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Five Things You Need to Know: The Echo Effect


Part two of the debt crisis is the spread from Wall Street to Main Street. Part three is the echo back to Wall Street again.


Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Fed's Lacker Bats Out of Turn

It's called "batting out of turn." It happens when a player in the grift blows the scene by delivering his line off cue. Today, Richmond Federal Reserve Bank President Jeffrey Lacker batted out of turn.

In a speech before the European Economics and Financial Centre in London, Lacker said the Federal Reserve's lending program to securities firms initiated in March - the first lending program to non-banks since the great Depression - may sow the seeds for further financial crises. "The danger is that the effect of the recent credit extension on the incentives of financial-market participants might induce greater risk taking,'' Lacker said.

As we've seen throughout history, that's not a theoretical "danger," but an inevitability. If investors anticipate an official intervention to limit losses in "situations of financial stress,'' firms will be less likely to take "costly'' measures to protect themselves, Lacker said, according to Bloomberg.

Lacker added that the challenge now is it "might be difficult to resist further expanding the scope of central bank lending.'' We'd argue that in reality it will prove not just "difficult," but impossible. The Fed's role during the Great depression didn't stop asset deflation, it merely prolonged it.

What may be most misunderstood about that time - and similarly about today - is that the central bank's actions were never intended to forestall a deflationary credit unwind, but to prolong it. Prolong in this sense must be understood separately from exacerbate. For what it's worth, the Fed did not intend to exacerbate the depression. Rather, and this is even more true today, the goal was/is to simply extend the unwind so that it occurs slowly, over time. Their theory is that extending it reduces the impact on the overall economy since it allows more time for the economy to prepare for it. '

2. The Wall Street to Main Street to Wall Street Echo Effect

A report today by the Mortgage Bankers Association shows the delinquency rate for all outstanding mortgages jumped to 6.3% from 5.82% three months ago. Foreclosures now total 1% of all mortgages, the reports said.

Well, look, on the surface 1% doesn't sound so bad, and neither does 6.3%. After all, a little more than 93% of all mortgages are not behind or in foreclosure, right? By focusing on foreclosures we're basically focusing on the tombstones in the cemetery and ignoring the increasingly sick population that may be headed there.

According to Moody's, the number of homeowners with negative equity as of the first quarter of this year was 8.5 million. Now, we're starting to get to real numbers. Factor in even the most modest estimates of further home price declines and that number with negative equity will continue to expand. Any acceleration puts further pressure on that negative equity number. And even a flat lining of prices will still require years for that equity situation to improve, and that makes the further assumption that those with negative equity don't capitulate and add to the already bloated inventory of homes.

In short, the bottom line is that just as economists (and former Fed Chairmen) praised the "wealth effect" and its contribution to consumer spending, so too should we expect the negative wealth effect to create a long-lasting drag over the next few years. This is part two of the debt crisis as it spreads from Wall Street to Main Street. Part three is when it echoes back to Wall Street again.

3. Airline Capacity Cuts Showing Up in Fares

Continental (CAL) said it will retire 67 planes and axe 3,000 jobs once the summer season passes. The company's CEO, Larry Kellner, also said he will not be taking a salary for the remainder of the year. According to the Cleveland Plain-Dealer, Kellner received total compensation of $7.3 mln last year, with a base salary of $712,500.

Meanwhile. as airlines continue to reduce capacity and eliminate jobs, USA Today reports the cheapest airline tickets available on many routes in July are 100% to 300% higher than a year ago.

4. Food: The New Gold?

Another part in the ongoing New York Times series The Food Chain today takes a look (finally) at one of Minyanville Professor Ryan Krueger's long-standing themes: investments in farming.

According to the Times, a few large private investors are making bigger, and longer-term bets, that the world's need for food will increase, mainly by purchasing farmland, grain elevators, fertilizer distribution outlets and barges and ships.

Also mentioned in the piece are BlackRock (BLK), whose London branch last year introduced the BlackRock Agriculture fund. The angle of the piece falls somewhere between - investments by these investors could bolster production just when the world needs it - and - these investors will focus on profits above everything else, not sharing the industry's commitment to farming during both good and bad times.

5. Manhattan's Green Acres

Speaking of farming, who knew there were so many farms in Manhattan?

Just a guess, but the ones dotted underneath FDR Drive presumably grow crops that don't need much sunlight.

No positions in stocks mentioned.

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