The Ben Franklin Report: Strains in the Economy

With the latest manufacturing data from the United States showing even more signs of contraction, one of the few thigns that can be said for certain about the overall situation, is that what might have been limited to the financial sector is clearly affecting the very basic sectors of the economy. Also, those were predicting that this affair was going to be a minor correction that would pass in a quarter or at most two, have been revealed as having played a guessing game, as the crisis is instead shaping up to be the worst economic crisis in almost a century. 

Manifestations of the problems are appearing in sales reports of the auto industry, where all of the manufacturers were hit with double-digit drops in sales, especially trucks. On Wall Street, too, there are signs as Circuit City has received a delisting notification from the New York Stock Exchange, and plans to close 155 stores as its death spiral continues to get tighter and tighter. 

Part of the misdirection that was at the heart of the financial crisis is coming unwound, as investors who bought notes from the now defunct Lehman Brothers that were promised to be sound investments worth of inclusion in retirement investment portfolios are now revealed to be worth only pennies on the dollar. Regulators are going to investgiate, but unfortunately, due to the counter-terrorism priorities of the Bush Administration, the FBI has been left critically short-handed as they try to investigate the myriad economic crimes and financial fraud. School districts in Wisconsin were caught up in their own form of financial mismanagement. Buying supposedly safe investments, the now infamous C.D.O.s, school boards all over the state are facing the prospect of cutting services in order to meet financial obligations from the defaults of various corporations.

Strains are also being seen on the macro scale, as the primary contributor to American GDP, the Federal Government, has announced plans to finance the largest budget deficit in history. The government itself won't put a number on how much the deficit will be exactly, but estimated that the total amount of bonds issued would be approximately $550 Billion for the October-December period, including $300 Billion for Federal Reserve liquidity operations. Analysts in the field estimate that the government's borrowing needs for the next fiscal year, which began in August, will total up to $2.1 Trillion. This number stems from funding the $850 Billion deficit projected in the Federal Budget, and approximately $500 Billion to further reinforce the Fed's liquidity operations of the amalgram soup, and the remainder going to roll over securities from state and local governments which are expected to see a significant drop in demand over the next year. The budget deficit is so large partly in thanks to deteriorating economic conditions and the $700 Billion bailout package passed by Congress against almost every economist's better judgment, but doesn't factor in whatever additional stimulus proposal will be passed by the Congress during the lame duck period following the election. 

On the micro scale, individual homeowners and families are also showing severe signs of strain. Throughout the country, but particularly in areas that are hardest hit by the mortgage crisis, more nad more homes are going 'underwater' to use the industry phrase. That is to say, about 1 in 5 of all homes in American are worth less than the balance of the mortgage the homeowner is paying. Families are also having a harder time making ends meet with their utility bills, also. As further evidence, about 44% of families are living paycheck to paycheck, and about 48% have less than $5,000 in liquid assets. So, in the event of a family emergency, medical or otherwise, very few would have any options, especially with bank lending still not an option, despite the Treasury's and Federal Reserve's efforts.

There is no shortage of people who are ready to criticize the Treasury and the Federal Reserve for their management of this crisis and their willingness to bail out institutions that were threatening to go bankrupt. A Nobel Prize-winning economist Robert J. Aumann predicts that more banks and insurance companies will go under because of moral hazard and the lack of consequence. Others say that deflation is the order of the day, also brought about by the various interventions in the free market. My question has been, since this crisis started, where were those in the position to do something about this problem when it started becoming apparent? Why weren't more authorities, for lack of a better word, willing to stand up and make warnings? Unfortunately, someone who is such a position is also at a loss for why pronouncements against the general consensus come in whispers, rather than shouts. 

I'll leave off with the latest scary charts from the Federal Resreve of St. Louis. Good night and good luck.

Click on the charts to see them at full size.

The Ben Franklin Report: Leave the Spigot Open

While workers in GM's Janesville, Wisconsin SUV plant are getting a lesson in freemarket economics, Ron Paul is trying to spread the word about an economic malady of a slightly different nature: the ballooning and out of control federal debt that we've been covering here on the Fringe Element. As if the near vertical climb that is growth in the monetary base weren't already enough, the Federal Reserve is going to go ahead and provide unlimited amounts of funding in return for collateral to central banks from around the world. One could say that this is a very selfless act of a benevolent and intelligent Chairman, but more likely, this is an effort to return monetize US Government debt as Dr. Paul points out in the above article. This move by the Federal Reserve will have, perhaps, unintended consequences, as Central Banks return bonds originating in the United States, such as those issued by Fannie Mae and Freddie Mac, to our shores. After all, in a liquidity crisis, why would an institution choose to hold onto assets that are, at best, potentially troublesome?

The rest of the world is also responding to the crisis in ways similar to the United States. After weekend meetings of the IMF and World Bank in Washington, D.C., financial leaders from around the world agreed to initiate a coordinated response, and the markets seem to be enjoying the show. In Japan, the Central Bank is ready to assist any effort negotiated by the IMF, but has so far not announced any support of particular amount of money to domestic banks and financial institutions. In Europe, markets surged amid a flurry of announcements from various national governments laying out plans to guarantee their financial sectors in various degrees, ranging from total guarantees of interbank lending and capital infusions in Germany to bond lending programs in Portugal. In China, the weather is a little less rough, with currency reserves recently surpassing $1.9 trillion in value, the People's Bank's chief Yi Gong, while promising cooperation with the other members of the IMF,  has expressed full confidence that China will weather the financial turmoil. Perhaps not coincidentally, the central government in the same weekend announced plans to double rural disposable income by 2020 to create a domestic consumption base as a way to offset falling exports to the U.S.

While some lament the appearance that Capitalism has become the newest whipping boy in the arena of economic philosophies, Treasurer Henry Paulson took bold steps in ushering in a whole new era of American socialism, essentially seizing portions of the nine largest lending houses in the United States.

Ben Franklin Report: Warning Signs

Parroting the same policy as many previous Treasury Secretaries before him, Sec. Henry Paulson has come in favor of a 'strong dollar.' Of much more interest, though, is his sound byte saying that the government will not step in to intervene in the market on behalf of investors who made poor decisions and took on way too much of the worst kind of risk. Federal Reserve Chairman Ben Bernanke, in some of the most constructive testimony of his tenure thus far, indicated without words that the U.S. economy is probably already in a recession, that there will be bank failures in the near future, and yet he does not anticipate stagflation in the near-term.

In other pressures on the U.S. Dollar, OPEC has agreed to not lift output, which has pushed crude oil to a new record close, even further exasperating the oil standard. Pricing barrels of oil in euros is undoubtedly just around the corner. Expect to see oil ministers from the various OPEC countries begin speaking about it openly before their next production meeting.

As municipal bond markets continued to deteriorate, forcing yields up on long-term bonds, the city of Vallejo becomes the largest city in California to look bankruptcy square in the eye. This probably is the beginning of the trend, rather than the end of it, especially as houses will continue to have their values reappraised downward.

As an interesting aside, Fannie Mae paid $200K to lobby those who decide upon its workings. FNM's $2.1 billion loss on the year announced yesterday could put pressure on the ability of the mortgage giant to tap into credit pools, as Moody's announced that Fannie Mae's B+ rating is under review.

If you're wondering tomorrow morning why your wallet feels lighter, it's because it probably is. As of publishing the dollar was at a new record low against the Euro, weaker than the Canadian Dollar, and near a 4-year low with the Yen.

Ben Franklin Report: What's That Flushing Noise?

For those who have been watching the Dow Jones since Friday, one might feel a sense of relief as markets appear to be recovering value, but as new data points suggest, the economy has not yet begun to feel the pinch of the financial crisis.

The first two points of data are a double whammy against two of the biggest motives in a capitalist system, the ability of a producer to make a profit and the willingness of the individual to spend money on goods and services. While a 7.4% increase may not seem like much of an increase in the Producer's Price Index, one can be sure that such a trend would lead to inflation above the 1%-2% range preferred by the Fed. However, deteriorating consumer confidence because of a bad job market means that addition spending on the part of the aforementioned consumer will not be spurred by a material increase in wealth but rather will be pried out by higher costs, which means that the increased revenue will be pure stagflation. This is only spurred on further by the third point of data, continued deterioration in the value of housing, which has served as a store of value in the face of a negative savings rate.

The combined effect of these trends in the market mean that the dollar is going to continue losing value, which will be reflected in exchange rates against other currencies, especially the Euro. Unfortunately, for the American citizen, the U.S. Dollar has ceased to be a safe investment vehicle, which is beginning to be reflected in the price of oil. As the dollar loses its value, the basis for the U.S. Dollar's Oil Standard will be eroded. Some of this increase will, of course, be based on speculation, but this is a losing proposition as the infrastructure that supports the movements of our economy might . This, of course, is not a permanent situation, but the painful solution to the crisis is not immediately forthcoming: fiscal conservatism, re-evaluation of oil as an energy source, and stricter regulation of the financial marketplace.

All in all, expect the situation to get worse, and a clear sign will be yearly earnings releases from Fannie Mae and Freddie Mac, on Wednesday and Thursday, respectively.

Ben Franklin Report: Consequences

Observable in most economic aggregates of data, there is a form of statistical lag, which is how long it takes those who count to count the count that they choose to count. This phenomenon is acutely visible in the most recent jobs report, which is accompanied by a downward revision of data from December, to the tune of 376,000 jobs in the level of employment. According to the latest figures, the economy lost about 17,000 jobs in January. There is a large disparity, according to the aforementioned story, in the number of jobs expected and those that actually were, wherein lies the statistical lag. If one can assume that there is a two month lag in the system when it comes to employment figures, how will they look two months from now? In my opinion, the stock market could come to reflect the 2003 levels of the job market, depending on the fundamental strength of the U.S. Dollar, because it is all about the Benjamins. The reporter, Rex Nutting, Washington Bureau Chief for MarketWatch, covering the jobs report also says hard times are coming, starting, "The last pillar to hide behind has fallen. Jobs are being lost in the U.S. economy."

Speaking of, the dollar isn't seen to be in the best shape, having lost ground against most of the major currencies since the beginning of the year, such as the Euro and the Yen. Canada's Dollar is enjoying the benefits of a difference in interest rates, again stronger than the American greenback. Of course, the U.S. Dollar is continuing it's increasingly not so gradual slide against the Chinese Yuan (RMB).

In a minor aside, the subprime crisis is continuing to develop in an international way. The latest casualty of the curious lending practices is Mizuho Financial Group, to the tune of $3.2 Billion. In a sign that the subprime crisis is going to spread into other sectors of the economy, pharmaceutical giants like Bristol-Myers Squibb and IT tech companies like Ciena Corp. are posting writedowns on subprime investments. Moody's is predicting that the subprime loss could amount to 85% of all such loans made, their CEO blames flawed models. It looks like the State of Florida is going to blame Countrywide Financial Corp, and the FBI is looking at 14 companies and counting. Alan Greenspan is trying to deflect blame from his time in office. In an exercise of States' Rights, states are refusing to take on the burden of refinancing subprime mortgages, a primary part of Bush's economic crisis recovery plan. And, also, there's video goodness, as Jon Stewart talks about the economy.