Week of wild cards (Headlines from the Meltdown)
Ottowa Citizen (Reuters wire piece), Feb. 6
Dozens of U.S. banks will fail in the next two years as losses from soured loans mount and regulators crack down on lenders that take too much risk, especially in real estate and construction, an analyst said.
….Between 50 and 150 U.S. banks — as many as one in 57 — could fail by early 2010, mostly those with no more than a couple of billion dollars of assets, Cassidy said. That rate of failure would be the highest in at least 15 years, or since the winding down of the savings-and-loan debacle.
“The initial round of failures will come from smaller banks with limited access to capital and overexposure to commercial real estate,” Cassidy said.
“Could banks with $75 billion or $100 billion of assets fail? That’s hard to say, but it depends on the severity of the economic downturn and the real estate decline,” he added.
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Mike Whitney, Information Clearing House, Feb. 7
On January 14, 2008 the FDIC web site began posting the rules for reimbursing depositors in the event of a bank failure. The Federal Deposit Insurance Corporation (FDIC) is required to “determine the total insured amount for each depositor….as of the day of the failure” and return their money as quickly as possible. The agency is “modernizing its current business processes and procedures for determining deposit insurance coverage in the event of a failure of one of the largest insured depository institutions.”
The implication is clear, the FDIC has begun the “death watch” on the many banks which are currently drowning in their own red ink. The problem for the FDIC is that it has never supervised a bank failure which exceeded 175,000 accounts. So the impending financial tsunami is likely to be a crash-course in crisis management. Today some of the larger banks have more than 50 million depositors, which will make the FDIC’s job nearly impossible.
….So, what does it all mean?
It means there’s going to be an unprecedented wave of bank closures in the US and that people who want to hold on to their life savings are going have to be extra vigilant as the situation continues to deteriorate. And it is deteriorating very quickly.
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CNNMoney.com, Feb. 7
U.S. retailers are on track to report their slowest monthly sales growth in five years, which would further cement fears that American consumers are buckling under the weight of a slowing economy.
Leading the way is No. 1 retailer Wal-Mart Stores Inc., which on Thursday reported a big miss in its January same-store sales, or sales at stores open at least a year. Same-store sales is a key measure of performance in the retail industry.
Wal-Mart partly blamed its soft sales on poor gift card redemptions, but one retail analyst wasn’t buying that explanation.
“Wal-Mart’s not a top destination for gift card redemptions,” said Ken Perkins, president of sales tracking firm Retail Metrics. “I think its results show that its core low-income shoppers and now the middle-class households who shop there are scaling back.”
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Yahoo! Finance (AP wire piece), Feb. 7
The nation’s retailers delivered more evidence of a stumbling economy Thursday, as merchants reported their weakest January performance in nearly four decades, extending a malaise that has deepened since the holiday shopping season.
The sales figures made it clear that consumers wrestling with high gas and food prices, a slumping housing market, an escalating credit crisis and a weakening job market retrenched further, buying mostly necessities even when redeeming their holiday gift cards. The disappointments cut across all sectors including discounters like Wal-Mart Stores Inc., teen retailers including Pacific Sunwear of California Inc. and mall-based apparel chain Limited Brands Inc. Even affluent shoppers are pulling back, hurting stores like Nordstrom Inc.
“Clearly, this is a reflection of a very difficult environment for the consumer,” said Ken Perkins, president of RetailMetrics LLC, a research company in Swampscott, Mass. “It looks like consumer spending is stalling.”
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MSNBC , Feb. 7
Here’s a sign of how shaky the economy has become: Wal-Mart says its shoppers are redeeming their holiday gift cards for basic items — pasta sauce, diapers, laundry detergent — instead of iPods or DVDs.
Merchants had hoped shoppers armed with gift cards would provide a lift after a dismal holiday shopping season — partly because shoppers tend to spend even more than the value of the card. But that didn’t seem to happen last month, and retailers are feeling the pain.
On Thursday, the nation’s retailers turned in their worst January in almost four decades as high gas and food prices, a slumping housing market, tighter credit and a tougher job market pushed consumers to the edge.
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Andrew Leonard, Salon, Feb. 5
This was supposed to be a slow week for economic indicators. Then came a report from the Institute of Supply Management (ISM), documenting a precipitous drop in the strength of the United Service service sector in January. Investors instantaneously ran for cover — at 12:25 p.m. EST, the Dow Jones industrial average was down 248 points and economy-watchers were verging on the apocalyptic. (UPDATE: the Dow closed down 370 points.)
Wall Street Journal: “[The ISM data] has recession written all over it. It’s not that it’s weak. It’s a complete collapse in the number, one of the lowest readings this statistic has ever had,” said Jim Paulsen, chief investment strategist at Wells Capital Management.
Bloomberg: “This is a stunning fall,” said Michael Moran, chief economist at Daiwa Securities America Inc. in New York. “If accurate, it’s dire news on the economy.”
Calculated Risk: “It couldn’t be much worse.”
Why such a big deal? Well, for one thing the service sector is only responsible for 90 percent of the American economy. As if Super Tuesday needed help in getting any more exciting!
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International Herald Tribune, Feb. 7
Job losses and a contraction in the business sector where more than 80 percent of Americans work show that the angle of descent for the U.S. economy is steepening. Unsurprisingly, while problems are spreading to the formerly indefatigable American consumer, the old issues — falling home prices and crippled credit markets — show no signs of healing themselves or being healed from on high.
And yet, the Dow Jones industrial average is just 14 percent below its all-time closing high, an improbable combination.
The big question — can the economy possibly shake off a deflating debt bubble? — seems to have been answered.
….An increasing number of American businesses and consumers will be finding credit harder to come by. The great piggy bank called home is definitely tapped out, with declining house prices and banks’ unwillingness to extend more credit making further borrowing difficult.
….In a week of incredible stories, maybe the most amazing was that Fitch Ratings was reviewing 172,326 bond issues after putting on a negative watch the triple-A ratings of one such insurer, MBIA
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CFO.com, Feb. 7
The next wave from the subprime mortgage crisis will flow past lenders and homebuilders and strike nonfinancial U.S. companies with forced write-downs, the chief executive of PricewaterhouseCoopers warned.
Samuel DiPiazza, chief executive of the Big Four accounting firm, pointed out that many nonfinancial companies were exposed through securities in their own investment portfolios, according to a Reuters report.
“It’s not just in banks,” DiPiazza said. “These securities sit in cash equivalent accounts of industrials; they sit in investment portfolios of pensions. We are having to deal with this with thousands of companies, not just a handful of big banks.
….”I will not underestimate the challenge we have working through a lot of complex securities and getting them valued,” said DiPiazza. “We have to ask the question: What’s under the surface?”
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The London Telegraph, Feb. 7
More than 10 million people may default on repayments for mortgages, credit cards or personal loans by the end of the year.
A forecast from one of Britain’s biggest accountancy firms, says that “the merry-go-round of credit is about to stop”, as millions of people realise their take-home pay is not enough to service their debts.
….[Jeff] Randall [the Daily Telegraph’s Editor at Large] who . . . met people who had been driven to the point of suicide by their debts, said: “What we believed was widespread economic prosperity turns out for many to have been an illusion, funded by excessive debt.”
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CBS4, Feb. 6
Florida has been faced with more foreclosures in 2007 than 1980, 1981, 1982, 1983, 1984, 1985, 1986, 1987, 1988, 1990, 1991, 1992 combined. The year 2007 was a record.
….Every week, inside our county courthouses, banks try to sell hundreds of foreclosed homes. Some of them are half off, most of them with little success.
….Where American dreams are struggling, [Miami resident Cathi] DeThomas said, “I don’t think the middle class can survive here. Your nurses and teachers and postal workers, and all of our middle professional people who aren’t upper management, it’s like we don’t have an option.”
She reiterates a common theme in today’s economy that people are caught in the middle.
“Every day it’s getting worse. Every hour it’s getting worse. It’s getting harder and harder for people to survive. There are people who commit suicide over the same situation. It’s just that serious.”
By the numbers, South Florida appears to be in a state of metamorphosis. Its middle class is leaving, and quickly being replaced by a wealthier class. People may have to be wealthier not only to survive in South Florida, but to thrive.
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The New York Times, Feb. 7
In just the last few weeks, The San Diego Union-Tribune eliminated more than 100 jobs, one-tenth of its work force. The Chicago Sun-Times began a major round of newsroom layoffs, then put itself up for sale, and publishers in Minneapolis and Philadelphia warned that tough economics could force cuts there.
Not long ago, news like that would have drawn much commentary and hand-wringing in the newspaper business, but in the last few months, reductions have become so routine that they barely make a ripple outside each paper’s hometown. Since mid-2007, major downsizing — often coupled with grim financial reports — has been imposed at The San Francisco Chronicle, The Seattle Times, The San Jose Mercury News, USA Today and many others.
The talk of newspapers’ demise is older than some of the reporters who write about it, but what is happening now is something new, something more serious than anyone has experienced in generations. Last year started badly and ended worse, with shrinking profits and tumbling stock prices, and 2008 is shaping up as more of the same, prompting louder talk about a dark turning point.
“I’m an optimist, but it is very hard to be positive about what’s going on,” said Brian P. Tierney, publisher of The Philadelphia Inquirer and The Philadelphia Daily News. “The next few years are transitional, and I think some papers aren’t going to make it.”
….Newspaper executives and analysts say that it could take five to 10 years for the industry’s finances to stabilize and that many of the papers that survive will be smaller and will practice less ambitious journalism.
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David Whitford, Economy, February 8
[Cardin comments: What follows is the introduction to an article that I encourage you to read in full. As the author explains below, he took a road trip last month to get an impressionistic idea — “I wasn’t looking for a snapshot but a kaleidoscope,” he stresses — of what life is really like on the ground right now, in real American cities and towns, beneath and behind the types of gloomy headlines that I’ve been chronicling here in these Headlines from the Meltdown posts. His itinerary included Medford, Oregon; Phoenix; El Paso; Sioux Falls, South Dakota; Cincinnati; Charleston, South Carolina; and Portland, Maine. The picture that emerges in the article is quite varied but Whitford ends it on a note of patent hope. One thing he isn’t taking into account, though, is the dramatic onset of troubles related to peak oil (cf. the two articles below this one). These still represent a wild card, or rather a looming and present certainty, that will cut right through all other problems and issues. Nevertheless, I still find Whitford’s approach to be extremely valuable in exactly the way he meant it to be: as a counterweight and antidote to the widespread practice of making pronouncements about the American economy that are derived purely and solely from “staring at a computer screen or studying survey results.”]
We’re entering a recession. That’s what the power brokers in Washington and Wall Street have recently concluded. Or we will be soon. Or else it started a while ago and we’re just now finding out. In any case, the pundits are gloomy, and the politicians all have plans. They trot out some scary numbers. But here’s what I was wondering: How are American business owners really coping with all this confusion? What does the economy truly look like? Not when you’re staring at a computer screen or studying survey results, but when you actually go someplace that’s not a major media market (the farther from those places, the better) and you introduce yourself to a stranger and ask him how he’s doing.
During the last full week in January, I did just that, visiting cities from the Pacific Northwest to the desert Southwest, from Texas to the Great Plains, from the Midwest to the Deep South, and all the way up to northern New England. I met a restaurateur in Arizona, a statue manufacturer in South Dakota, and a jewelry wholesaler in Ohio. I touched a broad, if admittedly somewhat arbitrary, cross-section of America. I wasn’t looking for a snapshot but rather a kaleidoscope of the $13 trillion American economy, a collection of stories and images that together might offer some insight into what’s really going on out there.
What did I learn? A lot about immigrants — how important they are to the economy (even in South Dakota!), but also how little policymakers appreciate the real-life consequences of their actions when they mess with the ebb and flow of people across borders. I learned that all business is local. Gas prices matter, interest rates matter, trade policies matter — it might even matter who’s in the White House. Only to a point, though. Success in business is about creativity and flexibility and making the best of what’s staring you in the face. Yeah, times are tight here and there. But people find a way. Which brings me to my third lesson: American entrepreneurs, for the most part, are surprisingly, stubbornly optimistic. I’ll take that as a positive. You can judge for yourself . . .
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The London Telegraph, Feb. 7
[Cardin comments: When this type of story with its overt catastrophist predictions appears in something like the Telegraph, you can know that peak oil theory has truly entered the mainstream. Of course the likes of The Wall Street Journal and The New York Times are also talking about it now. And this is precisely what I and the many others who have followed peak oil for years have been expecting. The oil and energy issue will inevitably and necessarily become the main topic of conversation for every member of a civilization — namely, modern industrial civilization — whose basic way of life is underwritten by fossil fuels that are shifting from cheap, available, and abundant to expensive, unavailable, and scarce. The Telegraph article about “peak oil morphing into peak food” is part of the proverbial “peak oil playbook.”]
Vulnerable regions of the world face the risk of famine over the next three years as rising energy costs spill over into a food crunch, according to US investment bank Goldman Sachs.
“We’ve never been at a point in commodities where we are today,” said Jeff Currie, the bank’s commodity chief and closely watched oil guru.
Global oil output has been stagnant for four years, failing to keep up with rampant demand from Asia and the Mid-East. China’s imports rose 14pc last year. Biofuels from grain, oil seed and sugar are plugging the gap, but drawing away food supplies at a time when the world is adding more than 70m mouths to feed a year.
“Markets are as tight as a drum and now the US has hit the stimulus button,” said Mr Currie in his 2008 outlook. “We have never seen this before when commodity prices were already at record highs. Over the next 18 to 36 months we are probably going into crisis mode across the commodity complex.
….The current “supercycle” is a break with history because energy and food have “converged” in price and can increasingly be switched from one use to another.
Corn can be used for ethanol in cars and power plants, for plastics, as well as in baking tortillas. Natural gas can be made into fertiliser for food output. “Peak Oil” is morphing into “Peak Food”.
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Energy Tech Stocks, Feb. 7
[A]s Charles T. Maxwell, the “dean” of Wall Street’s energy analysts, looks into the future, he deeply fears that Washington won’t do anything to head off the oil crisis he sees rapidly developing starting in 2010. He says this will make the financial crisis he fears even worse. Also, because Washington will be seen by angry voters (who will be paying $12 to $15 for a gallon a gas) as the cause of their “Nightmare on Main Street,” Maxwell sees the American political system being shaken to its roots.
….Seeing no chance of a timely political response to America’s looming oil calamity, Maxwell, senior energy analyst at Weeden & Co., expects an oil-induced financial crisis to start somewhere in the 2010 to 2015 timeframe. He said that, unlike the recession the U.S. appears to be in today, “This will not be six months of hell and then we come out of it.” Rather, Maxwell expects this financial crisis to last at least 10 or 12 years, as the world goes through a prolonged period of price-induced rationing (eg, oil up to $300 a barrel and U.S. pump prices up to $15 a gallon), while waiting for new technologies that can wean nations off their oil dependency to take hold in the marketplace. (It will take time to change over the world’s one billion or so oil-consuming cars and trucks.)
As this combined oil and financial crisis worsens, Maxwell would not be surprised if the U.S. government started functioning the way it did in World War II, when the democratic dialogue was often put on hold so that unilateral decisions could be made by people given special powers. He described them as little tyrants who will be able to cut off debate, effectively weakening the democratic process. Not a pleasant prospect, Maxwell emphasized, but one that may be unavoidable in the oil-scarce world that’s coming.