So much for “decoupling”: Nations of the world report optimistic GDP growth
German president/former IMF chief lays the smackdown on banks of the world
Fed keeps U.S. financials afloat… latest data show financials still in desperate need of cash
Housing gets a surprise batch of positive data… has the bottom been struck?
Plus, the latest commodity on the rise… could steel’s sudden spike put the kibosh on global growth?
What global recession?
To the delight of those who think the global economy is no longer dependent on the United States, France, Germany and Japan all posted surprisingly strong first-quarter results yesterday.
Germany’s economy, in fact, grew at its fastest rate in nearly 12 years. During the first quarter of 2008, Deutschland GDP grew by 1.5% — an annual rate of 6%. German economists cited a surge in corporate investment and strong export growth. $1.50-plus euros didn’t hurt either.
France’s economy chugged along at 0.6%, twice its fourth-quarter growth rate and well above expectations. And for all the worry about the eurozone in the wake of the U.S. credit crisis, the 15 nations grew at a collective 0.7% — higher than expected and on track for a decent year.
The Japanese booked their third consecutive quarter of growth. In fact, Nipponese GDP growth surged twofold, to 0.8%, from the 0.4% booked in the fourth quarter of 2007.
“The international financial markets,” opined German president Horst Koehler, “have become a monster that has to be shoved back into the cupboard.” Taking no time to bask in the glory of Germany’s impressive economic growth, the former head of the IMF recommended broad reform and increased regulations for the world’s megabanks.
“Capitalism is not just about pulling in profits,” Koehler said, “but above all about being able to handle risk. The financial markets crisis shows that too many players in banking houses did not understand precisely that.
Koehler: Still waiting to hear a “mea culpa”
“The overcomplexity of financial products and the possibility of undertaking huge leverage operations with the smallest amount of capital as security allowed the monster to grow.
“We have to hold up a mirror to the finance world. They have deeply embarrassed themselves. And I still have not heard a clearly audible mea culpa.”
Back in I.O.U.S.A., the Federal Reserve is doing its part to keep Wall Street on life support. Direct Fed loans to banks using of the “discount window” rose to a daily average of $14.4 billion last week. That’s an all-time high.
Similarly, investment banks, which were until recently barred from borrowing from the discount window, borrowed an average $16.5 billion a day… up from last week and close to an all-time high.
The Fed’s latest TSLF yesterday, was also a “success.”
The Fed exchanged $7.2 billion in Treasury notes for ill-fated mortgage and asset-backed securities held by brokerage houses. The Fed was willing to lend out as much as $25 billion in IOUs, so we suppose it’s a good sign that the queue wasn’t wrapped around the block this week.
“Recent events have demonstrated the importance of generous capital cushions for protecting against adverse conditions in financial and credit markets,” crowed Ben Bernanke yesterday at a Federal Reserve conference in Chicago.
The Fed chairman then delivered plenty of advice yesterday that… well… would have been a whole lot more useful last year.
Nevertheless, the U.S. stock market seems quite content with the status quo. No tragic news stunned Wall Street yesterday. Oil backed off a few bucks. And a manufacturing report from the Philly Fed was deemed “not as bad as April,” and therefore gave “investors” a shot of courage.
Whether they truly are or not, the markets appear to functioning with more suavity lately. Deals are popping up in greater frequency and the horror of earnings season has passed. For those reasons, the Dow ended yesterday up 0.7%, the S&P 500 rose 1% and the Nasdaq shot up a good 1.5%.
Hell, even housing is looking up. Housing starts surged 8.2% in April, says the Commerce Department today, the biggest monthly increase in two years. Hooray! All is well in Toyland.
Uh-oh… what’s this? The entire boost came courtesy of apartment and condo construction. Actually, builders broke ground on single-family homes at their slowest rate in 12 years. Bummer.
Homebuilder confidence has actually fallen close to an all-time low.
The NAHB/Wells Fargo homebuilders sentiment index fell to a score of 19 in May, just one point above the all-time low set in December. The index had flat-lined at 20 for the first four months of 2008, but in May, builders “assessment of current sales” hit a record low and brought the index down a point.
For reference, the index hit a record high of 72 in 2005.
Of all the housing stats released this week, we can give one piece of truly optimistic data. Building permits increased around 5% in April, both for single-family and multifamily dwellings. That’s the first increase for single family homes in 13 months.
Year over year, those same permits are down about 40%.
“Tight supply conditions continue to be the primary catalyst for higher crude prices,” reads a Goldman Sachs report this morning. The famous investment bank notched its 2008 oil price target just a bit higher today… from $107 to $141.
And just like that, oil set yet another record high this morning. Trading for $127 as we write, light sweet crude rebounded suddenly this morning after sinking as “low” as $120 a barrel yesterday. We suspect the Goldman’s report and today’s options expirations are all the market will need to set record highs though the weekend.
The average gas price in the U.S. struck $3.78 this morning, a new all-time high for the ninth day in a row. Hawaii, Alaska and Connecticut (naturally) are all reporting averages over $4 a gallon.
The dollar index is holding tight to 73, a range it’s been content with since April. The euro trades for $1.55 today, the pound for $1.94 and the yen for 104… all at yesterday’s levels.
The Canadian dollar got a shot in the arm this week. As oil has been hitting new highs, the loonie is creeping up and up, now back at parity with the greenback again. The U.S. imports more oil from Canada than from any other country.
Gold is making another run at $900 again this morning in New York.
“Gold could be ready to end the summer doldrums even before summer begins,” writes our gold adviser Ed Bugos. While summer is often a tough time for gold, an e-mail from Ed this morning suggests this summer might be different.
“The most relevant area of ‘resistance’ right now is between $890-920. This most recent rally is a good early trend.
“What I don’t want to see is a drift toward the high end of that range through June, and then, whack, summer sets in. In that case, the market could fall back to the mid-high $700s. But given the recent move upward, the trade looks better than that. I think we’ve already had our seasonal low.”
Steel is rapidly becoming an expensive commodity, too.Global steel prices are up around 50% since the New Year.
“We have not yet seen that [steel] prices have peaked,” said Lakshmi Mittal of ArcelorMittal, the world’s largest steel maker, “what we have seen is the costs increasing every month.” The three major resource costs in making steel — iron ore, coking coal and scrap steel — have all doubled in price this year. Steel producers have thus far been able to pass these increases along… growth in Asia is too white-hot to be cooled by rising steel costs.
But sooner or later, says Mittal, “There will be impact on demand, and that is not a good development for the steel industry.”
“I agree completely with the statements made about government/public employee pensions,”writes a reader. “I think it is a very serious problem in New Jersey. But when I talk about it, people look at me like I am crazy or evil.
“‘How can you be against teachers, police and firemen?’ people ask.
“I’m not against them. But where will the money come from to pay their pensions? Police and teachers get pensions of 50-70% of their salary and free medical after working only 20-25 years.”
“So let’s see,”writes another. “Firemen, police and anyone else whose job requires a talent that may leave our bodies must be able to get government retirement in 20 years. Surely, we can’t ask them to get another job, or get some education to find that job. No, just another handout.”
“Your reader’s response on vegetarianism shows a significant misconception about human diet and metabolism,”writes a third. “One is quite able to get adequate protein from a ‘balanced’ vegetarian diet. We definitely do not need the vast amounts of meat protein found in the average American diet.
“In addition, consuming such vast amounts of meat protein is detrimental to overall health in several ways, to say nothing of the adverse effects of all the hormones and antibiotics that are present in commercial meat.”
“The sad part is that I believed all the hype about vegetarianism,”admits our last reader today. “I went nearly meatless for two years for my ‘health.’ I got fat, sick and tired and nearly went out of my mind. I was attempting to care for two small children at the time — not a pretty combination.
“Vegetarianism works for a small group of people, but it just plain-old won’t work for the rest of us. I can think of two famous ‘health gurus’ who started out as vegetarians and were forced to incorporate at least some animal-based proteins in their diet. Your reader’s response was right on the money.”
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