Data Points to Downturn in Germany, With a Ripple Effect Feared

By CARTER DOUGHERTY Published: August 26, 2008

Adam Berry/Bloomberg News
Shoppers at a Filippa K clothing store in Berlin

Highlights

"FRANKFURT: The odds of a mild recession in Germany rose significantly Tuesday, 8/26/08. "

"German Statistical Office: said that private consumption shrank 0.5 percent in the second quarter, the third consecutive contraction. (lowest level since a downturn in 1993.)"

"Julian Callow, chief Europe economist at Barclays Capital in London: said that the reading raised recession warnings for the entire euro zone. “This is a bombshell,” “because in one fell swoop it went down far more than we would have expected.”"

"German Ifo index: compiled by the Ifo Institute in Munich, showed the lowest reading for business confidence in the last three years. A crucial component of the index, which measures expectations for the future, showed a level not seen since Germany tumbled into recession in the early 1990s, after reunification."

"Euro fell to $1.465 against the dollar: On Tuesday 8/26/08 the Euro fell to its lowest point since February, while oil prices were around $116, far off their summer peaks."

Comments

Why Germany: in a Subprime Solutions Blog - because it is my belief that we are in the first phase of a world wide deflationary cycle. Look for more of the same to continue to appear in Europe and Asia.

World Wide Slow Down: It is clear that Europe is beginning to catch the business slow down virus. It is now beginning to show up in it's numbers.

CRB Cash Commodity Index: is bouncing off the resistance at the 500 point level but look for it to continue downward in a saw tooth pattern into Fall and Winter of 2008.

Interest Rates: Global slow down will be putting downward pressure on interest rates World Wide and in a perverse sort of way result in stabilizing the dollar with a slight upward bias.

Jim

No more need for Freddie and Fannie Published: August 20 2008 19:53

No more need for Freddie and Fannie

Published: August 20 2008 19:53 - Financial Times: Editorial Comments

Freddie Mac and Fannie Mae are the platypuses of the financial world. As shareholder-owned companies which rely on state guarantees, the two government-sponsored enterprises are neither public fish nor private fowl. They are also evolutionary relics from another time. The US Treasury looks increasingly likely to bail out the two mortgage giants. But before it does so, Hank Paulson, the Treasury secretary, must think about an intelligent design for what he would like the GSEs to evolve into.

Fannie and Freddie are vast institutions, guaranteeing $5,300bn of US mortgages, of which 15 per cent are from riskier categories of lender. The credit squeeze and the housing slump mean borrowers are defaulting and Fannie and Freddie have run up significant losses.

Last month, responding to fears about their solvency and liquidity, the Federal Reserve gave the GSEs permission to borrow from the Fed’s discount window. Mr Paulson sought powers from Congress to allow him to, one day, bail out Fannie and Freddie, making their implicit state guarantee explicit. It had been hoped this would be enough to save them and that action would not be necessary. This bluff, alas, does not seem to be working.

Indeed, Freddie and Fannie are now finding it hard to raise new capital precisely because investors are worried about losing out in the event of a public bail-out.

The lumbering GSEs are too big to fail several times over. If Mr Paulson needs to save them, he may need to act very quickly. But he should not be thinking about simply keeping them as they are but on tighter regulatory leashes. The GSEs are set up to socialise losses and privatise profits. This is clearly ridiculous. In the short term it would be better to nationalise them to align risk and reward. In the long run, the government should get rid of Fannie and Freddie.

There is no need for the government to engage in the secondary mortgage market, not least because doing so provides perverse incentives for the state to prop up US house prices. The GSEs should be cut into small-enough-to-fail pieces before a real privatisation. Winding down the GSEs as we know them need not be immediate or rapid, but it should begin now, when it is easier to gather the will for reform.

The Federal Reserve and the Treasury are right to try to prevent the collapse of the GSEs. But they must now work to get rid of them. Conservation efforts have kept the duck-billed platypus alive. Freddie and Fannie do not deserve the same protection.

The Financial Times Limited 2008

Comments

Another Point of View: I printed the entire article because a variety of points are being raised about what to do with Freddie Mac and Fannie Mae. It appears some individuals think the two agencies should be dismantled and fade away due to the dramatic readjustment in the mortgage markets. Because they are the biggest, they are stuck with alot of Monday Morning Quarterbacks who are ready to throw them off the plane.

Workingman's Mortgages: For decades the two agencies have been the pulse of the workingman's mortgage either directly or indirectly. This never agreed well with many of their competitors (Large Banks, Mortgage Companies, and later financial Institutions who got into the game). Narrowed their profit margins. Certainly a big success for the average homeowner trying to purchase a home and the envy of the World.

Large Size: Is the reason why many or Freddie Mac and Fannie Mae competitors want to take them apart. It is also the reason why they have been so successful in the past. They could and did make a difference in the market.

Countrywide /Bank of America Merger: Not sure the consolidation of; Private Banking, Mortgage Banking, and Failing Financial Investment firms (JP Morgan/Bear Stearns) solves any problems or just kick's the can down the road another 12 to 18 months. But I do understand the global strategies which keep on growing market share and lowering execution costs/ overhead.

Merging Frannie Mae and Freddie Mac: Rather than dismantling, I believe, we should be talking about merging the two agencies together. Understanding that as stated above "In the short term it would be better to nationalise them to align risk and reward."

In an age of Global Consolidations: and mega size Corporations someone has to look out for the best interests of the working class citizens. I am sorry to say I don't trust the private sector to regulate themselves. We are experiencing world wide financial contagion and solutions will not be accomplished only though mergers or break ups.

Law of the Jungle: Works well for the animal kingdom but not so well in an evolved society. Without oversight/regulations in the financial markets we find an easy exit for the guilty parties and huge debt burden for the citizens in the end.

Jim

Gold, Oil Slump, Leading Commodities Plunge to Four-Month Low

Gold ingots are arranged for a photograph at the Mitsubishi Materials Corp. headquarters in Tokyo, Feb. 22, 2008. Photographer: Tomohiro Ohsumi/Bloomberg News Aug. 15 (Bloomberg) --By Feiwen Rong and Chanyaporn Chanjaroen

Highlights

• "Gold Plunged below $800 an Ounce: heading for the biggest weekly slide in more than 25 years, and oil, wheat and sugar slumped as the dollar's rebound reduced the appeal of commodities after a six-year boom."
• "CRB down 20 percent: from a record July 3, descending into a bear market. Declining raw- materials prices may help ease global inflationary pressures after consumer prices in the U.S. accelerated 5.6 percent during the year to July, the biggest jump in 17 years."
• Michael Pento, a Senior Market Strategist at Delta Global advisor's in Huntington Beach: California.:``There will be a precipitous slowdown in global growth and that means a lot less demand for things like energy and base metals. It would be insane to step in and buy oil or metals now. These markets will be vulnerable for the next four of five months.''
• Peter Luxton, an energy analyst at Informa Global Markets: `It's not just a U.S. problem, it's a global problem, and it's taking its toll on commodities,'' said . ``What's happening elsewhere is starting to take its toll.''

Comments

All that Glitters is not always Gold: I remember the Gold and Silver bubble from 1979 to 1980. There are investors who bought at the top of the market (Spiked up to around 875 an oz.) and as of today still aren't in profit. Be careful with gold, it will always have some value but that doesn't make it a good financial investment. It doesn't earn you interest, commissions on certain types of gold coins can run as high as 30 to 35% and higher, and liquidation of investment size portfolios can be a problem during market stress.

CRB Cash Index: Is an index to watch. (Refer to link on blog) I am looking for a near term support level around the 500 level. We will clearly experience a saw tooth chart pattern decline so I would expect some consolidation of pricing at around these levels for a bit. However, I am bearish on the long term chart and believe this is piece of the World Wide Deflationary puzzle we need to experience to justify my observations.

World Wide Slow Down: I am hearing that nothing can stop the growth of Countries such as China and India because they are; To big, To much momentum, Don't need the USA to continue to grow etc.... As this World Wide Economic Malaise virus spreads, they will be even more vulnerable than the more mature economies. We are all interconnected and don't have the luxury of only experiencing positive economic outcomes.

Jim

One Third of New Owners Owe More Than House Is Worth (Update1)

Aug. 12 (Bloomberg) --By Bob Ivry

Highlights

• "Almost one-third of U.S. homeowners: who bought in the last five years now owe more on their mortgages than their properties are worth, according to Zillow.com, an Internet provider of home valuations."
• "Second-quarter home prices: fell 9.9 percent from a year earlier, giving 29 percent of owners negative equity, said Zillow, the Seattle-based service that offers values for more than 80 million homes. For those who bought at the 2006 peak of the housing market, 45 percent are now underwater, Zillow said."
• "Prices fell on a year-over-year basis: in 140 out of 165 markets, Zillow said. Pittsburgh, Oklahoma City and Austin, Texas, were among the markets that saw rising home values, the company said."
• "Zillow Home Value Index: is the median valuation for a given geographic area on a given day and includes the value of all single-family residences, condominiums and cooperatives, regardless of whether they sold within a given period, the company said. The index at the national and metropolitan area levels is calculated using a weighted average of the median home value for each county."

Comments:

Using your home as an ATM: Obviously those days are gone for now. But they sure did make it easy to spend your home equity. Now all that buying power is out of the market and you still have a debt hangover to repay.

Proud Negative Equity Homeowners: Not sure this is part of the American dream and wonder how it is going to play out with unemployment on the rise and times getting harder for everyone. What do you do with a home that has a large negative equity position, just mail in the keys with a short note, "Don't like it anymore you keep it".

Foreclosures: With almost 15% of the home sales foreclosure property I don't view these added sales as a positive. Yes, inventory reduction but are we encouraging others on the fence to jump into the foreclosure market to cut their losses. I mean, why pay and extra $100k if you can just walk away and rent a house for a while till the market settles down.

Jim

Wall Street Report Tries to Dissect Financial Meltdown

Highlights

• E. Gerald Corrigan, a managing director at Goldman Sachs & a chairman of the Counterparty Risk Management Policy Group III: " Virtually everybody was frankly slow in recognizing that we were on the cusp of a really draconian crisis,”.
• Wall Street: "Created complex structures that masked connections between asset classes as well as compensation incentives that pushed traders to take risky steps for short-term gain. The industry’s failings have now translated into pain for the broader economy, the report said."
• As Bear Stearns struggled: " in early March, investors feared that too many of those links would collapse if the bank folded — leading some Wall Street executives to say that Bear Stearns was not too-big-to-fail but rather too-interconnected-to-fail."
• Accounting for bundles of Mortgage loan Packages: "Those have been kept off the balance sheet, and many in the industry think that rules that would put the bundles back on the books should apply only to the future. The report suggests putting loan packages from the past — which will force many banks to raise more capital from investors."

Comments

Three Little Monkeys: See no Evil, Hear no evil, Speak no Evil and we all profit handsomely. The report itself is worth a quick glance if you have the time. Just read the intro and Summary and you quickly get the picture regarding what did and didn't happen.
Report - CRMPG3 Link: http://www.crmpolicygroup.org/

2+2=8: Through the magic of high finance and well oiled Credit Ratings support - the insane became sane. Yes, big profits for everyone and AAA ratings to boot.

Who can complain: and no one did. The Best brains on Wallstreet never saw it coming. I am sure the kids fresh out of school and hired to formulate the financial engineering structures didn't. How could they, they wrote expensive moving averages that work very well until the cyclical downturn. Then, like any good moving average does, informs you are upside down on the trade after the fact.

Leadership and Guidance: Nowhere to be found. Structured finance became to profitable to stop. With no regulations, off balance sheet advantages, and a Fed & White House to fully support you when you falter.

$500 Billions later: Nobody did anything wrong except for the poor slobs that really believed the Rating Agencies and Wallstreet story Book bond values. No crime, no foul - now the American tax payer can pay the tab.

Jim

Commentary - - 2nd Q. GDP - - INFLATION vs. DEFLATION

Trust: We are all losing faith in the numbers. Yes, the negative GDP in the 4th Q caught my attention immediately. Even 1.9 GDP 2nd Q number is highly suspect.

Stimulus Package: My thoughts regarding the stimulus package being able to jump start the U S economy bring to mind an image of a young boy throwing a snowball at the sun and thinking he will put out the fire.

Current Economic Problems Include:

* Elevated energy prices.

* Rising unemployment.

* Slow to falling real wages in the lower and middle working class sector.

* Falling profit margins across almost all industries and service sectors.

* Rising Bankruptcies.

* Stiffening Multi National production and service competition.

* Federal, State, & Local Deficit Spending - Will result in rising taxes and or cutting back of services, employment, and special programs.

* Housing Crisis - has destabilized the underlining asset pricing of various securitized fix income investment classes that has been distributed worldwide.

* Major De Leveraging - of Multi-National Banking and Financing Institutions has created credit conditions difficult for organic business and consumer growth.

Deflation: We are currently experiencing the symptoms of a World Wide deflationary cycle. One simple test is to monitor CRB Commodity Index - - It should peak this summer and start dropping in Fall and Winter 2008.

Monthly CRB Chart - Link: http://www.mrci.com/client/m-crb.pdf

Daily CRB Cash Chart - Link: http://www.crbtrader.com/data.asp?page=chart&sym=CIY0

Beware: Life long inflationary remedies used in the past will not protect your financial portfolio this time around.

Jim

U.S. Economy:Jobless Rate Climbs to 5.7% as 51,000 Jobs Lost in July

Paul Sakuma/Associated PressUnemployment brochures are on display at an employment training center in Menlo Park, Calif. The jobless rate rose to 5.7 percent in July.

By MICHAEL M. GRYNBAUM

HIGHLIGHTS

"Nation’s employers: eliminated 51,000 jobs in July, the seventh consecutive contraction in the labor market, as the unemployment rate reached a four-year high."

"July 2008: the unemployment rate rising to 5.7 percent from 5.5 percent in June, its highest level since March 2004."

"Teenage Unemployment: rate rose to 19 percent, its highest level in 16 years."

"Companies avoided job cuts: by reducing their workers’ hours, among private employers, the average work week fell to 33.6 hours from 33.7 hours in June."

"Robert Barbera, the chief economist of ITG: an economic research company. “The bad news is there’s nothing about the data that suggests improvement anytime soon.”

COMMENTS

Brother can you spare a dollar: As the credit crunch crashes through Main Street we are slowly beginning to see the fall out on employment. From teenagers, veteran auto workers, to service professionals we are all feeling the pinch and it is starting to hurt - - ouch. Sadly, there is no end in sight or even a hint of a plan regarding how to handle the problem.

Worried about Inflation: Jobs contracting across the board, overseas problems now bubbling up forcing them to tighten profit margins, and stagnant wage grow in the lower and middle sectors of the wage scale. These are deflationary signals.

Humm, cost going up and no money in my pocket, I wonder what is going to happen. I guess I won't buy that big luxury SUV with the extra wide profit margins or take that super duper luxury vacation. This year I will be taking a homcation - - and spend it with my wife and kids in the backyard.
Yep, just turn the water hose on and enjoy all the sun and fun of our backyard. For dinner we can have a real special treat from big Al's bucket of chicken shop, Honey, order all the fixing, No cooking for anyone while we are enjoying ourselves.

Jim