On the Cusp

The Detroit Free Press has a Michigan Census Snapshot that I would like to share.

In a dramatic sign of its ailing economy, Michigan's household income dropped, more children joined the ranks of poor people and the number of people living below the poverty level jumped in the suburbs, according to census figures released Tuesday.

The figures show Michigan's median household income fell more than any other state's during the last six years. It was $46,039 in 2005 -- 12% less than what it was in 1999 when adjusted for inflation. None of the 28 counties and 21 municipalities for which data were reported showed a rise in median household income between 1999 and 2005, the estimates show.

The news was grim in other areas, too. In 2005:

• 19% of children in Michigan lived in poverty, up from six years ago.

• Almost a third of the state's African Americans lived below the poverty level.

• Detroit remained one of the poorest big cities in the country with almost a third of its residents living below the poverty line.

• Cities and townships posted drops in median household incomes ranging from 24% to 6% and poverty rates increased in all but three cities.

"I hate to superimpose worse news on top of bad news, but this is not a cycle," said David Littman, a senior economist for the Mackinac Center for Public Policy, a Midland-based think tank. "We're in a secular decline here in Michigan. As the economy slows nationally, we're going to sink much farther relative to the other states. We've only just begun.

"We're going to see Michigan sink to levels that no one has ever seen. We're going to be looking at the highest unemployment rates in the nation for the next five to 10 years."

Following is a chart showing the income drop of Michigan vs. other states.



The next two charts show how various counties in Michigan have fared.





Thanks to the Detroit Free Press for all of the above charts.
More statistics and a better chart can be found in this PDF.

I believe Michigan is a harbinger of times to come for much of the US. So do a few others.

Regli on Silicon Investor writes "Michigan will be called unrepresentative until people realize in a few years to a decade that it is not. The only advantage it has is that it came first."

John Vosilla on Silicon Investor is asking "Is Florida going to follow in Michigan's footsteps?"

Vosilla was referring to the St. Petersburg Times article Economic gloom tightens grip

Battered by fuel prices, a housing slump and storm fears, Floridians are less confident in the economy than at any time since 1993.

Floridians' confidence in the economy plunged this month to its lowest level in 13 years, University of Florida economists said Tuesday.

The chill in the housing market, higher interest rates and fuel prices appear to be taking their toll. National confidence numbers also fell in August, but not as much as they did in Florida.

The Florida Consumer Confidence Index fell 11 points to 76, while the national index, compiled by the Conference Board, went from 107 to 99.6.

The Florida drop is very similar to the one that occurred last September in the wake of Hurricane Katrina, only this time there was no hurricane to blame. Chris McCarty, director of survey research at the University of Florida's Bureau of Economic and Business Research, thinks the changed outlook for housing is at least partly responsible.

"Florida is in a position to really be affected by a decline in housing," McCarty said.

"There are a lot of overvalued markets in Florida, and there are a lot of risky loans, some of which are going to readjust right about now," he said. "Also, a lot of employment increases over the last few years have been related to housing."

When projects get canceled or put on hold, that has a direct impact on jobs and a secondary impact on sales of appliances and furniture, he said.

Many consumers also are feeling the pinch of higher energy prices at the gas pump and in their utility bills.

"The feedback I get from people when they cancel their appointments at the last minute is that they're broke," said Valerie Bohr, 41, who owns Brilliance Color and Hairstyles in Largo. "Just this week I had two people tell me they got electric bills over $400. People can't afford to come in and get their hair done if they're working to pay an electric bill like that."

She worries about being able to keep her salon open.

Hmmm. People can't afford to come in and get their hair done if they're working to pay an electric bill like that." She worries about being able to keep her salon open.

Translation: Regardless of what it costs to run that salon, Brilliance Color and Hairstyles in Largo simply is in no position to even attempt to raise prices.

Bennigan's restaurant dropped the price of their half pound burger from $7.99 to $4.99.
That's a drop of $3 or 37.54 percent! That can't happen can it? At least that is what I am told with rising input costs on food and energy. OK, Bennigan's is just one restaurant, big deal. No, it's not just one restaurant, and yes it is indeed a very big deal. It is all about discretionary spending and a slow change from consumption to saving.

I talked about that idea recently (along with Kevin Depew) and was mainly scoffed at judging by the blog responses to The Psychology of Deflation.

The facts are what they are and here they are:

• Prices of homes are dropping.
• Land prices are dropping.
• Prices at restaurant are dropping.
• Prices at some nail salons are dropping.
• Now we see that hair salon owners might not be able to stay in business.

Hey, what's the problem?
Concrete prices rising, energy prices rising, copper prices rising?
The solution is simple: Just raise your prices!

I am told that "must" happen.

Meanwhile I watch the opposite happen.
I talked about PPI prices in Intermediate vs. Finished PPI.

Input prices rising?
What's the problem?
Just raise output prices.
It has to happen. Right?
Well why isn't it?

Am I declaring victory in my call for deflation?
No way. I will instead sit back (probably for quite some time) and watch the inflationists explain away things that "can not happen" that are happening.

Here are a couple more facts to consider.

1. The $CRB just busted a 5 year trendline.
2. Changes in secular trends do not change easily or overnight.

Actually I think we are about to see a cyclical change in the $CRB but a secular change in regards to consumption and savings. The implications of those two points will make the Fed's problem all the more difficult.

Will the Fed counteract? Yes they will. Indeed, the reaction to the next few moves by the Fed over the next year or so will be the proof of the pudding. That makes it too early to declare victory even as all sign are currently pointed "down town".

We will see what "Helicopter Drop" Bernanke has up his sleeves (or not).
We are now at an economic inflection point. There may be a headfake at this point in either direction.

I will offer this prediction.
It is an easy one, yet one that few believe.
Many more states will follow the path of Michigan.
We are indeed on the cusp..... of deflation.
It is ironic that the Fed unleashed the very beast they feared by fighting it too early, at a time when there simply was no threat. Now that the threat is real, no one sees it.

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

July Personal Spending

2006-08-31
Today's Thought of the Day is a collective effort that I meshed together in a hopefully meaningful way.

It starts with comments on personal spending from John Succo andKevin Depew at Minyanville followed by my thoughts autos, a snip from a post on GDP by Nouriel Roubini, and an image of a mythical creature by CalculatedRisk.


John Succo:

TV is trumpeting the consumer as alive and well. Personal spending is up 0.8%!!

Let's use deduction instead of induction.

Personal spending rose 0.8% yet personal income only rose 0.5%. That is a negative savings rate of -0.3% for the month. That equates to an annualized negative savings rate of -3.6%.

We can say that the consumer continues to borrow to spend last month. That is quite different than saying the consumer is alive and well.

Kevin Depew:

Consumer spending doubled the 0.4% increase that had been expected in July, rising by 0.8%, while the personal savings rate was a -0.9% in July, compared to a -0.7% in June.

• The personal savings rate fell to -0.9% in July, the lowest since last August.
• It also marks the 16th consecutive month of a negative U.S. personal savings rate.
• That's the longest period of negative savings since the Great Depression.
• Meanwhile, good luck finding a news release on the Internet or the newspapers that is able to successfully report the personal savings rate.
• Here is an example of the Google News number one story on the personal savings data: "The personal savings rate fell to 0.9% in July, the lowest since August."
• It's too bad that is wrong.
• From the BEA news release: "Personal saving as a percentage of disposable personal income was a negative 0.9 percent in July."
• Yeah, that's NEGATIVE 0.9%. Not 0.9%.
• But so what. More than a few economists insist the personal savings rate understates real savings and wealth.
• What does the BEA say? "Negative personal saving reflects personal outlays that exceed disposable personal income. Saving from current income may be near zero or negative when outlays are financed by borrowing (including borrowing financed through credit cards or home equity loans), by selling investments or other assets, or by using savings from previous periods."
• Clearly, the government needs to change the way this data is collected.
• If for no other reason than to make us feel better about ourselves.

Mish:

It seems the article Kevin was referring to has been corrected but I do have this chart to show.



So far all we have seen is a slump in home sales and restaurants. I now have my eye on autos. To keep the ball rolling Ford and GM are both offering increased incentives.

0% Financing for 6 years

Ford is offering 0% 72 months on all Mercury vehicles.
The Wall Street Journal is reporting Chrysler will make the same deal.

Price Reductions

Ford is dropping the price of the 2007 Lincoln Navigator.
The suggested retail price for the 2007 Navigator ranges from $46,575 to $51,475, including destination and delivery - $4,100 less, on average, than the 2006 Navigator base models. Lincoln is estimating that the 36-month lease-end residual values of the 2007 Navigator will be as high as 48 percent, which is a seven-point improvement compared with the 2006 model.

The Detroit Free Press is reporting GM announces customer cash incentives on 2006 and 2007 models.

General Motors Corp. announced Tuesday that it will offer $500 to $1,500 in bonus cash on many of its 2006 and 2007 models. The offer is good until Sept. 5, and in most cases, comes in addition to previously announced low-interest loan and customer cash offers.

The company is offering $500 in bonus cash on many of its cars, $1,000 on many of its pickups and car-based sport utility vehicles, and $1,500 on some of its truck-based SUVs.

Company spokesman John McDonald said the incentives are merely the company's annual Labor Day sale and not a sign that it is backing away from its strategy of trying to bring sale prices closer to the sticker prices.

We will find out about auto sales and incentives as we head into the 4th quarter.
More information on jobs will be out on Friday. Will it be the 5th consecutive disappointment?
I am struggling to see how job numbers can't disappoint but perhaps the bar has been set low enough or perhaps the BLS pulls off some kind of birth/death miracle.
We will find that out soon enough.

Nouriel Roubini

Nouriel Roubini's is taking a hard look at the GDP in Revised Q2 GDP Figures: Much Worse Than the Headline…Beware of the Spin Doctors

The revised Q2 figures are out and the headline figure – 2.9% growth – is better than the initial advance estimate of 2.5%. Right after the publication of these revised figures today the spin doctors have been in a frenzy to use this number to prove that the economy is fine. First in the line among these spin doctors is “Eighth Inning” Dallas Fed President Richard Fisher – yes the same Fisher who firmly predicted in June 2005 that we were at the “eighth inning” of the Fed tightening cycle and then went on voting another nine times for a Fed Funds raise. An hour after the release of the new Q2 figures he stated in a speech:

"We are slowing down, but this number may help us keep it in perspective," Federal Reserve Bank of Dallas President Richard Fisher said today after a speech in Dallas. "We could not have kept growing at the rate we were growing in the first quarter." He called the figures today "pretty healthy". This is also the same Fisher who – in a previous speech – called me and other realists who are worried about housing and the economy an Eeyore.

Beware of these spin doctors. Behind the headline figure, the numbers in the revised Q2 figures are much worse than the initial estimate. Essentially, almost all of the upward revision to the figures comes from a much larger increase in inventories of unsold goods, an ominous signal for future growth as firms saddled with unsold goods will soon start cutting production (as it is happening, for example in the auto sector). Indeed, if you exclude inventories and look at final sales, the figures are much worse: in Q2 final sales of domestic product grew only 2.3%.

The GDP growth improvement is also due in part to slightly better net exports but beware of this. The fact that now net exports are not anymore a drag on growth is also bad news, not good news: as the economy sharply slows down imports of consumption and investment goods are slowing down. Thus, the news from net exports is also lousy as it signals the coming recession: net exports improve when an economy slows down and worsen when the economy grows fast. Indeed, the figures about a fall in imports - a -0.1% in Q2 – are a clear indication that, as the economy is sharply slowing imports are falling.

The sharp increase in inventories is particularly worrisome since, as in any inventory cycle, an increase in such supply of unsold goods, is a leading indicators that firms will tend to reduce production when faced with slowing demand and rising inventories. So, higher GDP figures for Q2 via higher inventories means that – all equal – Q3 and Q4 figures for GDP growth will be worse than otherwise as a sharp inventory adjustment will occur; indeed, the Ford decision to cut production by over 20% in Q4 is a typical – if extreme - canary in the mine in terms of signaling how corporates will react to a sharp unexpected increase in inventories.

....

In summary the details of the new Q2 GDP figures are simply ugly and uglier than the initial estimate: much bigger inventories of unsold goods implying slower production and GDP growth in the second half of 2006; very slow growth of final sales that is down to 2.3%; actual falling investment in software and equipment; a modest trade improvement that is reflecting an economic slowdown; profit growth sharply down, sharp productivity growth slowdown and unit labor costs sharply up; anemic consumption growth and flat consumption of durables (and a worsening of consumer confidence based on current July-August data); negative growth of Federal consumption spending.

So let “Eighth-Inning” Spin-Doctor-In-Chief Fisher eat crow – as he did after he raised rates nine more times after his “eighth inning” speech – again once the actual real economy figures about the coming sharp slowdown and eventual recession will prove him soundly wrong again. Beware of perma-bull spin doctors with rose-tinted glasses who are totally blind to the extent of the current economic slowdown and are still talking about a soft landing of housing and an orderly economic slowdown. Soon enough the only thing orderly about the comatose housing market will be the undertaker carrying the coffin...and the rest of the economy will enter into a coma right after...

The Eeyore

I am sure enquiring minds are wondering what an Eeyore is.

Calculated Risk came through with this image and commentary.



What is an Eeyore? From Wikipedia:

'Eeyore is a fictional character from the book series and cartoon Winnie-the-Pooh. ... He is a pessimistic, gloomy, old donkey who is a friend of Winnie the Pooh. Eeyore is hardly ever happy and when he is, he is still sardonic and a bit cynical.'

Thanks to Nouriel Roubini, CalculatedRisk, Kevin Depew, and John Succo for material used in this post. Perhaps we are collectively just a sorry bunch of Eeyores. Perhaps just I am. Then again, compared to those who think gold is headed to 3000, the DOW to 2500, interest rates to 15%, and the dollar crash landing near zero, one might make a case that we are all optimists. Perhaps again we are more or less realists, to varying degrees, all trying to do our best making sense of the data that is now coming in.

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

How Black is Coal?

In a review of the book "Big Coal" The Rocky Mountain News is reporting on The black side of coal dependency.

America is the Saudi Arabia of coal. Whereas Saudi Arabia has more than 20 percent of the world's oil reserves, the United States has more than 25 percent of the world's recoverable coal reserves - approximately 270 billion tons.

Russia comes in a distant second with 176 billion tons; China has 126 billion tons, and Europe has a paltry 36 billion tons. It's no surprise that many in America's coal industry are making a strong push for our increased reliance on coal.

Jeff Goodell [the author of Big Coal], however, isn't so optimistic. While he agrees absolutely that America's coal reserves provide a solid natural resource base that ensures our long-term energy needs, providing for those needs with coal will be problematic.

First, extracting coal is extremely destructive - oil can be pumped out of the ground from a few relatively small holes, and is easier to store and transport. But getting at coal requires extensive underground mining, or, worse, strip mining. Entire Appalachian mountains have been torn down to get at the coal underneath, and at Wyoming's massive strip mines, according to one saying, "they don't really mine coal, they just move dirt." Because it is a solid, coal is far more expensive and difficult to transport than oil.

Second, burning coal introduces vast amounts of CO2 into the atmosphere, continuing the cycle of global warming and increasing the likelihood of more frequent and more devastating disasters like hurricane Katrina.

Third, reliance on coal, like other fossil fuels, discourages us from searching for alternative fuel sources. And finally, coal mining has a significant human cost - something Goodell is keenly aware of: "Coal is the only energy source that requires workers to put their lives on the line on a daily basis."

Is the black side of coal really that black?
The answer of course is another question "compared to what?"

Like everything else related to energy, the answers are seldom black and white but rather shades of grey. One alternative to burning coal directly is to first convert coal into something called Dimethyl ether (DME). DME, is a colorless water soluble gas. DME is non-toxic and environmentally friendly. It can also be used for transportation. A September 2004 research paper by Princeton University entitled TRANSPORTATION FUEL FROM COAL WITH LOW CO2 EMISSIONS discusses the possibilities.

This paper explores a strategy for mitigating climate change for coal-derived synthetic fuels both by CCS and by choosing an energy carrier that facilitates a shift to more-efficient energy end-use technology. The focus is on dimethyl ether (DME). Its high cetane number makes DME a suitable candidate fuel for compression ignition engine vehicles, which are more energy efficient than spark-ignition engine vehicles. Compression ignition engine vehicles are not more widely used in part because of difficulties in realizing simultaneously low levels of emissions of both NOx and particulate matter (PM), which are being sought in tightening air pollutant emission regulations through-out the world, driven by public health concerns. The tradeoffs that make simultaneous NOx and PM control difficult for diesel fuel do not exist for DME, the combustion of which generates essentially no PM because of the absence of C-C bonds and of sulfur. These pollution control advantages can facilitate a transition to fuel-efficient vehicles such as compression ignition engine/hybrid electric vehicles, although the pollution control advantages offered by DME are offset in part by the refueling infrastructure challenges that arise because at atmospheric pressure DME is a gas that must be stored in mildly pressurized canisters such as those required for LPG.

Crude oil price at which wholesale prices are equal for DME and diesel fuel ranges from $27 to $36 per barrel. Such surprisingly low DME production costs must be considered together with extra costs of getting DME to the consumer (infrastructure costs) relative to petroleum diesel and potentially lower costs for DME vehicles as a result of lower costs for pollution controls. A preliminary analysis suggests that added infrastructure costs may be roughly offset by the reduced vehicle costs.

DME Research and Production

So who is leading the way in DME research and production?
Why China of course.

The Hindu is reporting China to build its largest DME project

China, the world' second largest energy consumer, will start construction of its largest dimethyl ether (DME) project with an annual output of three million tonnes to reduce rising oil consumption.

Coal-based DME is a clean-burning alternative to liquefied petroleum gas, liquid natural gas, diesel and gasoline.

Located in Ordos city of north China's energy-rich Inner Mongolia Autonomous Region, the project will cost 21 billion yuan (USD 2.6 billion), the Shanghai Securities News reports.

Compared with the current annual output of 120,000 tons of DME each year, the project will make a huge difference to China's alternative energy sector, the National Development and Reform Commission (NDRC), the top planning body, said.

Facing oil shortages, China is speeding up efforts to develop an oil substitution programmes to reduce its reliance on oil imports and offset the effects of rising oil prices. But as sustained coal supply has remained a challenge for China, NDRC has banned any coal-based DME project with a design capacity lower than one million tonnes.

I had to read that last sentence twice. Logic should dictate that if coal was in short supply one would not be insisting on massively large plants. The real reason is not that coal is in short supply but rather the Chinese economy is at risk of overheating, water supply is a serious issue, and resultant pollution from the plant is a problem.

The bar was set purposely high enough that it would take central bank funding to get projects off the ground and the NDRC could place those projects in areas where the above concerns would be minimized. The end result seems to be a decrease in overall pollution if coal is converted to DME rather than using it straight up.

Clean Coal

The Business Online is reporting Sinopec to spearhead $2.6bn clean coal project.

SINOPEC, Asia’s largest oil refiner, is leading a clean coal project in China worth 21bn yuan ($2.6bn, E2.1bn, £1.4bn).

The Chinese government is trying to develop coal-based fuel on the mainland to reduce its reliance on oil imports and cut key pollutants by 10% between now and 2010.

A potential shortage of natural gas has been worrying both suppliers and customers in China, prompting energy companies to build their own source of fuels.

DME plants cost 10 times more to build than comparable crude refining capacity and one tonne of DME requires three tonnes of water to make, according to Deutsche Bank.

Piped gas distributor XinAo Group is also building a coal-conversion project in Inner Mongolia, which was set to be China’s largest before the Sinopec scheme was announced.

XinAo Group’s plant, scheduled to start operation in 2009, will have annual capacity for 400,000 tons of DME.

Coal to Petrochemicals

BizChina is reporting China National Coal Group Corp purchases Harbin coal-to-petrochemicals plant.

China National Coal Group Corp is buying a major coal-to-petrochemicals plant in Harbin, Northeast China, where it plans to turn out 600,000 tons of olefin products annually using home-grown technology.

The Beijing-based State-owned company, China's second-biggest coal firm, has reached an initial agreement with the Harbin municipal government on the takeover of Harbin Coal Chemical Engineering Co Ltd.

Within the next three years, China National Coal aims to produce olefin products such as ethylene and propylene, widely used in the production of plastics, said Jing Tianliang, president of the coal conglomerate.

The plant's annual production target for 2009 also includes 10 million tons of coal and 2 million tons of methanol, compared with the current capacity of 2.6 million tons of coal and 140,000 tons of methanol.

Zhang from the NDRC said that the government was keen to develop alternatives to oil, in order to cushion the Chinese economy from the effect of soaring oil prices.

But companies should also avoid excessive investment in sectors such as coal-to-liquids, Zhang warned.

"Coal-to-petrochemicals is a good way (for China) to cope with high oil prices, but we should develop it with a good awareness of environmental protection and economic returns," said Zhang.

Air pollution in China

MonstersAndCritics is reporting China deal to cut back coal.

The International Finance Corporation -- the private-sector arm of the World Bank Group -- signed a deal with China’s Xinao Group to buy shares worth up to $10 million in the company, in addition to providing a $40 million loan for a plant that will convert coal into dimethyl ether. In addition, Xinao will access loans up to $140 million from commercial banks to build petrochemical facilities that will produce up to 600,000 tons of methanol, the bulk which will be brought in from Inner Mongolia. That methanol will be used to produce about 400,000 tons of DME each year.

Although securing a steady supply of energy is crucial for China to keep its economic engine roaring, the price for explosive growth has often been paid by the country’s environment.

Coal is the most readily available and cheapest energy source in China, yet mining for the resource is not only dangerous for miners, but it also causes considerable environmental damage, in addition to releasing toxic fumes when used indoors. Indeed, more than 1 million Chinese die from air pollution each year, with over 60 percent of those deaths occurring as a result of indoor smog, according to the bank.

'This project will help develop new resources to meet China’s energy demand and will do so in an environmentally friendly way. Replacing coal with a clean fuel for household cooking and heating has clear health benefits,' said the IFC’s executive vice president, Lars Thunell, at a news briefing following the agreement signing with the bank’s president, Paul Wolfowitz.

Xinao Chairman Wang Yusuo said that the deal will be as much about profits as it will be about protecting the environment.

'DME is a clean fuel ... that can replace diesel,' Wang said, and added that the shift toward DME use by public transportation and household use should eventually decrease China’s dependency on oil and natural gas, an objective that has been highlighted by the Communist Party.

'With this project, Xinao is developing a clean energy source that has been identified by the Chinese government as a strategically important alternative to polluting fuel such as coal or diesel,' Wang said. He declined, however, to specify how affordable the DME will be for consumers.

Yet therein lies the key for the success of the project. For while DME may be less damaging to the environment than coal, the ultimate aim will be to ensure that more people are using it over coal, which will depend on a number of factors including its affordability and availability in areas consumers are located.

The bank’s director of the oil, gas, and mining department, Rashad Kaldany, pointed out that the agency will gauge how well the project is doing not simply by setting basic numerical targets, but also by monitoring how popular it becomes with consumers, how many jobs it creates, and see how it will affect lifestyles, particularly in energy-intensive cities.

Leading the Way

Given that "1 million Chinese die from air pollution each year, with over 60 percent of those deaths occurring as a result of indoor smog", burning coal straight up is not the answer to peak oil. Greenhouse gasses, scarred earth, smog, and respiratory illnesses are some of the problems with coal. Converted into DME, however, many of those problems go away. A reduction in emissions is a start. And China seems serious about reducing those emissions given the size and scope of the projects mentioned above.

Once again the US seems content to let the rest of the world take a lead. We have up to now concentrated our effort on solving our energy needs on one of the least productive and most expensive ethanol producing alternatives (producing ethanol from corn). We will not even allow the importation of ethanol from Brazil, a country that can produce it at far cheaper prices than we can. Norway, Brazil, Canada, China, and other countries are all developing significant ways to reduce their need for oil and/or are attempting to take advantage on pollution control aspects offered by DME or nuclear power. For now, the US is needlessly bogged down in Iraq and seems content to sit back and watch other countries lead the way.

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

Political Stalemate?

Bloomberg is reporting Democrats See Victory in U.S. House Races, Senate Within Reach.

Barring an unexpected and big event, Democrats will win control of the U.S. House of Representatives in November and conceivably the Senate, too. Whether it's a tsunami or just a powerful wave, the political dynamics are moving in that direction, or more accurately, against the Republicans and President George W. Bush.

Democratic insiders, who months ago thought their chances of winning a majority in the House were no better than even, and that the Senate was a lost cause, have become far more optimistic. Now, they say, winning the House is a lock, and the Senate is within reach.

``We have to go back to 1974 (during Watergate) to find such a favorable environment,'' says James Carville, who ran Bill Clinton's 1992 presidential campaign. ``If we can't win in this environment, we have to question the whole premise of the party.''

More telling is that the smartest Republican political minds agree. ``The issue matrix and political dynamics are not good for us,'' says Representative Tom Davis, a Virginia Republican. ``Only some big national or international event before the election can change that.''

`People Are Angry'

Bill McInturff, the pre-eminent Republican pollster who sees survey data from all over the country, isn't any more sanguine. ``The national mood is like that of sweep elections,'' he says. ``People are angry about Iraq, about gas prices, about health care.''

Privately, Republican congressional leaders are bracing to lose 20 to 30 House seats -- more than the net 15 gain that Democrats need to take control of that chamber -- and to barely hold on to their Senate majority.

Stalemate

Even with a slight Democratic majority, the next Congress is likely to be just as stalemated on big issues such as reducing taxes or overhauling entitlement programs like Social Security. With Bush wielding a veto pen, Democrats aren't going to enact any important domestic initiatives.

The most important difference -- and the reason the White House desperately hopes to avoid a Democratic House -- will be much more aggressive oversight. With tough lawmakers like Dingell of Michigan and Henry Waxman of California setting oversight agendas, defense contractors such as Halliburton Co., eavesdroppers at the national security and intelligence agencies and anti-environmentalists at the Interior Department will be in for a rough few years.

To win the six seats necessary for a Senate majority, Democrats need a perfect political storm that even a tsunami may not produce. There is, party strategists believe, a good chance to knock off five Republican incumbents; any other victory would be a real upset, and Republicans are competitive for several Democratic-held Senate seats.

Not Playing Defense

The dynamics are different in the House. On a seat-by-seat analysis, there are three-dozen potentially vulnerable Republicans. Conversely, there are fewer than a handful of endangered Democrats. ``They are not playing much defense,'' laments Republican Congressman Davis.

The Democrats enjoy a couple of other tactical advantages. One is that their Senate and House campaign committees have been remarkably successful in raising money; Republicans will enjoy less of a financial advantage than usual.

Another is that in several states where three or four House seats are closely contested -- New York, Ohio and Pennsylvania -- a top-of-the-ticket sweep by strong candidates such as Eliot Spitzer, who's running for governor in New York, and Hillary Clinton, who's going for re-election in the Senate, may be decisive.

Moreover, if there is a national tide, the Democrats will win seats that aren't on anyone's radar screens today. ``There are going to be some people in Washington, D.C., next January that no one's ever heard of,'' Carville predicts.

October Surprise?

To be certain, the party's confidence is occasionally tempered by the realities of recent elections. At a private gathering sponsored by Democratic House Leader Pelosi for some of the party's biggest givers in California early this month, there was a palpable sense that Karl Rove and the White House will engineer some ``October surprise.''

And Republicans, with a better get-out-the-vote system, generally tend to close better in American elections. But October surprises usually are the invention of summer nervous nellies; the public mood, not organization, will shape this year's elections.

In the House, the Democrats nevertheless probably will only win about half the seats they did in the 1974 landslide, when they picked up 48, or that the Republicans won in 1994, 52. In part, this is because of a bipartisan redistricting scam that has resulted in many congressional districts being politically non- competitive. Nowhere is this more evident than in the South, which has seen an unusual alliance of Republicans and African- American Democrats redrawing congressional districts.

Dominant in South

The number of Southern black representatives, all Democrats, has jumped to 16 from just two 20 years ago. Yet Republicans now hold an 82-49 overall advantage in these 11 states, reversing the Democrats 73-43 edge of two decades ago.

The upshot is that even on a banner day, Democrats expect to pick up a net of fewer than a half-dozen seats in the South this November.

The gains in the Northeast and Midwest, however, should be easily sufficient to carry the day. That would return political normalcy to America: divided government. The Republican dominance of the White House and Congress for most of the past six years is the most concentrated control by one party in Washington since the days of John F. Kennedy and Lyndon Johnson.

I am very fearful of the "big event" as God only knows what kind of lies, deceit, or even an attack on Iran the Republicans are willing to do to stay in power.

Yet I look at Hillary waiting in the wings and am about ready give up on some of the alternatives. Yes, I am talking politics but politics are likely to affect what stock sectors someone should be in (if any at all). If Democrats take control of both houses we ould see impeachment proceedings, but the house alone will be enough to make Bush miserable for two more years.

Stalemate will seal the doom on getting anything done. As far as I am concerned everyone should be rooting for just that. Look at all the damage the Republicans have done in the last six years: to the deficit, to the US dollar, to unfounded wars, to nonsensical spending of all sorts, to the environment, to the destruction of the Bill of Rights, and to the first "preemptive warfare" in US history.

Look back on that list and tell me how many of those are truly Republican beliefs. Yet most Bush supporters simply do not care. The only "True Republican" as far as I can tell is Ron Paul.

My dislike of Bush admittedly knows no bounds. But the same (in reverse) can be said for Clinton haters, even though when he was in office the economy prospered.

Here is my official take. Clinton was very lucky and Bush was very unlucky. Clinton had falling interest rates and an internet boom to look forward to. How much luckier can one get? Obviously he can not take full credit for that regardless of what Clinton lovers say.

On the other hand, Bush had an internet bust to deal with. That bust was clearly not his fault so I do not blame him for the loss of jobs, outsourcing to China, or many other things that he is blamed for.

But I can and do blame him for the way he played the cards he was dealt. That blame is the mess in Iraq, the attack on the Bill of Rights, trade issues with Canada and Mexico, inability to pass a flat tax, meddling in complete nonsense over the brain dead Terri Schiavo, handling of Katrina, health care giveaways, signing a law that does not allow Medicare or Medicaid to negotiate group prescription rates, refusal to allow drug imports from Canada and other places, and immigration control and border security with Mexico.

I believe Bush has done more damage to the US than any president other than FDR or Wilson. Here are my top 4 most disliked presidents in no particular order: Bush LBJ FDR Wilson. As you can see, that is not a partisan list.

I do not know what the solution to this madness is. Actually I do (put Ron Paul clones into most government positions), but how likely is that?

Right now I am fearful that one of two things may happen.
1) The country swings to the other extreme and elects a bunch of mindless Democrats led by Hillary in 2008
2) Bush further erodes the Bill of Rights, and Republicans manage to stay in power until they are violently overthrown.

The middle ground for now is to hope Democrats take control of the House, impeach but not remove Bush from office, win the presidency in 2008 but do not win control of both the house and senate.

Perhaps if we can stalemate for 6 more years we can eliminate stupidity on both sides and do no further damage. That may the best we can hope for while waiting for third party alternatives. The market may not like stalemate but it may like stalemate better than any of the current alternatives.

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

The Psychology of Deflation

2006-08-28

Today's Thought of the Day starts with an idea posted by Kevin Depew at Minyanville.

It continues with my thoughts on the implications of this abrupt shift in consumer psychology. Those implications are massive. Read on and see why.


From Kevin:

It begins as a simple standoff. The bidders hold their bids. The sellers hold their offers. Activity lurches to a stop... until someone blinks.

Of course, I'm talking about real estate, right? No. I'm talking about restaurants.

• In the face of a meltdown in same-store sales and falling customer counts, some of the biggest names in casual dining are cutting prices, according to the USA Today.
• "This is unprecedented," Paul Avery, COO of OSI Restaurant Partners (OSI), which includes the Outback Steakhouse brand, told the newspaper.
• Beginning in November, Outback plans to cut prices across its menu.
• T.G.I. Friday's has a new appetizer menu with limited-time discounts up to 50%.
• And so the deflationary toothpaste tube gets a bigger squeeze.
• This is the psychological aspect of deflation we think the market has yet to fully grasp.
• Faced with widespread rising prices in the 1970s, consumers pushed purchases forward, virtually across the board.
• Faced with rising prices in just a few segments of the economy today, the consumer cuts back. And they cut back fast.
• Unprecedented indeed.

Kevin Depew Continues

Deflation: How Entrenched is it? Ask Japan.

Japanese core CPI for July came in at 0.2%, less than half the 0.5% expected.

• The CPI data also followed major revisions to the CPI - the data now that core CPI actually fell in January and April where before they were seen to have risen.
• The new calculation method shaved around 0.5 percentage points off year-on-year changes in data for overall Japanese CPI from January, a government official said, while economists had expected a downward revision of 0.2 to 0.3 percent, according to Reuters.
• Meanwhile, Reuters poll showed eight out of 20 market players and analysts expect the BOJ to raise rates to 0.5 percent by the end of the year from the current 0.25 percent, while two now rule out the possibility of another hike before the end of the fiscal year in March.
• The Japanese Government Bond market spiked higher on the news with 10-year yields falling 9 basis points to 1.695%, the lowest level since March 14.
• The 10-year U.S. Treasury Note also saw a brief dip in yields below 4.8% before giving back most of that gain in the early opening for equities.
• Ok, a rise is a rise. It's not exactly deflationary. But it emphasizes the difficulty in shifting time preferences and changing consumption and spending behavior once a secular psychological trend is in place.

Kevin Depew / Minyanville

Mish:

Here is the article Kevin was referring to:
Restaurants shave prices, plump menus

Casual restaurants are no longer taking the national dining slump casually.

In the face of a meltdown in same-store sales and falling customer counts, some of the biggest names in casual dining — from Outback Steakhouse to Applebee's to T.G.I. Friday's — are taking serious actions to try to salvage 2006. Some are even chopping prices.

Excluding the weeks after 9/11, this is the toughest period the industry has faced in nearly a decade, says Richard Snead, CEO of Carlson Restaurants Worldwide, which owns Friday's.

"This is unprecedented," concurs Paul Avery, COO of OSI Restaurant Partners (OSI), whose brands include Outback. Beginning in November, Outback plans to cut prices across its menu, he says.

The $68 billion casual-dining sector posted a 1.8% decline in same-store sales in June, the most recent month reported by Knapp-Track, which monitors the restaurant industry.

• Outback. The chain has carved $1 off the price of its popular sirloin steaks in about 40% of its markets, Avery says. By November, it will lower prices on ribs, side salads, appetizers and drinks, Avery says. "We've lowered prices from time to time, but never this magnitude."

• Applebee's (APPB). To lure price-sensitive diners, the chain has a three-course "Southwest Fiesta" promotion (appetizer, entree and dessert) for $9.99. Applebee's today will announce it has hired Food Network chef Tyler Florence. He's creating four "fresh" entrees, which he calls quality cuisine at value prices. "We're adding a whole different category of food to Applebee's," he says.

• T.G.I. Friday's. Known for appetizers, it has a new appetizer menu with limited-time discounts up to 50%, Snead says. Over the past six weeks, Friday's has introduced 23 items, the most ever for the chain, he says.

• Cheesecake Factory (CAKE). For the price-conscious, the chain has created smaller, cheaper lunch entrees. The Shepherd's Pie typically sold for $13.95 now has a lunch portion for $10.95. It also added 16 food items, eight drinks and five desserts. That's the biggest menu change in a decade, says Howard Gordon, senior vice president.

• Bennigan's. Monte Cristos, usually $7.99, go for $5.99 on Mondays. On Wednesdays, half-pound burgers are $4.99 (usually $7.99). Next month, some markets will sell all burgers at $4.99, marketing chief Clay Dover says.

• Ruby Tuesday (RI). It recently added a Triple Prime Burger (tenderloin, sirloin and rib-eye) and will promote it with a $60 million TV budget, its biggest ever, says Rick Johnson, senior vice president.

The Changing Psychology

Yes the psychology is changing. In Japan. Slowly.
The psychology is also changing in the US. Much more slowly.
It started with housing but that reality has not really set in yet.
It is now shifting to restaurants.
Check out the "psychology on burgers". Prices dropped from $7.99 to $4.99.
Hmmm is that a drop of $3 or 37.54 percent?

I am wondering: Is there a bear left on oil, other than Perennial Oil Bears (POBs)?
Or did POBs go extinct long ago?

Commodities
Following are two charts from the August Survival Report:

The CRB is flirting with a long term trendline.
A break below will not be good for oil bulls.



Japanese YEN



In the August Survival Report we wrote:

People are excessively worried about a collapse in the US dollar in our view. We have our eyes on the YEN. The market is likely to force Japan to hike. Refusal by the BOJ to do so may cause a currency blowup, no not the US dollar but rather the last place most people are looking, the YEN.

The Yen is in a precarious position. A quick look at the Yen future shows the line in the sand for a new downtrend. A break below 86 will likely lead to a new decline that could last many months. From it’s December low the Yen has traced out a classic A-B-C correction to a high in May, and has since fallen back to its uptrend line (in Blue). While this consolidation could have a few more swings left in it (see notes in Black), a break below 86 could lead to a decline far below 82.

At the time we wrote that section above, the YEN was comfortably in the wedge. To us, it broke in the expected direction. Judging from talk on stock market boards I run, It seems most people are dollar bears and YEN bulls. Unless and until Japan starts hiking aggressively, that sentiment is more likely to be wrong than right.

Discretionary Spending

No one (well just a few of us deflationists) expected to see price drops. Well here they are, first in housing and now in restaurants. What's next? I expect we will see all kinds of drops in the price of goods and services. Someone emailed me just a few days ago about a price drop at the nail salon from $10 to $9. Hmmm. Is that a 10% drop? Why yes it is. Discretionary spending in all kinds of things is likely to go out the window. Prices will drop with falling demand, and it will not matter one iota what input costs are doing. Ask yourself if Bennegan’s is paying 37.5% less for ground beef that it was last week. Did it matter? Think this through one step further. What will that mean for home prices, the value of businesses unable to pass on cost increases, the stock market, jobs, etc? It will be interesting to see just how much we overbuilt retail stores, nail salons, Home Depots, and restaurants of all kinds.

Psychology is shifting from consumption to saving in the US and from saving to spending in Japan. What we are really talking about is a SECULAR change in "Time Preference". There is likely to be a lot of pain associated with that change, especially in the US.

Bernanke’s worst nightmare took another big step forward today with these price cuts. If those price cuts do not attract consumers, job cuts will follow. Things will get really interesting when Bernanke starts talking about "an unwelcome drop in inflation". Does anyone remember Greenspan saying that? Will people think Bernanke is nuts if he says the same thing?

What consumers most need is a "welcome drop in inflation". Unfortunately it will destroy much of the "savings" that are tied up in housing. Like it or not, people are about ready to suffer the consequences of treating houses like ATMs. Home prices are now poised for collapse. Equity prices should follow. Be prepared for it.

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

Time Keeps on Ticking

This post is a further continuation of the "Saga of Sonnypage", an Atlanta area real estate broker who posts on my investment board the Motley FOOL.

Previous Sonnypage highlights include:

Lights Out in Georgia on 2006-07-27
Soft Market Debris .... on 2006-08-02
Is the Fed irrelevant? on 2006-08-03
Scared in Atlanta....... on 2006-08-06

Sonypage - 2006-08-27

Most of our regulars here know by now that my wife and I are Realtors who live and practice real estate north of Atlanta. It's been a slow year to say the least. In my last post I mentioned that we currently have eight listings, but that I thought, for various reasons, perhaps only four or five of them might realistically be expected to sell. At the bottom of my list would be Kevin's new construction listing.

We met Kevin almost a year ago. He was introduced to us by his son in law, also a builder, whom we had sold a home for a couple of years ago. Together we walked through the newly framed home Kevin wanted us to sell for him. He wanted to ask $800,000 and asked us what we thought. We really had no comps. We were out in the boondocks north of Alpharetta, out in Hall County. If this home was in the expensive golf community where Kevin was building two other homes, then perhaps that price could be justified. But here we were on an isolated country road far from shopping and other amenities. The lot was a full three acres; this was out in horse country, so we took a chance. The buyer of this home, if one came along, might be someone with horses and money. Besides, last October when we took this listing, our market here was still strong. So, we agreed to start at $800,000.

Ten months have slowly passed. Kevin has slowly drawn down his construction loan, slowly moved forward on this home, and hoping, as all builders do, that a buyer will surface and give him a $50,000 or so deposit to finish the home. For you see, construction loans, certainly for spec homes, are never 100% of the cost to build. My professional best guess is that the construction loan was about $600,000 and is exhausted. Kevin probably has only $50,000 or so of his own money in the home and has no more to put in. He reduced to $750,000 a few months ago, but balked at dropping to $700,000 a few weeks ago when I suggested he do so. He told me then that would be all of his profit. Activity on Kevin's home has been very slow, the slowest of any of our listings. In a still decent market like we had last year, Kevin might have pulled it off, but this year, I was starting to think it would never happen.

Then, last week, we received a hit on our website. A potential buyer had seen our pictures of Kevin's home on the internet and wanted to see the house in person. Most importantly, he had two daughters with horses. The rule is one acre per horse, so this just might work. We set up an appointment for the very next day. We called Kevin with the good news. He was out of town, he also builds in another city, but said he would call his son in law to stop by and “spruce it up”. My wife and I arrived early the next day and were appalled at what we saw. In the two weeks since we were last there, the tall weeds that had completely overgrown the front and side yards had only grown taller. Kevin had promised to have them cut. Inside, the house looked abandoned, with construction debris all about. No work at all had been done since we last saw the home. The prospective buyer pulled up and we walked him through the home. It did not show well, debris was everywhere. In the basement, one entire corner was flooded. Did the buyer notice the mold on the basement stairs as we walked back up? I did. In spite of all this, the buyer said that he would like to bring his wife back for a look and to meet with the builder to get ideas on finishing out the home. That was last Thursday. We called Kevin that night. The soonest he could meet he told us was next Thursday. He is building in another city, as I said, plus another subdivision on the other side of Atlanta. We urged him to meet sooner. We also urged him to get the basement flooding resolved quickly and get those weeds hedge hogged. He would get his son in law to deal with the issues with the house, he said, but next Thursday was the soonest he could meet. This morning, Sunday morning, I received an email from the prospective buyer asking us to cancel next Thursday's meeting with Kevin. They found something else and are under contract.

Kevin, it is very unlikely that you will ever read this, but if you should, even though your real name is not Kevin, you will certainly know this is about you. That buyer needed two acres for those horses. In spite of all else, if your home had been spotless and ready to show, we just might have pulled this off. I doubt we would have gotten you $750,000, but maybe $700,000, or certainly $650,000. Would that not beat defaulting on your construction loan? It is, and was, perfect for two horses and that is what the buyer needed. What he did not need, and would not accept, was the sloppy abandoned appearance of the home and the indifference of the builder. Bear markets, in housing as well as stocks, cull out marginal players. A bull market would have forgiven you, Kevin, a bear market will not.

Sonnypage

Mish:

Kevin wanted to do better than break even as he gave up on maintaining his place for showing. Ten months have been blown with only one showing. Mold is showing on the walls. Kevin, kiss it goodbye. You need a miracle now and if I am not mistaken things are slowing everywhere. Given that "all real estate is local" (yeah right), the big problem is Atlanta (and Boston, and LA, and San Diego, and Las Vegas, and DC, and Phoenix, and Chicago) but other than that real estate may be local (but at this time I doubt it).

Since Sonnypage has not reported a sale I assume he has none to report. No I am not gloating as I have no desire to see Sonnypage get hammered but I will suggest to Sonnypage that the time has come and gone for him to "make his year". Two sales a quarter or even three a quarter will not do it now.

Time Keeps on Ticking
It's too late for Kevin (barring a miracle) and I wonder if Kevin even realizes it.

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

Deep Trouble

You can sometimes tell how much trouble a company is in simply by looking at their ads. This seems to be one of those cases.

An unheard of 15% commission

Real Estate Agent Commission Incentive Program

We are pleased to announce a new Real Estate Agent Commission Incentive program for our Prestige Builder Partners, LLC (PBP) projects throughout the State of Florida. This program will apply to sales, at any PBP property, on or after July 24, 2006 and through August 31, 2006. This unique program of incentives will permit your Agents to earn commissions as high as 15% on the sale and closing of one of our condominium units.

This is how it works, each Agent will earn an escalating commission based on the number of units sold by the Agent and closed within 30 days of the sale. The first closed sale will earn the Agent a 6% commission on that unit; the next closed sale will earn the Agent a 7% commission on that unit and so on. Thereafter, each closed sale will earn an additional 1% commission up to and including the 10th sale where the Agent would earn 15% commission on the 10th unit closed. The escalating commission applies to sales by the participating Agent and no collectively for a brokerage house.

Looking beyond the hype it will be next to impossible to get 15%.
No one can possibly sell 10 of those turkeys. Still it smacks of desperation by Prestige Builders Partners.

Summer Blowout

Every Home Must Be Sold.
We're Giving Away $20 Million in Savings*

It's our $20 Million August Blowout Sale!

- Orlando
- Southeast Florida
- Fort Myers
- Naples
- Sarasota
- Tampa

Visit our Sales Centers today and register to win incredible prizes! You could win a car, a condominium, even $1,000,000!**

*Based on interest only payments for 12 months @ 6% 90% LTV. This special offer is valid only with seller’s preferred lender and title company.

I sense deep trouble at Prestige Builder Partners and perhaps by their "preferred lender".

I called to ask about this fine project and got a badly recorded answering machine at one number. I got through on a different number and following “I am inquiring about your Summer Blowout”, I asked what I thought was a simple question "Who is your preferred lender and why would I need to go through them?" I was placed on hold for 5 minutes then was transferred to an answering machine.

Perhaps I found what I was looking for.
Following are the companies that may be in hock when this project goes under.

Preferred Lenders

Prestige Builders Partners works with quality lending institutions. Below are our prefered lenders. They have proven time and time again that they are willing to go the extra mile to help our buyers realize their dream of home-ownership.

* First Meridian Mortgage
* Secure Financial, Inc.
* Service Financial Co.
* Financial Funding, Inc.
* Fembi Mortgage
* Countrywide Financial
* First United Funding
* Wells Fargo

By the way, someone might suggest to these companies that it might be a good idea to run their ads through a spell checker. They might find out how to spell prefered.

Let's see how long PBP stays in business.
Any Bets?

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

A Dose of Reality

David Lereah August 15, 2006

Second Quarter State Existing-Home Sales Soften

The quarterly report on total state existing-home sales shows that the seasonally adjusted annual rate* was 6.69 million units in the second quarter, down 7.0 percent from the record 7.19 million-unit level in the second quarter of 2005.

The biggest increase was in Alaska, where existing-home sales rose 48.6 percent from the second quarter of 2005. In Arkansas the second-quarter resale pace rose 17.9 percent from a year earlier, while Texas experienced the third strongest gain, up 11.3 percent. Twenty-eight states and the District of Columbia experienced declines. Complete data for two states was not available.

David Lereah, NAR’s chief economist, said two sets of market conditions are apparent in the report. “When you look at states with high housing costs or that have experienced a prolonged period of rapid price gains, you typically see slower home sales,” he said. “By contrast, states with moderately priced areas that have experienced healthy job creation are seeing sales gains – the economic backdrop remains favorable for the housing market, which is helping home sales to level out.”

David Lereah Aug 23, 2006

Existing-home sales plunge to a two-year low

"Boom markets are cooling significantly," said David Lereah, chief economist for the realtors group. Sales fell in all four regions.

The housing market and the economy are "fragile," Lereah said. Some markets that never boomed are now weakening because of sluggish local economies, such as Michigan, Ohio and parts of the Northeast, he said.

"It's important for the Fed to understand how fragile the housing market is, and how fragile the economy is," Lereah said. "The economy impacts housing, and housing impacts the economy."

That last sentence is the key. It seems the reality of Lereah’s circular argument for these past several years along the lines of “housing won’t crash because the economy is strong and jobs are strong” is about to hit him smack in the face. The economy was strong and employment was growing because housing was strong. Housing fell first just as many of us predicted.

Yet on the same day Lereah finally started saying a few things that actually made some sense he quickly reverted to his normal self.
Please consider some lowlights from another article for the same day.

David Lereah Aug 23, 2006

Existing-Home Sales Down With Softening Prices

David Lereah, NAR’s chief economist, said higher interest rates dampened sales but that price softening is good news for the housing market because it is drawing buyers. “Many potential home buyers have been on the sidelines, some ‘kicking the tires,’ but mostly waiting for sellers to compromise on prices and terms,” he said. “Now sellers in many areas of the country are pricing to reflect current market realities. As a result, there could be some lift to home sales, but it’ll likely take some months for price appreciation to rise.”

If ever there was total nonsense, especially in relation to other statements made on the same day, that paragraph is surely it. On one hand Lereah is saying lower prices are good while simultaneously bitching that "housing and the economy are fragile". And what's with this "softening is drawing buyers" nonsense? Where do the numbers show that?

Cheerleading from the NAR

From the same article here is some heavy duty cheerleading from the NAR.

NAR President Thomas M. Stevens from Vienna, Va., said most sellers continue to see excellent returns on their homes. “Considering that typical sellers have been in their home for six years, the average appreciation during that time is close to 60 percent,” said Stevens, senior vice president of NRT Inc. “This demonstrates the value of housing as a long-term investment – the longer you own, the better your return.”

Mr. Stevens I think you need more than a dose of reality. Housing up 60% in six years is describing a bubble. The longer anyone holds their houses now the worse the return. This is likely to go on for years.

Toll Brothers April 18, 2005

THE NEW KING OF THE REAL ESTATE BOOM

But can this magical market really defy gravity much longer?

Shockingly, despite his paranoid questions and years of hardscrabble experience, Bob Toll's answer to that question is a resounding yes. For Toll, what looks to many people like pure craziness is perfectly normal, a reflection of a new supply-and-demand equation that will last a long time. He's an outspoken believer that, yes, the world really has changed this time. That the traditional boom-to-bust housing cycle is now a smooth upward climb. That housing prices will keep rocking practically, well, forever. "We'll reach the point Europe reached 20 years ago, where families pay 45% of their income on housing and married couples have to live with their parents for years before they can afford houses," he says. "Prices will keep going up in double digits for years."

Toll Brothers Aug 23, 2006

Housing Slump Proves Painful For Some Owners and Builders.

"It would be difficult to characterize the position of home builders as other than in a hard landing," says Robert Toll, chief executive of luxury home builder Toll Brothers Inc., which reported yesterday that net income fell 19% in the third quarter ended July 31.

In his 40 years as a home builder, Mr. Toll says, he has never seen a slump unfold like the current one. "I've never seen a downturn in housing without a downturn in employment or... some macroeconomic nasty condition that took housing down along with other elements of the economy," he says. "This time, you've got low unemployment, you've got job creation, you've got a stable stock market and relatively low interest rates."

It seems a dose of reality is needed by Robert Toll as well. The macroeconomic connection missed by Robert Toll, is that housing was in a bubble, is still in a bubble and bubbles pop. As for "low unemployment and job creation" it should now be obvious to everyone that the reason they were low was because of an overheated housing bubble was creating jobs until the bubble popped. The reason you have not seen a downturn like this before is because you have not seen a national housing bubble like this before. Let's now turn our focus to the Question of the Day.

Does Greed Have Bounds?

Propitiously Timed Grants Helped KBH CEO Karatz Collect More Than $100 Million

Several past stock-option grants to Bruce Karatz, the highly paid chief executive of KB Home, were dated at unusually low points in the home builder's stock price, and the company said it has commenced a review of the awards.

Four grants to Mr. Karatz between 1998 and 2001 were propitiously timed. One was dated at the stock's lowest closing of the year, another at a quarterly low, and the remaining two at monthly lows. That pattern raises questions about whether the grants were made on the fortunate dates specified in company filings.

Mr. Karatz has reaped more than $100 million from cashing out many of the unusually timed options, according to regulatory filings.

Caroline Shaw, a spokeswoman for KB Home, said in a statement following inquiries from The Wall Street Journal that KB Home "has been reviewing these grants with the assistance of outside counsel. Because they are the subject of pending litigation, we will not comment on them."

Backdating can lead to civil and criminal fraud charges, as well as a litany of accounting and tax troubles. Earlier this month, federal prosecutors charged three former executives of Comverse Technology Inc. in a backdating scheme; one remains a fugitive. Two former officials of Brocade Communications Systems Inc. have also been criminally charged with backdating-related offenses.

The stock-option grants at KB Home could complicate efforts to untangle stock-options timing problems at another company, UnitedHealth Group Inc. The chairman of KB Home's compensation and stock-option committee from 1995 through 2000 was James A. Johnson, who also serves as a UnitedHealth director. UnitedHealth Group is facing a criminal and civil investigation into a series of stock-option grants to its chief executive, William McGuire, as well as to other senior officers.

Mr. Karatz's grants at KB Home regularly dwarfed those given to any other executive. In 2000, for instance, he received 500,000 options -- 30.9% of all the options granted to the company's employees. The grant was dated Oct. 13, 2000, the lowest closing price of October, and just ahead of a leap in KB Home shares that took them up more than 20% in a month.

In 2004 and 2005, he exercised all of those options, pocketing profits of about $54 million.

Another grant, for 450,000 shares, was dated Oct. 25, 1999, the day the stock reached its lowest closing price of the year. Those options accounted for 20.1% of all grants to employees. Grants to Mr. Karatz prior to 1998 generally exhibited unremarkable timing.

Mr. Karatz was one of the highest-paid executive in the U.S. in 2005, according to The Wall Street Journal's annual survey of executive compensation. His total direct compensation in 2005 was $155.9 million, the bulk of it coming from exercising options, according to the Journal report. Mr. Karatz continued to own stock valued at $132.6 million as of Nov. 30, the fiscal-year end for the company.

Last month, a shareholder filed a lawsuit in Los Angeles County Superior Court against Mr. Karatz and other KB Home officers and directors, alleging that executive grants had been manipulated to carry the dates on which the stock was particularly low.

If Karatz is guilty he needs a dose of reality from a prison cell so he can reflect on whether or not an extra $40 million or whatever was worth going to prison over. For many, a mere $100 million would be enough money to scrape by on.

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

Systemic Risk, SPX Correlation, and Fannie Mae

2006-08-23

Today's Thought of the Day comes from John Succo at Minyanville.

The actual correlation between SPX stocks over the last 30 days has been 0.19. Folks, the lowest this thing can go is zero and the highest is 100. In 1998 it was 98.

This means that when one stock goes down, like when Accredited Home Lenders (LEND) or Capital One (COF) or Lowe's (LOW) blows up, the money goes into other stocks that compensate. Correlation between stocks is low when people do not associate problems in one company to the next.

When investors connect the dots and begin to see risk increasing correlation rises.

Low correlation is closely tied to low volatility (it actually causes it in the indexes), but it tells us a little more. It tells us that even though volatility picks up in one stock because of problems, it is quickly sold in another. Low correlation implies the market believes there is low systematic risk.

As I said, 0.19 implies little concern for risk by investors, specifically systemic risk.

[Speaking about systemic risk in the banking sector Professor Succo went on to say]

Banks seem immune to any trouble. But if you own them please understand that your risk is rising substantially.

The flat yield curve makes it difficult to make money in general. But they seem to be doing alright on the surface. Let's look under the surface.

For the money centers, it is now clear they are making money mostly through capital market activity, which is risky.

But the real scary ones are the west coast banks. Barron's highlighted Washington Mutual (WM). In 1Q 2005 WM made about $23 million from negative amortization loans. In 1Q 2006 the company made $203 million (about $0.20 per share).

In an option ARM, the borrower can defer payments. If they choose to defer, the bank (WM and others like Golden West Financial (GDW)) adds the amount to the principal BUT STILL CREDITS THAT AMOUNT TO EARNINGS. This increases the risk dramatically of loans out of control and risks to default.

If we soft land (whatever that is) WM may experience only limited problems. If we go into a recession and as defaults rise all those "earnings" may get unwound and principal write-offs will increase dramatically.

The point is no one is accounting for that risk.

John Succo / Minyanville

Mish:

Also speaking of systemic risk I find the following clip about Fannie Mae and Freddie Mac by Randal K. Quarles Under Secretary for Domestic Finance U.S. Department of the Treasury rather telling.

Secretary Paulson has made it clear to me that he believes there is systemic risk associated with the GSE's retained portfolios. While he shares the view that a legislative outcome is preferable, he has instructed us to ensure that the mechanics of our debt approval process are robust enough to give Treasury the practical option of limiting the GSEs' debt issuance in accordance with our statutory authority should that become necessary. If a legislation solution is not achieved, Treasury will have no choice but to consider additional action.

It seems the Treasury is bound and determined to do something about systemic risk at the GSEs whether Congress acts or not. Given that the government always acts after the cat is out of the bag and the damage already done, it's just a matter of time before we see the fallout from the busting of the housing bubble that GSEs, the administration's "ownership society", and the Fed all acted together to create.

Earlier today Dow Jones sent the following news clip:
08/24 9:13A *DJ Justice Dept Informs Fannie Mae Probe Is Discontinued
That clip does nothing to remove the systemic risk at the GSEs.

Thanks to Professor Succo and Minyanville for today's thought of the day.

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

The Fed as Pontius Pilot

The Federal Reserve of is attempting to wash its hands of any wrong doing in The great turn-of-the-century housing boom.

The above article is rather long and mostly boring, filled with mathematics that only geeks could understand but the conclusion is as one might expect. The Fed is admitting no wrong doing for the current housing boom, and therefore by implication will not want any part of the blame for a bust that is just beginning to unfold. In fact, they are now attempting to absolve themselves of any error during this whole sordid affair. Following is the conclusion of "The great turn-of-the-century housing boom".

Conclusion

This article has attempted to explain two features of the turn of the twenty-first century U.S. economy: high levels of residential investment and homeownership rates. Our main findings are as follows. First, it appears that the housing boom has not been driven by unusually loose monetary policy. This is not to say the monetary policy has not been unusually loose, but that to the extent it has been loose, this is not what has been driving spending on housing. Second, the current levels of spending on new housing are largely explained by technology-driven wealth creation over the previous decade. Third, changes in the demographic, income, educational, and regional structure of the population account for about one-half of the increase in homeownership. That is, without any other developments, the homeownership rate is likely to have gone up anyway, but not by as much as it has done. The last finding is that substitution away from rental housing made possible by developments in the mortgage market, such as subprime lending, could account for a significant fraction of the increase in residential investment and homeownership.

We view our findings as supporting the view that the current housing boom may be a temporary transition toward an era with higher homeownership rates in which spending is temporarily higher than historical norms but will eventually return to such norms. While we have so far mostly avoided discussing housing prices, our findings do suggest that to the extent that house prices have grown considerably in recent years, this is not due to unusually excessive speculation in the housing market, such as would occur in a bubble. Instead, our findings point toward the high prices being driven by fundamentals.

IdiomSite offers the following take on I wash my hands of it.

Commonly, when someone has attempted to avert a wrong and it continues anyway, he states, "I wash my hands of the issue", indicating that he is clean and not to blame. This comes from Jesus' trial, as recorded in Matthew 27:24. Pontius Pilate, who was in charge of sentencing Christ, claimed that Jesus was innocent as far as he could tell. However, the crowds pushed to have Him executed. "When Pilate saw that he was accomplishing nothing, but rather that a riot was starting, he took water and washed his hands in front of the crowd, saying, 'I am innocent of this Man's blood; see to that yourselves.'

This seems all the more fitting because housing is about to get crucified.

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

Electrocution Prompts Lawsuit Against Lennar

This is one of those stories that is so personal you wonder if you are supposed to report it or not. The story was passed to me from Mike Morgan at MorganFlorida.

Here goes from Morgan, followed by an email from Lisa Ugalde whose husband was accidentally electrocuted:

Mike Morgan to Martin County Commissioners

Dear Martin County Commissioners:

That’s one of the first thing’s I heard from a caller this morning. Below is her story. ALL very well documented. Many of you are receiving this email as a blind cc along with a few dozen other contacts ranging from national figures to national media.
Please take a moment to read the heart wrenching email below. And if you have time, click on this link and read the story and watch the video.

Lisa’s husband was killed by a defective Lennar home. He was electrocuted on his one year old daughter’s birthday. The home had passed inspection by the local inspector just two weeks earlier.

Is this what we need to happen in Martin County before someone takes action? Needless to say, this has energized me. I am committing an additional million dollars of my time and money to address these issues. This problem will not go away.

I will be at the Tuesday meeting next week to make a presentation. I will be addressing Larry Massing’s qualifications in regard to his public application for the position and his entire personnel file from the City of Stuart. If Mr. Weberman’s wants to attack me again, I will address the issue publicly. I did not address the issues at the last meeting, since the room was full of firemen there for the contract issue. Consider Mr. Massing was the former Fire Chief at the City of Stuart, to respond to Mr. Weberman would have been suicide for me. Mr. Massing has excellent credentials as a fireman. But I will demonstrate his credentials for the position he is in, as Chief Building Official, raise some questions. I will also be reading Ms. Ugalde’s email below.

Today I made a presentation at the Florida Building Commission. I was told the problem must be addressed locally. After my presentation, one of the Commissioners ran out to catch me. He told me, (and repeated four times that this was off the record) there is no entity in Florida to address the issues I have raised. He said it is a problem in Florida that needs to be addressed, but it can only be addressed at the Legislative level. I will pursue that, as well as the national media with the death of Mr. Ugalde.

Next month is little Victoria’s second birthday. It is also the day a Lennar home electrocuted her Daddy. We are starting a fund for little Alexis and Victoria. If any of your would like to contribute, please let me know. Next month for Victoria’s second birthday, my company is sending her, her sister, her Mom and Grandmother to Disney and Sea World for three days. If you would like to contribute to that, please call me. It’s the anniversary of her Daddy’s electrocution, so I want to try to make her smile. This family has had enough tears.

One final quote from Victoria’s Mom. She told me today that five year old Alexis can’t walk by a wishing well without asking for a quarter. She asks for a quarter because she has to make a “really big wish.” She wishes the same thing with every quarter . . . “Please God, bring my Daddy back.”

Lisa Ugalde Email:

I wish someone would have taken all the problems in the Building Industry, especially in Florida seriously a long time ago, it may have saved my husbands life, and not left 2 Children without a father, the youngest can now celebrate her Birthday and the anniversary of her father's Death on the same day. Lennar's negligent construction has now caused a Death, and left the family to suffer repercussions along with dealing with the death, losing our home, all because my husband walked into their Death Trap. On Sept.20th 2005 Rafael Ugalde was hooking up a dryer vent and was electrocuted, even though the power to the Laundry room was shut off at the Main Electrical Box, all of which has been documented on tape showing that the Home was wired in such a way that the entire House was electrified to the point that there was 110 volts running through the screw of the Medicine Cabinet. Where were Lennar Supervisors through the entire construction of these homes? The wires were not bundled which Fl code requires, the dry wall was put up over the wiring and the screws for the dry wall pierced the wiring and the screws through the metal frame of the home, which caused the entire home to be Electrified, and no one on site trained to save his life, now a disabled Mother left to raise 2 small children and Lennar has taken no responsibility to date, had someone responded to numerous complaints of serious Building problems and put a stop to Lennar Homes Building Practices Rafael Ugalde would not have been tragically killed, electrocution is no way to die, as we know as we changed our way of taking a life for People whom we deem through Law should die for their crimes, Rafael Ugalde was not convicted of crime he was just trying to make a living and support his family. I intend to do everything I can to make sure this is the first and last death which Lennar is responsible for.

Mish:
Best wishes and condolences to Lisa Ugalde and her family.

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

Reflections on Danville Illinois

I grew up in Danville, Illinois.
Zipcode 61832.
Yes, I am talking about the home of Dick Van Dyke, Gene Hackman, Jerry Van Dyke, and Bobby Short. I am sure there are other notables.

No, I am not bragging, I just want to make sure people are in tune to Danville Illinois not Danville California or Danville Virginia.

Far be it from bragging, Danville Illinois happens to be the #1 cheapest urban city in the entire country to live. A couple of people on Silicon Investor recently said to me "No wonder you are such a deflationist. You grew up in the single worst place in the entire county for real estate appreciation".

Yes indeed, and if you do a Google search you will find other real estate "horror stories" about Danville.

Danville in the News

Yes, Danville is back in the news once again.
Yahoo is reporting Home Sales Decline in 28 States.

The biggest price drops in percentage terms were in Danville, Ill., where home prices fell by 11.2 percent in the spring compared with the spring of 2005, and the Detroit area, where home prices were down 8 percent.

What Happened?

Enquiring minds may be asking "What the H Happened to Danville?"
The answer is long and complex. It all goes back to Uncle Joe Canon.



Joseph Gurney Cannon (May 7, 1836 – November 12, 1926) was a United States politician from Illinois and leader of the Republican party. Cannon served as Speaker of the United States House of Representatives from 1903 to 1911, and historians generally consider him to be the most dominant Speaker in United States history, with such control over the House that he could often control debate. Until Dennis Hastert passed him on June 1, 2006, he was the longest-serving Republican Speaker in history.

You see, "Uncle Joe" being the influential person that he was, controlled the very fate of Danville, Illinois. He had a choice of giving Danville the University of Illinois or a veteran's administration hospital. Uncle Joe did not choose wisely, at least for Danville. Should you care to, you can even blame my being on a random decision by "Uncle Joe" decades ago. My father, Tom Shedlock, worked as a clerk for the VA hospital in Danville for his entire career.

I graduated from Danville Schlarman High School in 1971. At that time the population of Danville was about 42,000. The population peaked at about 44,000 or so sometime when I was in high school. Danville now has a population of 33,904 according to the last census. Interestingly enough, Danville is growing by leaps and bounds geographically. The area keeps expanding outward (mainly to the North) while much of the "inner core" decays.

When I was in high school, Danville had three pizza parlors. I think there are at least 8 now. The number of additional restaurants, shopping centers, coffee houses etc is now staggering. The population of Danville has shrunk by 33% but the number of retail stores and restaurants has grown by 300% easily. Does this make any sense?

Industry

Danville Illinois was once home of Chuckles.



Danville was also the home of a General Motors foundry, aerosol bottling companies, a Coca Cola bottling plant, Hyster fork lift truck manufacturing etc etc etc. All have left. Hyster still exists but in a non-manufacturing role only.

Danville still lays claim to fame as having the world's largest grain elevator.
Following is a picture of the Lauhoff grain elevator in Danville.



That grain elevator exploded when I was in high school (grain dust powder is very explosive) and the flames could be seen as far away as Chicago, 120 miles north.

Question of the Day?

Will places like Danville will just sink into the sunset, or is a revival is on the way?

$250,000 will buy one of the best homes in the entire county (let alone the city proper). $250,000 in LA might buy you a bad house in a bad neighborhood. Yes, Danville is in decay, but it is not a crime ridden decay. It is a decay caused not by infiltration of gangs or crime but by flight of businesses. Danville is an aging city.

Still one has to wonder about all the new retail stores and restaurants. If expansion is happening in Danville, is there any place in the country (above say 20,000 in population) where expansion is not occurring?

Looking ahead what does that say about pricing pressures and the ability to pass costs on?
I am not talking about Danville here, but the whole country.

No, Danville does not have an ocean or Lake Michigan, but it does have cheap housing. May dad passed away just a couple years back. His house sold for the grand total of $14,000. Yes that is the correct figure. There is no dropped zero. Still, that is all the house was worth.

When I grew up I did not feel deprived. I thought we were "middle class". I went to an expensive Catholic High School. One bathroom for six people did not seem unusual to me at all. The neighbors down the street somehow thought we were rich. Perhaps we were. We were happy and my parents were debt free.

Tuition at the University of Illinois was $250 a semester when I started college. It was about $400 a semester when I graduated. I did not have a car so I hitchhiked home on weekends to be with my friends (about 35 miles). I always got a fast ride.

I am struggling to figure out how anyone in Danville can afford to send their kids to the University of Illinois today, whether they hitchhike there or not. In regards to that last sentence, I am not talking just about Danville Illinois, but "SmallTown" USA in general. For that matter I may be talking for all but the top 15% of the country.

Perhaps the savior of Danville and other "SmallTown" cities will be when no one can afford to live anywhere else. At the current pace of outsourcing, that scenario may be coming sooner rather than later.

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