Cyrillic Partners

The Federal Reserve injected $8 billion into the economy Monday. The New York Times has the story:

The $8 billion — essentially a low-interest loan to the nation’s banks — will be issued Wednesday and repaid Jan. 10. The 43-day loan period is the longest in three years for this type of year-end injection. While it is not an unusual step for the Fed, the injection usually takes place later in the fourth quarter and involves a smaller amount. In 2005, the last time the Fed issued year-end funds, it issued 28-day repurchase agreements for $5 billion, starting Dec. 8.

Wall Street’s reluctance to lend can be intensified during the holiday season, as consumers demand more money for spending and banks look to close out their yearly balance sheets with a generous amount of capital and investments in safe-haven securities like Treasuries.

This year, anxiety about the ailing credit market has made banks more hesitant to provide their peer institutions with overnight loans, a crucial component of the nation’s economic bloodstream.

Some economists are interpreting this as a signal from the Fed that the economy is doing okay. We’re less optimistic…

Apartment hunting in San Francisco is both daunting and depressing. V and I looked at a one-bedroom place in my building over the weekend and were stunned to find that it was going for $2350 a month! We found ourselves wondering how we could ever afford to actually own a place of our own.

The Boston Globe recently ran an interesting case study on the difference between renting a place and owning it. A lady wrote to the paper asking for help assessing the deal her land lady had offered her. Broad is the paper’s evaluator and Pennucci is the lady looking to rent or buy:

Although the assessed value was $300,000, the online real estate service Zillow set the town house’s value at $240,000. Broad chose the lower number, checked out current mortgage rates, and looked at Pennucci’s tax return to calculate potential tax savings. The result: With a 6.25 percent fixed-rate 30-year mortgage, with no money down, monthly costs would come to $1,892. Given Pennucci’s 15 percent marginal tax rate, tax savings would drop the monthly expense to $1,738.

But when Broad moved on to Pennucci’s current living expenses, the benefits of home ownership began waning. Given the current $1,200 monthly rent, which Pennucci said accurately reflected the Medford rental market, ownership would increase monthly housing expenses 45 percent, costing an additional $538 a month.

“No matter how wonderful owning the place might be, right now renting is the better deal,” Broad said. The case for renting became even more compelling when Broad reviewed Pennucci’s cash flow and retirement savings.

Turns out that the extra $500+ was going to put a serious squeeze on Pennucci’s pocketbook, especially as she was looking at the cost of adopting a second girl from China.

The case study is a little misleading, though. The paper mentions Pennucci’s 15% marginal tax rate in passing. I imagine it is significantly lower than what two young professionals might expect to pay…

[Image from CartoonStock.com]

A friend from across the pond, a writer for the Economist magazine, sends the following image.

Her take? “Nice to know dollars are still good for something, eh?”

[Image Source]

The Writer’s Guild strike, already more than two weeks in progress, could be costing the Los Angeles economy more than $21 million each day, according to the non-profit group FilmL.A. The Los Angeles Times has a breakdown of the various costs associated with the estimate:

The estimate is based on the average number of employees on these shows, and their typical budgets and shooting cycles.

For example, a single episode of a drama costs about $3 million to produce, employs 300 people and takes eight days to shoot. An episode of a half-hour sitcom costs $1.5 million, employs an average of 88 employees and has a five-day shooting cycle.

Sitcoms were the first to take a hit because of the shorter lead times in writing them. During the first two weeks of the strike, filming for sitcoms outside of studio soundstages dropped nearly 50% compared with the same period a year earlier, according to FilmL.A. Activity for TV dramas has been virtually flat, while on-location reality TV shoots jumped 23% recently.

FilmL.A.’s estimate is conservative because it only takes into account jobs in the industry, not the scores of jobs at restaurants, hotels and other businesses that service Hollywood. The entertainment industry accounts for almost 7% of Los Angeles County’s $442-billion economy.

Nor does it factor in job losses from the feature film sector. Studios already have scripts in hand for their 2008 slates, so only a few feature films have delayed production, including Ron Howard’s “Angels & Demons” and Oliver Stone’s “Pinkville.”

It’s easy to poke holes in any cost-assessment, and the L.A. Times brings up a few good ones.

James “the genius” Surowiecki has a good piece in The New Yorker about strikes and why it is difficult to resolve them (read it here).

[Image from thepointmedia.com]

Christmas trees are expected to cost an average of 20% more this year according to agriculture officials in Massachusetts. The reason? See the stats from the Boston Globe’s website:

There are several reasons for the rise, including increased fuel prices, added demand, and a weak dollar that makes trees imported from Canadian farms more expensive.

Last year, 28.6 million real Christmas trees were sold in the United States at an average price of $40.50, according to the National Christmas Tree Association. Americans also bought 9.3 million fake trees at an average price of $68.

The average cost of a tree last year was 27 percent higher than in 2001, when trees cost $31.90. In a spot check of tree retailers in Massachusetts, tree prices ranged yesterday from about $25 for a 5-foot balsam fir to nearly $100 for a 10-foot Fraser fir.

How’s that for an effect of the falling dollar on inflation? Our plan this year is to buy a Christmas tree after Christmas and in advance of the new year. We’re hoping for a post-holiday price cut, but I’m not particularly optimistic.

Alan Greenspan told a group of executives in Oslo that the falling dollar shouldn’t be a Federal Reserve priority unless it is creating inflation.

From Reuters: Asked if the Fed should take the weak dollar into account, he said: “To the extent that a weakened dollar is of such a margin that it creates problems, then yes, the central bank needs to address that. One has to ask what are the inflationary consequences of a weakening of the dollar.”

This question may have more to do with the mix of imported and domestic goods that a person typically consumes. A basket of mostly imported goods would drive up an individual’s consumer-price-index. It also has to do with the price stickiness of import-competing goods. As prices on imported automobiles go up, for example, how long will it take General Motors to increase the price on its cars and trucks?

At least the former Fed chairman isn’t spouting as much doom and gloom earlier this month (see our post on it).

Russia and Italy agreed to build a natural gas pipeline under the Black Sea, skirting the former Soviet republics of Ukraine and Belarus, which have recently been giving Moscow a hard time.

Details, as covered by BusinessWeek:

If completed, the $10 billion (6.74 billion euros) project would run more than 560 miles under the Black Sea and through Bulgaria. It could eventually distribute gas to northern and southern Europe, with an estimated annual capacity of 30 billion cubic meters (1.15 trillion cubic feet).

“The South Stream project is of strategic importance for Europe’s energy security,” Putin told reporters. “It is being implemented based on principles of transparency and taking into account interests of energy suppliers and consumers.”

Prodi said Russian energy and the EU go together like “vodka and caviar.” But Europe must be mindful of the ramifications of such a culinary combination. Letting Russia supply 40% of the EU’s natural gas and a third of its oil could result in a diplomatic hangover.

[Image by AFP’s Ria Novosti]

The FOMC released the minutes from its last meeting Tuesday, showing a closely divided board when it came to cutting rates. It also downgraded its optimism on economic growth.

From Bloomberg: “Most members saw substantial downside risks to the economic outlook and judged that a rate reduction at this meeting would provide valuable additional insurance against an unexpectedly severe weakening in economic activity,” according to minutes of the Federal Open Market Committee’s Oct. 30-31 meeting. “Many members noted that this policy decision was a close call.”

The prediction for slower growth shouldn’t be that much of a surprise, not after Bernanke’s address to Congress earlier this month (read our story). Still, the extent to which the Fed anticipates a slow-down shocked some.

From CNNMoney.com: The Fed indicated in an addendum to its minutes that it now expects the economy to grow at about a 1.8 percent to 2.5 percent rate next year, down from a forecast in June of 2.5 percent to 2.75 percent growth. “I am surprised that their forecast for next year is as low as it is,” said David Resler, chief economist of Nomura Securities International Inc. “The forecast is considerably weaker than it had been and that is the most significant development in this report.”

So what’s the takeaway? Expect cuts when the FOMC meets in December. The Fed Funds Futures quoted on the CBOT indicate a 90% chance of another quarter cut in December and 67% odds that the Fed will do the same again in January.

Seems like the markets are betting against Kroszner and his sanguine predictions (which we covered here).

Read our coverage of the last rate cut here.

[Picture thanks to TheFreshTrader.com]

Iran and Venezuela have proposed that OPEC move off the U.S. Dollar as its currency of choice for pricing crude oil, but it’s not going to happen. The political move is designed to further destabilize the damaged dollar, but isn’t getting any traction from Saudi Arabia–the linchpin of any OPEC decision. (See our last story on the subject.)

Steve Hargreaves, CNNMoney.com staff writer, has a good story on the subject, with some nice reporting on what the effects of OPEC going off the Dollar. From Hargreaves’ story:

The effect that switching from pricing oil in dollars to euros might have on the American currency is hard to say, but it’s possible it could further drive down the value of the dollar and hence make oil more expensive for U.S. customers.

“That’s the political weapon Iran and Venezuela are trying to leverage,” said Peter Tertzakian, chief energy economist at ARC Financial, a Calgary-based private equity firm.

The amount of oil OPEC sells on the world market is somewhere around $1.5 billion per day, said Jeffrey Currie, the head of commodity research at Goldman Sachs in London.

Compare that, he said, to the more than $3 trillion that change hands in currency markets every day.

“You’re talking about a value that’s just too small to show up on the radar screen,” said Currie. “It isn’t enough to materially change the currency markets.”

So it’s basically a smoke screen thrown up by the leaders of countries that don’t like the U.S. to further cast doubt on the Dollar. Don’t bet on it actually happening.

[See our other stories on currency issues.]

[Image thanks to EVWorld.com]

Blogger “Macro Man” has a great post that’s both funny and scary. It’s a blog post from the future, three years out, when the dollar is worth nothing, the economy has lost steam, gasoline is at $5 a gallon and Hillary is in the White House. A small excerpt of his brilliance:

So yeah, I kind of wish that it was still 2007. Hell, I wish it could be 2007 forever. Instead, I’m stuck here in 2010. Crappy job, crappy paycheck, crappy TV. I mean, it’s a four year old 42” plasma! I can’t remember the last time I had a TV that old in my family room, and I certainly can’t remember the last time all my stuff was this far behind the latest technology. I guess my only consolation is that none of my buddies have gotten a new TV, either. No one can really afford it. For the first time in our lives, we really have to worry about saving.

Still, it’s not all doom and gloom. A couple of months ago I treated the wife to a nice weekend away while her folks looked after the kids. Who’d have ever thought that Clemson would win the NCAA tourney last year? But hey, with 75 bucks on them at 50-1, I’m not complaining. Yeah, I know $3750 is chump change these days, but at least we could afford two nights at a pretty good Holiday Inn and a nice dinner at Applebee’s.

It’s all kind of weird, though, when you think about it. Most of us have never been outside America, never seen how the rest of the world lives. I suppose we all just assumed that a weaker dollar could bring nothing but more jobs and more money. But I guess when you buy a lot of stuff from the rest of the world, a weaker currency makes it more difficult to afford things.

So, too, when Hillary threatened China with those tariffs. Who’d have thought that some guy ten thousand miles away could make a decision that would make it more difficult to borrow money here in the Heartland of America. Not me, that’s for sure. I have to say one thing, though. I felt a little burst of nostalgia when Hillary started the Whip Inflation Now program…it really took me back to my childhood.

Well, I suppose that’s enough of my yakking. I’d better get back to work. It’s more than my job’s worth if this report doesn’t make it to Abu Dhabi by tomorrow morning.

Rumors that the U.S. Federal Reserve was having an emergency meeting to discuss a rate cut spooked Asian markets Tuesday, demonstrating the importance of the FOMC’s efforts toward increased transparency (see our story).

From the MarketWatch story: “What happened was there was talk that the Federal Reserve was calling a meeting, which means there is a possibility that the U.S. may cut interest rates,” said Francis Lun, general manager at Fulbright Securities in Hong Kong. “It is just a market rumor,” Lun added.

OPEC met over the weekend to discuss, among other things, the falling U.S. Dollar–the currency which it denotes its reserves. This is largely a political debate with little economic merit. Is it a coincidence that the push to move to a different currency is spearheaded by Iran?

Consider the following from the Associated Press: “They get our oil and give us a worthless piece of paper,” Ahmadinejad told reporters after the close of the summit in the Saudi capital of Riyadh. He blamed U.S. President George W. Bush’s policies for the decline of the dollar and its negative effect on other countries.

Michael “Mish” Shedlock has the right take on this red herring. He suggests that the basket of currencies OPEC considers for a replacement might be called WHSIT, short for “What the Hell Is It?” From a recent post of his:

That night you tune into CNBC and the commentator says “crude reached a new high at 102.3 WHISITs”. This would last about 3 days or less simply for the novelty of it. Eventually someone would be smart enough to figure out what percentage the US$ was of WHISITs and compute a price of oil in US$. Every country on earth would do the same thing and that would be the end of discussion of WHISITs for all practical purposes.

[Picture by Hasan Sarbakhshian/ AP Photo]