by Addison Wiggin & Ian Mathias
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South Korea ditches the dollar… the ironic twist to the greenback’s latest rejection
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A Town Car confession highlights the sea change within the global economy
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Paulson speaks, The 5 translates… new legislation already appearing in the wake of Bear Stearns
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The next shoe to drop in the U.S. housing crisis
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Gas prices got you down? Ain’t seen nothin’ yet… one chart shows gasoline near 10-year lows
Irony is sweet.
First the news: “It is difficult to buy more U.S. Treasuries,” Kwag Dae-hwan, head of the South Korean National Pension Service, said yesterday, “because the portion of our Treasury investment is already too big and Treasury yields have fallen a lot.”
Kwag, who controls the $220 billion fund — the world’s fifth largest pension portfolio — said he’s no longer interesting in buying U.S. debt. “We need to diversify our portfolio away from U.S. Treasuries, and we find asset-backed securities and corporate debt more attractive because of wider credit spreads.”
Now the irony: In 1997, to prevent the “Asian contagion” currency crisis from wiping out the entire South Korean economy, the U.S. chipped $5 billion into a historic $57 billion IMF-orchestrated bailout plan.
Thirteen years later, this is what we get? How, we wonder, do you say, “Thanks a lot, Kwag” in Korean?
Although from a purely financial standpoint, Kwag’s got a point. As a proxy, let’s look at the U.S. dollar — it can’t catch a break! Since last week’s brief dollar rally sputtered, the trade of the day — every day — this week has been sell
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Aside from a spit of buying early this morning, the dollar index is again nearing its all-time low. The index trades at 71.5.
The euro reached as high as $1.58 last night, but has since lost about a cent. The pound, enjoying a few rare gains, is now back to $2.01. The Japanese yen will cost you one U.S. penny today.
Coming in from the airport last night, we had an interesting chat with our driver. He’d just driven some executives for Constellation Energy to the airport on their way to an emergency one-day meeting in Paris. Then, he swung by the baggage claim to apprehend us.
In three easy nuggets, we’ll reprise our conversation with the driver, while he was recounting his conversation with the energy execs:
*Coal, oil and gas are in increasing global demand. The switch to “green tech” is going to be a slow and expensive one. At the same time, “green tech” is as good a candidate as any to be the next bubble on Wall Street
*Traders in Europe are increasingly nervous about the health of the U.S. banking system. Ironic, given how much hot air has been expelled chastising the Chinese for their “immature” banking system… and the finger wagging the U.S. has done at Japan for not letting its banks fail quickly enough to get the Japanese economy started again
*Many of the European investment funds are looking elsewhere for returns. Most notably, in the context of this conversation, Brazil.
“When would you ever have thought you’d hear that?” the driver asked “Investors preferring to invest in Brazil than here in the United States. Pheeew. Things sure have changed since the ’90s.”
Of course, you can take these comments for what they’re worth, having come third-hand from unusual sources. Still, we suspect given the chatter out of Washington lately, it’s going to get a lot worse before it gets better.
“Insured depository institutions remain important participants in financial markets,” Treasury Secretary Paulson told the U.S. Chamber of Commerce yesterday, as if trying to illustrate our point, “but this latest episode has highlighted that the world has changed, as has the role of other nonbank financial institutions, and the interconnectedness among all financial institutions.”
Translation: Banks have always been borrowing from the Fed, but when the sh*t hit the fan this time, we chose to let brokerages and investment banks use the discount window too.
“These changes require us all to think more broadly about the regulatory and supervisory framework that is consistent with the promotion and maintenance of financial stability. Now that the Fed is granting primary dealers temporary access to liquidity facilities, we must consider the policy implications associated with such access.”
Translation: Now that we’ve lent a couple hundred billion bucks to these struggling nonbanks, we want to be sure they’ll pay us back.
Paulson went on to use words like “supervision,” “regulation,” and “oversight.” So don’t be surprised when Congress passes a new law forcing investment banks and brokers to let the Fed peruse their books.
In short, get ready for Sarbanes-Oxley, Part Two.
And another law may have been conceived during the amorous Bear Stearns bailout. Call this bastard love child “Baucus-Grassley.”
Sens. Max Baucus and Charles Grassley — two members of the Senate Finance Committee — are asking point-blank “how the government decided to front $30 billion in taxpayer dollars for the Bear Stearns deal.”
The Senate Finance Committee sent a letter to Secretary Paulson that, essentially, demanded every detail of the Fed-sponsored bailout by the end of the week.
“Congress has a responsibility to look at whether the taxpayers will lose money here” said Sen. Grassley, “And what kind of precedent this sets for the federal involvement in other direct and indirect ways, and whether top executives will come out better than the rank-and-file workers who weren’t in the room negotiating the deal.”
Behold! Our fine democratic institutions at work.
Meanwhile, Americans owe a record-breaking $1.1 trillion in home equity loans — twice as much as a decade ago.
Chart courtesy The New York Times
As more Americans borrowed against the rising value of their homes, so too did they default when the housing bubble popped last year. Who could have seen that coming? Moody’s economy.com claims that 5.7% of home equity lines of credit were delinquent or in default at the end of last year, up over 26% from 2006.
You may recall, last year, home equity for Americans on average fell below 50% for the first time since 1945, when the Fed first starting tracking the stat. You can expect both of these trends to continue… in the wrong direction.
Despite all the bluster and hand-wringing over the “R” word, the U.S. economy did grow at a snail’s pace in the last quarter of 2007, the Commerce Department whispered this morning.
After thinking long and hard for the past three months, the government made official its 0.6% GDP growth estimate for the fourth quarter of last year. Annual growth for 2007 will now go in the books at 2.2% — the slowest period of economic growth since the same time in 2002.
Most economists predict 0% growth rate for this first quarter of ’08, says The Wall Street Journal. They also expect a blistering 1% for the next.
Indian auto manufacturer Tata Motors finalized its purchase of Land Rover and Jaguar yesterday. Tata will buy the iconic British brands from Ford for $2.3 billion.
It’s hard to fathom the depths of this loss for Ford. The American manufacturer bought both brands for over $5 billion — $2.5 billion for Jaguar in 1989, $2.8 billion for Land Rover in 2000 — and then spent billions more trying to rehabilitate both.
Ford has posted net losses of over $15 billion since 2006, so one could argue they need the extra cash.
Ford stock hasn’t been this “cheap” since 1985.
Gold continued to rebound overnight.The precious metal has tacked on $50 since Monday, moving as high as $955 late last night. This morning, you can grab an ounce for around $945.
Oil, too, continued its abrupt rise yesterday and overnight.
After yesterday’s surprisingly ugly U.S. supply
report, oil shot up a good $4, to $106, this morning.
Petroleos Mexicanos (PEMEX), the state-owned Mexican oil conglomerate and major U.S. trading partner, announced a 6.4% decline in oil production
during the first two months of 2008 yesterday.
“The Mexican government is assessing additional charges on PEMEX,” explains our oilman Byron King, “to cover administrative overhead of the Mexican government. So now PEMEX has less money with which to invest in new wells and upgrades.
“They are so far behind in new drilling and field upgrades that it will take a decade to catch up, if they start tomorrow. Which they won’t. Even if they had the money to do it. Which they don’t. Or if the cost of oil field equipment and services were not skyrocketing. Which it is.”
Mexico is the fourth largest source of crude oil imports to the U.S. Global exports for PEMEX are down 14%.
Good for most, gasoline has feigned indifference to oil’s sudden rise. The national average price at the pump remains at $3.26, about 2 cents off last week’s record high.
“During March 1999,”
writes in our friend Charles Vollum of pricedingold.com. “U.S. pump prices spiked from 95.5 to 112.1 cents per gallon. Priced in gold, this was a jump from 103.6 mg to 124.5 mg per gallon.
“And today? So far in March 2008, with the U.S. dollar pump price at about 331 cents per gallon, gasoline prices have risen from 101.1 mg to 111.2 mg of gold per gallon.
“So what has changed in the last nine years? Gas hasn’t gone up any… the USD has just shrunk to one-third of its former self. Gas prices in gold would have to double from here to surpass their old highs… but if the dollar keeps shrinking, gas will hit $8 even if it continues to trade near the 100 mg level.
“My bold prediction? Nobody will really care, despite all the media hoopla.
“I remember gas at 25 cents per gallon, and at 75 cents, and at $2 and at $3. I’m still driving. I also remember shopping at dime stores as a kid. My kids shop at the dollar store! Someday they will tell stories to their kids about it… but they may have a hard time explaining to them just what a ‘dollar’ was. Meanwhile, I try to keep their investments growing in gold!”
“I am so sick of hearing ‘Get used to $8 gas,’” writes a reader overnight, “and it’s inevitable and Europe is already over $8.
“I say we form OFEC, Organization of the FOOD Exporting Countries, and then we see who gives in first. How long can you drink oil and eat sand, my brother? Only thing wrong with that is there are not enough BALLS in AMERICA anymore to stand up to the treasonous bastards running this place to make it happen. The rest of the world is going to have to let go of our coattails for a while so we can figure out a way to get them out of this mess they made.”
“I have seen no comments anywhere on the coming mother of all real estate bubbles: urban China,” writes a reader. “I live in Guangzhou, where a shoddily constructed three-bedroom apartment in a desirable locale is now costing 3-4 million yuan (approx. $430,000-570,000). I sold my apartment last month for 30% more than I bought it six months earlier.
“Vacant apartments are ubiquitous. So is new building, however, driven on by a consortium of banks, municipalities and developers. Growth is fueled by speculators using funds borrowed from cash-flush government companies to buy and resell blocks of apartments.
“This will end badly for many millions of middle-class Chinese, I’m afraid.”
“David Blitzer’s comment that ‘No market is completely immune from the housing crisis’ is, believe it or not, incorrect,” writes another reader. “Out here on the island of Guam, a U.S. territory in the western Pacific, we are only in the earliest stages of a housing boom.
“Prices are up about 10% each year for the last three years, with no end in sight. Raw land gets pricier every day, and the demand for homes is already greater than the supply. Much of the reason is a planned move by the military that will bring 8,000 Marines and three times as many dependents and support people to the island of 150,000.
“The island economy is tied far more to the Asian economies than the U.S. economy. The low U.S. interest rates aren’t hurting anything, either. Guam is, without a doubt, the hottest real estate market in the U.S. right now!”
Aloha,
Addison Wiggin
The 5 Min. Forecast
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