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Mark's Market Blog

2-25-09: Recession news

By Mark Lawrence

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George Soros, billionaire and self-professed market genius (lately it seems clear that we have over-produced this category of person), said on Friday the world financial system has effectively disintegrated, actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union. He said the bankruptcy of Lehman Brothers in September marked a turning point in the functioning of the market system.

Paul Volcker, a former Federal Reserve chairman, said industrial production around the world was declining even more rapidly than in the United States, which is itself under severe strain. "I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world," Volcker said.

The Conference Board said on Tuesday that its index fell to 25.0 from a downwardly revised 37.4 in January. This is the lowest number on record. Only 8.7% of consumers expect business conditions to get better within the next six months. The percentage of consumers expecting fewer jobs in the months ahead rose to 47.3%. Low consumer confidence means low retail sales. In the US, 70% of our economy is retail consumption. We're at levels that lead one to expect more bankruptcies among major retailers,

Consumer Confidence Board ratings, Feb 2000 to Feb 2009.

U.Michigan Consumer Sentiment ratings, 1979 to 2009.

US Federal Reserve chief Ben Bernanke warned Congress on Tuesday that without the right policies from the government, the US recession could last into 2010. Unfortunately, no one is certain what those right policies are. He also outlined long-run predictions for the economy, which he said reflected "the view of policymakers that a full recovery of the economy from the current recession is likely to take more than two or three years". He described a vicious circle of rising unemployment and shrinking house prices and savings forcing consumers to cut back, which would in turn increase unemployment.

The Standard & Poors/Case-Shiller U.S. national home price index fell 18% in the fourth quarter of 2008 compared to the same period a year ago, the largest decline in the index's 21-year history. The Case-Shiller index compares the sale prices of homes against their previous sales and corrects for factors that would alter a home's value, such as remodeling. 100 represents January 2000 prices. The latest Los Angeles index number was 171, a LA house that was worth $250,000 in 2000 is worth $425,000 at today's bargain prices. Or perhaps we have a bit further to fall. It's still very expensive to buy compared to renting, but with all the empty houses it's hard to say what that means - there's pressure on rental prices just as on selling prices today.

Rent as a percentage of mortgage cost, 1990 to 2008

American International Group, rescued twice last year by the U.S. government for a total of about $150B, is asking for more aid and bracing for a fourth-quarter loss of roughly $60 billion. It would be the biggest loss in a quarter in corporate history. These losses are related to credit default swaps, CDSs, those unregulated insurance contracts, gone bad. Warren Buffet has referred to CDSs as "weapons of financial mass destruction." Interestingly, Buffet's company, Berkshire Hathaway, recently announced that it had $38B of exposure to CDS's on its books.

An Assemblyman from San Francisco argues that it's time to tax and regulate marijuana, the state's biggest cash crop, in the same manner as alcohol. Ammiano's measure, AB 390, would essentially replicate the regulatory structure used for beer, wine and hard liquor, with taxed sales barred to anyone under 21. California's pot crop is a $14-billion industry, putting it above vegetables ($5.7 billion) and grapes ($2.6 billion). This could mean upward of $1 billion in tax revenue for the state each year.

"Shoppers pay a disproportionate amount of attention to the leftmost digits in prices and these leftmost digits impact whether a product's price is perceived to be relatively affordable or expensive," write authors Kenneth Manning (Colorado St.U) and David Sprott (Washington St.U). In one experiment, Manning and Sprott asked participants to consider two pens, one priced at $2.00 and the other at $4.00. A penny decrease in the price of either pen lowered the price's leftmost digit. The researcher manipulated the prices and found that when the pens were priced at $2.00 and $3.99, 44 percent of the participants selected the higher-priced pen. But when the pens were priced at $1.99 and $4.00, only 18 percent of the participants chose the higher-priced pen.

A team of European scientists have finally solved a mystery that has perplexed humans throughout the ages: why we turn gray. Going gray is caused by a massive build up of hydrogen peroxide due to wear and tear of our hair follicles. The peroxide winds up blocking the normal synthesis of melanin, our hair's natural pigment. Turns out we're all nature's own version of the peroxide blond.

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