KeNo's Housing and Economic Portal: Friday October 23 Housing and Economic stories

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Banks brace for Latvia's collapse - (www.telegraph.co.uk) The Baltic states are once again in the eye of the storm after leaked reports that Sweden is bracing for a full-blown economic and political "breakdown" in Latvia. The Svenska Dagbladet newspaper said Sweden's finance minister Anders Borg had told banks secretly that Latvia's political order was unravelling, advising them to prepare for the collapse of Latvia's rescue talks. Latvia has failed to deliver draconian spending cuts agreed to secure the next tranche of its €7.5bn (£6.85bn) bail-out from the EU, the International Monetary Fund, and Sweden, balking at 20pc cuts in pensions and a further 15pc cut in public wages. The People's Party, the largest group in the coalition, voted against austerity measures last month, raising concerns that the country is ungovernable. Mr Borg said the world's patience is running out. "It will be very hard to continue with these international programmes if they don't fulfill the spirit and the content in the agreements they have signed." Latvia's economy contracted by 18.2pc in the twelve months to June, trumped only by Lithuania at 20.4pc. "Latvia's currency peg is back on the agenda, " said Hans Redeker from BNP Paribas. "The government has to relax policy for social reasons. The hardship this winter is going to be unbelievable." Youth unemployment in Latvia is already 31pc, and concentrated among ethnic Russians. Premier Valdis Dombrovskis said his chief task is to "preserve social peace". Neil Shearing from Capital Economics said the appetite for austerity has been exhausted. Latvia is "more likely than not" to devalue, toppling pegs in Estonia and Lithuania. "Financial markets elsewhere in the region are likely to be hit by contagion, with Hungary, Romania, and Ukraine most vulnerable." The area is better able to cope with shocks than during the panic this Spring. The G20 tripled the IMF's fire-fighting fund to $750bn in April, chiefly as an insurance for Eastern Europe. This has greatly reduced risk of a liquidity crisis. It does not alter the slow-burn damage of rising defaults. The Baltic trio financed property booms in euros (and swiss francs) because rates were lower. It was taken for granted that eventual euro entry had eliminated the exchange risk. This has become a trap. They need to devalue to break the cycle of depression, but cannot do so because of euro mortgages. Instead they hope to claw back lost competitiveness through wage deflation. This takes years, and discipline. Mr Shearing said Latvia's economy would shink by 30pc whether it devalues or not. The peg merely draws out the agony, and slows the pace of inevitable defaults. Washington's Center for Economic and Policy Research said the IMF is enforcing a"pro-cyclical contractionary policy" in Latvia. Foreign banks (mostly Swedish) are being rescued at the cost of local taxpayers. The IMF deal equals 34pc of GDP. Latvia is piling up debt to defend its peg. The policy may backfire in any case. Fiscal contraction is causing tax revenues to implode, feeding a vicious circle. Lars Christensen from Danske Bank said Latvia's political class is chiefly responsible for clinging to the peg. "It's their choice, but if they want the bail-out money, they must do what they promised. They don't seem to understand that the IMF and EU are willing to walk away now that the global economy has improved and spill-over risks have been reduced," he said. Prospects are grim whatever happens "There is absolutely no sign of stabilisation. The economy is still contracting. It's paralysis," he said.

END OF THE DOLLAR: Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading - (www.independent.co.uk) n a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading. In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar. Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars. The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years. The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security." This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region's conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves. The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. "One of the legacies of this crisis may be a recognition of changed economic power relations," he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China's extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America's power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states. Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East. China imports 60 per cent of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq – blocked by the US until this year – and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures.

Would you like your burger with or without feces? 22 yo woman paralyzed after eating burger tainted with E.coli - (www.nytimes.com) Stephanie Smith, a children’s dance instructor, thought she had a stomach virus. The aches and cramping were tolerable that first day, and she finished her classes. Then her diarrhea turned bloody. Her kidneys shut down. Seizures knocked her unconscious. The convulsions grew so relentless that doctors had to put her in a coma for nine weeks. When she emerged, she could no longer walk. The affliction had ravaged her nervous system and left her paralyzed. Ms. Smith, 22, was found to have a severe form of food-borne illness caused by E. coli, which Minnesota officials traced to the hamburger that her mother had grilled for their Sunday dinner in early fall 2007. “I ask myself every day, ‘Why me?’ and ‘Why from a hamburger?’ ”Ms. Smith said. In the simplest terms, she ran out of luck in a food-safety game of chance whose rules and risks are not widely known. Meat companies and grocers have been barred from selling ground beef tainted by the virulent strain of E. coli known as O157:H7 since 1994, after an outbreak at Jack in the Box restaurants left four children dead. Yet tens of thousands of people are still sickened annually by this pathogen, federal health officials estimate, with hamburger being the biggest culprit. Ground beef has been blamed for 16 outbreaks in the last three years alone, including the one that left Ms. Smith paralyzed from the waist down. This summer, contamination led to the recall of beef from nearly 3,000 grocers in 41 states. Ms. Smith’s reaction to the virulent strain of E. coli was extreme, but tracing the story of her burger, through interviews and government and corporate records obtained by The New York Times, shows why eating ground beef is still a gamble. Neither the system meant to make the meat safe, nor the meat itself, is what consumers have been led to believe. Ground beef is usually not simply a chunk of meat run through a grinder. Instead, records and interviews show, a single portion of hamburger meat is often an amalgam of various grades of meat from different parts of cows and even from different slaughterhouses. These cuts of meat are particularly vulnerable to E. coli contamination, food experts and officials say. Despite this, there is no federal requirement for grinders to test their ingredients for the pathogen. The frozen hamburgers that the Smiths ate, which were made by the food giant Cargill, were labeled “American Chef’s Selection Angus Beef Patties.” Yet confidential grinding logs and other Cargill records show that the hamburgers were made from a mix of slaughterhouse trimmings and a mash-like product derived from scraps that were ground together at a plant in Wisconsin. The ingredients came from slaughterhouses in Nebraska, Texas and Uruguay, and from a South Dakota company that processes fatty trimmings and treats them with ammonia to kill bacteria. Using a combination of sources — a practice followed by most large producers of fresh and packaged hamburger — allowed Cargill to spend about 25 percent less than it would have for cuts of whole meat. Those low-grade ingredients are cut from areas of the cow that are more likely to have had contact with feces, which carries E. coli, industry research shows. Yet Cargill, like most meat companies, relies on its suppliers to check for the bacteria and does its own testing only after the ingredients are ground together. The United States Department of Agriculture, which allows grinders to devise their own safety plans, has encouraged them to test ingredients first as a way of increasing the chance of finding contamination. Unwritten agreements between some companies appear to stand in the way of ingredient testing. Many big slaughterhouses will sell only to grinders who agree not to test their shipments for E. coli, according to officials at two large grinding companies. Slaughterhouses fear that one grinder’s discovery of E. coli will set off a recall of ingredients they sold to others. “Ground beef is not a completely safe product,” said Dr. Jeffrey Bender, a food safety expert at the University of Minnesota who helped develop systems for tracing E. coli contamination. He said that while outbreaks had been on the decline, “unfortunately it looks like we are going a bit in the opposite direction.”

The "Real" Economy Is Dying: Q4 "Going to Be a Bloodbath - (finance.yahoo.com) Stocks rallied to start the week thanks to a better-than-expected ISM services sector report and a Goldman Sachs upgrade of big banks, including Wells Fargo, Comerica and Capital One. But all is not right in either the economy or the banking sector, according to Christopher Whalen, managing director at Institutional Risk Analytics. In fact, Whalen says most observers are drawing the wrong economic conclusions from the stock market's robust rally. "Why is liquidity going into the financial sector? It's because the real economy is dying [and] everyone is fleeing into the stocks and bonds because they're liquid at the moment," Whalen says. "That's not a good sign." The banking sector's assets shrunk by about $300 billion per quarter in the first half of 2009, a sign of banks hoarding cash in anticipation of additional future losses, according to Whalen. "The real economy is shrinking because of a lack of credit." The shrinkage will continue into 2010, Whalen predicts, suggesting the banking sector hasn't yet seen the peak in loan losses. Institutional Risk Analytics forecasts the FDIC will ultimately need $300 billion to $400 billion to recoup losses to its bank insurance fund. (In other words, the $45 billion the FDIC sought to raise last week by asking banks to prepay fees is just a drop in the bucket.) "Investors should think about this because the fourth quarter in the banking industry is going to be a bloodbath," says Whalen, who believes smaller and regional banks like Hudson City Bancorp may come into favor vs. larger peers, which have dramatically outperformed since the March lows. "When you see the markets rallying when the real economy is shrinking that tells you this [recovery] is not going to be very enduring," Whalen says. In this regard, Whalen finds himself in philosophical agreement with Nouriel Roubini, George Soros and Meredith Whitney, among other "prophets of the apocalypse" who've once again been raising red flags in recent days.

Deflation: America on Sale - (apnews.myway.com) There has never been a better time to be a consumer. America is on sale. The Great Recession has caused massive job losses and hardship for millions, but it has also fostered a shoppers' paradise. Anyone who still has the means to spend can find unheard of deals. Prices on everything from clothes to coffee to cat food are dropping, some faster than they have in half a century. Items rarely discounted - like Tiffany engagements rings - are now. The two biggest purchases most people make - homes and new cars - are selling at steep price reductions. "This is the new normal," says Donald Keprta, president of Dominick's, a supermarket chain in the Midwest, which just cut prices by as much as 30 percent on thousands of items. "We aren't going back." Consumers like Karen Wilmes, a mother of two in Hopkinton, R.I., relish the steals. During a recent trip to Shaw's Supermarkets, she bought a basketful of goods, including Eggo waffles, Kleenex tissues and Betty Crocker cake mix. The retail price: $63.89. Wilmes paid $7.31 by buying items on sale and using coupons. "The deals out there are unbelievable," says Wilmes, 36, who writes the Frugal Rhode Island Mama blog, which tracks local and national bargains. "We can put the money I save toward something else." And she's doing just that, but only when she can find another deal. Wilmes and her husband recently bought a Samsung television from Best Buy's Web site for $1,299, about $300 less than she found at other stores. She also got free delivery and another $13 back from ebates.com, which receives commissions from online retailers for directing customers their way. What's happening now has been building for years. Wal-Mart Stores Inc. introduced "every-day low prices" many years ago. Amazon.com redefined the idea of bargain prices during the late 1990s when it helped introduce online shopping. After the 2001 recession, automakers introduced zero-percent financing to boost sales. McDonald's "Dollar Meals" made fast food even cheaper. But until the Great Recession came along, consumers hadn't seen anything yet. Last fall's financial meltdown triggered a plunge in stock prices and home values and wiped out 11 percent - $6.6 trillion - of household wealth in six months. It also put an end to easy credit, which had fueled the consumption that powered the economy for most of the decade. Those who still have jobs don't want to spend as they once did. There is a new societal pressure to be careful and smart when buying almost anything. From Chicago's Miracle Mile to malls around Orange County, Calif., it was once a status symbol to trot around with armloads of shopping bags with designer names on them. Now, it's considered ostentatious. Traditionally, manufacturers and retailers lowered prices to clear inventory. Today, they're cutting prices because consumers are demanding it. If it lasts, the ramifications will be wide-ranging.

OTHER STORIES:

Gold Closes in on $1020 - (www.reuters.com)

Ron Paul on the Benefits of a Gold Standard - (www.dailypaul.com)

Kunstler: World War Three Anybody? - (www.depression2.tv)

Goldman stands to win $1bn – while US taxpayers would lose $2.3bn – if embattled CIT fails - (www.ft.com)

NYT: Treasury Misled Congress, Public on TARP Bailouts (Duh!) - (www.nytimes.com)

UN Ranks Norway Most Desirable Place to Live - (www.dailymail.co.uk)

A bear's 'bad feeling:' Is the recovery faltering? - (www.globeinvestor.com)

Roubini Sees Stock Declines as Soros Warns on Economy - (www.bloomberg.com)

Too big to fail is too hard to kill, it seems - (www.nytimes.com)

Group of 7 Begins a Slow Fade - (www.nytimes.com)

The 'sale-less' recovery - (money.cnn.com)