Friday, November 21, 2008

Bad News Roundup.

The Market Oracle
World Economic Demand is Collapsing
Economics / Recession 2008 - 2009 Nov 21, 2008 - 01:43 AM
By: Christopher_Laird

...Credit spreads have not improved. There is flight out of any and all bonds into US Treasuries of all stripes. Now even 30 year US Treasuries have fallen below 4%, while the 3 months short term USTs are below a half percent, nearing zero. There is literally no money going into new credit of all stripes, and this is worldwide too.

Businesses cannot roll over their short term credit facilities. That means they have to operate on a cash basis. This has worsened in the last two months, not improved. What that means is that when the cash runs out, they have to shut down, and layoffs come. Get ready for a horrific next few months of layoff news around the world.


We already mentioned how the literal total absence of credit is stalling ships at the docks. I am starting to get concerned that, with the supply chain so tight (typically 3 days worth in pipeline) we may see shortages of many things if this credit meltdown and its resultant freeze on exports continues...

...In the mean time, since inventories are piling up, manufacturers will be shutting down plants worldwide. Big layoffs are coming everywhere. The end of 08, and 09 are going to be the worst layoffs worldwide we have seen since the Great Depression in the 1930s.

Another Great Depression?

So, since world demand is literally falling off a cliff since October, and businesses are running out of cash (there is no credit at all out there for the companies or their customers), it appears we are indeed in the beginning stages of a real world economic depression, what's next?

USD prospects

First, as far as the USD goes, things don't look good. The USD already had big problems with the US fiscal and trade deficits totaling $1 trillion a year for the last 5 years. Now, the fiscal deficit alone will be over $1 trillion and growing. Sure, a slowing economy will bring down the US trade deficit, but the pressures on the USD are becoming big enough to cause real trouble.

Another thing is that the USD has been held up for decades by the US appetite for imports. As the US economy falls into depression, the incentive for our trade partners to keep buying US bonds to fund our fiscal deficits dwindles...

The Daily Reckoning
So Many Things to Correct… So Little Time.
By Bill Bonner • November 19th, 2008

...The whole process takes time. There are millions of mistakes in need of correction. Each one has to be marked down, written off, worked out, and forgotten. We still have to see the show trials. And the perp walks. And the kvetching... the complaining... the whining... the whimpering. The bailouts and the payoffs... The bottles of whiskey and the loaded revolvers. It's all still ahead! Dow 5,000... 10% - 15% unemployment...20% off house prices.
Goldman sees jobless rate at 9%, GDP shrinking into 2009
By Deborah Levine
Last update: 9:45 a.m. EST Nov. 21, 2008

NEW YORK (MarketWatch) -- Unemployment will reach 9%, from 6.5% currently, by the end of 2009 and the economy will shrink in each quarter until mid-2009, said economists at Goldman Sachs on Friday. The firm's forecasts are lower than previous predictions due to "continuing signs of falling domestic and foreign demand, labor market deterioration, renewed tightening in financial conditions, and an apparent impasse in fiscal policy pending the transfer of power to the Obama administration in late January," analysts wrote in a note. If unemployment reaches that level, it would be "unequivocally the worst single downturn on record since World War II." Gross domestic product will shrink 5% this quarter, and 3% and 1% in the subsequent quarters, they said. The forecast leads to a 25% decline in after-tax corporate profits, which would be the worst since the Great Depression...

And I wouldn't hold my breath on anything getting better in the latter half of 2009, either.

Stocks Slump As Signs Point To Harder Times
Key Indicators Suggest Deep Recession
By Neil Irwin and David Cho
Washington Post Staff Writers
Thursday, November 20, 2008; Page A01

...There was no single reason for yesterday's stock market decline, which accelerated in the final hour of the trading day. Turmoil in the commercial real estate market deepened as securities backed by loans on commercial properties such as office buildings fell in value. Shares of financial companies, especially Citigroup, and real estate investment trusts fell sharply.

But investors were also spooked by the Fed's weak projections and a general sense of anxiety.

"It's a tough environment, you've got layoffs, you've got bad news, people are worried about banks," said Andrew Brooks, head equity trader at T. Rowe Price. "It's a nervous, anxious market."

Investors sold off corporate bonds with lower credit ratings, concerned that a rash of retailers, manufacturers and other companies will close their doors and default on their debt in the coming months.

Moody's has been predicting a sharp rise in failures among firms that have lower-rated -- or "junk" -- credit ratings. In a report last week, it predicted a "deep and protracted" recession would force more than one in 10 of these companies to go under. The majority of U.S. firms have these credit ratings.

The nerves in the bond markets are making it prohibitively expensive for many companies to raise money. And without a healthy bond market, a swath of economic activity is eliminated. Firms stop borrowing to buy construction equipment to put up buildings, acquire land for expanding restaurant chains or raise money to get through a cash crunch...
Hurting the real economy
The impact of the financial crisis on some of the most basic industries

IT IS about as far as you can get from the woes of Wall Street:the mucky business of digging ore out of the ground, shipping it across the oceans and turning it into steel, the feedstock of industry. So the recent slump in raw-material prices and the decline in shipping costs indicate just how far-reaching the consequences of the global financial crisis will be for the real economy.

Since the early summer the price of steel has fallen by 20-70% and the key rate for bulk shipping of commodities is down by more than four-fifths. There are even stories of grain cargoes piling up in ports in the Americas. Their buyers’ letters of credit have not been honoured, because of a lack of confidence in the banks that underwrite them...

There. That ought to be enough indigestion for now.

Shabbat Shalom.

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