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Daily Digest - Dec 2

Tuesday, December 2, 2008, 6:38 AM

Loss of credit viewed as America's biggest threat, bailout lacks coherency, Bernanke says "not like 1930s", banker says "worst is yet to come", manufacturing goes from bad to worse, California declares a fiscal emergency, and quantitative easing = printing like mad.

Economy

 

America must keep consumer liquidity flowing (Registration is free)

I estimate that the mortgage market will shrink for the first time in US history and that the credit card market will be 18 months behind it. While just over 70 per cent of US households have access to credit cards, 90 per cent of these people use credit cards as a cash-flow management vehicle, or revolve payments at least once a year. While the credit card market is small relative to the mortgage market, it has grown to play a key role in consumer liquidity. Declining liquidity here will have disastrous effects on consumer spending and the economy. My primary concern is preserving liquidity to consumers, who command more than two-thirds of gross domestic product.

There is no doubt that time will be the greatest healer, but there is a strong argument for putting the financial system through a methadone-clinic-style rehabilitation as opposed to the "cold sweats" rehab that we face. The US government appears to feel the same, which is why various versions of direct government lending and quasi- as well as real bail-outs have been announced. Certainly, credit was extended to unworthy borrowers, but the baby is now being thrown out with the bath water. I expect more broad-based credit contractions but, specifically, more than $2,000bn in credit lines to be cut in reaction to risk aversion, constrained capital and regulatory change.

Here are some easily adoptable changes that would make a difference.

 

Bailout Monitor Sees Lack of a Coherent Plan

The head of a new Congressional panel set up to monitor the gigantic federal bailout says the government still does not seem to have a coherent strategy for easing the financial crisis, despite the billions it has already spent in that effort. 

 

Bernanke says crisis 'no comparison' to Great Depression

Bernanke said the situation at that time represented "very difficult circumstances," because "we didn't have the social safety net that we have today. So let's put that out of our minds; there's no -- there's comparison in terms of severity."

He added, "We're very lucky to live in a country as rich and diversified as the one we have. And I hope that we will have a quick and rapid recovery from the current slowdown.

 

"The Worst Is Yet To Come: Anonymous Banker Weighs In On The Coming Credit Card Debacle

Today, we are bailing out the banks because of their greedy and deceptive lending practices in the mortgage industry. But this is just the tip of the iceberg. More is coming, I'm sorry to say. Layoffs are being announced nationwide in the tens of thousands. As people begin to lose their jobs, they will not be able to pay their credit card bills either. And the banks will be back for more handouts.

 

Manufacturing: Bad to Worse:

A measure of U.S. manufacturing activity fell to a 26-year low in November as new orders dropped for the twelfth consecutive month, a trade group said Monday.The Institute for Supply Management's monthly index of manufacturing activity fell to 36.2 from October's 38.9. The reading is worse than Wall Street economists' expectations of 38.4, according to a survey by Thomson Reuters. A figure below 50 indicates the sector is contracting.

 

Schwarzenegger declares fiscal emergency

Schwarzenegger said immediate action is essential because although the state projects a $28-billion deficit by mid-2010, California is on track to run out of cash by February or March. He said that if lawmakers fail to act within 45 days as required under his declaration of a fiscal emergency, they will have to find an additional $1.5 billion to $2 billion in savings or new revenue above what is needed right now. He said the administration is already drawing up plans to lay off state workers.

"It's like an avalanche, that it gains momentum," he said.

 

Quantitative easing: printing money like mad to ward off deflation 

Translation: it is always preferable to a central bank to print money or create some reasonable facsimile of printing to prevent deflation before its onset than to try and deal with deflation once it has set in.

 

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7 Comments

jpbeer's picture
jpbeer
Status: Member (Offline)
Joined: May 18 2008
Posts: 8
Re: Daily Digest - Dec 2

http://video.google.com/videoplay?docid=-2398389779813975826

What about this?

 

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: Daily Digest - Dec 2

Bernanke says crisis 'no comparison' to Great Depression

 Hell no......  it'll be MUCH WORSE!

The.Techno.Luddite's picture
The.Techno.Luddite
Status: Bronze Member (Offline)
Joined: Nov 26 2008
Posts: 34
$13,000,000,000,000+

My morning started cheerily with this chart of the current total bail out costs from The Big Picture site:

 

http://www.ritholtz.com/blog/wp-content/uploads/2008/12/total-bailout-co...

 

Barry notes that the 8+ trillion that chart breaks down doesn't include the $5.2 trillion in Fannie/Freddie portfolios.  So, we are already at more than 13 trillion new bucks out there. Is there even any chance of this all NOT collapsing eventually now?  Any ideas?  Bueller?

 

 

Mike Pilat's picture
Mike Pilat
Status: Platinum Member (Offline)
Joined: Sep 8 2008
Posts: 929
Re: Daily Digest - Dec 2

I have two comments:

 1) We see a recurring positive feedback loop: The more bailouts we do, the more people ask for them and the more we seem to "need" to bailout. Anyone who thinks that we are nearing the end is blind. The end to the bailouts will never arise because we no longer "need" them. The end will emerge when someone with political courage draws a line in the sand and says "no more."

 2) Bernanke is absolutely nuts if he thinks that this is going to be far easier than the Great Depression. And my theme has always been energy. In the 1930's, the United States was the Saudi Arabia of oil and we could produce it cheaply and freely. We had so much oil in America those days that we were still trying to find many new ways to use it. Now, not only is the United States very far into our own decline in production, but it looks as if the world is just about rounding the top of Hubbert's Peak. All of this while population soars.

 I would like to ask Bernanke: It's clear that too much easy credit caused the crisis. Why do you extend more credit thinking it will solve it?

"The definition of insanity is doing the same thing and expecting a different result." --- Einstein

And I would also like to ask Bernanke what he thinks about energy and oil. Is he really that confident that we have enough oil to cheaply produce food, transport ourselves to work, and (apparently most importantly) transport ourselves to Best Buy to buy the iPods, LCD flatscreens, and compact discs that our consumer focused economy requires???

jdownie's picture
jdownie
Status: Bronze Member (Offline)
Joined: Apr 7 2008
Posts: 58
Re: Daily Digest - Dec 2

Alarm, Alarm!

All the action is in the bond market, see www.bloomberg.com/news/markets/bonds.html

Central Bank bond buying is driving yields lower, the bond speculators are making a killing and bankrupting  commodity producers in the process.

BUT now precious metals are moving into backwardation (futures prices lower than spot). This is an indication that supply of real metal is disappearing, in other words less and less people are prepared to swap real metal for paper. Producers of other commodities will follow.

Soon enough the bond speculators will also follow and go short the bond market, since their paper profits will mean nothing if nobody accepts it in return for goods and services. Bond yields will rise, possibly very quickly................hyperinflation!

r101958's picture
r101958
Status: Martenson Brigade Member (Offline)
Joined: Aug 24 2008
Posts: 257
Re: Daily Digest - Dec 2

All this great news and the Dow is up 270. Naaaaah!....I don't believe in the PPT.

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: Daily Digest - Dec 2

The US recession, it's official ! Now start looking for the opportunities !!

Well,
it's confirmed folks. The US recession is officially here according the
the NBER, and it has been crippling the American economy for over a
year now, since Q4,2007 (as if most ordinary people on the street and
business owners haven't noticed.) This could even stretch out into a
prolonged depression and there is plenty of evidence pointing in that direction. 

The news was greeted by a record, free fall drop in the Dow Jones
stock exchange of 7.7% and an even bigger drop in the Canadian Toronto
stock exchange (TSX) of 9.3%.  The Financial Times reports that surveys
of manufacturing orders in the US, Europe and China published on Monday
were much weaker than expected. In Europe, measures of risk aversion
reached new highs, as the iTraxx Crossover index climbed to 934bp,
another record.The Baltic Exchange Dry Index
-a measure of ocean going vessel traffic, shipping volume and costs
-dropped to 700 today,  a historic record low, taking many more vessels
out of service.(...several opportunity scenarios here....;-))

But why did it take the NBER over a year to call the downturn, which
started back in 2007? It's like having your fuel gage in your car
telling  you that your gas tank is empty, a week later, once you're
already back at home or after you got stranded on the side of the road.
Savvy entrepreneurs would have spotted the early warning signals that
pointed to a possible topping out of the business cycle, such as the
drop in container traffic from Asia into Long Beach, California, back
in 2007. Even in May
2008, many business people and trade associations that I spoke with
were in denial that a recession was on the way, especially in Alberta
(well at least that's what was said publically if not privately).

What's worse, U.S. entrepreneurial activity fell from 12.4
percent of the total workforce in 2005 to 9.6 percent in 2007,
according to a joint study by Babson and Baruch Colleges.

Regular Smart Economy blog readers would have been warned two years
ago, long before the general economic trouble was acknowledged by
several of our weak signals of change that we spotted for you...  such as our warning of the pending housing mortgage collapse back in April 2006 and the threat of a financial banking collapse, which we suggested could happen in 2008 back in Sept 2006. This past week we warned you of the pending commercial mortage collapse,
for which every business should be making contingency plans for now. At
the same time every entrepreneur should be shifting into an opportunity
spotting and sence-making mindset and keeping a lookout for all the
potential generic opportunity events that are likely to emerge in the
chaos.

"Chance favors the prepared mind",

Every dark cloud has a silver or gold lining (read opportunity
window) for someone, only if you are sharp enough to anticipate it. Make yourself as recession proof as possible and that requires a new type of thinking-anticipatory thinking.

Here's a recent example from my Opportunity Clinic workshop -

"Because of the increased number of home foreclosures in the USA, a
new startup business segment has quickly emerged in America-Those 
contractors that used to build your homes, are now the clean-up crews
that come in to empty it out (and resell salvaged furniture and
contents) and tidy up homes for the banks and real estate agents after
the previous owners have abandoned their houses."

There will be plenty more opportunity windows like these.

As we see from Malcom Gladwell's new book, Outliers, the US Great
depression of  1873, produced the greatest concentration of wealthy
families on the entire planet and in all of history. I can't wait to
see the next crop of wealth builders.

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