Rising U.S. bond yields may spark Credit Crisis II

Reuters
May 30, 2009

The global financial crisis may morph into a second, equally virulent phase where borrowing costs rise again, hobbling an embryonic economic recovery, debilitating cash-strapped banks, and punishing investors all over again.

Early warnings signs of this scenario include surging government bond yields, a slumping U.S. dollar, and the fading of the bear market rally in U.S. stocks.

Optimists hope that a fragile two-month rally in world stock markets, a rise in U.S. Treasury yields from record lows during the depths of the crisis in late 2008, and some less scary economic data all signal that a recovery is around the corner.

But gloomy analysts insist that thinking is delusional.

Once Credit Crisis Version 2.0 ramps up, foreign investors may punish the U.S. government for borrowing trillions of dollars too much by refusing to buy its debt until bond prices plunge to much cheaper levels.

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Economic crisis spurs spike in 'suburban survivalists'

By Gillian Flaccus
ASSOCIATED PRESS
Tuesday, May 26, 2009

SAN DIEGO — Six months ago, Jim Wiseman didn't even have a spare nutrition bar in his kitchen cabinet.

Now, the 54-year-old businessman and father of five has a backup generator, a water filter, a grain mill and a 4-foot-tall pile of emergency food tucked in his home in the San Diego suburb of La Jolla.

Wiseman isn't alone. Emergency supply retailers and military surplus stores nationwide have seen business boom in the past few months as more Americans spooked by the economy rush to stock up on gear that was once the domain of hard-core survivalists.

These people snapping up everything from water purification tablets to thermal blankets shatter the survivalist stereotype: They are mostly urban professionals with mortgages, SUVs, solid jobs and a twinge of embarrassment about their newfound hobby.

From teachers to real estate agents, these budding emergency gurus say the dismal economy has made them prepare for financial collapse as if it were an oncoming Category 5 hurricane. They worry about rampant inflation, runs on banks, bare grocery shelves and power failures that could make taps run dry.

For Wiseman, a fire protection contractor, that's meant spending about $20,000 since September on survival gear.

The surge in interest in emergency stockpiling has been a bonanza for camping supply companies and military surplus vendors, some of whom report sales spikes of up to 50 percent. These companies usually cater to people preparing for earthquakes or hurricanes, but informal customer surveys now indicate the bump is from first-time shoppers who cite financial, not natural, disaster.

Top sellers include 55-gallon containers, freeze-dried foods, water filters, purification tablets, glow sticks, lamp oil, thermal blankets, dust masks and first-aid kits.

Online interest in survivalism has increased too. The niche Web site SurvivalBlog.com has seen its page views triple in the past 14 months to nearly 137,000 unique visitors a week. Jim Rawles, a self-described survivalist who runs the site, calls the newcomers "11th-hour believers." He charges $100 an hour for phone consulting on emergency preparedness and says that business also has tripled.

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IRS tax revenue falls along with taxpayers' income

By John Waggoner, USA TODAY

Federal tax revenue plunged $138 billion, or 34%, in April vs. a year ago — the biggest April drop since 1981, a study released Tuesday by the American Institute for Economic Research says.

When the economy slumps, so does tax revenue, and this recession has been no different, says Kerry Lynch, senior fellow at the AIER and author of the study. "It illustrates how severe the recession has been."

For example, 6 million people lost jobs in the 12 months ended in April — and that means far fewer dollars from income taxes. Income tax revenue dropped 44% from a year ago.

"These are staggering numbers," Lynch says.

Big revenue losses mean that the U.S. budget deficit may be larger than predicted this year and in future years.

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German debts set to blow 'like a grenade'

Germany's financial regulator BaFin has warned that the toxic debts of the country's banks will blow up "like a grenade" unless they take advantage of the government's bad bank plans to prepare for the next phase of the crisis.
Jochen Sanio, BaFin's president, said the danger is a series of "brutal" downgrades of mortgage securities by the rating agencies, which would eat into the depleted capital reserves of the banks and cause broader stress across the credit system. "We must make the banks immune against the changes in ratings," he said.

The markets will "kill" banks that try to go it alone without state protection, warning that banks have €200bn (£176bn) of bad debts on their books. "We are pretty sure that within a month or two our banks will feel the full force of the sharpest recession ever on their credit portfolios," he said, speaking after the release of BaFin's annual report last week.
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Crisis deals Germany worst blow in 40 years :
By Agence France Presse (AFP) Saturday, May 16, 2009 - Powered by FRANKFURT: The global recession has struck exporting giant Germany the biggest blow since records began 40 years ago, with data on Friday showing a first-quarter output slump of 3.8 percent. The quarter-on-quarter contraction in Europe's biggest economy, accounting for a third of eurozone output, was even steeper than the 2.2-percent fall recorded in the final three months of 2008, the statistics office said.
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DOLLAR IN DISTRE$$ BUCK PLUNGES ON GLOBAL CREDIT-RATING WORRIES

By PAUL THARP and MARK DeCAMBRE

The greenback tumbled to its lowest level of the year on global fears that Uncle Sam is borrowing too much with credit that's already stretched too thin.

Investors around the world dumped their hoards of dollars in favor of other currencies and under-priced stocks and corporate bonds, as they moved away from the belief that the dollar remained a haven for investors.
Traders pushed the euro and yen past the greenback after Standard & Poor's shocked the world by issuing a negative outlook on the UK's debt rating, which puts that country's AAA rating in jeopardy.

That such a threat now looms over Britain stoked fear among investors that the US could suffer a similar fate.

"We've been spared so far, but markets now are starting to show how worried they are," said Peter Schiff, president of Euro Pacific Capital.

Sources told The Post that part of the pressure on the dollar might be tied to the growing perception that the US can no longer be called upon as the world's rich uncle. Indeed, Uncle Sam's status in the world has suffered a number of knocks as a result of the credit crisis.

"The markets are beginning to anticipate the possibility" of a US credit rating cut, Bill Gross, co-chief investment officer of bond giant Pimco, told Bloomberg.

Yesterday, the euro closed up 0.8 percent to $1.3988 after breaking through the $1.40 threshold to reach $1.4051 yesterday morning. It was the weakest performance for the greenback since January.

Meanwhile, the British pound jumped to its highest level in six months, hitting $1.5933 before closing at $1.5933. The Japanese yen advanced to 94.78, vs. 94.31 a day earlier.
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