bank run blog

The widely predicted and much feared contraction in US consumer spending has been obscured by the government stimulus checks and skyrocketing commodities prices, but the underlying data confirm that consumers are tapped out. The Associated Press reports on consumer spending and personal incomes figures that are pushing Wall Street down this morning :

“Personal incomes plunged in July while consumer spending slowed significantly as the impact of billions of dollars in government rebate checks began to wane.

The Commerce Department reported Friday that personal incomes fell by 0.7 percent in July, the biggest drop in nearly three years and a far larger decline than the 0.1 percent decrease analysts expected.

Consumer spending edged up a modest 0.2 percent, in line with expectations, but far below June’s 0.6 percent rise. When the impact of rising prices was factored in, spending actually dropped by 0.4 percent in July, the weakest showing for inflation-adjusted spending in more than four years.”

Analysts agree that the outlook for the second and third quarters is bleak, as the factors that pushed GDP growth to a stated 3.3 percent in the second quarter recede. According to Bloomberg :

“Incomes dropped 0.7 percent, the first decrease since August 2005, reflecting the end of the rebates, after a 0.1 percent gain the prior month. The median projection was a decline of 0.2 percent.

As domestic demand wanes, the U.S. may also be hit by a slowdown in economies abroad that would erode export gains. Europeans’ confidence fell more than forecast this month as the economy teetered on the brink of a recession, a report showed today. The European Commission’s index of executive and consumer sentiment dropped to 88.8 from 89.5 in July.

The Commerce Department report’s price gauge tied to spending patterns jumped 4.5 percent from July 2007, the biggest 12-month gain since 1991.”

Associated Press : July incomes drop by largest amount in 3 years

Bloomberg : U.S. Economy: Consumer Spending Slows, Inflation Accelerates

It may seem odd, but the foreclosure crisis will in time be recognized as the catalyst for several public health problems. An increasingly serious concern is Arizona and California is the large number of stagnant pools that are left unattended for moths or even years. Consumer Affairs reports :

“Foreclosures not only have economic impact, there is a suggestion by officials in California that the foreclosure epidemic has spawned a health problem as well.

There are so many vacant homes – and so many of those homes have swimming pools – that officials worry these abandoned pools have become breeding grounds for mosquitoes that spread the West Nile virus.”

One radical solution that is being tried in more and more communities is the introduction of non- native species in an attempt to control the mosquitoes. According to Reuters :

“Authorities in Arizona are stepping up a program to put mosquito-gobbling minnows into the stagnant pools of foreclosed or abandoned homes to prevent an outbreak of West Nile virus.

Public health workers in Maricopa County, which includes the cities of the Phoenix valley, are breeding thousands of so-called mosquitofish to gobble up larvae that thrive in the green pools of abandoned homes across the county.

The tiny, silvery fish are being offered to residents and municipal authorities across the parched desert county, which has tens of thousands of swimming pools, and one of the highest foreclosure rates in the United States.”

Consumer Affairs : California Foreclosures Linked To West Nile Virus

Reuters : Mosquito-eating fish thrive in foreclosed pools

Perhaps because it’s Sunday, the Associated Press has published an extended news feature about the Almighty :

“The almighty dollar is mighty no more. It has been declining steadily for six years against other major currencies, undercutting its role as the leading international banking currency. The long slide is fanning inflation at home and playing a major role in the run-up of oil and gasoline prices everywhere.”

The article goes into unusual detail for an American media outlet, briefly describing how the US has alienated its chief international trading partners by successfully exporting counterparty risk during the bubble of the last decade :

“The loss of the dollar’s purchasing power and international respect has some experts worrying that the euro might one day replace the dollar as the so-called primary reserve currency. And that could trigger a dollar rout as foreign governments and international investors flee from U.S. Treasury bonds and other dollar-denominated investments.

Making matters worse: The gaping U.S. current-account deficit — the amount by which the value of goods, services and investments bought in the U.S. from overseas exceeds the amount the U.S. sells abroad — and the low levels of domestic savings means that foreigners must purchase more than $3 billion every business day to fund the imbalance.

Since roughly half of the nation’s nearly $10 trillion national debt is held by foreigners, mostly in Treasury bills and bonds, such a withdrawal could have enormous consequences.”

In a related story, the Guardian ran a piece from Reuters this morning, reporting that President Bush is being urged by other heads of state at the G8 conference in Japan to intervene to bolster the US currency in order to stabilize world markets :

“The Bush administration has come under pressure from abroad to take action to stabilise the weak U.S. dollar, another issue likely to come up during the G8 meetings at the lakeside resort of Toyako July 7-9, after complaints the weakness has contributed to soaring food and fuel prices.

‘In terms of the dollar, the United States believes in a strong dollar policy and believes the strength of our economy will be reflected in the dollar,’ Bush said when asked what world leaders could do to improve the economy and intervene to boost the dollar.

When pressed on potential intervention, Bush replied, ‘I just said, the relative strength of our economy will be reflected in currencies.’”

Associated Press : The buck doesn’t stop here; it just keeps falling

Guardian : Bush says backs strong dollar policy

General Motors, once the largest and most profitable corporation in the United States, to the extent that it was commonly said “As GM goes, so goes the nation”, is now essentially bankrupt, with liabilities hugely in excess of its assets or its future earnings potential. The company has been continuously allowed access to capital despite its horrendous balance sheet in a manner that must cause envy among struggling small business owners and strapped private individuals. Time Magazine asks, Can General Motors Recover? :

“Two months short of the company’s 100th anniversary, General Motors Corp. executives remain defiantly upbeat in the face of a weak economy, terrible sales and Wall Street speculation that the giant automaker could ultimately wind up in bankruptcy court if the slump continues.

GM’s stock price dropped below $10 this week to its lowest level in 54 years, and down significantly from $43 last autumn after the automaker had signed a new four-year labor contract with the United Auto Workers that included significant concessions. JP Morgan said the company has to raise $10 billion in fresh capital in the next several months. Merrill Lynch was even less optimistic. ‘We believe there is potential downside in the stock below $7 and that bankruptcy is not impossible if the market continues to deteriorate and significant incremental capital is not raised,’ Merrill Lynch analyst John Murphy wrote in a note to investors.”

full story

Reuters reported earlier in the week Merrill says GM bankruptcy possible :

“Merrill Lynch analyst John Murphy cut GM to ‘underperform’ from ‘buy’ and lowered his price target for the largest U.S. automaker to $7 from $28. Shares fell as much as 11 percent to $10.50 in Wednesday’s trading in the New York Stock Exchange. The cost to insure GM’s debt rose.”

GM spokesmen predictably disputed Murphy’s assessment, but he actually sees his estimates as conservative, given the underlying fundamentals :

“’The recent extreme deterioration in volume and mix is driving much higher cash burn and eroding GM’s cash position,’ Murphy said. ‘We believe $15 billion is necessary because there is downside risk to our current estimates and a greater cushion is essential.’”

Any capital GM raises has the potential to dilute equity if it’s done through convertible offering or the issuance of additional equity, both possibilities analysts have raised.

full story

As world leaders gather in Japan for next week’s G8 summit, the Associated Press is reporting on the drastic alterations to the economic landscape that have occurred in the year since the last meeting :

“Between surging oil prices, food inflation and a credit crunch that’s depressed global growth, leaders from the Group of Eight economic powers face the gravest combination of economic woes in at least a decade when they gather next week.”

Comments by a Goldman analyst cited in the AP story reflect growing concern over spiking commodities prices :

“’Things have changed for the worse across the board,’ said Robert Hormats, vice chairman at Goldman Sachs (International) Corp. in New York.

Hormats argues that the economic problems now are more serious and widespread than during the Asian financial crisis of 1997-98, where the pain was largely limited to emerging markets.

‘Now you have a financial disorder where the epicenter is the U.S.,’ he said. And fuel and food inflation ‘are serious matters that affect large numbers of people.’”

Ahead of the summit, the president of the World Bank issued an urgent appeal to the member countries of the G8 to act with regard to the commodities bubble. According to Reuters :

“World Bank President Robert Zoellick on Wednesday urged swift action from Group of Eight industrial nations and major oil producers to address a worsening global food and energy crisis pushing more of the world’s people into poverty and destabilizing economies.

‘We are entering a danger zone,’ Zoellick wrote in a July 1 letter to Japan’s Prime Minister Yasuo Fukuda, who is chairing the G8 summit next week in Hokkaido.

‘What we are witnessing is not a natural disaster — a silent tsunami or a perfect storm. It is a man-made catastrophe and as such must be fixed by people,’ he said in the letter, which was copied to leaders of the United States, Canada, France, Germany, Italy, Russia, Britain and the United Nations.”

Associated Press : G-8 meets as economy storm clouds thicken

Reuters : World Bank chief urges swift actions on food by G8