Daily Digest

Daily Digest - June 1

Monday, June 1, 2009, 10:01 AM
  • USD (Article)
  • USD (Chart)
  • Baltic collapse repercussions
  • Bond Carnage, Muddled Inflation Thinking, and Fed Options
  • Why we're storing billions of seeds: Jonathan Drori on TED.com (Video)
  • Ron Paul, (Video - Federal Reserve Transparancy, H/T Inverstorzzo)
  • Hay festival: Niall Ferguson's grim prediction for western economies (H/T GreenT)
  • The Great Depression of 1930-1940 looms into view
  • ATA Truck Tonnage Index Declines 2.2 Percent in April
  • Berkshire Hathaway's Sokol: "No Green Shoots"
  • Guest post: A finance view of the political nature of the coming GM bankruptcy (Videos on page)
  • Congress Probes ‘Deceptive’ Credit Card Charges
  • Towns Rethink Self-Reliance as Finances Worsen
  • FDIC Insures $4.7 Trillion in Deposits with a $13.6 Billion Deposit Insurance Fund. This is Like Going into a Hurricane with a 99 Cent Store Umbrella.

Economy

USD (Article)

The dollar is now in our target zone of the high 70's. If we are to get a desperately needed (by policy makers) 2nd deflationary dunk, it should come before the dollar loses the noted monthly support. It would be a profound thing if this were lost here and now. It would be the gateway to Bananaville USA [emphasis mine] and who knows what with regard to China's reactions, given its huge foreign reserves.

So the question remains, is this the big hyper-inflationary blow off, or is that pushed into the future? This line in the sand drawn on USD will help indicate.

USD (Chart)

Baltic collapse repercussions

While depegging might be what they have to do, the result will be a dagger struck at the heart of already-deeply-wounded european banking.

Bond Carnage, Muddled Inflation Thinking, and Fed Options

The irony is that this may wind up being a replay of 1936, when the economy started looking better and the government, worried about deficits, tried cutting spending and plunged the economy back into its morass. But with tax revenues and programs already passed, Team Obama couldn't trim the fiscal sails even if it wanted to. The brave talk about reducing the deficit down the road does nothing for the Treasury supply hitting this year.

Now the Fed may get a mini-reprieve. If Thursday's 7 year auction (a weird maturity), goes well, the market may stabilize and recover a tad. There are some other possible short term ways out, but they require cooperation.

Why we're storing billions of seeds: Jonathan Drori on TED.com (Video)

Ron Paul, (Video - Federal Reserve Transparancy H/T Inverstorzzo)

http://embedr.com/playlist/ron-paul-seattle-campaign-for-liberty-speech

Hay festival: Niall Ferguson's grim prediction for western economies (H/T GreenT)

"Welcome to the axis of upheaval" - Niall Ferguson.

Major western countries could go bankrupt in the wake of the current financial crisis, one of Britain's most celebrated historians has warned, predicting riots in major cities by the end of the year. According to the Harvard professor Niall Ferguson, the economists charged with navigating the credit crisis are ill-qualified to analyse the current situation – since they lack the overview of historians such as himself.

"The idea that countries don't go bust is a joke," the author of The Ascent of Money told an audience at the Guardian Hay festival. "The argument that it can't happen in major western economies is nonsense." The economic crisis, Ferguson said, would be the harbinger of a period of instability and a "series of political crises". "Forget the axis of evil," he added, "welcome to the axis of upheaval."

The drip feed of revelations about the peccadilloes of MPs is only the beginning of "a crisis of political legitimacy that will be played out over the next 18 months," he continued. "It won't be like the 1930s – it won't end up with fascism – but it might be like the 1870s, or 1970s, so don't throw out that old kipper tie yet."

There would be a rise of populist politics, which would involve "a rejection of the culture of Westminster" he said. "There will be more riots in major cities this year. If you don't trust legislation, you take to the streets."

Ferguson warned that "the debt trap may be about to spring" for countries that have created large stimulus packages in order to encourage their economies. The prime candidate to go bust, he said, "is Ireland, followed by Italy and Belgium, and the UK is not too far behind".

He also attacked economists' claims to understand the crisis. "There are economic professors in American universities who think they are the masters of the universe – but they didn't have any historical knowledge. I have never believed that markets are self-correcting. No historian could."

For the historian, Ferguson suggested, the questions about the future of the economy frame themselves between two contrasting scenarios. The first scenario is that the US authorities are right to predict growth of 3% in 2010 rising to 4% and 4.6% in the following years. He called that the "Dr Pangloss scenario".

Alternatively, he said, there is a "Dr Doom scenario", in which we are plunged into another Great Depression – in which the economy contracts by as much as 13%.

Mercifully, he argued, the Great Depression scenario is unlikely – because the Federal Reserve has "massively expanded the monetary base, which is the opposite of what happened in the 1930s". Its chairman, Ben Bernanke, had taken this step "with speed and understanding" because in his academic career he had worked on the history of the Great Depression and knew how to prevent its recurrence.

(More)

The Great Depression of 1930-1940 looms into view

Paul Krugman editorialized in the New York Times issue of May 25 that California is said to be where the future first appears.

ATA Truck Tonnage Index Declines 2.2 Percent in April

Compared with April 2008, tonnage contracted 13.2 percent, which was the worst year-over-year decrease of the current cycle and the largest drop in thirteen years. In March 2009, tonnage dropped 12.2 percent from a year earlier.

ATA Chief Economist Bob Costello said truck tonnage is getting hit from both the recession and the massive inventory correction that the supply chain is currently undergoing. [emphasis mine - mostly] 

Berkshire Hathaway's Sokol: "No Green Shoots"

From Reuters: MidAmerican's Sokol sees US housing staying weak (ht Alexander, Cord)

David Sokol, chairman of Berkshire Hathaway Inc's MidAmerican Energy Holdings and a contender to succeed Warren Buffett, warned that the U.S. housing market still has a ways to go before bottoming out...

"...as we look at the economy, I have to be honest: we're not seeing the green shoots," Sokol said ... "We think the official statistics of 10 to 12 months' backlog is actually nearly twice that amount," ...

"There is an enormous shadow backlog of about-to-be foreclosed homes and of individuals who need to sell but have time, and there are already six (for sale) signs on their block," he said.

"...It will be be mid-2011 before we see a balancing of the existing home sales market." He defined "balanced" as a six-month backlog.

Guest post: A finance view of the political nature of the coming GM bankruptcy (Videos on page)

Yet, somehow you get the impression that many in the financial media think we could just turn the lights out and go home. Witness the video below of CNBC anchors Mark Haines, Erin Burnett and Phil Lebeau and a trio of auto analysts trying to impress upon Haines how important GM is.

Congress Probes ‘Deceptive’ Credit Card Charges

The Senate Commerce Committee on Thursday opened an investigation into so-called “mystery charges” that appear on consumers’ credit cards.

The charges, up to $12 monthly, stem from what the committee labeled “deceptive” e-commerce marketing practices connected to pop-up adds on popular sites like Fandango.com and Orbitz.com. Thousands of consumers have complained, the committee said.

“If consumers accept the offer by providing an e-mail address and clicking a ‘yes’ button, their credit card or debit card account information is automatically forwarded to the company and they are automatically enrolled in the service,” the committee said. “And unless the consumer cancels this online membership service, their credit card or debit card is indefinitely charged $9-$12 on a monthly basis.”

Committee Chairman Jay Rockefeller, D-West Virginia, sent letters to pop-up companies Vertrue (.pdf) and Webloyalty.com (.pdf) “to extract more information about these controversial practices.” The letters inform the companies that the Better Business Bureau has received consumer complaints that “your company charges their credit card or debit card on a monthly basis for services they are not aware they have purchased.”

Towns Rethink Self-Reliance as Finances Worsen

As the recession batters city budgets around the U.S., some municipalities are considering the once-unthinkable option of dissolving themselves through "disincorporation."

Benefits of this move vary from state to state. In some cases, dissolution allows residents to escape local taxes. In others, it saves the cost of local salaries and pensions. And residents may get services more cheaply after consolidating with a county.

An empty parking lot at an out-of-business store in Vallejo, Calif., a city that filed for bankruptcy-court protection.

In Mesa, Wash., a town of 500 residents about 250 miles east of Portland, Ore., city leaders have initiated talks with county officials about the potential regional impact of disincorporating. Mesa has been hit by a combination of the recession and lawsuits that threaten its depleted coffers, leaving few choices other than disincorporation, said Robert Koch, commissioner of Franklin County, where Mesa is located.

Two California towns, Rio Vista and Vallejo, have said they may need to disincorporate to address financial difficulties; Vallejo filed for bankruptcy protection last year. Civic leaders in Mountain View, Colo., have alerted residents that they are left with few options but to disincorporate because the town can't afford to pay salaries and services.

Incorporation brings residents a local government with the ability to raise money through taxes and bond issuances. It also gives them more control of zoning decisions and development, and usually provides for local services such as trash pickup and police as well.

An American Town Ponders Life Without GM

A small town in New York faces a future with possibly no GM car dealerships. Townspeople are rallying around their car dealers, who they say are ingrained in their community. WSJ's Andy Jordan reports from Port Jervis, N.Y.

Dissolving a town government, on the other hand, often shifts responsibility for providing services to the county or state. A city's unexpired contracts usually remain binding, and residents are still obligated to pay off any debt.

(More)

FDIC Insures $4.7 Trillion in Deposits with a $13.6 Billion Deposit Insurance Fund. This is Like Going into a Hurricane with a 99 Cent Store Umbrella.

On Friday, three banks failed and the FDIC took them over. Now this isn’t the big news necessarily. What it significant is that one of the banks taken over was Silverton Bank of Atlanta, Georgia. Silverton bank has $4.1 billion in assets and will cost the FDIC $1.3 billion from their dwindling insurance fund. This will be the costliest bank takeover since U.S. Bank took over Downey Savings and Loan in November of 2008 for a cost of $1.4 billion to the FDIC Insurance Fund. So how much is left in the fund? Not much. In fact, if we throw in Citigroup and Bank of America, two banks that have failed without government support and massive intervention, the fund would be broke. But let us set those two banks aside and start running the numbers.

5 Comments

Tim_P's picture
Tim_P
Status: Gold Member (Offline)
Joined: Feb 23 2009
Posts: 298
Re: Daily Digest - June 1

Davos,

Thank you for putting this together every day.  It's a must read for me and has been instrumental in keeping me up to date on what matters.

Tim

FireJack's picture
FireJack
Status: Silver Member (Offline)
Joined: Feb 8 2009
Posts: 156
Re: Daily Digest - June 1

Can't help but notice that every claim of good news turns out to be an outright lie or a result of a huge stimulus or bailout. I'm still thinking a economic crash come aug/sept when lies and bailouts can no longer hide how bad it's been. We'll see if it lasts that long.

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - June 1

 Hello Tim_P:

Most welcome, a pleasure to contribute to this fine community that Chris built, takes just minutes to cut and paste the best of what I find each day as I complete my readings and I often I learn more from this section than from the articles themselves. Take care

idoctor's picture
idoctor
Status: Diamond Member (Offline)
Joined: Oct 4 2008
Posts: 1731
Re: Daily Digest - June 1

Peter Schiff today.

I am just so happy today knowing that my life has been made so much simpler by Government Motors....only one color will be offered....GREEN powered by green energy LOL!

fujisan's picture
fujisan
Status: Gold Member (Offline)
Joined: Nov 5 2008
Posts: 296
Re: Daily Digest - June 1

 ISM Manufacturing Index: New orders growing - Credit Writedowns

The Institute for Supply Management released its monthly manufacturing index.  The data shows that the manufacturing sector is still contracting with the headline number rising to 42.8 in May, up from 40.1 in April. This number was ahead of analyst expectations of 42 flat.  50 represents the dividing line between a contracting manufacturing sector and an expanding one.

The key to the ‘beat’ was new orders, which rose from 47.2 in April to 51.1. That says that new orders in the manufacturing sector are growing for the first time in 18 months.  You should also notice that customers’ inventories are moving in a big way as well, with that number registering too low and the contraction of inventories actually accelerating.  Translation: the much fabled de-stocking of inventories is gathering pace, setting the stage for inventories to make a positive contribution to GDP by Q3.  You should see these two trends as leading indicators for a recovery because they are the first two sub-indices to switch direction in this incipient bottoming process.  You should also notice that the overall economy is also now growing according to this index.

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