Weekly Economic Potpourri November 22, 2008

Every week there are a numerous headlines that are worthy of mentioning but I simply run out of time. Here are some news items from around the globe from this past week.

Obama Targets 2.5 Million Jobs With Stimulus Plan

President-elect Barack Obama said he aims to save or create 2.5 million jobs in a two-year plan to stimulate an economy facing a “crisis of historic proportions.”

“It’s likely to get worse before it gets better,” Obama said today in his weekly radio address. He said that this week “financial markets faced more turmoil,” potentially leading to a “deflationary spiral” that may plunge the nation further into debt and cost millions more jobs.

“We have now lost 1.2 million jobs this year, and if we don’t act swiftly and boldly, most experts now believe that we could lose millions of jobs next year,” Obama said.

“It will be a two-year, nationwide effort to jumpstart job creation in America and lay the foundation for a strong and growing economy,” Obama said. “We’ll put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children, and building wind farms and solar panels; fuel-efficient cars and the alternative energy technologies that can free us from our dependence on foreign oil and keep our economy competitive in the years ahead.”

California jobless rate soars to 8. 2%

California's unemployment rate jumped to 8.2 percent in October, and employers cut 26,400 nonfarm payroll jobs, as the global financial crisis punished the state, exacting its heaviest toll on the struggling Central Valley.

The state Employment Development Department reported Friday that the jobless rate had increased from 7.7 percent in September to its highest level since September 1994.

California's unemployment slide has been steep and sudden. Last October, the rate was just 5.7 percent.

Every Stock Mutual Fund Has Lost Money in 2008, Except One

Out of the 11,585 U.S. and international stock mutual funds tracked by Morningstar Inc., 11,584 have lost money in 2008, according to fund data through Nov. 20.

In other words, just one fund hasn’t lost money this year—and that is the APX Mid Cap Growth Fund, which was flat through Thursday’s close. That’s right, folks, its return—or lack thereof—is a mere zero thus far in 2008.

Annette Larson, who is Morningstar’s chief data cruncher, has worked at the Chicago firm since 1994. “I’ve never seen it this bad before,” she says. In fact, she was certain she made a mistake when she analyzed the most recent mutual fund data. “I thought to myself: ‘This cannot be right,’ so I did it again, and again, and then I realized all but one fund is negative. I’m in awe,” Larson says.

Prices in Canada Decline, Raising Fears of Deflation

Prices in Canada fell by 1 percent on an unadjusted basis from September to October, the largest such decline in 49 years, Statistics Canada reported on Friday.

Michael McCracken, the chairman and chief executive of Informetrica, an economic analysis company based in Ottawa, dismissed fears that Canada was heading toward sustained price reductions.

“This is not deflation; this is not something that’s going to continue for a long time,” he said. “It’s good news in that the people at the central bank can now spend more time worrying about the real economy and the state of financial institutions, rather than the incipient inflation they seem to see around every corner.”

But Karen Cordes, an economist with Scotia Capital, a unit of the Bank of Nova Scotia, was not as positive. She titled a note released on Friday, “Canadian Deflation Fears Mount.”

U.S. Bancorp acquires deposits of failed Downey, PFF

U.S. banking regulators seized California banks Downey Savings and Loan and PFF Bank & Trust late Friday as the housing crisis claimed two more victims from the financial crisis. U.S. Bancorp took over the two banks' branches, deposits, and most of their assets, the Federal Deposit Insurance Corp said.

Downey, which specialized in exotic mortgages known as "option ARMs," is the third largest bank to fail this year as plummeting housing prices and the slowing economy have triggered massive mortgage defaults.

So far this year, 22 banks have failed. That already represents the most bank failures in the U.S. since 1993, when 50 banks failed.

The FDIC estimated that Downey's failure will cost the deposit insurance fund $1.4 billion, while PFF will cost another $700 million. As of the end of June, the fund had $45.2 billion, although the FDIC has multiple ways to boost the fund if necessary, including emergency lines of credit.

General Motors board weighs bankruptcy option

The board of directors of embattled U.S. automaker General Motors Corp is considering "all options" including bankruptcy, according to a report on the Wall Street Journal's website late on Friday.

The paper, citing people familiar with the board's thinking, said the stance puts it in conflict with chief executive Rick Wagoner, who told lawmakers this week bankruptcy is not a viable alternative for the company.

GM, in a statement to the newspaper, said the board has discussed bankruptcy, but said the board did not view it as a "viable solution to the company's liquidity problems."

Hollywood actors guild to seek strike

The Screen Actors Guild said Saturday it will ask its members to authorize a strike after its first contract talks in four months with Hollywood studios failed despite the help of a federal mediator.

SAG, representing more than 120,000 actors in movies, television and other media, said in a statement that it will launch a "full-scale education campaign in support of a strike authorization."

Talks broke down after the studios sought the right to create productions for new media, such as the Internet, using nonunion actors and without paying residuals, said Doug Allen, SAG national executive director and chief negotiator.

Residuals are payments to actors that are made every time a production airs, such as TV reruns. Many SAG members rely on residuals for more than half of their income, Allen said.

Canada’s Carney Says Some Bankers Focused on Opera, Not Lending

Bank of Canada Governor Mark Carney said the global financial crisis was caused in part by banking executives who thought about opera and ski trips instead of risks in their loan portfolios.

Regulators and executives were “seduced” by the idea that risk was “spread thinly around the world” by packages of loans, Carney told the British Broadcasting Corp. in a radio interview broadcast today. “If you were having a conversation with a central banker like myself, and the chief executive drifted into opera or the ski slopes of Davos or some type of social setting, that’s an issue,” Carney told the London-based network.

The credit crisis might have been prevented if other countries had regulations like Canada’s, Carney said. The country’s banks were rated the strongest by the World Economic Forum last month.

Mexico's Calderon Says Obama Shouldn't Try to Renegotiate Nafta

Mexican President Felipe Calderon said U.S. President-elect Barack Obama shouldn't succumb to protectionist pressures by attempting to renegotiate the North American Free Trade Agreement.

"I believe the next U.S. administration has enough talent and common sense" not to touch Nafta, Calderon said today at the Asia-Pacific Economic Cooperation forum in Lima.

New Zealand Prime Minister blames 'reckless' money men for crisis.

Prime Minister John Key has hit out at his former money trader colleagues, accusing some of helping trigger the global financial crisis with a "reckless" attitude to risk. Key said the global economy had been fuelled by an unprecedented amount of credit obtained through "huge amounts of leveraging" by hedge funds and other financial institutions.

"These forces were in turn fuelled by excessive optimism in asset markets and a more relaxed, and in many case, recklessly complacent attitude to risk," Key told the chief executives.

Introduced to his audience as a former businessman and Merrill Lynch trader, Key went on to harshly criticise his former colleagues in the financial sector, saying hedge fund managers had become unregulated, opaque, and "globally unmanagable".

Markets wary of Irish debt as fresh rescue looms

Ireland's bank rescue has begun to unravel despite a blanket debt guarantee for the country's top lenders, prompting concerns that Europe's credit crisis may be entering a second and more menacing phase.

While talk of a fresh bail-out has helped revive the battered stocks of Anglo Irish, Bank of Ireland and other lenders, it appears merely to have shifted the risk to the Irish state itself.

Michael Klawitter, a strategist at Dresdner Kleinwort, said the cost of insuring Irish sovereign debt through credit default swaps (CDS) has surged to 133 basis points. "The markets have begun to see a risk to the solvency of the Irish government. They are questioning whether it has the financial muscle to back up the guarantees," he said.

This is a disturbing pattern across Europe as the global credit crisis drags on, with extreme cases in Iceland, Ukraine, Russia, Hungary and Latvia. There are fears that investors could start to shun sovereign debt in Western states where banks have outgrown the underlying economy.

Regulators to discuss short selling rules

Global securities regulators will gather on Monday to discuss rules on short selling and disclosure of credit derivatives, the head of the US Securities and Exchange Commission said on Thursday.

Christopher Cox, SEC chairman, said the meeting, to be held via teleconfrerence, would address “urgent regulatory issues in the ongoing credit crisis.”

“In addressing turbulent market conditions, it is essential not only that regulators act against securities law violations, including abusive short selling, but also that there be close coordination among international markets to avoid regulatory gaps and unintended consequences,” Mr Cox said in a statement on Thursday.

Company With Hybrid Battery Solution to Seek Billions From Energy Department

The stumbling block for the plug-in hybrid, a vehicle designed to travel its first 40 miles or so every day on battery power, and the rest on gasoline, is the battery — particularly its durability.

For a long life, batteries typically need to be charged and discharged slowly, but electric cars make high demands on the battery — and not only when accelerating from a stop. They also use “regenerative braking,” where the drive motor is reversed, turning momentum back into current when the driver wants to slow down.

So in both acceleration and deceleration, the current flow can be so large it causes internal heating in the battery, shortening its life.

AFS Trinity Power, a small company in Bellevue, Wash., says it has the problem licked. In January, the company rolled out a small S.U.V. that uses lithium-ion batteries nursed along by common electrical storage devices called capacitors.

Japan Faces Deflation as Exports Slump, Says Barclays' Morita

Japan is sliding back into deflation as slumping global demand cuts exports, prompting companies to cut jobs and reduce spending, said Kyohei Morita, chief Japan economist at Barclays Capital in Tokyo.

"Japan will go back to deflation" that plagued the country for 10 years until 2007, Morita said in an interview. "The global financial crisis is forcing companies to cut jobs and keep a lid on investment."

Falling prices may prompt Bank of Japan Governor Masaaki Shirakawa to return to the so-called quantitative easing policy that keeps interest rates close to zero percent and floods the money market with cash.

Junk Bond Yields Reach Record 20% as Economy Declines

Yields on speculative-grade corporate bonds surpassed 20 percent for the second straight day as a declining economy increased the risk of default.

The average yield on high-yield, high-risk debt rose to 20.81 percent today, from 20.14 percent on Nov. 18, the previous record, according to Merrill Lynch & Co.'s U.S. High Yield Master II index. The level is the highest since Merrill began collecting overall yield data in January 1986.

Junk bonds have lost more than $187 billion in market value since August on speculation the U.S. recession will leave a glut of companies unable to meet their debt payments, Merrill data show. General Motors Corp.'s announcement Nov. 7 that it may run out of operating cash as soon as this year stoked default concerns, said Martin Fridson, chief executive officer of money management firm Fridson Investment Advisors in New York.

"Prices are in a virtual freefall," Fridson said. "Either the market is right and expecting a default rate considerably higher than it was in the Great Depression, or we have such profound dislocations and selling pressures going on that it really is creating extraordinary fundamental value."

Obese have right to 2 airline seats --Canada court

Obese people have the right to two seats for the price of one on flights within Canada, the Supreme Court of Canada ruled on Thursday.

The high court declined to hear an appeal by Canadian airlines of a decision by the Canadian Transportation Agency that people who are "functionally disabled by obesity" deserve to have two seats for one fare.

The airlines had lost an appeal at the Federal Court of Appeal in May and had sought to launch a fresh appeal at the Supreme Court. The court's decision not to hear a new appeal means the one-person-one-fare policy stands.

Russian Central Bank Spent $58 Billion Backing Ruble

Russia's central bank spent $57.5 billion defending the ruble in September and October, Chairman Sergey Ignatiev said.

Russia's international reserves stood at $475.4 billion as of Nov. 7, the third-biggest after China's and Japan's. They have fallen $122.7 billion since Aug. 8 as the central bank shored up the ruble. The bank buys and sells currency to keep it within a trading band against a dollar-euro basket to limit the impact of exchange-rate fluctuations on the economy.

Ignatiev also said that the central bank reduced its holdings of Fannie Mae and Freddie Mac bonds, which are held by Russian oil funds that are part of the reserves, to $20.9 billion on Nov. 1 from $65.6 billion on Jan. 1.

Toxic Toads Killing Crocodiles in Australia, Scientist Says

Toxic cane toads are threatening Australia's freshwater crocodile population as their numbers explode in the country's Northern Territory, a scientist said.

The toads have poisonous sacs on their heads and prove deadly when eaten by the crocodiles, which are smaller and grow at a slower pace than their saltwater counterparts, said Professor Keith Christian of Charles Darwin University. In some waterways, their numbers have been cut in half.

Cane toads were introduced to Australia in 1935 from central and South America to combat beetles destroying sugar cane crops in the tropical northeast. The creatures, Bufo Marinus, bred rapidly and became a destructive pest themselves, killing off native wildlife such as snakes, fish and goannas when eaten.

That mix should contain something for everyone to discuss.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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