Today's Tidbits

Decline of the Dollar Indicates Weakening US Global Economic Dominance
From Bloomberg: “``It may be our currency, but it's your problem'' was Treasury Secretary John Connally's taunt when the U.S. unhooked the dollar from the gold standard in 1971, unilaterally rewriting the rules of world business in America's favor. Now the world is taunting back. Almost four decades after the U.S. tore up the monetary arrangements that governed the post-World War II international economy, the dollar's fall from grace amounts to a tectonic shift in the global hierarchy. This time, the U.S. currency is on the losing side. After declining in five of the last six years, the weakest dollar in the era of floating currencies reflects a period of diminished U.S. political and economic hegemony. Whoever wins the White House next year will confront two unpopular choices: Accept the fall in U.S. clout and the rise of new rivals, or rein in record public and consumer debt that the rest of the world no longer wants to bankroll. ``What we're seeing is a very broad rebalancing of economic and political power in the world,'' says Jeffrey Garten, a Yale School of Business professor who was the Commerce Department's undersecretary for international trade in the Clinton administration. ``The scales are moving, and they're moving quite fast.''… For the first time, economists are raising the once-improbable specter that the dollar's monopoly as the world's dominant reserve currency is under threat. Like the British pound, its predecessor as the world currency, the dollar has fallen victim to widening burdens overseas and economic stresses at home. The slippage began in 1971 when President Richard Nixon, in a stopgap move to cope with the inflationary financing of the Vietnam War, halted the exchange of dollars for gold…``Part of the depreciation is permanent,'' says Harvard University professor Kenneth Froot, who has been a consultant to the Fed. ``There is no doubt that the dollar must sink against periphery currencies to reflect their increase in competitiveness and productivity.'' The Fed's trade-weighted major currency index bottomed at 71.11 on Nov. 7, the lowest since the era of free-floating currencies started in 1971. Against the yen and European currencies, the dollar is now worth about a third of what it was in the days of fixed rates. One of the main U.S. exports since then has been the dollar itself, in exchange for foreign capital to finance trade deficits and a national debt of more than $9 trillion. While the current- account deficit is narrowing from last year's record $811.5 billion, the U.S. still requires $2.1 billion a day of other people's money. ``We're getting into a very unstable situation,…Such a prospect unsettles U.S. allies, and concerns are mounting that the flight from the dollar is feeding on itself and threatening a crisis of confidence …The dollar's share of global central banks' currency portfolios slid to 64.8 percent in the second quarter from 71 percent in 1999, the year the euro debuted, the International Monetary Fund says. The euro, used in 13 countries, now accounts for 25.6 percent. ``The global reserve system is fraying; it's falling apart,'' said Joseph Stiglitz, a Nobel-laureate economist at Columbia University…To be sure, the latest slump -- 6.6 percent against the euro sin ce the end of August, 4.7 percent against the yen --partly reflects an economic dry spell. Credit-market turmoil led banks to cut consumer lending, bruising the U.S. economy's main engine…For now, the U.S. economy is a drag on the rest of the world. When the IMF last month trimmed its global growth prediction for 2008 to 4.8 percent from 5.2 percent, it blamed the U.S., whose forecast was cut to 1.9 percent from 2.8 percent….Cash-rich governments are discovering the profit motive, adding to pressure on the dollar as they comb the world's markets for investments that pay more than the current 4.25 percent return on 10-year U.S. Treasury bonds. Economists at Merrill Lynch & Co. estimate as much as $1.2 trillion in dollar holdings will shift to other currencies in the next five years. A warning by Cheng Siwei, vice chairman of the National People's Congress, that China will invest in stronger currencies triggered a recent stampede out of the dollar. China doesn't have to dump dollars to depress the U.S. currency, economists at UBS AG say. Accumulating them at a slower pace will have the same effect.”

CPI Data Shows Unusual Divergence in Rental Indices
From HSBC: “Tenant rent (+0.5%) rose more than anticipated, although OER was lower at +0.2%. Rising fuel costs (which results in a downward adjustment to OER) may account for this gap, or alternatively it may be that rents at larger homes selected to match owner-occupied units are rising slower than smaller renter-occupied units. In either case, we need to watch for the possibility of a sustained pickup in rental inflation.”
From Goldman Sachs: “October featured an unusual divergence between rent and owners equivalent rent (OER). OER increased by 0.2% while rent ran much faster at +0.5% (the unrounded gap was 0.23%). When these have diverged in the past there has tended to be a correction the next month; more fundamentally, with markets for both rental and owner-occupied housing in excess supply, we would take the owners equivalent rent number more seriously.”

GE Let’s Money Market Fund “Break the Buck”
From Lehman: “Barron’s reported that a General Electric Asset Management-sponsored short-term bond fund returned cash to outside investors at 96 cents on the dollar after the fund took losses of $200 million on mortgage-related securities.”
From Morgan Stanley: “The announcement from GE follows news that BoA and Legg Mason shored up some of their money market funds with cash injections. In contrast, GE
is not adding any additional cash to this fund and is instead allowing investors to withdraw money at $0.96/share--effectively 'breaking the buck'. Even though the GE fund is a relatively small money market fund, the announcement is likely to fuel concerns about additional contagion from subprime market weakness.”

Fed Doubles Forecast Frequency to Four Times a Year
From Goldman Sachs: “…the FOMC announced several significant changes to its communication of forecasts of inflation and economic activity, including: (1) greater forecast frequency, (2) a longer forecast horizon, (3) forecasts of headline as well as core inflation, (4) more information about the dispersion of individual forecasts, and (5) written summaries. This is a highly welcome step in providing more color about FOMC thinking on a more frequent basis. That said, market participants should be aware of several points: (1) The FOMC forecasts are not, and never have been, one integrated view; they are a collection of 19 different forecasts; (2) forecasts for out years are better thought of as objectives in the case of inflation and opinions about sustainable growth in the case of GDP; (3) the added attention to headline inflation does not mean that the FOMC has dropped its focus on core inflation as a key indicator for where inflation (by either measure) is headed; and (4) formal adoption of an inflation targeting (IT) regime is quite a distance off, if it occurs at all.”

Total and Ex-BP Oil Executives Expect Major Supply Shortage Early Next Decade
From AP: “Perhaps the biggest reason that oil costs nearly $100 a barrel can be found in places like China, where roads that were full of bicycles 15 years ago are now choking with cars and trucks. Or in India, where sales of diesel-powered generators have soared as people try to avoid frequent power outages. The rapid growth in China, India and other emerging economies has been fed by crude oil, but this rising demand for fossil fuels may finally be pushing the limits of supply… Some experts see a potential disaster looming - in as soon as five years or even less. Chris Skrebowski, the editor of the London-based Petroleum Review, thinks slower-than-expected supply growth combined with rising demand from burgeoning Asian economies could result in a worldwide shortfall of as much as 7 million barrels a day by 2013. Demand is so strong that Matthew Simmons, a Houston oil and gas investment banker, says $100 a barrel oil may even be a bargain… From the oil industry, too, there are voices of concern. For example, Christophe de Margerie, chief executive of Total SA, France's largest oil company, believes the Department of Energy's global production forecast is far too high. "One hundred million barrels ... is now in my view an optimistic case," de Margerie said at an industry conference in London late last month. "It is not (just) my view, it is the industry view, it is the view of people who like to speak clearly, honestly and not ... just to please people."
Over time, soaring energy costs could have disastrous consequences for the world economy, with affordable transportation being the most obvious casualty. Manufacturing, petrochemicals and power generation would all be affected. But some analysts argue that consumption growth will slow if limited supply keeps prices high. Recent evidence suggests that prices of $80 a barrel have already begun to put a crimp in consumption in industrialized countries, said Leo Drollas, chief economist at the London-based Center for Global Energy Studies… Drollas' view appeared to get a boost Tuesday when the IEA lowered its oil demand forecast for the fourth quarter by 500,000 barrels a day and for 2008 by 300,000 barrels a day. Demand growth will now average 1.2 percent in 2007, the group said. However, it said demand will likely grow 2.3 percent in 2008, keeping consumption close to global supply. So far, subsidies in China and India have blunted the impact of high prices on their consumers. But state-run oil refineries are feeling the pinch, and China recently raised retail gasoline prices about 10 percent… Looking at planned oil field developments, Skrebowski, the London-based oil expert, calculates that 23.6 million barrels a day of new production will come onto the market by 2013 - and that only if projects are completed on schedule, despite growing shortages of equipment and qualified personnel. But the former long-term planner for energy giant BP PLC and oil analyst for Saudi Arabia believes that new production will be largely offset by the natural depletion of existing fields totaling 20 million barrels a day. The net gain, then, would be only about 3.5 million barrels over the five-year period, raising daily production to 88.5 million barrels. Against that, Skrebowski says IEA demand projections would raise consumption to 96 million barrels by 2013, more than 7 million barrels short of his production estimate. "After 2011 we could be in for serious trouble," he said.”

MISC
From JP Morgan: “The headline CPI, already up to 3.5%oya from 1.9% as recently as August, is likely to exceed 4% by year-end, signaling a very significant drag on the consumer’s purchasing power. But core inflation remains well-contained.”

From Merrill Lynch: “AB-CP was UP $8.1 bln w/w (in seasonally adjusted terms), its first weekly rise since the week of August 8th, the week prior to the financial market upset and Fed discount rate cut, on August 17th. So far, including the latest week, outstanding issuance of AB-CP has fallen $329.6 bln since the week of August 8th, the "peak" of the AB-CP issuance.”

From Morgan Stanley: “Looking back to the summer crisis, bank CDS was a great leading indicator for this[Fed funds/LIBOR]spread widening.”From Deutsche Bank: “The news that FAS 157 was largely going forward starting today was a factor behind yesterday's late equity sell-off. FASB yesterday decided only to delay implementation for nonfinancial assets and liabilities, e.g. goodwill…A large range of possibly profitable investments could be in Level 3, and thus Level 3 asset levels should not be a gauge of subprime exposure.”From The Wall Street Journal: “…put money into a health-care flexible spending account. Many workers -- particularly young singles -- make the mistake of paying more taxes than they should because they don't take advantage of these pre-tax savings accounts… "you could be saving 40% of every dollar you spend." …"The average [health-care] plan today has a deductible of $350…Indeed, a Hewitt survey estimates employees will contribute an average of $1,859 toward insurance premiums in 2008, compared with $1,690 this year. Out-of-pocket expenses are also expected to climb, thanks to higher co-pays and deductibles. According to Hewitt, employees can expect to pay an average $3,597 out of pocket in 2008, or about 10% more than last year.”

From HSBC: “UAE Central Bank governor, Nasser al-Suweidi, said in a press interview today that the UAE might switch from a dollar peg to a peg against a dollar-heavy basket of currencies…it must be noted that the governor stressed that the UAE will act only with other Gulf states and will not act unilaterally. If this is taken literally to mean that the UAE will only move if other Gulf states adjust with it, then it is far less likely that there will be adjustment. Every indication from Saudi Arabia, the pivotal Gulf player, suggests that it is opposed to change. The onshore market in Saudi Arabia continues to believe that there will be no movement.…The market is now waiting for comment from Saudi Arabia, which, along with the UAE, has seen strong dollar selling across the curve in anticipation of currency change. The other key event is a meeting of GCC heads of state which will take place in Qatar in the first week of December. The forum was already expected to confirm that plans for monetary union in 2010 have been delayed. It will now be keenly watched for evidence that the Gulf states are preparing to introduce more substantial changes to their individual currency regimes.”

From The Wall Street Journal: “Just weeks after some of the world's largest banks took tens of billions of dollars in losses on their holdings of debt linked to tainted mortgages, a new concern is emerging: It might not have been enough.”

From Reuters: “Loans to banks from the Federal Home Loan Bank system rose by 28.6 percent to $824 billion in September from the end of 2006 as the institutions sought alternate mortgage funding, the FHLB Office of Finance said on Wednesday.”

From Credit Suisse: “2008 total mortgage securities (Agency MBS, non-Agency ABS/MBS) net issuance is likely to decline 80% to $106B from 2007 levels. Agency MBS net issuance is projected at $639B, non-Agency MBS at -$189B and subprime at -$344B assuming the Q3:07 run rate… Decline in issuance is concentrated in subprime. Agency MBS and non-Agency MBS net issuance projected at $762B (annualized) in 2007 are essentially flat from 2006 levels. 2008 MBS net issuance is projected at $450B, a 41% decline from 2007.”

From Barclays: “It seems that the vainest age to be is 27, when mirrors are looked into 52 times a day on average. By contrast, people in their sixties only look in the mirror an average of 5 times a day. British women look in the mirror an average of 34 times a day, while men do it 27 times.”

From JP Morgan: “The Philadelphia Fed and Empire State surveys have showed little change in current manufacturing activity in November, but both have shown a significant decline in future expectations.”

End of Day Market Update

From UBS: “Markets. Equity markets fell again on Thursday, with the S&P 500 down 1.3% and the Nasdaq down 1.0%. 10-year Treasury yields fell 9bp to 4.16%; 2-year yields fell 16bp to 3.35%. “