Monday, October 20, 2008
Wednesday, August 13, 2008
Economists predict tough times ahead for US economy
Saturday, August 02, 2008
More bad news for Vegas
The new casino development was designed to include five hotels, including two built and operated under a joint venture with Morgans Hotel Group Co. It was also to have two theatres, a convention center and a retail ``high street,'' -- which is a joint venture with General Growth Properties Inc., the second- largest U.S. owner of shopping malls.
Las Vegas-based Boyd said it won't resume the project for three or four quarters while the U.S. economy slows and banks remain reluctant to lend.
``This is a very prudent, tough decision by management in light of the capital markets, the slowdown in Las Vegas and significant shareholder opposition,'' Joel Simkins, an analyst at Macquarie Securities USA Inc. in New York, said today.
``The delay of Echelon indicates the unprecedented downturn that Las Vegas is currently undergoing and the extreme difficulty in securing capital,'' Steven Kent, an analyst at Goldman Sachs Group Inc. in New York, said today in a note to clients.
Project shutdown leaves many workers worried
~ 800 ironworkers, carpenters, electricians, laborers and just about everyone else working on Boyd Gaming's partially finished resort left the job Friday, not knowing when or if they'd return.
Rapp, an ironworker, said he was hopeful there would be jobs at other projects. But he was also afraid the shutdown marked the end of a Las Vegas boom where jobs at decent wages were plentiful.
"It is kind of a scary thought, you know," Rapp said. "I don't think work will ever be as good as it was for the last 10 years, not for the middle class."
Rapp said he has a wife and five kids, three of whom are in college.
"They are going to have to start paying their own rent," he said.
My Note: In addition to the 800 jobs lost, Echelon was projected to add 10,000 new Las Vegas jobs when it opened in 2010 - Guess they will have to wait...
Though LV unemployment (currently at 6.5%) is already higher than the national average, If this trend continues (which I expect it will), we may have a 7.5% or better unemployment rate by the end of this year. Heck, we're already in a Recession: Las Vegas Economic Recession is here
Echelon Delay Could Have Major Economic Impact
The economic troubles could be a financial red flag at a time when other projects are facing financial woes. As Wall Street rethinks Las Vegas, jobs and housing could be hit hard.
That seems to be the perception on Wall Street. And when the projects do poorly, that means fewer jobs and houses that were expected to come online. Everything is tied together.
UNLV Professor Keith Schwer says when a project is delayed or cancelled suddenly, the impacts are felt beyond the Strip, "That's the nature of economics. It's like a cloth and each fiber is tied to the next."
Allow me to switch gears a bit -- LV Banking:
If you recall,, I warned you about SilverState Bank last weekend (excerpts below):
"Andrew McCain, son of Republican nominee John McCain, has resigned from Silver State Bank's board of directors this weekend. "
"Would a banking failure under son McCain's leadership look bad for dear old dad's election prospects? Hmmm... Well, I suggest you keep an eye on Silver State Bank -- word on the street is: they are not doing well."
"Take a look at the Bankrate and Safe and Sound ratings for Silver State Bank, Henderson Nevada: One Star (The Lowest Possible Rating) and 5G (Lowest Possible Rating)."
"I can only imagine the FDIC is working disaster/cleanup plans and decided it's probably time for Andrew to get out of the picture before the bomb goes off. "
Well, based on news reports today, it looks as if we're getting closer to the implosion:
Bank reports $62.7 million loss, replaces key officials
Silver State Bancorp, the $2 billion-asset holding company for the similarly named Henderson bank, lost $62.7 million in the second quarter and replaced its CEO as the number of bad loans grew huge.
Michael Thorell, 42, former president of an Arizona bank that Silver State acquired, was named acting CEO, replacing Corey Johnson, 50, who resigned.
The board named Phillip Peckman, 59, acting board chairman to replace Bryan Norby, 51, of Boise, Idaho.
Thorell declined to comment on Johnson's resignation. Attempts to reach Johnson were unsuccessful.
Silver State shares dropped 30 percent, or 38 cents, to 90 cents in heavy trading on Nasdaq following the announcements. Its shares hit a 52-week high of $24.10 last summer
Michael Threet, chief operating officer and chief financial officer, said the quarter's financial numbers stem from "the severe economic downturn in our nation, in our region and in the real estate values in the markets we serve."
Silver State's nonperforming assets, which include bad loans, were 83 percent larger than the total of reserves it set aside for problem loans plus its tangible equity or ownership interest in the company.
The company has been trying to raise $40 million in additional capital since June 5. It has been difficult to raise capital, because "all of the capital raised in the first quarter (for commercial and investment banks) is under water," Threet said. -- to increase deposits, the bank recently offered 4.25 percent on some certificates of deposit.
Moving on to LV Housing:
HousingTracker.net is reporting some rather awe inspiring numbers for Las Vegas today:
Inventory (28,581) continues to grow while Median prices plunged a dramatic - 30% YoY.
Additionally, RealtyTrac is showing that 36,161 homes are in some state of foreclosure for Clark County -- about 1/2 of the numbers are in preforeclosure, 1/4 in auction and another 1/4 Bank Owned.
LV Industrial Market:
Vegas Industrial Vacancy at 7.7%, Heading to 9%
LAS VEGAS-An industrial building boom than began in better economic times has been overwhelming the now tepid market over the past year or so, elevating vacancy to 7.7% from 4.5% one year ago, according to the latest report from Applied Analysis, a locally based business advisory that tracks the commercial market. Company principal Jeremy Aguero predicts the rate will rise to approximately 9% in coming quarters before demand rebounds and vacancy begins falling again.
The Las Vegas industrial market continues to be impacted by a declining economic climate, elevated fuel pricing for regional distributors, and increased caution on the part of business decision makers,” he says. “Company expansions and relocations are much more limited today than any point during the past five years.
Other LV News:
LVSands Corp. Trimming Las Vegas headcount by 1,500 --“through attrition, not layoffs”-- as part of a plan to find between $70 and $90-million in annual savings in the market. “It’s a challenging market that could continue for some time,” he said.
Businessman drops out of Tropicana bidding -- A New York developer whose group had offered $950 million to buy the Tropicana Casino and Resort says they're no longer interested. Joseph Palladino tells The Press of Atlantic City his group is looking at other casino properties in Atlantic City and Las Vegas, but no longer wants the Tropicana. The Tropicana has been for sale since last December
Airlines sound alarm for Vegas tourism -- Airlines serving McCarran International Airport have issued the bleakest economic forecast yet for Las Vegas, recommending that officials reconsider the need for a terminal that is under construction because there may not be sufficient tourism traffic to justify it. The airlines’ message to Las Vegas: The industry will not quickly recover from the tourism decline wrought by a combination of higher fuel prices and a sputtering economy.
McCarran Flier Count Dips 7 Percent in June -- Passenger counts at McCarran International Airport fell 7 percent in June, another indication that the nation's shaky economy is undermining the leisure travel industry. McCarran's top five carriers all posted declines in June, including Southwest, the No. 1 airline in Las Vegas and the only major domestic carrier making more money than it spends.
Casino bankruptcies making gaming sector a real gamble -- Already, casino owners such as Tropicana Entertainment LLC, Legends Gaming LLC and Greektown Holdings LLC have all gone bankrupt this year, but more are teetering on the brink, too... Herbst Gaming Inc. popped up on Bankruptcy Insider's Zombie Watch list three months ago... Even gaming giants Harrah's Entertainment Inc. and Station Casinos Inc. aren't immune. Moody's slashed the ratings for both on July 17 to B3, citing a deterioration in the Las Vegas gaming markets.
LAKE LAS VEGAS: Bankrupt project still alive -- tries to borrow $127 million. So what does one of the largest bankruptcies in Nevada history look like from street level?
On Monday, a Las Vegas bankruptcy judge will hold a hearing to determine whether Lake Las Vegas should be allowed to borrow $127 million from a Wall Street investment banking firm.
Company officials say they need the money to pay for repairs to the 2-mile-long man-made lake and maintain payroll, employee benefits and day-to-day operations. The company employs 260 workers, mostly for its golf courses.Rapoport said this bankruptcy "might well be" the largest Nevada has ever seen... Already it's large enough to prompt wild speculation about the city of Henderson getting dragged into bankruptcy, too. But city officials literally laugh that off.
It looked like business as usual Thursday morning at Lake Las Vegas. Golfers golfed. Mowers mowed. Waterfalls fell... But there wasn't much business.
At 10 a.m., a single player had the tables to himself at Casino MonteLago. The nine other people in the 40,000-square-foot casino confined themselves to the slots.
Outside, MonteLago Village was a ghost town of boutiques, coffee shops and high-end eateries...
Bottom line:
I feel the last few sentences above capture the Las Vegas condition/situation quite nicely, and believe we're much closer to the beginning of this unprecedented LV economic downturn than we are to the end.
You may want to hold on to your hat, because this wild downturn will likely get quite ugly in the not too distant future... As you'll see when the significant casino layoffs begin - and soon.
Again, going back to 1970, there has only been ONE OTHER time (since this recent economic downturn) where gambling revenues actually fell -- in the aftermath of the Sept. 11 terror attacks. During that timeframe (2001-2002) gaming revenue fell 1 percent. Today, LV gaming revenue is down ~ 6% for the year (16% just last month), but we've yet to see massive layoffs experienced after 9/11.
Are things different this time around? I wouldn't bet on it, as you 'd probably lose to the house - the layoffs are coming... and probably just in time for Christmas 2008.
With that, I hope you have a great weekend!
Randy
Saturday, June 14, 2008
Las Vegas Downturn Gathering Momentum
The Las Vegas Economic Downturn Has Started
Las Vegas's Economic Downturn Getting Worse
Today's update will highlight some of the more recent LV economic woes, illustrating that the issues are gathering momentum and won't end anytime soon.
Las Vegas economy looks like busted flush
On the surface, the Las Vegas economy looks dangerously like a busted flush.
As if the housing crisis wasn’t bad enough, hotel occupancy is down, visitors are spending less, commercial projects are running into trouble and convention revenues are dwindling.
Even the city’s casino operators, traditionally seen as relatively recession-proof, reported a sharp downturn in their fortunes in the first quarter, in part because they have expanded their leisure and retail offerings, which are more sensitive to the fortunes of the broader economy.
Harrah’s, the world’s largest gaming group, with eight casinos on The Strip, including Caesars Palace, reported a first-quarter loss of $187.8 million after what Gary Loveman, its chief executive, described as a “lousy” March. The Tropicana resort filed for bankruptcy protection this month because it could not sustain its debt payments. Since November, shares in Las Vegas Sands, the owner of the Venetian and Palazzo resorts, have fallen by 38 per cent, while MGM Mirage, which controls Bellagio, Mirage and eight other Strip casinos, has dropped by 42 per cent.
But there are still $36 billion of new hotel, gambling and housing resorts being built, including an entire quarter-mile stretch at the centre of The Strip.
If recent developments are anything to go by, the chances are that a good portion of the new corporate construction will run into difficulties and some will be scrapped.
LAS VEGAS ECONOMY: Gaming revenues tumble again
The slumping national economy has affected the bottom line of Nevada casinos much like what happened in the wake of the terrorist attacks of Sept. 11, 2001.
For the fourth straight month and the fifth month out of the last six, gaming revenues decreased as gamblers cut their discretionary spending.
The gaming win in April was just above $1 billion statewide, a 5.05 percent decrease compared with $1.053 billion won from gamblers in April 2007.
Frank Streshley, the control board's senior research analyst, said the amount casino customers wagered on slot machines declined for the sixth straight month, an economic indicator that shows casino customers are spending fewer dollars.
"You have to assume high gasoline prices have cut into people's budgets," Streshley said. "You can go through every reporting market, and there are declines with what people are spending on slot machines. It falls in line as to how people are spending less in other areas as well."
Airline cuts to squeeze Las Vegas resorts
Airline capacity cutbacks combined with U.S. economic softness look set to take more money off the tables at Las Vegas Strip resorts after the summer, likely forcing room rate discounts on top of already declining visitor rates.
Work is under way to add more than 40,000 luxury hotel rooms to the gambling corridor -- about one-third more than today -- but it looks as though operators will have trouble filling them up.
The Airline cutbacks will likely mean higher fares for remaining seats as well as more time-consuming travel routes, Jacob said, which could deter potential Las Vegas visitors
Hooters Casino Sale Termination Spells Trouble For Owners
The ownership of the Hooters Casino Hotel in Las Vegas has found itself in deep financial trouble as a plan to sell the resort has fallen through. 155 East Tropicana, an investment and holding company, was forced to terminate the potential sale of the casino to Hedwigs Las Vegas Top Tier after the purchaser failed to make a $500,000 payment due by a June 6th deadline.
Although Hedwigs' offer was unsolicited, and despite Hedwigs forfeiting a non-refundable $5.5 million in deposits and payments for extensions, East Tropicana still finds itself in an untenable position regarding its debt.
Moody's Investment Service has downgraded Tropicana's corporate rating and the rating on its secured notes, as well as its default probability.
Lenders give Herbst Gaming more time to repay debts
Herbst's reliance on budget-conscious customers drives down profits
Herbst Gaming reached an agreement with lenders this month that buys the company more time to work out a deal with them and potentially avoid bankruptcy court despite the company’s worsening finances.
The agreement includes suspending payments on bond debt until Sept. 30. Most of the company’s $1.1 billion in debt is in bank loans, which carry less risk than corporate bonds.
The company’s slot route and small casino business benefited for many years from Las Vegas’ population growth but is now feeling the brunt of the slowdown, as Herbst caters to budget-conscious customers who are more affected by a downturn, Farrell said.
Herbst had $16.5 million in losses in the first quarter due to higher gas costs and the economic slowdown, with slot route operating profit down 6 percent in the first quarter compared with a year ago and the company’s casino business down 5 percent over the same period.
Casino Bonds Crush Harrah's as Recession Hurts
Casino bonds are generating the worst returns for investors as companies from Apollo Management LP's Harrah's Entertainment Inc. to Herbst Gaming Inc. risk bankruptcy under the weight of their debt.
High-yield, high-risk casino bonds, which returned 10 percent during the last recession in 2001, are the biggest losers this year, according to Bank of America Corp., as consumers get slammed by record gasoline prices and the worst housing-market slump since the Great Depression. The debt has lost 4.4 percent, compared with junk bonds' average return of 1.4 percent.
Until the latest economic slowdown, casino bonds had gained a reputation for being recession-resistant, said Bruce Monrad, who manages $1.2 billion of below investment-grade debt at Northeast Investment Management Inc. in Boston.
Herbst Gaming, operator of 8,400 slot machines in Nevada, stopped paying interest last month, Tropicana Entertainment LLC and Greektown Casino LLC filed for bankruptcy in May and bond prices show Harrah's and Station Casinos, which piled on more than $25 billion of combined debt in the past year to go private, are also at risk of default.
High oil prices and falling property values are curbing spending on gambling at a time when casino operators have committed to spend more than $10 billion through 2009, according to Deutsche Bank AG. They invested $7.8 billion last year.
Casinos took on a record debt load before the economy's latest slowdown.
``This would probably be the most leveraged'' the gaming industry has ever been, said Michael Paladino, an analyst at Fitch Ratings in New York. ``There's going to be an increase in defaults.''
Moody’s offers glum Vegas outlook
Bond rating agency Moody's Investors Service released its most negative report yet on the Las Vegas Strip Wednesday.
Moody's analysts say this downturn will have a more negative effect on earnings than the period following the Sept. 11 terrorist attacks and will dampen earnings for the next 12 to 18 months.
While that seems hard for many to believe (witness many fewer layoffs and the simple fact that travelers are still free to travel) Moody's offers an able argument, already hinted at by analysts and economists.
"Las Vegas largely sidestepped trouble by using price discounts to lure skittish travelers," the report said. "Now, with consumers' anxieties centered on their economic well-being, that strategy is unlikely to be as effective. Las Vegas operators are preparing for an extended period of weak demand will have to turn to other levers, such as reduced capital spending or less aggressive financial policies, to hold up through the next year or more."
Las Vegas Office vacancies soar to seven-year high - result of 4,000 office jobs lost in 2007
Southern Nevada's office market further softened during the first quarter as a cooling economy ratcheted up unemployment resulting in a glut of available inventory. The valley had a 13.4 percent, first-quarter vacancy rate, 2.5 percent more than a year ago, and higher than the 2001 recession peak vacancies, Colliers International Las Vegas reports.
"There is no doubt that the Las Vegas office market is struggling through the current sluggish economy," Colliers' managing partner Michael Mixer said. "In 2007, office employment in the Las Vegas area decreased by 4,000 jobs."
Vacancy rates could creep higher in the future with 1.4 million square feet of new projects under construction in the first quarter, such as Centra Realty's $20 million, 100,000-square-foot Seven Series at Hughes Airport Center at 740 Pilot Road. There is also another 3.5 million square feet planned for future development, including an eight-story, 173,210-square-foot Class A office tower addition inside Hughes Center at 3893 Howard Hughes Parkway.
While demand for office space over the past two years was strong, it simply couldn't keep pace with new supply.
Las Vegas Restaurants implement survival techniques as business slows
Stumbling home sales and slipping resort earnings grab all the headlines these days, but the housing and hotel sectors aren't the only industries suffering from faltering consumer spending.
Restaurants are enticing fewer customers as well.
Industry members credit the restaurant slump to slower spending among three segments: Local consumers struggling with falling home equity and higher fuel prices; executives reining in corporate expense accounts for hurting businesses; and a 6.6 percent decline year over year in March in the number of local visits from conventioneers, who typically spend lavishly on meals out while in town.
State numbers on taxable sales reveal the dip in food-and-beverage spending.Taxable sales among restaurants in Clark County have fallen three of the past 12 months, including a 10.3 percent drop in February year over year.
Closing:
As I've pointed out before, this downturn will be much larger than any that have come before it. Gaming revenues have fallen ONLY ONCE since 1970 -- in the aftermath of the Sept. 11 terror attacks (they dropped a mere 1 percent from 2001 to 2002).
Thus far, compounded by the housing crisis, higher debt loads, higher gas prices, higher airfare/reduced flights, increasing layoffs, reduced credit availability, etc, the gaming losses have been far worse than that experienced in 01/02.
As stated in a previous post of mine: Las Vegas Preforeclosures Hit Record:
“ Las Vegas lives off the margin. Good times, fat margins; lean times, no margin. LV has no plan B, there's nothing to take up the slack from a decrease in visitor volume. Even dollar rich foreigners aren't going to hold up employment that is based on a volume service industry and housing construction.”
Regards
Randy
Monday, June 09, 2008
New Stimulus Package: Infrastructure Projects?
" Logic reasoning leads us to believe it has now become official Government policy to try to inflate our way out way out of this financial crisis, so lets assume a master plan exists to bail out numerous banks/financial institutions and rescue the bond, housing and various other markets. Let’s then go on to assume a plan exists to eventually ramp up numerous government infrastructure and military/industrial projects to promote US job growth (in the midst of our deep/dark recession). "
Wednesday, May 28, 2008
US Economic Outlook 2008-11+
Note: If it's hard to see/read the briefing below, please click on this link and view the updated briefing in full-screen
Best regards
Randy
Tuesday, May 27, 2008
Airlines: More problems for Las Vegas Strip
The nationwide economic downturn, combined with extremely high fuel prices and declining profit margins, has caused five airlines with services to/from Las Vegas to file for bankruptcy or cease operations since December. Additionally, US Airways recently announced it would reduce flights servicing the valley by some 20% come August, while American stated it would cut some flights after the peak season is over.
All this bad news leads to less airline competition and fewer available seats, that when combined with new fuel surcharges and luggage fees will soon put an end to cheap flights to and from Las Vegas -- reducing the number of tourists visiting and cutting into the discretionary budgets of those who decide to come anyway -- compounding the situation we're already starting to see:
- Gaming revenue falling
- Casino layoffs starting
- State tax revenue down 9%
"It wouldn't surprise me to see a lot more capacity drawbacks in Vegas over the next year," said Darryl Jenkins, former director of the George Washington University Aviation Institute. "This isn't an economic cycle. This is a cost increase. It is the worst one any of us have ever seen."
Though Las Vegas was able to thrive in previous economic downturns, I believe this one is very different and our non-diversified gaming economy, which is completely reliant on the discretionary spending of vacationers, will get hammered this time around.
The Las Vegas Economic Downturn Has Started
Economic Troubles Affect the Vegas Strip
Regards
Randy
Saturday, May 17, 2008
Las Vegas Valley Economic Index Decreases
Las Vegas, regarded in the past as a city that has been somewhat immune to downturns in the national economy, failed to make Forbes.com's list of the nation's top 10 recession-proof cities.
Clark County business activity index peaked in October and has drifted lower since.
Recent activity has been "rather tepid," especially compared with the torrid pace of 2005 and 2006, said local economist Keith Schwer, director of the Center for Business and Economic Research at University of Nevada, Las Vegas .
The county's tourism index turned in another "lackluster" peformance for February, even with an extra day in the month for leap year, he said. Evidence suggests that some weakness lies ahead, reflected in lower average room rates and slower convention bookings.
Clark County gross gaming revenue dropped 4 percent from the same month in the previous year to $866 million and taxable sales declined 3.1 percent to $2.76 billion
(SIDE NOTE: This really is Huge, because gambling revenues have fallen ONLY ONCE since 1970 -- in the aftermath of the Sept. 11 terror attacks they dropped a mere 1 percent from 2001 to 2002.
YoY Snapshot of several leading economic indicators below:
- New Home Permits (Down 80%)
- New Residents (Down ~20%)
- Total Employment (Down slightly)
- Unemployment Rate (up over 1%)
- New Home Sales (Down 30%)
- Commercial Permits (Down 50%)
- Existing Home Sales (Down 30%)
- Median New Home Price (Down 18%)
- Taxable Sales (Down 3%)
- Gaming Revenue (Down 2%)
- Visitor Volume (Down 1.5%)
- McCarran Passenger Volume (Down ~2%)
The Las Vegas Economic Downturn Has Started
Regards
Randy
Saturday, May 10, 2008
"Goldilocks economy" news roundup
Citigroup aims to shed between $400 billion and $500 billion of its $2.2 trillion in assets and grow revenue by 9 percent over the next few years as it tries to rebound from massive losses tied to deterioration in the credit markets.
The $500 billion in so-called "legacy assets" the bank intends to sell off or allow to mature include yet-to-be-named noncore businesses, as well as assets in Citigroup's securities and consumer banking segments. That includes mortgages and other real estate-related holdings.
Citigroup has already begun its winding-down process by writing down about $38 billion in soured debt since last summer, and setting plans to reduce its residential mortgage assets by $45 billion over the coming year. It has also sold businesses including CitiCapital, CitiStreet and Diners Club.
These moves arrived on top of huge stock sales to outside investors, including government funds in Singapore and the United Arab Emirates.
While others agreed that Citi had to sell assets, not everyone was certain how easy such a sale would be.
"I'm not sure they have half a trillion in good assets that someone wants to buy. But they're doing the obvious — they have no choice," said R. Christopher Whalen, managing director of consulting firm Institutional Risk Analytics.
A.I.G.’s Quarterly Loss Depresses Dow
The insurer American International Group helped send the Dow Jones industrial average down about 120 points after posting a $7.8 billion first-quarter loss that rekindled anxiety about the strained state of the global financial system.
“The news came as something of a surprise to some and a wake-up call to most that the financial service companies are not yet out of the woods,” said Philip J. Orlando, chief equity market strategist at Federated Investors
Delphi Corp. Reports 1st-Quarter Loss of $589 Million
Delphi Corp., the bankrupt former auto-parts subsidiary of General Motors Corp. said its first- quarter loss widened to $589 million as sales to its former parent declined.
The supplier, which failed to leave court protection as planned last month when an investor group pulled out, said shipments to GM fell 18 percent. The automaker's output in North America has been curtailed by a strike at supplier American Axle & Manufacturing Holdings Inc. that began on Feb. 26.
Delphi last month cut its 2008 earnings forecast because of falling U.S. vehicle sales. The supplier said today it will seek to increase the limit on its debtor-in-possession credit facility to $4.35 billion from $4.1 billion, subject to court approval
Gas jumps above $3.67, oil passes $126 on Venezuela concerns
Oil rose above $126 a barrel for the first time Friday, bringing its advance this week to nearly $10, as investors questioned whether a possible confrontation between the U.S. and Venezuela could cut exports from the OPEC member. Gas prices, meanwhile, rose above an average $3.67 a gallon at the pump, following oil's recent path higher.
On Friday, The Wall Street Journal published a report that suggested closer ties between Venezuelan President Hugo Chavez and rebels attempting to overthrow Colombia's government. Chavez has been linked to Colombian rebels previously, but the paper reported it had reviewed computer files indicating concrete offers by Venezuela's leader to arm guerillas. That appears to heighten the chances that the U.S. could impose sanctions on one of its biggest oil suppliers.
Oil prices also were boosted Friday by the dollar, which declined against the euro. The European Central Bank said it was unlikely to consider interest rate cuts to cool the strong euro against the slumping dollar.
FedEx Lowers Profit Outlook on Higher Fuel Costs, Lower Demand
FedEx Corp., the second-largest U.S. package-shipping company, said fourth-quarter profit will miss its forecast after surging fuel prices raised costs by at least $100 million more than estimated.
Yesterday's forecast marked the second time FedEx pared its outlook this fiscal year under the strain of the rising price of oil, which set records each day this week, and a possible U.S. recession. United Parcel Service Inc., the largest U.S. shipper, last month lowered its forecast as well.
High fuel prices hurting airlines more than 9/11:
"The world has changed dramatically for the airline industry," said Scott Dickson, senior vice president and chief marketing officer at Oak Creek, Wis.-based Midwest Air Group Inc. (NYSE: MEH), which operates Midwest Airlines.
"This is probably a bigger shock to the airlines' systems than what happened after 9/11. This is going to bring some very fundamental change in the industry in terms of its size, its shape and its character, especially if these phenomenally high fuel prices continue for any length of time."
Fuel prices for airlines have risen 200 percent since 2000 and more than 60 percent over the last year, said Dickson, who spoke Thursday at the Public Policy Forum's Viewpoint luncheon at the Hilton Milwaukee City Center.
Eight airlines recently have gone out of business, in large part because of fuel costs, according to Dickson.
"There are carriers that have had aggressive growth plans that are now announcing zero or negative growth plans," he said. "I don't think any carrier in the industry has a growth plan for the next 18 months."
Housing Bailout Bill Seems to Be on Shaky Ground
Even as the housing foreclosure crisis deepens, legislation to rescue homeowners and their lenders appears to be in significant political jeopardy.
The bill, which passed the House on Thursday, is quickly becoming a casualty in a battle between the Bush administration, which says it opposes any taxpayer bailout that would only further encourage risky lending practices, and Democrats who say that homeowner assistance is the only way to contain the damage to the broader economy.
The Bush administration on Friday said it would only support legislation that did not require taxpayer funds. The Congressional Budget Office estimates that the House-passed measure would refinance as many as 500,000 homes over the next five years, at a cost to taxpayers of about $2.7 billion.
“Taxpayers shouldn’t be taking on the risk of foreclosure,” said Tony Fratto, a White House spokesman.
Under the voluntary plan that was approved by the House, borrowers at risk of default would be able to refinance their loans at a more affordable 30-year fixed-rate mortgage insured by the Federal Housing Administration.
In exchange for avoiding foreclosure, lenders would have to agree to reduce the principal balance. The borrowers would pay a monthly insurance fee that would go to a fund to protect taxpayers from losses. A consensus was emerging on Friday that if Congress adopted a measure, it would likely be far more modest than the one passed by the House, which itself has been criticized by housing groups for being too small.
Fannie to Aid Underwater Loans
Fannie Mae is preparing to introduce by midyear a program of refinancing mortgages for people who owe more than the current value of their homes, a situation known as being "underwater."
The plan is the latest twist in efforts to contain the surge in foreclosures on homes in much of the U.S. It differs from a bill approved by the House on Thursday that would authorize the Federal Housing Administration to insure loans for distressed borrowers only after the lender has written down the principal -- something many lenders are reluctant to do. Fannie's refinance plan would result in new loans of equivalent size, leaving the borrower underwater but giving him or her a lower monthly payment or at least a fixed rate.
We're saying to the consumer, 'You're not trapped any more,'" said Jeff Hayward, a senior vice president at Fannie.
The program will allow refinancing loans of as much as 120% of the property value. Fannie officials project that 150,000 households could qualify for such refinancings.
Rather than reducing the principal due on the loan and taking an immediate loss, Fannie is betting that these people will be able to keep up on their new loans and prices will recover.
The Ticking Credit Card Time Bomb
My guess is that many Americas continue to run up massive credit card debt because they have little intention of every paying it off. Since many who are underwater on the home loans, and behind on the auto and student loans see bankruptcy as a foregone conclusion, they see no downside to pilling on as much debt as possible while the taps remain open.
Those choking on credit card debt may also be taking cheer from the gathering government campaign to bail out over-leveraged homeowners. The sheer numbers of who are afflicted with spiraling monthly payments will make credit card relief a potent political issue for crusading Congressman and Presidential candidates. After all, there are few fundamental differences between those who borrowed too much to buy houses and those who made the same mistake with consumer goods. If the government bails out the former why not the latter? In fact, one reason some homeowners have such large mortgages is that they consolidated their credit card debts into their mortgages each time they refinanced. Why should renters be forced to pay off their credit card debts while homeowners have theirs forgiven?
Soon, as credit card delinquencies rise and losses on pools of securitized credit card debt mount, those supplying the credit will finally get wise to the fact they will never get their money back. As a result the market for such debt will dry up even more quickly than did the market for subprime mortgages. Cards will therefore be much harder to come by and will have much lower limits then they do today. Limited to only the cash in their wallets, Americans will finally be forced to dramatically curtail their spending, and the recession will finally gather serious momentum.
Randy
Thursday, May 08, 2008
Schiff in US Recession Debate
(Click start twice)
Tuesday, May 06, 2008
Economic Troubles Affect the Vegas Strip
Quote 1:
"You're certainty about the fragility of Vegas in the face of a national economic downturn belies a level of profound ignorance to it's past. Stated in terms more suited to you, betting against Vegas is a sucker bet. "
Quote 2:
"Randy, the level of certainty you work yourself into regarding things you know absolutely nothing about is fun to watch, in the same way one watches "Jack Ass". Whether or not that is at cross purposes to your own best interest will be for you to decide."
Ouch! Yes, pretty harsh indeed... But I was un-fazed, because I knew this national economic downturn would be bigger than any seen in many decades, and that the final outcome would be very difficult for our non-diversified Las Vegas economy...
Well, it now looks as if I may be vindicated, as the tide is beginning to turn...
Take my recent (April 08) piece which listed some downturning indicators; illustrating that all is not well in Las Vegas: The Las Vegas Economic Downturn Has Started
And just today the the New York Times released an article that backs me up: Economic Troubles Affect the Vegas Strip
For decades, this gambling center seemed nearly immune to the economic swings of the rest of the country. But these days, the city built on excess is seeing a troubling sign: moderation.
Gambling revenue and hotel occupancy are down. Resorts are slashing room rates and offering coupons or free nights. Casino operators are firing hundreds of workers, and their stock prices have plummeted since October. Credit is drying up for hotel and condominium projects planned before the slowdown arrived.
Even the people still coming to Las Vegas are spending less. Julia Lee, 27, of Los Angeles said she normally brings $10,000 on her trips here to play blackjack. As Ms. Lee picked up show tickets the other night, she said she had brought less than half that on this trip. “My parents are in real estate, and we’re worried,” she said.
So are this city’s hoteliers, retailers, wedding chapel operators and anyone else who depends on the extravagance of gamblers and tourists. The spending declines are relatively modest, a few percentage points here and there. But Las Vegas has a huge inventory of new casinos and hotels due for completion in the next few years, and a long national recession could send the city reeling.
The Las Vegas outlook would be far worse if not for foreign visitors. They are taking advantage of the low dollar to savor the fare of celebrity chefs like Alex Stratta and to snap up goods that might cost twice as much in Europe.
To manage the slowdown, Las Vegas is revving up an overseas marketing campaign, and in the United States, it is pitching spontaneous Vegas escapes. “Do it without thinking!” says one television spot.
But representing only 13 percent of visitors, foreigners can take up only so much slack. Deutsche Bank recently started foreclosure on a $760 million construction loan for the Cosmopolitan Resort and Casino, a partly built project in the heart of the Las Vegas Strip.
Crown Las Vegas, a bullet-shaped hotel and casino resort that was supposed to become the tallest building in the city, was scrapped a few weeks ago for lack of financing.
One of the most prominent Las Vegas casino operators, Tropicana Entertainment, said Monday it would seek bankruptcy protection. The company, beset by financial difficulties, made cutbacks at a casino in Atlantic City that prompted New Jersey regulators to strip it of its license there; that set off a cascade of fresh financial problems.
Other multibillion-dollar Las Vegas projects are facing delays or have been put up for sale because of tightening credit and changing Wall Street perceptions about the city. The city’s resort properties already have 130,000 rooms, and Wall Street — which financed much of the recent boom — is worried that Las Vegas cannot absorb the 40,000 more that are on the drawing board or under construction.
“In this market, it is not good business to be confident,” said Jan L. Jones, a senior vice president at Harrah’s Entertainment and a former Las Vegas mayor. “I’ve never seen an economy like this nationally. Nobody knows how deep what nobody wants to call a recession will go.”
Historically, Las Vegas has been resistant to recessions, entering them later and exiting them sooner than the country at large. Gamblers, particularly high rollers, tend to play no matter which way the economic winds are blowing.
But executives here worry this recession could be different from the last two — in 1990-1 and 2001 — when consumer spending was propped up by easy credit. Now credit is drying up. And high gas and food prices, declining home values and rising unemployment are keeping many Americans closer to home.
More important, over the last two decades Las Vegas has shifted from a destination dominated by gambling to one with more appeal to middle-class shoppers, diners, golfers and others who can afford brief splurges. Whereas gambling represented 58 percent of revenue for Las Vegas Strip resorts in 1990, it represented only 41 percent of revenue in 2007, according to a Deutsche Bank report.
As gambling was legalized in more parts of the country in recent years, Las Vegas was forced to expand its own offerings to keep growing. It worked, but it made the city more susceptible to recessionary declines in disposable income.
“Las Vegas is now as vulnerable as other communities,” said J. Terrence Lanni, chairman of the board of MGM Mirage.
Hotel occupancy was down for January and February, the most recent figures, by 1.5 percent, despite average daily room rates 3.8 percent below the year before. Gambling revenue in the Las Vegas metropolitan area for the same period was down about 4 percent.
“It’s accelerating to the downside,” said Bill Lerner, a senior gambling analyst at Deutsche Bank who lives in Las Vegas. “Las Vegas’s economy is more reflective of the general economy than ever.”
Las Vegas visitors said in recent interviews that they were spending less than in the past.
Rita Keene, a retired insurance risk manager from Collinsville, Ill., said she has been coming to Las Vegas several times a year since 1978 and had never set gambling limits. This year she is betting no more than $300 a day at the slot machines, and she is not going to shows.
“We have investments, and you know what the stock market has been doing,” she said while putting quarters in a slot machine at the Orleans casino. “My husband and I have even talked about this maybe being our last time.”
Closing:
Allow me to repeat my 2006 closing post (from: Las Vegas -- A House of Cards) below:
"Once the LV layoffs begin, more homes will go into foreclosure, as people won’t be able to make their mortgage payments. Then businesses outside of the casino industry (local restaurants, retail, home improvements, beauty, health care, etc) will also begin to feel the pain. Eventually, a chain reaction of dominoes will begin to fall, and ultimately the number of outbound U-hauls will vastly exceed those inbound..."
Well, Nevada is already leading the nation in both foreclosures and price declines ( Nevada Tops in Foreclosures AND Price Declines! ), so as tourism continues to fall and the layoffs increase, I expect we'll see a far worse economy down the road...
Bottom Line:
The Las Vegas downturn has just started and we're merely seeing the opening salvo today.
Better reserve that U-haul now!!!
Regards
Randy
Thursday, April 24, 2008
Thursday's Economic News Roundup
Wall Street rallied Thursday after the government's jobless claims data and Ford Motor Co.'s first-quarter results helped reinject some optimism about the economy into the market.
The Dow Jones industrial rose more than 80 points as investors focused on the Labor Department data showing weekly unemployment claims dropped and word that Ford had a $100 million profit in the first quarter.
Investors were also able to set aside any concerns about another drop in factory orders for big-ticket manufactured goods and weak forecasts from Amazon.com Inc. and Starbucks Corp.
OK, I'll give the indices credit for this, but what of other news today?
New home sales plunge to lowest level in 16 1/2 years, prices drop by largest amount in 38 years
Sales of new homes plunged in March to the slowest pace in 16 1/2 years as a two-year housing downturn extended into the start of another spring sales season. The median price of a new home in March compared to a year ago fell at the fastest clip in 38 years.
Sales of new homes dropped by 8.5 percent last month to a seasonally adjusted annual rate of 526,000 units, the slowest sales pace since October 1991, the Commerce Department reported Thursday.
The median price of a home sold in March dropped by 13.3 percent compared with March 2007, the biggest year-over-year price decline since a 14.6 percent plunge in July 1970.
As financial markets grow increasingly worried about inflation pressures, Freddie Mac reports that fixed-rate mortgages move higher--Rates on 30-year mortgages now top 6%
"Average rates on mortgages increased across the board this last week as the most recent economic data raised inflationary concerns in the capital markets," said Frank Nothaft, Freddie Mac's chief economist.
Fueling those concerns was a bigger-than-expected 1.1% jump in wholesale prices and a renewed surge in energy costs, which have pushed gasoline and crude oil prices to record levels.
US Airways, following Delta & Northwest, Reports Loss
US Airways Group Inc. said Thursday it swung to a loss in the first quarter, punished like other airlines by the rising cost of jet fuel.
US Airways said it lost $236 million, or $2.56 a share, in the January-March period, compared with a profit of $66 million, or 70 cents a share, a year earlier. Excluding special items, the net loss was $239 million, or $2.60 a share.
US Airways' earnings report came a day after Northwest Airlines Corp. and Delta Air Lines Inc. reported combined losses of more than $10 billion. Most of those losses came on write-downs to reflect a decline in market value.
Motorola 1st-qtr loss widens as mobile-device sales plunge and it forecasts 2nd-qtr loss
Struggling cell phone maker Motorola Inc. disappointed investors Thursday when it posted a wider first-quarter loss and failed to meet revenue forecasts.
The suburban Chicago company, which is in the midst of a massive reorganization that includes splitting itself into two publicly traded companies, said it lost $194 million, or 9 cents per share, for the quarter that ended March 31.
Sales fell about 21 percent to $7.45 billion, down from $9.43 billion a year ago.
Microsoft reports 11 pct profit drop
Microsoft Corp.'s third-quarter profit fell 11 percent, the software maker reported Thursday as executives renewed their warning that they may go hostile or walk away from their $44 billion-plus offer for Yahoo Inc. if Yahoo doesn't agree to a deal by Saturday
Sales of Windows software were not as strong as Microsoft or analysts had predicted in the quarter, despite Microsoft's comments that sales of Vista licenses -- now at 140 million, up from the 100 million mark reached in January -- are on track.
Revenue in that division fell 24 percent to $4.02 billion.
American Express profit falls 6%; New York-based credit-card company slips as U.S. cardholders struggle to make their payments.
American Express Co.'s first-quarter profit slipped 6% as the credit-card lender saw more U.S. cardholders fail to make their payments, it said Thursday.
Like other lenders, the New York-based company has been writing off more loans as unpaid as U.S. borrowers struggle with slumping home prices, rising costs, and a less certain job market.
The company's total provisions for credit losses amounted to $1.27 billion, a 48% increase from the first quarter of 2007.
U.S. card services profit fell 19% to $523 million in the first quarter compared with the same period a year earlier, as profit from international card services rose 30% to $133 million.
The writeoff rate in U.S. card services, including both on-balance sheet cardmember loans and off-balance sheet securitized cardmember loans, increased to 5.3% from 3.7% a year ago - faster than the company anticipated.
United hikes fares 3% to 5%, blaming fuel costs; The second-largest U.S. carrier increases almost all of its domestic airfares for the third time in two weeks.
United Airlines, the second-largest U.S. carrier, raised nearly all its domestic airfares by 3% to 5% Thursday as it struggles to cope with soaring fuel costs.
The widespread increase is the third in a row initiated by United in just over two weeks, and will likely entice other carriers to follow suit. The Chicago-based carrier's last two attempts were quickly matched by competitors and remain in place in many markets.
The move comes just two days after Delta Air Lines Inc. Chief Executive Richard Anderson said domestic carriers need to raise tickets 15% to 20% just to break even at existing fuel prices.
"This is the most challenging financial period in the history of the industry," said John Heimlich, chief economist of the Air Transport Association. "Just at the same time we have this unprecedented surge in jet fuel prices with no end in sight, we're bumping up against a weakening economy."
My Thoughts:
Maybe I'm biased, but based on the news reports above, it certainly doesn't look like our economy is getting any better... Could the PPT and pundits possibly be trying to lull the cattle into a false sense of security while leading them to the slaughterhouse? Oh well, until the sheeple (cattle) pull their heads out of the sand there is really nothing I can do about it...
OK, last but certainly not least, here is a very good opinion article that I thought you would enjoy:
The U.S. Dollar has Been the Gold Bug’s Best Friend – Until the “Amero” Debuts
As all gold bugs know, gold’s historic rise since 2001 has largely been attributed to the dilution of the U.S. dollar. Trade deficits, government overspending and the more recent sub-prime mortgage debacle have all helped deflate the greenback while driving up the price of gold.
However, what would happen if the U.S. dollar just disappeared? How would gold and other hard assets be valued then?
This week the three NAFTA amigos, President George Bush, Prime Minister of Canada Stephan Harper and Mexican President Felip Calderon met to ram new polices down our throats which will impact gold and other commodity prices going forward.
The reopening of the North American Free Trade Agreement is the first strategic move toward a North American Union that will create a new currency to compete with the Euro.
On Tuesday, the U.S. dollar sank yet again with the Euro breaching the psychologically significant $1.60 mark for the first time.
It’s only a matter of time before the U.S. dollar collapses to the point of no return internationally. With the Fed unable to manage the slide with higher interest rates due to the economic slowdown in the U.S., the three amigos are setting up the chess pieces for the inevitable next move: the creation of a North American currency, the “Amero.”
The Hallmark of Bush’s presidency could very well be the creation of the Amero, the perfect solution and savior to the failing U.S. dollar. Whether it’s Bush or the next president, at some point in the not too distant future the dollar will be abandoned and a new game will begin.
International trade has already started to price commodities in Euros as foreign governments holding dollars have lost their shirts while holding Euros has increased their buying power.
The Euro was introduced with the same degree of stealth such that the citizens of Europe had little choice but to adopt it.
Some thought a European union was an impossible dream but now they have 27 nations under its authority with more members waiting in the wings.
The U.S. is already facing economic hardship which will only get worse. The Amero will be introduced to the American public as the administrations solution to recover from the current financial mess.
In Canada, the Canadian dollar has been trading at close to par for several months. Canadian politicians can easily sell the idea of the Amero by simply making promises of cheaper gas prices (Americans pay amongst the lowest prices in the western world.) Plus many Canadians who live near the border travel to the U.S. for major shopping binges buying assortment of much cheaper goods from dairy products, used cars, electronics and clothing. If they can get the same prices at home, the NAU will be an easy sell.
As far as the Mexicans are concerned well, doesn’t nearly everyone already speak Spanish from California to Florida?
In the interim, gold’s still got a long way to go so stay tuned. However be aware that the Amero will put the brakes on gold’s march as the illusion of strength and power will put confidence into the world’s latest fiat money system. Also know that in the history of mankind, fiat money systems have always failed. The U.S. dollar is the latest victim. Bill Ridley: jameswinston.com/
Best regards
Randy
Wednesday, April 23, 2008
Worse than a Recession?
Fed Underrates Inflation
Here John discusses the rapid growth of M3 (our money supply) and what we can expect to see in our economic future -- Severe Inflation, falling dollar (worth_less) and a severe recession (the worst business cycle since the great depression); "potentially" followed by a Depression
Friday, April 18, 2008
Professor Nouriel Roubini on US Recession
Part 1
Part 2
Part 3
Saturday, November 24, 2007
Will the Fed Cut Rates again on December 11?
If Federal Open Market Committee (FOMC) members were to center their December 07 rate decision around the basis of Treasury Secretary Paulson’s continually spouted “Strong Dollar Policy” there is absolutely no way they could make a rate cut, as the dollar is falling off a cliff and its rate of decent is increasing.
Bloomberg 24 Nov: The U.S. Dollar Index touched 74.484 yesterday, the lowest since the gauge started trading in 1973. The index tracks the value of the dollar against six major currencies, including euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc.
So what is happening in the financial realm and why is the dollar falling so fast? Well, a big part of the answer to this question relates directly to debt and the creation of money.
For those of you who don’t know, every dollar in circulation today was actually borrowed into existence and was created from nothing. For many years this creation of new money through debt was not a problem. As long as the debt could be adequately serviced and various conduits (banks) were open to/available to take on new debt, the system worked just fine.
Recently however, it has become abundently clear to our Federal Reserve Policy makers that massive US debt loads are proving very difficult to service, while at the same time our banking systems are having problems allowing for the creation of new debt (hence new money). This is all VERY BAD news that could cause a systemic implosion if not dealt with swiftly. Therefore, the Fed is monitoring this crisis closely and is lowering short term borrowing rates while injecting massive amounts of new money (through new bank debt) into the banking systems. This combination of excessive liquidity (monetary injections) and lower rates is causing the value of the dollar to plummet. See video below for a better understanding of this whole debt-to-money process (money as debt)
MONEY AS DEBT (~11 seconds to load)
Money As Debt Part 2
Video Summary: money is created through debt and in order to keep an economy expanding, debt loads must continually expand (increasing money supply) or else a deflationary environment sets in.
As previously stated: today, after many years of cheap/easy credit (much of it subsidized by foreigners--we used to suck up 80% of the world’s surplus savings) US debt loads are now at an all time high and adequately servicing this debt has become a huge problem.
A perfect example of this problem is the US housing market. Back in the heyday of our irrationally exuberant housing market, nearly anyone could qualify for a mortgage. We had >100% financing, super low teaser rate mortgages and even NINJA Loans (No Income, No Job, No Assets). All this easy money led to no-risk investment speculation and caused a huge new wave of home buyers (many who couldn't previously qualify). This led to supply/demand imbalances, which drove home prices up dramatically.
Today however, things are a bit different. As these initial teaser rates on millions of mortgages began to reset, servicing this additional debt became unbearable for many and defaulting was the only option. These defaults (in the $ tens of billions per month) eventually led to the collapse of several hedge funds, a significant tightening of lending standards and ultimately to a complete immobilization in the Securitized Mortgage Backed Commercial Paper market—where recent financial losses & bank write downs have been massive (yet merely the tip of the iceberg to date).
But, these write downs are only making matters worse, as each dollar of the losses eats into available bank capital, creating an additional burden to future lending, which tightens lending standards further, prevents the creation of new debt, and causes further downward price pressures on all those homes that sit unsold.
Additionally, part of the domino effect caused by reduced home sales (due to less available credit) is lowered sales volume at home improvement, furnishing and a myriad of other stores--cutting into business profits, leading to less work hours, increased layoffs, et cetera.
Ultimately, reduced credit leads to reduced money creation, which leads to reduced spending which leads to a deflationary environment.
That is where we are today… The beginning of a deflationary environment poised to implode the economy…
Well have no fear Ben Bernanke and the boyz are here!
In a 2002 speech before the National Economists Club in Washington, D.C., Ben Bernanke made it clear the Fed should do everything in its powers to prevent deflation: Deflation: Making Sure "It" Doesn't Happen Here
So, what are the tools Ben feels the Fed should use to prevent deflation?
Well, based on his comments, the Fed could cut rates to ZERO, while simultaneously they could print/inject massive amounts of fiat money into the system. See excerpts of the link below (Note: Emphasis is mine)
“ But suppose that, despite all precautions, deflation were to take hold in the U.S. economy and, moreover, that the Fed's policy instrument--the federal funds rate--were to fall to zero. What then? In the remainder of my talk I will discuss some possible options for stopping a deflation once it has gotten under way”.
Could this comment be a sign of things to come—Zero percent?
“ Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
There you go, he said it--print more money to reduce its value and to generate more spending (sounds like a call for Hyperinflation)
“ Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).8 Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.”
I believe what he’s saying is: the Fed will reduce rates simultaneously while increasing liquidity, but the fireworks (printing/monetary injections) will really have to pick up steam once we’re at zero because the Fed’s ammunition canister will then be empty.
“ The Fed should and does use its regulatory and supervisory powers to ensure that the financial system will remain resilient if financial conditions change rapidly. And at times of extreme threat to financial stability, the Federal Reserve stands ready to use the discount window and other tools to protect the financial system, as it did during the 1987 stock market crash and the September 11, 2001, terrorist attacks.”
Huge discount window operations have become a regular thing of late, while the rules were recently changed to allow banks to pledge a broader range of commercial paper as collateral. Are we currently experiencing an extreme threat to our financial stability? Nah, can’t be--the media keeps telling me everything is fine.
“ Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly.12 However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window.13 Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.14 For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Pursued aggressively, such a program could significantly reduce liquidity and term premiums on the assets used as collateral. Reductions in these premiums would lower the cost of capital both to banks and the nonbank private sector, over and above the beneficial effect already conferred by lower interest rates on government securities.15”
Minus the zero interest, I think we’re already there.
Bottom Line:
Back in 2002, Ben Bernanke highlighted what he would like to do if faced with the problem of deflation. Well, his test has just begun and deflation is now standing at our doorstep. Thus far, with consumer price inflation raging and the dollar tanking around the globe, Ben and the Boyz have been working overtime in an attempt to bail out our banking/financial sectors. They see the approaching financial train wreck, barreling downhill at ever increasing speed, and although they would really like to back Treasury Secretary Paulson’s Smoke and Mirrors “Strong Dollar Policy”, it is far too late for that. They are now stuck between a rock and a hard place (Deflation/financial collapse is the rock; Hyperinflation is the hard place) and they have chosen the hard place--Hyperinflation
With bank losses mounting, Ben and the Boyz know that they are waay behind the power curve in their rescue attempts and that deflation is setting in. Therefore, I feel pretty confident in predicting that come December 11th, rates WILL once again be cut.
As an aside, If we are fortunate enough to evade a complete systemic banking failure, I think the tools used (printing presses and helicopters) will force us into a Hyperstagflationary environment (Hyperinflationary consumer price inflation combined with slow-to-no output growth, rising unemployment, and recession) This should allow us to muddle through until ~ 2010, but unfortuantely I don't think the "Big D" can be avoided forever. My bet is: 2011/2012.
Regards
Randy