Friday, July 09, 2004

Round Up: World Economic Issues

The NYT has provided a nice summary of business news from around the world. This will allow the oldman to make a whirlwind commentary blitz. I like to do this from time to time to keep myself updated and to show how economic issues are connected around the world.

Oil Back Over $40 a Barrel
Friday, July 9, 2004; Page E02

Crude oil prices in New York surged above $40 per barrel for the first time in more than a month after the Department of Homeland Security signaled terrorists were scheming to disrupt U.S. elections. Light, sweet crude for August delivery closed at $40.33 on the New York Mercantile Exchange. A slimmer-than-expected rise in commercial oil inventories and the highest domestic gasoline demand in four weeks contributed to the rally.

Despite the hopes of central bankers to the otherwise, higher energy price inflation is going to be a staple of the "new new economy" for the foreseeable future. While we may have dips in the futures down to the lower-mid thirty dollar per barrel mark, those will be buying opportunities. Just as this most recent one was. Unseasonable weather may continue to depress the demand for summer gasoline, actually making the prices bearable however.
HUD Challenges Fannie, Freddie

Fannie Mae and Freddie Mac fell short of their federal mission in 44 states to help low-income home buyers, the Department of Housing and Urban Development said. The government-chartered, shareholder-owned companies would have purchased 470,000 more single-family loans for low- and moderate-income families from 1999 until 2002 if they had matched market demand, HUD said. HUD, which is responsible for regulating the companies through its Office of Federal Housing Enterprise Oversight, wants the companies to increase the amount of funds they devote to low- and moderate-income home buyers to 57 percent from 50 percent by 2008. Freddie Mac spokesman Douglas Robinson and Fannie Mae spokeswoman Janice Daue said in response that their companies have met HUD goals for promoting affordable housing.

I hate to break it to HUD but Fannie Mae and Freddie Mac are horribly overextended. While they may have failed in their "mission" to extend loans to lower-income buyers, let's face it many of these buyers are marginal. If the two loan securitizers had taken on even more low-quality mortgage debt they'd be in even more trouble than they are now. Let's not forget that bankruptcies have been steadily climbing.

Retailers reported generally weak sales for last month. Wal-Mart Stores said same-store sales rose 2.2 percent from a year ago, and the chain forecast that July same-store sales will be up 2 to 4 percent. Same-store sales rose 2.3 percent at Target and 6 percent at Costco. Gap sales were down 2 percent. The International Council of Shopping Centers-UBS tally of 71 retailers was up 2.9 percent.

Much has been made of the Walmart and Target shortfalls from estimates, but they're still net positive. The economy is in fact better than it was at its depths. It's just that because an economic restructuring hasn't taken place we're likely to revisit those lows once central bank stimulus dries up.
The Labor Department said the number of new people signing up for jobless benefits dropped last week by a seasonally adjusted 39,000 to 310,000, the lowest level in more than three years. Economists had forecast that claims would decline to around 345,000. The number of people continuing to draw unemployment benefits fell by 85,000, to 2.87 million, for the week ending June 26, the most recent period for which this information is available. A year ago, the number stood at 3.7 million.

The labor market always lags the leading indicators. Job growth is still positive if declining in size in official statistics. There is going to be a period where job growth is still positive but declining and therefore jobless insurance claims decline. The jobless claims are also known to be notoriously volatile as the WSJ reports. (via Brad Delong)
Consumer credit increased in May as Americans had more confidence to take on debt, the Federal Reserve said. Consumer credit increased at a seasonally adjusted annual rate of 4.9 percent in May, or by $8.19 billion, from the previous month. That pushed total consumer credit outstanding to a record $2.03 trillion in May.

This is a better indicator of the economic health of the households of the nation. If the growth is credit is higher than the growth in wages, what does that say? It says we're still living beyond our means. Consumer debt is at an all time high. It looks to get even higher yet. We've second mortgaged our nation and eventually will come a time when the piper must be paid. Then truly will there be a gnashing of teeth and wailing in the outer darkness! It probably won't come until the next decade however though it's not exactly going to be roses and light until then. A venture with a deteriorating balance sheet has a palpable feel of constriction of hope and opportunity about it.
Mortgage rates fell for a third straight week, reaching levels unseen since April, Freddie Mac said. Benchmark 30-year, fixed-rate mortgages fell to 6.01 percent, from 6.21 percent last week. Fifteen-year, fixed-rate mortgages dropped to 5.42 percent from 5.62 percent. One-year adjustable-rate mortgages fell to 4.05 percent from 4.19 percent.

Apparently the mortgage market had priced in a significantly more aggressive set of moves from the Federal Reserve Open Market Committee. This is bad news. It means that the interest rate increases were insufficient to slow the speculative asset inflation which will now grow to true bubble proportions. Greenspan had a chance to stop it. Now if things continue as they are, next year we will have a true real estate market crash - no soft landing in sight.
Ford and DaimlerChrysler will invest $100 million in a money-losing maker of automotive fuel cells in a move that could speed development of the clean technology. The companies will give Ballard Power Systems $58 million to develop new fuel cells and electronic drives, and will spend $42 million to gain control of a Ballard company that designs hydrogen delivery systems.

Right now we have no way of producing the energy to charge the fuel cells they're developing. What are we gonna do? Burn coal - the dirtiest fossil fuel - to generate the electricity to charge these fuel cells? Or maybe we can burn natural gas to generate the electricity - and send natural gas prices sky high - in order to do it. A fuel cell is just a big fancy battery. You still need to charge it somehow.

Russia's banking sector troubles spread to one of the largest banks as clients rushed to retrieve their savings, only to wait in long lines and pay a 10 percent penalty. The troubles began in May when the Central Bank revoked Sodbiznesbank's license because it was allegedly laundering money.

Between this and the near bankruptcy of Yukos, their big oil producer, the Russian economy is really going to hell. These two situations are indicative of a larger meltdown and regression of both the political and economic progress made in Russia. The new Czar and boyars are here, only we call them Putin and the oligarchs. The more things change, the more they stay the same...

Ryanair Holdings plans to stop checking baggage in a move that could cut the European low-cost airline's costs by as much as $185.4 million, or $9.26 per passenger, chief executive Michael O'Leary said. Passengers would be encouraged to buy any essentials that they can't bring on board at their destinations, he said.

Let's hope this doesn't catch on in the States. The whole airline industry is dysfunctional. Just about the only move Treasury made recently I agree with is to deny that loan guarentee to that big carrier. If we're in a capitalist system we have to let it work. We have to let dysfunctional companies go down the tubes in order to create an incentive for good companies to make the sacrifices needed to prosper.
Total's Nigerian subsidiary resumed oil and gas production in the African nation after an unprecedented six-day shutdown over fears of violence in simmering labor unrest. Elf Nigeria expected to return to full daily production of 235,000 barrels of oil and 187 million cubic feet of natural gas in 12 to 14 hours after reaching an accord with labor officials. Nigeria is the world's seventh-largest oil exporter and the fifth-biggest source of U.S. oil imports.

The oil markets seemed to over-react to this "crisis" in Nigeria. That indicates to me that the traders sense that oil is being underpriced. You heard me, underpriced. When actual pricing is not market efficient to actual underlying structural supply and demand, one of the signs of this is increased price volatility. The market participants sense that the entire system is fragile and being artificially maintained. Therefore any possible disruption magnifies panic selling (or buying to hoard) because the potential for disruption in consumption.
European Union regulators challenged nine leading French banks over suspicions that they collaborated to shut out competitors in the credit card market. The European Commission said the banks had a secret agreement to limit competition. The banks have three months to reply and request a hearing.

We had a price and market fixing arrangement in the American credit market not so long enough. Now though there is an expansion of credit cards and consumer credit spreading. I'm not sure it's a good thing. A lot of the credit being issued is marginal at best and it's sucking the life out of the economy in the long run. Anyone can tell you, if you run an enterprise that's loaded down with debt - it's very difficult to manage it profitably because of debt service and creditor management issues. Taking risks is hard, you have no reserve to draw on, and you have no leeway for failure. The inhibition of risk-taking alone is usually enough to depress profitability.