Monday, June 21, 2010

The Latest On the Economy ... In D Minor, With Chocolate (Of Course)

Bad news always goes down better with a lovely song and chocolate. So go on now, fetch some chocolates from your stash. You know they won't keep for the entire summer anyway.
Canon in D Minor by Pachelbel is one of my favorites. Press “Play” now, and begin reading. Relax … while I share a few of my latest finds on our economic recovery.

We're not done with the housing market bubble, in case you were thinking otherwise. Inventory is 144% of the 10 year average, prices dropped-then leveled briefly-and seem to be dropping again, 8 million mortgages are delinquent (and cure rates are at an all-time low so that means either foreclosure or short sales), and 25 million homeowners have no equity in their homes

We are not off the sovereign debt roller coaster. The stock market has been up and down on Euro debt issues since late 2009. The situation is calmed for the moment and the Euro currency is drifting slightly upward from 12 month lows.  Generally, when the Euro goes up, the US dollar goes down, and stock prices go up in value (since dollars are worth less).  One Greek mayor's hunger strike to protest austerity continues, however.  (Hint to Ralph Becker, Mayor of Salt Lake City and Kelvyn Cullimore, Mayor of Cottonwood Heights … there are probably better things to do with your political influence than starve for 43 days.)
Germany's Deutschebank is betting against Spain by shorting Spain's debt and five Spanish companies. Spain has serious issues, among them 20% unemployment and has total debt of 270% of its GDP. The level of unsold housing inventory is six times US levels.  If you think eating tapas will cure this, think again! 
Like I said a couple of posts ago, those Eurozone meetings must be anything but pleasant. And in case you're thinking, well that's a problem for folks across the pond, think again. The US is the largest member of the International Monetary Fund. Our contribution to the Greece bailout will be $8 billion via the IMF. We are all in this together … the US, Japan, and UK have tremendous exposure in Europe.  Cha ching.

Interestingly, California is among ten governments with the highest probability of default. As a megastate, California definitely has an economy larger than many countries.  Just so you know, banks measure probabilities of default and use them as a factor (among others) to determine interest rates on loans.

Closer to home, IOU fervor is spreading. IOUs are reminiscent of the Great Depression and possibly you used them as a kid when your allowance kitty ran dry but needed your sister's cash.  California and New York are beyond slow pay. Enter Illinois. No physical IOUs, the state is simply acknowledging its unpaid accounts receivables to non profit organizations. This situation may well put the affected non-profits offering much needed medical and mental health services out of operation. And Illinois's borrowing costs are astronomical: the bond premium increased by 40% versus two months ago because the state legislature is unable to close the gap on its deficit.  Other states in significant trouble: Wisconsin, Massachusetts, Ohio, Nevada, New Jersey, and Michigan.
US banks continue to struggle. There are more than 90 banks that deferred their TARP payments, up from 74 in February and 55 in November. And 781 banks are on the “unofficial” problem bank list
The Gulf oil spill drama continues. Please be aware that oil is gushing at a rate of 840,000 to 1.7 million gallons per day through last week. I haven't found any great ballpark estimates on the economic impact of the Gulf oil spill yet. It's probably too soon. But in the states of Alabama, Florida, Mississippi, and Louisiana, tourism, oil and gas, port, logistics, and commercial fishing will see unemployment rise. And Texas oil related jobs will be lost because of the drilling moratorium.  I think it's sad and ironic that these are the same states that were heavily impacted by Hurricane Katrina.
Here's a smidge of good news: If by chance you spot an oiled bird, you can wash them with Dawn dish detergent. At least there is a solution!

Risk managers, take note. You need to push harder to get the attention of your CFO on the cost of key risks associated with your business. This preventable oil spill has already cost $2 billion, not counting the $20 billion recovery fund established last week. 

Unemployment, a topic near and dear to my heart, didn't go away. I have already addressed unemployment in a recent post so I don't want to drone on.  Or whine.  In any case, the above little news bites are just that. As with many news stories, you have to dig deep to get a clear understanding of the financial news.  But the point is ... while I don't think Rome is burning, a few "concerns" exist and the summer may get hotter.

Later this week, I will cover situations which are still very much "looming," with lesser known impact such as the stress tests on Eurobanks to be released in July and the weekend announcement regarding the Chinese yuan.

And now, finish your chocolates, go back to whatever you were doing, and don't worry.  We have a lunar eclipse coming up on Saturday and I want you to be well rested and prepared for whatever is heading your way.

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