Economic Potpourri December 11, 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.

Recycling goes from boom to bust as economy stalls

Faced with a dramatic slump in the recycling market, the director of the Kanawha County Solid Waste Authority has cut 20 of his 24 employees' work week to four days from five, shuttered six of the authority's drop-off stations and is urging residents to hoard their recyclables after informing municipalities with curbside recycling programs that the center will accept only paper until further notice.

Cardboard that sold for about $135 a ton in September is now going for $35 a ton. Plastic bottles have fallen from 25 cents to 2 cents a pound. Aluminum cans dropped nearly half to about 40 cents a pound, and scrap metal tumbled from $525 a gross ton to about $100.

"Nobody saw it coming. Absolutely nobody," Kowalsky said. "Even the biggest players didn't see it coming."

Shoppers complain it's no fun at the mall

Some 80 percent of mall shoppers questioned said they experienced a problem on their last visit, according to a study conducted by the Baker Retailing Initiative at the University of Pennsylvania's Wharton School and the Verde Group, a market research consultancy.

Last week, retailers posted sales figures that were the worst in more than 35 years, according to the International Council of Shopping Centers. Average vacancy levels at large U.S. malls are at their highest since 2001.

"One of the most counterintuitive findings was the extent with which consumers have a problem ... with the infrastructure, the range and variety of the stores, everything related to access and comfort," said Paula Courtney, president of the Verde Group.

Consumers also complained there were not enough restrooms in malls, nor signs directing shoppers to key areas. Shoppers also cited "too many teenagers hanging around" as a top complaint.

With traffic way down, why are lack of restrooms a problem now? Have the homeless moved in?

Generic-Pill Spending Dips in ‘Fierce’ U.S. Price War

American consumers and health insurers saved about $1 billion on generic drugs this year as “fierce” competition among drugmakers and pressure from insurers lowered prices.

Total spending on drugs from Teva Pharmaceutical Industries Ltd., Mylan Inc. and other generic-drug makers fell 2.7 percent to $33 billion in the 12 months ended in September, the biggest decline in at least a decade, the health research firm IMS Health Inc. said in a report today. The average price manufacturers charged wholesalers for the copycat pills fell 8 percent while demand increased 5.4 percent, IMS said.

“We are seeing a very significant intensification of price competition among the generic competitors that has resulted in this significant decline in the market,” said Murray Aitken, senior vice president for health-care insight at IMS in a telephone interview. “We haven’t seen this in the recent past.”

President-elect Barack Obama says he wants to expand health- care coverage and reduce costs, partly by increasing the use of generic drugs. Obama also wants to give Medicare, the U.S. health program for the elderly, authority it now lacks to negotiate prices with drugmakers, which Democrats in Congress say may lower prices further.

Allowing bargaining is a step in the right direction, but better yet would be to allow drug imports from Canada and Mexico.

German ridicule for UK policies

The German finance minister has launched an outspoken attack on the UK government's plans to help pull Britain out of the economic downturn. In an unusual breach of standard diplomacy, Peer Steinbruck attacked the UK's decision to cut VAT and raise the national debt to record levels.

Mr Steinbruck said the UK's switch from financial prudence to heavy borrowing was both "crass" and "breathtaking". Criticising the UK government's decision to cut VAT from 17.5% to 15%, Mr Steinbruck questioned how effective this will be.

"Are you really going to buy a DVD player because it now costs £39.10 instead of £39.90?" he said. "All this will do is raise Britain's debt to a level that will take a whole generation to work off."

"When I ask about the origins of the [financial] crisis, economists I respect tell me it is the credit-financed growth of recent years and decades. "Isn't this the same mistake everyone is suddenly making again, under all the public pressure?"

That's one hell of a rant. And he's right too, which is an unusual rarity for any politician, especially an outspoken one. Can we please trade Barney Frank for him? I would gladly throw in Nancy Pelosi and make it a two for one deal.

Australia Jobless Rate Rises as Employers Cut Workers

Australia’s jobless rate climbed to the highest in a year as employers cut part-time workers in November, adding to signs the economy may follow the U.S., Japan and Europe into a recession. The jobless rate rose to 4.4 percent from 4.3 percent in the previous month, the statistics bureau said in Sydney today. The number of people employed fell 15,600 in November.

“The bleak outlook for employment means the Reserve Bank’s job is far from complete,” said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney. “We expect the bank to lower the cash rate another 50 basis points in early February and 25 basis points in March.”

Investors have a 100 percent expectation the Reserve Bank of Australia will cut interest rates by one percentage point at its next scheduled meeting on Feb. 3, according to a Credit Suisse index based on swaps trading.

These moves will pressure the Australian dollar.

California budget woes worsen

California's budget crisis is growing worse as its shortfall for its current fiscal year has increased to an estimated $14.8 billion from a previously estimated $11.2 billion, Gov. Arnold Schwarzenegger said on Wednesday.

Schwarzenegger's new budget shortfall estimate comes a day after state Controller John Chiang reported the state's general fund revenues in November were $1.3 billion, or 18.5 percent, below expectations.

Canada housing starts at lowest levels since late 2001

Construction of new homes in Canada slowed last month to levels not seen since late 2001, driven by a drop in condominium construction and a tougher environment for borrowers, according to a national housing agency.

CMHC reported Monday the seasonally adjusted annual rate of housing starts fell to 172,000, down 19 per cent from 211,800 in October. That was far below private-sector economist expectations of about 200,000, and the biggest percentage decline since last December.

Canadian economists better get their act together with their predictions if they do not want to look as silly as Lereah did for years.

Hedge Funds Shrink by $64 Billion, Eurekahedge Says

The global hedge-fund industry lost $64 billion of assets in November, with an index tracking its performance declining for a sixth month as economies in Asia and Europe joined the U.S. in recession, Eurekahedge Pte said.

“It's very clear that there is going to be significant consolidation in the hedge-fund industry,” said Duncan Smith, a partner in Hong Kong at Ogier, a firm that provides corporate and legal services to financial companies. “Conditions are quite difficult and that really goes without saying. Underlying liquidity is very hard for funds.”

Distressed selling and the rollback of debt-funded investments continued to pull down funds as the credit crisis sent the U.S., Europe and Japan into the first simultaneous recession since World War II. The MSCI World Index slumped 6.7 percent last month.

I estimate half to three fourths of hedge funds will close shop within a couple years.

$20 oil predicted

Crude oil prices will plunge to $20 US per barrel as the global slowdown throws even burgeoning China into a recession, predicts Philip Verleger of the Haskayne School of Business at the University of Calgary. Furthermore, he said Tuesday, the downturn will be so deep it will take three to four years for the global economy - and energy prices - to return to normal levels.

Crude oil closed down $1.64 at $42.07 US a barrel Tuesday in New York, less than a third of the $147 peak it reached in July, after the U.S. Energy Information Administration said in its monthly energy outlook it expected global oil demand to fall by 50,000 barrels per day in 2008 and 450,000 bpd in 2009 - marking the first time since 1983 that year-to-year world oil demand has dropped.

Deflation Descends Upon The U.S.

A. Gary Shilling
For years, we've been forecasting that chronic deflation of 1% to 2% per year would start with the next major global recession. Well, it's here!

In October, the U.S. producer price index fell 2.8% from September, and the consumer price index dropped 1%, the biggest decline since before World War II. Sure, the big driver was the decline in energy costs, but even excluding food and energy, consumer prices dropped 0.1%. As retailers panic in the face of retrenching consumers, prices of many items have nosedived.

• Dell(DELL) is offering 20% to 30% discounts on new notebooks
• Kohl's (KSS) is discounting Christmas merchandise up to 75% to attract shoppers. Toys are being discounted 50% to 60%, and sellers are emphasizing low-priced merchandise to attract frugal buyers.
• Don't forget that recent auctions were disappointing and saw prices of contemporary, modern and impressionist art drop 30%.

Indeed, deflation is here but prices certainly are not the key.

How to Combat a Banking Crisis: First, Round Up the Pessimists

Latvia -- Hammered by economic woe, this former Soviet republic recently took a novel step to contain the crisis. Its counterespionage agency busted an economist for being too downbeat.

"All I did was say what everyone knows," says Dmitrijs Smirnovs, a 32-year-old university lecturer detained by Latvia's Security Police. The force is responsible for hunting down spies, terrorists and other threats to this Baltic nation of 2.3 million people and 26 banks.

Now free after two days of questioning, Mr. Smirnovs hasn't been charged. But he is still under investigation for bad-mouthing the stability of Latvia's banks and the national currency, the lat. Investigators suspect him of spreading "untruthful information." They've ordered him not to leave the country and seized his computer.

Finance is a highly touchy subject in Latvia, one that the state tries, with unusual zeal, to shield from loose tongues. It is a criminal offense here to spread "untrue data or information" about the country's financial system. Undermining it is outlawed as subversion.

So, when the global financial system began to buckle this autumn, Latvia's Security Police mobilized to combat destabilizing chatter about banks and exchange rates. Agents directed their attention to Internet chat rooms, newspaper articles, cellphone text messages and even rock concerts. A popular musician was taken in for questioning after he cracked a joke about unstable Latvian banks at a performance.

When does Bernanke propose this solution?

Pimco’s Bill Gross Regrets Not Buying Treasuries Amid Rally

Bill Gross, manager of the world’s biggest bond fund, says he regrets not buying Treasuries in what is shaping up to be the best year for U.S. government debt since 2000.

“If we had our druthers, if we went back 12 months and we had known then what we know now, it would have been all invested in Treasuries,” Pacific Investment Management Co.’s Gross said in a Bloomberg Television interview from Newport Beach, California. “The question going forward is ‘Is it the winner over the next 12 to 24 months?’ We don’t think so.”

Gross’ $129.5 billion Total Return Fund lost 2.1 percent in the three months through Sept. 30, compared with a 0.49 percent slump by the benchmark it uses to measure performance, according to Pimco’s Web site. Mortgage securities and investment-grade corporate debt accounted for 93 percent of its holdings. The Total Return Fund has not held Treasuries since last December.

“Treasuries have some bubble characteristics, certainly the Treasury bill does,” Gross said. “A Treasury bill at zero percent is overvalued. Who could argue with that in terms of the return relative to the risk? There is no return.”

Pimco, a unit of Munich-based Allianz SE, has about $790 billion in assets under management. The Total Return fund has gained 4.63 percent over the last five years, ranking it among the top one percent of all comparable funds, according to Bloomberg data.

You could have beat that by buying 5-year treasuries and holding them. 10-year or 30-year treasuries would have smashed those returns, with a lot more risk of course.

Office Depot cutting 112 stores, 2,200 jobs

Office Depot Inc. will close about 9 percent of its North American stores and cut 2,200 jobs over the next three months while planning to open fewer locations next year in an effort to cut costs. The plan to shutter 112 stores will reduce the chain's base to 1,163. It plans to close 45 stores in the Central U.S., 40 in the Northeast and Canada, 19 in the West and eight in the South.

Office Depot, which began the year with about 49,000 workers, also will close six of its 33 North American distribution facilities. Meanwhile, the Delray Beach, Fla.-based company said it plans to shut another 14 stores next year while opening just 20 new sites, half of what it planned.

Why not jut file bankruptcy now and get it over with? What's the point in dragging this out?

Blumenthal challenges AT&T layoffs

Attorney General Richard Blumenthal asked state regulators Friday to block AT&T's proposed layoffs in Connecticut.

Blumenthal asked the state Department of Public Utility Control to put 389 layoffs on hold for as it long as it takes for AT&T to improve its “degraded” customer service. The agency is already in the throes of addressing complaints about customer service. Blumenthal also asked the agency to reconsider its refusal to block earlier layoffs of 60 AT&T workers.

AT&T announced Thursday it would lay off 12,000 workers across the country, citing the economy and transformational pressures in the telecommunications industry.

Let me get this straight: Companies are not allowed to fire workers because it will degrade service? I suppose ATT should hire more workers, improve service, then file for bankruptcy. Then again, perhaps Blumenthal thinks the government should run phone companies.

Hells bells, why not?

Government is already running banks, brokers, insurance companies, and the GSEs. Let's not forget the proposal to run auto makers. What harm can there be to add phone companies, casinos, and amusement parks to the list?

GM, Chrysler Running Out of Time as Congress Debates Rescue

The debate over the automaker bailout in Congress has become a race against the clock. The U.S. House voted 237-170 last night to approve emergency loans for General Motors Corp. and Chrysler LLC, shifting the focus to the Senate, where Republican opposition threatens to delay or kill the legislation.

House Speaker Nancy Pelosi tossed a challenge to senators, saying on Bloomberg Television she wouldn’t bring her chamber back for further action if the Senate passed a different version of the plan.

Senate Republicans emerged from a meeting yesterday with Vice President Dick Cheney and White House Chief of Staff Josh Bolten and said the measure doesn’t have enough support to clear a 60-vote legislative hurdle. Democrats control the chamber 50- 49.

“It has minimal, very little support in our caucus,” Tennessee Republican Bob Corker said after the meeting. He said Cheney and Bolten gave a “non-compelling” presentation in favor of the plan.

Pelosi said on Bloomberg Television, “You never say never, but the fact is, I think it’s important for the Senate to know that this is a strong bipartisan bill.”

Excuse me but how is this a strong bipartisan bill if only one party is for it. Let's hope that Pelosi keeps her word and Shelby his. Then GM can go bankrupt like it should. This is touch and go now. There is a very good chance the Senate will not pass this without huge arm twisting by Bush, and it may not pass the bill even with that arm-twisting. The public is sick of bailouts and at least the Republicans know it.

Please contact Richard Shelby, Jim DeMint, and Judd Gregg one more time expressing support for a filibuster. There is good chance this bill goes down the toilet where it belongs.

Congressional Phone And Fax Numbers

Click Here For Congressional Phone And Fax Numbers

Richard Shelby
Tel: (202) 224-5744
Fax: (202) 224-3416
Email: senator@shelby.senate.gov

Jim DeMint
Phone: 202-224-6121
Fax: 202-228-5143

Judd Gregg
Phone: (202) 224-3324
Fax: 202-224-4952

Please Email ,Phone, and Fax Shelby.
Please phone and/or Fax the rest.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List