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Archive for January 22nd, 2008

King Says U.K. Inflation May Match Fastest Pace in a Decade

Posted by Sada Mosler on 22nd January 2008

States the issues clearly:

King Says U.K. Inflation May Match Fastest Pace in a Decade

(Bloomberg) Bank of England Governor Mervyn King said inflation may match the fastest pace in at least a decade this year and require an explanation to the Treasury, a sign that policy makers have limited scope to cut interest rates.

“It is possible that inflation could rise to the level at which I would need to write an open letter of explanation, possibly more than one, to the chancellor,” King said in a speech today. “To put it bluntly, this year we are probably facing a period of above-target inflation and a marked slowing in growth.”

Posted in Articles, Interest Rates | No Comments »

Summary of subprime bank losses

Posted by Sada Mosler on 22nd January 2008

Spread around enough so no one went out of business, and most lost less then a quarter’s worth of earnings. And a chunk of it probably recoverable.

It’s been a year and the total has to be at the low end of expectations, but could be a lot more to surface in a lot of small pieces around the world.

Seems that only when the Fed sees signs of general progressive improvement vs the current perception of continuing deterioration will they stop cutting.

Subprime Bank Losses Reach $133 Billion, Led by Merrill: Table

by Yalman Onaran

Jan. 22 (Bloomberg) The following table shows the $133 billion in asset writedowns and credit losses since the beginning of 2007, including reserves set aside for bad loans, at more than 20 of the world’s largest banks and securities firms.

The charges stem from the collapse of the U.S. subprime mortgage market and its repercussions on the rest of the housing industry. The figures, from company statements and filings, incorporate some credit losses or writedowns of other mortgage assets caused by subprime crisis.

Analysts estimate additional writedowns and credit losses of $23.5 billion, which would bring the total to $157 billion. All figures are in billions and are net of financial hedges the firms used to mitigate their losses.


Firm Writedown Credit Loss Total
Merrill Lynch $24.5 $24.5
Citigroup 19.6 2.5 22.1
UBS 14.4 14.4*
HSBC 0.9 9.8 10.7
Morgan Stanley 9.4 9.4
Bank of America 7 0.9 7.9
Washington Mutual 0.3 6.2 6.5**
Credit Agricole 4.9 4.9*
Wachovia 2.7 2 4.7
JPMorgan Chase 1.6 1.6 3.2
Canadian Imperial (CIBC) 3.2 3.2**
Barclays 2.7 2.7*
Bear Stearns 2.6 2.6
Royal Bank of Scotland 2.5 2.5*
Deutsche Bank 2.3 2.3
Wells Fargo 0.3 1.4 1.7
Lehman Brothers 1.5 1.5
Mizuho Financial Group 1.5 1.5
National City 0.4 1 1.4
Credit Suisse 1 1
Nomura Holdings 0.9 0.9
Societe Generale 0.5 0.5
Japanese banks
(excluding Mizuho, Nomura)
0.8 0.4 1.2
Canadian banks
(excluding CIBC)
1.4 0.1 1.5
____ _____ _____
TOTALS*** $107 $26 $133

* Includes losses the company expects to report in the fourth quarter of 2007.
** Includes losses the company expects to report in the first quarter of 2008.
***Totals reflect figures before rounding.

–With reporting by Samar Srivastava in New York, Doug Alexander in Toronto. Editors: Steve Dickson, Dan Kraut.

Posted in USA | 2 Comments »

Re: Will the cure be worse than the disease?

Posted by Sada Mosler on 22nd January 2008

(an interoffice email)

> the only problem i have with Meltzer is that is the consensus view now,
> that inflation is a foregone conclusion-i think long term that may be
> right (long term paper currency devaluation) but you could easily
> correct commodity and energy prices if you have a reduction of
> speculator and investor demand (ie see 1970s chart of gold and crude
> oil-there years in which the price of those commodities corrected
> viciously in a long term up trend). Specs of today in a mark to market
> world i dont believe are immune from short term negative commodity
> marks…


Two things (as Reagan would say):

  1. Crude probably stays high as Saudis are selling 9 million bpd at current prices. no reason to cut price unless demand fall off and forces them to hit bids rather than getting offers lifted. And world inventories are relatively low so it would be hard to get a sell off from physical inventory liquidation. More likely for other commodities to underperform crude in a spec sell off. Might even be happening now. (And biofuels like crude and food costs.)
  1. Even if crude/food/import and export prices level off or even go down some, they are so far ahead of core CPI increases that core can continue to go up for several quarters to close the gap. And the Fed thinks that can dislodge expectations so can’t afford to let it happen.
  1. world employment/income seems to be holding up, so actual nominal demand for consumption of resources shouldn’t collapse without some major positive supplied side shock.

Meltzer is wrong as IMHO not much is a function of interest rates; so, he’s ‘blaming’ the wrong entity for ‘inflation’. But his story is the mainstream story; so, i expect a lot more of same.


Posted in Articles, Fed, Oil | No Comments »

Will the cure be worse than the disease?

Posted by Sada Mosler on 22nd January 2008

Will the cure be worse than the disease?

Right, the financial press will chop the Fed to ribbons if inflation continues higher, as I expect it will.

But Bernanke is setting the stage for an even bigger recession down the road. Just as the ultra-low rates of the early 2000s created many of the problems we’re experiencing today, pumping money into the system would probably stoke inflation, forcing the Fed to hike rates sharply in the near future. “It’s better to take a small recession and kill inflation immediately instead of facing high inflation and a really big recession later,” says Carnegie Mellon economist Allan Meltzer.

That’s the orthodox mainstream view. They are already starting to turn on Bernanke and his reinvention of monetary policy.

Meltzer, who is finishing the second volume of his history of the Federal Reserve, warns that Bernanke is risking a disastrous replay of the 1970s, when high oil prices fueled double-digit inflation. Every time the Fed started to tighten and unemployment jumped, chairmen G. William Miller and Arthur Burns lost their nerve. They lowered rates to boost job growth, and inflation inevitably revived, causing a vicious price spiral. The Fed let the disease rage for so long that it took draconian action by chairman Paul Volcker in the early 1980s to finally defeat inflation. The price was a deep recession, with unemployment hitting 11% in 1982. “The mentality is the same as in the 1970s,” says Meltzer. “‘As soon as we get rid of the risk of recession, we’ll do something about inflation.’ But that comes too late.”

Yes, that’s the mainstream story (not mine, of course) and likely to get a lot louder, and if inflation picks up, it could cost Bernanke his job.

Indeed, while the economy is sending mixed messages about growth, the signs of increasing inflation are flashing bright red. For 2007 the consumer price index rose 4.1%, the biggest annual increase in 17 years. Gold, historically a reliable harbinger of inflation, set an all-time high of more than $900 an ounce. The dollar is languishing at a record low against the euro and a weighted basket of international currencies. “Flooding the market with liquidity is a disaster for the purchasing power of the dollar,” says David Gitlitz, chief economist for Trend Macrolytics.

And the Fed knows this. And they know they are ‘way out of bounds’ of mainstream theory with current policy, including encouraging a fiscal package.

The Fed’s supporters tend to downplay those dangers. They contend that the inflation surge is being driven largely by energy costs. Since oil isn’t likely to rise from its near-$100 level, inflation is likely to tail off in 2008. “That argument is wrong,” says Brian Wesbury, chief economist with First Trust Portfolios, an asset-management firm. “As people spend less to drive to the golf course, they will spend the extra money on golf clubs or other products. The Fed wants to reflate the economy, so the money that went into higher oil prices will drive up the prices of other goods.”

That’s the mainstream story, and it’s lose/lose for the Fed.

Fed supporters also point out that the yield on ten-year Treasury bonds stands at just 3.8%, a figure that implies that investors expect inflation to be around 2% in future years. So if inflation is really expected to rage, why aren’t interest rates far higher? The explanation is twofold. First, government bonds are hardly a foolproof forecaster. For example, five years ago Treasury yields were predicting 2% inflation over the next five years, and the actual figure was 3%, or 50% higher.

Another point the mainstream will make: Fed foolishly relied on its forecasting models and ignored the obvious signs of inflation.

Second, investors are so skittish about most stocks and corporate bonds that they’re paying a huge premium for safe investments, chiefly U.S. Treasuries. “It’s all about a flight to safety,” says Meltzer. Stand by for a major rise in yields as the reality of looming inflation sinks in.

So what is the right course for the Fed? Bernanke should hold the Fed funds rate exactly where it is now, at 4.25%. Standing pat might well push the economy into a recession. But the Fed’s newfound vigilance on inflation would boost the dollar, effectively lowering the prices of oil and other imports. America would suffer a short downturn and restore price stability, paving the way to a strong recovery in 2010 or 2011.

Sadly, the Fed has already chosen sides. It’s likely to lower rates every time growth slows or joblessness rises. As a result, it will never tame inflation until it becomes a clawing, bellowing threat. Then we’ll have to suffer a real recession, the kind we suffered in the aftermath of a time we should study and shouldn’t forget – the 1970s.

Says it all.

Hard to say why the Fed hasn’t played it that way, but they haven’t and will pay the price if inflation keeps rising.


Posted in Oil | 2 Comments »

Fed comments

Posted by Sada Mosler on 22nd January 2008

The Fed is aware rate cuts don’t do much for near term financial disruptions. For example, the FF/LIBOR spread was first addressed with FF cuts, but little or nothing changed until the TAF was introduced to address and normalize that spread.

Along the same lines, Bernanke has recently met with the President and Congress to coordinate a fiscal package, and today’s cuts were preceded by Paulson talking about what Treasury is doing for the financial crisis.

The Fed knows they pay an inflation price for each cut, but also believe they need to get the current financial crisis behind them first, and then address any residual inflation issue. Nor does Congress want to go into the election with a weak economy.

The incentives are in place for a credible fiscal package.

And with core inflation indicators now moving up, the Fed would very much like this rate cut, along with the pending fiscal package, to ‘work’ and be the last one needed.


Posted in Fed, Interest Rates | No Comments »

2008-01-22 US Economic Releases

Posted by Sada Mosler on 22nd January 2008

2008-01-22 FOMC Inter-meeting Rate Cut

FOMC Inter-meeting Rate Cut (Jan 22)

Survey n/a
Actual 3.50%
Prior 4.25%
Revised n/a

The cut was fully priced in for next week, with a lesser probability for doing it today.

The Fed is worried about ‘financial conditions’ and hopes to prevent them from spilling over into the real economy by doing, what the mainstream would call, ‘stepping on the inflation pedal.’

2008-01-22 Richmond Fed Manufact. Index

Richmond Fed Manufacturing Index (Jan)

Survey -5
Actual -8
Prior -4
Revised n/a

2008-01-22 Richmond Fed Manufact. Index TABLE

Richmond Fed Manufacturing Index TABLE

Down, but was lower last year about this time.

Also, the details of the table say more than the headline number. Shipments, cap utilization, and number of employees were the larger declines. Lead time, wages, and new orders and backlogs were up the highest percent. Prices remained moderately positive.

2008-01-22 ABC Consumer Confidence

ABC Consumer Confidence

Survey n/a
Actual -23
Prior -24
Revised n/a

Bumping along the bottom – still watching CNBC.


Posted in Daily | No Comments »

Meltdown?, continued..

Posted by Sada Mosler on 22nd January 2008


  • Equity markets still heading down.
  • Commodity markets anticipate slowing demand.
  • Credit markets anticipate additional rate cuts.

First, a word on the bond insurers:

A Fed rate cut won’t address the risk that an insurer failure could trigger panic selling by bond holders that require AAA ratings to hold their bonds.

The Fed could offer to provide supplemental insurance to investors holding the bonds for a fee (maybe a point), and discount the strike of the put a few points as well. The insurer would continue in first loss position. This would allow investors to ‘pay the price’ to the Fed if they want to keep the AAA rating. Additionally the Fed would take measures to make sure this doesn’t happen again.

Second, commodity markets:

Story today that OPEC still sees demand increasing 1.3 million bpd, even with a slowdown. Not good. Means they retain pricing power.

The unknown is whether they agreed to cut prices in response to the Bush visit.

Third, equities:

Dupont earnings way above expectations on world demand, and price increases on their cost side were more than passed through.

And bank earnings off but all still in positive territory for Q4, indicating losses during what is likely the largest quarter for writeoffs were less than earnings. I’ve seen worse…

Equity markets relatively flat from yesterday, earning look good, particularly ex financial writedowns, as core earnings of the financials look OK as well.

One of the problems with equities continues to be shareholder vulnerability to converts and other dilutions as corporate structure/law rewards management for this kind of recapitalization. This shifts wealth from existing shareholder to new shareholders.

Initial claims estimated at 325,000 for Thursday. If so, I still don’t see much damage to the real economy. Q4 may sink or swim on December export numbers that will be released in February.

The jobless recovery ends with a full employment recession?

Posted in Fed, Interest Rates, Oil, USA | 2 Comments »