After six horrific quarters, several major U.S. banks finally reported profits. So is it time to celebrate?
No, says Simon Johnson, a senior fellow at the Peterson Institute, professor at MIT’s Sloan School of Management, and co-founder of the popular economics blog, BaselineScenario. In fact, if we're not careful, we'll find ourselves in another Great Depression.
What it is time to do, says Johnson, is look at the credit markets, which are telling us that the major U.S. financial institutions are being hit with a "speculative attack":
Showing posts with label recession. Show all posts
Showing posts with label recession. Show all posts
Thursday, 23 April 2009
Friday, 17 April 2009
The Year of Cockeyed Economic Optimism Amidst a Fake Recovery
"The foundations of our economy are strong" - Retail sales fell in March as soaring job losses and tighter credit conditions forced consumers to cut back sharply on discretionary spending. Nearly every sector saw declines including electronics, restaurants, furniture, sporting goods and building materials. Auto sales continued their historic nosedive despite aggressive promotions on new vehicles and $13 billion of aid from the federal government.
The crash in housing, which began in July 2006, accelerated on the downside in March, falling 19 percent year-over-year, signaling more pain ahead. Mortgage defaults are rising and foreclosures in 2009 are estimated to be in the 2.1 million range, an uptick of 400,000 from 2008. Consumer spending is down, housing is in a shambles, and industrial output dropped at an annual rate of 20 percent, the largest quarterly decrease since VE Day. The systemwide contraction continues unabated with with no sign of letting up.
Conditions in the broader economy are now vastly different than those on Wall Street, where the S&P 500 and the Dow Jones Industrials have rallied for 5 weeks straight regaining more than 25 percent of earlier losses. Fed chief Ben Bernanke's $13 trillion in monetary stimulus has triggered a rebound in the stock market while Main Street continues to languish on life-support waiting for Obama's $787 billion fiscal stimulus to kick in and compensate for falling demand and rising unemployment. The rally on Wall Street indicates that Bernanke's flood of liquidity is creating a bubble in stocks since present values do not reflect underlying conditions in the economy. The fundamentals haven't been this bad since the 1930s.
The financial media is abuzz with talk of a recovery as equities inch their way higher every week. CNBC's Jim Cramer, the hyperventilating ringleader of "Fast Money", announced last week, "I am pronouncing the depression is over." Cramer and his clatter of media cheerleaders ignore the fact that every sector of the financial system is now propped up with Fed loans and T-Bills without which the fictive free market would collapse in a heap. For 19 months, Bernanke has kept a steady stream of liquidity flowing from the vault at the US Treasury to the NYSE in downtown Manhattan. The Fed has recapitalized financial institutions via its low interest rates, its multi-trillion dollar lending facilities, and its direct purchase of US sovereign debt and Fannie Mae mortgage-backed securities. (Monetization) The Fed's balance sheet has become a dumping ground for all manner of toxic waste and putrid debt-instruments for which there is no active market. When foreign central banks and investors realize that US currency is backed by dodgy subprime collateral; there will be a run on the dollar followed by a stampede out of US equities. Even so, Bernanke assures his critics that "the foundations of our economy are strong".
As for the recovery, market analyst Edward Harrison sums it up like this:
"This is a fake recovery because the underlying systemic issues in the financial sector are being papered over through various mechanisms designed to surreptitiously recapitalize banks while monetary and fiscal stimulus induces a rebound before many banks' inherent insolvency becomes a problem. This means the banking system will remain weak even after recovery takes hold. The likely result of the weak system will be a relapse into a depression-like circumstances once the temporary salve of stimulus has worn off. Note that this does not preclude stocks from large rallies or a new bull market from forming because as unsustainable as the recovery may be, it will be a recovery nonetheless." (Edward Harrison, "The Fake Recovery", Credit Writedowns)
The rally in the stock market will not fix the banking system, slow the crash in housing, patch-together tattered household balance sheets, repair failing industries or reverse the precipitous decline in consumer confidence. The rising stock market merely indicates that profit-driven speculators are back in business taking advantage of the Fed's lavish capital injections which are propelling equities into the stratosphere. Meanwhile, the unemployment lines continue to swell, the food banks continue to run dry and the homeless shelters continue to burst at the seams. So far, $12 trillion has been pumped into the financial system while less than $450 billion fiscal stimulus has gone to the "real" economy where workers are struggling just to keep food on the table. The Fed's priorities are directed at the investor class not the average working Joe. Bernanke is trying to keep Wall Street happy by goosing asset values with cheap capital, but the increases to the money supply are putting more downward pressure on the dollar. The Fed chief has also begun purchasing US Treasuries, which is the equivalent of writing a check to oneself to cover an overdraft in one's own account. This is the kind of gibberish that passes as sound economic policy. The Fed is incapable if fixing the problem because the Fed is the problem.
Last week, the market shot up on news that Wells Fargo's first quarter net income rose 50 percent to $3 billion pushing the stock up 30 percent in one session. The financial media celebrated the triumph in typical manner by congratulating everyone on set and announcing that a market "bottom" had been reached . The news on Wells Fargo was repeated ad nauseam for two days even though everyone knows that the big banks are holding hundreds of billions in mortgage-backed assets which are marked way above their true value and that gigantic losses are forthcoming. Naturally, the skeptics were kept off-camera or lambasted by toothy anchors as doomsayers and Cassandras. Regretably, creative accounting and media spin can only work for so long. Eventually the banks will have to write down their losses and raise more capital. Wells Fargo slipped the noose this time, but next time might not be so lucky. Here's how Bloomberg sums up wells situation:
"Wells Fargo & Co., the second biggest U.S. home lender, may need $50 billion to pay back the federal government and cover loan losses as the economic slump deepens, according to KBW Inc.’s Frederick Cannon.
KBW expects $120 billion of “stress” losses at Wells Fargo, assuming the recession continues through the first quarter of 2010 and unemployment reaches 12 percent, Cannon wrote today in a report. The San Francisco-based bank may need to raise $25 billion on top of the $25 billion it owes the U.S. Treasury for the industry bailout plan, he wrote.
“Details were scarce and we believe that much of the positive news in the preliminary results had to do with merger accounting, revised accounting standards and mortgage default moratoriums, rather than underlying trends,” wrote Cannon, who downgraded the shares to “underperform” from “market perform.” “We expect earnings and capital to be under pressure due to continued economic weakness.”
What happened to all those nonperforming loans and garbage MBS? Did they simply vanish into the New York ether? Could Wells sudden good fortune have something to do with the recent FASB changes to accounting guidelines on "mark to market" which allow banks greater flexibility in assigning a value to their assets? Also, Judging by the charts on the Internet, Wells appears to have the smallest "ratio of loan loss reserves" of the four biggest banks. That's hardly reassuring.
Paul Krugman takes an equally skeptical view of the Wells report:
"About those great numbers from Wells Fargo....remember, reported profits aren’t a hard number; they involve a lot of assumptions. And at least some analysts are saying that the Wells assumptions about loan losses look, um, odd. Maybe, maybe not; but you do have to say that it would be awfully convenient for banks to sound the all clear right now, just when the question of how tough the Obama administration will really get is hanging in the balance."
The banks are all playing the same game of hide-n-seek, trying to hoodwink the public into thinking they are in a stronger capital position than they really are. It's just more Wall Street chicanery papered over with vapid media propaganda. The giant brokerage houses and the financial media are two spokes on the same wheel gliding along in perfect harmony. Unfortunately, media fanfare and massaging the numbers won't pull the economy out of its downward spiral or bring about a long-term recovery. That will take fiscal policy, jobs programs, debt relief, mortgage writedowns and a progressive plan to rebuild the nation's economy on a solid foundation of productivity and regular wage increases. So far, the Obama administration has focused all its attention and resources on the financial system rather than working people. That won't fix the problem.
Deflation has latched on to the economy like a pitbull on a porkchop. Food and fuel prices fell in March by 0.1 percent while unemployment continued its slide towards 10 percent. Wholesale prices fell by the most in the last 12 months since 1950. According to MarketWatch, "Industrial production is down 13.3% since the recession began in December 2007, the largest percentage decline since the end of World War II"....The capacity utilization rate for total industry fell further to 69.3 percent, a historical low for this series, which begins in 1967." (Federal Reserve) The persistent fall in housing prices (30 percent) and losses in home equity only add to deflationary pressures. The wind is exiting the humongous credit bubble in one great gust.
Obama's $787 billion stimulus is too small to take up the slack in a $14 trillion per year economy where manufacturing and industrial capacity have slipped to record lows and unemployment is rising at 650,000 per month. High unemployment is lethal to an economy where consumer spending is 72 percent of GDP. Without debt relief and mortgage cram-downs, consumption will sputter and corporate profits will continue to shrink. S&P 500 companies have already seen a 37 percent drop in corporate profits. Unless the underlying issues of debt relief and wages are dealt with, the present trends will persist. Growth is impossible when workers are broke and can't afford to buy the things the make.
The stimulus must be increased to a size where it can do boost economic activity and create enough jobs to get over the hump. Yale economics professor Robert Schiller makes the case for more stimulus in his Bloomberg commentary on Tuesday:
"In the Great Depression ... the U.S. government had a great deal of trouble maintaining its commitment to economic stimulus. 'Pump- priming' was talked about and tried, but not consistently. The Depression could have been mostly prevented, but wasn’t.... In the face of a similar Depression-era psychology today, we are in need of massive pump-priming again.
It would be a shame if we are so overwhelmed by anger at the unfairness of it all that we do not take the positive measures needed to restore us to full employment. That would not just be unfair to the U.S. taxpayer. That would be unfair to those who are living in Hoovervilles...; it would be unfair to those who are being evicted from their homes, and can’t find new ones because they can’t find jobs. That would be unfair to those who have to drop out of school because they, or their parents, can’t find jobs.
It is time to face up to what needs to be done. The sticker shock involved will be large, but the costs in terms of lost output of not meeting either the credit target or the aggregate demand target will be yet larger." (Robert Schiller, Depression Lurks unless there's more Stimulus, Bloomberg)
A Year of Cockeyed Optimism
"We are starting to see glimmers of hope across the economy." President Barack Obama, April press conference
Even though industrial production, manufacturing, retail and housing are in freefall, the talk on Wall Street still focuses on the elusive recovery. The S&P 500 touched bottom at 666 on March 6 and has since retraced its steps to 852. Clearly, Bernanke's market-distorting capital injections have played a major role in the turnabout. Former Secretary of Labor under Bill Clinton and economics professor at University of Cal. Berekley, Robert Reich, explains it like this on his blog-site:
"All of these pieces of upbeat news are connected by one fact: the flood of money the Fed has been releasing into the economy. ... So much money is sloshing around the economy that its price is bound to drop. And cheap money is bound to induce some borrowing. The real question is whether this means an economic turnaround. The answer is it doesn't.
Cheap money, you may remember, got us into this mess. Six years ago, the Fed (Alan Greenspan et al) lowered interest rates to 1 percent.... The large lenders did exactly what they could be expected to do with free money -- get as much of it as possible and then lent it out to anyone who could stand up straight (and many who couldn't). With no regulators looking over their shoulders, they got away with the financial equivalent of murder.
The only economic fundamental that's changed since then is that so many people got so badly burned that the trust necessary for consumers, investors, and businesses to repeat what they did then has vanished.... yes, some consumers will refinance and use the extra money they extract from their homes to spend again. But most will use the extra money to pay off debt and start saving again, as they did years ago....
I admire cockeyed optimism, and I understand why Wall Street and its spokespeople want to see a return of the bull market. Hell, everyone with a stock portfolio wants to see it grow again. But wishing for something is different from getting it. And cockeyed optimism can wreak enormous damage on an economy. Haven't we already learned this? (Robert Reich's Blog, "Why We're Not at the Beginning of the End, and Probably Not Even At the End of the Beginning")
If the purpose of Bernanke's grand economics experiment was to create uneven inflation in the equities markets and, thus, widen the chasm between the financials and the real economy; he seems to have succeeded. But for how long? How long will it be before foreign banks and investors realize that the Fed's innocuous-sounding "lending facilities" have released a wave of low interest speculative liquidity into the capital markets? How else does one explain soaring stocks when industrial capacity, manufacturing, exports, corporate profits, retail and every other sector have been pounded into rubble? Liquidity is never inert. It navigates the financial system like mercury in water darting elusively to the area which offers the greatest opportunity for profit. That's why the surge popped up first in the stock market. (so far) When it spills into commodities--and oil and food prices rise--Bernanke will realize his plan has backfired..
Bernanke's financial rescue plan is a disaster. He should have spent a little less time with Milton Friedman and a little more with Karl Marx. It was Marx who uncovered the root of all financial crises. He summed it up like this:
"The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit." (Karl Marx, Capital, vol. 3, New York International publishers, 1967; Thanks to Monthly review, John Bellamy Foster)
Bingo. Message to Bernanke: Workers need debt-relief and a raise in pay not bigger bailouts for chiseling fatcat banksters.
Source: Mike Whitney
Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.
The crash in housing, which began in July 2006, accelerated on the downside in March, falling 19 percent year-over-year, signaling more pain ahead. Mortgage defaults are rising and foreclosures in 2009 are estimated to be in the 2.1 million range, an uptick of 400,000 from 2008. Consumer spending is down, housing is in a shambles, and industrial output dropped at an annual rate of 20 percent, the largest quarterly decrease since VE Day. The systemwide contraction continues unabated with with no sign of letting up.
Conditions in the broader economy are now vastly different than those on Wall Street, where the S&P 500 and the Dow Jones Industrials have rallied for 5 weeks straight regaining more than 25 percent of earlier losses. Fed chief Ben Bernanke's $13 trillion in monetary stimulus has triggered a rebound in the stock market while Main Street continues to languish on life-support waiting for Obama's $787 billion fiscal stimulus to kick in and compensate for falling demand and rising unemployment. The rally on Wall Street indicates that Bernanke's flood of liquidity is creating a bubble in stocks since present values do not reflect underlying conditions in the economy. The fundamentals haven't been this bad since the 1930s.
The financial media is abuzz with talk of a recovery as equities inch their way higher every week. CNBC's Jim Cramer, the hyperventilating ringleader of "Fast Money", announced last week, "I am pronouncing the depression is over." Cramer and his clatter of media cheerleaders ignore the fact that every sector of the financial system is now propped up with Fed loans and T-Bills without which the fictive free market would collapse in a heap. For 19 months, Bernanke has kept a steady stream of liquidity flowing from the vault at the US Treasury to the NYSE in downtown Manhattan. The Fed has recapitalized financial institutions via its low interest rates, its multi-trillion dollar lending facilities, and its direct purchase of US sovereign debt and Fannie Mae mortgage-backed securities. (Monetization) The Fed's balance sheet has become a dumping ground for all manner of toxic waste and putrid debt-instruments for which there is no active market. When foreign central banks and investors realize that US currency is backed by dodgy subprime collateral; there will be a run on the dollar followed by a stampede out of US equities. Even so, Bernanke assures his critics that "the foundations of our economy are strong".
As for the recovery, market analyst Edward Harrison sums it up like this:
"This is a fake recovery because the underlying systemic issues in the financial sector are being papered over through various mechanisms designed to surreptitiously recapitalize banks while monetary and fiscal stimulus induces a rebound before many banks' inherent insolvency becomes a problem. This means the banking system will remain weak even after recovery takes hold. The likely result of the weak system will be a relapse into a depression-like circumstances once the temporary salve of stimulus has worn off. Note that this does not preclude stocks from large rallies or a new bull market from forming because as unsustainable as the recovery may be, it will be a recovery nonetheless." (Edward Harrison, "The Fake Recovery", Credit Writedowns)
The rally in the stock market will not fix the banking system, slow the crash in housing, patch-together tattered household balance sheets, repair failing industries or reverse the precipitous decline in consumer confidence. The rising stock market merely indicates that profit-driven speculators are back in business taking advantage of the Fed's lavish capital injections which are propelling equities into the stratosphere. Meanwhile, the unemployment lines continue to swell, the food banks continue to run dry and the homeless shelters continue to burst at the seams. So far, $12 trillion has been pumped into the financial system while less than $450 billion fiscal stimulus has gone to the "real" economy where workers are struggling just to keep food on the table. The Fed's priorities are directed at the investor class not the average working Joe. Bernanke is trying to keep Wall Street happy by goosing asset values with cheap capital, but the increases to the money supply are putting more downward pressure on the dollar. The Fed chief has also begun purchasing US Treasuries, which is the equivalent of writing a check to oneself to cover an overdraft in one's own account. This is the kind of gibberish that passes as sound economic policy. The Fed is incapable if fixing the problem because the Fed is the problem.
Last week, the market shot up on news that Wells Fargo's first quarter net income rose 50 percent to $3 billion pushing the stock up 30 percent in one session. The financial media celebrated the triumph in typical manner by congratulating everyone on set and announcing that a market "bottom" had been reached . The news on Wells Fargo was repeated ad nauseam for two days even though everyone knows that the big banks are holding hundreds of billions in mortgage-backed assets which are marked way above their true value and that gigantic losses are forthcoming. Naturally, the skeptics were kept off-camera or lambasted by toothy anchors as doomsayers and Cassandras. Regretably, creative accounting and media spin can only work for so long. Eventually the banks will have to write down their losses and raise more capital. Wells Fargo slipped the noose this time, but next time might not be so lucky. Here's how Bloomberg sums up wells situation:
"Wells Fargo & Co., the second biggest U.S. home lender, may need $50 billion to pay back the federal government and cover loan losses as the economic slump deepens, according to KBW Inc.’s Frederick Cannon.
KBW expects $120 billion of “stress” losses at Wells Fargo, assuming the recession continues through the first quarter of 2010 and unemployment reaches 12 percent, Cannon wrote today in a report. The San Francisco-based bank may need to raise $25 billion on top of the $25 billion it owes the U.S. Treasury for the industry bailout plan, he wrote.
“Details were scarce and we believe that much of the positive news in the preliminary results had to do with merger accounting, revised accounting standards and mortgage default moratoriums, rather than underlying trends,” wrote Cannon, who downgraded the shares to “underperform” from “market perform.” “We expect earnings and capital to be under pressure due to continued economic weakness.”
What happened to all those nonperforming loans and garbage MBS? Did they simply vanish into the New York ether? Could Wells sudden good fortune have something to do with the recent FASB changes to accounting guidelines on "mark to market" which allow banks greater flexibility in assigning a value to their assets? Also, Judging by the charts on the Internet, Wells appears to have the smallest "ratio of loan loss reserves" of the four biggest banks. That's hardly reassuring.
Paul Krugman takes an equally skeptical view of the Wells report:
"About those great numbers from Wells Fargo....remember, reported profits aren’t a hard number; they involve a lot of assumptions. And at least some analysts are saying that the Wells assumptions about loan losses look, um, odd. Maybe, maybe not; but you do have to say that it would be awfully convenient for banks to sound the all clear right now, just when the question of how tough the Obama administration will really get is hanging in the balance."
The banks are all playing the same game of hide-n-seek, trying to hoodwink the public into thinking they are in a stronger capital position than they really are. It's just more Wall Street chicanery papered over with vapid media propaganda. The giant brokerage houses and the financial media are two spokes on the same wheel gliding along in perfect harmony. Unfortunately, media fanfare and massaging the numbers won't pull the economy out of its downward spiral or bring about a long-term recovery. That will take fiscal policy, jobs programs, debt relief, mortgage writedowns and a progressive plan to rebuild the nation's economy on a solid foundation of productivity and regular wage increases. So far, the Obama administration has focused all its attention and resources on the financial system rather than working people. That won't fix the problem.
Deflation has latched on to the economy like a pitbull on a porkchop. Food and fuel prices fell in March by 0.1 percent while unemployment continued its slide towards 10 percent. Wholesale prices fell by the most in the last 12 months since 1950. According to MarketWatch, "Industrial production is down 13.3% since the recession began in December 2007, the largest percentage decline since the end of World War II"....The capacity utilization rate for total industry fell further to 69.3 percent, a historical low for this series, which begins in 1967." (Federal Reserve) The persistent fall in housing prices (30 percent) and losses in home equity only add to deflationary pressures. The wind is exiting the humongous credit bubble in one great gust.
Obama's $787 billion stimulus is too small to take up the slack in a $14 trillion per year economy where manufacturing and industrial capacity have slipped to record lows and unemployment is rising at 650,000 per month. High unemployment is lethal to an economy where consumer spending is 72 percent of GDP. Without debt relief and mortgage cram-downs, consumption will sputter and corporate profits will continue to shrink. S&P 500 companies have already seen a 37 percent drop in corporate profits. Unless the underlying issues of debt relief and wages are dealt with, the present trends will persist. Growth is impossible when workers are broke and can't afford to buy the things the make.
The stimulus must be increased to a size where it can do boost economic activity and create enough jobs to get over the hump. Yale economics professor Robert Schiller makes the case for more stimulus in his Bloomberg commentary on Tuesday:
"In the Great Depression ... the U.S. government had a great deal of trouble maintaining its commitment to economic stimulus. 'Pump- priming' was talked about and tried, but not consistently. The Depression could have been mostly prevented, but wasn’t.... In the face of a similar Depression-era psychology today, we are in need of massive pump-priming again.
It would be a shame if we are so overwhelmed by anger at the unfairness of it all that we do not take the positive measures needed to restore us to full employment. That would not just be unfair to the U.S. taxpayer. That would be unfair to those who are living in Hoovervilles...; it would be unfair to those who are being evicted from their homes, and can’t find new ones because they can’t find jobs. That would be unfair to those who have to drop out of school because they, or their parents, can’t find jobs.
It is time to face up to what needs to be done. The sticker shock involved will be large, but the costs in terms of lost output of not meeting either the credit target or the aggregate demand target will be yet larger." (Robert Schiller, Depression Lurks unless there's more Stimulus, Bloomberg)
A Year of Cockeyed Optimism
"We are starting to see glimmers of hope across the economy." President Barack Obama, April press conference
Even though industrial production, manufacturing, retail and housing are in freefall, the talk on Wall Street still focuses on the elusive recovery. The S&P 500 touched bottom at 666 on March 6 and has since retraced its steps to 852. Clearly, Bernanke's market-distorting capital injections have played a major role in the turnabout. Former Secretary of Labor under Bill Clinton and economics professor at University of Cal. Berekley, Robert Reich, explains it like this on his blog-site:
"All of these pieces of upbeat news are connected by one fact: the flood of money the Fed has been releasing into the economy. ... So much money is sloshing around the economy that its price is bound to drop. And cheap money is bound to induce some borrowing. The real question is whether this means an economic turnaround. The answer is it doesn't.
Cheap money, you may remember, got us into this mess. Six years ago, the Fed (Alan Greenspan et al) lowered interest rates to 1 percent.... The large lenders did exactly what they could be expected to do with free money -- get as much of it as possible and then lent it out to anyone who could stand up straight (and many who couldn't). With no regulators looking over their shoulders, they got away with the financial equivalent of murder.
The only economic fundamental that's changed since then is that so many people got so badly burned that the trust necessary for consumers, investors, and businesses to repeat what they did then has vanished.... yes, some consumers will refinance and use the extra money they extract from their homes to spend again. But most will use the extra money to pay off debt and start saving again, as they did years ago....
I admire cockeyed optimism, and I understand why Wall Street and its spokespeople want to see a return of the bull market. Hell, everyone with a stock portfolio wants to see it grow again. But wishing for something is different from getting it. And cockeyed optimism can wreak enormous damage on an economy. Haven't we already learned this? (Robert Reich's Blog, "Why We're Not at the Beginning of the End, and Probably Not Even At the End of the Beginning")
If the purpose of Bernanke's grand economics experiment was to create uneven inflation in the equities markets and, thus, widen the chasm between the financials and the real economy; he seems to have succeeded. But for how long? How long will it be before foreign banks and investors realize that the Fed's innocuous-sounding "lending facilities" have released a wave of low interest speculative liquidity into the capital markets? How else does one explain soaring stocks when industrial capacity, manufacturing, exports, corporate profits, retail and every other sector have been pounded into rubble? Liquidity is never inert. It navigates the financial system like mercury in water darting elusively to the area which offers the greatest opportunity for profit. That's why the surge popped up first in the stock market. (so far) When it spills into commodities--and oil and food prices rise--Bernanke will realize his plan has backfired..
Bernanke's financial rescue plan is a disaster. He should have spent a little less time with Milton Friedman and a little more with Karl Marx. It was Marx who uncovered the root of all financial crises. He summed it up like this:
"The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit." (Karl Marx, Capital, vol. 3, New York International publishers, 1967; Thanks to Monthly review, John Bellamy Foster)
Bingo. Message to Bernanke: Workers need debt-relief and a raise in pay not bigger bailouts for chiseling fatcat banksters.
Source: Mike Whitney
Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.
Thursday, 16 April 2009
Nine building societies have credit ratings downgraded
Nine of Britain’s biggest building societies, including Nationwide, have had their credit ratings downgraded in anticipation of further pain to come in the UK housing market.
Marjan Riggi, Moody’s lead analyst for UK mortgage lenders, said that the action had been taken after stress-testing scenarios that incorporated a peak-to-trough decline in house prices of 40 per cent. Some building societies have been downgraded by three notches, making it more expensive for them to raise funding in the wholesale markets.
As well as Nationwide, Moody’s downgraded Chelsea Building Society, West Bromwich, Principality, Newcastle, Skipton, Yorkshire, Norwich & Peterborough and Coventry. Some are considering challenging their ratings with Moody’s.
At the same time, there are signs that the cost of borrowing for homeowners may have bottomed out, with Barclays set to increase the cost of fixed-rate mortgages despite the Bank of England leaving interest rates unchanged this month. Other lenders are expected to follow suit.
Barclays is pulling a 3.99 per cent four-year fixed-rate deal for borrowers with a 40 per cent deposit, from tomorrow. It is also increasing the costs of its three- and five-year fixes by up to 0.4 percentage points.
Woolwich, the mortgage arm of Barclays, blamed the decision on a rise in the cost of longer-term wholesale borrowing, which banks use to fund new mortgage lending.
The bank is the first big lender to increase rates since the cost of borrowing hit a historically low level at the beginning of February. Brokers see this as evidence that mortgage rates have no further to fall.
Melanie Bien, of Savills Private Finance, said: “It was only a matter of time before lenders starting edging up their longer-term fixes. Borrowers who have been trying to time the bottom of the market in terms of mortgage rates may be wise to secure a longer-term fix now.”
Source: The Times
Marjan Riggi, Moody’s lead analyst for UK mortgage lenders, said that the action had been taken after stress-testing scenarios that incorporated a peak-to-trough decline in house prices of 40 per cent. Some building societies have been downgraded by three notches, making it more expensive for them to raise funding in the wholesale markets.
As well as Nationwide, Moody’s downgraded Chelsea Building Society, West Bromwich, Principality, Newcastle, Skipton, Yorkshire, Norwich & Peterborough and Coventry. Some are considering challenging their ratings with Moody’s.
At the same time, there are signs that the cost of borrowing for homeowners may have bottomed out, with Barclays set to increase the cost of fixed-rate mortgages despite the Bank of England leaving interest rates unchanged this month. Other lenders are expected to follow suit.
Barclays is pulling a 3.99 per cent four-year fixed-rate deal for borrowers with a 40 per cent deposit, from tomorrow. It is also increasing the costs of its three- and five-year fixes by up to 0.4 percentage points.
Woolwich, the mortgage arm of Barclays, blamed the decision on a rise in the cost of longer-term wholesale borrowing, which banks use to fund new mortgage lending.
The bank is the first big lender to increase rates since the cost of borrowing hit a historically low level at the beginning of February. Brokers see this as evidence that mortgage rates have no further to fall.
Melanie Bien, of Savills Private Finance, said: “It was only a matter of time before lenders starting edging up their longer-term fixes. Borrowers who have been trying to time the bottom of the market in terms of mortgage rates may be wise to secure a longer-term fix now.”
Source: The Times
Wednesday, 15 April 2009
Halifax to rescue borrowers in negative equity with 120pc remortgages
One of Britain's biggest mortgage lenders is offering loans of as much as 120pc of the property value to existing customers coming to the end of their current deal.
HBOS, which is part of Lloyds Banking Group, will consider offering a new mortgage to customers in negative equity whose existing deal, such as a fixed rate, is about to expire.
Normally such borrowers would see the rate they pay revert to the lender's standard variable rate (SVR) and would be unable to remortgage if the new loan were greater than the current value of the property as a result of the decline in house prices.
Lenders are generally restricting loans to 95pc of the property value, while borrowers wanting the most competitive deals need to borrow no more than 75pc or even 60pc.
But Halifax and Bank of Scotland, which are both part of HBOS, are offering the rates on 95pc loans to some remortgage customers needing to borrow more than the property value – up to 120pc of the value in some cases.
"HBOS told us they were doing this [offering 'negative equity' loans] earlier this month for borrowers with up to 120pc LTV [loan to value] deals, although they also said that this would not be publicised anywhere," one mortgage broker told The Telegraph.
Brokers said they believed HBOS to be the only major lender offering this option to customers in negative equity.
Melanie Bien of Savills Private Finance said: "HBOS is doing the decent thing, ensuring that existing customers who are in negative equity can still get a fixed rate.
"With other lenders, such borrowers are stuck on the standard variable rate, which is fine when such borrowing is cheap – as it is at the moment. But rates are likely to rise quickly next year, and those who can't remortgage elsewhere will find they are stuck on a spiralling rate."
She added: "By giving existing customers access to a fixed rate normally available only to those borrowing at 95pc LTV, HBOS is putting borrowers first and treating them fairly. We hope that other lenders follow its good example."
David Hollingworth of London & Country Mortgages, another broker, said: "It's very encouraging to see lenders looking after their existing borrowers by at least giving them some kind of product choice other than standard variable rate when they reach the end of their existing deal.
"With lending so restricted these days, borrowers who have slipped into the higher loan to value brackets as a result of falling house prices will find that options are limited at best and more likely non-existent from other lenders. Halifax is enabling existing borrowers to take advantage of the rates tagged for 95pc LTV even if their current loan to value has increased beyond that and can be up to 120pc. Halifax offers rates fixed for four or five years, currently available from 5.19pc."
He added: "This is a good service for existing borrowers who frankly will not be able to go anywhere else. While many may like the idea of sticking on the lender's SVR while it is currently low, it is good that lenders continue to offer borrowers the ability to protect against future rate rises."
A spokeswoman for Halifax said: "When our borrowers come to the end of their existing product rate, we work with them on a case-by-case basis to determine the product options that are available to them."
Source: Telegraph
HBOS, which is part of Lloyds Banking Group, will consider offering a new mortgage to customers in negative equity whose existing deal, such as a fixed rate, is about to expire.
Normally such borrowers would see the rate they pay revert to the lender's standard variable rate (SVR) and would be unable to remortgage if the new loan were greater than the current value of the property as a result of the decline in house prices.
Lenders are generally restricting loans to 95pc of the property value, while borrowers wanting the most competitive deals need to borrow no more than 75pc or even 60pc.
But Halifax and Bank of Scotland, which are both part of HBOS, are offering the rates on 95pc loans to some remortgage customers needing to borrow more than the property value – up to 120pc of the value in some cases.
"HBOS told us they were doing this [offering 'negative equity' loans] earlier this month for borrowers with up to 120pc LTV [loan to value] deals, although they also said that this would not be publicised anywhere," one mortgage broker told The Telegraph.
Brokers said they believed HBOS to be the only major lender offering this option to customers in negative equity.
Melanie Bien of Savills Private Finance said: "HBOS is doing the decent thing, ensuring that existing customers who are in negative equity can still get a fixed rate.
"With other lenders, such borrowers are stuck on the standard variable rate, which is fine when such borrowing is cheap – as it is at the moment. But rates are likely to rise quickly next year, and those who can't remortgage elsewhere will find they are stuck on a spiralling rate."
She added: "By giving existing customers access to a fixed rate normally available only to those borrowing at 95pc LTV, HBOS is putting borrowers first and treating them fairly. We hope that other lenders follow its good example."
David Hollingworth of London & Country Mortgages, another broker, said: "It's very encouraging to see lenders looking after their existing borrowers by at least giving them some kind of product choice other than standard variable rate when they reach the end of their existing deal.
"With lending so restricted these days, borrowers who have slipped into the higher loan to value brackets as a result of falling house prices will find that options are limited at best and more likely non-existent from other lenders. Halifax is enabling existing borrowers to take advantage of the rates tagged for 95pc LTV even if their current loan to value has increased beyond that and can be up to 120pc. Halifax offers rates fixed for four or five years, currently available from 5.19pc."
He added: "This is a good service for existing borrowers who frankly will not be able to go anywhere else. While many may like the idea of sticking on the lender's SVR while it is currently low, it is good that lenders continue to offer borrowers the ability to protect against future rate rises."
A spokeswoman for Halifax said: "When our borrowers come to the end of their existing product rate, we work with them on a case-by-case basis to determine the product options that are available to them."
Source: Telegraph
Tuesday, 14 April 2009
The Fake Recovery
Submitted by Edward Harrison of the site Credit Writedowns
I last posted on "Credt Writedowns" on Thursday before the Easter Holidays in two posts very much at odds with one another. The overall thrust of the first post was that the financial services industry in the United States was due to gain from some very advantageous circumstances in 2009. Meanwhile, the later re-post pointed out the continued fragility of the U.S. economy and banking system and focused on liquidity and solvency as unresolved issues. I would like to bring these two posts together here because I believe the concept behind the dichotomy is best described as the Fake Recovery.
Why 'Fake'? This is a fake recovery because the underlying systemic issues in the financial sector are being papered over through various mechanisms designed to surreptitiously recapitalize banks while monetary and fiscal stimulus induces a rebound before many banks' inherent insolvency becomes a problem. This means the banking system will remain weak even after recovery takes hold. The likely result of the weak system will be a relapse into a depression-like circumstances once the temporary salve of stimulus has worn off. Note that this does not preclude stocks from large rallies or a new bull market from forming because as unsustainable as the recovery may be, it will be a recovery nonetheless.
The real situation
In truth, the U.S. banking system as a whole is probably insolvent. By that I mean the likely future losses of loans and assets already on balance sheets at U.S. financial institutions, if incurred today, would reveal the system as a whole to lack the necessary regulatory capital to continue functioning under current guidelines. In fact, some prognosticators believe these losses far exceed the entire capital of the U.S. financial system. Witness a recent post by Nouriel Roubini:
Now, obviously, if we were to face up to this situation, there would be no chance of recovery as the capital required to recapitalize the banking system would mean a long and deep downturn well into 2010 and perhaps beyond. This is not politically acceptable as 2010 is an election year. Nor is the nationalization of large financial institutions acceptable to the Obama Administration. Moreover, bailing out banks to the tune of trillions of dollars while the economy is in depression is equally unacceptable to the American electorate. The Obama Administration is keenly aware of this fact.
These constraints, some artificial and others very real, leave the Administration with limited options.
Engineer recovery
With the preceding constraints in mind, we should remember that the first priority of elected officials in Washington is not necessarily to make the best long-term choices for the American people, but rather to get re-elected in order to have the opportunity to make those choices. It should be patently obvious that a downturn which began in December 2007 would be fatal to many politicians if allowed to continue well into 2010. This is why recovery of some sort must take place before that time - irrespective of whether it is sustainable.
How to engineer recovery is another question altogether. Here again there are a set of political constraints which make things more challenging. First, there are large swathes of the population that are uncomfortable with the huge debt load and deficit spending that a stimulus-induced recovery creates. Moreover, a government-sponsored nationalisation or recapitalisation plan would only increase this deficit spending and these debts.
As a result, the Obama Administration has crafted a plan to circumvent these obstacles.
The stimulus to come from these measures is still in the pipeline and, by the end of this year, will probably add a big kick to the economy. You should note that only the fiscal stimulus required legislative approval. All of the other 'stimulus' has been done without Congressional approval and largely without Congressional oversight. These activities have been specifically designed to be opaque. The government's claims of wanting to increase transparency ring hollow (see my post on Bloomberg's suit against the Fed as an example of what is really happening).
I should also mention that the Federal Reserve has been a large factor here. It is acting in concert with the executive branch in a non-arms length fashion which I believe will have consequences regarding Fed independence down the line.
Other positive economic factors
There are a number of so-called green shoots (a phrase coined by Norman Lamont) of note.
•Jobless claims have plateaued and comparisons to last year are actually declining (see post).
•The U.S. trade deficit is declining significantly as U.S. import demand has fallen off a cliff.
•Inventory liquidation will put U.S. manufacturers in a better position by Q4 and help make quarterly and yearly comparisons favourable.
I linked to the first two bullets of these other factors. And I wanted to spend a little time on factor number three because I think it is important.
Turning my attention to the global economy, after a rather muted beginning, manufacturers around the world have now begun to react aggressively to the economic downturn and inventories are falling aggressively. Chart 5 below depicts US manufacturing inventories as published recently by the Census Bureau. Inventory changes can have a meaningful impact on GDP. There is one example from the 1981-82 recession where the inventory correction subtracted 5% (annualised) from GDP in just one quarter. The current inventory correction is very negative for GDP in Q1 and possibly also in Q2, but it is very difficult to quantify the effect it is going to have. We will have to wait and see.
However, as we must remind ourselves, the stock market is not trading on what is going to happen in Q1 and Q2 of this year. Projecting at least 6-9 months ahead, the stock market is probably already looking ahead to Q4 and possibly even Q1 of next year. And the inventory adjustment currently underway is very bullish for GDP growth later this year and into next. The reason is simple. Manufacturers always overreact. Come Q3 or Q4, they will suddenly sit up and realise that inventories have fallen too much and that they need to produce more. There is no reason to believe that this recession will be any different.
Obviously, this means that U.S. Q1 and perhaps even Q2 GDP will be very low due to the subtraction of inventories now being purged. However, when we get to Q3 and Q4, this effect will be gone and quarterly and yearly comparisons will look favourable. So the inventory purge may mean a huge upside surprise to GDP in the second half of the year and early 2010 - potentially enough to see positive GDP numbers.
A brief reminder of what lurks beneath
Despite the positives from the previous section, there are significant headwinds which may even preclude a positive GDP number. They include:
•Rising joblessness
•Increased savings as households rebuild balance sheets
•Spending cuts by local and state governments
•Decreased capital spending by companies
•A calamitous GM bankruptcy
Moreover, credit availability --and hence GDP will be constrained by numerous factors including the following:
•Declining home values
•Increasing foreclosures
•Commercial property writedowns
•Credit card-related writeoffs
•Junk bond defaults
All of this means that a cyclical rebound is not a foregone conclusion at all.
Tying the threads together
You should be under no illusion that the coming rebound is permanent. Much of it is not. What we are seeing is the makings of a cyclical recovery that might begin as early as Q4 2009 or Q1 2010. How long or robust that recovery is remains to be seen. Moreover, it is still questionable whether we will get any meaningful recovery at all in spite of the 'green shoots' because the banking system in the United States is severely undercapitalised and more asset writedowns are coming due. This is a fake recovery underneath which many problems remain.
Nevertheless, banks are going to earn a lot of money and that is bullish for their shares - at least in the medium-term. Yes, the stock market is overbought right now. However, if banks put together some decent earnings reports over the next few quarters, their shares will rise.
Furthermore, if the banks can earn enough, this cyclical recovery will have legs as banks will then have enough capital to resume lending and that is supportive of the broader market as well. It is still too early to tell how this will play out over the longer-term. For now, I am much more positive on financials, and somewhat positive on the broader market as well.
I last posted on "Credt Writedowns" on Thursday before the Easter Holidays in two posts very much at odds with one another. The overall thrust of the first post was that the financial services industry in the United States was due to gain from some very advantageous circumstances in 2009. Meanwhile, the later re-post pointed out the continued fragility of the U.S. economy and banking system and focused on liquidity and solvency as unresolved issues. I would like to bring these two posts together here because I believe the concept behind the dichotomy is best described as the Fake Recovery.
Why 'Fake'? This is a fake recovery because the underlying systemic issues in the financial sector are being papered over through various mechanisms designed to surreptitiously recapitalize banks while monetary and fiscal stimulus induces a rebound before many banks' inherent insolvency becomes a problem. This means the banking system will remain weak even after recovery takes hold. The likely result of the weak system will be a relapse into a depression-like circumstances once the temporary salve of stimulus has worn off. Note that this does not preclude stocks from large rallies or a new bull market from forming because as unsustainable as the recovery may be, it will be a recovery nonetheless.
The real situation
In truth, the U.S. banking system as a whole is probably insolvent. By that I mean the likely future losses of loans and assets already on balance sheets at U.S. financial institutions, if incurred today, would reveal the system as a whole to lack the necessary regulatory capital to continue functioning under current guidelines. In fact, some prognosticators believe these losses far exceed the entire capital of the U.S. financial system. Witness a recent post by Nouriel Roubini:
The RGE Monitor new estimate in January 2009 of peak credit losses (available in
a paper for our RGE clients) suggested that total losses on loans made by U.S.
financial firms and the fall in the market value of the assets they are holding
would be at their peak about $3.6 trillion ($1.6 trillion for loans and $2
trillion for securities). The U.S. banks and broker dealers are exposed to half
of this figure, or $1.8 trillion; the rest is borne by other financial
institutions in the US and abroad. The capital backing the banks’ assets was
last fall only $1.4 trillion, leaving the U.S. banking system some $400 billion
in the hole, or close to zero even after the government and private sector
recapitalization of such banks and after banks’ provisioning for losses. Thus,
another $1.4 trillion would be needed to bring back the capital of banks to the
level they had before the crisis; and such massive additional recapitalization
is needed to resolve the credit crunch and restore lending to the private
sector.
Now, obviously, if we were to face up to this situation, there would be no chance of recovery as the capital required to recapitalize the banking system would mean a long and deep downturn well into 2010 and perhaps beyond. This is not politically acceptable as 2010 is an election year. Nor is the nationalization of large financial institutions acceptable to the Obama Administration. Moreover, bailing out banks to the tune of trillions of dollars while the economy is in depression is equally unacceptable to the American electorate. The Obama Administration is keenly aware of this fact.
These constraints, some artificial and others very real, leave the Administration with limited options.
Engineer recovery
With the preceding constraints in mind, we should remember that the first priority of elected officials in Washington is not necessarily to make the best long-term choices for the American people, but rather to get re-elected in order to have the opportunity to make those choices. It should be patently obvious that a downturn which began in December 2007 would be fatal to many politicians if allowed to continue well into 2010. This is why recovery of some sort must take place before that time - irrespective of whether it is sustainable.
How to engineer recovery is another question altogether. Here again there are a set of political constraints which make things more challenging. First, there are large swathes of the population that are uncomfortable with the huge debt load and deficit spending that a stimulus-induced recovery creates. Moreover, a government-sponsored nationalisation or recapitalisation plan would only increase this deficit spending and these debts.
As a result, the Obama Administration has crafted a plan to circumvent these obstacles.
1.Moderate fiscal stimulus. The Obama Administration decided not to seek massive stimulus earlier this year because they deemed it non-viable politically.This clears the first obstacle: deficit hawks. Most economists understand that the output gap that has opened up in the American economy is $2 trillion or more whereas the Obama stimulus package was only $800 billion. That leaves a massive hole in output in the U.S. Moreover, the immediate effective stimulus is less. Much of this 'stimulus' will be saved or will not come into play until months from now. Obviously, this is not going to meet the grade (See my comments on this from February).
2.Quasi-fiscal role for the Fed. Having partially assuaged deficit hawks, Obama still needed to close the output gap. Enter the Federal Reserve. You will have noticed that the Federal Reserve has added legacy assets as eligible for the TALF program. In effect, this allows banks to slip tens or even hundreds of billions of dollars in so-called toxic assets off their balance sheets. Mind you, these are assets already on the books impairing banks' ability to loan money. Under normal circumstances, one would expect the Federal Government to take these assets out of the system (bad bank, good bank, nationalization) after being given legislative approval to do so. However, as I have previously stated this approval is not going to be forthcoming. This is why the Federal Reserve is taking these assets on. In so doing, the Federal Reserve is taking on a quasi-fiscal role that re-capitalizes the banking system in order to stimulate the economy by increasing credit availability.
3.Quasi-fiscal role for the FDIC. The new PPIP is a similar end-run around Congress. After all, the role of the FDIC is that it "maintains the stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions, and managing receiverships." Meanwhile, the PPIP has the FDIC guaranteeing dodgy assets in a massive transfer of wealth from taxpayers to banks and select investors. (See my previous comments on this issue).
4.End of mark-to-market as we knew it. You should have noticed that most of the assets written down in the past two years have been marked-to-market. Securities traded in the open market are marked to market. Loans held to maturity are not. This is one reason that large international institutions which participate in the securitisation markets have taken the lion's share of writedowns, despite the low percentage that marked-to-market assets represent on bank balance sheets. But, this should end because of new guidelines in marked-to-market accounting. However, the new guidelines do have two major implications. First,there are still many distressed loans on the books of U.S. banks that if marked to market would reveal devastating losses. Second, there will also now be many distressed securities on bank balance sheets that if marked-to-market would reveal yet more losses. In essence, the new guidelines are helpful only to the degree that it prevents assets being marked down due to temporary impairment. If much of the impairment is real, as I believe it is, we are storing up problems for later.
5.Interest rate reductions. One reason often given for a large increase in writedowns at financial institutions had been the coming reset of Alt-A adjustable-rate mortgages in 2009. With the subprime writedowns mostly accounted for, a souring of the much larger pool of Alt-A and Prime residential mortgage loans is the real Armageddon scenario. Well, part of this problem has been temporarily relieved because the Federal Reserve has reduced short-term interest rates to near zero and has begun trying to manipulate long-term interest rates lower by buying long-dated treasury securities.
6.Bank margin increases. Key to the whole program is banks' ability to earn massive amounts of money and re-capitalize themselves through retained earnings as opposed to shedding assets or receiving additional paid-in capital (see post from last April on these three methods of recapitalizing). The market for bank assets is distressed and few banks can get enough capital from private sources or investors. Therefore, Obama's plan hinges on the ability to allow these banks to earn shed loads of money as quickly as possible. If the banks cannot do this, we are going to have a big problem very quickly (Of course, I think the can).
The stimulus to come from these measures is still in the pipeline and, by the end of this year, will probably add a big kick to the economy. You should note that only the fiscal stimulus required legislative approval. All of the other 'stimulus' has been done without Congressional approval and largely without Congressional oversight. These activities have been specifically designed to be opaque. The government's claims of wanting to increase transparency ring hollow (see my post on Bloomberg's suit against the Fed as an example of what is really happening).
I should also mention that the Federal Reserve has been a large factor here. It is acting in concert with the executive branch in a non-arms length fashion which I believe will have consequences regarding Fed independence down the line.
Other positive economic factors
There are a number of so-called green shoots (a phrase coined by Norman Lamont) of note.
•Jobless claims have plateaued and comparisons to last year are actually declining (see post).
•The U.S. trade deficit is declining significantly as U.S. import demand has fallen off a cliff.
•Inventory liquidation will put U.S. manufacturers in a better position by Q4 and help make quarterly and yearly comparisons favourable.
I linked to the first two bullets of these other factors. And I wanted to spend a little time on factor number three because I think it is important.
Turning my attention to the global economy, after a rather muted beginning, manufacturers around the world have now begun to react aggressively to the economic downturn and inventories are falling aggressively. Chart 5 below depicts US manufacturing inventories as published recently by the Census Bureau. Inventory changes can have a meaningful impact on GDP. There is one example from the 1981-82 recession where the inventory correction subtracted 5% (annualised) from GDP in just one quarter. The current inventory correction is very negative for GDP in Q1 and possibly also in Q2, but it is very difficult to quantify the effect it is going to have. We will have to wait and see.
However, as we must remind ourselves, the stock market is not trading on what is going to happen in Q1 and Q2 of this year. Projecting at least 6-9 months ahead, the stock market is probably already looking ahead to Q4 and possibly even Q1 of next year. And the inventory adjustment currently underway is very bullish for GDP growth later this year and into next. The reason is simple. Manufacturers always overreact. Come Q3 or Q4, they will suddenly sit up and realise that inventories have fallen too much and that they need to produce more. There is no reason to believe that this recession will be any different.
Obviously, this means that U.S. Q1 and perhaps even Q2 GDP will be very low due to the subtraction of inventories now being purged. However, when we get to Q3 and Q4, this effect will be gone and quarterly and yearly comparisons will look favourable. So the inventory purge may mean a huge upside surprise to GDP in the second half of the year and early 2010 - potentially enough to see positive GDP numbers.
A brief reminder of what lurks beneath
Despite the positives from the previous section, there are significant headwinds which may even preclude a positive GDP number. They include:
•Rising joblessness
•Increased savings as households rebuild balance sheets
•Spending cuts by local and state governments
•Decreased capital spending by companies
•A calamitous GM bankruptcy
Moreover, credit availability --and hence GDP will be constrained by numerous factors including the following:
•Declining home values
•Increasing foreclosures
•Commercial property writedowns
•Credit card-related writeoffs
•Junk bond defaults
All of this means that a cyclical rebound is not a foregone conclusion at all.
Tying the threads together
You should be under no illusion that the coming rebound is permanent. Much of it is not. What we are seeing is the makings of a cyclical recovery that might begin as early as Q4 2009 or Q1 2010. How long or robust that recovery is remains to be seen. Moreover, it is still questionable whether we will get any meaningful recovery at all in spite of the 'green shoots' because the banking system in the United States is severely undercapitalised and more asset writedowns are coming due. This is a fake recovery underneath which many problems remain.
Nevertheless, banks are going to earn a lot of money and that is bullish for their shares - at least in the medium-term. Yes, the stock market is overbought right now. However, if banks put together some decent earnings reports over the next few quarters, their shares will rise.
Furthermore, if the banks can earn enough, this cyclical recovery will have legs as banks will then have enough capital to resume lending and that is supportive of the broader market as well. It is still too early to tell how this will play out over the longer-term. For now, I am much more positive on financials, and somewhat positive on the broader market as well.
Retailers call for action to prevent 'ghost towns'
Retailers have urged the Government to provide them with more assistance to keep shops occupied, as Whitehall unveils a £3m initiative today to try to prevent high streets from becoming ghost towns during the recession.
Hazel Blears, the Community Secretary, will also unveil provisions to help local people or entrepreneurs temporarily convert empty shops into community projects or businesses, such as local art displays, to avoid high streets being boarded up. The provisions include special planning application waivers, standard interim-use leases, and temporarily leasing shops to councils that will allow the shops to get makeovers.
Experian, the information services company, believes that 15 per cent of high street shops, or 135,000 outlets, could be left empty by the end of the year, as retail administrations and financial woes force retailers to close stores.
But the British Retail Consortium (BRC) said the way to prevent high streets becoming ghost towns is to remove burdens and help retailers survive in them. Stephen Robertson, director general of the BRC, said: "Art displays are not the answer for empty shops. We agree that vacant premises blight town centres. But contriving schemes to fill them with other users is tackling the symptom while ignoring the cause." He singled out property costs as a key burden. Mr Robertson said: "Rather than offering empty shops for uses that are rates-free, wouldn't it be better to reduce the rates burden for struggling retailers?"
The BRC won a victory for its members on 31 March when the Chancellor, Alistair Darling, modified plans to introduce a 5 per cent increase in business rates. As a result, business rates increased by only 2 per cent from 1 April, with the remaining 3 per cent rise being spread over the next two years, under new legislation unveiled by the Government.
However, prior to Mr Darling's U-turn, the BRC had called for the Government to freeze new business rates and reverse its policy on empty property relief, which was scrapped in April last year.
At a seminar in Stockport today, Ms Blears will say: "Empty shops can be eyesores or crime magnets. Our ideas for reviving town centres will give communities the know-how to temporarily transform vacant premises into something innovative for the _community ... and stop the high street being boarded up."
Entrepreneurs have begun many successful businesses from empty premises, such as Romy Fraser who started Neal's Yard Remedies from a disused warehouse in 1981.
Source: The Independent
Hazel Blears, the Community Secretary, will also unveil provisions to help local people or entrepreneurs temporarily convert empty shops into community projects or businesses, such as local art displays, to avoid high streets being boarded up. The provisions include special planning application waivers, standard interim-use leases, and temporarily leasing shops to councils that will allow the shops to get makeovers.
Experian, the information services company, believes that 15 per cent of high street shops, or 135,000 outlets, could be left empty by the end of the year, as retail administrations and financial woes force retailers to close stores.
But the British Retail Consortium (BRC) said the way to prevent high streets becoming ghost towns is to remove burdens and help retailers survive in them. Stephen Robertson, director general of the BRC, said: "Art displays are not the answer for empty shops. We agree that vacant premises blight town centres. But contriving schemes to fill them with other users is tackling the symptom while ignoring the cause." He singled out property costs as a key burden. Mr Robertson said: "Rather than offering empty shops for uses that are rates-free, wouldn't it be better to reduce the rates burden for struggling retailers?"
The BRC won a victory for its members on 31 March when the Chancellor, Alistair Darling, modified plans to introduce a 5 per cent increase in business rates. As a result, business rates increased by only 2 per cent from 1 April, with the remaining 3 per cent rise being spread over the next two years, under new legislation unveiled by the Government.
However, prior to Mr Darling's U-turn, the BRC had called for the Government to freeze new business rates and reverse its policy on empty property relief, which was scrapped in April last year.
At a seminar in Stockport today, Ms Blears will say: "Empty shops can be eyesores or crime magnets. Our ideas for reviving town centres will give communities the know-how to temporarily transform vacant premises into something innovative for the _community ... and stop the high street being boarded up."
Entrepreneurs have begun many successful businesses from empty premises, such as Romy Fraser who started Neal's Yard Remedies from a disused warehouse in 1981.
Source: The Independent
HSBC faces crisis over US credit cards
HSBC faces a meltdown at its US credit card operations where around $50bn (£34bn) has been lent to people with poor credit histories, say analysts.
Write-offs at the credit card arm of HSBC Finance Corporation (HFC), formerly Household, a sub-prime lender, could double to $10bn in 2009, according to brokers. Fears are growing that the bank could be forced to ask shareholders for more cash, on top of the £12.5bn it raised during its recent rights issue designed to bolster its balance sheet.
Analysts at Société Générale said that the strong take-up of the share offer did not necessarily "translate into smooth sailing for HSBC over the next couple of years" as it faced the prospect of rising bad debt and sour loans. The bank is not yet out of the woods, added SocGen.
Of particular concern are loans outstanding at HFC's credit card business, which stood at $49.6bn last year - representing around two-thirds of all HSBC credit card loans. The HFC credit card operation wrote off $5.4bn in bad or doubtful loans in 2008, according to the annual report, but made a profit of $520m. But analysts say that the profit will be wiped out this year and the offshoot will plunge into the red.
HSBC refused to comment on the speculation but said the HFC provisions "would be impacted by factors such as US unemployment and wage growth".
There is no suggestion that HFC's problems will push HSBC as a whole into loss - its businesses outside the US are highly profitable. But the bank, led by Stephen Green, has admitted that its purchase of Household for $15bn in 2003 has destroyed about $10bn of shareholder value.
Last month, the company unveiled a rights issue, slashed the dividend and disclosed that group profits had more than halved to $9.3bn. At the time, HSBC insisted that the proceeds of the cash call were not designed to plug an existing capital shortfall, but would give the bank a competitive advantage over rivals. But two weeks later it announced 1,200 redundancies as part of a review of operations to make it more efficient.
Leigh Goodwin, an analyst with Fox-Pitt, Kelton, said the job cuts were in response to a decline in demand for mortgage and savings products.
At the time of its annual results in March, HSBC chief executive Mike Geoghegan said HFC would stop making loans to new customers. It is also shutting 800 HFC branches in a move to shrink its exposure to the US housing and sub-prime markets.
Dissident shareholder Knight Vinke has demanded that the bank walk away from its HFC investment. It has also flagged up concern that the $34bn difference between the book and market value of HFC would have to be closed at some point, as it doesn't believe that US house prices will recover in the near future. But HSBC has queried Knight Vinke's assessment of the financial strength of HFC.
Source: Guardian
Write-offs at the credit card arm of HSBC Finance Corporation (HFC), formerly Household, a sub-prime lender, could double to $10bn in 2009, according to brokers. Fears are growing that the bank could be forced to ask shareholders for more cash, on top of the £12.5bn it raised during its recent rights issue designed to bolster its balance sheet.
Analysts at Société Générale said that the strong take-up of the share offer did not necessarily "translate into smooth sailing for HSBC over the next couple of years" as it faced the prospect of rising bad debt and sour loans. The bank is not yet out of the woods, added SocGen.
Of particular concern are loans outstanding at HFC's credit card business, which stood at $49.6bn last year - representing around two-thirds of all HSBC credit card loans. The HFC credit card operation wrote off $5.4bn in bad or doubtful loans in 2008, according to the annual report, but made a profit of $520m. But analysts say that the profit will be wiped out this year and the offshoot will plunge into the red.
HSBC refused to comment on the speculation but said the HFC provisions "would be impacted by factors such as US unemployment and wage growth".
There is no suggestion that HFC's problems will push HSBC as a whole into loss - its businesses outside the US are highly profitable. But the bank, led by Stephen Green, has admitted that its purchase of Household for $15bn in 2003 has destroyed about $10bn of shareholder value.
Last month, the company unveiled a rights issue, slashed the dividend and disclosed that group profits had more than halved to $9.3bn. At the time, HSBC insisted that the proceeds of the cash call were not designed to plug an existing capital shortfall, but would give the bank a competitive advantage over rivals. But two weeks later it announced 1,200 redundancies as part of a review of operations to make it more efficient.
Leigh Goodwin, an analyst with Fox-Pitt, Kelton, said the job cuts were in response to a decline in demand for mortgage and savings products.
At the time of its annual results in March, HSBC chief executive Mike Geoghegan said HFC would stop making loans to new customers. It is also shutting 800 HFC branches in a move to shrink its exposure to the US housing and sub-prime markets.
Dissident shareholder Knight Vinke has demanded that the bank walk away from its HFC investment. It has also flagged up concern that the $34bn difference between the book and market value of HFC would have to be closed at some point, as it doesn't believe that US house prices will recover in the near future. But HSBC has queried Knight Vinke's assessment of the financial strength of HFC.
Source: Guardian
Monday, 13 April 2009
Economy will be over worst by October, says Alistair Darling
The British economy will be over the worst of the downturn in six months, Alistair Darling will declare in his Budget.
The Chancellor is set to forecast that the economy will halt its fall in the last quarter of the year, which starts in October. He will predict a return to growth at the turn of the year, with a recovery well underway by the time of the next general election.
The outlook will draw political accusations of over-optimism, since some forecasters are much more pessimistic. The National Institute of Economic and Social Research this week suggested that economic growth may not resume until 2012.
However, some independent economists believe the Treasury position is credible: nearly half the City analysts polled this week by Reuters said the UK economy will at least stabilise in the last three months of the year, and some predict growth will resume then.
Despite bleak economic data and rising unemployment, government insiders say there are some reasons for cautious optimism, including last week's Bank of England credit survey suggesting banks are preparing to lend more to families and companies in the months ahead.
Some economists also expect the US economy to pull out of its recession in the second half of the year. President Barack Obama has said he sees "glimmers of hope" for a recovery.
And the Organisation for Economic Co-operation and Development said on Friday that although all major economies are suffering a major contraction, there are some "tentative signs of improvement" in the rate of decline in France and Germany.
The forecast of resumed British growth may be the only optimistic signal in an otherwise gloomy Budget. Mr Darling is set to accept that during a year-long contraction that started last year, the UK economy shrank by more than 3 per cent, the sharpest fall for a generation.
Faced with an ever-growing hole in the public finances, he will also announce long-term tax rises and spending cuts to try to balance his budget over the next six years.
There will be few eye-catching giveaways, although Whitehall discussions are continuing about offering a £2,000 "scrappage fee" to people trading in used cars for new models.
Despite reports that the Treasury has rejected the proposal by Lord Mandelson, the Business Secretary, sources said over the weekend that the plan remains "on the table".
In his last forecast at the pre-Budget report in November, Mr Darling predicted that growth would resume from the third quarter, which begins in July.
Although the Chancellor has since admitted that he understated the severity of the recession and will have to increase his estimate of the depth of the slump, in the Budget he will only move his prediction of renewed growth back by three months.
The Treasury is signalling it believes the British downturn could be 'V'-shaped, a steep fall followed by a relatively quick rebound. Stephen Timms, a Treasury minister this week signalled the Government expects growth to resume this year, adding: "The question is when in the second half of the year."
Signs of economic recovery around the New Year are vital to Gordon Brown's fragile hopes of winning a general election next spring.
Labour strategists also believe the party must appear optimistic about the future, accusing the Tories of "talking Britain down".
However, even if headline figures like gross domestic product are improving by then, unemployment - which lags behind economic growth - may still be rising as the Prime Minister goes to the polls.
Source: The Telegraph
The Chancellor is set to forecast that the economy will halt its fall in the last quarter of the year, which starts in October. He will predict a return to growth at the turn of the year, with a recovery well underway by the time of the next general election.
The outlook will draw political accusations of over-optimism, since some forecasters are much more pessimistic. The National Institute of Economic and Social Research this week suggested that economic growth may not resume until 2012.
However, some independent economists believe the Treasury position is credible: nearly half the City analysts polled this week by Reuters said the UK economy will at least stabilise in the last three months of the year, and some predict growth will resume then.
Despite bleak economic data and rising unemployment, government insiders say there are some reasons for cautious optimism, including last week's Bank of England credit survey suggesting banks are preparing to lend more to families and companies in the months ahead.
Some economists also expect the US economy to pull out of its recession in the second half of the year. President Barack Obama has said he sees "glimmers of hope" for a recovery.
And the Organisation for Economic Co-operation and Development said on Friday that although all major economies are suffering a major contraction, there are some "tentative signs of improvement" in the rate of decline in France and Germany.
The forecast of resumed British growth may be the only optimistic signal in an otherwise gloomy Budget. Mr Darling is set to accept that during a year-long contraction that started last year, the UK economy shrank by more than 3 per cent, the sharpest fall for a generation.
Faced with an ever-growing hole in the public finances, he will also announce long-term tax rises and spending cuts to try to balance his budget over the next six years.
There will be few eye-catching giveaways, although Whitehall discussions are continuing about offering a £2,000 "scrappage fee" to people trading in used cars for new models.
Despite reports that the Treasury has rejected the proposal by Lord Mandelson, the Business Secretary, sources said over the weekend that the plan remains "on the table".
In his last forecast at the pre-Budget report in November, Mr Darling predicted that growth would resume from the third quarter, which begins in July.
Although the Chancellor has since admitted that he understated the severity of the recession and will have to increase his estimate of the depth of the slump, in the Budget he will only move his prediction of renewed growth back by three months.
The Treasury is signalling it believes the British downturn could be 'V'-shaped, a steep fall followed by a relatively quick rebound. Stephen Timms, a Treasury minister this week signalled the Government expects growth to resume this year, adding: "The question is when in the second half of the year."
Signs of economic recovery around the New Year are vital to Gordon Brown's fragile hopes of winning a general election next spring.
Labour strategists also believe the party must appear optimistic about the future, accusing the Tories of "talking Britain down".
However, even if headline figures like gross domestic product are improving by then, unemployment - which lags behind economic growth - may still be rising as the Prime Minister goes to the polls.
Source: The Telegraph
Saturday, 11 April 2009
Robert Reich: Why We're Not at the Beginning of the End, and Probably Not Even At the End of the Beginning
Nice article by Robert Reich who severed as Labour Secretary under Bill Clinton until 1997.***************************************
Are we at the beginning of the end? Mortgage interests are now so low (the average rate on 30-year fixed mortgages was 4.87 percent Thursday, slightly higher than the 4.78 percent last week, but still the lowest level since 1971) that President Obama has begun urging Americans to refinance their homes so they can save money and start spending again. Presidential aide Larry Summers says the country is likely to see positive economic signs in the next few months. Wells Fargo Bank rallied stocks and surprised analysts Thursday when it predicted a strong $3 billion first-quarter profit, citing surging mortgage originations. And executives at the nation's biggest three banks -- JPMorgan Chase, Bank of America, and Citigroup -- say their operations were (at least by some measures) profitable in the first two months of this year, mainly because a resurgent debt market and equity trading lifted earnings in the investment banking divisions.
But we're not at the beginning of the end. I'm not even sure we're at the end of the beginning. All of these pieces of upbeat news are connected by one fact: the flood of money the Fed has been releasing into the economy. Of course mortage rates are declining, mortgage orginations are surging, and people and companies are borrowing more. So much money is sloshing around the economy that its price is bound to drop. And cheap money is bound to induce some borrowing. The real question is whether this means an economic turnaround. The answer is it doesn't.
Cheap money, you may remember, got us into this mess. Six years ago, the Fed (Alan Greenspan et al) lowered interest rates to 1 percent. Adjusted for inflation, this made money essentially free to large lenders. The large lenders did exactly what they could be expected to do with free money -- get as much of it as possible and then lent it out to anyone who could stand up straight (and many who couldn't). With no regulators looking over their shoulders, they got away with the financial equivalent of murder.
The only economic fundamental that's changed since then is that so many people got so badly burned that the trust necessary for consumers, investors, and businesses to repeat what they did then has vanished. Yes, banks will lend to highly trustworthy borrowers, and the low-hanging fruit of highly trustworthy borrowers is the first they'll pick. But there's not much of this kind of fruit to go around. And yes, some consumers will refinance and use the extra money they extract from their homes to spend again. But most will use the extra money to pay off debt and start saving again, as they did years ago. Most consumers continue to worry about their jobs, and for good reason.
Some of the big banks will claim to be profitable, but don't bank on it. Neither they nor anyone else knows what their assets are really worth. Besides, the big banks are sitting on over $500 billion over taxpayer equity and loans. Who knows how they're calculating profits? Most importantly, there's still a yawning gap between the economy's productive capacity and what it's now producing, and absolutely nothing will turn the economy around until that gap begins to close.
I spent the better part of an hour yesterday evening debating Larry Kudlow on his CNBC program, along with Arthur Laffer and two other financial analysts, all of whom were sure that the stock market had hit bottom and was now poised for a major recovery. I admire cockeyed optimism, and I understand why Wall Street and its spokespeople want to see a return of the bull market. Hell, everyone with a stock portfolio wants to see it grow again. But wishing for something is different from getting it. And cockeyed optimism can wreak enormous damage on an economy. Haven't we already learned this?
Source: Robert Reich
Friday, 10 April 2009
Gerald Celente Radio Interview (09-04-2009)
Gerald Celente discusses the economy on the Jeff Rense Program.
Part 1 (10min)
Part 2 (10min)
Part 3 (10min)
Part 4 (10min)
Part 1 (10min)
Part 2 (10min)
Part 3 (10min)
Part 4 (10min)
Thursday, 9 April 2009
London office vacancy rate soars to over 10 million square feet
Approximately 11.9pc of City offices are vacant – equivalent to 10 large city towers – up by a tenth already in 2009 and more than double the 5.2pc prior to the onset of the credit crisis in 2007, as increasing numbers of businesses collapse or downsize.It is first time since 2004 that empty office space has breached the 10m sq ft mark, according to research by property agent NB Real Estate.
The slump is placing immense pressure on rents, which have now fallen 27pc in the past year from an average of £65 per sq ft to £47.50.
Increasing supply through the completion of new developments is hastening the fall in rents, although the situation is even more dire in the West End. The failure of a large number of hedge funds, many of which are based in the area, has pushed rents down 37.5pc to £75 per sq ft.
Alan Dornford, managing director of markets at NB Real Estate, said: "Sentiment-wise this has probably been the toughest quarter in the leasing market.
"Many landlords have been aggressively adjusting the rents they quote but in isolation this will not stimulate a recovery. A broader recovery relies on confidence returning to the employment market."
Source: Telegraph
Wednesday, 8 April 2009
Market bear Roubini sticks to dour forecasts
There's still bad news ahead for the U.S. economy and the bear market for stocks is not over yet, according to a prominent economist who foretold much of the current turmoil.Nouriel Roubini, a professor at New York University's Stern School of Business and chairman of economic research firm RGE Monitor, said on Tuesday that he expected more dour macroeconomic data and problems in the banking and housing sectors, as well as pressures on consumers.
Big stimulus packages will eventually slow the rate at which economies contract, but that will take time, he added.
"There will be a light at the end of the tunnel somewhere down the line, later rather than sooner," he said at a Toronto news conference, which took place ahead of a Sprott Asset Management event entitled "A Night with the Bears."
Roubini, who made a name for himself by sounding early warning signs about housing bubbles and credit crises, earlier told Canada's BNN television that he still believed the recent market upturn represented a bear market rally, and not a change in sentiment.
"Macro news, earnings news and financial shocks are going to be worse than expected and that's why I believe this is still a bear market rally," he told BNN.
Markets logged four straight weeks of gains until this week on optimism that unprecedented interest rate cuts and billions of dollars of stimulus will eventually fight off the worst global downturn since World War Two, and on upbeat comments from U.S. banks on their performance so far in 2009.
The fact that some indicators did not match pessimistic expectations was also a positive factor, as were last week's pledges by world leaders to do more to fight the crisis.
But Roubini played down the rally.
"I am more a realist than a pessimist. I'll be the first one to call for the bottom of this economic contraction, recovery of the market when I see a sustained economic and therefore financial recovery," he said.
Meredith Whitney, chief executive of Meredith Whitney Advisory Group, said stabilization in the banking sector would hold the key to a turnaround. Whitney, one of Wall Street's most bearish bank analysts, has forecast another rough year for banks as they shed assets to raise capital.
"It's not just the banks that have to stabilize their own lending it's that they have to make up for the void of the shadow banking industry that has been shut down since the summer of 2007. We've got a ways to go," she said.
Canadian banks have largely shrugged off the severe banking troubles south of the border.
But commodity prices have fallen sharply from the peak of last summer and the Canadian auto sector is hurting badly.
"The fundamentals of the (Canadian) economy are robust, but when the U.S. sneezes the rest of the world catches a cold," said Roubini. "This time around the U.S. is not just sneezing, it's a severe case of pneumonia and the biggest trading partner next door is Canada."
Sprott Asset Management's Eric Sprott said his pessimistic view on the economy is based on the "overleveraging of the banking system."
"When we look at the systemic financial system we're in -- and it affects every country in the world including Canada -- I think staying bearish is the route to go," he told BNN.
Source: Reuters
Consumer Credit Only Beginning to Fall
The Fed released preliminary February data for consumer credit, which doesn’t include mortgage debt.
Bloomberg:
(Click to enlarge)
Note in particular the growth of securitization. According to the Fed, “these balances are no longer carried on the balance sheets of the loan originators.”
What Alan Greenspan and so many others toasted as The Great Moderation, was nothing more than moving risks off balance sheet.
Risk didn’t disappear, it was just moved. Originators cared little about the quality of their loans because they were packaging them into securities to be sold to investors. Securities were rated AAA so investors felt protected. Default rates were low so who was going to argue?
But of course default rates were low. The avalanche of liquidity allowed consumers to rollover/refinance at every turn. Remember analysts talking about “the resilient consumer” back in 2005-2007? It’s easy to be resilient if credit is limitless.
For the economy to recover, consumers need to repair their balance sheets, which means debt has to be paid down or written off. The ride up the credit mountain sure was fun. The ride down won’t be.
Source: Option Armageddon
Bloomberg:
The pace of borrowing by U.S. consumers fell in February as fewer Americans sought credit to make purchases amid what may become the worst recession in seven decades.As you can see in the chart above, consumers have built up a mountain of debt over the last 20 years.
Consumer credit fell by $7.48 billion, or 3.5 percent at an annual rate, to $2.56 trillion, the Federal Reserve said today in Washington. Credit increased by $8.14 billion in January, more than previously estimated. The Fed’s report doesn’t cover borrowing secured by real estate…
(Click to enlarge)
Note in particular the growth of securitization. According to the Fed, “these balances are no longer carried on the balance sheets of the loan originators.”
What Alan Greenspan and so many others toasted as The Great Moderation, was nothing more than moving risks off balance sheet.
Risk didn’t disappear, it was just moved. Originators cared little about the quality of their loans because they were packaging them into securities to be sold to investors. Securities were rated AAA so investors felt protected. Default rates were low so who was going to argue?
But of course default rates were low. The avalanche of liquidity allowed consumers to rollover/refinance at every turn. Remember analysts talking about “the resilient consumer” back in 2005-2007? It’s easy to be resilient if credit is limitless.
For the economy to recover, consumers need to repair their balance sheets, which means debt has to be paid down or written off. The ride up the credit mountain sure was fun. The ride down won’t be.
Source: Option Armageddon
U.K. GDP Drops 1.5% as Recession Resembles 1979, Niesr Says
The U.K. economy shrank 1.5 percent in the first quarter as the recession increasingly resembled the one that started in 1979 when Margaret Thatcher took power, the National Institute of Economic and Social Research said.
The drop in gross domestic product followed a 1.6 percent decline in the last three months of 2008, Niesr, whose clients include the U.K. Treasury, said in London today. Consumer confidence last month matched the lowest level in at least four years, Nationwide Building Society said in a separate report.
Unemployment is rising at the fastest pace in three decades, pushing Prime Minister Gordon Brown to redouble his efforts to revive economic growth before the next election. The Bank of England will probably keep the benchmark interest rate unchanged at a three-century low of 0.5 percent in its monthly decision tomorrow.
“The output fall so far is very similar to that of the recession that began in the summer of 1979,” Niesr said in a statement. “If the 1980s profile were followed, output would continue to decline for up to another year and it would take two further years before the level of output enjoyed at the start of 2008 would be reached again.”
Niesr still said that there’s no “obvious reason” why the recession will follow the course of the one in the early 1980s.
Thatcher succeeded James Callaghan as U.K. prime minister in May 1979 following the so-called Winter of Discontent, when car workers, truck drivers and trash collectors went on strike.
Job Cuts
Unemployment jumped the most since 1971 in February, the government’s statistics office reported March 18. Royal Bank of Scotland Group Plc said yesterday it will cut up to 4,500 back office jobs in Britain to save money.
“Feelings about the current labor market have weakened,” Nationwide Chief Economist Fionnuala Early said in a statement. “Further reports of job losses are likely to have affected consumers’ views of this.”
Nationwide’s index of consumer confidence slipped to 41 in March, matching January’s four-year low, from 43 the previous month. Two-thirds of Britons said there are few jobs available, the mortgage lender’s survey showed.
The number of permanent staff appointments by job consultants fell further in March, though at the slowest pace in six months, KPMG and the Recruitment and Employment Federation said in a separate report today.
“The availability of permanent and temporary jobs in the U.K. continues to decline, salaries are being reduced and the pool of available candidates is rising further,” Mike Stevens, a partner at KPMG, said in a statement. “Recovery might take longer and be more protracted than many hope.”
Chancellor of the Exchequer Alistair Darling presents his next budget on April 22. Brown, whose governing Labour Party trailed the opposition by 13 percentage points in an April 6 poll, must call an election by mid-2010.
Bank of England Governor Mervyn King last month took the unprecedented step of cutting interest rates close to zero and buying government bonds with newly created money to stimulate the economy. All except two of the 62 economists in a Bloomberg survey predict policy makers will keep the key rate unchanged at 0.5 percent tomorrow.
Source: Bloomberg
The drop in gross domestic product followed a 1.6 percent decline in the last three months of 2008, Niesr, whose clients include the U.K. Treasury, said in London today. Consumer confidence last month matched the lowest level in at least four years, Nationwide Building Society said in a separate report.
Unemployment is rising at the fastest pace in three decades, pushing Prime Minister Gordon Brown to redouble his efforts to revive economic growth before the next election. The Bank of England will probably keep the benchmark interest rate unchanged at a three-century low of 0.5 percent in its monthly decision tomorrow.
“The output fall so far is very similar to that of the recession that began in the summer of 1979,” Niesr said in a statement. “If the 1980s profile were followed, output would continue to decline for up to another year and it would take two further years before the level of output enjoyed at the start of 2008 would be reached again.”
Niesr still said that there’s no “obvious reason” why the recession will follow the course of the one in the early 1980s.
Thatcher succeeded James Callaghan as U.K. prime minister in May 1979 following the so-called Winter of Discontent, when car workers, truck drivers and trash collectors went on strike.
Job Cuts
Unemployment jumped the most since 1971 in February, the government’s statistics office reported March 18. Royal Bank of Scotland Group Plc said yesterday it will cut up to 4,500 back office jobs in Britain to save money.
“Feelings about the current labor market have weakened,” Nationwide Chief Economist Fionnuala Early said in a statement. “Further reports of job losses are likely to have affected consumers’ views of this.”
Nationwide’s index of consumer confidence slipped to 41 in March, matching January’s four-year low, from 43 the previous month. Two-thirds of Britons said there are few jobs available, the mortgage lender’s survey showed.
The number of permanent staff appointments by job consultants fell further in March, though at the slowest pace in six months, KPMG and the Recruitment and Employment Federation said in a separate report today.
“The availability of permanent and temporary jobs in the U.K. continues to decline, salaries are being reduced and the pool of available candidates is rising further,” Mike Stevens, a partner at KPMG, said in a statement. “Recovery might take longer and be more protracted than many hope.”
Chancellor of the Exchequer Alistair Darling presents his next budget on April 22. Brown, whose governing Labour Party trailed the opposition by 13 percentage points in an April 6 poll, must call an election by mid-2010.
Bank of England Governor Mervyn King last month took the unprecedented step of cutting interest rates close to zero and buying government bonds with newly created money to stimulate the economy. All except two of the 62 economists in a Bloomberg survey predict policy makers will keep the key rate unchanged at 0.5 percent tomorrow.
Source: Bloomberg
Tuesday, 7 April 2009
George Soros warns 'zombie' banks could suck lifeblood out of economy
Billionaire investor George Soros has warned that bailing out banks could turn them into "zombies" that suck the lifeblood of the American economy, which he predicted is in for a "lasting slowdown".
He also cautioned that the recent rise in global stockmarkets is a "bear market rally because we have not yet turned the economy around".
His gloomy verdict weighed on Asian stockmarkets today, alongside a report that the International Monetary Fund now estimates that the toxic debts racked up by banks and insurers could spiral to $4tn (£2.7tn).
Tokyo's Nikkei index edged down 0.3% to 8832.85 while Hong Kong's Hang Seng fell 1.1% and Singapore's Straits Times index was down 2.1%. However, the FTSE 100 index in London rose 33 points to 4027.15 in early trading.
Soros said he does not expect the US economy to recover until next year at the earliest.
"The recovery will look like an inverted square root sign," he said. "You hit bottom and you automatically rebound some, but then you don't come out of it in a V-shaped recovery or anything like that. You settle down, step down."
His comments last night came after Morgan Stanley warned the bear market was not over. Its much followed strategy team led by Teun Draaisma moved its recommendation on equities from neutral to underweight.
The team said in a note yesterday: ""We have to decide whether this is towards the end of another bear market rally that we should sell into now that hope has grown, or the start of a much larger advance, maybe even a new bull market. Our decision is to sell into strength now."
Soros stressed that restoring health to the "basically insolvent" banking system and the housing market is key to any recovery. The public-private investment funds introduced to rid US banks of bad debts will work but won't be enough to recapitalise the banks so they can start lending again, he said.
"What we have created now is a situation where the banks will be able to earn their way out of a hole but by doing that, they are going to weigh on the economy," Soros said. "Instead of stimulating the economy, they will draw the lifeblood, so to speak, of profits away from the real economy in order to keep themselves alive."
Analysts agreed that the financial system remains a problem and thought recent optimism that the worst may be over was overdone.
"The market's stance on banks had been too optimistic recently," said Nagayuki Yamagishi, a strategist at Mitsubishi Securities in Tokyo. "Some large US banks have already passed stress tests, but others haven't, and given that results are coming up soon, this simply reignited investor uncertainty."
Source: Guardian
He also cautioned that the recent rise in global stockmarkets is a "bear market rally because we have not yet turned the economy around".
His gloomy verdict weighed on Asian stockmarkets today, alongside a report that the International Monetary Fund now estimates that the toxic debts racked up by banks and insurers could spiral to $4tn (£2.7tn).
Tokyo's Nikkei index edged down 0.3% to 8832.85 while Hong Kong's Hang Seng fell 1.1% and Singapore's Straits Times index was down 2.1%. However, the FTSE 100 index in London rose 33 points to 4027.15 in early trading.
Soros said he does not expect the US economy to recover until next year at the earliest.
"The recovery will look like an inverted square root sign," he said. "You hit bottom and you automatically rebound some, but then you don't come out of it in a V-shaped recovery or anything like that. You settle down, step down."
His comments last night came after Morgan Stanley warned the bear market was not over. Its much followed strategy team led by Teun Draaisma moved its recommendation on equities from neutral to underweight.
The team said in a note yesterday: ""We have to decide whether this is towards the end of another bear market rally that we should sell into now that hope has grown, or the start of a much larger advance, maybe even a new bull market. Our decision is to sell into strength now."
Soros stressed that restoring health to the "basically insolvent" banking system and the housing market is key to any recovery. The public-private investment funds introduced to rid US banks of bad debts will work but won't be enough to recapitalise the banks so they can start lending again, he said.
"What we have created now is a situation where the banks will be able to earn their way out of a hole but by doing that, they are going to weigh on the economy," Soros said. "Instead of stimulating the economy, they will draw the lifeblood, so to speak, of profits away from the real economy in order to keep themselves alive."
Analysts agreed that the financial system remains a problem and thought recent optimism that the worst may be over was overdone.
"The market's stance on banks had been too optimistic recently," said Nagayuki Yamagishi, a strategist at Mitsubishi Securities in Tokyo. "Some large US banks have already passed stress tests, but others haven't, and given that results are coming up soon, this simply reignited investor uncertainty."
Source: Guardian
Brown Pressed by Unions, Lawmakers to Increase Spending in U.K.
Unions and lawmakers from the U.K.’s ruling Labour Party pressed Prime Minister Gordon Brown to increase spending in the annual budget, countering a warning from the central bank to keep a lid on the deficit.
The Trades Union Congress representing 6.5 million workers called on Brown today to set aside 25 billion pounds ($37 billion) to build and insulate homes, support clean energy projects and renew Britain’s rail network. Five Labour lawmakers led by former Cabinet minister Peter Hain asked for more government measures to stimulate the economy.
“The U.K. fiscal stimulus has not been that generous,” TUC General Secretary Brendan Barber said in a statement in London today. “There is still scope for a carefully targeted second round that can promote a quicker recovery.”
The demands are at odds with the advice of Bank of England Governor Mervyn King and the Institute for Fiscal Studies. Both have warned that the government already is piling up too much debt. Their advice suggests Brown may have to lift taxes or curb spending around the time of the next election, due by mid-2010.
Chancellor of the Exchequer Alistair Darling presents his budget statement to Parliament on April 22 and will have to balance concerns about the deficit against demands from pressure groups for more support for the economy.
Mortgage Rescue
Another lobby group, the Home Builders Federation, said Brown should move more quickly to prop up the market for mortgage-backed securities, which financed a third of home loans before credit markets faltered in 2007.
The Treasury is negotiating with banks about loan guarantees to prop up the market, which hasn’t created any new securities in the U.K. since August 2008.
The lobby group also called for an extension of a tax holiday on the purchase of some homes and for the Treasury to funnel more money into building houses.
Labour lawmakers including Meg Munn, Sally Keeble and Mark Todd joined Hain in calling for more government support for the economy in articles published in Progress magazine.
“More not less public investment is needed to create jobs,” Hain wrote. “Taxes on lower incomes must not rise and should be lowered if possible.”
Darling already has said the recession in Britain is worse than he had forecast in November, suggesting there isn’t much money available.
The Treasury’s deficit this fiscal year will reach 150 billion pounds, or 10.4 percent of gross domestic product, the Institute for Fiscal Studies said yesterday. Earlier this month, the government failed to attract enough investors for an auction of its 40-year bonds. King has said Darling should be “cautious” before spending more.
“In the longer term, we have to have a sustainable position,” Darling said March 26 when questioned about the budget. “A substantial amount of money has gone into the economy” already.
Source: Bloomberg
The Trades Union Congress representing 6.5 million workers called on Brown today to set aside 25 billion pounds ($37 billion) to build and insulate homes, support clean energy projects and renew Britain’s rail network. Five Labour lawmakers led by former Cabinet minister Peter Hain asked for more government measures to stimulate the economy.
“The U.K. fiscal stimulus has not been that generous,” TUC General Secretary Brendan Barber said in a statement in London today. “There is still scope for a carefully targeted second round that can promote a quicker recovery.”
The demands are at odds with the advice of Bank of England Governor Mervyn King and the Institute for Fiscal Studies. Both have warned that the government already is piling up too much debt. Their advice suggests Brown may have to lift taxes or curb spending around the time of the next election, due by mid-2010.
Chancellor of the Exchequer Alistair Darling presents his budget statement to Parliament on April 22 and will have to balance concerns about the deficit against demands from pressure groups for more support for the economy.
Mortgage Rescue
Another lobby group, the Home Builders Federation, said Brown should move more quickly to prop up the market for mortgage-backed securities, which financed a third of home loans before credit markets faltered in 2007.
The Treasury is negotiating with banks about loan guarantees to prop up the market, which hasn’t created any new securities in the U.K. since August 2008.
The lobby group also called for an extension of a tax holiday on the purchase of some homes and for the Treasury to funnel more money into building houses.
Labour lawmakers including Meg Munn, Sally Keeble and Mark Todd joined Hain in calling for more government support for the economy in articles published in Progress magazine.
“More not less public investment is needed to create jobs,” Hain wrote. “Taxes on lower incomes must not rise and should be lowered if possible.”
Darling already has said the recession in Britain is worse than he had forecast in November, suggesting there isn’t much money available.
The Treasury’s deficit this fiscal year will reach 150 billion pounds, or 10.4 percent of gross domestic product, the Institute for Fiscal Studies said yesterday. Earlier this month, the government failed to attract enough investors for an auction of its 40-year bonds. King has said Darling should be “cautious” before spending more.
“In the longer term, we have to have a sustainable position,” Darling said March 26 when questioned about the budget. “A substantial amount of money has gone into the economy” already.
Source: Bloomberg
Monday, 6 April 2009
Bankrupt Britain: 340 people go bust every day
BRITAIN is facing a bankruptcy timebomb with a record number of individuals and companies predicted to go bust this year.
Begbies Traynor, the insolvency and restructuring group, reckons more than 35,000 firms could go under this year – equivalent to more than 95 a day. The figure would be 18% higher than during the previous peak in the 1990s crash. Nick Hood at Begbies said he would not be surprised if the number rose to 40,000 by the end of the year.
Begbies forecasts that as many as 125,000 people will go bust this year – well above the 107,000 peak in 2006 – equivalent to 342 people a day. Richard Goodwin, editor of The London Gazette, the newspaper of record that prints personal and corporate bankruptcy notices, said pagination had reached a record last month – averaging 96 pages a day – up from 85 last year and 78 in 2007.
Hood told The Sunday Times: “The rate is accelerating – on a bad day we could see 20 businesses going under a day. Companies [you couldn’t imagine going bust] in the last recession are going to the wall this time round – a Chinese restaurant next to a university campus or a hairdressing salon.”
He added: “It feels much worse than the 1990s – there are much fewer options to rescue businesses today. In the past you could go to another bank or small-business owners could remortgage and use equity from their homes – today that is next to impossible.”
The bankruptcy boom comes seven years after the Labour government tried to remove the stigma of going bust through the introduction of the 2002 Enterprise Act, which made the process much easier.
Critics claim the act created a mood of easy credit with no downside.
In America an average 5,945 bankruptcies were filed each day last month by troubled consumers – the highest level since October 2005.
The news comes as a report released today by Ernst & Young, the accountancy firm, shows quoted companies in Britain issued 117 profit warnings in the first quarter with worse to come.
The first-quarter figure for warnings was the highest since 2001, and the third consecutive three-month period in which there had been more than 100 warnings.
Keith McGregor, restructuring partner at Ernst & Young, said: “It is not just the number of warnings that concerns us. The tone of company statements has also darkened.
“The prospects for 2009 appear asuncertain and as gloomy as at any point in the crisis.”
The highest warning sectors were support services, with 22; media, 13; industrial engineering and software & computer services, with 10 each; and general financial,9.
Ernst & Young said the fact that so many different sectors were being affected reflected the spread of the credit crisis into a full-blown recession.
Also today, Hay Group, the consultancy, predicts more than 600,000 job losses as companies retrench. On the basis of a survey of 140 of the top 1,000 firms, it discovered “unprecedented” cost-cutting which it said threatened to do long-term damage to the economy.
Nine in ten firms plan operational cuts in 2009-10, it found, with a high proportion planning job cuts. A fifth of companies intended a big restructuring of their businesses in response to the recession.
Almost half of large companies plan to reduce headcount by an average of 10% this year.
Source: Times Online
Begbies Traynor, the insolvency and restructuring group, reckons more than 35,000 firms could go under this year – equivalent to more than 95 a day. The figure would be 18% higher than during the previous peak in the 1990s crash. Nick Hood at Begbies said he would not be surprised if the number rose to 40,000 by the end of the year.
Begbies forecasts that as many as 125,000 people will go bust this year – well above the 107,000 peak in 2006 – equivalent to 342 people a day. Richard Goodwin, editor of The London Gazette, the newspaper of record that prints personal and corporate bankruptcy notices, said pagination had reached a record last month – averaging 96 pages a day – up from 85 last year and 78 in 2007.
Hood told The Sunday Times: “The rate is accelerating – on a bad day we could see 20 businesses going under a day. Companies [you couldn’t imagine going bust] in the last recession are going to the wall this time round – a Chinese restaurant next to a university campus or a hairdressing salon.”
He added: “It feels much worse than the 1990s – there are much fewer options to rescue businesses today. In the past you could go to another bank or small-business owners could remortgage and use equity from their homes – today that is next to impossible.”
The bankruptcy boom comes seven years after the Labour government tried to remove the stigma of going bust through the introduction of the 2002 Enterprise Act, which made the process much easier.
Critics claim the act created a mood of easy credit with no downside.
In America an average 5,945 bankruptcies were filed each day last month by troubled consumers – the highest level since October 2005.
The news comes as a report released today by Ernst & Young, the accountancy firm, shows quoted companies in Britain issued 117 profit warnings in the first quarter with worse to come.
The first-quarter figure for warnings was the highest since 2001, and the third consecutive three-month period in which there had been more than 100 warnings.
Keith McGregor, restructuring partner at Ernst & Young, said: “It is not just the number of warnings that concerns us. The tone of company statements has also darkened.
“The prospects for 2009 appear asuncertain and as gloomy as at any point in the crisis.”
The highest warning sectors were support services, with 22; media, 13; industrial engineering and software & computer services, with 10 each; and general financial,9.
Ernst & Young said the fact that so many different sectors were being affected reflected the spread of the credit crisis into a full-blown recession.
Also today, Hay Group, the consultancy, predicts more than 600,000 job losses as companies retrench. On the basis of a survey of 140 of the top 1,000 firms, it discovered “unprecedented” cost-cutting which it said threatened to do long-term damage to the economy.
Nine in ten firms plan operational cuts in 2009-10, it found, with a high proportion planning job cuts. A fifth of companies intended a big restructuring of their businesses in response to the recession.
Almost half of large companies plan to reduce headcount by an average of 10% this year.
Source: Times Online
Gordon Brown's House Price Boom and Bust
Have a look below at what we all know but Gordon Brown is hoping we forget!
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