AMEX/CAT

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Karim writes:

AMEX notes consumer spending slowed in latter part of quarter, suggesting effect of fiscal impulse waning. CAT driven by emerging market strength, states U.S. and Europe are two weakest regions, and expects rate cuts by Fed and ECB by year-end.

AMEX

  • Consumer spending slowed during the latter part of the quarter and credit indicators deteriorated beyond our expectations,” Mr Chenault said. The economic fallout was evident even among American Express’s prime customers.

CAT

  • CATERPILLAR SEES ECB CUTTING RATES AT LEAST 25BP BEFORE YR END
  • CATERPILLAR SEES NO SIGN OF RECOVERY IN NORTH AMERICAN HOUSING
  • CATERPILLAR ASSUMES AT LEAST ONE MORE RATE CUT LATER THIS YR
  • CATERPILLAR SEES ‘DIFFICULT’ FOR ECONOMY TO AVOID A RECESSION
  • CATERPILLAR SEES OIL PRICE AVG ABOUT 16% HIGHER IN LAST HALF
  • CATERPILLAR SAYS 2Q SALES/REVENUE UP 30% OUTSIDE NORTH AMERICA
  • Caterpillar Net Rises 34% as Asia, Mideast Building Lift Sales
  • Caterpillar Reports All-Time Record Quarter Driven by Strong Growth Outside North America

    • Right, weak domestic demand for sure. But note the last few lines that represent the booming exports even though domestic economies around the world are slowing.

    That’s what happens when they spend their accumulated hoard of USD here and spend less at home as they try to get rid of their USD hoards. This doesn’t stop until their holdings of USD fall to desired levels.

    I still see continued domestic weakness with GDP muddling through due to exports and government spending.

    And ever higher prices pouring in through the import/export channel.


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FT: Letter to the editor

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Published letter to the editor in FT.

Expect public-sector deficits and oil prices to go on rising

by Prof Philip Arestis, Dr John McCombie and Mr Warren Mosler.

Sir, Public-sector deficits and crude oil prices will probably both continue rising. Chris Giles’ reports, “Treasury to reform Brown’s fiscal rules” and “Treasury sees storm clouds gathering” (July 18), recognise the inevitability of growing deficits due to economic weakness while also implying public-sector deficits are per se a “bad thing”.

What the articles fail to appreciate are three dimensions to the argument: the first is that public-sector deficits do not present a solvency issue, only an “inflation” issue. Second, public-sector deficits equal total non-government (domestic and foreign) savings of sterling financial assets and are the only source of non-government accumulation of sterling net financial assets. Third, public-sector deficits provide the net financial equity to the non-government sector that supports the private-sector credit structure.

It is the case that the public-sector deficit will increase in one of two ways. The “nice” way would be pro-actively with sufficient tax cuts or spending increases (depending on one’s politics) that support demand at desired levels. The “ugly” way is from a slowing of demand that reduces tax revenues and increases transfer payments. If, instead, the government tries to suppress the current deficit with any combination of tax increases or spending cuts, the resulting accelerated slowdown of the economy will then increase the deficit the “ugly” way.

In any case, the current “inflation” is the result of Saudi Arabia acting as swing producer as it sets the oil price at ever-higher levels and then supplies all the crude demanded at that price. Our institutional structure then passes these prices through the entire economy over time, and there is nothing interest rates or fiscal policy can do to change these dynamics.

The ability to set crude prices can only be broken by a sufficiently large supply response, such as in the early 1980s when net supplies increased by more than 15m barrels per day, helped considerably by the US deregulating natural gas production, which allowed substitution away from crude oil products.

In sum, the deficit will go up either the nice way or the ugly way, as it always does when markets work to grant the private sector the desired net financial assets, which can come only from government deficit spending. “Inflation” will continue higher as long as the Saudis remain price-setter and continue to post ever-higher prices to their refiners.

Philip Arestis,
University Director of Research,
Cambridge Centre for Economic and Public Policy

John McCombie,
Director,
Cambridge Centre for Economic and Public Policy

Warren Mosler,
Senior Associate Fellow,
Cambridge Centre for Economic and Public Policy,
University of Cambridge, UK


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Bloomberg: Inflation weakening some currencies

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Interesting how reports of higher inflation have often meant stronger currencies in the short run due to higher anticipated rates from the CB.

Inflation, however, by definition means the currency buys less of most everything; therefore, inflation and a weakening currency are one and the same.

But it can take a long time for markets to discount this.

Emerging-Market Currency Rally Dies as Inflation Hits

by Lukanyo Mnyanda and Lester Pimentel

(Bloomberg) The five-year rally in emerging- market currencies is coming to an end as central banks from South Korea to Turkey struggle to contain inflation, say DWS Investments and Morgan Stanley.

The 26 developing-country currencies tracked by Bloomberg returned an average 0.86 percent in the past three months, down from 1.63 percent in the first quarter, 8.2 percent for all of 2007, and 30 percent annually since 2003. For the first time in seven years, investors are less bullish on emerging-market stocks than on U.S. equities, a Merrill Lynch & Co. survey showed last week.

Confidence in the Indian rupee is weakening after inflation accelerated at the fastest pace in 13 years, stoked by soaring food and energy prices. South Korea’s won will drop this year by the most since 2000, while Turkey’s lira will reverse its biggest gain since at least 1972, the median estimates of strategists surveyed by Bloomberg show.


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NYT: Too big to fail?

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Too Big to Fail?


by Peter S Goodman

Using public money to spare Fannie and Freddie would increase the public debt, which now exceeds $9.4 trillion. The United States has been financing itself by leaning heavily on foreigners, particularly China, Japan and the oil-rich nations of the Persian Gulf.

This is ridiculous, of course. The US, like any nation with its own non-convertible currency, is best thought of as spending first, and then borrowing and/or collecting taxes.

Were they to become worried that the United States might not be able to pay up, that would force the Treasury to offer higher rates of interest for its next tranche of bonds.

Also ridiculous. Japan had total debt of 150% of GDP, 7% annual deficits, and were downgraded below Botswana, and they sold their 3 month bills at about 0.0001% and 10 year securities at yields well below 1% while the BOJ voted to keep rates at 0%. (Nor did their currency collapse.)

The CB sets the rate by voice vote.

And that would increase the interest rates that Americans must pay for houses and cars, putting a drag on economic growth.

As above.

For one thing, this argument goes, taxpayers — who now confront plunging house prices, a drop on Wall Street and soaring costs for food and fuel — will ultimately pay the costs. To finance a bailout, the government can either pull more money from citizens directly,

Yes, taxing takes money directly, and it’s contradictionary.

But when the government sells securities they merely provide interest bearing financial assets (treasury securities) for non-interest bearing financial assets (bank deposits at the Fed). Net financial assets and nominal wealth are unchanged.

or the Fed can print more money — a step that encourages further inflation.

This is inapplicable.

There is no distinction between ‘printing money’ and some/any other way government spends.

The term ‘printing money’ refers to convertible currency regimes only, where there is a ratio of bill printed to reserves backing that convertible currency.

Skip to next paragraph “They are going to raise the cost of living for every American,”

True, that’s going up!


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2008-07-21 Weekly Credit Graph Packet

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Looks and feels like spreads will be generally narrowing for a considerable period of time.

Bank earnings are better than expected with revenues growing nicely.

GDP, income, and spending being sustained by a growing government budget deficit, exports, and housing leveling off and no longer subtracting from growth.

‘Inflation’ continues with Saudi’s supporting prices and pass-throughs intensifying.

IG On-the-run Spreads (Jul 18)

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IG6 Spreads (Jul 18)

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IG7 Spreads (Jul 18)

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IG8 Spreads (Jul 18)

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IG9 Spreads (Jul 18)


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Re: Oil as a % of global GDP

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(an email exchange)

>   
>   On Sun, Jul 20, 2008 at 10:46 PM, Russell wrote:
>   
>   Brad Setser, at Follow the Money, presents a couple of graphs on changes in
>   oil export revenue: The Oil Shock of 2008.
>   
>   The following graph shows the Year-over-year change in oil exports as a
>   percent of world GDP (and in billions of dollars).
>   
>   

>   
>   Year-over-year change in oil exports
>   
>   This calculation assumes that the oil exporters will export about 45 million
>   barrels a day of oil.
>   
>   Each $5 increase in the average price of oil increases the oil exporters’
>   revenues by about $80 billion, so if oil ends up averaging $125 a barrel this year
>   rather than $120 a barrel, the increase in the oil exporters revenues would be
>   close to a trillion dollars.
>   
>   Assuming oil prices average $120 per barrel for 2008, the increase in 2008 will
>   be similar to the oil shocks of the ’70s.
>   
>   

Right, the notion that oil is a smaller % of GDP and therefore not as inflationary was flawed to begin with and now moot.

Two more thoughts for today:

First, the second Mike Masters sell-off may have run its course. The first was after his testimony in regard to passive commodity strategies which I agree probably serve no public purpose whatsoever. The second was last week as markets expect Congress to act to curb speculation this week, which they might. Crude isn’t a competitive market (Saudi’s are the swing producer) so prices won’t be altered apart from knee jerk reactions, but competitive markets such as gold can see lower relative prices if the major funds back off their passive commodity strategies.

Second, just saw a headline on Bloomberg that inflation is starting to hurt the value of some currencies.

Third, the Stern statement will continue to weigh on interest rate expectations up to the Aug 9 meeting.

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AFP: British finances

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The deficit will go higher. The only question is whether it will go higher the nice way (proactive spending or tax cut to restore demand and growth), or the ugly way (revenues fall and transfer payments go up until the deficit is large enough to restore financial equity and aggregate demand).
Solvency is not an issue. The choice is purely political.

British finance minister paints bleak picture of economy

Britain’s economic downturn is worse than previously thought and there is no extra money available for public spending, Chancellor of the Exchequer Alistair Darling said in an interview published Saturday.

There’s the problem. They’ve got it backwards – the money to pay taxes comes from government spending, not vice versa as they think.

Darling also told The Times newspaper that taxpayers were at the limit of what they were willing to pay, a day after official data showed a record deficit in Britain’s public finances, and reports that the government might bend its budget rules.

“At Christmas most people remained hopeful there would be an improvement by the autumn,” he said.

“Most people would now say it’s far more profound. It’s affecting every economy and everybody. I can’t say how long it will last.”

He added: “We are going through a very, very difficult time.”

Yes, and the government is making it worse.

Darling said that the economic picture was “at the bottom end of my range” set out in his annual budget in March.

On public spending, the finance minister said he has been “very clear with my colleagues that there is no point them writing in saying, ‘Can we have some more money?’ because the reply is already on its way and it’s a very short reply.”

“I told them at the last meeting of Cabinet they’ve got to manage within the money they’ve got.”

Again, they’ve got it backwards – the money to pay taxes comes from govt spending, not vice versa as they think.

The Office for National Statistics said on Friday that public sector debt at the end of June was at 38.3 percent of GDP, but increased to 44.2 percent when the impact of nationalised mortgage lender Northern Rock is included.

Japan’s been at 150%. Doesn’t matter. It’s all a function of private/non-government savings desires which are a function of institutional structure, including tax advantages for not spending income for the likes of pension fund contributions, ins reserves, etc.

Public finances were at a record deficit of 15.5 billion pounds in June compared with the same time last year, well over market expectations of a 12.3-billion-pound deficit.

So? If demand is deemed too low it’s not enough, whatever it is.

The Financial Times, meanwhile, reported that finance ministry officials were working on plans to revise the rules to allow for increased borrowing without raising taxes amid the current economic downturn.

In actual fact they spend first, then borrow, but they don’t know that either.

One of the fiscal rules sets a government borrowing limit of 40 percent of national income.

Yes, a self imposed constraint not inherent in the system.

In The Times interview, Darling played down the report and reiterated comments made Friday that the Treasury constantly reviews its fiscal rules.

He noted, however, that while voters will “pay their fair share … you can’t push that.”

“My judgment is that there are a lot of people in this country who feel they work hard, they make their contribution and they’re feeling squeezed.”

Yes they are, but the deficit isn’t the problem.


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Bloomberg: Stern Says Fed Rate Rise `Can’t Wait’ for Markets to Stabilize

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A minority view but a growing one.

They are thinking the low rates are destabilizing the housing and financial markets via the weak USD channel.

Stern Says Fed Rate Rise `Can’t Wait’ for Markets to Stabilize

by Vivien Lou Chen
(Bloomberg) Federal Reserve Bank of Minneapolis President Gary Stern said the central bank shouldn’t wait for financial and housing markets to stabilize before raising interest rates.

“We can’t wait until we clearly observe the financial markets at normal, the economy growing robustly, and so on and so forth, before we reverse course” and begin raising rates, Stern said in an interview in Minneapolis today. “Our actions will affect the economy in the future, not at the moment. Forecasts play a critical role.”

The comments by Stern, a voter on the rate-setting Federal Open Market Committee this year, may reinforce traders’ forecasts for a rate increase by year-end. Stern indicated that Treasury Secretary Henry Paulson’s rescue plan for Fannie Mae and Freddie Mac will help prevent a deeper housing and economic slump.

“We’re pretty well-positioned for the downside risks we might encounter from here,” said Stern, 63, the Fed’s longest-serving policy maker. “I worry a little bit more about the prospects for inflation.”

The bank president compared the current credit crunch to the one in the early 1990s, which restrained economic growth for almost three years. That’s a more sanguine assessment than others have. The International Monetary Fund has said it’s the worst since the Great Depression and former Fed Chairman Alan Greenspan said it’s the most intense in more than half a century.

17-Year High
Stern spoke two days after government figures showed consumer prices surged 5 percent over the past year, the biggest jump since 1991. Excluding food and fuel, so-called core prices rose 2.4 percent, higher than the 2.1 percent average over the last five years.

“Headline inflation is clearly too high,” Stern said. He added that he’s concerned that will feed through to core prices and public expectations for inflation.

As long as energy and food costs level off, core inflation ought to slow over the next year, Stern said.

Crude oil has surged 73 percent in the past 12 months, and rose to a record of $147.27 a barrel on July 11. Worldwide, prices for food commodities such as wheat and rice were 43 percent higher in April than a year earlier, according to the United Nations Food and Agriculture Organization.

Stern declined to say when policy makers may shift toward raising rates. The FOMC halted its series of seven reductions last month, after reducing the benchmark rate to 2 percent, from 5.25 percent last September.

Rate Outlook
Traders estimate 58 percent odds that the Fed will boost its main rate at least a quarter point from 2 percent in October, after keeping borrowing costs unchanged in August and September. There’s a 73 percent probability of a move by year-end, futures prices show.

Minutes of the Fed’s June 24-25 gathering, released July 15, showed that some Fed officials favored an increase in rates “very soon.” Fed Chairman Ben S. Bernanke this week said there are risks to both inflation and growth, abandoning the FOMC’s June assessment that the threat of a “substantial” downturn had receded.

“This is a very challenging policy environment,” Stern said today. “I don’t think we ought to pretend that” an end to the credit crisis “won’t take some time,” he said.

The Fed on July 13 offered Fannie Mae and Freddie Mac access to direct loans from the central bank in case the firms needed the financing before Congress acts on Paulson’s rescue plan. The Treasury chief is seeking power to make unlimited loans to and purchase equity in the companies if needed.

Stern said the proposals are “clearly designed to bolster Fannie and Freddie.”

Stern is the only FOMC member who’s served with three chairmen: Paul Volcker, Greenspan and Bernanke. He became the bank’s president in 1985.


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Crude sell off

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Seems like a sale ahead of possible Congressional action to limit ‘speculation’.

Not sure how big the dip might be, but yet another buying op as the choice remains – pay the Saudis their asking price or shut the lights off.

The price only goes down if the Saudis cut price, or if there is a supply response of more than 5 million bpd that dislodges them from being swing producer.


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