Job Losses Continue to Mount
Good day… And a Happy Friday to one and all! A Fantastico Friday, as I head to my fave city in the country, San Diego. I’ll be heading to the airport shortly after sending this out. The currencies rallied nicely yesterday, and I’ll tell you why… So, let’s go to the tape!
Well… Remember all the talk about relaxing the FASB mark-to-market rules in the past couple of months? The announcement was made in the communiqué’ of the G20 meeting. The Financial Accounting Standards Board (FASB) revised the rules to allow companies to use their “judgment” to a greater extent in determining the “fair value” of their assets. The board also made it easier for companies to avoid having to take impairment charges against earnings when they suffer losses on their investments.
Talk about opening Pandora’s Box of risk appetite! Stocks soared… And everyone was feeling the euphoria of the day… Well, everyone but me! I can guarantee you this, folks… If little old Joe’s Bank had complained that these rules were too stringent they would have fallen on deaf ears… But… Let’s see if it works, right? Shoot, these financial institutions made such “great” decisions to own the junk they “used to have to write down” I bet they’ll make even “better” decisions when using “judgment” on what gets marked down and by how much…. You make the call…
Another thing that pushed the euro higher on the day was the European Central Bank’s (ECB) decision to cut rates by only 25 BPS or 0.25%. It was widely expected that the ECB would do 50 BPS to keep up with the Joneses of the world. Not so fast, Tim! There was a hint from ECB President Trichet about quantitative easing, but at this point, it hasn’t happened, and as I explained yesterday…. That’s a good thing!
And what do we have here? Oh! It’s a Jobs Jamboree Friday! But before we go there… Let’s recap this week’s employment numbers leading up to the Jobs Jamboree, eh? First we had the ADP report show 742K jobs were lost in March… Then yesterday we had the Weekly Initial Jobless Claims show that 669K new claims were filed, and that the previous week’s 630K figure was revised up to 672K… What’s really scary here folks is that the 4-week moving average is now up to 649.5K…
All the king’s men and all the king’s horses that believe the Humpty Dumpty economy will be recovering by the end of this year, might want to look over those forecasts and come clean on what they really think, not what the government wants them to say, to make it look like everything will be right on the night, because… These unemployment numbers are not shaping up to be anything close to a recovering economy!
Getting back to G20 for a minute… G20 also announced that they would give the IMF $1 trillion to help countries in crisis… Well… Just whom do you think the majority of that $1 trillion came from? Well, that’s right, it would be the only country currently running their printing presses 24-hours a day, and 8 days a week… It’s not enough to show I care!
OK… I read a story on the WSJ website yesterday that said, “Hey, Chuck! This story’s for you!”
So… Here you go…
“Anticapitalist protesters gathering in London for two days of demonstrations are missing the point. If there is one myth the credit crunch has surely exploded, it is that the financial system is a free market. The world is in a mess because the financial system wasn’t capitalist enough.
“True, there were some terrible regulatory failures, and politicians lacked the stomach to stop excess as bubbles formed. But successive bailouts over many years also distorted the banking system to the point where real price signals were swamped. Nothing in the current global recovery proposals suggests this lesson has been learned.
“In a capitalist system, prices are set in the free market and providers of capital bear responsibility for their losses. Neither of these characteristics hold true of the banking system. The price of credit, the basic commodity of the financial system, was distorted first by implicit government guarantees to depositors and other providers of capital, and second by the tendency of governments to cut interest rates at the first sign of financial trouble.
“Financial theory says the cost of capital to an enterprise should rise in line with risk. But banks during the boom were able to leverage themselves more than 50 times yet see their cost of funding fall.
“That is hardly the sign of a well-functioning free market. Those who provided funding to banks correctly gambled that governments would ride to their rescue. Since the crisis began, implicit guarantees have become explicit and thresholds have been raised. The U.K. is even proposing to raise depositor protection in certain circumstances to £500,000 ($717,360), further undermining the principle of personal responsibility.
“This government protection effectively extends to wholesale funding, too. With a few exceptions, including Lehman Brothers, bondholders have been spared losses as a result of bank failures.
“Indeed, it has been axiomatic of the policy-maker response that bondholders should be kept whole to avoid the threat that the banking system would seize up completely or that the insurance industry, with large bond portfolios, would become the next domino to fall. Most Western bank bonds are now issued with an explicit government guarantee. The result is a distorted global financial system in which the true cost of capital is obscured.
“In a fully capitalist system, there would be no guarantees. The market would ensure banks didn’t become too big or too leveraged.
“At least the current crisis is sure to lead to higher common-equity buffers for all. But since removing the guarantees and breaking up the banks is outside the realm of political reality, an alternative solution is to charge banks explicitly and upfront for all guarantees. The charges would rise in line with leverage. That at least would raise the cost of funding, helping to generate a price signal to the market.
“Instead, global governments are taking the opposite tack. Unable to remove the guarantees and unwilling to properly charge for them because the banks remain too weak, they will try to limit the risks through more intrusive regulation.
“The results, if that goes too far, should be clear enough: lower bank profits, less capital generated, less credit created, lower economic growth and more bureaucratic control over the banks and the wider economy.
“The protesters should be careful what they wish for.”
It was as if this writer basically interviewed me! WOW! That was really strange! But right up my alley of beliefs!
OK, back to the return of risk appetite once more before we head to the Big Finish… Now, if you’ve been paying attention in class for the past couple of years this will be an easy pop quiz for you…. What currency will NOT perform well when risk appetite returns to currencies? (Sure wish I could do a sound bite here, and play the Jeopardy music) Ready? YEN (JPY)! By Jove I believe that everyone was on board!
Japanese yen briefly weakened above 100 for the first time since November 4th 2008, in the overnight markets… It has slipped back below 100 as I write. G20 didn’t do yen any favors that for sure!
Currencies today 4/3/09: A$ .7140, kiwi .5830, C$ .8065, euro 1.3450, sterling 1.4740, Swiss .8810, rand 9.1660, krone 6.5660, SEK 8.0560, forint 219.90, zloty 3.32, koruna 19.79, yen 99.70, sing 1.5050, HKD 7.75, INR 50.40, China 6.8355, pesos 13.75, BRL 2.23, dollar index 84.33, Oil $53.07, Silver $12.81, and Gold… $905.30
That’s it for today… Thanks to Cheryl Harper for making me my fave cake (pineapple upside down cake) for my birthday. She waited until I returned… What a sweetheart! It was great to come back and see everyone in the office yesterday. Well… I was watching the weather forecast on TV last night, and the forecast for Monday’s Home Opener for my beloved baseball Cardinals is not very baseball like! Snow Flurries? Only 37 degrees? YIKES! I just came from watching games in sun and 80 degrees! Oh well… Who knows, by Monday it could all change, this is St. Louis weather I’m talking about! I was thinking about traveling this weekend to San Diego for the Richard Russell Tribute without my laptop… Dare I? No… I get there this afternoon, and will work the rest of the day… Almost left without it though… Man, wouldn’t it be nice to… Oh, never mind, I almost went into a Beach Boys song there, and that would have really thrown us off course! So… Strap yourself in for this wild ride of the Jobs Jamboree, and have yourself a Fantastico Friday!