American “misery” soars… John Williams on how recent inflation stats will move markets
Stock indexes soar… the unlikely leaders of yesterday’s big rally
Housing starts stage big upside surprise, Trump sets single-home sales record… could the bottom be near?
Oil prices retreat… a technical indicator that crude might have more room to fall
Two worrisome trends emerge from the Far East
Heh… here’s your dose of afternoon cheer: American “misery” is at a 15-year high. We refer to the “Misery Index”… a measure created during the Johnson administration that combines the U.S.’ various unemployment and inflation rates. So as you might guess, after this week’s dreadful inflation stats, things are looking pretty miserable. The index popped 10.5%, the highest level since Bill Clinton took office in 1993.
For some perspective, the misery index hit an all-time high of nearly 22 in 1980. Inflation was raging at 14.4% and unemployment had risen to 7.6%.
“Inflationary recession implications should start to roil markets,” suggests John Williams. “Reporting of the last couple of days should result in mounting market recognition of an intensifying inflationary recession and of the resulting unhappy implications for the broad financial markets. One area, in particular, that is likely to receive more intense analysis is the federal government’s fiscal condition.
“The federal budget deficit should increase well beyond expectations in the current and next fiscal years, thanks to the deepening recession and rapidly increasing inflation, factors that are not reflected in the government’s underlying assumptions for its budget estimates. Such will mean increases in Treasury borrowings well beyond what already is expected, with likely negative pressures on the credit markets and the U.S. dollar. This is separate of any consideration of mounting financial system bailout efforts or talk of further tax rebates.”
Despite the crippling long-term effects of yesterday’s consumer inflation number, the stock market shot through the roof.
The Dow and S&P 500 rallied over 2.5%, while the Nasdaq soared to 3% gains… the best day for the three indexes in more than three months.
As we mentioned yesterday, fuel for the rally came from the most unlikely places. Airline industry stocks soared after Delta and American both announced billion-dollar losses… the Street was expecting more cataclysmic results. Ditto with Wells Fargo… shares leapt 32% after the bank reported a 22% drop in second-quarter earnings, citing the growing number of unpaid/defaulted loans. But hey, Wells also raised the dividend 10%… BUY! BUY! BUY!
Wells’ news coupled with some Fannie and Freddie jawboning from Ben Bernanke provided a nice buoy for the financial sector. Just about every bank and brokerage under the sun managed double-digit gains.
Banks are still on the rise this morning. J.P. Morgan announced a 53% fall in net income for the second quarter, but still managed to surprise the Street with better-than-expected earnings. The stock is up 14% on the news and taking most of the financial sector along for the ride.
Fannie Mae and Freddie Mac are up big-time today, as well… up over 40% each. We’ll give you the full rundown tomorrow. In the meantime, consider this:
Over the past 10 years, Fannie and Freddie have spent over $170 million on various lobbying efforts in Washington. That puts both companies among Washington’s top 20 biggest corporate lobbying spenders. Fannie and Freddie execs have “donated” $16 million to congressional campaign coffers since 1997, by far the biggest donors in the mortgage industry.
Housing starts skyrocketed the most in two years in June, reports the Commerce Department today. The sudden 9.1% rise surely marks the bottom of the housing crisis… Hooray!
Ugh… no… false alarm. Construction of new single-family homes fell to its slowest pace in 17 years in June, says the same report. Housing starts of such homes have slumped to an annual rate of 647,00 units, the worst pace since 1991.
It was construction on multifamily residences and apartment buildings that buoyed the report. They are up 42% and 9%, respectively. The majority of the rise, we hear, is due to a change in New York City building codes. But we won’t discount the sea change entirely… when the housing market eventually rebounds, we wouldn’t be too surprised to see it led by less expensive, multifamily dwellings near city centers.
U.S. homebuilders aren’t feeling too rosy… homebuilder sentiment has fallen to another record low. The National Association of Home Builders/Wells Fargo Sentiment Index printed a score of 16 yesterday. That’s the lowest score in the survey’s 23-year history, and worse than economists expected.
Heh… what housing crisis? Check it out… the newly crowned most expensive house in the U.S.:
Donald Trump just sold this mega-mansion for $95 million… likely the most expensive private residence ever bought and sold. Trump bought the West Palm Beach “house” in 2004 for a cool $41 million.
And we mentioned the buyer when this deal was first rumored , but his name bears repeating: Dmitry Rybolovlev, a Russian billionaire who made his money in the fertilizer biz. The new rumor is that Rybolovlev intends to tear most of the property down and build a mansion more to his liking — seriously.
And what’s this… The FBI is investigating IndyMac for possible fraud ? We hear los federales have launched a probe into the failed bank. Word on the street is that IndyMac may have purposefully practiced fraudulent lending policies and then improperly disclosed the true value of its assets (gasp!). But we thought the bank failed because of Chuck Schumer and those evil short sellers with their nastily little rumors? Hmmm…
BTW, the FBI is currently investigating 21 companies tied to the subprime bust. Over 1,400 cases of mortgage fraud have already been opened, bringing in more than 400 indictments.
Oil continued its recent decline yesterday, also a big boost to the buying frenzy on Wall Street. Over the past two days, light sweet crude has fallen $10.50 a barrel in U.S. trading. We mentioned several bits of news this week that build the argument for weakening oil demand in the states… now you can add yesterday’s surprise inventory report. Traders expected a decline in crude supply, but got a nearly 3 million barrel rise. The stuff trades for $134 this morning.
If you’re the charting type, you can see here that oil has twice failed to break resistance levels around $146-147. Now it’s fallen below previous support at $136… the first time that sort of thing has happened YTD.
For all the ups and downs in commodity and equity markets, the dollar has stayed largely the same. The dollar index scores at 72 as we write, less than two points above its all-time low. Currency traders took profits on their record euros from earlier this week, sending the multination currency down to $1.58. The pound remains at $2 even, and the yen has backed off a bit to 105.
“The most important economic trend,” opines our oilman Byron King, “is the long-term decline of the U.S. dollar. That’s it, hands down.
“The declining dollar is affecting everything. The dollar decline has much to do with the rising prices for precious metals, energy, other basic commodities and foodstuffs. Sure, there are issues with growing world population (a ‘net’ of 130 million new mouths to feed every year). And the Peak Oil thesis is entirely valid.
“People expect that at the end of the day, the U.S. Treasury and Federal Reserve will be down below with a safety net. The monetary gurus will just goose up the money supply to maintain peace in our time. But the long-term price is inflation and a declining dollar, which ruin savings and destroy capital.
“But right now, the key to it all is the declining dollar. And the best way to play the dollar decline is with precious metals like gold and silver.”
And if you believe Byron’s thesis, you’re presented with a nice buying opportunity this morning. Gold is about $30 off its Tuesday highs as we write. You can score an ounce for $955.
China is slowly looking to reduce its dollar holdings. According to this morning’s FT, China’s State Administration of Foreign Exchange (SAFE) is shopping around in the European private equity market for away to diversify massive dollar reserves. The salmon-colored journal didn’t report any specific details as to how much China is looking to spend, but it did say that “SAFE has been holding talks with Europe-based private equity firms about putting billions of dollars into their latest funds, precisely because these funds are not dollar denominated.”
The overwhelming majority of China’s $1.6 trillion reserves are dollar denominated, including over $500 billion in U.S. Treasuries.
Another worrisome trend out of China… Chinese GDP is growing at its slowest pace since 2005. After a year of record-setting economic growth, we learn today that second-quarter GDP “slowed” to an annual rate of 10.1%. As in I.O.U.S.A., inflation is starting to sting the red nation… prices there are rising at an annual rate of 7.1%.
Still, of the world’s 20 largest economies, China’s is still growing at the fastest rate… by far.
“Of course, new U.S. oil supplies would help reduce price and decrease our dependence on foreign oil,” writes a reader in response to yesterday’s debate.
“The argument is made that if we increase supply, worldwide demand will increase. That is a silly argument. Demand goes up because more people want more of something. The newly emerging middle classes in India, China and elsewhere want what we have, and it all takes energy, and, to a large extent, oil.
“If there is more oil supply relative to demand, the price will be lower than if there is less supply. Thus, if the U.S. produces more oil, it will help depress the price. If the worldwide oil supply is not increased relative to demand, it will help to increase the price.”
“You are missing something,” fires back another reader. “That something is demand for oil, which is increasing in China, India and the developing nations at a rate many times that in the U.S. By the time that any production from new offshore wells come online — three-five years from now — the Chinese will be waiting to buy it at $150-200 a barrel. As long as they are willing to pay that price, that’s what new OCS oil will sell for — unless you dream that the oil companies, out of the goodness of their little hearts, will be willing to subsidize the American consumer by selling that oil at a fraction of the world market price.
”Moreover, as far as ‘decreas[ing] our dependence on foreign crude’ is concerned, we would be lucky if the new production, assuming Congress went along with it, equaled the decline in production from existing U.S. wells that is forecast three-five years from now. Most likely, it will not. Anyone who naively believes that we can ‘drill our way out of the oil crisis’ is living in the same imaginary world as those who believe that running up massive federal deficits by cutting taxes while embroiling us in unnecessary wars will produce economic prosperity. Bush and his supporters are advocating a ‘Tinker Bell solution’ — but when they wave their magic wands, nothing happens!”
The 5: Quite a debate we’ve started… many, many similar e-mails were sent to The 5’s inbox. Thanks for your feedback. Don’t forget, you can always display your thoughts on our blog.
Drilling sounds nice… and it might reduce crude prices and decrease our dependence on foreign oil, if only by a very small margin. More likely, the whole prospect of offshore drilling will be trapped in Congress as part of some endless partisan debate. If and when it’s ever passed into law, “all we need are billions of dollars, drillships that aren’t available and at least five years to unwind the 30-year moratorium on drilling in these areas,” Kevin Kerr reminds us this morning. Will it even end up being “worth it”? Who knows… but it’ll probably make for a serious investment opportunity. We hope you’ll join us for the ride.
Thanks for reading,