News What is wrong with the US economy? Part 2

[edward]

Half of Chinese toy factories have closed. That casts a heavy shadow on the global situation, especially the USA.

"Last year was the most difficult time in decades for the Chinese toy industry," said the vice-chairman of the China Toy Association, Liang Mei.

A total of 3,631 toy exporters, or 52.7% of the industry's businesses, shut down in 2008, according to figures from the Chinese General Administration of Customs reported by the official Xinhua news agency.

http://news.bbc.co.uk/2/hi/asia-pacific/7670351.stm

In other areas of production Chinese companies are moving their factories to Laos, Cambodia, and Vietnam. The reason is claimed to be excess government regulation and cheaper labor elsewhere.

Where have I heard that before? Has Walmart pushed the ever lower prices a bit too far??

http://www.clipser.com/watch_video/124913

 

[Astronuc]

5 Reasons the Market Could Fall Further
http://www.usnews.com/articles/busi.../5-reasons-the-market-could-fall-further.html
Credit's still weak, and so is the global economy
By Kirk Shinkle
Posted October 24, 2008

The beatings are likely to continue on Wall Street after one of the most frightening trading days in a long, bearish season.

Today's shudder started with early-morning fright when premarket trading was halted on the New York Stock Exchange following a drop of 550 points—6.5 percent—in Dow futures. Stocks opened down about 450 but staged a modest comeback after what analysts were calling "Black Friday" in equity markets around the globe.

Stocks are still bouncing around their lows for the year—a dangerous place to be until markets get some confirmation that it really is a bottom. Unfortunately, the coming days don't appear to offer much in the way of hope for a quick recovery, even given what has become one of the worst trading months in decades.

The problem is this: Equity traders are still largely blinded by problems in the credit markets even as weakness in the economy and corporate America continues to creep into an already chaotic scene. That's nothing new. However, the longer heightened levels of uncertainty continue, the greater the damage. When the smoke clears, traders could be disappointed even further.
. . . .

 

[jal]

Warning of approaching disasters were made and were ignored.
-------
http://johncbogle.com/wordpress/wp-content/uploads/2007/10/risk_mgmt.pdf
Black Monday and Black Swans
Remarks by John C. Bogle
Founder and former chief executive, The Vanguard Group
before the Risk Management Association
Boca Raton, Florida
October 11, 2007
When investors—individual and institutional alike—engage in far more trading—inevitably with one another—than is necessary for market efficiency and ample liquidity, they become, collectively, their own worst enemies.
While the owners of business enjoy the dividend yields and earnings growth that our capitalistic system creates, those who play in the financial markets capture those investment gains only after the costs of financial intermediation are deducted. Thus, while investing in American business is a winner’s game, beating the stock market—for all of us as a group—is a zero-sum game before those costs are deducted. After intermediation costs are deducted, beating the market becomes, by definition, a loser’s game.
We’re merely trading pieces of paper, swapping stocks and bonds back and forth with one another, and paying our financial croupiers a veritable fortune. We’re also adding even more costs by creating ever more complex financial derivatives in which huge and unfathomable risks have been built into our financial system.
The Soaring Costs of our Financial System
Turning first to the costs of our system, they have soared to staggering proportions. Led by Wall
Street bankers and brokers and mutual funds, followed by hedge funds and pension fund managers, plus advisor fees and all the other costs incurred by financial market participants have risen from an estimated $2.5 billion as recently as 1988 to something like $528 billion this year, or some 20 times over. (Chart 9)
But don’t forget that these costs recur year after year. If the present level holds for the next decade (I’m guessing that it will grow), total intermediation costs would come to a staggering $5 trillion.
Then think about these cumulative costs relative to the $16 trillion value of the U.S. stock market and the $12 trillion value of our bond market. Those costs would represent an astonishing 18 percent of that value.
Does this explosion in intermediation costs create an opportunity for money managers?
You better believe it does! Does it create a problem for investors? You better recognize that too. For as long as our financial system delivers to our investors in the aggregate whatever returns our stock and bond markets are generous enough to deliver, but only after the costs of financial intermediation are deducted, these enormous costs seriously undermine the odds in favor of success for our citizens who are accumulating savings for retirement. Alas, as we all know, the investor feeds at the bottom of the costly food chain of investing.
-----
jal

 

[Astronuc]

After intermediation costs are deducted, beating the market becomes, by definition, a loser’s game.

That's a big part of the problem.

 

[Art]

Perhaps it is time the US and other world gov'ts took even more ownership of the finance industry.

The bail out, deposit guarantees and huge injections of money to improve liquidity seem to have stopped the collapse of the banking industry but given the tiny reductions in the LIbor rate it seems the banks aren't keeping to their side of the deal with credit remaining as tight as ever. The spread difference between 3 month T-bills and the 3 month Libor rate should be around 0.2% but currently stands at 3.5% which in plain language means borrowers are being ripped off as interest reductions by the central banks are not being passed on.

It would seem the banks are soaking up the extra cash to improve their balance sheets whilst eyeing their fellow bankers looking for signs of renewed weakness ready to pounce. In some cases in the UK at least incredibly the banks are actually putting the cheap money the gov't injected into the system on deposit with the central bank and earning interest on it!

It seems to me it is impossible for the current batch of finance executives and managers to change the predatory way they think and the way they have operated for the past 20+ years as evidenced by the huge bonuses they are still paying themselves at even this critical time and so if the banks will not voluntarily perform their vital role in oiling the gears of the economy then the gov'ts should put their own people in charge of them who will.

 

[fuzzyfelt]

Perhaps, but the governments already now have stakes, and also perhaps there has been a change from the developed market credit crisis to emerging markets currency meltdown, all with the downturn in the background.

 

[turbo]

What galls me is that the Fed keeps dropping rates to stimulate borrowing and lending, while those of us who have saved all our lives are taking it in the neck. Money-market accounts and savings accounts pay nothing these days.

 

[Astronuc]

Low government interest rates are part of the problem also. The lenders benefitted from low interest rates by larger point spreads - they borrowed low and load at high interest rates. For the most part, consumers did not benefit.


They the other thing - under Bush, the economy produced sub-prime jobs. That and too many sub-prime loans lead to an over-leveraged economy - in addition to fiscal irresponsibility.

 

[Astronuc]

Hammer time!

World markets slump [again]; Nikkei at 26-year low
http://biz.yahoo.com/ap/081027/world_markets.html

LONDON (AP) -- World stock markets slumped again Monday with the Nikkei index in Japan closing at its lowest in 26 years as the financial crisis drove up the yen, piling the pressure on the country's exporters.

Tokyo's Nikkei 225 index closed down 6.4 percent to 7,162.90 -- the lowest since October 1982. Hong Kong's Hang Seng Index tumbled 12.7 percent to 11,015.84, its lowest close in more than four years and biggest daily decline since 1991.

European markets followed Asia lower, with benchmarks in Britain, Germany and France trading down more than 4 percent in early trading. The FTSE 100 index was 190.31 points, or 4.9 percent, lower at 3,693.05, while Germany's DAX was down 182.81 points, or 4.3 percent, at 4,112.86. France's CAC-40 was the worst performing European index, down 184.65 points, or 5.8 percent, at 3,009.14.

"Worries about the impact of the surging yen on Japanese export earnings have hit the Nikkei hard," said Julian Jessop, chief international economist at Capital Economics.

"This in turn has led to sharp falls in European markets even when, as on Friday, the U.S. had closed higher the day before," he added.

Dow futures were down 268 points, or 3.2 percent, at 7,994. Standard & Poor's 500 futures were down about 4 percent.

Major Stock Indices (in local currency)
Asian Markets

AORD   All Ordinaries       3,768.30 1:11AM ET     -63.30 (-1.65%) 
SSEC   Shanghai Composite   1,723.35 3:00AM ET    -116.27 (-6.32%)  
HSI    Hang Seng           11,015.84 5:59AM ET  -1,602.54 (-12.70%)  
BSESN  BSE 30               8,509.56 5:59AM ET    -191.51 (-2.20%)  
JKSE   Jakarta Composite    1,166.41 6:33AM ET     -78.46 (-6.30%) 
KLSE   KLSE Composite N/A                            0.00 (0.00%)  
N225   Nikkei 225           7,162.90 3:00AM ET    -486.18 (-6.36%)  
NZ50   NZSE 50              2,778.55 Oct 24        -28.79 (-1.03%) 
STI    Straits Times        1,600.28 Oct 24          0.00 (0.00%)  
KS11   Seoul Composite        946.45 5:03AM ET      +7.70 (+0.82%)  
TWII   Taiwan Weighted      4,366.87 1:46AM ET    -212.75 (-4.65%)

European Markets

ATX    ATX                  1,700.32 6:59AM ET    -156.51 (-8.43%)  
BFX    BEL-20               1,824.52 7:16AM ET     -93.56 (-4.88%)
FCHI   CAC 40               3,005.89 7:16AM ET    -187.90 (-5.88%) 
GDAXI  DAX                  4,105.93 7:02AM ET    -189.74 (-4.42%)  
AEX    AEX General            234.35 7:16AM ET     -11.57 (-4.70%)  
OSEAX  OSE All Share          250.75 7:01AM ET     -17.63 (-6.57%)  
MIBTEL MIBTel              14,653.00 7:16AM ET    -737.00 (-4.79%)  

SMSI   Madrid General         843.54 7:15AM ET     -50.91 (-5.69%) 
OMXSPI Stockholm General      176.17 7:16AM ET     -10.52 (-5.64%)  
SSMI   Swiss Market         5,423.12 7:16AM ET    -251.97 (-4.44%)  
FTSE   FTSE 100             3,699.04 7:01AM ET    -184.32 (-4.75%)

This will certainly be one of those periods highlighted in the history books.

 

[jal]

"Worries about the impact of the surging yen on Japanese export earnings have hit the Nikkei hard," said Julian Jessop, chief international economist at Capital Economics.

Has anyone figured out that now the japanese can go and buy out any asset at basement prices?

 

[mgb_phys]

Has anyone figured out that now the japanese can go and buy out any asset at basement prices?

Not exactly - the US$ is going up.
Any asset they wanted they bought last time (in the 80s) most profitable US companies are either in defence or can claim to have enough links to national security that you can block foreign takeovers (eg ports). somehow I can't see Toyota buying GM to gain their experience of building cars.
The euro is looking very cheap though - might be time to buy a european car company or mobile phone maker.

 

[mheslep]

I believe the markets now undervalue the underlying earnings beyond any reason: The US stock market capitalization is now $7-9 trillion in an economy that produces $14 trillion yearly. Even in the worst recession scenario on the table GDP is NOT going to change much. The stock markets may decline further, but at this point it is panic selling not earnings based.

 

[Astronuc]

This morning I heard that there was a lot of downward pressure because of margin calls, i.e. all those folks who had borrowed to buy stock with the expectation of appreciation had to sell stock to pay back the borrowed money/stock.

 

[edward]

This morning I heard that there was a lot of downward pressure because of margin calls, i.e. all those folks who had borrowed to buy stock with the expectation of appreciation had to sell stock to pay back the borrowed money/stock.

I have been thinking about that. Speculators can now borrow money provided by the government to play the market, Something is wrong with this picture.

 

[fuzzyfelt]

Really weird stuff, like Volkswagon being the 2nd biggest company in the world for a little while today.

 

[mgb_phys]

Really weird stuff, like Volkswagon being the 2nd biggest company in the world for a little while today.

And Porsche are still trying to buy them!

So you are rolling in cash because yuppies have been buying your sports cars and even the worlds ugliest SUV (although cthulu knows why) - you suspect that things aren't going to last for ever so you look at buying one of the biggest producers of small cars.
Somebody in the Porsche family obviously inherited some brains.

 

[fuzzyfelt]

I believe the markets now undervalue the underlying earnings beyond any reason: The US stock market capitalization is now $7-9 trillion in an economy that produces $14 trillion yearly. Even in the worst recession scenario on the table GDP is NOT going to change much. The stock markets may decline further, but at this point it is panic selling not earnings based.

I think this could be confusing micro (like the evaluation of companies) with macro (like countries) economics. National account numbers are historical figures (which, roughly, in the event of a recession the GDP growth rate declines over 6 months or more, and in a depression GDP growth itself declines for that period). Companies, otoh, are valued on their future earnings, for say a year in advance, involving variables, some knowable, that include EBITDA, like price to earning ratio, dividend yield, free cash flow multiple... With the speed of this crisis Analysts, in most cases, haven't yet revised their projections.

 

[B. Elliott]

And Porsche are still trying to buy them!

So you are rolling in cash because yuppies have been buying your sports cars and even the worlds ugliest SUV (although cthulu knows why) - you suspect that things aren't going to last for ever so you look at buying one of the biggest producers of small cars.
Somebody in the Porsche family obviously inherited some brains.

Porsche has slowly been buying more and more of Volkswagen over the years. It's primarily been due to prevent foreign companies from taking over. Preservation of tradition and heritage is paramount to Porsche.

 

[jal]

What is wrong with the US economy?
http://www.bloomberg.com/apps/news?pid=20601109&sid=aVann0.cv9Tw&refer=home
Broken Securities Industry Still Has $20 Billion to Pay Bonuses

The following table compares compensation and estimated bonuses for the first nine months of 2008 with the first nine months of last year. Bonus estimates are 60 percent of total compensation. Bonus awards are typically determined at the end of the year, with payments made in December or January.

( The table does not cut and paste properly go read it)
---------
Their wages came out of the money that came from the investors.
Therefore, don't ask why there is a "market correction".
You could ask, "Without the bail out, where would the money come from for those bonus?"

 

[fuzzyfelt]

Wow, VOW was the biggest company in the world for a little while today.

(Agreed the Porsche SUV is really ugly )

 

[mheslep]

So a friend working at Freddie Mac told me recently that Secretary Paulson had dropped by and gave a large forum talk to the employees of the now government owned firm. Apparently he told them keep their heads up, and "just keep doing what you've been doing". Ok, I assumed that meant keep buying mortgages, but certainly the days of low down payments and risky loans are over, right? Then I see this in the latest The Economist:

...Surprisingly, mortgage-lending conditions may be improving. Under pressure from the federal government, Fannie Mae and Freddie Mac, the now-nationalised mortgage agencies, and the Federal Housing Administration, the programme for low-income buyers, are stepping up their activity. A buyer can now obtain an FHA loan with as little as 3.5% down on a house costing up to $625,000—which would include most of the homes in the country. Ms Zelman reckons the FHA accounted for 22% of mortgage originations in the third quarter, up from 5% in all of 2007.

Incredible. Inmates are running the asylum. Anybody giving out less than 20% down loans ought to be in a padded room.

 

[Greg Bernhardt]

Incredible. Inmates are running the asylum. Anybody giving out less than 20% down loans ought to be in a padded room.

yup, if you can't put down 20% you simply can't afford it. Stick to renting. Why people think they can borrow $600k when they only have $20k in the bank is beyond me.

 

[Astronuc]

White House to banks: Start lending now
http://news.yahoo.com/s/ap/20081028/ap_on_bi_ge/financial_meltdown

WASHINGTON – An impatient White House served notice Tuesday on banks and other financial companies receiving billions of dollars in federal help to quit hoarding the money and start making more loans.

"What we're trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money," White House press secretary Dana Perino said.

Though there are limits on how much Washington can pressure banks, she noted that banks are regulated by the federal government.

"They will be watching very closely, and they're working with the banks," she said.

Anthony Ryan, Treasury's acting undersecretary for domestic finance, made the same point in a speech in New York before financial executives.

"As these banks and institutions are reinforced and supported with taxpayer funds, they must meet their responsibility to lend, and support the American people and the U.S. economy," Ryan told the annual meeting of the Securities Industry and Financial Markets Association. "It is in a strengthened institution's best financial interest to increase lending once it has received government funding."

Washington is getting impatient.

It will certainly be interesting to see who takes Paulson's place. I understand, he doesn't plan to stay in the next administration.

 

[mgb_phys]

WASHINGTON – An impatient White House served notice Tuesday on banks and other financial companies receiving billions of dollars in federal help to quit hoarding the money and start making more loans.

In further news they gave $5 to a 5 year old and told them not to spend it all on sweets.

 

[Astronuc]

In further news they gave $5 to a 5 year old and told them not to spend it all on sweets.

The US government can't afford such lavish spending. Five bucks indeed! What is this nation coming to?!

 

[Astronuc]

Folks with money snatched up stocks on the US markets sending the Dow 30 up nearly 900 pts. A good day.

Meanwhile

Medical Debt Sending Many Over Financial Brink
http://news.yahoo.com/s/hsn/20081028/hl_hsn/medicaldebtsendingmanyoverfinancialbrink

TUESDAY, Oct. 28 (HealthDay News) --Since 1999, Keith and Deborah Krinsky of Magalia, Calif., have seen their health insurance deductible soar from $1,000 to $10,000.

And their health-care costs have put them in a financial hole.

A combination of Keith's chronic asthma and potential heart problems, Deborah's connective tissue disorder and fallen arches, and their kids' various scrapes and stumbles led them to amass a pile of credit card debt and forced them to refinance the mortgage on their house -- which they now are having trouble paying.

Keith, once a plant manager for a trucking company in Chico, took a $30,000 pay cut to get a job with better health benefits. Deborah, who doesn't work because of her disability, said they are still fighting desperately to stave off foreclosure.

"Right now, we are in the process of losing our home. We will probably go to my mother-in-law," Deborah said Monday.
. . . .

U.S. consumer confidence plunges to record low
Job, economic worries worsen as financial crisis takes toll


On the bright side - Stranger buys foreclosed home for woman on hard times

 

[mheslep]

I think this could be confusing micro (like the evaluation of companies) with macro (like countries) economics. National account numbers are historical figures (which, roughly, in the event of a recession the GDP growth rate declines over 6 months or more, and in a depression GDP growth itself declines for that period). Companies, otoh, are valued on their future earnings, for say a year in advance, involving variables, some knowable, that include EBITDA, like price to earning ratio, dividend yield, free cash flow multiple... With the speed of this crisis Analysts, in most cases, haven't yet revised their projections.

There are also the large number of private or small firms that help make up annual GDP numbers but are not reflected in the publicly traded stock markets. Yet the figures are still connected, with GDP reflecting earnings for the nation, and the stock market _should_ be reflecting a valuation of the publicly traded part those company's earnings, or more precisely the expected present value of future earnings. That is, the market _should_ reflect not just a company's earnings for one year in advance, but _all_ of its expected future earnings calculated as net present value.

 

[fuzzyfelt]

There are also the large number of private or small firms that help make up annual GDP numbers but are not reflected in the publicly traded stock markets. Yet the figures are still connected, with GDP reflecting earnings for the nation, and the stock market _should_ be reflecting a valuation of the publicly traded part those company's earnings, or more precisely the expected present value of future earnings. That is, the market _should_ reflect not just a company's earnings for one year in advance, but _all_ of its expected future earnings calculated as net present value.

I see, Ok.

Arguably, the markets are below long term fair trade, basis $70 earnings for S&P 500 companies, that that number should be around 925 theoretically, with compelling value, based on historical data, around the 580-650 range. But then, when is it likely to trade there, 5 years time, sooner? I also wonder how connected, given other influences like global money flows, currency and emerging markets risks, crude, or internally, capital destruction, savings, etc..

 

[mheslep]

I see, Ok.

Arguably, the markets are below long term fair trade, basis $70 earnings for S&P 500 companies, that that number should be around 925 theoretically, with compelling value, based on historical data, around the 580-650 range. But then, when is it likely to trade there, 5 years time, sooner? ...

Good point, illustrating why investment in the market requires a ~5 year window at least.

 

[Astronuc]

World markets cheer Fed rate cut- AP

World stock markets rose Thursday after the U.S. Federal Reserve slashed interest rates to help revive the world's largest economy and opened new credit lines with other central banks.

Shell reports 22 percent rise in 3Q profit- AP (before the price of oil fell)
VW's 3Q net profit up 28 percent to 1.2B euros- AP
Cigna reports 53 percent drop in 3Q profit- AP (financials are still problematic)


Stocks signal sharply higher open after rate cut
http://biz.yahoo.com/ap/081030/wall_street.html

Global stocks, euro rally on emerging market gains
http://news.yahoo.com/s/nm/20081030/ts_nm/us_markets_global

. . . . The Fed also opened up dollar liquidity aid beyond traditional markets, with four new $30 billion currency swap lines with Brazil, Mexico, South Korea and Singapore.

"The Fed's statement has paved the way for further rate cuts ...Its policy outlook is softer, and is pushing the dollar lower," said David Tinsley, economist at nabCapital.

"The Fed is doing its bit to shore up emerging economies, so that's improving risk appetite toward those currencies."

The MSCI world equity index rallied by nearly 3 percent, driven by gains of over 9 percent in the benchmark emerging equities index.

Emerging equities have bounced by 24 percent from four-year lows set on Tuesday.

. . . .

The support of the markets in Brazil, Mexico, S. Korea and Singapore is interesting. Some people will make some major bucks.

But have systemic problems been addressed? I think not.