Wednesday, April 7, 2010
Doug: Yes, I’m quite serious about what I said about “the grim reality of impending currency controls.” As the global economy continues to deteriorate, governments will have to appear to be “doing something.” It’s going to become very fashionable to institute some sort of foreign exchange control.
Why might that be? Because obviously, people who are taking their money out of the country are unpatriotic…
Shipping costs will fall to an average of $28,758 a day this quarter from $44,576 on April 1, according to the median estimate in a Bloomberg survey of 13 analysts, traders and shipbrokers. Rates to hire the ships, each bigger than the Chrysler Building, averaged $49,908 a day in the first quarter, the most since the last three months of 2008. (more)
The index began a strong recovery a year ago, but now the rebound has weakened, he says. “It’s kind of iffy now – the outlook,” Shiller says.
“The big cloud on the horizon is the withdrawal of government support for the housing market,” he recently told Bloomberg.
He was referring to the March 31 end of $1.25 trillion of mortgage securities purchases by the Federal Reserve. (more)
The key point he notes is that Greece has an insolvency problem, but not a short-term liquidity problem. This is the exact opposite of the problem that was faced by Bear Stearns and Lehman Brothers. While it could be argued they were solvent, well at least Bear Stearns, they both suffered from a liquidity crisis. They couldn't borrow funds to pay outstanding obligations.
Münchau observes, correctly, that credit markets are still open to the Greeks, but at a price: (more)
In what may be the beginning of an explosion of city insolvency across the U.S., the city of Vallejo, Calif., with a population of 117,000 in the San Francisco Bay area, has filed bankruptcy, Jerome Corsi's Red Alert reports.
Citing a 2009 Cato Institute study, Steven Greenhut, director of the Pacific Research Institute's Journalism Center in Sacramento and author of "Plunder! How Public Employee Unions Are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation," notes police and firefighter salaries, pensions and overtime accounted for 74 percent of Vallejo's $80 million general budget, significantly higher than the state average of 60 percent. (more)
Gov. Arnold Schwarzenegger (R) commissioned the study, which was prepared by graduate students at the Stanford Institute for Economic Policy Research (Theriault, San Jose Mercury News, 4/5).
The study examined:
“One of the best methods of stock market valuation is based on the work of Yale professor Robert Shiller and his now-famous “Shiller P/E ratio.” The Shiller P/E ratio is calculated as follows: Divide the S&P 500 by the average inflation-adjusted earnings from the previous 10 years. Here is a chart of the Shiller P/E going all the way back to 1880:“This is the best P/E ratio to use over long stretches of history, because it smoothes out the extreme peaks and valleys in earnings, giving a better framework for thinking about future S&P earnings power. The mean and median Shiller P/E since 1880 are both about 16. Today, it’s about 22. At the last four major bear market bottoms, in 1921, 1932, 1949 and 1982, the Shiller P/E fell all the way into the range of 5-10. This is a far cry from bouncing sharply off of 15 -- which we saw at the March 2009 bottom.
“Valuation is the main reason why I expect the bear market to last several more years into the future -- probably somewhere in the 2015-2020 time frame. I think we’ll get there through some combination of falling stock prices and modest earnings growth. Rising Treasury yields should drive stock valuations lower.”
The U.S. dollar affects many other markets, and signs of continued strength should be closely watched, no matter what market you trade. U.S. dollar rallied after the release of the March employment report on Friday, April 2, which showed the best job growth in three years. I think further gains are ahead for the dollar, as rising interest rates at both ends of the yield curve are only a matter of time.
The ICE June Dollar Index futures contract showed some consolidation after the employment-report-driven surge, but I think there is more upside ahead for the dollar. The economic climate in Europe is far from sunny, and confidence has been shaken. Greece’s budget deficit issues still have not been resolved. The Dollar Index represents the dollar’s standing against six different currencies, but is weighted most heavily against the euro currency, so I’d also recommend selling the euro futures. (more)