Thursday, April 3, 2008

Consequences Of The Risks Identified, So Far

High Fuel Cost Forces ATA Into History
NY times reported on ATA filing for bankruptcy, canceling all of its flights and laying off almost all of its 2,200 employees. Put ATA alongside TWA, Pan Am, and others. They are done.

My analysis on the airline companies clearly indicated that more airline companies would be going out of business unless they start taking radical actions to overcome the high fuel prices:

Fed Still Trying To Manipulate The Market
NY Federal Reserve Bank President Tim Geithner said policy makers and the financial industry was right to “act forcefully'' to stem the credit crisis, according to a Bloomberg report. From CNBC: “The Federal Reserve moved to assist a Wall Street investment bank [Bear Stearns] on the brink of bankruptcy to prevent a failure that could have dealt serious consequences to the U.S. economy, Federal Reserve Chairman Ben Bernanke said.”

Whatever actions the Fed take, forceful or otherwise, to prevent the current crisis will not correct the crisis. Rather, it may prolong the crisis:

Consumer Debt Delinquencies Still Rising
Consumers fell behind on car, credit card, and home-equity loans in the fourth quarter, the highest level in 15 years, according to an American Bankers Association survey. I think that the consumer debt delinquency rates will continue to rise throughout 2008, peaking around 1Q 2009. Here is my analysis on this issue:

U.S. homeowner bail-out hits resistance
A recent Rasmussen Reports survey indicates that 53% of Americans believe that the government should not help out homeowners who borrowed more than they could afford (29% believe that the government should help out and 17% were unsure). For government helping banks that made bad loans, opposition was even stronger with those against outnumbering those in favor four to one. I am firmly in the 53% group, as my views are clear on this:

Gas Futures Surge
Gasoline futures prices rose sharply Wednesday. This was in reaction to the Energy Department report that noted an unexpected jump in gasoline demand. According to USAToday, gas prices returned to record levels and appeared to go higher.

With the summer driving months coming up, the demand for gasoline will rise (also here). This has been the trend and even with record high gasoline prices, people will still drive because they need to drive for work. Additionally, more people have been driving on vacation rather than flying, as a way to save on the cost of their vacation. Therefore, the demand for gasoline will not diminish, which means much higher gas prices. It would seem that my call for $4 per gallon of gasoline by 4Q 2008 might have been conservative as the consensus is now indicating $4 per gallon by the start of the summer driving season.

Truckers’ Protest Disrupting Traffic
Reuter reported on the sporadic but widespread protest and traffic slowdown by independent truckers on Tuesday. The independent truckers’ claim of rising fuel cost eating into their profit to the point where it is difficult for them to pay their bills. I have noted that the truckers are vital to the U.S. economy as they move 70% of all goods by value in the U.S.

Truckers’ protest is just starting. The diesel prices have increased nearly 50% so far but it will continue to increase. Expect more truckers’ protests, especially on major travel days. Truckers really have nothing much to lose at this point since their earnings are being squeezed by rising fuel cost. If the truckers start going out of business, then it will have a severe negative affect on the U.S. economy, as they are the transportation backbone of America.

All the news out there is clearly indicating that this recession is not your typical slight dip, contrary to what the Fed is saying. Drastic times take drastic measures. Perhaps the Bear Stearns bailout was the correct drastic measure, but there is a need for the U.S. to take more drastic measures to come out this economic malaise. However, we should learn from the Swedish depression in 1990-92 and not begin to act Socialistic in our measures.

Ed Kim

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