Expect Everything To Be Worse Than Expected

Let's tune into unexpected developments in the UK before we return to unexpected developments in the US. Here goes:

According to RICS U.K. Housing Market Slump Becomes Worst Since 1990.

The U.K. housing slump deepened in February, becoming the worst since the eve of the nation's last recession in 1990, a survey of real-estate professionals showed.

The number of residential property agents and surveyors saying prices fell exceeded those reporting gains by 64.1 percentage points in February, the most since June 1990, the Royal Institution of Chartered Surveyors (RICS) said today. In London, the balance was the worst since May 2003. A separate report showed annual retail sales growth slowed in February.

Bovis Homes Group Plc, the U.K.'s most profitable homebuilder, yesterday urged the Bank of England to take "decisive action" and cut its benchmark interest rate further from the current 5.25 percent.

Retailers have also called for rate cuts. The bank "needs to take action sooner rather than later," Stephen Robertson, director general of the British Retail Consortium, which represents 80 percent of U.K. stores, said after policy makers kept the benchmark rate unchanged on March 6.

Kingfisher Plc, Europe's largest home-improvement retailer, said Feb. 21 that fourth-quarter sales dropped after the U.K.'s housing market slump discouraged spending.

No Silver Bullets

Rates cuts are not silver bullets. If they were, there would never be a recession. Furthermore the Term Auction Facility (TAF) has proven to be no silver bullet and the Term Securities Lending Facility (TSLF) will prove to be no better. For more please see The Fed's Swap Meet and Night of the Living Fed.

And let's be honest about who the Fed is trying to help with the TSLF. It is banks and primary dealers not consumers.

TSLF Offers Little Aid To Agencies

Bloomberg picks up that story in Fed's Loan Program Provide Little Aid to Agency Mortgage Bonds.

Yields on agency mortgage securities relative to U.S. Treasuries traded near 22-year highs, as the Federal Reserve's plan to temporarily swap up to $200 billion of government debt for mortgage bonds failed to ease concern that a liquidity and capital crunch will continue to roil debt markets.

The difference in yields on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10- year government notes narrowed about 5 basis points, to 223 basis points, paring a larger decline. The spread helps determine the interest rate on new prime home mortgages of $417,000 or less.

The drop still left the spread about 87 basis points wider than on Jan. 15, the recent low, and higher than last week. Banks and securities firms last month launched a new round of demands for more collateral on loans secured by debt to investment funds including Thornburg Mortgage Inc. and Carlyle Capital Corp., forcing sales and eroding potential returns, and few buyers have emerged. The spread reached the highest since 1986 on March 5.

The new Fed program announced today "prevents things from getting considerably worse, and it helps the broker-dealer community a fair amount," said Ajay Rajadhyaksha, head of fixed- income strategy at Barclays Capital. "But by the end of the day people will realize it's not a silver bullet."

The Fed move should ease concern that brokers, such as New York-based Bear Stearns Cos., face a cash crunch, Rajadhyaksha said, especially because of the inclusion of AAA rated non-agency mortgage securities. Their quoted prices have tumbled this year by about four times the amount as they did last year, he said.

Delay Tactics

Rajadhyaksha is correct about there being no silver bullet, but this move by the fed certainly does not "prevent" anything. It temporarily forestalled a day of reckoning for Bear Stearns (BSC), Lehman (LEH), Citigroup (C), and other overleveraged players.

Economists Still Not Calling For Recession

A new poll of economists says U.S. Slowdown to Be Deeper, Rebound Weaker.

The economic slowdown in the U.S. will be deeper and the recovery weaker than previously forecast, according to a Bloomberg News monthly survey.

The world's largest economy will grow at an annual rate of 0.3 percent from January through June, a half point less than projected in February, according to the median estimate of 62 economists polled from March 3 to March 10.

The odds of a recession over the next 12 months were pegged at 50 percent, the same as in the February survey, according to the median estimate of 42 economists that responded to the question.

"We're seeing the drop in home prices accelerate, and we're seeing persistent energy-cost pressures," said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. "Both of those developments have been worse than expected."

Everything Worse Than Expected

Housing has been worse than expected every month for years. And it is interesting to note that economists still expect GDP to be positive through June. So you can book GDP as one of the things guaranteed to be worse than expected. Jobs are going to continue to be miserable, so count on jobs to be worse than expected.

Just what does it take to get economists tuned into reality? Are economists always such an optimistic lot? Or do they get paid by their firms to purposely present overly optimistic scenarios that do not have a snowball's chance in hell of happening?

In the meantime, expect everything to be worse than expected and you will do far better at predicting what's going to happen than 85% of the economists surveyed. If you expect things to be far worse than expected you will likely do better than almost all of them.

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