Awaiting a bailout: Metals markets are nervous

Although the metals markets should benefit from the US rescue package (when one is eventually agreed on), they are lagging behind in demand and price as they face a headwind from a stronger dollar and poor economic data. This past week, the commodity exchanges have remained nervous over demand and consumption prospects, uncertainties over the details and the timing of the U.S. financial rescue plan, and the dollar’s direction.

Industrial output fell substantially last month, the largest single-month drop since 1990 (except for the month of hurricanes Katrina and Rita). Manufacturing output was down 1%, with most of the loss due to an 11.9% drop in motor vehicles and parts. And then, the new orders for durable goods showed they were down 4.5% in August.

About that $700 billion “plan” to stabilize the U.S. financial markets – that is, the idea to set up an unnamed entity to buy illiquid mortgage–related assets from banks; is it a good idea? The principal defense is that not doing anything would have far greater economic and social consequences, according to those who know. And while it looked like we’d have Congressional agreement that would have given the Treasury immediate access to $250 billion, with another $100 billion to follow if needed (and it will be,) negotiations broke down along party line (surprise, surprise) with no agreement .

So, assuming some further redrafting of the original idea, and eventual final passage, what will this new business unit be called? Some early guesses include: “Troubled Asset Relief Program”, or TARP. Also in the running is “Secured Housing Investment Trust.” We’re sure that our clever readers can come up with other names.

And how did we get into this mess? Well, the oversimplified answer (in 100 words or less) rests with the low U.S. interest rate policy of 2002-2005; the effects of financial deregulation and the subsequent unbridled credit expansion; and the U.S. trade deficit that encouraged trading partners to lend out surplus dollars. In other words, cheap money and lax lending practices fostered irresponsible lending and equally irresponsible borrowing to the point where it became nearly impossible to assign a value to toxic mortgage-backed securities that were tied to credit default swaps and other derivatives. Consequently, balance sheets became “frozen” because no one could figure out who owed what and to whom and whether they even had the ability to pay. It’s that simple and that complex.

Misery index has returned

On the housing front this week, we noted that existing home sales decreased 2.2% in August to an annual rate of 4.91 million, less than the consensus expected…existing home sales are down 10.7% versus a year ago…also, the months’ supply of single-family existing homes fell from 10.4 in July to 10.0 in August. But despite some hopeful signs, FT Advisors, for one, notes that prices continue to weaken and are unlikely to hit bottom “for about another year.”

Also, new single-family homes were sold at an annual rate of 460,000 in August, and much slower than the consensus expected 510,000 pace…sales are down 34.5% versus a year ago and down 66.9% versus the peak in 2005.

With no shortage of disturbing macro news, some folks have resurrected the so-called “misery index” that became popular during the Carter administration as the U.S. back then faced rising inflation and unemployment. The “index” is simply the sum of both, and during the Jimmy Carter years (1977-1981), the index rose to 21.9. We’re currently at 11.5 but both components are moving up with the CPI at 5.4% and the unemployment rate at 6.1%, we’ll be keeping an eye on the misery.