Posts Tagged ‘Federal Reserve’
Wednesday, November 2nd, 2011
American companies ordered more heavy machinery, computers and other long-lasting manufactured goods in September, an encouraging sign for the shaky economy. The increase in demand for these durable goods suggests businesses are staying with investment plans, despite slow growth and a lack of consumer confidence.
Durable goods are products expected to last a minimum of three years. Core capital goods are products that have nothing to do with defense or aircraft. The gains are driven by tax breaks given to businesses for investments made this year, an incentive Congress approved last December to boost the lethargic economy.
“Demand for big ticket items seems to be alive and well,” said John Ryding, an analyst at RDQ Economics. “Outside of the volatile transportation sector, the gains in durable orders were broad based in September, and point to a manufacturing sector that continues to expand at a solid rate.”
“Despite the understandable concern about economic growth, businesses are still investing,” said Jennifer Lee, senior economist at BMO Capital Markets.
Robust demand for core capital goods is a strategic reason why economists expect an annual growth rate of 2.4 percent in the 3rd quarter. That would be a major improvement from the first six months of the year, when the economy expanded at just 0.9 percent, the worst growth since the recession ended more than two years ago. A 2.4 percent growth rate could ease fears that the economy is on the verge of sliding back into a recession. Even so, the growth rate needs to nearly double to make a substantial dent in the unemployment rate, which remained stuck at 9.1 percent in September for the third consecutive month.
“Manufacturing is in pretty decent shape, and this ends the quarter on a high note,” said Brian Jones, a senior U.S. economist at Societe Generale, who accurately forecast demand for non-transportation equipment. “We’ve got decent momentum going into the 4th quarter.” Orders for computers and related products jumped as much as six percent. A Commerce Department report is projected to show the world’s largest economy grew at a 2.5 percent annual pace in the 3rd quarter, an increase of the 1.3 percent rate in the previous three months. Societe Generale’s Jones said the gain in durable goods demand has the potential to bring GDP growth for last quarter closer to three percent.
Boeing, the largest American aircraft maker, received 59 airplane orders in September, compared with 127 the preceding month. September’s decline came on the heels of a 25 percent gain in August. Orders for non-defense capital goods excluding aircraft jumped 17 percent at an annualized rate compared with an 11 percent increase in the previous three months, an indication that business investment is picking up.
Additional indicators show that manufacturing, which accounts for approximately 12 percent of the economy, continues to grow. The Institute for Supply Management’s factory index rose a full point to 51.6 in September, compared with 50.6 in August. A level greater than 50 indicates that expansion is taking place. Industrial production advanced in September on demand for items such as cars and computers, according to the Federal Reserve.
According to Mike Shea, Managing Partner and Trader at Direct Access Partners LLC, “The number wasn’t bad, and having a decent number in durables is far better than having a bad number, since with the overhang of Europe, if we were getting lousy data here, then we wouldn’t have anything to hang our hats on. If not for what was going on in Europe, this market would be running on all cylinders. The summit in Europe is the tradable event. We could have one hundred percent earnings positive surprises today, we could have great economic data come out, all of that could come in rosy domestically, but if the news out of Europe is judged to be bad, none of what happens in the U.S. will matter. This market will not shrug off a lousy plan coming out of Europe. It will not shrug off any plan that is not fundamentally based in reality.”
Tags: Auto parts, Autos, BMO Capital Markets, Boeing, Commercial aircraft, computers, congress, Core capital goods, Department of Commerce, Durable goods, Durable goods orders, Europe, Federal Reserve, GDP, Heavy machinery, Institute for Supply Management, RDQ Economics, recession, Societe Generale, unemployment rate
Posted in Development, Economics, General | No Comments »
Monday, October 24th, 2011
Federal regulators have requested public comment on the Volcker Rule – the Dodd-Frank Act restrictions that would ban American banks from making short-term trades of financial instruments for their own accounts and prevent them from owning or sponsoring hedge funds and private-equity funds. The Volcker rule, released by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency, is intended to head off the risk-taking that caused the 2008 financial crisis. The rule, which is little changed from drafts that have been leaked recently, would ban banks from taking positions held for 60 days or less, exempt certain market-making activities, change the way traders involved in market-making are compensated and assure that senior bank executives are responsible for compliance.
Analysts say the proposed rule could slash revenue and cut market liquidity in the name of limiting risk. Banks such as JPMorgan Chase & Co. and Goldman Sachs Group Inc., have already been winding down their proprietary trading desks in anticipation of the Volcker Rule kicking in. Banks’ fixed-income desks could see their revenues decline as much as 25 percent under provisions included in a draft, brokerage analyst Brad Hintz said. Moody’s Investors Service said the rule would be “credit negative” for bondholders of Bank of America Corporation, Citigroup, Inc., Goldman Sachs, JPMorgan and Morgan Stanley, “all of which have substantial market-making operations.” The rule, named for former Federal Reserve Chairman Paul Volcker, was included in the 2010 Dodd-Frank Act with the intention of reining in risky trading by firms whose customer deposits are insured by the federal government.
John Walsh, a FDIC board member and head of the Office of the Comptroller of the Currency, said that he was “delighted” that regulators had reached an agreement on the proposed rule, “given the controversy that has surrounded this provision — how it addressed root causes of the financial crisis.” “I expect the agencies will move in a careful and deliberative manner in the development of this important rule, and I look forward to the extensive public comments that I’m sure will follow,” Martin J. Gruenberg, the FDIC’s acting chairman, said. The rule will be open for public comment until January.
Not surprisingly, Wall Street opposes the rule, saying it will cut profits and limit liquidity at a difficult time for the banking industry. Moody’s echoed those concerns, saying the current version of the Volcker rule would “diminish the flexibility and profitability of banks’ valuable market-making operations and place them at a competitive disadvantage to firms not constrained by the rule.” Some Democratic lawmakers and consumer advocates are pushing to close loopholes in the rules, especially the broad exemption for hedging. Supporters of the Volcker rule take issue with a plan to excuse hedging tied to “anticipatory” risk, rather than clear-and-present problems. “Unfortunately, this initial proposal does not deliver on the promise of the Volcker Rule or the requirements of the statute,” said Marcus Stanley, policy director of Americans for Financial Reform, an advocacy group. Additionally, the Securities Industry and Financial Markets Association raised concerns about whether the exemption for trades intended to make markets for customers is too narrow.
According to Moody’s, the large financial firms all have “substantial market-making operations,” which the Volcker Rule will target. The regulations also will recreate compensation guidelines so pay doesn’t encourage big risk-taking. Derivatives lawyer Sherri Venokur said restrictions on compensation are “intended to create a sea change in the mindsets of those who create the culture of our banking institutions — to value ‘safety and soundness’ as well as profitability.”
Equity analysts at Bernstein say that the Volcker Rule — if implemented in its current form – will slash Wall Street brokers’ revenues by 25 percent, and cut pre-tax margin of their fixed income trading businesses by 33 percent. According to Bernstein, the Volcker Rule’s potential limitations are a surprise because it appears to prohibit flow trading in “nonexempt portions” of the bond-trading business. Bernstein says inventory levels – and, in all probability, risk taking – must be based on client demands and not on “expectation of future price appreciation.”
A Bloomberg.com editorial offers support to the Volcker Rule, while admitting it won’t be perfect. According to the editorial, “This week, the first of several regulatory agencies will consider a measure aimed at ending the practice. Known as the Volcker rule, after Paul Volcker, the former Federal Reserve chairman, the measure would curb federally insured banks’ ability to make speculative bets on securities, derivatives or other financial instruments for their own profit — the kind of ‘proprietary’ trading that can lead to catastrophic losses. Whatever form it takes will be far from perfect. It will also be better than the status quo. The bank bailouts of 2008, and the public outrage over traders’ and executives’ bonuses, laid bare a fundamental problem in big institutions such as Bank of America Corporation, Citigroup Inc. and JPMorgan Chase & Co.
“They attempt to combine two very different kinds of financial professionals: those who process payments, collect peoples’ deposits and make loans, and those who specialize in making big, risky bets with other peoples’ money. When these big banks run into trouble, government officials face a dilemma. They want — and in some ways are obligated — to save the part of the bank that does the processing and lending, because those elements are crucial to the normal functioning of the economy. But in doing so, they also end up bailing out the gamblers, a necessity that erodes public support for bailouts and stirs enmity for banks. Separating the bankers from the gamblers is no easy task. Commercial banks’ explicit federal backing — including deposit insurance and access to emergency funds from the Federal Reserve — is attractive to proprietary traders, who can use a commercial bank’s access to cheap money to boost profits. Bank executives like to employ traders because they generate juicy returns in good times that drive up the share price and justify large bonuses. In effect, both traders and managers are reaping the benefits of a government subsidy on financial speculation. The Volcker rule will not — and probably cannot — fully dissolve the union of bankers and gamblers.”
Tags: Americans for Financial Reform, Bank of America Corporation, Bloomberg, Citigroup, derivatives, Dodd-Frank Act, Federal Deposit Insurance Corporation, federal regulators, Federal Reserve, financial crisis, financial regulation, Goldman Sachs, hedge funds, Inc., JP Morgan Chase & Company, Moody’s Investor Services, Morgan Stanley, Office of the Comptroller of the Currency, Paul Volcker, President Barack Obama, Private-equity funds, securities, Securities Industry and Financial Markets Association, Short-term trades, Volcker Rule, Wall Street
Posted in Economics, Financing, General | No Comments »
Tuesday, October 18th, 2011
The strange saga of how a rogue UBS trader lost $2 billion and who has since been fired and charged with fraud and false accounting in a London court has raised questions about the bank’s stability and whether it will retain its clients. Ghana-born trader Kweku Adoboli was perceived as a polite and snappily dressed young man who mixed grueling hours in London’s financial district with a lavish social life in the capital’s nightspots. But even the 31-year-old Adoboli appeared to foresee his work-hard, play-hard lifestyle coming undone. “Need a miracle,” he posted on his Facebook page, just hours before his arrest.
Analysts and regulators questioned why the Swiss banking giant UBS and its monitoring systems had failed to spot Adoboli’s alleged fraud. “Nobody blames the tiger for stalking its prey, but you do blame the zookeeper for leaving the tiger’s cage open,” said Stephen Brown, professor of finance at New York University’s Stern School of Business. “These top banks hire the best and brightest ambitious young people and when they outperform everyone else the bankers want to believe in their brilliance so they look the other way. That’s exactly what happened at UBS.”
Said a London based private banker at a rival global institution, “We don’t want to gloat because there but for the grace of God. But it’s likely to be the kind of thing that if we were in competition with them for a pitch it would help us because it would be another question mark in people’s minds,” he said.
Peter Thorne, an analyst at Helvea said this crisis is less serious than UBS’ previous woes and is unlikely to result in a similar stampede. “I can’t believe they’re not going to do their utmost to maintain their clients. Also, if you’ve been through the financial crisis and you stuck with UBS you must love them, so I’m not sure you’re going to jump ship,” he said.
The Wall Street Journal’s David Weidner compares this case to that of Nick Leeson. “Consider the story of Nick Leeson, the first trader to bring down a bank. He racked up $1 billion in losses and was sentenced to six years in jail. Barings Bank collapsed under the weight of the exposure. Leeson said exceptional risk-taking was common. He actually used an account that his team had set up to cover losses of a junior trader. And as many accused rogues have argued, Leeson said the bank tacitly approved. The number of rogue traders — there have been at least 11 since 1995 who have lost roughly $10 billion combined – suggests that Leeson may be right. So, why is trading beyond internal limits allowed? Because of the winners. Enter Philipp Meyer, a former UBS derivatives trader who left the business a few years ago and wrote about the excess of the business. To be clear, Meyer never said he made unauthorized trades, but he did offer this observation about trading. ‘It was pretty clear what The Market didn’t like. It didn’t like being closely watched. It didn’t like rules that governed its behavior.’”
Writing for Business Week, William D. Cohan says that “Whether UBS is shown to have been aware of Adoboli’s trading is almost beside the point. If the bank was aware of it and did not stop it, then its failure to do so is unconscionable. If it was not aware of the trades, then its compliance and risk management departments’ failure to prevent them from happening in the first place is equally appalling. In the post-Lehman, Dodd-Frank, Basel-III era, it is nearly unfathomable that a global bank of UBS’s heft, wealth and importance could allow this kind of loss to occur. Where were the adults? There will almost certainly be regulatory consequences for the rest of Wall Street as a result of this ill-timed debacle. The banks will howl, but tighter rules could actually help protect the rest of us from their bad behavior.”
Happily for the United States and the Dodd-Frank laws, it’s less likely that a rogue trader could topple a major U.S. financial institution. One section of the Dodd-Frank legislation is the Volcker Rule, named after former Federal Reserve chairman Paul Volcker, which limits American banks’ ability to trade their own funds. That wasn’t true in 2008, when losses from bad bets that banks made on mortgages led to the meltdown of Bear Stearns and Lehman Brothers. Full implementation of the Volcker Rule is expected to be delayed from its original July 21, 2012 deadline. A majority of the largest American banks have already sold or closed the desks that make these trades – known as “prop” or proprietary trading desks. “Banks can put themselves under with dangerous trading and take the commercial side with them as they go down,” said Robert Prentice, a professor of business law at the University of Texas’ McCoombs School of Business. “A big part of what the Volcker Rule will do is separate out the risky trading from the deposits.”
A majority of the banking system depends on computers to spot abnormal trading activity that could signal unauthorized trades. Industry watchers still question whether the Volcker Rule in its final form will mandate the spin-off of prop trading from banks or whether it will be watered down. “You can’t underestimate the lobbying ability of the banking industry in the U.S. and the U.K.” said Stewart Hamilton, a finance and accounting professor at the University of Edinburgh. “It’s huge.”
Tags: Barings Bank, Basel III, Bear Sterns, Credit Suisse, Dodd-Frank Act, Federal Reserve, Helvea, Kweku Adoboli, Lehman Brothers, London Capital Markets Division, Nick Leeson, Paul Volcker, Proprietary trading desks, Rogue trader, UBS, Volcker Rule, Wall Street
Posted in Economics, General | No Comments »
Wednesday, October 5th, 2011
Federal Reserve Chairman Ben Bernanke, in a long-awaited speech in Jackson Hole, WY, announced no new steps the Fed will take to prop up the shaky U.S. economy. Rather, he expressed optimism that the economy will continue to recover, based on its inherent strength and from assistance provided by the central bank. Bernanke restated the Fed’s determination to keep the federal funds rate “exceptionally low” for a minimum of two years. He did not say what many had been hoping to hear: that the Fed would begin another round of quantitative easing – usually referred to as QE3.
Bernanke said that he expected inflation to remain at or below two percent. Additionally, he acknowledged that the recent downgrade of the nation’s AAA credit rating had undermined both “household and business confidence.” He implied that there was only so much more the Fed can do to stimulate the economy, and that the time has come for Congress and the Obama administration to create “policies that support robust economic growth in the long term,” to reform the nation’s tax structure and to control spending.
“In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including, of course, economic and financial developments, at our meeting in September,” Bernanke said. He went on to clarify the Fed’s guidance about how long interest rates will remain exceptionally low. “In what the committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years.”
As Bernanke delivered his remarks, the government cut its estimated 2nd quarter GDP growth to a paltry rate of one percent, a revision from the 1.3 percent previously reported. The revision was expected and primarily due to weaker exports. In more positive news, private spending and investment in April through June were slightly higher than initially estimated. The GDP grew by an annual rate of just 0.4 percent in the 1st quarter. The 2nd half of 2011 is expected to be somewhat stronger, but a major driver of the economy — consumer spending — remains weak amid slow hiring and sluggish income gains.
“This economic healing will take a while, and there may be setbacks along the way,” Bernanke said. “Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not, as a consequence, disregard the fragility of the current economic recovery. Although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years,” Bernanke said. “It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals.”
“Economic performance is clearly subpar, and from that standpoint the case for some sort of further economic-policy assistance is just being made by the poor performance,” said Keith Hembre, chief economist and investment strategist in Minneapolis at Nuveen Asset Management. Although Bernanke said the Fed has stimulus tools left, “the threshold to utilizing them is going to require fairly different conditions than what we have today,” such as lower inflation or a return of financial instability, Hembre said.
Bernanke also used the occasion to scold Congress for its tardiness in resolving the deficit debate. “The country would be well served by a better process for making fiscal decisions,” Bernanke said at the Federal Reserve Bank of Kansas City’s annual economic symposium. “The negotiations that took place over the summer disrupted financial markets and probably the economy, as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses.” Bernanke implied that a return to economic prosperity is at stake. “I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if — and I stress if — our country takes the necessary steps to secure that outcome,” he said. The budget process, according to Bernanke, would be more effective if negotiators set “clear and transparent budget goals” and established “the credibility of those goals.”
Bernanke reassured investors that United States prospects for growth are sound over the long term and that the Fed has tools to aid the recovery if needed, even though he is not planning another stimulus at this time. “What no action will do is give confidence to investors that things are not as bad as many people perceive, otherwise he would’ve acted,” Keith Springer, president of Springer Financial Advisors in Sacramento, CA, said. “Investors will eventually see the positives.”
Tags: Ben Bernanke, congress, consumer spending, Debt-ceiling battle, economic stimulus, exports, Federal Reserve, Federal Reserve Bank of Kansas City, GDP, interest rates, Jackson Hole, Nuveen Asset Management, Obama administration, QE3, Springer Financial Advisors, WY
Posted in Economics, General | No Comments »
Wednesday, September 28th, 2011
World Bank President Robert Zoellick believes the world will not slide into a double-dip recession. Zoellick was in Singapore, attending an economic conference amid plummeting world stock prices and worries over a slowdown in U.S. economic growth. Zoellick believes the United States and the world will avoid a “double-dip” recession, but admitted that growth is likely to remain sluggish and prospects are uncertain. Zoellick said the world is entering a “dangerous period,” noting that the United States could reassure markets with steps to put the brakes on increasing its debt, rather than making deep cuts in spending.
Zoellick’s comments add pressure on European officials who are trying to contain a sovereign debt crisis that threatens Italy, whose government bonds in euros have declined a record 11 consecutive days. Finland has fostered division among policy makers by looking for collateral for loans to Greece, the first of the three euro-region nations to receive bailouts so far. American and European economies are stalling and feeble global growth are impacting Asia, Singapore’s Minister of Finance Tharman Shanmugaratnam said. Growth in the U.S. and Europe may be just one percent.
“We’re already at stall speed in the U.S. and Europe, which means we’re now more likely than not to see a recession,” Shanmugaratnam said. Companies are holding back spending and consumers globally lack confidence. Zoellick tamped down the likelihood of a “double-dip” global recession in comments to reporters in Singapore today. Still, “we are now seeing a particularly sensitive time in the euro zone,” the World Bank chief said. “A number of issues are converging.”
“These things are very hard to predict because if you have events trigger uncertainty in Europe, that will flow back to the U.S.,” Zoellick said. The eurozone’s performance “depends on the political decisions moving forward,” he said. The euro will survive in the next five years, although the question over membership of the common currency is one that Europeans must answer. “Sometimes people hope that you can muddle through by providing financing and liquidity, in the case of Europe, from the European Financial Stability Facility or the European Central Bank,” Zoellick said. “They now recognize that’s not going to happen and instead what you see is with some of the weaker economies, that the austerity policies are pushing them into slower and slower growth and so this could be a downward spiral.”
According to Zoellick, recent European Central Bank government bond purchases have given temporary monetary liquidity to markets. “The policies that have been pursued by the EU up to now can buy time, but parliaments and the public have to come to terms with fundamental questions,” Zoellick said. One direction is to deepen the fiscal union.”
“They’ve tried to pump money into it, they’ve tried in the past month. The ECB bought a lot of bonds. But, I think dealing with these problems through liquidity measures will not be sufficient,” Zoellick said. “Christine Lagarde of the International Monetary Fund (IMF) and I from a different position at the World Bank have been trying to prod people to recognize some of these questions.” Lagarde, who told the Federal Reserve’s annual conference that European banks need urgent capitalization, angered some European policymakers and politicians with her opinions.
“People should not underestimate the European response, but Europeans should not be fooled that that type of response will deal with the fundamental questions that still need to be addressed,” Zoellick said. The markets have been hoping for additional monetary stimulus from the Federal Reserve to relieve global growth concerns, but Zoellick said that monetary policy alone won’t do the job. Rather, he said, the real solution to Europe’s crisis must be found to deal with the crisis. “This one is really even beyond the finance ministers’ pay grade. These are going to be the decisions that have to be made by the heads of government and supported by their parliaments,” he said.
American markets analyst Peter Kenny of Knight Capital said “We have a eurozone that is an apoplectic frenzy of just trying to right the ship. If you can find some stabilizing influence in the eurozone to give the global markets some confidence, I’d be shocked.” Parliaments in Germany and France currently debating the extent of their countries’ contribution to the European Financial Stability Facility, the fund set up to bail out any eurozone nations struggling with their debt obligations.
Richard Jeffrey, chief investment officer at Cazenove Capital Management, said that “Money that the key worry for the markets was the health of the world economy. “If the world economy is slowing down or perhaps even moving into recession – I think that is less likely, but that is what people fear – then that has negative implications for the financial system and the banking sector. The debt problems in the peripheral European economies rumble on, of course, but again their debt problems are helped if there is growth. If there isn’t growth in the economies, then their debt problems become more difficult to support, so this is all interlinked.”
Tags: Asia, Austerity, Capitalization, Christine Lagarde, Double-dip recession, euro, Europe, European Central Bank, European Financial Stability Facility, Eurozone, Federal Reserve, Finland, Greece, International Monetary Fund, Italy, Monetary stimulus, Robert Zoellick, Singapore, Sovereign-debt crisis, Tharman Shanmugaratnam, World Bank
Posted in Economics, General | No Comments »
Monday, September 26th, 2011
Mark Zandi of Moody’s Analytics,
who often discusses the economy, recently said something disturbing and fascinating about the possibility of a double-dip recession. According to Zandi, it could be the only recession that we will ourselves into. Zandi was talking about gloomy expectations that make people so nervous that in terms of economics, they freeze. His remarks are a reminder that while we regularly report economic data – unemployment, cost of living, home prices, trade deficits – there are other measures of our economy that are, by definition, subjective. Do we feel secure? Do we have confidence in the future to the point where we’re willing to spend money and take risks?
According to Dennis Jacobe of the Gallup Organization, “We’re a lot less confident than we normally are. Three out of four right now will say the economy is getting worse. And that’s a number that approximates the numbers of late 2008. I think the American people don’t see the economy that most of us economists and the public policymakers see. Americans see high unemployment rates and are concerned about losing their job. They’re concerned about higher food prices and higher energy prices, even though we say that there’s not much inflation. They’re worried about the housing market. And then on top of that, they’re worried about things like politics and the confrontational kind of stalemate in D.C.
“That certainly had an impact according to our numbers,” according to Jacobe. And what we see happening over the last several weeks is interesting in the sense that the average American, middle and lower income American, has been fairly pessimistic for quite a while with all these things that have been bothering them. But what we’ve seen happen recently is that things like the confrontation over the debt ceiling bill and on other kinds of things seem to have troubled upper-income Americans. Now, they’re also affected by what’s happening on Wall Street and what’s happening internationally with the problems in Europe and those kind of things, but when upper-income people also get very pessimistic, that’s when our numbers get up to three-quarters or 80 percent of Americans being worried.
“There really isn’t. And, you know, I think that one of the things that’s happening is that we’re not paying enough attention to consumer psychology as opposed to Wall Street and investor psychology. People all the time talk about how that affects Wall Street and how when Europe has had financial problems, they thought – people thought back to 2008 and the financial crisis and all those kind of things. But the average American is affected by the same kind of thing. They saw tremendous financial shock in 2008 and early 2009. And they saw that in their lives and in terms of not only credit access, but also in terms of their jobs and their job security. And I think people forget that when a lot of these things happen, like the budget confrontation, that that brings back memories of those days and those troubles. And that has a major impact on consumer psychology. So the statement like Zandi made makes a lot of sense in the sense that consumers actually are impacted today differently than, say, in years past,” Jacobe said.
“The trouble is people are so shell-shocked and haven’t really gotten over the recession,” according to Zandi. “They’re extraordinarily nervous, and when anything goes off script even a little bit they freeze, and that’s where we are right now and why we are so close to recession.”
In discussing the recent Standard & Poor’s downgrade of the United States’ credit rating from AAA to AA+, Zandi believes that there is a logical apprehension that a financial market selloff could feed on itself, doing real economic damage if it drags on. Wary households might respond by cutting back on spending, and anxious businesses would be even more cautious about investing and hiring. This could cause a double-dip recession, which would only intensify the nation’s fiscal troubles. Federal Reserve policymakers are certain to take this into account. S&P might even downgrade other nations’ sovereign debt, since the U.S. government provides vital support to the entire global financial system. This could increase borrowing costs for homebuyers seeking mortgages and businesses that want to expand. The impact on lending rates would be small, a few basis points at most. Financial markets should be able to weather the S&P downgrade, with little lasting economic impact. “Fundamentally the United States does not deserve a downgrade, because policymakers have made significant strides toward fiscal responsibility. The debt-ceiling deal was a vital step that doesn’t solve the nation’s problems, but it goes more than halfway,” Zandi said.
One idea that Zandi has to stimulate the economy is to take back unspent dollars from the American Recovery and Reinvestment Act (ARRA) and spend it on projects or on short-term stimuli like food stamps. This is easier said than done and might create more problems than it fixes. “It’s meaningful, but it’s not a game-changer,” Zandi said. “From an economic and political perspective, I’m not sure that would make a lot of sense to do. A lot of this spending has generated a lot of planning, a lot of environmental designs. They’re counting on the money. If you’re going to divert it, you’re going to create all kinds of problems for them.”
Tags: American Recovery and Reinvestment Act, Cost of living, D.C., Double-dip recession, Energy prices, Federal Reserve, Food prices, food stamps, Gallup Organization, home prices, inflation, Mark Zandi, Moody’s Analytics, S&P credit downgrade, Sovereign debt, stalemate, stimulus bill, Trade deficit, unemployment, Wall Street, Washington
Posted in Economics, General | No Comments »
Wednesday, September 21st, 2011
The Consumer Price Index (CPI) climbed by 0.5 percent in July, according to a Labor Department report. That came after a decrease of 0.2 percent the previous month. Rising inflation cuts consumers’ buying power. Average pay, when adjusted for inflation, fell in July and has declined by 1.3 percent in the last year. Over the last 12 months, prices have gone up 3.6 percent. Core prices over the last year have risen 1.8 percent — the largest increase since December of 2009.
“Once again, the consumer was pushed to the wall by rising retail costs,” said Joel Naroff, chief economist at Naroff Economic Advisors. “It’s bad enough that workers are not getting any pay increases but the surge in retail prices is cutting into spendable income.” Although many economists and the Federal Reserve expect that higher food and energy prices will prove short lived, that offers little good news to Americans who must find the money to pay for food and gas. “This is not welcome news for Fed officials who are trying to justify QE3,” First Trust analysts said.
The news also raises the specter of stagflation, a circumstance when the inflation rate is high and the economic growth rate is slow. Writing for CBS Money Watch, Dan Burrows says that “Prices are growing rapidly but the economy is not. Sound familiar? It’s called stagflation — something we haven’t had in three decades — and markets are getting more jittery about its possibility with each passing data point. A stagnant economy plus inflation equals stagflation, and it could actually be worse for American households this time around, should it come to pass. Yes, inflation rates of three percent to four percent are nothing compared to the double-digit inflation Americans lived with in the 1970s and early 1980s. But then households were in much better shape back then because they carried much less debt, be it through mortgages, home equity loans, credit cards or student loans.”
The Hill’s Vicki Needham writes that “The energy index has risen 19 percent over the past year. Overall, food prices increased 0.4 percent in July, with larger increases in dairy and fruit prices. The cost of meat, coffee and vegetables all increased. The core index, excluding volatile food and energy, was up 0.2 percent, slightly below the 0.3 percent increase in each of the previous two months. Prices are up 3.6 percent from a year ago, the same amount as in May and June. Core prices are 1.8 percent higher than they were a year earlier, the largest increase in two years, with rent and the rising cost of hotels pushing up housing prices by the most in three years. Although prices are up, the index of core prices, used by the Federal Reserve to gauge inflation, is within the target range of 1.5 and two percent. Core consumer inflation is expected to remain between 1.5 and 1.8 percent this year, the Fed has said. The cost of apparel increased sharply last month, as clothing prices were up 1.2 percent, the third consecutive month of increases. Clothing costs have increased 3.1 percent during the past 12 months, the largest yearly increase since July 1992.”
With an economy sluggish, and many calling a recession inevitable, the latest CPI number fits with recently released Producer Price Indexes (PPI) which showed prices rising throughout different levels of production. While recessions are usually deflationary, rising measures of inflation have sparked fears of stagflation.
Surprisingly, the Chicago area was relatively immune to July’s inflationary numbers. Consumer prices in metropolitan Chicago declined 0.4 percent in July from June as energy prices fell, according to the Labor Department. With the exception of food and energy, prices were also down 0.4 percent. Compared with last year, prices rose 3.2 percent and there was a 17.8 percent spike in energy costs. When food and energy are taken out of the equation, prices rose 1.6 percent compared with last year. Food prices remained the same as June, but rose 3.5 percent from July 2010. Energy prices declined one percent from June as gasoline prices dropped 4.2 percent. Gas prices were 37.3 percent higher than in 2010. The biggest price declines were in education and communication, down 3.8 percent; clothing was down 2.6 percent; and transportation was down 1.7 percent. Housing costs rose 0.5 percent.
Tags: consumer price index, deflation, Department of Labor, economic growth, Federal Reserve, inflation, Producer Price Indexes, QE3, stagflation
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Tuesday, September 13th, 2011
Home prices revived somewhat during the 2nd quarter, but the housing market is still struggling. Prices climbed an impressive 3.6 percent, compared during the three months ending March 31. Despite the upbeat news, home prices are still down 5.9 percent compared with the 2nd quarter of 2010. The rise in home prices came after three straight quarters of drops, the S&P/Case-Shiller national index — a recognized gauge of residential real-estate markets — reported. The year-over-year decline was slightly more than the than the 4.7 percent drop that had been forecast by a consensus of experts at Briefing.com. A separate monthly index of home prices in 20 major metro areas reported a month-over-month gain of 1.1 percent for June, and a 4.5 percent decline compared with last year.
The quarter-over-quarter price increase may be the last one for a while, said Stan Humphries, chief economist for the real estate website Zillow. He expects prices will weaken again. “The August turmoil of credit rating downgrades, negative GDP revisions, stock oscillations and European debt woes are likely to leave a mark on both August home sales and home value appreciation,” according to Humphries. “Monthly home value appreciation in June may mark the last hurrah before beginning to weaken in the back half of this year,” Humphries said.
Foreclosures still constituted a higher proportion of sales throughout the winter and spring as families took a break from home shopping; cash-rich investors dominate the market. Nationally, home prices have returned to their 2003 levels.
Chicago, Minneapolis, Washington and Boston saw the largest monthly increases. Cities hit hardest by the housing crisis, such as Las Vegas and Phoenix, reported small seasonal increases. Housing has remained a drag on the economy and is one of the most important reasons why it is still struggling to recover two years after the recession officially ended. Home sales in 2011 are likely to be at the lowest level in 14 years. Home prices in many cities have reached their lowest points since the market bubble burst more than four years ago. Home prices in Cleveland, Detroit, Las Vegas, Phoenix and Tampa are at 2000 levels. “These shifts suggest that we are back to regional housing markets, rather than a national housing market where everything rose and fell together,” said David M. Blitzer, chairman of the S&P’s index committee. “This month’s report showed mixed signals for recovery in home prices. No cities made new lows in June 2011, and the majority of cities are seeing improved annual rates,” Blitzer said. “Looking across the cities, eight bottomed in 2009 and have remained above their lows. These include all the California cities plus Dallas, Denver and Washington D.C., all relatively strong markets.”
“There’s no theoretical floor for prices. If the economy worsens, housing will get into a vicious cycle of falling prices and foreclosures,” said Mark Zandi, chief economist at Moody’s Analytics. “When prices fall, confidence wanes.”
Foreclosures and short sales — when a lender sells for less than what is owed on a mortgage – accounted for approximately 30 percent of all home sales in July, an increase from about 10 percent reported in normal years. Nearly 1.7 million potential foreclosures are being delayed, according to real estate firm CoreLogic, either by backlogged courts or lenders waiting for the conclusion of state and federal investigations into questionable foreclosure practices.
“Prices aren’t going to rebound back rapidly,” said Paul Dales, a senior U.S. economist at Capital Economics Ltd. in Toronto. “Most people think that when the downturn ends the recovery will be pretty good, but that’s not going to be the case at all.”
“Consumer confidence is still weak, and the housing sector remains in a fragile state,” According to Robert Toll, chairman of Toll Brothers, Inc. the nation’s largest luxury homebuilder. “The nation’s economy continues to suffer from the lack of jobs in housing construction and the related manufacturing and service sectors that a decent new-home market would typically generate.”
Federal Reserve Chairman Ben Bernanke said “an overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and ongoing concerns by both potential borrowers and lenders about continued house price declines” are hurting the housing market.
Lawrence Yun, chief economist at the National Association of Realtors, described the activity as “underperforming. The market can easily move into a healthy expansion if mortgage underwriting standards return to normalcy,” he said. “We also need to be mindful that not all sales contracts are leading to closed existing-home sales. Other market frictions need to be addressed, such as assuring that proper comparables are used in appraisal valuations, and streamlining the short sales process.”
Tags: Ben Bernanke, Briefing.com, Capital Economics Ltd., CoreLogic, Credit-rating downgrades, European debt woes, Federal Reserve, foreclosures, GDP, home prices, Inc., Moody’s Analytics, mortgages, National Association of Realtors, recession, S&P/Case-Shiller National Index, short sales, Toll Brothers, Zillow
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Thursday, September 8th, 2011
The Treasury Department is laughing all the way to the bank. Insurance Giant AIG repaid $2.15 billion that it had borrowed through the Troubled Asset Relief Program (TARP). In 2008, the government helped the giant get back on its feet with a $180 billion loan. AIG has been gradually repaying the money. The most recent repayment is the result of the sale of AIG’s Taiwan-based subsidiary Nan Shan Life Insurance Company. One of AIG’s strategies for cutting its debt has been to raise funds by selling assets. “We continue to make progress in helping the Treasury and taxpayers recoup their investment in AIG,” according to AIG CEO Robert Benmosche.
Not surprisingly, the Treasury Department is pleased with the transaction. “This is another important milestone in AIG’s remarkable turnaround,” Tim Massad, the assistant secretary for financial stability, said in a statement. “We continue to make progress in recovering the taxpayers’ investments in AIG.” AIG still owes Treasury $51 billion. TARP legislation was passed by Congress in late 2008 to rescue the financial sector, which was on the verge of collapse.
Benmosche is still weighing whether to retain a stake in AIA Group Ltd. while repaying TARP funds. AIG sold 67 percent of Hong Kong-based AIA last year in an IPO that raised $20.5 billion. The remaining interest added $1.52 billion to AIG’s second-quarter profit as the Asian insurer’s stock price surged. AIA has soared 19 percent this year and is the number one gainer in the 73-company Bloomberg World Insurance Index. “It’s been a great investment, so they may want to hold onto it,” said Paul Newsome, an analyst at Sandler O’Neill & Partners LP.
Now that the Nan Shan deal has closed, AIG’s final significant disposal will be International Lease Finance Corporation, or ILFC, which purchases airplanes to lease them to airlines. The company is considering an initial public offering (IPO) for ILFC later this year. Using Nan Shan proceeds to repay the special purpose vehicle gives AIG “more flexibility as to what to do with ILFC and other assets, too. It adds in general to their cash-flow flexibility.” He is telling his clients to buy AIG stock. Treasury holds a $9.3 billion preferred interest in the special-purpose vehicle after accepting proceeds from the Nan Shan sale, according to AIG. Benmosche may delay or forego selling AIA shares. AIG’s agreement with underwriters lets Benmosche reduce or hedged the stake in October. “We’re looking potentially at monetizing other assets that we have so that AIA might be sold much later on, if at all,” he said.
Writing in The Hill, Peter Schroeder says that “In many ways, AIG came to serve as a symbol of much of the public’s anger over the bailout, as it found itself at the center of the historic financial crisis and reliant on substantial government support. That dissatisfaction came to a head in 2009, when executives at the company planned to distribute hundreds of millions of dollars in bonuses after billions in losses during the financial crisis. In January, AIG completely repaid the Federal Reserve Bank of New York with a $47 billion payment, and the Treasury in May agreed to sell 200 million shares of AIG stock, raising nearly $9 billion in that offering. The latest payback from AIG means the Treasury has recovered $313 billion of the investments it made under the Troubled Asset Relief Program (TARP) — roughly three-quarters of the $412 billion it originally dished out to keep the financial system afloat. The Treasury announced in March that it had officially turned a profit on the bank portion of TARP. It followed that up with a July announcement that it had exited its investment in Chrysler, ahead of schedule but losing about $1.3 billion in the process.”
On the Huffington Post, Jason Linkins has a cynical take on AIG’s recent repayment of TARP money. “Okay, I’m just going to stop it right there, because when it comes to ‘AIG’s remarkable turnaround,’ the devil is in the details. Time and time again we’re asked to celebrate the success of TARP. Back in March, the good news was that, ‘The Treasury currently estimates that bank programs within TARP will ultimately provide a lifetime profit of nearly $20 billion to taxpayers.’ But this profit that the government has turned on the bailout of AIG rings pretty hollow in light of the four different restructurings of the original agreement that the government has acquiesced to since the fall of 2008.
“When the Fed first stepped in to prevent AIG from collapse in September 2008, the deal was actually pretty good — it carried a punitively-high interest rate appropriate for a bailout, the CEO was dismissed and the company was going to sell itself off in parts, ending its too-big-to-fail status. If the government were turning a profit on a deal like this, it would indeed be good news. The trouble is, AIG’s new management didn’t break up the company very quickly. And even as it paid out lavish bonuses to its top-performing traders and executives, it couldn’t make good on its interest payments to the government. So the feds stepped in again — and again, and again — throwing more money at the company, reducing the interest that it would pay taxpayers and eventually converting the government’s loans to common stock, abandoning concrete repayment obligations in favor of whatever the stock might someday be worth.”
Tags: AUG, Bloomberg World Insurance Index, Chrysler, congress, Federal Reserve, Federal Reserve Bank of New York, financial crisis, International Lease Finance Corp, IPO, Nan Shan Life Insurance Company. AIA Group Ltd., Sandler O’Neill & Partners LP, TARP, Too big to fail, Treasury Department
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Thursday, September 1st, 2011
Former Federal Reserve chairman Alan Greenspan says that Italy is the root of most of Europe’s economic problems, as well as our own. In a recent appearance on “Meet the Press”, “It depends on Europe, not the United States,” Greenspan said. “The United States was actually doing relatively well, sluggish but going forward until Italy ran into trouble.” According to Greenspan, 50 percent of American corporations have offices in Europe, and the continent “has been a very important driving force in the overall earnings of U.S. corporations.” Greenspan also noted that S&P’s downgrade “hit a nerve”. The ratings agency said it was reducing the AAA rating to AA+ not only because of the country’s debt load, but because it doesn’t believe that Congress can resolve the country’s debt problems. Mark Zandi, chief economist at Moody’s Analytics, agrees, noting that “There’s a lot of fear and misunderstanding and confusion, and that all could come out in the stock and bond markets. I don’t think it takes much to unnerve investors given the current environment. I think anything could drive investors to sell given how fragile sentiment is.”
At the same time, Greenspan downplayed the risk of a double-dip recession in the United States, noting that the economy is in better shape than its European peers. With all of this bickering going on, the economy is slowing down,” Greenspan said. “You can see it in all the data. I don’t see a double-dip, but I do see it slowing down.” Europe, which purchases 25 percent of American exports and is home to the operations of many American companies, could determine the course of the U.S. economy’s recovery, according to Greenspan. European leaders are working to control a sovereign-debt crisis, which has spread to Italy, the euro zone’s third-largest economy, and is causing chaos in global financial markets.
“When Italy first showed signs of weakness and started selling its bonds — the yield is now over six percent, which is an unsustainable level — it created a massive problem in Europe because Italy is a very large country, cannot be easily bailed out and indeed cannot be bailed out. This is not an issue of credit rating. The United States can pay any debt it has because we can always print money to do that. There is zero probability of default,” Greenspan said.
In the meantime, Fitch Ratings delivered some good news to the U.S. economy when it reaffirmed its AAA credit rating and said it did not anticipate downgrading the nation’s debt in the near future. The firm said the outlook for the rating is stable because the recent deal to raise the debt ceiling and cut the budget deficit proved that the nation’s political leaders are willing to do what’s necessary to cut the nation’s growing debt. The debt-ceiling deal “was a significant positive development that provided a substantive and necessary increase in the federal debt ceiling. It also signaled that there is the political commitment to place U.S. public finances on a sustainable path consistent with the U.S. sovereign rating remaining ‘AAA’,” Fitch said. Fitch’s outlook is the most positive on the U.S. of the primary credit rating agencies. Standard & Poor’s downgraded long-term debt to AA+ after concluding that the planned $2.1 trillion to $2.4 trillion budget cuts over the next 10 years are not large enough to stabilize the nation’s rising debt. Moody’s Investor Services also retained the nation’s AAA rating, but changed its outlook to negative. This means that there’s a possibility of a downgrade.
“The key pillars of the U.S.’s exceptional creditworthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base. Monetary and exchange-rate flexibility further enhances the capacity of the economy to absorb and adjust to ‘shocks,’ Fitch said.
“I think they’re looking at a broader perspective than S&P in the global aspects,” Steve Goldman, Weeden & Company market strategist said of Fitch’s decision. “It’s giving a sigh of relief to investors here.”
Tags: AAA credit rating, Alan Greenspan, Austan Goolsbee, Budget deficit, congress, Debt ceiling, default, Euro zone, Federal Reserve, Fitch Ratings, Italy, Mark Zandi, Moody’s Analytics, Moody’s Investor Services, President Barack Obama, Sovereign-debt crisis, Standard & Poor’s, U.S. Treasuries, Unemployment crisis, “Meet the Press”
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