Economic Potpourri December 13, 2008

Once again news is flying out of every corner at record speeds. Here are a few headline news reports of interest from the past couple days.

Mazama Capital assets fall 75%, but optimism holds steady

In a year of devastating investment losses, it may comfort amateur stock pickers to know that even the pros are suffering. Take the case of Portland-based Mazama Capital Management, whose assets under management have melted away in 2008 like a Mount Hood glacier in full global-warming mode.

From a peak of $7.2 billion in October 2007, Mazama cratered to $1.8 billion in total assets under management as of Oct. 10. Market losses, client defections and asset reallocations snowballed into a 75 percent decline in assets in 12 months. Ron Sauer, Mazama co-founder and CEO, retains a bullish confidence.

Virtually all equity managers have suffered double-digit percentage declines this year, Mazama officials point out. But that hasn't been enough to persuade some of the firm's customers to stick around.

Note that 75% loss is assets under management. There was no reporting of percentage losses to accounts.

Citadel Halts Withdrawals From Two Hedge Funds After 50% Drop

Citadel Investment Group LLC, enduring its biggest losses since starting in 1990, halted year- end withdrawals from its two biggest funds after investors sought to take out $1.2 billion, or 12 percent of assets.

Withdrawals may resume as early as March 31 for the Kensington and Wellington funds, the Chicago-based firm said in a letter yesterday to clients. The funds, which together manage about $10 billion, have lost 49.5 percent of their value this year through Dec. 5.

“We have not made this decision lightly,” Citadel founder Kenneth Griffin, 40, wrote. “We recognize how a suspension impacts our investors, especially those with current financial obligations of their own to meet.”

Firms including Fortress Investment Group LLC and Tudor Investment Corp. also have limited redemptions to avoid dumping securities to raise cash.

The stampede to the exit will be worse in March than they are now. This is a bad decision by Citadel.

Natural Gas Falls on Demand Concern After Auto Bailout Rejected

Natural gas futures in New York fell for a second day after a proposed bailout for U.S. automakers was rejected in the Senate, signaling the possibility of a deeper recession and further cuts in energy demand.

About 42 percent of U.S. gas consumption comes from industrial and commercial companies and another 30 percent is used in power generation. Prices pared losses after the Bush administration said it may act to save the carmakers from bankruptcy until a new Congress convenes in January.

Natural gas for January delivery fell 11 cents, or 2 percent, to settle at $5.488 per million British thermal units at 3:03 p.m. on the New York Mercantile Exchange. Gas declined 4.4 percent this week and is down 27 percent this year.

Natural Gas Monthly



Every two to 3 years natural gas futures seemingly spike out of the blue.

Oil May Crash to $10 a Barrel

Oil prices may crash as low as $10 a barrel, says Devina Mehra, chief strategist at First Global. She explains her extremely bearish outlook on oil, with CNBC's Martin Soong & Sri Jegarajah.

Saudis Signal Deeper Oil Output Cuts Than Expected

Saudi Arabia, the world’s biggest oil exporter, cut production more than traders and analysts had estimated last month, reflecting the nation’s commitment to halt the $100 plunge in crude prices.

Oil rallied after Oil Minister Ali al-Naimi said in an interview in Poznan, Poland, that the kingdom pumped 8.493 million barrels of oil a day in November. That’s 287,000 barrels a day less than estimated by the International Energy Agency, and close to Saudi Arabia’s OPEC quota of 8.477 million barrels. Libya’s top oil official Shokri Ghanem said previous OPEC cuts haven’t been enough.

Expect to see massive cheating by OPEC members unprepared for the dropoff in dollar inflows.

Deflation has become inevitable

For a while now I have been on the fence on the inflation/deflation issue – whether the massive monetisation of bad debts by central banks and governments will lead to rapidly escalating inflation as currencies are debased or, alternatively, lead to deflation as bad debts and illiquidity undermine all commercial and financial activity in the economy. I’m now coming down on the side of deflation for a very simple reason: there is no longer any incentive to save or invest, and so debt and investment cannot increase much beyond current bloated levels.

It is now clear to me that policy makers in the West are determined to apply every available resource to underpinning failure, misallocation and executive excess. As this discourages the honest saver from parting with cash, policy makers are ensuring that deflation will wreak its havoc on the financial and real economies of the world. Only when that deflation has played out and rational policies that reward market-based management and returns are restored will it be worthwhile to invest again. In the meanwhile, any wealth saved securely from state seizure will "swell" to buy more assets in future - a key aspect of deflation and a key means of restoring the control of the economy into the hands of more farsighted savers and investors.

I have quoted Mr John Mill before, but it bears repeating: ““Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.”

I am struggling to make sense out of the first paragraph because people will indeed save (pay down debts) and decrease consumption. Others will default. The second paragraph rings true.

London Banker states to have been "a central banker and securities markets regulator during a varied and interesting career in global financial markets". I have no reason to doubt the claim. His posts are generally good, so it is unfortunate to hear that he will no longer post starting the end of this year due to time constraints.

Jim Rogers calls most big U.S. banks "bankrupt"

Jim Rogers, one of the world's most prominent international investors, on Thursday called most of the largest U.S. banks "totally bankrupt," and said government efforts to fix the sector are wrongheaded.

Speaking by teleconference at the Reuters Investment Outlook 2009 Summit, the co-founder with George Soros of the Quantum Fund, said the government's $700 billion rescue package for the sector doesn't address how banks manage their balance sheets, and instead rewards weaker lenders with new capital.

"What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent," he said. "What's happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics."

Rogers has this correct. I listed 25 sign the banking system is insolvent in You Know The Banking System Is Unsound When....

Brown Says U.K. Working on ‘Second Stage’ of Bank Bailout

Prime Minister Gordon Brown said the U.K. government is working on a “second stage” of a rescue program for banks that will prompt lenders to channel more cash to consumers and businesses. He made the comment after meeting European Union leaders in Brussels.

Anything that encourages more consumption is ridiculous.

Ruble Suffers Biggest Weekly Plunge Against Euro Since 2000

Russia’s ruble headed for its biggest weekly decline against the euro since 2000 after the central bank eased its defense of the currency for the fifth time in a month as foreign-exchange reserves fell. The ruble dropped 3.3 percent this week to 37.0395 per euro and was 0.2 percent lower today as of 12:54 p.m. in Moscow.

Bank Rossii extended the amount the ruble can decline against its target to 7.7 percent yesterday, double the 3.7 percent allowed a month ago, after depleting the world’s biggest foreign-currency reserves by $161 billion since August supporting the currency.

“They still need to devalue more from here,” said Jon Harrison, an emerging markets currency strategist in London at Dresdner Kleinwort, who forecasts a 25 percent drop in the ruble next year. “There is still concern about the depth of the slowdown and the collapse in oil prices.”

California faces financial meltdown as debt grows by $1.7m an hour

The state of California, one of the top ten largest economies in the world, will run out of money by February, causing “financial Armageddon”, according to dire new budget projections. As of yesterday, the state’s debts were mounting at a rate of $1.7 million (£1.1 million) per hour.

The de facto insolvency of America’s most populous state — home to such economic engines as Silicon Valley, the Central Valley agricultural region, Hollywood, Napa Valley, the Long Beach ports, and the defence research and production facilities of Los Angeles, San Diego and the Mojave desert — would represent a new scale of catastrophe in a year in which financial markets and economies have imploded globally.

Bill Lockyer, the treasurer of California, has cautioned that $5 billion of public works projects, including road and school construction, will have to be canceled because the state’s lenders are worried about an impending Iceland-style bankruptcy. California — which has a GDP of $1.7 trillion — already has the worst credit rating of any of America’s 50 states. “Without a budget solution, state financing of infrastructure projects will stop. It’s as simple, and dire, as that,” Mr Lockyer said this week.

California’s biggest problem is the precipitous decline in tax revenues over the past year. The state’s property taxes — the equivalent of Britain’s council taxes — are based on the value of a house when it was first bought, and can then rise by no more than 2 per cent a year. This means that by far the most tax revenues come from new property sales, and these have all but dried up.Tax revenues have also been hit by the global recession. and credit crunch.

The deflationary consequences canceling projects and raising taxes are going to be enormous.

KB Toys Files Bankruptcy With Plan to Close Stores

KB Toys Inc., the 86-year-old toy retailer, filed for bankruptcy with plans to close its stores, citing a “sudden drop” in sales in the past two months.

The Chapter 11 filing comes three years after KB Toys ended a previous bankruptcy by closing almost half of its 1,200 stores. The chain has shut hundreds more since amid increased competition from Wal-Mart Stores Inc., Toys “R” Us Inc. and Target Corp., which together control about two-thirds of the U.S. toy market, according to industry analyst Sean McGowan.

Australia-Backed Bank Bonds ‘Crowd’ State Debt, Prices Plunge

Australian state bonds slid this week as banks sold A$11 billion ($7.4 billion) of debt backed by Prime Minister Kevin Rudd’s funding guarantee, “dislocating” markets and pushing the premium investors demand to hold New South Wales securities over sovereign to the highest since the 1990s.

The spread on five-year New South Wales bonds over sovereign borrowings of similar maturity swelled to 150 basis points today, from an average of 31 points in the past 10 years, after Commonwealth Bank of Australia Ltd. auctioned A$2.2 billion of government-backed debt on Dec. 10. National Australia Bank Ltd. and Suncorp-Metway Ltd. sold similar domestic debt yesterday and three other banks carried out offerings in U.S. dollars.

Rudd’s guarantee has driven up state government yields without achieving its goal of bringing down banks’ funding costs, JPMorgan Chase & Co. said in a note to clients.

US Household Net Worth Dn 4.7% To $56.54 Tln In 3rd Qtr

U.S. households' net worth shriveled last summer as asset prices tumbled, and their borrowing declined for the first time ever. Business borrowing slowed and federal government debt soared.

The total net worth of households fell 4.7% to $56.54 trillion in the third quarter from $59.35 trillion in the second quarter, the Federal Reserve said Thursday. The decline was the fourth in a row. Net worth dropped 0.7% during the second quarter of 2008.

The fourth quarter is going to be a repeat of the third.

Ad spending falls 1.7% in first nine months of '08

Total advertising expenditures from January to September 2008 fell 1.7% compared with the first nine months of 2007, with ad spending on pace for more declines as the fourth quarter winds to a close, according to a report issued Thursday by TNS Media Intelligence.

Not surprisingly, the decline was led by a 10% drop in newspaper advertising, as compared with the first nine months of 2007. Local newspaper ad spending fell 10.2%, while national fell 8.9%. Spanish-language newspapers saw a nearly 13% decline in ad spending.

Radio advertising suffered the second-largest drop, at 8.8%. National radio spot ad spending plunged 11.1%, while local spending tumbled almost 9%. Network radio programming saw a decline of just 2.6%.

In magazines, ad spending fell 3.9%. Within the category, the biggest decline was seen among business-to-business magazines, where spending dropped nearly 7%.

Treasury Bubble Talk Grows as U.S. Gets Free Money

The rally in Treasuries that pushed yields on bills below zero percent this week is adding to concerns that the $5.3 trillion market for government debt is a bubble waiting to burst.

Investors seeking safety from losses in equity and credit markets charged the Treasury zero percent interest when the government sold $30 billion of four-week bills on Dec. 9, the same day three-month bill rates turned negative for the first time since the U.S. began selling the debt in 1929. Yields on two-, 10- and 30-year securities touched record lows this month.

“Treasuries have some bubble characteristics, certainly the Treasury bill does,” said Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., which oversees the world’s largest bond fund. “A Treasury bill at zero percent is overvalued. Who could argue with that in terms of the return relative to the risk?” he said in a Bloomberg Television interview yesterday.

Money-Market Fund Yields May Fall to Less Than Zero

Investors in money-market mutual funds that focus on U.S. Treasuries may lose money for the first time if the Federal Reserve cuts interest rates next week and yields become too small to cover expenses.

Record-low yields on government debt have already led money-market funds to waive fees to keep returns positive. If the Federal Open Markets Committee, as expected, cuts its target rate, some Treasury funds may allow returns to turn negative, said Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts.

“No one has ever paid above and beyond their interest income to be in a fund,” Crane said. “But if we see another cut, we’ll likely see negative yields.”

This can easily trigger another wave of money market redemptions. The first was occurred over concerns of money market guarantees (previously nonexistent) vs. FDIC guarantees at banks.

To halt the exodus of cash, the Treasury Temporarily Guaranteed Money Market Funds. What's the Fed going to do now, guarantee positive interest in excess of fees?

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