Global Economic Trainwreck

This post is about the coming "Second Wave Down" in housing and the "Global Economic Trainwreck" that are both poised to happen.

These themes will be will the topic of discussion with George Noory and I on Coast to Coast radio Wednesday November 8th, 2006 from 11:00 PM until 2:00AM PST.

Late evening insomniacs can tune in on these Affiliate Stations.

Let me invite all Coast to Coast listeners as well as regular Mish Blog readers to a free subscription to Whiskey & Gunpowder, a publication on global economic news, and also to a free trial of the Survival Report, a monthly newsletter on on the global economy, interest rates, gold, silver, oil, and the major stock market indices that I write along with partner Brian McAuley. No credit card information will be requested and there is nothing to lose and nothing to cancel. Click here to find out more.

For those unaware, I do a free podcast with Tom Jeffries on Howe Street nearly every week. This week's podcast will be be a "Post Election Stock Market Review" and an update on the housing situation in Vancouver and Phoenix on Thursday November 9th.

On with the trainwreck....

UK Bankruptcies

Bloomberg is reporting U.K. Third Quarter Personal Bankruptcies Reach Record.

Personal bankruptcies in Britain climbed to a record in the third quarter as surging house prices and rising interest rates pushed consumers to take on more debt than they were able to repay.

Individual insolvencies in the three months through September totaled 27,644, up 5.7 percent from the previous quarter and 55 percent from a year earlier. It was the highest since records began in 1960, the U.K. Department of Trade and Industry said on its Web site today.

"The increase is quite shocking,'' said Louise Brittain, personal insolvency partner at accountants Baker Tilly. "There's an expectation now that people can have what they want, when they want, on credit. At this rate, we will have personal insolvencies continuing at about 110,000 a year.''

Insolvencies have created a boom in debt advice services from specialist lenders including Debt Free Direct Group Plc, which said yesterday that first-half sales almost doubled as the number of personal financial consolidations it handled jumped. The company said that its full-year profit will "comfortably'' meet market expectations.

Consumers are also taking on more debt in relation to their income to afford homes whose costs are rising faster than their salaries. Abbey, the U.K.'s second-biggest mortgage lender, said Oct. 31 it has begun offering individuals home loans worth five times their wages, because of continuing gains in house prices.

It's lovely isn't it?
Bankruptcies are soaring but the response by the biggest lender in the U.K. is to increase loan amounts "because of continuing gains in house prices". Even as home prices in the U.S. are collapsing, lenders in the U.K. somehow think home prices can keep rising orders of magnitude faster than wages and rents. This same situation is playing out in Canada, Europe, China, and obviously the U.S.

Credit Quality

According to the S&P US credit quality is in 25-year retreat toward junk.
Following are the highlights.

• U.S. corporate credit quality has been on a 25-year decline toward junk status
• Almost half of all companies now rated below investment grade
• Liquid financial markets, downgrades in the auto and airline sectors, a spate of takeovers and global competition have contributed to the credit quality erosion.
• "An aggressive financial posture is necessary for survival in a stiff globally competitive environment."
  
• "The same dynamics are unfolding in Europe, albeit at a slower pace."
• As of September, junk, or speculative-rated issuers, defined as those rated "BB-plus" or below, stood at a record high of 49 percent, up from 48 percent at the end of 2005 and a low of 28 percent in 1992.
• "AAA" ratings dropped to 18 from a peak of 24 in 1998.
• The default rate could exceed 15 percent, the highest since the Great Depression, if the economy goes into a recession, according to Martin Fridson, publisher of independent research service Leverage World.
• Shareholder-friendly activity, such as share buybacks, restructurings and leveraged buyouts, have all increased debt burdens and lowered credit quality.
• High risk tolerance by investors has also attracted more speculative grade issuers to the bond market.
• 61 percent of all newcomers to the bond market had ratings at the "B" level, a mid-level junk considered highly speculative.
• "B" is now the largest rating category, making up 27 percent of all issuers.
• The investment-grade universe, meanwhile, is now dominated by financial institutions, "as mergers and acquisitions have created enormous financial entities with huge funding appetites"

Shareholder-Friendly Activity

Some of the above is so staggering I hardly know where to begin commenting, but let's start with "Shareholder-friendly activity". Buybacks at these levels are NOT shareholder friendly. Headed into an economic slowdown corporations should be hoarding cash, not squandering it. To make matters worse corporate insiders are bailing on their own shares by the bucket load as fast as they can.

Let's now turn to a statement made by the S&P that "An aggressive financial posture is necessary for survival in a stiff globally competitive environment." Unless you are a Lemming you should not have to follow the competition over the cliff. Then again, the idea of Lemmings jumping off a cliff as pictured in the 1958 Disney nature documentary White Wilderness is really just a Suicide Myth in stark contrast to suicidal credit lending activities by corporations which appear to be “the real deal”.

Foreclosures

RealtyTrac is reporting U.S. Foreclosures Up 43 Percent From 2005.

IRVINE, Calif. – Nov. 1, 2006 – RealtyTrac™, the nation’s leading online marketplace for foreclosure properties, today released its Q3 2006 U.S. Foreclosure Market Report showing that 318,355 properties entered some stage of foreclosure nationwide during the third quarter of 2006, a 17 percent increase from the previous quarter and a 43 percent yearly increase from the third quarter of 2005.

In response to one of my blogs, a person posting under the name "KIA" reported:

There are also a lot of non-judicial foreclosure states, like Virginia, where foreclosures occur without any "official" court filing. Personal observation: foreclosures are roaring through. The current record holder from my office is a April, 2006 loan for about $500k which is currently in foreclosure. The wave is past the first edge and is swelling higher and higher now.

Even as foreclosures skyrocket, corporate lemmings are doing everything they can to keep the machine greased and the wheels spinning. I guess the theory must be that as long as the wheels keep spinning faster and faster, they will not fly off the axle. That theory is about to be tested.

The Role of Government

Some responses to my blogs were blaming the "gold standard" for the Great Depression while others were arguing that the expansion of credit by GSEs proves we need more government regulation not less. One person concluded a very long rant with "What is pretty clear now is that Mish is asking what will make things worse and what everybody will be asking pretty soon, pro cycle policies, stuff that will amplify the crisis."

Those arguing for more government controls are in effect arguing in favor of Russian Style Communist government central planning that is now thoroughly discredited everywhere.

The free market is the answer not more ridiculous central planning. Government setting interest rates is a problem not a solution. The Fed even admitted it. See Confessions by the Fed. Government mandated programs of all kinds at every level is a huge problem not a solution. Growth in government employment is a problem not a solution. The invasion of Iraq wasted a half trillion dollars and that is a problem not a solution.

The roll of government should be limited to areas of safety, environmental standards, routine police work, and genuine national defense concerns as opposed to attempting to be the world's policeman. The government has no business setting prices for orange juice or mortgages. Nor should government be in the business of promoting housing. Some 300 government programs designed to make housing affordable did exactly the opposite.

We do not have a free market here, not with 300 government programs promoting housing. The free market did not cause this housing bubble, stupid government policies did. There should not be a Fannie Mae or a Freddie Mac for lending institutions to dump mortgages on. There should not be a HUD guaranteeing below cost mortgages. There should not be programs as there are in Illinois guaranteeing low cost loans to illegal aliens. Illinois Governor Rod Blagojevich simply had to be out of his mind when he passed an Opportunity I-Loan Program guaranteeing low cost government sponsored mortgage loans for illegal aliens.

Those blaming the "free market" for problems should really be blaming "central planning". It is ironic to find people arguing for MORE communist central planning because the Current Communist Central Planning is not working.

What we really need is a free market because the markets we have now are anything BUT free markets.

The Gold Standard

As far as the gold standard being the cause of the great depression, people simply do not know what they are talking about. Those that think like Bernanke does (the Fed did not cut rates fast enough soon enough) do no know what they are talking about either. For starters we did not really have a "gold standard" but rather much of the world had a "gold exchange standard" which is something far different. Secondly we had massive government manipulations of all kinds throughout that period and it is was that manipulation that did nothing but make matters worse. It continues through to today with policies designed to blow ever bigger and bigger bubbles.

To dispute the myth that the gold standard is at the root of the problem let me refer everyone to Murray N. Rothbard, the leading authority on the HISTORY OF MONEY AND BANKING
IN THE UNITED STATES.

It is a very long read but those wishing to understand the gold exchange standard as well as the results of government intervention of all sorts throughout US history, would be advised to read the document. Following are some highlights from the above link, for the period between the mid-20's and the start of the Great Depression.

The Gold-Exchange Standard in the Interwar Years
.....
.....
After generating the burst of inflation in 1927 [by lowering the Fed discount rate], the New York Fed continued, over the next two years, to do its best: buying heavily in prime commercial bills of foreign countries, bills endorsed by foreign central banks. The purpose was to bolster foreign currencies, and to prevent an inflow of gold into the U.S. The New York Fed also bought large amounts of sterling bills in 1927 and 1929. It frankly described its policy as follows: We sought to support exchange by our purchases and thereby not only prevent the withdrawal of further amounts of gold from Europe but also, by improving the position of the foreign exchanges, to enhance or stabilize Europe’s power to buy our exports.

The stock market had already been booming by the time of the fatal injection of credit expansion in the latter half of 1927. .... Dow Jones industrials had doubled from 95.1 in November 1922 to 195.4 in November 1927. But now, the massive Fed credit expansion in late 1927 ignited the stock market fire. In particular, throughout the 1920s, the Fed deliberately and unwisely stimulated the stock market by keeping the “call rate,” that is, the interest rate on bank call loans to the stock market, artificially low. Before the establishment of the Federal Reserve System, the call rate frequently had risen far above 100 percent,when a stock market boom became severe; yet in the historic and virtually runaway stock market boom of 1928–29, the call rate never went above 10 percent. The call rates were controlled at these low levels by the New York Fed, in close collaboration with, and at the advice of, the Money Committee of the New York Stock Exchange. .....

Credit expansion always concentrates its booms in titles to capital, in particular stocks and real estate, and in the late 1920s, bank credit propelled a massive real estate boom in New York City, in Florida, and throughout the country. These included excessive mortgage loans and construction from farms to Manhattan office buildings.

The Federal Reserve authorities, now concerned about the stock market boom, tried feebly to tighten the money supply during 1928, but they failed badly. The Fed’s sales of government securities were offset by two factors: (a) the banks shifting their depositors from demand deposits to “time” deposits, which required a much lower rate of reserves, and which were really savings deposits redeemable de facto on demand, rather than genuine time loans, and (b) more important, the fruit of the disastrous Fed policy of virtually creating a market in bankers’ acceptances, a market which had existed in Europe but not in the United States.

....
A few days before leaving office in March 1929, Coolidge called American prosperity “absolutely sound” and assured everyone that stocks were “cheap at current prices.”

DEPRESSION AND THE END OF THE GOLD-STERLING-EXCHANGE STANDARD: 1929–1931

The depression, or what nowadays would be called the “recession,” that struck the world economy in 1929 could have been met in the same way the U.S., Britain, and other countries had faced the previous severe contraction of 1920–21, and the way in which all countries met recessions under the classical gold standard. In short: they could have recognized the folly of the preceding inflationary boom and accepted the recession mechanism needed to return to an efficient free-market economy.

In other words, they could have accepted the liquidation of unsound investments and the liquidation of egregiously unsound banks, and have accepted the contractionary deflation of money, credit, and prices. If they had done so, they would, as in the previous cases, have encountered a recession-adjustmentperiod that would have been sharp, severe, but mercifully short. Recessions unhampered by government almost invariably work themselves into recovery within a year or 18 months. But the United States, Britain, and the rest of the world had been permanently seduced by the siren song of cheap money. If inflationary bank credit expansion had gotten the world into this mess, then more, more of the same would be the only way out. Pursuit of this inflationist, “proto-Keynesian” folly, along with other massive government interventions to prevent price deflation, managed to convert what would have been a short, sharp recession into a chronic, permanent, stagnation with an unprecedented high unemployment that only ended with World War II.

Key Points

• Throughout the 1920s, the Fed deliberately and unwisely stimulated the stock market by keeping the “call rate,” that is, the interest rate on bank call loans to the stock market, artificially low.
• In the late 1920s, bank credit propelled a massive real estate boom in New York City, in Florida, and throughout the country
• We sought to support exchange by our purchases and thereby not only prevent the withdrawal of further amounts of gold from Europe but also, by improving the position of the foreign exchanges, to enhance or stabilize Europe’s power to buy our exports.
• The United States, Britain, and the rest of the world had been permanently seduced by the siren song of cheap money.
• A few days before leaving office in March 1929, Coolidge called American prosperity “absolutely sound” and assured everyone that stocks were “cheap at current prices.”
• “proto-Keynesian” folly, along with other massive government interventions to prevent price deflation, managed to convert what would have been a short, sharp recession into a chronic, permanent, stagnation with an unprecedented high unemployment that only ended with World War II.

Does any of that sound familiar? It should. It parallels nearly exactly what is happening today.
In fact, it is downright eerie. This is not a rerun of That 70's Show but rather a rerun of the Roaring 20's.

Roaring 20's Comparison

• Florida is once again ground zero on housing bubble bursting.
• The Fed admits it kept interest rates too low too long. See Confessions by the Fed.
• Credit derivatives are soaring.
  
• According to the International Swaps and Derivatives Association’s (ISDA) Mid-Year 2006 Market Survey, the notional value of credit derivatives outstanding grew 52 percent during the first six months of 2006 to $26 trillion. (see Economic Conditions and Emerging Risks in Banking)
• FDIC-insured institutions also reported a 13 percent increase in credit derivatives holdings, to $6.5 trillion, during the first half of 2006. (see Economic Conditions and Emerging Risks in Banking)
• Margin rules were relaxed.
• US credit quality is in 25-year retreat toward junk
• The US, Great Britain, Japan, China continue to be seduced by cheap money.
• Japan, China and other countries have interventionist monetary policies designed solely to help their exports and keep the US consumer borrowing binge going.
• Greenspan and the Fed simply refused to let the dotcom bubble play out. Instead we saw "Keynesian Folly" that did nothing but create an even bigger bubble in housing, putting off the inevitable one last time.
  
• The administration is telling everyone how great things are even as we slide into recession.

Thomas Jefferson on Banks

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

Letter to the Secretary of the Treasury Albert Gallatin (1802)
3rd president of US (1743 - 1826)

Keynesian folly by the Fed and this administration in cooperation with Foreign Central Banks (FCBs) everywhere have put the global economy on the brink of disaster. There is no way out. All that remains to be seen is the tipping point that sends this global train on a "23 skidoo" over the cliff.

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

Shell Shocked in Key West

Following is a post from a friend living in Key West.
He posts under the name "FreeThinkerKW" on my board on the Motley FOOL, and rents a house in Key West. Here goes from FreeThinkerKW....

As longtime readers of this board know, I live in Key West where Real Estate tripled, quadrupled, and quintupled in the past 6 to 7 years.

I alerted this board to the most unprecedented "happening" in Key West in my 16 years down here which took place yesterday, Saturday: an attempt to sell 22 homes at auction in a stalled real estate market.

Last week in Key West, only 1 home sold. The week before, 2 homes sold. The week before that either 2 or 3 homes sold.

Mind you that we now have 1400 to 1600 homes on the market, depending on the source of your information. Know too that there are approximately 300 to 600 homes being sold by owner which are not even listed in the MLS.

If we sold 2 homes a week in Key West, this inventory would last, oh, about 14 to 19 years at this rate. And as you will read, the asking prices of these homes are so out of reach for most people that the sellers must now face either foreclosure or drop their prices even more rapidly than they have already dropped.

I am about to lay the results on you from yesterday's auction. I am hoping you will be able to read the entire article without the Key West Citizen truncating it. If you cannot read the entire article, let me know, I'll send it to Mish, and then he can post it on his blog.

Furthermore, I know someone mentioned in this article. I will not divulge his name as I don't want someone to google a reference to this auction and then they see my post come up alluding to his pain with his name prominently displayed. I don't want to add to his embarrassment and dismay. But I will say this: his remarks to the paper are not what he is telling me personally.

This builder is so underwater with unsold homes that he recently put his own luxury home on the market. He also has 7 brand new homes up on Stock Island, the next island up from us. Those homes, when first completed, were on the market for $550,000 to $700,000. They are on the market now for $400,000 to $500,000 with no lookers whatsoever. He might get lookers at $250,000. And he might actually get some buyers in the sub-$200,000 range, IMHO.

Anyway, this auction was the talk of the town for the last two weeks. Ads ran daily. People who wanted to be able to finally afford a house were excited. I kept telling these folks to curb their enthusiasm as this auction was set up with “reserve” prices that the homeowners pre-set. If the reserve asks were not met by a bid, the home would remain unsold.

The newspaper gives an objective accounting of the auction, but anyone from the Mish board will read between the lines here and tell you the 22 homeowners who tried to sell at auction are now in a state of shock. Even the one guy who sold is probably passed out at the big loss he ate between his asking price and his actual sold price..

The realtors who participated in this auction with bids now on public record probably wish they had never joined in this rude awakening. This is not the kind of thing Real Estate agents want their clients to be reading on the front page of today's paper.

Herewith, some of the most noticeable comments: And by the way, I met a couple from New York, well to do, who wanted to buy a second home at this auction. They told me tonight that people trying to sell were very disheartened by the bids. Their description of these locals who listened to bids way below what they valued their homes at was one word: shellshock.

Thanks FreeThinker.
Here is the article to which he refers: Auction yields disappointing results for sellers

The number of people attending Saturday's housing auction at the Doubletree Grand Key Resort was high, but unfortunately for the 22 property sellers, most of the bids were not.

Before the start of the auction, Slokumb had estimated 100 people would attend the event, but more than 200 showed up, with 58 registering to bid. Many chose to hang on to their bidding cards, and those who did bid were cautious. Absent were "bidding wars" with people vying back and forth for the highest bid while the price climbs higher and higher. Instead, most were content to let the property go to someone else for a lesser "bargain."

None of the asking prices were met. The closest bid fell $149,000 short, while bidding on the most expensive property, located at South St., fell more than $2.5 million shy of the almost $6 million asking price.

Jack Anderson and Kevin Broomell, the owners of a condominium at 1211 Olivia St., said the final bid of $495,000 did not meet their reserve, or lowest acceptable price, and so they would not be selling. All of the sellers had an undisclosed reserve price that had to be met for them to consider accepting the bid.

"We're disappointed, but excited about the buzz it might generate," Anderson said. "The battle's not over yet. Regardless of what happens, it's definitely created interest."

Like Anderson and Broomell, property owner Gary Burchfield said the $3,000 he paid to participate in the auction was worth the exposure he's received for his property at 816 Ashe St. All participants contributed $3,000 to a pool to help pay for advertisements and marketing leading up to the auction.

"To me it was a gamble, but the gamble was worth it," said Burchfield, who has other homes for sale. "The reason I did this house was because it exposed two others next-door. Plus, I wanted to see how this goes so if they do another one in February, March or April, I can decide whether to put more houses in it."

The highest bid on his 2,297-square-foot property was $1.3 million, well below his reserve price. The house was recently appraised at $2.15 million.

For those bids that did meet the reserve, it could be a few days before the buyers know if their bids were accepted, especially since several of the sellers have other homes out of town, said Terri Spottswood of Truman & Co. Real Estate Services. Spottswood said she was pleased with the turnout but that it was too soon to determine how successful the auction was or whether there would be another one held in the spring.

"All the appeals that Key West ever had, we still have them," Searcy said. "It's always going to be a destination."

There are 1,400 residential properties for sale in all of the Lower Keys, and almost 900 of them are in Key West, according to Resort Realty.

Well Key West will indeed always be "a destination" unless and until a hurricane or global warming wipes it out, but that does not mean greater fools will always catch a bid nor does it say anything about the desirability of Key West as a destination. Consider the following graph.



That graph and other stunners are available in this Key West Chamber of Commerce document.

As for the 2,297-square-foot property "recently appraised at $2.15 million" the market says it is now worth $1.3 million. Bear in mind that is what the market says it is worth today. Perhaps tomorrow someone will come to their senses and decide that a 2,297 square foot house in a hurricane zone is not worth more than $600,000. Then again perhaps another greater fool with money to burn will decide otherwise.

The messages here is that expectations about appraised values have a long long way to decline to get to realistic prices. In the meantime carrying costs on flippers are mounting by the day and the supply of houses is a mere 14 years not counting FSBOs. Those shell shocked and needing a quick sale to avoid foreclosure are in deep cereal trouble.

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

Bulls, Elephants, Jobs

MarketWatch is reporting October jobless rate at lowest rate in five years.

Although U.S. nonfarm payrolls grew by a lower-than-expected 92,000 in October, this was not the entire picture. The unemployment rate fell to 4.4%, the lowest level since May 2001, the Labor Department reported Friday. Economists were expecting payroll growth of about 123,000, according to a survey conducted by MarketWatch. The jobless rate was expected to remain at 4.6%. The job report may dispel some worries that the economy is slowing sharply. Third quarter gross domestic product fell to a 1.6% annual rate from 2.6% in the second quarter.

The above numbers are even worse than they look given that government added 34,000 of those 92,000 workers. How many time can one paint lipstick on a pig and have the results still look pretty? That is what I want to know.

Assuming that one believes the GDP numbers how the hell does this anemic report dispel worries that the economy is slowing? One either believes the numbers or not. For the record, I don't believe the GDP numbers. They were much worse. I talked about this in Numbers Game.

If you are bullish write this down on a piece of paper and recite it every day: "Jobs are a lagging indicator". That jobs are doing so poorly this far along in a recovery is telling. In fact, this "recovery" is now over and jobs have only one way to go and that is downhill.

That bit of reality did not stop MarketWatch from reporting Good news for bulls ... and elephants

The surprising drop in the U.S. unemployment rate to a 5-1/2 year low of 4.4% is a big boost for bulls on Wall Street and Republicans on Capitol Hill. The employment report for October was much stronger than anyone expected. While payrolls growth itself was a relatively tepid 92,000, nearly all the other details in the report showed signs of a healthy economy. The biggest shock was the drop in the unemployment rate to 4.4%, marking the lowest since May 2001.

For embattled Republicans just days away from key elections, the report hands them fresh talking points over the weekend to assure voters that the economy's doing fine. Lower gasoline prices in the past few months have been calming consumers' spirits, but polls have not indicated any real boost for Republicans in opinion polls because of the economy.

Once again we see belief in the most volatile of numbers (the household survey) at at critically suspicious time instead of a much harder to turn GDP number that in and of itself was suspiciously high.

Economic Policy Institute

Let's look at what the Economic Policy Institute is saying about the Jobs Picture.

The nation's employers added 92,000 jobs last month, about 30,000 fewer than expected, according to today's report from the Bureau of Labor Statistics. Private-sector job gains were only 58,000, the lowest month for job growth in a year. However, upward revisions of data from August and September added a total of 139,000 more jobs to those months' gains, bringing the average monthly gain for the year thus far up to about 150,000 per month for total payrolls, and 126,000 for the private sector.

The unemployment rate fell to 4.4%, the lowest rates since May 2001, due to a large increase in employment as measured by the survey of households (up 437,000). Analysts typically pay less attention to monthly employment gains from the household survey as these data come from a much smaller sample and are too "noisy," or volatile, to trust on a monthly basis. Over the past two years, for example, the variance (I.e., data volatility) of monthly changes has been five times greater in the household than the payroll survey.

There are some signs, however, that the slowing economy is beginning to reach the job market. The first chart below shows job gains over the past three months, both total and private sector. The slowing of monthly gains is clear, and if this pattern persists, unemployment will eventually reverse course as the job market slackens.



.....

The slump in residential housing is clearly contributing to the diminished job gains in recent months. EPI's index of jobs related to residential housing, including construction and real estate, fell by 33,000 last month, led by large losses in residential contractors. As shown in the figure, thus far this year jobs related to housing are down 26,000, compared to a gain of 245,000 over the same period last year.


....
....
Once again, we have a tale of two surveys, with the household survey painting a prettier picture of job market conditions than the payroll survey. However, the payroll survey is widely agreed to be a more reliable measure of monthly job changes, and while it shows moderate gains so far this year, it also reveals steadily slower job growth in recent months. If the economy continues to grow below trend, as was clearly the case in the third quarter (real GDP up only 1.6%), monthly gains will continue to disappoint in coming months, and the job market will slacken.

Birth/Death Model

The Birth/Death model added 73,000 jobs to the total this month. Those are presumed jobs that only exist in the minds of bureaucrats related to the birth or death of businesses based on estimates of where we are in the business cycle. Given that "presumed jobs" are not seasonally adjusted although reported jobs are (is this on purpose?), it is not possible to subtract presumed jobs from actual jobs and get a reliable count (not that any of these numbers are reliable anyway). But IF one could do that then the actual number of jobs gained this month would be 92,000 - 73,000 or roughly 19,000 jobs. Another way of looking at it would be that 79% of the job gains this month were presumed (forgetting for a moment that 34,000 of those 19,000 jobs were government jobs as opposed to being anything remotely productive). Bear in mind that is not technically accurate for reasons I just stated.

Nonetheless we see bulls and elephants whooping it up over the household stats although data volatility is five times greater in the household survey than the payroll survey.

Job Prospects

Meanwhile other anecdotal evidence piles on. The New York Times is reporting A Job Prospect Lures, Then Frustrates, Thousands.

The call for job applications seemed routine; certainly nobody at corporate headquarters gave it much thought. A new candy store that would be opening in Times Square needed workers. Starting pay was $10.75 an hour.

But by midmorning yesterday, a huge, swelling, discontented crowd of job seekers was milling around the sidewalks of Midtown Manhattan, not far from Macy’s in Herald Square, filling the air with curses.

The crowd put a human face on jobless statistics at a time when the city’s unemployment rate, 4.5 percent in September, was the lowest since 1988.

Several thousand people — mostly young, black and Hispanic — had shown up to apply for fewer than 200 positions, only 65 of them full-time jobs. They came, they said, because of a phrase that had leapt out of the advertisements for the jobs: “on-the-spot hiring.” But there were too many people clogging the sidewalk outside the building on Eighth Avenue between 35th and 36th Streets where the company was conducting interviews, and everyone was abruptly told to go home and mail in the job applications.

Yes, I know about the other side of the story. This is the inner city... Even though the unemployment number is low there are still huge numbers of unemployed... etc etc.
The fact remains there are hundreds or thousands of these stories playing out across the U.S. and not just in inner cities either.

No matter how one slices or dices things it takes approximately 150,000 jobs a month just to keep up with population growth and the immigration rate. In a recovery we should be vastly exceeding that amount but we are not.

Here is the latest hard number for bears to consider:
Initial jobless claims rise to 16-week high.

Bulls and Elephants might make note that the subtitle was "Reflecting healthy job market, continuing claims fall to 4-month low".

Pricing Pressure

Where is it?
[/sarcasm on] In obviously inflationary news Wal-Mart cuts more prices in time for the holidays [/sarcasm off]

Nov 4, 2006

SAN FRANCISCO Wal-Mart Stores Inc., which just turned in softer-than-expected same-store sales growth for October and forecast flat results for November, on Friday said it was cutting prices on nearly a hundred electronics products, including high-definition TVs, digital cameras and cell phones.

It's the second price cut by the world's largest retailer ahead of the key holiday shopping season; The price cuts, including a Panasonic 42" HD plasma TV for $1,294 instead of $1,794 and a Dora The Explorer Talking Kitchen for $65 vs. $89.84, will be in effect until Dec. 31.

Pricing pressure simply is non-existent even as other deflationary pressures are not.

Outsourcing Pressure

CNNMoney is reporting White-collar outsourcing pressure builds

U.S. companies could save billions by sending administrative jobs overseas, says study.

Job losses in the United States from outsourcing, already a touchy political issue, could mushroom in the next decade as companies shift hundreds of thousands more professional white-collar jobs offshore, according to a new study.

Fortune 500 companies could potentially save $58 billion annually, or some $116 million per company, by offshoring general and administrative jobs, according to the Hackett Group, a strategic advisory firm.

The study estimates that increased use of cheaper overseas labor could affect up to 1.47 million back-office jobs over the next decade, or nearly 3,000 at a typical Fortune 500 company. And the jobs under review will go far beyond call centers.

"People have become more confident in the analytical capabilities of the overseas staff, and that is expanding the profile of the kinds of jobs that are under consideration," Wayne Mincey, the Hackett Group's president, told Reuters from Atlanta.

Some of the jobs that can now more readily be shipped overseas than they could several years ago include those in information technology, finance, human resources and procurement.

The education base and skill set, and with it the potential savings on labor costs, are on the rise in India, China, the Philippines, Pakistan, Eastern Europe, Brazil and other emerging countries, the Hackett study said.

Sending certain jobs offshore results in typical savings in salaries of about 70 percent, compared to savings of 10 percent to 20 percent by moving jobs to lower-cost U.S. locations, Mincey said.

Should that scenario play out there is absolutely no way the loss of that number of white collar jobs can be replaced anywhere, especially in the face of a housing slump and recession.

Catch 22

In the rush to maintain profits in the wake of an economic slowdown, corporations who outsource white collar will be cutting their own throats if such outsourcing commences on a massive scale. After all who will be left that can afford to buy discretionary items? The problem is, if a corporation does not outsource but the competition does, the former will be driven out of business by a loss of business. It is the perfect "catch 22" otherwise known as "Economic Zugzwang" corporate style.

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

Get out the Brooms

A very long overdue sweeping change is about to happen.
Be prepared for it.

Democracy Corps did a voter poll of 1200 Likely Voters in 50 Republican-held Competitive Districts. This was a NAMED candidate poll in REPUBLICAN swing districts, not a generic ballot national survey.

Click here for complete Results Analysis. Some snips follow. Remember you are looking at results in REPUBLICAN swing districts only.

This survey, unlike any other public survey, asks the congressional vote using the actual names of each candidate, meaning this survey fully reflects any advantages for incumbency. We also ask the generic ballot for a read of overall partisan sentiment, but named vote is more likely to tell us what happens.

Iraq

Despite the increased titters about Senator Kerry, there is every reason to believe that this week has further contributed to making this election a referendum on Iraq. First, it keeps Bush on center-stage, and he is not popular in these Republican-held districts (45 percent strongly disapprove and only 24 percent strongly approve). It is hard to have a base strategy without a base. Second, the president is telling the American people to vote next Tuesday on who you trust on Iraq. And third, it has crowded out any other issue, including national security and terrorism and the economy and taxes.

The trends on Iraq promise disaster for the Republicans, as we can see in the results below:

The president’s approval on Iraq is only 39 percent in these Republican districts, unchanged from last week, with no evidence of growing confidence as they define the election on Iraq.

Most important is the new majority of 53 percent in the two polls over the last week for reducing troop levels, with only 43 percent for staying the course for stability – a break with years of being evenly divided. That 10-point margin for reduced troop is greater than the margin in the congressional vote – suggesting this debate helps Democrats in these Republican districts.

Engagement and Turnout

• This election is on Iraq, not national security.
• One-in-five Bush voters are not voting Republican and the trend of this week is moving in the opposite direction.
• 85 percent of those voting Democratic say they are “absolutely certain” to vote, compared to 83 percent of Republicans.
• 68 percent of Democratic voters score “10” very interested in the election, compared to 54 percent of Republican voters.
• 66 percent of Democratic voters say they are “more enthusiastic” than usual, compared to 49 percent of those voting Republican

The Vote

The vote is trending Democratic in this last week, and importantly, Democrats have moved into a clear lead in tier one races in the last few days and now have a 3-point lead in the least competitive tier. The incumbent Republicans are only polling at 40 percent in tier one and 46 percent on average in tier three, a difficult place to be for an incumbent.

With five days to go to the election, these Republican-held seats, already in jeopardy before this week, are moving to the Democrats. Virtually all the underlying trends on significant indicators have made it more likely this is a wave election that we see only once in a decade.

With 1994 as our backdrop, we see this Republican battleground deeply upset about the direction of the country and the Republican Congress and increasingly prepared to vote for a sweeping change in Washington.

That poll is for Congressional Elections.

Rasmussen Reports is writing about the Senate Balance of Power

November 3, 2006

On the final Friday of Election 2006, Democrats take the lead for the first time in the race for control of the U.S. Senate. Today, Rasmussen Reports is switching two states (New Jersey and Montana from “Toss-Up” to “Leans Democrat”). We now rate 49 Senate seats as Democrat or Leans Democrat, 48 seats as Republican or Leans Republican and three as Toss-Ups. We polled in each of the Toss-Up States (Tennessee, Missouri and Virginia) on Thursday night and this may lead to further shifts in the Senate Balance of Power ratings.

Given the analysis by Democracy Corps in swing republican districts the odds of the Democrats winning all leaners has to be very high, just based on overall sentiment alone. If Rasmussen is correct the odds of Republicans holding the senate comes down to Tennessee, Missouri, and Virginia.

Tennessee
October 27, 2006
The latest Rasmussen Reports poll of the Tennessee race for U.S. Senate shows Mayor Bob Corker leading Democratic Congressman Harold Ford 47% to 46%. With "leaners" added, Corker leads 49% to 47%.

Missouri
October 27, 2006
In the contest of inches that has marked the Missouri Senate race from the start, the most recent Rasmussen Reports election survey shows incumbent Republican U.S. Sen. Jim Talent leading Claire McCaskill 48% to 46%.

When leaners are added into the equation, Talent still leads McCaskill by two (50% to 48%). This is the first time that either candidate has reached the magic 50% level of voter support.

Virginia
October 27, 2006
In Virginia's fierce U.S. Senate campaign, Republican Senator George Allen's once double-digit lead over Democrat James Webb has virtually vanished. Allen now leads 49% to 48%—with leaners added, 50% to 48%.

Nancy Pelosi

Unless this election is stolen we are going to have a new speaker of the house. Get used to hearing her name. That name is Nancy Pelosi. The Washington Post is reporting Pelosi Calls for a Fast Pullout.

House Minority Leader Nancy Pelosi's embrace Wednesday of a rapid withdrawal from Iraq highlighted the Democratic Party's fissures on war policy, putting the House's top Democrat at odds with her second in command while upsetting a consensus developing in the Senate.

For months now, Democratic leaders have grown increasingly aggressive in their critiques of President Bush's policies in Iraq but have been largely content to keep their own war strategies vague or under wraps. That ended Wednesday when Pelosi (D-Calif.) aggressively endorsed a proposal by Rep. John P. Murtha (D-Pa.) to pull U.S. troops out of Iraq as soon as possible, leaving only a much smaller rapid-reaction force in the region.

All I can say is "Bring It On!".
We have wasted a half trillion dollars in Iraq (that the government admits to), and probably half that again (if not more)buried elsewhere.

The way to do it is easy. Cut funding for the war to zero. Give Bush a choice: face impeachment or bring the troops home now. It's high time to take back our country from those trying to wreck it. It remains to be seen if this election will be stolen or not, but the House at least is a safe bet. I am encouraged by the Democracy Corps polls that clearly shows even Republicans are sick of Bush, his policies, and the War in Iraq.

I am hoping for a clean sweep everywhere but we may have to settle for a massive sweep in the house elections alone. If you live in Tennessee, Missouri, or Virginia, please vote!

My broom is ready. It's time for a sweeping change.

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

Nobody Saw This Coming

Earnings are soaring, the few remaining bears have been discredited, the stock market has been making new highs, the housing bubble is headed for a "soft landing" and Goldilocks doesn't have a care in the world.

To top it off, BusinessWeek is reporting A Do-Nothing Fed Is Looking Less Likely.

The notion that the Federal Reserve will be cutting interest rates next year is rapidly losing support on Wall Street. The idea was pushed hard in the third quarter by several big-time players in the bond market who believed the housing slump would hammer the economy, and it was responsible for a huge bond rally that pushed Treasury yields sharply lower across the maturity spectrum. Now most analysts have seen the light. Yields, while still low, are heading up again, and stock investors seem happy in the belief that maybe the Fed will be on hold for quite a while.

However, investors beware. Several factors are coming together that could cause the Fed's patience to wear thin. By the Fed's own accounting, there is not as much slack in the economy as its policymakers saw only a few months ago. That means the economy has less room to grow without putting added pressure on inflation. Further complicating that issue, the economy appears to be regaining some momentum in the current quarter, especially from faster consumer spending. The new risk: Inflation could remain stubborn enough to provoke the Fed into raising rates sometime next year.

For now, Wall Street seems to be buying the Goldilocks scenario--an economy that's not too hot and not too cold. However, chances are increasing that this porridge could start to heat up, a situation that would begin to try the Fed's patience.

Indeed various Fed members have been stressing the need to closely monitor inflation. Following are a few snips from recent speeches by some Fed members.

1. Recent information suggested that price inflation might be picking up slightly and only partly as a direct result of increases in energy prices.
2. The members saw substantial risks of rising pressures on labor and other resources and of higher inflation, and they agreed that the tightening action would help bring the growth of aggregate demand into better alignment with the sustainable expansion of aggregate supply.
   
3. Even with this additional firming the risks were still weighted mainly in the direction of rising inflation pressures and that more tightening might be needed.
4. Looking ahead, further rapid growth was expected in spending for business equipment and software.
5. Even after today's tightening action the members believed the risks would remain tilted toward rising inflation.

The above snips can be used to emphasize just what BusinessWeek suggests: "Inflation could remain stubborn enough to provoke the Fed into raising rates sometime next year."

No sooner that I finished typing that sentence, and without even opening the Mish telepathic message lines, I was flooded with questions. Inquiring minds are wondering if I am throwing in the towel on deflation.

The answer is "Not at all". You see the above five quotes were not from recent Fed speeches (although they sure sound like it), but rather from the May 16, 2000 FOMC minutes.

Flashback May 2000

Over the next 18 months the CPI dropped from 3.1% to 1.1%, the US went into a recession, and capex spending fell off the cliff. What happened was simple: "Nobody saw it coming" and by the time they did it was too late to do anything about it.

The Yield Curve

"Yields are heading up" said BusinessWeek. Is BusinessWeek looking at what I'm looking at?
Here is the yield curve as of October 31, 2006 with thanks to Bloomberg.



Hmmm. Is that a 54 basis point inversion between the 5 yr and 6 month treasury?
Hmmm. Is that a 69 basis point inversion between the 5 yr and the Fed Fund rate?

Please consider TLT, the 20yr+ Lehman bond fund.



Given that TLT rallies when long term yields collapse, it seems to me that the treasury market sees "something" is coming and that something is not Goldilocks. Could it be the treasury market sees rising foreclosures, rising unemployment, a falling CPI, and a slowing worldwide economy?

Foreclosures

RealtyTrac is reporting U.S. Foreclosures Up 43 Percent From 2005.

IRVINE, Calif. – Nov. 1, 2006 – RealtyTrac™, the nation’s leading online marketplace for foreclosure properties, today released its Q3 2006 U.S. Foreclosure Market Report showing that 318,355 properties entered some stage of foreclosure nationwide during the third quarter of 2006, a 17 percent increase from the previous quarter and a 43 percent yearly increase from the third quarter of 2005.

"Higher interest rates and a general softening of the real estate market are the two key factors contributing to the 43 percent increase in foreclosure filings from the third quarter of 2005," said James J. Saccacio, chief executive officer of RealtyTrac. "What our third quarter research appears to be showing is that the first wave of adjustable rate mortgages is having a negative impact on the number of homes going into foreclosure. With the volume of these loans — more than $1 trillion of them due to adjust over the next 15 months — this is a trend that definitely bears watching."

Colorado posted the highest foreclosure rate in the nation for the second consecutive quarter, reporting one new foreclosure filing for every 127 households — 2.9 times the national average.

A 55 percent spike in activity catapulted Florida into leading the nation in total foreclosure filings during the third quarter. Texas, which led the nation in foreclosure activity for the first two quarters of the year, moved into second place, reporting 39,363 properties in some stage of foreclosure. With a 35 percent spike in activity, California rounded out the nation’s top three, reporting 37,317 properties in some stage of foreclosure for the three-month period.

Even though interest rates were hiked 17 consecutive times (a new FOMC record), and even though it was widely understood that $1 trillion in mortgages would reset in 2007, and even though the bottom fell out on credit standards, I am quite sure that "Nobody Could See This Coming".

As preposterous as that might sound, I have proof.
Please consider the Bloomberg article UBS Reports 21% Drop in Third-Quarter Profit on Lower Trading

UBS AG, Europe's biggest bank by assets, said third-quarter profit fell 21 percent, missing analysts' estimates after trading revenue dropped at its securities unit.

"Nobody saw this coming," said Florian Esterer, a fund manager at Swisscanto in Zurich, which oversees about $40 billion, including UBS shares. The combination of market swings and rising costs for staff and technology "were just too much," he said.

At UBS, proprietary trading revenue fell, in part because the bank was "incorrectly positioned" in the Treasury market, the company said. Treasuries posted the biggest gains in four years in the third quarter on speculation a slowing economy would reduce the likelihood of further Federal Reserve interest rate increases.

Incorrect Positioning

UBS was "Incorrectly positioned" in the Treasury market, huh? Fancy that. I am quite sure we are going to see a lot of "incorrect positioning" going forward. This is simply the way it HAS to be. Before a deflationary credit crunch can set in, bears have to embrace the rally (and except for a few diehards they are), the masses have to embrace the Goldilocks scenario (and they are), housing has to look like a soft landing is possible (and most think so), and the Fed HAS to seem more worried about inflation than deflation (and without a doubt they are).

In 2000 the Fed was worried about inflation right at the outset of the dotcom bust.
In 2002 the Fed was worried about deflation in the aftermath of the dotcom bust. The Fed lowered interest rates to 1% even though consumers never stopped spending and housing was going strong. It was the wrong fear at the wrong time. In fact, those actions by the Fed set in motion the very thing they feared: a deflationary bust, not of dotcoms but housing, something far far bigger.
In 2006 the Fed believes a soft landing in housing is coming, inflation risks are to the upside, and wages and jobs are picking up nicely.

The stage is now set for a massive number of "Nobody Could Possibly Have Seen This Coming" proclamations. When they come, please point them here.

The above article originally appeared in Whiskey & Gunpowder.

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

Confessions by the Fed

If ever a case could be made to abolish the Fed and to let the market set interest rates, that case was made today. Ironically enough the case against the Fed was made by Richard W. Fisher, a current Fed Governor. Please consider the following speech:

Confessions of a Data Dependent
Fisher's remarks before the New York Association for Business Economics
New York Nov. 2, 2006

A good central banker knows how costly imperfect data can be for the economy. This is especially true of inflation data. In late 2002 and early 2003, for example, core PCE measurements were indicating inflation rates that were crossing below the 1 percent "lower boundary." At the time, the economy was expanding in fits and starts. Given the incidence of negative shocks during the prior two years, the Fed was worried about the economy's ability to withstand another one. Determined to get growth going in this potentially deflationary environment, the FOMC adopted an easy policy and promised to keep rates low. A couple of years later, however, after the inflation numbers had undergone a few revisions, we learned that inflation had actually been a half point higher than first thought.

In retrospect, the real fed funds rate turned out to be lower than what was deemed appropriate at the time and was held lower longer that it should have been. In this case, poor data led to a policy action that amplified speculative activity in the housing and other markets. Today, as anybody not from the former planet of Pluto knows, the housing market is undergoing a substantial correction and inflicting real costs to millions of homeowners across the country. It is complicating the task of achieving our monetary objective of creating the conditions for sustainable non-inflationary growth.

If anyone ever wondered how or why the Fed kept blowing bigger bubble after bigger bubble the confession by Fisher above should explain it all. The Fed was too slow to halt the massive expansion of credit leading up to the dotcom bust, then overreacted on the way down which fueled the biggest housing bubble and credit lending bubbles the world has ever seen. In simple terms the Fed is always chasing its own tail.

Now Fisher seems worried that it is "complicating the task of achieving our monetary objective of creating the conditions for sustainable non-inflationary growth."

Economic Zugzwang

Unfortunately "Complicating" does not remotely begin to describe the problem Bernanke faces. Readers may wish to ponder The Red Queen Race written on back on February 22nd.

In Lewis Carroll's Through the Looking-Glass there is an incident involving the Red Queen, a representation of a Queen in chess, and Alice constantly running but remaining in the same spot. The scene is often referred to as The Red Queen's Race.

"Well, in our country," said Alice, still panting a little, "you'd generally get to somewhere else -- if you ran very fast for a long time, as we've been doing."

"A slow sort of country!" said the Queen. "Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"

I picture Ben Bernanke as the new Red Queen.
He is now trapped in Zugzwang.

Definition: A German term for the obligation to move. All legal moves lead to a worsening of the position.

Click on the above link for multiple chess possibilities. Here is one example (taking poetic license) as the position shows a red king not a queen.



For non-chess fans who might not fully understand the above position: no matter which way Bernanke moves, white will next capture the red pawn, and march the remaining white pawn to victory. The red king can not capture the white pawn or move one square forward since either would put the king in "check" (subject to capture by the opposing king or pawn).

In economic terms, there is no magic mirror.
Bernanke is trapped in "Wonderland" but unlike Alice has no way out.

Checkmate

Ludwig von Mises understands the endgame brought on by reckless expansion of credit:
"There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved."

The sooner the Fed (and this administration) understands that last paragraph, the better off we will all be. If they fight this to the end (which they will likely do) I have two predictions: It won't do them any good (because it will not create any jobs and there is no pool of real funding), and the price of gold will soar.

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

October ISM

Bloomberg is reporting Manufacturing Growth Slowed in October

Manufacturing in the U.S. expanded at the slowest pace in more than three years last month and construction spending unexpectedly declined because of a deteriorating housing market.

The Institute for Supply Management's factory index fell to 51.2, lower than forecast, from September's 52.9. A reading higher than 50 signals expansion. A measure of prices paid for raw materials dropped to the lowest in more than four years. Outlays for construction fell 0.3 percent in September following no change, the Commerce Department said in Washington.

Manufacturers are providing little spark for the economy, which grew the least since 2003 last quarter. Together with weaker consumer confidence reported yesterday, the figures spurred traders to begin wagering the Federal Reserve will cut interest rates by the end of March.

"You can see the evidence of economic slowing here almost every day," said Roger Kubarych, senior economic adviser at HVB America Inc. in New York and a former Fed economist. The Fed is "going to have to come off this bias toward tightening very soon. The risks of an economic slowdown are very great."

Fed policy markers may take comfort in the drop in the index of prices manufacturers pay for raw materials, which suggests inflation pressures are subsiding. The index fell to 47, from 61 in September. The measure is down 26 points over the last two months, the biggest back-to-back drop since records began in 1948.

Economists expected the overall index to rise to 53, according to the median of 72 forecasts in a Bloomberg News survey. Estimates ranged from 49 to 56.

A build-up in inventories is pushing some companies to cut production as a way to clear their shelves. Caterpillar Inc., the world's largest marker of earthmoving equipment, started cutting back inventory in its third quarter and said on Oct. 20 that it expects a "sharp drop" in truck engine sales.

"We have work to do on our production facilities," Caterpillar Chief Financial Officer David Burritt said in an interview on Oct. 20. "We see our business entering a pause, if you will, but beyond that we're optimistic about the future."

Bloomberg reported "construction spending unexpectedly declined because of a deteriorating housing market".

I am wondering how anyone could possibly have expected to construction spending to stay elevated in the face of the housing bust. Yet somehow we have a "big surprise" over these numbers.

It seems that very few see the massive recession that is coming. Instead we see "optimism about the future" from Caterpillar with similar optimism reiterated every 15 minutes by the cheerleaders on CNBC. I will have more on this theme in my next post.

October ISM Chart



The above chart is courtesy of Institute for Supply Management

Pay particular notice of the prices paid for raw materials component. It fell from 61 in September to 47 in October. "The measure is down 26 points over the last two months, the biggest back-to-back drop since records began in 1948" yet all the inflationists on Silicon Investor and other places are still harping about about double digit inflation.

Once again the deflation key to me is an actual credit contraction as opposed to a decline in prices. Yet I am nearly stunned at how those perpetually fixated on prices are ignoring ISM data and the housing collapse while closely monitoring trivial data such as the NYT increasing home delivery charges. Yes someone actually posted that on my blog as proof that deflation was not happening.

Pricing Power

This collapse in ISM prices paid should really not have been a surprise to those watching the trends. On August 16th in Intermediate vs. Finished PPI I asked "Where is the pricing power?" A table in the above link shows that for months on end it was extremely difficult to pass on price increases. While raw materials costs were soaring at that time, the intermediate PPI showed rising input costs simply were not being passed on. The situation was unstable. This was resolved by a break in the expected direction: south. The reason that direction should have been expected was (and remains) a sustained downturn in housing. A consumer led recession is going to follow.

NAHB

David F. Seiders, Chief Economist for the National Association of HomeBuilders is reporting Economic Growth Continues to Slow, But Recession Is Unlikely

As expected, growth of real gross domestic product (GDP) slowed further in the third quarter, according to the “advance” estimate released by the Commerce Department on Oct. 27. Third-quarter growth slipped to an annual rate of 1.6%, marking the second consecutive quarter of below-trend economic performance.

It’s likely that GDP growth will remain somewhat below trend in the final quarter of this year (we’re projecting 2.7%), and RFI will once again exert a significant drag on economic growth.

However, the worst of the housing contraction now appears to be behind us, and the overall economy should strengthen in 2007 — steering clear of recession and carrying the expansion forward for years to come.

Now just what kind of nonsense is that? Does anyone really think the NAHB "expected" the GDP to slow to 1.6%? Of course it was really more like .9% on account of auto production. But more to the point, where is the evidence that the "housing contraction now appears to be behind us, and the overall economy should strengthen in 2007 "?

Indeed there is every indication that the housing bust is gaining steam. The yield curve sure is not suggesting anything close to a strengthening economy in 2007. Furthermore, we have not yet seen the effect of construction layoffs, rising foreclosures, and the inevitable spillover into consumer spending and commercial construction that tends to follow residential construction with a 6-12 month lag.

Europe

The Financial Times is reporting Eurozone inflation at 7-year low.

Eurozone inflation has fallen to its lowest level since November 1999 and economic confidence has reached a five-year high. However, German consumers have again spoilt the upbeat picture with September’s retail sales down on a year earlier.

The overall upbeat data on Tuesday highlighted the strength of economic activity in the final months of the year. However, the fall in the inflation rate, to 1.6 per cent in October from 1.7 per cent in September, added to the presentational problems facing the European Central Bank.

The ECB will almost certainly keep its main interest rate unchanged at 3.25 per cent on Thursday but has signalled that another quarter percentage point rise is highly likely in December – even though inflation is within its target of a rate “below but close” to 2 per cent.

The unexpectedly weak German retail sales figures suggested that economic recovery still lacks a broad domestic dynamism in Europe’s largest economy.

Once again we see the term "unexpectedly weak". Does anyone anywhere (except us bears that no one listens to) ever expect bad news? Does anyone see what is coming? German spending on big ticket items actually soared recently because of a huge VAT (value added tax) increase that takes place in January. With everyone scrambling earlier to purchase big ticket items ahead of time, one might think we might see a slowdown into the end of the year and certainly in the first half of next year.

Perhaps we see a pickup in December getting all the bulls lathered up before the bottom falls out in January. Someone remind me to check in January if the bottom falling out of German consumer spending in 2007 was "expected" or not. For the record, I expect it to.

What has me laughing at that article however is the idea that "the fall in the inflation rate, to 1.6 per cent in October from 1.7 per cent in September, added to the presentational problems facing the European Central Bank."

The question here is "Do we want lower inflation or not?" If we do, should we really be worried about "presentational problems" simply because no one is expecting lower inflation?

Nightmare Scenario

Let's now turn our focus to the nightmare deflationary scenario facing the Fed. Stage one is the housing bubble bust now underway. Stage two is a massive loss of construction jobs. Stage three is a massive loss of white collar jobs.

MSN is reporting Pressure builds on U.S. business to outsource.

Pressure on the U.S. labor market from the outsourcing of traditionally white-collar jobs is just starting to build, according to a new study.

Fortune 500 companies could potentially save $58 billion annually, or some $116 million per company, by offshoring general and administrative jobs, according to the Hackett Group, a strategic advisory firm.

The study estimates that increased use of cheaper overseas labor could affect up to 1.47 million back-office jobs, or nearly 3,000 at a typical Fortune 500 company.

Some of the job functions that can now more readily be shipped overseas than they could several years ago include IT, finance, human resources and procurement, the group said.

"Over the past few years, the resources available offshore have matured to an extent no one could have imagined, creating a paradigm shift that companies can ignore only at their peril," said Julio Ramirez, Hackett managing director.

The education base and skill set, and with it the potential savings on labor costs, is on the rise in India, China, the Philippines, Pakistan, Eastern Europe, Brazil and other emerging countries, the Hackett study contends.

In fighting the dotcom bubble bust the Fed unwittingly (or wittingly whichever you prefer) created an even bigger bubble in housing. As long as home prices rose and consumers could service that debt things were OK. Well home prices are no longer rising and cracks are in the consumer dike are appearing as evidenced rising foreclosure rates. A housing related jobs bust is 100% guaranteed to follow. That slowdown is likely to put additional pressure on companies to maintain earnings anyway they can. Heaven help us if the method chosen is outsourcing of additional white collar jobs.

The bottom line is simple. There is no conceivable action the Fed can take to replace jobs lost by a general economic slowdown, a housing slowdown, and increased outsourcing of white collar jobs. The mother of all credit bubble busts is coming and when it does it will not have anything remotely to do with inflation.

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