the visible hand

it is the theory which decides what can be observed – einstein

Archive for January, 2008

Biggest Drop in Existing Home Sales in 25 Years

Posted by ecoshift on January 24, 2008

Biggest Drop in Existing Home Sales in 25 Years – New York Times
By THE ASSOCIATED PRESS
Published: January 24, 2008
Filed at 11:04 a.m. ET

WASHINGTON (AP) — Sales of existing homes fell in December, closing out a horrible year for housing in which sales of single-family homes plunged by the largest amount in 25 years. The median home price dropped for the entire year, the first time that has occurred in four decades.

The National Association of Realtors reported that sales of single-family homes and condominiums dropped by 2.2 percent in December to a seasonally adjusted annual rate of 4.89 million units.

For the year, sales of single-family homes were down by 13 percent, the biggest drop since a 17.7 percent plunge in 1982. The median price for a single-family home dropped 1.8 percent to $217,000.

That was the first annual price decline on records going back to 1968. Lawrence Yun, the Realtors’ chief economist, said it was likely that the country has not experienced a decline in housing prices for an entire year since the Great Depression of the 1930s.

The new figures underscored the severity of the slump in housing, which has been battered for the past two years after enjoying a boom in which sales set records for five consecutive years.

The housing bust has sent shock waves through the entire economy as defaults have risen, resulting in multibillion-dollar loses for big financial firms whose investments in subprime mortgages have gone sour.

There is a concern that the housing and credit troubles could be enough to push the country into a full-blown recession. After global stock markets experienced a sharp sell-off earlier this week, the Federal Reserve announced a bold three-quarter point cut in a key interest rate and held out the promise of more rate cuts to follow.

The Bush administration and congressional leaders are trying to quickly wrap up negotiations on a stimulus package in an effort to boost consumer and business confidence.

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U.S. Policies Evoke Scorn at Davos

Posted by ecoshift on January 24, 2008

U.S. Policies Evoke Scorn at Davos – New York Times
By MARK LANDLER
Published: January 24, 2008

DAVOS, Switzerland — Over the years, the United States has fulfilled many roles at the World Economic Forum: dot-com dynamo, benevolent superpower, feared aggressor.

Now add wounded giant.

On the first day of the annual conference here, a parade of bankers, economists and government officials expressed deep fears about the faltering American economy — and blunt criticism, particularly of the Federal Reserve, which some blame for sowing the seeds of today’s crisis.For George Soros, the financier who made a fortune betting against the British pound, the slump now goes beyond subprime loans. It signals a reordering of the postwar economy and the end of dollar dominance.

“The current crisis is not only the bust that follows the housing boom,” Mr. Soros declared. “It’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency.”

Suggestions of a new economic order abounded here: India’s commerce and industry minister, Kamal Nath, said that China had overtaken the United States as his country’s largest trading partner, buttressing his view that India could come through an American recession unscathed.

The head of the National Bank of Kuwait, Ibrahim S. Dabdoub, said Americans who opposed sovereign wealth funds, like the one run by the Kuwaiti government, need to come to terms with the new reality.

And an American economist, Nouriel Roubini, said bluntly, “The United States looks like an emerging market,” with large deficits and a weak currency. Brazil, an actual emerging market, had done a better job overhauling its economy, he said.

Mr. Roubini, whose frequent predictions of a downturn have made him something of a soothsayer at Davos, said that the United States would suffer a recession lasting at least a year. He foresees a flood of defaults on car loans and corporate bonds, and a prolonged bear market.

“The debate is not whether we’re going to have a soft landing or a hard landing,” he said, as his audience squirmed. “The question is only how hard the hard landing will be.”

Several economists said the Federal Reserve seemed to have lost control of events since the subprime crisis erupted last summer. Some criticized its steep cut in interest rates Tuesday as a knee-jerk reaction to calm markets, rather than a reasoned response to a deteriorating situation.

“Policy makers are reaching back into the same playbook that got us into this mess,” said Stephen S. Roach, the economist recently named chairman of Morgan Stanley Asia.

Mr. Roach argued that the Fed, by signaling its readiness to cushion the stock market from the credit crisis, risked creating conditions for a new round of inflation in asset prices.

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Whiplash Wednesday…

Posted by ecoshift on January 24, 2008

A Day of Sharp Swings, and a Final Gain – New York Times
Richard Drew/Associated Press
By MICHAEL M. GRYNBAUM
Published: January 24, 2008

This week, investors were bracing for Black Tuesday. Instead, they got Whiplash Wednesday.

A day after the Federal Reserve slashed interest rates, averting a nasty nose dive in the market, Wall Street watched as the Dow Jones industrial average swung like a yo-yo, diving nearly 250 points in the opening minutes, spending the day in a series of rallies and swoons, then closing up — way up — with a gain of nearly 300 points to snap a five-day losing streak.

Market volatility is near its highest level in five years. In a three-hour span in the afternoon, the blue-chip index ricocheted by almost 600 points.

“The market has this out-of-control feeling, and until the market sees some semblance of stability, it’s going to continue to be very volatile,” said Richard Sparks, senior equities analyst at Schaeffer’s Investment Research….

There were few obvious reasons for the market’s mood swings. The session started with a plunge after Apple and Motorola, two technology heavyweights, issued lackluster profit forecasts, raising fears about the resilience of corporate earnings in the face of a likely recession.

The reports spooked investors and dragged down the technology sector; Apple shares declined 10 percent, and shares of Motorola fell by nearly twice that amount.

But the markets reversed course around midday. Shares of financial firms, beaten down by months of mortgage-related write-offs, rebounded as investors drove up the stock prices of companies like Citigroup and JPMorgan Chase & Company, which leapt more than 12 percent.

Investors were most likely lured by reports that New York State regulators would work with Wall Street to help rescue a group of bond reinsurers, whose woes have depressed financial stocks for weeks. The aid effort — coupled with the Fed’s aggressive interest rate cut, which was aimed at easing the current credit crunch — might have made the financial sector more attractive, especially to bargain hunters….

Still, some market watchers cautioned that in a time of great uncertainty — with everything from corporate earnings to economic strength to Fed policy decisions shrouded in doubt — a single day’s gain does not make a trend. “This rebound is probably only as good as the next economic release,” said Russ Koesterich, an investment strategist at Barclays Global Investors.

And Sam Stovall, a strategist at S.& P., suggested that the market’s steep swings and afternoon rally might have resulted from a simple rule of finance.

“Even in a bear market environment,” Mr. Stovall said, “you can’t fall every day.”

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Economists in Davos warn of U.S. recession spillover

Posted by ecoshift on January 24, 2008

Economists in Davos warn of U.S. recession spillover_English_Xinhua
http://www.chinaview.cn 2008-01-24

The U.S. economy, troubled by the financial turmoil, is all but certain to fall into recession, which could spill over to the whole world, economists warned at the World Economic Forum on Wednesday.

    DAVOS, Switzerland, Jan. 23 (Xinhua) — The U.S. economy, troubled by the financial turmoil, is all but certain to fall into recession, which could spill over to the whole world, economists warned at the World Economic Forum on Wednesday.

Nouriel Roubini, professor and chairman of Roubini Global Economics of the United States, told a six-person panel on the world economy in 2008 that the debate now was not whether the U.S. will fall into recession, but how severe it will be.

The warning came one day after the U.S. Federal Reserve suddenly slashed its interest rate by 75 basis points to 3.5 percent overnight, a move designed to help ease market nerves and salvage the world’s biggest economy from recession.

“The Fed cannot prevent the (U.S.) economy going into recession,” Roubini said, “My view is that world economy cannot decouple from a U.S. hard landing.”

Roubini predicted a deep and prolonged decline, perhaps lasting as long as a year.

“The point is not about a soft or hard landing, but how hard the hard landing is going to be,” he said, “I believe we are going to have a severe (U.S.) recession lasting for four quarters.”

A major downturn in the U.S. will inevitably result in a severe slowdown in economic growth in the rest of the world, Roubini said, while ruling out an outright recession on the global scale.

Stephen Roach, chairman of Morgan Stanley’s Asia division, said he stands “shoulder to shoulder” with Roubini’s pessimistic forecast.

“I think it’s going to be a fairly painful and relatively lengthy recessionary period,” he said, referring to the troubled U.S. economy.

Like Roubini, Roach predicted a prolonged global slowdown, not a recession, stressing a decoupling from the U.S. is only a fantasy.

Concerning Europe, another economic power severely hit by financial turmoil, Roach said it was not going to get special dispensation from a global economic slowdown, predicting the European Central Bank is likely to follow the step of the U.S. Federal Reserve to cut interest rate in the short term.

However, Roach criticized the U.S. Federal Reserve’s decision of interest rate cut as “reckless” and “dangerous.”

It “could create another (asset price) bubble-induced recovery” which was “the last thing the world and U.S. needs,” Roach said.

Roubini said the Fed’s recent easing, while necessary, comes too late to do more than make the recession “slightly more shallow and less protracted” than otherwise, due to the exhausted finances of U.S. consumers and a severely stressed banking system.

In contrast to Roubini and Roach, the Indian Commerce and Industry Minister Kamal Nath appeared more optimistic, arguing the growth of trade between developing countries could cushion the effect of a U.S. slowdown.

If the U.S. does slip into a recession, “this is the first time the world is looking at a recession with two engines of growth — China and India,” Nath said.

He said India’s growth, in particular, is largely being driven by domestic demand, making the emerging economy more resilient to any U.S. fallout.

As to China, the threat of a U.S. recession would pose a particularly difficult policy challenge, according to Yu Yongding, a member of the Chinese Academy of Social Sciences and a former member of the monetary policy committee at the People’s Bank of China.

“A serious slowdown in the U.S. economy will have quite a serious impact on the Chinese economy,” he said.

However, Yu said China’s growth could help it weather any slowdown.

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75 bip cut and the market still falling…

Posted by ecoshift on January 23, 2008

A surprise 75 basis point cut in the Fed Fund rate, the steepest one-day cut in central bank history, and the market still falls over 100 points yesterday.  Paul Krugman wonders if the Fed has enough ammunition left to weather the downturn. Some commenters figure this means there’s nothing left to scare the bears out of their shorts if 75 bips don’t halt falling prices. And, the NYT wonders if the good times were just a mirage.

Hint: yes.


Worries That the Good Times Were Mostly a Mirage – New York Times
By DAVID LEONHARDT
Published: January 23, 2008

So, how bad could this get?

Until a few months ago, it was accepted wisdom that the American economy functioned far more smoothly than in the past. Economic expansions lasted longer, and recessions were both shorter and milder. Inflation had been tamed. The spreading of financial risk, across institutions and around the world, had reduced the odds of a crisis.

Back in 2004, Ben Bernanke, then a Federal Reserve governor, borrowed a phrase from an academic research paper to give these happy developments a name: “the great moderation.”

These days, though, the great moderation isn’t looking quite so great — or so moderate.

The recent financial turmoil has many causes, but they are tied to a basic fear that some of the economic successes of the last generation may yet turn out to be a mirage. That helps explain why problems in the American subprime mortgage market could have spread so quickly through the world’s financial system. On Tuesday, Mr. Bernanke, who is now the Fed chairman, presided over the steepest one-day interest rate cut in the central bank’s history.

The great moderation now seems to have depended — in part — on a huge speculative bubble, first in stocks and then real estate, that hid the economy’s rough edges. Everyone from first-time home buyers to Wall Street chief executives made bets they did not fully understand, and then spent money as if those bets couldn’t go bad. For the past 16 years, American consumers have increased their overall spending every single quarter, which is almost twice as long as any previous streak.

Now, some worry, comes the payback.

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day of reckoning?

Posted by ecoshift on January 21, 2008

I don’t normally prognosticate about the stock market. It’s behavior has been so flighty. From my perspective the last 1500 points of gain leading up to the October peak was based on nothing — other than some kind of of group think spin and speculative delusion. So really, what business did I have trying to guess when — if ever — the correction to reality-based economics would occur ? Bulls were making money hand over fist while I searched in vain for the fundamentals that supported their optimism. So I’m not naming any stock targets today either.

With all that said, it does appear that tomorrow’s market will be worth watching. Asian and European markets have been taking on major declines (5% + in a single day’s trading) while we take the day off to honor Martin Luther King. Futures markets indicate the Dow could open as much as 500 points down. There is much speculation that the FED will declare an emergency rate cut prior to market opening. Perhaps that will slow things down and take the panic out of the air. We’ll see.

So I’m not predicting anything specific… Just sayin’: Could be worth watching the market tomorrow…


Stock futures pointing to sharp losses when U.S. re-opens Tuesday – MarketWatch
U.S. stock futures point to major decline on reopen
Markets in Europe end day in bear-market territory
By Steve Goldstein & Sarah Turner, MarketWatch
Last update: 3:57 p.m. EST Jan. 21, 2008

LONDON (MarketWatch) — If futures contracts traded on a day when U.S. stocks weren’t even due to open are anything near accurate, then markets will be in for a major decline on Tuesday, with concerns about bond insurers and the health of financial institutions dragging markets lower.The Dow Jones Industrial Average futures contract was recently off 520 points at 11,586, the Nasdaq futures were at 1773.25, down 76.25, and the Standard & Poor’s 500 futures recently were at 1265, down 60.3.

Futures contract don’t move in complete lockstep to the underlying indexes, but by comparison, the Dow industrials fell 382 points on Sept. 20, 2001, just days after the terrorist attack on the Twin Towers, and by 387 points on Aug. 9, 2007, shortly after the recent credit crunch first emerged.

U.S. markets were closed Monday for the Martin Luther King holiday. Trading resumes Tuesday.

The futures declines come on the back of big drops in European and Asian stock markets.

From developing markets like Shanghai — down over 5% — to established ones in Paris — down nearly 7% — financial institutions around the world sold off. See Europe markets. Canada and Latin America also took hits in trading on Monday.


Day of reckoning in the US glasshouse – Times Online
From The Times
January 21, 2008
World Economic Forum: The Davos Agenda
Jospeh Stiglitz

There is a growing consensus: America is going into a marked slowdown, if not a downright recession. There will be a large gap between potential growth – usually estimated at 3 per cent to 4 per cent – and actual growth, meaning lost output of hundreds of billions of dollars. America actually faces three separate but related problems; a credit crunch, a debt crisis and a macro-economic problem….

Even the Fed is beginning to realise that, although misguided monetary policy and inadequate financial regulation got the US into the mess, reversing course will not get it out. (In a classic case of shutting the barn door after the cows are out, regulations have now been tightened. It has admitted, in effect, that it was asleep at the wheel.)

Can fiscal policy do the trick? President Bush’s cureall for any of the nation’s ills – making the 2001 and 2003 tax cuts permanent – will drive up the deficit but not the economy. In some sense, they are at the root of the problems that have ensued. Tax rebates for lower-income Americans will have the biggest stimulant per dollar of deficit (in the jargon, the biggest bang for the buck). And it will be fast-acting.

But will the Bush Administration, so long focused on helping the rich, be willing to change course? And is it wise to encourage America on its consumption binge? What America desperately needs is more investment, in infrastructure, in research, in education. This, too, would provide a big bang for the buck. But while defence spending has soared, including billions for weapons that don’t work against enemies that don’t exist, will it be willing to countenance more government spending in these areas?

This is an election year and anything is possible. My betting is that the Administration won’t want to admit just how bad the economy is, and that even if a compromise is achieved, it will be too little too late.

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MLK: A time to remember

Posted by ecoshift on January 21, 2008

Lest we forget the risks of leadership:

Martin Luther King (b. January 15, 1929 – d. April 4, 1968)

MLKonline.net:
I Have a Dream (audio)
I Have A Dream Speech (video)

— delivered at the March on Washington on August 28, 1963

American Rhetoric: Martin Luther King, Jr.
Beyond Vietnam — A Time to Break Silence (Declaration Against Vietnam War)
— delivered at a meeting of Clergy and Laity Concerned at Riverside Church in New York City on April 4, 1967

The war in Vietnam is but a symptom of a far deeper malady within the American spirit, and if we ignore this sobering reality, we will find ourselves organizing “clergy and laymen concerned” committees for the next generation. They will be concerned about Guatemala and Peru. They will be concerned about Thailand and Cambodia. They will be concerned about Mozambique and South Africa. We will be marching for these and a dozen other names and attending rallies without end, unless there is a significant and profound change in American life and policy.

And so, such thoughts take us beyond Vietnam, but not beyond our calling as sons of the living God.

In 1957, a sensitive American official overseas said that it seemed to him that our nation was on the wrong side of a world revolution. During the past ten years, we have seen emerge a pattern of suppression which has now justified the presence of U.S. military advisors in Venezuela. This need to maintain social stability for our investments accounts for the counterrevolutionary action of American forces in Guatemala. It tells why American helicopters are being used against guerrillas in Cambodia and why American napalm and Green Beret forces have already been active against rebels in Peru.

It is with such activity in mind that the words of the late John F. Kennedy come back to haunt us. Five years ago he said, “Those who make peaceful revolution impossible will make violent revolution inevitable.” Increasingly, by choice or by accident, this is the role our nation has taken, the role of those who make peaceful revolution impossible by refusing to give up the privileges and the pleasures that come from the immense profits of overseas investments. I am convinced that if we are to get on the right side of the world revolution, we as a nation must undergo a radical revolution of values. We must rapidly begin the shift from a thing-oriented society to a person-oriented society. When machines and computers, profit motives and property rights, are considered more important than people, the giant triplets of racism, extreme materialism, and militarism are incapable of being conquered.

http://www.americanrhetoric.com/speeches/mlkatimetobreaksilence.htm

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Smart stimulus to counteract the economic slowdown

Posted by ecoshift on January 21, 2008

Some attention to green tech, renewables, reducing dependence on oil, etc. would be worthy of consideration as well, but perhaps this fits within existing pro-growth frames well enough to have a chance of implementation. Worth a read…


Strategy for economic rebound: Smart stimulus to counteract the economic slowdown
January 11, 2008 | Economic Policy Institute Briefing Paper #210
by Lawrence Mishel, Ross Eisenbrey and John Irons”

After months of battering by high winds in the housing and credit industries and a year of slowdown in job growth, there is broad agreement that the economy is tipping into recession or rising unemployment. This week’s report that the past holiday season was the weakest for retailers since 2002 makes it unlikely that cash-strapped consumers will be able to buy our way out of the slump and gives credence to rising concern that the recession we’ve been dreading may already have arrived.

Against this backdrop, the Economic Policy Institute today unveiled a broad-based, three-part prescription for stimulating the economy and urged lawmakers to take quick action in order to prepare the nation and working Americans to weather what’s ahead.

We need to shore up the economy before the storm hits full force, and time is crucial, said EPI president Lawrence Mishel. The right kind of strong action now can help limit the rise in unemployment and losses in income that can be expected in the next recession.

EPI’s plan, titled “Strategy for an Economic Rebound”… calls for federal investment of about $140 billion (1% of total GDP) an amount big enough, when properly targeted, to make a difference. To achieve optimal targeting, that amount would be allotted among four kinds of expenditures: infrastructure, relief to the states, help to unemployed individuals, and targeted tax rebates.

read more…

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Foreigners Buy Stakes in the U.S.

Posted by ecoshift on January 19, 2008

Foreigners Buy Stakes in the U.S. at a Record Pace – New York Times
By PETER S. GOODMAN and LOUISE STORY
Published: January 20, 2008

Last May, a Saudi Arabian conglomerate bought a Massachusetts plastics maker. In November, a French company established a new factory in Adrian, Mich., adding 189 automotive jobs to an area accustomed to layoffs. In December, a British company bought a New Jersey maker of cough syrup.

For much of the world, the United States is now on sale at discount prices. With credit tight, unemployment growing and worries mounting about a potential recession, American business and government leaders are courting foreign money to keep the economy growing. Foreign investors are buying aggressively, taking advantage of American duress and a weak dollar to snap up what many see as bargains, while making inroads to the world’s largest market.

Last year, foreign investors poured a record $414 billion into securing stakes in American companies, factories and other properties through private deals and purchases of publicly traded stock, according to Thomson Financial, a research firm. That was up 90 percent from the previous year and more than double the average for the last decade. It amounted to more than one-fourth of all announced deals for the year, Thomson said.

During the first two weeks of this year, foreign businesses agreed to invest another $22.6 billion for stakes in American companies — more than half the value of all announced deals. If a recession now unfolds and the dollar drops further, the pace could accelerate, economists say.

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An Oil Quandary: Costly Fuel Means Costly Food

Posted by ecoshift on January 19, 2008

New York Times – The Food Chain
An Oil Quandary: Costly Fuel Means Costly Calories
By KEITH BRADSHER
Published: January 19, 2008

This is the other oil shock. From India to Indiana, shortages and soaring prices for palm oil, soybean oil and many other types of vegetable oils are the latest, most striking example of a developing global problem: costly food.

The food price index of the Food and Agriculture Organization of the United Nations, based on export prices for 60 internationally traded foodstuffs, climbed 37 percent last year. That was on top of a 14 percent increase in 2006, and the trend has accelerated this winter.

In some poor countries, desperation is taking hold. Just in the last week, protests have erupted in Pakistan over wheat shortages, and in Indonesia over soybean shortages. Egypt has banned rice exports to keep food at home, and China has put price controls on cooking oil, grain, meat, milk and eggs.

According to the F.A.O., food riots have erupted in recent months in Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen.

“The urban poor, the rural landless and small and marginal farmers stand to lose,” said He Changchui, the agency’s chief representative for Asia and the Pacific.

A startling change is unfolding in the world’s food markets. Soaring fuel prices have altered the equation for growing food and transporting it across the globe. Huge demand for biofuels has created tension between using land to produce fuel and using it for food.

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