Inflation, Russian oil, new high for crude prices, and accelerating foreclosures are on the menu for today.
There
are two forms of inflation tracked by the Labor Department; one is the
Consumer Price Index (CPI), and the second is the Producer Price Index
(PPI), which (supposedly) tracks
the prices that producers are experiencing for raw, intermediate, and
finished goods. Unsurprisingly, there are quite a few commentators
(myself included) who eye the reported PPI figures as suspiciously as
they do the CPI.
However, even with all the statistical massaging, this months reading for the PPI was quite high:
U.S. March Producer Prices Rise More Than Forecast
April 15 (Bloomberg) — Prices paid to U.S. producers rose almost twice as much as forecast in March, reflecting higher fuel and food costs that threaten a pickup in inflation.
The 1.1 percent gain followed a 0.3 percent increase in
the prior month, the Labor Department said today in Washington. So-
called core producer prices that exclude fuel and food increased 0.2
percent, as forecast.
Rising raw-material costs are hurting profits as slowing demand makes
it difficult for companies to pass increases on to consumers. The
need to avert a deeper economic slump will prompt Federal Reserve
policy makers to lower the benchmark interest rate again this month
even as inflation accelerates.
The 1.1% gain is for the month, not yr/yr, and were it to continue it
would result in a 14% rate for yr/yr inflation. However, this is
unlikely because the PPI is a notoriously volatile number. It is worth
noting the conclusion of the article, that the need to avert a deeper
slump will trump concerns about the accelerating rate of inflation.
This is dangerous thinking, although I do not doubt that the Fed thinks
this way. The Fed truly plays a dangerous game, with hyperinflation on one side of the tight wire, and deflation on the other.
As I wrote awhile ago, the next shoe to drop will be corporate
bankruptcies, especially for the companies that most resemble subprime
homeowners. An historically low rate of bankruptcies over the past 6
years lulled a lot of banks and investors into complacency, and most
high-risk companies had little difficulty in rolling over, or even
increasing, their borrowing.
Now that credit markets have regained some of their senses, money is
harder to come by, and we are seeing a fresh wave of defaults and
bankruptcies among the weaker corporations.
I am anticipating somewhere between $500 billion and $1 trillion in
losses to arise from this arena, to complement the $1 trillion in
losses that I see coming from the housing market.
Bankruptcies Rise in Crunch for Firms `That Should Have Failed’
April 15 (Bloomberg) — U.S. corporate bankruptcies are accelerating as the economic slowdown compounds the end of easy credit.
The filing by Frontier Airlines Holdings Inc. April 11 followed
those of three other airlines and companies in restaurants and
retailing this year. Increased levels of distressed corporate debt
signal that failures will accelerate, says Lynn LoPucki, a professor at
the University of California, Los Angeles law school who studies
bankruptcies.
The amount of distressed corporate bonds jumped to $206 billion
April 11 from $4.4 billion in March 2007, according to a Merrill Lynch
& Co. index of bonds yielding at least 10 percentage points more
than Treasuries. The share of leveraged loans considered distressed was
16 percent at the end of March, the highest since 1997, says Standard
& Poor’s, based on loans trading below 80 percent of their face
value.
“Money was so easy, companies that should have failed were kept alive,”
said Rick Cieri, a bankruptcy lawyer at Kirkland & Ellis in New
York. He said bankruptcies will include businesses “with severe
operational problems” and too much debt. “Companies may well be sicker
when they enter Chapter 11.”
Oil news…
If it looks like a duck, walks like a duck, and quacks like a duck…it just might be a duck!
What I’m referring to here is the possibility that Peak Oil is here
right now, today, and not some distant prospect. Falling economies should create lower demand for oil, and therefore we should be seeing lower prices. But we are not. We’re seeing new records set each month…
Perhaps we need to listen to the market prices?
Oil Rises to Record Above $113 Amid Nigeria, Mexico Disruptions
April 15 (Bloomberg) — Crude oil rose to a record above $113 a barrel in New York on supply disruptions in Nigeria and Mexico and rising fuel demand in China.
Oil climbed to $113.66 a barrel on the New York Mercantile Exchange,
the highest since futures began trading in 1983. Mexico, the U.S.’s
third-largest crude supplier, shut its fourth export terminal
yesterday, while Eni SpA halted output in Nigeria. China said today
diesel imports surged 49 percent in March.
“The predominant market view is that the emerging economies will
overcompensate for any possible demand slump in OECD countries,” said Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt.
Not too many ways to slice that
statement…it is clearly saying that the market participants (who have
vast sums of money on the line, so I trust that they are paying pretty
close attention to the real situation) have decided that demand growth
is stronger than supply growth.
Now why could that be….?
Fears emerge over Russia’s oil output
Russian oil production has peaked and may never return to current levels,
one of the country’s top energy executives has warned, fuelling
concerns that the world’s biggest oil producers cannot keep up with
rampant Asian demand.
The warning comes as crude oil prices are trading near their record high of $112 a barrel, stoking inflation in many countries.
Leonid Fedun, the 52-year-old vice-president of Lukoil, Russia’s
largest independent oil company, told the Financial Times he believed
last year’s Russian oil production of about 10m barrels a day was the
highest he would see “in his lifetime”. Russia is the world’s second
biggest oil producer.
Mr Fedun compared Russia with the North Sea and Mexico, where oil
production is declining dramatically, saying that in the oil-rich
region of western Siberia, the mainstay of Russian output, “the period
of intense oil production [growth] is over”.
Russia was until recently considered as the most promising oil region
outside the Middle East. Its rapid output growth in the early 2000s
helped to meet booming Chinese demand and limited the rise in oil
prices.
The trend, however, has turned, with supply dropping below year-ago levels for the first time this decade, according to the International Energy Agency, the energy watchdog.
For the record, Russia is the #2 oil exporter
in the world, behind only Saudi Arabia…so this is big news. Really
big. Like, you should already be thinking about all the possible ways
that our lives will change once the reality of an oil supply crunch
becomes openly accepted as being self-evident.
Is the credit crisis over? Has the Fed, by
sloshing enormous amounts of money into the coffers of preferred
banking institutions, got us back on the path to endless growth?
At times like these, it’s important to keep your eye on the causes,
not the symptoms, nor even the ‘solutions.’ The cause of all this was a
housing bubble of biblical proportions. To believe that the worst is
behind us and that it’s nothing but blue skies going forward, we’ll
need to see some promising signs in the actual, real-world housing
markets.
Instead, we find this:
U.S. Foreclosures Jump 57% as Homeowners Walk Away
April 15 (Bloomberg) — U.S. foreclosure filings jumped 57 percent
and bank repossessions more than doubled in March from a year earlier
as adjustable mortgages increased and more owners gave up their homes
to lenders.
About $460 billion of adjustable-rate loans are scheduled
to reset this year, according to New York-based analysts at Citigroup
Inc. Auction notices rose 32 percent from a year ago, a sign that more
defaulting homeowners are “simply walking away and deeding their
properties back to the foreclosing lender” rather than letting the home
be auctioned, RealtyTrac Chief Executive Officer James Saccacio said in
the statement.
“We’re not near the bottom of this at all,” said Kenneth Rosen,
chairman of Rosen Real Estate Securities LLC, a hedge fund in Berkeley,
California and chairman of the Fisher Center for Real Estate at the
University of California at Berkeley. “The foreclosure process will
accelerate throughout the year.”
Bank seizures climbed 129 percent from a year earlier,
according to RealtyTrac, which has a database of more than 1 million
properties and monitors foreclosure filings including defaults notices,
auction sale notices and bank repossessions. March was the 27th consecutive month of year-on-year monthly foreclosure increases. In February, foreclosure filings rose 60 percent.
Are we near the bottom yet? Nope, not even
close. If you haven’t read it yet, I have broken down the causes and
challenges we will face in the coming years in real estate in an
article titled “Housing – Simple As That.”