So its 2009....

My thoughts:

And so it begins. Quietly. Like a thief. It has all the makings of being a year that most people would like to forget when it does end. The financial crisis is getting close to the mid point mark. The gangrene though has spread into the real economy. Large masses of people are starting to get laid off - not just the bottom 10% as sales slow. Consumers and Business are deleveraging simultaneously and as they do - they are feeding what is a classic deflationary downward spiral with demand destruction in all economic activities. In such a scenario the velocity of money slows dramatically and one of the ways to combat this is to create more money and hope that the additional money will compensate for the reduced velocity. The second and surer way to combat this is by Keynsian government spending. We've now heard of a proposed 800B Stimulus package from Obama's financial team. By the time this makes it way into Congress and Senate this should be close to 900B if not 1T. This spending if done wisely (giving it to the 50 States, green infrastructure etc) will help create demand (which is being destroyed in the private sectors). Robert Shiller (of Case Shiller) has called for Obama to create full employment (or what full employment would be in a typical recession). Obama is 100% right when he pinpoints the fact that it will be JOB CREATION that will renew confidence. Right now that is the most vital commodity that we're in a sore lack of. CONFIDENCE. Without it - nothing much matters.

Speaking of confidence, restoring that in the financial markets is another ballgame completely. Ofcourse one of the first things on Tim Geithner's agenda will be Insolvency at the heart of the US Banking system. If we were to assume 2T of total losses (I have even heard 3T worldwide if you factor in credit cards, student loans, CRE etc) - then only 550B or so has been recognized. Even if I were to believe some other estimates and say 800B has been recognized - that still means there is 1.2 to 1.4 T dollars of looses that have not been recognized. Even cutting this estimate into half - we're still left with 600B - 700B of looses that need to be recognized before the end of 2009.

Folks - this means that the Fed is going to print money. It also means that the Treasury will likely have to come up to the Congress one more time for another 700B or so and this money will be solely to re-capitalize the banks (dare I say nationalize the banks?). But assuming that this happens in the early part of 2009 - and the stimulus passes - and we start creating jobs again - we should see the end to this immediate nightmare by end 2009 or early 2010. But then we will have a ton of printed money worldwide sloshing around. At that point, inflation will make a huge comeback. I wouldn't be surprised to see oil take off to the races once again along with the other commodities in 2010. The Fed as usual is likely to be behind the curve and will tighten only when it is sure that inflation has taken hold and the economy will not die. So expect some tightening of interest rates in mid 2010 (and expect inflation to run rampant here...). Eventually Volcker will be able to talk some sense into the responsible people and liquidity will be drained severely in 2011. But don't be surprised if ice-cream ends up costing you five dollars a cone before this is done and things return to "normal."

Expect to be robbed and take steps to protect yourself.

Good luck to all.

Honey, Inflation ate my rebate check

from nytimes.com
August 5, 2008
Higher Prices Outpace June Spending by Consumers
By CATHERINE RAMPELL

Consumer spending increased in June, but those gains were outpaced by rising prices, the Bureau of Economic Analysis reported Monday.

The increase in spending was $57.1 billion, or 0.6 percent, from May, but prices rose 0.8 percent in the month. It was the highest inflation level in the monthly report since September 2005.

The decrease in consumer spending after accounting for inflation reversed the trend in May, when stimulus checks from the federal government helped produce a real increase in spending.
“This is a kind of ‘Honey, inflation ate my rebate check’ story,” said Jared Bernstein, senior economist at the Economist Policy Institute.

Inflation was driven primarily by food and energy prices. Excluding food and energy, prices rose 0.3 percent in June, compared with 0.2 percent in May. The prices of nondurable goods — propelled mostly by food and energy, but also including things like clothing and toiletries — were up 7.3 percent year over year, the highest level since July 1981.

Markets fell this morning in response to the news before recovering in midday, largely on news of a sharp one-day decline in oil prices.

Monday’s announcement followed a tepid report last week on economic growth, which showed a mild positive annual growth rate of 1.9 percent for the second quarter in gross domestic product.
While the numbers in the spending report were not as dire as many had forecast, they still indicate months of challenges to come.

“That real consumer spending is down two-tenths in June is not a good thing in and of itself, but it also is a bad thing for what it means for third-quarter consumption,” said Michael Feroli, an economist at JPMorgan Chase. “To get positive consumption growth in the third quarter is going to be very challenging, especially with things like auto sales down as much as they are.”

The real drop in spending from May could also be due to the dwindling effects of the Economic Stimulus Act of 2008, which rolled tax rebates in consumers’ pockets starting in April. Real consumer spending had risen 0.3 percent in May, according to revised estimates. Dean Maki, chief United States economist at Barclays, said he expects that rebates will continue to pump a minor boost for several months, however.

The decreasing effect of rebates also resulted in personal income and disposable personal income numbers heading in opposite directions.

Personal income increased in June by only 0.1 percent, and disposable personal income — which is personal income less taxes — decreased 1.9 percent. Adjusted for inflation, disposable personal income decreased 2.6 percent in June.

“What you had in the way rebates got counted was, for most people, a reduction in taxes,” Mr. Feroli said. “That reduction was bigger in May than in June. Effectively, that increased taxes, and was a negative on disposable income.” The federal government issued rebate payments of $1.9 billion in April, $48.1 billion in May, and $27.9 billion in June.

Say Wha homie? Hoocoodanode?

Consumer sentiment is ugly

from www.reuters.com

Consumer sentiment at lowest level since 1980
By Burton Frierson
NEW YORK (Reuters) - Consumer confidence fell more than expected in June, hitting another 28-year low as surging prices and mounting job losses contributed to a bleak outlook, according to a survey released on Friday.
The Reuters/University of Michigan Surveys of Consumers said five-year inflation expectations remained steady at the peak of 3.4 percent reached in May, which was the highest in 13 years.

Federal Reserve officials have focused on long-term inflation expectations and the persistence of such pressures heightens their dilemma -- whether to fight price growth or support a weak economy in the grips of the worst housing slump since the Depression of the 1930s.

The Surveys of Consumers said the final June reading for its index of confidence fell to 56.4 from May's 59.8. The report said the pace of consumer spending is likely to sink at least through the start of 2009.

"Moreover, gas prices have risen to an all-time peak, food prices posted the largest increases in decades, home prices have fallen faster than any time since the Great Depression, and there has been widespread distress associated with foreclosures," the report added.

Also weighing on consumers, data earlier this month showed U.S. employers shed jobs for a fifth straight month in May and the unemployment rate jumped to 5.5 percent, its highest in more than 3-1/2 years.

Economists had expected a reading of 57.0, according to a Reuters poll. Their forecasts ranged from 55.9 to 60.0. The final June result is slightly below the preliminary figure of 56.7 released on June 13.

"Overall, no new information, only confirmation of prevailing weak sentiment," analysts at RBS Greenwich Capital said in a note to clients about the report.

Financial markets showed little immediate reaction to the report. Stocks were flat and the dollar was down against the yen. Government bonds were higher on the day.

The June reading is the lowest since 51.7 in May 1980, which was also the lowest reading ever. The index dates back to 1952, though the survey has been conducted since 1946.
One-year inflation expectations declined to a still-elevated 5.1 percent from May's 5.2 percent. May's one-year inflation expectations reading was the highest since 5.2 percent in February 1982.

The index of consumer expectations fell to 49.2 in June -- its lowest since May 1980. This was down from May's 51.1. Meanwhile, the index of current personal finances fell to 69 in June -- the lowest on record -- from 80 in May.
(Editing by Jonathan Oatis)

As expected, it is getting uglier - FAST. This is a consumer led recession. Expect consumer spending to drop dramatically once the short term bounce from government refund checks runs out. All consumer discretionary items are going to get hit at the median to upper consumer levels. Restaurants, Retail, Autos, Electronics, Housing (but we knew that!), Vacations, Road Trips - all of it! Once full fledged layoffs start - I expect targeted education industries to do well. I expect collection and repo agencies, bankruptcy lawyers and consultancies (on both consumer and business levels) to do booming business.

Fed keeps rates at 2%

from www.federalreserve.gov

FOMC Meeting
Release Date: June 25, 2008

For immediate release

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.

Richard Fisher was right in voting for a rate increase. The rate decreases are helping banks recapitalize I suppose but are directly contributing to the bubble in commodities. The ECB on the other hand has indicated that it is likely to raise rates next month. While everyone is counting on slower consumer growth to cool inflation - I am not so sure that will play out. Stagflation has a better than 50% chance in my opinion

Prices Higher - Food and Energy

from www.nytimes.com

June 14, 2008
Oil and Food Push Consumer Prices Higher in May
By MICHAEL M. GRYNBAUM
Inflation hit hard in May as prices for a wide swath of consumer goods rose at their fastest pace in six months, underscoring warnings from central bankers and adding to a growing consensus that the Federal Reserve might raise interest rates by the end of the year.

The Consumer Price Index, which measures prices of a batch of common household products, rose 0.6 percent last month, as Americans were forced to cope with a sharp increase in fuel costs. The report, released Friday by the Labor Department, is considered a benchmark measure of inflation.

On Wall Street, the major stock indexes rose after the report, with the Standard & Poor’s 500-stock index up 0.76 percent in afternoon trading. The Dow Jones industrials, which had gained more than 140 points, in morning trading was up about 80 points.

The index, which rose more than economists had forecast, comes on the heels of repeated warnings about inflation from the world’s central banks. Ben S. Bernanke, the chairman of the Fed, joined other top officials this week in focusing on higher prices, citing the economic damage wrought by the record run-up in food and oil prices around the world.

The speeches have fueled a growing sense on Wall Street that the Fed has shifted its focus from supporting growth to fighting inflation. The May C.P.I. will probably heighten expectations that higher interest rates, which tend to hold down prices, may be in the offing.

In May, gasoline prices rose 5.2 percent, and were up 21 percent compared with a year ago, according to the report. They may rise again in June: the nationwide average for gasoline topped $4 a gallon last weekend as the price of oil leaped to a new high.

The cost of eating rose, as well, as Americans paid 5 percent more for foods and beverages in May than a year ago.

On an annual basis, inflation worsened for the first time in three months, reversing a downward trend. Inflation ran at 4.2 percent in May compared with a year ago.

High oil prices also pushed up costs for other products, as businesses, squeezed by higher shipping and production costs, sought to raise the prices paid by their customers. Prices for transportation, commodities, tobacco and utility fuels all increased for the month. Excluding the cost of food and gasoline, inflation ran at 0.2 percent for the month.

“Both consumers and financial market participants are becoming sensitized to large headline price rises, and were especially ready this month amid heightened inflation anxiety,” Peter Kretzmer, an economist at Bank of America, wrote in a note.

Consumers, however, do not appear content with rising prices. A measure of Americans’ confidence in the economy fell to its lowest level since 1980, another period of high inflation and slow growth. The University of Michigan’s consumer confidence survey dropped to 56.7 in June, the fifth consecutive month of decline.

Inflation expectations in the limelight

from www.nytimes.com

June 11, 2008
Inflation Worries Unsettle Global Markets
By MATTHEW SALTMARSH and KEITH BRADSHER
PARIS — Fears of rising interest rates in Europe and the United States and their effect on already faltering consumption dragged share prices lower in Europe on Tuesday after a sell-off in Asia.
In afternoon trading, the main European indexes had pared earlier losses of over 1 percent but remained lower, taking their cue from Asia.
Stock-index futures in New York also dropped amid mounting concern that the Federal Reserve will raise borrowing costs to fight inflation.
Chinese stocks fell 8.1 percent on Tuesday, their biggest single-day drop in nearly 16 months, leading a downturn in Asian stock markets.
The plunge in the Shanghai and Shenzhen markets followed an increase in Chinese bank reserve requirements, heightened worries about food and oil prices, and fears about exports to the United States.
Comments late Monday from the chairman of the Federal Reserve, Ben S. Bernanke, who said that threats to the American economy had diminished and that the central bank would “strongly resist” inflation pressure, added to the sense in the market that rates in the United States have hit a low point in this cycle.
The remarks, coupled with a signal last week from the president of the Europe Central Bank, Jean-Claude Trichet, that borrowing costs in the euro zone could rise as soon as next month, have led to fears that consumer activity will weaken further.
“The mood has changed quite dramatically in the last two or three weeks,” said Roger Cursley, equity strategist at Investec, a banking group in London. “Central banks are focusing on inflation, and seemingly they have put worries about the effects of the credit crisis behind them.”
The expectation of higher rates, just as consumers struggle to adapt to higher oil and food prices, has led to a raft of downward revisions to growth estimates in the West from institutions like the Organization for Economic Cooperation and Development. The OECD said last week that growth among its members would slow to 1.8 percent this year and 1.7 percent next year, compared with its previous forecast of 2.3 percent in 2008 and 2.4 percent in 2009.
That in turn is lowering the expectation among analysts for earnings growth, particularly among banks, retailers, homebuilders and leisure stocks. Those stocks with more exposure to emerging markets, particularly food and tobacco stocks, and those that benefit from rising prices, like utilities, appear less vulnerable to the downturn.
In London, the FTSE 100 was down 0.6 percent to 3,576.11 points in early afternoon trading. The CAC-40 was down by the same amount at 4,769.76 in Paris and the broader Stoxx 600 also shed 0.6 percent, to 306.99. In Frankurt, the DAX was off 0.8 percent to 6,760,29.
Among individual stocks, ABB, the world’s largest builder of power networks, lost 2.3 percent to 31.56 Swiss francs. Tesco, the giant British retailer, dropped 3.2 percent to 389.1 pence after higher food and energy prices curbed its revenue.
Among American stocks traded in Europe, Bank of America sank 24 cents to $29.37 in Germany. Texas Instruments fell 57 cents to $30.76 in Germany after predicting second-quarter sales that met analysts’ forecasts.
In Asia, Industrial and Commercial Bank, the largest Chinese lender, slumped 8.4 percent to 5.38 yuan. Shanghai Pudong Development Bank dropped 10 percent to 25.75 yuan.
Elsewhere in the region, the Hong Kong stock market fell 4.1 percent; the Nikkei stock market index in Tokyo dipped 1.1 percent; the South Korean market declined 2.1 percent; the Taiwanese market was down 2.5 percent and the Australian stock market fell 2.8 percent.
Stock markets in mainland China and Hong Kong had been closed on Monday as a continuation of the Dragon Boat Festival on Sunday.
Economists attributed the steepness of the Chinese market’s plunge to broader worries among investors about how far the Chinese government will go to slow the economy to prevent food and oil prices from triggering a broader rise in inflation.
Chinese markets have lost 45 percent of their value since setting a record in October during a period of feverish speculation when many small investors began buying stocks for the first time.
The People’s Bank of China, the country’s central bank, announced on Saturday that it would raise the proportion of assets that banks must hold as reserves by a full percentage point, in two equal steps on June 15 and June 25. The increase — the fifth this year — tightens monetary policy by leaving banks with less money to lend.
“People can’t see the end of inflation,” said Stephen Green, the head of China research in the Shanghai office of Standard Chartered. “People are worried about the government having to continue to tighten.”
China is scheduled to announce on Thursday its statistics for consumer price inflation in May. During trading hours on Tuesday, news wire services cited unidentified Chinese officials as saying that the inflation rate was 7.7 percent; that would represent a decline from 8.5 percent in April, but would still be well above the rate of 5 percent that Chinese officials have described as the maximum they can tolerate.
Officials at the National Bureau of Statistics in Beijing could not be reached on Tuesday evening for comment.
China depends fairly heavily on exports, which have already slowed along with growth in the American economy.
Weaker growth in the United States could further reduce demand for the Chinese electronics, clothing and other products that already crowd the shelves of American stores.
China’s current account — the broadest measure of trade in goods and services as well as remittances and overseas investment returns — reached 11.3 percent of its entire economic output last year. Together with massive currency market intervention to slow the rise of the Chinese currency against the dollar, the current account surplus was a central reason why Chinese foreign exchange reserves grew by a record $462 billion last year.
Keith Bradsher reported from Hong Kong and Matthew Saltmarsh from Paris.