Global Financial Crisis (Was: Subprime Meltdown)

[Xyzzy]

Crude falls to $75.94 a barrel, analysts say $50 oil possible.

Still $3.59⁹ here.

[Fusion_power]

lemmings made another mad dash today.

Gas here is $2.98 and falling an average of $.10 per week.

DarJones

[mdettweiler]

Originally Posted by Fusion_power

lemmings made another mad dash today.

Gas here is $2.98 and falling an average of $.10 per week.

DarJones

YOWZA! That's pretty low. Is that specific to a certain promotion or sale of some sort, or is that price an overall trend in your area?

[ewmayer]

Originally Posted by mdettweiler

YOWZA! That's pretty low. Is that specific to a certain promotion or sale of some sort, or is that price an overall trend in your area?

I can't speak for DarJones` area, but that drop seems reflective of the national trend [outside of areas in the SE where Hurricane Ike led to some short-term supply and refinery disruptions].

Here in the SF bay area, gas is around $3.50 per gallon at the low end, which is down roughly a full dollar from its high of the summer.

Oil is down by ~50% from its summer spike up to $150. With worldwide demand continuing to wane due to the now-global recession, it will likely go lower still.

[mdettweiler]

Originally Posted by ewmayer

I can't speak for DarJones` area, but that drop seems reflective of the national trend [outside of areas in the SE where Hurricane Ike led to some short-term supply and refinery disruptions].

Here in the SF bay area, gas is around $3.50 per gallon at the low end, which is down roughly a full dollar from its high of the summer.

Oil is down by ~50% from its summer spike up to $150. With worldwide demand continuing to wane due to the now-global recession, it will likely go lower still.

Yes, it's been going down in my area too--currently at about $3.35-$3.45 (depending on the station), down from a previous average of $3.50-$3.60. It wasn't so much the overall drop that I was surprised at, more just hearing that gas has actually dropped below $3.00 somewhere in America!

[ewmayer]

Wall Street gets hit again: Stocks slump on Merrill and Citi's earnings and more woes for the manufacturing sector.

NEW YORK (CNNMoney.com) -- Wall Street remained in retreat Thursday - with the Dow turning lower for the week - as investors eyed Merrill Lynch and Citigroup's disappointing results and two surprisingly weak manufacturing reports.

The Dow Jones industrial average (INDU) lost about 246 points nearly 90 minutes into the session. That decline, combined with the losses of the past two sessions, erased Monday's record 936-point gain.

The Standard & Poor's 500 (SPX) index tumbled 3% and the Nasdaq composite (COMP) lost 2.4%.

The credit market showed some signs of loosening, as the initiatives taken by the U.S. and world banks began to have an impact. Treasury prices slumped, raising the corresponding yields. The dollar gained against other major currencies. Oil, gas and gold prices declined.

The major gauges zigzagged in the first 30 minutes of trading as better-than-expected inflation and labor market reports tempered the results from Merrill Lynch and Citigroup.

But the market soon turned lower, with the financial sector weakness spreading and the manufacturing reports reviving recession fears.

Recession talk pounded stocks Wednesday, with the Dow falling 733 points, its second worst session ever on a point basis. The slide of 7.9% was the Dow's 9th worst ever. Declines for the S&P 500 and the Nasdaq were comparable.

The decline Wednesday wiped out $1.1 trillion in market value on the Dow Jones Wilshire 5000, the broadest measure of the stock market.

My Comment: So much for Monday`s short-lived euphoria. Regarding the inflation numbers - as illustrated by plunging oil prices, inflation is now not the worry. A Great-Depression-like deflationary spiral [precisely the thing Ben Bernanke studied in his PhD work] is the threat. We already have one key component, which is a collapse in [admittedly previously inflated] asset values, from homes to equities. Wages are stagnant or falling for those who have jobs, and we are in the process of losing millions of jobs over the course of this year and the next several. Consumer spending is falling off a cliff, driving prices for just about everything but consumer staples lower. That`s deflation, folks. And once the negative feedback loop really gets rolling, it`s much more dangerous than inflation, which can be reined in - not without some short-term pain, mind you - simply by jacking up interest rates and reining in the growth of money supply, the way former Fed chair Paul Volcker in the 70s.

Here are links to stories about the earnings and manufacturing reports mentioned in the above article:

Citigroup loses $2.8 billion: Banking giant books its fourth straight quarterly loss but the loss was smaller than expected.

Big loss for Merrill: No. 1 U.S. brokerage reports worse-than-expected quarterly loss of $5.58 per share, says it will issue $10B in equity to Treasury.

Factories: Drop worst in 34 years: Manufacturing in September falls by a whopping 2.8%, according to Federal Reserve.

In other troubling news, The Philadelphia Federal Reserve reported that its regional manufacturing index decreased by 41.3 points, to minus 37.5 from positive 3.8 in October. It was the largest one-month decline in the history of the index. Economists polled by Briefing.com expected a decline of just 5 points.

The report also showed that industrial capacity utilization - a measure that tracks the percentage of factories in use - posted a seasonally adjusted decrease of 4.6% to 76.4%. Economists had expected a decrease of just 0.7% to 78%.

My Comment: Once again, the vast majority of mainstream economists proves it is clueless in the face of what`s going on in the real world. When your computer models so consistently and grossly mispredict key economic indicators, it`s time to throw the models out and consider perhaps descending from the ivory tower and actually *talking* to some industrial plant managers, retail store owners, and bulk goods shippers.


Oil Prices Continue to Plunge:

Crude Oil Falls Below $70 as U.S. Inventories Rise; OPEC Moves Up Meeting: Crude oil futures fell below $70 a barrel after a U.S. government report showed a bigger-than- forecast increase in inventories.

Iraqi official: $100 a barrel is 'fair': Oil ministry spokesman, Assem Jihad, says if crude prices continue to fluctuate, OPEC will cut production.

My Comment: The leaders of OPEC must be crapping their pants [or khaftans] to see the demand destruction that`s going on. It couldn`t have happened to a nicer bunch of people. Regarding the secnd story - I believe it`s the job of the global marketplace to determine what price is "fair", my Iraqi friend. We didn`t hear you complaining about "fairness" when oil leaped above $100 this past summer.


EU Pushes to Overhaul Bretton-Woods II:

EU Pushes for Overhaul of Postwar Financial System

Oct. 16 (Bloomberg) -- European Union leaders pressed for an overhaul of the global financial system to prevent a repeat of the credit crunch that sparked the biggest stock-market selloff since the Great Depression.

EU leaders called for a global summit as soon as next month to rewrite the 1944 Bretton Woods accord that paved the way for Europe's post-World War II reconstruction and set up the institutions that oversee the world economy today.

``We do not have the right to miss this opportunity to re- construct our financial system,'' French President Nicolas Sarkozy told reporters today after chairing a two-day EU summit in Brussels. ``Crises can be turned into opportunities.''

The European initiative is likely to face resistance from the U.S., which has used its dominance of international financial institutions to promote its brand of capitalism.

``The U.S. got what it wanted in 1944 and, I suspect, will do so again simply because the Europeans won't be able to decide what they want,'' said Martin Weale, director of the National Institute of Economic and Social Research in London.

Sarkozy today went beyond calls by fellow European leaders such as U.K. Prime Minister Gordon Brown for global bank supervision and tighter regulation, saying governments need to consider re-anchoring currencies, the hallmark of the original Bretton Woods agreement.

Currencies

That dollar-based monetary system fell apart in the 1970s, giving way to today's freely floating currencies.

My Comment: while I don`t think a return to the gold standard is practicable, I do believe that anchoring the value of currencies in *some* tangible measure of wealth [perhaps on objective agreed-upon measures of an economy`s production of goods and services] is crucial, as is elimination [or at least a radical paring-back] of fractional reserve lending by banks. alas, I doubt either of those will happen, mainly due to the above-mentioned resistance from the U.S., which will do everything in in its power to preserve the post-WW2 hegemony of the US$ as the world`s reserve currency. Preserving that hegemony is one of the things that allows the U.S. to continue to swell its national debt and effectively force foreign governments with which we have a trade deficit to buy our debt at sub-market interest rates.,

[R.D. Silverman]

Originally Posted by ewmayer

Wages are stagnant or falling for those who have jobs, and we are in the process of losing millions of jobs over the course of this year

And a direct consequence of losing jobs will be a large rise in credit card
debt as people out of work start charging day-to-day living expenses on their
credit cards. This, of course, will be followed by a massive default on
those debts.

However we can all be sure that the senior executives responsible for
this mess will not lose THEIR jobs... nor see a reduction in their ridiculous salaries.......Instead, they will lay off productive people doing actual
work. Productive people will be punished for the mistakes of others...

We need some laws reeling in executive compensation. We need some
laws limiting executive authority to lay off others while retaining their
jobs. I have a "modest proposal" for such a law--> noone at a publicly
traded company can be laid off until the person they report to has been
laid off... This will force layoffs from the top down. Which is as it should
be. Executives claim they have the right to their ridiculous salaries because
they have responsibility for the well-being of their company. If they
are responsible when it does well, they they are also responsible when it does
BADLY and hence should be the first ones laid off. (and the last ones hired back)

[ewmayer]

Stock market had a decent late-day rally today, apparently investors decided they liked lower oil prices after all ... "Lower oil and gas prices increase the likelihood that the series remake of 'Knight rider' will be able to keep its production budget under control and thus be picked up for a second season, said an unnamed CNDC spokeswoman."


California Sells $5 Billion of Notes After Boosting Size of Offering Twice: California sold $5 billion of short- term notes to avert a cash shortage after taking record orders from individual investors this week following a sales pitch featuring Governor Arnold Schwarzenegger.

Oct. 16 (Bloomberg) -- California sold $5 billion of short- term notes to avert a cash shortage after taking record orders from individual investors this week following a sales pitch featuring Governor Arnold Schwarzenegger.

State Treasurer Bill Lockyer added $1 billion to the size of the initial offering after individual investors bought more than $3.9 billion of notes. Lockyer also was able to reduce the yields on the two-part sale, which remained as much as 0.88 percentage point above what California paid last year.

California, the biggest borrower in the U.S. municipal bond market, typically sells short-term notes to cover bills until tax revenue arrives late in the year. This sale comes amid a global financial crisis that has constricted lending. The state had said it might run out of cash by November if it couldn't borrow.

``It's a good sign that there are investors out there buying, given the difficulties in the market,'' said Paul Brennan, who oversees about $12 billion in municipal bonds as portfolio manager at Nuveen Asset Management in Chicago. ``It is crucial that they get it done.''

Underwriters led by Bank of America Corp. and Goldman Sachs Group Inc. priced $3.8 billion of notes maturing June 22, 2009, to yield 4.25 percent, down from an upper estimate of 4.5 percent. The $1.2 billion of notes due May 20 were priced to yield 3.75 percent. California's $7 billion note sale in October 2007 was priced to yield 3.37 percent.

My Comment: Interesting - Despite the woes of the credit markets, the flight-to-safety effect resulting from the ongoing rout in the equities markets appears to be helping to boost the muni bond market. It would have been potentially disastrous if California had not been able to find buyers at a reasonably low interest rate.


Another interesting consequence of the dire economy - It's a buyer`s market for racehorse semen:

Stallion Fees Sink as Crisis Hits Racehorse Market `Plagued' by Oversupply: Claiborne Farm, the 93-year-old breeding company that housed Triple-Crown winner Secretariat, slashed mating fees this month, a move that may signal the start of the thoroughbred industry's biggest slump in two decades.

However, I`m not sure if these are the kind of "liquidity injections" Fed chairman Ben "Hur" Bernanke had in mind to help recapitalize the banks and unfreeze the credit markets...


Vacation Alert:

I'll be taking a short Fall break tomorrow through Monday, traveling to Yosemite Park. I encourage readers to post story links of interest and keep the discussion going during my absence.

[ewmayer]

Americans Finally Start Saving Again: Consumers are tucking away more money, and that's good for the long run. But it won't help battered job and housing markets.

By Colin Barr, senior writer
Last Updated: October 16, 2008: 2:42 PM ET

NEW YORK (Fortune) -- The economic storm pelting the U.S. economy is going to do plenty more damage to already flattened job and housing markets.

But as dark as the next three or four quarters could be, the U.S. economy appears to be undergoing a more lasting, and ultimately uplifting, shift.

Americans who for decades have spent an increasing share of their incomes and taken on more and more debt are now, for the first time in years, saving instead.

The personal savings rate, which measures the amount of disposable personal income that isn't spent, ticked up to almost 3% in the second quarter of 2008, after almost four years below 1%.

While Americans still aren't going to win any awards for thrift - consumers save more than 10% of their paychecks in creditor nations such as Germany and Japan, for instance - the return to saving carries big implications for U.S. economic health.

More saving is good over the long haul, because domestic savings create a pool of money from which companies can borrow to invest in new plants and equipment, creating the jobs that push living standards higher over time.

A growing domestic savings pool could also reduce America's need to borrow money overseas - which would make the U.S. less beholden to foreign creditors who now supply us with hundreds of billions of dollars in financing every year.
The trouble with virtue

Unfortunately, thrift will cost in the short run. Saving more means spending less - which translates into more hard times in retail and other consumer-driven businesses like the auto industry. The latest evidence of the shift came in Wednesday's steeper-than-expected pullback in retail sales. They dropped 1.2% in September, in their first year-on-year decline in six years and only their third drop in the past 16 years. Economists had been looking for a 0.7% drop.

Given that two-thirds of economic activity is consumer spending, today's thrift will exacerbate a general downturn and will weaken the impact of the massive interventions the government has made in the financial markets.

"The breadth of the decline shows a broad-based pullback in consumer spending that will not quickly turn around," writes PNC economist Stuart Hoffman, "even with the arsenal of federal firepower now aimed at the Great Financial Crisis of 2008."

My Comment: Learning to live within our means, and doing so not just during the crisis times but rather in a lasting way, is the *only* long-term solution to the credit crisis. Ultimately the crisis is not one of too little credit - that is just the current symptom of the deeper problem - but rather one of too much. As Mish Shedlock likes to say, "frugality is the new reality". I hope his aphorism proves true in a long-term sense.

[japelprime]

Originally Posted by ewmayer;
My Comment:[/b

When I first saw the article headline, I thought it said "...Cold War", which made me think something was fishy. Can any Brits or Icelanders amongst our readership comment on what the *British* exclusion zone was, and currently is?

The Zone was 50 miles and was expandet to 200 miles as it is now.

[Jwb52z]

I think the government should have to act as very poor people do or at east historically have done. When poor people run out of money, they go without. I long for the days before credit was run amok and people could charge without having the money in their bank accounts to pay it at the end of the month. Bartering used to be a good idea that might be a good way to do things now instead of relying on currency. Surely we have something that other countries want that could be traded for something we need in the US. If it were made a law that the government couldn't just "get money because they need it", as in printing it on demand or somehow just somehow making it appear from nowhere or raising taxes to get it, there wouldn't be anymore 400 dollar toilet seats and such. If they just had to wait to do anything after they'd spent their money for the year, before taxes are paid in the year, like everyone else does who doesn't use credit as a crutch and is financially responsible, things would get better if you ask me.