Solarbird (solarbird) wrote,

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good morning, again

Turning to the economy:

Oil prices continue to drop despite sharp declines in inventory and an OPEC agreement to adhere to production quotas, which would in theory cut supply by 500,000bpd. This price contraction is due in part to continuing economic contraction and in part due to this being pretty much the bottom point in annual demand, but is also in part due to OPEC apparently quietly declining efforts by Russia to engage in "extensive cooperation" with OPEC on production.

Not only is Washington Mutual's stock price in the gutter (hanging around $2 today, sometimes below, sometimes above), but costs to insure their debt have become prohibitive, as in astronomical, as in basically they can't generate new debt anymore because no one will buy it:
...yesterday there were reports that it was being quoted at 40% up front. To put this in perspective this means you pay $4,000,000 to protect $10,000,000 in corporate bonds initially, plus more every year (for a total of five years.) ... The unfortunate reality is that when swaps start being quoted like this the outcome is no longer in material doubt, nor is there anything you (or anyone else) can do about it.
BTW, Lehman Brothers are also in desperately bad shape, and the market's taking them to the shed today - down 40% this morning alone. But I don't have much in interesting linkages; watch for fallout in derivatives markets, though.

In US dollar news, despite the recent dollar rally, there are continuing contradictory rumblings; in addition to the previously-discussed moves by Russia, Brazil and Argentina are dropping the dollar for bilateral trade. More importantly, Brad Setser, who has been following dollar flows very closely for some years now, notes that we are starting to see reversal of these flows from emerging economies. (See also how this is impacting certain markets, notably the BRIC countries.)

Minyanville has more commentary on the Fannie Mae/Freddie Mac bailout. Mish is very unhappy that Fannie Mae is saying it's "business as usual," given that "business at usual" is what got them nationalised. Bloomberg notes that the precedent it has set - pretty much just nationalisation - has scared the hell out of and severely damaged the market for "preferred" market shares. Remember those credit-default swaps (CDSes) I mentioned earlier? Citibank London is estimating only US$10-$25B in actual losses on the US$200bn-$500bn in credit derivatives, which is good, but remember: this is an unusual case, in that because of the form of the nationalisation, the resulting Treasury/taxpayer backstop means that most of these are being paid at nearly par, which will help keep the US$62T CDS market standing.

Please do not confuse this market with the more general US$200-$300B added to US taxpayer responsibility; those are direct losses, and completely separate to the CDS market. For those very confused, a picosummary: this doesn't change previous reports of financial costs better; it merely indicates that this other financial cost segment, previously unknown, may be small.

Mish at Globgal Economic Trend Analysis thinks we're on a slippery slope of bailouts, and suggests a lot more may be coming, up to and including firing up the printing presses by the end of the year and just printing money. However, he does not think this will be done enough to stop credit deflation:
Eventually Bernanke is going to start printing in an effort to shore up banks. Borrowed bank reserves will soar. But hardly a penny of that will get lent. With collapsing consumer demand and rising unemployment, businesses will not want to borrow and banks will not want to lend.

The zombified banks will sit there pretending they have cash to lend and the Fed will pretend that banks are well capitalized. Inflationists will be screaming inflation and they will still be wrong. Bank credit marked to market will continue to collapse at a rate far greater than the printing for quite some time.

Most will miss the credit collapse for the simple reason banks will resist marking their assets to market. However, the bond market will sniff this out as treasury yields continue to sink, corporate bond yields skyrocket, unemployment soars, and asset prices collapse.

Welcome to Deflation American Style. You are in it now.
Relatedly, Yves Smith at Naked Capitalism wonders if we're seeing signs of the Fed "pushing on a string," which is to say, pushing money into the system without result. If so, this is also a deflationary indicator.

Finally, I want to point at two graphs that I think may indicate something different than their publisher intends. First, go look here, at Now and Future's reconstructed M3 figure, which is a count of "total money supply" no longer published by the Fed as of a couple of years ago. This indicates total government money, but does not capture private credit very well at all, which is where most of the growth has been lately. Go look now.

Okay, done? Now go look here, at this chart of money supply and price inflation linkage. Go look now.

Back? Good. Now, the argument they're making is that increases in money supply (monetary inflation) always lead to increases in price inflation, and they are fundamentally inflationistas.

But month-to-month M3 growth, which does not capture private credit gains and losses, is flat now. If you add private credit destruction over the last year, to create, I don't know, an MC3 or somesuch, I think that wouldn't be flat at all. I think that'd be down. Sharply. And their second graph shows that while price inflation does follow money supply, that's true both ways.

Their argument is that the M3 is the best figure and that this plateau is temporary. I think their M3 reconstruction, while accurate, is missing a big part of the credit picture, but that even without that, M3 is flat until M3 isn't flat anymore, and we're near the end of the monetary inflation/price inflation lag, and that even on their M3, the inflationistas' charts are indicating possible deflation, the opposite of their case.

Add in all the missing credit that the M3 doesn't cover (and doesn't pretend to) and that indicator starts throwing up some fairly ugly alerts. Inflationary blowoffs typically precede deflationary periods, and we've certainly been experiencing a lot of price inflation lately, haven't we?
Tags: economics
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