Thursday, May 15, 2008

Debt Rattle, May 15 2008: Money costs money

Russell Lee: Home Sweet Hovel - December 1936.
"Mrs. Charles Benning sweeping steps of shack in Shantytown. Spencer, Iowa."

Ilargi: The US economy survives on fantasy inflation and sales (no cars?!) criteria and accountancy tricks à la Freddie Mac.

Germany and Spain share the same currency but live in different universes which can't even be called parallel anymore. How much longer does the EU -and the European Monetary Union- hold on for dear life? And why would they? There'll be a country soon that wants to go its own way, either on the rich or on the poor side of the spectrum, or both.

US inflationists are swallowing their predictions faster than they can say debt depression. And that too drives up the markets, all the way to the impossible prospect of deflation, the one thing the Fed will make sure to never let happen again.

Emerging economies start to feel why is is not a good idea to import unlimited amounts of overleveraged US dollars; it has to go somewhere, brothers! You'll have to stop accelerating your exports to America, or you'll be steamrolled into oblivion by your own hungry crowds.

Down the line, where the chips and the whips come down, money has a price. Just watch the bond markets.

Sorry Greenspan, But I’m Not Seeing It
According to Marketwatch yesterday, "Greenspan sees U.S. house price hit bottom in 2009".  I think he’s seeing things.
U.S. home prices will likely bottom out in early 2009 after the market absorbs excess inventories, former U.S. Federal Reserve Chairman Alan Greenspan told audiences in Asia Wednesday, according to news reports. Greenspan, who spoke by video link to audiences in Hong Kong and Singapore, said the current pace of liquidation will accelerate, but excess supply won’t be eliminated until early 2009.

According to data from the NAR, existing home inventory is up 6.6% year-over-year, and months’ supply is up 32%.  Existing homes aren’t going anywhere fast.  The National Association of Homebuilders is reporting a 15% drop in inventory year-over-year, but months’ supply is also up 32%.  At this rate, how will all the excess supply be "eliminated" by early 2009

Ilargi: In the end, the fate of the financial world is in the hands of the bond markets. No government or central bank has any control over them. It’s becoming harder every day to see how a sharp rise in government -and corporate- borrowing costs can be averted. And that will be bad. Real bad.

Fund managers fear bond rout and stagflation more than recession
Fund managers across the world are no longer worried about the imminent risk of recession, fearing that inflation has become the bigger danger after the emergency stimulus by the US Federal Reserve. The monthly survey by Merrill Lynch shows that portfolio chiefs are still deeply disturbed by the imbalances in the global system, but are now switching their focus to the danger of a bond debacle.

David Bowers, chief adviser to the Merrill report, said that 80pc of investors expect long-term interest to move higher over the next year. "Evidence is pointing to a possible sell-off in bonds as inflation worries mount. A sharp rise in bond yields could help convert this financial crisis into an economic crisis," he said.

The proportion expecting a global recession within a year has fallen from 40pc to 29pc since last month, probably reflecting the view that the Fed has stabilised the banking system by rescuing Bear Stearns. Even so, a full 18pc think we are already in a recession, a view that conflicts starkly with mainstream consensus among central banks.

"The mix of concerns for investors has changed. There is a deeply embedded view that investors are now facing a stagflationary environment. Concerns about earnings haven't got worse, but they haven't gone away," said Mr Bowers. The funds think that earnings forecasts by analysts are "detached from reality", with 77pc across the globe saying that estimates are too high.

Least popular are UK equities, in part because of moves to give the UK Pensions Regulator more power to stop companies tapping their pension kitties to pay dividends to shareholders. UK managers are holding almost record levels of cash. A net 52pc think oil is overvalued, and 29pc think gold is too high. Even so, European funds are pouring money into the commodity sector as they flee deterioration at home, betting that the infrastructure boom in emerging markets is not over. A net 41pc are overweight in oil and gas.

The survey is based on 179 managers worldwide controlling $615bn in funds. One thing they seem to have in common is contempt for banks. Financial stocks have sunk into the ultimate hell, the "value trap". Investors seem to believe the European Central Bank has been vindicated on inflation. The proportion complaining the ECB has been "too restrictive" is down from 48pc to 20pc since last month.

Is It Really Different This Time?
In just the two months since the world stood at the precipice of a financial meltdown, the markets have decided inflation presents the clear and present danger and, moreover, the Federal Reserve's next move will be to raise interest rates. It's as if an anorexic had bulked up so much in a couple of months as to need to go on a diet.

In the Treasury market, prices plunged and yields soared Tuesday on concerns about inflation and, ironically, consumer spending was as soggy as it seemed (but no worse.) Convoluted? Indeed. And Robert Kessler, the eponymous head of Kessler Investment Advisors in Denver, isn't buying it. Kessler, whose firm manages leveraged portfolios of Treasury notes for institutions and wealthy individuals around the globe, has seen this pattern in each cycle in the past quarter century.

There's been a hiccup in every decline in the two-year Treasury note yield in the four major cycles since the mid-1980s. (The two-year T-note is the most actively traded security on the planet and reflects expectations about the Fed's next move. Kessler concentrates on this portion of the yield curve and adjusts the effective duration of the portfolio by adding or subtracting leverage.) But, after those temporary blips, the two-year note yield fell again, and onto new lows for the cycle.

For instance, in 1984-85, after a drop of over 200 basis points (two percentage points), the two-year backed up by 119 basis points -- before declining 200 basis again. In 1990-92, after a 300 basis-point decline, the two-year yield popped up 110 basis points -- and then declined about 200 basis points. Once again, in 2000-02, the two-year note yield rose 135 basis points after a 300-plus basis-point decline, and then fell about 175 basis points.

And from last September through mid-March, the two-year note yield plunged from 4.25% to under 1.50% amid the deepening credit crisis. From its nadir, the two-year have jumped more than 100 basis points. The recurring script seems to be that after the initial phase of the financial squeeze that leads to the first cuts in interest rates, Wall Street essentially thinks that this monetary easing has cured all ills. But, while that addresses the problems of the financial markets, the economic woes in the real economy take longer to cure. That realization leads to the final downleg in rates, Kessler says.

That's still to come, he continues. "Phase Two will be worse than Phase One," he says. It will come when consumers pull up to the gas pumps and then have nothing left to spend on anything else. Combined with the impact from soaring food costs, that point isn't far away. Nevertheless, the Treasury market was spooked Tuesday by the April retail sales data, which showed sales excluding automobiles rose 0.5%, which seemed downright perky, even though overall sales dropped 0.2%.

Excluding autos from retail sales makes even less sense than deducting food and energy costs from inflation measures, but so be it. In the real world of the stock market, General Motors is down over 50% from last year's peak because of the irrelevance of weak car sales. As for inflation, Kessler also observes that it's curious that with crude oil hitting $126 a barrel, gold hasn't made net headway in three months. Tuesday, June gold futures lost $15.30 to $869.60 an ounce even as crude futures set a new mark.

While the charts of the current cycle looks almost like those of its three predecessors, Kessler fingers an important difference. Then, the Fed could fuel a recovery by dropping interest rates. Housing, especially, would respond forcefully and lead the rest of the economy to recovery. But in past cycles, the mortgage market could readily provide credit to prospective buyers; not so any more. Credit this time is tighter, not by the Fed's doing, but mortgage originators, which play an integral role in the process.

Consumers, Kessler continues, came out of the 1980s with high savings rates and liquid assets. Now, they're tapped out because of a lack of savings in the past few years. And to sustain spending in excess of poor income growth, Americans used credit to keep spending. The limits on that are becoming apparent. All in all, it really is different this time, Kessler says, invoking the mantra used by blinkered bulls for years. It is worse, he asserts, given the little response he sees in the real economy from the rate cuts that have taken place.

Food Stamps and The Un-Adjusted Economy
While food stamps are clearly a lagging economic indicator, the continuous rise in recipient numbers during 2002-2008 causes me to conclude that real GDP growth in previous years was not as robust or widespread as the headline numbers suggested. Unlike other data, I believe food stamp numbers are not greatly "adjusted" and thus provide a truer picture of the economy - or, at least one aspect of it: how difficult it is for real people to make ends meet.

As opposed, say, to those phantom employees created by BLS models. (I guess they don't need food stamps because, if we are to believe the official inflation figures, they don't eat.) For example, after adjusting and re-adjusting, the BLS reported that the economy added a net 800,000 jobs in the 12 months to February 2008. And yet, in the same time food stamp participation increased by nearly double that number.

While the two statistics are not necessarily mutually exclusive, which one provides a better "feel" for what is actually happening in the "un-adjusted" economy? Looking at the entire 2002-07 period, the economy added a net 8 million jobs and 10 million more people went on food stamps.

Retail and food service sales were reported today (-0.2% from the previous month) and the media spin machine immediately went into overdrive to cushion the bad numbers. The favorite ploy is to exclude autos and various other sectors to come up with "core" retail sales. (It's a bit like core inflation that excludes food and fuel, also known as inflation without the inflation...).

Today's spinning involved the exclusion of auto sales, since they dropped by a very sharp -2.8% in April. So, without the drag of such a terrible figure, "spun sales" become a much more palatable +0.5%, supposedly signifying all kinds of "robust core spending" nonsense. Only problem is, at $72 billion/month auto sales are by far the largest segment, accounting for 20% of all retail and food service sales.

Since two can play at this game, how about total sales minus gasoline, food stores and restaurants? After all, these are exactly the items most impacted by rising food and fuel prices and rising sales there are not exactly a sign of higher discretionary spending. This total was down -0.4% from March. Robust..not!

Ilargi: Angelo Mozilo’s head is caught in a tightening noose, and there’s few people who feel for him. His cronies are far too busy to save their own skins to care; they’ll sell him out whenever and wherever they’re offered the opportunity.

Judge Says Countrywide Officers Must Face Suit by Shareholders
Directors and officers of Countrywide Financial, the beleaguered mortgage lender, must answer shareholder accusations of insider trading and an overall failure to monitor lending practices that led to the company’s collapse, a federal judge in California has ruled.

Rejecting the arguments of Countrywide executives and directors that they were unaware of lax loan operations that led to ballooning defaults, Judge Mariana R. Pfaelzer of Federal District Court in Los Angeles ruled Tuesday that she found confidential witness accounts in the shareholder complaint to be credible and that they suggested “a widespread company culture that encouraged employees to push mortgages through without regard to underwriting standards.”

Plaintiffs also identified “numerous red flags” that would have warned directors of increasingly risky loans made by Countrywide, according to the judge, who rejected a motion to dismiss the suit. “It defies reason, given the entirety of the allegations,” Judge Pfaelzer wrote, “that these committee members could be blind to widespread deviations from the underwriting policies and standards being committed by employees at all levels. At the same time, it does not appear that the committees took corrective action.”

Hundreds of mortgage companies have failed in the last year or so, but few executives or directors have taken responsibility. That makes the ruling significant, said Blair A. Nicholas, one of two lawyers at Bernstein Litowitz Berger & Grossmann representing the plaintiffs. “It is a critical step enabling Countrywide and its shareholders to hold accountable the officers and directors who looted the company and were responsible for its devastating collapse,” Mr. Nicholas said.

Countrywide shareholders have lost billions of dollars since 2007 when its shares hit a high of $45.03. They closed on Wednesday at $4.85. “As institutional investors, it is our duty to seek recourse when a company’s directors engage in practices that are not in the best interests of shareholders,” said Christa S. Clark, chief legal counsel of the Arkansas Teacher Retirement System, the lead plaintiff in the case. “We are pleased with the court’s ruling as it enables the shareholders to move forward with our case and remedy this wrong.”

The plaintiffs in the case said they hoped to recover money for shareholders from Countrywide officials named in the case who sold $850 million in stock from 2004 to 2007. The plaintiffs contend that the directors and officers dumped shares even as the company spent $2.4 billion to repurchase its own stock in late 2006 and early 2007.

The chief executive of Countrywide, Angelo R. Mozilo, has argued that his $474 million in stock sales during the three-year period complied with securities laws under a planned selling program. But he revised the program, known as a 10b5-1 plan, several times, each time increasing the shares to be sold. As a result, the judge wrote: “Mozilo’s actions appear to defeat the very purpose of 10b5-1 plans,” created to allow corporate insiders to sell stock regularly and without direct involvement.

Gerald H. Silk, who also represents the plaintiffs, said: “Corporate fiduciaries cannot expect to evade liability by blaming a general market downturn when there is specific and systematic misconduct taking place right beneath their noses.” The suit names 14 current and former directors and officials as defendants; it is known as a derivative action because shareholders of Countrywide are suing its officers and directors on behalf of the company.

Lawyers for the plaintiffs said that they would ask the judge to expedite discovery so that they can get testimony before the proposed purchase of Countrywide by Bank of America takes place. The deal is expected to close in the third quarter.

OECD warning as stagflation goes global
The OECD's early warning signal is flashing clear signs of economic weakness across the world, with mounting evidence that China, India, and Brazil may soon succumb to the downturn. The closely-watched gauge -- known as the Composite Leading Indicators (CLI) -- has picked up a sharp deterioration in the eurozone in March, notably in Italy and France where the advance signals are falling even faster than in Britain.

The measure tends to anticipate the industrial cycle by about six months. While growth continues to power ahead in most emerging markets, rampant inflation is starting to damage business confidence. "The latest data point to a potential downturn in Brazil, China, and India," said the OECD, the club of rich nations.

Russia is the only country still in full boom among the so-called BRIC quartet of rising powers, but the country's inflation rate reached 14.3pc in April as oil and gas wealth the flooded the economy.

Price pressures across the emerging world are reaching levels that may soon threaten stability unless governments jam on the brakes. Inflation rates have reached: Venezuela (22pc), Vietnam (21pc), Latvia (18pc), Qatar (17pc), Pakistan (17pc), Egypt (16pc) Bulgaria (15pc), The Emirates (11pc), Estonia (11pc), Turkey (9.7), Indonesia (9pc) Saudi Arabia (9.6pc), Argentina (8.9pc), Romania (8.6pc), China (8.5pc), Philippines (8.3pc), India (7.6pc).

Many of these countries are now suffering the worst prices spiral in thirty years, setting off widespread riots. India's government has suspended futures for a clutch of key commodities as states resort to draconian measures. While the soaring cost of food and energy is the key driver for the poorest countries, others are ensnared by their own currency pegs. Most Gulf states are linked to the dollar, forcing them to shadow the US Federal Reserve's super-loose interest rate policy, with inevitable over-heating. China operates a semi-fixed rate, or 'dirty float'.

Christian Noyer, governor of the Bank of France, said this week that the pegs had become a major headache. "The world environment has become very inflationary. Many emerging economies are partially 'importing' US monetary policy, although their position in the economic cycle is fundamentally different," he said.

Stock markets have already fallen sharply in China, India, and Vietnam as the authorities rein in credit. Morgan Stanley has advised clients to cut their holdings of emerging market stocks, warning that surging prices have started to queer the pitch -- at least in the "near term".

Europe faces an incipient "stagflation" as inflation of 3.3pc combines in a nasty cocktail with slowing growth. The mix poses an acute dilemma for the European Central Bank. It fears that 1970s-style inflation could become lodged in the system as workers push for higher wage deals.

Jean-Claude Trichet, the ECB's president, warned of a return to "mass unemployment" if Europe repeats the errors of first oil shock. "We would make an enormous mistake, which is precisely the mistake we made in the first oil shock. We are calling on all economic agents, whether corporate or social partners, to be as responsible as possible," he said.

The ECB's task is doubly complicated by the yawning gulf between the Germanic and Latin blocs of the eurozone. Industrial output fell in Italy, France, and Spain in March. April manufacturing orders fell at the fastest rate since the dotcom bust in Italy and Spain. "We're suffering a clear and profound slowdown in the Spanish economy", said Pedro Solbes, the country's finance minister. The issue of Spain's crumbling property market intruded on the bank's policy agenda last week, pitting the South against the hawkish Bundesbank chief Axel Weber.

It is understood that the meeting broke down into a fierce exchange of national views, ignoring the EU treaty requirement that the ECB focus on the eurozone as a whole. EU officials have begun to ask whether Mr Weber is committed to monetary union. A senior German advisor told a closed group of investors in London last week that "it wouldn't matter in the least if Spain left the euro".

David Bloom, currency chief at HSBC, said the single currency was likely to fall from near record highs as investors woke up to the realities in the South. "The euro has been trading on the German export story. The market has conveniently ignored the collapse in Spain, and the near recession in Italy," he said.

Critics say the ECB has been fretting too much about inflation and not enough about the risk of a severe slowdown later this year and into 2009 if monetary policy is kept too tight. The bank has held rates at 4pc since the credit crisis began, even though its own credit survey points to a lending squeeze.

Three-month Euribor rates -- which set many financial contracts --- are still at distress levels of 4.85pc, roughly 60 basis points above par. ECB officials say their rigid mandate does not allow them to look beyond the current energy spike and follow the Fed in cutting rates pre-emptively. The risk is that the ECB's over-reacts to the oil spike, setting off debt deflation down the road.

European Expansion Beats Forecasts, Led by Germany
European economic growth accelerated more than forecasters expected in the first quarter as the strongest German expansion in 12 years powered the euro region through the global slowdown. Germany's 1.5 percent expansion from the previous quarter was five times the rate of the fourth quarter and more than double what economists expected.

It enabled gross domestic product in the euro area to increase 0.7 percent, exceeding the 0.5 percent estimate of economists and the 0.1 percent witnessed in the U.S. Sustained growth for now justifies the European Central Bank's decision to hold off cutting interest rates as it tries to conquer inflation, which remained above the ECB's ceiling for an eighth month in April. The bank may still soon face a quandary as evidence mounts that the expansion is weakening, even in Germany.

"It appears that the euro zone is still resisting the U.S. slowdown and the ongoing financial turmoil," said Oscar Bernal, an economist at ING Groep in Brussels. "However, a slowdown in economic activity is likely to be in evidence over coming months." Demand from emerging markets and streamlined production methods introduced since the 2001 slump are supporting Germany as other economies weaken.

Commerzbank AG today revised up its growth forecast for Europe's largest economy to 2.4 percent this year from 1.8 percent, paving the way for it to enjoy only its third soft-landing since 1960. The European economy was also boosted by faster-than- expected first-quarter growth in France, which helped to compensate for the weakest Spanish expansion in almost eight years.

Strength at the core of the 15-nation euro-area marks a difference from the last downturn, which was driven by contractions in France and Germany, which together account for almost half of the region's GDP. They may not prove invulnerable for much longer as more recent data suggest Europe is stumbling as the U.S. slowdown and strong euro weaken exports and tighter credit and record commodity costs also hurt consumers and companies. Germany's first-quarter expansion may also be explained by a milder-than- usual winter.

U.S. Industrial Production Dropped More Than Forecast
Industrial production in the U.S. fell more than forecast in April, as the slowdown in consumer spending prompted car and appliance makers to cut back. The 0.7 percent decrease in production at factories, mines and utilities was twice as much as anticipated by economists surveyed by Bloomberg News. Capacity utilization, which measures the proportion of plants in use, fell to 79.7 percent, the lowest since September 2005, from 80.4 percent the prior month.

A deepening housing slump, restrictions on credit and soaring food and fuel prices have caused consumers and businesses to rein in purchases of expensive items like cars and machinery. Only growing demand from overseas has prevented American factories from declining even more.

"Manufacturing is now showing clear evidence of weakening," said Michael Feroli, an economist at JPMorgan Chase & Co. in New York, who accurately projected the drop. "We will see a continued slowdown in the economy, but no collapse. The industrial sector isn't going to escape the slowdown."

Industrial production for March was revised down to a 0.2 percent increase from 0.3 percent. April output was forecast to drop 0.3 percent, according to the median estimate of 76 economists surveyed by Bloomberg News. Projections ranged from a drop of 0.8 percent to a gain of 0.7 percent.

Earlier today, the New York Fed reported manufacturing in the region shrank in May for the third time in four months, as a drop in orders caused businesses to pull back. Its Empire State index fell to minus 3.2, lower than forecast, from 0.6 percent in April. Readings less than zero signal contraction.

U.S. Treasury securities were little changed following the reports and stock-index futures held earlier gains. The yield on the benchmark 10-year note was 3.90 percent at 9:33 a.m. in New York, compared with 3.91 percent late yesterday. The industrial production report showed factory output, which accounts for about four-fifths of industrial production, slumped 0.8 percent, the most since September 2005, after no change the prior month.

Ilargi: Oh yes, it’s come to this: Wall Street’s biggest gains these days, you might even say this whole rally, are based on accounting tricks. That’s surely a comforting thought.

Wall Street Likes Freddie Mac's New Math
Re-jiggered accounting methods gave Freddie Mac a boost Wednesday when investors rallied over better-than-expected losses. Semi-government sponsored firm Freddie Mac rose sharply during morning trading after posting $151.0 million, or 66 cents per share, in first quarter losses and plans to raise $5.5 billion in new capital.

The mortgage lender added 8.9%, or $2.23, to $27.20 during midday trading in New York. Freddie's agency counterpart Fannie Mae was equally buoyant rising 7.3%, or $2.0, to $30.16. Fannie also posted significant write-downs last week, but still got love from Wall Street. Freddie devised a new way to assess its books during the quarter and losses were lessened as a result.

Freddie's chief financial officer, Anthony S. Piszel, said Tuesday that although the U.S. housing market hasn't hit bottom quite yet, the firm has a "strong and sound" capital position and maintained their current dividend, according to Many critics believe that ever-growing Freddie and Fannie pose a grave risk to the U.S. economy because of their massive holdings which exceed $7 trillion dollars.

Freddie's chief executive, Richard Syron, assured analysts that losses from the mortgage mess will be manageable "under any reasonable scenario." Syron added: "It's clear we have not yet hit bottom in the housing market." Freddie executives said they expect home prices to tumble by 15.0% from their peak, but didn't rule out greater declines. The company expects losses to continue through 2009.

The U.S. government has been looking to Fannie and Freddie to help stabilize and invigorate the troubled U.S. mortgage market in the wake on the subprime-mortgage mess. Freddie Mac will be able to buy up and insure more mortgages because its required capital cushion was lowered Wednesday. The Office of Federal Housing Enterprise Oversight, Freddie's federal regulator, said it would reduce the capital cushion to 15.0% from 20.0% as a result of the planned stock sale.

OFHEO made a similar announcement last week for Fannie Mae, which is raising $6.5 billion to fortify its balance sheet after posting a $2.2 billion first quarter loss. Another five-point cut is expected to come in September, provided Freddie behaves itself.

Barney Frank wants the FHA to bail out failed flippers and mortgage fraudsters. Problem? The FHA thinks that's a really f*cking stupid idea.
Monkeys I tell ya. Monkeys.

You'd think Barney and the FHA would have had a little chat before he put together his housing bailout turd. But that would be competent. Thanks to Luke over at USNews for the tip. And thanks to Barney Frank for showing us just how well-deserved Congress' record-low approval rating is.

FHA Chief Criticizes Rescue Plan

While most government officials scratch and claw for more authority, Federal Housing Administration Commissioner Brian Montgomery is pouring cold water on a housing rescue plan that would make his agency the linchpin of an expanded federal effort to keep people in their homes.

The House of Representatives last week passed a bill championed by House Financial Services Chairman Barney Frank that would enable struggling borrowers to refinance into more affordable loans guaranteed by the government. The legislation would require a significant expansion of the FHA—an idea recently endorsed by Federal Reserve Chief Ben Bernanke.

But speaking to a roomful of real estate agents this morning at the National Association of Realtors Midyear Legislative Meetings and Trade Expo, Montgomery expressed his opposition to the legislation recently passed by the House:

"As one colleague described it, it is "on steroids" because it throws sound underwriting out the window.

"It moves us toward a federalization of the mortgage market, forces taxpayers to pay for bad loans, and doubles FHA's portfolio, adding hundreds of thousands of risky loans in a Byzantine process that will take years to sort out and create a regulatory nightmare."

Volcker Says Fed Interventions Risk Political Battles
Former Federal Reserve Chairman Paul Volcker warned that Ben S. Bernanke's interventions in securities markets opened the door to political interference that may threaten the Fed's independence in setting interest rates.

"Intervention in a broad range of credit-market instruments may imply official support for a particular sector of the market or the economy," Volcker said in testimony to the congressional Joint Economic Committee in Washington today. Support for specific markets "throws them into political battles," he said in an interview, referring to the Fed.

Volcker's comments are his most detailed warning yet about the consequences of the Fed's rescue of Bear Stearns Cos. and taking on mortgage securities from bond dealers. He joins former Fed chief Alan Greenspan in anticipating greater meddling with the central bank at a time of rising inflation pressures.

"Independence is integral to the central responsibility of the Federal Reserve" for "the conduct of monetary policy," said Volcker, 80, who served as Fed chairman from 1979 to 1987, and is credited with halting runaway inflation. He was succeeded by Greenspan, who retired in January 2006. Greenspan, 82, wrote in his book "The Age of Turbulence," published before the Fed's credit-market actions, that "the dysfunctional state of American politics does not give me great confidence in the short run" and there may be "a return of populist, anti-Fed rhetoric."

Volcker, who engineered a surge in interest rates to 20 percent when battling consumer price gains 18 years ago, said "there is some resemblance to where we are now in the inflation picture to the early 1970s." The Fed failed to contain a pickup in prices at that time, spurring the acceleration of inflation later that decade, he said. "If we lose confidence in the ability and the willingness of the Federal Reserve to deal with inflationary pressures" and buttress the dollar, "we will be in real trouble," Volcker said.

"That has to be very much in the forefront of our thinking. If we lose that we are back in the 1970s or worse." Consumer prices rose 3.9 percent in April from a year before, compared with an average rate of 2.7 percent over the past decade, a Commerce Department report showed today. Volcker said there's "a lot more inflation" than reflected in government figures.

Bernanke 'Strongly' Urges Banks to Raise More Capital
Federal Reserve Chairman Ben S. Bernanke pushed U.S. banks to keep raising capital so they can help the economy by expanding lending as the credit crisis wanes. "I strongly urge financial institutions to remain proactive in their capital-raising efforts," Bernanke said in a speech in Chicago today. "Doing so not only helps the broader economy but positions firms to take advantage of new profit opportunities as conditions in the financial markets and the economy improve."

Bernanke said that the central bank is considering strengthening its guidance on risk management in the aftermath of the crisis and that senior bank executives need to take a leadership role. The strongest banks didn't rely on credit ratings companies and accounted for the danger of a slump in access to funds, he said. Banks and securities companies have raised about $244 billion of capital since July, after writedowns and credit losses in excess of $333 billion.

Bernanke and Treasury Secretary Henry Paulson have repeatedly said firms should keep increasing their funds, seeking to alleviate the impact of the credit crunch. "I have been encouraged by the recently demonstrated ability of many financial institutions, large and small, to raise capital," Bernanke said at a Chicago Fed conference on credit markets. Raising capital allows for more lending, "which supports economic expansion," he said.

Bernanke spoke a day after former Fed Chairman Paul Volcker warned that the Fed's rescue of Bear Stearns Cos. and acceptance of mortgage debt from bond dealers increased the risk of political interference. U.S. regulators, including the Fed, have begun an analysis of how markets and regulatory enforcement failed and led to the credit crisis.

The flight from risk since August has made financial institutions reluctant to lend to each other, driving up banks' borrowing costs. That has increased the threat to economic growth already posed by the worst housing recession in a quarter-century by making banks more reluctant to extend credit.

Foreclosure flood: 1,000 auctions per day in California
California's foreclosure crisis passed another ominous milestone in April, when more than 1,000 foreclosed homes were  auctioned off every weekday at courthouses across the state, the auction tracking firm ForeclosureRadar reported today.

The April total of foreclosure sales at auction -- 22,838 for the state -- represents a jump of 44% over March totals and the highest level ever in California, ForeclosureRadar reports.

A separate estimate of foreclosures by DataQuick Information Systems had counted 47,171 foreclosures in the first quarter, a rate of more than 500 per day from January to March. The new statistics show every category of foreclosure statistics rose in April.

It appears the pipeline of potential foreclosures is jampacked, too: the ForeclosureRadar reported 44,101 new "Notices of Default" filings in April, a new record for California. Notices of Default are the first step in the foreclosure process.

Barclays Profit Falls After $3.3 Billion Writedown
Barclays Plc, the U.K.'s third-biggest bank, reported a drop in first-quarter earnings because of 1.7 billion pounds ($3.3 billion) of writedowns and said further losses from the credit markets are possible. Barclays fell as much as 4.3 percent today in London trading after Finance Director Chris Lucas told reporters the company hasn't ruled out a share sale to replenish depleted capital.

"Earnings momentum is slowing and there is the prospect of significant further writedowns," said Sandy Chen, a London-based analyst at Panmure Gordon & Co., who has a "sell" rating on the stock. "As for rights issues, I would rather be at the front of the queue than at the back." Royal Bank of Scotland Group Plc and HBOS Plc, two of Britain's biggest banks, are raising about 16 billion pounds to bolster capital after the collapse of the U.S. subprime mortgage market led to losses.

Barclays will decide how to increase capital when the outlook for writedowns and earnings becomes clearer, Lucas said. Pretax profit may fall about 10 percent in 2008, matching analysts' estimates, he said. Barclays fell 14.25 pence to 413 pence at 12:40 p.m. in London, valuing the bank at 27.1 billion pounds. The shares are down 18 percent this year, trailing the eight-member FTSE 350 Banks Index, which fell 11 percent.

While Barclays's consumer, commercial and securities units were profitable, first-quarter earnings were less than "the very strong prior-year period," Chief Executive Officer John Varley said in a statement. The company didn't say how much it earned.

Barclays dramatically increases share of new mortgage lending
Barclays has dramatically increased its share of new mortgage lending in the UK since Northern Rock took itself out of the market and other banks have become increasingly reluctant to lend. The bank, which this morning also revealed £1bn of new writedowns, said that its market share of net new lending at its mortgage business Woolwich was 20pc in the first quarter of 2008, compared with an average of 8pc in 2007.

Chris Lucas, group finance director, said that he expected Barclays’ share to increase further, but not at the same pace. Barclays is bucking the current trend, as the number of mortgages available has dramatically shrunk and those that are available are more expensive, pricing many first-time buyers as well as existing homeowners out of the market.

Northern Rock has stopped offering competitive loans and is advising existing customers to remortgage with other banks as it struggles to pay off its £24bn government loan. The Council of Mortgage Lenders said on Tuesday that the number of new home loans tumbled nearly 50pc to 46,000 in March compared with a year earlier, and warned that the market could deteriorate further.

Recession danger is real, warns Mervyn King
Mervyn King warned families to brace themselves for a further "squeeze" on household finances as rising energy bills and food prices continue to rise. Mr King said that inflation was set to increase sharply to about 3.7 per cent - almost double the official target. As a result most British people will feel poorer this year as pay rises fail to keep pace with rising costs.

The Governor - who said that "the nice decade is behind us" - also warned homeowners that property prices would fall further and that it was impossible to predict the scale of the decline. He became the first senior public figure to openly discuss the possibility that the British economy may now be heading for recession. The economy was "travelling along a bumpy road" and that a sharp downturn could not be ruled out, he said.

The comments are some of the most stark issued by the Bank and indicate growing concern within Government over the economic prospects for the country. The prospects for the British economy have worsened since the Bank's last inflation report in February. Mr King made his comments as official figures revealed unemployment rose last month and Alistair Darling, the Chancellor, conceded that British families needed help to deal with rising fuel, food and energy costs.

Mr King said: "There is going to be a sharp slowing in growth. It is quite possible that at some point we may get an odd quarter or two of negative growth, but recession is not the central projection…But clearly further shocks could push us in that direction." The technical definition of recession is two or more consecutive quarters of negative growth, a situation last seen in 1991.

The Governor added: "As price increases feed through to household bills, they will lead to a squeeze on real take-home pay, which will slow consumer spending and output growth, perhaps sharply." Mr King's mention of "the nice decade" is a reference to the acronym "non-inflationary consistent expansion" used by economists to describe the sort of growth since Labour came to power.

Housing crisis: Caroline Flint gaffe reveals Government's price fears
Caroline Flint, the housing minister, told a private meeting of the Cabinet that "we can't know how bad it will get". She warned that house-building was "stalling", repossessions rising and mortgages increasingly hard to acquire. The expected fall in house prices – which Miss Flint said would be up to 10 per cent "at best" – would knock about £20,000 off the value of the typical home.

The official concerns were made public after Miss Flint's Cabinet briefing notes were photographed as she arrived in Downing Street yesterday morning. The briefing she gave in private to her Cabinet colleagues can clearly be read in the photographs. The Government does not publicly forecast future house price movements and Tuesday's blunder is particularly embarrassing as both Gordon Brown and Miss Flint have denied that they expect a property crash.

Figures released by Miss Flint's department on Tuesday morning showed that house prices dropped by only 0.1 per cent during the first three months of the year, yet no mention was made of the concerns over future price falls. Her comments were made on another day of announcements that underlined the deteriorating state of the economy – and the rising cost of living faced by millions of families. It also emerged that:
  • The number of new home loans dropped in March to the lowest level for 30 years, according to the Council of Mortgage Lenders.
  • Last month, inflation registered its biggest increase in six years to 3 per cent, leaving the average family almost £600 a year worse off as a result of escalating food, petrol and utility bills.
  • More than 300 jobs a week are being lost in the City as a result of the global credit crisis. A total of 6,500 people are expected to be dismissed in the next month. On Tuesday, HSBC had to write off another £1.3 billion in bad debts.

You'll be pleased to know that the inflation target has been suspended – for three years
For those hoping the Bank of England might be prepared to throw caution to the wind, and cut interest rates with impunity to address the slowdown in the economy, there was a stark warning yesterday.

Mervyn King, the Governor, insisted that monetary policy cannot and should not try to prevent what he sees as a necessary adjustment in the economy, where disposable incomes and therefore consumption remain squeezed for perhaps years to come. Yet though this is the sort of hair-shirt message that central bankers have to send out in conditions where inflation is rising and the economy is slowing, he perhaps protests a little too much.

In fact the Bank seems willing to allow quite a lot more inflation than a strict interpretation of its remit would imply. The Governor anticipates having to write a number of open letters to the Chancellor over the next year to explain why inflation is so much above target, while yesterday's Inflation Report alarmingly forecasts that, on present expectations of policy, inflation won't finally return to the 2 per cent target until some time in 2011. I'm not sure three years counts as what the Governor calls "the medium term".

Certainly it is hard to see how Britain can escape second-round effects if these elevated levels of inflation persist for as long as three years. Absent of a calamitous rise in unemployment, workers are bound to try and recoup the loss of buying power through wages. Quite a test looms for Britain's "flexible" labour market.

Kenya Slaps Ban On Sugar Export in War Against Cartels
The Government yesterday revoked 16 export trade licences as it began a radical purge of suspected cartels in the sugar industry, raising hopes that the pressure on consumer prices could ease. Agriculture minister William Ruto said high pricing of the commodity had defied the basic fundamentals of demand and supply owing to cartels that had infiltrated the market, leaving consumers with huge expenditure bills.

Though Kenya had convenient arrangements with several partner Comesa States to offset her annual production deficit of 220,000 tonnes of sugar, consumers were faced with endless price surges - thanks to manipulations by groups seeking to maximise on profitability. "For instance why should we have people exporting sugar from Kenya yet we know we are a deficit nation...there is no logic to export when you produce less," said the minister.

Kenya produces about 520,000 tonnes of sugar each year against a consumption demand of 740,000 tonnes with the deficit being filled through imports from Comesa states. Mr Ruto accused the cartels of taking advantage of special export licences to evade taxes and divert the sugar into the local market.

Zimbabwe: Questions As Government Pays $700 million to Settle Bank Debt
Mystery surrounds Zimbabwe's surprise $700 million (Sh43 billion) loan repayment to the African Development Bank at a time when President Robert Mugabe's government says it cannot organise a presidential election run-off within the stipulated period because it is broke. The pan African bank announced that the country whose economy is caving in under the weight of economic sanctions imposed by Western countries had reduced its arrears to $250 million following the big payment.

But the state-run Zimbabwe Electoral Commission (ZEC) says it is waiting for the government to allocate it $60 million before it announces the date of the presidential election run-off between Mr Mugabe and Movement for Democratic Change (MDC) leader, Mr Morgan Tsvangirai. The announcement made ahead of the AFBD's meeting in Mozambique on Monday seems to have caught the Zimbabwean authorities flat footed and observers said efforts were now under way to limit the damage caused by the story.

In an interview with news agencies in Maputo, Finance Minister, Dr Samuel Mumbengegwi confirmed the payment but refused to reveal the source of the funds. The story made headlines in the government controlled media on Tuesday only for the central bank governor in Harare, Dr Gideon Gono to deny that such payments had been made.

Dr Gono is said to be part of a "a junta" that has sidelined Mr Mugabe and most of his lieutenants in the ruling Zanu PF party in the day to day running of the country since their dramatic defeat in the March 29 elections by the opposition. "Whilst the article made nostalgic good reading, as the country's central bank and custodian of government's foreign exchange receipts and payments, we wish to categorically state that to our knowledge, there has not been any such payment," he said in statement carried by the state media on Wednesday.

"If the country had such resources ($700 million), the Reserve Bank would have prioritized the importation of grain (maize and wheat); the importation of fuel, electricity, medical drugs, industrial chemicals, fertilizers, seeds, water treatment chemicals, agricultural equipment, and other infrastructural development essentials, and of course leaving some for debt service."

Blackstone Has $66.5 Million Loss as Buyouts Dry Up, Portfolio Value Drops
Blackstone Group LP, the buyout firm that went public at the peak of the takeover boom last year, reported a loss of $66.5 million as fees tumbled in every business, including deal-making, hedge funds and mergers advice. The first-quarter loss excluding some compensation costs was 6 cents a share, compared with a profit of $838.5 million, or 75 cents, a year earlier, the New York-based company said today in a statement.

That missed the average estimate of 12 cents a share profit by 7 analysts surveyed by Bloomberg. Blackstone, run by former investment banker Stephen Schwarzman, announced one leveraged buyout in the quarter, the $1.2 billion purchase of food distributor Performance Food Group Co. of Richmond, Virginia, compared with $42 billion in deals a year earlier. Revenue fell 94 percent as the company's cut of its funds' investment profits turned negative.

"Blackstone has been taking steps to put itself in position take advantage of market dislocation, but this doesn't look impressive at all," said Jackson Turner, an analyst with Argus Research Corp. in New York who recommends clients buy Blackstone shares. "Real estate was the biggest disappointment. I expected this segment to be the one saving grace this quarter."

Blackstone had a net loss of $251 million, or 97 cents a share, including costs related to the vesting of executives' ownership stakes as part of the company's initial public offering in June. The company has said it will continue to post net losses during the next five years because of the vesting expenses.

"Everyone who thought that private equity and hedge funds would be the sexy new entrants has been sorely disappointed," said Benjamin Phillips, managing director of strategic analysis at New York-based Putnam Lovell, an investment-banking unit of Jefferies Group Inc. "The key for these types of companies is they're going to have to diversify the sources of revenue and earnings."

Ilargi: This is how crazy is it is: Ontario Teachers Pension Plan has $105 billion under management, and the BCE deal is for $52 billion. Only about $4 billion is its own money, the rest is leveraged capital.

And while Blackstone is in full damage control mode, Teachers knows everything better. Hey, it’s not their money, it’s yours, Ontario. The managers just want their signing bonuses. If I were part of Teachers, I would move to have these guys removed, before that BCE deal is signed. It’s going to cost many $billions.

Clear Channel Agreement May Help LBOs, Move BCE Deal
Clear Channel Communications Inc.'s acceptance of a lower takeover price may signal a return of leveraged buyouts and increase the chances an investor group completes its C$52 billion ($51.8 billion) purchase of BCE Inc. Clear Channel, the largest U.S. radio broadcaster, settled a legal fight with banks financing its LBO by Bain Capital LLC and Thomas H. Lee Partners LP by agreeing to a reduced offer of $17.9 billion, or $36 a share.

That's 8.2 percent less than the Boston-based buyout firms agreed to pay last year, according to a statement from San Antonio-based Clear Channel yesterday. The accord caps more than 18 months of wrangling over the buyout, including a collapse of leveraged lending that brought deal-making to a near halt and threatened announced transactions. Citigroup Inc. and five other investment banks, stuck holding LBO commitments made during last year's record year for deals, balked at funding the Clear Channel transaction.

"It's good for the market in general that banks cannot just pull back because they don't like the deal anymore," said Jack Neele, a fund manager who helps oversee $200 billion at Robeco NV in Rotterdam. "This illustrates things are getting a little better in the credit market," said Neele, who doesn't own Clear Channel shares. BCE's takeover by a group of investors including Ontario Teachers Pension Plan, which would be the largest LBO, has yet to close. Ontario Teachers' Chief Executive Officer Jim Leech said yesterday in an interview he expected that "all other parties will honor their commitments."

With Clear Channel, the private-equity firms and banks avoided the fate of other buyouts that collapsed amid a global credit freeze triggered last July by record defaults in U.S. subprime mortgages. Deals to buy SLM Corp., Harman International Industries Inc. and Alliance Data Systems Corp. failed during the past nine months. The Clear Channel agreement settles lawsuits in New York and Texas over claims the lenders refused to provide $22.1 billion in promised funding.

Bain and Thomas Lee Partners sued the banks March 26 in Manhattan seeking a court order compelling them to finance the deal. Clear Channel and CC Media Holdings Inc, a shell company created for the buyout, sued the same day in Texas state court seeking more than $26 billion in damages. The banks, including Credit Suisse Group, Morgan Stanley, Wachovia Corp., Deutsche Bank AG and Royal Bank of Scotland Plc, stood to lose billions of dollars if they financed the transaction because of a declining leveraged-lending market and a U.S. economic slowdown. They sought to dismiss the suits or at least consolidate them in New York. The requests were denied by judges in both states.

"The fact that the banks realized they had the weakest hand at the table led to revisiting a compromise," said Fred Moran, an analyst at the Stanford Group in Boca Raton, Florida. He suggests investors hold on to their Clear Channel shares and doesn't own any. "It became increasingly clear that if they went to a full trial, their liabilities would be open-ended to the tune of $26 billion and a level of risk that was unbearable."

Canada spies opportunity
The private equity arm of the Ontario Teachers' Pension Plan (OTPP) has opened its first international office in London. Teachers' Private Capital (TPC), which has C$15bn (£7.6bn) of assets invested, is expanding into the European market to take advantage of the growing awareness of private equity-style investing.

The new office will be headed by TPC director Andrew Claerhout, and by Erol Uzumeri, TPC's manager of international investments. TPC will focus on its continued niche of consumer and business service investments, but will also look at companies in the industrial, financial services and TMT sectors, investing in deals with an equity component of £50m-£250m. OTPP has C$108.5bn under management.

Taking Doom And Gloom To A New Level
The Californian city of Vallejo, population 117,000, has filed for bankruptcy. A city has never filed for bankruptcy before in the US. Vallejo's tax income has been shattered by a 26% fall in house prices. There are other cities on the brink in California. They're lining up to file.

The Dow Jones Industrial Average has gained 7.7% since the Fed pulled out the "nuclear option" of Article 13 (3) on March 17 and ensured no more Bear Stearns events. With the Fed watching its back, Wall Street has decided, for the most part, that it's time to look ahead to the promise of the financial market crisis easing and economic growth returning. The Australian ASX 200 has risen 14.5% in the same period, driven by the supposedly safer Aussie banks and a greater proportion of corporate exposure to rising commodity prices. The question now, as many are asking, is: Is this a bear market relief rally or the real thing?

The UK Daily Telegraph's Ambrose Evans-Pritchard has been among the most bearish commentators since the whole credit crisis began. But in his latest missive, published on Monday, Evans-Pritchard reaches new levels of doom and gloom. Central to his view is the US housing crisis, and he cites analysis by Lehman Bros and Goldman Sachs suggesting prices will fall across the country by an average of 25%. While some states, such as California and Florida, have already seen such drops in value, the national average fall is still only about 10%. We're not half way there yet, but already Americans collectively have more debt in their houses than equity.

Under such circumstances one might expect Americans would begin reining in the fantastic plastic, but the opposite is true. Credit card debt jumped by 6.7% in the first quarter to US$957bn. That's US$6,000 for every working American. The cash rate may have fallen to 2%, but credit card rates are at 20%. High food and petrol prices are forcing average Americans to turn to credit cards to survive. One money market trader suspects many simply intend never to pay them off.

At the corporate level, a groundswell of bankruptcies has also begun in the US.  In the last two weeks, six US "companies of substance" have gone down the tubes owing between US$142m and US$2.5bn. Evans-Pritchard notes the total in all of 2007 was seventeen. Standard & Poors notes defaults are rising at almost twice the rate of previous downturns.

The problem is this time companies have a much more toxic mix of equity and overstretched debt. Margin for error is razor-thin as the US heads into recession. Two-thirds of companies are rated by the agency as "speculative", compared to 50% before the dotcom bust and 40% before the last big recession of the early 1990s. Debt was ramped up to dangerous levels in the 18 months prior to the credit crunch. There were deals being funded, says S&P, that should never have been funded. S&P suggests some 174 US companies are now trading at "distress levels". This number only includes those companies large enough to score a rating of any sort.

Thankfully, suggests Evans-Pritchard, the Fed's actions have avoided another Great Depression. With the cash rate down from 5.25% to 2% those potentially catastrophic mortgage reset rates are more manageable. However, the outlook is thus hardly positive, according to many.

France's Societe Generale - the bank rocked in January by the world's second great "rogue trader" affair - has, for the first time ever, reduced its exposure to equities to the minimum 30% allowed under its articles. SocGen is expecting equities to fall globally by 50-75%. It has moved to a 50% weighting of government-issued AAA bonds. "Nowhere and nothing will be immune," said SocGen global strategist Albert Edward, "We are on the cusp of an equity meltdown that will slash and shred portfolios".

The rising oil price had been seen as a friend to equity markets as it pushed up to US$110/bbl, notes Evans-Pritchard, fuelling strong rallies in the energy and energy services sectors. But at US$125/bbl it has become the enemy. The average US home is now spending 8% of income on fuel.

The oil spike will burn itself out, he suggests, as China hits the buffers on 8.5% (and rising) inflation. China has repeated Japan's mistakes of the 1980s - too many factories shipping too many goods at slender margins into a crumbling export market. Lehman Bros analyst Sun Mingchun says China will tip over in the second half of the year.

"With so much latent overcapacity," says Sun, "an export-led slowdown could trigger a chain reaction which, in the worst case, could threaten the stability of [China's] financial and economic system" Current evidence suggests Britain, Europe, and Japan will slump before America returns to growth, and China can possibly be added to the mix as well.

Well that's heartening, isn't it? Of course, for every Evans-Pritchard there's a Jake LaMotta - a raging bull who sees a US recession as shallow and temporary, the credit crisis as behind us ever since the Fed saved Bear Stearns, the housing crisis as nearing an end, and the US export economy as surging along on a lower greenback. Look out Dow 14,000, we're coming back!

The reality is that every bear market has a relief rally, and never does a market drop 20%, turn on a dime, and then return directly. The euphoria soon runs out of puff as those investors who missed out on selling on the way down take the opportunity to sell on the bounce. And just as the down-move may well have overshot, so too will the bounce likely overshoot as well. As to what the correct levels and timing are is a matter of conjecture, and that which ensures a market exists. But at the very least, dooming and glooming aside, global equities will need to do some more work to form a more solid base before investors can start to worry that they've missed out on the next great rally.

Mankind is the 'Earth's biggest threat'
Researchers who analysed 30,000 academic studies dating back to 1970 said man was responsible for changes that ranged from the loss of ice sheets to the collapse in numbers of many species of wildlife. "Humans are influencing climate through increasing greenhouse gas emissions, and the warming world is causing impacts on physical and biological systems," said Cynthia Rosenzweig, at the Nasa Goddard Institute for Space Studies.

The effects on living things include the earlier appearance of leaves on trees and plants; the movement of animals and birds to more northerly latitudes and to higher altitudes in the northern hemisphere; rapid advances in flowering time and earlier egg-laying in Britain; and changes in bird migrations in Europe, North America and Australia. On a planetary scale the changes include the melting of glaciers on all continents; earlier spring river run-off; and the warming of oceans, lakes and rivers.

The study's conclusions go further than the most recent report by the Intergovernmental Panel on Climate Change, which concluded last year that man-made climate change was "likely" to have had a discernible effect on the planet. It says natural climate variations cannot explain the changes to the Earth's natural systems.

In the study, published in the journal Nature, Miss Rosenzweig and researchers from 10 institutions across the world analysed data from published papers on 829 physical systems – such as glaciers and ice sheets – and 28,800 plant and animal systems. They produced a picture of the changes to each continent. The changes were most marked in North America, Asia and Europe but mainly because far more studies had been carried out there.

The authors said there was an urgent need to study environmental systems in South America, Australia and Africa, especially in tropical and subtropical areas.
  • In North America, the researchers found that 89 species of plants were flowering earlier, such as the American holly and box elder maple; a decline in the population of polar bears; and the rapid melting of Alaskan glaciers.
  • In Europe, they found evidence of glaciers melting in the Alps; earlier pollen release in the Netherlands; and apple trees producing leaves 35 days earlier in Spain.
  • In Asia they reported a change in the freeze depth of permafrost in Russia; and the earlier flowering of ginkgo in Japan.
  • In Antarctica, the population of emperor penguins had declined by 50 per cent.
  • In South America, the melting of the Patagonia ice-fields were contributing to a rise in sea levels.

Prof Barry Brook, of the University of Adelaide, described the evidence that mankind was altering the world as "overwhelming". He said: "These changes are only a minor portent of what is likely to come."

Food prices poised to drop sharply: Yardeni
Market strategist Ed Yardeni, who made a name for himself with accurate calls on the U.S. stock market's bull runs of recent decades, says that soaring food prices won't last because farmers are rushing to plant more crops and agricultural productivity is increasing with new investment.

“There's so much capital now that's going to pour into agriculture that I think food prices are going to come down sharply,” Mr. Yardeni said at a presentation Wednesday morning sponsored by Thomson Reuters Academy.

“There's plenty of room for using fertilizer and better seeds, along with the incentive that prices give farmers to plant more,” said the economist, who during his time as chief strategist at Deutsche Bank Securities called the bull market of the 1990s. He now runs his own firm.

He was not as sanguine about the outlook for other surging commodities, especially energy. Oil prices are likely to remain high because of geopolitical issues and the fact that energy prices are dictated less by markets and more by such factors as cartels and subsidies.

“I do think that food prices will come down, but energy is a whole ‘nother story,” Mr. Yardeni said. “The [oil] price mechanism is distorted by subsidies and national oil companies that have political issues, they are not behaving competitively.”

For that reason, Mr. Yardeni recommended investing in a trinity of sectors: materials, energy and industrials. “That's where the growth is,” he said. “These are the growth stocks and they're still trading like cyclicals.” Notwithstanding his outlook for food prices, his recommendations still include fertilizer stocks after their big run because of the role that fertilizer will play in increasing crop yields and dropping prices.

Fertilizer stocks are “not cheap, but I still think there's upside there, believe it or not,” he said. For those investors who are worried about such sectors in the face of a U.S. recession, he predicted that global growth will hold up so long as the U.S. avoids a depression. Global economies are decoupling from the U.S. as companies get more and more of their growth outside America, he said.

And U.S. consumers are likely to surprise economists with their spending even in the midst of a huge downturn in housing prices.. “You know how we Americans are,” Mr. Yardeni said. “When we're happy we spend money, and when we're depressed, we spend more.”


Greyzone said...

Now we finally see the first real sign that oil prices may flatten or decline - China's economy is starting to stagger in statistically measurable ways. I'm not saying I am going to do this, but I am now seriously thinking about shorting oil and coal going into the post-Olympic period. I'm going to have to look at it real hard though. If China's economy doesn't start to actually turn south soon (rather than just emitting warning signs), then the bull run in oil, coal, and other key commodities may go clear through the end of the year.

P.S. No, I do not believe the SEC and the EU regulators when they made noises last week about forcing banks to open up their books. That was public consumption noise. When we get to this autumn, the SEC will find yet another way to let the liars tell another lie. And the problem with the lies is that none of us can predict how long they will be accepted before they are ultimately rejected. It might be months or it might be years. In fact, some might say it has been years since the first giant set of lies happened in the 1979-1982 crash and all we've really had since then are bigger and bigger whoppers.

Anonymous said...


My field of study was chemistry and I know little about economics or accounting (other than balancing the equations of chemical reactions :-) But I find the whole question of burying the lies intriguing. I would imagine that the only thing which would unbury these lies is when these institutions start to default on their obligations. I guess this is the moment of truth, a la Enron. I guess the question regarding false accounting revolves around how investors are suckered, and the consequent speed of the collapse of the institution once default occurs and the lies consequentially exposed. On one level, it doesn't personally concern me as I have no intention in investing in these types of companies.

I am also interested in the legal questions of one's stock broker going belly up in the pond. My understanding is that when one puts one's money in a bank savings account or a money market fund, it is a type of loan. The bank is entitled to loan out your "investment" in a leveraged form. If the bank screws up, you are SOOL like any other lender (except possibly for federal insurance).

On the other hand, if you own 100 shares of Consolidated Dogturd, held by your broker in your name, that the expropriation of these shares if the broker goes down would be larceny. Am I missing something?

Stoneleigh said...


The China bubble is indeed popping, as is India. They've built far too much productive capacity, especially in a world where demand for what they produce is about to get hit with a sledgehammer. That excess capacity, built on the back of bad debt, will hang around the neck of their economy for years.

For China, this is the 1930s. For us it's something worse, as we are the hollowed-out empire in decline rather than empire in the ascendancy, as we were then and they are now.

I agree that oil prices will fall, and soon I think. I would argue that shifting speculation into reverse would fuel the initial decline, followed by global falls in demand. The end of the Chindia boom combined with the evaporation of credit in developed counties could hit demand very hard. In the long term, oil will be less and less affordable, but that doesn't mean its price can't fall substantially in nominal terms in the meantime.

Anonymous said...


About the EMU, I think we probably will see countries like Spain leave the euro. Not good, but would you throw out the baby with the bathwater? A few months ago, I suggested here that we might see a fallback to the central countries, i.e. D, F and a few others. The real question is whether F can pull its act together. I fear not, but do not wish to despair prematurely.

Of course, the EU will come up with some compromise about "temporary" withdrawal or some such thing.

We will see.

Anonymous said...

Stoneleigh & Ilargi,

I just wanted to say thanks for the reply yesterday about the Wizard of Oz--makes sense but sometimes the ability of ourselves to lie to ourselves is amazing.

On the topic of keep your eyes on the bond market,this report came out from the U.S. Treasury today:

This shows a negative net flows of 48.2 billion for March of this year which is much lower than the previous months.

This mostly seems to be a result of a Change in Banks' Own Net Dollar-Denominated Liabilities going hugely negative. I'm sure some of this had to do with the Bear Stearns debacle, but I don't have the skills to interpret this report.

Can you guys explain this report?

If rates are going to go up, it seems that would because foreigners would stop buying bonds and we would need to raise rates to keep the money flowing in like we need.

So when you guys say, keep your eye on the bond market, what do you think one should look for?

Anonymous said...

bicycle mechanic said...


Ticker Forum has been up all day, and Karl seemed in a decent mood, but yesterday he did threaten to take it off line for several days.

I get the log in screen. I just read, never registered, and there is not a link to register.

Is it a members only site now,

. said...

I like the shantytown picture for today. The year that was taken my paternal grandparents lived in their very own shack about a dozen miles east of that location, and my maternal grandparents were struggling to hold on to a bit of a homestead another ten miles east of there.

The original house on the homestead was expanded around this time - things got real bad, the neighbor got "tractored off the land", and my grandfather and older uncles just picked their house up, moved it a quarter mile south, and melded it with the original house on the property. The original part is to the left and the addition is right. No indoor plumbing and it was still in use by one of my many uncles in the late 1980s when I was in highschool.

Anonymous said...


I agree there is likely to be a crash in China - to the extent that China has a market economy. Lots of exporters will go bankrupt and the stronger firms will consolidate. They will probably just bulldoze the substandard factories.

But China is more of a crazy mutant experiment than a market economy. It's crony capitalism under a communist control stucture.

The response to a stalling economy, and millions unemployed, and protests in the streets and people being trampled to death in food riots, will be to round up as many people as possible and find some great patriotic project to keep them occupied.

I would expect a Great Public Works program based on the New Deal - dams, railways, highways, and whole new cities of concrete and steel. And they could spare a few million people for a Peace Corp to go over to Africa and builds some mines and farms and railways there. Given their trillion-dollars reserves this isn't unrealistic.

New Deal, meet the Great Leap Forward. The one thing the leadership in China fears more than anything else is popular discontent. Social harmony is the justification for Party Rule.

I don't think this is 1930 redux. It's 1908. 2007 was a re-run of the Panic of 07.

British power peaked in 1900 - they then had a 20 year bear market, during which time America rose to greatness. Likewise the USA peaked in 2000 with the dot-com boom, and has been sinking since (if you adjust for the falling dollar).

During Britain's long slide they experienced rising prices for commodities even as wages fell - because rising demand from the USA was affecting global demand.

Likewise, even though the USA is in the grip of deflation now, it is possible for rising demand from China to push up commodity prices.
Britain's Long Depression is a much better parallel than the Great Depression.

I know you think China is going to fall on it's face as sales to the USA slump. I agree, it will.

I just think that they will see this coming and use their reserves and status as a creditor nation to fund a public works program and a drive to create internal demand. They will inflate their money supply in order to make up for the dollars they no longer get from the USA. Instead of trying to rein in their banks, they will employ Keynesian stimulus.

It isn't a real market economy. They don't have to play by the rules. They can change the rules on the fly as politics and strategy dictate.