Investing Curiouscatblog

Category: Economics

  • Changing Shopping Habits

    I think this article stretches pretty far to try and find a silver lining but these days it is hard to find anything positive: A silver lining to the economic crisis? by James Melik

    “People are now understanding they are going to have to depend on each other – employees are deciding to take a day off work without pay, or even a pay cut, to avoid their colleagues losing their jobs – that’s kind of a new phenomenon,” says Mr Wallis. He believes there is a growing sense of community.

    “People are trying to understand that we are all in this together, not just in an idealistic, altruistic way, but in a practical way,” he says. He is also concerned about how future generations will look after the environment. “We are stewards of fragile resources,” he says.

    “That conversion to a green economy is more than structural, it is also spiritual and that is the chance this crisis offers us,” he says.

    We certainly do need people to be more financially responsible in their spending habits. Poor spending habits have been a problem for quite some time, the poor economy just is now focusing more people on those bad habits.

    Related: Trying to Keep up with the Jones – Can I Afford That? – Too Much Stuff – Americans are Drowning in Debt

  • House of Cards – Mortgage Crisis Documentary

    A documentary of the mortgage crisis by CNBC: House of Cards. It is a bit slow and simple but still for people that don’t really understand the basics of what happened it is interesting.

    Related: Nearly 10% of Mortgages Delinquent or in Foreclosure – Ignorance of Many Mortgage Holders (2007) – How Not to Convert Equity – mortgage terms

  • I Wouldn’t Sell Oil at These Prices

    Oil has fallen to $40 a barrel from nearly $140 less than a year ago. Now that $140 level was the result of a huge spike in the price. But if I owned a bunch of oil (as a country or a company) I sure wouldn’t want to sell it at $40. I would much rather just keep it in the ground and sell it later.

    OPEC has reduced quotas in an attempt to react to the global recession. But it strikes me as bad management to sell your resources at these low levels. Now you might have to sell some to service debt and meet fixed expenses. But continuing to sell at these levels instead of just keeping it in the ground and waiting a year or two (or longer) just seems like a very shortsighted action.

    Now you would have great difficulty acting on my opinion if you don’t plan ahead. To do so you would need to bank profit when you are selling at high prices so you can ride out low prices without being forced to sell to meet your obligations. And it seems many countries are unable to do that. And my guess is many oil company contracts require production based on what the country wants done.

    It just doesn’t seem to me that the I would do much better waiting to sell my oil than sell it at these prices.

    Related: Forecasting Oil Prices – Oil Consumption by Country – South Korea To Invest $22 Billion in Overseas Energy Projects – Curious Cat Science and Engineering Blog posts on energy

  • Manufacturing Contracting Globally

    Global manufacturing recession continued in February. From the Institute for Supply Management, the USA is in the 13th consecutive month of contraction:

    Manufacturing contracted in February as the PMI registered 35.8 percent, which is 0.2 percentage point higher than the 35.6 percent reported in January. This is the 13th consecutive month of contraction in the manufacturing sector. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

    Japanese Factory Output Posts Record Drop in January

    Japan says its industrial output plunged a record 10 percent in January, another sign the world’s second-largest economy is facing its worst economic recession since the end of World War II. January’s bad numbers break the previous record of 9.8 percent set just the month before.

    European Manufacturing Contracts at Record Pace

    A gauge of manufacturing activity declined to 33.5 from 34.4 in January, lower than an initial estimate of 33.6 published on Feb. 20. The index is based on a survey of purchasing managers by Markit Economics and a reading below 50 indicates contraction.
    …
    The manufacturing index for Germany, Europe’s largest economy, was at 32.1 in February, lower than the initially reported 32.2, according to a separate report. Italy’s dropped to 35 from 36.1 and the French gauge declined to 34.8 from 37.9, less than the initial estimate.
    …
    The International Monetary Fund predicts the euro area economy will contract 2 percent this year.

    In Korea, industrial output shark 26% in January, the largest decline even (statistics available since 1970). A one month period is not very significant but with a 26% decline that is still huge. And the December decline was 19%

    China appears to be slowing the least of any sizable manufacturer:

    The CLSA China Purchasing Managers Index, produced by U.K.-based research firm Markit Group Ltd., came in at 45.1 in February, compared with 42.2 in January. The index registered a record low of 40.9 in November. A PMI reading below 50 indicates contraction.

    It was the third straight month that the PMI came in higher than the month before, which provided some hope that China’s economy, which grew at its slowest pace in seven years in the fourth quarter of 2008, might be starting to stabilize. But economists are far from declaring an economic rebound.

    Related: Manufacturing Employment Data from 1979 to 2007 – Top 12 Manufacturing Countries in 2007 – The Economy is in Serious Trouble – Japanese Economy Shrinks 12.7% – USA Job Growth (2007)

  • When Will the Recession Be Over?

    6 months ago I figured we could hope than in late 2009 we would see the beginning of the recovery. I am much less optimistic about the later half of 2009 now. The initial reports for the last quarter of 2008 showed GDP Down 3.8%, the worst since 1982. That has now been updated to an annualized decline of 6.2%. Still the economy actually grew for all of 2008 by just over 1%, something I don’t think most people realize.

    The New York Times has published the thoughts of several economists on When the Recession Will End, from the always true to the “dismal science” name, Jame Grant, “the end is unknown.” A. Michael Spence, 2001 Nobel Prize in Economics, “The short answer is not soon“:

    The recession is global: exports, production and consumption are in high-speed descent. The headwinds are powerful because of excessive leverage, damaged balance sheets and the resulting tight credit.
    …
    Governments and central banks are the only major sources of credit, liquidity and incremental demand — private capital and sovereign wealth funds, having experienced losses, are largely sidelined. If governments are quick and clear in their intentions and intervene in a coordinated way in both the real economy and the financial sector, we will probably have an unusually long and deep global recession through 2010. If they don’t, it is likely to be worse than that.

    Nouriel Roubini, this recession may last 36 months:

    Today, as we enter the 15th month, it’s obvious that we are already in a painful U-shaped recession that has become global and will last at least until the end of the year — 24 months, the longest since the Great Depression. Even if the gross domestic product grows in 2010, it is likely to be no higher than 1 percent. And at that rate, with the unemployment rate rising toward 10 percent, we will still be substantially in a recession.

    And from the Google CEO

    But when looking at our economic decline, we can all agree on two things: we did not get here overnight and we will not recover tomorrow.
    …
    By the end of the year, we may see some growth, with gains in employment to follow a few months later.

    I am much less confident that by the end of 2009 we will be in a recovery. That is still very possible, but I am much more worried we will not be. Frankly if we keep the decline in the 2009 GDP to under 2% I think that will be a success. And if the 2010 GDP declines less than 1% or increases I think we should be happy. Another key is how high the unemployment rate goes. It is almost certain to go significantly higher. If 2010 sees a return to the decent or good job growth that will be a huge success. But job growth the last 8 years has been horrible (500,000 more jobs lost).

    Related: Uncertain Economic Times (March 2008) – The Economy is in Serious Trouble – What Should You Do With Your Government “Stimulus” Check? – Economic Fault: Income Inequality

  • What the Bailout and Stimulus Are and Are Not

    The huge banking bailouts and stimulus bill are meant to counter-balance the huge problems the economy is suffering through. The damage caused to the economy, is largely from unwise risks that were allowed by regulators and politicians that have not panned out and are now greatly damaging the economy. It is always easy for politicians to pay out money in an attempt to buy our way out of problems. That is what the stimulus and bailout bills are doing. They are yet again heaping huge debts on our children and grandchildren.

    The bailout and stimulus packages are not about preventing foolish risks to the economy by huge banks that would make the economy safer in the future. Those types of bills are very hard to pass as the politicians get great sums of money to allow people to risk the economy for their own benefit. The concept of the stimulus is not to fix the cause of the problem but do cope with the problem we are left with due to people that paid themselves huge amounts of money. Now the taxpayers get to fund the huge payouts wall street has given themselves.

    This is because they never actually provided the value they claimed. They merely created false returns to claim they provided a benefit to justify obscene pay (many of them truly didn’t understand this is what they were doing so beyond failing they were so incompetent [while accepting well over a million dollars a year] they didn’t even understand that the financial games they were playing were failing. It is hard to know what is worse, being so incompetent while claiming you deserve millions or knowing you are just paying yourself money based on false claims of value.

    Either way, the banks are left bankrupt – having worthless securities created by those paying themselves huge amounts of money. If the huge banks fail the financial system collapse creates huge problems – businesses that have operated for decades by borrowing some funds (responsibly) go bankrupt because no funds are available to lend them, etc..

    The stimulus is not about fixing the problems of the past it is about countering the huge decline from the bubble economy. That bubble economy was funded largely by claiming value where none existed thereby allowing people to spend huge amounts of money based on those faulty claims. How people are shocked that playing financial games doesn’t actually make hundreds of billions of dollars appear out of thin air is beyond me.
    (more…)

  • Volcker: Economic Decline Faster Now Than Any Time He Remembers

    Paul Volcker said some pretty alarming words recently. Volcker: Crisis May be Even Worse than Depression

    “I don’t remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world,” Volcker told a luncheon of economists and investors at Columbia University.
    …
    He stressed the importance of preventing financial institutions large enough to pose a threat to the entire system from engaging in risky behavior such as running hedge funds or trading for its own accounts.

    He is certainly right on the second point. I must say the decline is bad. And the recent new on jobs and GDP have been bad. It doesn’t strike me as approaching the depression type problems but he didn’t say the economy was approaching a depression, just that the decline was steeper now, perhaps. When he says something like that it makes me at least want to pay a bit more attention to the economy.

    Related: Too Big to Fail, is Too Big – Treasury Now (1987) Favors Creation of Huge Banks – Monopolies and Oligopolies do not a Free Market Make

  • Who Will Buy All the USA’s Debt?

    Who Will Buy All the USA’s Debt? That is a question worth thinking about. The USA is a huge net borrower. The government can’t borrow from consumers because they are hugely in debt themselves. Over the last few decades huge investments from Japan, China and the Middle East in USA government debt have allowed the huge amount of federal debt to continue to grow rapidly. But who is going to buy the increasing amounts of debt; in the next few years, and the next few decades?

    China is right to have doubts about who will buy all America’s debt

    Chinese doubts about the value of US Treasury bonds highlight a crucial question: who will buy the estimated $2.7 trillion (£1.9 trillion) to $4.2 trillion of debt expected to be issued over the next two years?
    …
    The other area of concern for China is the value of its Treasuries. Given the US borrowing requirement and its lax monetary policy, Treasury bond yields could well rise sharply, causing a corresponding price decline. If China’s holdings match Treasuries’ average 48-month duration, then a 5pc rise in yields, from 1.72pc on the 5-year note to 6.72pc, would lose China 17.5pc of its holdings’ value, or $119bn.

    Foreign buyers have absorbed a little over $200bn of Treasuries annually, a useful contribution to financing the $459bn 2008 deficit, but only a modest help towards the $1.35 trillion minimum average deficit forecast for 2009 and 2010.

    Unless that changes substantially, there will be $1 trillion annually to be raised by the Treasury from domestic sources, more than double the previous record from domestic and foreign sources together, plus whatever is needed to bail out the banks.

    Even if the US savings rate were to rise from zero to its long-term average of 8% of disposable personal income, that would create only an additional $830bn of savings — not enough to fund the domestic share of the deficit. Interest rates would probably have to rise substantially to pull in more foreign investors.

    Very true. Anyone buying government debt at these rates has reason to question the wisdom of doing so. Exporters to the USA have macro-economic reasons for buying debt (to keep the value of the dollar from collapsing) but the investing reasons for buying USA debt I find very questionable (I wouldn’t be buying it as an investment, if I were them).

    Related: Personal Saving and Personal Debt in the USA – Americans are Drowning in Debt – USA Federal Debt Now $516,348 Per Household – Is the USA Broke?

  • Japanese Economy Shrinks 12.7%

    The Japanese economy shrank an amazing 12.7% in the fourth quarter of 2008. for comparison, the US economy fell by 3.8% in the quarter. Japan Economy Shrinks 12.7%, Steepest Drop Since 1974 Oil Shock

    The world’s second-largest economy shrank 3.3 percent from the third quarter, today’s report showed. That compared with the U.S.’s 1 percent contraction and the euro-zone’s 1.5 percent decline, which was the sharpest in at least 13 years.

    “There’s no doubt that the economy is in its worst state in the postwar period,” Economic and Fiscal Policy Minister Kaoru Yosano said in Tokyo. “The Japanese economy, which is heavily dependent on exports of autos, electronics and capital goods, has been severely hit by the global slowdown.”
    …
    Capital investment fell 5.3 percent. Manufacturers cut production by a record 11.9 percent in the quarter, indicating they have little need to buy equipment as factories lay idle. Consumer spending, which accounts for more than half of the economy, dropped 0.4 percent, as exporters fired workers.
    …
    The jobless rate surged to 4.4 percent in December from 3.9 percent, the biggest jump in four decades.

    The decline is huge. Economies shrinking 2% is a large and fairly rare event. Shrinking over 10% is dramatically bad. The drop appears to be largely due to falling exports as consumer spending only dropped by .4 percent. Since 1930 the US economy has only fallen over 10% in a year 1932 and 1946. And real GDP has fallen over 2% only 5 times, the most recent time close to that large a fall was in 1982 with a 1.9% decline). Data from the United States Bureau of Economic Analysis. There is a good chance the US GDP will decline between 2-3% in 2009.

    Related: Dreadful economic results in Japan suggest that things will only get gloomier – Over 500,000 Jobs Disappeared in November – Economic Fault: Income Inequality – Goldman Sachs Rakes In Profit in Credit Crisis (2007)

  • China and USA Exports and Imports Drop Sharply

    China and USA exports and imports have been dropping sharply. The USA has decreased the excess consumption over production by $20 billion a month (from $60B to $40B monthly deficit). China maintains a trade surplus and as imports drop faster than export this is actually increasing on a percentage basis.

    Can the improvement in the US trade balance continue?

    The US trade deficit — which is a good proxy for the current account balance (the income surplus offsets a transfers deficit) — is now around $40b a month. At its peak it was more like around $60b a month. That implies, if nothing changes, the 2009 current account deficit would be around $500b, down from a peak of $700b.
    …
    Deficits and surpluses are shrinking globally now that the price of oil is at levels that roughly cover the oil exporters imports.* Right now China’s (growing) surplus is clearly the main counterpart to the United States’ (shrinking) deficit.

    It is hard to put lipstick on a pig (or even an ox):

    The sharp fall in China’s exports (down 17.5% y/y) and imports (down 43% y/y) shouldn’t have been a complete surprise. Korean and Taiwanese exports are down far more than China’s exports, in large part because of sharp falls in their exports to China. And, given the intra-Asian supply chain, that has long augered bad news for China.

    Related: The Budget Deficit, the Current Account Deficit and the Saving Deficit – Top 12 Manufacturing Countries in 2007 – Personal Saving and Personal Debt in the USA – Charge It to My Kids