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America’s vulnerable economy
The Economist (UK)
Recession in America looks increasingly likely. Can booming emerging markets save the world economy?
IN 1929, days after the stockmarket crash, the Harvard Economic Society reassured its subscribers: “A severe depression is outside the range of probability”. In a survey in March 2001, 95% of American economists said there would not be a recession, even though one had already started. Today, most economists do not forecast a recession in America, but the profession’s pitiful forecasting record offers little comfort. Our latest assessment (see article) suggests that the United States may well be heading for recession.
Granted, GDP grew by a robust 3.9%, at an annual rate, in the third quarter. Granted also, revisions may well push this figure up. But that was the past. More timely signs suggest that the economy could stall in this quarter. By early next year, output and jobs could be shrinking. The main cause is the imploding housing market.
(15 November 2007)
FedEx Cuts Profit Outlook on Fuel, Slowing Freight
Mary Schlangenstein, Bloomberg
FedEx Corp., the No. 2 U.S. package- shipping company, cut its profit forecast for a second time because of rising fuel costs and weak freight demand. The shares fell the most in 16 months.
FedEx and other transportation companies are among the first affected by economic slowdowns or expansions, making them leading indicators. The National Retail Federation anticipates the smallest holiday-sales increase in five years.
“It is absolutely an indication of the broader economy,” Robert W. Baird & Co. analyst Jon Langenfeld said today in an interview. “We may look back and figure that we are already in a recession. If we’re not, we’re very close to one.”
A 14 percent surge in crude oil prices since September also overwhelmed FedEx’s monthly adjustments to its fuel surcharges. The Memphis, Tennessee-based company said its fuel costs jumped 8 percent, or $85 million, over the period.
(16 November 2007)
The Finance Round-Up: November 16th 2007
Stoneleigh, The Oil Drum:Canada
According to Gregory Peters, head of credit strategy at Morgan Stanley:
There’s a greater than 50 percent probability that the financial system will come to a grinding halt. You have the SIVs, you have the conduits, you have the money-market funds, you have future losses still in the dealer’s balance sheet in the banks [..] That’s all toppling at once.
Financial institutions are acknowledging that the losses could reach over $400 billion, and that is before an additional several hundred billion dollars worth of residential real estate enters foreclosure, leading to additional losses in the derivatives market of many times that figure due to leverage.
Over the next few months, major impacts will be felt.
First, the gargantuan bond insurance industry is teetering on the brink of the abyss, with rating agencies threatening downgrades of 14-18 notches (from AAA to deep junk). That could leave trillions of dollars of bonds uninsured, and therefore no longer able to borrow a triple A credit rating independent of their true worth. Those bonds would lose much of their value, and many large investors, such as pension funds, would be obliged by law to sell anything below investment grade.
Secondly, US accountancy rules changed November 15, affecting the upcoming financial year. “FASB 157” dictates that banks and securities firms can no longer hide their worst assets as Level 3, which allowed them to be kept off balance sheet. Trade in classes of commercial paper theoretically worth more than entire countries will have to be valued using observable inputs for the first time (where possible), rather than mark-to-make-believe.
In addition, as of January, banks can no longer indemnify their auditors for signing off on accounts they cannot verify, leaving the auditors potentially liable over the virtually unquanitfiable exposure of their clients to the derivatives market. Auditors are therefore likely to make every effort to verify valuations where evidence of true value can be found.
A cascading failure of financial institutions is all too possible.
(16 November 2007)
$2 trillion lending crunch seen
Grace Wong, CNNMoney
Goldman Sachs economist says mounting credit losses could force banks to significantly scale back their lending.
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The mortgage wipeout could result in a $2 trillion cutback in lending and have dramatic implications for the U.S. economy, according to Wall Street investment bank Goldman Sachs.
The housing slump is expected to end up costing banks, hedge funds and other lenders an estimated $400 billion as defaults on home loans rise, according to Goldman economist Jan Hatzius.
(16 November 2007)
