Economic Musings – The US

Driving in today I heard that the latest GDP numbers for the 4th quarter and it turns out that the U.S. economy contracted 6.2% in the last three months of 2008. This ends up being significantly weaker than the 3.8% originally predicted at the beginning of the month.

Not only this is the worst GDP drop in 25 years, but the magnitude of the revision is truly astounding. When one looks at the unemployment numbers and the large waves of layoffs in the last two months, Q1/2009 could easily be on par – if not worse than – Q4/2008.

Economic Musings – International

Two days ago I commented that people need to look beyond our boarders for additional indicators of the economic climate. I specifically singled out Japan and Germany. Both countries saw significant contraction in recent months, but what about other countries?

Chilean industrial production fell the most in 10 years as output declined 8.9% year over year, another country we can add to the recession list.

By now it should be clear that this is a world wide recession and no country is safe.

Don’t understand the credit crisis? Watch this.

I know a number of people who do not fully understand the credit crisis and how the economies of the world ended up where they are today. Here is an outstanding cartoon that manages to explain a rather complicated situation in a very simple, yet effective method.

This is a must watch!

• In German, Opel workers stage a mass rally demanding that GM (the Parent Company) keep their plant open.
• Saab, who just filed Bankruptcy in their home country last week, is also staging a protest against GM closing production facilities.
• The Latvian Government is on the verge of collapse due to the financial crisis.
• Greek farmers shut down airports and public services as a form of protest to the current economic conditions they face.

And the final random thoughts for this post…

It’s the weekend and I need a break – time to get away from the stresses of work, the world, and life in general.

I’ll be having dinner with my Parents on Sunday, which will be enjoyable, and I expect to watch The Curious Case of Benjamin Button as well.

There will be no cooking, exotic or otherwise… though I do have a few new things I want to try. One specifically is the Paprika Chicken Roast over @ ReTorte! Wandering Coyote really has some good food selections.

Finally, my review of The Prodigy’s Invaders Must Die will come this evening…

Until then!

As energy prices rose over the last 4 years, so did Russia’s desire to once again become a major player in world politics.  This time, however, the country could actually afford to do so because the huge amounts of capital the sale of oil and gas provided to its government.  The new found money allowed Russia to start expanding their military once again, and it also provided them a means of purchasing (for lack of better words) it’s way into situations.  Think of it as a pay for play.

Now that energy prices are falling, and the demand for oil and natural gas is low in Europe (and in the world in general at this moment) Russia finds that all may not be as positive as they had previously expected.  In order to counteract the decline in energy and the credit crisis, Russia has devalued their current – the rouble – 9 times.  This has the potential to cause inflation/hyperinflation if energy prices to not improve, not to mention that fact that it also can wipe out the savings of the average Russian citizen.  

Russia is vulnerable simply because their empire is built on natural resources. They have no major industry to speak of, no goods that are produced and consumed on a mass world wide scale, so what is the country to do when their base is threatened?  Use it as a weapon – be it for self-preservation or aggression.

If you take note, Russia is talking about cutting off natural gas supplies to the Ukraine once again.  The last time this took place was in 2006.  Both sides have their own version of what is taking place.  Russia says the Ukraine is expecting unrealistic prices and that they pay off their debt.  The Ukraine says they’ve paid their debts and believes the cost of gas it too high.

I am not saying Russia is in the wrong, just imagine if Russia was acting with purely political interests in mind.  “We don’t like the President you chose, ok, we are shutting off your supply to gas.” or “You didn’t vote in our favor during the last session of the UN, your oil transfers now will come in at 10% of what you were previously getting” all suddenly become possible tools within their power.  

Not a big deal, you may be thinking – wrong.  Russia provides roughly 25% of the EUs natural gas.  If it wanted to make life difficult as an act of aggression or self-preservation, it could do so really quickly.

This is the power Russia truly has.  Unless the EU takes steps to prevent dependence on Russia, they run the risk of being help at Russia mercy. I hope that someone in Europe is paying attention to this…

I’m curious – how does a company, or a person, simply get away with saying “Bankruptcy is not an option”? 

For the last several weeks that is exactly what General Motors has been saying.  Apparently the automaker has had several board meetings, which included input from lawyers and financial consultants, and everyone agreed that nope, bankruptcy is not an option.  Sorry, it just won’t work. 

 What?  Really?

The reality is that it is an option, a viable option; it’s simply that the automaker does not want to go into bankruptcy.  I’m guessing the company continues to say this is tied directly to the belief that if GM does slide into bankruptcy that will be the end of the storied American automaker.  What GM is really saying is “Having our company go out of business is not an option”

As of this writing, 9:30 PM on 12/11/08, the Senate was still attempting to hammer out a plan to provide a “loan” to the auto industry.  As of 10:20 PM on 12/11 the bailout died in the Senate.  Yes, I believe, be it today or tomorrow or the 20^th of January 2009, a plan will be passed. 

In the end, I still believe GM will end up going under at some point.  It may not be tomorrow, but the company is not sustainable with the way it is currently managed. So, guess what, bankruptcy is an option. Simply saying something “is not an option” does not make it so.  

Hmmm…Well, what did GM say?

 ”While we’re still the U.S. sales leader, we acknowledge we have disappointed you,” the company said in the magazine ad. “At times we violated your trust by letting our quality fall below industry standards and our designs become lackluster. We have proliferated our brands and dealer network to the point where we lost adequate focus on our core U.S. market. We also biased our product mix toward pick-up trucks and SUVs. And, we made commitments to compensation plans that have proven to be unsustainable in today’s globally competitive industry.”

The company just admitted it drove itself (no pun intended) into the ground. They made poor business decisions and now have no ability to continue operations without government loans…. Human impact aside, why should we bother supporting a bail out? 

Two things missing from the admission where a) we are sorry for operating our company in this fashion and b) here is how we are going to change.

Obviously, admitting any type of fault would place management in a questionable legal situation.  While they did run the company into the ground, why admit your mistake when shareholders could sue you?  More importantly, there was no evidence of change…. No plan as to how the company would avoid such a situation moving forward.

The only company I support in this process thus far is Ford due to strategic moves they made last year, and because they are claiming they do not need the money for operations but simply as a backstop incase things were to get worse (which I suspect they will). 

Basically, Ford is the only one with a plan and is acting accordingly.  If anyone should get “bailed out”, we should look in their direction.

Ok, with all the searching on information for Gerald Celente and his predictions for the US, I decided to track down a video of him. While none of this information is “new”, you can see his comments in person and judge for yourself.

Read the rest of this entry »

Answer #1: Yes, if…

Answer #2: No, but…

I take it you saw the news yesterday that the Tribune Company, which also owns the Los Angeles Times and the Baltimore Sun, declared Bankruptcy under the leadership of Sam Zell. An investor group lead by Zell purchased the Tribune Co via a massive leveraged buy out, leaving the company with roughly 13 Billion in debt. Unfortunately, a downturn in circulation company wide, a decline in advertising, and tied in with the credit crisis, lead to a situation where the company simply couldn’t pay its loans…

Along with the Tribune filing, news came out that the New York Times Company was going to borrow $225M against its Manhattan building in order to make more cash available for operations.  Obviously, they are having problems as well.

All of this begs a bigger question – has the time of major print media come to an end? 

Yes, if…

Print organizations re-evaluate their business models.  A number of the companies are conglomerates in the traditional sense, which own print channels as well as radio and TV.  The companies need to divest themselves of core businesses and focus solely on what they do best. 

If that is TV, sell the print to an organization that will give it the attention needed.

Print companies need to evaluate their circulation levels as well. Aside from having less ad revenue, people are simply buying less print media.  If there are a limited number of editions available, sold in strategic locations, sales may be manageable.  

No, but…

The print media needs to look to record labels in order to understand their future.  The major labels are all in significant trouble due to the advent of digital distribution.  Initially, companies did not want to adapt and simply wanted to fight change.  Apple and the iTunes store showed that physical media is not necessary, but also allowed a place for the record label.

While print media may no longer be needed, they can still function if they adapt to the digital world – and I’m not talking websites.  Find a way to distribute editions via a PDF download, for example, or have twitter specific feeds for registered users.

It will not be overnight, but newspapers are slowly dying.  Who knows, they may be next in line for a bailout.

I know I’m sounding repetitive now, as I’ve said this over and over, but I need to say it once again as I am very frustrated.  Uncertainty Creates Fear!

Now you one could call me paranoid, but now I have some ability to show just how the market is impacted when Bernanke and Paulson speak in public about the current state of the market.

Here is some evidence via Newsbusters:

That message and others like it have had an impact on financial markets. Altogether, it has lost a total of 2,507 points during the 21 days listed on the Federal Reserve Board’s Web site that Bernanke delivered public remarks. That’s more than half of the 4,127 points the market has lost in that time.

 

Jerry Bowyer, chief economic advisor to BenchMark Financial Network and columnist for National Review told the Business & Media Institute it is reasonable to assume this is more than just a coincidence and the barrage of live media coverage of Bernanke has something to do with it.

 

“Yup. It’s quite reasonable,” Bowyer said. “After all CNBC usually runs the Dow on a split screen with Bernanke speaking on the other. I’d also look at Paulson – same pattern seems to hold.”

 

It’s an issue of trust, according to Bowyer – Wall Street is leery of Washington.

 

“Big Picture: the investor class doesn’t trust the political class, even if they are Republican,” Bowyer said.

The administration needs to speak with one voice because the credibility of the U.S. is in question when public officials are providing two difference views of the situation.  It really makes it look like someone isn’t at the helm of the ship.

The news is littered with stories of the mortgage implosion, home prices falling, financial institutions with record losses, and consumer sentiment at low levels but the headline that really stuck out at me today was this: Credit card industry may cut $2 trillion of lines.

This is a scary thought in terms of the U.S. economy when you read this quote from banking analyst Meredith Whitney:

“In other words, we expect available consumer liquidity in the form or credit-card lines to decline by 45 percent.”

Almost * HALF * of all consumer credit, in the form of credit cards, is expected to evaporate within the next year.

HALF.

The debate on usage of person credit is a long and heated discussion, one I am not about to address, however, even the most responsible of credit holders may feel pain in if this becomes a reality. Individuals with outstanding credit, those who have done nothing wrong, may no not be able to purchase…. You know… buy things… as in keep the consumer economy moving forward

The impact of such a contraction will send a shock wave through all sectors of the economy. It makes me wonder what the bailout money that was allocated to credit card companies is being used for. Apparently, it is not to increase consumer liquidity.

The start of the “credit crisis” is often linked to the subprime mortgage lending industry.  So, mortgages that required little or no money down, mortgages issued to individuals with insufficient income, or mortgages issued to people with troubled credit histories all fall into the category of subprime.

From the “it didn’t take a genius” to see it coming department, now the prime mortgage market is watching the default rate on once “safe” mortgages climb dramatically.  How dramatic, one may ask?  Nationally, 3.07% of prime mortgages were in foreclosure or at least 60 days late in the second quarter of 2008.  That number may not seem that significant until one realizes the highest default rate had previously been set at 1.97% back in 1985.

A very important point to notice in the paragraph above – Nationally.   Depending on what part of the country one is in, the default rate on prime mortgages could jump at high as 4.15%.   Areas with severely depressed real estate markets, where prices have dropped upwards of 30%, are at higher risk for prime mortgage defaults.

While the press may have temporarily chanced focus, I believe the credit crisis is going to get a lot uglier.

Update: Just thought I would point out, the subprime mortgage default rate in August was at 43% nationally.

Another day is upon us, as is another Bailout bill. The Senate will vote this evening (7:30 Eastern) on a bill that is essentially the same except that it includes raising the FDIC insurance limit to $250,000 per account, up from $100,000, as well as the addition of a $8 billion tax cut for hit by natural disasters in the Midwest, Texas and Louisiana. Is this what the bill needs for Republicans to support the effort? If it passes the Senate, will the House pass the bill as well?

Wall Street seems to be asking the same questions as well as volatility is high in this trading session. The DOW is currently down 135 points, off session lows, trading at 10,713. As if the bailout wasn’t enough for traders to be worried about, more “mixed” financial data was released today, which may be adding to the down market.

Mixed, you ask? Yes – mixed. The manufacturing index fell to 43.5% in September, which is mighty close to indicating a recession, and mortgage applications plummeted 23% from the previous week. However, yesterday consumer confidence posted an unexpected rise and only 8,000 jobs were lost in the private sector for the month of September when Economists were forecasting a loss of 60,000.

While the stock market is quite volatile these days, and the credit markets are virtually frozen, I am starting to ask the question if the bailout is truly necessary. The world didn’t end when the first bill failed, business still went on, and there were not long soup lines… Yes, we will see the long term pain by not opening up the credit markets, mass bankruptcies and unemployment could be witnessed in the very near future but maybe that is what needs to happen…

I still view the whole situation as a correction, not a collapse and, as such, I am starting to waiver on the need for the bailout.

UPDATE: a few interesting tidbits

Want to see possible evidence the economy is slowing, the US has higher than expected crude supplies – translation: less oil is being used by consumers.

Investors are skeptical of the vote taking place this evening and they should be!