The CPI & Three-Card Monte

The March 2007 CPI Numbers are in.

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.3% (3.3% annualized rate) in March.

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.6% (7.5% annualized rate) in March. The CPI less food and energy rose 0.1% (0.7% annualized rate) on a seasonally adjusted basis.

Over the last 12 months, the median CPI rose 3.5%, the 16% trimmed-mean CPI rose 2.8%, the CPI 2.8% and the CPI less food and energy 2.5%

The Devil is in the Details

Following is a chart of the Disaggregated Median CPI Data (the makeup of the CPI by individual components and weightings).



(click on chart for a better view)

The above chart is Javascript so I cannot post a link but you can get to the complete chart from the link at the top of this page. I stopped the chart on Owner's Equivalent Rent.


Does anyone care to go through this line by line? Are the prices of vegetables, hotel lodging, truck rentals, clothes, and watches falling like a rock? Then again what about Owner's Equivalent Rent?

OER is essentially an estimate of the amount of rent you would collect if you rented your own house from yourself (or to someone else if you prefer). Here is the actual question used in the Determination of OER. "If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?"

Is the amount that people think their house would rent for any kind of valid construct? If that is not an absurd measurement of price in and of itself what is? That single line item has that highest weighting in the CPI with a relative weighting of 24%. The next highest weightings are recreation at 5.5%, medical care services at 4.9%, household furnishings at 4.6%, and motor fuel at 4.5%.

The weighting of housing expenses should be high but what is happening with the OER does not make much sense. When the actual price of housing soared between 2000 and 2005 OER was often dropping. Now that home prices are out and out crashing in many places OER is going up.

From my point of view, housing price inflation was dramatically underreported for many years and is now being overstated in the CPI because the ridiculous way OER is computed. There are other bizarre numbers in this set of numbers even if the weighting is small. Does anyone believe furniture prices are rising? I don't. Does anyone think fresh vegetable prices dropped 19%? I don't.

Just looking at those numbers is a nightmare. For someone with school age kids, education is severely under represented at 3.1%. For a cab driver is motor fuel way under represented at 4.5%? Does entertainment deserve the second highest weighting at 5.5%? For who? What about medical expenses?

Does this mess all average out? Even if by some miracle it does average out from time to time the process itself is flawed given that true inflation is not a measure of a basket of goods and services but an increase in money supply and credit. The latter (for now) is still soaring with all the leveraged buyouts, stock buybacks and debt offerings.

Shills and Three-Card Monte

All of the focus on the CPI by the Fed and its charlatans is nothing more than a game of economic Three-Card Monte. Like the actual card game, the shills and distractions are many: gasoline, hurricanes, oil companies, subprime lenders, insurance, demographics, S&P forward earnings estimates, capacity utilization, terrorism, etc. While the shills rotate consumer focus from one distraction to the next, the real problem is hidden.

The real problem is the US government is spending more money than it is taking in, while the Fed happy to oblige. The Fed's role is to keep the shills happy by attempting to keep consumers in the game via asset price targeting.

Eventually the "mark" (in this case the US consumer) runs out of money to play the game (buy more houses) but Congress is now stepping into the picture in a blatant attempt to buy votes while keeping the shills (the lenders) happy.

The big difference between "Economic Three-Card Monte" and the actual card game itself is the lapse in time that it takes the mark to realize he was had. It took condo buyers in Florida well over a year to realize what happened. Worse yet, the carnage is still accumulating.

Interestingly enough, global confidence in "Economic Three-Card Monte" is still growing in spite of the subprime housing collapse in the US. The result is all sorts of maneuvers like we have seen lately with corporate stock buybacks funded by debt and with increasingly large LBOs funded in part by "foreign marks" as discussed in Leveraged Buyout Mania. Meanwhile corporate insiders are for the most part bailing as fas as they can.

Confidence games like these can only go on so long as there is a fresh supply of marks (also known as greater fools). With a March Decline in Real Earnings and Mortgage Equity Withdrawal (MEW) slowing with the decline in home prices, US marks have been harder to come by. Given that the supply of marks is not unlimited, the key question now is: How long will foreign marks keep funding the game?

Note: This post originally appeared in Minyanville.

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

The Vista/Dell Experience

I needed a new laptop. My choices were to scrounge around and try and find something with Microsoft XP or to bite the bullet and opt for Vista. One of the problems with the former was that many graphics cards that come with XP machines will perform only marginally at best with Vista (or at least I am told). I am not a PC guru but I have a friend who I trust that told me to stay away from at least a dozen options I was considering because of a graphics card issues. I have learned from bitter experience that it is better to be safe than sorry.

I had a second requirement in that I wanted a very good machine for cheap. My third requirement was that it had to be better than my current desktop model. That desktop had an older processor but it did have 2 gigabytes of memory. The new laptop (with the addition of a new monitor) would replace the desktop system.

Like it or not Vista is coming. My current desktop is running Windows 2000 Professional and although it was running fine, it will soon be unsupported and I have current performance issues as well. I also needed the laptop up and running with all my stuff on it by the end of April. No, I was not going to consider a Mac. Here then were my requirements.

Requirements

1. I wanted a very good laptop for cheap
2. It had to have a good processor with at least 2 gigabytes of memory
3. It had to be up and running with all my stuff on it by the end of April
4. It had to have a graphic card, memory, and processor capable of running Vista reasonably well, although it did not have to have Vista itself per se
   
5. In a weird but true situation the deal had to please my friend more so than me
   

Although Vista was not a requirement (future capability to run Vista was) all the non-Vista machines that I looked at all had crappy graphics cards that were ruled out by my friend. Changing a graphics card is no big deal in a desktop model but on a laptop it is.

To get a machine for cheap we were watching Dell for refurbished models as well as best deals at other places. All in all I had a pretty tough set of requirements and at least 3 weeks passed with my friend nixing every choice that I presented him with. Finally a machine came in that met his satisfaction. And if he was satisfied then so was I.

The Machine

Dell Inspiron 6400/E1505 Notebook
Intel Core 2 Duo processor T7200
4MB Cache/2.00GHz/667MHz FSB
2 GB DDR2 SDRAM 533MHz (2 DIMMs)
TV Tuner w/ Remote Control
15.4 in WSXGA+ Notebook Screen
Windows Vista Home Premium
6 Cell Primary Battery
Intel Pro Wireless 3945
8X DVD +/- RW w/dbl layer write capability
120 GB SATA Hard Drive (5400 RPM)
256MB ATI MOBILITY RADEON X1400 HyperMemory graphics card
Norton Internet Security 15 Month Subscription
Image Restore Software
Free Shipping

The price was $1,099.00. I am not a geek but I am assuming this is a very good deal given my set of requirements and also by looking at current pricing of that configuration in a DELL catalog. I was also able to pick up a Dell Refurbished UltraSharp 2407WFP 24-inch Widescreen Flat Panel LCD Monitor for $539 (also with free shipping) that my friend said was to die for. I wanted to get a 22 inch monitor for way less but my friend, bless his heart, would have none of it.

Software Problems

The problems started shortly after I received my stuff. The hardware was all fine but I started having huge problems when I loaded my existing Office 2002 versions on the machine. I kept getting repeated messages that an application was trying to access my outlook mailbox. By repeated I mean something like 20 popup boxes one right after another all saying the same thing. Canceling the messages did no good, I had to OK every damn one of them. Then after a 30 second pause or so there would be another blast of 20 messages to respond to. Not just once again either but forever.

The specific message was "A program is trying to access email addresses you have stored in outlook." Check out this Outlook Experience. "I can deny or I can allow for 1,2,5,10minutes. If I don't select 1 minute, I am not able to do anything with the form. Only if I did select the check box "Allow for 1 or 2 minutes" then only I am able to get the program to work." That person's experience was actually better than mine. Regardless of what I did, I was not able to get Outlook to work at all.

Here is the dreaded message.



Imagine that popping up every second for 20-30 seconds after which you get about 20-30 seconds to do something followed by another blast of 20 or so prompts again. Allowing access for 10 minutes does not help.

Dell Software Support - Less Than Worthless

I made the mistake of calling Dell for support. They told me that I did not purchase coverage to help me with this problem. I replied that I paid an extra $70 for one year's support with my purchase. They responded this was a software issue and my policy was for hardware only. I asked for escalation. The supervisor said I could have signed up for one month of support for $50 at the time I bought the machine but it would now cost me $250 (and that it was a good deal). They would not give me the first month for $50 anymore. I was too late. What kind of policy is that from Dell anyway? I threatened to return the machine (I wasn't serious as I needed something), but all that got me was "one free try" for 15 minutes. They looked around for a while and their conclusion was that I had a virus. I told them others had this problem as well (there are lots of references to this on Google) but they insisted I had a virus. I escalated one more time and was told once again that I had a virus. I explained to them why it was extremely unlikely that I had a virus but they responded "take it or leave it for $250."

So here's the deal. I have a brand new machine, running Vista, behind a hardware firewall, with Norton security on the machine and one of the first things I did was update virus configurations (after I got my DSL connections working which by the way was another time consuming problem in and of itself) but the best Dell could come up with was that I had a virus and they wanted $250 to fix it.

I told Dell where to go. Dell software support seriously sucks. But I knew that headed in. I have had previous support issues with Dell. I wasted a few more hours of mine and my friend's time scrambling around on the internet for as solution. I did find some free software that supposedly would fix this problem. It locked up Outlook and I had to remove it.

Somewhere along the line in my attempts at trying things Outlook itself realized I had a problem, and searched for a solution. The solution was a set of fixes to Outlook. I put them on. Same problem, another search. More fixes. This went through three iterations. After the last fix was applied the solution from Microsoft was what I should have been bright enough to figure out in the first place. I needed to upgrade to Office and Outlook 2007.

One can actually spend days on crap like this and I did, while slowly loading other stuff from my old machine to my new machine, and getting a small amount of other work done as well. Note that Vista has a feature to move data files between computers automatically but it does not work with Windows 2000. Sheeesh. I am not even going to go into the details of the time and effort it took to fix a corrupted Outlook file on my old machine that happened only in the process of trying to export it to the new machine. That alone took a half day to fix, and I still do not know how it got corrupted.

Flying Saucers and Missing Shards

There was no real choice. I decided to purchase the Home Version of Office for 2007 and by clever design from Microsoft, Office Home does not come with Outlook. I had to also purchase a stand alone version of Outlook as well.

Microsoft packages their stuff securely. I removed all the clear tape that I could find on the Outlook box but I still could not get the box open. If you have not seen these boxes they consist of very thick bolted plastic and a slider to open the top. I could not get the slider open. I was not a happy camper and at 3:00AM in the morning on the third day of trying to get the computer to run, I just decided to force the box open by prying it apart.

This was a mistake. The box splintered into a dozen or so pieces and I cut my hand in the process. The CD went sailing across the room and I was dripping blood on the carpet. Although the CD was not damaged, the product key was. It split into three pieces of which I could only find two. I spent 2 hours that night looking for a tiny plastic shard containing two characters of the product key to no avail.

I decided to load the disk and of course it would not load authorized (without the key) but it would load unauthorized with a 25 use limitation after which the product would not run. I also opened, this time successfully (with no cuts or bruises), the Office 2007 box and loaded that software as well.

Low and behold the problem of repeated messages "A program is trying to access email addresses you have stored in outlook" went away. I suspected as much. Word and Outlook talk to each other. Vista just cannot handle programs accessing the mailbox like they used to. So I would have paid Dell $250 for nothing and would have trained them as well (assuming of course that still would not be searching for the solution some two weeks later). On next to no sleep for three days of messing around I went to bed somewhat happy at 5:00AM.

A New Product Key

The next day I called Microsoft. I was actually impressed with their automated voice menu system as I quickly got to someone who could help me with activation.

I told them I had a problem they had never heard of before. They assured me they had heard everything. I explained the problem and they stood corrected. They had not had yet had anyone cut their hand opening a box of software, with the CD sailing across the room, with the product key splintering in pieces, one of which could not be found.

The contact generated a new key for me. I entered it and it was accepted on the first try. Hooray! I was happy. I spent the rest of the day loading other software on the new laptop. I was pleased to see that my own programs ran without a hitch. I also managed to get some real work done for a change. So was everything was up and running on the 4th day? Not so fast.

I rebooted the evening of the fourth day as some software that I loaded required it. I went into Outlook and it would not run. It seems Microsoft gave me a key for some sort of trial. I could not send or forward messages, only receive them. That problem only happened after I rebooted. No problem I thought, just call Microsoft again.

The next day I called their automated system, but this time it took me to a person in India that had no idea what I was saying at all. Eventually that person gave me another number to call. It was for Microsoft paid support on a per incident basis. No thanks. I called back up the first number and talked to yet another person that redirected me back to India where once again I received no help.

Somewhere along the line I escalated the problem and finally got to someone who was (after several attempts) able to generate a product key for me that would actually work. Ultimately I had to uninstall Outlook then reinstall it with the new generated key.

Dell Hardware Support

It was only after getting all my software up and running and stuff moved off the old machine did I even bother with the new monitor. That was 5 full days later. The new monitor came up but I could not get any output to display on it. It's like it was sitting there turned on but unattached to my computer. Furthermore Dell neglected to send me a user manual with the monitor.

I called Dell hardware support about the monitor. When it comes to automated response systems, Dell's is as bad as it gets. After a very lengthy delay in their automated system with me repeatedly doing nothing but swearing and pressing the operator key on my phone I was actually connected to a real live person.

This time I was very lucky to get a person that not only cared but also knew what he was doing. This is a very rare combination these days. He stepped me through configuring the monitor so that I could use both the laptop monitor and the new flat panel monitor together. The graphics card for which I also have no manual seems to work beautifully, at least for my purposes. I would like to say that Dell hardware support is great, but after the software fiasco and the length of time it took to get to a live body, I believe that I simply got a random "good draw", sort of like catching double aces to start off a hand of Texas Hold-Em.

But the guy that helped me was indeed very good, especially since this was actually a software problem on how to configure the ATI graphics card. I felt blessed in light of recent experiences at both Dell and Microsoft that this hardware person from Dell even agreed to help.

Hmmm. It now seems that one feels "blessed" to get any help. Is that unusual?

Lessons Learned & Advice

• Do not even think about trying to get prior versions of Office or Outlook (at least 2002 versions) up and running on Vista.
• Dell software support totally sucks. Plan on this problem never being fixed.
• Dell laptops are fine but only if you know enough to make a wise selection or if you have a guru helping you. Actually that statement is not unique to Dell.
  
• I really do like Dell's 24 inch flat panel monitor.
• Dell hardware support is likely far better than software support. Then again I may have simply been very lucky with hardware support. Then again, anything is likely better than Dell software support. In fact, if you have a software issue with Dell you may want to try hardware support first and pray.
  
• It may take you far longer than you think to get a new machine up and running.
  
• If you buy Vista, plan on purchasing new versions of Office and Outlook.
• Do not attempt to force open a hard plastic case containing Microsoft software unless you want a cut hand, missing shards of product keys, and an extra day of grief.
• Get a knowledgeable person that understands your needs to help you. I am very pleased with my new system now. Thanks R.E!
• The Vista Experience took me five days. Armed with info from this post, however, your results could be much better.
  

Addendum. I have been running Vista now for about a week with no additional problems. I like it, especially the extra security. Many things you do now require permission which is fine with me. There will be no more automatic uploads if you visit a rogue site accidentally.

Some will note that I have previously stated that Open Office etc would be the end of Microsoft revenue streams. I think it will.... eventually. And because of problems like mine, businesses will be slow to migrate to Vista.

Vista did not change the fact that Microsoft's upgrade model is under stress. New computers may come with Vista but the amount that Microsoft can get for Office and the like will likely drop significantly over time. I just can't see users in India and China paying for Office when they can get something nearly equivalent for free.

It was my personal timeline to do something quickly that forced me into one more Office upgrade cycle when I was still relatively happy with Office 2002. I got a lot of use out of Windows 2000 Professional (six years perhaps) and close to five years out of Office/Outlook 2002. For many, myself included, I expect or at least hope this will be my last major paid for hardware/software upgrade cycle for a long time.

Notes:
This post originally appeared in Whiskey & Gunpowder.
Tomorrow I will take a look at the CPI.

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

Leveraged Buyout Mania

The LBO craze continued today with Sallie Mae going private for $25 billion.

Shares of student-loan firm Sallie Mae jumped about 18% Monday after the company agreed to sell itself to a group of private-equity firms and two major banks for $60 a share, or about $25 billion, the companies said Monday.

"We see some plausible financial logic behind these investors' interest in Sallie Mae. New investors may be able to increase SLM's financial leverage, thanks to their willingness to forgo an investment-grade corporate credit rating and $200 billion of backup financing from two bank owners," Prudential analysts wrote Monday morning.

So the "plausible rationale" is the increased leverage someone gets from turning corporate grade investments into junk. Lovely.

Rumors of the deal pressured Sallie Mae Bonds last Friday.

Corporate bonds of Sallie Mae sold off on Friday after a New York Times report that the student lender is in takeover talks with private-equity firms about a leveraged buyout deal that could be worth more than $20 billion.

SLM Corp bond spreads widened by 33 basis points. A spread represents the distance between the yield on a corporate bond and the yield of a Treasury note of comparable maturity. Wider spreads indicate investor uneasiness with developments at a company.

Earlier this week, New York Attorney General Andrew Cuomo said his office reached a settlement with Sallie Mae in which it would adopt a new code of conduct regarding student loans and would contribute $2 million to an education fund. On Wednesday Cuomo's office issued a press release that noted "revenue sharing agreements, university call center staffing by lender employees, gifts and trips from lenders to financial aid directors, and even apparent stock tips to financial aid officers."

Sallie Mae and Citigroup Inc dominate the student loan market and both were found by Cuomo to have engaged in improper lending practices. Last week Cuomo announced multi-million dollar settlements with eight universities and Citigroup unit Citibank.

LBOs wreck havoc on bondholders

While shareholders are happy the LBO craze wreaks havoc on corporate bondholders.

Bondholders in leveraged buyout transactions are much like uninvited guests standing outside a mansion watching the revelry at a lavish party they cannot attend. Once an LBO gets under way, bondholders watch their investment-grade assets slip into junk status while the owners of shares of the same companies receive premiums as high as 25%.

"If you are a shareholder getting a 25% premium, you are in a very good position, but if you are a bondholder, good luck," said Nick Riccio, a managing director of corporate ratings at Standard & Poor's.

Typically, private equity firms and other takeover artists issue large amounts of new debt to finance LBOs, often borrowing at least two-thirds of the purchase price. The increase in debt frequently pushes the ratings of the acquired companies' debt lower, and often they end in speculative, junk status.

Naturally, this chain of events is painful for investors who deliberately bought high-grade bonds in the first place to avoid speculative risk.

There are stirrings of revolt among bondholders as the current LBO wave shows no sign of slowing. In fact, there are published reports that a $100 billion LBO deal could be on the horizon -- to date the largest LBO on record is the $44 billion Kohlberg Kravis Roberts and TPG Inc. agreed to acquire Dallas-based power producer TXU Corp

The enormous pools of liquidity that private equity firms can generate mean that companies once considered too large to be takeover targets are now seen as candidates.

[After a leveraged buyout deal was announced for First Data Corp], First Data's corporate debt rating was cut five notches by Standard & Poor's to BB+, which is junk status.

Although it is unclear at what level First Data Corp bond investors will be compensated, the faint-hearted among them will not have to hold the debt for long and be left to wonder whether a bankruptcy is in the works. Yet many observers expect Kohlberg Kravis Roberts to maneuver to pay less than full value to the bond holders.

In some cases, bond holders are taking legal action against private equity firms. Holders of Equity Office Properties bonds, for example, hired a Paul, Weiss, Rifkind, Wharton & Garrison attorney who secured almost $225 million more than the face value of their bonds, according to published reports. Blackstone Group took Equity Office Properties private for $20 billion.

But not all bond holders want to pay legal fees and, in general, their options are rather limited. At the same time, private equity firms are not likely to be voluntarily generous with bond holders.

"Typically, to make these deals worthwhile, a firm will pay as little as possible to the bond holders," said Dominick DeAlto, a senior credit analyst with Robeco, Weiss, Peck & Greer.

This leaves holders of existing bonds with few weapons in their arsenal. "Unless a bondholder owns a bond issued under a contract or an indenture that has an ironclad protective clause that would be triggered by this specific (LBO) event," he is stuck, according to GimmeCredit's Levenson.

Part of the problem is that the current LBO craze is only about a year old. This type of transaction was popular in the late 1980s, but fell out of favor in the 1990s and did not become common again until 2006. That means that many existing corporate bonds were structured at a time when LBO worries were minimal so they were not set up to give investors protection against such events.

Standard & Poor's Riccio predicted that bond holders will become more militant in coming months, given that the LBO trend shows no sign of abating. "We are sensing a lot of concern on the part of the investment community about takeouts that do not carry protections for bondholders," he said. "We are certainly hearing of some frustration with the current trends."

Panic Buying

Who in their right mind wants to own corporate bonds when they can be turned into junk overnight? Spreads are absurdly low and odds of "An Event" occurring are priced far in the distant horizon when the reality is otherwise. Of course most debt issues are junk already which is still another reason to not own corporate bonds.

There almost seems to be a panic now to get into LBOs now before someone else does even though most of the deals make little financial sense on a risk/reward basis. The justification for taking over Sallie Mae seems to be increased leverage associated with junk funded of course with OPM (Other People's Money). Is the idea to scoop up every company that is not already junk, strip the assets, stiff the bondholders, and turn the debt structure into junk before someone else does?

Whatever the driving force is, layer upon layer of debt keeps stacking up for unproductive purposes. None of this activity adds to GDP. As for who is buying corporate debt....

Capital Flows Rise to $94.5 Billion.

Capital flows to the U.S. totaled $94.5 billion in February, the Treasury Department said. This is up from an inflow of $79.6 billion in the previous month. Foreigners bought $39.9 billion in corporate bonds in February and $14.5 billion in Treasury notes. They also bought $13.2 billion in stocks, down from $23.3 billion in January. They sold $2.2 billion in government agency bonds, after buying $20 billion in January.

Michael Gregory, a senior economist at BMO Capital Markets, said market awareness of the weakness in the subprime mortgage sector "came to a head" in February.

Economists said the capital inflow is enough to cover the U.S. current account deficit, which requires an average monthly foreign saving inflow of $65 billion.
But analysts detect some slowdown in foreign investment as interest rates differentials between Europe and the United States narrow.

"The monthly trend of foreign purchases of U.S. long-term securities seems to have downshifted to the $60 billion per month range," said Jay Bryson, global economist at Wachovia.

TREASURY INTERNATIONAL CAPITAL DATA FOR FEBRUARY



(click on chart for a better view)

Given that month to month data is very volatile, take a look at the yearly trends in the above chart. Foreign acquisitions of treasuries and agencies are sinking but corporate bond and equity purchases are rising substantially.

As long as the corporate bond market holds together there is going to be support to get leveraged buyout deals done no matter how risky they are or how little financial sense they make. In conjunction with what has transpired in housing, interest rates seem high enough to be chocking off much of the real economy but nowhere near high enough to choke off financial speculation that is not only happening at an insane pace, but is increasingly being financed by foreign capital flows into corporate bonds.

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

Sleazy Ads at Why Pay Double

I am looking at the latest in extreme borrowing techniques. This one involves yet another 2% loan financing scheme except that it is offered for rental properties only. The first thought that comes to mind when one sees 2% financing options is expectation of another negative amortization option arms scam where 2% is the payment option with the actual interest rate being much higher.

But loans from WhyPayDouble.com offer a genuine 2% interest rate or even lower. What's the catch? The catch is the loan is in Yen. All I can think of is that someone is making a massive bet that the Yen is going to appreciate greatly. Alternatively, someone is just looking for another way to collect big origination fees off uneducated and unsuspecting borrowers. Let's take a look at the hype.

We are offering a yen-based United Kingdom AAA rated bank (LloydsTSB, since 1765) for purchasing or re-financing residential properties in the:

UK, Australia, New Zealand, Spain, Portugal, France, Dubai, Singapore, Hong Kong, Canada (BC, Ontario, Alberta & Quebec), USA - states of:

* New York
* New Jersey
* California
* Florida
* Colorado
* Washington
* Oregon
* Nevada
* Connecticut
* Hawaii

All qualified at 1.5% - 2.03% for up to 30-year terms as of January 1st, 2007.

Clients can obtain "in principle" agreements without cost or obligation for loans at the lowest interest rates of any country in the world and on flexible terms. The minimum loan amount is $75,000.

These loans can be for purchases or re-financing. This is based solely on the client's assets, liabilities and earnings. The bank will wish to see proof of employment and assets etc... in order to conduct a cash flow analysis and ascertain his or her ability to repay the loan. Once done, the bank will offer a loan amount and interest rate specific to each client (anywhere from 1.5% to 2.03%), depends on which country your from, the offer is valid for six months.

Why can Japan offer such low rates?

Because the Japanese government's lending rate is so incredibly low. That's it, nothing more. Take a look at the chart below and see the national average for a 30-year mortgage rate. As of January 9th, 2007.
• US 6.04%
• New Zealand 8.7%
• Dubai 9.02%
• UK 6.4%
• Australia 7.33%
• Japan 1.92%

Triple Play

Great. Just what everyone needs:

1. A chance to get hammered on declining property values
2. A chance to get hammered on rising interest rates again (this time in Japan)
   
3. A chance to get destroyed on a rising Yen

Interest rates in Japan are poised to rise and the Yen along with it. If not now, then sometime huge over the life of the loan (30 years).

More Hype

This is by far the most stable lending rate of any country of the world. The US Federal Reserve Rate which the world banks follow, goes up and down like a yo-yo, changing with whatever economic theory is most prevalent at the moment to control growth.

Lenders have been trying for years to break into the Japanese Lending rate market for years without success, because it would offer homebuyers so much more for their money, as this article from Money-Week magazine says, check it out.

A bull market in property is just beginning - but where?

It basically says that this low interest rate is normal in Japan. Its so cheap in comparison that people will either be able to cut their current payments drastically or they will be able to afford a much bigger house for the same payment as a smaller house. This will radically shift the homebuyer's abilities in America today and in for this program the rental owners options have just sky rocketed.

Send in your application and see if you can get it!

For starters that is not what the article says at all. The MoneyWeek article essentially says "Buy Japanese Real Estate". It most assuredly does not say to buy US investment properties because rates in Japan are low. It does not discuss the impacts of the Yen at all (likely a positive reason for buying Japanese properties and certainly a negative factor for those borrowing in Yen while collecting rents in other currencies). And it most assuredly does not say to borrow money in Yen to finance investment properties outside of Japan.

While Japanese real estate is likely a bargain compared to most other places the article itself is so full of holes it is hard to know where to start rebutting. If 0% interest rates were so good in and of themselves then why did Japanese real estate sink for decades?

The article does state "The government will do everything in its power to prevent going back into bust mode. It will NOT get in the way as property prices start to rise. And it will do everything possible to keep prices from falling.". This is another absurd statement. If the government could do anything about what happened it would have done so long ago. In fact, it is extremely likely that Japanese government intervention is exactly what prolonged the bottoming period.

But the fact that Japanese interest rates have been held so low so long means they have only one way to go and that is up. With that hike in interest rates the Yen will likely rise as well. But this blog is not about poorly written articles on MoneyWeek, it is about .....

Pure Sleaze

Property value in New Zealand has been going up 30%+ a year! But, for future projections its always best to be negative so I'll walk you through year-by-year of what could happen to you if the property values drop every year for 30 years straight. This is about as negative as you can get, but let's walk this through one year at a time and see what your half a million dollar property would be worth at the end of this terrible decline.

• Year 1: this year your new 500,000 dollar property goes up by 30%, (500,000 x .3 = 150,000 gain in value your first year).
• Year 2: your 650,000 dollar property goes up by 29% = 188, 500 increase in value.
• Year 3: your 838,500 dollar property goes up by 28% = 234, 780 increase in value.
• Year 4: your 1,073,280 dollar property goes up by 27% = 289, 785.60 increase in value.
• Year 5: your 1,363,065.60 dollar property goes up by 26% = 354,397.06 increase in value
• Year 6: your 1,717,462.7 dollar property goes up by 25% = 429,365.68 increase in value.
• Year 7: your 2,146,828.4 dollar property goes up by 20% = 429,365.68 increase in value.
• Year 8: your 2,576,194.1 dollar property goes up by 19% = 489,476.88 increase in value.
• Year 9: your 3,065,671 dollar property goes up by 17% = 521,164.07 increase in value.
• Year 10: your 3,586,835.1 dollar property goes up by 13%=466,288.56 increase in value.
• Year 11: your 4,053,123.7 dollar property goes up by 10%=486,374.84 increase in value.
• Year 12: your 4,539,498.5 dollar property goes up by 9% = 408,554.87 increase in value.
• Year 13: your 4,948,053.4 dollar property goes up by 8% = 395,844.27 increase in value.
• Year 14: your 5,343,897 dollar property goes up by 7% = 374,072.79 increase in value.
• Year 15: your 5,717,969 dollar property goes up by 4% = 285,898.45 increase in value.
• Year 16: your 6,003,867.5 dollar property never goes up again for the next 15 years!

You pay off your 500,000 dollar original loan and end up with over 5 million in profits from the land value increase.

I would be embarrassed to be associated with such nonsense if I was Loyds TSB. The "Why Pay Double" example purports to show the effects of "what could happen to you if the property values drop every year for 30 years straight" but instead starts off year 1 with a 30% increase (as if that is normal) then proceeds to assume enormous increases for 14 more years.

How do you know when you are getting a bad deal? One way to tell is if an ad is pure sleaze. And this ad is as sleazy as ads can get.

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

Zero Hour

I received the following question yesterday in response to Liquidity Without Responsibility.

Mish- I have been reading your posts for some time, and it does seem like the scenarios you have prophesied are slowly unfolding.

You have mentioned deflation many times, and I know there is debate as to what the definition of deflation actually is...

Just looking at price alone: some prices such as housing are dropping, while others...eg commodities are rising...do you think this divergence will continue, or will we get outright deflation...commodities, housing, wage, manufactured goods etc at some point in this cycle?

Thanks, I appreciate that question. Yes some things that I have called for are happening (especially in regards to housing and housing related credit), while you and others are wondering how the rising price of commodities fits into the picture.

I am a fan of gold and commodities in general and have stated so many times. But the price of commodities or the price of anything is not what determines deflation vs. inflation. The Austrian definitions I use are that inflation is an increase in money and credit and deflation is a decrease in money and credit. Right now it is clear that we are in a state of inflation (but it is not very stable for reasons I will get to later).

Long term I agree with Ron Paul on the US dollar. I agree with him in general about hard assets (especially gold) as well. Yes he is calling for stagflation and possibly an "inflationary depression". I am not a big fan of the term "stagflation" as many know. I guess the problem I have with it is that I believe inflation and deflation are monetary events while the term stagflation is not. Here is a typical definition of stagflation: "a period of slow economic growth and high unemployment (stagnation) while prices rise (inflation)". There are countless other definitions all mentioning "inflation" with the general sense I get uses the term inflation in stagflation as meaning rising prices.

Astute readers will also pick up on the aspect of "high unemployment" and scratch their heads over the rock bottom unemployment rate. At a minimum the stated unemployment rate does not take into consideration wages or how skewed those wages are. Others will counter with various "Shadow Statistics" suggesting unemployment is way higher. Arguably the correct way to look at things is where job creation is and where it is headed. Citigroup announced plans to slash 17,000 jobs. MID LEVEL JOBS. Where are those people going? Where are high paying construction employees going? Where is job growth going to come from at the tail end of an expansion? Capital spending is slowing dramatically. What does that say for job creation? The weekly claims numbers also seem to be ticking up again.

But lost in the debate about stagflation is the real meaning of inflation and deflation. Economic growth, unemployment, and prices are nowhere to be found in what I believe is the correct definition of inflation or deflation. Stagflation might say something but it certainly is not (at least by Austrian definition) some sort of in between step between inflation and deflation. The step between inflation and deflation is arguably perfection, not stagflation.

So what's next? As long as asset prices rise people can pay the bills and an expansion in credit can continue. But we are running into trouble, especially with housing. The containment is spreading as I and others have pointed out. The stock market cheers layoffs like those at Citigroup until people can't pay their bills. Now we are seeing Congress stepping into the fray (too late of course) hoping to bail out homeowners who are underwater in mortgage payments.

Stress keeps mounting. Other aspects of the proposed bill will shut off credit and subprime lending. Yet congress is too late. The market has already reacted. Where was congress and the Fed four years ago when a bill was needed and might have done some good? Now whatever congress does will just make matters worse.

Many say the stock market is forward looking. I disagree. In fact I have proven otherwise (see Leading Economic Indicators). The stock market is a measure of sentiment towards risk. As long as that risk taking continues the stock market can rise. But gains are harder and harder to come by. So hedge funds have resorted to leverage to make up the difference. Mutual funds and hedge funds are also selling options to gain income. This reduces volatilities. The whole mess of leverage on leverage works until it doesn't.

In the meantime commodity prices are rising while prices on many finished goods as well as housing are falling. This obviously unstable. But supply constraints and peak oil are not inflation. I keep getting told that there MUST be a pass through of rising commodity prices. I disagree. The cost to produce something is irrelevant as to the price it will fetch. The latter is purely a supply/demand issue. If you disagree look at prices of condos in Florida. They cost more to build than what the can be sold for. Demand is simply too low as a result of mammoth malinvestments and overbuilding. Yet condos are still being built. Projects are headed to completion and the supply of stuff still grows in the face of falling demand. At some point creditors will shut off funding but that has not happened yet.

Prophesies

Clearly this is unsustainable. Ron Paul thinks "An Event" will happen within five years. I happen to agree. But no one really knows when or how insane things will get in the meantime. Remember how high shares of NEW and LEND were just a few short months ago? Remember how subprime did not matter until it did. Remember people camping out overnight to buy Florida condos less than two years ago?

Right now there is credit contraction in subprime and that contagion is spreading regardless of what anyone says to the contrary. But speculation and leverage are still running rampant with enormous amounts of money (debt) funding leveraged buyouts and stock buybacks. The broad markets also still have a huge underlying bid.

In regards to the latter, Professor Succo on Minyanville had this to say on Thursday.

More and more of us are talking...
It's not just me now. Some of the best traders I talk to are noticing the same thing: stocks are heavy and illiquid, yet indexes are well bid and liquid.

The bids I see in index ETF's are ridiculous for anyone trying to actually buy them intelligently (at the best price). I routinely (like today) am seeing massive bids advertised in the ETF as if the "buyer" wanted to buy them at the worst price possible. In other words, to drive the market up.

Eventually the weak stocks are dragged up kicking and screaming by index arbs.

I can only speculate as to why this is happening. Either "buyers" want overall exposure to the U.S. stock market and they do not care what price they pay, or some non-economic buyer is showing massive bids for some other reason.

As deflationary forces build and central banks run out of inflationary bullets, I can at least wonder at those charged with stimulating sluggish economies understand that if stock prices go down the game is up.

Succo

Zero Hour

Professor Sedacca mentioned a similar concept back on April 13 in What the Markets Know Isn't Worth Knowing. Here is a short snip.

I have felt for the better part of a decade that the Federal Reserve has been targeting asset prices (stocks and real estate) in addition to the real economy, rather than just the real economy as it has done for many decades. This is a direct result of the monstrous amount of debt outstanding relative to the size of the economy. For further proof, please look at a chart of Total Credit Market Debt, courtesy of our friends at Ned Davis Research. Not only is the percentage of credit market debt relative to GDP important, but note the trajectory of the debt growth. What is important to me is that what accompanies debt is debt service, and that debt service requires ever-increasing asset prices to support the debt service.

I wrote recently about a concept called “zero hour” that was initially unveiled by Barry Bannister (who worked for Legg Mason at the time). Essentially, zero hour is defined loosely as the moment at which credit growth no longer has an impact on the real economy. While the US not yet there, I wonder aloud if it is not heading on a course towards zero hour, or as some call it, “the day of reckoning.” I will say this. I do not know when and even if this is to occur. Frankly, for our children’s sake, I hope that it does not. But to blindly ignore the mere possibility of this potential outcome is to be imprudent, particularly with other people’s hard earned capital. If the US does not, as a nation, get its financial house in order (in a short time I may add), then the question becomes not if the US visits zero hour, but when it reaches zero hour.

Clearly the situation we are in is not sustainable. We cannot keep replacing high paying jobs with low paying jobs forever. Debt and financing are not unlimited either. Housing proved that. Using rising asset prices to pay bills can only go so far. Housing proved that as well. Once the impact of reduced capital spending hits the jobs front, there is bound to be a pickup in the inability to service debt. In the meantime please keep an eye on debt and leverage. It is taking ever increasing amounts of both to have an impact. Zero Hour approaches. I don't know the date but I do know the time.

Rocket Man

She packed my bags last night pre-flight
Zero hour nine a.m.
And I'm gonna be high as a kite by then
I miss the earth so much I miss my wife
It's lonely out in space
On such a timeless flight

And I think it's gonna be a long long time
Till touch down brings me round again to find
I'm not the man they think I am at home
Oh no no no I'm a rocket man
Rocket man burning out his fuse up here alone

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

Liquidity Without Responsibility

A congressional study on subprime problems ended the way most congressional studies do, with lawmakers seeking to buy votes based on poor analysis that was simply too late to do any good even if it was accurate. This is going to cost taxpayers money and make problems worse than they are now.

The headline reads Emergency funds proposed for subprime crisis.

Lawmakers seek 'hundreds of millions of dollars' to head off foreclosures.

The federal government should increase aid to nonprofit groups, strengthen rules on mortgage origination, create an antipredatory-lending law banning unfair and deceptive practices and take other steps to tackle the crisis in subprime-mortgage lending, a congressional study said Wednesday.

A report issued by the Joint Economic Committee said that foreclosures in the subprime sector are expected to rise this year and next year, as nearly 2 million hybrid adjustable-rate mortgages, or ARMs, reset in the weakened housing market.
What was once the American dream of homeownership, according to Joint Economic Committee Chairman Charles Schumer, D-N.Y., has "now become the un-American nightmare."

The crisis is particularly acute in Midwestern states like Illinois and Ohio, and states in the South and West like California, Colorado, Florida and Georgia, the report indicated.

Joined at a Capitol Hill press conference with Sens. Robert Menendez, D-N.J., and Sherrod Brown, D-Ohio, Schumer said that he and others would be proposing that "hundreds of millions of dollars" in federal money be funneled to community-based groups to help borrowers head off foreclosures.

"We'd like to do something very quickly," Schumer added.

What should congress do?

I would like congress to do something quickly as well: go on recess for the rest of the year. That will save hundreds of millions of dollars of money on this foolish proposal to buy votes. It would also have the enormous side benefit of cutting off funds for the the war in Iraq saving countless billions of dollars. It's a win-win proposal vs. the status quo.

Liquidity Without Responsibility

Unfortunately congress is not about to declare recess, instead they are proposing still more subprime silliness. Bloomberg is reporting Mortgage Bondholders May Bear Subprime Loan Risk.

The top Democrat and Republican on the House Financial Services Committee said investors in mortgage bonds should be liable for deceptive loans made by banks. Democratic Chairman Barney Frank of Massachusetts and Spencer Bachus of Alabama, the committee's highest-ranking Republican, said such legislation would discourage lenders from extending loans to people with poor credit histories by making it more difficult and expensive for the banks to sell the mortgages.

"More money was being lent than should have been lent," Frank said in an interview from Washington. Frank, who last month predicted that the House would approve such a bill this year, said growth in the market for mortgage bonds "provided liquidity without responsibility."

New Jersey's Safeguards

The New Jersey law erected safeguards against predatory lending, including a requirement that lenders certify that borrowers can repay the loan. The borrower must receive financial counseling when financing mortgage points and fees, which may not exceed 2 percent of the total loan amount.

The "assignee liability" spelled out by "New Jersey is what I would go for, it works," Bachus said in the interview. The New Jersey law, which "could be the starting point for national legislation," allows "purchasers of securitized loans to protect themselves from liability via due diligence," Bachus said in the e-mail statement.

Frank declined to describe what he would include in any bill. Lenders this decade have increasingly relied on mortgage- backed securities to fund new loans rather than tap capital from federally insured bank deposits. Frank called the process flawed, saying that as a subprime financing mechanism, banks' exposure to the risk of default is excessively diluted.

By dispersing risk, the bonds fueled reckless and unscrupulous lending and compromised underwriting standards, he said. "There should be a decrease" in the money available for subprime mortgages, he said.

"Our job is to continue to have money available for people to continue to buy homes with minimal chance of these kind of disasters,'' Frank said. "The effect this has on the ability of people in the bond market to make money is simply not a factor."

Bachus wants to certify borrowers. Won't that be fun?

Frank wants a law to make boldholders liable. Uh excuse me but aren't bondholders the ones who are going to get hammered when these loans default?

This is all too funny. Greenspan has been praising the derivatives miracle for dispersing risk. Now Frank is complaining that "banks' exposure to the risk of default is excessively diluted".

"Our job is to continue to have money available for people to continue to buy homes with minimal chance of these kind of disasters. The effect this has on the ability of people in the bond market to make money is simply not a factor."

Is this guy clueless or what? Bondholders are going to get crucified in the upcoming debacle. If this bill actually passes as being discussed it will shut of credit in mass. Banks won't want the risk of holding real estate loans in a declining market. So essentially he is asking that only risk free money be lent. Given there is no such thing, very little money will get lent.

We could possibly see mortgage rates skyrocket because of rising default risk even as the Fed is forced to slash the Fed Funds later this year. The next conundrum would then be why mortgage rates do not follow the 10 yr treasury yield lower. This has the potential to be the 2007 version of Smoot-Hawley. That's OK I'm all ready for a bout of deflation anyway. Shutting off "liquidity without responsibility" should just about do it.

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

Ron Paul on hard assets, gold, and the economy

Following is a three part video series of Ron Paul on the economy, gold, and the US dollar from a 2006 hard assets conference. It is a timeless discussion if you have not seen it yet. The videos below were added on April 8th 2007.

Part 1 - Ron Paul - Korelin Economics Report
Part 2 - Ron Paul - Korelin Economics Report
Part 3 - Ron Paul - Korelin Economics Report

Synopsis Part 1

• Ron Paul is pessimistic about the economy.
• We have been living on borrowed money and borrowed time.
• People are deceiving themselves over the idea of a soft landing.
• There is so much malinvestment and monetary inflation that it will translate into price inflation and a weak economy.
• Conditions are much worse than the 70's.
• Stagflation is back and the extreme of that will be an inflationary depression.
• Whether or not we reach that stage is yet to be determined but we are in for some very serious times.
• In these conditions paper assets will be the worst assets to hold and hard assets the best investments.
• In politics we have lost respect for the rule of law and we don't follow the constitution and that has gotten us into trouble.

Synopsis Part 2

• When it comes to the Fed he is hoping to make inroads on transparency.
• Bernanke talks about transparency but the first thing he did was take away M3 reporting hiding what the money supply is doing.
• No concern in Congressional committees about the lack of transparency.
• But the private sector has reconstructed M3 and that is good.
• Our currency is based on an illusion and a false sense of trust that will eventually be lost.
• The basis for the dollar was totally destroyed in 1971.
• Believe it or not there are still members on the banking committee that believe the US dollar is backed by gold.
• The market will eventually take over and asset itself.
• Right now we are still running our economy, our welfare, and our warfare on borrowed money created out of thin air.
• The debt eventually gets so high it is not repayable. We are at that point now.
• Bernanke thinks the great depression happened because we did not print enough money when the cause was the Fed printing too much.
• The dollar has been under attack ever since Bretton woods.

Synopsis Part 3

• At some point there is going to be a major economic event, we just can't say when.
• He will be surprised if it is not in the next 5 years.
• We are certainly closer today to that event than we were 30 years ago.
• Economically we are a house of cards with no foundation.
• The idea that the Fed can keep the stock market together an illusion.The market is more powerful than bankers and the Nikkei has proven that over the last 17 years.
• The internet is valuable because that is where the information people need to know is circulating.
• Americans today will not give up their guns, their gold coins, and the internet. If freedoms are not lost that will get us through.

Thanks to Ron Paul for taking the time to express his views on these important issue.

This post on hard assets and Ron Paul originally appeared on Minyanville.

And speaking of hard assets, Kevin DePew discussed Uranium Mania today in parts 2 and 3 of his daily "Five Things You Need To Know". Those interested in uranium should check it out.

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