Global Economic Snapshot

Senior executives from the world's largest investment banks recently released a report suggesting new regulations of global credit markets. On Wall Street, there is a widespread loss of faith that the financial system can adequately assess and price risk. The report proposes stringent standards within banks for reporting the value of complex securities on balance sheets and recommends the creation of a market clearinghouse to allow quick exchange and valuation of such investments.

Snapshot asks, are these regulations cosmetic and an attempt to fend of heavy government regulation?

Financial Times - US banks urge sweeping credit market reform
Counterparty Risk Management Policy Group - Official Report

Central banks in three of the world's largest economies, the U.S., U.K., and the Eurozone, are set to decide this week whether to raise lending rates. All three economies are flirting with recession but central banks fear that lowering rates would stoke inflation. Most analysts expect the three banks will hold rates steady until further signals that inflation is cyclical. Second quarter growth in the U.S. was a sluggish 1.9%, despite the fiscal stimulus package. Meanwhile, June consumer prices rose at the fastest rate in 25 years.

Snapshot asks, in the second half of 2008, will growth or inflation dominate central banks' interest rate policy?

Associated Press -Fed Likely to Hold Rates Steady Amid Crosscurrents
Market Watch - Dollar Flat as Traders Eye Central Banks
Bloomberg - Rolling Recessions Bring Paralysis to Bernanke, King, Trichet

Despite falling prices, liquidity may be returning to California's housing market. June's unsold inventory index for existing homes in California dropped to 7.7 months, a decline from 10.2 months last year. Sales across the state rose for the third consecutive month to gain 18% from last year as deep discounts on foreclosed properties enticed buyers into the market. In the Sacramento region, one of the hardest hit markets in the nation, sales rose 95% year on year.

Snapshot asks, is this increase in liquidity in the housing market a sign that the market will soon bottom?

Wall Street Journal - Home-Price Declines Accelerate
Sacramento Business Journal - Home sales up, inventory index down statewide
Contra Costa Times - Resets Begin Peaking on Subprime Loans

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Regional banks are finding it difficult to raise enough capital to fend off fears over their poor financial health. A recent report from Goldman Sachs claims banks will need $65bn in addition to the $120bn they already raised to shore up their balance sheets. Most national and global banks continue to find investors, but regional banks are struggling to secure financing and investors are convinced they are too small to receive a government bailout. Last week, IndyMac's failure will likely cost the FDIC almost 8 billion dollars.

Snapshot asks, is the FDIC's $53bn fund adequate to handle a run on regional banks?

The unprecedented rise in oil prices from 100 dollars to almost 150 dollars a barrel over the past six months has stoked speculation over the possibility of oil hitting 200 dollars in the near future. Call options for oil at 200 dollars a barrel doubled in trading over the past month and more companies are buying long term contracts locking them into high oil prices, an indication that the market anticipates further oil price increases. Such an outcome would devastate the world economy, especially the automobile and airline industries, and would cripple American consumers.

Snapshot asks, how much of this unparalleled increase in prices is due to speculative fever as opposed to market forces?

Businessweek - What If GM Did Go Bankrupt...
Market Watch - Allianz predicts oil price of $200 barrel in next 2 years
Financial Times - Bets double on oil hitting $200
Wall Street Journal - Oil's Rapid Rise Stirs Talk of $200 a Barrel This Year

Bond insurers are in trouble again, and banks will be forced to look for more capital. But the sovereign funds that bailed out investment banks in the winter may have lost their appetite for financials. A recent short-list of potential investors for Washington Mutual was absent of eight sovereign wealth funds the bank approached earlier. Merrill Lynch overcame investor reluctance in its last round of capital raising by agreeing to strict restrictions on subsequent share offerings.

Snapshot asks, as banks face further write-downs and seek to raise capital, will better deals lure sovereign wealth funds back into financials?

Falling currencies and rising prices for food and fuel are raising inflationary pressures to dangerous levels across Asia. Annualized inflation reached 4.9% in South Korea and over 11% in India. As domestic pressure mounts from consumers and labor unions, Asian central banks are reversing long standing policies designed to maintain weak currencies and benefit exports, and are instead actively intervening to push up currency values and lessen the blow from rising import costs.

The only nation not caught up in this wave is China. While consumer inflation reached its highest levels in a decade, the government has stifled domestic discontent and the trade surplus has held steady despite rising import costs.

Snapshot asks, will rising commodity and fuel prices force a greater Chinese response?

With the rising price of oil, a consensus has been building that the world is becoming less "flat" than it was in Tom Friedman's bestseller The World is Flat. With higher energy prices global supply chains will fail, countries in East Asia will re-think their export orientation and try to stimulate domestic demand, and countries such as the United States may gain a competitive edge in their domestic market. Oil makes up nearly half of total freight costs and over the past three years every one dollar rise in oil caused a 1% increase in transport costs.

Snapshot asks, will higher energy costs make U.S. manufacturing more competitive?

Business Week - Can the U.S. Bring Jobs Back from China?
Morgan Stanley - High Transport Costs to ‘Un-Flatten' the World
Wall Street Journal - China's Export Machine Threatened by Rising Costs
CIBC - Will Soaring Transport Costs Reverse Globalization?

Central banks may be diversifying away from the dollar, but they are still buying more U.S. Treasury bills than ever. This may seem impossible until you look at central bank reserve growth in 2008 and realize that there may not be enough U.S. Treasuries to satiate the explosion in worldwide reserve growth.

The People's Bank of China's reserves increased $230bn in the first four months of 2008 - a figure beyond imagination just a couple years ago. The majority of sovereign wealth is still invested in safe and liquid US Treasuries.

Snapshot asks, will sovereign investors ever change their ways?