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    Daily Digest – Jan 20

    by Davos

    Tuesday, January 20, 2009, 12:18 AM

  • Did Inflation Really Dry Up Last Year?
  • Global Banking Sector Struggles
  • YTD Job Losses (2009 Chart)
  • Worst Performing S&P 500 Stocks (YTD 2009 Table)
  • Jan. 1934: The Gold Reserve Act (Video is slow if you let it play and then replay it it works great)
  • Volker Recommendations FINANCIAL REFORM A Framework for Financial Stability
  • EU Recession Gets "Official" Status
  • Brazil loses 654,000 jobs in December amid crisis
  • MSNBC Warren Buffett Interview (Video Economy/Obama)
  • The Next Threat To The Financial System: Corporate Default
  • Spending the Deficit 
  • Bush’s Economic "Legacy" (Bloomberg Video)
  • Financial Sense News Hour 12/20/2008, 3rd Hour Year End Review (Possible Repost, Very Good)


Did Inflation Really Dry Up Last Year?


A mathematical oddity in Friday’s consumer price index means you can claim with some statistical backing that inflation last year was either 0.1% or 3.8%.


Measured on a December to December – or calendar year – basis, the consumer price index only grew 0.1% in 2008, according to Labor Department figures, the smallest gain in over 50 years and well below the 4.1% gain in 2007.

But when the annual average of the CPI for all of 2008 is compared to the average for 2007, the increase was much higher, 3.8%. That was actually up from 2007’s rate.

"It’s unusual for there to be this big of a difference," said Labor Department analyst Stephen Reed. The two series sometimes line up exactly, and usually when there’s a gap it’s only a few tenths of a percentage point.

But when there’s a lot of volatility, like in 2007 and 2008, they can diverge a lot. Think of it this way: if the price of gasoline stays at $1 all year, then there’s obviously no inflation there. If it rises quickly from $1 to $2 per gallon and stays there for the first 10 months of the year and then falls quickly back to $1 in December, then on an average annual basis inflation would be higher than on a calendar year basis, where it would still be flat.

When it comes to assessing near-term trends, economists prefer calendar-year changes, which is why Wall Street research notes universally mentioned the 0.1% figure, and not the 3.8% one.

The two series should even out over time, and in 2009 the calendar-year increase will probably be much higher than the average annual increase given the low base that the CPI index is starting at this year. -Brian Blackstone



Global Banking Sector Struggles 

The following chart (hat tip Paul @ Infectious Greed) details the percentage of companies in the banking sector that are on negative watch (per Fitch) by country as of now (January 2009) and then (January 2007).


YTD Job Losses (2009 Chart)

Worst Performing S&P 500 Stocks (YTD 2009 Table)


If the Dow were to close at its current level, the only prior close that would be lower since the October 2007 peak would be the November 20th low. It’s not looking good for the bulls who thought we wouldn’t see the Dow with a 7 handle for some time. 

Jan. 1934: The Gold Reserve Act (Video is slow if you let it play and then replay it it works great)

Volker Recommendations FINANCIAL REFORM A Framework for Financial Stability

EU Recession Gets "Official" Status 

The EU finally owned up to what everyone already knew. It will face its first recession since it was formed over ten years ago. It was nothing more than a fantasy that it could dodge the fates of the US and UK. 

The forecasting arm of the European Commission said GDP within the region would drop at 1.9% this year. The number seems optimistic.

According to Bloomberg, "The overall outlook is grim," European Union Monetary Affairs Commissioner Joaquin Almunia told reporters in Brussels today. "In 2009, we are forecasting negative growth for 11 out of the 16 euro-area members."

The news from the EU actually sends ripples all the way around to the other side of the world. The regions to which China exports most of its goods have now all officially said the 2009 will be a year of economic contraction. Japan admitted its troubled some time ago, The UK and US have seen the light in the last 60 days.

China can no longer count on any substantial part of the consuming world to exhibit an increased demand for the products that its factories send out around the globe. That makes it near certain that the world’s most populated nation faces negative GDP before the end of the year. 

Brazil loses 654,000 jobs in December amid crisis 

SAO PAULO, Brazil (AP) – Brazil’s Labor Ministry says the country lost 654,000 jobs in December as the international financial crisis slammed Latin America’s largest economy.
The loss for the month was the worst on record since May 1999. The hardest hit sectors were industry, agribusiness and construction. 

Labor Minister Carlos Lupi said Monday that the job losses were a direct impact of the global crisis.

The data measures the number of formal jobs in Brazil’s economy. Brazil added 1.6 million workers for all of 2008 despite the December job losses. 

MSNBC Warren Buffett Interview (Video Economy/Oboma)

The Next Threat To The Financial System: Corporate Defaults (NYT)(CHTR)(LVLT)(SIRI) 

The next big threat to bank earnings may be corporate defaults on debt, much if it originally supplied by the banks themselves. The irony is that the problem could be solved by the banks, if they won’t open their vaults and provide more capital to companies who are in the process of refinancing. 

But, they won’t. At least not without being forced to do so by the government. Banks don’t want to put their earnings in greater trouble by offering more risky loans on top of the ones they already have issued. As the recession deepens, they have no reasonable way to evaluate whether they will be paid back.

For debt which is rated junk, the reluctance of the banks is understandable, but the issue reaches far beyond firms with highly risky credit profiles., The New York Times reports that "This year alone, more than $700 billion in corporate loans will come due, according to Standard & Poor’s. "

A number of large American companies are left without access to capital by the trend. These include The New York Times (NYT) itself, which has $400 million in debt due at the middle of this year. Other corporations from Sirius (SIRI) to cable giant Charter (CHTR) to large telecom firm Level 3 (LVLT) may be forced into Chapter 11 or liquidation because they cannot tap funds that would have been readily available two years ago.

When companies are able to borrow, they are paying interest rates of 10% or higher. Servicing that debt requires a large part of operating income which means that the money borrowed may solve short-term problems but it robs money from operations as time passes. High debt service costs become a boat anchor in and of themselves.

The trend makes it more likely that the US will have to do what the UK has announced that it will do. The Treasury may have to step directly into the corporate debt market and sponge up paper from private enterprises to take the credit obligations of American corporations out of the hands of financial institutions. It is a hell of a way to fix the credit crisis, and its eventual consequence is that the federal government does not just end up owning big pieces of banks. It ends up owning pieces of companies across a wide spectrum of industries.

In the final analysis, the government becomes the source of capital for the engines of private enterprise. 

Spending the Deficit 

Spending the Deficit

The Congressional Budget Office announced last week that the federal deficit for 2009 would be $1.2 trillion-as a share of the economy, the largest since World War II. Responding to that staggering sum, President-elect Barack Obama warned that without decisive action, "trillion-dollar deficits will be a reality for years to come."

How much is $1.2 trillion?

To put the deficit in perspective, we thought of a few unrealities that carry a similar price tag:

For the sake of our children: 4.8 billion Nintendo Wiis.
What really does the body good: 300 billion gallons of milk.
Love thy neighbor: everything produced in Canada in one year.
Monopolize: purchase Exxon Mobil, General Electric, Microsoft and Wal-Mart.
IS our children learning?: fund the entire education system, Kindergarten through college, for one year.
Second time’s a charm: pay for the entire War in Iraq twice over.
At the pump: free gasoline for all Americans for the next five years.
At the box office: one free movie ticket for every American, every single day.
I.O.U.’s: pay back all the money we owe to China and Japan.
Reverse the Ponzi: compensate all of Bernard Madoff’s defrauded investors with a 2000% rate of return.
A recent article in The Christian Science Monitor provides some additional spending scenarios. For example, according to CSM:

"If the sum were calculated as a traditional 30-year fixed-rate mortgage, Uncle Sam would have to write a monthly check for $6.7 billion. That would be enough to pay the mortgage on about 10 percent of the nation’s homes each month."

PGPF’s Manager of Research & Analysis Matthew Helm told CSM that "another way to view the $1.2 trillion deficit is in terms of citizens and households. It works out to $4,000 per citizen, or $10,000 per household." 

Bush’s Economic "Legacy" (Bloomberg Video)


Financial Sense News Hour 12/20/2008, 3rd Hour Year End Review (Possible Repost, Very Good)

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