Jul 18, 2011

Misery Index Hits New High

July 18, 2011

Stocks are weak this morning as the European debt crisis continues to crumble. The Euro is down almost 1% this morning vs. the Yen, Italian, Spanish, Portuguese, and Greek bonds are all down once again today and their credit default swaps all rose to record levels. Demand for long term US financial assets (TIC flows) declined to $23.6 billion in May versus the estimate of $40.0 billion. Both Japan and China added to their holdings of US treasuries. The TIC is considered a measure of global confidence in the US economy.

The Misery Index, so named because it combines measures of consumer confidence, unemployment, and inflation to measure consumer comfort, has risen to a 28 year high (see chart below). The gauge has shown a strong inverse correlation to consumer spending.

Amazingly, eight of 90 banks in Europe failed the recent stress tests due to capital shortfalls. These banks will have to seek additional capital to shore up deteriorating balance sheets. Here in the US, Bank of America has been under tremendous pressure as speculation continues that they may have to raise at least $50 billion in additional permanent capital to offset housing related losses.

World Bank President Robert Zoellick was quite critical of US policy during a recent interview with the Washington Post. Zoellick commented that the Obama administration’s refusal to cut ethanol tax breaks and farm subsidies “doesn’t make sense when the US is trying to reduce spending. It’s a missed opportunity for a pro-growth strategy at a time when the US, and the world, could use one.” He also stated the US has failed to exercise “global economic leadership” and has become defeatist regarding the Doha round of trade negotiations.

Linked somewhat to the Misery Index above, 1 in 7 Americans are now relying on food stamps to have enough to eat. Moody’s Analytics feels food stamps are one of the most effective stimulus programs in the US, generating $1.73 in economic activity per dollar.

The Financial Stability Board (FSB) is expected to endorse a proposal aimed at avoiding taxpayer rescues of failing financial institutions. The group is discussing a capital surcharge for large banks. A high enough surcharge could be enough to end TBTF (too big to fail) as banks find it more economical to stay at a size that minimizes or eliminates the surcharge. While there are certainly economies of scale associated with financial services, I think we’ve all seen that there another economic maxim needs to be considered: the law of diminishing returns.

JetBlue was offering $4 one way, and $8 round trip flights between Burbank and Long Beach to observe Carmageddon, the closure of one of the world’s busiest stretches of highway, the 405 between the 10 and 101. The flights reached only 5K feet altitude, and lasted about 12 minutes. All the flights were sold out over the weekend. For those with the means, extended leg room seats were available for $5 each, a 25% premium.

The Women’s US Soccer Team lost in penalty kicks to Japan. It was a match that seemed to be dominated by the US, but they couldn’t convert a number of scoring opportunities. Congratulations to Japan.

Have a great day


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