The Economy Guy

Stocks, the Dollar and Gold went sideways today – kind of boring.

Bonds hit another near term HIGH today as the US Treasury auction didn’t go that well.  Higher interest rates coming – see stories below.

Oil and gasoline also hit a near term HIGH today as oil is now over $71/barrel.

In the news today…..

Supreme Court doesn’t hear Chrysler bondholders claim – and they are allowing the sale to Fiat to advance.  So, why am I including this news story in the economic news???  Because it represents a legal precedent in my opinion that can be used in the future.  The government won this round, and did it by ignoring commercial law.  The legal system of the United States doesn’t appear to work well when it must move FAST.  We are in an emergency situation according to the government.  We can’t wait to think about the ramifications of decisions – we must act, and act the way the government says to act.

Here is the rub.  The government now has a precedent to ignore Commercial Law that can be used in future actions, and has the backing of a Supreme Court.

Mortgage Rates – are still rising.  The 30 Year fixed rate is now 5.57%, up from 5.25% last week. Interest rates are now a full percent higher than their low, and mortgage applications are falling accordingly.  This is the proof of the statement I made a few days ago that the FED program to save the mortgage market has failed.

Citibank – announced today that it will be converting $25B of the $45B of TARP money (YOUR money) from its current status as “preferred shares” into “common stock.”   Naturally, the Treasury made this decision “on your behalf.”  What’s the difference?  Well, preferred shares are paid a fixed dividend ahead of common share dividends – a dividend that you are NOT guaranteed by being a common share holder.  In fact, why would Citibank ever pay a dividend to common share holders when they need so much more capital injection???  With the conversion of $25B preferred shares into common shares, the government (that’s YOU) become the owner of 34% of Citibank.  

Congratulations.  Do you think the Treasury was doing this in YOUR best interest?  If so, what was that interest?  (My guess is that this conversion keeps the wolf away from the Citibank door for a little longer – and the Treasury believes this is in YOUR best interest.  The Treasury is betting the economy will turn around and these failing banks will find a way out of their quagmire someway.)  If not, what should the government have done?  (My answer is let Citibank fail and be broken up into smaller entities.  This course of action would cost the taxpayer less in the long run.)  You will now be earning LESS interest on your TARP investment in Citibank.  Why didn’t the government convert MORE of the $45B into common shares??  The reason – isn’t it obvious??? – is that the government would have owned a MAJORITY of Citibank in that case.  So, why didn’t the government go for the majority???  My guess is FEAR – the fear that Citibank might just go under, and if the government owned (controlled) the bank when it went under, it would be obvious that the government didn’t know how to run a bank.

10-Year Treasury Auction Fails – as the interest rate paid went as high as 4.01%.  While there were plenty of investors bidding for these new bonds, they got more interest than they anticipated.  This is a major increase in interest rates over the recently high interest rates; so, hold onto your socks folks – it’s going to get expensive.

FED Beige Book – says the “economy’s downward trend is moderating.”  The FED Beige Book is a look at the US economy through the eyes of the 12 FED Bank Regions.  Let me parse these words for you.  It means the economy is still GOING DOWN.  Just not as fast downward as it was going down before.  In fact, only 5 of the 12 regions said they saw “moderating” going on.  Is that good???  It’s in the eye of the beholder.  From my perspective, this is BAD news as the economy is WORSE today than it was a month ago; and until the economy starts getting BETTER, I will be looking at this glass as “half empty.”

FED lost $5.6B in 1Q 09 – on the assets they took over from Bear Stearns and AIG.  Those assets, including mortgage securities, fell in value by $5.6B.  Another way to look at this is that the FED is gambling with YOUR money.  Rather than sell these assets off, the FED chose to hold onto them, hoping they would increase in value – that’s my definition of gambling.  How much more will it lose???  Yes, the FED did earn some interest on its emergency loan programs – it earned $1.2B.  That’s just not enough to offset the losses.

Tonight’s Dinner Conversation….

Stagflation is here today.  What is stagflation?  “A condition of slow economic growth and relatively high unemployment – a time of stagnation – accompanied by a rise in prices, or inflation.”

Doesn’t the reality of the current US economy exactly fit the definition of stagflation?

Oil at over $70/barrel is the first price rise that will cause real pain to the US economy and the US people.  High oil prices will cause high gasoline prices (here today) and will be shortly followed by higher natural gas prices, higher electricity prices, higher home heating fuel prices, etc.  Higher energy prices will have kicked in by the end of the year.

And, what’s next?  The big threat is higher food prices in my opinion.  Commodities are controlled by world demand, and food is no exception.  This too will hit the American pocketbook, and will probably hit this year as a second major CPI measured inflationary force.

Here are the last numbers for today:
Dow Jones 30 Industrial – 8739 (down 24 points)
10 Year Treasury Bond – 3.94% (up 0.08%)
Euro – $1.3992
Gold – $955 (no change)
Oil – $71.33 (up $1.32) – another near term high
Gasoline $2.02 (up $0.05)