Fed in a Quandary

The minutes of May 10 FOMC meeting were released today.
Here are a few key snips:

Participants discussed in some detail inflation expectations--a potentially important factor influencing future inflation trends. Some surveys suggested that inflation expectations had risen in recent weeks, but others implied that expectations were little changed.

On balance, participants judged that inflation expectations had risen somewhat--a development that would have to be taken into account in policymaking and warranted close monitoring--but remained contained.

Although the Committee discussed policy approaches ranging from leaving the stance of policy unchanged at this meeting to increasing the federal funds rate 50 basis points, all members believed that an additional 25 basis point firming of policy was appropriate today to keep inflation from rising and promote sustainable economic expansion.

Recent price developments argued for another firming step at today's meeting. Core inflation recently had been a bit higher than had been expected, and several members remarked that core inflation was now around the upper end of what they viewed as an acceptable range. Moreover, a number of factors were augmenting the upside risks to inflation: the surge in energy and commodity prices, some recent weakness in the foreign exchange value of the dollar, and the possibility that the apparent increase in inflation expectations could, if it persisted, impart momentum to inflation

At the same time, members also saw downside risks to economic activity. For example, the cumulative effect of past monetary policy actions and the recent rise in longer-term interest rates on housing activity and prices could turn out to be larger than expected. Still, it seemed most likely that, with modest further policy action, including a 25 basis point firming today, growth in activity would moderate gradually over coming quarters, pressures on resources would remain limited, and core inflation would stay close to levels experienced over the past year.

Given the risks to growth and inflation, Committee members were uncertain about how much, if any, further tightening would be needed after today's action. In view of the risk that the outlook for inflation could worsen, the Committee decided to repeat the indication in the policy statement released after the March meeting that some further policy firming could be required.

Members debated the appropriate characterization of inflation expectations in the statement. Low and stable inflation expectations were key to the attainment of the Committee's dual objectives of price stability and maximum sustainable economic growth. However, the apparent pickup in longer-term expectations, while worrisome, was relatively small. They remained within the range seen over the past couple of years, and the increase could well reverse before long. Accordingly, it appeared appropriate to characterize inflation expectations again as "contained."

Dow Jones summed it up as follows:

*DJ FOMC: May Minutes: Upside Inflation, Downside Econ Risks
*DJ FOMC: Debate Ranged From No Fed Funds Change To 50BP Hike
*DJ FOMC: Rise In Price Expectations 'Worrisome' But Small
*DJ FOMC: Inflation Expectations Warrant 'Close Monitoring'
*DJ FOMC: Staff Forecasts Inflation To Slow Later In '06
*DJ FOMC: Unsure How Much 'If Any' More Tightening Needed
*DJ FOMC: Lagged Rate Impact On Housing Could Be Larger
*DJ FOMC: Lower Dollar Could Add To Inflation Pressures

Fed in a Box

Those minutes prove the Fed is in a box and is essentially clueless about what to do. Some wanted to pause while others wanted a 50BP hike. In the end they all agreed to go down on the sinking ship together by agreeing to agree. It was a unanimous vote in favor of a 25 BP hike.

At least in the UK we see policy makers willing to dissent. The last BOE meeting had a three way split with some voting to pause, some to hike, and one to cut.

It is notable that finally after 16 consecutive rate hikes the Fed finally put a 50 basis point rate hike on the table just as housing is getting crucified in many places. They are also worried about inflation expectations while at the same time unsure if any more hikes are needed.

I have said it before and will repeat it again. The lagging effects of 16 consecutive hikes, in light of action in housing as well as rising bankruptcies makes it extremely likely the Fed has already overshot.

Given that this Fed created the housing bubble in the wake of a stock market bubble the Fed also helped create, why anyone thinks the Fed has any clue what they are doing is simply beyond me. Past bubbles and those minutes clearly prove the Fed is guessing. Then again, given that the greatest liquidity experiment in the history of mankind was openly undertaken by numerous central banks over the last few years (most notably the Fed and the BOJ) it should not be too surprising that the Fed is guessing.

We can top that off with $Ben Bernanke who actually believes price targeting can work in a global economy burdened by peak oil, outsourcing, trillions of dollars of derivatives floating around, and interest rates ranging from 0% in Japan to 2% in Europe to 5% in the US. All I can say is that it can't be done.

Bernanke is the wrong person for the wrong job at the wrong time. For more discussion on the silliness of price targeting, please consider Inflation Monster Captured. Targeting prices is like trying to catch your tail. The job is wrong because the job should not exist. The man is wrong because price targeting can't work. The time is wrong simply because it was never right and never will be. The Fed should be abolished and the market should set rates. The market can not possibly do any worse than the bubbles blown by the Greenspan and Bernanke Fed.

The Fed is in a quandary because of the mess they helped create. There are no good solutions from here, yet the talk from Wall Street is as if some sort of miracle soft landing that keeps the consumer spending without going bankrupt is about ready to happen. No chance.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Florida Numbers

Following are "The Numbers" from Mike Morgan at MorganFlorida.
The first set of numbers are for the last 7 days. The second set of numbers are for the prior week. Sold represents a home that was under contract and has closed, while Pending sales are contracts written this week, but they don’t all close. Less than 85% of Pending listings will actually close.

• New Listings - 541/508
• Price Drops - 177/228
• Sold - 67/41
• Pending - 50/42
• Listings to Pending Sales = 10.8212.09
• Listings to Closings (Sold) = 8.079/12.39
• Open Houses – No Open Houses. Holiday Weekend.
• Sales – Nothing sold this week.
• Showings – A slow week. The only homes that had showings were those with recent price drops.
• Listings – We received 10-12 calls from new sellers, but we turned down all listing requests this week with the exception of two. The two listings we took were referrals from good clients. Moving forward we are not going to take any listings unless they are priced 2-5% under the market.
• Buyer Inquiries – A new category for the weekly report. We saw an average week for the number of inquiries, maybe even a bit up. Unfortunately, all of these potential buyers were looking for bargains. That is the first thing out of their mouth. Not only bargains, but steals. The typical caller wants a home with 4 bedrooms, 3 bathrooms, 2 car garage on an acre with a pool for under $300,000. Me too.
• Inventory – Still building, but we did see the rate of build-up slow down a bit this week. Please don’t take that as very much of a positive sign. We are still seeing 10 listings for every contract.
• Advertising – The deadline for the next issue of the Real Estate Book is in one week. If you want to feature your home in the next issue, the cost is $450 for a full page or $150 for a one third page. We only run full page ads with either 1, 2 or 3 homes per page, as compared to most agents that crowd in 9-12 tiny listings.
• Rental Market – We turned down all requests from flippers that want to rent. The rental market is flooded with flippers trying to salvage something out of their investments. Unfortunately, there are far more vacant homes than renters.
• Home Builders – The builders are lowering prices and offering a variety of incentives.
• Suggestions – Selling Agent Bonuses. These are still the homes that are getting the most showings. If you must sell, I suggest dropping the price now versus later. The market is getting softer. If you wait, prices will continue to drop and you will be trying to catch a very sharp knife.

Possibly the most interesting factoid of Mike's Email is his refusal to take listings that are not UNDER priced:

We turned down all listing requests this week with the exception of two. The two listings we took were referrals from good clients. Moving forward we are not going to take any listings unless they are priced 2-5% under the market.

The situation in Florida will soon spread to all of the other bubble areas.
You can see it already with rising foreclosures in Denver, Ohio, Indiana, and now California.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

How to buy a home

I found some very practical advice today from Charles Hugh Smith.
It was on How to buy a $450,000 home for "only" $750,000.

I cleaned up his accompanying image a bit in Photoshop and it appears below.



Following are the words of wisdom from Mr. Smith about "The cutting-edge secrets to buying real estate at 30% to 50% above market value"

• Appoint a Federal Reserve which flooded the nation with virtually unlimited money supply even as it lowered interest rates to historic lows
• Lower lending standards to basically zero so even those with poor credit and no cash can buy a house with no money down and no documented history of financial discipline
• Enable investors to buy new condos and houses with maximum leverage so that 40% of all new homes are purchased as investments
• Lower lending reserves requirements to the lowest levels ever, so lenders need not be encumbered with onerous standards like having cash on hand to cover bad debts
• Enter into an unspoken agreement with our Asian trading partners in which our homeowners can borrow 105% the value of their homes to buy Asian-made consumer goods, and our trading partners will buy all our depreciating long bonds at low rates of return so mortgage rates stay low
• Keep wage increases down to basically zero so consumers count on re-financing their homes to pay for vacations, college, new cars and boats, etc.
• Enable a 10-fold expansion of mortgage-backed derivatives and various exotic financial instruments so that trillions of dollars in mortgages can be tranched, sliced and hedged, giving the financial markets the false impression that the risks have been lowered, even as they've actually increased to unprecedented levels
• Enlist an army of Wall Street and media cheerleaders to promote the notion that "this time it's different" and "housing never drops in value," lulling the unsuspecting into believing that the business cycle and the laws of supply and demand have been officially revoked
• Encourage builders to build up to 10 times the number of units which sell annually, insuring massive overbuilding (over-supply).
• Rig the inflation measurements (CPI, etc.) to hide the actual inflation rate (close to 8%)

Truth in thievery:
Since I blatantly took Charles Hugh Smith's image he can oblige by posting my version (or perhaps an even better one) so by the time you read this, the versions may or may not be the same. Anyway, a tip of the hat goes to Mr. Smith for a clever idea, well thought out.

Addendum:
I was away on vacation for about the last 12 days. I did not know if I could even send any blogs at all. Wireless reception was piss poor where I was staying. It only worked in the lobby. It would not work in our room 300 feet away or even the bar lounge 100 feet away. That might explain a lack of responses to some questions I received in the while I was gone. I should be back on a more orderly schedule shortly.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Greenspan Predicts Housing Bust

On May 21st Greenspan all but assured a housing collapse was coming with his statement Stable prices replacing boom

Former Federal Reserve Chairman Alan Greenspan said the five-year housing "boom is over," though prices won't fall nationally.

"We're not about to go into a situation where prices will go down," Greenspan, 80, said in response to questions Thursday evening at a reception in New York hosted by the Bond Market Association. There is "no evidence home prices are going to collapse."

Greenspan echoed comments earlier in the day by his successor, Ben S. Bernanke, who said housing is undergoing a "very orderly and moderate cooling," and that central bankers are monitoring the market to help shape their analysis of the economy's performance.

With his "permanently high plateau" call, Greenspan all but assured prices are about ready to collapse. Bear in mind there was no evidence of a Nasdaq crash in Spring of 2000 either. But given that Greenspan has been wrong at every critical juncture in his entire career, we know housing is will collape sooner or later.

Actually his position is peculiar to say the least. He claimed there was a bubble in stocks in 1994, he embraced the productivity miracle in 1999-2000 looking for upside in the economy as shown by Fed minutes, then after the bubble burst claimed that bubbles could only be detected after they pop. Now he is claiming "very orderly and moderate cooling where prices where prices will not go down". This is of course reminiscent of esteemed economist Irving Fisher's statement in October 1929: "Stock prices have reached what looks like a permanently high plateau."

Head Cheerleader

Of course Greenspan has company with his call. Please consider statements made by David Lereah, head cheerleader for the National Association of Realtors: "There is no real estate bubble.

More than 50 people turned out for an investor seminar recently hosted by Keyes Company/Realtors and held at Belaire Boca, a community of luxury condominiums and townhomes in Boca Raton.

The featured speaker for the evening was David Lereah, senior vice president/chief economist for the National Association of Realtors. Lereah is also the author of "Why The Real Estate Boom Will Not Bust & How You Can Profit From It: How To Build Wealth In Today's Expanding Real Estate Market."

Lereah was quick to make his message clear: "You don't need a boom for real estate to roar. The real estate boom is over but the real estate expansion is still here." Although homes are not selling as quickly right now, prices are still up. "There are no real estate bubbles, only balloons that expand and contract," he said.

Lereah substantiated that good news by presenting numerous facts. The 14-year real estate expansion (1991-2005) resulted in a U.S. mortgage market that increased tenfold during that time. Low mortgage rates resulted in a refinancing boom, as consumers became more comfortable with the process.

He said the real estate boom was caused by factors such as lenders being able to reduce financing costs; baby boomers reaching their peak earning years and trading up or buying second, third and vacation homes.

"Forty percent of all home sales in 2005 were second homes - investment properties and vacation homes - compared to about 9 percent 10 years ago," Lereah said.

"Real estate is not an irrational investment, but speculators purchased irrationally during the boom, especially in areas like Miami. This drove prices up, and many speculators took out interest-only loans. This produced a vulnerable real estate market," Lereah explained. "In 2006, we are cleansing the market of speculation."

In 2007, Lereah believes that the real estate market will continue to expand even if mortgage rates increase to 7 percent. "That is still low," he said.

He added that he is bullish on Florida, Arizona and Nevada because of even greater population increases. "The law of supply and demand works."

All of Lereah's real estate investments are in condominiums and townhomes because he doesn't want to be involved in maintaining them. "If you're Mr. Fix It, then it's okay to invest in a single-family home," he said.

Cheerleader Review
Let's analyze some of Lereah's statements shall we?

"The law of supply and demand works." Yes, the law of supply and demand works. It is in fact one of the reasons Florida is crashing and will continue to crash. 50,000-100,000 condos being built in Miami-Dade should be proof enough. It is why people are walking away from $80,000 deposits. The market is saturated with condos and you are still recommending them.

"Speculators purchased irrationally during the boom, especially in areas like Miami." Hmm It seems that contradicts the reasons to be bullish on Florida condos doesn't it? Besides were you admitting "irrational buying" a year ago or were you humming a different tune then?

"Forty percent of all home sales in 2005 were second homes - investment properties and vacation homes - compared to about 9 percent 10 years ago." Seems to me this is evidence of a bubble. Who hasn't bought that is going to do so now at these inflated prices. Not only are rental prices 4 standard deviations above norm, purchasing second homes for investments seems wildly above normal as well.

"The 14-year real estate expansion (1991-2005) resulted in a U.S. mortgage market that increased tenfold during that time. " Hmmm, you are proclaiming a tenfold increase in the mortgage market huh? It seems you ought to be writing reasons for Professor Piggington on why this is a bubble instead of denying it.

"There are no real estate bubbles, only balloons that expand and contract." Even if this nonsensical statement was true, why would one be touting Florida, a market in clear contraction, with enormous inventory and insurance problems, instead of areas with less speculation?

"If you're Mr. Fix It, then it's okay to invest in a single-family home." Even this seems like poor advice. In every boom I have seen, condos are the last to rise, the first to fall, and heaven help anyone that buys a poorly constructed condo. You may not have to fix it yourself but some has to, and typically at rates far greater than you might find for yourself. Tuckpointing repairs and the like are horrendously expensive and that is for Chicago. I can only begin to imagine the problems in hurricane zones.

At times David Lereah appears to have a grasp of the underlying facts, yet manages to come to all of the wrong conclusions about what is happening and why. No one should be surprised by this. David Lereah is a paid cheerleader for the National Association of Realtors, not a real economist.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Wake-Up Call

Stephen Roach is writing about a Wake-Up Call for Central Banking. Perhaps he has himself waken up from some kind of stupor when he suddenly turned bullish on the global economy right at the market top a couple weeks ago. Let's tune in.

I worry increasingly that history will not treat the recent record of central banking kindly. Inflation may well have been conquered — a conclusion financial markets are actively debating again — but that was yesterday's battle. Over the past six years, monetary authorities have turned the liquidity spigot wide open. This has given rise to an endless string of asset bubbles — from equities to bonds to property to risky assets (emerging markets and high-yield credit) to commodities. Central banks have ducked responsibility for this state of affairs. That could end up being a policy blunder of monumental proportions. A new approach to monetary policy is urgently needed.

By focusing solely on the inflation battle, there is now risk of losing a much bigger war. That's what the profusion of asset bubbles is telling us, in my view. The great triumph of central banking rings increasingly hollow in today's bubble-prone environment.

By consciously ignoring the perils of a mounting asset bubble — a stunning reversal, of course, from Alan Greenspan's original warning of "irrational exuberance" in the stock market in December 1996 — the Fed became entrapped in the dreaded multi-bubble syndrome. Stressing that it had learned the lessons of Japan, the US central bank was aggressive in easing in the aftermath of the bursting of the equity bubble. A new Governor by the name of Ben Bernanke led the charge at the time in arguing that the US central bank should use every means possible to avoid an unwelcome post-bubble deflation — including, if necessary, "unconventional" measures aimed at targeting the yield curve, providing subsidized bank credit, and even pegging the dollar (see his 21 November 2002 speech, "Deflation: Making Sure "It" Doesn't Happen Here"). With inflation low — and the risk of deflation actually rising at the time — the price-targeting Fed had no compunction about turning the liquidity spigot wide open. And so the miracle drug that was used as the cure for the first bubble created a dangerous addiction — systemic risk, in financial market parlance — that has fostered a string of asset bubbles. Unfortunately, that addiction has yet to be broken.

When inflation is low and a price-targeting central bank pushes nominal interest rates down to unusually low levels, there are new risks to confront — namely, asset bubbles. Central banks that let economies "rip" because inflation risks are minimal, are asking for trouble. That doesn't mean monetary authorities should target asset prices. It does mean, however, that there are times when asset markets need to be taken into consideration in the setting of monetary policy. A low nominal interest rate regime is precisely one of those times.

America's Federal Reserve is increasingly isolated in arguing that asset markets should be ignored in the setting of monetary policy. In fact, its new chairman is the academic high priest of inflation targeting — embracing an even tighter rules-based approach than his predecessor. Asset bubbles are, at best, an after-thought in a strict inflation-targeting regime. Therein lies the potential for a strategic policy blunder: The US central bank has yet to develop an exit strategy from the multi-bubble syndrome that the Fed, in its zeal for inflation targeting, has spawned. Moreover, as one bubble begets another, excess asset appreciation has become a substitute for income-based saving — forcing the US to import surplus saving from abroad in order to sustain economic growth. And, of course, the only way America can attract that capital is by running a massive current-account deficit. In other words, not only has the Fed's approach given rise to a seemingly endless string of asset bubbles, but it has also played a major role in fostering global imbalances.

Central banks deserve great credit for waging a successful battle against inflation. To their credit, this war is never over — monetary authorities must always remain alert to the possibilities of a resurgence of inflation. But policy strategies have been surprisingly unprepared to cope with the pitfalls that emerge as economies near the hallowed ground of price stability. Nor have inflation-targeting monetary authorities shown themselves to be adaptable to changing circumstances, such as IT-enabled productivity enhancement and globalization. To the extent rules-bound central banks operate in a vacuum and fail to appreciate the impact of these powerful structural headwinds, they may be biased toward injecting too much liquidity into the system. The multi-bubble experience of the past six years is a wake-up call for central banks. A new approach to monetary policy is urgently needed.

I do not think that "Central banks deserve great credit for waging a successful battle against inflation" but at least most of the rest of what he had to say sounded more like the Roach I used to know. The reason there should be zero credit given to central banks for a successful battle against inflation is they did nothing to foster it. In fact they blew asset bubble after asset bubble so why should anyone give them credit for that?

Money supply exploded out of control under the Greeenspan Fed. It was only because of global wage arbitrage, outsourcing, and a productivity boom caused by the internet that inflation SEEMED low. Inflation was not low if one understands what inflation really is: growth in money supply an credit as discussed in Inflation: What the heck is it?.

Now Bernanke is even more intent on price targeting than was Greenspan. It is a policy doomed to failure as I mentioned in Inflation Monster Captured.

Sometimes money flows into houses and stock and bonds instead of goods and services. Sometimes productivity improvements mask inflation. Sometimes falling commodity prices mask inflation. Of course I am talking about "real inflation" as measured by increases in money supply as opposed to hedonically adjusted price inflation as seen through the eyes of central bankers.

The last paragraph is exactly what made a fool out of Greenspan. In the mid-to-late
1990's, "real inflation" (a rampant increase in money supply), was masked by
productivity improvements, falling oil prices, and falling prices of goods from Asia. Greenspan called it a "productivity miracle". It was a "miracle" indeed. Rampant increases in money supply fueled the 2000 stock market bubble and spawned nonsensical talk about "new paradigms". Then in sheer panic "after the bubble pops" adjustments that he likes to make, Greenspan refused to allow a recession run its course. Instead he slashed interest rates to 1%, fueling the biggest housing bubble the world has ever seen. Here we are three short years later now facing a "new paradigm" in housing, with debt levels far worse at both consumer and governmental levels.

Given that Bernanke is even more focused on prices than Greenspan was, Roach is right to be worried. Our economic policies are clearly broken and and the Fed and government spending are right at the heart of the mess. Both are to blame.

A new approach is certainly needed as there is now hell to pay for the horrid economic policies of the last 18 years.

I suggest the following.

1)Eliminate fractional reserve lending
2)Let the market set interest rates
3)Abolish the Fed
4)Rein in government spending
5)Return to the gold standard

Can this all happen at once? Of course not. It would probably plunge the US into an instant depression if it was tried. Furthermore, one can have sound money without a gold standard, gold just makes the enforcement easier(see Gold's Honest Discipline). Fractional reserve lending can be curtailed over time as can government spending. One way or another, unsound economic practices and serial bubble blowing will be halted or the market will force it at the worst possible time. The wake-up call may be loudly ringing but the big fear is that both the Fed and Congress are deaf.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Billmon Gets It - Do You

Buried deep in a Billmon Post last week was a critical chart and a few words of wisdom on why this is NOT a repeat of the inflation scene of the 70's and 80's. Most reading his post probably missed the key idea in a potpourri of other ideas. Let's take a look.

Wages and Salaries

We would need to see a lot faster wage growth -- growth at or exceeding the current 3% core CPI rate -- before I would think about buying a piece of the inflation is coming back story.


















And while those kind of wage gains are not impossible I definitely don't see it right now. What we have, in other words, is almost pure cost-push inflation -- instead of the wage-price spiral that made the '70s such an interesting time to live through, financially speaking.

At some point, presumably when the extra disposable income derived from that last mortgage refi runs out, households are going to have to suck it in. Indeed it looks like it's already started -- retail sales are weakening and the Amazon-sized river of imports flowing in from points east (or west, if you live in California) has actually slowed a bit.

Meanwhile, job growth has decelerated, jobless claims are creeping up and housing starts finally appear to be, well, stopping.

That indeed is the heart of the matter. I have been harping about this for what seems like ages. Everyone is in some sort of "Inflation Scare" AFTER 16 consecutive rate hikes. Does this make any sense? I suppose it does to those that are perpetually gloomy on the US$ or US treasuries who probably now feel vindicated by this blip up in treasury yields.

It all comes down to wages and housing and jobs. Without meaningful rises in employment and wages, the former above the birth rate plus the rate of immigration (both illegal and illegal), and the latter above the TRUE cost of living, inflation really does not have a chance. Yes at 1% we had sustainable inflation. An incredible housing boom was the result. The better question (looking ahead) is "What Now?"

Has Inflation Won Out?

I have been asked countless times what it would take for me to throw in my "deflation towel", oddly enough(or perhaps not) most of those questions have come in the last few months right on the verge of victory. Unlike Stephen Roach (a Morgan Stanley permabear who suddenly and without reason turned bullish about two weeks ago), I am not reversing course here.

Is that illogical? I think not. I have many times stated what will change my mind. It is really simple: "wage increases, job growth, and housing that does not bust". I see little reason to change course now. In fact, treasuries are probably a screaming buy.

Primer on Inflation

Most people screaming "inflation" do not know what it really is.
Those that think "Inflation = Price Increases" are sadly mistaken.
In fact that is one of the reasons why we see repetitive bubbles being blown by the Fed.

If you think inflation = price rises, I suggest reading the following:

1. Inflation: What the heck is it?
2. Inflation Monster Captured
3. Marc Faber shatters prevailing market myths

One of the reasons for these repetitive bubbles is the Fed does not itself know what inflation is. They think they can micromanage the economy when all they are doing is chasing their tale due to the lagging effect of their actions.

At some point, and I think we are at that point right now, a sort of economic zugzwang is reached. I spoke about this in Red Queen Race. Here is the critical diagram.



In economic terms, there is no magic mirror.
Bernanke is trapped in "Wonderland" but unlike Alice has no way out.
Bernanke gets to choose between hyperinflation and deflation.
The moment he can not run fast enough, the US economy will implode.
If he runs too fast, the value of the US dollar as well as the Fed’s power will both come to a very abrupt stop.

Economic Checkmate

In effect Bernanke is in Zugzwang and he does not even know it.

Eventually Bernanke (like the Bank of Japan) will have to choose deflation. The reason is simple: hyperinflation will end the game, which in turn would eliminate the wealth of the Fed as well as all of their power.

I do not know if Billmon is an inflationist or a deflationist or either. Personally I think the latter (neither). What I do know is that without wage growth and with a housing bust, inflation is extremely unlikely to raise its head.

While everyone else is looking at the oil scare in the 70's as the model, virtually no one is looking at Japan of the 90's as the model. I am betting on the latter.

PS to Billmon:
Whatever graphic package you are using it seems worse than google software that I am using that only handles JPEG images as opposed to GIF images. I touched up the years on your chart as well as adding a trendline to show just how pathetic this recovery has been wage wise. But... beggars can't be choosy. Nice article.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Ostrich of Omaha

Michael Mandel, chief economist for BusinessWeek, is writing about the 'Ostrich of Omaha'.

Buffett's bearishness on the U.S. economy ignores how Americans' hard work adds value at a steadily higher rate than trade adds debt. To be frank, I'm getting a bit tired of Warren Buffett's pessimism about the U.S. economy.

The so-called Oracle of Omaha, the second-richest man in the world, was anti-New Economy in the 1990s. Now he's downbeat on the U.S. dollar.

In his latest letter to the shareholders of Berkshire Hathaway, Buffett wrote: "The underlying factors affecting the U.S. current-account deficit continue to worsen, and no letup is in sight.... Either Americans address the problem soon in a way we select, or at some point the problem will likely address us in an unpleasant way of its own."

We don't need this "voice of prudence" from someone worth more than $40 billion.

Mandel writes "We don't need this voice of prudence from someone worth more than $40 billion." Somehow that does not seem exactly right. Here, let's try this version: What we don't need is someone who is totally clueless about factors affecting the current account deficit giving Buffett a lecture about "fundamental market values" based on the nebulous idea of "hard work".
Mandel continues with:

"Lucky for us, the Social Security Administration publishes a range of long-term forecasts going out to 2080, which take into account a variety of assumptions about demographics and productivity. Their most pessimistic forecast calls for a long-term growth rate of 1%, while their optimistic forecast projects that long-term growth will average 2.8%.

The fundamental market value of the U.S. economy also includes the output generated by future labor -- that is, all the skilled labor and hard work that Americans will put out in the years to come.

It turns out that the market value of the U.S. economy is increasing by anywhere between $4 trillion to $7 trillion per year. To put it in financial terms, this is the annual capital gains for the whole American enterprise. By comparison, our trade deficit means that the U.S. is adding roughly $1 trillion in external debt each year. That's a big number, but far less than the increase in the market value of the economy. From this perspective, we can keep this up forever."

USA! USA!
Other industrialized countries are not so fortunate. It's expected that the prime-age working populations of Japan, Germany, and France will start shrinking soon. As a result, most current forecasts call for these countries to have very slow economic growth 20 years from now. That means the fundamental market values of these countries is rising very slowly, if at all.

My advice to Buffett is to apply the same sort of fundamental analysis to countries as he does to the stocks he owns. He might find that it's the U.S. that is the better deal.

Lucky For Us

Gee, "lucky for us" the Social Security Administration publishes a range of long-term forecasts. That is indeed lucky, or do I mean useless? Since when has any long term government forecast been any good? I also have to wonder if Mandel thinks Buffett is supposed to feel "lucky" that Mandel is so generous with his advice.

"It turns out that the market value of the U.S. economy is increasing by anywhere between $4 trillion to $7 trillion per year."

This is a lot like looking at the stock market in 2000 and projecting future earnings growth as far as one can see forever into the future without considering whether or not the result is sustainable.

Other than "hard work" Mandel does not explain where this "market value" comes from. He does not look at production of goods or manufacturing and perhaps presumes we can keep borrowing forever while flipping each other houses at ever increasing prices, living happily ever after. One can work hard at digging holes then filling them up again but that work simply is not productive. Working hard at flipping homes or working hard at passing the trash (risky loans) to Fannie Mae is not exactly productive either, and certainly bombing Iraq to smithereens is not what anyone should call productive.

Just as people were offering Buffett advice on "The New Economy" in 2000 we now have economists like Mandel explaining to Buffet how the US can "can keep this up forever".

To any thinking person that is just another version of "It's Different This Time". I have no doubt this proclamation from Mandel will prove to be as foresightful as the June 2005 cover of Time Magazine "Why we're going gaga over real estate" or the 1999 Economist cover story predicting $5 Oil with a cover touting "awash in oil".

The Richebächer Letter

Actually the best rebuttal to Mandel's "It's Different This Time" argument come from the May issue of the Richebächer Letter. Let's take a look at a few highlights. Richebächer writes:

It Is Far Worse Than In 2000

THE NEW U.S. ECONOMY

The policy dilemma currently facing the United States can be simply stated. Economic growth has become completely dependent on consumer spending, and this, in turn, has become completely dependent on rising house prices providing the collateral for the most profligate consumer borrowing.

This borrowing has become a necessity because income growth has abruptly caved in. Rock-bottom short-term interest rates and utter monetary looseness were the key conditions fostering altogether four bubbles: bonds, house prices, residential building and mortgage refinancing.

What developed is an economic recovery with an unprecedented array of escalating imbalances: ever-declining personal savings; an ever-widening current deficit; exploding government and consumer debts; and, on the other hand, a protracted shortfall in business fixed investment, employment and available incomes.
We must admit that the staying power of this extremely ill-structured and debt-laden recovery and the stubborn buoyancy of the financial markets have rather surprised us.

But this only lengthens the rope with which to hang oneself. What American policymakers and most economists studiously keep overlooking is that the credit bubbles are doing tremendous structural damage to their economy. The longer the bubbles last, the greater the damage.

DEBT EXPLOSION VS. INCOME IMPLOSION

This time, we want to focus on the dramatic shortfall of employment and income growth that radically distinguishes this recovery from all its precedents in the postwar period. It must have a particular cause, but where is it? In search of its causes, we contrast, first of all, credit and debt growth with income growth.

Over the five years from 2000–2005, total debt, nonfinancial and financial, has increased $12.7 trillion in the United States. This compares with a simultaneous rise in national income by $2.1 trillion. For each dollar added to income, there were $6 added to indebtedness.

In real terms, national income increased little more than $1 trillion. Last year, U.S. private households added $374.4 billion to their disposable income and $1,204.7 billion to their outstanding debts. Inflation-adjusted disposable income grew $115.7 billion. It is a growth pattern with exploding debts and imploding income growth.

To make our point perfectly clear: The present U.S. economic recovery has never gained the traction that it needs for self-sustaining economic growth with commensurate employment and income growth. As to its main cause, all considerations lead to the conclusion that it must reside in the protracted, appalling shortfall in business fixed investment. Investment spending is, really, the essence of economic growth.

Our own considerations begin with the recognition that the U.S. economy is, in every single respect, in far worse shape today than it was in 2000, and also that there is no other bubble in sight to replace the housing bubble. Everything depends on the housing bubble to rapidly reflate once the Fed eases again.

Our strongly held assumption that the U.S. economy is in a most precarious condition basically has two reasons. One is the extravagant size of the housing bubble, involving the whole financial system to an unprecedented extent. The other is the grossly ill-structured economy, replete with imbalances inhibiting sustained economic growth.

CONCLUSIONS:

Forecasts for the world economy are generally optimistic in the expectation that the U.S. economy will continue its global pull with continuous strong growth. We think the anemic and extremely unbalanced U.S. economic recovery is in its last gasp.

Our key consideration is that the U.S. economy has become perilously addicted to asset inflation in general and the housing bubble in particular. Both rising asset prices and the rising dollar had their foundation in carry trade of astronomic scale. While interest rates may still appear rather low compared with the inflation rates, the Fed’s rate hikes have pulled the rug from under the dollar-based carry trade.

Mandel practically taunts Buffett without considering the effects of globalization and what that that has done to real wages, he ignores a credit bubble, a housing bubble and instead focuses on a cyclical recovery of stocks while making huge assumptions about "hard work".

Somehow the busting of the housing bubble is of little importance to Mandel. Then again, perhaps he does not see that trainwreck coming. Nor does Mandel look at earnings, book values or dividends.

In The Big Chair John P. Hussman of Hussman Funds addresses some of those issues.

It's interesting that the current P/E is about double its “normal” level based on the current position of earnings. If you look at the price/book ratio on the S&P 500, at 3.1, it's also about double the historical norm of about 1.5. The price/dividend ratio on the S&P 500, at 54, is about double the historical norm of about 26. The price/revenue ratio on the S&P 500, at 1.5, is nearly double the historical norm of 0.8. This market isn't cheap.

From an economic perspective, corporate profits as a share of GDP are near an all-time high. Historically, a high profit share relative to GDP has generally been followed by disappointing earnings growth over the following 5-year period.

What's worse, nearly all the growth in U.S. domestic investment since the mid-1990's has been financed by imported capital – which we observe as a current account deficit – so that the observed “productivity boom” has gone hand in hand with an expansion in imports. To the extent that we now have an intolerably deep current account deficit, the U.S. is likely to observe restricted growth in capital investment in the coming years, which will tend to be a drag on productivity even while real wages increase. The resulting squeeze on profit margins may be acute within a few years.

In short, the S&P 500 is richly valued on the basis of nearly every fundamental measure, including earnings when those figures are properly considered. The point is not to predict a near-term decline in stocks, but rather to emphasize that the long-term returns priced into stocks here are likely to be disappointing.

So what did Buffett miss if anything? Perhaps he missed predicting that the Fed would panic by slashing interest rates to 1%, or perhaps he did not foresee panic home buying where 40% of the homes bought over the last two years were for "investment purposes" or perhaps he failed to account for the effects of credit standards lowered to the point that if one could breathe one could get a mortgage.

Please consider the MarketWatch bulletin Banks' mortgage demand weakens. Published quarterly, the Fed's senior loan officer survey polls 57 domestic banks and 19 foreign banks about lending trends. Of the respondents, 11.3% said they'd eased home mortgage lending standards, while only 1.9% said they'd tightened them somewhat.

The interesting thing is that even in the face of rising foreclosures and rising bankruptcies companies are still lowering credit standards. The fact that companies are acting reckless by taking on more and more risk in the face of deteriorating fundamentals is something that anyone but an ostrich should clearly be able to see.

More than likely Buffett did not miss much if any of that and chose to be relatively bearish on a market driven by such forces.

The question now is who would you rather believe?

1. John Hussman, Warren Buffett, Dr. Kurt Richebächer
2. Michael Mandel

Will the "Real Ostrich" please come up for some fresh air?
Having your head in the sand clearly affects one's thinking.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Burn Rates

John Doe on the Southern California Real Estate Bubble Crash Blog made an interesting post about Burn Rates.

Over the past few days, we've had the chance to review the proverbial Canary in the Coalmine, San Diego. It doesn't look good. Inventory has been continuing its parabolic rise. It surpassed its all-time record set in July 1995 of 19,250 some time late last month. The population adjusted inventory record will likely be surpassed within 1 month, give or take a few weeks.

Median prices have been flat for at least a year, with considerable weakness shown in recent months that show down since summer last year. Housing analysts agree that houses are not like stocks, and prices will not go down because they have intrinsic value that is not like a piece of paper like stocks.

True, houses are not like stocks in every way, but a market is still a market, and certain attributes of a house ARE different than a stock.

One of the biggest differences between the typical house purchase and the typical stock purchase is that most homes have substantial holding costs while stocks often have little or none (not opportunity cost, just the cost to keep someone from taking it away from you). This is your burn rate. With flat or shrinking equity, time to sell means over time, you lose money, even if you are just standing still.

OK, so let's look at some hard data:

1. According to Bubble Tracking, Current inventory stands at just over 20K and last months' sales were 2600. That puts us at roughly 7 3/4 months inventory, a decidedly bad place for the local area to be in.
2. In recent months, the average payment homeowners committed to was just over $2700/month. If you take the premise that the average home is going to take nearly 8 months to sell, the selling opportunity (new holding costs) for the current strike price could be as much as 7.75*2700=or about $20K If inventory goes higher to 10 months, it would be $27K. Keep in mind the average new payment includes equity rolled in, so we don't really get a lift from current equity.
3. Interest rates are most likely on the rise. We demonstrated that the average spread between Fed Funds Rates and 30 Year rates were about 3%, current rates are about 2.5% too low (payments should be about 50% higher than they currently are). With net out-migration, don't expect expanding rents or newcomers to handle the coming inventory.

The burn rate for many San Diegans should start to get difficult to handle in the near future.

I asked Mike Morgan of MorganFlorida his take on Burn Rates. At least San Diego is holding up better than Florida (for now). Not only does Florida have high carry costs, home prices are collapsing on top of it all. The insurance situation with hurricanes and sinkholes is not exactly helping either.

Here was Mike's response:

I just completed a two day tour of Gulf Coast and East Coast Florida developments, visiting developments in Naples, Marco Island, Bonita Springs, Miami, Palm Beach and the Treasure Coast. After speaking with several sales agents for builders, it was clear they were all willing to make deals to make sales. This is unheard of. Historically, the listed price is the price. No more. Now, you can just about name your price and name you incentives from free upgrades to price reductions, a car, vacation timeshare, etc.

The most disturbing thing I heard was from the resale market. In the same developments where builders are trying to sell, the resale market is huge. We saw 20-50% numbers of the total number of homes in developments that are on the resale market listed in the local MLS systems. The builders agents are NOT selling homes. How can they, when the flippers are willing to undercut any price the builders can drop to. To analogize this, think about going to a new car dealer to buy a new car, but right next door is a lot filled with the same brand new cars for 10-20% less. Same car, same warranty and a wider selection, but 10-20% less. There is no reason to buy the car from the dealer. And there is no reason to buy these homes from the builder, when you can buy the same home for less from a flipper that is desperate to cut his losses.

We were the only traffic at any of the builders we visited. They had no other buyers and they all told me the same thing. Sales are dead, and they will do whatever it takes to make the sale. But we heard the same thing from the agents for the flippers. I’ll stake my reputation that we start seeing negative sales numbers in Q3 or Q4. It is inevitable. Moreover, with lower prices and higher selling expenses, margins will be squeezed to low single digits . . . if they are lucky.

Think about this. In the high-rise market with a 1.5M condo, the carrying costs for Condo Association Dues, maintenance, insurance and taxes are about $4,000 a month. And that is without a mortgage. Add an 80% mortgage and your carrying costs jump to more than $10,000 a month. For a $500,000 home the number is more than $3,000 a month. The builders have been telling the Street that the high end market has no investors. I found more flip inventory in the high end than the low end!

The carrying costs apply to flippers as well as builders. As the builders complete inventory and get a Certificate of Occupancy, they must start paying Insurance, Mortgages, Association Dues and taxes based on the appraised value of the units. That, combined with lower margins and a halt in sales will crush the builders’ bottom lines.

The market is in far worse shape than I had anticipated. If some of the Wall Street Analysts got out of their offices and into the field, they’d be singing a different tune. And with another Fed increase inevitable after yesterday’s CPI, it is clear the builders are in more trouble than they have ever been in. It is different this time.

It’s a lot worse than I thought. And I have been accused of being too negative!
I will put more together next week.

Mike

Perhaps this explains why would be flippers are walking away from $80,000 deposits.
By the way, those are the lucky ones. Condo buyers that closed are trapped in a situation with no buyers and no renters. The foreclosure party has just started.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Remodeling Bubble

The Pacifica Tribune is reporting the remodeling bubble still going strong.

Talk to a home buyer, home seller or real estate pro these days and you'll get a brisk debate about whether there's a real estate bubble in our area — and whether it's going to pop. But there's no debate on about the remodeling bubble — it's still fully inflated, and that could be very good news for the value of your home.

What remodeling bubble, you ask? Well, every year the Cost vs. Value Report by Remodeling Magazine lays out statistics on the investment return of kitchen and bathroom remodels, room additions and other projects in every major city in America. Last year, the San Francisco numbers were stunning — 150 percent returns on many bathroom, kitchen and deck projects. In other words, every $10,000 you laid out for a project like that would enhance the value of your home by $15,000.

Don t want to put 32K into your bathroom? A mid-range bathroom remodel costs an average of $13,700 in the Bay Area and increases your home value by over 23K. That's a 169 percent return.

The same project in Salt Lake City returns about 80 percent.

If you remodel your kitchen, you'll be cooking up some serious equity as well. The survey says low-end ($17K) and mid-range ($52K) kitchen projects around here return 153 percent and 147 percent, respectively. An upscale kitchen remodel, in the neighborhood of $100,000, returns about 118 percent, compared with the national average of 85 percent.

And again this year, you can generate the same equity benefits with much smaller projects, even regular maintenance. Does your roof need replacing? The report says that on average you ll spend almost $16,000, which is a pain in the wallet — until you find out the new roof will enhance your home value by more than $18,000. Spend $9600 on new siding and your home value increases $10,700. Replacing your windows or adding a small deck are both projects that cost in the low five figures and boast return rates of 130 and 160 percent, respectively.

Bruce Turner is president of TurnerBuilt, Inc. He can be reached at bturner@turnerbuilt.com

Well I am glad Bruce Turner agrees this is a bubble.
It is probably the only thing he got right.
Over the long haul one simply can not destroy a $10,000 kitchen, replace it with a $40,000 kitchen and expect to make money on it by selling it for $60,000. Yet that is what Bruce Turner is expecting. Now if you are putting in a $40,000 kitchen by yourself with materials that cost $10,000 that might be another matter (in regards to expected profitability). But that is hardly the norm.

The extreme example of this sort of nonsense is teardowns. People are bulldozing $400,000 homes and putting up $1.5 million dollar homes expecting to get that $400,000 back and them some. I have news for Bruce Turner: They won't. Nor will someone destroying a $10,000 kitchen in favor of a $40,000 kitchen. The times have changed.

On that note the Mish Telepathic Question Lines are now open.
The predominate question seems to be: "Mish do you have any proof of that?"

Well, actually I think it is obvious, especially when it comes to structural damages like roofs and concrete problems, but let's take a look at my favorite renovation index: Home Depot.

The AP is reporting Home Depot 1Q Profit Up Despite Weak Sales.

Weak demand for flooring and seasonal products were partly to blame for The Home Depot Inc.'s disappointing retail sales in the first quarter, though it still reported a 19 percent jump in profit and reaffirmed its growth guidance for the year Tuesday.

Shares of its stock, which has lagged behind rival Lowe's Cos. of Mooresville, N.C., fell more than 5 percent on the news.

"Our stock price is a conundrum, but rather than spending a lot of time stewing about that, we focus on growing the business," Chief Financial Officer Carol Tome said in an interview.

The company acquired Hughes Supply -- a distributor of construction, repair and maintenance products -- in the first quarter, and that company's results are included in Home Depot's consolidated results for the final month of the quarter.

Hughes Supply has more than 500 locations in 40 states.

In part because of the acquisition, Home Depot said its Home Depot Supply division saw its sales jump to $2.13 billion in the first quarter, compared with $657 million in the year-ago period. It saw the segment's operating profit jump to $149 million in the quarter, compared with $28 million in the same period a year ago.

For comparability purposes, The Home Depot said it will no longer report sales at stores open at least a year, a key retail barometer also known as same-store sales, but will now report total sales growth for both of its segments as a percentage change over the prior period.

Following is a chart of Home Depot.
Click on the chart for an enhanced view.



"Our stock price is a conundrum" said Chief Financial Officer Carol Tome. A conundrum? Really? Your only means of growth is by acquisition, and you have stopped reporting same store sales. What is it that you are afraid of on those same store sales? Falling sales perhaps?

That is the answer to the conundrum and that is why Bruce Turner is both 100% wrong and 100% right. He is 100% right about remodeling being a bubble. He is 100% wrong about expected remodeling returns from here on out.

Here is the not so pretty current picture if anyone wants it. It might be necessary to do $40,000 worth of fix-ups to sell your house for $20,000 less just to get rid of it. That is how fast home inventories are now rising.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Snap! Crackle! Pop!

When Kellogg's Rice Krispies are toasted the cooked and dried rice "berries" expand their size (puff) to many times their normal size.

Since the weight of the rice berry and its material mass remains nearly the same, the rice material is stretched to form very thin walls of the Rice Krispies structure.

This is much like a very thin glass crystal. When subjected to a change in heat, a severe "stress" is set up and the thin wall fractures - creating a Snap, Crackle and Pop!

This happens in the cereal bowl when cold milk (i.e. heat stress) is poured in the Rice Krispies and presto SNAP! CRACKLE! POP! The sounds are made by the uneven absorption of milk by the cereal bubbles.

It seems the market as of late is much like a bowl of Rice Krispies.

When subjected to a change in sentiment, severe "stress" situation are set up. Distinct SNAP! CRACKLE! POP! sounds are made by the uneven absorption of decreasing liquidity in various market bubbles. Let's take a look at a few examples.

Snap!

A loud Snap! was heard when the $NDX broke both the trendline and the 200 day moving average.



The Homebuilder index snapped its trendline on a weekly basis and as you can easily see has plenty of room to fall.



Investors (using the word loosely) have been pouring into various emerging market ETFs without paying any attention to how technically stretched those charts were. TRF, the Templeton Russia ETF is one such example. In spite of a 20% snapback in a mere three days, the fund is still 21% above NAV. There are many such examples of technical damage done to charts over the last couple weeks or so, some just since last Wednesday. Is this another chance to buy or is it the start of something more significant? That of course is million dollar question.



Crackle!

The crackling sounds you are hearing can be depicted by rising foreclosures as well as the National Association of Homebuilders Housing Index. It dropped below 50% for the first time since 911. Two of the last three times it plunged like this a recession followed. There was a plunge but no recession in 1995.



MarketWatch is reporting Builders' confidence falls to 11-year low.

Contractors have negative outlook on market for first time since late 2001

The NAHB/Wells Fargo housing market index, a builders' sentiment gauge, fell six points in May from a revised 51 to 45, the lowest level since June 1995, the industry group said. The index shows more builders say the market is "poor" than say it's "good."

Despite the sharp decline, builders are still more optimistic about sales over the next six months than they are of current sales.

In May, builders' assessment of current single-family home sales fell to 50 from 55. The assessment of future sales dropped to 54 from 59. The assessment of traffic of prospective buyers dropped to 32 from 39. All three subindexes were at their lowest levels since mid-1995.

Expectations for sales in the next six months decreased during in May by five points to 54, the NAHB said. The traffic of prospective buyers fell the most sharply, dropping seven points to 32.

Traffic down, future expectations up. Sounds like denial to me.

The Atlanta Journal is reporting Home foreclosures soar, with Georgia leading the way.

Georgia leads the country in the rate of foreclosure, RealtyTrac said. The number of Georgia homes in some stage of foreclosure has more than doubled since the end of 2005. Currently, there is one foreclosure for every 127 households — almost 25,000 homes statewide — RealtyTrac reported.

Rick Sharga, vice president of marketing for RealtyTrac, said recent mergers and layoffs in some of metro Atlanta's largest employers help explain the sharp rise in foreclosures. Unemployment and foreclosure rates are closely linked, Sharga said.

"That could be a factor in a place like Georgia where you've had a lot of churn," Sharga said.

The Consumer Credit Counseling Service of metro Atlanta, which works with foreclosed homeowners like Steedley, reported a 20 percent increase in first-quarter 2006 referrals for housing finance problems compared with the first quarter of 2005.

CCCS President Suzanne Boas said Georgia's short foreclosure process, which bypasses the court system, contributes to the state's high rate because it attracts aggressive lenders willing to make loans to marginal candidates. Once a property enters foreclosure, it can be sold at public auction within 37 days.

"Our state is very attractive to lenders, and part of that is our non-judicial foreclosure process," Boas said. "There have been a number of incredibly aggressive products [loans] marketed to consumers over the past five to eight years. Now we're starting to see the fallout of that aggressive marketing."

The Coloradoan is reporting a sharp increase in foreclosures.

Colorado saw the second highest foreclosure ratios in the first three months of the year, a time in which nationally, foreclosures increased 38 percent over the previous quarter.

"The sharp increase in foreclosures in the first quarter continues a steady upward trend that we've seen since the beginning of the year last year," said James Saccacio, CEO of RealtyTrac.

Over-zealous homebuilding is adding supply at a rate too quick for the current market to absorb. More than one-fifth of the Larimer County households that entered foreclosure in March was a brand new home.

The supply of homes for sale on the market is another factor. Fifty percent of the homes on the market in the region are vacant, including about 20 percent which are brand new homes.

More than 13,000 Colorado households entered foreclosure proceedings during the first quarter this year, at the second-worst rate in the nation after Georgia.

WTVM is reporting forclosures in Columbus are rising

Experts say foreclosures in Columbus are up 25 percent from last year. The culprit -- rising mortgage rates. Something a lot of homeowners didn't budget for.

"I don't think people really read the fine print about what was going to happen to their payment when the interest rates went up,"says Daniels.

The Crackle! sound you hear is that of people buckling under the weight of a mortgage they never really could afford in the first place.

Greedy lenders made it easy for people to buy houses but difficult for people to hang on to them. This sound is only going to get louder as it spreads to states where housing prices still have not yet taken a significant tumble.

Pop!

The Pop!Pop!Pop! sound you hear is from bubble areas like Florida where speculators want out so bad they are willing to walk away from $80,000 deposits.

The National Post (Canada) is asking Housing boom a bust?

South Florida was once so hot speculators flocked to buy and flip properties. Now the market has cooled so much they're walking away from US$80,000 deposits

"This is the first cycle that you could actually instantaneously crystallize the rise in the notional price of a home and use it for current consumption," says David Rosenberg, chief North American economist for Merrill Lynch & Co.

"The mortgage market today is bigger than the government bond market; housing is valued at double the level of household equities on the household balance sheet," he says. "Never before has housing come to permeate the economic and social fabric to the extent that it does today. So that's why, if you ask me, what the No. 1 risk is to the U.S. economy: It is going to be what the house-price landscape is, what happens to house prices."

In Miami-Dade County alone, there are 25,000 condos under construction and another 25,000 that have already got their financing and are likely to go forward, says Jack McCabe, chief executive of McCabe Research and Consulting in Deerfield, Fla. In addition, 50,000 more have been announced.

In the whole period from 1995 to 2004, only 9,079 units were built in Miami Dade.

The Merrill Lynch study found non-traditional mortgage products accounted for 60% of loans last year in California, the hottest market in the United States.

"That's really bizarre," says Mr. Shaffer at Prestige Mortgage. "When you think about it, you should be fixing at historically low rates."

Many flippers are now walking away from their deposits or trying to wiggle out of their contracts, using shoddy workmanship as a loophole. Mr. Morgan says he now has 43 investors who are walking away from deposits of US$35,000 to US$80,000.

"Never before has housing come to permeate the economic and social fabric to the extent that it does today. So that's why, if you ask me, what the No. 1 risk is to the U.S. economy: It is going to be what the house-price landscape is, what happens to house prices."

In Miami-Dade McCabe is reporting a potential 100,000 more condos coming online with 25,000 of them already started. No matter how you look at it, that is a bubble and it is popping now. The size of the mortgage bubble is both enormous and obvious. Well at least it should be obvious by the sounds being made.

Denial or Deaf?

Please consider Bottom's up? Maybe.

Some estimates predict a fifth of the nation’s 77 million baby boomers will buy homes in Florida in the next decade.

“Southwest Florida is still a very solid market,” said Timmerman, based in Naples. “We’ve got a lot of people with money who still like it here.”

That’s not much consolation to impatient sellers like Kasey Reavis, who now finds herself competing with thousands of other sellers in a flooded market that’s seen sales slow to a crawl.

A single mom who works for a property management company, Reavis hopes to use the money she makes off her Golden Gate house to move to a more affordable area in Georgia. She’s got her eye on a town with a good school district.

“I’m lucky if I have $30 left at the end of the week,” Reavis said.

But leaving requires a buyer.

Her three-bedroom, two-bath house with a new roof and new tile on a corner lot is listed for $299,900 — a price that was hard to find in last year’s market that saw agents fielding multiple offers for properties as soon as they hit the market. Reavis paid $150,000 in 2003.

After almost a month on the market, Reavis’ agent hadn’t shown it to a single potential buyer.

It’s a lament from agents all over town these days: Where are the buyers? It’s a buyers’ market, but many buyers still don’t know it.

“A lot of people have some very inflated numbers,” said Rob Dowling, a Naples agent with the John R. Wood real estate firm. “They’re saying ‘Gosh, if I can get all that money, I will move.’”

"It's a buyer's market but buyer's don't know it yet." Yeah right. It makes as much sense to say it's a sellers market but sellers don't know how to price their units to sell. Rising inventories and falling sales both show that the housing bubble has a lot more popping to do.

Mish addendum: This was written two days ago and first used today by WhiskeyAndGunpowder. The index charts above will reflect that, and now look worse, a louder "Snap!" if you would.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

USA for Sale

Bloomberg is reporting Transurban Buys Pocahontas Parkway Road for $611 Mln.

Transurban Group, Australia's second- biggest toll road owner, agreed to buy Virginia's Pocahontas Parkway for $611 million, gaining its first U.S. motorway.

Transurban bought the rights to manage, operate and maintain the 8.8-mile (14 kilometer) highway known as State Route 895 for 99 years, the Melbourne-based company said in a statement today. Transurban plans to build an extension linking the route to Richmond International Airport in Virginia's capital.

Transurban is among companies attracted to the reliable cash flows from toll roads that it estimates will spur some $200 billion of deals worldwide in the next 10 years. Macquarie Infrastructure Group and Cintra SA got state approval in March for their $3.85 billion bid for Indiana's toll road as U.S. states sell rights to their highways to pay debt.

Pocahontas is Transurban's ``first baby step into the U.S. market,'' said Jason Teh, who helps manage the equivalent of $4.2 billion at Investors Mutual Ltd. in Sydney, including more than 22 million Transurban shares. ``A lot of the state governments there are running budget deficits and they need the cash from wherever they can get it.''

There are $25 billion of private investments proposed for new and existing toll roads in six U.S. states including Virginia, Texas and Oregon, according to a report last month by the Los Angeles-based Reason Foundation, which advocates for such privatization.

More Highway Sales

More U.S. states will sell roads as they seek to raise non- tax revenue to pay for repairs to heavily traveled highways and bridges, Merrill Lynch & Co. said in a report in March.

The firm said 14 U.S. states have enacted laws allowing for toll-road, public-private transactions, and five more have introduced legislation permitting it.

International Jpost is reporting Dubai firm completes US $1.3 billion acquisition of Doncasters .

Dubai International Capital said Sunday it had completed its acquisition of Doncasters Group Ltd, which operates several US manufacturing plants that make parts for US military vehicles and aircraft.

The White House approved the US $1.3 billion deal last week after a two-month review satisfied some American lawmakers who earlier blocked a Dubai company's attempt to buy a British firm that operated several US ports.

"Dubai International Capital is pleased to have successfully completed its acquisition of Doncasters," said Sameer al-Ansari, company CEO. "This acquisition allows Dubai International Capital to move forward with its investment strategy to build a diverse portfolio of direct investments across various industries around the world."

The deal followed a fierce and much-publicized battle between The White House and Congress over Dubai Ports World's bid for control of six US ports.

Government-owned Dubai Ports World was forced to give up control of six US ports it had bought from Peninsular and Oriental Steam Navigation Co. after that deal provoked concerns over the national security implications of the Arab company running several US ports.

Given our trade deficits and our massive government debt I wonder what is not for sale. Then again we refused to allow China to buy Unocal. Given that oil is fungible, it really did not matter one iota who bought Unocal.

What is clear is that the US is for sale provided we like the buyer. Thank President Bush for cutting taxes while funding a stupid war off budget. Heck thank the entire Republican Congress. While you are at it, thank the spineless Democrats for not objecting.

The Moscow Times is reporting Russia Currency Reserves Jump to $225Bln.

Russia's foreign currency and gold reserves rose to a record $225.7 billion on surging oil and natural gas prices, giving the country cash to pay off its foreign debts early.

The reserves jumped by $8.6 billion by April 28, the 23rd consecutive weekly gain and the biggest increase since January 2005, the Central Bank said in an e-mailed statement Thursday. The country's reserves are now the fourth-largest in the world, behind China, Japan and Taiwan.

Russia is awash with cash from oil and gas after the price of Urals, its main export blend of crude, more than doubled in the last two years.

The stockpile prompted President Vladimir Putin to say on April 27 that he wants to pay off the country's debt to the Paris Club of creditor nations ahead of schedule.

"We are going to see massive reserve growth over the next few months as Russian oil sold today at these record prices will arrive with a lag of one to three months,'' said Peter Westin, chief economist at MDM Bank in Moscow. Westin expects reserves to rise by as much as $6 billion per week over the next few months.

The country's reserves have climbed almost 20-fold since 1998, when crude sank to less than $10 per barrel and the government was forced to default on $40 billion of domestic debt and devalue the ruble, sending the economy into recession.

"This year, Russia plans to fully repay its debt to the Paris Club," Putin said April 27 in the Siberian city of Tomsk, where he was hosting German Chancellor Angela Merkel. Russia paid $18 billion to the Paris Club ahead of schedule last year and has another $30 billion or so to go.

BRIC nations surpass G-7 in forex, gold holdings

So Russia is sitting on a huge pile of US dollar reserves. Of course so is China and so is Japan. The question is "What are they going to do with them?" One answer of course is to outbid US companies for oil and gas reserves in Canada, Nigeria, and other places. The next answer is to buy US treasuries, but perhaps they might be getting ready to choke on them. Of course they could buy overpriced US equities, but then again why not buy US roads and bridges and convert then to Toll Roads?

Think about how much money we are blowing in Iraq, how much we have blown on the latest Medicaid giveaway, how much our pathetic energy policy has cost us, and you have the answer as to why the USA is on sale to the highest bidder.

On that note, the telepathic thought lines are now open.
Once again I am flooded with calls.
The big question on everyone's mind is "Who else besides Russia"?

Enquiring minds deserve answers so let's take a look.

SmartMoney is reporting BRIC nations surpass G-7 in forex, gold holdings.

Brazil, Russia, India and China, referred to as BRIC group that currently manifests the world's highest economic growth rate, have surpassed G7 countries in their forex /gold holdings for the first time in history.

As of the end of March, the aggregate holdings of BRIC amounted to $1,292,200 million, according to estimates published on Thursday in Japan's leading economic newspaper, 'Nihon Keizai'.

As compared with the state of affairs in this respect as of the end of 2004, the forex/gold holdings of BRIC went up by 40 per cent. At the same time, the forex /gold reserves of G7 countries (Britain, Germany, Italy, Canada, the United States, France, and Japan) amounted to $1,253,900 million, said the paper.

At present, China accounts for 68 per cent of forex/gold reserves of BRIC countries. However, according to the estimates of Japanese experts, the growth of its forex/gold reserves has slowed down while those of Russia, India and Brazil now increase by more than 10 per cent a year.

BRIC countries, the daily wrote, will continue to increase their influence on the world currency market while having a mounting impact on the rate of the US dollar, in particular.

So the big question is does BRIC buy more gold, silver, copper, and oil, or do they buy more US toll roads, bridges and ports? Either way please tell me how the US wins.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Why Now?

Have you ever read a press release and the first thing on your mind is the question "Why Now?"

This happened to me just today.
Please consider the following news release from the US Immigrations and Customs office: Fischer Homes supervisors charged with harboring illegal aliens.



Cincinnati.Com is reporting 80 People Arrested In ICE Raid Of Fischer Homes.

Police took four supervisors and 76 undocumented workers into custody Tuesday in connection with a two-year investigation of Fischer Homes.

The 76 suspected workers were picked up from at least three construction sites in Hebron, Union and Florence, officials with the U.S. Immigration and Customs Enforcement, also known as ICE, said.

Some were also taken into custody at their homes, according to the wife of one man taken away from an apartment complex in Florence.

"I was asleep when I was hearing the commotion around the apartment at about 6 a.m. When I came out, my husband was arrested with his two co-workers," she said. "I looked at him and he started crying."

Those taken into custody will likely be sent back to their home countries if they can't verify their U.S. citizenship. Most of those arrested were from Mexico.

Four employees at Fischer's headquarters in Crestview Hills were also taken into custody, charged with "aiding and abetting" and "harboring illegal aliens for commercial advantage or private financial gain."

They are:

* Timothy Copsy, a Fischer Homes construction manager
* Doug Witt, a Fischer Home superintendent
* William Allison, a Fischer Home superintendent
* Bill Ring, a Fischer Home superintendent

Each is facing a maximum punishment of ten years in prison, a $250,00 fine or both. They all appeared in federal court in Covington Tuesday morning.

"ICE has no tolerance for corporate supervisors who harbor illegal aliens for their workforce and deny labor opportunities for legitimate American employees," said ICE Assistant Secretary Julie Myers.

ICE is part of the U.S. Department of Homeland Security, which is led by Michael Chertoff. He commented on Tuesday's raids.

"We will continue to bring criminal actions against employers who are consistently harboring illegal aliens," said Chertoff. "We will stop this type of illegal facilitation."

Fischer Homes released this statement:

"Fischer Homes utilizes a rigorous screening process for all of its employees, including citizenship verification. We require all subcontractors to sign a document promising they will use no aliens as employees. Fischer Homes does not in any way condone the use or hiring of illegal aliens."

A company spokesman went on to say he's very proud of the Fischer Homes workforce.

I am not sure who Fischer Homes is (I never heard of them before) but they are now officially "burnt toast". Then again this is the USA. It is acceptable to be proud of harboring illegal aliens as long as you can get away with it.

The Mish telepathic question lines are now open.
I am being swamped with questions, and for a change there is lots of variety.
Let's make a list.

1. Why Now?
2. Is Fischer the only home builder hiring illegal aliens?
3. Is this an outlier or some kind of crackdown?
4. Why Ohio?
5. Is this page 15 news headed for page one or is this a local stunt?
6. If we are starting a serious crackdown on illegal aliens what does that mean for the economy?
7. Are we starting a serious crackdown on illegal aliens?
8. Mish do you really believe the "ICE has no tolerance for corporate supervisors who harbor illegal aliens for their workforce and deny labor opportunities for legitimate American employees"?

1) The answer to "Why now?" is sort of obvious, even though it was the #1 question on everyone's mind (mine included). The answer is that as long as other things were OK, corporations were making tons of money off hiring illegals. It now seems that jobs are not what they are made out to be as I reported in Jobs, are they as good as they seem? Bush's approval rating dropped again on Thursday to 31% and Republicans (including the president) are now running scared. Please consider Panic Over Oil. Is sending every US citizen $100 for gas a rational solution to any problem? Of course not. While rounding up illegal aliens may or may not be rational, the rational mind is asking "Why Now". The above is the long answer. The short answer is a single word: "Panic".

2) Is Fischer the only home builder hiring illegal aliens? Hmmm. Lots of people were asking that even though everyone should know the answer. The answer is that "until now, the practice was condoned". This is certainly a change. The real question that many enquiring minds asked is....

3) Is this an outlier or some kind of crackdown? We simply can not answer the question at this time. If the masses are impressed with a "one night stand" then all the masses will get is a "one night stand". On the other hand, if there is more calls for action, this can get a lot uglier. My best guess is that this is not a "one night stand" but we will see.

4) Why Ohio? This one is easy. Ohio, and Michigan and the rust belt has been hard hit with job losses. If Ohio could vote 2004 all over again we would have a different president. Heck is anyone 100% sure Ohio really went for Bush in 2004? Anway, for political reasons it makes clear sense for the administration to start a crackdown in Ohio. They will do the minimum necessary, then if Republicans can keep control of Congress, quickly reverse course.

5) Is this page 15 news headed for page one or is this a local stunt? It all depends on how the masses react. Given that the CPI numbers are a lie, job numbers are a lie, and GDP numbers are a lie, the correct prediction is that this is the beginning of a panic, not a one time event. In that case look for this to make page 1 news.

6) If we are starting a serious crackdown on illegal aliens what does that mean for the economy? This question is simply ass backwards. IF (and it is debatable) that we are just beginning a crackdown on illegals, it is because the economy is weakening rather than it will "mean something in the future" for the economy. In other words it is a symptom of a piss poor economy rather than something that will "cause" a bad economy to happen. Please bear in mind that strikes and protectionism and nationalism are hallmarks of deflationary times, not inflationary times.

7) Are we starting a serious crackdown on illegal aliens? This is essentially the same question as #3. Please see the answer to #3 for my synopsis.

8) The ICE will be as tolerant (and then some) of illegal aliens until the masses demand action. That is what the Proposed Wall on the border of Mexico is all about. The wall will be useless. If (big IF) the government wants to shut off the flow of illegal aliens, all it has to do is crack down on companies hiring them. Is this the opening salvo? That is the key question and the wall is a less than useless sideshow.

Let's readdress the very first question "Why Now?"
The short answer and the long answer are the same.
The simple answer is "Panic by those in power to stay in power".
If elections were not coming up no one would care.
While everyone else is pondering the addition of the word "Yet" added to the FOMC statement today, Mish enquiring minds are asking "Why Now?"
No matter how one twists and turns the answer is not pretty.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

The Politics of Ethanol

In the wake of the panic over oil more and more people are talking about ethanol. Indeed, the New York Times is reporting that politicians everywhere are chirping about Ethanol's Promise.

The political scramble to find quick answers to rising oil prices has produced one useful result, which is to get people talking about substitute fuels that could make us less vulnerable to market forces, less dependent on volatile Persian Gulf oil producers and less culpable on global warming.

That, in turn, has focused attention on the fuel that seems to have the best chance of replacing gasoline — ethanol. President Bush mentioned ethanol in his State of the Union address. Entrepreneurs like Bill Gates have begun investing in it. And every blue-ribbon commission studying energy has embraced ethanol as a fuel of the future. One leading environmental group, the Natural Resources Defense Council, predicts that ethanol, combined with other strategies, could replace all of the gasoline Americans would otherwise use by mid-century.

Until recently, the only ethanol anyone had heard about was corn-based ethanol, a regional curiosity that accounts for about 3 percent of the nation's fuel and suffers from its association with the agribusiness lobby and with presidential candidates hustling support in the Iowa primaries. What the experts are talking about now, however, is cellulosic ethanol, derived from a range of crops, native grasses like switchgrass and even the waste components of farming and forestry — in short, anything rich in cellulose. A Canadian company called Logen, a leader in the field, makes its ethanol from wheat straw.

The Associated Press is reporting New York Governor Pataki Reopens Budget Talks For Biofuels Program.

New York Gov. George Pataki said he would reopen limited budget talks with lawmakers to resurrect his idea of establishing alternative fuel pumps statewide for biofuels that could cost 50 cents per gallon less than gasoline.

On Monday, Pataki said he doesn't want to add to what he said is already too much spending. But he would restore his $1.8 million proposal to help gas stations to add alternative fuel pumps. He also wants to encourage the purchase of hybrid automobiles with a $200 tax break, cut state taxes on alternative fuels to bring the price to 50 cents per gallon less than gas and provide incentives for alternative fuel manufacturing using corn, natural gas, wood fibers and other products.

He said the state Thruway will start installing alternative fuel pumps at rest stops this summer.

Pataki pitched some of the ideas in his State of the State speech in January, but the Legislature cut it from his budget.

"If people took a look and pulled up and saw that one (pump) was 50 cents a gallon less than the other, they would be demanding the opportunity to have access to that and to have vehicles that can use that," Pataki said. "So with a very small investment we could have a tremendously powerful impact on changing the energy dynamic in New York state."

Obviously this is yet another version of the "free gas" rebate theory. If gasoline is 50 cents cheaper at one pump because taxes are 50 cents lower, how are those lost revenues going to be made up? If this was such a great idea, why not eliminate the tax completely? This is just more political pandering that does not really solve a thing.

Let's take a look at some of the products used or proposed to make ethanol.

Tapioca

In Sky-high oil prices fuel ethanol mania in China Reuters reports lessening Chinese interest in corn ethanol but instead looking at non-grain raw materials such as sweet sorghum or cassava, also known as tapioca.

Record crude oil prices are fuelling ethanol fever in China, the world's second-largest oil consumer, despite Beijing's reservations in allowing more food grains to be used to run cars.

Beijing is reluctant to expand ethanol production from food grains as China will face a shortage of grains like corn or wheat possibly as early as next year, due to rising domestic demand brought on by higher affluence.

"With current technology, people start breaking even making ethanol at around $40 a barrel of oil," said the head of LME's Starch & Sweetener Research, who was in China last week.

Earlier this month, the National Development and Reform Commission, the country's top planner, said on its Web site (www.ndrc.gov.cn.) that biofuels should replace about 2 million tonnes of crude oil by 2010 and 10 million tonnes by 2020.

But it also said China would shift to non-grain raw materials -- such as sweet sorghum or cassava, also known as tapioca -- to make fuel ethanol. These alternatives can be used to churn out around 30 million tonnes of ethanol, the commission said.

Industry observers said that though there was as yet no efficient technology to convert sweet sorghum into fuel ethanol, it was possible with cassava as seen already in Thailand, the world's top cassava producer.

Sen Yang, a professor from China Agricultural University, told a conference last week that cassava alone could supply as much as 4 million tonnes of fuel ethanol in China.

An official from the Starch Association in Guangxi, China's top cassava producer, said the province was studying the feasibility of building a fuel ethanol plant which could have an annual capacity of 1 million tonnes.

Furthermore, grains traders said there already exists a black market for fuel ethanol produced from cassava in the southern provinces of Guangxi and Guangdong, where there is a strong tradition in producing food ethanol, or ethyl alcohol, for Chinese liquors.

The black market also explains the surge in China's imports of tapioca chips from Thailand, the traders said.

The Jatropha Bush

The Associated Press is reporting Asia Is Turning to Plants for Fuel.

FARIDABAD, India (AP) -- Indians know better than to eat the plum-sized fruit of the wild jatropha bush. It's poisonous enough to kill.

But with oil prices surging, the lowly jatropha is experiencing a renaissance of sorts -- as a potential source for fuel for trucks and power stations. The government has identified 98 million acres of land where jatropha can be grown, hoping it will replace 20 percent of diesel consumption in five years.

Sugar

The Wall Street Journal is reporting Energy Independence in Brazil

After nearly three decades of work, Brazil has succeeded where much of the industrialized world has failed: It has developed a cost-effective alternative to gasoline. Along with new offshore oil discoveries, that's a big reason Brazil expects to become energy independent this year.

To see how, take a look at Gildo Ferreira, a 39-year-old real-estate executive, who pulled his VW Fox into a filling station one recent afternoon. Instead of reaching for the gasoline, he spent $29 to fill up his car on ethanol made from sugar cane, an option that's available at 29,000 gas stations from Rio to the Amazon. A comparable tank of gasoline would have cost him $36. "It's cheaper and it's made here in Brazil," Mr. Ferreira says of ethanol. If the price of oil stays at current levels, he can expect to save about $350 a year.

"Flexible fuel" cars running ethanol, gasoline or a mixture of both, have become a hit. Car buyers no longer have to worry about fluctuating prices for either fuel because flex-fuel cars allow them to hedge their bets at the pump. Seven out of every 10 new cars sold in Brazil are flex-fuel.

Brazil is also fortunate that sugar is the cheapest way to make ethanol and Brazil has the right conditions for growing the crop -- plenty of land, rain and cheap labor. Despite these unique circumstances, Brazil's efforts are being closely followed by countries with big fuel bills. India and China have sent a parade of top officials to see Brazil's program.

The most recent U.S. energy bill, signed into law in August, calls for more than doubling ethanol use by 2012. But U.S. ethanol, which is made from corn, costs at least 30% more than Brazil's product, in part because the starch in corn must be first turned into sugar before being distilled into alcohol. It may take the U.S. a few more decades to bring the cost of ethanol down to 80 cents a gallon -- equivalent to Brazil's most efficient producers -- according to the U.S. Department of Energy. U.S. trade barriers make Brazilian ethanol and its sugar expensive to buy.

The Seattle Times is reporting a Sugar High.

CALI, Colombia — In a lush valley flanked by the Andes Mountains, sugar is sweet again for cane grower Andrés Martinez. Global prices of sugar have doubled in the past year, hitting 15-year highs and creating a windfall.

The reason: ethanol, an alcohol made from sugar that is in demand worldwide as an additive to gasoline to produce biofuel.

"This has been a nice surprise, although the full impact is only beginning to reach us," said Martinez, an agronomist who works a 50-acre farm in the Cauca Valley, which is carpeted with sugar cane.

Switchgrass

The Nebraska Independent is reporting Switchgrass will be a major ethanol player.

Vogel, an Agricultural Research Service geneticist, based in Lincoln, has led a study paving the way to make switchgrass a major player in renewable energy production.

A study, led by Ken Vogel -- a geneticist at the ARS Grain, Forage and Bioenergy Research Unit at Lincoln -- found that two switchgrass plants per square foot the first year ensures a successful bioenergy crop harvest in subsequent years.

The research was conducted by ARS scientist on Northern Plains farms in Nebraska, South Dakota and North Dakota.

Switchgrass is a native prairie grass long used for conservation plantings and cattle feed in the United States. Interest in switchgrass ethanol has intensified recently as the federal government gains confidence in its potential as a bioenergy crop because of its wide adaptability and high yields on marginal lands.

The Northern Plains was chosen first because the economics seemed most favorable there. Farmers can expect switchgrass yields to be high enough there to produce 100 to 400 gallons, or about 80 gallons per ton of ethanol per acre with current varieties.

Current ethanol technology can yield as much as 90 gallons of ethanol from a ton of corn. Vogel said a company in Canada is producing 1 million gallons of ethanol from wheat straw at a cost of around $1.35 per gallon.

What makes switchgrass attractive as an ethanol source is that it's much more efficient as a fuelstuff than corn. Vogel said while producing ethanol from corn is positive, that same efficiency is multiplied by four when using switchgrass for ethanol production. "That's because you don't have the annual tillage or planting cost and so forth," he said.

As a perennial plant, switchgrass has the advantage of not needing annual planting and tillage. Skipping these can save soil and energy. It can also reduce sediment and other pollutant losses to waterways.

Another benefit of switchgrass is that it requires less water than corn.

Hemp

Enquiring minds are asking about Hemp and the Environment.

An acre of hemp produces four times as much paper as an acre of trees. Every pot-smoking hippy in the country knows that. The problem is, why doesn’t anyone else? In this short article, I will attempt to educate you, the reader, of the many ways in which hemp can Save The Planet. No kidding.

Herbicides are also virtually unnecessary as the plants grow 6 to 16 feet tall in only 110 days. The complex root structure prevents erosion and decays quickly after harvest.

That’s all well and good, but what do you do with the hemp? Well, as I mentioned above, its great for making paper. That’s most of the reason that industrial hemp is illegal in the U.S. See, in the mid-1930’s, there were two industries that had just made breakthrough machines that would make paper productions much more cost-effective. One was the hemp industry, the other was DuPont. Coincidentally, the 1937 Marijuana Tax Act was passed, effectively making hemp illegal by charging transfers $1/ounce or, for unregistered dealers, $100/ounce, even for industrial grade hemp.

So, with hemp out of the way, DuPont was free to become the giant corporation that it is today, and to produce the great majority of the toxic sludge that contaminates our Northwestern and Southeastern rivers. Had hemp become our primary paper source, this pollution would have been vastly reduced, and here is why: Hemp means no deforestation, which results in less topsoil erosion, more oxygen, less carbon dioxide, less destruction of natural habitats, etc. Hemp paper is much easier to bleach, and does not require chlorine, which means no more thousands of tons of toxic sludge pouring into the water. Scientists in Sweden have developed a hemp-bleaching process that uses only natural enzymes and some pounding of the pulp.

Cotton, the other big evil, is grown on 3% of the world’s arable land and uses 26% (wow!) of the world’s pesticides and 7% of the world’s fertilizer annually. It requires heavy irrigation, depleting the water supply even as it poisons it. Many developing countries grow cotton as a cash crop, trying desperately to pay off foreign debt. While the country’s land and water is being destroyed, food crops are neglected, so the people go hungry.

Hemp can be used to make clothing that is, if treated properly, soft like cotton and far more durable, thus rendering cotton unnecessary. Adidas and Ralph Lauren already have hemp products, and Calvin Klein insists that hemp will hit the fashion industry full-force in the years to come.

While an acre of trees is about 60% cellulose, and acre of hemp is nearly 75%. How much hemp is necessary to meet current US energy needs? Somewhere between 10 million and 90 million acres, depending on how efficient the production is. Every year, the US government pays farmers (in cash or “kind”) to *not* farm what they call the “soil bank”, which happens to be about 90 million acres of farmland. The math is pretty simple.

Hemp seed oil is very similar to petroleum diesel fuel, and produces full engine power with reduced carbon monoxide and 75% less soot and particulates. Hemp stalk (different than the part that can make paper and textiles) can be converted into 500 gallons of methanol/acre.

It seems so simple, you must be saying. If this is true, why are we still using petroleum and paper and cotton? Well, there are corporations who sponsor politicians that have a reason to keep hemp down, like, the oil industry, etc.

Corn is one of the least productive methods of making biofuel. Corn takes a lot of fertilizer and has important food uses. So guess which one is most subsidized in the US? You get one guess. But the politics does not stop there. Please consider the following article.

On May 5th, the Associate Press reported that Congress worked up the "courage" to Oppose Ethanol Tax Change.

Farm-state lawmakers say they're prepared to fight vigorously any attempt to remove the 54-cent tariff on imported ethanol even though demand for the additive is growing as refiners use more of it in gasoline.

"Congress can bring down prices by cutting the tax on imported ethanol," Rep. John Shadegg, R-Ariz., maintains. He has introduced a bill that would suspend the 54-cent import tax for the rest of the year.

Congress seems in no mood to tamper with the tax, which is strongly supported by farm-state lawmakers, including some of the most powerful on Capitol Hill.

"It's a step in the wrong direction," Sen. Charles Grassley, R-Iowa, said Friday. He is chairman of the Finance Committee, which would consider any change in the tariff. "It would send a signal that we're backing away from our own efforts to seek energy independence."

The panel's top Democrat, Sen. Max Baucus, D-Mont., also said that a change in the tax would be a mistake. House Speaker Dennis Hastert, R-Ill., whose state has the biggest ethanol producer, Archer Daniels Midland, also opposes a tax change.

How far down the energy independence road would be if we spent the last 20 years "bio-improving" switchgrass or hemp? Instead we made hemp illegal, put our focus on the least efficient method of producing ethanol (corn), did next to nothing with switchgrass, invaded Iraq, and taxed the hell out of foreign produced ethanol. That is the sorry state of affairs of our so called “energy policy”. It is also the sad politics of it all.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/