Benchmark Currencies: 16 Dec 2008

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Unemployment claims dropped dramatically to 466,000 this past week. This is the best data on the unemployment front we have seen in a long time. The prior week’s claims were also downwardly revised for the first time in a while. These changes brought the widely followed 4-week average down to 496,500, the first time we have been below 500,000 in 12 months. All around, this was a welcome pre-Thanksgiving report.

Claims had been holding stubbornly high in the 530,000 range in September and October. Since that time they have declined, but not quickly enough. Last week, I reiterated that I had thought seasonal adjustments were overstating initial jobless:

The Case-Shiller Home Price Index has increased yet again. This marks the fifth consecutive monthly increase in house prices in the United States. Prices are now only 11.3% lower in the Composite-10 cities and 9.3% lower in the more comprehensive Composite-20 cities than at this time last year.

However, diffusion is breaking down. When the Case-Shiller index began increasing in July, 14 of 20 markets were showing an increase. This number steadily increased as time wore on. Case-Shiller reported in August that 18 of 20 cities showed price increases. When Case-Shiller reported in September, 18 of 20 cities showed price increases.

Bonds like this. Let’s see how the stock market reacts to this. Pre-market data show no big moves.

From the BEA:

The Financial Times reports that British regulators have now opened up to reveal more of the details surrounding the emergency aid banks received during the most acute periods of stress to date in the financial crisis. Meanwhile, in the U.S., the Federal Reserve continues to resist providing greater details.

The sum some of Britain’s largest largest banks received was in excess of 60 billion pounds.

Two weeks ago as the Financial Reform Bill was wending its way through Congress, Paul Kanjorski emerged as the champion of breaking up too-big-to-fail financial institutions. After seeing trillions of dollars in taxpayer money go to backstopping, propping up and guaranteeing the liabilities of weak financial institutions, It looked like we were going to see some draconian action.

On Nov 11th, the Wall Street Journal reported:

My post title is an ode to Yves Smith, who likes to feign surprise when the blindingly obvious finally comes into plain view for all to see. The latest sign that underneath the surface weakness remains at large financial institutions comes courtesy of Standard & Poor's. According to the Telegraph’s Ambrose Evans-Pritchard, S&P believes many are horribly short of capital.

Every single bank in Japan, the US, Germany, Spain, and Italy included in S&P’s list of 45 global lenders fails the 8pc safety level under the agency’s risk-adjusted capital (RAC) ratio. Most fall woefully short.

This is a pretty wonkish post but I hope you appreciate the concepts presented.

I made some allusions to modern monetary theory in a recent post when I asked, “If the U.S. stopped issuing treasuries, would it go broke?” The short answer is no. But that still leaves questions about the inflationary impact of all of this debt. The fact is a lot of base money is being added to the system. Normally, one would expect this to be inflationary. However, it has not been because the money multiplier (the relationship between base money, more inclusive monetary aggregates and credit) has dropped precipitously. Still, if and when the economy picks up – and with it the demand for credit, inflation could be a serious problem.

In this post:

A few thoughts about the limitations of government
Our founding fathers
How large should government be?
How policy helps frame the debate
Where we are headed

After British chain WHSmith backed out of a deal with Borders (BGP), the U.S. megastore bookseller is desperately looking to stave off bankruptcy and Chapter 7 liquidation.

I love Borders and have been an avid shopper at countless Borders stores near where I have lived in D.C., L.A., New York, London and elsewhere on the road. But, honestly, it doesn’t make sense to me that WH Smith was in the bidding for Borders in the first place. WHSmith are a more a news agent.

This comes via Deal Book at the New York Times.

The company’s chief executive, Fritz Henderson, called the repayment plan “a personal commitment.” The Obama administration, wardens of the 60 percent taxpayer stake in the company, declared itself “encouraged” by the news. Many commentators followed suit. But in the premature rush to herald the beginning of the end of the government’s involvement in the auto industry, a number of key considerations were left out, Edward Niedermayer, the editor of The Truth About Cars, writes in an op-ed in The New York Times.

This is a post I just wrote over at Yves Smith’s site Naked Capitalism in response to a reader request. Marshall Auerback has already written a reply as well and I will post that later today.

A reader at Naked Capitalism asked us to respond to a recent article from the Christian Science Monitor asking Does US need a second stimulus to create jobs?

Morgan Stanley’s (MS) piece on Treasuries Priced for Perfection…for Now! is pretty bearish. The basic gist is that while the ten-year represents fair value today, because inflation expectations have become unanchored, Morgan Stanley expects the yield to rise from 3.3% to 5.5%. That’s a disaster of 1994 proportions. Obviously, given some of my recent comments, this is not what I expect to happen, but be well aware of the risk; in this economic environment, it would be fatal.

Here’s an excerpt of what Manoj Pradhan had to say (emphasis added):

Valero Energy (VLO) has just announced it is shutting down its Delaware City Refinery. This is a major news announcement because refiners should be seen as a canary in the coalmine for end-user demand and Valero is one company in the oil patch which has been loath to cut workers to improve the bottom line. This announcement is an indicator that, despite a technical recovery, the economy still has major obstacles to overcome.

Business Wire reports:

The Mortgage Bankers Association is reporting that nearly one in ten households with mortgages are at least one payment behind. That is a record, my friends. And it certainly means we cannot believe house prices have permanently stabilized.

The New York Times says:

I pick up Bill Gross where I left him on Friday. He said in his monthly newsletter that the Fed is going to keep interest rates at zero percent through 2010. But, he is not willing to stick his neck out in a liquidity seeking return kind of way even though this is what reflation is all about. He advises lower risk assets over higher risk ones cognizant that this could mean under-performance.

What I found interesting is that Gross highlighted only two bits in his piece. That should lead you to believe these are the most important points he makes. The first bit is the rationale behind why he thinks the Fed is on hold through 2010:

I have written extensively about how I believe the bank bailouts were the worst of all possible solutions – fixes that perpetuate too big to fail, moral hazard and crony capitalism. That ship has sailed, but the questions still linger – in large part because the fix has not trickled down to common folk to better their lot. Rising unemployment is but one demonstration of this.

Arnold Kling writes a post that goes beyond banking to AIG, mortgages and Fannie (FNM) and Freddie (FRE). He offers real world solutions that don’t require creating special resolution authority, buying toxic assets or orchestrating bailouts. While there would certainly be costs to these solutions as well, they would be far less than what we are paying now.

Here’s another interesting piece from Randall Wray, the economics professor from University of Missouri-Kansas City (that same school which employs Bill Black of “The Best Way to Rob a bank is to own one” fame).

Wray has a lot to say - most, but not all, of which I found convincing – but that’s a story for another day.

I want to take a break from banking and macro stuff and talk a little bit about technology. I wrote an article about Android a few weeks back. That was a more personal account on why I was switching from a Windows Mobile phone to Android, the latest whiz-bang operating system running mobile phones. (Don’t ask me why I stuck with Windows Mobile for so long – even I don’t know any more). This article is looking at the Android phenomenon more from a strategic perspective.

You may have seen the Verizon (VZ) commercials on TV. They’re everywhere: Droid has arrived. And this happens to be a big problem for Apple Computer (AAPL).

Initial jobless claims for the past week were 505,000, tied with last week for the lowest since January. This brings the 4-week average down to 514,000, the lowest since November of last year and the 11th consecutive week of declines.

Clearly, fewer people are losing their jobs. But, 505,000 is still a large number – one consistent with a net loss of 150,000-200,000 jobs per month. And there are still 5.6 million people with continuing unemployment insurance claims, 1.8 million more than at this time last year.