FDIC prepares for more bank failures

Bloomberg reports : FDIC Adds Office Space in Dallas, Ready for More Bank Failures

The Federal Deposit Insurance Corp. is preparing to sign a five-year lease to add five floors of space at its Dallas regional office as the agency prepares to increase scrutiny of failing and troubled U.S. banks.

I guess this may take some time to work through.

That agency will add about 300 staff at the building, including some of the 69 retirees it is bringing back to help handle the increased workload, said spokesman Andrew Gray.

Dallas is the headquarters of the agency's Division of Resolution and Receivership, the unit that handles failed banks. The staff additions would bring the total number employees at that location to about 850, he said.

The market action in the XLF would seem to suggest the credit problems in the banks are behind us.

Debt in the name of Asia

It seems Paulson had more on his mind than helping Americans out with the housing woes.

Here's the story

I think Karl Denninger at Market Ticker sums it up best.

Worst Inflation in 27 years

The Commerce Department released the June personal income and spending report Monday morning showing inflation is growing faster than most economist expected. As reported by MarketWatch, the worst in 27 years. By my calculation that was 1980, when Paul Volcker limited the growth of the money supply, abandoning the previous policy of targeting interest rates.

Nominal spending grew 0.6% on the month, but the increase was all due to higher prices, which spiked 0.8% -- the most for a month since 1981.

Unfortunately the Fed is walking a tightrope hoping inflation expectations do not become elevated. Is the current 2% Fed Funds rate too low? Mondays numbers would suggest so.

The Fed seems committed to keeping its interest-rate target steady at 2%, in an effort to balance the risks of a more severe economic slump against the risks that inflation could get out of hand. The June income and spending report highlights both sets of risks in bold letters.

The Fed's commitment to targeting interest rates may be abandoned; just as Volcker was forced to target inflation.

However, the change in policy contributed to the significant recession the U.S. economy experienced in the early 1980s, which included the highest unemployment levels since the Great Depression, and Volcker's Fed also elicited the strongest political attacks and most wide-spread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of the high interest rates on the construction and farming sectors, culminating in indebted farmers driving their tractors onto C Street and blockading the Eccles Building.

Unemployment has already started to creep into our economy with the rate at 5.7%. One has to wonder if corporations are able to keep employment levels in tack if a worsening slowdown deepens.

One asset class that performed well during that period up until rate increases was Gold. Will history repeat itself?

Shipping costs pinch profits

In Sunday's NY Times front page: Shipping Costs Start to Crimp Globalization

Some excerpts from the story

Many economists argue that globalization will not shift into reverse even if oil prices continue their rising trend. But many see evidence that companies looking to keep prices low will have to move some production closer to consumers.

The cost of shipping a 40-foot container from Shanghai to the United States has risen to $8,000, compared with $3,000 early in the decade, according to a recent study of transportation costs.

The study, published in May by the Canadian investment bank CIBC World Markets, calculates that the recent surge in shipping costs is on average the equivalent of a 9 percent tariff on trade. “The cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today,” the report concluded, and as a result “has effectively offset all the trade liberalization efforts of the last three decades.”

Will Transportation stocks lose their luster?

In a more regionalized trading world, economists say, China would probably end up buying more of the iron ore it needs from Australia and less from Brazil, and farming out an even greater proportion of its manufacturing work to places like Vietnam and Thailand. Similarly, Mexico’s maquiladora sector, the assembly plants concentrated near its border with the United States, would become more attractive to manufacturers with an eye on the American market.

Is it time to look south of the border for opportunities?

Weekend Observations

NY Times Business Section headline "Unemployment Hits 5.7% As Jobs Fall for the 7Th Month". Quoted in the story is James Glassman senior domestic economist with JP Morgan Chase..."What we are seeing is a steady hemorrhaging of jobs, and that is going to continue until housing stabilizes and stops dragging down the rest of the economy".

Follow that up with Barron's interview NYU economist and Professor Nouriel Roubini who sees the bursting housing bubble debt related losses around $2 Trillion. " Yes , That's $2 Trillion of Debt-Related Losses. We are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year."

CalculatedRisk reports that Goldman Sachs put out a research note lowering second half projections.

That's enough to sour traders expectations come Monday when the market opens. Unfortunately, one more news worthy event occurred Saturday afternoon. Iran has decided to reject US calls for an end to their Nuclear Energy pursuits. I would expect tensions to begin to rise again in the Middle East as Israel will now question its safety in the region. Oil prices should once again see a higher premium.

History in the making

Today's financial markets are history in the making. My hope is to relay my experience to the reader. I have been an equity trader for 20 years and the tape I see today is beyond anything I have ever witnessed.

The market is always evolving and my goal is to bring about discussion and opinion.

The journey starts today August 1st 2008.