ECONOMICS
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A cold winter-down turn --predicted

KATRINA:  A SHOCK TOO MANY FOR ECONOMY

REUTERS NEWS SERVICE

 

By Mike Dolan, Economics Correspondent, Sept. 1, 05.

Initial estimates of the cost of replacing insured property and goods in the area is as high as $26 billion, higher than the $22 billion of damage incurred by 1992's Hurricane Andrew -- America's costliest storm to date.  The most affected states -- Louisiana, Mississippi and Alabama -- account for less that 3 percent of overall U.S. gross domestic product.  {If you have a break down as to how much is taxes and how much is profits, send to *@skeptically.org)

 

The oil price impact will be the biggest for the national economy," economists at Goldman Sachs said in a research note.  Goldman estimates average U.S. crude oil prices of $70 per barrel for September -- close to Thursday's level of $69.45 -- could force a rise of $50-$60 billion annualized in energy spending that would force cutbacks in spending on other goods and knock half a percentage point off third-quarter GDP.  But with gasoline prices set to soar and remain above $3 per gallon and amid pre-winter fears of rising home heating costs, the timing of this regional catastrophe could have massive ripple-effect.

 

American consumers, whose spending on goods, services and houses accounted for 76 percent of U.S. gross domestic product in the second quarter.  Figures released on Thursday show the national household saving rate, at minus 0.6 percent, was the lowest on record -- falling negative for only the second time ever.  With household debt now up 60 percent in just five years, rising short-term interest rates will already be crimping wallets. Consumer mortgage interest payments alone were up 14 percent in the last year.  And, as with the devastation on the ground, poorer Americans will take a disproportionate hit from the energy price spike.  Consumer spending on gas, fuel oil and natural gas accounts for just 2.4 percent of the income of the richest fifth of households but 11.2 percent of the poorest fifth, said David Kelly, Senior Economic Advisor at Putnam Investments

The gulf's treasure-trove is its roughly 4,000 offshore oil-and-gas operations, connected to land by 33,000 miles of pipelines. Together, they account for more than one-quarter of total U.S. oil production. Louisiana's Offshore Oil Platform, known as the LOOP, also is a major entry point for foreign oil.  There was evacuation of thousands of energy workers from more than half of the gulf's nearly 1,000 manned platforms and rigs.

Gasoline prices vaulted to well over $3 a gallon in many parts of the United States after Katrina slammed the Gulf Coast, shutting down most of the region's oil production and refineries. Gasoline had sold for about $2.60 a gallon before the hurricane hit.  {How is it possible that already lower priced gas stored in refineries and service stations should be allowed to go up?  Rather should the price reflect the paid cost of the gas—jk.} 

 

For all the outrage from U.S. drivers over soaring prices, they still pay much less than their European counterparts, who have learned to adapt with much smaller cars and shorter commutes. In Britain, for example, petrol prices hover over roughly $6 a gallon.

 

 

The Looming Mortgage Bubble
Don't bank on it going quietly. And when it does, the vitality of the economy and stock market are in danger.

by David W. Tice | Jul 01 '04


In a March speech, Donald E. Powell, chairman of the FDIC, shared an interesting insight: Banks are no longer closely tied to the economic cycle. Chairman Powell noted that the banking industry has added jobs consistently since 2000, a period that includes the recent recession. In fact, rather than being dependent on the economy, banks actually have served as a "pillar of strength" for business activity.

As Powell notes, this is quite a turnaround from the 1980s when commercial banks virtually stopped growing, with earnings stalling out at around $15 billion. But during the 1990s, earnings grew almost five-fold to more than $70 billion. The FDIC chairman called the 90s a "golden era" for banking, one that he believes continues to this day. In fact, the FDIC recently reported that banks and thrifts earned $31.9 billion in the first quarter - the fifth consecutive quarterly record.

While it's true that banks have produced exceptional operating performance for some time, as Powell goes on to say, most of the banking industry's growth has been in mortgage and consumer lending. The reason, to paraphrase bank robber Willie Sutton, is that that's where the loan demand is.

However, loan demand didn't just show up at the party by accident; it was issued an engraved invitation and chauffeured in a limo. That is, Federal Reserve policies, and bankers' responses to them, created surging mortgage and consumer demand that maintained momentum through the Nasdaq collapse, a recession and a war.

The accompanying table shows how residential mortgages play a much larger role in bank loan portfolios today, while traditional lending has grown less important.

The popularity of "revolving home equity loans" is another example of the expanding role of real estate-related lending. This loan category was virtually non-existent six years ago, accounting for just over 3 percent of bank loans. Today the category takes a 7 percent share.

Of course, the shifting loan portfolio is hardly the only change in banking. With Glass-Steagall now extinct, banks rely on investment banking and even insurance operations to help deliver earnings. Still, the mortgage bubble's role in boosting bank profits cannot be ignored.

Consider that Wells Fargo regularly ranks as one of the top three mortgage providers in the country. Last year, the bank's mortgage operations were the largest contributor to non-interest income (20 percent), even more important than service charges on deposit accounts. This is no small feat given the importance of non-interest income to bank earning power.

Wells Fargo credits its ability to cross-sell products as one key to its success in the mortgage business. In fact, in its annual report Wells Fargo notes that 80 percent of its growth comes from selling various products to existing customers. The bank has certainly succeeded in the mortgage area, as 18.9 percent of its home-owning bank customers also have Wells Fargo mortgage products. That's double the 1999 percentage.

Similarly, Bank of America's mortgage banking activities accounted for 11.7 percent of non-interest income last year compared to 5.6 percent in 2002.

Currently, the below-market multiples of bank stocks are attractive to many value investors, while their historic earnings performance appeals to the racier growth stock crowd. However, judging by bank stock prices, the new "golden era" has not gone unnoticed. From the March 2000 stock market peak through May of this year, the Philadelphia Bank Index (BKX) has advanced 20 percent. That's compared to a 27 percent price drop for the S&P 500. Banks even kept pace with the broad market's sharp advance over the past year. In fact, investors rewarded bank operations by bidding up their stock prices.

New golden era or not, we can't help but wonder if banking's success can continue in an environment of weaker mortgage loan demand. For example, if the refinance market continues to shrivel, Wells Fargo will have fewer chances to cross-sell mortgage loans to its checking account customers. Given that refinancing booms have been recurring since 1998, will investors tolerate a return to mere normalcy?

The point here is not so much to pick on banks generally, but to expand on last month's comments regarding the pervasiveness of the mortgage bubble and the importance of all things mortgage-related to the economy. This is the same mortgage bubble that helped Countrywide Financial reach $8 billion a year in revenues and made it possible for a car maker (General Motors) to be one of the 10 largest mortgage services in the U.S. Meanwhile, mortgage industry employment doubled from 1992 to 2002 while annual loan production expanded an even greater 134 percent.

While the mortgage bubble could have further to run given the infatuation with adjustable rate mortgages and other "sophisticated" products, indications of the mortgage mania's mortality are growing. According to National Mortgage News, the first quarter's $599.1 billion in mortgage funding was the weakest in seven quarters. Funding by the biggest 100 lenders fell 33 percent year over year. Compare those results to the third-quarter of 2003 when originations reached $1.2 trillion.

In his speech, Chairman Powell reminded his audience that "a healthy, well-functioning banking industry is key to the economic vitality of our nation." We couldn't agree more.

But given that the mortgage bubble has permeated virtually every aspect of the economy, from mortgage insurers to homebuilders to retailers and to banks, we remain skeptical that today's vitality in either the economy or the stock market is either healthy or sustainable.

David W. Tice is a CFA and CPA who publishes Behind the Numbers, an institutional research service publication for money managers. Tice also manages the Prudent Bear and Prudent Global Income Funds. For more information, call 800-711-1848.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

 

For the best account of the Federal Reserve  (http://www.freedocumentaries.org/film.php?id=214).  One cannot understand U.S. politics, U.S. foreign policy, or the world-wide economic crisis unless one understands the role of the Federal Reserve Bank and its role in the financialization phenomena.  The same sort of national-banking relationships as in our country also exists in Japan and most of Europe.