by Calculated Risk on 6/30/2008 02:23:00 AM

The Shanghai SSE composite index is off another 1.9% tonight (most recent quote), and is now below 2700 for the first time since early 2007. The index is off 54% from the peak.

Click on graph for larger image in new window.

This is some serious cliff diving.

And other markets are also selling off, probably because of some combination of a slowing global economy and higher inflation.

As the NY Times notes: Falling Prices Grip Major Stock Markets Around the World

In ... Germany, the benchmark DAX index is off slightly more than 20 percent this year, and the CAC-40 in France is down almost 22 percent. The Euro Stoxx 50, a gauge for the 15-nation euro zone, has declined by about 24 percent. The nearly 15 percent decline in the FTSE 100 in Britain looks tame by comparison.

Emerging market indexes have fared even worse. The Hang Seng in Hong Kong has plunged nearly 21 percent, the Shanghai Composite has lost nearly half its value this year. The Bombay 500 in India lost about 38 percent.

by Calculated Risk on 6/29/2008 06:49:00 PM

Lawrence Summers writes in the Financial Times: What we can do in this dangerous moment

It is quite possible that we are now at the most dangerous moment since the American financial crisis began last August.

Summers has four recommendations:

First, the much debated housing bill should be passed immediately by Congress and signed into law.

I haven't commented very much about this housing bill. Many of the critics have labeled it a $300 billion bailout - it's not. The cost will only be a small fraction of that amount, and the bill will probably be inconsequential. For more on the bill, see the CBO's analysis Federal Housing Finance Regulatory Reform Act of 2008 and Vikas Bajaj's article today in the NY Times: As Housing Bill Evolves, Crisis Grows Deeper.

Second, Congress should move promptly to pass further fiscal measures to respond to our economic difficulties. ... There is now also a case for carefully designed support for infrastructure investment ... There are legitimate questions about how rapidly the impact of infrastructure spending will be felt. ...

Yes, it appears the 2nd half recovery has been cancelled and there will be calls for more stimulus packages. Some infrastructure investment - that provides jobs for unemployed construction workers - seems to make sense. Atrios made a similar point this morning.

And from Summers on inflation:

Third, policymakers need to make a clear commitment to addressing the non-monetary factors causing inflation concerns. ... the primary source of inflation concern is increases in the price of oil, food and other commodities. ... Appropriate steps include reform of misguided ethanol subsidies that distort grain markets to minimal environmental benefit, allowing farm land now being conserved to be planted; measures to promote the use of natural gas; and reform of Strategic Petroleum Reserve Policy to encourage swaps at times when the market is indicating short supply. Major importance should be attached to encouraging the reduction or elimination of energy subsidies in the developing world.

There seems to be an overwhelming consensus that corn ethanol is misguided - and yet the program persists.

Fourth, it needs to be recognised that in the months ahead there is the real possibility that significant financial institutions will encounter not just liquidity but solvency problems as the economy deteriorates and further writedowns prove necessary.

Solvency is the real issue, and I'm not sure about the solution.

by Calculated Risk on 6/29/2008 09:49:00 AM

Robert Shiller writes in the NY Times: One Rebate Isn’t Enough

In January, just before Congress passed the stimulus bill authorizing the rebate checks, Peter R. Orszag, director of the Congressional Budget Office, wrote that, in the current economic situation, there was a risk of “a self-reinforcing spiral (of less lending, lower house prices, more foreclosures, even less lending, and so on) that could further impair economic activity and potentially turn a mild recession into a long and deep recession.”

In his view, there was only a moderate probability that this “self-reinforcing spiral” would take hold. The goal of the rebate checks, he said, would be to lower this probability “to an acceptable value.” He thought that an economic stimulus bill might well make the difference.
...
Has the tax rebate substantially reduced the probability of a downward spiral?

It is too soon to tell, because the Treasury only started to send out rebate checks in late April. Retail sales did rise in May. But the dreaded serious recession still seems very much a possibility.

And Shiller goes on to argue that more stimulus is needed:

[W]e should be putting in place another stimulus package like the current one, and stand ready for another after that, and another.

With the "2nd half recovery" apparently cancelled, and the immediate effects of the stimulus mostly behind us, it is not surprising that more stimulus is being discussed. But if the stimulus checks go to Saudi Arabia or China, it isn't really helping (there is no multiplier effect).

And it's not clear how a little more consumer spending is supposed to slow the downward spiral of "of less lending, lower house prices, more foreclosures, even less lending, and so on" other than to buy a little time.

by Calculated Risk on 6/28/2008 09:14:00 PM

From the NY Times: Cruise Night, Without the Car

For car-loving American teenagers, this is turning out to be the summer the cruising died.
...
From coast to coast, American teenagers appear to be driving less this summer. Police officers who keep watch on weekend cruising zones say fewer youths are spending their time driving around in circles, with more of them hanging out in parking lots, malls or movie theaters.

by Calculated Risk on 6/28/2008 09:00:00 AM

From the NY Times: Luring Affluent Renters in Manhattan

ONE month’s free rent. Two months’ free rent. No security deposit.

How about a year’s worth of storage at Manhattan Mini Storage or an appointment at a doggie day spa for Rover on moving day?

As the rental market in Manhattan has softened in recent months, these are some of the incentives that owners of high-end buildings are offering to lure tenants.

Note that this is for some high-end buildings only. It looks like the layoffs in the financial industry are starting to bite ... and it's about to get worse:

... many of the people laid off by Wall Street firms will not officially become unemployed until their severance pay runs out. For the entire metropolitan area, she said, Moody’s economy.com is projecting a loss of 60,000 jobs by the beginning of 2009, with about 45,000 of those jobs in financial services.

by Calculated Risk on 6/27/2008 08:23:00 PM

From Edmund Conway at the Telegraph: House prices won't recover until 2015, ex-MPC expert warns

Families must wait until 2015 for the property market to start booming again, according to Stephen Nickell, who heads up the unit which advises the Prime Minister on housing planning.
...
"The housing market - in terms of the price of houses - will not look much the same as it did before the credit crunch until after six or seven years."

It's probably too early to be talking about when house prices will return to pre-credit crunch levels, but at least Gordon Brown is hearing that it will take years.

Also from the Telegraph: British household debt is highest in history

Families in the UK now owe a record 173pc of their incomes in debts, official figures have shown. The ratio of debt to income is higher than any other country in the Group of Seven leading industrialised economies, and is sharply higher than the 129pc of incomes it was five years ago.
...
Michael Saunders of Citigroup warned that - at 173pc of household incomes - the debt burden is higher even than Japan's when it peaked in 1990, before more than a decade of deflation.

"Not only are we the highest in the G7, we are the highest a G7 country has ever seen," he said.

by Calculated Risk on 6/27/2008 03:40:00 PM

From the WSJ: Deep June Car-Sales Slump Seen in J.D. Power Estimate

J.D. Power & Associates sees the market for U.S. light vehicles contracting 15.4% in the month of June compared to a year ago, according to a report released Friday ... The firm expects the closely-watched seasonally adjusted annual rate of sales to fall to 12.5 million vehicle rate, well below the 16.3 million rate set in the same period last year.

This is more grim news for the U.S. auto industry.

by Calculated Risk on 6/27/2008 01:45:00 PM

For those with a round number fetish, the Dow is now off more than 20% from the peak last October. If it closes at or below this level, then this will be considered an official bear market.

Dow closing high on Oct 9, 2007: 14,164.53

20% off would be: 11,331.62 (right now 11,326 so it's close).

The closing high for the S&P 500 was 1565.15 last October 9th and 20% off would be 1252.12 - so we still have a little ways to go for the S&P.

by Calculated Risk on 6/27/2008 10:54:00 AM

Tim Duy has another great post on the Fed being caught between inflation and recession: This Is Not Good. Here is his conclusion:

This is a no win situation...which way will the Fed turn? The Fed will hold the current policy in place until policymakers becomes sufficiently distressed by the impact of energy price inflation ... Note that market participants are increasingly aware that the Fed’s default policy for the time being is higher inflation, as evidenced by the rise in 10 year TIPS breakeven levels to 254bp today.

In theory, the best outcome is to find is a sweet spot that allows global growth outside of the US to decelerate while avoiding a free fall in the Dollar. In the absence of such equilibrium, the US economy can hobble along only as long as the following three conditions hold:

1. The Federal Reserve can maintain easy monetary policy.

2. The US government can sustain repeated fiscal stimulus measures.

3. China and the rest of the dollar bloc continue to be willing to accumulate US assets, primarily the Treasury debt needed for fiscal stimulus.

When these conditions no longer hold – such as the Fed needs to tighten to counter energy inflation, or the demand for US debt drops sharply – then I suspect the US economic environment will shift decisively toward higher inflation or significant recession.

by Calculated Risk on 6/27/2008 10:18:00 AM

From MarketWatch: Consumers extremely gloomy, UMich survey says.

The consumer sentiment index fell to 56.4 in June from 59.6 in May ... It's the lowest since 1980 and the third-lowest reading in the 56-year history of the survey.

A record number of consumers said their own finances had worsened, and inflation expectations are the highest since Feb 1982. (here is the Reuters story with more detail)

Usually consumer sentiment surveys tell you what you already know, and sentiment is heavily impacted by gasoline prices, but these are still pretty stunning numbers.