Federal Reserve alters yearly forecast… even the moneymakers see a gloomy 2008
FOMC minutes reveal more rate cuts to come… but perhaps a “rapid reversal” soon after
Great modern minds collide… Volcker, Richebacher, Roubini add their thoughts to the state of the union
Major agriculture CEO warns: Without a record grain crop in 2008, “I believe you’d see famine.”
One of the few subprime-proof housing markets skyrockets to new highs… the sickening details below
Plus, in The 5’s inbox: The “vanishing money” debate rages on…
The Federal Reserve published a revised outlook for 2008 yesterday. It’s not good. Especially by their standards.
In the minutes of their Jan. 22 and 30 meetings — and the transcript of a secret emergency conference call on Jan. 9 — we see the following forecasts:
Economic growth: 1.3-2% in 2008, revised down from an October forecast of 1.8-2.5%
Unemployment: 5.2-5.3%, up from 4.8-4.9%
Core inflation: 2 — 2.2%, up from 1.7-1.9%.
Mr. Bernanke and his friends blamed “further intensification of the housing market correction,” “tighter credit conditions amid increased concerns about credit quality” and “ongoing turmoil in financial markets” as reasons for the downward revisions. Oh… and “higher oil prices.”
Still, not one of the 8,704 words in the release could be rearranged to spell R-E-C-E-S-S-I-O-N. So at least we don’t have to worry about that.
Or this: The FOMC said that its 125-point cuts in January “would likely not contribute to an increase in inflation pressures given the actual and expected weakness in economic growth and the consequent reduction in pressures on resources.”
Translation: A slowing economy — consequently slowing demand for raw materials — will put the kibosh on any bad things that might happen as the dollar gets crushed. The Fed did, however, leave the door open for a “rapid reversal” in policy, should the need arise. After all, the Fed’s charter says it’s supposed to promote “price stability.”
To review: Cutting rates won’t increase inflation, because the economy is slowing down. But raising rates quickly will stem inflation in a pinch. Got it?
What happens to the economy, then? Hmmmn….
A lot of smart people think Bernanke and the Fed are fast running out of bullets.
You may recall when we interviewed former Fed Chairman Paul Volcker for I.O.U.S.A., he cautioned Bernanke not to let inflation get started, because once it does, fixing it may not be as simple as a “rapid reversal” in policy.
And readers of the late Dr. Kurt Richebacher would have to agree… Kurt’s gotta be rolling over and over in his grave right now. When we were working with him on his opus in Cannes in August 2006, apart from trying to disprove the monetarist view of the Great Depression, Dr. Richebacher was extremely concerned about two things: a “balance sheet” recession among banks and the Fed’s inability to address the crisis with “monetary policy.” Monetary policy, in Kurt’s view, always fails in the long run.
With the billions in write-downs still pouring in from major global banks on a daily basis, it’s no mystery what a “balance sheet” recession looks like… now we’ll see how long the Fed can hang on trying to inspire consumers with cheaper and cheaper money before “price stability” becomes a quaint notion of the past.
Last week, the economist Nouriel Roubini cooked up a 12-step doomsday scenario explaining how failing monetary policies might wreck the global economy. Martin Wolf, writing in the Financial Times, paraphrased him in this way:
“Step one is the worst housing recession in U.S. history. House prices will, he says, fall by 20-30% from their peak, which would wipe out between $4,000-6,000 billion in household wealth. Ten million households will end up with negative equity, and so with a huge incentive to put the house keys in the post and depart for greener fields. Many more homebuilders will be bankrupted.
“Step two would be further losses, beyond the $250-300 billion now estimated, for subprime mortgages. About 60% of all mortgage origination between 2005-2007 had ‘reckless or toxic features,’ argues professor Roubini. Goldman Sachs estimates mortgage losses at $400 billion. But if home prices fell by more than 20%, losses would be bigger. That would further impair the banks’ ability to offer credit.
“Step three would be big losses on unsecured consumer debt: credit cards, auto loans, student loans and so forth. The ‘credit crunch’ would then spread from mortgages to a wide range of consumer credit.”
Steps four-12 are a swirling Charybdis of defaults, write-downs and deleveraging of hedged bets on a global scale. If nothing else, Roubini’s list
is worth considering.
In the end, the Fed could be ineffective in dealing with the onslaught of bankruptcies, for some of the following reasons: “U.S. monetary easing is constrained by risks to the dollar and inflation, aggressive easing deals only with illiquidity, not insolvency… overall losses will be too large for sovereign wealth funds to deal with, public intervention is too small to stabilize housing losses, and regulators cannot find a good middle way between transparency over losses and regulatory forbearance.”
“I place the beginning of ‘the Greater Depression’ in January 2007,” writes our friend W. Curtiss Priest, who heads up the Center for Information, Technology & Society at MIT “corresponding with the first month that the Shiller/Case/S&P home price composite index turned negative.”
Hey, they don’t call this the “dismal science” for nothing.
By the end of the day, futures in Chicago priced in a 100% chance of the Fed cutting again in March.
And the markets cheered. Never mind $100 oil, sharply rising consumer prices, a gloomy spate of economic data… the hint of another rate cut coupled with a great earnings statement from HP was enough to move the Dow, S&P 500 and Nasdaq up nearly 1% apiece.
Good vibes in the U.S. shimmied across the oceans, too. A quick glance at our favorite world market sites shows a sea of green. Just about every benchmark index in Asia and Europe ended higher overnight, most by 1.5-2%.
For its part, the European Union tried to one up the Fed yesterday with its own dour outlook on economic growth in the eurozone. The EU cut its growth forecast to 1.8% this year, down 0.4% from its last release.
And guess what… markets are up in Europe this morning, too. Go figure.
“If you had any major upset,” warns William Doyle, CEO of Potash — the world’s largest maker of crop nutrients — “where you didn’t have a crop in a major growing agricultural region this year, I believe you’d see famine.”
Global grain supplies briefly touched all-time lows late last year, and have barely recovered since.
“We keep going to the cupboard without replacing,” Doyle explained to Bloomberg this week, “and so there is enormous pressure on agriculture to have a record crop every year. We need to have a record crop in 2008 just to stay even with this very low inventory situation.”
“There’s no room for error,” laments our resource trader Kevin Kerr. “Feels a lot like the energy refining situation in the U.S. One bad weather scenario and suddenly we have a whole different pricing matrix. If we get a drought here like they suffered in Australia last year and it impacts soybeans during the critical pod stage, or if it were to roast 50% of the corn prior to harvest, imagine where that would (will) send prices.
“My advice, stock up on those cheap soybeans at 13.50 and $5 corn.” If you need additional trading advice on the ever hot commodities market, check out Resource Trader Alert here.
While home sales across the U.S. fell an average 13% in 2007, Manhattan apartment sales rose 3.2%, says a study by CBS. Likewise, as the national average home price fell 1.8%, to $217,000 last year, the average Manhattan apartment sold for $1.4 million — an all-time high.
“According to three different real estate firms,” says the CBS story, “the number of apartments that sold for more than $10 million in the city last year tripled over those sold in 2006. Brokers say they haven’t seen this kind of action since the dot-com boom of 2000.”
To that, add this
18 E. 68th St.… it could be all yours for a cool $64 million.
The 103-year-old mansion, formerly an apartment building for some seriously “old money” city dwellers, was recently converted to a single unit. Thus, one family might soon enjoy its 15 bedrooms, 17 bathrooms, seven fireplaces and — of course — spacious ballroom.
The whole building was sold, as an apartment building, for $7.6 million in 2003. It changed hands again last May for $39 million. Thus, nine months and the prospect of just one family living in this mansion have nearly doubled its “value” to the most expensive officially listed home in Manhattan.
When this bubble pops, don’t say we didn’t warn you.
Oil prices climbed to a fresh high yesterday of $101.32 per barrel yesterday, not long after the Fed released higher inflation forecasts. For what it’s worth, we don’t see oil backing too far off this level until at least March 5, when OPEC meets again. And the “SOS”
have a chance to stick it to the empire once again.
Gold showed signs of bouncing out of its consolidation phase this morning. The metal leapt to $948 per ounce overnight. Spot prices climbed to a new high in aftermarket U.S. trading yesterday and have held steady near their new record since.
“Gold got a boost from inflationary price data,” writes our friend Doug Casey, “as well as the release of the FOMC’s last meeting minutes, which suggests that the Fed is focused right now on propping up the economy at the expense of the dollar.
“Gold as an inflation hedge is clearly getting some play.”
Currency traders gave back most of the dollar’s recent gains yesterday. The dollar index fell back to 76 even. The euro rose a full cent, back to $1.47. The pound bounced off 10-month lows, rallying 2 cents, back to $1.95. The yen remains at 108.
“That money didn’t vanish,” a reader quibbles, responding to our coverage of the total subprime mess wiping out some 7.7 trillion bucks. “The value vanished. You pay $70 for a stock that drops to 30 cents… your value or equity has vanished, but the person whom you paid the $70 to still has the money, so it has not vanished.
“The banks got $7.7 trillion from somewhere (depositors, the Fed, etc.) and loaned or paid it out in exchange for deeds of trust and various derivatives. Someone got that money. Then when the deeds of trust and derivatives dropped in value, the banks no longer had the assets on their balance sheets, nor the ability to get the money back.
“My guess is that most of this money ended up in foreign sovereign wealth funds. The money in those funds had to come from somewhere, and it probably came from all the people who got the equity loans or who sold their price-inflated houses and then bought all kinds of ‘essentials’ from China.”
The 5 responds: Semantics. In a fractional reserve system in which banks can “create” money out of thin air, it can just as easily vanish… as our next reader points out:
“This reader, like so many others,” he writes, “can’t get a grasp on the nature of the so-called ‘money’ supply. Most still have a mental image of money as something tangible, as witness his reference to someone putting a match to it.
“He needs to understand and come to grips with the reality that the overwhelming amount of the money supply is simply computer numbers or paper documents with zeroes added on as needed, therefore easily created and easily destroyed, as we are witnessing. The only tangible and true money remaining is gold and silver, both indestructible.”
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