Monthly Archives: October 2008

UK Daily News Highlights

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Highlights

U.K. Home Prices Drop as Economy Nears `Abyss,’ Rightmove Says
U.K. Mortgage Lending Declines to Lowest Since 2005, CML Says
Economy in recession, says E&Y
Darling to ‘reprioritise’ spending
U.K. Deposit Fund Pays 3 Billion Pounds for ING Iceland Savers

 
Very constructive move here- front loading future public sector capital expenditures.

Darling to ‘reprioritise’ spending (FT)

Alistair Darling evoked the spirit of John Maynard Keynes on Sunday as he signalled a “reprioritising” of spending plans towards capital infrastructure, housing and energy. The chancellor of the exchequer will call on departments to bring forward billions of pounds of capital expenditure to invigorate the economy ahead of an expected recession. The government is limited in its ability to step up overall spending for the current three-year period, set at the last comprehensive spending review. But it can bring forward money from planned budgets in 2010-11 – after the next general election. The government has already announced the front-loading of money to build more social housing as part of its autumn relaunch. It has also allowed the Ministry of Defence to sign off its £4bn aircraft carrier contracts by juggling its budget.


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OPEC to cut output

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Saudis still price setters, this is just a smoke screen to disguise that. The great Mike Master’s sell off that also triggered the last leg of the financial crisis must have run it’s course in the crude markets. Price hikes may return, this time with no excess inventory and very weak world economies. If their motives are the destruction of the Great Satans and Putin is with them it’s going to get very, very ugly.

OPEC’s oil supply must be ‘significant’- Khelil

(Reuters)- OPEC oil producers will cut oil supplies when they meet next week in Vienna and “the reduction must be significant,” the group’s president, Chakib Khelil, was quoted as saying on Saturday.

“There will be a reduction of the output and the reduction must be significant to restore the balance between supply and demand,” Algerian state news agency APS quoted Khelil as telling reporters.

The Organization of the Petroleum Exporting Countries will hold an emergency meeting on Oct. 24 in Vienna to discuss the impact of economic weakness on oil markets.

“If the cut is 1.5 million barrels per day, then it will be 1.5 million barrels. If it is 2.0 million barrels per day, it will be 2.0 million barrels per day,” added Khelil, who is also Algeria’s energy and mining minister.

Saudis will just start raising their posted prices and let their quantity adjust. The fall in demand for their output won’t be all that much as prices rise, suggesting to an unsuspecting world OPEC didn’t cut as much as they proclaimed.

Earlier, Khelil was quoted in Saturday’s edition of Algerian daily El Watan as saying that OPEC saw oil prices bottoming at $70-$90 per barrel.

“Normally, OPEC has no price target. The market decides on prices. But people say that the bottom price, the bottom cost below which we can not step down, is between $70 and $90 per barrel,” El Watan quoted Khelil as telling reporters.

What they are really saying is the Saudis decide the price, and the markets then determine how much they want to buy at that price.

He cited cases of Canada and Brazil, where oil could not pumped if prices were to fall below $70 per barrel.

On Friday, Khelil told Algerian state radio a “decision will be taken to lower oil supply by some OPEC members so that the oil price will not be damaged.

“This decision will not be implemented immediately because there are contracts, but will probably be implemented 40 days after it (the decision) is taken.” He did not say which countries were likely to cut supplies.


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Next six months

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What do you see happening in the next 6 months?

Negative US GDP likely until the budget deficit gets high enough to reverse it, much like 2001-2003.

Back then the very large (and retroactive) fiscal package turned the tide, not monetary policy.

Doesn’t look like an immediate $500 billion+ fiscal package is in the cards anytime soon.

Particularly with Congress thinking they just ‘spent’ $700 billion.

Banking problems lingering on but interbank lending will no longer be an issue.

Lots of traditional bank closures by the FDIC as the slowing economy results in more main stream business failures and loan losses.

Accelerating use by the 4 CB’s of the Fed’s unlimited USD swap lines as those demands grow as well.

If the Fed cut them off, for example, as their total borrowings soar past $1 trillion, their currencies and economies would all head towards collapse.

This is NOT good!

And I’m not always this negative. For the last year and a half I’ve been about the only one saying ‘no recession’ for a while due to government spending, exports, and our pension funds ‘monetizing’ their assets with passive commodity investments. (All this was in past blogs and emails.)

Then something snapped in July/August,

Probably triggered by the collapsing oil prices as Mike Masters successfully got Congress to at least discourage our pension funds from their sector shift to passive commodities.

This also removed aggregate demand, and falling commodity prices also cut the import bill of the US, thereby hurting foreign demand.

Potentially the fall in crude will help the US consumer but that takes a while, especially when the media has driven him into a foxhole, as evidenced by the rising ‘savings rate’ (which is mainly the ‘flip side’ of the rising US budget deficit. Government deficit = non government savings, etc.)

Fortunately it is ultimately all self correcting- the automatic stabilizers will increase deficits until they are large enough to turn the world economies.

Except for in the Eurozone where rising deficits can make the member nations insolvent.

Bottom line= we need a US payroll tax holiday NOW to keep it all from getting a lot worse.


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ECB council member foresees ‘tri-polar’ currency system

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(email exchange)

>   
>   On Sun, Oct 19, 2008 at 11:06 PM, wrote:
>   
>   Sure he can say that now so long as the Fed is there to
>   backstop everything. These Europeans have no shame.
>   

Right, the Eurozone is surviving on the unlimited Fed USD swap lines.

That’s a complete ideological failure for the Euro members.

It’s their worst nightmare- the ECB borrowing USD reserves to support the Euro Banking System.

ECB council member foresees ‘tri-polar’ currency system

By Jonathan Tirone

VIENNA, Austria — European Central Bank council member Ewald Nowotny said a “tri-polar” global currency system is developing between Asia, Europe, and the United States and that he’s skeptical the U.S. dollar’s centrality can be revived.


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Re: IPOs- none for 10 weeks

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Yes, but for the near term it could all look like a ‘traditional recession’ as LIBOR comes down and the ‘financial crisis’ seems to stop getting worse. Stocks could be OK with that for a while.

It will all be support by the US extending increasing (and unlimited) swap lines to foreign central banks, and ECB broadening its lending outside its member nations. And the Bank of Japan may do the same for nations and banks strung out on yen debt as evidenced by the strong yen what has been a falling budget deficit in Japan making net yen financial assets that much tougher to get.

This all supports the ‘external currency debt’ that’s happened around the world.

Problem is, however, like the traditional emerging market collapses, it takes ever increasing lending by the Fed beyond its own US member banks to hold it all together, and it all comes down when the Fed says ‘no mas’ which is will probably be forced to do (maybe by Congress if it wakes up to what’s happening) should the foreign lending look to be going parabolic.

Watch for this weeks expansion of swap lines to the ECB, BOJ, BOE, and SNB as they continue to offer unlimited USD loans to their member banks.

The only way to immediately avoid prolonged recession remains a US payroll tax holiday which will add over $20 billion per week to the incomes of workers and businesses, adding maybe 5% to US GDP and supportive of the USD incomes and exports of the rest of the world as well. Increasing govt. spending on needed projects and state revenue sharing for same would also work but would take much longer to kick in and be narrower in focus. These could be done as well and when they do kick in should the economy show signs of overheating methods to reduce demand might be appropriate. But most expansions do this ‘automatically’ as the last one did. The problem is getting the politicians to realize that falling budget deficits during an expansion are not a ‘good thing’ per se.

>   
>   On Mon, Oct 20, 2008 at 3:53 AM, Bob wrote:
>   
>   Hi
>   
>   This says a lot too about how bad things are and will become >   further:
>   

Absence of IPOs Hits 10 Weeks

By Lynn Cowan

It’s official: The U.S. IPO market has seized up completely, with a record-setting stretch of inactivity that began in August.

It’s been 10 weeks since a company has held an initial public offering in the U.S., the longest period on record since Thomson Reuters began tracking deals in 1980. The last deal occurred on Aug. 8, when Rackspace Hosting Inc. made its debut on the New York Stock Exchange.

If the vacuum continues throughout October, it will mark the first consecutive two-month period without an IPO in the U.S. since Thomson Reuters began keeping track. The company’s data includes real-estate investment trusts but excludes closed-end funds and special-purpose acquisition companies.

The last similar empty stretch on the IPO calendar was from Feb. 27 to May 12 in 2003, a 74-day period, according to Standard & Poor’s Capital IQ database, which excludes REITs as well as closed-end funds and SPACs. Today marks the 73rd day since Rackspace priced, and with no deal in sight this week, that number will easily be passed.


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Putin consolidating control

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As suspected:

Putin may Use Credit Squeeze to ‘Destroy’ Oligarchs (Update1)

By Torrey Clark and Henry Meyer

Oct. 17 (Bloomberg) — Vladimir Putin came to power in 2000 vowing to destroy Russia’s oligarchs “as a class.” Within two years, he’d driven two into exile and imprisoned another.

Now, he may use the global markets meltdown to finish the job.

The $50 billion that the prime minister and President Dmitry Medvedev have pledged to lend cash-strapped companies will extend state control over business leaders. Billionaires seeking bailouts — including Oleg Deripaska, Russia’s richest man, and Mikhail Fridman — will have to give authorities veto power over their companies’ financing decisions.

“This will give the state more leverage over the country’s biggest companies and main industries,” said Chris Weafer, chief strategist at UralSib Financial Corp in Moscow. “In 2008, there is only one real oligarch: the state.”

All this marks a reversal from a decade ago, when oligarchs bankrolled Boris Yeltsin’s almost-insolvent government. As recently as April, Russia’s 100 wealthiest citizens had a combined fortune equivalent to about a third of the economy, Forbes magazine estimated.

The nation’s 25 wealthiest businessmen have seen their worth shrink by $230 billion, or 62 percent, according to Bloomberg calculations. And Putin controls the strings on the biggest remaining purse — $531 billion in government reserves, which he is doling out through state-run Vnesheconombank, or VEB, where he presides as chairman of the supervisory board.


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Re: more on Fed swaplines

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Yes, with their unlimited Fed swap lines euro credit is ‘improved’ but seems only for as long as the Fed keeps that window open?

Two problems with what the Fed is doing:

1. External currency (dollar) debt is moved from ‘private banks’ to the ECB if those banks fail.
If they hadn’t done this, bank failures would mean the banks default to their lenders who become general creditors and maybe equity holders when the smoke clears. The ECB can’t ‘fail’ without the entire europayments system shutting down. Before that happened it would probably sell euros for dollars to service it’s dollar debt if the Fed caps its lending to the ecb.
Yes, if the Fed never caps its lending to the ECB this can go on forever, with the ECB borrowing more and more to pay the dollar debt service, which is ponzi and will end one way or another.

2. It’s likely the Fed will be faced with rapidly increasing demands from the CB’s for the ‘unlimited’ dollar borrowings as the CB’s have banking systems that will utilize infinite USD loans if available to stay afloat and use new borrowings to service the old dollar debt unless/until they are declared insolvent, in which case the CB’s have the debt to the Fed.

3. This means the unlimited dollar lending will continue to grow until the Fed says no mas. Just like the classic emerging market dollar debt where it always tried to go parabolic before being cut off.

>   
>   On Sat, Oct 18, 2008 at 12:06 PM, wrote:
>   
>   Of course, they can now do everything, now that the Fed is
>   effectively backing them via these unlimited swap
>   arrangements.
>   


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Re: The first weak link to be probed?

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Good read, thanks, passing it along.

>   
>   On Thu, Oct 16, 2008 at 8:22 PM, wrote:
>   
>   Even though Hungary is not a member of the euro zone, this analysis
>   suggests that this could be the weak link which shatters the whole euro
>   project. Is the ECB now going to be able to secure swap lines from the
>   Fed to deal with the problems in eastern Europe? Interested to hear
>   your thoughts.
>   

ECB Agrees to Lend Hungary as Much as 5 Billion Euros

The European Central Bank has announced that it will lend up to 5 billion euros to Hungary’s Central Bank. The move aims to stop Hungary’s financial crisis from spreading, a goal that overrides its drawbacks.

Analysis

The European Central Bank (ECB) announced Oct. 16 it will lend as much as 5 billion euros ($6.75 billion) to the Hungarian Central Bank to help head off a local liquidity crisis. The ECB is attempting to nip Hungary’s potentially destabilizing problems in the bud, for if the Hungarian economy tanks, far more than one small Central European country will be affected.

International Economic Crisis

Hungary’s mortgage system is locked up in the carry trade with the Swiss franc; many mortgage loans are denominated in Swiss francs rather in the local currency, the forint. Since 2006 in fact, nearly 80 percent=2 0of all Hungarian mortgages have been granted in Swiss francs. As the forint falls versus the Swiss franc (it fell 7.1 percent Oct. 15 alone) the cost of servicing those mortgages for the average Hungarian homeowner will increase proportionally (even before things like teaser rates are taken into account). All told, approximately 40 percent of Hungary’s mortgages are directly affected, along with approximately 40 percent of all consumer debt. The ECB move today to inject 5 billion euros into the country is designed to head off a plunge in the forint. At about 4.8 percent of gross domestic product, this represents proportionally the same amount of money as the entire U.S. bailout package.

At present, how critical the Hungarian situation is to the Europeans remains somewhat murky, but we do know that most of the Swiss franc-denominated loans were granted by Austrian banks. So as the forint falls and Hungarians begin defaulting on their mortgages en masse, we could see broad and deep failures in the Austrian banking sector, which is already in trouble due to the global liquidity crisis. Should that happen, the next step in the chain is the Swiss banks that lent the Austrian banks the francs needed to fund the Hungarian mortgages in the first place. Switzerland remains one of the world’s most critical financial nodes. Problems there would have global implications, with the epicenter at the heart of Europe. Switzerland is completely surrounded — culturally, economically, figuratively, financially and literally — by EU states, but is not a member.
Budapest has seen this problem coming, and has worked aggressively to get its budget deficit — which stood at 9.2 percent of GDP in 2006 — under control. Last year it was brought down to 5.5 percent, and now the government is redoubling its efforts and hopes to get that number down to 3.4 percent this year and 2.9 percent in 2009.

Highly contractionary move but necessary to keep the currency up and comply with ECB entrance requirements.

But it may be too late for that. The government has discovered that there is no appetite at home or abroad for additional government debt issues,

I haven’t been watching this, but that reads like the problem is a fixed FX policy, as they try to fit it to the Euro.

raising the prospect that government financing could simply freeze up. The government already has taken the precautionary step of seeking a standby agreement with the International Monetary Fund (IMF) for emergency financing. Preferring to avoid the embarrassment of having one of their own going hat in hand to an international institution that normally helps manage economic basket cases, the European Union jumped in Oct. 16 with that 5 billion euro loan both to (hopefully) nip the problem in the bud, and in the longer term avoid the embarrassment of having the IMF taking one of their own into receivership. Hungary now stands as the only European country to receive direct emergency aid in the history of the European Union, and Hungary is not even a member of the eurozone.

The only reason for that kind of financial assistance is to support the local currency at a pegged rate. Also sounds like a ‘managed peg’ of some kind as per the mortgage problems above stemming from currency depreciation.

As for the other end of this daisy chain of potential chaos, the normally stolid Swiss are filled with fear more appropriate for a former Soviet republic=2 0that has just fallen under the shadow of a resurgent Moscow. On Oct. 16, the two largest Swiss banks, UBS and Credit Suisse, received government capital injections worth $6 billion as Bern assembled a fund to buy up $60 billion (both of the packages are denominated in U.S. dollars) in questionable assets held by the banks. And this is on top of the 6.5 billion euros ($8.7 billion) gleaned from the banks’ own recapitalization efforts. The ECB is also working with the Swiss National Bank in a very big way to bolster liquidity in each others’ markets. The Swiss see a storm coming, and when the Swiss get nervous about financials, everyone should take note.

As of the time of this writing, Hungary is holding. The forint has risen 3.8 percent versus the euro since the ECB’s announcement, mitigating yesterday’s 5.4 percent fall. To prevent the collapse from going regional and perhaps even global, the ECB needs to keep the forint as locked into its current value as possible. That means the ECB probably will de facto draw Hungary into the eurozone. This is because if the forint/euro exchange rate can be frozen, homeowners will be able to keep up with their payments, the mortgages will not go into foreclosure and there will not be a domino effect. It would be better yet to freeze the forint versus the Swiss franc, the currency the problem loans are denominated in. But the ECB controls the euro, not the Swiss franc, and must work with the tools at its disposal.

This is a highly inflationary policy as it will take more and more euros to support the local currency that seems to have its own inflation issues.

Again, I haven’t followed this one.

Thanks for the heads up!

Warren

In the long run, essentially extending euro membership to Hungary on crisis terms is a horrible decision. Normally, states spend years working themselves to the bone to qualify for the sort of perks and stability that euro membership grants, so the political and economic fallout of what began Oct. 16 will damage the euro’s credibility for years. But these are exceptional circumstances. The ECB, and the European Union as a whole, realizes full well that without dramatic action far more than Hungary is at stake.


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