Key home price index shows record decline
Drop of 8.9 percent in late 2007 is largest in index's 20-year history.
Dollar dives to record euro low; oil and gold score record highs
In early European deals, the euro touched a record 1.5088 dollars, after smashing through the 1.50 barrier for the first ever time on Tuesday. It later stood at 1.5048 dollars, from 1.4979 dollars in New York late on Tuesday.
Manufactured goods orders plunge
Orders for big-ticket durable goods for January fall 5.3%, the largest amount in five months.... http://money.cnn.com/2008/02/27/news/economy/durable_goods.ap/index.htm?postversion=2008022709
February 27, 2008
Market Place
Russia Quietly Starts to Shift Its Oil Trade Into Rubles
By ANDREW E. KRAMER
MOSCOW — Americans surely found little to celebrate when the price of oil settled above $100 a barrel last week.
They could, though, be thankful that oil is still priced in dollars, making the milestone of triple-digit oil prices noteworthy at all.
Russia, the world's second-largest oil-exporting nation after Saudi Arabia, has been quietly preparing to switch trading in Russian Ural Blend oil, the country's primary export, to the ruble from the dollar. Industry analysts and officials, however, say that this change, if it comes, is still some time off.
The Russian effort began modestly this month, with trading in refined products for the domestic market.
Still, the effort to squeeze the dollar out of Russian oil sales is yet another project notable for swagger and ambition by the Kremlin, which has already wielded its energy wealth to assert influence in Eastern Europe and former Soviet states.
"They are serious," said Yaroslav Lissovolik, the chief economist at Deutsche Bank in Moscow. "This is something they are giving priority to."
Oil trading is nearly always denominated in dollars. When Middle Eastern oil is sold to Asia, for example, the price is set in dollars.
Similarly, Russia's large trade with Western Europe and the former Soviet states in crude oil and natural gas is conducted in dollar-denominated contracts. Gazprom, the natural gas monopoly, set the price of gas in Ukraine at $179 per 1,000 cubic meters in 2008, for example. There are no proposals yet to switch gas pricing away from dollars.
As a result, companies and countries that buy petroleum products are encouraged to hold dollar reserves to pay for their supplies, coincidentally helping the American economy support its trade deficit.
Russia would like to change this practice, at least among its customers, as a means of elevating the importance of the ruble, a new source of national pride after gaining 30 percent against the dollar during the current oil boom.
In a speech on economic policy this month, Dmitri A. Medvedev, a deputy prime minister and the likely successor to President Vladimir V. Putin in elections on March 2, said Russia should seize opportunities created by the weak dollar.
"Today, the global economy is going through uneasy times," Mr. Medvedev said. "The role of the key reserve currencies is under review. And we must take advantage of it." He asserted that "the ruble will de facto become one of the regional reserve currencies."
Other oil-exporting countries are also chafing at dealing in the weakening dollar.
Since 2005, Iran, the world's fourth-largest oil exporter, has tried to open a commodity exchange to trade oil in currencies other than the dollar. The Iranian ambassador to Russia said Iran might choose rubles to free his country from "dollar slavery."
To be sure, some economists have dismissed the project as improbable, given the exotic nature of a security — oil futures contracts denominated in rubles — that would blend currency risk with the dollar-based global oil market.
Ruble-denominated futures contracts for Ural Blend, the main Russian grade, would be attractive only if the dollar continues to depreciate, said Vitaly Y. Yermakov, research director for Russian and Caspian energy at Cambridge Energy Research Associates.
"There is a big distance between the desire to trade commodities for rubles and the ability to do so," he said.
All this has not stopped the Kremlin from trying.
In a sign of the government's seriousness, a new glass-and-marble high-rise home for a ruble-denominated commodity exchange is rising this spring in a prestigious district in St. Petersburg, Russia's second-largest city after Moscow. The exchange will occupy three floors of the 16-story tower on Vasilievsky Island, one of the islands that make up the historic city center.
The director of the St. Petersburg exchange, Viktor V. Nikolayev, said that the intention was to move slowly and gain market acceptance; the government will not strong-arm sellers or buyers onto the exchange, even in an industry dominated by the state.
Web-based trading for refined products like gasoline or diesel is being introduced in three phases for domestic customers, beginning with government buyers like the Russian navy or municipal bus companies. Private brokers will be allowed to trade in March; futures contracts will be introduced in April.
Mr. Nikolayev said no timeline had been established for trading for export on the exchange, which also handles grain, sugar, mineral fertilizer, cement and esoteric financial products like Russian government beef and pork import quotas — all in rubles.
"We are in Russia, and the currency is rubles, not euros, not dollars," he said. "We don't want to depend on the rise or fall of the dollar."
"We will trade in rubles, to strengthen the ruble," he said.
Bernanke Vision for Fed Evokes Investors' Frustration (Update1)
By Craig Torres
Feb. 27 (Bloomberg) -- In the second week of August, the short-term fixed-income sales team at JPMorgan Securities Inc. sat stunned as the trillion-dollar market for asset-backed commercial paper began to collapse.
In normal markets, JPMorgan sells $25 billion of short-term IOUs for clients daily. ``Within the span of six or seven business days, every single investor stopped buying asset-backed commercial paper tied to structured investment vehicles,'' said John Kodweis, a managing director at the New York bank.
How the Federal Reserve has responded to that credit debacle -- the worst since the savings and loan crisis of the early 1990s -- defines Chairman Ben S. Bernanke's reshaping of the world's most important central bank.
With its focus on building consensus around long-term goals and attempts to separate liquidity from broader monetary policy, Bernanke's approach evokes appreciation among some economists. He's also caused frustration among traders trying to discern his intentions.
``The chairman walked into a job that I can best describe as trial by fire,'' said Allen Sinai, president of New York- based Decision Economics Inc. Separating interest-rate policy from liquidity tools was ``absolutely brilliant,'' he said.
To critics, his failure to quickly recognize the economic impact of the market tumult exacerbated the slowdown and meant that when the Fed began cutting rates, reductions needed to be deeper and faster.
`Awfully Smug'
``It's hard to be democratic in a crisis when leadership and image are so key,'' said Karl Haeling, head of strategic debt distribution in New York at Landesbank Baden-Wuerttemberg, Germany's fourth-largest bank. ``The Fed seemed awfully smug until August that this subprime issue was not a big issue. Then, they had to come out with both barrels blasting.''
The 54-year-old Fed chairman is giving his semi-annual testimony to the House Financial Services Committee today. He pledged to act in a ``timely'' manner to help revive the economy. Inflation risks are greater than a month ago, he said.
In August, Bernanke defied traders' predictions of an immediate cut in the federal funds rate, which affects borrowing costs for consumers and businesses. Instead, as credit dried up, he responded with a $35 billion cash injection into banks Aug. 10. Seven days later, he lowered the cost for banks to borrow directly from the Fed.
Inflation Still Emphasized
Officials waited a month before lowering the federal funds rate. Even then, they said ``inflation risks remain,'' leading some on Wall Street to complain Bernanke was out of touch.
``They stepped on their message in the first five months,'' said Vincent Reinhart, former director of the Fed's Division of Monetary Affairs. ``They weren't willing to emphasize why, or how they arrived at that inflation risk.''
Meanwhile, the economy continued to weaken.
As mortgage delinquencies rose to a 20-year high in the third quarter, Fed officials cut the federal funds rate just a quarter-point in October and said they thought inflation risks ``roughly balance'' risks to growth. Coming after a half-point cut the previous month, the October action was seen by economists including Stephen Stanley as a signal that policy makers thought they had eased credit enough to sustain the economic expansion.
``It really kind of scares me that the Fed had no idea things were going to get worse,'' said Stanley, chief economist at RBS Greenwich Capital Markets Inc., and a former member of the Richmond Fed staff. ``They were totally blindsided by the deterioration in liquidity conditions after the October meeting.''
December Disappointment
By December, investors were expecting some promise of year- end liquidity following the Federal Open Market Committee's meeting on Dec. 11. They didn't get one. Instead, policy makers again cut the benchmark rate a quarter point and maintained their view that ``some inflation risks remain.''
Investors showed their disappointment, driving the Dow Jones Industrial Average down 2.1 percent. Markets were setting up for a panic.
The Fed again surprised Wall Street the following morning, announcing that the central bank would loan as much as $40 billion for 28 days through a facility that would let banks borrow directly from the Fed.
The Fed also arranged swap lines with the European Central Bank and the Swiss National Bank, allowing them to channel dollars into their markets.
`Credit for Trying'
The Fed's response to the credit squeeze ``wasn't handled with the aplomb you would have liked,'' said E. Craig Coats Jr., co-head of fixed income at Keefe Bruyette & Woods Inc. in New York. Still, ``it was actually pretty creative, and I give them credit for trying.''
Only after Fed officials saw the potential for higher unemployment and indicators such as retail sales declining did they have confidence that inflation risks were subsiding. They then cut the benchmark rate 1.25 percentage points in nine days in January, the fastest reduction in two decades.
Bernanke's goal of keeping policy trained on a medium-term forecast while flooding the banking system with short-term cash shows how the chairman has adopted some of the discipline of inflation-targeting central banks in the United Kingdom and Sweden.
``Good central banking is not a matter of magic touch,'' said Doug Elmendorf, a senior fellow at the Brookings Institution in Washington, and a former Fed staff economist under both Bernanke and former chairman Alan Greenspan. ``It is a matter of doing something systematically right.''
The Bernanke system also includes changes in governance and communication. Bernanke persuaded fellow members of the Federal Open Market Committee to publish their projections four times a year instead of two, and stretch out to a third year. The exercise transformed the undefined preferences of Greenspan into numeric priorities of an institution.
Last to Vote
Bernanke votes last in policy meetings, unlike Greenspan who argued his policy choice first. Bernanke calls it ``depersonalization.''
``It is commendable that they are implementing these changes in the midst of the most challenging environment for central banks in decades,'' said Angel Ubide, director of global economics in Washington at Tudor Investment Corp., a hedge fund.
Bernanke's scholarly work on the Great Depression also came into play as he retooled the Fed's function as lender of last resort to grapple with what NYU economist Nouriel Roubini calls ``the first crisis of financial globalization and securitization.''
Instead of bank depositors fleeing banks, as in the Depression, it was commercial paper investors who wanted safety. These investors were running from off-balance-sheet structured investment vehicles, which have some features of banks with none of the backstops.
`Frightening at Times'
Kodweis recalled how the normal din of ringing phones fell quiet inside JPMorgan's mid-town Manhattan trading room as credit markets dried up in early August. ``It was frightening at times,'' he said. ``It took longer to sell commercial paper, it was later in the day when we were done, and maturities were increasingly shorter.''
The rush by money market funds to securities not tied to mortgages or consumers created new problems for the Fed.
On Aug. 20, the three-month Treasury bill yield declined 0.66 percentage point in one day to 3.09 percent, the biggest fall in two decades, in a stampede to safety.
On Aug. 21, Bernanke, who had been holding twice-daily conference calls with the New York Fed, reached for another tool. The New York bank halved the fee for dealers borrowing securities from the central bank's portfolio.
New Challenge
By November, Fed officials faced a new challenge. ``Banks wouldn't lend to each other,'' said Haeling. ``There was enough liquidity in the system. The trouble was it wasn't getting to the right places.''
The price of three-month interbank dollar loans in London rose to an average 60 basis points over the federal funds rate in November, from 10 basis points in January to July.
By mid-February, the Fed had auctioned $130 billion in term reserves. The Libor to federal funds rate spread fell back.
Now, Fed officials have said they are considering making the facility permanent.
``He did creative intelligent things about the banking problem. He recognized that a central bank has two concerns -- the financial problem and the macroeconomic problem,'' said Allan Meltzer, a Fed historian and Carnegie Mellon University economist. ``He acted appropriately.''
To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net .
Last Updated: February 27, 2008 10:02 EST
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