Fed's volte face sends the dollar tumbling,economy in decline, QE II to start soon?

The very respected Ambrose Evans-Pritchard writes in the Telegraph fom London:

"Rarely before have a few coded words in the minutes of the US Federal Reserve caused such an upheaval in the global currency system, or such a sudden flight from the dollar."

I also note that "quantative easing" is mentioned in this article.

The Fed minutes warned of "significant downside risks" and a possible slide into deflation, an admission that zero interest rates, $1.75 trillion of QE, and a fiscal deficit above 10pc of GDP have so far failed to lift the economy out of a structural slump.

"The Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably," it said. The economy might not regain its "longer-run path" until 2016.

"The Fed is throwing in the towel," said Gabriel Stein, of Lombard Street Research. "They are preparing to start QE again. This was predictable because the M3 broad money supply has been contracting for months."

The Fed minutes amount to a policy thunderbolt, evidence of how quickly the recovery has lost steam. Just weeks ago the Fed was mapping out withdrawal of stimulus.

This is a must read. Its a little long but compelling. Click on the heading above for the link.

Recovery does not require more stimulus, Fed officials say

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, and Richard Fisher, head of the Federal Reserve Bank of Dallas, indicated that although economic growth is cooling, more stimulus is not necessary. Hoenig also reiterated his stance that the Fed should increase its key interest rate to 1% to keep inflation at bay and counter the threat of asset-price bubbles. Meanwhile, Fisher said additional asset purchases by the Fed are not needed.
Bloomberg

Yes Mr Hoenig, it is time for the Fed to stop buying financial assets and to start buying real assets... try real property so that the Dollar is backed by something in addition to gold.

US home forfeitures

This page is about distressed sales of homes. Its a little dry but is vital reading for all.

The main questions are whether the backlog is being cleared and whether distressed sales are affecting prices.

Thank you Clear on Money.

http://www.clearonmoney.com/dw/doku.php?id=public:us_home_forfeitures

Summary
23 Jun 2010.

The underlying trend in US distressed home sales has been upward for about a year. Despite some ambiguity and incompleteness in the seven available data series, it is clear that the upward trend remains intact.

House prices are inversely related to the fraction of all sales that is distressed, where bank sales and short sales constitute the distressed category. The rate of change in house prices is inversely related to the inventory of existing homes, measured in months of supply. Both of these measures now suggest falling prices.

Industrial Production In and Out of Recession

Industrial production plays a key cyclical role

Industrial production is more cyclical than the economy on average. That is, it falls further during recession and jumps more during recovery. The current recession started in January 2008 (with the prior expansion peaking in December 2007). How does this manufacturing recession compare to recent recessions? Is this the worst manufacturing recession since the end of World War II? And which industries have been hit the hardest and which have fared the best?


Different cyclical patterns

Recent recessions have followed different patterns. Thus far, the current recession in manufacturing is most like the 1973-75 recession. However, the 1973-75 saw an upturn in manufacturing 19 months after the peak. With one major auto producer in bankruptcy and another likely, it is not a good bet that manufacturing in this recession will begin recovery by July. Adding to this improbability is the downturn in exports, falling demand for construction supplies, and no pickup in consumer demand.

Both the 1990-91 and 2001 recessions were shallow and relatively short. It is interesting that the Fed has cut interest rates even more this recession than during the 2001 recession but the economy has responded less this time around. This speaks volumes on how different the current recession is – being more of a credit crunch than a simple downturn in demand and output.



The two years of data for the 1980 recession looks like a roller coaster. Not only did the 1980 recession (induced by oil price shocks to a large degree) end quickly, but it also fell back into recession within that two year period (including a portion of the 1981-82 recession) due to extreme Fed tightening.



Overall, there has not been any typical recession in manufacturing going back to 1972. But the current recession certainly is worst thus far and even is likely the worst since the end of World War II.
The hardest hit industry by market groups is consumer autos, down 34.5 percent since the end of expansion. Housing pulled down output sharply for appliances, furniture & carpeting, down 24.8 percent, and construction supplies, down 22.6 percent. On the business side of market groups, transit equipment fell 21.1 percent over the recession.

Some industries actually have not been touched much by the recession. These have been nondurables. One industry – energy – even posted a net gain of 1.7 percent over the 16 month recession period. The nondurables groups that fell little were chemical products, down 2.9 percent, and food & tobacco, down 3.2 percent. But demand has fallen for clothing and paper products with output for those groups down 14.9 percent and 10.0 percent, respectively.





Bottom Line

Indeed, the current recession for manufacturing is the worst in decades. Traditionally, the industries hardest hit during recession often rebound the most during recovery. Is that likely this time? With credit more restricted, the auto sector may not make as much of a comeback as is typical – even with interest rates so low. Tighter credit standards may cause construction industries to lag this time – notably those related to building new housing. But when home purchases do pick up, industries such as carpeting and appliances may do relatively well because they can improve along with existing home sales. Finally, if overseas economies – especially in Asia – rebound soon, we could see a rise in output for industries such as transit, industrial equipment, paper, and chemicals. Every recession and recovery in manufacturing has been different and that will likely be true this go around, too.

The Great Re-Leveraging

It's time to buy.

Over the last 30 days, a new wave of liquidity has hit Wall Street. Real estate companies are suddenly able to raise new equity at attractive prices. And big banks, which the government says need billions in additional capital, have seen their share prices rally substantially - a sign that plenty of money is now available. That clearly shows the government's efforts to stimulate the economy and provide more liquidity to the market is now working.

Commercial meltdown: Companies dumped 25 million square feet

How the commercial real estate meltdown will destroy the insurance industry... Your policies could be at risk.

From Calculated Risk:

Companies struggling to cut costs dumped a near-record 25 million square feet of office space in the first quarter, driving vacancy up and rents down, according to data to be released today by Reis Inc.

The office vacancy rate nationwide rose to 15.2% from 14.5% in the previous quarter, and likely will surpass 19.3% over the next year, according to Reis, a New York firm that tracks commercial property. That would put the vacancy rate above the level during the real-estate bust of the early 1990s, the worst on record.

China: the first to recover?

China with all their trillions of dollars sitting around losing their value, and set to lose their value even more in the future, looks to have possibly turned around their recession in a heartbeat... You may recall that China put into place a 4 Trillion renminbi Stimulus Package a few months ago... And when you deal from a position of strength, you can do these things quickly and with force. So, according to an economist at Merrill Lynch, "China looks set to be the first major economy to recover from the current global meltdown. China is the only economy in the world to see significant growth in credit to corporate and household sectors since September 2008, when the financial crisis worsened to a near collapse."