everyone is waiting

[solarbird]

Good morning.

On this day before American elections, a dramatic plunge in US factory activity has not upset the equities markets overmuch - not even the plunge in automobile sales, with GM down 45%, Ford down 30%, and Toyota North America down 23%. Also, Mercedes and Porsche are off 34% and 50%, respectively. (The story is still being updated so the GM, Mercedes, and Porche numbers which curently appear only in links to it may not be in the actual article. However, they are the published numbers.) Similarly, the record low manufacturing numbers in China is being taken with a degree of serenity, for the moment, in equities.

But shipping continues to fall, with the Baltic Dry Index sliding today down to 827. At this point, I am lead to understand that the index implies that there is literally zero profit in shipping - the spot price is essentially the operations cost without markup. I can't find cost numbers this low previously (tho' my data only goes back to 2000), and the index is either at or below the trough established after the terrorist attacks in 2001. Predictably, shipbuilding interests are taking it in the teeth.

Gordon Brown and Nicolas Sarkozy are calling for a new Bretton Woods-type currency arrangement. I'm not sure how a Bretton Woods 3 would work in the original BW model. Brad Setzer is thinking BW2 may fall apart in a bang, but not the way he and Dr. Roubini thought it would (with a dryup of foreign interest in US treasury debt), but maybe he should stick to his guns - Karl Denninger points out the beginnings of exactly that failure. However, the US dollar continues to climb back out of the pit it made last Thursday. LIBOR rates and TED spread remain, however, uncomfortably high - still well down from the 4.x TED numbers we were seeing a couple of weeks ago, but still in the 2.5 range - a number typically indicative of a major credit crisis and possible collapse.

Meanwhile, the Federal Reserve continues to miss its target rate by quite a bit, failing on Friday even more than the newtype "target" of "within 75 basis points." The actual effective funds rate is one-third to one-quarter of a percent, which puts it on a par with the Bank of Japan, and all they have left is a formal ZIRP before they're done. Mish talks about the "global race" to a true ZIRP, and the European Central Bank's abandonment of any inflation-fighting mandate.

It's been a while since I've mentioned it, but the CMBX, a measure of commercial real estate lending risk, has hit new levels of bad everywhere except AAA, and AAA is near its highs. After a period of recovery, the ABX indicies a measure of performance of housing CDOs, have been exploring new lows in AAA, A, and junk, while holding on to some extremely modest recovery in the the AA tranches. The New York Times has an article on the sorts of fraud endemic to the mortgage-loan industry in the last couple of years of the boom.

Finally, Ambrose Evans-Pritchard writes about the hard shift to old-school leftiness in Europe. He doesn't like it.

Comments

[peakoilchaplain.livejournal.com]

I read an article (sorry, can't recall where, so can't provide link) that indicated that shipping firms aren't even covering operating costs at the moment, and that the only reason they are continuing to operate is that they are projecting (which is to say, hoping) that the rates they can charge will recover within 6 months or so, and that laying up ships for that relatively short period of time would cost more than operating through the trough.

[solarbird]

My knowledge here is extremely limited, so this could well be the case for all I know. And probably is. The no-markup to which I was referring was simply cost of ship operation - food, fuel, and crew.

And layoffs and such are spendy, so yeah.

[llachglin.livejournal.com]

What Evans-Pritchard is scared of is a good kind of old-school leftiness, improved now because we have historical understanding of what does and does not work. I'm encouraged that people are thinking in terms of a New New Deal.

[solarbird]

Really? Which part do you like best, nationalising banks, nationalising the auto industry, or directing the economy politically?

[llachglin.livejournal.com]

To the extent that it helps the middle class? All three, frankly.

The banks need to be nationalized to the extent that they aren't lending money. The auto industry needs to be encouraged to convert to a post-oil future, and clearly isn't capable of competing in the marketplace. And in a deflationary economy, we need investment in infrastructure on a scale that only government can direct.

Now, you have to be careful to leave enough room for the private economy to recover over time, and you can't be so heavy-handed that private investment is crowded out. You need to direct capital to the kinds of projects that will recreate a functioning private economy. The long run goal should be an improved, social capitalism that regulates its financial core and provides a reasonably functional social democracy, with a thriving market on top of that.

My main concern right now is that most public money so far has gone to everything but investment. We need to shift to a strategy that gives fiscal stimulus to the general economy instead. The only alternatives are continued crony capitalism (which can't rescue the economy), monetary policy (which is pretty much exhausted with the looming arrival of zero interest rates as you've pointed out repeatedly in recent posts), or a new wartime economy with full conscription and war on a scale not seen in 60 years. Doing nothing is not an option distinct from the first option.