Is the housing slowdown in the UK a harbinger of what is about to happen in the US? Let's take a look at current situation in the UK and see if we can find any parallels for the US.
Citing official figures, the BBC is reporting nearly 26,000 property repossession orders were granted in the first three months of 2005, the highest number since 1995.
"We are seeing lots of younger people coming to us for help," Frances Walker, spokeswoman for debt charity the Consumer Credit Counseling Service (CCCS). "They are often very heavily in debt as they have been able to borrow far more than in the past. The trouble is they have no assets, so when they get into difficulty they have nothing to fall back on."
As a result, Ms Walker said that CCCS's counselors were advising more people to go bankrupt, many of them in their 20s and just out of university.
Between the fourth quarter of 2000 and 2004, U.K. home prices increased 88 percent, on average, according to the Halifax house price index. "Buy-to-let" became all the rage as investors shifted funds from their traditional portfolios into rental properties. Like all rages and with little warning, the housing market dramatically cooled.
According to the Council of Mortgage Lenders, lending to "buy-to-let" investors dropped 18 percent between the first and second half of 2004. During that time, the number of investors unable to meet their mortgage payments increased 50 percent. All of a sudden people that were thinking they would rent it out and make 15 or 20 percent appreciation, were left with huge mortgage payments, negative appreciation and rent that did not cover carrying costs.
Mortgage equity withdrawal slumped to 6.9 billion pounds in the fourth quarter of 2004, the lowest since the final three months of 2001, according to Bank of England statistics. Less mortgage equity withdrawal means less finance available to households so a slowing housing market is enough to cause a turnaround in consumer spending. Loan write-offs and revaluations by banks reached 6 billion pounds last year, the highest since records began in 1993, according to central bank statistics.
Just one year ago everyone believed the supply of houses for sale simply could not keep up with demand. It was a seller's market. The mortgage industry looked great and the number of people in arrears was very low and foreclosures were at an all-time low. One year later repossessions hit their highest total since 1995.
The Bank of England trimmed its 2005 growth forecast to about 2.6 percent from 2.7 percent amid evidence that consumer spending, which has fuelled 51 successive quarters of growth, is decelerating. The British Retail Consortium on May 10 said store sales slumped the most in at least 10 years in April.
I am wondering what will happen to consumer spending when taxes pick up and housing prices further decline? It seems to me that Chancellor Brown is in denial over the state of affairs. Brown claims that the UK is on target with his self imposed "golden Rule" of borrowing only to invest. Others disagree.
"With the economy unlikely to meet Mr. Brown's forecast of three per cent growth this year we still expect taxes to have to rise after the election to put the public finances on a more sustainable footing," said Capital Economics' chief UK economist, Jonathan Loynes.
And, the Shadow Chief Secretary to the Treasury, George Osborne, said all the figures proved was that the Chancellor had got his figures wrong again. Mr. Osborne said: "These figures show the current budget deficit is half a billion pounds worse than the Chancellor said it would be in the Budget just one month ago.
"This is further backing from the Government itself for what almost all the independent experts have been saying - that there is a shortfall in spending plans that they would have to fill with higher taxes."
Higher taxes would just about kill the housing market and consumer spending as well. Already UK housing appears to be on the brink as evidenced by the April report from the Royal Institution of Chartered Surveyors (RICS) which found that 40% more surveyors experienced a fall than a rise in house prices. This is up from the 39% the previous month and not far from the 12 year high of 44% recorded last November. UK house prices have now dropped for eighth consecutive months.
In an effort to keep the UK housing bubble alive, Brown doubled the stamp duty threshold to £120,000. Is this an act of futile desperation? At some point does it really make sense to keep encouraging people to spend money they do not have on over-priced assets they can not afford?
The moves in the UK to keep the housing bubble alive seem similar to what is currently happening on this side of the ocean as reported in Should the government sell bread, orange juice, or mortgages? with President Bush urging tax credits for homebuilders and Housing and Urban Development Secretary Alphonso Jackson "absolutely emphatic" about the US government "winning back our share of the market that has slipped away to subprime lenders".
Should this really be government's role, here or there or anywhere to promote a specific kind of consumption? Will it serve to lower prices to first time buyers or will it keep them elevated up until there is a housing crash?
Bloomberg is now reporting U.K. jobless claims rose for a third month in April and wage growth eased to the slowest in almost a year amid signs expansion in Europe's second-largest economy is faltering.
The number of people claiming unemployment benefit rose by 8,100 to 839,400, the Office for National Statistics said in London today. The central bank last week trimmed its economic forecast and said a slowdown in consumer spending has "become more marked" leading to speculation of a rate cut.
In the meantime Brown's "Golden Rule" will be fighting an uphill battle with UK manufacturing conditions getting worse according to the Confederation of British Industry (CBI). A survey of small and medium-sized firms from the CBI found that trading conditions over the past quarter remain tough, with output, orders and employment all falling. The survey found that small firms reported the sharpest falls in numbers employed since October 2003 and although medium-sized firms reported broadly unchanged numbers, they expect to reduce employment over the next three months.
Meanwhile, back in the states we have a mixed bag. Home sales and housing starts are still quite strong (but in a disorderly up down up down fashion. That is a sign of a topping market. On the other hand higher, interest rates and a weak economy seem to be taking their toll as foreclosures jumped 57% from last year in some areas. The hardest hit states were Ohio, Texas, Michigan and Georgia, with more than 2,300 new foreclosures each.
Manufacturing is clearly in trouble in the UK. Enquiring minds might be wondering about the US. Let's take a look. Manufacturing activity in the New York area deteriorated sharply for the second straight month in May, the New York Federal Reserve Bank said Monday. The bank's Empire State Manufacturing index fell to -11.1 in May from a revised 2.0 in April. This was the first negative, and lowest, reading since April 2003. Readings below zero indicate contraction. The drop was unexpected. Economists were forecasting the index to rebound to about 10.7 in May from the initial estimate in April of 3.1. Given that leading economic indicators have now gone negative for the first time since early 2003, there is no war stimulus to look forward to, business tax credits expired at the end of 2004, and we have had eight consecutive rate hikes, I am inclined to think this is a sign of things to come as opposed to an outlier.
The cycle here in the US will likely follow a similar path as to what is currently happening in the UK since the "buy to let" aka "buy to rent" is now the latest fad here in the US.
They are one more sign of the magnitude of the real-estate boom in the US. Eager to cash in on one of the strongest housing markets in the postwar era, speculators and even average investors are buying homes and renting them out until they decide to sell them at presumably far higher prices.
"Housing derives value from rents and the two cannot diverge for very long," says Mark Zandi, chief economist at Economy.com. "People may care about this if the weak rental market weighs on the single-family housing market."
'Get rich' seminars
Other investors are being lured by so-called real estate investment seminars, which frequently advertise on Sunday-morning television shows. These seminars purport to show people how to get rich - by buying and renting real estate. They usually include sections on purchasing repossessed or foreclosed property. There are often promises that developers will pay many of the closing costs and provide appliances.
Yet the riches can be elusive. One woman, for instance, bought a new house in Cordova, Tenn., a suburb of Memphis, with the intention of renting it. On a real estate Internet chat room, she bemoaned that her closing costs ended up running $4,000 more than her mortgage broker had quoted two months earlier. She paid fee after fee, including $1,000 to a property manager to rent the house.
"Never did find a renter because they had 83 other properties closing in the same time frame as mine and in the same area!" she wrote. After eight months, she reduced the rent by $350 a month and eventually sold the house after a year for $10,000 less than the original purchase price. She did not return e-mails asking for more information.
I think she got out lucky. $10,000 is a costly but not fatal mistake. Those pouring it on now with "buy to let/rent" ideas will not do nearly as well.
Here is the scenario I envision:
1) Stagnant housing prices that are hard to rent
2) Decreasing cash out refis
3) Decreasing demand for manufactured goods
4) Decreasing manufacturing employment
5) Decreasing demand for housing
6) Housing speculation stops
7) Housing prices fall
8) Decreasing retail employment
9) Decreasing demand for goods and services
10) Recession
My conclusion is that we are about 4-8 months behind the UK cycle with a recession headed our way in 2006.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Tuesday, 31 May 2005
Monday, 30 May 2005
More Concern Over Rising Foreclosures
On Saturday I wrote that foreclosures were on my mind. It seems that foreclosures are on other minds too, as evidenced by this Washington Post article. Let's take a look:
"Philadelphia, its suburbs and indeed much of Pennsylvania have experienced a foreclosure epidemic as low-income homeowners take on mortgage debt they cannot afford. In 2000, the Philadelphia sheriff auctioned 300 to 400 foreclosed properties a month; now he handles more than 1,000 a month. Allegheny County, which includes Pittsburgh, had record auctions of foreclosed homes, and officials speak of a "Depression-era" problem. The foreclosures fall particularly hard on black and Latino families."
.......
"Foreclosure rates rose in 47 states in March, according to Foreclosure.com, an online foreclosure listing service. The rates in Florida, Texas and Colorado are more than twice the national average. Even in New York City and Boston, where real estate markets are white-hot, foreclosures are rising in working-class neighborhoods."
........
Fannie Mae claims "The solution lies with more counseling and fine-tuning of mortgages for lower-income families."
No! I say one of the root causes of the rising foreclosures we see is blatantly reckless "fine tuning" as opposed to a lack of "fine tuning". We have interest only loans, 1, 3, and 5, year arms, 40 year loans, cash out refis to support consumption, loose credit standards, zero % down loans, and even 125% loans. Finally we have a huge rise in what will surely bring a rash of fraud charges in the years to come: stated income and no doc loans. What more creative "fine tuning" could possibly be next? Anyone for 50 year loans, 100 year loans, or 200 year loans? Fannie Mae wants to get anyone who could breathe into a house. Perhaps I mean Fannie Mae wants to get anyone and everyone into three houses. The reckless behavior of lenders, who are all too willing to drop the worst loans on Fannie Mae's lap, guarantees rising home prices for everyone. The Pennsylvania Banking Department seems to agree with me.
"We've had a national agenda that's putting people into homeownership who are not ready for it," said A. William Schenck III, Pennsylvania's secretary of banking and a former bank president. "This is a fact that the nation must deal with unless we want to wreck the credit of a lot of middle-class Americans."
Rest assured that president Bush's "ownership society" in conjunction with "fine tuning" and loose lending standards is going to cause one of the biggest national housing problems since the great depression.
Foreclosures seem to be on the Fed's mind as well. Since April 22, no fewer than four FED governors (Kohn, Greenspan, Guynn, and Ferguson) have all sounded alarm bells on housing. CalculatedRisk addresses this in a fine article entitled Housing, the Fed and M3.
It now seems that Greenspan is going to keep hiking until he breaks housing. Paradoxically, every FED tightening lends support to 10 year treasuries and the 30 year long bond. It seems the bond market can sense the housing debacle that is developing. I think 4% yields will look rather nice once housing implodes and takes the stock market down with it.
Already this housing boom is a bust to many. "For lots of these folks, homeownership is a dangerous, precarious existence," said Ira Goldstein, policy director for the fund. "Foreclosures can become like a contagion in these neighborhoods."
Few of these homeowners were tutored in home buying, and 70 percent relied on "subprime" mortgage brokers, which specialize in buyers with bad credit and charge interest rates between 8 and 12 percent, far above market interest rates of 6 percent or less.
Said Williams, the acting comptroller of the currency: "We've produced a new class of lenders willing to take on riskier and riskier borrowers at a very high price. Many of the products are nothing more than time bombs."
We have only just begun to see rising foreclosures. Wait until California and Florida get into the act. In the meantime party on.
Mike Shedlock /Mish
http://globaleconomicanalysis.blogspot.com/
"Philadelphia, its suburbs and indeed much of Pennsylvania have experienced a foreclosure epidemic as low-income homeowners take on mortgage debt they cannot afford. In 2000, the Philadelphia sheriff auctioned 300 to 400 foreclosed properties a month; now he handles more than 1,000 a month. Allegheny County, which includes Pittsburgh, had record auctions of foreclosed homes, and officials speak of a "Depression-era" problem. The foreclosures fall particularly hard on black and Latino families."
.......
"Foreclosure rates rose in 47 states in March, according to Foreclosure.com, an online foreclosure listing service. The rates in Florida, Texas and Colorado are more than twice the national average. Even in New York City and Boston, where real estate markets are white-hot, foreclosures are rising in working-class neighborhoods."
........
Fannie Mae claims "The solution lies with more counseling and fine-tuning of mortgages for lower-income families."
No! I say one of the root causes of the rising foreclosures we see is blatantly reckless "fine tuning" as opposed to a lack of "fine tuning". We have interest only loans, 1, 3, and 5, year arms, 40 year loans, cash out refis to support consumption, loose credit standards, zero % down loans, and even 125% loans. Finally we have a huge rise in what will surely bring a rash of fraud charges in the years to come: stated income and no doc loans. What more creative "fine tuning" could possibly be next? Anyone for 50 year loans, 100 year loans, or 200 year loans? Fannie Mae wants to get anyone who could breathe into a house. Perhaps I mean Fannie Mae wants to get anyone and everyone into three houses. The reckless behavior of lenders, who are all too willing to drop the worst loans on Fannie Mae's lap, guarantees rising home prices for everyone. The Pennsylvania Banking Department seems to agree with me.
"We've had a national agenda that's putting people into homeownership who are not ready for it," said A. William Schenck III, Pennsylvania's secretary of banking and a former bank president. "This is a fact that the nation must deal with unless we want to wreck the credit of a lot of middle-class Americans."
Rest assured that president Bush's "ownership society" in conjunction with "fine tuning" and loose lending standards is going to cause one of the biggest national housing problems since the great depression.
Foreclosures seem to be on the Fed's mind as well. Since April 22, no fewer than four FED governors (Kohn, Greenspan, Guynn, and Ferguson) have all sounded alarm bells on housing. CalculatedRisk addresses this in a fine article entitled Housing, the Fed and M3.
It now seems that Greenspan is going to keep hiking until he breaks housing. Paradoxically, every FED tightening lends support to 10 year treasuries and the 30 year long bond. It seems the bond market can sense the housing debacle that is developing. I think 4% yields will look rather nice once housing implodes and takes the stock market down with it.
Already this housing boom is a bust to many. "For lots of these folks, homeownership is a dangerous, precarious existence," said Ira Goldstein, policy director for the fund. "Foreclosures can become like a contagion in these neighborhoods."
Few of these homeowners were tutored in home buying, and 70 percent relied on "subprime" mortgage brokers, which specialize in buyers with bad credit and charge interest rates between 8 and 12 percent, far above market interest rates of 6 percent or less.
Said Williams, the acting comptroller of the currency: "We've produced a new class of lenders willing to take on riskier and riskier borrowers at a very high price. Many of the products are nothing more than time bombs."
We have only just begun to see rising foreclosures. Wait until California and Florida get into the act. In the meantime party on.
Mike Shedlock /Mish
http://globaleconomicanalysis.blogspot.com/
Friday, 27 May 2005
Foreclosures on my Mind
According to RealtyTrac Inc. the Dallas-Fort Worth area has the dubious distinction of leading the nation in foreclosures with one foreclosure for every 319 households. This is more than 5.5 times the national average.
Following are the top five foreclosure states according to this article :
1. Texas 9,672
2. Florida 9,506
3. New York 3,024
4. Arizona 2,386
5. Pennsylvania 1,790
According to the West Virginia Gazette, West Virginia foreclosures are at a 40 year high. Here is an interesting snip from the article: A West Virginia bill passed in the Legislature this year requires high schools to start teaching students the basics of personal finance, initiating them into the mundane world of balancing checkbooks, paying off loans and sweating out investments. Just seven other states have such a requirement.
These courses have long been offered as high school electives in West Virginia, but now they’ll be covered in the core curriculum, mandatory for graduation starting with the class of 2008.
That’s not a semester too soon, if you ask Treasurer John Perdue, a longtime proponent of such legislation. "Too many kids are graduating from high school who don’t know how to balance a checkbook," Perdue said. "And sometimes the credit card companies are getting to them while they’re still in high school."
Meanwhile
check out the volume of transactions in three California counties: San Mateo -18.7%, Santa Clara -11.7%, Santa Cruz -23.8%. Will volume lead price down? I think so.
According to foreclosures.com Speculators are cashing out of Las Vegas Housing Market. "Investors represented over 25% of home sales in 2004," said Foreclosures.com president Alexis McGee. "Foreclosures averaged just 607 per month for the first quarter of 2005. Now speculators have cut down on buying and are cashing out." Falling prices and rising foreclosures will follow in this writer's opinion.
Foreclosures.com is also reporting that although California Foreclosure Activity Remains Low, Pressure is Mounting.
This quote sums up my feelings on the precarious situation in California precisely. Alexis McGee, president of foreclosures.com said "We can't say when defaults will increase. We just see it coming."
Mike Shedlock /Mish
http://globaleconomicanalysis.blogspot.com/
Following are the top five foreclosure states according to this article :
1. Texas 9,672
2. Florida 9,506
3. New York 3,024
4. Arizona 2,386
5. Pennsylvania 1,790
According to the West Virginia Gazette, West Virginia foreclosures are at a 40 year high. Here is an interesting snip from the article: A West Virginia bill passed in the Legislature this year requires high schools to start teaching students the basics of personal finance, initiating them into the mundane world of balancing checkbooks, paying off loans and sweating out investments. Just seven other states have such a requirement.
These courses have long been offered as high school electives in West Virginia, but now they’ll be covered in the core curriculum, mandatory for graduation starting with the class of 2008.
That’s not a semester too soon, if you ask Treasurer John Perdue, a longtime proponent of such legislation. "Too many kids are graduating from high school who don’t know how to balance a checkbook," Perdue said. "And sometimes the credit card companies are getting to them while they’re still in high school."
Meanwhile
check out the volume of transactions in three California counties: San Mateo -18.7%, Santa Clara -11.7%, Santa Cruz -23.8%. Will volume lead price down? I think so.
According to foreclosures.com Speculators are cashing out of Las Vegas Housing Market. "Investors represented over 25% of home sales in 2004," said Foreclosures.com president Alexis McGee. "Foreclosures averaged just 607 per month for the first quarter of 2005. Now speculators have cut down on buying and are cashing out." Falling prices and rising foreclosures will follow in this writer's opinion.
Foreclosures.com is also reporting that although California Foreclosure Activity Remains Low, Pressure is Mounting.
This quote sums up my feelings on the precarious situation in California precisely. Alexis McGee, president of foreclosures.com said "We can't say when defaults will increase. We just see it coming."
Mike Shedlock /Mish
http://globaleconomicanalysis.blogspot.com/
Is the US blinking first?
Check out Snow's comments to the Senate Banking Committee:
"I don't think it's in our interests or in their interests to go to a full float. I see them on a path to a float." Hmmm Is that a blink?
Snow said the judgment on whether China was a currency manipulator would depend on how its large current account surplus with the United States developed -- as well as its large and growing surplus with the world, continued capital inflows and the buildup of its foreign currency reserves.
So far, he is refusing to say how much he wants Chinese officials to revalue the renmimbi. Others in the administration are privately demanding an immediate increase of 10 to 15 percent. "I am frankly astounded the administration continues to report the Chinese peg is not currency manipulation," said Senator Elizabeth Dole, Republican of North Carolina. "I think we're going to see action by China," Snow told members of the Senate committee but added that he "might have to eat those words" in six months.
Would someone please wake up Treasury Snow from his sleep? China has a trade surplus with the US but it is not that huge with the rest of the world. In fact, China has big trade deficits with its Asian trading partners including Japan, Taiwan and South Korea. More to the point, is Snow really bitching about China holding US$ reserves? Why the focus on China anyway? What about the US$ reserves in Japan and South Korea? Perhaps this is the correct question: Is Snow on Mars or is he on drugs?
So far China is doing the right thing: nothing.
Six months from now will we see crow eating accompanied by trade wars or just plain crow eating? Perhaps we get a token 3% move allowing the US to save face. If so China will be showing a lot more class than we have.
Here is the real (but unreported) story behind all these "snowjobs" and congressional threats: The situation in the US is nowhere near as good as it seems or we would not be doing all this bitching. Think about how much worse it will get when housing finally collapses.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
"I don't think it's in our interests or in their interests to go to a full float. I see them on a path to a float." Hmmm Is that a blink?
Snow said the judgment on whether China was a currency manipulator would depend on how its large current account surplus with the United States developed -- as well as its large and growing surplus with the world, continued capital inflows and the buildup of its foreign currency reserves.
So far, he is refusing to say how much he wants Chinese officials to revalue the renmimbi. Others in the administration are privately demanding an immediate increase of 10 to 15 percent. "I am frankly astounded the administration continues to report the Chinese peg is not currency manipulation," said Senator Elizabeth Dole, Republican of North Carolina. "I think we're going to see action by China," Snow told members of the Senate committee but added that he "might have to eat those words" in six months.
Would someone please wake up Treasury Snow from his sleep? China has a trade surplus with the US but it is not that huge with the rest of the world. In fact, China has big trade deficits with its Asian trading partners including Japan, Taiwan and South Korea. More to the point, is Snow really bitching about China holding US$ reserves? Why the focus on China anyway? What about the US$ reserves in Japan and South Korea? Perhaps this is the correct question: Is Snow on Mars or is he on drugs?
So far China is doing the right thing: nothing.
Six months from now will we see crow eating accompanied by trade wars or just plain crow eating? Perhaps we get a token 3% move allowing the US to save face. If so China will be showing a lot more class than we have.
Here is the real (but unreported) story behind all these "snowjobs" and congressional threats: The situation in the US is nowhere near as good as it seems or we would not be doing all this bitching. Think about how much worse it will get when housing finally collapses.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Thursday, 26 May 2005
What's Supporting the US Dollar?
Only two things
1) Sentiment was so extreme against it
2) Fundamentals
That is a pretty powerful argument is it not?
Here is the sentiment side:
The mainstream press (Newsweek) finally addresses the US$ on a features cover, Buffet is shorting the US$ and Billy Come Lately (Bill Gates) does the same thing. OK where were these guys two years ago? Let's look at a chart:
A bottom warning was sent out on March 18th with this post on The Incredible Shrinking Dollar. On May 12th we had an update called Dollar On My Mind.
Since then lots of people are jumping on the US dollar bandwagon, the falling dollar is no longer news, and the shoeshine boy is no longer telling you to short the dollar but to buy real estate. Sentiment has perhaps shifted but what about fundamentals? Good question. Let's take a look.
Many people (in fact nearly everyone) thought that the fundamentals of the US$ could hardly be worse. Was that really the case? One of the biggest factors in currency moves is interest rate differentials and expectations of future rate hikes or rate cuts. Many people, myself included, did not think the US would get this many hikes in. Then again, some treasury bears and hyperinflationists on the other hand thought interest rates would soar to the moon. Oddly enough it seems fundamentally wrong (to me anyway) to have a view of hugely rising US interest rates and at the same time be bullish on gold and bearish on the US$. Sure enough, gold miners collapsed. It's not that US interest rates are rising per se that is lending support to the US dollar, the pertinent point is US interest rates are rising as compared to other countries. Let's take a look.
Right there in a nutshell you have the answer to why gold miners have been weak and why the US$ has been strong. The FED is the only country currently hiking (against the belief they would quickly pause) and other countries are on hold, or in the case of the UK and Australia, expected to have rate cuts.
Following are the major fundamentals supporting the US$.
1) Currently the FED still sees interest rates as being "accommodative".
2) The Fed Funds have expectations of future hikes priced in so more "measured" rate are expected in the coming months.
3) The US Federal Reserve remains the only central bank on a committed tightening track.
4) Rate cuts are now expected to be the next move by central banks in a number of other countries.
5) Reality or not, the perception is that the US is still strongly growing but that Japan, Italy, and Germany are in or near recession.
6) Greenspan is likely to keep hiking until housing comes unglued. The FED seems increasing worried about the housing bubble as admitted to by none other than Greenspan himself. This idea was discussed in Concern About Froth.
What now?
If seems the market finally understands that Greenspan is committed to hiking. A reversal (which I think is coming) is for sure not priced in. It is not priced into gold or the US dollar. In the meantime sentiment against miners has gotten so extreme that the downside may be limited from here. George Palous at Freebuck suggests that in his article Are the Stars Finally Aligned for Gold Stocks? Michael Swanson discusses the same idea in Three Signs of a Gold Bottom.
My take is that sometime between now and July, gold miners will bottom and the US$ rally will peak. The exact timing depends on a number of factors including but not limited to, housing, the EU constitution, trade wars, geopolitical uncertainty, and interest rate cuts in the UK.
Seasonally gold tends to do well in an August timeframe, and if US housing weakens and/or the FED pauses, the stars will indeed be aligned for gold and gold stocks. The best case scenario for a sustained rally is that we build a long base here rather than blast off.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
1) Sentiment was so extreme against it
2) Fundamentals
That is a pretty powerful argument is it not?
Here is the sentiment side:
The mainstream press (Newsweek) finally addresses the US$ on a features cover, Buffet is shorting the US$ and Billy Come Lately (Bill Gates) does the same thing. OK where were these guys two years ago? Let's look at a chart:
A bottom warning was sent out on March 18th with this post on The Incredible Shrinking Dollar. On May 12th we had an update called Dollar On My Mind.
Since then lots of people are jumping on the US dollar bandwagon, the falling dollar is no longer news, and the shoeshine boy is no longer telling you to short the dollar but to buy real estate. Sentiment has perhaps shifted but what about fundamentals? Good question. Let's take a look.
Many people (in fact nearly everyone) thought that the fundamentals of the US$ could hardly be worse. Was that really the case? One of the biggest factors in currency moves is interest rate differentials and expectations of future rate hikes or rate cuts. Many people, myself included, did not think the US would get this many hikes in. Then again, some treasury bears and hyperinflationists on the other hand thought interest rates would soar to the moon. Oddly enough it seems fundamentally wrong (to me anyway) to have a view of hugely rising US interest rates and at the same time be bullish on gold and bearish on the US$. Sure enough, gold miners collapsed. It's not that US interest rates are rising per se that is lending support to the US dollar, the pertinent point is US interest rates are rising as compared to other countries. Let's take a look.
Right there in a nutshell you have the answer to why gold miners have been weak and why the US$ has been strong. The FED is the only country currently hiking (against the belief they would quickly pause) and other countries are on hold, or in the case of the UK and Australia, expected to have rate cuts.
Following are the major fundamentals supporting the US$.
1) Currently the FED still sees interest rates as being "accommodative".
2) The Fed Funds have expectations of future hikes priced in so more "measured" rate are expected in the coming months.
3) The US Federal Reserve remains the only central bank on a committed tightening track.
4) Rate cuts are now expected to be the next move by central banks in a number of other countries.
5) Reality or not, the perception is that the US is still strongly growing but that Japan, Italy, and Germany are in or near recession.
6) Greenspan is likely to keep hiking until housing comes unglued. The FED seems increasing worried about the housing bubble as admitted to by none other than Greenspan himself. This idea was discussed in Concern About Froth.
What now?
If seems the market finally understands that Greenspan is committed to hiking. A reversal (which I think is coming) is for sure not priced in. It is not priced into gold or the US dollar. In the meantime sentiment against miners has gotten so extreme that the downside may be limited from here. George Palous at Freebuck suggests that in his article Are the Stars Finally Aligned for Gold Stocks? Michael Swanson discusses the same idea in Three Signs of a Gold Bottom.
My take is that sometime between now and July, gold miners will bottom and the US$ rally will peak. The exact timing depends on a number of factors including but not limited to, housing, the EU constitution, trade wars, geopolitical uncertainty, and interest rate cuts in the UK.
Seasonally gold tends to do well in an August timeframe, and if US housing weakens and/or the FED pauses, the stars will indeed be aligned for gold and gold stocks. The best case scenario for a sustained rally is that we build a long base here rather than blast off.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Unsolicited Advice To the Chinese
I can not possibly improve upon the following idea so I will not try.
Here is Paul Kasiel's Message to China:
Anchor Your Currency To Gold
Everyone from Fed Chairman Greenspan to Treasury Secretary Snow seems to be offering advice to the Chinese monetary authorities as to how they should manage their currency. So, I will add to the unsolicited advice – anchor the renminbi to gold. ....
There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
Paul Kasriel has long been one of my favorite economists.
Hopefully he is now one of yours.
Rest assured The Northern Trust is a mainsteam organization and his call means (or should mean) a lot more than if this message came from me or you.
Paul & Paul
Ron Paul & Paul Kasriel
Two minds that are willing to tell it like it is.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Here is Paul Kasiel's Message to China:
Anchor Your Currency To Gold
Everyone from Fed Chairman Greenspan to Treasury Secretary Snow seems to be offering advice to the Chinese monetary authorities as to how they should manage their currency. So, I will add to the unsolicited advice – anchor the renminbi to gold. ....
There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
Paul Kasriel has long been one of my favorite economists.
Hopefully he is now one of yours.
Rest assured The Northern Trust is a mainsteam organization and his call means (or should mean) a lot more than if this message came from me or you.
Paul & Paul
Ron Paul & Paul Kasriel
Two minds that are willing to tell it like it is.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Wednesday, 25 May 2005
Concern About Froth
Greenspan is concerned about 'froth' according to this article in the New York Times.
"Without calling the overall national issue a bubble, it's pretty clear that it's an unsustainable underlying pattern," Mr. Greenspan told the Economic Club of New York at the Hilton New York hotel in Midtown.
Mr. Greenspan emphasized that he sees no sign of a nationwide housing bubble, but he acknowledged concerns over "froth" in the market and pointed to a big increase in speculation in homes - particularly in second homes. As a result, he said, there are "a lot of local bubbles" around the country.
This is an interesting reversal given his stated position that bubbles could only be detected in hindsight. Let's summarize the history of Greenspan's beliefs in ability to detect bubbles.
1996 - Greenspan warns about irrational exuberance in the stock market
2000 - Greenspan embraces the "productivity miracle" and says there is no stock market bubble.
2000 - The full FOMC minutes just now released after 5 years show that the FED was openly discussing bubbles even though Greenspan was publicly denying them
2001 - Greenspan said bubbles can only be detected in hindsight
2004 - Greenspan says there is no housing bubble
2005 - Greenspan says there is no national housing bubble even though he admits we have "an unsustainable underlying pattern", "froth", and "it's hard not to see that there are a lot of local bubbles."
Let's review the latest home sale figures just released for April 2005.
According to the National Association of Realtors sales of existing U.S. homes rose 4.5% in April to a record seasonally adjusted annual rate of 7.18 million. It was a new all time record. The previous record of was 7.02 million sales, set in June 2004. The inventory of unsold homes rose 8.1% to 2.48 million, a 4.2-month supply at the April sales' rate.
Sales of new U.S. homes also hit a new all time record in April, record rising 0.2% to a seasonally adjusted annual rate of 1.316 million according to the US Census Bureau.
"The median sales price of new houses sold in April 2005 was $230,800; the average sales price was $283,500. The seasonally adjusted estimate of new houses for sale at the end of April was 440,000. This represents a supply of 4.1 months at the current sales rate."
It seems the FED is getting more than a bit concerned about this trend as indicated in the latest minutes: "Home sales and other indicators of activity in the residential real estate market remained at very high levels," the minutes said. "House price appreciation was expected to moderate over coming quarters, but a number of local markets were still regarded as 'hot' with signs of possible speculative excess.".
Let's see, we have an all time record numbers of sales, people flipping houses like mad, 10 years worth of condo units coming on the market in Miami within the next year, people putting real estate into their IRAs, and 36% of homes sold last year were second homes and/or for "investment". Yes, Chairman Greenspan, I would concur that we are in "an unsustainable underlying pattern" with a "lot of local bubbles" to boot.
Now the interesting thing to me is that in spite of record sales, we still have 4.1 months of supply and builders are still building as fast as they can. One question: What happens to monthly supply when we no longer have record sales month after month?
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
"Without calling the overall national issue a bubble, it's pretty clear that it's an unsustainable underlying pattern," Mr. Greenspan told the Economic Club of New York at the Hilton New York hotel in Midtown.
Mr. Greenspan emphasized that he sees no sign of a nationwide housing bubble, but he acknowledged concerns over "froth" in the market and pointed to a big increase in speculation in homes - particularly in second homes. As a result, he said, there are "a lot of local bubbles" around the country.
This is an interesting reversal given his stated position that bubbles could only be detected in hindsight. Let's summarize the history of Greenspan's beliefs in ability to detect bubbles.
1996 - Greenspan warns about irrational exuberance in the stock market
2000 - Greenspan embraces the "productivity miracle" and says there is no stock market bubble.
2000 - The full FOMC minutes just now released after 5 years show that the FED was openly discussing bubbles even though Greenspan was publicly denying them
2001 - Greenspan said bubbles can only be detected in hindsight
2004 - Greenspan says there is no housing bubble
2005 - Greenspan says there is no national housing bubble even though he admits we have "an unsustainable underlying pattern", "froth", and "it's hard not to see that there are a lot of local bubbles."
Let's review the latest home sale figures just released for April 2005.
According to the National Association of Realtors sales of existing U.S. homes rose 4.5% in April to a record seasonally adjusted annual rate of 7.18 million. It was a new all time record. The previous record of was 7.02 million sales, set in June 2004. The inventory of unsold homes rose 8.1% to 2.48 million, a 4.2-month supply at the April sales' rate.
Sales of new U.S. homes also hit a new all time record in April, record rising 0.2% to a seasonally adjusted annual rate of 1.316 million according to the US Census Bureau.
"The median sales price of new houses sold in April 2005 was $230,800; the average sales price was $283,500. The seasonally adjusted estimate of new houses for sale at the end of April was 440,000. This represents a supply of 4.1 months at the current sales rate."
It seems the FED is getting more than a bit concerned about this trend as indicated in the latest minutes: "Home sales and other indicators of activity in the residential real estate market remained at very high levels," the minutes said. "House price appreciation was expected to moderate over coming quarters, but a number of local markets were still regarded as 'hot' with signs of possible speculative excess.".
Let's see, we have an all time record numbers of sales, people flipping houses like mad, 10 years worth of condo units coming on the market in Miami within the next year, people putting real estate into their IRAs, and 36% of homes sold last year were second homes and/or for "investment". Yes, Chairman Greenspan, I would concur that we are in "an unsustainable underlying pattern" with a "lot of local bubbles" to boot.
Now the interesting thing to me is that in spite of record sales, we still have 4.1 months of supply and builders are still building as fast as they can. One question: What happens to monthly supply when we no longer have record sales month after month?
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
An evolution in transportation funding
The bipartisan highway bill currently moving through the Senate would break new ground in creative financing by establishing federal transportation construction bonds that would not fall under traditional definitions of federal debt. These new bonds would be called "Build America Bonds".
Senate sponsors Jim Talent (R-Mo.) and Ron Wyden (D-Ore.) all but proclaim the next free lunch. For every $1 billion invested in federal highway and transit infrastructure, an estimated 47,500 jobs are created. For every $1 billion invested in federal transportation infrastructure, an estimated $5.7 billion in economic activity is generated. "The Build America Bonds proposal looks beyond the bleak budget headlines and taps the big potential of bonds to create more than a million jobs and improve our country’s transportation system at the same time," said Wyden. "By investing in Build America Bonds, Americans can put their money to work building and improving critical infrastructure like roads, bridges, transit, rails and ports, while helping to create jobs, spur the economy and ultimately save lives."
The Build America Bonds legislation would create a federally chartered non-profit corporation that would issue $39 billion in bonds, of which $30 billion would be used to fund transportation projects.
Does anyone seriously think it would stop there if this monstrosity passes? Do we really need another quasi-government corporation messing things up? Don't we have a big enough mess with Fannie Mae, Freddie Mac, Farmer Mac, and Ginnie Mae? Apologies to lovers of the childhood game with a similar name but I think its time to put a complete stop to another "Mother Mae I?" before it gets started.
Supposedly, Build America Bonds would usher in a mini-New Deal for the age of globalization using seed money to help new jobs and economic activity.
"It's an evolution in transportation funding," said Ed Mortimer, spokesman for the U.S. Chamber of Commerce, another of the bonds' advocates on Capitol Hill. "With limited dollars in Washington, we're going to see the trends go more toward getting Wall Street and investors involved in funding these types of projects."
It seems to me that getting Wall Street involved in more creative off book financing schemes is the last thing we should be doing.
Hear is the essence of the deal: To pay off the $30 billion principal, the government would invest $9 billion more in a "sinking fund, using reliable choices such as Ginnie Maes and Freddie Macs". Senate estimates predict it would take 30 years for the initial cost to be recouped, but the bonds would stay off the deficit's bottom line due because their issuer would be a nonprofit corporation established by the government, not the government itself.
According to the bill’s sponsors, the proposed legislation will reduce congestion, correct deteriorating road conditions, save 12,000 lives each year caused by inadequate road conditions, enhance long term economic growth, and create millions of job opportunities. Is this the ultimate free lunch or is there an even better creative financing scheme around the corner?
As long as we are being creative, why stop with roads? Why not Build Iraq Bonds to fund the war and keep that debt off the books. Oh wait, aren't we already keeping Iraq funding off the books somehow? Let's go for something big. Why not fund Social Security or Medicaid this way? Since we get nearly a six times payback on this free lunch investment, why not just sink $5 trillion into it and solve all of our problems at once? Imagine how nice it would be to completely remove huge budget items off the books. After all, that’s one way Bush can meet his goal of cutting the budget deficit in half. As the Church lady says “How Convenient”!
How much more creative finance, buy now pay later schemes can we stand before we have a debt implosion accompanied by an enormous credit crunch?
Once you start down the slippery slope of creative financing where does it stop? Consider Enron. How many investors were totally wiped out when that company imploded? More recently consider the shenanigans at Fannie Mae. Fannie Mae has to restate earnings because they were hiding billions of dollars of losses off the books. Here is a report from the SEC on the poor accounting practices at Fannie Mae. Greenspan and congress are now up in arms warning about financial risk, denying that Fannie Mae is too big to fail, and in general publicly trashing Fannie Mae's accounting practices that let them keep $9 billion dollars in derivative losses off their balance sheet. In fact, their books are so screwed up they still are months delayed in filing up to date quarterly reports. It might be as long as a year before the mess at Fannie Mae is straightened out. Congress now wants to rein in lending at Fannie Mae before it implodes.
The point of this is not to bash Fannie Mae (even though they truly deserve it), but to point out the stupidity of creating another yet non-government agency for the explicit purpose of keeping debt off the US governments books. If anyone's books are more screwed up that Fannie Mae, it's the US governments.
Meanwhile the president's Office of Management and Budget said the said the bond mechanism "disguises the true costs to taxpayers," threatening a veto if the bill included the provision. If Bush vetoes this bill it would be his first veto ever. The fact that Bush is actually threatening a veto over something like this tells you how extreme this Republican Congress has gotten in their spendthrift ways and their foolish creativity in attempting to hide it.
Enough is enough.
It seems to me that we already have had way too much creative financing. Instead of more free lunch proposals, what we really need is some semblance of fiscal sanity in conjunction with GAAP reporting of Federal finances. Don’t hold your breath.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Senate sponsors Jim Talent (R-Mo.) and Ron Wyden (D-Ore.) all but proclaim the next free lunch. For every $1 billion invested in federal highway and transit infrastructure, an estimated 47,500 jobs are created. For every $1 billion invested in federal transportation infrastructure, an estimated $5.7 billion in economic activity is generated. "The Build America Bonds proposal looks beyond the bleak budget headlines and taps the big potential of bonds to create more than a million jobs and improve our country’s transportation system at the same time," said Wyden. "By investing in Build America Bonds, Americans can put their money to work building and improving critical infrastructure like roads, bridges, transit, rails and ports, while helping to create jobs, spur the economy and ultimately save lives."
The Build America Bonds legislation would create a federally chartered non-profit corporation that would issue $39 billion in bonds, of which $30 billion would be used to fund transportation projects.
Does anyone seriously think it would stop there if this monstrosity passes? Do we really need another quasi-government corporation messing things up? Don't we have a big enough mess with Fannie Mae, Freddie Mac, Farmer Mac, and Ginnie Mae? Apologies to lovers of the childhood game with a similar name but I think its time to put a complete stop to another "Mother Mae I?" before it gets started.
Supposedly, Build America Bonds would usher in a mini-New Deal for the age of globalization using seed money to help new jobs and economic activity.
"It's an evolution in transportation funding," said Ed Mortimer, spokesman for the U.S. Chamber of Commerce, another of the bonds' advocates on Capitol Hill. "With limited dollars in Washington, we're going to see the trends go more toward getting Wall Street and investors involved in funding these types of projects."
It seems to me that getting Wall Street involved in more creative off book financing schemes is the last thing we should be doing.
Hear is the essence of the deal: To pay off the $30 billion principal, the government would invest $9 billion more in a "sinking fund, using reliable choices such as Ginnie Maes and Freddie Macs". Senate estimates predict it would take 30 years for the initial cost to be recouped, but the bonds would stay off the deficit's bottom line due because their issuer would be a nonprofit corporation established by the government, not the government itself.
According to the bill’s sponsors, the proposed legislation will reduce congestion, correct deteriorating road conditions, save 12,000 lives each year caused by inadequate road conditions, enhance long term economic growth, and create millions of job opportunities. Is this the ultimate free lunch or is there an even better creative financing scheme around the corner?
As long as we are being creative, why stop with roads? Why not Build Iraq Bonds to fund the war and keep that debt off the books. Oh wait, aren't we already keeping Iraq funding off the books somehow? Let's go for something big. Why not fund Social Security or Medicaid this way? Since we get nearly a six times payback on this free lunch investment, why not just sink $5 trillion into it and solve all of our problems at once? Imagine how nice it would be to completely remove huge budget items off the books. After all, that’s one way Bush can meet his goal of cutting the budget deficit in half. As the Church lady says “How Convenient”!
How much more creative finance, buy now pay later schemes can we stand before we have a debt implosion accompanied by an enormous credit crunch?
Once you start down the slippery slope of creative financing where does it stop? Consider Enron. How many investors were totally wiped out when that company imploded? More recently consider the shenanigans at Fannie Mae. Fannie Mae has to restate earnings because they were hiding billions of dollars of losses off the books. Here is a report from the SEC on the poor accounting practices at Fannie Mae. Greenspan and congress are now up in arms warning about financial risk, denying that Fannie Mae is too big to fail, and in general publicly trashing Fannie Mae's accounting practices that let them keep $9 billion dollars in derivative losses off their balance sheet. In fact, their books are so screwed up they still are months delayed in filing up to date quarterly reports. It might be as long as a year before the mess at Fannie Mae is straightened out. Congress now wants to rein in lending at Fannie Mae before it implodes.
The point of this is not to bash Fannie Mae (even though they truly deserve it), but to point out the stupidity of creating another yet non-government agency for the explicit purpose of keeping debt off the US governments books. If anyone's books are more screwed up that Fannie Mae, it's the US governments.
Meanwhile the president's Office of Management and Budget said the said the bond mechanism "disguises the true costs to taxpayers," threatening a veto if the bill included the provision. If Bush vetoes this bill it would be his first veto ever. The fact that Bush is actually threatening a veto over something like this tells you how extreme this Republican Congress has gotten in their spendthrift ways and their foolish creativity in attempting to hide it.
Enough is enough.
It seems to me that we already have had way too much creative financing. Instead of more free lunch proposals, what we really need is some semblance of fiscal sanity in conjunction with GAAP reporting of Federal finances. Don’t hold your breath.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Monday, 23 May 2005
The message from China
China has no timetable for lifting the dollar-peg on its yuan currency and will not do so unless conditions are right, Vice Premier Wu Yi said here. "As for when we will conduct the yuan rate reform, there is no timetable," Wu told a forum in Tokyo. "If the conditions are right, we will conduct reform voluntarily, even without pressure from foreign countries." "If the conditions are not right, we will not carry out the reforms, no matter how much pressure foreign countries exert," she said. "In a word, we will abide by market rules, but we will not succumb to external pressure."
It seems to me that message is crystal clear.
1) China alone will decide when to make the change
2) It will do so at a time of China's choosing not the US's choosing
In just under 6 months we will see if Congress is bluffing or China is bluffing. 27.5% tariffs will not solve a thing other than make the price of goods coming into the US that much more expensive.
As discussed in Cyclical Endgame and Lone Wolves on the Renmimbi I suspect China is not the one that is going to be prodded into inappropriate action.
It seems to me that with today's statements by Vice Premier Wu Yi, China just raised Treasury Secretary Snow's and US Congress's bet, but in a much more diplomatic fashion. Is Snow going to escalate the rhetoric once again? Will it do any good?
It seems to me the US better learn a little bit about the Asian principle of "saving face". Then again, given the ever escalating rhetoric coming from our Capitol, perhaps it’s already too late.
Meanwhile the clock is ticking.
"Son of Smoot-Hawley" in on deck.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
It seems to me that message is crystal clear.
1) China alone will decide when to make the change
2) It will do so at a time of China's choosing not the US's choosing
In just under 6 months we will see if Congress is bluffing or China is bluffing. 27.5% tariffs will not solve a thing other than make the price of goods coming into the US that much more expensive.
As discussed in Cyclical Endgame and Lone Wolves on the Renmimbi I suspect China is not the one that is going to be prodded into inappropriate action.
It seems to me that with today's statements by Vice Premier Wu Yi, China just raised Treasury Secretary Snow's and US Congress's bet, but in a much more diplomatic fashion. Is Snow going to escalate the rhetoric once again? Will it do any good?
It seems to me the US better learn a little bit about the Asian principle of "saving face". Then again, given the ever escalating rhetoric coming from our Capitol, perhaps it’s already too late.
Meanwhile the clock is ticking.
"Son of Smoot-Hawley" in on deck.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Wednesday, 18 May 2005
Should the government sell bread, orange juice, or mortgages?
What would you think if the government decided that that the price of bread was way too high and decided to open up a chain of bakeries to sell bread at the "correct" price? Here is another one: what if the government decided that Florida orange juice was priced too high and started selling orange juice by the barrel at the "correct" price? If either of those happened would you be standing on top of a mountain and screaming with all your might about the insanity of it all? I think you would and so would I. Well how come there is no screaming about this?
The Washington post reports that Housing and Urban Development Secretary Alphonso Jackson has a message to sub-prime lenders: "We need to reach out" to African-American, Hispanic and other first-time buyers with better loan concepts, more flexible guidelines and quicker service, said Jackson in an interview. "I am absolutely emphatic about winning back our share of the market" that has slipped away to subprime lenders."
Excuse me! Since when is it the business of the federal government to "win back" market share on housing loans? How is this any different that the federal government opening up bakeries to compete against the outlandish price of bread by private bakeries?
Jackson has a special reason for wanting first-time buyers to check out FHA loans. The FHA has lost significant ground during the past several years to competitors in the booming, private subprime sector. FHA-insured mortgages had an 11 percent share of the American home market as recently as 1995, but plunged to 4.3 percent in 2003 and 3.3 percent in 2004.
Gee that’s nice but as for me I do not want the Government assuming market risk especially after this run-up in housing. All of a sudden, after this enormous run-up in housing, with some areas appreciating 100% in as little as 5 years, the FHA thinks that the subprime sector is gouging. Well one way to take care of that problem would be to cap interest rates but no!
Instead we see congress pass the Deflation Guarantee Act of 2005 otherwise know as the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005". This supposedly "Consumer Protection Act" does not cap interest rates, it does not cap fees, and it does not make allowances for loss of jobs, medical expenses or anything else. It is in fact the most anti-consumer act in the entire history of Congress. Rest assured whenever this Congress passes a law stipulating "protection" of anything, if you assume the opposite you are 98% likely to be correct. If ever there was a case for needed reform it would be in usury laws that might restrain the insane growth in credit. Instead, we see the FHA deciding to compete against private industry in an over-bloated housing market.
If that was not enough, President Bush is now urging tax credits for homebuilders! "To boost housing sales even more, Congress needs to pass my single-family homeownership tax credit," Bush told a meeting of the National Association of Realtors on Friday. Bush said the credit would increase the supply of affordable single-family homes by as many as 50,000 each, with the aim of increasing the supply of affordable homes by 7 million over the next 10 years.
President Bush said a surging real estate market could be enhanced even further if Congress passes a tax credit aimed at encouraging homebuilders to target middle class families. The proposal would grant a tax credit to firms that build affordable housing and sell it to middle-class buyers. The credit would cost around $2.5 billion over five years. In the speech, Bush said that homeownership set a record in 2004, with 69% of American families owning a home. "There are 74 million homeowners in America today. And that's the most ever in our nation's history," he said.
Just when you thought things could not get any sillier, they get sillier, much sillier. According to the commerce department's most recent data, US new-home sales jumped 12% in March to a record 1.431 million seasonally adjusted annual rate. That figure smashed the previous record of 1.304 million homes set in October. It was the largest percentage gain in nearly 12 years. Is that an industry that needs tax credits?
Let’s see. New home sales are at an all time high, 69% of American families own a home, prices have gone parabolic, but… the FHA wants to compete against subprime lenders and the president wants to give tax breaks to an industry that has been setting record profits for the last four years. Is this blatantly stupid or what?
Rest assured that housing would be more affordable if it were not for our "ownership society" policies that encourage Fannie Mae and Freddie Mac to grant 125% mortgages to anyone who could breathe. Combine that with loose lending practices based on pure faith that Fannie and Freddie are too big to fail and it is no wonder that home prices are going thru the roof. Credit lending standards are in the gutter but "the society" says no matter how little economic sense it makes, we will try to give you the credit to make your purchase. Subprime lenders seem a bit worried (not worried enough IMO) so they have raised their fees. Now the government comes along and wants to compete with private industry. Is this a bad dream or do we really have a Republican president with a Republican Congress doing these things?
For what it’s worth, I think the government has zero clues about how to get corporations to hire US workers, so it is attempting to goose the one an only thing (housing) that is holding this whole ball of wax together. In the meantime it is getting more and more costly to “own” anything.
In 2001 only 2% of new mortgages in California were Interest-Only. In 2004 this rose to 49%. Obviously the only way people newcomers can "afford" housing is with the age old trick of "how much monthly payment can you afford". Were it not for the GSE's willingness to lend money to anyone who could breathe, the government promoting "ownership", and absurdly low interest rates that intensified the housing bubble, we would not be in this mess in the first place. Now the FHA and Bush want to keep the insanity rolling by selling bread (home loans) at the "correct price".
Since there is no conceivable way this can possibly end well, I have a fail safe prediction: It won’t.
Note: This article appeared in today's Email edition of Whiskey & Gunpowder.
You can sign up for their free Email newsletter at http://www.whiskeyandgunpowder.com/
I will be writing for them from time to time.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
The Washington post reports that Housing and Urban Development Secretary Alphonso Jackson has a message to sub-prime lenders: "We need to reach out" to African-American, Hispanic and other first-time buyers with better loan concepts, more flexible guidelines and quicker service, said Jackson in an interview. "I am absolutely emphatic about winning back our share of the market" that has slipped away to subprime lenders."
Excuse me! Since when is it the business of the federal government to "win back" market share on housing loans? How is this any different that the federal government opening up bakeries to compete against the outlandish price of bread by private bakeries?
Jackson has a special reason for wanting first-time buyers to check out FHA loans. The FHA has lost significant ground during the past several years to competitors in the booming, private subprime sector. FHA-insured mortgages had an 11 percent share of the American home market as recently as 1995, but plunged to 4.3 percent in 2003 and 3.3 percent in 2004.
Gee that’s nice but as for me I do not want the Government assuming market risk especially after this run-up in housing. All of a sudden, after this enormous run-up in housing, with some areas appreciating 100% in as little as 5 years, the FHA thinks that the subprime sector is gouging. Well one way to take care of that problem would be to cap interest rates but no!
Instead we see congress pass the Deflation Guarantee Act of 2005 otherwise know as the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005". This supposedly "Consumer Protection Act" does not cap interest rates, it does not cap fees, and it does not make allowances for loss of jobs, medical expenses or anything else. It is in fact the most anti-consumer act in the entire history of Congress. Rest assured whenever this Congress passes a law stipulating "protection" of anything, if you assume the opposite you are 98% likely to be correct. If ever there was a case for needed reform it would be in usury laws that might restrain the insane growth in credit. Instead, we see the FHA deciding to compete against private industry in an over-bloated housing market.
If that was not enough, President Bush is now urging tax credits for homebuilders! "To boost housing sales even more, Congress needs to pass my single-family homeownership tax credit," Bush told a meeting of the National Association of Realtors on Friday. Bush said the credit would increase the supply of affordable single-family homes by as many as 50,000 each, with the aim of increasing the supply of affordable homes by 7 million over the next 10 years.
President Bush said a surging real estate market could be enhanced even further if Congress passes a tax credit aimed at encouraging homebuilders to target middle class families. The proposal would grant a tax credit to firms that build affordable housing and sell it to middle-class buyers. The credit would cost around $2.5 billion over five years. In the speech, Bush said that homeownership set a record in 2004, with 69% of American families owning a home. "There are 74 million homeowners in America today. And that's the most ever in our nation's history," he said.
Just when you thought things could not get any sillier, they get sillier, much sillier. According to the commerce department's most recent data, US new-home sales jumped 12% in March to a record 1.431 million seasonally adjusted annual rate. That figure smashed the previous record of 1.304 million homes set in October. It was the largest percentage gain in nearly 12 years. Is that an industry that needs tax credits?
Let’s see. New home sales are at an all time high, 69% of American families own a home, prices have gone parabolic, but… the FHA wants to compete against subprime lenders and the president wants to give tax breaks to an industry that has been setting record profits for the last four years. Is this blatantly stupid or what?
Rest assured that housing would be more affordable if it were not for our "ownership society" policies that encourage Fannie Mae and Freddie Mac to grant 125% mortgages to anyone who could breathe. Combine that with loose lending practices based on pure faith that Fannie and Freddie are too big to fail and it is no wonder that home prices are going thru the roof. Credit lending standards are in the gutter but "the society" says no matter how little economic sense it makes, we will try to give you the credit to make your purchase. Subprime lenders seem a bit worried (not worried enough IMO) so they have raised their fees. Now the government comes along and wants to compete with private industry. Is this a bad dream or do we really have a Republican president with a Republican Congress doing these things?
For what it’s worth, I think the government has zero clues about how to get corporations to hire US workers, so it is attempting to goose the one an only thing (housing) that is holding this whole ball of wax together. In the meantime it is getting more and more costly to “own” anything.
In 2001 only 2% of new mortgages in California were Interest-Only. In 2004 this rose to 49%. Obviously the only way people newcomers can "afford" housing is with the age old trick of "how much monthly payment can you afford". Were it not for the GSE's willingness to lend money to anyone who could breathe, the government promoting "ownership", and absurdly low interest rates that intensified the housing bubble, we would not be in this mess in the first place. Now the FHA and Bush want to keep the insanity rolling by selling bread (home loans) at the "correct price".
Since there is no conceivable way this can possibly end well, I have a fail safe prediction: It won’t.
Note: This article appeared in today's Email edition of Whiskey & Gunpowder.
You can sign up for their free Email newsletter at http://www.whiskeyandgunpowder.com/
I will be writing for them from time to time.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Tuesday, 17 May 2005
U.S. Warns Lenders To Elevate Standards
Federal banking regulators yesterday warned banks and other lenders to be more selective about who can get home equity loans and lines of credit because rising interest rates may make it harder for people to repay their loans. A harsh statment made by The office of Comptroller of the Currency, the FDIC, the FED and the National Credit Union Administration (collectively known as the agencies) claims that in many cases, institutions' credit risk management practices for home equity lending have not kept pace with the product's rapid growth and easing of underwriting standards.
Here is the complete text of the statement.
Who doesn't agree that lending standards are more than a bit loose? The idea is fine but doesn't this sound like another case of locking the barn doors after the goats wandered out and ate all your neighbor's prize roses?
In related news Scott Stern, the CEO of Lenders One made one of the biggest Freudian slips of the year when he said: "As long as the housing bubble doesn't burst, home equity lines should remain strong and remain safe and there should be no serious problem."
Lenders One is a St. Louis-based cooperative of 60 mortgage companies that originate home-equity lines, including some that feature 100 percent loan-to-equity ratios.
As I read it, we have explicit confirmation of an housing bubble by Lenders One. Not to worry.... Things will be OK as long as the bubble doesn't burst. One question: what bubble doesn't burst?
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Here is the complete text of the statement.
Who doesn't agree that lending standards are more than a bit loose? The idea is fine but doesn't this sound like another case of locking the barn doors after the goats wandered out and ate all your neighbor's prize roses?
In related news Scott Stern, the CEO of Lenders One made one of the biggest Freudian slips of the year when he said: "As long as the housing bubble doesn't burst, home equity lines should remain strong and remain safe and there should be no serious problem."
Lenders One is a St. Louis-based cooperative of 60 mortgage companies that originate home-equity lines, including some that feature 100 percent loan-to-equity ratios.
As I read it, we have explicit confirmation of an housing bubble by Lenders One. Not to worry.... Things will be OK as long as the bubble doesn't burst. One question: what bubble doesn't burst?
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Thursday, 12 May 2005
Focus on Chinese SOEs
According to the State-owned Assets Supervision and Administration Commission (SASAC) more than 2,000 debt-ridden State-owned enterprises (SOEs) will be closed down or go bankrupt in the next four years.
Asia Pulse reports the shutdown of these SOEs will leave 3.66 million employees needing reallocation.
Enquiring minds might be wondering if there are additional clues in the Shanghai Stock Index. Let's take a look.
Am I really supposed to believe that China is ready to float the RMB or even substantially repeg it higher in the face of a collapsing stock market, a certified property bubble, insolvent banks, and hot money pouring hoping to make a quick score?
I think not. If China did float and hot money left, what would happen to the RMB with Chinese banks and SOEs in the condition they are in? So far no one has been able to answer that question satisfactorily.
My opinion is actually irrelevant but here is one that matters:
China will not revalue the yuan when it expands foreign exchange trading next week, Xinhua news agency reported, citing central bank governor Zhou Xiaochuan.
"That is definitely impossible," Zhou said, responding to a question about market rumors of a yuan revaluation on May 18 when the foreign exchange market expands the number of currencies traded.
"That's only what foreigners have been saying, and only some individuals at that," Zhou said at a meeting of the Chinese Academy of Social Sciences. "Can you really take that seriously?" he said.
If Zhou can force the hot money out of China, then we can talk. In the meantime, day in and day out there is too much speculation that China is about to do something that dollar bears think they would appreciate. Perhaps dollar bears better think twice. They just might not want what they seek.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Asia Pulse reports the shutdown of these SOEs will leave 3.66 million employees needing reallocation.
Enquiring minds might be wondering if there are additional clues in the Shanghai Stock Index. Let's take a look.
Am I really supposed to believe that China is ready to float the RMB or even substantially repeg it higher in the face of a collapsing stock market, a certified property bubble, insolvent banks, and hot money pouring hoping to make a quick score?
I think not. If China did float and hot money left, what would happen to the RMB with Chinese banks and SOEs in the condition they are in? So far no one has been able to answer that question satisfactorily.
My opinion is actually irrelevant but here is one that matters:
China will not revalue the yuan when it expands foreign exchange trading next week, Xinhua news agency reported, citing central bank governor Zhou Xiaochuan.
"That is definitely impossible," Zhou said, responding to a question about market rumors of a yuan revaluation on May 18 when the foreign exchange market expands the number of currencies traded.
"That's only what foreigners have been saying, and only some individuals at that," Zhou said at a meeting of the Chinese Academy of Social Sciences. "Can you really take that seriously?" he said.
If Zhou can force the hot money out of China, then we can talk. In the meantime, day in and day out there is too much speculation that China is about to do something that dollar bears think they would appreciate. Perhaps dollar bears better think twice. They just might not want what they seek.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Dollar on my Mind
Back in March we had a strong clue there was going to be a decent sized dollar bounce or at least the decline would stall. Were you paying attention? Here was the clue in case you missed it.
Since then dollar bears as well as gold bugs have been severely tested. Covers like that often mark major turning points. Sometimes it's just best to step to the sidelines and wait things out. I am still waiting to get back into gold but as long as the FED keeps hiking and Europe and Japan headed for or back in recession, dollar bears and gold bugs are both likely to remain frustrated. Is it possible there are too many bottom callers on the $HUI? Let's take a look at some charts:
US$ Weekly
US$ Monthly
Gold Weekly
Judging from those charts, both dollar bears and gold bugs might be in for still more of a rocky road. Recently we talked about How well gold might do in inflation vs. deflation. Here is my key belief: Gold and likely miners will do well when the FED pours on the liquidity spigot to fight the upcoming deflationary credit crunch. My view is that they will NOT be successful any more than Japan was, but the fighting will be beneficial to gold.
Right NOW the FED is fighting inflation, the UK appears headed for recession, Japan IS in recession, and the EU is at the brink of recession. I believe those are supportive of the US$ and have been supportive of the US$ for quite some time. Whether or not I have the reason correct, the charts point to more consolidation and/or more grief.
Ultimately gold will shine. This is just a temporary setback. But having suffered thru several of these I am happy to be on the sidelines for this one. My expectation, which could easily be wrong, is that the US economy is on the cusp of turning. Bear in mind that I have been brutally WRONG about how many hikes it would take to crush housing but if the UK and Australia are any indication, we have about 3-6 months lag before we hit the brick wall. What the FED does at that time will determine where gold is headed.
I think new highs are ultimately coming BUT there just might be more frustration in the meantime. Define your timeframe and your risk and the rest will likely fall into place.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Since then dollar bears as well as gold bugs have been severely tested. Covers like that often mark major turning points. Sometimes it's just best to step to the sidelines and wait things out. I am still waiting to get back into gold but as long as the FED keeps hiking and Europe and Japan headed for or back in recession, dollar bears and gold bugs are both likely to remain frustrated. Is it possible there are too many bottom callers on the $HUI? Let's take a look at some charts:
US$ Weekly
US$ Monthly
Gold Weekly
Judging from those charts, both dollar bears and gold bugs might be in for still more of a rocky road. Recently we talked about How well gold might do in inflation vs. deflation. Here is my key belief: Gold and likely miners will do well when the FED pours on the liquidity spigot to fight the upcoming deflationary credit crunch. My view is that they will NOT be successful any more than Japan was, but the fighting will be beneficial to gold.
Right NOW the FED is fighting inflation, the UK appears headed for recession, Japan IS in recession, and the EU is at the brink of recession. I believe those are supportive of the US$ and have been supportive of the US$ for quite some time. Whether or not I have the reason correct, the charts point to more consolidation and/or more grief.
Ultimately gold will shine. This is just a temporary setback. But having suffered thru several of these I am happy to be on the sidelines for this one. My expectation, which could easily be wrong, is that the US economy is on the cusp of turning. Bear in mind that I have been brutally WRONG about how many hikes it would take to crush housing but if the UK and Australia are any indication, we have about 3-6 months lag before we hit the brick wall. What the FED does at that time will determine where gold is headed.
I think new highs are ultimately coming BUT there just might be more frustration in the meantime. Define your timeframe and your risk and the rest will likely fall into place.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Wednesday, 11 May 2005
Grossly Distorted Procedures
Sometimes I wonder if GDP stands for Gross Domestic Product or Grossly Distorted Procedures. Then again, it sure seems that all government reporting is highly suspect, not just the GDP. Mish readers just tuning in may wish to refer to previously discussed gross distortions such as job growth via the birth/death model in Making Sense of April Payroll Numbers as well as gross distortion of the unemployment rate in Searching For Jobs and Where the hell are the jobs?
Tonight we will focus on Hedonics and Imputations.
Hedonics is a way of accounting for the changing quality of products when calculating price movements. For example, today's computers are 2 to 3 times faster and have more memory than models produced just a few years ago. If someone can buy a better computer today than last year for the same price, have not prices really fallen? Here is another example. Is it realistic to compare the price of a 1955 Chevy with the price of a 2005 Toyota with air conditioning, DVD player, anti-lock breaks, seat belts, air bags, side air bags, power steering, power brakes, etc etc etc?
To say that cars have gone from 1955 prices to 2005 prices and calling the ENTIRE rise "inflation" is obviously wrong although many "inflation alarmists" do just that. Sorry folks, but that is not a straight up valid comparison. Would you be willing to drive to work a Model T ford today? If not, then comparisons of car prices today vs. 1920 or 1950 or whenever are pretty absurd.
Here is an article that explains hedonics and how they are used in calculating the CPI. I highly recommend following that link when you have time to see how hedonics are measured by our government in actual practice.
My take is there are reasonable uses for hedonics and absurd uses for hedonics. Accidentally overstating or understating the affect of hedonics (or purposely if you believe in conspiracies) is one problem with hedonic adjustments that are by their very nature SUBJECTIVE. Why would the Government purposely want to overstate quality improvements and understate poor quality replacements? That is an easy question to answer: To lower the CPI, thereby making inflation look lower than it is and minimizing Social Security increases and Ibond payouts. It is obvious (to me anyway) that we are quick to count improvements but loathe to count poor workmanship or substitution of inferior materials.
My biggest gripe with hedonics however, is not with CPI calculations but as applied to the GDP. That computer that sold for $1000 two years ago might sell for $800 today and have more memory and a faster CPU as well. Yes that is price DEFALTION for sure and perhaps needs to be adjusted in the CPI but is that any reason to adjust the GDP and say we sold more computers in 2005 although price wise sales were REALLY down? The logical answer is no, although that is not what we do.
I contacted the BEA today asking for the latest hedonic and imputation measurements. They pointed me to some online articles and tables and emailed me an Excel spreadsheet. Unfortunately the figures are severely behind and the latest numbers for imputations was from 2003. The most current figure I have for hedonic adjustment to the GDP is 2.257 TRILLION dollars which is roughly 22% of the GDP.
To the best of my knowledge the US is the only major country that hedonically adjusts its GDP. I believe Japan was recently considering using hedonic GDP estimates but I am not sure of the final outcome. To me, price is price and sales are sales as far as GDP is concerned. To say that we sold 50% more "whatever" in 2005 than 2004 although actual PRICE sales of "whatever" have dropped seems absurd.
Not only is the US GDP distorted by hedonics but we "lord it over" the EU as well. If we did not hedonically adjust our GDP for subjective quality improvements our "growth" would not be anywhere near as strong as it looks.
While we are on the subject of distortions, how long will it be before we hedonically adjust wage growth? Real wages in the US are falling at their fastest rate in 14 years, according to data by the Financial Times.
Inflation rose 3.1 per cent in the year to March but salaries climbed just 2.4 per cent, according to the Employment Cost Index. In the final three months of 2004, real wages fell by 0.9 per cent.
The last time salaries fell this steeply was at the start of 1991, when real wages declined by 1.1 per cent.
How is the stock market supposed to rally with headlines like that? Clearly there is a problem with measurement. I suggest the government hedonically adjust jobs to show that people are making more money than ever. Here is how we do it: Between 1990 and now, jobs are obviously more satisfying. The average person accepts less pay now because they really enjoy the work so much more. I believe that job satisfaction has risen 1% a year and needs to be properly accounted for. All one has to do is look around to see that jobs at Walmart and McDonalds are highly in demand and computer programmer jobs much less so. The worst job is that of the CEO whose job desirability has steadily worsened to the point that millions of dollars in additional pay barely compensate for the wretched drudgery of it all. The logical conclusion is we need to hedonically adjust wages. With correctly applied hedonic adjustments we will be able to show that the Walmart employees are overpaid and CEOs underpaid. I am sure with proper measurements, the headlines will accurately report that CEO pay is down and wages at Walmart have skyrocketed. Clearly the government has more work to do in this area. I am willing to offer my services for the right price. BTW I sure hope everyone detected this entire paragraph to be sarcasm.
OK, now that we have tackled hedonics let's turn our focus to imputations.
According to the BEA imputations are made to place a market value on certain transactions that do not occur or are not observable in the market economy. Specifically, six imputations are included in the estimates of personal income: Imputed pay–in–kind, employer–paid health and life insurance premiums, the net rental value of owner–occupied farms and the value of food and fuel produced and consumed on farms, the net rental value of owner–occupied non-farm housing, the net margins on owner–built housing, and the imputed interest paid by financial intermediaries except life insurance carriers.
That is a mouthful so let's state it in clear English: Imputations are a part of GDP that the government decides to estimate value, where no cash actually changed hands. In other words, if I scratch your back and you scratch mine but no one gets paid, then back scratching is undercounted in the GDP. Clearly it would be a travesty of justice if economic activity like that was under reported in the GDP. It goes far beyond that however, into complete fairy tale absurdities. For example: If you own your own house, the government recalculates your income as if you were really renting from yourself and paying yourself rent! In light of some earlier sarcasm you might think I am making this up but rest assured I am not.
Imputed rent just happens to be one of the most frequently asked questions of the BEA. Here is their response: The BEA treats homeowners as businesses, which pay rent to themselves. Therefore, homeowners contribute to the real estate industry's GSP even if not employed by the industry. In addition, like businesses, homeowners' property taxes paid to state and local governments are included as part of real estate TOPI.
Here is the most current imputations table. If you scroll down to line 67, under the innocuous title of "Rental income of persons with capital consumption adjustment" you will see that the government assumes that homeowners are paying themselves $153.8 billion in rent!
On line 145 under the innocuous title of "Services furnished without payment by financial intermediaries except life insurance carriers" you will see an imputed figure of $335.2 billion. Enquiring Mish readers just might be wondering "What the H is that?" so here goes: The Government imputes the total value of "free checking accounts" to be worth a mere $335.2 billion. Personal income was thus boosted by this amount because the government thinks banks don't charge you enough for the privilege of living off your float!
OK Mish what is the Total Gross Imputed Distortion (TGID) of all this nonsense? Look on line two and you will see that it is a mere $1635 billion dollars. If we add in the Total Gross Hedonic Distortion (TGHD) of $2257 billion dollars you come to the conclusion that the Total Of All Distortions (TOAD) is a mere $3892 billion out of a total 2003 GDP of $11004 billion. Gee, it seems we are a mere 35% distorted. Bear in mind that is what the government readily admits to. My guess is that the real TOAD is far uglier.
What is it we do not know and where does the nonsense stop? As long as we are counting services rendered but not paid, why aren't we adding in the value of sexual relations? Consider for example teenage sex. How much is that worth to the average teenage guy? With just a little more creative thought processes and by merely carrying current procedures to their logical conclusions we can really get our GDP revved up. Isn't that what we are implicitly doing anyway?
PS I am quite interested in finding out how different the US is from other countries. If some readers from Japan, Europe, Canada, or Australia know if your governments are or are not this grossly distorted, and/or if you really think these are not Grossly Distorted Procedures then please drop me a line. Thanks.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Tonight we will focus on Hedonics and Imputations.
Hedonics is a way of accounting for the changing quality of products when calculating price movements. For example, today's computers are 2 to 3 times faster and have more memory than models produced just a few years ago. If someone can buy a better computer today than last year for the same price, have not prices really fallen? Here is another example. Is it realistic to compare the price of a 1955 Chevy with the price of a 2005 Toyota with air conditioning, DVD player, anti-lock breaks, seat belts, air bags, side air bags, power steering, power brakes, etc etc etc?
To say that cars have gone from 1955 prices to 2005 prices and calling the ENTIRE rise "inflation" is obviously wrong although many "inflation alarmists" do just that. Sorry folks, but that is not a straight up valid comparison. Would you be willing to drive to work a Model T ford today? If not, then comparisons of car prices today vs. 1920 or 1950 or whenever are pretty absurd.
Here is an article that explains hedonics and how they are used in calculating the CPI. I highly recommend following that link when you have time to see how hedonics are measured by our government in actual practice.
My take is there are reasonable uses for hedonics and absurd uses for hedonics. Accidentally overstating or understating the affect of hedonics (or purposely if you believe in conspiracies) is one problem with hedonic adjustments that are by their very nature SUBJECTIVE. Why would the Government purposely want to overstate quality improvements and understate poor quality replacements? That is an easy question to answer: To lower the CPI, thereby making inflation look lower than it is and minimizing Social Security increases and Ibond payouts. It is obvious (to me anyway) that we are quick to count improvements but loathe to count poor workmanship or substitution of inferior materials.
My biggest gripe with hedonics however, is not with CPI calculations but as applied to the GDP. That computer that sold for $1000 two years ago might sell for $800 today and have more memory and a faster CPU as well. Yes that is price DEFALTION for sure and perhaps needs to be adjusted in the CPI but is that any reason to adjust the GDP and say we sold more computers in 2005 although price wise sales were REALLY down? The logical answer is no, although that is not what we do.
I contacted the BEA today asking for the latest hedonic and imputation measurements. They pointed me to some online articles and tables and emailed me an Excel spreadsheet. Unfortunately the figures are severely behind and the latest numbers for imputations was from 2003. The most current figure I have for hedonic adjustment to the GDP is 2.257 TRILLION dollars which is roughly 22% of the GDP.
To the best of my knowledge the US is the only major country that hedonically adjusts its GDP. I believe Japan was recently considering using hedonic GDP estimates but I am not sure of the final outcome. To me, price is price and sales are sales as far as GDP is concerned. To say that we sold 50% more "whatever" in 2005 than 2004 although actual PRICE sales of "whatever" have dropped seems absurd.
Not only is the US GDP distorted by hedonics but we "lord it over" the EU as well. If we did not hedonically adjust our GDP for subjective quality improvements our "growth" would not be anywhere near as strong as it looks.
While we are on the subject of distortions, how long will it be before we hedonically adjust wage growth? Real wages in the US are falling at their fastest rate in 14 years, according to data by the Financial Times.
Inflation rose 3.1 per cent in the year to March but salaries climbed just 2.4 per cent, according to the Employment Cost Index. In the final three months of 2004, real wages fell by 0.9 per cent.
The last time salaries fell this steeply was at the start of 1991, when real wages declined by 1.1 per cent.
How is the stock market supposed to rally with headlines like that? Clearly there is a problem with measurement. I suggest the government hedonically adjust jobs to show that people are making more money than ever. Here is how we do it: Between 1990 and now, jobs are obviously more satisfying. The average person accepts less pay now because they really enjoy the work so much more. I believe that job satisfaction has risen 1% a year and needs to be properly accounted for. All one has to do is look around to see that jobs at Walmart and McDonalds are highly in demand and computer programmer jobs much less so. The worst job is that of the CEO whose job desirability has steadily worsened to the point that millions of dollars in additional pay barely compensate for the wretched drudgery of it all. The logical conclusion is we need to hedonically adjust wages. With correctly applied hedonic adjustments we will be able to show that the Walmart employees are overpaid and CEOs underpaid. I am sure with proper measurements, the headlines will accurately report that CEO pay is down and wages at Walmart have skyrocketed. Clearly the government has more work to do in this area. I am willing to offer my services for the right price. BTW I sure hope everyone detected this entire paragraph to be sarcasm.
OK, now that we have tackled hedonics let's turn our focus to imputations.
According to the BEA imputations are made to place a market value on certain transactions that do not occur or are not observable in the market economy. Specifically, six imputations are included in the estimates of personal income: Imputed pay–in–kind, employer–paid health and life insurance premiums, the net rental value of owner–occupied farms and the value of food and fuel produced and consumed on farms, the net rental value of owner–occupied non-farm housing, the net margins on owner–built housing, and the imputed interest paid by financial intermediaries except life insurance carriers.
That is a mouthful so let's state it in clear English: Imputations are a part of GDP that the government decides to estimate value, where no cash actually changed hands. In other words, if I scratch your back and you scratch mine but no one gets paid, then back scratching is undercounted in the GDP. Clearly it would be a travesty of justice if economic activity like that was under reported in the GDP. It goes far beyond that however, into complete fairy tale absurdities. For example: If you own your own house, the government recalculates your income as if you were really renting from yourself and paying yourself rent! In light of some earlier sarcasm you might think I am making this up but rest assured I am not.
Imputed rent just happens to be one of the most frequently asked questions of the BEA. Here is their response: The BEA treats homeowners as businesses, which pay rent to themselves. Therefore, homeowners contribute to the real estate industry's GSP even if not employed by the industry. In addition, like businesses, homeowners' property taxes paid to state and local governments are included as part of real estate TOPI.
Here is the most current imputations table. If you scroll down to line 67, under the innocuous title of "Rental income of persons with capital consumption adjustment" you will see that the government assumes that homeowners are paying themselves $153.8 billion in rent!
On line 145 under the innocuous title of "Services furnished without payment by financial intermediaries except life insurance carriers" you will see an imputed figure of $335.2 billion. Enquiring Mish readers just might be wondering "What the H is that?" so here goes: The Government imputes the total value of "free checking accounts" to be worth a mere $335.2 billion. Personal income was thus boosted by this amount because the government thinks banks don't charge you enough for the privilege of living off your float!
OK Mish what is the Total Gross Imputed Distortion (TGID) of all this nonsense? Look on line two and you will see that it is a mere $1635 billion dollars. If we add in the Total Gross Hedonic Distortion (TGHD) of $2257 billion dollars you come to the conclusion that the Total Of All Distortions (TOAD) is a mere $3892 billion out of a total 2003 GDP of $11004 billion. Gee, it seems we are a mere 35% distorted. Bear in mind that is what the government readily admits to. My guess is that the real TOAD is far uglier.
What is it we do not know and where does the nonsense stop? As long as we are counting services rendered but not paid, why aren't we adding in the value of sexual relations? Consider for example teenage sex. How much is that worth to the average teenage guy? With just a little more creative thought processes and by merely carrying current procedures to their logical conclusions we can really get our GDP revved up. Isn't that what we are implicitly doing anyway?
PS I am quite interested in finding out how different the US is from other countries. If some readers from Japan, Europe, Canada, or Australia know if your governments are or are not this grossly distorted, and/or if you really think these are not Grossly Distorted Procedures then please drop me a line. Thanks.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Buckle Up
"Taxpayers had better buckle up because we will be in for a bumpy ride of bailout after bailout, as more and more corporations dump their pension plan obligations on the PBGC" said U.S. Rep. Jan Schakowsky, D-Ill., referring to the Pension Benefit Guaranty Corp. that already is operating at a more than $23 billion deficit.
Yes Jan that is correct as we reported in yesterday's blog.
"We feel sold out", said Dianne Tamuk, 49, a United flight attendant. Her pension will be reduced from $1,700 a month to $800 a month by Judge Eugene Wedoff's ruling. Wedoff called it "the least bad" of the available choices, since it gives United the best chance to keep functioning.
Flight attendants for American are now gathering in Washington to lobby for federal pension reform that would allow carriers to extend the amount of time they have to replenish under funded plans.
I hate to break the news to the Association of Flight Attendants, but extending the amount of time for companies to fund their plans just ensures that they won't. Companies get away with under funding because they are allowed to assume 10% returns on their investments even if they do not come close to it. Over time pension plans just get further and further behind. Perhaps companies should start funding their pension plans with leap puts on their own companies. That would help. For most of the airline industry it is just too late.
As for Judge Wedoff's ruling, yes it might be United's best chance to keep functioning, but it increases the pressure on other airlines with hugely under funded pension plans and gives United a competitive advantage over them in that regard.
Slowly but surely companies with hugely under-funded pension plans will bite the dust, one by one. In the meantime, United is headed back to court to take up another sensitive matter: The proposed overhauling of collective bargaining agreements. Won't that be fun?
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Yes Jan that is correct as we reported in yesterday's blog.
"We feel sold out", said Dianne Tamuk, 49, a United flight attendant. Her pension will be reduced from $1,700 a month to $800 a month by Judge Eugene Wedoff's ruling. Wedoff called it "the least bad" of the available choices, since it gives United the best chance to keep functioning.
Flight attendants for American are now gathering in Washington to lobby for federal pension reform that would allow carriers to extend the amount of time they have to replenish under funded plans.
I hate to break the news to the Association of Flight Attendants, but extending the amount of time for companies to fund their plans just ensures that they won't. Companies get away with under funding because they are allowed to assume 10% returns on their investments even if they do not come close to it. Over time pension plans just get further and further behind. Perhaps companies should start funding their pension plans with leap puts on their own companies. That would help. For most of the airline industry it is just too late.
As for Judge Wedoff's ruling, yes it might be United's best chance to keep functioning, but it increases the pressure on other airlines with hugely under funded pension plans and gives United a competitive advantage over them in that regard.
Slowly but surely companies with hugely under-funded pension plans will bite the dust, one by one. In the meantime, United is headed back to court to take up another sensitive matter: The proposed overhauling of collective bargaining agreements. Won't that be fun?
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Tuesday, 10 May 2005
The Beginning of the End of Pension Plans
Judge OKs Termination of United Pension Plans, Clearing Way for Largest U.S. Pension Default
United's pensions are underfunded by an estimated $9.8 billion, of which the PBGC would guarantee only about $5 billion. The previous largest U.S. pension default was Bethlehem Steel's $3.6 billion in underfunding in 2002.
United's biggest competitors would be under the most pressure to follow suit. American Airlines, the largest U.S. carrier and a unit of AMR Corp., has said it will keep its pension plans but is concerned about No. 2 United gaining a financial advantage with the elimination of its pensions.
No. 3 Delta Air Lines Inc., which has said it is in danger of being forced to file for Chapter 11 bankruptcy, faces $3.1 billion in pension payments over the next three years.
Is this unexpected?
Not really but look ahead.
Notice that the title is "The Beginning of the End of Pension Plans".
United is currently at bat.
On deck are American Airlines, Delta, GM, and Ford.
The order is not certain and there will be more.
If that gives you the idea that not a single pension plan is safe then indeed you have the right idea.
Every company with a hugely underfunded pension plan that is currently struggling to make ends meet is likely to follow United Airlines into bankruptcy.
Taxpayers will be forced to pick up some of the tab.
Is this inflationary?
Hardly
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
United's pensions are underfunded by an estimated $9.8 billion, of which the PBGC would guarantee only about $5 billion. The previous largest U.S. pension default was Bethlehem Steel's $3.6 billion in underfunding in 2002.
United's biggest competitors would be under the most pressure to follow suit. American Airlines, the largest U.S. carrier and a unit of AMR Corp., has said it will keep its pension plans but is concerned about No. 2 United gaining a financial advantage with the elimination of its pensions.
No. 3 Delta Air Lines Inc., which has said it is in danger of being forced to file for Chapter 11 bankruptcy, faces $3.1 billion in pension payments over the next three years.
Is this unexpected?
Not really but look ahead.
Notice that the title is "The Beginning of the End of Pension Plans".
United is currently at bat.
On deck are American Airlines, Delta, GM, and Ford.
The order is not certain and there will be more.
If that gives you the idea that not a single pension plan is safe then indeed you have the right idea.
Every company with a hugely underfunded pension plan that is currently struggling to make ends meet is likely to follow United Airlines into bankruptcy.
Taxpayers will be forced to pick up some of the tab.
Is this inflationary?
Hardly
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Reader Question on Gold and Silver
Tonight I received the following email:
I really enjoyed reading your article: Deflation is in the Cards. I have one question: Based on a recent article by Steve Moyer , he argued that in an event of deflation, the precious metals will also take a hit just like all other asset classes. I also understand you have a quite opposite view in regards to the fall of PM's in a deflationary environment.
Could you please clarify on how gold, and silver fare during deflationary periods?
Thank you.
Best Regards,
Ed
Thanks Ed, I am glad someone enjoys my articles.
(keep those questions and comments coming even if I can not answer them all)
I try and avoid criticizing OBIs (Other Blogger Ideas) but sometimes it is necessary to have a decent discussion. Let me say this: Having read his post there certainly is merit in the idea that XAU and or HUI could crash, especially short term. As for physical gold and silver, or longer time frames I doubt it but am willing to admit that it is possible. Thus I am a gold bug nut not tied 100% lock stock and barrel to the idea.
Take a look around you right now. Certainly the HUI has been totally hammered and gold and is near all time highs. What gives? Let's take a look at some charts. As always click on any chart for a better view:
Here is the $HUI daily chart
Would you buy that chart?
I wouldn't. It looks like there is a clear downtrend with another leg to come. But let's take a step back and look again.
Here is the $HUI monthly chart
Do you see anything wrong there? If so what? I don't.
Here is the monthly gold chart
There is obviously nothing wrong there.
OK Mish what gives?
This is a theory, no more no less and perhaps Pretcher gets the last laugh with gold collapsing but I do not think so. Clearly (to me anyway) gold and the $HUI are out of sync. I am not the first to notice this of course but rather than blindly say that the $HUI will blast off I am inclined to think that gold is about to put in a 4 and drop while the $HUI continues putting in the "C" dropping less fast.
There are fundamental reasons for this viewpoint as well. Miners have been selling off with general equities much of this year while gold physical has been steady. Perhaps this is due to a liquidity crisis of sorts affecting miners (equities) more so than gold. Cash is being raised and equities are being sold across the board. Also note that trend line breaks typically occur in wave 4 so perhaps we are about to see one on the physical gold monthly chart right now. In this scenario, $HUI falling to 150 or even 140 is certainly not out of the question. If it happens in conjunction with what seems to be a wave 4 in gold, I am backing up the truck in miners.
There are lots of problems with this scenario. Perhaps gold and miner take off right now or perhaps they both crash. Given seasonality factors as well as liquidity factors I am willing to risk miners taking off right now. I am flat and have been so for a long long time.
As long as the FED is perceived to be fighting inflation with rate hikes, and as long as the yield curve is flat to down, miners will likely fail to get traction. Sentiment is overwhelmingly against the US$ now but take a look at the UK. It is a disaster happening NOW while the US is a disaster IN WAITING. That is lending support to the US$. Banking problems in China are lending support to the US$ as are other things. No doubt there are a zillion problems with the US$ but other countries have SERIOUS problems that dollar bears have not factored in.
I think the next leg up in gold starts when the FED pauses. I think gold blasts up when the FED cuts rates to fight the upcoming DEFLATION. In the meantime, as long as the FED is fighting inflation and not deflation, Pretcherites are likely to be more right than wrong. If and when the FED changes tactics, gold bears better change their tune.
This is the key idea: Gold and likely miners will do well when the FED pours on the liquidity spigot to fight the upcoming deflationary credit crunch. My view is that they will NOT be successful any more than Japan was, but the fighting will be beneficial to gold. IF the FED does not choose to fight (unlikely) then Pretcher will likely be correct.
FWIW That is my take.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
I really enjoyed reading your article: Deflation is in the Cards. I have one question: Based on a recent article by Steve Moyer , he argued that in an event of deflation, the precious metals will also take a hit just like all other asset classes. I also understand you have a quite opposite view in regards to the fall of PM's in a deflationary environment.
Could you please clarify on how gold, and silver fare during deflationary periods?
Thank you.
Best Regards,
Ed
Thanks Ed, I am glad someone enjoys my articles.
(keep those questions and comments coming even if I can not answer them all)
I try and avoid criticizing OBIs (Other Blogger Ideas) but sometimes it is necessary to have a decent discussion. Let me say this: Having read his post there certainly is merit in the idea that XAU and or HUI could crash, especially short term. As for physical gold and silver, or longer time frames I doubt it but am willing to admit that it is possible. Thus I am a gold bug nut not tied 100% lock stock and barrel to the idea.
Take a look around you right now. Certainly the HUI has been totally hammered and gold and is near all time highs. What gives? Let's take a look at some charts. As always click on any chart for a better view:
Here is the $HUI daily chart
Would you buy that chart?
I wouldn't. It looks like there is a clear downtrend with another leg to come. But let's take a step back and look again.
Here is the $HUI monthly chart
Do you see anything wrong there? If so what? I don't.
Here is the monthly gold chart
There is obviously nothing wrong there.
OK Mish what gives?
This is a theory, no more no less and perhaps Pretcher gets the last laugh with gold collapsing but I do not think so. Clearly (to me anyway) gold and the $HUI are out of sync. I am not the first to notice this of course but rather than blindly say that the $HUI will blast off I am inclined to think that gold is about to put in a 4 and drop while the $HUI continues putting in the "C" dropping less fast.
There are fundamental reasons for this viewpoint as well. Miners have been selling off with general equities much of this year while gold physical has been steady. Perhaps this is due to a liquidity crisis of sorts affecting miners (equities) more so than gold. Cash is being raised and equities are being sold across the board. Also note that trend line breaks typically occur in wave 4 so perhaps we are about to see one on the physical gold monthly chart right now. In this scenario, $HUI falling to 150 or even 140 is certainly not out of the question. If it happens in conjunction with what seems to be a wave 4 in gold, I am backing up the truck in miners.
There are lots of problems with this scenario. Perhaps gold and miner take off right now or perhaps they both crash. Given seasonality factors as well as liquidity factors I am willing to risk miners taking off right now. I am flat and have been so for a long long time.
As long as the FED is perceived to be fighting inflation with rate hikes, and as long as the yield curve is flat to down, miners will likely fail to get traction. Sentiment is overwhelmingly against the US$ now but take a look at the UK. It is a disaster happening NOW while the US is a disaster IN WAITING. That is lending support to the US$. Banking problems in China are lending support to the US$ as are other things. No doubt there are a zillion problems with the US$ but other countries have SERIOUS problems that dollar bears have not factored in.
I think the next leg up in gold starts when the FED pauses. I think gold blasts up when the FED cuts rates to fight the upcoming DEFLATION. In the meantime, as long as the FED is fighting inflation and not deflation, Pretcherites are likely to be more right than wrong. If and when the FED changes tactics, gold bears better change their tune.
This is the key idea: Gold and likely miners will do well when the FED pours on the liquidity spigot to fight the upcoming deflationary credit crunch. My view is that they will NOT be successful any more than Japan was, but the fighting will be beneficial to gold. IF the FED does not choose to fight (unlikely) then Pretcher will likely be correct.
FWIW That is my take.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Monday, 9 May 2005
Cyclical Endgame
The politics over the Renmimbi are increasingly about the outcome for the global economy claims Andy Xie in an interesting article on the Cyclical Endgame that came out just today. I believe this is the key idea: Pressure on China’s Currency Is a Strategic Game.
The intensifying pressure on China to change its currency regime should be viewed in the context of the conflicting interests between China and the US on how the business cycle should end. If the Fed raises interest rates to lower the US current account deficit, China could enjoy relatively good growth rates at the bottom of the cycle, while the US could experience growth rates significantly below 3%. If China were to suffer a hard landing, the US could enjoy high growth rates at the bottom of the global economic cycle, as during the Asian Financial Crisis.
The following discussion on endgame scenarios is similar but not always identical to the views presented by Andy Xie. One way or another, the US current account deficit is not sustainable and there seems to be several ways to fix it. Let's look at some possibilities:
1) China has a hard landing right here, right now. That would help alleviate the pressure on oil, copper and other commodities as well as end the property boom in China. The Fed could then pause or perhaps cut interest rates. This would prolong the US housing bubble. In short, a hard landing for China would lower consumption costs for the US, boost US asset prices, and perhaps strengthen the US dollar as well. This scenario would be similar to the Asian Financial Crisis of 1997-98. The problem with this "solution" is twofold: It would add more fuel to asset bubbles in the US and it would support continued US consumption when the problem is clearly US over-consumption and too little savings. All in all, this is hardly in the US's long term best interest but as with "China Bashing" and nonsense tariff talk, no one here cares to look ahead. In addition to this not being in the long term interest of the US, a crash landing in China is certainly not in China's best interest now as it struggles to get its banking system in order.
2) The US could fix its current account deficit by raising interest rates, cutting consumption, and cutting government spending. Further hikes in interest rates in the US would cool the inflow of hot money into China. No doubt such actions by the US would lead to a US recession, sooner rather than later. These actions would also hurt Chinese exports but China’s export prowess is not all that it appears to be. If you look under the hood at the details you will find that 62% of Chinese export growth over the past decade came from Chinese subsidiaries of multinational corporations headquartered elsewhere (Asia, Europe, and the US). Should the US attempt to solve the problem via tariffs, the US would inflict more damage on itself than China (both at the consumer level with higher prices and at the corporate profit level as well). Tariffs can readily be dismissed from any proposed solution.
3) The world goes on a buying spree of US goods and takes FED governor "Helicopter Drop" Ben Bernanke's message to heart that the problem is not with the US but with the rest of the world saving too much. I dismiss this solution as obviously absurd as well as unsustainable but include it for sake of completeness. After all, a FED governor was silly enough to suggest it.
It seems that everyone wants a soft landing. Given the global imbalances, I do not think a soft landing scenario is possible for either the US or China (or anyone else for that matter, especially the UK), but certainly not everyone simultaneously. The World's economy is just too FUBAR'ed for multiple miracle soft landings.
Unfortunately it is increasingly obvious that the US has no intention of fixing the problem where it should be fixed (cutting US consumption). Congress is increasingly aggressive in its China Bashing and we hear Snow talking nonsense about every other day about the RMB. The current goal of the US is to "fix" the problem by attempting to prod China into stupid actions that will cause an immediate and severe hard landing in China at the worst possible time for Chinese banks (a slowing worldwide economy). Long term I have no doubt that the US will be forced into saving more and consuming less and that enforcement mechanism will be a housing slump followed by a severe recession.
In the meantime, it remains to be seen if China can be goaded into foolish actions. If for some reason China succumbs to US pressure and it causes another Asian Currency Crisis that benefits the US short-term, the repercussions down the road for the US will be more severe than if we just pay the piper and let the economic cycle take care of itself right here right now. The best course of action for China is to stall, hoping that a sustained slowdown in the US cuts US consumption to more manageable levels. Prolonging US asset bubbles is not in anyone's best interests. We are in this mess in the first place because Greenspan and the FED thought they could "beat the cycle" and "stimulate jobs" with 1% interest rates. The FED did not "beat the cycle" and certainly did not produce any jobs to speak of either. Further attempts to "beat the cycle" would just add more fat to the US consumer debt problem.
China should call the US's bluff, stand pat, and let the cycle play itself out. Exhaustion will eventually get the US housing bubble if these repeated hikes from the FED do not get take their toll first. Once housing goes the US will quickly fall into a recession, and that will be that. It's always taken a recession to cure global mal-investments of this order and this time will not be different. The best long-term solution is the one that no one seems willing to accept: A hard US consumer-led recession right now.
It seems increasingly likely to me that the choice is not recession now or recession later, but recession now or depression later.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
The intensifying pressure on China to change its currency regime should be viewed in the context of the conflicting interests between China and the US on how the business cycle should end. If the Fed raises interest rates to lower the US current account deficit, China could enjoy relatively good growth rates at the bottom of the cycle, while the US could experience growth rates significantly below 3%. If China were to suffer a hard landing, the US could enjoy high growth rates at the bottom of the global economic cycle, as during the Asian Financial Crisis.
The following discussion on endgame scenarios is similar but not always identical to the views presented by Andy Xie. One way or another, the US current account deficit is not sustainable and there seems to be several ways to fix it. Let's look at some possibilities:
1) China has a hard landing right here, right now. That would help alleviate the pressure on oil, copper and other commodities as well as end the property boom in China. The Fed could then pause or perhaps cut interest rates. This would prolong the US housing bubble. In short, a hard landing for China would lower consumption costs for the US, boost US asset prices, and perhaps strengthen the US dollar as well. This scenario would be similar to the Asian Financial Crisis of 1997-98. The problem with this "solution" is twofold: It would add more fuel to asset bubbles in the US and it would support continued US consumption when the problem is clearly US over-consumption and too little savings. All in all, this is hardly in the US's long term best interest but as with "China Bashing" and nonsense tariff talk, no one here cares to look ahead. In addition to this not being in the long term interest of the US, a crash landing in China is certainly not in China's best interest now as it struggles to get its banking system in order.
2) The US could fix its current account deficit by raising interest rates, cutting consumption, and cutting government spending. Further hikes in interest rates in the US would cool the inflow of hot money into China. No doubt such actions by the US would lead to a US recession, sooner rather than later. These actions would also hurt Chinese exports but China’s export prowess is not all that it appears to be. If you look under the hood at the details you will find that 62% of Chinese export growth over the past decade came from Chinese subsidiaries of multinational corporations headquartered elsewhere (Asia, Europe, and the US). Should the US attempt to solve the problem via tariffs, the US would inflict more damage on itself than China (both at the consumer level with higher prices and at the corporate profit level as well). Tariffs can readily be dismissed from any proposed solution.
3) The world goes on a buying spree of US goods and takes FED governor "Helicopter Drop" Ben Bernanke's message to heart that the problem is not with the US but with the rest of the world saving too much. I dismiss this solution as obviously absurd as well as unsustainable but include it for sake of completeness. After all, a FED governor was silly enough to suggest it.
It seems that everyone wants a soft landing. Given the global imbalances, I do not think a soft landing scenario is possible for either the US or China (or anyone else for that matter, especially the UK), but certainly not everyone simultaneously. The World's economy is just too FUBAR'ed for multiple miracle soft landings.
Unfortunately it is increasingly obvious that the US has no intention of fixing the problem where it should be fixed (cutting US consumption). Congress is increasingly aggressive in its China Bashing and we hear Snow talking nonsense about every other day about the RMB. The current goal of the US is to "fix" the problem by attempting to prod China into stupid actions that will cause an immediate and severe hard landing in China at the worst possible time for Chinese banks (a slowing worldwide economy). Long term I have no doubt that the US will be forced into saving more and consuming less and that enforcement mechanism will be a housing slump followed by a severe recession.
In the meantime, it remains to be seen if China can be goaded into foolish actions. If for some reason China succumbs to US pressure and it causes another Asian Currency Crisis that benefits the US short-term, the repercussions down the road for the US will be more severe than if we just pay the piper and let the economic cycle take care of itself right here right now. The best course of action for China is to stall, hoping that a sustained slowdown in the US cuts US consumption to more manageable levels. Prolonging US asset bubbles is not in anyone's best interests. We are in this mess in the first place because Greenspan and the FED thought they could "beat the cycle" and "stimulate jobs" with 1% interest rates. The FED did not "beat the cycle" and certainly did not produce any jobs to speak of either. Further attempts to "beat the cycle" would just add more fat to the US consumer debt problem.
China should call the US's bluff, stand pat, and let the cycle play itself out. Exhaustion will eventually get the US housing bubble if these repeated hikes from the FED do not get take their toll first. Once housing goes the US will quickly fall into a recession, and that will be that. It's always taken a recession to cure global mal-investments of this order and this time will not be different. The best long-term solution is the one that no one seems willing to accept: A hard US consumer-led recession right now.
It seems increasingly likely to me that the choice is not recession now or recession later, but recession now or depression later.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Friday, 6 May 2005
Lone Wolves on the Renmimbi
I thought I was a lone wolf on the RMB. It seems that almost everyone else is all lathered up on the RMB. Certainly hot money has been pouring into China for some time in anticipation of making a quick killing. I still maintain that China will not and more importantly SHOULD not float the RMB anytime soon. If they did float right now, my belief is that the RMB would SINK vs. the US$ perhaps after an initial pop.
Finally I see some support from a well respected economist, Andy Xie at Morgan Stanley.
Andy writes :
I see a very low probability that the Chinese renminbi (Rmb) will revalue soon. China faces major economic uncertainties at home. Its overheated property sector is experiencing uncertain times. A revaluation may cause hot money to leave and, hence, the property market to collapse. On the other hand, elevated expectations of imminent Rmb appreciation could prevent panic selling and help stabilize the property market. The expectation – not the reality – of imminent Rmb revaluation is in China’s interest at present.
Foreign pressure is unlikely to be sufficient to force China to take an action not in its interest. The global economic cycle could well turn down next year. China’s trade performance would also deteriorate with it, and the pressure on China to revalue would evaporate. I believe it is in China’s interest to stall on the currency issue.
There are two necessary conditions for China’s exchange rate regime to change. First, China’s state banks should be listed. Listing the banking sector would lead to a good assessment of the bad asset problem in China. If the magnitude of the problem is bigger than expected, China may have to delay its currency reform.
Second, any currency reform by China should be acceptable by the US. Were the US to disapprove of China’s actions, it would continue to put pressure on China – and because China would have already changed, the market would likely give the US pressure more credibility and speculate in the Chinese currency even more.
China has had the peg for ten years. It is groundless to criticize China for currency manipulation. Such an accusation would not stand up at the WTO. However, if China moves away from the peg, any increase in foreign exchange reserves could be interpreted as currency manipulation. This would be a very negative scenario for China.
The political will in Washington seems likely to be for a big appreciation by China, regardless of its language. If China makes a small move, it will only whet Washington’s appetite and invite more demands, in my view. This is why I believe that, if China plans to make a small move, it will need to reach an agreement with Washington that this is acceptable and that there will be no more demands for five years.
------------------------------------------------------------------------------------------------
In Would Floating the Renminbi Solve Anything? we discussed why it would not help the US one bit. Andy Xie contributes ideas as to why it is not in China's best interest either. As for losses on the US$ and reserves that everyone else is bitching about.... The US$ has essentially gone nowhere (in fact I think it is up), ever since Newsweek's Incredible Shrinking dollar cover hit the stands.
I do think there is probably another leg down in the US$ but the time to be super bearish on the dollar was two years ago not today. Look at the problems in the UK, the housing bubble bursting in Australia and Japan back in recession and then look at the huge problems in the banking sector in China and tell me the demise of the dollar is just starting. I do not buy it. Every fiat currency has problems and eventually gold is likely to outperform them all.
Here are my reasons why China should not float the RMB
1) The Chinese central bank does not want to trigger a currency crisis by floating the RMB too soon.
2) There is too much "hot money" flowing into China in hopes of making a quick killing on a currency repeg or float.
3) China thinks in terms of years or decades on policy changes. What happens over the course of the next 6 months is not relevant.
4) Chinese banks might not be in a position to take the stress of floating the RMB at this time, even if other factors were conducive.
6) Fundamentals such as slowing worldwide growth do not favor floating the RMB right now
7) The Asian principle of "face saving" suggests that China can not be forced into premature action and that "Snowtalk' is counterproductive.
8) The peg has served China well. China did not blow up in the last Asian currency crisis because of that peg. The peg has provided stability and that stability is still useful.
9) The US has bigger problems that need addressing first.
10) Paper losses on paper currencies look far bigger on paper than they actually are in the grand scheme of things that central bankers consider.
On the other hand you may wish to consider Stephen Roach's article insisting that China Needs a New Anchor. My reply to Roach would be "Yes, but not now". There is just too much hot money, too many issues with a global slowdown (that almost everyone is in denial over), and too many bad loan problems with Chinese banks.
Anyone else in the boat with Andy Xie besides myself or are we the two lone wolves?
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Finally I see some support from a well respected economist, Andy Xie at Morgan Stanley.
Andy writes :
I see a very low probability that the Chinese renminbi (Rmb) will revalue soon. China faces major economic uncertainties at home. Its overheated property sector is experiencing uncertain times. A revaluation may cause hot money to leave and, hence, the property market to collapse. On the other hand, elevated expectations of imminent Rmb appreciation could prevent panic selling and help stabilize the property market. The expectation – not the reality – of imminent Rmb revaluation is in China’s interest at present.
Foreign pressure is unlikely to be sufficient to force China to take an action not in its interest. The global economic cycle could well turn down next year. China’s trade performance would also deteriorate with it, and the pressure on China to revalue would evaporate. I believe it is in China’s interest to stall on the currency issue.
There are two necessary conditions for China’s exchange rate regime to change. First, China’s state banks should be listed. Listing the banking sector would lead to a good assessment of the bad asset problem in China. If the magnitude of the problem is bigger than expected, China may have to delay its currency reform.
Second, any currency reform by China should be acceptable by the US. Were the US to disapprove of China’s actions, it would continue to put pressure on China – and because China would have already changed, the market would likely give the US pressure more credibility and speculate in the Chinese currency even more.
China has had the peg for ten years. It is groundless to criticize China for currency manipulation. Such an accusation would not stand up at the WTO. However, if China moves away from the peg, any increase in foreign exchange reserves could be interpreted as currency manipulation. This would be a very negative scenario for China.
The political will in Washington seems likely to be for a big appreciation by China, regardless of its language. If China makes a small move, it will only whet Washington’s appetite and invite more demands, in my view. This is why I believe that, if China plans to make a small move, it will need to reach an agreement with Washington that this is acceptable and that there will be no more demands for five years.
------------------------------------------------------------------------------------------------
In Would Floating the Renminbi Solve Anything? we discussed why it would not help the US one bit. Andy Xie contributes ideas as to why it is not in China's best interest either. As for losses on the US$ and reserves that everyone else is bitching about.... The US$ has essentially gone nowhere (in fact I think it is up), ever since Newsweek's Incredible Shrinking dollar cover hit the stands.
I do think there is probably another leg down in the US$ but the time to be super bearish on the dollar was two years ago not today. Look at the problems in the UK, the housing bubble bursting in Australia and Japan back in recession and then look at the huge problems in the banking sector in China and tell me the demise of the dollar is just starting. I do not buy it. Every fiat currency has problems and eventually gold is likely to outperform them all.
Here are my reasons why China should not float the RMB
1) The Chinese central bank does not want to trigger a currency crisis by floating the RMB too soon.
2) There is too much "hot money" flowing into China in hopes of making a quick killing on a currency repeg or float.
3) China thinks in terms of years or decades on policy changes. What happens over the course of the next 6 months is not relevant.
4) Chinese banks might not be in a position to take the stress of floating the RMB at this time, even if other factors were conducive.
6) Fundamentals such as slowing worldwide growth do not favor floating the RMB right now
7) The Asian principle of "face saving" suggests that China can not be forced into premature action and that "Snowtalk' is counterproductive.
8) The peg has served China well. China did not blow up in the last Asian currency crisis because of that peg. The peg has provided stability and that stability is still useful.
9) The US has bigger problems that need addressing first.
10) Paper losses on paper currencies look far bigger on paper than they actually are in the grand scheme of things that central bankers consider.
On the other hand you may wish to consider Stephen Roach's article insisting that China Needs a New Anchor. My reply to Roach would be "Yes, but not now". There is just too much hot money, too many issues with a global slowdown (that almost everyone is in denial over), and too many bad loan problems with Chinese banks.
Anyone else in the boat with Andy Xie besides myself or are we the two lone wolves?
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Flipped Out
March survey shows 17% increase in foreclosure properties nationwide
"Our March data includes approximately 62,422 new properties in some stage of foreclosure – a 17 percent increase from February," said Jim Saccacio, CEO of RealtyTrac.
"While some of this increase can be attributed to new counties in our coverage area, foreclosures clearly increased from February to March. We'll be watching the April numbers very carefully to see if this is the beginning of a trend, or a one-month aberration."
Five states constituted more than 45 percent of all March foreclosures – Florida, Utah, Georgia, Texas and Colorado, according to the report. These five states have the largest number of foreclosures, with more than twice the national average. Florida and Texas alone made up one-third of national foreclosures in March.
For the second month in a row, Florida had the highest rate of foreclosures, more than two and a half times the national average. Nearly 17 percent of all March foreclosures took place in Florida.
Gee. Does that bode well for this insanity?
Plans for the world's tallest condo tower are unveiled. Miami's new landmark? A developer is proposing to build the world's tallest condo tower -- 1,200 feet and 110 stories high -- on Biscayne Boulevard.
Doesn't the building of mammoth new buildings typically mark the end of real estate peaks? Not to worry.... Never a better time to buy. I guess foreclosures, taxes, affordability and rental prices are completely meaningless as is the number of new condos being built in Florida.
For a saner look at the housing bubble, please consider this advice :
When old-time dirt guys sell ENTIRE portfolios they have taken a LIFETIME to build, it reminds me of the developers I used to arrange financing for in the late ’80s who told me, “Toby, when the amateurs are bidding on land I KNOW I can’t make money on, it's time to pack it in … until the middle of the next DOWN cycle. You can reach me in Aspen or the beach if you need me.”
If you are convinced that there is still a lot of easy money to be made buying residential real estate in the hot zones of the U.S. these days … well, you have about six months to make it happen. The stupid money is now on the prowl to earn “up to $50,000 in just 90 days” and all it takes is a free digital camera -- an “$80 value”-- to get them in the door.
At the end of every trend the hucksters start telling everyone "how to do it". When there is far, far more money to be made in telling people how to do it than in doing it, you know the end is near. Speculation and optimism and seminars and headlines are ALWAYS high at the end.
Out of the "goodness of their hearts" people are willing to tells us "how to do it" after this housing run up. The Washington Post, L.A. Times and San Francisco Chronicle have recently shown at least two full page ads for seminars claiming to be able to tell us how to make $50,000 in just 90 days in residential real estate. Is this the next "free lunch"? No sports fans, they are telling you how they did it because they NO LONGER CAN (if indeed they ever did in the first place). Perhaps in some areas it can still be done, but the odds of success when you are at the tail end of a mania seem rather small to me. Seriously, if you could make $50K in 90 days or $200,000 in a year would you be telling people about it or just doing it?
If you want to know where we are in this housing cycle, then take this chart and move the sentiment reading one notch closer to the top.
As you can plainly see, there is not much room left in the above chart before we flip over.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
"Our March data includes approximately 62,422 new properties in some stage of foreclosure – a 17 percent increase from February," said Jim Saccacio, CEO of RealtyTrac.
"While some of this increase can be attributed to new counties in our coverage area, foreclosures clearly increased from February to March. We'll be watching the April numbers very carefully to see if this is the beginning of a trend, or a one-month aberration."
Five states constituted more than 45 percent of all March foreclosures – Florida, Utah, Georgia, Texas and Colorado, according to the report. These five states have the largest number of foreclosures, with more than twice the national average. Florida and Texas alone made up one-third of national foreclosures in March.
For the second month in a row, Florida had the highest rate of foreclosures, more than two and a half times the national average. Nearly 17 percent of all March foreclosures took place in Florida.
Gee. Does that bode well for this insanity?
Plans for the world's tallest condo tower are unveiled. Miami's new landmark? A developer is proposing to build the world's tallest condo tower -- 1,200 feet and 110 stories high -- on Biscayne Boulevard.
Doesn't the building of mammoth new buildings typically mark the end of real estate peaks? Not to worry.... Never a better time to buy. I guess foreclosures, taxes, affordability and rental prices are completely meaningless as is the number of new condos being built in Florida.
For a saner look at the housing bubble, please consider this advice :
When old-time dirt guys sell ENTIRE portfolios they have taken a LIFETIME to build, it reminds me of the developers I used to arrange financing for in the late ’80s who told me, “Toby, when the amateurs are bidding on land I KNOW I can’t make money on, it's time to pack it in … until the middle of the next DOWN cycle. You can reach me in Aspen or the beach if you need me.”
If you are convinced that there is still a lot of easy money to be made buying residential real estate in the hot zones of the U.S. these days … well, you have about six months to make it happen. The stupid money is now on the prowl to earn “up to $50,000 in just 90 days” and all it takes is a free digital camera -- an “$80 value”-- to get them in the door.
At the end of every trend the hucksters start telling everyone "how to do it". When there is far, far more money to be made in telling people how to do it than in doing it, you know the end is near. Speculation and optimism and seminars and headlines are ALWAYS high at the end.
Out of the "goodness of their hearts" people are willing to tells us "how to do it" after this housing run up. The Washington Post, L.A. Times and San Francisco Chronicle have recently shown at least two full page ads for seminars claiming to be able to tell us how to make $50,000 in just 90 days in residential real estate. Is this the next "free lunch"? No sports fans, they are telling you how they did it because they NO LONGER CAN (if indeed they ever did in the first place). Perhaps in some areas it can still be done, but the odds of success when you are at the tail end of a mania seem rather small to me. Seriously, if you could make $50K in 90 days or $200,000 in a year would you be telling people about it or just doing it?
If you want to know where we are in this housing cycle, then take this chart and move the sentiment reading one notch closer to the top.
As you can plainly see, there is not much room left in the above chart before we flip over.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
Making Sense of April Payroll Numbers
U.S. nonfarm payrolls were up 274,000. Bulls were crowing all morning but I wonder why. Treasury yields spiked with the 5 yr yield moving from 3.80 to 3.97. That is a pretty huge reaction. Likewise yields on 10-yr treasuries went from 4.16 to 4.28.
A sustained spike in interest rates will not be good for housing, period. Write this down and don't forget it: Housing is the economy, stupid.
Cheerleaders would have you believe this data is good for stocks because it shows that the economy is getting better. Likewise a poor jobs number would have been considered good for stocks because the FED would pause and that would support the economy. Day in and day out, there's never better a time to buy stocks.
Back to the real world.... In our drug ridden economy with US consumers keeping the entire world barely afloat, the only thing holding up this mess is 1)cheap credit 2)loose lending practices 3)housing. All that remains to be seen is whether or not housing dies of simple exhaustion or Greenspan hikes one too many times. Either way, there will be MASSIVE job losses when it happens.
As for today’s job numbers a mere 257k of the 274k jobs we added this month were assumed. Let's take a look:
Birth-Death-Adjustments April 2005
Hmmm 90,000 of the assumed jobs were in Leisure and Hospitality. This category includes food services. Yeah, that is going to support a lot of purchasing power.
How does the BLS go about guessing these numbers? Well it looks at the economy and says well historically we add such and such number of jobs in a "typical recovery" blah blah blah as if this train wreck has anything to do with a typical recovery.
What is interesting about the assumed jobs this month is that the GDP for the 1st quarter of 2004 was +4.1% while the GDP for the 1st quarter of 2005 was +3.1%. Last April we added 225,000 jobs and this April in spite of a lower GDP we assumed a "mere" 257,000 jobs. Thanks to John Succo at Minyanville for pointing that out.
Also interesting is that the BLS Household Survey showed an increase of 598,000 jobs. Does anyone really believe that? What did we do, add another 500,000 people selling stuff on EBAY as their job?
In the Establishment Survey we see that leisure and hospitality gained 58,000 jobs in April, including 35,000 in food services and drinking places. Since June 2002, employment in leisure and hospitality has expanded by 823,000 with four-fifths of the gain occurring in food services. This trend is clear, we are outsourcing manufacturing and adding bartenders, waiters, and greeters at Walmart.
Also note that according to BLS table A-12 (about the only place one has any inkling of what the employment situation might be, alternative measures of unemployment are still at 9%. That number is probably much closer to reality but with all the obvious shenanigans, who really knows for sure what the real rate is.
Finally I would be remiss if I failed to point out the BLS reported that for the 31st month in a row, more than 20% unemployed had been out of work longer than six months. Is that consistent with creating 589,000 jobs?
Here is the complete BLS pdf Report for April. If you can make any reasonable sense out of this bizarre combination of numbers please enlighten me.
BTW it is not technically correct to say 257k of the 274k jobs we added this month were assumed. The reason being the 257k jobs were not seasonally adjusted but the headline numbers are. Here is a Q&A on that from the BLS.
Q: Can I subtract the birth/death adjustment from the seasonally adjusted over-the-month change to determine what it is adding to employment?
A: No. Birth/death factors are a component of the not seasonally adjusted estimate and therefore are not directly comparable to the seasonally adjusted monthly changes. Instead, the birth/death factor should be assessed in the context of its effect on the not seasonally adjusted estimate.
Q: Can BLS provide an estimate of the contribution of the birth/death adjustment to the seasonally adjusted monthly payroll change? Can BLS independently seasonally adjust the net birth/death component?
A: There is not an estimate of the seasonally adjusted contribution of the birth/death model. The sample collected on a monthly basis, the imputation of business births using deaths, and the net birth/death model are all necessary components for obtaining an accurate estimate. The components are not seasonally adjusted separately because they do not have particular economic meaning in and of themselves.
Of course all this does is make an even bigger mess out of the reported figures. Bear in mind that at the turn, their model of how many jobs were "created" will likely be horribly out of whack since the assumptions they are making now are based on the false premise that the economy is headed for the "proverbial soft landing" and the recovery will continue. At some point they will be massively taking back a lot of these "assumed jobs".
In the meantime I will guarantee you this. Today's numbers are nowhere near as strong as the headline numbers indicate, especially in light of a slowing economy and a dramatically slowing GDP. I look for huge downside revisions in July if this keeps up.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
A sustained spike in interest rates will not be good for housing, period. Write this down and don't forget it: Housing is the economy, stupid.
Cheerleaders would have you believe this data is good for stocks because it shows that the economy is getting better. Likewise a poor jobs number would have been considered good for stocks because the FED would pause and that would support the economy. Day in and day out, there's never better a time to buy stocks.
Back to the real world.... In our drug ridden economy with US consumers keeping the entire world barely afloat, the only thing holding up this mess is 1)cheap credit 2)loose lending practices 3)housing. All that remains to be seen is whether or not housing dies of simple exhaustion or Greenspan hikes one too many times. Either way, there will be MASSIVE job losses when it happens.
As for today’s job numbers a mere 257k of the 274k jobs we added this month were assumed. Let's take a look:
Birth-Death-Adjustments April 2005
Hmmm 90,000 of the assumed jobs were in Leisure and Hospitality. This category includes food services. Yeah, that is going to support a lot of purchasing power.
How does the BLS go about guessing these numbers? Well it looks at the economy and says well historically we add such and such number of jobs in a "typical recovery" blah blah blah as if this train wreck has anything to do with a typical recovery.
What is interesting about the assumed jobs this month is that the GDP for the 1st quarter of 2004 was +4.1% while the GDP for the 1st quarter of 2005 was +3.1%. Last April we added 225,000 jobs and this April in spite of a lower GDP we assumed a "mere" 257,000 jobs. Thanks to John Succo at Minyanville for pointing that out.
Also interesting is that the BLS Household Survey showed an increase of 598,000 jobs. Does anyone really believe that? What did we do, add another 500,000 people selling stuff on EBAY as their job?
In the Establishment Survey we see that leisure and hospitality gained 58,000 jobs in April, including 35,000 in food services and drinking places. Since June 2002, employment in leisure and hospitality has expanded by 823,000 with four-fifths of the gain occurring in food services. This trend is clear, we are outsourcing manufacturing and adding bartenders, waiters, and greeters at Walmart.
Also note that according to BLS table A-12 (about the only place one has any inkling of what the employment situation might be, alternative measures of unemployment are still at 9%. That number is probably much closer to reality but with all the obvious shenanigans, who really knows for sure what the real rate is.
Finally I would be remiss if I failed to point out the BLS reported that for the 31st month in a row, more than 20% unemployed had been out of work longer than six months. Is that consistent with creating 589,000 jobs?
Here is the complete BLS pdf Report for April. If you can make any reasonable sense out of this bizarre combination of numbers please enlighten me.
BTW it is not technically correct to say 257k of the 274k jobs we added this month were assumed. The reason being the 257k jobs were not seasonally adjusted but the headline numbers are. Here is a Q&A on that from the BLS.
Q: Can I subtract the birth/death adjustment from the seasonally adjusted over-the-month change to determine what it is adding to employment?
A: No. Birth/death factors are a component of the not seasonally adjusted estimate and therefore are not directly comparable to the seasonally adjusted monthly changes. Instead, the birth/death factor should be assessed in the context of its effect on the not seasonally adjusted estimate.
Q: Can BLS provide an estimate of the contribution of the birth/death adjustment to the seasonally adjusted monthly payroll change? Can BLS independently seasonally adjust the net birth/death component?
A: There is not an estimate of the seasonally adjusted contribution of the birth/death model. The sample collected on a monthly basis, the imputation of business births using deaths, and the net birth/death model are all necessary components for obtaining an accurate estimate. The components are not seasonally adjusted separately because they do not have particular economic meaning in and of themselves.
Of course all this does is make an even bigger mess out of the reported figures. Bear in mind that at the turn, their model of how many jobs were "created" will likely be horribly out of whack since the assumptions they are making now are based on the false premise that the economy is headed for the "proverbial soft landing" and the recovery will continue. At some point they will be massively taking back a lot of these "assumed jobs".
In the meantime I will guarantee you this. Today's numbers are nowhere near as strong as the headline numbers indicate, especially in light of a slowing economy and a dramatically slowing GDP. I look for huge downside revisions in July if this keeps up.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
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