Daily Digest

Daily Digest - June 25

Thursday, June 25, 2009, 9:42 AM
  • California set to issue IOUs as fiscal crisis weighs
  • FOMC Statement
  • FOMC (Output Gap and Inflation)
  • In the Inflation Camp
  • Latest Schultz Shock: a 'bank holiday'
  • Economist puts dent in optimism: bigger crash is coming
  • Buffet: Economy in Shambles, NO signs of Recovery (Video)
  • A Factory for Words in a Sea of Debt (H/T Djhester1940)
  • Durable Goods, or Planes, Planes and More Planes? (Chart)
  • May durable goods +1.8%
  • Goldman Sachs: "Engineering Every Major Market Manipulation Since The Great Depression" Rolling Stone
  • China buys Addax for £4.4bn to tap Iraqi oil

 Economy

California set to issue IOUs as fiscal crisis weighs

"Next Wednesday we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression," Controller John Chiang said in a statement announcing that he would be forced to use IOUs to pay the state's bills beginning on July 2.

"The state's $2.8 billion cash shortage in July grows to $6.5 billion in September and after that we see a double digit freefall," Chiang said. "Unfortunately, the state's inability to balance its checkbook will now mean short-changing taxpayers, local governments and small businesses."

FOMC Statement

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. [emphasis mine]

FOMC (Output Gap and Inflation)

The main change came in the 2nd part when they mentioned the rise in commodity prices BUT they continue to hang their hat on the ‘output gap’ in giving them comfort that “inflation will remain subdued for some time.”

In the Inflation Camp

The first of these monetary fallacies is that 'the output gap will prevent inflation.' The second is that a lack of net bank lending or other 'debt destruction' will require a deflationary outcome. Let's deal with the output gap theory first.

Output gap is the economic measure of the difference between the actual output of an economy and the output it could achieve when it is most efficient, or at full capacity.

The theory is that when GDP underperforms its potential, with unemployment remaining high, there can be no inflation because demand is weak and median wages will be presumably stagnant. This idea comes from neoliberal monetarist economics, and a misunderstanding of the inflationary experience of the 1970s.

The thought is that sustained inflation is due to a 'wage-price' spiral. Higher wages amongst workers cause prices to rise, prompting workers to demand higher wages, thereby fueling inflation. If workers do not have the ability to demand higher wages there can be no inflation.

While this is in part true, it tends to confuse cause and effect.

The cause of a monetary inflation, which is a broadly based inflation across most products and services relatively independent of demand, is often based in a monetary expansion of the currency resulting in a debasement and devaluation.

A monetary expansion is relatively difficult to achieve under an external standard since it must be overt and often deliberative. A gradual inflation is an almost natural outcome under a fiat currency regime because policy-makers can almost never resist the temptation of cheap growth and the personal enrichment that comes with it.

Latest Schultz Shock: a 'bank holiday' (H/T Sam Linder)

In its current issue, HSL reports rumors that "Some U.S. embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of U.S. cash to purchase currencies from those governments, quietly. But not pound sterling. Inside the State Dept., there is a sense of sadness and foreboding that 'something' is about to happen ... within 180 days, but could be 120-150 days."

Economist puts dent in optimism: bigger crash is coming (H/T DamnTheMatrix and Fujisan)

Economist puts dent in optimism: bigger crash is coming

An international economic forecaster says another big crash lies ahead for global share and property markets within the next two years.

Harry Dent predicted the Japanese recession in the 1990s and also forecast the current global financial crisis.

He has told ABC News Breakfast that the Australian share market will continue to make gains during the next few months, before bottoming in about 2011.

"I'd say maybe the Australian All Ordinaries will get back up near 4,500, the Dow maybe close to 10,000," he said.

"And then you'll see another crash late this year and into next year, as banking systems melt down again. I think the next one's going to start in Europe and Eastern Europe, housing prices would lag.

"I think stocks are going to end up down 60 or 70 per cent before it's all over, and I think housing prices in Australia will probably be down 40, maybe 50, per cent, maybe more than that in the United States and Europe."

A Factory for Words in a Sea of Debt (H/T Djhester1940)

A factory in New York has vanished. The door is locked and the lights are out. The phone rings and rings. No one answers. The promised checks are not in the mail, and a small army of workers, owed hundreds of thousands of dollars, scramble to pay the rent and buy groceries.

This factory was Inkwell Publishing Solutions, and the widgets it made were the innards of textbooks — the sentences and pictures, chapter headings and study guides, all written and designed to the specifications of education panels in big states like Texas and California and New York. The states buy their books from publishing houses like Houghton Mifflin Harcourt that hire Inkwell and similar companies, called book developers, to assemble the parts.

And Inkwell, on West 27th Street, hired freelancers like Taylor Baxter, 28, to execute the mission of providing a language arts book for fifth graders in San Antonio, and to keep the multibillion-dollar textbook industry chugging along. Inkwell, Mr. Baxter says, has not paid him more than $10,000. “I owe the I.R.S. over $4,000,” he said. “My credit card is days from being frozen. I am two months late on rent. I have $100 in cash.”

Buffet: Economy in Shambles, NO signs of Recovery (Video)

Durable Goods, or Planes, Planes and More Planes? (Chart)

May durable goods +1.8%

So unfilled orders and shipments are still on long losing streaks, with backward revisions down, while orders jumped.

Bookings for non-defense capital goods excluding aircraft, a proxy for future business investment, jumped 4.8 percent, the most since September 2004. Shipments of those items, used in calculating gross domestic product, rose 0.3 percent after dropping 2.7 percent.

I'm not sure you can make a green shoot out of that, but it is at least some further evidence of a well-established moderation in the rate of contraction.

Goldman Sachs: "Engineering Every Major Market Manipulation Since The Great Depression" Rolling Stone (White Paper)

China buys Addax for £4.4bn to tap Iraqi oil

The board of Addax, which is also listed in Toronto and based in Switzerland, has recommended a C$52.80 per share offer from Sinopec, the Chinese state oil and gas company.
Addax has oil assets in West Africa and the Middle East, particularly the Kurdistan region of northern Iraq. The company has increased its crude oil production from 8.8m barrels per day ten to 134.7m barrels per day over the last ten years.

16 Comments

hughacland's picture
hughacland
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Re: Daily Digest - June 25

Hi - i think the buffet video has got the wrong link. It goes to an article about Sanford being met on return at Atlanta...

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dcm
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Re: Daily Digest - June 25

Growing up in California, I was always told the fault lines would send us crashing into the ocean. Little did I know the fault lines were above ground and crossed in Sacramento

 

http://vlog.clipal.com/2009/06/bear-flag-banana-republic-flash.html 

Davos's picture
Davos
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Re: Daily Digest - June 25

 http://www.ritholtz.com/blog/2009/06/buffett-on-americas-economic-war/

sorry, there is buffet's video

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SteveS
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Rolling Stone white paper on Goldman-Sachs

Thanks Davos - good (but maddening) read! It sure offers interesting explanations for a lot of odd things that have happened over the years. Be interesting to hear some expert analaysis of the claims put forth. Their take on  cap-and-trade makes you think.

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idoctor
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Re: Daily Digest - June 25

Peter Schiff Wall street unspun 6/25/09

1.

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6.

Lakhota's picture
Lakhota
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Re: Daily Digest - June 25

Mr. Davos,

Here is a link to a written article on Warren Buffett's dire predictions to accompany your video link.

http://articles.moneycentral.msn.com/Investing/Dispatch/market-dispatches.aspx?post=1166774&_blg=1,1166774

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Four Bad Bear Markets Compared (including ours)

http://dshort.com/

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SamLinder
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Re: Daily Digest - June 25
Lakhota wrote:

Mr. Davos,

Here is a link to a written article on Warren Buffett's dire predictions to accompany your video link.

http://articles.moneycentral.msn.com/Investing/Dispatch/market-dispatches.aspx?post=1166774&_blg=1,1166774

Very, very interesting remark at the end of the article Lakhota referenced:

"We have done things that raise the probability of high rates of inflation at some point," he told CNBC.

pinecarr's picture
pinecarr
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Re: Daily Digest - June 25

Thanks for the link to the Rolling Stone article, Davos!  How refreshing to have a journalist like Matt Taibbi with the kahoonas to come out and print this for the public to see! You go Matt!

suesullivan's picture
suesullivan
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Median house prices in some inland SoCal cities below 1989 value

http://www.latimes.com/business/la-fi-cheaphomes10-2009jun10,0,4802553.story

In parts of Southern California, the housing crash has upended a basic tenet of the American dream: that home values always increase over the long term.

Properties in several areas are selling for less than they did 20 years ago, and that's not even counting the effects of inflation.

The reversal is a bonanza for some first-time buyers. They're nabbing houses for less than what their parents paid in the late 1980s, jumping into a real estate market that has become a kind of economic time machine.

To return to the past, take a stroll down Mulberry Avenue in Lancaster. John A. Beatrice, 55, bought his spacious two-story Spanish-style house there brand-new for $120,000 in 1989. It was a price he could comfortably afford, and he planned on staying through retirement, so he wasn't worried about price swings.

"I always knew real estate goes like this," said the aerospace engineer, moving his hand in an undulating motion like bell curves on a graph.

 

But he never imagined his neighborhood would drop off the charts. In April, a slightly larger home two doors away sold for $66,500. That's just over half the $130,000 it went for new in 1992. In 2005, that house sold for $330,000.

Beatrice's 29-year-old daughter is now shopping for Lancaster houses priced lower than when she was a kid.

Home prices across most of Southern California have not fallen nearly as far. The median price in the six-county area was $247,000 in April, about what it was in 2002.

But in 14 Southland ZIP Codes, mainly desert communities in the Antelope Valley and Inland Empire, median prices have fallen below levels recorded in April 1989, according to MDA DataQuick, a San Diego real estate information service.

That means thousands of homes in those neighborhoods -- even houses barely 20 years old and in decent shape -- have lost every dime of their appreciation, giving back not just the gains of the recent bubble but steady increases logged over a generation.

The April median price in Beatrice's Lancaster ZIP Code of 93535, for example, was $87,000. That's down 74% from a $334,500 peak price in 2007. Even worse was the 92410 ZIP Code in the city of San Bernardino, which covers several older neighborhoods. Its $61,000 April median represents an 84% drop from the peak of $370,000 in 2007.
 

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Re: Daily Digest - June 25

More Intentional Misdirection - The Market Ticker

About a week ago I wrote a Ticker about my astonishment that foreign central banks would want 50% of a 30 year Treasury issue, and mused that these foreigners must be expecting (and might be intending to impose) crushing deflation.

It turns out that my skepticism was well-warranted, for a different reason:

But in a little-noticed switch on June 1, the Treasury changed the way it accounts for indirect bids, putting more buyers under that umbrella and boosting the portion of recent Treasury sales that the market perceived were being bought by foreigners.

....

The new definitions are deep in the arcane world of Treasury auctions. The change involves buyers who place orders through primary dealers. Those had been counted as direct buyers, but as of June 1 they were classified as indirect buyers, making that group larger than before. Because investors view that group as being dominated by foreign buyers, they assumed foreign demand was higher.

Very nice.

So now we have the Treasury Department changing the rules so that the investing public cannot determine what sort of actual appetite foreigners have for our Treasury Debt by obscuring what had, up until then, been a very reliable gauge of their sentiment.

This sort of intentional game-playing is obscene and pervasive in our financial system and government over the last twenty years, with this being just the latest insult.

Treasury, of course, knows the interest level of foreigners in our government debt.

Why are they suddenly afraid of letting every market participant see the same information?

Do we have a "little problem" here that someone doesn't want to talk about? 

 

fujisan's picture
fujisan
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Re: Daily Digest - June 25

FT Alphaville » Blog Archive » Borrowed in China

Here’s quite a glaring chart from Standard Chartered depicting M2 expansion rates from around the world:
World M2 - Standard Chartered

... 

 

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fujisan
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Re: Daily Digest - June 25

Chiquita: No problems from shipper's woes | Cincinnati.com | Cincinnati.Com

Downtown-based produce giant Chiquita Brands International says that the bankruptcy and liquidation of one of its major shipping providers will not impact the flow of bananas and other products.

Eastwind Maritime, Inc. filed for Chapter 7 bankruptcy and liquidation protection in New York Wednesday. The company owned four ships that had previously belonged to Chiquita, which sold off all its own ships in 2007 but leased them back under a long-term charter. All 12 of those ships still remain under Chiquita control, and handle about 70 percent of Chiquita's shipping needs to the U.S. and Europe.

"We are taking appropriate steps to protect Chiquita's interests under these long-term charters," said Waheed Zaman, senior vice president, product supply organization. "While Chiquita's shipping operations represent only a comparatively small part of Eastwind's business, we have been monitoring developments closely and are working with the other parties involved in the chartering relationships to help assure ongoing and timely service to our customers."

About just-in-time: efficiency vs. resilience

From Wikipedia:

Resilience is defined as “the positive ability of a system or company to adapt itself to the consequences of a catastrophic failure caused by power outage, a fire, a bomb or similar” event.

...

Making Resilience Reality

More scholarship is turning towards examining how to achieve resilience. Some have identified the four facets of resilience as preparedness, protection, response and recovery.

fujisan's picture
fujisan
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Re: Daily Digest - June 25

Enjoy 

 Vladimir Putin humiliates Russian supermarket chiefs over expensive sausages - Telegraph

Vladimir Putin, the Russian prime minister, has burnished his populist credentials by storming into a Moscow supermarket and ordering staff to cut the price of their sausages.

In keeping with a new strategy of deflecting blame for the country's economic woes onto the standard-bearers of Russian capitalism, Mr Putin excoriated supermarket executives for their greed as ordinary shoppers looked on in bewilderment.

The prime minister abruptly interrupted a meeting with senior retailers at the Moscow White House, the seat of the Russian government, to drag them on an impromptu visit to a nearby branch of the Perekrestok supermarket chain.

Striding angrily through the aisles with a retinue of glum executives in tow, Mr Putin came to a halt in the supermarket's cold meat section and gesticulated towards a packet of sausages priced at just under £5.

Rounding on Yuri Kobaladze, the chain's head of corporate relations, Mr Putin demanded: "Why do your sausages cost 240 roubles? Is that normal?" "But these are high quality sausages," Mr Kobaladze replied, looking crestfallen.

With a look of relief crossing his face, the executive spotted some cheaper sausages.

"Look, these ones are just 49 roubles," he said.

But the prime minister was not to be deterred. "Too expensive," he muttered, before conjuring up a price list from his pocket. "I can show you your mark up. Look at this kind of sausage. You've marked it up by 52 per cent."
...

Davos's picture
Davos
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Re: Daily Digest - June 25

 Fujisan: GREAT articles!

I'm reading the one just above and wondering how long it will be before our government does the same thing. Take care.

idoctor's picture
idoctor
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Re: Daily Digest - June 25

Glen Beck Peter Schiff 6/25/09

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