Something Brewing Upstream
The stream of bad economic news quickened last week, leading many to believe a flood is building somewhere upriver. On Sunday, the flood seemed to be confirmed as it was announced the Feds would buyout the virtually-defunct government sponsored enterprises (GSEs) Fannie Mae & Freddie Mac. We are still digesting the effects of this massive intervention in our supposedly free markets.
But last week the flotsam was the rapidly-falling price of crude oil, which ended the week at its lowest point in five months. Isn’t lower oil good news? In some ways, yes. The problem is that oil is getting cheaper because demand is falling. Demand is falling because the global economy is slowing down. When a growing number of people are not driving as much because their jobs that don’t exist anymore, of course fuel prices will fall. It is simple supply and demand.
Friday’s report on non-farm payrolls was dismal indeed. It appears that some 84,000 jobs may have disappeared in August. We say “may have” because this statistic is subject to dramatic revision. Last month, for instance, the government statisticians initially reported a loss of 51,000 jobs in July, but they have now revised this figure to 60,000. The June figures changed even more dramatically, to a loss of 100,000 jobs from -51,000 originally. Add it up and so far in 2008 some 605,000 jobs have disappeared, and the official unemployment rate now stands at 6.1%. Here again, the real number is probably quite different. People who have given up looking for a job, or people who hold part-time jobs but would like to work full-time, are not included in the statistics.
Not coincidentally, mortgage delinquencies and foreclosures are on the upswing. It seems that unemployed and underemployed people often have difficulty making their mortgage payments. According to the Mortgage Bankers Association, 6.41% of all mortgages were delinquent on their payments as of the end of June. If you zero in on subprime mortgages only, the delinquency rate jumps to 18.67%. As of June 30, 11.81% of subprime mortgages and 2.75% of all mortgages were in the process of foreclosure.
Given all this, it is fair to ask why the financial sector was one of the few corners of the market to show a gain in the holiday-shortened week? It does seem odd. Most of the gain came in a big jump on Tuesday; the rest of the week brought steady deterioration until a surge unfolded on Friday. This suggests that dollar strength and falling energy prices were beneficial to the financial sector.
Today, the markets reacted positively to the U.S. government GSE-buyout. The Dow was up 234 points or 2.1% at the time of this posting. Historically, post-intervention rallies have not been sustained over the past 13 months. We will see if this one is different. Regardless of the effect, this is the largest intervention of it’s kind since the recent market mahem commenced.