Home Prices Rise: a Surprise?

In no surprise to anyone (for a change) the GDP was revised lower to 0.6% in first quarter.

The U.S. economy slowed to a crawl in the first quarter, held back by falling investments in homes, shrinking inventories and a large trade gap, the Commerce Department reported Thursday.

The economy grew at a 0.6% annualized pace in the quarter, revised down from the initial estimate of 1.3%, the government said in its second estimate of quarterly gross domestic product. It was the slowest growth since late 2002.

The economy has grown just 1.9% in the past four quarters, well below the 3% growth most economists say is the long-run potential. It's the weakest year-over-year growth in four years.

"The details of the report suggest some reasons for even more optimism for the second quarter," wrote Drew Matus, an economist for Lehman Bros. The faster businesses cut their inventories, the sooner they'll be ready to ramp up production again.

Considering the large upward revision to consumer spending, the report "will widely be viewed as a positive when the details are scoured," wrote Tony Crescenzi, chief bond market strategist for Miller Tabak & Co. Although the drags from inventories and home building will lessen in coming quarters, consumer spending is weakening, he said.

"The composition of GDP will turn unfavorable in the second quarter, putting into question the sustainability of a rebound in GDP," Crescenzi said. Data on consumer spending will be the main variable to watch.

Select Details of GDP

• Real consumer spending increased 4.4% annualized, the fastest in a year, compared with the 3.8% initial estimate. Spending on durable goods increased 8.8%, spending on nondurable goods rose 3.5% and spending on services increased 4%.
• Consumer spending contributed 3 percentage points to growth.
• Business fixed investments increased at a 2.9% annual pace, revised up from 2% earlier. Investments in equipment and software rose 2%, while investments in structures increased 5.1%. Business investments contributed 0.3 percentage points to growth.
• Inventories shrank by $4.5 billion. The change in inventory investment cut 1 percentage point from growth.
• Exports fell 0.6%, the biggest decline in four years. Meanwhile, imports rose 5.7%. The trade deficit cut 1 percentage point from growth.
• Government spending rose 1% in the first quarter. Federal spending fell 3.9%, including a 7.3% drop in national defense spending. State and local government spending rose 3.9%.
• Government spending contributed 0.2 percentage points to growth.

Note that the 4th quarter 2006 GDP was also revised dramatically lower (see US GDP Flunks Smell Test). Now we are starting see the same thing happen with 1st quarter 2007 estimates. Is there a pattern here?

If one believes as I do, that the first 2% of GDP is hedonics, imputations and other fictional activity (e.g. the estimated value of things like free checking accounts - yes I am serious - added into the GDP numbers), then we are already in a recession starting now.

What is most interesting is the notion that this is some sort of optimistic report. It is not. Rather than looking at inventories that have to be replenished, the correct way to look at things is that GDP was up a mere .6% in spite of very robust consumer spending. If +.6% GDP is all we can muster with strong consumer spending, it should be obvious what will happen when consumers toss in the towel.

Home Prices Rise

In unrelated news I see that Home prices rise at slowest pace in 10 years.

U.S. home prices increased 0.5% in the first quarter, the slowest quarter-to-quarter price gain in 10 years, the Office of Federal Housing Enterprise Oversight reported Thursday.

The OFHEO price index shows home prices are up 4.3% compared with a year earlier, the smallest gains in 10 years. Price appreciation has slowed sharply from a 13.7% year-over-year gain in 2005.

"Prices are rising slowly in most areas," said Patrick Lawler, chief economist for the federal agency, which regulates mortgage giants Fannie Mae and Freddie Mac. The price index is derived from mortgage data from the two companies.

In the OFHEO index, prices fell in seven states from the fourth quarter to the first, including California, Nevada and Florida, three states that saw the largest price gains in 2004 through 2006.

Prices were dropping at a 3.4% annual rate in California and at a 2% annual pace in Nevada and Massachusetts.

Prices were down quarter-to-quarter in 96 of 285 cities, including 13 of 18 Florida cities and 22 of 26 cities in California. Among 22 major cities around the nation, prices were falling in eight.

On a year-over-year basis, prices fell in two states: Michigan and Massachusetts.

It borders on ridiculous to suggest with a straight face and no explanation that "Home prices are rising slowly in most areas". Home prices are not rising and have not been rising for at least a year. Want proof? Just ask the CEO of any homebuilder if home prices including incentives are rising. I suspect they would all laugh in your face.

Yesterday in Housing prices: Comparing Shiller and HPI I was wondering whether or not the numbers will tell us what we already know: home prices are falling. The numbers are in. Surprise Surprise Surprise. We now have to wait at least another quarter for a government agency to tell us what we all knew many months ago.

This post originally appeared in Minyanville.

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

Housing prices: Comparing Shiller and HPI

Eyes are focused on the upcoming Office of Federal Housing Enterprise Oversight (OFHEO) housing price report due out on Thursday to hopefully tell us what we already know: home prices are falling.

For reference purposes the fourth quarter 2006 headline from OFHEO was U.S. House Price Appreciation Rate Steadies. Yes, the word appreciation was still in the headline. Here is a snip:

The rate of home price appreciation in the U.S. remained steady in the fourth quarter of 2006, extending a general trend of deceleration begun earlier in the year. Home prices, based on repeat sales and refinancings, were 1.1 percent higher in the fourth quarter than they were in the third quarter of 2006. This is slightly above the revised growth estimate of 1.0 percent from the second to the third quarter.

Prices in the fourth quarter of 2006 were 5.9 percent higher than they were in the same quarter in 2005. Price appreciation in 2006 was substantially smaller than the tremendous price gains of recent years, which ranged from 7.4 percent in 2002 to 13.2 percent in 2005. The figures were released today by OFHEO Director James B. Lockhart, as part of the House Price Index (HPI), a quarterly report analyzing housing price appreciation trends.

“These data show that, on the whole, prices are still rising, albeit at a much slower
pace,” said Lockhart. “This suggests that house price appreciation is, for now, more in line with historical norms.”

Does anyone possibly believe that housing prices in general were still rising at the end of 2006? I don't. I doubt even David Lereah believes that.

Shiller Reports First Price Drop Since 1991

According to the Shiller Index U.S. home prices fell for first time since 1991.

U.S. home prices dropped 1.4% in the first quarter compared with a year earlier, the first year-over-year decline in national home prices since 1991, according to the S&P/Case-Shiller index released Tuesday.

A year ago, home prices were rising at an 11.5% pace. Prices have been falling for the past three quarters.

The Case-Shiller indexes cover three geographical areas. The national index is released quarterly, while the 10-city and 20-city indexes are released each month.
The 10-city Case-Shiller price index fell 1.9% year-on-year through March, while the 20-city index dropped 1.4%. The 10-city index has fallen nine months in a row, while the 20-city index has fallen for eight straight months.

Thirteen of 20 cities in the Case-Shiller index have seen falling prices in the past year, led by Detroit (down 8.4%) and San Diego (down 6%). Home prices rose 10% in Seattle, 7.4% in Charlotte, N.C., and 7% in Portland, Ore. Prices in Phoenix and Las Vegas, Nev., have fallen the furthest from their peak. After growing at a 49.3% pace in September 2005, home prices in Phoenix are now down 3% year-on-year. In Las Vegas, price gains went from 53.2% in September 2004 to negative 1.6% in March 2007.

Among other major cities tracked by the index, home prices are down 4.9% in Boston, down 4.8% in Washington, down 3% in Tampa, Fla., down 2.4% in Cleveland, and down 2.3% in San Francisco. Prices fell 2% in Denver, 1.9% in Minneapolis, 1.4% in Los Angeles and 1.1% in New York. In addition to the price gains in Seattle, Charlotte and Portland, prices rose 2% in Atlanta, 1.6% in Dallas, 1.3% in Chicago and 1% in Miami.

The Case-Shiller index is considered a superior gauge of home prices compared to the median sales-price data released by the Commerce Department or National Association of Realtors, because it tracks multiple sales on the same property and is therefore not influenced by a different mix of homes sold in a period.

Unlike the price index produced by the Office of Federal Housing Enterprise Oversight, the Case-Shiller index does not include refinancings. And, also unlike the OFHEO index, it includes homes with mortgages larger than the conforming limit of $417,000.

The OFHEO index for the first quarter will be released on Thursday. Through the fourth quarter, home price gains had slowed to 5.9% year-on-year from 13.3% a year earlier. The OFHEO purchase-only index (which excludes refinancings) had risen 4.1% year-over-year.

HPI Methodology

Here are a few of snips about the HPI (Housing Price Index) as computed by the OFHEO.

Each quarter, Fannie Mae and Freddie Mac provide OFHEO with information on their most recent mortgage transactions. These data are combined with the data of the previous 32 years to establish price differentials on properties where more than one mortgage transaction has occurred. The data are merged, creating an updated historical database that is then used to estimate the HPI.

The HPI is a weighted, repeat-sales index, meaning that it measures average price changes in repeat sales or refinancings on the same properties.

The HPI is based on repeat transactions. That is, the estimates of appreciation are based on repeated valuations of the same property over time. Therefore, each time a property "repeats" in the form of a sale or refinance, average appreciation since the prior sale/refinance period is influenced.

Shiller Methodology

Eligibility Criteria
To be eligible for inclusion in the indices, a house must be a single-family dwelling. Condominiums and co-ops are specifically excluded. Houses included in the indices must also have two or more recorded arms-length sale transactions. As a result, new construction is excluded.

High Turnover Frequency
Data related to homes that sell more than once within six months are excluded from the calculation of any indices. Historical and statistical data indicate that sales made within a short interval often indicate that one of the transactions 1) is not arms-length, 2) precedes or follows the redevelopment of a property, or 3) is a fraudulent transaction.

Time Interval Adjustments
Sales pairs are also weighted based on the time interval between the first and second sales. If a sales pair interval is longer, then it is more likely that a house may have experienced physical changes. Sales pairs with longer intervals are, therefore, given less weight than sales pairs with shorter intervals.

Shiller attempts to adjust for time factors by giving more weighting to repeat sales (as long as they are at least 6 months apart) as the following chart shows.



Shiller goes on to make a lengthy mathematical presentation of his model but there is theory and there is practice.

His model shows that prices in Tampa are down 3%, Phoenix down 3%, and prices rose 1% in Miami. That is what the data shows (in theory). In practice I do not buy it. There is simply no way home prices rose in Miami in 2006 nor is there any way prices in Tampa or Phoenix are down as little as reported.

What Went Wrong?

Supposedly the index's main advantage is that it only looks at repeat sales. Perhaps that is fine in a steady market with frequent repeat sales, where the rate of appreciation is uniform, but how often do those conditions exist? How long does a blowoff top spike keep influencing the data? And what happens at major turning points or when repeat sales take longer and longer?

Based on the above weightings chart, a home that resells with an interval of 10 years has a weighting of .8 while one that sells in six months (but not sooner) has a weighting of 1. Let's consider a house that sold in 2002 for $200,000. It sells in 2007 for $250,000. Is that a gain? How much? What if that house would have sold for $400,000 in 2005 and $300,000 in 2006 based on comparables? There is no way to account for this in his model because it looks at only the seen. Also unseen are potential upgrades such as new kitchen, incentives, etc. that were done to make the home "more sellable". Extensive upgrades should be factored in but they are not.

Both indices exclude new home sales even when the homebuilder is still building the same model year after year (at now dramatically reduced prices). With homebuilders discounting new homes by hundreds of thousands of dollars and 20% or more (not counting incentives) it is absurd to believe (or even report) that Miami home prices are rising by 1% or Tampa prices are falling by a mere 3%.

But I am not just talking Florida. Homebuilders nationwide have been reducing prices dramatically in nearly every market, even more so when one includes incentives. Try telling the guy trying to bail on his condo in any city anywhere that prices are down a mere 1.4% last year. See what kind of reaction you get. Ooops, condo prices are not included in Shiller's index either.

Also note that neither model looks at incentives and incentive have been massive lately (but nonexistent at the blowoff peak in 2005).

The differences between Shiller and the HPI seem to be that Shiller does not look at refinancings but the HPI does, and the HPI has a price cutoff based on Fannie Mae conforming loans at $417,000 but Shiller does not. Otherwise they both seem to have a fatal flaw in assuming that there was an increase in price over a 5 year period (on a house that last sold in 2002) when in fact there may have been huge unrealized gains 3 years and a huge unrealized loss in year 5.

By attempting to eliminate distortions caused by optimistic appraisals and evaluation of comparables, other serious flaws in the computations were introduced. While it's true that the faster the housing turnover the less the bias (barring fraud), does a difference in weightings of 1.0 vs. .8 over a 6 month period vs. a 10 year period properly account for that bias?

More importantly, for long timespans it is not what happened but how it happened that is important. A model that looks at a sales price (and a sales price only) from 10 years ago vs. today cannot properly account for year to year variations in price. Prices may have gone up 5 years were flat 3 years and fell for two years but if the price appreciated over 10 years the model is going to be biased towards a year over year gain when in fact there may have been a loss two consecutive years.

It will be interesting to see if the OFHEO tells us what everyone already knows: home prices are falling. But what the index will not show is by how much. The methodology of looking only at previous sales is simply too flawed. Shiller's model is an improvement over the HPI but for practical purposes and year over year comparisons, both models seem fatally flawed.

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

Property Tax Dilemma

Kevin Depew in Tuesday's Five Things wrote about the Property Tax Dilemma.

The Florida legislature plans to convene a special session in mid-June that could result in more than $30 billion in property-tax relief over the next five years, the Wall Street Journal reported.

• Thanks to the housing boom, the average annual property-tax bill in the U.S. was $1,132 per person in 2005, up 13% from 2000 in inflation-adjusted terms, according to data from the Commerce Department.
• The boom was so strong that in many areas housing prices rose too fast for local tax assessors to keep up, the WSJ said.
• Now, tax assessments are catching up just as market prices are declining, a double whammy for homeowners facing increasing mortgage payments due to resets, or homeowners now trapped in residents with property tax bills edging them out of their comfort zone.
• But that's the homeowners problem.
• Here is the dilemma for states: Reducing property-tax revenues threatens budgets of cities and counties. However, a property-tax cut could stimulate the economy by leaving homeowners with a bit more money in their pockets.
• Florida doesn't have a personal income tax, and its cities and counties depend heavily on property taxes to pay for services such as police and firefighters, the Journal noted.

That post got me to thinking about dilemmas in general.
So Let's Recap General Dilemmas ....

• So property taxes are up even as home prices are sinking.
• So gasoline prices are up because of demand from China.
• So food prices are up because of bad policies on ethanol.
• So health care prices are up because of bad policies everywhere.
• So wages are not keeping up with inflation.
• So insurance cost are rising dramatically especially in the hurricane zones.
• So foreclosures and bankruptcies are rising dramatically.
• So the economy is slowing.
  
• So the little guy is being squeezed.
• So property tax relief is on the way.
• So states are facing declining revenue.

Dilemma?
Do you see any dilemmas here?
The stock market sure doesn't.
For now anyway.

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

Record Short Sales & Liquidity Bubbles

Bloomberg is reporting Short Sales Break Record on NYSE; Market Bulls Get More Bullish.

Short sellers are betting against U.S. stocks like never before as the Standard & Poor's 500 Index approaches an all-time high. That's making some of the biggest bulls even more optimistic.

"What the short seller appears to be doing is doubling down," said Kenneth Fisher, who oversees about $40 billion as chairman of Fisher Investments in Woodside, California. "You love to see it, because if you believe there is a basic driver to the bull market, they're going to get run over."

The amount of shorting -- where traders sell borrowed stocks expecting to buy them back after prices fall -- jumped to 3.1 percent of the total shares listed on the New York Stock Exchange this month. That's the highest since at least 1931, according to Bespoke Investment Group LLC, a research firm in Mamaroneck, New York.

The wagers represent billions of dollars that could be invested in equities if short sellers close their positions. The bears also reassure fund managers who get skittish when few traders anticipate the possibility of a stock market decline.

"Ultimately you have to cover the short positions and that tends to create more of a buying frenzy," said Andy Engel, co- manager of the Leuthold Core Investment Fund, which has outperformed 99 percent of similar funds over the past five years.

Losses are mounting for traders speculating on a drop in stocks. So-called short interest on the NYSE rose to a record 11.8 billion shares as of May 15, 7 percent more than a month earlier, according to the world's biggest exchange.

"Anyone that did the theory, sell in May and go away, they're going to wish they never read that," Chicago-based Froehlich said. He expects the Dow average to climb 11 percent and reach 15,000 by Christmas.

Dow 15,000 on a short squeeze huh? I am hearing other targets like 1800 on the S&P. And there is talk of bears piling it on when bulls are pressing their bets based on merger mania in leveraged buyouts (LBOs) and banking on short squeezes.

The liquidity that is driving these LBOs can dry up at any time. I suspect it will be lights out at some point just as it was with Florida condos. Remember how people went from camping out overnight to get in on hot new condo developments to no bid almost overnight. We were all told that it would take much higher interest rates to kill housing. It didn't. The housing bubble popped on pure exhaustion.

I suspect the liquidity bubble fueling these stock buybacks and LBOs will die of exhaustion as well. Overnight (at a date unknown) there will be an attitude change and financing these deals will go from super easy to super hard just as we saw previously with subprime lending for housing.

As for short sales and the meaning thereof, the bulls are simply wrong. We talked about this at length last week on Buzz&Banter. In case you missed it, here is a repeat of Hussman's article called Spot the Pigeon.

A similar claim is that “there are a lot of shorts out there, and they're going to be forced to cover.”

Again, this is not supported by the data. Recent years have seen a proliferation of hedge funds, market neutral strategies, and merger arbitrage vehicles. All of these are based on matched long and short positions. These are not “speculative” or “naked” shorts, and in many cases are not even bets that the stocks sold short will decline (instead, the objective is to earn a difference in performance between the longs and the shorts, regardless of whether they both rise or fall in absolute terms). It is wrong to quote the current short interest as a bullish argument, as if the shorts are somehow compelled to cover here.

In today's Buzz, Jason Goepfert at SentimentTrader responded to this Mini-Minyan Mailbag:

"Regarding the record-breaking levels of short sales: My question stems from the fact, and from the remembrance of something (Prof. Succo) touched on awhile back, that the short sale figures can't really be relied upon due to traders who may be short, but vs. derivatives of some kind (in most cases being calls on a delta ratio)...

That being said my question is how much of the short sales out there do you believe to be part of a larger vol play and how much do you think is due to a plain vanilla short."

Minyan Michael

Reply from Jason Goepfert at SentimentTrader

Michael, this is a difficult question on which to even hazard a guess, since we don't know how many traders are using the options as a hedge versus speculation, and for those who do hedge, on what kind of ratio they're doing so.

But, that doesn't mean we can't take a guess, right? So here's my shot. From mid-April through mid-May, the NYSE reported 11.7 billion shares short, which was a change of +772 million from the previous month.

Over approximately the same period, there were 18 million call options bought to open on all the U.S. exchanges by large traders. By "large traders," I mean those that did transactions of 50 or more contracts at a time.

Assuming that every trader hedged those call options they bought, and they wanted to remain delta-neutral, and the average delta of the calls was 0.50, then they would need to short about 902 million shares.

There are a whole host of wild assumptions in that previous paragraph, but it resulted in these hedgers shorting 117% of the change in the NYSE short interest! That's obviously not possible, which means that some of our assumptions are off base.

If we assume that only half the traders were fully hedging those calls, then last month's activity would have explained about 60% of the change in short interest. Or, assuming that the traders did not remain exactly delta-neutral, or the average delta was lower, would also reduce the number of shares they had to short.

So without knowing a lot more detail, this is basically an impossible question to answer, but given the information we do have, it seems like derivative activity could possibly explain a big chunk of the monthly changes in short interest.

So there you have it. Thus there are three solid reasons why short interest is not what it seems: derivatives hedging, long/short funds, and arbs on convertible bonds. Once again mainstream media presents a distorted view of what is really happening and draws the wrong conclusions.

Stocks are not cheap and there is likely no short squeeze (in the broader sense). Instead we are in the midst of liquidity madness where it is more important to get deals done than it is for any deal to make sense.

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

Waning Patience

Stephen Roach is talking about China’s Pace, America’s Angst.
Following are a few select snips:

Round II of the Strategic Economic Dialog has come and gone. In just eight months time, this carefully orchestrated consultation between senior officials from the US and China has established a robust framework of engagement between the world’s first and fourth largest economies. The good news is there is progress to report. The bad news is that the progress was predictably incremental – insufficient to defuse the political angst now bubbling over in the US Congress.

In an era of accelerating globalization, the Chinese strain of open development offers the world considerably greater opportunity than the closed approach long advocated by Japan.

The US Congress could care less. The economic pressures bearing down on Washington come straight from the American middle class. And with understandable reason: According to the US Bureau of Labor Statistics, the median real wage – inflation-adjusted wages for the worker in the middle of the pay distribution – has risen a cumulative total of just 0.9% over the seven years ending in the first quarter of 2007.

Over the past 30 years, China has been exceedingly careful to balance the pace of reforms against the risks of instability. At no point did it follow the shock-therapy approach embraced by states of the former Soviet Union. “Determined incrementalism” is the best way I would describe the character of three decades of Chinese reforms – no backtracking but steady and unrelenting progress toward private ownership and markets. This approach is very much at odds with the search for the “magic potion” that always seems to dominate the short-term problem-solving mentality of Washington politicians. The radical currency-fix option that is now on the table in Washington is very much at odds with the gradualism that has served China so well over the past 30 years.

The easy answer is to blame someone else – in this case, scapegoating China because it accounts for the largest bilateral piece of America’s record multilateral trade deficit. The tougher answer is to get to the bottom of the real wage stagnation problem – and put policies in place that could rectify this situation.

I stand by my view that there is about 60% chance that a veto-proof majority of the US Congress will pass a WTO-compliant bill by the end of 2007 that will impose broad-based trade sanctions on Chinese products sold in America.

If Roach has it correct that there is a 60% chance of massive protectionist legislation out of Congress, then I will suggest that it will be the equivalent of another Smoot Hawley Tariff Act if it passes.

Roach writes "Congress could care less". I believe he means "Congress could NOT care less". Congress seldom cares about anything but votes. If horrendous policies will get Congress reelected then horrendous policies we will get.

Right now there is a vested interest in protectionism all under the nonsense of "fair trade" as opposed to "free trade". Fair of course means fair to those with a vested interest in keeping their wages high regardless of the consequences to anyone else. No one in Congress ever bothers to look at the seen and the unseen. There is simply too much political hay to be made by only concentrating on the seen. I recently talked about this in Protectionist Crackdown - Seen vs. Unseen.

Another interesting factoid is that inflation-adjusted wages for the worker in the middle of the pay distribution – has risen a cumulative total of just 0.9% over the seven years ending in the first quarter of 2007.

That is of course if one believes the CPI. I don't. If the CPI is understated by as little as 1% then real wages are negative over the last seven years.

Business Employment Dynamics

But not only do I disbelieve the CPI, I disbelieve job stats as well and have written about it many times. Please consider Birth Death Model Fatally Flawed.

Supporting evidence is starting to roll in. The New York Times is writing Wait a Few Months Before You Believe the Numbers.

Sometimes the statistics that take the longest to arrive can provide the most important information, particularly when they point to inflection points in the economy.

So it may be with jobs data that the Bureau of Labor Statistics released this month for the third quarter of 2006. The new data calls into question the previous conclusion that employment grew at a strong rate in late 2006.

And it indicates that many small businesses, which had been leading the way in job creation, are now suffering. As is shown in the accompanying graphic, companies with fewer than 50 employees lost workers in the quarter, while larger ones kept hiring, albeit at a reduced pace.

It also appears that 8,000 more businesses closed than opened in that quarter, making it the worst quarter by that measure since the third quarter of 2001, when an economy already in recession was jolted by the Sept. 11 attacks.

The data is included in a quarterly report, titled “Business Employment Dynamics,” that comes from reviewing employment at every company in the United States that is subject to state unemployment compensation laws. By that measure, private-sector employment rose by just 19,000 jobs in the quarter.

The widely reported data from the bureau’s monthly survey of employers concluded that the quarter had a net gain in private-sector jobs of 498,000. That led economists to conclude that employment growth was holding up well even though the overall economy had slowed, growing at just a 2 percent annual rate.

A big difference was in construction employment, which the quarterly study found contracted by 77,000 jobs in the quarter, in contrast to the increase of 34,000 jobs shown by the monthly surveys.

“The data show we had two consecutive quarters of job losses in construction,” said David Talan, an economist at the bureau, noting the small decrease shown in the second quarter of last year.

One has to be nuts in the midst of this housing slump to think that we are adding construction jobs at the pace estimated by the BLS, but nonetheless, the BLS seems to be sticking to their model (without ever explaining it I might add). It is one gigantic optimistic black box that will not turn negative until it is obvious to everyone on the planet that the US is in recession.

Men's earnings shrink

Are women to blame for shrinking mens wages?

Those in their 30s make less than dads did, a report says. Outsourcing and the advancement of women are cited.

American men in their 30s earn less than their fathers' generation did at the same age, potentially reversing longtime assumptions that each successive generation will be better off than their predecessors, according to a study released Friday.

Family incomes of thirtysomething men have continued to rise in recent decades, but mostly because more of their wives are working, the study's authors said. Yet even with the addition of women's paychecks, the rate of family income growth has slowed.

Taken together with data showing more workers are earning less in comparison with the stratospheric incomes of top earners, the report suggests that a growing number of Americans "believe that the rules of the game are no longer fair," said John E. Morton, director of the Economic Mobility Project at the Pew Charitable Trusts and one of the study's lead authors.

In 2004, the median income for a man in his 30s was $35,010, 12% less than that of men in their 30s in 1974, adjusted for inflation, according to the study, which was based on Census Bureau data. By contrast, thirtysomething men in 1994 earned 5% more than their older counterparts.

The generational income gap highlights troubling questions, Morton said, including what happens if an increasing percentage of Americans believe the American dream "is off limits to them."

Die-hard careerist baby boomers may partly explain the inability of thirtysomething men to move up the income ladder as quickly as their fathers. From the moment Generation Xers first set foot in the workplace, the boomers have been the "ceiling" blocking their way up the income ladder, said Peter Rose, a partner with marketing research firm Yankelovich Inc. in Los Angeles.

"The boomers stand out in defining themselves in terms of their work and have shown a disinclination to get out of the way," he said.

Freelancer Hayslett thinks there's another factor at play: "Honestly, it seems that women are more together," he said.

They're more stable and focused, he said, as compared with "a lot of guys who feel so frustrated that they tend to move around and leave."

Let me be the first to say that any study that blames women for shrinking men's wages is simply way off base as to cause and effect. Excuses are now running rampant.

Although China is willing to proceed on a pace that can be described as Determined Incrementalism, in typical US fashion we want action now even it it means compounding the problem by 800%. Heaven help us if Congress gets insanely protectionist.

But if unemployment was as low and jobs as plentiful as the BLS, the treasury and this administration says, then Congress should not be threatening the actions against China that are now under serious discussion. Which is it? Jobs can't be plentiful and the economy humming along if one is looking for protectionism as the cure. You can't have it both ways.

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

Healthcare costs soar-What are we getting for it?

The Seattle Times is reporting Blue Shield is hiking rates 19 percent on 137,000 plans.

Regence BlueShield on Tuesday began notifying 137,000 individual-plan customers that their premiums are rising an average of 19 percent in July in the steepest increase for individual plans this year by a Washington health insurer.

And for 16,000 of those enrollees, the rate increase will total 40 percent because they also happen to be moving into an older, more expensive age group.

The rate jump is a sharp change from last year, when Regence proposed — then rescinded — raising premiums by 5 percent. Regence has gained 30,000 new customers, bringing its total individual members to 137,000.

The rate boost does not apply to people who buy their coverage through employer plans or small-group plans. But both Regence's rate reversal last year and the size of this latest premium increase have outraged Washington Insurance Commissioner Mike Kreidler, who accuses the insurer of a bait-and-switch.

"I have serious concerns that consumers may have been whipsawed in an effort by Regence to increase market share," Kreidler wrote in a letter sent Tuesday to state legislative leaders.

Cute. Hold off rate hikes, get 30,000 more customers then jack up costs 19-40%. Inquiring minds might be asking if this is just a Washington state thing. So let's take a look.

The Boston Globe is reporting Healthcare costs soar out of control.

A common refrain this spring in local town and city halls is that despite increased revenues, jobs or programs will have to be cut. The culprit, according to municipal officials, is an increase in fixed costs, which are rising faster than tax receipts.

The major factor is health insurance. But per-employee annual costs for healthcare to municipalities covered by City Weekly have almost doubled since 2000, according to officials in Boston, Brookline, Cambridge, and Somerville.

According to a Boston Municipal Research Bureau report of November 2006, the city cut 1,176 employees between 2002 and 2006. But in that time it also spent an additional $187.5 million on employees, two-thirds of which was to cover benefits, such as healthcare.

In the state of Michigan Inmate health care costs soar.

The cost of sending Michigan's 51,000 inmates to hospitals and medical specialists outside prison walls has skyrocketed this year, with state officials predicting spending will run 61 percent over budget.

Corrections officials expect the bill for specialty care and hospitalization to grow from $58.8 million to nearly $95 million by Sept., 30, the end of the fiscal year.

"It's huge," said Barry Wickman, the Michigan Department of Corrections chief financial officer.

In all, taxpayers will spend $281 million this year to cover physical and mental health treatment and prescriptions for prisoners, even as the state considers cuts to schools and local governments to deal with a deficit that's pegged at $686 million.

Driving the increase are more inmate referrals to specialists outside prison and more hospital stays. In 2004, inmates spent 9,612 days in hospitals, jumping to 13,039 in 2006. Similarly, the number of referrals to care outside prison rose from 18,777 in 2004 to 23,294 in 2006.

Corrections officials say they have little choice but to pay the bills. A 1976 U.S. Supreme Court decision mandated health care to prisoners as an entitlement, including dental, vision, pharmaceutical and mental heath treatment.

The payment for outside care had been running $5 million per month, but jumped to $8.15 million during each of the first four months of the fiscal year starting in October, according to Corrections. Lawmakers appropriated $11.7 million for extra costs last fiscal year and $12.6 million this fiscal year. A request for an additional $23.3 million this year is pending.

"The increase in (health care) costs within the prison system far outstrips what we're seeing in the rest of society,'' Kahn said. "This is much, much, much worse."

U.S. is Dead Last

A study of Comparative Performance of American Health Care shows that you can find much better care, but you can't pay more.

Despite having the most costly health system in the world, the United States consistently underperforms on most dimensions of performance, relative to other countries. Compared with five other nations—Australia, Canada, Germany, New Zealand, the United Kingdom—the U.S. health care system ranks last or next-to-last on five dimensions of a high performance health system: quality, access, efficiency, equity, and healthy lives. The U.S. is the only country in the study without universal health insurance coverage, partly accounting for its poor performance on access, equity, and health outcomes. The inclusion of physician survey data also shows the U.S. lagging in adoption of information technology and use of nurses to improve care coordination for the chronically ill.

The most notable way the U.S. differs from other countries is the absence of universal health insurance coverage. Other nations ensure the accessibility of care through universal health insurance systems and through better ties between patients and the physician practices that serve as their long-term "medical home."

With the inclusion of physician survey data in the analysis, it is also apparent that the U.S. is lagging in adoption of information technology and national policies that promote quality improvement.

Health Care Stats

• The much touted Canadian system comes in second to last and is the second most expensive but has a cost about half that of the US.
• The UK reportedly has the best healthcare system at well under half the cost of the US.
• New Zealand is the low cost provider at just about a third of what one pays in the US.

Most seem to think we should do something about this. But what?

Competing Plans

1. President Bush announced his plan for Affordable, Accessible, and Flexible Health Coverage in the State of the Union message.
2. California Governor Arnold Schwarzenegger has his health care plan.
3. Democratic Senator Ron Wyden has a health care plan.
4. Families USA the self proclaimed Voice for Health Care Consumers pans Bush's Health Savings Account approach while offering its own plan.
   

Hospice Care Anecdotes

There were a couple of interesting posts recently on the The Market Traders about personal experiences with Hospice care. The first is by WilsonsJulie on Odyssey Hospice.

My dad has alzheimer's. He qualified for Hospice care several years ago and has been under the care of odyssey hospice since 2004. Hospice is a service aimed at comfort, mainly for the last 6 months. My dad is a tough, sweet guy, so he's chosen to keep hanging on ;-) There are clients who have had this care for 5-6 years, in some cases, where the health decline is steady but serious.

Odyssey was sued in a whistle blowing case a couple of years ago for giving services to people who didn't qualify and they had to pay the government millions of dollars. See the Hospice Blog article Is Odyssey Hospice the tip of the iceberg?

I just recently got notice that my dad no longer qualifies for hospice. It is ironic because the guy is very much bedridden now and he is literally wasting away as the disease progresses. However they consider his condition "stable". They have a new feature to call and contest it. I did, and the person was very sympathetic, but my dad was denied services. I then got a three page letter about the denial of services.

I contacted another hospice provider who hasn't been sued by the government for fraud and they did an initial evaluation of my father and will return in a month to chart any changes. I fully expect my dad to requalify for hospice. I just wanted to give the heads up in case anyone else is involved with Hospice or will be considering Hospice. I think the government might just be shifting the burden of end of life care back onto the families, despite past promises. ~julie

In response to Julie's post PeterTribo responded with his story on hospice care.

Part of my skeptical attitude toward all things "official" and "bureacratic" comes from my caring for my mother for three years while she was in a nursing home. This occurred in Massachusetts 1993-96 and I was a naive layman with no experience dealing with either the Healthcare or the Legal System. I did a lot of research on both at that time and what I found horrified me.

One of the first books I read at a Probate and Family Court Law Library run by the MA government was a tome titled THE LAWYER'S GUIDE TO MEDICARE. I had read a few "civilian" books about MEDICARE by that time but this book was a real shocker. I can only describe it as a "nudge, nudge, wink, wink" guide to scammming MEDICARE. It described in detail methods to hide assets and get MEDICARE to pay fraudulent legal bills. This book really sat me up in my chair as to the state of affairs in the US since it was written by a Law Professor!

One of the techniques used by the nursing home to raise additional revenue was quite a shocker. My mother had to be hospitalized two times outside of the nursing home. When that happens, the nursing home gave me the choice: do you want to reserve your mother's place if she returns from the hospital? If not, we do not guarantee that she can return to the facility. So, for each day that you pay, you may or may not be paying for a place that might have been empty anyway. Only the nursing home knows their occupancy rate. This is classic double billing.

Another shocker was that the nursing home dealt with only one drug supplier. At one point, they changed the supplier and the cost of a drug my mother was taking was tripled!

Another time I received a call from someone who said they were my mother's "audiologist". My mother had never had any trouble with her hearing. I did some research on this and found out that a private company was allowed into the facility to examine patients and sell their wares. I was never consulted on this. It sure looked like a revenue raiser for both the hearing aid company and the nursing home via fees paid to them.

On four occasions, ambulances were used and I thought the fees for these rides were exorbitant.

I can only imagine a room full of Healthcare Beancounters examining every nook and cranny of Operations and devising schemes and methods to maximize profits. In short, I am rather amazed that more Americans working in this vast system are not whistle blowing. Like many institutions in American society, one must ask if the corruption and venality are not beyond critical mass.

One might simply substitute the Mortgage Industry with its crooked appraisers, mortgage brokers willing to falsify paperwork, Wall Street ready to slice, dice, bury the paper and regulators turning a blind eye to all. It would seem that much of the American Economy is predatory.

Plans are floating everywhere but little attention is focused on fraud, waste, paperwork, the right to die, liability costs, or health care rationing. Is it any wonder costs are soaring?

Fraud

At every step of the way there is every incentive to milk the system for as much as possible, and conditions for fraud run rampant. The Insurance Journal is reporting
Three California Doctors Arrested in Outpatient Surgery Center Scam.

The California Department of Insurance and the Orange County District Attorney's Office have arrested three doctors for medical fraud. The doctors are the latest charged defendants in what's being dubbed the Unity Outpatient Surgery Center scheme, and are accused of performing unnecessary surgical procedures and fraudulently billing more than $30 million to medical insurance companies.

According to the DOI, the doctors participated in a $96 million billing scheme that recruited 2,000 healthy people from all over the country to receive unnecessary surgeries in exchange for money or low cost cosmetic surgery. The recruitment of patients, or "capping," is illegal in California. Insurance companies paid Unity more than $17 million during a 10-month period.

The Unity cappers, or recruiters, targeted employees from businesses in more than 32 states and covered by PPO insurance plans, as pre-approval from the insurance company would not be a requirement for surgery. More than 1,600 employers were affected by employees who were involved in this scheme. The cappers arranged transportation for the patients, scheduled the surgeries, and coached the healthy patients on what to say. In exchange for undergoing surgery, the "patients" would receive a cash payment, usually between $300 and $1,000 per surgery, or credit toward a free or discounted cosmetic surgery.

Chan is accused of performing procedures on 208 patients which resulted in more than $9.5 million in insurance billing with more than $1.8 million collected for the unnecessary and fraudulent work.

Rosenberg, on staff at Cedars-Sinai Medical Center and affiliated with Herbalife, primarily performed colonoscopies and esophagogastroduodenoscopy (EGDs). Rosenberg is accused of performing 646 procedures on 554 patients, which resulted in the fraudulent billing to insurance companies of more than $9 million, for which Unity was paid more than $2.3 million.

Hampton is accused of performing 180 procedures on 178 patients. He primarily performed thoracic sympathectomies, also known as sweaty palms surgeries, which is a highly unusual and dangerous medical procedure.

Arguing about competing healthcare plans and health savings plans or even mandating insurance as Massachusetts was dumb enough to do (see Massachusetts Marks Health-Care Milestone Insurance Required Of All Residents) is a waste of time unless those plans deal with fraud prevention, paperwork reduction, the right to die, liability costs, and some reasonable discussion about health care rationing. In other words the whole system probably ought to be scrapped not patched.

Instead of figuring out what the real problem is (and what we can really afford), in typical bureaucratic procedure we have states and the federal government mandating solutions and most of those solutions just waste more money. I would recommend that we take a look at New Zealand and start all over from there. Reducing expenses by two thirds and improving care dramatically at the same time has to be a good start.

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

Home Prices Take Record Dive

In the shadow of the headline Monthly new-home sales hit a 14-year high is the more important subtitle "prices taking record dive".

The beleaguered housing industry is sending mixed signals, with sales of new homes surging in April by the biggest amount in 14 years while prices endured a record plunge. Analysts said the price drop could provide evidence of builders' desperation. They are looking to reduce a glut of unsold homes in the face of the worst slump in sales in more than a decade.

The Commerce Department reported Thursday that sales of new single-family homes jumped by 16.2 percent in April to a seasonally adjusted annual rate of 981,000 units. That was the biggest one-month sales gain since a 16.4 percent surge in April 1993. Even with the increase, however, sales are 10.6 percent below the level of a year ago.

The median price of a new home -- the midway point between the costliest and cheapest -- fell to $229,100, a record 11.1 percent below the March level. The price was 10.9 percent below the level of a year ago, the biggest year-over-year price decline since 1970.

Analysts said the drop in home prices probably reflected efforts by builders to cut prices more aggressively to sell homes. The inventory of unsold new homes fell slightly to 532,000 in April. It still would take six months to deplete this inventory at the April sales rate.

Good News

• The Census Bureau Report shows new home sales are up 16.2% from March
• The Census Bureau report shows that housing inventory plunged from 6.7 months supply to 5.8 months supply.
  

The Bad News

• Median new home prices made a record plunge
• Those prices do not include incentives that are running rampant
• The new home sales figures will likely be revised lower
• March sales were revised lower from 858,000 to 844,000
• New home sales do not include cancellations
• The margin of error on new home sales is +- 13%
• Median home prices are now reportedly back to July 2005 prices and there were few if any pricing incentives in summer of 2005
• Home for sale dropped 540,000 to 532,000 units.

Summary

In spite of a record decline in median sales price and a 14 year high in new home sales, actual inventory of homes dropped a mere 8,000 units from 540,000 to 532,000 units.

Having trouble paying the mortgage?

No Problem. Just Charge-It.

American Express is breaking new ground, allowing its card members to pay their monthly mortgage bills on the card. I know what you're thinking, but hold on... Amex is requiring that these be prime loans only, so you can forget that whole subprime mortgage implosion issue. And of course, they'll be charging you $395 to enroll in the program.

"Obviously you have to be approved for the loan and depending on your credit line, it's all governed by the same standards," Christine Elliott of American Express tells me.

The loans, for now, also have to come from American Home Mortgage Corp the first lender to offer this Express Rewards Mortgage program, and oh to think of the rewards!!

How anyone can think this is a good idea is simply beyond me. I guess everyone thinks prime is safe. Then again all the lenders acted as if subprime was safe. And of course we all know how well "contained" this problem is, don't we?

Reality TV

Check out the Flip This House reality show on A&E. The entire event was staged right down to "rented landscape" buried in pots that was removed after the filming. It is quite amazing what passes as reality.

Half Price Houses

There is a great video on YouTube about half price houses in zipcode 95832 (Sacramento California).



Less than 2 years ago the above house sold for $526,000. At the recent courthouse foreclosure auction no one wanted it even at half price. That's reality.

This post originally appeared in Minyanville.

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

Bankruptcy Trends: A Perfect Storm of Debt

The TimesFreePress is reporting Boomers look to bankruptcy system for relief.

"People are getting squeezed," said Mr. Young, [a bankruptcy lawyer] who has practiced in Chattanooga for almost 30 years. "A lot of baby boomers are seeing incredible debt loads. All the sudden you're just keeping your mouth above water to keep from drowning."

Competing financial obligations to parents and children, health care costs, mortgage debt and inadequate retirement planning are all adding up for many older Americans who opt for bankruptcy, said some Chattanooga bankruptcy lawyers and credit counselors.

Their perceptions are echoed in a recent study by John Golmant and Tom Ulrich, researchers at the Administrative Office of the U.S. Courts, which found that older Americans are filing for bankruptcy at faster rate than the general population.

The number of bankruptcy petitioners over the age of 45 increased from 27 percent of all filers in 1994 to 39 percent of filers in 2002, according to the study published in the May 2007 issue of American Bankruptcy Institute.

Conversely, the percentage of filers under 25 years old decreased from 10.6 percent to 4.2 percent of all filers in the same period.

The fastest growth occurred in the percentage of petitioners over the age of 55, which increased by nearly 46 percent from 1994 to 2002, though the age grouping still comprised only 14 percent of all filers in 2002.

Credit card debt is often the immediate cause of bankruptcy filings, but many of these debtors are using credit cards as a life-line to pay for prescriptions and high insurance deductibles, said Lois R. Lupica, professor at University of Maine School of Law and resident scholar at American Bankruptcy Institute.

"People don't have the money, so they use the credit cards," she said. "The increasing credit card debt can be a deceptive cause of people filing for bankruptcy, until you look behind what's being charged. The underlying causes have not been addressed."

Kyle Weems, a Chattanooga bankruptcy attorney, said, "We've filed many more boomer (bankruptcy) cases recently because of health problems. They have a lot of problems with coverage until they get to Medicare. There's that gap from 50 to 65."

Bankruptcy filing rates in Chattanooga and nationwide have fluctuated in recent years, due to bankruptcy law reform.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made it more complicated and more expensive to file for bankruptcy, and required debtors to receive credit counseling before and after filing. Bankruptcies nationwide surged before its passage in October of 2005 and dropped steeply in the months following.

Bankruptcy rates in Chattanooga also dipped significantly in 2006, but now the numbers appear to be bouncing back. In the first three months of 2007, 1,259 people in Chattanooga filed for bankruptcy, compared to 917 in the same period of 2006, according to the Eastern District of Tennessee Bankruptcy Court.

Tracy Johnson, education specialist with the Consumer Credit Counseling Service in Chattanooga, said, "I don't want to say the (reform) law didn't work, but what the law was intended to do was make people come to a legitimate credit counseling agency and learn their alternatives before they went bankrupt."

Mr. Young said there is hope for breaking the cycle of financial illiteracy and indebtedness.

"I think some of the young people are starting to see the faults of the baby boomer generation and the mistakes of their parents," he said. "The cycle is only going to be broken with the true education of people in their teens and twenties and I think that's slowly starting to turn around."

"I don't want to say the (reform) law didn't work, but what the law was intended to do was make people come to a legitimate credit counseling agency and learn their alternatives before they went bankrupt."

Does anyone think that the intent of the law was anything other than to make people debt slaves forever? It's pretty easy to extend credit at high interest rates if you think chapter 7 bankruptcy will be removed as an option. Remember when there used to be credit redlining? Now credit companies go out of their way to solicit those with the worst credit history.

But the law backfired once already with a massive number of filings ahead of bankruptcy reform bill enactment and rates are starting to tick back up again. Since boomers are getting older, people are living longer, and health care costs are soaring I guess this trend should be expected.

Here are a few snips from the American Bankruptcy Institute about the study.

A recent study reveals that bankruptcy filings by older Americans age 55 and over are increasing at a faster rate than the general population. John Golmant and Tom Ulrich, researchers at the Administrative Office of the U.S. Courts, conducted their study by comparing chapter 7 and 13 consumer filing data from 1994 and 2002 to examine how age demographics affect bankruptcy filings. The results of the study are summarized in their article titled “Aging and Bankruptcy: The Baby Boomers Meet Up at Bankruptcy Court,” published in the May 2007 issue of the American Bankruptcy Institute Journal.

In conducting their research, Golmant and Ulrich looked to determine the proportion of bankruptcy petitioners that fall within particular age categories and whether these proportions have changed over time. While previous demographic studies primarily relied on survey data to find out more about the filing rates of different age groups, the researchers evaluated actual data from courts and public records available through outside resources.

The study concludes that a number of factors are behind the rising “Baby Boomer” bankruptcy filing rate. Golmant and Ulrich point to the growing amount of mortgage debt carried by older Americans as they tap into their home equity, and rising health care costs as primary reasons behind the growing bankruptcy rate for those 55 years of age and older. Facing reduced income in retirement and escalating health care costs, the researchers said they expect that the increasing bankruptcy filing rates for older Americans will persist into the foreseeable future.

There are numerous articles on the internet referencing this story but no one yet has asked the big question that is on my mind: Why did Golmant and Ulrich stop at 2002? The study missed the recovery after 911, the housing boom, and the subsequent housing bust. It would seem the report is 5 years old the moment it was published. I emailed John Hartgen at the ABI asking for a copy of the study and also asked if there was any hard data from 2002-2006.

Mr. Hartgen responded with a PDF of the study The Baby Boomers Meet Up at Bankruptcy Court but referred me to the authors for additional information. A chart from the article follows annotated in red by me.



It sure would be interesting to see what those numbers would look like with data from 2002-2006. I have email questions in to the authors of the study about those missing years.

A Perfect Storm of Debt

Although there are no hard numbers from the report for the years 2002-2006 there is plenty of anecdotal evidence about boomer stress in articles such as a Perfect Storm of debt puts Floridians in bankruptcy.

Mortgage woes, higher gas prices and a "perfect storm" of other financial troubles have caused personal bankruptcies to spike in Central Florida so far this year, according to the latest court records.

Nearly 1,300 personal-bankruptcy cases were filed in Orlando during the first three months of 2007, nearly twice as many as during the first quarter of last year, figures from U.S. Bankruptcy Court for the Middle District of Florida show.

And that may be just a hint of what is to come, bankruptcy lawyers say. From bankruptcy trustees and lawyers to clerks and credit counselors, everyone tied to the process is seeing more cash-strapped people coming through the door on their way to insolvency.

"Some people are just drowning in everything, whether it's debt, job loss, divorce or some health issue," George Janas, a credit counselor and managing partner of Orlando-based Consumer Debt Counselors, said Tuesday.

"They've been living so close to the edge financially -- when something big hits, it's enough to put them behind," he said. "And they can't catch up again."

Personal bankruptcies did plummet across the country after the new law took effect. In the Orlando portion of the Middle District of Florida, for example, the first-quarter caseload fell from 3,644 in 2004 and 3,300 in 2005 to just 658 last year.

But this year's first-quarter filings, while down 60 percent from 2005, to 1,298 cases, are up 97 percent from a year ago.

"There has been a perceptible increase in filings by people who are trying to prevent foreclosure," said Jonathan Alper, a bankruptcy lawyer in Lake Mary. "I don't think we've begun to see the full effect of that."

The housing boom also lured some people into buying a second home as an investment, sometimes with the aid of creative financing such as "teaser rate" or interest-only mortgages they can no longer afford, Alper said. If they qualify to file a Chapter 7 personal bankruptcy, he noted, it leads to the liquidation of their assets, including the second home, but lets them protect their primary residence.

Skyrocketing property-insurance premiums and property taxes, along with rising gas prices and that old standard, credit-card debt, are also taking their toll.

"There are a lot of things that are just out of people's control," said Anne-Marie Bowen, an Orlando lawyer and president of the Central Florida Bankruptcy Law Association. "Most people try to avoid bankruptcy at all costs, but at some point they need to realize they have to do something about their unsecured debt so they can keep a roof over their heads."

"There has been a perceptible increase in filings by people who are trying to prevent foreclosure," said Jonathan Alper, a bankruptcy lawyer in Lake Mary. "I don't think we've begun to see the full effect of that."

I suspect we have nowhere seen the full effect yet and that is going to hold back housing prices for years to come. Boomers counting on rising home prices as their retirement funding are going to be facing increasingly difficult times. The housing ATM is simply out of cash with a perfect storm of debt waiting those facing retirement.

This post originally appeared in Minyanville.

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

Protectionist Crackdown - Seen vs. Unseen

In response to Living Wages & The Protectionist Train Crackdown I received the following question from YTL:

So my question: how long do we allow ourselves to trade with a country that manipulates its currency and also has hundreds of millions of near-slave labor to tap, in order to misallocate resources towards its country?

YTL Thanks for the question.

Let me start by asking a couple of questions of my own: How long does China support our reckless spending habits? At what rate of interest?

It is far too easy (and simplistic) to point the finger at a scapegoat (China) and blame them for what really ails us. What really ails the U.S. is blowing trillions of dollars in a hellhole in Iraq, a horrid medical system (more on this coming up soon), a multitude of unfunded liabilities, and an increasing inability to compete in a global economy.

Look at the irony. We asked Russia to "tear down this wall" and for China to embrace capitalism. Both happened. Now instead of competing against central planners we have to compete against real economies. We got what we asked for did we not?

It seems we do not like it and that is one side of the coin. The other side of the coin is that China is doing us a favor by providing merchandise for cheap thereby raising the standard of living of those here and in China in its wake.

Yes we have lost manufacturing jobs to China. But in a global economy were we ever going to keep them? At what price? Bear in mind that China is now losing manufacturing jobs to Vietnam. Productivity is also increasing. A few years back my hometown of Danville, Illinois was excited to get a new aluminum stamping plant. Danville's population had shrunk from 44,000 when I was growing up to something like 32,000 now. This plant was going to be a savior. The reality was the plant provided something like 10 jobs! That is how automated things are now.

It is silly to think that putting tariffs on China will bring back jobs. How many jobs would we save even if it did? 10,000 jobs? 20,000 perhaps. In return for those 10-20K jobs, the price of underwear, TVs and cars go up for EVERYONE goes up by 25%? Is this a good deal? For who other than those whose job was saved?

People complain about China manipulating its currency. What about our currency manipulation through policies at the Fed, Congressional spending, and the administration? We are blatantly pursuing a weak dollar policy. We have a Fed manipulating interest rates. If central planners at the Fed can set arbitrary interest rates, why can't central planners in China peg to currencies?

On the jobs picture also consider the seen and the unseen. Cheap goods from China are for now providing scores of trucking jobs in return for those lost manufacturing jobs. It is also providing more dock work jobs and more jobs at Walmart, Lowes, Home Depot, and countless other stores.

There is far more damage done by the Fed setting interest rates like communist central planners and this administration blowing trillions of dollars in Iraq than any peg setting by China.

There is one more way to look at it. We can no longer dictate what the world does and we should stop trying and simply clean up our own act before pointing the finger elsewhere.

But let's for the moment assume you still disagree. For the sake of argument let's put a 25% tariff on goods from China. Will that be the end of it or will goods start pouring in from Vietnam and Brazil? I suppose we could put a 25% tariff across the board on everyone. If we do we will save some 20,000 jobs and crucify millions of consumer in the process.

Would we really save any jobs by such an action? Of course not. For every underwear manufacturing job we save we would likely lose 10 restaurant jobs from people who could no longer afford (or be willing) to eat out. Once again that is the seen and the unseen.

But there is still one more seen vs. unseen consequence to the China peg. That peg for now is fueling a massive boom in Chinese equities as talked about in Stir Fried Stocks. It is also (along with policies at the Fed that ignore asset bubbles), fueling unsustainable trends in stock buybacks and leverage buyouts.

From this aspect the seen is cheap goods from China, cheap funding for a war in Iraq, and cheap credit for US consumers. It is the aftermath of the unseen that is bound to follow that everyone should be looking at. Protectionism will only heighten the complications of the unseen.

This post originally appeared in Minyanville.

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

Stir Fried Stocks

Asia Times is reporting stock market transaction volumes are exploding in China.

Six months ago, total transaction volumes on the Shanghai and Shenzhen exchanges were less than US$5 billion per day. That figure now stands 10 times as high, at $50 billion per day. This volume is something China can be proud of, barring one minor detail, namely that the central bank and various policymakers would much rather not see it happening.

Even as central bankers exhort the country's citizens to beware of bubble-like conditions in the stock markets, investors appear unruffled, reversing the policy impact of any announcement. Be they students, farmers or construction workers, every Chinese living in the two big cities of Shanghai and Shenzhen appears now to have a brokerage account.

Conversations in the normally noisy dai pai dongs in Guangdong province and Hong Kong drop to a quick hush whenever the subject of stock tips comes up. Dai pai dongs are uniquely Cantonese eateries, generally specializing in a limited range of food items. Besides the delicious and cheap food, the eateries are also known for their communal seating, and extremely high noise levels.

It's a case of stock market fever for Chinese investors.

Millions of first-timers are getting involved in the frenzy as Shanghai's main market gauge continues to post eye-popping gains.

After watching Chinese stock prices gallop upward for months, Ding Xiurui wanted a piece of the action.

The 45-year-old office worker stood in line at a bustling brokerage last week to open her first trading account. She brought her sister, who opened an account too. They joined millions of other novice investors who are jumping into a market that has soared to dizzying heights, with prices up more than 51 percent this year.

"We still can make money," Ding said as she stood at the counter at Tiantong Securities with the paperwork for her new account. Asked what stocks she would buy, Ding said: "I don't know. I'm still learning."

China is in the grip of stock market fever. Shares are changing hands in record numbers as first-timers pour in new money. Some are mortgaging their homes or dipping into retirement savings to finance a frenzy of trading known as chao gu, or "stir-frying stocks."

Last week, the Shanghai index passed the 4,000-point mark for the first time, and economists say it could break 5,000 in a month.

"We are opening 40 to 50 new accounts a day," said Zhang Jun, deputy manager of the Tiantong Securities branch. "Six months ago, it was four to five a day."

Nationwide, the number of trading accounts has soared 30 percent over the past year, to 95 million, one-sixth of them opened in the past four months, according to the China Securities Depository and Clearing Corp., which is owned by China's two stock exchanges.

Stock prices are 30 to 40 times earnings, an unusually high ratio for many major markets, which some say makes them unrealistic.

"But that is not paying attention to earnings growth, which is very, very strong," said Goldman Sachs' Hong Liang.

And many investors believe Chinese leaders will prop up prices to avoid turmoil ahead of a key Communist Party meeting in late 2007 and the Beijing Olympics in 2008.

"We hear that before 2008 the government won't let prices fall," said Ding's sister, Ding Jingxian. "We're not afraid."

Interesting Soundbytes

1. Wanting a "piece of the action"
2. Opening an account but not knowing what stocks to buy... "I don't know. I'm still learning."
3. Mortgaging homes to buy stocks
4. Dipping into retirement savings to finance a frenzy of trading known as chao gu, or "stir-frying stocks."
5. "We are opening 40 to 50 new accounts a day. Six months ago, it was four to five a day."
6. Stock prices are 30 to 40 times earnings
7. "Earnings growth is very, very strong"
8. Chinese leaders will prop up prices to avoid turmoil ahead of a key Communist Party meeting in late 2007 and the Beijing Olympics in 2008.
9. "We hear that before 2008 the government won't let prices fall"
10. "We're not afraid."

I do not think I have seen as many soundbytes in an article that short ever before. This seems eerily reminiscent of the Nasdaq before it collapsed. Here is a chart sent to me by "BC" for comparison purposes.

Nasdaq vs. Shanghai



Click on chart for a better view.

Mortgaging homes to buy stocks .... after a quadruple runup in prices! Yikes. And we are seeing the same kind of rationalizations we saw before: "But that is not paying attention to earnings growth, which is very, very strong," said Goldman Sachs' Hong Liang. Is anyone asking if the earnings growth is sustainable?

I guess my favorite soundbyte is the idea that the government will not let the stock market fall. If that was remotely possible would the Nascrash have happened or the Japanese stock market have plunged like it did? Would housing prices in Florida and mortgage lending imploded?

Of course it's different in China. In every bubble you hear the same melody, even if some of the lyrics change. Certainly the idea of Stir Fried Stocks is a new one. But one line is always present: We have no fear. Ultimately the market proves otherwise, 100 percent of the time.

This post originally appeared in Whiskey & Gunpowder.

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

Ron Paul 2008

Click here to see Ron Paul Educating Rudy

Embrace the message, support the man.

Mish

Mispricing Risk / Conflict of Interest

There were two very interesting posts on May 17th by John Succo on Minyanville about risk. The first is called Don't Confuse Risk Taking With Value.

I haven’t had much to say lately. Just more of the same. With money growth my firm estimates at an egregious 14% (compared to a falling GDP now quoted in the 1-2% range, we can safely say that the money is becoming more and more anemic in producing growth), no wonder speculation in stocks and other assets is unabashedly high, along with risk. But I don’t confuse risk taking with value and I hope you don’t either.

I have suspected for a long time that government “intervention” or “participation” (or whatever you want to call it) in private asset markets is as high as it has ever been. The markets are just not acting “naturally” to me. They seem orchestrated in many ways. Why? With the levels of debt in the system (we have no historical reference), central banks must keep asset prices rising so that the debt doesn’t look so bad on balance sheets. To keep the public and corporate sectors borrowing, they have to have rising collateral. Governments are becoming a larger part of the real economy with their debt creation. Free money means lower returns for everyone.

One piece of evidence is something strange going on in option pricing. If governments are buying risky assets like stocks, they wouldn’t buy individual stocks, they would buy indexes. Any rally in stock markets would be led by index buying, not from the bottom up where investors buy individual stocks because they see fundamentals improving. Option prices are saying that is exactly what is happening.

.... Normally correlations fall as stocks rise because healthy rallies are created from the bottom up; normally correlations rise as stocks fall because corrections are caused more by macro events like recessions that affect all stocks.

.... Recently we are seeing correlations creep up as the market grinds higher. This is quite unusual.

.... The reason correlations are creeping up is that the rally is not being led by investors buying individual stocks, it is being led by index buying. I see a large and unnatural buyer (the buyer wants to pay the highest price possible) in indexes every day. I suspect it is the Bank of China buying U.S. stocks with sterilized trade dollars.

Stocks that want to go down because investors deem the fundamentals deteriorating are eventually dragged up with the rest of the market because of the index buying. Index buying infers that participants just want exposure to stocks regardless of fundamentals.

This increases risk. When trade slows down (as it is), there will be less trade dollars to recycle. When debt gets too high there will be less sterilization and lending to buy stocks.

Conflict of Interest

The second article from Professor Succo was called I Knew It Was Bad, But….

I asked a large broker firm to send over its smartest math person on Collateralized Debt Obligations (CDO) structuring. I wanted to know what I am missing: why is the market so sanguine in the face of deteriorating collateral values in the mortgage market? One of my firm's theses has been that, as the mortgage market deteriorates, investors holding CDO as an investment would realize losses and this would feed into other risky asset classes. Why aren’t losses being seen when the market is clearly deteriorating?

The team that came over was headed by a very smart gentleman. He was very good at math and very straightforward. Working for a broker I was prepared for some sugar coating. I didn’t get any.

The answer is simple and scary: conflict of interest.

He explained that due to the many layers of today's complicated credit products, the assumptions used to dictate the pricing and outcome of CDO are extremely subjective. The process is so subjective in fact that in order to make the market work an “impartial” pricing mechanism must exist that the entire market relies upon. Enter the credit agencies. They use their models, which are not sensitive to current or expected economic activity, but are based almost entirely on past and current default rates and cash flow to price the risk. This of course raises two issues.

First, it is questionable whether "recent" experienced losses over the last few years really represent the worst of the credit market (conservative). But even more importantly, it raises a huge conflict of interest: the credit agency's customers are the very issuers of the tranches they rate. The credit agencies, therefore, need to compete for business based at least in part on the ratings they are willing to give these tranches. As a result, they will only downgrade when forced to by experienced losses; not rising default rates, not a worsening economy, but only actual, experienced losses. Even more disturbing, they will be most reluctant to downgrade the riskiest tranches (the equity tranches) since those continue to be owned by the issuers even after the deal is sold.

So even though the mortgage market has deteriorated substantially, mark-to-market losses by those holding the CDO paper have generally not been realized simply because the rating agencies have not changed their ratings for all the above reasons. Accounting rules only require holders of the paper to mark prices according to the accepted model, not actual prices.

Actual prices where traders can really buy and sell is substantially lower than where investors are marking their positions. The levels at which investors are carrying the paper is not reflecting underlying reality as the holders simply hold their collective breath and the rating agencies ignore a worsening environment.

I asked them what would force the rating agencies to change their ratings and the response was “it's just a matter of time if the market continues to deteriorate, for the agencies at some point will be forced by the cumulative losses to acquiesce." Because these losses have been compressed, any re-adjusting of ratings by these agencies are likely to result in a massive repricing of risk.

Previously I talked about rating agencies in Cozy Relationships & Improprieties and Moody's in Wonderland. These two posts from Professor Succo lend more evidence to the idea that all is not what it seems.

Although we can see what is happening, there is no one alive that can say exactly when this will matter. However, we can say three things for sure.

1. Massive losses in CDOs (and conflicts of interest) can not be hidden forever.
   
2. The current trends in leverage, risk, and consumer debt are all unsustainable.
3. The longer things continue on the current path, the worse the eventual outcome.

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

Living Wages & The Protectionist Train Crackdown

Maryland stepped up to the plate on May 9th and passed legislation that would make any protectionist fan want to stand up and salute. Here is the headline: Maryland to make contractors pay 'living wage'.

Gov. Martin O'Malley signed the nation's first statewide "living wage" law, requiring state contractors to pay at least $8.50 per hour, more in urban areas. The bill, which O'Malley said was designed to strengthen the middle class, was one of 203 signed by the Democratic governor on Tuesday.

"It's the right thing to do," O'Malley said.

The bill was cheered by labor and civil rights groups, but the National Federation of Independent Business had argued against it, saying it could hurt small companies. It is modeled on local laws across the country, but advocacy groups say it is the first statewide one.

It affects state contracts worth at least $100,000 and includes exemptions for state universities, the lottery and some other agencies.

Besides the basic $8.50 pay rate, it mandates a wage of $11.30 in urban areas where it is more expensive to live. The measure does allow employers to reduce the rate if they pay for health insurance.

A similar measure passed the Democratic-controlled legislature in 2004 but was vetoed by then-Gov. Robert Ehrlich, a Republican. Instead the legislature, over another veto, raised the state's minimum wage by $1, to $6.15.

Among the other measures signed Tuesday was a bill in which Maryland apologized for slavery.

It's the right thing to do? For who? Certainly not for small businesses. And why of all things should the state lottery be exempt if it is the right thing to do? Seems to me we have a double standard somewhere. Sad to say, this is exactly the wrong thing to do and it is guaranteed to cost jobs at a time we can ill afford to lose jobs.

In Congress Targets China on Currency Manipulation I was wondering just how silly Congress might get with protectionist legislation. If the Living Wage legislation is any indication, we are now starting to see the answer.

The Protectionist Train Has Left The Station

Steve Roach is writing we are Past the Point of No Return.

Even the old timers in the Congress had never seen anything like it. On May 9, the US House of Representatives held what was billed as a tripartite hearing of three subcommittees on “Currency Manipulation and Its Effects on US Businesses and Workers.” I was one of the “expert witnesses” at this hearing – invited to submit a written statement and then, along with the other six members of the witness panel, to present a five-minute oral summary in front of the assembled legislators (my written statement, “A Slippery Slope,” was published as a Morgan Stanley Special Economic Study on May 9). The hearing concluded with an extensive question and answer session. It was an experience I will never forget. My worst fears were realized. At the end of over three hours of grueling give and take, I left Capitol Hill more convinced than ever that the protectionist train has left the station.

In terms of the substance of the debate, three things surprised me about this hearing: First, while the bulk of the discussion was about China, anti-Japan sentiment was formally brought into the picture for the first time. The issue was the yen – characterized by the Congress as the world’s most undervalued major currency. While the absence of explicit intervention by Japanese authorities over the past three years was duly noted, many representatives took the position that there has been unmistakable “implicit manipulation” of the yen. Second, the case against China was framed mainly around the concept of the “illegal subsidy” – WTO-compliant jargon that frees up Congress to impose sweeping countervailing duties on Chinese exporters. Third, the congressmen present at this hearing were highly critical of the US Treasury’s bi-annual foreign exchange review process and its failure to cite China for currency manipulation. This puts the House on a similar track as the Senate.

Contrary to what most believe, this is not a case of anti-trade Democrats now taking over Congress. I continue to stress that there is broad bipartisan support for anti-China “remedies.” While the Democrats are now in charge of the Congress, on matters of trade policy they have been joined by many Republicans in their crusade.
I didn’t go to this hearing with the naïve expectation that I would be able to change any minds. And there was no surprise on that count. There was little sympathy on the part of the Congress for linking trade deficits to domestic saving shortfalls.

The consensus of congressman at the hearing was that China was the problem – even though the non-Chinese piece of the overall US trade deficit slightly exceeded $600 billion in 2006, over two and a half times the size of the Chinese bilateral deficit with the US. Many congressmen were especially upset with my characterization of “China bashing.” One gentleman asked me to strike any such references from my testimony, claiming that, “We’re not China bashers. We are just trying to seek the truth.” At the same time, literally no once responded to the concerns I voiced over the unintended consequences of protectionism – namely that China bashing could backfire in the US, the rest of Asia, and the broader global economy. The bottom line here is very clear: The US Congress just doesn’t do macro.

On the basis of everything I have heard over the past several months, I remain more convinced than ever that Congress has finally thrown down the gauntlet. The May 9 tripartite hearing hammered that point home with disturbing clarity. As Barney Frank, Chairman of the House Financial Services Committee, said, “This problem is not going away. We are going to have to act.” If Congress changes its mind and backs away, it fears it will lose all credibility on this key issue with American workers. With respect to China, I am afraid that means the US Congress has now gone past the point of no return.

Crackdown on India

BusinessWeek is reporting a Crackdown on Indian Outsourcing Firms.

Two senators are probing how Indian outsourcing firms use U.S. work visas, with an eye on new restrictions. Concerns about foreign companies that benefit from a visa program designed to make the U.S. more competitive are taking center stage in Washington, with two senators demanding explanations from overseas users of the system. Senators Chuck Grassley (R-Iowa) and Richard Durbin (D-Ill.) on May 14 sent letters to nine foreign outsourcing companies requesting detailed information on how they use temporary work visas, known as H-1Bs, to bring foreign workers into the U.S.

Durbin said in a statement. "The reality is that too many H-1B visas are being used to facilitate the outsourcing of American jobs to other countries." Until recently, the discussion over high-skill immigration has centered largely on how to bring in more foreign workers adept at such jobs as software development.

While Durbin and Grassley's investigation is focused on Indian outsourcing firms, U.S. companies may very well be using the visas for much the same thing. Among the most active applicants for H-1B visas are Accenture (ACN) and Cognizant Technology Solutions (CTSH). Both are officially headquartered in the U.S., but they have extensive outsourcing operations in India.

Looking ahead to the next election I was initially wondering if there was going to be a distinction between Republicans and Democrats on protectionism. With Roach's Congressional report, with Living Wage legislation in Maryland, and with recent bipartisan concerns over H-1B visas, it may be a case of damned if you do and damned on the protectionist front regardless of who wins (unless by some miracle it's Ron Paul). I guess we can all hope.

In the meantime, the odds of more rhetoric (and eventually action) against China, Japan, and now India can be expected to grow as the US economy further slows and unemployment starts to rise. Scapegoats will be needed and scapegoats will be found, most likely by members of both parties.With that in mind, it is increasingly likely we see action before the next election. If not, look for protectionism and isolationism to be at the forefront of campaign issues.

I suppose it would never dawn on anyone in Congress in a million years what the real problem facing the US is, so let me spell it out: The primary reason workers are distressed is not because wages are too low but because of the purposeful debasement of the US dollar, horrid economic policies from Congress, this Administration and the Fed, all compounded by reckless consumer spending habits.

Politics aside, the US simply cannot afford to be the world's policeman. We have now blown close to a trillion dollars in Iraq with negative benefits. That is not a political comment, it is a simple statement of fact that any rational person from either part should be able to agree with. Over expansion has sunk every empire in history. If we keep on the same pace that alone will sink us and from where I sit the public finally seems to be catching on.

Look at the irony. We want tariffs to force import prices higher and living wage bills to keep wages up with prices. Talk about Nixon's wage and price controls in reverse! Is this insanity or what?

Wage and Price Controls (in reverse)

What we are doing is exactly the opposite of Nixon's Wage and Price Controls.

August 15, 1971. In a move widely applauded by the public and a fair number of (but by no means all) economists, President Nixon imposed wage and price controls. The 90 day freeze was unprecedented in peacetime, but such drastic measures were thought necessary. Inflation had been raging, exceeding 6% briefly in 1970 and persisting above 4% in 1971. By the prevailing historical standards, such inflation rates were thought to be completely intolerable.

The 90 day freeze turned into nearly 1,000 days of measures known as Phases One, Two, Three, and Four.

While there were skeptics in August, 1971, there were a great many who thought "temporary" wage and price controls could cure inflation. By 1974, this notion was thoroughly discredited, and attention gradually turned toward a monetary approach to inflation.

Well, Nixon's approach didn't work so now we are trying the opposite? Once again it should be obvious to any thinking person that forcing either wages or prices up smack in the face of a weakening economy is exactly the wrong cure. Besides we already tried protectionism once before on a massive scale, and it failed miserably. Unfortunately it's hard to stop politicians from doing damage once they get silly ideas in their heads.

The last time we tried this course of action with vigor was at the onset of the Great Depression. Does anyone remember a history lesson about the Smoot-Hawley Tariff Act?

Legislation that would put 15%-25% tariffs on goods from Asia (damn near everything) would have the same effect that Smoot-Hawley had in exacerbating the great depression. I guess that brings up a second irony about this situation: For all this talk about inflation, it sure seems like we are fighting something else.

Purposely or not, we are recklessly accumulating debt at every level: government debt, corporate debt (in stock buybacks and LBOs), and personal debt. The answer is not tariffs to keep prices high, or living wage bills to keep wages up with prices. The solution is to admit that we are living far beyond our means and take corrective action.

This post originally appeared on Minyanville. Also on Minyanville today was an interesting article about The Bernanke Put and Great Moments in Mortgage Lending Risk Management History by Kevin Depew.

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