Monday, October 22, 2007

Signs of the Economic Apocalypse, 10-22-07

From Signs of the Times:

Gold closed at 768.40 dollars an ounce Friday, up 1.9% from $753.80 at the close of the previous week. The dollar closed at 0.6994 euros Friday, down 0.8% from 0.7053 at the close of the previous Friday. That put the euro at 1.4298 dollars compared to 1.4178 the Friday before. Gold in euros would be 537.42 euros an ounce, up 1.1% from 531.67 for the week. Oil closed at 88.60 dollars a barrel Friday, up 5.9% from $83.69 at the close of the week before. Oil in euros would be 61.97 euros a barrel, up 5.0% from 59.03 for the week. The gold/oil ratio closed at 8.67, down 3.9% from 9.01 at the end of the week before. In U.S. stocks, the Dow closed at 13,522.02 Friday, down 4.2% from 14,093.08 for the week. The NASDAQ closed at 2,725.16 Friday, down 3.0% from 2,805.68 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.37%, down 31 basis points from 4.68 for the week.

Another scary week with oil rising 6% in dollars, briefly passing the $90 mark, gold rising 2%, the dollar falling to more record lows and, this time, even U.S. stocks began to falter, with the Dow falling 4.2%, more than half of that on Friday. Much of this can be attributed to the housing crash in the U.S. and the Bush administration in its death throes threatening to unleash World War III.

Crude Oil Breaches $90 a Barrel on Dollar Drop Against Euro

Bill Murray

Oct. 19 (Bloomberg) -- Crude oil breached $90 a barrel in New York for the first time as the dollar traded near a record low against the euro, enhancing the appeal of commodities as an investment.

Investors purchased oil on speculation the Federal Reserve will cut borrowing costs to bolster the U.S. economy when policy makers meet on Oct. 31. Oil futures set records the past four days on concern supplies from northern Iraq may be disrupted if Turkey takes military action against Kurdish rebels.

“The weak dollar is pushing the price higher,” said Simon Wardell, energy research manager with Global Insight Inc. in London. “It’s hard to see how this is going to turn around quickly.”

Crude oil for November delivery rose to $90.07 a barrel in after-hours electronic trading on the New York Mercantile Exchange, the highest since trading began in 1983. Prices were up 9 cents on the day at $89.56 at 1:29 p.m. in London.
Brent crude oil for December settlement traded at $84.66 barrel, up 7 cents.

Turkish lawmakers this week cleared Prime Minister Recep Tayyip Erdogan to authorize one or more military assaults against Kurdish rebel bases in Iraq within a year. Iraq will halt its oil exports through Turkey if attacked, Foreign Minister Hoshyar Zebari said yesterday.

“The search for explaining the price development during this week leaves three elements outside the market fundamentals namely, the role of speculators, geopolitical developments in the Middle East and the weakness of the dollar,” PVM analysts led by Johannes Benigni wrote in a report today.

Falling Dollar

Concern over the conflict between Turkey and the Kurdish rebels spreading to other parts of Iraq and the region is also supporting the oil price, said Wardell.

The U.S. currency fell to $1.4302, from $1.4279 yesterday, and traded at a record low of $1.4319 earlier in the day.

A lower dollar makes oil cheaper in countries that use other currencies. In U.S. dollars, West Texas Intermediate, the New York-traded crude-oil benchmark, is up 46 percent so far this year. Oil is up 35 percent in euros, 40 percent in British pounds and 42 percent in yen.

“This is a financially driven market,” Luis Giusti, the former head of Venezuela’s state oil company, said in an interview. “Investors are going into crude futures to hedge against a weakening dollar.” Giusti is a board member of the London-based Centre for Global Energy Studies.

…The Organization of Petroleum Exporting Countries, agreed last month to produce an extra 500,000 barrels a day starting on Nov. 1 to meet rising demand. World oil consumption peaks in the fourth quarter, when refiners make heating fuel for winter.

“Additional output from OPEC won’t affect the market that’s reacting to non-fundamental factors,” Maizar Rahman, Indonesia’s OPEC governor said in Jakarta today. “The weakening U.S. dollar is prompting investors to move funds to commodities futures from currencies.”

And the bad news in the U.S. housing market continues:

Vital Signs: Housing Drag Won't Let Up

On tap: September figures on home sales and durable goods, October consumer sentiment, and more earnings reports

James Mehring

October 18, 2007

How low can housing go? Early this year it appeared as if conditions were settling down, but the situation has changed dramatically in the past six months. Indeed, its drag on the economy shows few signs of letting up. According to Federal Reserve Chairman Ben Bernanke in a speech on Oct. 15, "the further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year."

This week, the September figures for both new and existing homes are released, and the consensus view is that conditions kept deteriorating. Falling sales has led to a ballooning level of unsold homes on the market. In August, there were over eight months worth of unsold new homes available and 10 months worth of existing homes up for sale.

This building supply of homes will force home prices to keep falling and drive builders to rein in building activity even further. Making matters worse is that falling home prices could keep potential buyers on the sideline as they patiently wait for better deals, thus completing what is shaping up to be a vicious cycle in housing.

Conditions in the credit market, touched off by bad subprime mortgages, are also making it tougher for those who would like to buy a home. Credit standards have been raised and mortgage rates are above levels seen before the credit market turmoil.

A big concern among Fed officials and Wall Street economists is that the ongoing contraction in the residential market will erode consumer confidence and spending. While the popular gauges of confidence haven't tracked very well with actual spending of late, they do provide some measure of apprehension. After all, people aren't just dealing with a housing recession, but also elevated energy costs heading into winter, a softer job market, and the increased uncertainty over the health of the U.S. economy.

In advance of this week’s release of nationwide housing numbers, housing sales in one of the prime bubble markets, northern California, look especially bad:

Bay Area home sales down 40%

From the Associated Press

October 19, 2007

September home sales in Northern California sank to their lowest level in two decades as mortgages became harder to get, a real estate research firm said Thursday.

A total of 5,014 new and resale homes and condominiums were sold last month in nine San Francisco Bay Area counties, a 40.1% drop from the same period a year earlier, according to DataQuick Information Systems.

Last month was the slowest September since the firm began keeping records in 1988.

Sales plunged 31.3% from August as lenders, stung by a nationwide credit crunch, put the brakes on many "jumbo" loans above the $417,000 mark.

Some large mortgages are still being written, but credit requirements have tightened, DataQuick reported.

The median price paid for a Bay Area home in September was $625,000.

There are also increasing signs of a flight from the dollar which could intensify a U.S. currency crisis:

The Turning Away?

Max Fraad Wolff

October 19, 2007

The US dollar has been steadily and consistently falling against major floating currencies. The last few months have been as hard on dollars as they might have been on investor nerves. Generally, the prevailing market sentiment has been positive, if thin and prone to wild swings. The steady rise of the VIX (CBOE volatility Index) speaks to the rising oscillation. American markets and pundits have remained upbeat in their self assessment. Our wealth allocation and indeed world allocation, is increasingly being bet in the opposite direction. We get a lot of reassurance and markets have soared back up and over their pre-July highs. Attention has not been paid to the data that tell us how people are allocating their wealth between nations. This data is released monthly by the US Treasury Department and is called the Treasury International Capital System(TICS). It reveals- with a 1-2 month lag- the net US and foreign purchases of long term US and foreign securities. The data is a good way to check if the money is following the “wisdom.” Lately, the money and the “wisdom” have parted course. We have seen this before. It can not last. Sooner- not usually later- the two move back into harmony.

The newest TICS numbers are for August 2007. The data reveal something very disturbing and important. The rest of the world sold US assets at a rapid clip across August. Our friends and neighbors abroad sold about $35 billion worth of long term US securities. This number includes all major categories of long term securities and all countries and areas. Across the recent past we have been seen massively and generally increasing foreign net purchases of US securities. Last year, 2006, was a record year as foreign entities purchased $1trillion in net long-term securities. Net foreign purchasing has risen since 1993 and was rising very rapidly from 2003 until June 2007. In 2003 purchasing was just under $600 billion rising to $876 billion in 2005. This number dramatically turned negative in August. We have been getting along by selling our future to those far enough away from the everyday realities on the ground to believe what we tell them. The latest figures on gross external debt reveal a grand total of $12.25trillion. This is an impressive gain over last year’s figure of $10.3trillion. America has experienced 18% year over year increase to gross external debt from 6/30/06-6/30/07.

The fire sale atmosphere is enhanced by The Incredible Shrinking Dollar Policy appears to be emerging. Pieces of our firms, future tax receipts, future home mortgage payments and future business profits are on the tender block. Treasuries, the IOUs of the Federal Government, are regularly sold to foreign and domestic institutions and individuals. Economically it would be fair to see government offering of Treasuries as the sale of future tax receipts for cash today. Uncle Sam would gladly pay 520 Tuesdays from now for some hamburgers today! Corporations also sell bonds. They are selling their future ability to pay interest and principle for capital today. Firms issue shares of stock. When these shares pay dividends, firms are offering a fraction of future earnings for capital today. When shares don’t offer dividends, they offer- hopefully- a chance to monetize the future growth of the firm’s earnings. The sale of mortgage backed securities (MBS) represents selling the future mortgage payments of American households.

If you combine the two preceding paragraphs you come up with the following, America has been selling its future household earnings, profits and tax receipts at a rapid and accelerating clip. Starting in August, the rest of the world’s appetite for our future seems to have diminished. Gee whiz, what could possibly explain that? Well all those future revenues are US Dollar revenues and the US dollar has been doing rather poorly of late. This does not help. We live in a magical nation where taxes are cut routinely but spending grows. The last 6 years have seen this long simmering problem flare up. The government revenue story has been defined by massive tax cuts and surging spending. This may rile some buyers. There seems to be some indication that American homeowners are and will continue to have trouble repaying some of the mortgage borrowing they have done. Thus, the currency in which foreign nationals will be paid is in decline. At the same time the certainty of repayment is in greater question than many had expected. America’s future looks less bright to some foreign asset buyers. Here American investors agree with foreign investors. The Net Purchase of foreign securities by Americans has been rising very rapidly since 2004.

Maybe they decided to watch what the Americans were doing with their money? Maybe the have bought some much American debt simple prudence and portfolio diversification mitigate against growing US exposure? Maybe they agree with every large bank, and international institutional forecast that sees the US under growing many other nations?

The position of the US in the world economy will move with the position of US Dollar assets in the world economy. We are huge net borrowers from the world. Across recent years we have been borrowing between 60%-70% of globally available international funds. We run on debt and selling assets to foreign investors. If that is trending down- let alone turning negative as in August- it is cause for real concern. One month does not a pattern make. The last 3 months have raised many daunting prospects. No looming risk is more serious than a possible turning away from US asset purchase.

Piling on are the IMF and the Japanese establishment:

IMF says dollar ‘overvalued’

Chris Giles

October 17 2007

Currency traders were given a green light to continue selling the US dollar on Wednesday, as the International Monetary Fund said the greenback “remains overvalued” and rejected claims the euro had risen too far.

Contradicting Rodrigo Rato, the outgoing IMF managing director, who last week said “right now the dollar is undervalued”, the fund’s staff conclude the dollar is still too high. The multilateral lender also forecast slower growth in 2008 at 4.75 per cent, compared with 5.2 per cent expected this year.

The IMF’s new stance on the dollar will counter the arguments to the contrary made by France and some other eurozone members at this weekend’s meetings of the Group of Seven leading economies and the IMF’s governing body. They have been urging a change in language to temper the fall in the dollar, which dropped by more than 4 per cent against the euro in September alone.

The IMF, however, has little sympathy for struggling eurozone exporters hit by the currency’s rise. It says that even after its recent rise, the euro “continues to trade in a range broadly consistent with medium-term fundamentals”.

Apart from the dollar, the IMF’s economists also think sterling is overvalued, while the Japanese yen and the Chinese renmimbi remain too cheap compared with other currencies.

In some of its strongest language to date, the fund’s officials call on China to let its currency appreciate. Repeating its demand for “greater flexibility” of China’s managed currency, the IMF added that such action was in China’s best interests.

“Further upward flexibility of the renminbi, along with measures to reform the exchange rate regime and boost consumption, would also contribute to a necessary rebalancing of demand and to an orderly unwinding of global imbalances,” the World Economic Outlook argued.

Even with slower growth forecast for the US and a weaker dollar, the IMF sees little improvement in the world’s huge trade imbalances, embodied in the US trade deficit and corresponding surpluses in Asia and in oil exporters.

The Fund thinks that the US current account deficit will remain close to 1.5 per cent of world output until 2012, raising the likelihood of a disorderly plunge in the dollar and protectionism growing over the next few years.
Sakakibara Says Dollar May ‘Plunge,’ Forcing Response

Stanley White and Kazumi Miura

Oct. 18 (Bloomberg) -- The dollar may ‘‘plunge’’ in 2008, prompting the U.S., the European Union and Japan to intervene in foreign exchange markets, said Eisuke Sakakibara, Japan’s former top currency official.

U.S. economic growth may slow to less than 1 percent next year as losses on loans to homeowners with poor credit erode consumer spending and bank earnings, he said in an interview today in Tokyo.
Sakakibara, 66, was dubbed “Mr. Yen” because of his ability to influence the currency market during his 1997 to 1999 tenure at the Ministry of Finance.

“Should growth fall below 1 percent, we could see a plunge in the dollar,” said Sakakibara, who is currently a professor at Tokyo’s Waseda University. “Some form of intervention would be necessary to stop it, and that would require coordinated effort from all three major economies.”

The dollar’s 7.3 percent decline against the euro this year and a global credit market slump will be the focus of discussion when Treasury Secretary Henry Paulson hosts policy makers from Group of Seven countries tomorrow in Washington. French Finance Minister Christine Lagarde has called for discussions over whether the European Central Bank should sell the euro to protect exporters’ earnings.

Greenspan Bullish

Former Federal Reserve Chairman Alan Greenspan doesn’t expect a rapid drop in the dollar should nations sell more U.S. Treasuries, according to people attending a forum in Seoul today. Japan, China and Taiwan sold U.S. government bonds at the fastest pace in at least five years in August.

Greenspan is “of the opinion that holdings of foreign- exchange reserves tend not to be moved easily,” said Kim Gyung Rok, chief investment officer of Mirae Asset Investment Management Co. in Seoul, who attended the presentation.

Sakakibara said falling U.S. interest rates will put off foreign investors. The Federal Reserve may follow its Sept. 18 interest rate reduction with a further cut before the end of the year to stem fallout from subprime mortgage defaults, Sakakibara said. It is likely to keep the target for the overnight lending rate between banks on hold at 4.75 percent on Oct. 31, he said.

The dollar fell to $1.4247 against the euro at 8:24 a.m. in London from $1.4208 late yesterday and approached a record low of $1.4283 reached on Oct. 1. It bought 116.50 yen from 116.68. The U.S. currency may fall beyond $1.45 per euro in 2008 and even further depending on the U.S. economy’s slowdown, Sakakibara said.

Intervention History

The International Monetary Fund yesterday cut its forecast for 2008 expansion in the world’s biggest economy to 1.9 percent from 2.8 percent. “There are serious risks ahead” because of the financial market turmoil, Simon Johnson, the IMF’s chief economist, said at a press conference in Washington.

Policy makers intervene in currency markets by arranging purchases or sales of foreign exchange. Japan hasn’t sold its currency since March 16, 2004, and last bought yen in 1998.

While Paulson has said repeatedly that a strong dollar is in America’s interest, he says the value of currencies should be set by the market. Under President George W. Bush, the Treasury has never intervened in the currency market.

The ECB bought euros in November 2000, seeking to boost the currency as it fell below 90 cents, following its launch in the previous year. ECB President Jean-Claude Trichet urged politicians to show “verbal discipline” on currencies in an interview with CNBC broadcast on Oct. 15.

The yen may approach 100 against the dollar next year as sentiment worsens for the U.S. currency, Sakakibara said. Japan’s currency climbed as high as 111.61 on Aug. 17, the strongest in more than a year.

“There’s more risk for the yen to strengthen next year, as the dollar’s problems grow,” Sakakibara said.

Beyond financial markets, worse storm clouds are appearing on the horizon: famine and pestilence. The pestilence part comes with frightening news that anti-biotic resistant staph infections are spreading in the U.S. While this may not end up being a Black Death-level plague, conditions are ripe for such an event. The Black Death of the fourteenth century followed three centuries of unprecedented economic growth, population growth and world trade and was preceded by growing food shortages in the decades before 1349.

Drug-Resistant Staph Infections Reaching Epidemic Levels in Some Parts of U.S.

By Steven Reinberg

Oct 19, 7:00 PM ET

FRIDAY, Oct. 19 (HealthDay News) -- Infections with the drug-resistant staph germ called MRSA are approaching epidemic levels in some parts of the United States, a federal epidemiologist says.

Methicillin-resistant Staphylococcus aureus infections, which are potentially deadly, are now responsible for an estimated 12 million outpatient visits each year for skin infections, said Jeff Hageman, of the U.S. Centers for Disease Control and Prevention.

Hageman blamed the increase on rising numbers of infections -- a trend that has probably been under way for several years -- and greater awareness of the problem.

"MRSA is epidemic in some regions of the country," he said. "The highest rates are in the southern parts of the U.S., including Atlanta, Los Angeles and Texas. We first began noticing MRSA in 1999 when there were four child deaths in Minnesota and North Dakota."

"Most of these infections are minor and go away without any medical treatment," Hageman said. "It's not clear why some progress to life-threatening disease."

While most MSRA infections occur in hospitals, the number and severity of infections in the community appears to be increasing. "Some 30 percent of people have staph bacteria on their skin," Hageman said. "The extent to which it is growing in the community is just being defined."

Hageman's assessment of the problem follows publication this week of a study in the Journal of the American Medical Association that found that MRSA staph infections are more common, both in and out of hospitals, than experts had once thought. More people died in 2005 from MRSA infections in the United States than from AIDS, the journal noted.

And it follows news reports that students in school districts in at least six states have been infected with MRSA, and three of the children have died. Ashton Bonds, 17, of Bedford, Va., died Monday as a result of infection. Preschooler Catherine Bentley of Salisbury, N.H., and Shae Kiernan, 11, of Vancleave, Miss., both died from infections last week, Fox News reported.

Also, six football players at one North Carolina high school, seven students at three West Virginia schools and two teens in Connecticut have been diagnosed with MRSA infections.

MRSA infections are the leading cause of skin and soft tissue infections among hospital patients, and can result in severe and even fatal disease. These infections account for almost 19,000 deaths and more than 94,000 life-threatening illnesses each year in the United States.

Dr. Pascal James Imperato, chairman of the department of preventive medicine and community health at the State University of New York Downstate Medical Center in New York City, said there's a growing awareness of MRSA infections, particularly those occurring outside of hospitals.

"But there is also an increase in the number of cases, especially in the community," Imperato said. "That has come about because of changes that have occurred in MRSA in the community where, at the biological level, the organism had mutated and can cause serious illness, whereas before it didn't."

Many people carry the MRSA bacteria on their skin. But it has only become a problem since the increased use of antibiotics, which has caused the bacteria to mutate into a drug-resistant form, according to the CDC.

MRSA is resistant to methicillin, which includes several types of penicillin. MRSA infections are treated with newer antibiotics, such as vancomycin, teicoplanin and glycopeptide, although newer strains of the bacteria are becoming resistant to these antibiotics as well. This is one reason health officials warn against the over use of antibiotics, the CDC said…

The famine part is coming with increased food costs and food shortages:

Food Set To Become The Next Big Global News Story

October 14, 2007

At the beginning of the summer, the National Farmers’ Union of Canada put out a press release that included the headline Global food crisis emerging.

The release is scary reading. Based on early predictions by the United States Department of Agriculture on world grain supply and demand for the 2007-08 crop year, the NFU’s director of research, Darrin Qualman, broadcasts a dire warning that “we are in the opening phase of an intensifying food shortage.”

Qualman means a worldwide shortage.

As the world went into the Northern Hemisphere’s summer, total grain supplies were the lowest in the 47 periods for which data exists and were quite possibly at their lowest levels in a century. This crop season would mark the seventh year out of the past eight in which global grain production fell short of demand.

“The world is consistently failing to produce as much grain as it uses,” Qualman said.

Despite the so-called “green revolution,” the miracle of fertilizers, irrigation techniques, and disease-resistant grains, the world, once again is in danger of not feeding itself. There are all kinds of reasons for this: population growth, climate change, a shift to feeding livestock instead of using grain directly for food, which is a less efficient way of feeding people, and growing demand for ethanol.

There are no easy solutions and there are other potential problems. The collapse of cod supplies is well-known, but many edible fish species are also in danger. Qualman says one-third of ocean fisheries are already in collapse and scientific journals estimate that two-thirds may be in collapse by 2025.

Climate change may exacerbate grain shortages. Global warming has been largely associated with drier conditions in grain-growing areas, but that is far from universal. Some areas in North America have been having unusually wet weather in spring — ideal conditions for scab, or head blight. Scab hit Nebraska wheat fields this year. The Broad Institute, a research body supported by the Massachusetts Institute of Technology, Harvard and affiliated hospitals warns that head blight “is becoming a threat to the world’s food supply.”

The Food and Agriculture Organization of the United Nations reported earlier this year that a new and virulent fungus of wheat-stem rust had spread from East Africa to Yemen. Some 80 per cent of wheat varieties in Africa and Asia are susceptible to the disease…

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