The Federal Reserve has accused banks of ignoring the risks of commercial real estate loans. Sound familiar? US banks have apparently been slow to realise losses from commercial property debt, and banks with heavy exposure to such loans have “set aside just 38 cents in reserves during the second quarter, for every $1 in bad loans,” according to an analysis of regulatory filings by The Wall Street Journal. “That is a sharp decline from $1.58 in reserves for every $1 in bad loans from the beginning of 2007.” Gulp.
As gold reaches yet new record highs, the US Mint has suspended production of 2009 proof and uncirculated versions of American Eagle gold and silver bullion coins due to “unprecedented demand”. This doesn’t happen often, so some conspiracy theories and historical tidbits to commemorate the occasion. Gold trading, particularly through ETFs, is attracting speculators as well as the typical risk-averse inflation hedgers: just think what would happen if speculators all sold at once. Gold is not the only asset experiencing a change in fanbase: “financial brain surgery” lies ahead as baby boomers shift from accumulating assets to making them last. And they have $10,000bn to play with.
US is considering imposing a duty of up to 98.7 per cent on imports of steel pipes in a move likely to increase trade tension with China. But Nobel Prize winner Paul Krugman argues tariffs aren’t such a big deal: he says protectionism in the 1930s was an effect and not a cause of the Great Depression, and that although growth is improving, the trade situation is worse now than it was then. Gulp again.
Australia is still doing well, with the unemployment rate falling unexpectedly from 5.8 per cent to 5.7 per cent in September (it had been expected to rise to 5.9 or 6.0 per cent), strengthening the Aussie dollar further and supporting the RBA’s decision to raise interest rates. Economists at Morgan Stanley see the Australian rate rise as the start of a new, contrary, trend: i.e. beginning to raise rates before output and inflation are back on target, to pre-empt asset bubbles. Analysts tout the next rate risers as Norway, New Zealand, Canada or South Korea.
The Latvian central bank has distanced itself from government policy on its website.
Fitch is forecasting a steep drop in UK house prices. The ratings agency expects a peak-to-trough fall of 30 per cent, based on long-run averages of the house price-to-income ratio. The current drop is at 13 per cent since the peak in October 2007, says Fitch. This as the Conservative party, likely to form the next UK government, forecasts “two years of pain” in the UK and the loss of 20,000 public sector jobs. The US is also in pain. As US government spending exceeded receipts in the fiscal year to September 30 by an estimated $1,400bn, US consumer credit is down for the seventh consecutive month. This suggests consumers are paying back debt. Laudable, in the long-term, but likely to make the US consumer-driven economy even harder to restart.
And Ireland has raised €7bn in 15-year government bonds, the distant maturity date implying confidence in spite of record government debt. It is significant that there is still demand for this debt issue, which takes total Irish bond issues this year to €32.4bn, where €25bn had been planned. Lithuania has also found demand for government bonds: the government was oversubscribed by more than 3 to 1 for its planned €1.5bn 5-year bond issue, the first since 1997, when it raised $200m.