, and the spillover will affect the Canadian economy, but a short purge is probably preferable to constant uncertainty as the Market attempts to react to the somewhat random actions of government interventions. That said, I could make a case for using the crisis to clean house on the government side: end earmarks and corporate welfare and use the savings to deliver a middle class tax cut to provide some extra resources to weather the storm:

http://theanchoressonline.com/2008/09/29/rush-echos-the-anchoress/

Rush echos The Anchoress - UPDATED

UPDATE: Nancy Pelosi poisoned her own meal ticket.

I said it on September 26, and I think I said it first: I am sure that things are in deeply serious and yes, something needs to be done, but there is also something illusory at work here. I wrote:

   It seems to me that there is an illusion being worked in the middle of all this frenzy; if during this crisis, the Democrats can still worry about laying themselves out for ACORN, and Harry Reid can take the time to try to sneak a ban on oil shale mining into new legislation, then that tells me something. It tells me there is time and room, here, and that more is driving this than we can see. It makes me wonder if we should not hit the brakes before we go over a cliff, because we couldn’t clearly see the bend in the road.

A short time later, I noted some skepticism from The Volokh Conspiracy. Then I noticed Glenn Reynolds observe:

   You know, it would be easier for me to believe this was a crisis, if the people in charge were acting like it was a crisis, instead of just an opportunity for graft. Then again, to some of these people, everything is just an opportunity for graft.

Just now, out driving, I heard Rush Limbaugh open his show with a musing that - while we are clearly in a serious situation - the people running in hysterics about the “crisis” are still not acting like there is a “crisis” - that Mrs. Pelosi and her crew could have done what they wanted without looking to the right for “cover,” and a true “crisis” would have demanded that she do exactly that. Nearly ten days into the frenzy - breathlessly reported by the same cheerleader press who cried through Katrina (but not Ike) and never corrected their reports of murders in the Superdome - we still have no legislation.

Harry Reid was able to say, “We need, now, the Republicans to start producing some votes for us. We need the Republican nominee for president to let us know where he stands and what we should do.” then turn around and play presidential politics with it.

It’s all presidential politics. I’m convinced of it. I became most convinced of it when Barack Obama went on the Sunday shows yesterday and took full credit for the “bailout” plan he now says he is giving only “cautious support.”

Hello? If it’s your baby, Sen. Obama, or the brilliant brainchild of your own party, why are you being so “cautious” with your support? Hello? If all of this about more than simply beating up your candidate with an inconsistent stick, why aren’t you behind this thing? Why - during this “terrible crisis” - are you comfortable playing politics and circling around in a holding pattern (working it for all the political advantage you can squeeze) and attempting to develop a narrative on what you are calling “McCain’s Katrina-like response”? Did you miss the part, Sen. Obama, where Harry Ried begged McCain to come back, and he suspended his campaign? Is there time for building narratives and circling around - dragging things out as close to the election as possible - if we are in a time of unprecedented “crisis”?

Hello? The GOP leadership says were it not for McCain the Democrats would have steamrollered them. So, why did the Dems insist on GOP support at all, except for a need to blame, blame and blame?

I’m disgusted.

Everyone says we need the bailout. Fine, yes, we must do something. But I’m convinced the frenzy we’ve been fed for the last ten days is theater; I’m not buying into it anymore. This is precisely the “presidential politics” the execrable Harry Reid was so egregiously, disgustingly quick to accuse of John McCain.

Hmmmmm….Dr. Mark Perry, Prof. of Economics & Finance at U. Michigan takes a look, makes a few graphs and wonders where is the credit crisis?

UPDATE: Watch this video of Rep. Paul Ryan, (R) Wisconsin.

Related: Jimmie Bise wonders if McCain is putting the country before his campaign?

Ace: Did Paulson 700 Billion out of his ass?. No, out of yours and mine, actually.

Dennis Miller on the egregious Reid


Amused Cynic pinged back with I used to be disgusted, now I try to be amused….
Maggie's Farm tracked back with Monday evening links...
small dead animals tracked back with Poison ...
The Irascible Chef pinged back with Cool Thing About Predictable Predictions…
The Strata-Sphere pinged back with Obama Claimed Bailout Was His Success, Will It Be His Failure?

 

[tomahawk6]

Video that had 1.2m hits the first day it was out.

http://www.youtube.com/watch?v=1RZVw3no2A4&eurl

 

[Kirkhill]

...(must be those mean, hard Scots hearts) ....

It was them that got us to this place in the first instance.  Everybody knows Adam Smith.  But they are less kenspeckle (yin o' thae nasty Scots words the Campbells micht no ken sae weel)  with William Paterson. 

"The bank hath benefit of interest on all moneys which it creates out of nothing."

 

[Lockness]

"McDonald’s Deemed More Credit-Worthy than U.S. Government"By Juhana Rossi
Translated By Henri Rautonen
September 26, 2008

http://watchingamerica.com/News/7016/mcdonalds-deemed-more-credit-worthy-than-the-us-government/

The State of Finland and fast-food chain McDonald’s are now deemed more credit-worthy than the U.S. when measured by prices of CDS-derivatives (credit default swaps).

The insurance risk-premium for a 10-year U.S. treasury bond shifted on Friday up to 0.3% according to a broker in a Finnish bank. In practice this means that if an investor wishes to insure 10 million dollars worth of U.S. T-bonds against a government default the insurance will cost 30,000 dollars. Such an insurance for the same amount of investments on Finnish bonds cost on Friday only about half of that at 16,000 dollars. Even loans to McDonald’s would be cheaper to insure than U.S.-bonds, at 28,000 dollars per 10 million.

CDS-derivative prices are an indicator of investors’ views and mood, but as such they reveal nothing of the true financial state and wealth of their targets. Thus, while Finland’s and McDonald’s risk of bankruptcy is now smaller in investors’ opinion than that of the U.S. this does not mean that Finland and McDonald’s would necessarily be any wealthier and thus safer targets of investment than the U.S.

This being said, it is extremely rare for a fast-food chain’s corporate loan to be viewed as a safer investment than the bonds of the world’s most powerful country.

Interesting times indeed.

 

[Edward Campbell]

Well, according to this article, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail, the bailout package is crafted, for better or for worse:

http://www.theglobeandmail.com/servlet/story/RTGAM.20080928.wbailout28/BNStory/Front/home

To see if it is working at its real goal: stopping the panic amongst too easily frightened ‘investors,’ watch the LIBOR numbers.

LIBOR = London Interbank Offered Rate; it is the rate of interest at which banks borrow funds from each other in the London interbank market. LIBOR is the primary benchmark for global short term interest rates. It is the basis for contracts on many of the world’s major futures and options exchanges and most Over the Counter and lending transactions.

The LIBOR is at 5.03%, down from near record highs yesterday, but still more than twice as high as the Federal Reserve's prime rate.

So what?

That means that, despite low rates from the Feds, banks will not lend to one another (except at a 100%+ premium) because they are afraid that too many banks will default and fail to pay back loans. That means business, for example, cannot borrow, except at very high rates - maybe not at all, in order to e.g. buy new stock. That means people get laid off at both the business that could not borrow money and at the supplier that lost an expected order and then another, and so on. 

 

[Kirkhill]

I've been interested in the, to my mind, contrarian reaction of the oil market.

I would have expected oil prices to rise (working on the basis that that would reflect a lack of confidence in the US Dollar and, by inference the US Government and Treasury).  Instead the price of oil has dropped some $20 dollars per barrel, or 17%.  Does that mean that the oil producers (the Saudis etc) are still betting on the Dollar, or might it be more appropriate to say that they are Backing the Dollar, attempting to alleviate some of the pressure on the Dollar by keeping the price down?

I should also note that the price ticked back up with speculation that the "package" is to be reintroduced.


What am I missing here?

 

[GAP]

The speculators.....the oil price is what it is based on market speculation....and if the speculators do not have massive lines of credit to buy and sell, the price will settle based on supply & demand only

 

[Kirkhill]

Good point GAP.

Thanks.

 

[Edward Campbell]

The oil markets are forecasting reduced demand caused by a contracting economy: fewer factories, people driving less and so on.

 

[GAP]

The oil markets are forecasting reduced demand caused by a contracting economy: fewer factories, people driving less and so on.

Would that be enough to drive it down to the prices it presently is....I would think they would try to keep the price higher if that was the case , at least in the short term to get as much as they can....

 

[Edward Campbell]

First: Most oil trades are in futures. Futures trading is a combination of (hopefully informed) guesstimating and gambling.

Second: The oil markets haven't made much sense for about a year.

 

[GAP]

First: Most oil trades are in futures. Futures trading is a combination of (hopefully informed) guesstimating and gambling.

Second: The oil markets haven't made much sense for about a year.

Thanks and True

 

[Lockness]

One futures contract in oil is 1000 barrels.  Margin rules in the futures exchange allow $1 to control about $15 of a futures contract.  Further leverage can be obtained by borrowing from low interest nations such as Japan with the Bank of Japan interest rates siting at only 0.5%.

http://www.investopedia.com/articles/optioninvestor/07/energy_market.asp

Futures contracts offer speculators a higher risk/return investment vehicle because of the amount of leverage involved with commodities. Energy contracts in particular are highly leveraged products. For example, one futures contract for crude oil controls 1,000 barrels of crude. The dollar value of this contract is 1,000 times the market price for one barrel of crude. If the market is trading at $60/barrel, the value of the contract is $60,000 ($60 x 1,000 barrels = $60,000). Based on exchange margin rules, the margin required to control one contract is only $4,050. So, for $4,050, one can control $60,000 worth of crude. This gives investors the ability to leverage $1 to control roughly $15. (Find out more about leveraging in What is the difference between leverage and margin?)

So with the amount of leverage available it is not hard for a multimillion or billion dollar hedge fund to cause an impact on the market place.  The CFTC for example is investigating manipulation in the silver markets by two banks shorting silver in August.

http://online.wsj.com/article/SB122231175151874367.html


Global oil demand forecasts for 2009 has fallen to less than forecasted but it is still increasing than previous years.

http://omrpublic.iea.org/

Forecast global oil demand has been lowered for both 2008 and 2009, following weaker deliveries in the OECD. World demand averages 86.8 mb/d in 2008 (+0.8% or +0.7 mb/d versus 2007 and 100 kb/d lower than previously estimated) and 87.6 mb/d in 2009 (+1.0% or +0.9 mb/d year-on-year and 140 kb/d lower than in our last report).

Less demand possible in the U.S. but don't count Asia out to keep global demand and prices higher.  China real GDP growth rate for 2007 was 11.4% which should increase their energy and oil demands going forward if their growth continues.

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2003rank.html

Is it any wonder billionaire investors such as Jim Rogers have setup shop in Singapore to capture the China and surrounding region growth story.