Morgan Stanley predicts one in ten homeowners ‘facing negative equity’ Times Online
I underestimated the threat, says Stern Guardian
Why new oil price highs? James Hamilton, Econbrowser. A nice little post. Hamiltion looks at some data, most importantly that all commodity prices are increasing, and the oil price rise is less than the average. He argues that only half the rise can be attributed to the fall of the dollar; he believes negative interest rates and the prospect of further Fed cuts (ie, even worse real returns from holding short-dated financial instruments) is a major culprit.
Lakes of meltwater can crack Greenland’s ice and contribute to faster ice sheet flow PhysOrg versus Greenland’s disappearing lakes leave giant ice sheets largely unmoved Guardian. Um, these two stories are reporting on the same research, and I don’t have time to go read the study myself to see which account is closer to the truth.
Fed Vice Chairman Kohn Warns on CRE Concentrations at Small banks Calculated Risk.
Investment banks eye CDS clearing house Financial Times
Central Bankers Guessing Everywhere Michael Shedlock. Mish applauds the hard-line stance of Australia’s Reserve Bank.
Royal Bank of Scotland in fresh cash plea Telegraph. The bank is looking for at least £5 billion via a rights issue. Rights issues are generally a sign of desperation. John Dizard of the Financial Times said to meet the Fed’s target of $200 billion in replacement equity in six months, we’d need a Wachovia sized funding a week. With Wachovia, JP Morgan, and RBS, we are right on schedule, but expect investor resistance, reflected in funding costs, to start rising.
Antidote du jour:
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1. First interest rates rise affecting the drivers of the US economy, housing, but before that auto production goes from bull to a bear markets.
2. This impacts many other industries and the jobs report. An economy is either rising at a rising rate or business activity is falling at an increasing rate. That is economic law 101. There is no such thing in any market as a Plateau of Prosperity or Cinderella – Goldilocks situations.
3. We have witnessed the Dow rise on economic news indicating deceleration of activity. This continues until major corporations announced poor earnings, making the Dow fall faster than it rose, moving it deeply into the red.
4. The formula economically is inherent in #2 which is lower economic activity equals lower profits.
5. Lower profits leads to lower Federal Tax revenues.
6. Lower Federal tax revenues in the face of increased Federal spending causes geometric, not arithmetic, rises in the US Federal Budget deficit. This is also true for cities & States as it is for the Federal government.
7. The increased US Federal Budget deficit in the face of a US Trade Deficit increases the US Current Account Deficit.
8. The US Current Account Balance is the speedometer of the money exiting the US into world markets (deficit).
9. It is this deficit that must be met by incoming investment in the US in any form. It could be anything from businesses, equities to Treasury instruments. We are already seeing a fall off in the situation of developing nations carrying the spending habits of industrial nations; a contradiction in terms.
10. If the investment by non US entities fails to meet the exiting dollars by all means, then the US must turn within to finance the shortfall.
11. Assuming the US turns inside to finance all maturities, interest rates will rise with the long term rates moving fastest regardless of prevailing business conditions.
12. This will further contract business activity and start a downward spiral of unparalleled dimension because the size of US debt already issued is of unparalleled dimension.
Therefore as you get to #12 you are automatically right back at #1. This is an economic downward spiral.
Jim Sinclair 9.1.2006