In this issue:

Mayors' Report Decline in Wages, Health Benefits

Millions of Jobless Now Without Any Benefits

Steel Price Hikes Threaten Auto-Parts Suppliers

Fed Raises Short-Term Rate by Quarter-Point

Top Banker: U.S. Housing Bubble About To Burst

California Housing Bubble Set To Blow

Freddie Mac Reports Huge Profit Plunge Based on Derivatives Losses

Derivatives Could Trigger 'Global Financial Crisis'


From Volume 3, Issue Number 27 of Electronic Intelligence Weekly, Published July 6, 2004

U.S. Economic/Financial News

Mayors' Report Decline in Wages, Health Benefits

The U.S. Conference of Mayors, during its annual meeting in Boston June 28, released a new Metro Economies and Jobs report analyzing the employment wage gap, as well as the impact of job gains and losses on health benefits. The study, conducted by Global Insight, estimated that all new jobs it assumed will be created between 2004-06 will have an average wage of 12% less than jobs lost between 2000-03. In addition, new jobs created in the top 10 job-creation sectors of the U.S. economy, will have a 15% lower wage compared to the 10 sectors that lost the most jobs during the previous four years.

Moreover, there is a 14.5% "health benefits gap" for new jobs, meaning that 14.5% fewer people with new jobs will have health-care coverage, compared to those who lost their jobs between 2000-03. The report attributed the health-care-benefits gap to a structural shift in the types of jobs, from good-paying (and physically productive) manufacturing jobs with strong health benefits, to jobs predominantly in the service sector, many of which are lower-paying with no health benefits.

Detroit Mayor Kwame M. Kilpatrick warned, "lower-wage jobs with no health benefits severely impact the overall economic and physical health of our nation."

Yet, the mayors failed to support the only solution, LaRouche's FDR-style economic recovery propelled by Federal government-directed credit for massive infrastructure projects. Instead, Mayor James A. Garner, USCM president, called on mayors and business CEOs to "work together to find solutions."

Millions of Jobless Now Without Any Benefits

A record 2 million jobless workers will have exhausted their unemployment benefits, and will have no further Federal aid, since last December when the Federal program providing a 13-week extension of state-funded jobless benefits ended, through June 30, according to the latest study by the Center on Budget and Policy Priorities (CBPP). Very large numbers of jobless workers have run out of unemployment benefits even during recent months of purported significant growth in "new jobs" touted by the Cheney-led Bush Administration. In March, the number of workers exhausting their regular 26-week state benefits and not qualifying for further Federal aid, CBPP found, was higher than in any other month on record, despite Bush's April Fool's jobs hoax. In May, a staggering 293,000 unemployed workers fell into the same predicament, the highest level for the month of May.

A whopping 2,031,000 unemployed workers will be suffering the same dire situation from late December through June 30, CBPP estimates—a level higher than the number of such "exhaustees" in any other six-month period on record, going back to the early 1970s. The next few months are also likely to see record numbers of exhaustees, CBPP projects, highlighting the urgent need not merely for extending unemployment benefits, but for LaRouche's Super-TVA policy to create jobs rebuilding the physical economy.

Steel Price Hikes Threaten Auto-Parts Suppliers

Steel price inflation could force "multiple" bankruptcies of auto-parts suppliers "within the next 90 days," warn industry experts, according to the Detroit News June 29. Surging steel prices are taking a mammoth financial toll on auto-parts makers, and could soon push some small- and medium-size suppliers into bankruptcy, as well as disrupt production at some auto assembly plants, according to a study released in June by accounting and management consulting firm Plante Moran. The price of rolled steel, for example, has jumped 57% to $617 per ton this month, from $350 per ton in January. Suppliers, already losing profits and forced to cut jobs, are now under pressure from automakers to provide parts at lower prices, thereby putting them on the verge of extinction.

"We will see multiple bankruptcies of suppliers within the next 90 days," warned Craig Fitzgerald, a partner with Plante Moran.

Industry executives also painted a bleak picture. "How do we cooperate, or somebody is going to die in this thing," lamented John Knappenberger, a vice president at Dura Automotive Systems. Auto-parts makers are slashing capital spending, raising parts prices, and cutting other operating costs to offset the rising steel costs. "It's been hell," declared Jim Zawacki, owner of an automotive stamping business in Grand Rapids, Mich., who has had to cut jobs as steel prices have doubled since December.

The spot price of hot-rolled steel, one of the most common types of steel used in auto production, has shot up 120% this month from a year ago, according to trade publication Purchasing, while cold-rolled steel is up 74%, and steel scrap is up 90%.

Suspension-system maker Tower Automotive, was slammed by $1 million in extra steel costs during the first quarter, and expects to see a greater hit in the second and third quarters, cautioned chief executive Kathleen Ligocki. "The worst is going to be here in the third quarter," agreed David Andrea, head of business development for the Original Equipment Suppliers Association, which represents 60% of North American auto suppliers.

"A supplier with (annual revenues) in the $25 million to $75 million range is very much at risk," said Jim Gillette, an analyst with automotive consultancy CSM Worldwide.

Fed Raises Short-Term Rate by Quarter-Point

Alan Greenspan's Federal Reserve Bank raised short-term interest rates by a quarter point, to 1.25%, and said further increases can be made at a "measured" pace, based on "economic prospects." The Federal Open Market Committee unanimously voted to hike the Federal funds rate, for the first time since May 2000, raising the overnight interest rate that banks are charged by the Federal Reserve from their lowest level since 1958.

"With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured," members of the rate-setting FOMC said in a statement following their two-day meeting in Washington. "Nonetheless, the committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability."

Top Banker: U.S. Housing Bubble About To Burst

Ian Morris, chief economist at HSBC (formerly Hong Kong Shanghai Bank) Securities USA released a report June 25 entitled, "The U.S. Housing Bubble—The case for a home-brewed hangover." Morris presents the case that the U.S. has a housing bubble that will burst in mid-2005. However, given the acceleration of the onrushing financial disintegration, the crash's timing could be moved up.

Morris's report demonstrates that U.S. home prices are at or near record highs relative to income, relative to rent, relative to replacement cost, and relative to home equity. Home price increases are going through their longest stretch of quarterly gains on record. Since the first quarter of 2000, home prices have shot up by the following percentages: Washington, D.C., 70%; California, 60%; New York, Massachusetts, and Florida, 50%. Morris warns that, "expectations of future home price appreciation are spectacularly, and unrealistically high.... We think the party stops in mid-2005. A series of rate hikes will cause a reassessment of likely future house price rises and its associated [mortgage] debt, thereby triggering housing's fall." He adds, "Prices are too high and can overshoot on the way down," most likely deflating over several years.

Earlier last week, the Federal Reserve Bank of New York issued a fantasy-land report entitled, "Are Home Prices the Next 'Bubble'?" which argue there is no national U.S. housing bubble (it used the "hedonic index" to adjust home prices downward), and pleading the case that a "soft landing" will occur. Morris's HSBC report demonstrates that there will be a hard landing.

California Housing Bubble Set To Blow

The June 27 Los Angeles Times carries a lengthy article, detailing the expansion of the housing bubble in California, where the housing market is white hot. The article also reviews the bursting of the much smaller housing bubble during the early 1990s:

"The median price for a Southern California home fell by 16.7% from a peak of $189,000 in June 1991 to the low point in the market, January 1996, when the median was $157,000. Los Angeles took an even harder hit. The median price for homes in the county peaked in May 1989 at $203,000 and then bottomed out in February 1995 at $158,000, a 22.2% decline."

By the end of 1996, the number of foreclosures in Southern California reached a staggering 109,123 homes. Were that process to repeat today—and it likely will be much deeper—when the median price of a home in Orange County, is $572,000, then home prices would fall by more $125,000 and hundreds of thousands would occur.

Freddie Mac Reports Huge Profit Plunge Based on Derivatives Losses

Freddie Mac reports its 2003 profits plunged by 52%, due to losses in derivatives, which it uses to "hedge" against interest-rate swings, and warned of more drops in the future, Reuters reported June 30. The government-sponsored mortgage-finance giant said it earned $4.9 billion last year, down from $10.1 billion in 2002.

In addition, Freddie said it will still not be able to report 2004 results on an annual or quarterly basis, until the end of March 2005. Company officials also could not say when it will make timely financial statements each quarter, or fulfill a pledge to file financial reports with the Securities and Exchange Commission.

Derivatives Could Trigger 'Global Financial Crisis'

Exponential growth in derivatives could trigger a "full-fledged global financial crisis, warned CBS Marketwatch commentary editor Tom Bemis June 29. "A huge portion of these financial transactions exist in a netherworld of little or no regulation.... Yet their use grows by an estimated 30 percent a year from already stunning levels," Bemis warns.

The over-the-counter derivatives market has "grown so exponentially over the past 15 years," to $140 trillion today, from just $3 trillion in 1993.

Randall Dodd, executive director of the Financial Policy Forum thinktank worries that one of the major banks or broker-dealers at the heart of the derivatives trade could run into a problem that cascades into a full-fledged global financial crisis.

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