Dr. Fatih Birol, the chief economist at the respected International Energy Agency (IEA) in Paris, which is charged with the task of assessing future energy supplies by OECD countries, told the Independent:
The public and many governments appeared to be oblivious to the fact that the oil on which modern civilisation depends is running out far faster than previously predicted and that global production is likely to peak in about 10 years � at least a decade earlier than most governments had estimated...
Oil production has already peaked in non-Opec countries and the era of cheap oil has come to an end, it warned...
The International Energy Agency believes peak oil will come perhaps by 2020. But it also believes that we are heading for an even earlier "oil crunch" because demand after 2010 is likely to exceed dwindling supplies.
Birol thinks that peak oil could drive gas prices at the pump much higher and destroy economic recovery efforts of fragile economies.
He thinks that the pressures could come sooner than 2019 because:
There is now a real risk of a crunch in the oil supply after next year when demand picks up because not enough is being done to build up new supplies of oil to compensate for the rapid decline in existing fields.
Birol also things the Middle Eastern oil producers will be economically strengthened by scarce oil:
The market power of the very few oil-producing countries, mainly in the Middle East, will increase very quickly. They already have about 40 per cent share of the oil market and this will increase much more strongly in the future.
Interestingly, Birol advocates developing alternative forms of energy now:
One day we will run out of oil, it is not today or tomorrow, but one day we will run out of oil and we have to leave oil before oil leaves us, and we have to prepare ourselves for that day," Dr Birol said. "The earlier we start, the better, because all of our economic and social system is based on oil, so to change from that will take a lot of time and a lot of money and we should take this issue very seriously," he said.
The Independent gives a caveat to the projections:
The amount of oil recoverable is always going to be an assessment subject to the vagaries of economics � which determines the price of the oil and whether it is worth the costs of pumping it out �and technology, which determines how easy it is to discover and recover.
All numbers tend to be informed estimates. Different experts make different assumptions so it is under- standable that they can come to different conclusions. Some countries see the size of their oilfields as a national security issue and do not want to provide accurate information. Another problem concerns how fast oil production is declining in fields that are past their peak production. The rate of decline can vary from field to field and this affects calculations on the size of the reserves. A further factor is the expected size of future demand for oil.
THIS IS A LIVE BLOG OF WARREN BUFFETT"S APPEARANCES ON CNBC"S SQUAWK BOX THIS MORNING. BUFFETT SPOKE WITH BECKY QUICK LIVE IN OMAHA, NEBRASKA.
MOST RECENT DISPATCHES WILL BE AT THE TOP OF THE PAGE. REFRESH OFTEN FOR THE LATEST DISPATCHES.
ALL TIMES ARE EASTERN.
8:59 AM: The three hours with Buffett live from Omaha are over.
8:59 AM: Becky asks who Buffett would like to see as Barack Obama"s vice-presidential pick. His reply: Senator Sam Nunn, although he has no idea who Obama will actually choose.
8:53 AM: Buffett says he worries about "what"s important and what"s knowable."
8:51 AM: Buffett says he would be surprised he Berkshire doesn"t "do something" in China in the next few years. Any investment there would probably be an extension of his existing businesses. He says the U.S. will do well, but the Chinese will do better because they"re starting from a lower base and have really learned how to unleash the potential of their people.
8:46 AM: Buffett: No interest right now in buying any homebuilder stocks. They still have plenty of problems.
Dave Grogan / CNBC
8:44 AM: Buffett predicts housing market recovery will take some time, probably years. "A lot of blame to go around." The market won"t really come back until you get to a normal inventory of unsold homes.
8:38 AM: Buffett says it"s possible there could be another financial firm imposion along the lines of Bear Stearns, but it would be "inappropriate" to comment on any specific companies right now because it could undermine confidence. He notes that while it is hard to find the sources, rumor-mongers should be punished.
8:17 AM: Buffett repeats his belief that a windfall profits tax on oil doesn"t make any sense, despite the fact that his favored candidate, Barrack Obama, has expressed support for such a tax. He notes that no one is calling for a tax on other commodities that have gone up in price like soybeans. The oil companies are an easy target.
8:15 AM: Buffett says he didn"t give any money to the John Edwards campaign, but if he did he might be asking for his money back. Buffett muses that there should be a class-action suit brought by contributors who want their money back because Edwards was soliciting funds while lying about an extra-marital affair that would prevent him from ever becoming President.
8:10 AM: Buffett says he was late getting into railroad stocks, like Burlington Northern
[WFC28.44-0.48(-1.66%)] if prices come down? Is he buying shares now? Buffett replies that he has indeed been buying shares in one of those two names lately, but won"t say which one. He points out that both companies were both started by the same people.
8:01 AM: Are there bargains in the stock market? Buffett says yes, there are companies that are better today than they were a year ago selling for lower prices. When he gets calls from someone who has just lost billion of dollars and wants to be replenished, he doesn"t get that excited. He points out that when someone tries to sell something to you, like an investment, it probably isn"t worth buying. The best ideas come from your own ideas and digging.
7:55 AM: Buffett reveals that on September 9 at Boston"s Fenway Park, he will be throwing out the first pitch with former General Electric CEO Jack Welch as his catcher. He jokes that whatever pitch Welch calls for, even if it is the pitch that bounces several times before it reaches the plate, he "will throw that pitch."
Dave Grogan / CNBC
7:53 AM: Buffett: The Fed "has real problems on inflation." Some Berkshire businesses are being squeezed on prices. For example, carpet manufacturing involves a lot of oil. The price of making carpets keeps going up, but it"s hard to pass those costs on to consumers due to weak spending. Wholesale prices will "have to" show up in consumer prices. Once inflation is "ignited" it gets difficult to bring it under control.
7:45 AM: Real test for a politician is whether they will support something their constituents oppose. He says both sides in the campaign are not addressing some issues because it would cost them votes.
7:42 AM: Buffett says he has no bets against the U.S. dollar right now and no direct currency plays.
7:40 AM: Buffett says there"s a "reasonable chance" that Fannie and Freddie"s equity will be wiped out. They keep existing because they"re backed by the government, and the government should continue to support them, expect for the equity portion. He notes that Berkshire had been a big holder of the GSEs before selling the entire stake around 2000 and 2001.
7:38 AM: After an interview from Beijing with a GE executive, Squawk returns to Becky and Buffett in Omaha. She asks what grade he would give to the Federal Reserve. He says he admires anyone who takes on a very difficult job. He might not always agree with Fed Chairman Ben Bernanke but he admires that Bernanke is taking tough problems with no obvious answers.
7:22 AM: Peterson says his foundation is looking at new media, including websites like Facebook, to try to get young people energized about doing something about continued deficits.
Dave Grogan / CNBC
7:15 AM: Dave Walker returns and is joined by Pete Peterson, whose foundation provided financial backing for the I.O.U.S.A film and AARP CEO Bill Novelli. They all participated in last night"s live panel discussion after the premiere of I.O.U.S.A. Walker says the cost of health care is the biggest problem contributing to the nation"s bleak financial future. Buffett says he believes the economy will continue to grow and "unleash human potential" so he isn"t as worried about the future as Walker and Peterson are. "The pie will grow." Still, he says, you always need to be thinking about the future. He fears large current account deficits could be dangerous politically years down the road, even if they don"t stop the economy from growing.
7:10 AM: Asked about the oil market, Buffett says demand and supply for crude has changed significantly in the past five years. He thinks Boone Picken"s energy plan is "on the right track" and warns that the world can not keep increasing its demand for oil.7:07 AM: Becky notes that in Berkshire"s latest SEC filing, the company keeps information about its holdings of Conoco-Phillips
[BUD67.760.01(+0.01%)] shares at prices around $61-$62 before the company agreed to a friendly merger with InBev at a sweetened price of $70. Buffett says at the time he wasn"t sure the deal would go through given Anheuser"s strong resistance to InBev"s original bid. "In retrospect, I was wrong," but he says that often happens.
7:03 AM: Becky asks again about the economy and he repeats his view that the negative ripples will continue to spread for awhile. He sees no "early end" to the problems although they will end eventually.
6:56 AM: Buffett says he does not have a "buy order" right now for any oil sand companies. 6:53 AM: Buffett talks about the trip he made this week with Bill Gates and some others to see the oil sands in northeastern Alberta, Canada. Buffett says he and Bill wanted to see what it looks like rather than just read about it. He confirms the trip was arranged by Omaha-based Kiewit Corp, which is doing some construction work connected with oil sands development. Asked if he"s interested in investing in oil sands, he said no, but that the information he learned about the industry has been filed away and could become useful at some point in the future.
6:48 AM: Is Fannie Mae going under? Buffett says in a sense they already have because they wouldn"t survive without government backing. "They priced risk wrong."
Dave Grogan / CNBC
6:46 AM: Buffett says "investing in yourself" is always the best thing.
6:44 AM: Becky and Warren have moved from the stage of the auditorium to a couple of the seats in the audience. Becky plays taped questions from some of the people who attended the movie premiere last night. The first question is about the American character and debt. Buffett says there"s nothing wrong with having some debt, it just becomes a problem when it gets too bid. "Berkshire can expect to have debt forever" and shareholders wouldn"t want it to operate debt-free. You worry when debt begins to spiral higher, because it then becomes more difficult to keep borrowing money
6:34 AM: Becky introduces Dave Walker, CEO of the Pete Peterson Foundation, whose campaign to raise awareness about the nation"s national debt forms the basis of the film I.O.U.S.A. While Buffett doesn"t agree with Walker on just how bad the problem is, he says he does admire Walker"s work and thinks it"s always better to try to get politicians to think longer-term.
6:22 AM: Buffett reveals that Berkshire made a half-billion dollar bid on a Chinese stock that wasn"t accepted. He wouldn"t say what stock or what industry. He did say that under the right circumstances he could have a lot of money in China, but noted that there are government restrictions on foreign ownership that must be overcome.
6:17 AM: After returning from a commercial break, Becky brings in Carl Quintanilla, who is co-anchoring from the Summer Olympics in Beijing. Becky asks about Coca-Cola"s sponsorship of the Olympics. (Berkshire has a big stake in Coca-Cola: [KO53.51-0.84(-1.55%)].) Buffett says Olympic spnsorship is good for a company like Coca-Cola that wants to be associated in people"s minds with happiness, competetition, and nations coming together. Buffett says he"s been enjoying watching the Olympics on television, but he hasn"t gone to China himself to see any of them.
6:13 AM: Buffett says derivatives aren"t evil, but can be misused. "They are dangerous things." Says he knows every derivatives contract Berkshire Hathaway has bought.
6:12 AM: Buffett says that while Fannie and Freddie have looked for cash from the private sector, it won"t be enough to save them. Government will have to step in. His comments raise the possibility that he and Berkshire had been approached to provide capital to Freddie and Fannie, although he does not address that directly.
6:10 AM: Buffett says problems of GSEs illustrate how difficult it is for government to regulate companies where management is trying to deceive or simply doesn"t know what"s going on.
6:06 AM: Asked about Fannie Mae [FNM4.850.45(+10.23%)] and Freddie Mac [FRE3.16-0.09(-2.77%)], Buffett says due to implicit government backing, the two GSEs could borrow without the usual checks and balances. Then needed to keep earnings growing to keep stock market happy and turned to accounting to do it. Agrees they are "too big to fail." Buffett says they would have been gone a long time ago if the government hadn"t been behind them. He thinks Freddie and Fannie will survive but shareholders could "lose a lot of money."
6:05 AM: Still thinks the economic problems will be deeper than longer than expected. He expects things will be better five years from now, but not five months from now. "Troubles feed on themselves."
6:03 AM: Buffett says "things have rippled out" in the U.S. economy, as one might expect.
6:01 AM: Becky Quick introduces Warren Buffett and plays a clip from the documentary I.O.U.S.A, which premiered last night in hundreds of movie theaters around the country.
Buffett says he doesn"t think the problem of the national debt is as bad as portrayed in the film, but he admires the people who made the film and thinks its good that people are thinking about the situation.
Steak n Shake Co. shares dropped to their lowest point in nearly seven years Monday as investors digested the restaurant operator"s warning that it would likely report a loss in its first quarter. Shares fell $1.68, or 17.7 percent, to $7.80 Monday. Earlier in the day, the stock sunk to $7.75. The shares haven"t traded that low since March 2001.
The drop came after Steak n Shake said after the market closed Friday that it would record a loss in its fiscal first quarter mainly because its same-store sales, or sales at location open at least a year, fell 9.5 percent. Same-store sales is a key indicator of restaurant performance since it measures growth at existing locations rather than newly opened ones.
The company blamed the sharp sales decline in a drop in consumer spending, unfavorable weather in December, promotions from competitors and issues with store execution.
Raymond James analyst Bryan C. Elliott in a note to investors called the sales decline "severe" and noted that the first quarter would mark the seventh consecutive period of negative same-store sales.
Let"s be real here. Any restaurant that blames unfavorable weather is barking up the wrong tree. That excuse is a sell signal if I ever heard one.
Shares of McDonald"s Corp (MCD) fell as much as 8 percent on Friday [Jan 11], as a survey of franchisees showed December same-store sales grew at the lowest level in the six-year history of the poll.
McDonald"s share decline led a downturn in many other U.S. restaurant stocks, amid concerns a U.S. recession could hurt even lower-priced restaurants.
"With gas (gasoline) prices at all-time highs, the discretionary income of the consumer is shrinking," said William Lefkowitz, options strategist at vFinance Investments.
Coming into Friday, the stock traded at a multiple of 20 times estimated 2008 earnings, the third highest multiple in the Dow Jones Industrial average. It trailed only Coca-Cola Co (KO) and Procter & Gamble (PG), two stocks that have been boosted by their defensive status as consumers generally buy things like soap and soft drinks even during a recession.
"The P/E (price-to-earnings ratio) is back to a level where for me it"s a little bit expensive," Janna Sampson, co-chief investment officer at Oakbrook Investments in Lisle, Illinois, said. "That said, relative to some of its competitors, I"d have to say its P/E still looks reasonable." Sampson"s company holds about 205,000 McDonald"s shares.
Yum Brands Inc (YUM), which owns Taco Bell, Pizza Hut and KFC chains traded at 23 times estimated 2008 earnings before Friday. Like McDonald"s, that company has an extensive overseas presence, which could help shelter it from a U.S. recession.
"People were hoping that their international growth would offset decreased sales in the United States," Lefkowitz said of McDonald"s. "However, investors are starting to believe that international growth will not be able to do that."
Restaurant Reality Blues
Steak N Shake has overexpanded.
Restaurants in general have overexpanded.
Retail stores have overexpanded.
Strip malls have overexpanded.
Commercial Real Estate has overexpanded.
Europe and Asia will not disconnect from the US.
PEs of 23+ are silly for big restaurant chains.
We do not need more Steak n Shakes (SNS), Pizza Huts (YUM), McDonald"s (MCD), Panera Breads (PNRA), Starbucks (SBUX) or any other restaurants for that matter, at least in the US.
Layoffs related to all of the above are coming. Consumers are tapped out.
Those who think Europe will disconnect from the US are likely to be sadly mistaken. Investing in restaurants with PEs of 20+ when the economy is in a recession and you can still get 5% guaranteed on a CD does not make a lot of sense to me.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click HereTo Scroll Thru My Recent Post List
Former Director of the Central Intelligence Agency Michael Hayden says releasing Bush administration torture memos harms national security and emboldens our enemies. I have been told by several sources during Hayden�s tenure that he was well liked by Agency employees. But everyone also understood why he was there, to clean things up after the massive amount of leaking that caused the Bush administration a good deal of embarrassment. The reality is our enemies know we tortured people. The world knows we tortured people. So our national security has already been harmed. Contrary to Mr. Hayden�s assertions, what the torture memos threaten is not national security. Rather, the memos threaten Hayden�s former boss and Hayden�s former employees with prosecution. Here is what Hayden had to say on Fox News � the predictable outlet for defending Bush era criminal activity as somehow akin to national security interests: "What we have described for our enemies in the midst of a war are the outer limits that any American would ever go to in terms of interrogating an al-Qaeda terrorist. That"s very valuable information," Hayden said during an appearance on Fox News Sunday. "By taking [certain] techniques off the table, we have made it more difficult -- in a whole host of circumstances I can imagine -- for CIA officers to defend the nation," he said. LinkHere
At the World Economic Forum in Davos, it was revealed that Forty Percent of the World"s Wealth has been destroyed by the financial crisis so far.
As writers like Mish have repeatedly pointed out, even though the forces which could create hyperinflation (printing gzillions of dollars) are gigantic, the deflationary forces are - at present - even more enormous.
Indeed, the whole plane might go down before cabin pressure is ever restored to normal.
If the pilot manages to avoid crashing into the ocean, then we might have to worry about excess cabin pressure (hyperinflation created by too many dollars).
But - as of today - the plane is still quickly losing altitude.
PHILADELPHIA (Reuters) - Kraft Foods Inc told employees it would use fiscal restraint in its pursuit of British confectioner Cadbury, and said its success as a company was not dependent on doing a deal.
"This is something we would like to do, not something that we have to do," Kraft Chief Executive Irene Rosenfeld said on Thursday in a town hall meeting with employees in Northfield, Illinois. A transcript of the meeting was filed with the U.S. Securities and Exchange Commission on Friday.
Earlier this month, Kraft made a $16.44 billion offer to acquire Cadbury but its bid has been rejected as too low.
Billionaire investor Warren Buffett, head of Berkshire Hathaway Inc -- Kraft"s largest investor -- said Kraft had "a lot to do" to justify that price tag.
Rosenfeld, however, promised Buffett that Kraft would take a disciplined approach in its pursuit of Cadbury.
"We intend to remain disciplined in our actions. And I can assure you we will avoid allowing those animal instincts that Warren Buffett alluded to take over," Rosenfeld told Kraft employees.
Rosenfeld noted that Kraft aims to use a mix of cash and stock to pay for the Cadbury deal, making the strength of its stock a factor in its bid.
"The performance of our stock in the coming weeks will be a key metric that investors of both companies will be following very closely," Rosenfeld said.
Shares of Kraft have fallen about 5.8 percent since it unveiled its bid on September 7. Shares of Kraft fell 4 cents to $26.34 in Friday morning trading on the New York Stock Exchange.
She outlined the benefits of the deal, saying it would combine two highly complementary companies and benefit revenue- and profit-growth for both.
"It would create a formidable global powerhouse in snacks, confectionery and quick meals, further expand our footprint in developing markets, and expand our presence in growing trade channels like convenience stores and gas stations," Rosenfeld said.
Cadbury on Friday said it did not believe that a deal with Kraft made financial or strategic sense for the British candy company.
(Reporting by Jessica Hall; Editing by Phil Berlowitz)
As Illinois state treasurer of Illinois Alexi Giannoulias notes:
Last week, the Census Bureau"s annual report on income, poverty and health insurance, revealed that in the last decade, media household income has actually fallen. The Census Bureau has been monitoring household income for four decades. Not only have we experienced the first decade where median income has failed to rise, but it appears that this is the first decade on record where household income has declined.
Standard & Poor"s said it may cut the credit ratings on $12 billion of bonds backed by subprime mortgages, prompting investors to dump the securities. S&P is preparing to lower the ratings on 2.1 percent of the $565.3 billion of subprime bonds issued from late 2005 through 2006 because the housing slump is worse than the company anticipated. The announcement sent U.S. government bonds higher, the dollar lower and caused shares of financial companies to drop.
[Mish Comment: $12 Billion? 2.1%? Is this a joke? Hell, they ought to downgrade it all. The excuse might be that most of it was rated properly in the first place but realistically speaking we all know that to be another blatant lie.]
"S&P"s actions are going to force a lot more people to come to Jesus," said Christopher Whalen, an analyst at Institutional Risk Analytics in Hawthorne, California. "When a ratings agency puts a whole class on watch, it will force all the credit officers to get off their butts and reevaluate everything. This could be one of the triggers we"ve been waiting for."
Almost 65 percent of the bonds in indexes that track subprime mortgage debt don"t meet the S&P ratings criteria that were in place when they were sold, according to data compiled by Bloomberg.
[Mish comment: I stand corrected. They should only downgrade 65% of it. The rest should be put on credit watch. Seriously what"s with this pathetic downgrade of a mere 2.1% of the debt?]
S&P"s review covers ratings on 612 pieces of bonds backed by subprime mortgages. S&P will implement a "stress test,"of hypothetical scenarios to see how a bond will react.
Critics of the ratings companies include Bill Gross, chief investment officer at Pacific Investment Management Co. Gross, who runs the world"s biggest bond fund, said last month that Moody"s and S&P gave mortgage bonds investment-grade ratings because they were fooled by the "six-inch hooker heels" of the collateral backing them.
[Mish comment: Gee no mention of Mish. Then again I was not as colorful as to describe the ratings companies as hookers like Gross did. Then again I think that Moody"s and the S&P knew full well what they were doing. If they didn"t then I think were incompetent. So what is it? Incompetent Hookers?]
"I"d like to know: Why now?" Steven Eisman, a portfolio manager at Frontpoint Partners in New York said on a conference call hosted by S&P to discuss the possible ratings changes. "The news has been out on subprime now for many, many months. The delinquencies have been a disaster for many, many months. The ratings have been called into question for many, many months. I"d like to know why you"re making this move today instead of many months ago."
[Mish comment: "Why now?" is very easy to answer. The blowup at Bear Stearns forced the issue. The ratings companies as well as Bear Stearns was hoping that this would blow over. Obviously it didn"t in spite of a multitude of fools yapping on CNBC how contained this mess is. Guess what? It"s still not contained and it is going to spread all the way to ridiculously rated grade A rated paper.]
Tom Warrack, an S&P managing director, said it takes time for performance to show through.
"We have been surveilling these deals actively on a regular basis beginning in 2005 and 2006," Warrack said on the call. "We believe that the performance that we"ve been able to observe now warrants action."
[Mish comment: That is one of the most ridiculous understatements of the year. Your heels have to be colored brightly to make such a straight faced statement. Yes, "action is now warranted", but it was also warranted last month, in April, In March, in February, and in January. And action is warranted on far more than a measly 2-3% of the issues."
Fran Laserson, a spokeswoman for Moody"s, and James Jockle, a spokesman for Fitch, said they had no immediate comment.
Mish comment: This is all part of the strategy. If you can"t say anything good, then simply hide under a rock]
Huge Rally in Treasuries
By the way. That"s quite an island reversal in treasuries today. Click on chart for a better view.
Imagine what might happen if and when 65% of the subprime debt is downgraded (as it should be). Imagine the flight to safety when it spreads to A rated debt. That"s when we will really see a "stress test". If today was any indication, expect some fireworks.
Mike Shedlock / Mish http://globaleconomicanalysis.blogspot.com/
Summary: On October 4, The New York Times published a front-page article about Sen. Barack Obama"s association with William Ayers -- at least the 18th Times article this year mentioning that association. But the Times has yet to mention Sen. John McCain"s relationship with G. Gordon Liddy. The October 4 article quoted Chicago Tribune columnist Steve Chapman denouncing Obama"s association with Ayers but did not note that Chapman has described Liddy as McCain"s "own Bill Ayers" and written that "[i]f Obama needs to answer questions about Ayers, McCain has the same obligation regarding Liddy." LinkHere
Source: AP April 19 (Bloomberg) -- U.S. former president Jimmy Carter met with the exiled leader of the militant Hamas group and his deputy today, for the second time in as many days, the Associated Press reported. Carter"s approximately hour-long meeting today with Khalid Mashaal and his deputy, Moussa Abu Marzouk, in Damascus, Syria, was in defiance of U.S. and Israeli warnings, the news agency said. Marzouk said Carter and Mashaal discussed a possible prisoner exchange with Israel and the siege imposed by Israel on the Hamas-controlled Gaza Strip, according to the AP. The two Palestinians are considered terrorists by the U.S. government, and Israel accuses them of masterminding attacks that have killed hundreds of civilians, the AP said. The first meeting was yesterday, according to the news service.
U.S. lawmakers will have to consider providing aid to about 2.2 million subprime mortgage borrowers who are at risk of defaulting and losing their homes, Senate Banking Committee Chairman Christopher Dodd said today.
"The impact of losing 2.2 million homes I suspect will be in a lot of areas of our cities and towns that are already pretty hard hit, so we clearly want to look at that and legislate," Dodd, a Democrat from Connecticut, told reporters in Washington after a speech to the National League of Cities.
Foreclosures involving homeowners who took out subprime loans from 1998 until 2006 could cost $164 billion, Dodd said, quoting a December study by the Center for Responsible Lending in Durham, North Carolina. The government needs to provide at- risk homeowners "forbearance or something like that to give them a chance to work through and get a new financial instrument here that they can manage financially better," Dodd said.
[Mish: Why does the government "need" to do anything of the kind? If is stupid government policies in the first place that led to this mess. If there is a "need" to do anything it is the need to get rid of Fannie Mae, and all the affordable housing legislation that Congress has passed]
Congress "may need to do something much more quickly to provide some protection or you could end up with a lot of poverty and blight," Dodd said. Federal aid of a few billion dollars "may be a lot less costly" than $164 billion in lost wealth, he said.
[Mish: Let"s face the facts. This has nothing to do with blight. This has everything to do with bailing out your banking cronies at the expense of the prudent. It also has to do with buying votes.]
Mortgage defaults during the next two years may rise to $225 billion, with about $170 billion tied to subprime loans, according to a report yesterday by analyst at Lehman Brothers Holdings Inc. led by Srinivas Modukuri. Subprime borrowers are those with poor or limited credit backgrounds or high debt.
Dodd didn"t specify the channel through which the government would offer aid. "I don"t want to settle on the specifics of it, but clearly we are looking at what we can do to help out."
[Mish: I am 100% confident that whatever program is initiated will be what lending institutions ask for. None of it will do consumers any good at all.]
Dodd reaffirmed a plan to introduce a bill that would combat predatory lending. "There is a difference between a subprime lender and a predator, and I don"t want to lose the subprime lender" he said.
"Finally the federal regulators are beginning to indicate that they want to start requiring similar standards to be used for prime and subprime lending," Dodd said, referring to the new guidelines.
[Mish: Like the Fed, Congress is acting 4 years and trillions of dollars too late. Where were you 4 years ago when something needed to be done?]
"I am a strong advocate of subprime lending," Dodd said. "I don"t want that word to become a pejorative as junk bonds did."
[Mish: The fact that government is a "strong advocate of subprime lending" is one of the reasons we are in this mess. You and your "ownership society" have no business promoting housing over renting. It is the market"s job to do that. When you interfere "stuff happens" to put the term politely. By the way, subprime is already as pejorative as "junk". And speaking of junk, take a look at corporate bonds. Those too are nearly all junk and we are about to have a second purge of junk bond lending as well.]
This bubble is exactly the result of both the Fed and Congress interfering against normal market forces. The market has now taken care of subprime lending (or rather is in the process of doing so) and any bills Congress passes at this point are just going to cause additional distortions. This idea was outlined in Malinvestments, Predatory Lending, and Demagogues.
It"s high time Congress spares us the Dudley Do-Right Charge in favor of letting the market take care of it. But no! Congress never learns. Or perhaps I mean they have learned too well. To stay in power, Congress takes handouts from the financial industry (and every other industry that wants to buy legislation for that matter) while simultaneously attempting to buy votes from the public.
No doubt the inflationists will be all over this, but some sort of reaction by the Fed or government was predicted well in advance by me and most likely a few other deflationists as well. I have no doubt the Fed will be cutting interest rates as well. But as I have pointed out before, such interference policies work until they don"t. I think we have finally reached the point where these policies will no more work here than they did in Japan.
Three Reasons Bailouts Will Fail
Consumers are going to be unable to take on more debt in the face of falling home prices.
A recession will force a cutback in consumer spending.
Credit will tighten up such that banks will be unwilling to lend given falling asset prices and rising credit risk.
Number 3 above is happening already and it will spread further. A significant repricing of both assets and risk will be the result. Unfortunately this tsunami is about to hit the baby boomers just as they think they are ready to retire.
Mike Shedlock / Mish http://globaleconomicanalysis.blogspot.com/
Several small townships in northern Norway went along with a securities firm"s advice and invested as much as NOK 4 billion in complicated American commercial paper sold by Citibank. They now risk losing it all.
The township politicians are both embarrassed and angry at the financial advisers who they now claim led them astray. "They think we"re a bunch of small-town fools," one local mayor told newspaper Dagens N�ringsliv.
Officials in four northern Norwegian townships (Narvik, Rana, Hemnes and Hattfjelldal) went along with an alleged recommendation by Terra Securities to invest a total of NOK 451 million in what they"re now calling "high-risk structured products" offered by Citibank and sold for Citibank by Terra.
To boost returns, the Norwegian townships also borrowed NOK 3.5 billion to invest in Citibank"s products, which later lost as much as 50 percent of their value because of the US credit crunch.
By now it should be clear that Asset Backed Commercial Paper ABCP problems are likely to turn up anywhere and everywhere.
Here is a small sampling:
Two Bear Stearns (BSC) Hedge Funds went to Zero
Two Hedge Funds in Australia liquidated
Money has been frozen in Canada including the Yukon
US and Canadian pension plans are affected
Two banks in Germany were bailed out by the ECB
Norway Townships borrowed money to invest in this mess
Citigroup (C) and Merrill Lynch (MER) both lost their CEOs over this mess
Hundreds of $billions in potential losses are still circulating
The latest news in the US is that SIV debts are hiding in scores of public school funds and close to a $billion in defaults losses had not even been disclosed as late as a week ago even though this mess has been brewing for six months. See SIV Debts A Disaster For Public School Funds for more on this story.
Very Expensive Lessons
Don"t chase yield
Don"t buy something you do not understand
There is no free lunch
Rating agencies opinions are essentially worthless because they are never timely enough and because their business model creates enormous credibility as well as conflict of interest issues
That last point is critical. Lack of trust will impact Citigroup, Bear Stearns, and Merrill Lynch"s credibility, as well as their ability to raise capital for years to come. Trust once lost, is not easily restored.
Mike Shedlock / Mish http://globaleconomicanalysis.blogspot.com Click HereTo Scroll Thru My Five Most Recent Posts
The U.S. is in deeper trouble than I thought, if Warren Buffett is right. In proclaiming an �all-in wager on the economic future of the United States, Buffett just paid $44 billion for a 19th century technology platform, a railroad, that carries 20th century goods�coal, agriculture, imports from Asia, petroleum. This is a vision of an America mired in the past and in economic and political decline.
And Buffett just might be right. He has a great track record betting against innovation. His company, Berkshire Hathaway, is famous for investing in insurance companies and utilities, and avoiding high tech and innovative corporations. Its stock is up 84% over the past decade, while the S&P 500 is down by 18%.
I�m hoping that Buffett�s vision of the future is wrong. I�m hoping that a US economy based on making, not consuming, green, not carbon-centric, based on digital not metal network platforms, will drive economic growth and prosperity. I�m betting on innovation.
The purchase of the Burlington Northern Santa Fe railroad may have one benefit lost on Buffett. A 19th century network platform that is a railroad may have new life in an energy-conscious 21st century economy. Railroads, as we all know, are among the most energy-efficient modes of mass transportation for goods and people. Updating that platform, making it even faster and cheaper, could help propel the U.S. into a very different kind of future than the one envisioned by Buffett. That would be a future where railroads shipped exports of innovation new products and capital goods that reduced carbon energy.
Every week there are a numerous headlines that are worthy of mentioning but I simply run out of time. Here are a few headline news reports of interest from the past week. Japan�s Factory Output Falls as Turmoil Hurts Exports
Japanese manufacturers reduced production in October and plan further cutbacks as a worsening global financial crisis weakens exports. Factory output fell 3.1 percent from September, when it rose 1.1 percent, the Trade Ministry said today in Tokyo. Economists surveyed by Bloomberg estimated a 2.5 percent drop.
Exports fell last month at the fastest pace in almost seven years and companies are responding to the slump by cutting everything from production to jobs and investment. Sharp Corp. said last week it may have to reduce output of televisions and fire some of the people who work on production lines; Toyota Motor Corp. will get rid of half its temporary employees; and Canon Inc. has postponed construction of a new factory.
Canadian shopping enthusiast Heather Gore described to CTV"s Canada AM the long lineups at a Niagara Falls, N.Y., outlet mall where she was shopping at 12:01 a.m. on Friday morning."I have been coming here on Black Friday for the past five or six years," she said. "This year is the busiest I"ve ever seen it." Gore, a Toronto lawyer and veteran cross-border shopper, said she had seen many Canadians at the malls on Friday morning.
Some U.S. retailers, in fact, appealed directly to Canadian shoppers, in an attempt to bring them across the border for Black Friday. In Detroit, mall owner Taubman Centers Inc., offered a $20 gift card voucher to the first 2,008 vehicles travelling through the Detroit-Windsor tunnel between 5 a.m. and 10 a.m. on Friday.
"For those Canadians who make Black Friday an annual shopping tradition, we would like to be their shopping destination of choice," Taubman spokesperson Karen MacDonald said in a release.
Three violent deaths in two stores marred the opening of the Christmas shopping season Friday. In the first, a temporary Wal-Mart employee was trampled to death in a rush of thousands of early morning shoppers as he and other employees attempted to unlock the doors of a Long Island, New York, store at 5 a.m., police said.
Video showed as many as a dozen people knocked to the floor in the stampede of people trying to get into the Wal-Mart store, Fleming said. The employee was "stepped on by hundreds of people" as other workers attempted to fight their way through the crowd, Fleming said. "Several minutes" passed before others were able to clear space around the man and attempt to render aid. Police arrived, and "as they were giving first aid, those police officers were also jostled and pushed," he said.
In the second, unrelated incident, two men were shot dead in a Toys "R" Us in Palm Desert, California, after they argued in the store, police said.
The nation�s real estate crisis has claimed its first title insurance giant, with Richmond, Va.-based LandAmerica Financial Group saying Wednesday morning that it had filed for bankruptcy protection amid a burgeoning mortgage crisis that, as of yet, shows no sign of slowing down.
The company said it and a subsidiary filed to reorganize under Chapter 11 of the U.S. bankruptcy code, and that it would sell its title underwriting subsidiaries, Lawyers Title Insurance Corporation and Commonwealth Land Title Insurance Company, as well as United Capital Title Insurance Company, to subsidiaries of Fidelity National Financial (FNF).
As the recession worsens, a lot of rich men are finding their gold-digging wives are taking to their heels.
The Toxic Wife is the woman who gives up work as soon as she marries, ostensibly to create a stable home environment for any offspring that might come along, but who then employs large numbers of staff to do all the domestic work she promised to undertake, leaving her with little to do all day except shop, lunch and luxuriate.
Like a frog, the Toxic Wife needs to hop safely on to another lily pad, and a rich one, before leaving her husband. She won"t stand on her own two feet. And finding a job is quite beneath her.
Lead fell to a two-year low in London as reductions in automobile production erode demand for the metal used mostly in car batteries. Copper declined. U.S. vehicle sales at the lowest since 1991 prompted cuts at General Motors Corp. and Ford Motor Co. China�s output of lead concentrate, used to make refined metal, climbed 14 percent in the first 10 months, according to Mainland Marketing Research Co.
Lead for delivery in three months declined $81, or 6.8 percent, to $1,105 a metric ton on the London Metal Exchange, the lowest since July 2006. Prices have dropped 57 percent this year. Inventories in warehouses monitored by the LME rose 250 tons, or 0.6 percent, to 41,200 tons, according to the exchange�s daily report.
Copper fell on concern a slumping U.S. economy will crimp consumption of Chinese imports and demand for industrial metals in the Asian economy. Some economic indicators in China showed a �faster decline� this month, National Development and Reform Commission Chairman Zhang Ping said in Beijing today.
Copper usage in the U.S., the largest buyer after China, fell 9 percent in the first eight months and demand in China rose 13 percent, according to the International Copper Study Group.
If you think the housing slump can"t get much worse, Martin Feldstein thinks that both home prices and the broader economy can � and very likely will � get a whole lot worse.
"There are now 12 million homes in the United States with a loan-to-value ratio greater than 100 percent. That"s one mortgage in four. The aggregate amount of that is some $2 trillion," said Feldstein. "If you look at the median (midpoint) loan-to-value ratio in that 12 million group of underwater mortgages � mortgages with negative equity � the median loan-to-value ratio is 120 percent."
That means about 25 percent of all U.S. mortgages are exceed the value of the homes the mortgages are financing. In the case of half the homes that are underwater, homeowners are paying a mortgage that"s now 20 percent higher than the value of the home.
That"s bad � but it"s likely to get worse.
A recent report by First American Core Logic, a real-estate data firm in Santa Ana, Calif., estimated that as of Sept. 30, 7.5 million mortgages, or 18 percent of all properties with a mortgage, had negative equity. The group thinks there are another 2.1 million mortgages that are within 5 percent of going underwater.
The implications for many homeowners are staggering. Before the recent housing boom of 2000 to 2006, homes increased in value at a historical annual rate of about 2.3 percent when adjusted for inflation.
That means that for homeowners who owe 35 percent more than their homes" value, it would take, at historical averages, about 15 years just to break even on their home investment. They won"t build equity. It would be a huge incentive for millions to hand the keys back to the lender and seek cheaper housing.
Central banks around the globe have slashed interest rates to try to ease the flow of credit and restart stalled economies. Economic sentiment in Europe"s single currency zone hit 15-year lows in November and inflation expectations plunged, boosting the case for a big rate cut from the European Central Bank (ECB) next week. "The euro zone is in a deep recession, upping the pressure on the ECB to cut interest rates further," said Christoph Weil, economist at Commerzbank. "We envisage a first move next week on a scale of 75 basis points to 2.5 percent."
The Bank of England is also expected to cut rates by 50 basis points or more on Dec. 4, a Reuters poll showed. Benchmark rates are 3.25 percent in the eurozone and 3.0 percent in Britain, against 1.0 percent in the United States. China"s central bank cut interest rates by the biggest margin in 11 years on Wednesday in response to a crisis which is reining in its once runaway growth, bringing worries about social unrest as jobs disappear.
Even as the holiday shopping season begins in full swing, the same events poisoning the housing market are now at work on commercial properties, and the bad news is trickling in. Malls from Michigan to Georgia are entering foreclosure. Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages.
That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies" credit.
"We"re probably in the first inning of the commercial mortgage problem," said Scott Tross, a real estate lawyer with Herrick Feinstein in New Jersey. That"s bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.
Unlike home mortgages, businesses don"t pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About $20 billion will be due next year, covering everything from office and condo complexes to hotels and malls.
Woolworths Group Plc was left on the edge of failure and MFI Retail Ltd. collapsed, putting more than 30,000 U.K. jobs at risk, after the economy"s slide into a recession caused consumer spending to slump.
As sales crumbled, the retailer was hampered by debt that totaled 295 million pounds when its first half ended on Aug. 2, more than 16 times its current market value. Woolworths had interest costs of 18.6 million pounds in the period, more than today"s market capitalization. The stock has plunged by nine- tenths this year after falling 62 percent in 2007.
U.K. home sales are at the lowest level in at least three decades, the Royal Institution of Chartered Surveyors said Nov. 11. A seizure in credit markets has restricted banks" ability to lend even as the Bank of England cut interest rates to the lowest since 1955.
The spending dropoff claimed victims from Ilva Furniture Ltd. to home wares retailer Rosebys Ltd., which both collapsed in September. Fashion chain MK One came under the control of administrators this month for the second time in 2008.
Life Plaza Center in San Gabriel used to teem with diners heading to Green Village, a Chinese restaurant in the middle of the horseshoe-shaped mall on Valley Boulevard.
But after the eatery closed five months ago, the 7,500- square-foot space remained vacant. With no tenants stepping forward and fewer customers clogging the parking lot, the plaza is quiet, with a curiously dark core.
It"s a scene repeated in various forms throughout the region, as the economic crash that started rolling through single-family housing more than a year ago begins to hit shopping centers, turning what had been a residential phenomenon into one that threatens commercial real estate as well.
Business is so bad that an increasing number of retailers are calling it quits -- without waiting to see whether money can be made as the Christmas season gets underway.
For property owners, the loss of tenants means more than a reduction in the revenue that is collected from rents. If one store closes, customers are less attracted to the center overall, and the losses can snowball. Whereas in previous years it was easy to find new tenants, now they are scarce. And as the property owners find themselves getting in trouble, their typical recourses -- to sell the building or refinance it -- are also stymied by the stuck economy.
"We were charging $2.75 a square foot, but if we can get $1.75 for it, we"d be very lucky now," said Art Ko, a leasing agent for STC Management. "It"s hard to even grasp what"s a fair market price now. Everything is up in the air. We"ve had many deals where people just walked away the last minute. It"s a buyer"s market."
Satellite Asset Management LP, founded by former employees of billionaire George Soros, stopped client withdrawals from its three largest hedge funds and eliminated more than 30 jobs after losses reduced the firm�s assets to about $4 billion this year.
Satellite Overseas Fund Ltd., Satellite Fund II LP and Satellite Credit Opportunities Ltd. have declined as much as 35 percent in 2008, said a person with knowledge of the funds� performance. Simon Rayler, Satellite�s general counsel, declined to comment and wouldn�t disclose how many people remain at the firm�s New York headquarters or London offices. Satellite oversaw about $7 billion for clients at the end of last year.
More than 75 hedge funds have liquidated or restricted investor redemptions since the start of the year as they cope with fallout from the global financial crisis. Investors pulled $40 billion from hedge funds last month, while market losses cut industry assets by $115 billion to $1.56 trillion, according to data compiled by Hedge Fund Research Inc. in Chicago.
Investors including private-equity firms may find it easier to acquire U.S. banks after the Federal Deposit Insurance Corp. said it will let groups without charters bid for the deposits and assets of failing lenders.
The FDIC change, announced in a press release today, will help ensure �failing institutions are resolved in a manner that will result in the least cost to the Deposit Insurance Fund� by marketing assets to �known, qualified and interested bidders.�
U.S. regulators this year have seized 22 banks, the most since 1993, amid a credit crunch that fueled more than $968 billion in financial-company losses and writedowns since 2007. The Office of the Comptroller of the Currency on Nov. 21 granted a new type of national bank charter called a �shelf charter,� also designed to find buyers for failed lenders.
�This is the government being flexible,� said William Sweet, a partner in the Washington office of law firm Skadden, Arps, Slate, Meagher & Flom LLP. �They simply are trying to accommodate the interest by investors and the need for capital.�
The Federal Deposit Insurance Corp. said Tuesday the list of banks it considers to be in trouble shot up nearly 50 percent to 171 during the third quarter -- yet another sign of escalating problems among the institutions controlling Americans" deposits.
The 171 banks on the FDIC"s "problem list" encompass only about 2 percent of the nearly 8,500 FDIC-insured institutions. Still, the increase from 117 in the second quarter is sharp, and the current tally is the highest since late 1995.
Banks that don"t make the list can end up collapsing anyway -- the two biggest bank failures over the past year, Washington Mutual Inc. and IndyMac Bancorp, had not been on the FDIC"s list of troubled banks. Wachovia Corp., which nearly failed before it got bought by Wells Fargo & Co. in October, had not been on the list, either.
Nine banks failed in the third quarter, decreasing the FDIC"s deposit insurance fund to $34.6 billion from $45.2 billion in the second quarter. This quarter, the pace appears to be picking up -- nine banks have already failed since Sept. 30, including Downey Savings and Loan Association, based in Newport Beach, Calif.
"To some extent, a bank failure is a regulatory failure," Ely said. Regulators, if they address bank problems early on, can convince a troubled bank to sell off assets, raise capital or find a buyer, he said. "My hope is they"re moving faster on these problems."
The FDIC said Tuesday that commercial banks and savings institutions suffered a 94 percent drop in third-quarter profits to $1.7 billion from $27 billion in the same period last year. Except for the fourth quarter of 2007, it was the lowest quarterly profit since the fourth quarter of 1990. Those institutions wrote off $27.9 billion in loans as uncollectible during the quarter.
Recently, community banks -- defined as those with assets under $1 billion -- have started to show similar stresses as their larger counterparts, the FDIC said.
A Federal Reserve Bank of Dallas survey released Monday says Texas businesses are reporting sharp drops in most indicators of current activity. And nearly two-thirds of the 101 firms responding to the November Texas Manufacturing Outlook Survey said their evaluation of general business activity had worsened.
Several indexes for future production fell to their lowest levels since the survey started four years ago. The volume of new orders sunk to a record low, with more than half of those surveyed reporting decreases.
Texas produces more than 8 percent of manufactured goods in the U.S., behind only California.
A farm couple got a huge surprise when they opened their fields to anyone who wanted to pick up free vegetables left over after the harvest -- 40,000 people showed up.
Joe and Chris Miller"s fields were picked so clean Saturday that a second day of gleaning -- the ancient practice of picking up leftover food in farm fields -- was canceled Sunday. " "Overwhelmed" is putting it mildly," Chris Miller said. "People obviously need food."
She said she expected 5,000 to 10,000 people to show up Saturday to collect free potatoes, carrots and leeks. Instead, an estimated 11,000 vehicles snaked around cornfields and backed up more than two miles. About 30 acres of the 600-acre farm 37 miles north of Denver became a parking lot.
Coffee farmer Joao Carlos Terra says his trees will yield about a third less than planned next year because he can�t get a big enough loan to buy fertilizer and pesticide as the global credit crunch bites in Brazil.
Terra received only 10,000 reais ($4,300) of the 35,000- real loan he needed this month, so trees that should yield 250 bags of coffee next season will likely produce just 170, he said. Terra is planning to pick up extra work as a farmhand to support his wife and two sons.
�It�s kind of impossible to keep going like this,� said Terra, 29, who grows arabica coffee on about 10 hectares (25 acres) in Bom Jesus da Penha, a city in the southeastern state of Minas Gerais. �I don�t know what will happen.�
Freddie Mac�s portfolio of mortgage assets grew at an annualized rate of 44 percent in October after regulators directed the government-run company to ramp up purchases to ease constraints on the U.S. housing market.
The portfolio rose to $763.7 billion for the first full month that Freddie was under federal control, adding $26.8 billion in net new purchases of home loans and mortgage bonds, the McLean, Virginia-based company said in its monthly volume summary today. Freddie had cut its holdings by $61.4 billion in August and September �as it struggled to remain independent,� Jim Vogel, a debt analyst at FTN Financial wrote in a note today.
Freddie and Washington-based Fannie Mae, which slowed their growth to protect against rising delinquencies, were seized by regulators on Sept. 6 and directed to focus on helping struggling homeowners.
Puzzled zookeepers in northern Japan have discovered the reason why their attempts to mate two polar bears kept failing: Both are female.
The municipal zoo in the city of Kushiro in Hokkaido brought in a polar bear cub three years ago. They named it Tsuyoshi, after the popular baseball outfielder Tsuyoshi Shinjo, and waited until it reached reproductive age.
In June, the zoo introduced Tsuyoshi to its resident bear, an 11-year-old female named Kurumi, and waited for sparks to fly. But much to the disappointment of zookeepers, Tsuyoshi never made any amorous advances toward Kurumi. Earlier this month, zookeepers put Tsuyoshi under anesthesia to get to the bottom of the matter. That"s when they made their discovery: Tsuyoshi is a female.
New Breakfast Cereal A Smash Hit
Shoppers everywhere are lining up for "Credit Crunch" the cereal.
Parents take note that it"s fortified with hedge funds, kids love the free helicopter, and everyone loves the sugar coated derivatives. Enjoy a bowl with your kids today.
Something for everyone including weekend animal stories.
