05 Sep, 2010
I Just Don't Understand This
I read this paragraph several days ago.
It's the last paragraph of an article, almost a throw-away from the writer. Let's take a look at it, and I'll tell you what I think it means:
The banking system needs to de-leverage even more considering that the
Notional Amount of Derivative Contracts increased another $7.365
trillion to $225.4 trillion at the end of the second quarter. Since “The
Great Credit Crunch” began at the end of 2007 the Notional Amount of
Derivative Contracts have increased $60.65 trillion.
Now, here's what I think this paragraph means:
a. It seems to indicate that on 12/31/07, there were derivative contracts outstanding with a "notional amount"of about $165 trillion.
b. It directly says that the current amount (6/30/10) is $225.4 trillion.
c. Therefore, the notional amount of derivatives outstanding has increased by $60.65T divided by $165T -- or almost 37%.
d. THIS IS EXACTLY THE OPPOSITE DIRECTION of where we all have been led to think that derivatives outstanding would be headed -- isn't it?
In other words; Instead of unwinding this mess, it seems to be . . . getting worse (? ? ? ? ? ?).
How the F is that possible?
02 Sep, 2010
Pento On Doctors Keynes + Hayek
An excellent tale by Michael Pento on our economic situation --
read it here. I won't ruin the story; this is what it boils down to, in Pento's words:
American consumers are trying their best to deleverage. In terms of the
story, the patient is actually trying to lose weight. But the government
is blocking deleveraging and trying to boost consumption. They are
forcing food down the patient's throat.
According to the Flow of Funds
Report, households reduced debt at a 2.4% annualized rate ($330 billion)
during Q1 of 2010. Meanwhile, the federal government was piling on debt
at an 18.5% annual rate ($1.44 trillion). Since every dollar of
government debt is a promise to tax the private sector in the future
with interest, this public spending spree effectively negated the
Herculean efforts of the private sector to return to a sustainable path.
20 Aug, 2010
Killing Me - And Not Softly
Check out these data from an otherwise not-too-interesting
post on Barry Ritholtz's blog about a meeting of Appraisers:
---------
During the session, Norris-who is considered to be a top authority on
the Southern California real estate market-shared some intriguing
insights. He believes the region is in an artificial market and is
concerned about the shadow inventory that could flood the market,
forcing prices even lower. However, this isn’t the shadow inventory of
bank-owned homes you may have heard about; he refers to all the houses
that may yet go into foreclosure. The problem will vary by region, but
referring to Riverside County in Southern California, Norris presented
some pretty alarming statistics:
• 23% of prime borrowers are not making payments
• 47% of non-prime borrowers are not making payments
• 90% of properties are upside down on value-to-loan (60% owe more than
150% of value)
Many borrowers haven’t made a payment in more than two years and have yet to receive a Notice of Default.
19 Aug, 2010
Test -- Passed WIth Flying Colors
One test of your thinking (anyone's thinking, anyone's theory) is to predict something and have it come to pass.
Back on JUNE 17TH,
a blog item posted here that said:
Today was TH, which is the day they release the weekly unemployment
claims numbers. It's a weekly number, it bounces around, there are
revisions, and going by one week's number (or even 4 weeks of these
numbers) is . . . a shaky way to think about an economy (or invest
money!).
However, the number came in HIGHER, at 472K.
The NY Times Economix blog (referenced in the previous item posted today here) noted that --
"They are largely unchanged over the course of 2010."
In
other words, there's an economic recovery, and yet jobless claims are
pretty much in the same place in May as they were in January. This is
bad. And if the weekly claims number somehow happens to drift higher --
say, back above 500,000 a week -- folks WILL start to notice.
I think that is precisely what is about to happen.
Yesterday was Thurs., 8/19. As is usual, the unemployment claims number was widely reported (
here's the LA Times story in case you missed it).
The figure was 500,000.
As the EleBlog predicted two months ago . . . !!!
18 Aug, 2010
2008 Bailout Counter-Factual
Barry Ritholtz here takes on the ALTERNATIVE actions that our nation did not take to the financial crisis. It's a very interesting read. Keep in mind, he's a financial guy (and is not, to my reading of him day after day, political). The piece is not about who-did-what, but instead suggests what MIGHT have been done, had we kept our heads when confronted with a crisis. EleBlog does not say that Ritholtz is "right" (we can't go back in time and re-run things, now can we?). But it sure is interesting to look at this -- and, if you are a citizen, you probably should!
Q2 housing starts by purpose -- from Calculated Risk. Worth a read, but be sure to get to the bottom of the short item, where it says:
This suggests that home builders are starting about the same number of
homes that they are selling (unlike in 2005 and 2006 when builders built
far too many spec homes).
How to create jobs -- from Bill Fleckenstein, my investment guru
Counterfeit french wine in China -- from Andy Xie, who is always worth reading.
. . . the Lafite price is now so high that it has led to a large counterfeit
industry. Some analysts estimate that 70% of the Lafite consumed in
China is fake. I have personally experienced this on a few occasions,
although the people who served me fake Lafite were unaware of its
questionable provenance because they paid the same high price fetched by
the genuine article.
I could tell that the fake was good wine too,
probably a good second growth poured into a Lafite bottle. Forgers have
targeted the legendary 1982 vintage in particular. Many wealthy Chinese
have bought large stocks of 1982 Lafite and the odds are most of it is
fake.
There are so few bottles of the real vintage left that it is
highly unlikely to find several cases of the real thing.
The problem with what the Fed is doing -- as described by Doug Noland in "The Credit Bubble Bulletin," a weekly free piece I never miss. Note that most of the thing is a description of what happened last week, you have to page to the bottom to get to Doug's analysis -- which ends with this paragraph:
Today, extreme activist fiscal and monetary policies inflate the
Global Government Finance Bubble. After the 2008 fiasco, I have a
difficult time comprehending how analysts can remain dismissive of
Bubble risks. And with an increasingly conspicuous Bubble at the heart
of our monetary system, our central bank should not be reinforcing the
market perception that the Fed is there to backstop the markets and
economic recovery with open-ended Treasury purchases. Instead of a
well-functioning marketplace (and central bank) working to discipline a
profligate Washington, dysfunctional monetary and market environments
continue to accommodate perilous Credit excess.
16 Aug, 2010
The Dreadful Potential of Frugality There is a danger the proposed fiscal tightening in the eurozone will
lead to further deflation and economic collapse. The Spanish government
faces what Mr Parenteau calls “the paradox of public thrift”: the less
it borrows, the more it will end up owing.
>>> EleBlog take: . . . ever hear the phrase "painted into a corner?" That's what the world's financial geniuses have done. THERE IS NO WAY OUT!
BofA adds 2,000 employees (April-June)
to handle troubled loansCommercial space in Southern California:
Lower rents, lower occupancies.
VIDEO:
"Moral hazard" worse coming out of crisis (worse than it was going in!)
11 Aug, 2010
That's the word from Laurence Kotlikoff, and he's nobody's fool. Here's a portion of
a commentary piece on Bloomberg.com that he penned:
delve deeper, and you will find that the IMF has
effectively pronounced the U.S. bankrupt. Section 6 of the July
2010 Selected Issues Paper says: “The U.S. fiscal gap
associated with today’s federal fiscal policy is huge for
plausible discount rates.” It adds that “closing the fiscal
gap requires a permanent annual fiscal adjustment equal to about
14 percent of U.S. GDP.”
The fiscal gap is the value today (the present value) of
the difference between projected spending (including servicing
official debt) and projected revenue in all future years.
To put 14 percent of gross domestic product in perspective,
current federal revenue totals 14.9 percent of GDP. So the IMF
is saying that closing the U.S. fiscal gap, from the revenue
side, requires, roughly speaking, an immediate and permanent
doubling of our personal-income, corporate and federal taxes as
well as the payroll levy set down in the Federal Insurance
Contribution Act.
Such a tax hike would leave the U.S. running a surplus
equal to 5 percent of GDP this year, rather than a 9 percent
deficit. So the IMF is really saying the U.S. needs to run a
huge surplus now and for many years to come to pay for the
spending that is scheduled. It’s also saying the longer the
country waits to make tough fiscal adjustments, the more painful
they will be.
Is the IMF bonkers?
No. It has done its homework. So has the Congressional
Budget Office whose Long-Term Budget Outlook released in June,
shows an even larger problem.
You need to go back to the top of this item and click on the link to the entire Kotlikoff op-ed on Bloomberg.com. Read it. Read it again. You might also want to click on the live links in the piece, which take you to more info.
Not only is the guy not an idiot . . . he's not wrong.
09 Aug, 2010
About 'Cash On Sidelines'
I've always "felt" there was something wrong with the idea -- typically trumpeted by stock-market bulls -- that there are oodles of cash on the sidelines, not in the market, waiting to be put to work.
A guy named John Hussman -- I read him every week -- offers his thoughts on the investment markets. In his 8/9 post, he puts this "
cash on sidelines" idea in perspective (as he apparently did 4 years ago, in a piece I either missed or had forgotten).
I am CERTAIN that this is worth a lengthy quote here, and that you should either read and re-read what's below, or click on the link above and go read the entire ditty, Here is just some of what Hussman wrote:
Don't get me wrong. At an individual company level,
it's obvious that if DuPont has a bunch of marketable securities on its
balance sheet, it is free to sell those securities and spend the money
on new equipment and so forth. The issue is that somebody else
has to buy those securities. At the end of the day, there is no less
"cash on the sidelines" after that change of ownership than there was
before.
Put simply, there is a lot of apparent "cash on the sidelines" because the government and many corporations have issued
enormous quantities of new debt, often with short maturities, while
other corporations have purchased it. It is an equilibrium. The assets
that are held in the right hand represent debt that is owed by the left.
You cannot call that pile of short-term marketable securities an asset
without calling it a liability. The cash on the sidelines is evidence of
debt incurred to fund economic activity that is already in the past. It
will remain "on the sidelines" until the debt is retired. The
government debt has been issued to finance deficit spending. At the same
time, a great deal of corporate debt has been issued over the past year
apparently as a pre-emptive measure against the possibility of the
capital markets freezing up again.
What's fascinating about the "corporate cash"
argument is that few observers recognize that a great deal of this cash
is not retained earnings but new debt issuance. Brett Arends of
MarketWatch puts present levels of corporate cash in perspective:
"According to the Federal Reserve, nonfinancial firms borrowed another
$289 billion in the first quarter, taking their total domestic debts to
$7.2 trillion, the highest level ever. That's up by $1.1 trillion since
the first quarter of 2007; it's twice the level seen in the late 1990s.
Central bank and Commerce Department data reveal that gross domestic
debts of nonfinancial corporations now amount to 50% of GDP."
Andrew Smithers observes that the prevailing
corporate debt burdens, " un derline the poor state of the U.S. private
sector's balance sheets. While this is generally recognized for
households, it is often denied with regard to corporations. These
denials are without merit and depend on looking at cash assets and
ignoring liabilities."
09 Aug, 2010
Rosenberg on "what's normal" Here's a slice of what he wrote:
• It is a 1-in-20 event to see successive declines in durable goods shipments and orders.
• To see the CPI down for three months in a row is a 1-in-40 event. To
see the PPI falling three months in row carries 1-in-25 odds. But to
have both PPI and CPI fall three months in a row is … 1-in-85 event.
• As for retail sales, posting back-to-back declines during expansionary periods is a 1-of-35 event.
• As for the deflationary waves hitting the shores of the labour
market, a decline in average hourly earnings, as we saw in last month’s
payroll data, is a 1-in-50 event.
AGC on construction unemployment (now only 17.3%)
"Anyone who thinks we are going to outcompete China and India with old
roads, unsafe bridges and outdated power grids is either sadly wrong or
woefully ill–informed," Sandherr said. "The choice ought to be clear:
put Americans to work today rebuilding our economy, or be prepared for
our economy to drown in traffic, brownouts and water shortages."
EleBlog take: I don't have to agree with Mr. Sandherr, the top staff guy at AGC. But I sure do this time.
(I kid you not!)
What if the Fed can't get rid of the toxic crap it now has on its balance sheet?
Accentuate the positive:
Manufacturing returns to the U.S.
06 Aug, 2010
Important Reminder: Monkey Economics
From
Barry Ritholz (I'm on his blog, reading it, several times each week):
You’re a monkey. It all comes down to that. You are a slightly clever,
pants-wearing primate. If you forget that you’re nothing more than a
monkey who has been fashioned by eons on the plains, being chased by
tigers, you shouldn’t invest. You have to be aware of how your own
psychology effects what you do. This is why we as investors sell at the
bottom, get panicked. All the other lessons I’ve learned have come out
of that. As has the field of behavioral economics.
31 Jul, 2010
Not long ago, TEDMAG posted a four-part column by yours truly on THE BIG SHRINK.
Read all four of the columns on this page, which includes other stuff -- page down to the first one (July 9th), and then page up to the other three.
It's reasonable for anyone (even someone who agrees) to say -- Where's the Evidence?
Here's some, in three pieces.
-------
1. HOMES ARE SHRINING
2.
Local government job losses may approach 500,000 nationwide.
Government never decreases. This is evidence that EVEN GOVERNMENT has figured it out. Things are Shrinking, need to Shrink. But the bad part is that local priorities will be set by politicians and despite the idea (abroad in this country since its founding) that government "closer" to the people is best, the priorities here will SUCK:
. . . public safety, public works, public health, social services and parks and recreation hardest hit by the cutbacks.
3.
ATA Truck Tonnage Index declines in JuneI have watched the Truck Tonnage Index for a while now. It's clear that the economy can't be growing if trucks aren't moving a lot of stuff, trains aren't moving a lot of stuff, and we're not generating a lot of waste and scrap.
29 Jul, 2010
Money magazine (which you can like) ran one of those "investment advice" articles, with all kinds of snippets, from people famous and not necessarily known at all, in its 4/10 issue. A squib, printed in red, in the upper-right-hand corner of page 68, was from Ronald Lippman of Buford Ga.:
"When I was 18 and an electrician's helper, we were working at a stockbroker's house. And I asked, 'How do I know if I should invest in stocks?'
"He replied: 'If you have extra money and are willing to lose it, then you are ready to invest'."
26 Jul, 2010
Housing Overhang Still Huge
This is a slide from a recent Goldman Sachs presentation on the economy, from Jan Hatzius (a smart guy and not, I don't think, a GS thief).
Find the presentation here.
25 Jul, 2010
Catching up on my investment reading, I got the chance in recent days to read John Hussman's weekly missives.
This is from his 7/12 -- I've highlighted the phrase I really, really like:
When you value stocks on the basis of the cash flows that shareholders
can actually expect to have delivered into their hands over time, it's
still possible to find values, but we find no support for the notion
that stocks are cheap as an investment class. All of this will change
eventually, but unfortunately, what investors do not learn voluntarily
is inevitably taught to them against their will.
23 Jul, 2010
Now, that's one heckuva hangover, ain't it?
It's the estimate of EXCESS MORTGAGE DEBT from a "chief strategist" --
see Bloomberg 7/16 article here.
If you read the short item, it refers to a "chart of the day" --
go to Barry Ritholtz's blog to see it.
21 Jul, 2010
I penned a 4-part opinion piece on what i call "The Big Shrink" -- what's happening to the U.S. economy, and to the men and women who run businesses. I won't regurgitate the arguments here.
To see it,
go to Part 4, which is here. The thing starts with links to Parts 1-2-3. So you can start by reading the end, or you can click thru and see where I started.
To whet your appetite, here's a piece:
It seemed to me then -- and this seems even more certain now -- that
the government of the United States was going to have two choices on
down the road:
A. Default on some or all of our debt. This might include debt held
by U.S. citizens, debt held by the Social Security fund, and/or debt
held by foreigners.
How would this work? I can't imagine. But one way to postpone paying
off what one owes is "payment in kind" (i.e., you get more debt, with a
kicker, for the debt you already own). Another way would be to just say
NO.
It's impossible to think about what would ensue after the U.S.
government said it would not pay the interest on T-bonds, for example.
Or repay the principal.
Think about it: Seems impossible/incredible, doesn't it? If you think
so, too, then there's the other option.
B. Devaluation of our currency. You can argue that this has been
happening -- and it has, but in slow motion. After the Clinton years,
the Dollar Index (a U.S. dollar valuation reading based on a basket of
currencies) was at 120. Now, it's around 80-85.
I'm not thinking this will be complete until the dollar index number
is around 40. Or maybe 25.
To devalue your currency, just invite inflation in the front door.
Allow your economy to go to Hell. Consider: The exchange rate in the
early 1980s for Dollar-Yen was 350. That is to say, one U.S. dollar
bought 350 yen. Now, it's below 100. These things happen . . .
obviously. We haven't really had all that much inflation in the U.S.
since 1988, but the Japanese have fought a 20-year (losing) battle with
deflation -- so their currency keeps appreciating vs. ours.
20 Jul, 2010
It's Quantative Easing #2, not the ocean liner named after some English broad.
My investment guru, Bill Fleckenstein (I've paid up to subscribe and read his stuff just about every day) posted (7/2, MSN)
a piece that splains it. Bill's right a lot. I hope he's wrong this time!
25 Jun, 2010
Well, maybe not. But maybe, just maybe. I wrote these lines for TED magazine:
. . . forget all the experts quoted here.
Instead, consider this: Can the huge
increase in debt by governments the world over and the never-ending
increase in
money printing by central banks everywhere have absolutely no impact on
the
price of anything?
Frank Bisbee of Wireville
included the entire column in his June "Heard On The Street" posting.
Thanks, Frank!
(More)
25 Jun, 2010
While I didn't unearth this (I found it via Calculated Risk, I think),
a Bloomberg report from 6/23 contains some amazing stuff said by Bank of America. The whole (short) news item is amazing -- it claims the bank has 18,000 people doing "default management."
The words "default management" are worth pondering, but that's NOT the amazing thing here.
Read this (I bolded the words that need to be rolled over, slowly, in your mind) --
“Given the depth of the nation’s recessionary impacts on
homeowners, a considerable number of customers will transition
from homeownership over the next two years,” Desoer said in the
testimony. “We must compassionately and responsibly help those
customers who have exhausted all their options and can no longer
afford to stay in their homes.”
24 Jun, 2010
Stuff about which you might want to be aware
22 Jun, 2010
Meredith Whitney on Housing
A recent Seeking Alpha post includes a lot of video (2 segments, one of them 10 minutes) of Meredith Whitney on the current state of Housing. Summary: BAD.
AND
While I was searching for that, I came across ANOTHER
Seeking Alpha post, from 3/17, that includes a video. The headline: Housing Will Double Dip - Meredith Whitney.
So she repeats herself (you gotta do that, I think, when you're right and the world generally ignores realists). I think she was right and is right.
17 Jun, 2010
Every once in a while, I read a bit of something or other that brings me up . . . short. Stops me. Gets me to re-read it and think.
Yesterday's Economix blog on the NY Times site had something like that. I include the first paragraph for background, and I bold-faced the part that made me think:
Lorenzo Bini Smaghi, a member of the executive board of the European
Central Bank, gave a speech in New York on Monday that shed some light
on why Europe’s sovereign debt crisis is such a threat to euro-zone
banks — and why the European Central Bank felt compelled to intervene
last month in the bond market.
Mr. Bini Smaghi offered a primer on a less-discussed aspect of
today’s banking system — how government bonds have become a kind of
currency that is crucial to institutions’ dealings with each other. When
the bonds lose value on open markets, as they have since investors
realized the gravity of Greece’s debt problems, the whole functioning of
the interbank system suffers and can even come to a standstill, forcing
the European Central Bank to step in as intermediary.
16 Jun, 2010
Watch This (If You'll Watch Anything)
If you're going to spend some time watching TV or Video today, click through below and watch/listen to Nassim Taleb talk about the economy.
He says things are getting worse, not better.
This is the guy who wrote the Black Swan book. He's arrogant, smart as a whip, thinks he's the smartest person in the world . . . and just might be in the ballpark on that last thing.
CNBC video on Barry Ritholtz's blog
15 Jun, 2010
Stuff that stumbled across me:
MSNBC senior producer writes (translation by EleBlog) --
YOU ARE TOO STUPID TO INVEST IN GOLD.
Serious reading: Floyd Norris, really excellent business writer for the New York Times, blogs --
Cancer And Me.
Leo Hindery, a pretty smart guy, criticizes the Obama Admin. on "
Jobs, Jobs, Jobs." I don't know if you'll agree with all of this, but it's interesting to see "left-ish" criticism of the President (for a change).
My investment guru, Bill Fleckenstein, says Mark Hanson has gotten housing right -- all along. Hanson's 5/27 blog entry says:
Unless foreclosures double from April's record, [housing's] shadow inventory will take 8 years to clear. This is something to sit down and think about!
"
Crunch Porn and Crash Lit" -- book reviews (of recent books on the financial disaster) by Satyajit Das, one of the people who helped me understand what was coming before it came. I read his book,
Traders, Guns & Money, shortly before every damn thing fell apart in 2007-2009. Incidentally, a revised edition of his 2006 book is now out. Note that it took me TWO readings of his book to understand about 50% of it.
14 Jun, 2010
The Shell Game - and MORE
Chris Martenson blogs on financial topics. I don't read him regularly (there's not enough time to read E-V-E-R-Y-T-H-I-N-G, ya know?).
But an April 5 entry is a doozy. Titled "
The Shell Game Continues," it includes a ton of information. It's a long piece. If you hope to understand why you should sell every Treasury bond, note, or bill that you own, you need to read this in its entirety.
I don't like reading online, and this seemed important, so I printed it out. I'm on my 2nd reading. Here's the part that I really found stunning (and note, this is only a tiny slice of the whole pie):
Let's look at the Treasury auction data since 2009 to see what it can
tell us. To begin with, an auction may do a couple of things. It may
sell brand-new debt to raise new cash, it may "roll over" past debt that
is maturing, or both. So where 2009 saw $1.49 trillion in new debt
sold, the total volume of the Treasury auctions was far larger,
when we add up all the roll-over activity.
Here's the data for the total activity 2009 and some of 2010:
(Note: This data excludes TIPS and cash management bills, so
these numbers are actually smaller than the complete total.)
The table above tells us that while $1.49 trillion in new debt was
issued in 2009, more than $8.5 trillion in total activity took
place. That's how much cash had to flow through the Treasury auction
market for it to function.
This illustrates why a failed Treasury auction will be avoided at all
costs. Any interruption to the trillions and trillions of dollars
flowing through the Treasury market each year would cause an immediate
and enormous train wreck that would ripple through the entire world's
financial system (and trigger an avalanche comprised of hundreds of
trillions of dollars of interest-rate derivatives). A failed auction is
simply not an option for the Fed or the Treasury Dept.
In 2010, more than $1.5 trillion in total activity had already
occurred by March 10th. Once we mentally add in this year's
likely borrowing, we might expect a grand total of some $10 trillion in
total activity to take place by the end of the year. In 2003, the total
activity of this market was only some $3.4 trillion. If you plot out
the growth in activity, it looks like an exponential chart.
So if you're keeping score at home, the U.S. Treasury needed to sell roughly $3.4T in bonds in 2003 for the USG to function. This year, it's $10T.
. . . And the headlines are about Greece and Europe being in trouble???
14 Jun, 2010
ARTIFICIAL Economic Growth
James Bianco offered a guest post on The Big Picture (Barry Ritholtz's blog) on 6/2, asking -- "
how much economic growth is 'artificial'?"
Good question. He looked at the stimulus-caused growth. His conclusion, which is (i think) -- devastating:
Add it up and only one quarter of the last seven (Q4 2009) has been
able to show real growth in excess of government stimulus.
Let’s be clear … real growth means standards of living are
advancing. Real growth means that economies are being more productive
and real useful jobs are being created. Government stimulus is an
attempt to manipulate growth statistics via inefficient and wasteful
government spending. Stimulus does not advance standards of living.
While we agree that the “Great Recession” probably ended in the
summer of 2009, the fact that the recovery is so dependent on government
stimulus is not an encouraging sign.
13 Jun, 2010
John Hussman runs some investing funds. Every week, he writes a weekly market comment.
His most recent weekly remarks (6/7)
are worth reading in their entirety -- but try this slice:
I'll reiterate that from our perspective, the essential difficulty of
the market here is not Greece, it is not the Euro, it is not Hungary,
and it is really not even the slow pace of job growth in the latest
report. The fundamental problem is that we have not, as a global
economy, accepted the word "restructuring" into our dialogue.
Instead,
we have allowed our policy makers to borrow and print extraordinarily
large band-aids to temporarily cover an open wound that will not heal
until we close the gap. That gap is the difference between the face
value of debt securities and the actual cash flows available to service
them. The way to close the gap is to restructure the debt.
This will
require those who made the bad loans to accept the associated losses. By
failing to do that, we have failed to address the essential problem
faced by the world, which is that we have created more debt than we are
able to service.
11 Jun, 2010
Household Net Worth - down $11.4 trillion from all-time high.
13.7% of 34,000 fixed-rate commercial mortgage-back securities have a debt-service coverage ratio of less than 1.0 -- "
a strong sign of financial weakness."
Things are getting better? Maybe not.
Household participation in food stamp programs is up 23.74% in the past year. Mortgage purchase applications -- down 35% over a four-week period.
10 Jun, 2010
Earlier this month (see June link at right), we posted a Scary Job Chart. Here's a Scary Housing Graphic.
Explanation, via Seeking Alpha's post of Pragmatic Capitalist's words -- here, I think, quoting a CNBC reporter (as if that's not complicated enough, I'm pretty sure the graphic below comes from David Rosenberg of Gluskin Sheff!). The graphic shows mortgage applications, weekly.
Mortgage applications to purchase a home
began to sink. Now, four weeks later, mortgage purchase applications
are down nearly 40 percent from a month ago to their lowest level
since April of 1997. Yes, you can argue that a larger-than normal
share of buyers today are all cash, but those are largely investors.
That means real organic buyers are exiting in droves.
08 Jun, 2010
John Crudele writes for the business section of The New York Post. I think much of the paper is a joke, and the business section (usually 2 pages) is pretty slim. HOWEVER, Crudele is worth reading because he sometimes has his moments. Today's piece, on
The Fake Job Market, may be one.
He is talking about the government's "Birth/Death Model," which -- if you've read one employment report, you've heard -- is a bunch of dung.
Included in Friday's report were the Labor Department's guesses as
to how many new jobs were created by small, newly formed businesses that
the government is unable to count. (Unable to count because they
probably don't exist.)
These estimates were proven to be
totally wrong last year, and the Labor Department was forced to reverse itself by removing 1.2 million
jobs from its total in the annual benchmark revision this past February.
This guess has an official name: the Birth/Death model and you
can search for it on the Bureau of Labor Statistics Web site. Since
this 2009 guesstimate was abysmally wrong, you'd think Labor would tone
down its optimism this year, right?
Wrong! The BLS thinks small
businesses that it hopes -- but again can't confirm -- exist created
215,000 jobs this May, compared with 186,000 in the same month a year
ago. I'll repeat, those 186,000 jobs did not exist last May. So why
should the BLS be any more right with this year's guess of 215,000?
08 Jun, 2010
5 Ways Job Numbers Are Worse Than They Seem (B. Arends, Marketwatch) -- very depressing reading. If you've not been paying attention, spend time here. One of the 5 things: Someone (who might know something, or might not) from TrimTabs predicts the nation will lose 200,000 jobs in June. That would come as a HUGE shock . . . IF it happens.
Unemployment Unlikely To Fall Quickly - says Fed Head -- so Bernanke has learned from The Great Depression of the 1930s, applied the lessons, and instead of putting people to work (as the nation did back then with the WPA) . . . we've got a bunch of people who are sitting around, unhappily, and are likely to be sitting around years from now. The guy is a genius! . . . at least in his own estimation.
Ritholtz takes down Art Laffer -- a total destruction of Laffer's WSJ article. Facts are difficult things for people who have an active fantasy life -- which is why such people (Laffer) should not write things down. This isn't an argument between two people. It's important because Laffer's version of the world (damn the facts, full speed ahead) is how a significant segment of America would like to go forward, economically.
AND - MOST INTERESTING:
67-MINUTE VIDEO -- it's Dr. Marc Faber, filmed talking about the markets and the economic sitch ("the coming economic catastrophe"). I spent a serious piece of change to subscribe (annually) to his monthly newsletter, The Gloom, Boom & Doom report. If you can make the time to watch this, you get the same stuff I pay for . . . for free (the renewal form is in my "in" box, and I am thinking about whether I need to pay up, given this kind of free stuff from Faber!).
(More)
08 Jun, 2010
S&P 500 At Inflection Point???
Bill Fleckenstein is my "investment guru." It's a long story, best told somewhere else -- but I pay to subscribe to his daily thoughts. You can, too, at www.FleckensteinCapital.com. I've tried to read his thoughts daily -- every day -- since 1998, back when he posted to SiliconInvestor.com, and I followed him (and paid) over to RealMoney.com . . . before he got his own site.
What about you? Once a week, he posts an item you can access for FREE, at MSN.com.
Here's last week's post.
I'd like to call attention to a specific segment of Bill's piece:
As to what this market action means, I sort of defer to Jason
Goepfert of SentimentTrader.com His data
appear to suggest that in the worst-case scenario, we will see a trading-range market without any clear direction. (In my opinion, that will be
followed at some point by a failing rally, but he currently does not
share this view.)
Jason seems to
feel that a plunge below 1,040 to 1,050 for the S&P 500
Index is a low-probability event in the near term. It did fall to 1,065 on
Friday.
I certainly see
no reason to disagree with that, though I don't see much of a reason to
have an opinion either way. From a risk-reward standpoint, it seems too
dangerous, and not really all that attractive, to buy stocks right now,
and it still seems too dangerous and tricky to short stocks.
OK. So what Bill thinks is SMART is JG's analysis that "a plunge below 1,040 . . . is a low-probably event in the near term." Bill's column posted Friday 6/4. Yesterday (Mon. 6/7), the S&P 500 closed at 1,050.
Today (Tues.) would be part of THE NEAR TERM that JG's analysis references.
Over on CNBC.com this morning, the morning outlook writer quoted a guy named Kernen, a trader in the S&P 500 options:
Patrick Kernen, who trades options on the
S&P 500, said investors, in some ways, appear less anxious but are
still very cautious. He said investors are not paying the high premium
for downside protection that they were paying several weeks ago.
"There really hasn't been
a panic of people to rush in and buy puts, which to some degree is
encouraging," he said. "I haven't seen much panic, not to imply it
doesn't mean we're not going to have volatile markets. People aren't
preparing for a 10 percent down day, at least."
So, a break below 1,040 today might (according to Fleckenstein's source) MEAN SOMETHING. And according to one trader, the option market is not prepared for it (that's how the EleBlog interprets the Kernen quote directly above) . . .
it's the punch you don't see coming that knocks you flat!
08 Jun, 2010
HOUSING: Back In The Crapper?
I saw this originally in a David Rosenberg daily write-up, but I found it online on another site (where someone regurgitated lengthy bits of Rosie's piece):
Take a look at page A6 of the weekend WSJ and you will see that Ivy
Zelman, the country’s best housing analyst, is calling for nationwide
home sales to slide between 25% and 30% in May and that is sequential,
not year-on-year (that is very close to a 100% annual rate plunge. Even
the usually optimistic National Association of Realtors is expecting “June
and July to remain fairly weak”).
A survey conducted by Credit
Suisse (released on Friday) showed that in stark contrast to the latest
National Association of Home builders survey, the traffic of prospective
homebuyers in May was back to depths of late 2008 when the financial
crisis was in full gear.
EleBlog take: This sounds BAD.
Find the thing here.
07 Jun, 2010
Stuff of note:
Chief Economist for Fannie Mae says "the home-building industry . . . [will] be tested until early 2013."
Calculated Risk.
Separately, from the same guy: “We’re now forecasting a bottom in home prices in the third quarter of
this year,” said Humphries, who spoke on a panel with Duncan. “We think
the bottom is going to be a long and flat affair in most markets.”
Business Week.
State & local governments shed jobs -- magnifying the effect of the crisis.
Economist's View.
LONG (might not be available to all) -- "The Doctor and the Dealman:
An Energy Update"
01 Jun, 2010
State + Local Outlook (BAD)
Jim Haughey, the veteran construction economist at Reed, posted this on 5/25:
State and Local Government Spending to Decline Again in FY '11Fiscal year 2011 will start (generally) July 1, 2010, and end June 30, 2011. That's the next 12 months, basically.
Jim may be an economist, but he knows how to write -- and how to end a piece. This was a short item, but the last 3 paragraphs (reproduced below) back a punch to the gut that can't really be matched:
Chapter 9 municipal bankruptcy is now being openly discussed in
Harrisburg PA and in Detroit. Massive cost overruns on an incinerator
upgrade are the problem in Harrisburg. Two bond payments have already
been missed and covered by the bond insurer. Detroit’s problem is that
more than a quarter of its housing units are vacant, sharply reducing
tax revenues. The Mayor of Los Angeles has stated that bankruptcy may be
inevitable. This list of troubled cities will get longer.
The municipal fiscal crisis is the consequence of the consequence of
the deepest drop in tax receipts in more than 50 years plus, in some
cities, unsustainable spending for staff cost — wages, healthcare and
pensions. Vallejo California
(between San Francisco and Sacramento) is now in Chapter 9 due to
plunging tax receipts and soaring staff costs. Their bankruptcy sours
their access to capital for many years until investors see not just a
change in their balance sheet but an improvement in their financial
management.
There is now a high risk of a bankruptcy of a major city. This would
have a depressing impact on municipal access to capital for several
years.
01 Jun, 2010
See the graphic below, which I found on Investmentpostcards.com. Lots of folks are "saying" that Gold is a bubble.
BUT: Gold is an awfully weak-ass-looking bubble, isn't it?
(More)
23 May, 2010
$3,000 Gold - May Be Conservative (???)
A summary of what
David Rosenberg, a deflationista, has to say.
21 May, 2010
You keep hearing there is no inflation. But the price of many things keeps going up.
Here's an example that woke me up, a headline from the 4/27 Financial Times --
"Fishmeal prices at all-time high after supply squeeze.". . . fishmeal?
25 Apr, 2010
Here's a quote about today vs. just a few years ago:
“The ability to actually extract credit even if you do have equity is
fairly limited,” he said. “You have to have greater than 30% equity in
your home today to even be able to talk about doing a home equity loan.”
It's from Colin McGranahan, a senior analyst for research firm Sanford C. Bernstein. I found it in
a brief about foreclosures, but I'm ignoring those (for the moment).
What it means: The days of extracting equity from a house are not only over, they are likely NOT coming back.
21 Apr, 2010
The March housing numbers came out, and they looked good. BUT: A guy name of Mark Hanson predicted they would be good, in a lengthy Internet radio interview on the housing market (some stuff about commercial in here, too). Based on the recommendation of my investing guru, Bill Fleckenstein, I listened to the whole thing.
It was worth my time -- it might be worth yours, for a look ahead from a guy who's been right and right and right and right --
Mark Hanson's KingWorld News interview.
14 Apr, 2010
Bernanke's Totally Bogus Baloney
Fed Head Ben Bernanke testified before Congress today.
His prepared statement is online here.
If you have a brain in your head, you might take serious issue with some of the thing he said (or the way he phrased them) --
Long-run inflation expectations appear stable; for example, expected
inflation over the next 5 to 10 years, as measured by the Thomson
Reuters/University of Michigan Surveys of Consumers was 2-3/4 percent in
March, which is at the lower end of the narrow range that has prevailed
for the past few years.
. . . uhh, of what value might this be? Inflation is under-measured currently. Long-term surveys and forecasts have proved useless during the entire 2007-2010 period.
Despite their stronger financial positions, banks' lending to
both households and businesses has continued to fall. The decline in
large part reflects sluggish loan demand and the fact that many
potential borrowers no longer qualify for credit, both results of a weak
economy.
. . . well, had you and your predecessor not kept a tight cap on interest rates, lending might have been NORMAL all along -- and might be recovering now. But a lot of really bad debt is still out there, on the books. Banks right now will only loan to those who don't ask for $$$.The federal budget deficit is on track this year to be nearly as wide as
the $1.4 trillion gap recorded in fiscal year 2009. To an important
extent, these extremely large deficits are the result of the effects of
the weak economy on revenues and outlays, along with the necessary
actions that were taken to counter the recession and restore financial
stability. But an important part of the deficit appears to be
structural; that is, it is expected to remain even after economic and
financial conditions have returned to normal.
. . . interesting that Bernanke feels free to comment on the deficit (and his remarks include urgings to Congress to do something about the outlook, which is for significant deficits for a long time). A big factor in deficits is the reduction in revenue (not just for the fedgov, but esp. for states and localities, too). The revenue has dropped off because when the balloon was being blown up, in the late 1990s and the years 2003-2007, the Fed didn't rein thing in. It's the Fed's job to "take away the punch bowl just as the party's really getting started," as someone or other said. When the Fed refuses to do its job (as it did under Greenspan and under Bernanke), the economy gets out of control. I would argue that we don't need a Fed, we need automatic rules (or a gold standard of some sort). Apparently, we're not going to do away with the Fed. If that's the case, we need Fed members (and chairmen) who don't shy away from criticism.
We've not had one of those since 1987.
13 Apr, 2010
ZeroHedge, an economics blog, notes --
here -- that 1.2 million households have "disappeared" during the recent housing bubble.
That 'splains a piece of the housing problem, doesn't it? Here's a piece of that blog, which is ZeroHedge quoting from someplace else:
It’s
widely assumed that many who lose a home to foreclosure become renters.
But since the recession began, there has been a five-fold increase in
“overcrowding” of remaining households — defined as more than one
person per room, according to the study.
That doubling-up is happening as families who lose their
homes move
in with friends or family. In other cases, younger people have delayed
moving out on their own, instead staying with their parents until the
economy improves. Others who fail to find work after graduating from
college move back home.
The decline in households is weighing on both the
home buying and rental markets. Since the number of home foreclosures
began surging in 2007, the national homeownership rate has been
steadily falling. But renters also have been forced to double up or
move in with friends or family. That’s a major reason that the vacancy
rate for U.S. apartments stood at 8 percent in the first quarter, the
highest level since 1986, according to a report this week from Reis, a
real estate research firm.
Note that I found the link on the 1.2M disappearing HHs on the blog of Doctor Housing Bubble, which is an amazing place to go to figure out what's happening. The most recent piece notes that a $925,000 house in Culver City, Calif., was renting for $4,500 (instead of $9,250). The blogger notes that that's based on a rule-of-thumb ($1,000 in rent for each $100K of house purchase price) -- and then goes on:
Like most rules, this is just a way to get an idea if a property is
valued accurately. For example, the above home at $925,000 should yield
$9,250 in monthly rents. Yet the actual rental is half that. These
kind of massive discrepancies tell us that either prices will come down
or incomes will boom up to reflect the current prices.
09 Apr, 2010
In fact, according to a blogger over at The Atlantic, this is THE MOTHER of all jobless recoveries:
More than 95 percent of the change in the unemployment rate since
the beginning of the recession is due, not to job separation, but
record-low job finding. "During the past three recessions," CF explains,
"the decline in the job
finding rate has been playing a bigger role in unemployment rate
fluctuations. Relative to the change in separations, the job finding
rate changed (declined) much more in the last three episodes." In other
words, what we're looking at is something like the mother of all hiring
crises.
http://www.theatlantic.com/business/archive/2010/03/the-mother-of-all-jobless-recoveries/38004/
01 Apr, 2010
From what I read (link below), when you buy an electric vehicle from Nissan (the Leaf), you need pay only about $25,000.
But for you to get that price, I, Joe Salimando, have to kick in $7,500 (via the federal government, as a taxpayer).
You're welcome!
http://money.cnn.com/2010/03/30/autos/nissan_leaf_pricing/index.htm
23 Mar, 2010
The EleBlog remains skeptical. But, to present all sides -- here's the lead on a 3/11/10 press release form the
air transport people:
The International
Air Transport Association (IATA) halved its loss forecast for 2010 to
US$2.8 billion (compared to the US$5.6 billion loss forecast in December
2009). The improvement is largely driven by a much stronger recovery in
demand seen by year-end gains that continued into the first months of
2010. Relatively flat capacity translated into some yield improvement
and stronger revenues.
13 Mar, 2010
Schwab Making An Ass Of Hmself
Investing has provided the best returns, frankly, of any place
you can point to. The numbers are irrefutable.
That's Charles Schwab, the broker/guy, from a Q-and-A in Esquire. The sentence is, obviously, WRONG, and wrong-big time.
Schwab's age is given as 72. He's in the investment biz. That means he has:
-- read about the 1930s.
-- lived through the 1966-82 period, in which "investing" returns were nil to MINUS.
-- endured 1987.
-- saw what happened to "returns" in the years 200-2002.
and
-- most recently, seen the 2007-2009 catastrophe.
Who the F is this guy kidding? Investment has provided the best returns for CHUCK SCHWAB, and people of his ilk. Period. These people mislead the general public. They are, at best, thieves.
05 Feb, 2010
I recently penned a 2-part TEDMAG piece on Copper's future price moves and the economic status of China. See
part one and
part two.
Chanos recently spoke about the China call (found on www.investmentpostcards.com). You can watch -- it's
a 57-minute video.
05 Feb, 2010
Bernstein's Angle On Employment
I regularly read David Bernstein, the Wall Street economist who used to work for Merrill Lynch (has moved back to his native Canada and labors now for Gluskin Sheff). Here's part of his 10-page PDF (he writes daily, you can get the e-mail for free):
" . . . consideration must be taken that in 2009, we had a zero policy rate [he means zero interest rate set by the Fed], a $2.2 trillion Fed balance sheet, and an epic 10% deficit-to-GDP ratio. You could not have asked for more government stimulus. Yet employment tumbled nearly 5 million in 2009."
01 Feb, 2010
Final Economic Thought . . .
As an investor, I can be "pigeon-holed" as a Contrarian. But what I really am is a SKEPTIC.
To avoid a long, drawn-out explanation of my investment philosophy, allow me to know POO-POOH my own view of the Economy. Here are some facts:
1. I have invested in stocks, on and off, since the early 1980s. I have learned one thing: I am NOT a market timer. I will be right, much of the time, on the direction of the market -- but not on when to get in. I will be right, eventually, on the individual companies I choose to BUY (stocks, options, etc.) or SELL (buying put options) . . . but I won't do it at the right time. For example, I was short (via puts) one heck of a lot of the bank stocks . . . in 2006. Too early. I was right . . . but I could have gone bust buying puts on these stocks in 2006! In fact, I lost money on every trade. Had I rolled the positions over for another 6 or 8 quarters (or was smarter about buying LEAP puts) -- I would have made money.
But the fact is: I did not and I did not -- and I did not.
2. The industry that I watch very closely is CONSTRUCTION. As the 5 previous posts tonight on the 2009 health of this industry should have showed you, there is a DEPRESSION in the construction industry right now. It's going to be WORSE in 2010. Many segments of the economy might NOT be worse. Therefore, I am looking -- not by choice, it's what I do for a living! -- at a part of the economy that is particularly sick at this moment. I could be wrong, big-time wrong, thanks to that.
3. The profession which I have chosen, that of a business-to-business journalist, is DYING. Sure, there are a lot of blogs, and lots more words being sent around the world by this wonderful thing called the Internet. But magazines are dying on the vine. I am, by training and instinct, a magazine person. B2B magazines are just flaking away and dying right now -- almost as fast as newspapers.
So maybe I'm wrong about that long-gold, short-S&P 500 trade. I don't think I will turn out to be, in the 3-to-5-year time frame that I chose (2013 to 2015).
But if you think I might be right, the very next thing to do is Factor In #1, #2, and #3 above.
You're welcome! (More)
01 Feb, 2010
Economy, Gold + the S&P 500
GDP supposedly rose big-time in Q4 of 2009 (at an annual rate of 5.7%). However, a big blob of that increase was accounted for by inventory rebuilding.
However however (!) -- who really knows? The question to ask is: How could GDP have increased while employment stagnated? And the answer is -- business confidence comes before business hiring. Many business execs are in a wait-and-see mode. How can you blame them?
Over here at the EleBlog, we're watching something else. For the past week or two, the S&P 500 Index and the per-ounce price of Gold have been chasing each other.
Today, the S&P 500 rose 15+ points, to finish at 1,089.
And gold rose about 25 bucks, to $1,105.
The BET here -- which I really wish I could make (but I won't, b/c I cannot afford to lose big!) -- is to short the S&P 500 and go long gold. The idea: Gold will get to $1,500 while the S&P gets to about 800 (or lower) in the next 3 to 5 years.
Does that sound as if I'm skeptical of the recovery, the ability of Ben Bernanke, and the confidence of many business executives? You damn betcha!!!
(More)
11 Jan, 2010
Norris On Employment Numbers
Floyd Norris, the NY Times bizniz reporter, is wonderful. Evidence comes in his posts (to his blog) on the NY Times website on Friday, 1/8, after the employment numbers were emitted:
Lost Decade: Reason to Expect Better.
At the end of 1999, the Labor Department counted 110 million private
sector jobs. The figure for the end of 2009, announced today and
subject to numerous revisions before we get a final figure, was 108.4
million.
That is a decline of 1.4 percent. During the same period the country’s population climbed by about 9.8 percent.
- - - - -
That drew responses; Norris replied to one of them in Lost Decade 2 (posted same day):
. . . at the end of the 1990s, the proportion of the working age
population that was 55 to 64 — the people who would hit 65 in the
decade just ended — was only 14.6 percent. The youngest of those people
had been born in 1944, just before the baby boom.
Now the figure is 19.4 percent. That means nearly a fifth of the
current work force will hit 65 over the next decade. That implies the
demand for jobs will fall, barring immigration, and that the
unemployment rate will also ease.
11 Jan, 2010
A one-page piece in a regional homebuilder magazine says "
The Long Road Back Will Be Foggy."
EleBlog belief: The housing market in 2010 has an equal chance of going up (McGraw-Hill says by 30%) . . . as it does of going down (perhaps not by 30%, however).
Most interesting piece:
. . . it's really the Generation Y cohor -- with three times the population of Generation X -- that will foster in the biggest changes to the building industry, as these "echo" boomers begin to enter the workforce, create their own households,a nd bring their own separate demands to builders of home and apartments.
Yes, the guy really wrote the words "foster in."
05 Jan, 2010
10 Year Investment Results
From
Paul Kedrosky's blog (which is just excellent, by the way):
What $10,000 invested 12/31/1999 would be today across various investable thingies:
- S&P 500: $9,090
- Venture capital: $8,800 (for 1999 vintage funds)
- 10-year Treasuries: $18,000
- Raw materials: $13,803
- Gold: $37,852
28 Dec, 2009
Itty-Bitty Green Shooties
Common sense will tell you that the statistics kept by our government -- on everything -- aren't accurate enough to be reliable. It's a big country. There are all of these places here (states, counties, cities, towns, etc.). The gathering of statistics is as good as it can be, but it's not perfect . . . and everyone knows this.
Or so I thought. I was wrong. Here, read this, about housing:
Single-family building permits tell a more
encouraging story. After peaking at a seasonally adjusted annual rate
of 464,000 in August, they fell to 452,000 in September and 449,000 in
October, most likely because the initial tax credit was about to expire.
But in November, there was a strong rebound to
473,000, the highest since September 2008. The increase appears to be
because builders have begun to rebuild their inventory of lower priced
houses that that were sold because of a boost from the tax credit and
in anticipation of increased demand resulting from its extension and
expansion.
I found it here.
This appears to "make a big deal" about a shift upward from a SAAR of 449,000 single-family building permits in October to 473,000 in November. By simple subtraction, that's a difference of 23,000 on a base of 449,000
But wait: It's a seasonally adjusted annual rate (SAAR). That means the October numbers were bumped and teased around to come out at 449K, and the November numbers were similarly adjusted and twisted/rejiggered by economists to come out at 473K.
Without casting any aspersions on the integrity of the economists who did the work, let's say that such a difference in SAARs from one month to another (or even over a six-month period) MEANS NOTHING.
Nada, nil, zilch, zippo. ZERO.
I find this kind of search for positive numbers to be ridiculous. So should you!
21 Dec, 2009
Unemployment: To Stay High?
John Mauldin writes a weekly missive on investing. He supposedly has 1 million readers!!! He says he saw what's here when it was coming, but I read the guy's stuff every week, and I don't remember him hitting a warning gong like a madman.
Perhaps my memory is selective. Or perhaps Mauldin isn't a genius (this is not a sin!). I read his writing for the following reasons:
a. I read enough "the sky is falling" investing advice. I need to balance that out with a little (just a little) Sunshine from someplace else.
b. Mauldin has been the chief promulgator of the "we're going to muddle through this" idea. I think he's abandoned it, but he kept at it for a long while (long after I had decided this was a dead issue). This is an idea that acknowledged we're in trouble, but said we'd get through it OK. It's not cockeyed optimism!
c. I can be wrong. The other people (Hickey, Faber, Fleckenstein, etc.) that I read CAN be wrong. If that's the case, the best thing to do is HEDGE. To button down (in my head!) the idea that I can/might be wrong, best to read something that gives me a reason to look at hedge-type investments.
So I read the guy. Recently, he has been riding a theory -- in some detail -- about how "employment is likely to be uncomfortably high for a number of years, and that assumes we do not go back into recession."
Employment? NO -- he meant UNemployment. He made a writing mistake that his editor didn't catch.
However, he provided a visual scenario for all of us -- see below. It's perfectly clear, isn't it?
You can draw one of several conclusions:
1. A former optimist has gone over to The Dark Side.
2. Things look so black now that even a guy who thought we'd "Muddle Through" is projected a dark future, on into 2020, at least on the unemployment picture. But he was wrong about the current period, so he might well be wrong about this.
3. Conclusion #3 is dreadful, and that is: What's below is the Optimistic take on the next decade. If so, we're in deep doo-doo . . . right?
17 Dec, 2009
Nov. Jobs Report: WRONG???
I've had this gut feeling that the November employment report from the FedGov -- only 11,000 more people added to the list of unemployed in the month -- was WRONG.
Here's the problem with this, for me:
a. I'm negative on the U.S. economy. I don't think we've done the right things (at all) to fix it. I think we're headed down the wrong road, at about 17 megaparsecs a secoind.
b. I don't like to say something is WRONG just because it doesn't fit my world view. If I'm going to call you BLEEP, I'm going to say -- "you're BLEEP, and this is why." If that goes for people, it goes double for data.
c. If the economy really IS recovering quickly -- something which I doubt -- than there is something wrong here, and IT IS ME.
Herewith, two items that encouraged me in me "the data is off" thinking:
We're Not Done With The Jobs Report --
East Shore Partners’ Frank Veneroso, who initially called the
November jobs report “super strong,” is rethinking that position today.
He was initially impressed by the increase in the work week and the
upward revisions to prior months. But “after thinking about this for
several days, I realize I may have overstated the implications for
recovery strength.”
“My concern today that I was premature in heralding significant
employment improvement last Friday is fed by some of the recent
concurrent economic data.” He cites several competing reports, the NFIB
report, the ISM services report, the JOLTS report, and withholding tax
data, which all paint a weaker picture than the BLS report.
“The withholding income tax data does not lie because tax
withholding is automatic. The payroll survey lies because the
birth/death model contribution is a ‘plug number’ based on a past
employment picture that looks nothing like employment in this
recession, which is the worst in three generations.”
Gluskin Sheff’s David Rosenberg takes note note of a little known (I’d never heard of it) calculation the BLS does, the “adjusted” household survey,
which tries to reconcile the establishment and household surveys.
According to that figure, the nation lost 109,000 jobs in November.
“This may well be the nugget that everyone missed because the
Household Survey does a much better job at picking up what is happening
in the small business sector,” Rosenberg wrote.
AND
What's Wrong with the November Employment Numbers -- this one is deeply technical, you have to read it (I did) a coupla times to understand it. Here's a slice:
There was a general sense of surprise at the November results, but no one has a clear concept of what went wrong. TrimTabs has entered an objection,
and I agree. The estimates of job change from our model, and the other
approaches that I report each month (including TrimTabs), will prove to
be better estimates than recent BLS reports.
It will take some
months before we see the actual data to prove this, but I intend to
follow up with some estimates. Meanwhile, I doubt that employment has
improved as much as the current report indicates. It is not consistent
with other economic data.
And finally, readers should note that
this had nothing to do with BLS bias, manipulating the numbers, or
creating "phantom jobs" on demand for President Obama. It is all about
methodology, and the inherent limitations on the survey approach. The
BLS team devised a good approach and implemented it in consistent
fashion. The change in the credit markets - not a normal recession --
seems to have undermined their empirical models.
07 Dec, 2009
Nov. Retail Sales: GIANT MESS?
I look around for indicators that might tell me where the economy is REALLY going. One of the places I look is David Bodamer's "Traffic Court" blog. He just recently posted a
roundup on November retail sales, with stuff I didn't actually hear or read anywhere else (which might mind my mind went kerplooey, I don't know).
I particularly liked the quote he pulled here, from Retail Metrics:
. . . same-store sales increased 0.9 percent–results the firmed called “a
giant miss”. Retail Metrics’ numbers include 37 retailers. Of those, 14
posted gains, two had flat sales and 21 posted same-store sales
declines.
The bottom line is that comp store
sales VERY disappointing ahead of the critical December Holiday
shopping season. Facing the easiest monthly comparison this decade,
retailers managed to eek out a very soft 0.7% increase. This despite
increased ad spending and earlier sales events. The standard line from
any retailers was a stronger YOY Black Friday weekend was not enough to
offset very weak sales throughout most of the month.
Let me ask you? Did you see (in the past week) the words "Giant Mess" associated with November's retail sales anywhere in the mainstream or bizniz media?
11 Nov, 2009
I Say Tomato, You Say . . .
I keep saying it's a Depression. Everyone else keeps saying it was a recession, and it's over. I don't know. What does this look like to you? It's the decline in state tax revenues (and I don't think it's yet at the bottom, folks) . . . from
www.Ritholtz.com, home of The Big Picture blog.
11 Nov, 2009
"One more leg down" is how Bloomberg TV headlined a 10-minute appearance by Whitney Tilson -- talking about housing (among other things).
See Tilson/Bloomberg VIDEO here.
I went looking for a presentation by Tilson/T2 Partners on housing, and found a 203-page thingy dated 11/9/09. See the graphic below, taken from the thing -- I hope it's self-explanatory.
03 Nov, 2009
I find the "below the surface" stuff -- not generally reported, I don't think -- to be more interesting than the opinions of "leading economists," Ben Bernanke, or any of the media or D.C.-based schmucks.
After all, not a one of them saw this economic cataclysm coming, did they? Yet you can't argue with the data. Of course, you can misinterpret the data -- but that's on you (and me) . . . right?
Here's a case in point, NPD Group, which is a consumer-focused market research company, reported this:
Summer is historically a peak season for the foodservice industry, but this past summer the industry realized its fourth consecutive quarter of traffic declines versus the same quarter a year ago, according to The NPD Group, a leading market research company. NPD’s CREST®, which continually tracks consumer usage of foodservice, reports that total restaurant industry traffic declined by -3.6 percent in the summer quarter (June, July, and August) versus the summer quarter last year. Total consumer spending at foodservice contracted by -1.6 percent versus a year ago due to the weakness in customer traffic, marking two consecutive quarters of spending decline.
According to CREST®, traffic declined across all restaurant segments and dayparts.This summer visits to quick service/fast food restaurants (QSR) declined by -3 percent. Casual dining declined -4 percent and midscale was down -5 percent. Visits at the supper daypart fell for the seventh consecutive quarter declining in the summer quarter (June, July and August) by -6 percent versus a year ago. Lunch visits contracted by -4 percent, morning meal traffic fell by -2 percent, and PM snack, which showed positive growth (+1 percent) in the spring quarter, declined by -2 percent this past summer.
What does this mean? At a minimum, it means 300+ million people are going out to eat less. Does it mean they have less disposable income, or they're all on a diet? Perhaps they're all doing REALLY WELL, but don't want to go out to the local Arby's and look like non-green big eaters in the eyes of their neighbors?
You tell me.
15 Oct, 2009
Andy Xie used to work for a big brokerage (Morgan Stanley, I think). I used to regularly read his commentary -- for years, I guess -- online. Now, he's independent. You can still find his stuff, for free, online (if you look).
I recently came across a three-page (three web pages, so you gotta click thru and click thru again) Xie piece,
Why One Bubble Deserves Another.
Mr. Xie's thesis is NOT the reason I'm calling this to your attention. There was a (long) paragraph in his piece which struck me as worth regurgitating. Yes, if you read it thru, it's obvious. But I don't recall seeing this point made so clearly (and if I've ever discussed it with anyone or heard it from someone else, I really don't recall that):
Trading gains are a form of income
redistribution. In the best scenario, smart traders buy assets ahead of others
because they see a stronger economy ahead. Such redistribution comes from giving
a bigger share of the future growth to those who are willing to take risk ahead
of others.
Past experience, however, demonstrates that most trading profits
involve redistributions from many to a few in zero-sum bubbles. The trick is to
get the credulous masses to join the bubble game at high prices. When the bubble
bursts, even though asset prices may be the same as they were at the beginning,
most people lose money to the few.
What's occurring now is another bubble that
is again redistributing income from the masses to the
few.
OK, now that you've read it, it seems obvious (doesn't it?). But do you think that most people invest their money with
this understanding of the basics? Here's what one of the richest people in the world (he made it all himself, by investing) has said -- I wrote these words in 2007:
George Soros
says the way to make a fortune is to identify the trend that is false, ride it
for as long as it lasts, and then jump off just before everyone else realizes
what you already know. This is a guy who reportedly made $1 billion in a single
trade (betting against the British pound); even if you hate his politics, it’s
hard to argue with his approach.
Doesn't what Soros said and what Xie wrote basically equate to the same gosh-durn thing? Doesn't it net out to: Investing is a fool's game for the average schmuck?
AND: If that's the case,
are you factoring this basic understanding into the way you invest the money you're able to put aside for the future? (More)
27 Sep, 2009
'Ghost Fleet Of The Recession'
Lots of folks say -- and are betting -- that the globe (and the U.S.) have entered a Recovery. The stock market is up a huge 60%. Some analysts are saying, out-and-out, we're in a bull market (as opposed to a fierce bear-market rally).
I don't buy a bit of that. David Rosenberg, the former Merrill Lynch analyst (now back in his native Canada at a firm called Gluskin Sheff), notes that 100% of global GDP growth in 2009 is coming from government money-printing -- and that will be followed by an "at least 80%" GDP growth figure from governments in 2010.
Here's another thing to look at -- a headline from a U.K newspaper that reads: "Revealed: The
ghost fleet of the recession anchored just east of Singapore."
You may have encountered this one before (it ran 9/16 and has made the rounds of some Internet places, especially where "bears" hang out). I'm not sure I've seen the piece reflected in a U.S. newspaper, magazine, or news website.
29 Jul, 2009
A post on AlterNet -- quoting The Wall Street Journal -- notes that "more than one-third of all pay in the U.S. now goes to executives and other highly paid employees."
That explains a lot, doesn't it?
And: Is it really surprising that the guys (and gals) who get to decide who-gets-paid-what allocate a big piece of the pie to themselves? Is it, really?
This, folks, is why unions sprang from the ground in this country many decades ago. I do not predict a recurrence. But if you want to look at why the average American is so angry, it is this fact . . . not necessarily the fact itself (i.e., people do not seem to be angry with their bosses, generally speaking) -- but the consequences of the non-executive worker bees getting a progressively smaller piece of the pie.
Obama is accused of being a socialist, by some. For all I know, he might be. For all I can tell, he might be taking the U.S. on a socialist path (after all, we now have a sort-of socialism for the wealthy executives who run very-big U.S. corporations, financial and otherwise, don't we?).
Here's the problem for those accusing the guy of this:
Socialism might actually become welcome in this country, in all but name.
28 Jul, 2009
I've read stuff by Andy Xie on and off for a long time, since he worked for Morgan Stanley. I came across
a piece by him in China International Business. It contains this paragraph, which puts the sales of debt by the U.S. government in some kind of (frightening-to-me) perspective:
However, the US government isn’t quite ready for high inflation. It has
USD 11.4 trillion in outstanding debt, and this is growing by over USD
6 billion per day.
The average maturity of the federal debt is only
four years and, hence, a quarter needs refinancing every year.
With USD
2 trillion net financing for 2009, the federal government needs to
raise about USD 10 billion per day.
24 Jul, 2009
Slow Stimulus - Part Of The Why
It's taking forever for the Stimulus $$$ (reportedly, $787 billion of it) to get into the economy. According to something I read the other day, little more than 10% of it will be spent by the end of 2009 -- I don't know if that's true.
But here's something I know to be true: A big piece of the money ($244B, or 31%) went into tax credits and tax cuts). Here's a
blow-by-blow description from The Reason Foundation (which, admittedly, is biased against the thing).
Short of mailing checks to the taxpayers (as the Bush Administration did, twice) -- or dropping $100 bills out of helicopters, as Ben Bernanke once jokingly suggested -- it apparently takes time to get government money "put to work."
22 Jul, 2009
Commercial real estate is,
it says here, a Ticking Time Bomb. David Bodamer, editor-in-chief of Retail Traffic magazine (and one terrific blogger), gets to the nub of the thing. I bolded a key phrase, which (if you're not already aware of it), you're going to hear a lot more about in the coming months:
One question: How can commercial real estate be a “ticking time bomb” when we’re already more than two years into the sector’s decline?
This testimony is occurring as a wave of new data hits us that shows that commercial real estate has already been hit very, very hard. We got the June same-store sales data today. Sales came in down between 4.3 percent and 5.1 percent, depending on whose numbers you look at.
Reis also released new numbers on shopping center and regional mall vacancies showing vacancies have hit 17-year highs. A report from Real Capital Analytics shows that commercial real estate worth $108 billion is now in default, foreclosure or bankruptcy. Isn’t the correction playing out? What exactly does the industry need?
The real problem at hand is the volume of refinancing that needs to be done in the coming years in the face of the fact that the securitization machine–which had accounted for up to 40 percent of annual commercial real estate financing by 2006 and 2007–is completely shut down.
Other sources of financing–commercial banks, life insurance companies, etc.–are still out there. They have tightened underwriting standards for sure and loan sizes are dramatically smaller than in the past. But they are out there. Moreover, there are government programs in place to address this–namely, the TALF and the PPIP.
In fact, today there were more announcements about PPIP that should supposedly get the program moving. (To be fair, though, there are major doubts that the PPIP will ever work.)
Think about it. If commercial real estate (which to me means the existing buildings) has problems, the commercial construction business will have problems.
29 Jun, 2009
Financial Crisis RESOURCE
I stumbled over a LOOOONG web page of links, apparently updated monthly, on the
Financial Crisis -- from a legal point-of-view. It's on the site of Morrison Foerster. There are an incredible number of links. Here's the directory to the page (these are not the links, but the LISTS of links on the page) --
One-Page Reference Guides (a/k/a Cheat Sheets) and Timeline of Events
Presentations
Financial Stability Plan and Related Financial Markets Legislation
TARP Programs and Emergency Economic Stabilization Act
Tax
Liability Management
Securities Markets
Employee and Executive Compensation
Money Market Funds
Covered Bonds
Accounting Rules and Best Practices
Consumer Finance and Mortgages
Outsourcing
Financial Crisis Response Outside the US
Links to Other Legal and Government Resources
Stress Test Results
Financial Stability Plan
Public Private Investment Trust
Federal Reserve Resources
Treasury Capital Purchase Program Resources
FDIC Resources
Congressional Resources
25 Jun, 2009
Ain't No Damn Green Shoots
I'm not happy for my country, but I am reasonably enjoying the fact that I was right about this (at least in the short term). I've added some boldfacing to the piece and a comment at the end.
- - - - -
WASHINGTON (MarketWatch) - First-time claims for state unemployment
benefits rose unexpectedly in the latest week, the Labor Department reported
Thursday. The number of initial claims in the week ending June 20 rose 15,000 to
627,000. It's the highest level since mid-May. The consensus forecast of Wall
Street economists was for claims to fall slightly.
Claims in the previous week were revised to an increase of 7,000 to
612,000 compared with the initial estimate of a increase of 3,000 to
608,000.
A Labor Department official said that some states reported more
end-of-school-year claims. Many states allow bus drivers and cafeteria workers
to file for unemployment during school breaks.
Meanwhile, the number of Americans receiving state jobless benefits
held steady rose 29,000 to 6.74 million in the week ending June 13.
The four-week moving average of continuing claims fell 3,250 to 6.76
million.
- - - - -
WHAT THIS DOESN'T SAY -- continuing claims could be falling because people who
were unemployed EARLY in this Depression are falling off the list -- their right
to claim unemployment benefits is EXPIRING.
IF SO -- it's not a good sign, not for the
economy . . . and certainly not for these people!!!
25 Jun, 2009
I have been contending that the U.S. (and perhaps the world) is in a Depression. Lots of folks have said that's nonsense (and not because I said it). One guy, in the distribution business, wrote a column that compared the unemployment rate (8%, he said) to the 1932 horror (25%).
I wrote a response on TEDMAG.com (now lost, as the website is in transition) noting that
1. The 8% rate isn't comparable to what we had in the 1930s. The headline unemployment measure back then wasn't factored the way it is today. You can dive into the monthly unemployment data from the Bureau of Labor Statistics and find the number of REAL unemployed and underemployed -- roughly 15.6%.
Compare 15.6% with 25%.
2. Further, the unemployment rate during the 1930s Depression wasn't 25% for the whole time. I found an article on the BLS website that showed the annual average unemployment rates. In 1931 (roughly comparable to where we might be in the CURRENT Depression!) . . . it was on the order of 16%.
Therefore, we were right on schedule.
- - - - -
So much for my brilliance. However, there is an article that has been making the rounds of various financial blogs (and was even discussed at length in the Financial Times by Martin Wolf, a widely respected economist who writes regularly for the FT).
The article: "
A Tale Of Two Depressions" is worth reading. It's simple. It's got a lot of charts. And one conclusion is that this time it's WORSE than the 1930s.
EleBlog take: Hang on, there might be worse coming.
02 Jun, 2009
While I was at Jim Haughey's blog, I noticed 2 other recent posts:
Construction wage gains weaken -- this is about union construction.
Economic recovery in 2009-2010, but problems beyond -- I think this perspective might prove to be VERY correct, and VERY VERY important.
. . . . Maybe very very very. Here's Jim's conclusion:
massive spending will lead to economic recovery later this year and
continuing recovery at a modest pace next year before bills come due
that cannot be repaid. The inevitable consequence is a pullback in
federal spending, including construction credit, and/or much higher
credit costs that force private construction customers to cancel
projects.
01 Jun, 2009
The stock market is UP. "Green shoots" reportedly have been seen. Yet realists see a lot more misery en route.
Among the pessimists are the members of the Federal Open Market Committee (of the Federal Reserve Board). A
5/20 Wall Street Journal blog reported on the latest projections from the committee, which now expects "a worse 2009 and 2010 than they forecast in January."
Unemployment, Q4 2009 -- now seen as 9.2% to 9.6%, vs. a forecast in January of 8.5% to 8.8%
Unemployment, Q4 2010 -- now seen as 9% to 9.5%, vs. the earlier 7.7% to 8.5%.
Q4 2009 GDP -- January's projection was a decline of 0.5% to 1.3%, now FOMC sees a Q4 dip of 1.3% to 2.0%.
Full-year 2010 GDP -- January: 2.5% to 3.3%. Now, 2% to 3%.
These numbers mean nothing, of course, as virtually every single economist has been WRONG WRONG WRONG in recent years (so it wouldn't be surprising if these people were wrong now, too, and were wrong in January). The key here is that the group that is running the economy (it's the Fed you know, NOT Obama!) sees things through a darker glass than it did just 4+ months ago.
26 May, 2009
Lately, I've been paying attention to the Railroad association (AAR) and its weekly report on railcar loadings.
Here's the latest release, which covers data for the week of 5/16. Key sentences:
U.S. railroads originated 247,258 cars during the week, down 25.3
percent from the comparison week in 2008, with loadings down 21.2
percent in the West and 30.9 percent in the East.
All 19 carload commodity groups were down from last year, with
declines ranging from 10.2 percent for the grain mill products to 69.5
percent for metallic ores.
Intermodal volume of 188,435 trailers or containers was off 19.4
percent from last year, with container volume down 14.1 percent and
trailer traffic off 39.1 percent.
Total volume was estimated at 26.2 billion ton-miles, off 24.3 percent from 2008.
For the first 19 weeks of 2009, U.S. railroads reported cumulative
volume of 5,036,579 carloads, down 19.2 percent from 2008; 3,531,569
trailers or containers, down 16.6 percent; and total volume of an
estimated 534.6 billion ton-miles, down 18.1 percent.
Here's the key for The EleBlog:
a. Everything is down ("all 19 carload commodity groups").
b. In the year's 19 weeks so far, carloads are down 19.2%
c. In the week covered by the release, carloads were down 25.3%
d. In the previous week, by the way, carloads were down 25.8%
If you compare the year's average so far with the past two weeks, THINGS ARE NOW WORSE than they were earlier in the year.
01 May, 2009
From a Barry
Ritholtz blog post (in which he quotes another blogger):
The drop in imports contributed 6.05 percentage points to the GDP growth rate.
What this means is that without the contribution from imports, GDP
declined at 12.15% annual rate in Q1. In other words, all of the
domestic activity was, as the employment numbers suggested, in free
fall!
GOOD GRIEF!
28 Apr, 2009
Wait Just A Doggone Minute . . .
The drift of most economic commentary of late has been "things are getting better, or at least getting worse at a slower pace -- there are 'green shoots' and we're at or very near the bottom."
The EleBlog is NOT SO SURE.
1. The
Truck Tonnage index for March was DOWN BIG. From the release:
The
gains during the previous two months, which totaled 4.5 percent, were
erased with March’s drop. (February’s increase was revised down to 1.5
percent.) In March, the SA tonnage index equaled just 101.4 (2000 =
100), which is its lowest level since March 2002. The fleets did
report higher volumes than in February, as the not seasonally adjusted
(NSA) index increased 10.2 percent, but that is well below the 15 to 20
percent range that NSA tonnage usually rises from February to March.
In March, the NSA index equaled 104.7.
Compared
with March 2008, tonnage contracted 12.2 percent, which was the
second-worst year-over-year decrease of the current cycle. In December
2008, the largest year-over-year contraction, tonnage dropped 12.5
percent from a year earlier.
2. But things don't only move via truck, do they? Have about the Rail Freight Index? Big-time fall in the week of 4/18, says AAR -- including this:
Freight traffic on U.S. railroads was off sharply during the week
ended April 18 in comparison with a year ago, the Association of
American Railroads reported today. U.S. railroads originated 255,269 cars during the week, down 24.3
percent from the comparison week in 2008, although up 2.8 percent from
the previous week this year. In comparison with last year, loadings
were down 20.6 percent in the West and 28.6 percent in the East. All 19
carload commodity groups were down from last year, with declines
ranging from 9.3 percent for grain mill products to 63.6 percent for
metallic ores.
and
For the first 15 weeks of 2009, U.S. railroads reported cumulative
volume of 4,025,476 carloads, down 17.7 percent from 2008; 2,789,760
trailers or containers, down 16.1 percent; and total volume of an
estimated 427.3 billion ton-miles, down 16.6 percent.
3. How about the Baltic Freight Index? It's doing a lot better, but not HERE!
April 20 (Bloomberg) -- The Baltic Dry Index, a measure of
world trade, rose to the highest in almost a month on demand to
transport iron ore to China and South American grains.
The index of commodity-shipping costs advanced 55 points,
or 3.3 percent, to 1,737 points, according to the Baltic
Exchange today. That’s the highest since March 25. Rents for
panamax ships that haul grains jumped 3.7 percent to $12,955 a
day, building on last week’s 36 percent gain. Bigger capesizes
that transport iron ore climbed 4.4 percent to $20,772.
NOTE: That's good news. But check out the recent readings vs. those from earlier in the 2000s in this chart.
4. Check out "Equities still a bubble and equity guys still out of this world, BNP Paribas says," a blog post on FT Alphaville. Summary: We're still in a BIG bubble. Here's a snippet from the Paribas report, as offered on Alphaville:
Using current valuations, if one were to calculate the P/E multiple on 2009 earnings, one lands up with 14x using operating earnings and 30x using as reported earnings. We will leave investors to make their own judgement but P/E multiples of 30x certainly scream bubble to us.
(More)
19 Apr, 2009
There's a lot of supposedly "good news" about "green shoots" in the economy. I believe it's fluff and wrong. Here's a data point from a guy name of Bill King, who writes a newsletter you can't get without paying (it was posted to
Barry Ritholtz's blog):
Part of the text that goes with it:
US industrial production for March declined 1.5% m/m and 12.8% y/y.
This is the biggest y/y decline since the end of WWII. Q1industrial
production collapsed 20% annualized. Since the recession ‘officially’
commenced in December 2007, industrial production is down 13.3% and
factory production has declined 15.7%, which is also the largest
decline since the end of WWII.
10 Apr, 2009
The UCLA Anderson Forecast is said to be reliable.
A brief covers it here. It looks at the U.S. economy and California's. As to the latter:
UCLA Anderson Forecast expects the unemployment rate for California to
rise to 11.9% in the second quarter of 2010 and average 11.7% for the
year. "Though the California economy will be growing in 2011, it will
not be generating enough jobs to drive the unemployment rate below
double digits until the following year."
08 Apr, 2009
According to this
Seeking Alpha item, the "man in charge of the second-largest borrower in the U.S." walked away from his job -- "substantially unnoticed" -- because of "his discomfort in vouching for the banks' combined financial statements."
There seems to be No End to this misery, nonsense, stupidity, and horror, does there?
26 Mar, 2009
Economy Down Double Digits?
If you go by railroad volumes, when they get around to estimating the decline in U.S. GDP in the first quarter of 2009, the numbers could be quite scary.
Read this brief weekly report from the American Association of Railroads.
Too afraid to click over? Well then, just digest this disgusting slice:
For the first 11 weeks of 2009, U.S. railroads reported cumulative
volume of 3,007,032 carloads, down 15.6 percent from 2008; 2,055,140
trailers or containers, down 15.5 percent; and total volume of an
estimated 319.2 billion ton-miles, down 14.4 percent.
Yike!
18 Mar, 2009
Jim Haughey, the construction economist at Reed Construction Data, is frequently quoted here. I liked ALL of what he had to say in his
3/17 blog post, especially including this paragraph:
The US environment for borrowing and building has changed permanently.
Monetary policy now has to be conducted with an eye to avoid chasing
away foreign lenders.
If the US were a smaller country we would now be
forced to rein in the economy to preserve foreign capital investment in
the country. Recall what happened recently in tiny Iceland. Excessive
foreign borrowing collapsed the economy within a few days when lenders
realized that massive defaults were inevitable. Ireland, Singapore and
Taiwan are now experiencing deep recessions for the same reasons.
The
huge US economy would counter similar problems with several years of
sluggish growth and high credit costs. This is now a much bigger risk
than it was even six months ago.
16 Mar, 2009
Dr. Housing Bubble, a blog about the economy that's usually interesting, says in
a lengthy missive posted yesterday that California is going to be in a recession until 2011. He provides copious documentation.
12 Mar, 2009
Economist Jim Haughey of Reed Construction Data does NOT seem (to me) to have a political agenda. Maybe he does. Having heard him speak over the years, and read what he's written in various Reed magazines, I consider him an honest broker.
It's possible I'm wrong.
He recently posted an analysis of the new Obama plan for
Housing on his blog. Here's the final paragraph:
The Homeowners Stability Initiative will likely help several hundred
thousand homeowners avoid foreclosure, far short of the 9.0 million
claimed. This number does not include later defaults on reworked or
refinanced mortgages.
The recent FHA experience is nearly a 50%
default rate.
I bought a home in 1980 with a 16.5% mortgage and a
waiver from the lender to spent 29% (instead of the usual 25% limit) of
monthly income on the mortgage payment. With no other debts, it took a
lot of belt tightening to make the payments.
The Obama plan permits a
total payment to income ratio of 35% which assures double-digits
default rates on the refinanced mortgages.
EleBlog take: I'm not ready to substitute Jim's opinion for mine. But I've not done enough reading about the Housing plan (or previous plans now defunct) to form an opinion. Assuming Jim is talking with a concern first for construction (rather than politics) -- the verdict above is NOT good.
18 Feb, 2009
I thought we all could benefit from pondering this section of today's entry on the Dr. Housing Bubble blog:
- - - - -
Where are all the delusional folks calling for a second half
recovery?
This mantra was going around for the last few months of 2008
with no basis in reality. Here we are, only a few weeks into 2009 and
we are now back testing the market lows of November:
This is an incredibly fast drop. In fact, the NASDAQ is down 6.7%
for the year, the S & P 500 is down 12.6%, and the Dow is down
13.9%. And we’re only in February! Keep in mind all this is happening
with trillions and trillions of dollars being but at risk for the corrupt banking and finance industry
and a $789 billion stimulus plan being signed.
Even with all this, the
market is now back to the lows seen in November! What do we need to do
to get a brief recovery? Announce a $100 trillion bailout plan? I
mean we are now in silly season here.
The problem is our economy was
dependent on a frat like force of financial wizards who didn’t care
about the financial long-term stability of the nation. They built
models to make a small select few richer and richer at the cost of the
American taxpayer. After all, this money we are funneling to them is
basically the insurance policy they bet on while feeding both
Republican and Democratic legislatures. Their bets have paid off. Why
else would such a inane plan like the TARP even get off the ground? Well if you leave it to a former Goldman Sachs crony to write the legislation, guess what is going to happen?
10 Jan, 2009
A blog I try to get to at least once a week (TrafficCourt, from Retail Traffic magazine, by David Bodamer)
ran this item late last year: An analyst says "up to 3,000 retail properties could close in March and April."
That's not 3,000 stores. It's 3,000 PROPERTIES -- strip malls, shopping centers, etc.
It's gotta be wrong . . . right?
I tried to click through to the original item (in the Boston Herald), but it's now behind a firewall.
24 Dec, 2008
I believe the U.S. economy is in a Depression, not a recession (and not a "severe recession").
I have great experience visualizing the phrase "beating a dead horse." I have placed significant dollars in win and exacta bets on many harness horses. Many of these horses have been in First Place all the way around the track (most harness races = 1 mile) . . . all of the way to the 3/4-mile pole.
That's when they drop dead. More often then not, the guy behind the horse (the driver) starts furiously whipping the horse.
This never, ever, EVER makes a difference -- which, of course, makes rational people wonder why the guy would do that.
What I've seen in the past week or so tells me the economy is DEAD:
a. Last night (12/23), while watching "House" on national TV, I saw a large number of automobile advertisements. I'm not sure why. This seems a very bad time of year to advertise a new auto. People are concerned with Xmas! Is it counter-trend programming? Cheap TV ads available? Despair on the part of the auto makers? I don't know. I do know I saw a parade of new auto ads (not just from the U.S. auto-makers). House apparently was a re-run, but it is a popular, "hit" TV show (and in theory commands a premium from the advertiser).
b. Just now, the news flashed from Freddie Mac (via Marketwatch) that "the average 30-year fixed mortgage rate fell to a new 37-year low as
existing home sales continued to fall. The average fell to 5.14% with
an average 0.8 point for the week ending Dec. 24, down from last week
when it averaged 5.19%. Last year, the average was 6.17%."
Now, this ain't the time of year to buy or sell a house, of course. But with rates this low, you would think houses would be selling like hotcakes. The fact that such a scenario is NOT taking place tells us one of three things:
-- people are scared.
-- people don't have the money for a down-payment.
-- house prices are still MUCH too high.
16 Dec, 2008
Fed Actions -- What Will Happen
With today's actions, the Federal Reserve Board has removed all of the stops. Instead of commenting (I have a lot to say about this, and all of it is BAD), I scrambled to find a speech I'd read a week ago or so, by Jeffrey M. Lacker. He's the president of the Federal Reserve Bank of Richmond; the speech was 12/3, and you can
read the whole thing here.
NOW: Here's the part I really want you to read. Maybe a few times. Until it sinks in for you, at least (it's gone right by everyone with any responsibility, apparently!). I have done some editing here, to make it more readable (and to emphasize some stuff) . . . but these ARE Lacker's words, not Joe's!
The striking feature of central bank lending during the recent
turmoil is the extent to which it has extended well beyond the
boundaries that previously were understood to constrain such lending,
both in the range of institutions and the contractual terms on which
credit has been provided. Intervention has been driven by a desire to
prevent damaging disruptions to financial markets, and thus reduce the
overall costs of the turmoil.
While this objective is clearly
understandable, central bank lending can create the expectation that
similar support will be forthcoming when market disruptions occur in
the future.
Such expectations can themselves be very costly, because
they can distort the incentives faced by, and as a result, the choices
made by private-sector participants.
The critical policy question of our time is where to establish the
boundaries around the public-sector safety net provided to financial
market participants, now that the old boundaries are gone. In doing so,
the prime directive should be that the extent of regulatory and
supervisory oversight should be commensurate with the extent of access
to central bank credit in order to contain moral hazard effectively.
The dramatic recent expansion in Federal Reserve lending, and
government support more broadly, has extended public sector support
beyond existing supervisory reach, and thus could destabilize the
financial system, if no corrective action is taken.
Restoring
consistency between the scope of government support and the scope of
government supervision is essential to a healthy and sustainable
financial system. One option is simply to adapt our regulatory and
supervisory regime to the new wider implied reach of government lending
support. This strikes me as an unattractive option, if for no other
reason than the current uncertainty about the outer bounds of that
support.
Constraining moral hazard in such a regime would be an immense
and daunting task. I take it as given, therefore, that the scope of
financial safety net ultimately must be rolled back.
Note that it will not be sufficient simply to roll back the current
lending programs when the economy recovers. The precedents that have
been set during this episode will influence how market participants
expect policymakers to react during the next episode of financial
market turmoil. Establishing a coherent and stable financial regulatory
regime will require rolling back expectations about how the
policymakers will respond to the next financial market disturbance.
Rolling back those expectations will be impossible if moral hazard
concerns are always set aside in the exigencies of a crisis
WHAT DOES ALL THIS MEAN? The EleBlog take:
a. What the Fed is doing might not work.
b. Lacker says that, even if it works, there might be hell to pay anyway.
So it's a case of "damned if you do, and damned if you do."
05 Dec, 2008
Here's what Jim Haughey, the economist at Reed Construction Data, had to say about the recent Construction Spending report (the EleBlog noted it earlier, but Jim's POV is more important):
The steep plunge in starts is partly a shock reaction to the abrupt
worsening of credit conditions and the outlook for construction
demand. As always, private commercial developers reacted the quickest
to the changed environment. The value of starts for “for lease”
buildings plunged 44% in October: office (-51%), retail (-42%) and
hotel (-32%). Education starts dropped only 7.0% and hospital starts
increased 0.7%.
Some of the delayed private commercial projects will come off hold
in the next few months as the credit market continues to improve and
developers believe they have more visibility on space demand in the
next few years. Some but not most. The AIA billings index, a measure
of project design work underway fall to 36.2 in October from over 50
early in the summer. the project starts trend in clearly down through
next summer even if private commercial project starts bounce up briefly
during that period.
EleBlog take: I read Jim H's posts regularly, and talk about some of them here. It seems to me he's wavering with the data. He's been optimistic in some earlier posts, but this one is black. If you want to sum it up in a sentence, it's: "clearly down through next summer" in nonresidential construction.
05 Dec, 2008
I've been speculating, openly, that the various economic programs that are being tried (and that WILL be tried) will not work. Here's some additional evidence, if you need it, from Paul Krugman's blog:
1.
Krugman's 12/4 entry: I bolded the key point --
I’ve been ruminating over economic prospects for next year, and I’m getting scared.
Two points:
1. The economy is falling fast. We’ll see what tomorrow’s employment
report says, but we could well be losing jobs at a rate of 450,000 or
500,000 a month.
2. Infrastructure spending will take time to get going — a new
Goldman Sachs report suggests that projects that are “shovel-ready” are
probably only a few tens of billions worth, and that a larger effort
would take much of a year to get going. Meanwhile, it’s very
questionable how much effect tax rebates will have on consumer demand.
So it may be hard for stimulus to get much traction until late 2009 —
and that’s even if Congress goes along, which may be a problem given
all the bad analysis and disinformation out there.
So here’s what I’m wondering: will it, in fact, even be possible to
pull the economy out of its nosedive before unemployment goes into
double digits? I’m starting to wonder.
2. Martin Wolf of the Financial Times "says big stimulus programs by debtor countries will end in tears," according to the
Naked Capitalism blog: You can follow the link to see what Wolf says (and what others say). Here's the NC blogger's thinking:
Not to beat a dead horse, but we have been struck by the number of
analogies made to the Great Depression that strike us as wrongheaded.
The first is the idea that throwing money at "stimulus" will actually
do the job, I see a lot of back of the envelope calculations of what %
of GDP it will take to do the job.
But as the misguided tax
rebates showed, it is quite possible to devise programs that are
largely ineffective (roughly 80% of the rebates went to savings or debt
reduction, which is a form of savings). A lot of money has similarly
been thrown at the "get credit markets working again" program. And what
are the results? Consumer and small business credit slashed, private
securitizations a thing of the past, almost no debtor in possession
financing (crucial for Chapter 11 bankruptcies), letters of credit
scarce and costly,
A2/P2 commercial paper at record spreads, and the Fed and Treasury still seeming to create, increase, or extend programs on virtually a weekly basis.
So
what economist Tom Ferguson calls the "hydraulic Keynesian" approach
might not be as successful as its advocates suggest. And that assumes
it is the right remedy. We have argued that
Keynes himself would not be on board with the idea of the US leading the stimulus charge:
30 Nov, 2008
It's hard to believe right about now, but some of us (me included) see
INFLATION, not DEflation, as the problem for which one must prepare.
28 Nov, 2008
No one seems to want to use the "D" word, but I'm starting to look hard at the possibility that there is nothing that humans can do about the hole . . . into which human beings took such a long time to insert themselves.
Along those lines, TEDMAG.com recently posted
Copper Depression, a look at market developments, including what's happened to copper ("the metal with a Ph.D. in economics") -- and much more.
25 Nov, 2008
This tiny country (300,000 residents) is one of the epicenters of the financial cataclysm. I clipped a story from the Financial Times (of England), in the Nov. 15-16 edition, on what happened there. Here is a particularly telling paragraph:
Easy access to 100% mortgages has seen a chance to the traditional pattern of young Icelanders living with their parents until their mid-20s. The suburbs of Reykjavik have grown by one-third in the past decade. New streets house young couples, many with children, most with two cards in the drive and furnished with the best that Ikea can provide. All bought with 100% loans, many in foreign currencies.
So, for the record: The financial insanity that struck the American population was not, it seems certain, unique to this country.
03 Nov, 2008
In a blog entry here, Jack Keough -- a respected editor in the distribution business -- quotes at length from comments by Peter McCausland, who Keough says is "one of the most well-respected CEOs in the distribution business."
I'll take Jack's word for it.
McCausland says McCain was right (in his inane, stupid, and WRONG comments on 9/15) -- that the fundamentals of the U.S. economy are strong. There's more to it, which y
ou can read here.
EleBlog take:
1. The economy has been weak all year -- that's why unemployment rose in every report from the Bureau of Labor Statistics during calendar 2008. What makes that more important is that BLS overestimates the employment numbers. I don't believe you can trust government figures on unemployment, inflation, or GDP. In the case of 2008 unemployment figures, I believe the situation is A LOT WORSE. Where's the "fundamental strength" in that?
2. Our economy -- other than the export end -- has grown from the 1990s to today on the back of one heck of a lot of debt, especially consumer debt. I think you can (and should) make a serious case that the "fundamentals" of an economy that uses excessive amounts of debt to grow are Seriously HORRIBLE.
3. What's worse is that we're not going to see that kind of consumer debt growth in the future. People will have to save money. That will take a huge bite out of demand. Fundamentally, that's GOING to make us strong. But at this moment, the fact that folks will have to cut back and save will NOT make us strong.
McCausland's comments, as quoted by Keough, slam various people in the investment community (and you'll probably agree with him). I'm not here to defend those stinkers. That's not the point. McCausland says folks who predict a depression are wrong.
I'm not sure we're going to have a depression. But I am certain that we have a fundamentally WEAK economy, we had one before these idiots began monkeying around on Wall Street, and that what they have done is going to make us weaker. If you've been following what the U.S. government is doing with billions of your tax dollars -- in shoring up AIG, bailing out Fannie Mae + Freddie Mac, pumping money into the money-market fund industry and backstopping the commercial paper market -- it's all about transitioning the country to a future in which Borrowing Survives.
I don't think it will work. But the fact that there has been so much stress on making sure we can take on more debt should tell you something. These are not the actions of a country that is fundamentally strong, economically or any other way.
03 Nov, 2008
2 Economists From NAHB Event
I did not provide info on what economists Doug Duncan (Fannie Mae) and Frank Nothaft (Freddie Mac) said at the Natl. Assn. of Home Builders' housing forecast conference on 10/22. There are reasons for this, including my excessive anger over what these companies have done.
You can find a summary of what they said
here.
Anger? Yes.
see this EleBlog post from 8/3/08, in which I noted that a Fannie Mae economist -- speaking at a previous fall NAHB forecast conference -- had titled his presentation "Housing Prices -- Is There A Bubble?"
The guy said there wasn't. The year was 2002.
30 Oct, 2008
A Market Stat To Remember
I believe Arthur B. Laffer, a right-wing nutjob supposed economic expert, is . . . a nutjob. Yes, that's a stupid personal insult, but I'm NOT going to elaborate, as this article is NOT about the guy. Having said all that, I want to QUOTE Laffer, from a 10/27 op-ed piece in The Wall Street Journal:
"The average real return for U.S. assets, compounded annually, was -6% for 16 years" -- early 1966 to August 1982.
Let's break that down:
a. There are returns and REAL returns. REAL means including the affect of inflation. REAL return is the only metric with which you should be concerned. Lots of people right now are talking about their comparative returns -- i.e., the S&P is down 40%, or whatever, and my fund is down only 27%. That's not only baloney, but it's totally irrelevant. What's the REAL return, if your fund is down 27%? If inflation is running about 5%, then your $100 just got turned into $68. How the heck is that good?
Focus on REAL returns. That's the end-all and be-all -- the reason to invest.
b. The annual return, on average, for the period was MINUS SIX PERCENT. That's right -- year after year of MINUS SIX PERCENT real returns on your money.
c. This persisted for 16 years. At the time, no one knew they were in a 16-year period of misery. However, in retrospect, it can be seen clearly: If you sold in early 1966 and left the stock market for 16 years, YOU CAME OUT AHEAD.
d. What this reminds all of us: The market can kill you. And it can do it over a long period of time. All of the "buy and hold" people tend to overlook this 16-year period. When they tell you that buying and holding has been a great long-term strategy, THEY ARE LYING.
Are the next 10-15 years going to be like this? I don't know. No one knows. And no one who says he or she knows . . . has the slightest idea.
28 Oct, 2008
Economist Jim Haughey, who is an experienced and smart guy, says the government's "fix" for the financial system is working.
See his
blog post from today.
Read it. I know I don't agree; I was speculating with a friend at lunch today on what might happen if the "fix" does NOT work (my friend thinks China or Russia - or both - might invade. I am not kidding. And this guy is FAR from crazy!!!).
Problem: I can't argue with Jim Haughey. He might be right. Plus, no one can really track everything the government is doing.
EleBlog take: The government doesn't belong in the market buying commercial paper. The government shouldn't be providing a $540 billion backup to the money market funds. The government said it would back AIG to the tune of $85 billion, and this weekend I learned we've already advanced to that company . . . $120 billion.
Maybe all of this will "fix" the situation. Or maybe the situation we're headed for is, literally, The End Of The Fricking World!
25 Sep, 2008
Back on 8/15, this site contained a
Loony Prediction on Oil. The gist: I predicted oil would be up to $130/barrel by 10/1/08.
Well, it might not make it all the way back. Today, the price is running @ $107. It did make it up to $120 recently, but that was about one-day games in the commodity market (when the October contracts rolled over to November, and someone or other was caught short at the wrong moment).
Was I wrong? Definitely. The contention was simple: China's cutbacks on factory production and driving in Beijing were at least partly responsible for the drop in the price of crude. Yes, yes, China doesn't use that much, blahblahblah -- go and read the original item (click above) to see the reasoning.
----------------
I still agree with my reasoning. In the past week, I've come across the Fatal Flaw, however -- I assumed that the Chinese would ramp up production and abandon the driving restrictions in Beijing as soon as the Olympics ended (8/24).
Here's where this was wrong:
a. The city hosted the Paralympics right after the Olympics. That was a reason to sustain the lower-the-pollution window for more than a week. I didn't know that.
b. From the 9/9/08
Short Term Energy Outlook, from the DoE's EIA:
Reports indicate that China plans to halt imports of selected products
in September to draw down stocks built up before the Olympics.
Moderation in China’s demand, however, is expected to be temporary, as
sustained economic growth is expected to support oil consumption
growth. Over both years, lower OECD consumption is expected to be more
than offset by continued non-OECD consumption growth, led by China, the
Middle East, Latin America, and India
I didn't know that. Essentially, China sustained its restriction on energy consumption from a mid-July pre-Olympic pollution draw down on into September.
-----------------
In the time since, I came across something I cut out of the 8/2 Financial Times (but didn't read). It's a short column based on the views of Yingxi Yu (a woman) of Barclays Capital. The piece quotes here:
"In oil, government policies have been mainly directed at ensuring supply during the Olympics month. Strong import growth suggests the supply system is operating above minimum inventory requirements, but we see no evidence of inventory building on the scale of the observed demand increase; hence, there is unlikely to be a signficiatn overhang, especially when about 1M vehicles return to the roads after the games."
Had I read those words, I would have been EVEN MORE SURE of what I predicted.
----------------
Yingxi Yu also told the newspaper that "the temporary closure of factories in Beijing implies a possible ramping up in operations when they restart" and that "For certain markets, such as coopoer and aluminum, she bleieves consumption data have been artifically depressed by destocking."
----------------
WHAT THIS MEANS -- FOR THE OIL PRICE PREDICTION:
Let's assume for the sake of argument:
a. The Chinese reined themselves in starting in July.
b. They have kept themselves from resuming demand through September.
c. . . . and the economic whatever-it-is in the U.S. and Europe is cutting into demand for Chinese goods.
If all of that is true, oil demand (and that for copper, aluminum, and you-name-it) might come back very slowly in China. I still think the price of crude oil is likely to get to $130/barrel, or higher, but I'm not sure of the time frame.
NOTE that I did make a price prediction for the end of 2008 (on TEDMAG.com) that the per-barrel crude price would be between $135 and $175. I made that call back in 12/07, so -- whether it looks good or not in a few months -- it still seems pretty good!!!
29 Aug, 2008
Lawrence B. Lindsey was a White House economist in the Bush admin -- earlier. He was crucified (and fired) for telling (
in 2003) the Congress some version of the truth -- that the war in Iraq was going to be costlier than the Bush liars and thieves were saying.
At the time -- for a contrast -- that Lindsey said the war could cost $1.7 billion,
Paul Wolfowitz (one of the architects of the war) said it might cost us -- IN TOTAL -- like $1.7 billion. Wolfie also was talking to Congress!
I mention all of that to give Lindsey some credibility. Here's what he wrote -- solid data, I think -- about the housing crisis, about 2 months ago:
There are 129 million housing units in the
United States, comprising owner-occupied, rented, and vacant units. Of
these, 18.5 million are empty. This vacancy rate is 2.5 percentage
points higher than it has been at any point in the half century the
data have been tracked, translating into at least 3 million too many
empty housing units in the country. This number, moreover, is rising.
This is the most intractable part of the real estate bubble, for we
cannot find a true bottom to home prices until this inventory of empty
units starts to clear, and we cannot find a bottom to the mortgage
finance market until home prices bottom out.
The worst type of inventory is an empty house, which people in the
industry like to say has about the same half-life as a head of cabbage.
As the former chairman of the Neighborhood Investment Corporation, I've
seen the damage done to neighborhoods by vacant homes. They are never
maintained adequately, depress surrounding property values, and can
quickly become temporary retail space for drug lords and a playground
for juvenile delinquents. They are also the homes whose owner has the
least incentive, and usually the least ability, to service the mortgage
or pay the property taxes. So whittling down the inventory of empty
houses should be the first economic, social, financial, and political
objective.
The math of the housing market is fairly clear. Each year roughly
half a million homes are destroyed to make better use of the land on
which they sit. Population growth also helps whittle down inventory.
The household formation years--ages 25 to 34--have 39.5 million people
in them forming 19 million households, a group that creates demand for
1.8 to 1.9 million units each year. On the other hand, households pass
from the scene later in life, and the homes they used to live in go
onto the market. There are 11.6 million households of 65- to
74-year-olds and 9 million households of 75- to 84-year-olds. Their
departure increases supply by around 1.1 million units per year. On
net, therefore, demographic realities add about 850,000 units to demand
on top of the half-million homes that are destroyed and removed from
supply.
The home building industry is in a deep recession, with additional
yearly new home supply cut in half since 2006. But homebuilders are
still adding nearly a million units per year. The math is simple: Build
a million, tear down half a million, form 850,000 households, and the
country only whittles down its excess inventory by 350,000 units per
year. This is one reason to expect a further drop in new home
construction, but it will still take years to get our housing inventory
back to normal. The economic, social, and financial damage over that
time could be staggering.
.
EleBlog take: The math is simple. The thinking is not hard to follow. The bottom line keeps coming out the same -- we're going to be "in" this mess for a long, long time to come.
Along these same lines, TEDMAG.com recently posted a column by yours truly -- "
Recovery In 2012, Or Thereabouts."
18 Aug, 2008
Recent Housing 'Data Points'
Barry Ritholtz of The Big Picture (blog) offers the bullets below on a Zillow.com Q2 housing report. I find
this info to be devastating:
• 24% of Homes sold in the past year were sold at a loss;
• 29% of Homes purchased in the past five years are “upside down” -- i.e., have negative net equity;
• Median home values are down a record 10% over the past year; this is the largest year-over-year decline since 1996.
• Foreclosed homes account for 50% of all home sales in some markets;
• 90% of US Homes had positive annualized appreciation over the past five years;
• Home values are now deflating in 85% of the country;
• Q2 is the sixth consecutive quarter of home value declines;
• Almost 15% of housing sales are now foreclosed transactions;
• Over the past 5 and 10 years, the nation has shown positive rates of appreciation of 4.4% and 6.5% respectively.
15 Aug, 2008
Denial is NOT a river in Egypt. Here are headlines (with links if you want to "learn" more) and brief summaries of "stuff" (brown, smelly stuff) from the 8/11 issue of Nation's Business News, the weekly from the National Assn. of Home Builders:
Housing Collapse Ahead? Not According to the DataOnly four states — Arizona, California, Florida and Nevada — have had
declines of more than 4% in home prices over the past year, according
to the house price index of the Office of Federal Housing Enterprise Oversight. Some worry that OFHEO's index may
be missing the full extent of the crisis because it doesn't include
very high-priced homes with "jumbo" mortgages or homes bought with
subprime loans — the ones being hit hardest. While one could argue that
the index would be more representative if it included these
transactions, the properties it does include represent more than
three-quarters of U.S. homes. EleBlog take: Obviously, everyone -- and I mean E-V-E-R-Y-O-N-E -- out in the world is fantasizing, hallucinating, misinformed, etc. There is a conspiracy to distribute bad news about house prices. We should round up twice the number of usual suspects . . . and shoot them!
Sales of new and existing homes continued to lose ground in June and
house prices continued to fall in many areas of the country. The
inventory of homes on the market remained quite high at mid-year,
particularly on a months’ supply basis, and the supplies of vacant
units for-sale and for-rent remained close to record levels.
Faced with daunting imbalances between housing demand and supply,
builders continued to cut housing starts and issuance of building
permits in June, particularly in the single-family sector. Furthermore,
NAHB’s single-family Housing Market Index hit a record low in July as builders’ assessments of current sales, buyer traffic and future sales all continued to decline.
EleBlog take: This one was written by David Seiders, chief economist of NAHB. I honestly don't think he wrote the headline, as -- you can see from what I've excerpted above -- there is a quite reasonable tinge of reality in his words.
. . . incidentally, Dave says (in this column written before mid-August 2008) that the Fed will leave interest rates at 2% until Q2 2009.
(a) My strong suspicion is that there won't be a pick-up (in housing, employment, or the general economy) by June 2009. Therefore, I find it extremely unlikely that the Fed will be RAISING interesting rates in 2009 at all . . . maybe not at all in 2010, either.
(b) If the Fed DOES leave interest rates alone for another 10 months (or more), it's reasonable to expect inflation to continue to bump up. Forget the much-ballyhooed mid-summer drop in commodities prices, at least for now; these prices can bounce up -- as fast or faster than they dropped . . . and to higher levels.
12 Aug, 2008
Remodeling Activity To Improve?
Headline: "
Remodeling Activity Expected to Show Improvement Starting in 2009."
EleBlog Take: NOPE. This is exactly the kind of crap we kept hearing last year and early in 2008 about the recovery "coming" in the housing market overall. The info needed to debunk the headline on this item is in its concluding paragraph, with the "him" referenced here being economist Kermit Baker:
Home price increases and declines also help him create remodeling
forecasts. Declining home values, for instance, offer "less incentive
for homeowners to undertake home improvement projects," Baker said.
"They're getting less return on their investment," so a lot of
households wait for prices to hit bottom before undertaking some of the
larger projects.
In other words:
When house prices stop falling, THEN, maybe, remodeling will pick up. Well -- the obvious question is: WHEN will house prices stop falling? Let's go to some thoughts from Bill Fleckenstein, who posted them
where I can link to them -- this being the relevant portion:
As for the potential of the
Fannie Mae (FNM, news, msgs) and
Freddie Mac (FRE, news, msgs) "bailout" bill to actually solve our housing problem, I thought I'd pass along a few nuggets from Joel Locker of
FBN Securities:
Even though folks are focused on foreclosure rates, rental vacancies
are just as material. As of the end of the second quarter, vacant
rental units stood at 10% (about 3.94 million units), up from the
43-year average of 7.16%.
That 2.84-percentage-point difference
equates to about 1.12 million excess rental units above the historic
mean, which prompts Locker to ask: "Why keep people in houses they can
barely afford without government (taxpayer) assistance when rental
units desperately need occupancy?"
He also points out that the overall housing vacancy rate climbed to
14.36% against a 43-year average high of 10.75%. (There are roughly 130
million total units, with 18.6 million vacant.) In order to get back to
the 10.75% mean, the U.S. would have to create about 4.7 million
households. To achieve equilibrium, we would need to create about 6.6
million jobs (assuming 1.4 jobs as creating a household) and not build
one additional housing unit.
Those are a few macro numbers to chew
on every time some uninformed source declares today to be the end of
our troubles. When we finally get to the end of the troubles, many of
these big numbers will have been worked through, and the psychology
will be much different than it is today. I'm not saying that I'll know
when that is exactly, but I'm very confident in saying we're nowhere
close yet.
You'll note that Bill isn't saying WHEN. But it's pretty clear the recovery -- in new housing construction, the sales prices of existing houses, and remodeling -- isn't happening any time in the next few YEARS.
09 Aug, 2008
Housing Still Hasn't Bottomed
Yeah, I know -- there's plenty of doom-and-gloom out there, who needs The EleBlog to ADD to that crap?
I'm not adding. I am pointing out that an eminent construction economist, Jim Haughey of Reed, has
something you should know. Here's the gist:
"How long will it take to eliminate the surplus of vacant homes?" he asks.
ANSWER: It is
" . . . a one or two year process but it does not begin until a little after
the end of job losses in the economy."
That's bad enough news as it is, but there's more:
"It may be an unusually long
process this time because of increasing evidence that lots of illegal
immigrants have left the country. Some illegal workers always leave in
tough economic times. But in the last year the economic self-deporters
have been joined by more people formally deported and by people who
left voluntarily when they lost hope of gaining legal status."
All of this (and more) appears beneath the heading,
Immigrant departures contribute to one million extra vacant homes for sale
21 Jul, 2008
While I was at the beach, I took the opportunity to read the daily paper (which I don't often do when working). Thanks to my location -- Bethany Beach, Del. -- I got a chance to vary my reading -- the Bawlmore Sun one day, the Philly Inquirer the next, the WSJ or the NY Times . . . even the New York papers (Post and News). I didn't read 'em all every day (I was on vacation!!!). But I varied it a bit.
By happenstance, then, I picked up the 7/9 NYT. The front-page, top-of-fold right-hand column headline: "Fed Sees Turmoil Persisting Deep Into Next Year."
1 -- hasn't the Fed been consistently wrong about just about EVERYTHING in its economic forecasts (hint: Answer is YES).
2 -- hasn't the Fed made a lot of questionable moves, if what it's doing is trying to help the economy -- i.e., bailing out the firms that employ financial bigwigs (you as a citizen should question whether bailing out every one of these filthy rich people is going to help the country at all).
3 -- given (1) and (2) . . .
-3a- . . . how can a reasonable person plan to do anything based on what the Fed says or doesn't say?
-3b- . . . given how wrong the Fed has been about EVERYTHING, is it reasonable to think it is WRONG about this, too? And if so . . . duya think they are wrong on the short time horizon (i.e., the "turmoil" is likely to end SOONER than "deep into" 2009 . . . or LATER (i.e., it will go "deep" into 2010 . . . or maybe 2011) . . .?
-3c- . . . while we're at it, for how long will what the Fed says and does (about anything and everything) be thought worthy of putting on the front page of the New York Times?
-3d- . . . and, when the day comes that the Fed falls in the forest and no one hears the sound -- what will that mean for the economic system of the United States of America?
13 Jul, 2008
Floyd Norris is a business columnist for the NY Times. He has a blog on the NYT site (I'm not sure you can see it, but
here's a link). His 7/9 post, apparently mailed in from his vacation, included this info -- I've boldfaced the words that SCREAMED out at me:
The inventory of new homes that have been completed and are available for sale is up 35 percent. In June 2006, there were 135,000 such homes. This May, the latest figure available, there were 182,000 such homes.
And the median age of those completed but unsold homes has gone up 136 percent over
that period, from 3.6 months to 8.5 months. That later figure is the
highest since the government started keeping that statistic. Some of
those homes are in subdivisions where foreclosures are already
climbing, and may be hard to unload at any price.
The actual number of completed but unsold new homes peaked in
January at 199,000 homes, and is now down 9 percent. Unfortunately,
sales of such homes are slower than ever, relative to the inventory.
May was the first month ever that sales of completed new
homes totalled less than 10 percent of the number of such homes that
had been available for sale at the beginning of the month.
Builders have largely stopped building, so the inventory must
eventually fall. But what is noteworthy is how slowly that process is
proceeding
EleBlog: If you read the mainstream media, and listen to blahblahblah from so-called experts, you might hear that we're at a bottom, near a bottom, things are gonna get better in 2009, etc. It's worth re-reading this portion of Norris's post -- and the sentence I bolded -- and let it sink in. While these experts have been opining on the bottom, we just (in May) set a record for incredibly low volatility on the home-buying front.
Is THAT the bottom? Maybe. But a chart of the "recovery" might (as some analysts have come to say) look like a Bathtub . . . which means, folks, we might end up spending a long, long, LONG time
on the bottom.
04 Jun, 2008
Financial Week, which is a publication I'm reading more and more (online), had a 5/22 item on what Bill Gross ("the bond king")
says about inflation measures by the U.S. government.
In his most recent investment letter, released
today, Mr. Gross compared inflation in 24 countries around the world,
which has averaged 7% over the last 10 years, with U.S. inflation,
which has averaged 4%.
“Sure, inflation was legitimately much
higher in selected hot spots such as Brazil and Vietnam in the late
’90s, and the U.S. productivity ‘miracle’ may have helped reduce ours a
touch compared to some of the rest, but the U.S. dollar over the same
period has declined by 30% against a currency basket of its major
competitors, which should have had an opposite effect, everything else
being equal,” he said.
EleBlog take: Government inflation numbers are misleading at best, totally wrong ALL THE TIME at worst. If John Williams at Shadow Government Statistics is right (and I think he might be), inflation is understated by maybe 3% (300 basis points).
That's tragic.
04 Jun, 2008
PCA = Portland Cement Association (www.cement.org).
Click here to download a 4-page PDF, of which just page 2 provides some insight, with a few choice words falling beneath this headline:
Brace Yourself: Recession Will Not Be Mild.
The thing dates from 4/30/08. Recent data (which show that if a recession is happening, things are pretty good) are NOT incorporated here.
Lots of savvy people (not me) watch cement consumption and use it as a leading indicator of how things are going in construction.
From the thing itself:
Unfortunately, the adverse influence of sub-prime resets and home foreclosures, along with job losses will worsen during the coming year – adding adverse momentum to the economy. While each of these factors were considered and weighed with relative accuracy in the fall recession report, each of these economic conditions has deteriorated beyond PCA expectations.
(More)
01 Jun, 2008
GDP Understatement + Pollution
You might not have read or heard me speak on the matter, but the UNDERstatement of inflation in our official government statistics is a BIG problem. Here's a practical reason that came up just last week:
The U.S. EPA says carbon dioxide emissions in the U.S. increased 1.6% in 2007. Compared with GDP growth (2.2% in '07), that sounds like we became efficient -- growing at 2.2% at a "cost" of "only" 1.6% more pollution.
But wait: GDP growth is arrived at by figuring "nominal" growth in the economy (everything, all in) and then SUBTRACTING INFLATION from that.
SO: If inflation is higher, GDP growth is lower.
I think inflation IS higher, and GDP growth is higher.Therefore, the EPA's note that GDP outgrew carbon dioxide emissions is WRONG. Here's a graph to go with it, from
this EPA site page:
29 May, 2008
Non-residential Falling, Still
Reed Construction Data's "construction starts" statistics for Jan-Apr 2008 show starts down 8.6% vs. the same period one year earlier (McGraw-Hill has non-res marginally up for the same time period). What's happening?
From Reed: "Four large markets experienced unusually weak starts in April: Warehouses, apartment buildings and condominiums, nursing homes, and miscellaneous civil projects."
From The Wall Street Journal (4/25): "A proposed $7B downtown Seattle project has become the latest major urban development to be scotched or delayed bcause of the credit crisis and a faltering ecoomy . . . the Seattle project joins other projects in New York, Phoenix, Atalnta, and Las Vegas that have been shelved, scaled back, or beset by financial problems in recent months."
From a 4/27 Baltimore Sun story headlined Project Stall -- "Mor ethan $1B in development projects -- offices, residences, stores, and hotels that would change Baltimore's skyline and help to revitalize the city -- have stalled in the face of the nationwide housing slump and faltering economy . . . at least 11 major projects have been recast or are in limbo."
None of this is permanent.
27 May, 2008
Paul Krugman is one of my favorite columnists. He's a liberal, an economist, and he can really write. There has been speculation, in writing (
not by me) that he could actually win a Nobel Prize for Economics AND a Pulitzer Prize (I am not kidding).
That would be impressive.
A lot of what Krugman writes makes sense to me. I don't always agree with him, of course -- but his thinking (expressed in 700 words twice a week) is always worth reading.
His 5/12 column was headlined "The Oil Nonbubble." His take: The recent run-up in oil prices is NOT the fault of speculators.
I don't know where you can point fingers on the oil price. Some say we should be poking holes in the earth, in Alaska and in the oceans. Others think we need to harvest switchgrass and turn it into ethanol. I could go on with all of the choices.
I spent this past weekend reading up on oil prices. I am a paid-up subscriber (there's a cost) to Oil & Gas Journal; I subscribed a few months ago to try to keep up with what's going on in the oil sector. Thanks to the 3-day weekend, I caught up on some reading.
SUMMARY: The folks who publish that august magazine do NOT think that current prices are justified by anything.
EleBlog take:
a. I am now a confirmed believer in Peak Oil (see www.theoildrum.com, and READ). That means we've already found all of the easy-to-find, easy-to-harvest crude in the earth, and what's left -- although NOT in short supply -- will be harder to get at, more expensive to harvest, and so forth.
As an example: Stories I've recently read about the "Tar Sands" in Canada say the process of turning that gooey stuff into gasoline or diesel takes ONE barrel of oil equivalent for every THREE barrels of oil produced. And: That does NOT include (I don't think) the cost of restoring the landscape to its previous condition.
If you believe as I do, you might come to the conclusion that the U.S. is better off leaving the oil (if there is any) that's in Alaska and off the contintent's coasts WHERE IT IS. We might need it later.
b. Speculators would have to be right out of their minds to allow oil to run up and NOT take profits. Today, oil correct down more than 2%. That's NOT the end of the world. It doesn't mean the oil bull market is over. It means that speculators MUST pause, from time to time, to take profits. There's no point in speculating without this, you know!
So perhaps you can interpret what happened today as "proof" that speculators are in control. If you follow markets (of any kind), you know that speculators usually end up crying. Sometimes, it takes time for this to happen.
c. Twice in a 5-month period, President George W. Bush has gone to Saudi Arabia to ask those people to boost oil output. I find this to be both stupid and humiliating. First, we here in the U.S. are capitalists: We should expect the Saudis, as merchants of a raw material, to act ONLY IN THEIR OWN INTEREST.
So we look stupid. It's humiliating for our president to go begging like this as well.
Additionally, it's possible that Matthew Simmons, author of Twilight In The Desert, is right. If he is, the Saudis KNOW they are sitting on a finite resource. IF that's true -- if Simmons is right, if the Saudis know they do not have "infinite" crude oil reserves -- textbook behavior by savvy merchants would be to MODERATE production as prices go up (i.e., NOT to increase it).
Right?
You want a steady cash flow from your resource (say it's X). When the price goes from $80 to $130 per barrel, you can stay at X cash flow only by REDUCING the amount of stuff you sell.
Right?
d. SOME FACTS TO CONSIDER
1 - From my reading, there are tankers full of "heavy" crude oil out there, on the seas, looking for buyers. Not every refinery can handle "heavy" crude . . . which would seem to mean, of course, that some enterprising SOB should be out there building a specialized refinery.
2 - Also from my reading, the "spread" between the price of crude oil and the price in the U.S. of gasoline has NARROWED. I follow this pretty closely, as I have some money (not much!) invested in VLO stock. According to something I read this weekend, if the spread were to return to where it has been in the past, gasoline would be up around $6.16/gallon.
. . . no, that's NOT a typo. $6.16.
3 - I bought that stock (Valero Energy = VLO) because I believe that all markets run to extremes, and then run back. Smarter people call this "reversion to the mean." In other words: Refining margins right now are NARROW. They won't always be. If you want to buy stock (or ETFs) that will go up with the price of oil, you can look into symbols USO or OIH.
But if you think gasoline prices might eventually go up, as that crude-gasoline spread WIDENS over time, the thing to do is buy the stock of a refiner when no one wants it. Which would be . . . now.
- - - - -
BOTTOM LINE: If it's speculation driving prices higher, SO BE IT. The speculators eventually will run
oil up too far (and it will correct $25/barrel in a day).
If it's
production being moderated by oil producers . . . well, so what? What would a reasonable customer group expect?
If it's a mismatch of what's being produced (an oversupply of "heavy" crude) and how Western refineries are equipped (i.e., they can best handle "light, sweet crude") . . . heck, that's fixable, given capital, know-how, and motivation.
If the U.S. wants to make itself immune from these crazy swings in oil prices in the future, the answer is NOT to poke more holes in the earth. Oil seeks a "market" price -- we won't get cheaper gasoline because we're harvesting crude off our coasts. WE DON'T GET CHEAPER GAS because of the 40% of our crude that comes from U.S. sources now; the U.S. crude is priced equal to the stuff we import from Venezuela or Saudi or wherever. THINK ABOUT IT. You can also check on this at www.eia.doe.gov.
No -- to make ourselves immune, we have to think outside of the freakin' box. That switchgrass idea -- it might be worth a think.
16 May, 2008
Some notes:
1. The price of gold ran up almost $40 in the past two days. Kitco.com charts for 5/14 show the spot-market close @ $863.00/oz. for gold. Today: $901.60.
2. The federal unemployment report for April was as bogus as many of us suspected. See the Reuters news item on
today's revelation from the Bureau of Labor Statistics.
3. Year-over-year growth in withholding taxes continues to decline. NOTE: THERE IS GROWTH. Read the chart carefully -- it shows growth these days in the 5% range, which isn't horrible. But look at the chart,
as presented here. It seems to tell a story of an economy in decline.
12 May, 2008
From a Wall Street Journal article (5/6) --
The Housing Crisis Is Over:
For starters, a bottom does not mean that prices are
about to return to the heady days of 2005. That probably won't happen
for another 15 years. It just means that the trend is no longer getting
worse, which is the critical factor.
Most people forget that the current housing bust is
nearly three years old. Home sales peaked in July 2005. New home sales
are down a staggering 63% from peak levels of 1.4 million. Housing
starts have fallen more than 50% and, adjusted for population growth,
are back to the trough levels of 1982.
EleBlog take: When the cockeyed optimists -- and I really DO want to stress the word "cockeyed" here -- note that we're not going to return to 2005 prices for 15 years, you might want to take a pass on bullish arguments until, maybe, 2012 or 2015.
12 May, 2008
Commercial: Price Correx 'Unavoidable'
I'm eyeing the commercial building market of late, for several reasons. Among them:
a. There's a significant amount of denial in this market right now -- like housing in late 2006 and early 2007.
b. This segment is doing a good job of keeping the construction industry busy, including (and specially) electrical contracting.
I just read an April issue
article from National Real Estate Investor,
A Price Correction Is Unavoidable, by a guy from the Brookings Institution. It's 1,135 words. I'm not sure this person is correct. Here'd a tiny piece of it -- from deep into the thing -- that woke me up:
How far will commercial property prices fall? No one can be sure,
but consider how much those prices rose from 1993 to 2006. If the net
income from a commercial property remained the same in dollars from
1993 to 2006, the prices of properties rose an average of 63.9% among
industrial properties and 78.3% among office properties.
Those figures are based solely on declines in
the cap rates typical of such properties, according to the National
Council of Real Estate Investment Fiduciaries. But if net operating
income rose by 20% during the same period, the price increases reached
96.7% and 113%, respectively. There is plenty of room for property
prices to decline and still leave owners financially well off, if they
owned the properties throughout that period.
01 May, 2008
I'm fortunate to have access to the Torto Wheaton website, where they post a real estate Think Piece weekly. TW is now owned by CB Richard Ellis, but they are still posting this stuff, free. I signed up once, a long time again, when Raymond Torto spoke to a conference and made this available.
For all I know, you can get in and register free. But I'm not sure that's possible.
ANYWAY,
How and When Can the U.S. Housing Market Recover? was the title of the 1/18/08 piece. The thoughts went into detail (with charts) on "duration" -- how long it takes to sell a house. Tentative conclusion of the writers (which included William C. Wheaton, Ph.D.): It's going to take a long time to clear the market, unless significant buying from some unforeseen source (i.e., foreign buyers?) comes to the fore.
The thing concluded as follows (I've bolded the key 5 words):
A final way that duration might be reduced would be if the
denominator—sales—were to increase. Most sales are driven by the
"lateral" moves of households, as they change jobs, family status, or
income. Economists call such mobility housing "churn", and generally it
rises a bit in good economic times and during strong housing markets.
Census surveys do show, however, that mobility is quite stable over the
long term. With all of the current concern about the economy and
housing market, a significant pick-up in sales seems unlikely.
All of this suggests that housing prices (and construction) will likely not begin
a recovery for at least three years.
Furthermore, if the five market
changes (above) that are needed for this recovery do not occur, then
prices will continue to fall until they do. That, after all, is the
nature of equilibrium economics!
28 Apr, 2008
Mortgages: Resets vs. Recasts
I'm not sure I completely grok the difference between a mortgage Reset and a mortgage Recast, but
Herb Greenberg seems to think it's important. And Herb ain't stupid.
Apparently, there's a lot more -- and perhaps a lot worse -- financial stuff to come. According to the guy Herb's quoting:
The
option arm loan was very popular through 1Q07 - so take 40 months from
that date, plus 3 months for them to go 90 days late and then and only
will you see foreclosures start to level off.
43 months from Jan-March 2007 takes us into mid- to late-2011. If this analysis is correct, we've got years of additional, worsening misery to go -- for a small subset of existing homeowners, for those who loaned them money, and perhaps for the U.S. as a whole.
22 Apr, 2008
The graphic says it all (I would hope). I found it in the weekly update from
Investment Postcards -- a web resource that provides a lengthy weekly investment update. It's not new, but it's new to me; I find it of value. And it's free!
18 Apr, 2008
Guy Explains Commodity Prices
Commodity prices are crazy high, some guy has written on
Seeking Alpha, because of the Federal Reserve Board's interest-rate cuts (and the prospect of more). You can click thru to see the whole piece (which has some pretty charts, and starts with the question Why Is Oil So Damn High?) -- but here's a key sentence:
Here's
a prediction for you. If the Fed surprises the markets by holding
steady at 2.25%, all those commodities will begin to crash within hours
of the news.
I'd fade that prediction. Big.
14 Apr, 2008
A 'Per Capita' Recession (?)
An interesting post to the Big Picture blog has had me thinking. It is about the contention (from a respected macro analyst at Merrill Lynch) that a "per capita" recession began in the 4th quarter of 2007.
Barry Ritzholtz of Big Picture quotes David Rosenberg, the chief economist at ML (note this underline is NOT clickable):
"We are amazed that everyone quibbles about whether real GDP growth
will be fractionally positive or negative this quarter. The population
is growing in a 1.0-1.5% band annually, so anything less than that on
real GDP means that real per capita income is contracting."
More here.
31 Mar, 2008
Oil: We're Not Finding It
Energy is THE major issue of our time. I keep hearing (from people who are smart) and reading (from folks who may well be respectable) that the problem is the Environmentalists. They won't let us drill for oil in Alaska. They won't let us drill off the coasts. Blahblahblah.
There are so many problems with this. But let's deal with a MAJOR problem: The oil companies aren't finding oil. Check out this graphic (which
comes from here):
One important fact: It would take more than a decade to drill in Alaska, if we started now. The total amount of oil we could harvest from new Alaska sources would be, literally, a drop in the bucket.
The Age Of Oil is NOT over.
But the era of cheap oil IS. Drilling in Alaska isn't going to change that; sinking wells off our coasts won't, either. It's time to pursue new solutions. They exist. We're just being stupid about them.
We don't have to remain stupid . . . do we?
30 Mar, 2008
Non-Res Construction To Get Sick?
I've not posted links to many of my recent TEDMAG.com columns here. This is a shameful lack of self-promotion! You can find links to all
recent stuff here.
However, a two-part series on Non-Residential construction, posted in early March, might be worth your time.
Part One talked about how
non-residential isn't immune.
Part Two provided further evidence, including specifics on niche markets.
10 Mar, 2008
Every weekend (as I've said before), I read the FREE "Credit Bubble Bulletin" -- written by Doug Noland, another guy I don't know personally. I'm promoting it here for this reasoin:
This past weekend's edition (3-07-08) was one of the most frightening things I've ever read.
The graphic below is the LEAST of it.
06 Mar, 2008
What's going to be the total damage of the mortgage finance bubble's collapse? Noriel Roubini -- an economist and sometime-talking-head -- has gotten a lot right in the past year-plus. While people were telling him he was too much of a pessimist, he kept right on calling things as he saw them . . . and he, as it turns out, was one of the few people to see things clearly.
He's penned a
February column here that goes into all of the interconnected crap that's going on. Here's the conclusion, which isn't X-rated, but certainly isn't for those with fragile constitutions:
There is thus a broader risk that many leveraged investors in both
equity and credit markets will be forced to sell illiquid assets in
illiquid markets, leading to a cascading fall in asset prices to below
their fundamental values. The ensuing losses will aggravate the
financial turmoil and economic contraction.
Indeed, adding up all these losses in financial markets, the sum
will hit a staggering $1 trillion. Tighter credit rationing will then
further hamper the ability of households and firms to borrow, spend,
invest, and sustain economic growth. The risk that a systemic financial
crisis will drive a more pronounced US and global recession has quickly
gone from being a theoretical possibility to becoming an increasingly
plausible scenario.
EleBlog Take:
1. Roubini has a blog at www.rgemonitor.com. You have to pay for many services there; I don't, but that's not reflective of my respective for this guy.
2. I am aware that many financial commentators, stock newsletter writers, and others sometimes call One Big Thing right, and then get everything else wrong for the rest of their careers. Robert Prechter is the exemplar of this. Perhaps Roubini will turn out to be a perma-bear and wrong about every single thing from 2008 on forward . . . but right now, we're in his sweet spot.
3. I can legitimately claim that I've been writing about the
mortgage finance bubble for years. On TEDMAG.com, you can find a (long) column which includes a reference to it -- dating back to 10/7/04. Yes, 2004! Click on the link above. Here's what you'll see:
When we had multiple bubbles, our national economic leader,
Greenspan, refused to acknowledge their existence; then he would not analyze
the extent to which things had gotten out of hand; finally, he refused to do
anything at all. The same thing is happening NOW with the mortgage finance bubble!
AND -- here's how I concluded that column:
To my way of thinking, the only open questions are:
1. Have we made things WORSE by hitting Bubble Consequences with everything? I think so. But that's a guess.
2. How bad could things get?
I don't know. But: See the graphic below. That other peak in total U.S.
Debt (governments, businesses, and private citizens) dates back to The Great
Depression. We've exceeded it now. It took a long time to get out from under
that sticky wicket.
3. When will Bubbles start hitting
us? I don't know, but the 2005-2006 time frame sure seems reasonable.
4. If I'm right, and Bubbles
starts clobbering us in the next 24 months, when will he get tired and stop?
That's the worst of all. The SOB is, judging by the last Great Depression,
indefatigable. It took World War II to get us out of the last one.
OK -- so I was a bit off on the timing. We started getting punished by the bubble NOT in 2005-2006, but in 2007.
(More)
03 Mar, 2008
Unemployment Data: Another Take
I am a big fan (as I believe I've said) of Herb Greenburg. Here's something from a 1/22/08 HG blog post -- Herb quoting correspondence from another Greenburg fan. I've truncated it here to the piece that matters to me:
The unemployment numbers lie.
Just because you still have a job doesn’t mean you are still making the same income.
How much has the income of closing attorneys, builders, appraisers,
home inspectors, title examiners, loan originators, lumber salesman,
misc supply salesman, various trade contractors etc dropped? They are
still employed earning 1/2 of what they earned last year if that lucky.
Those that are unemployed now don’t show up in statistics because most
were self employed or sub-contractors and therefore ineligible to apply
for unemployment.
The writer, it turns out, is an Atlanta home builder. Read Herb's blog/the guy's
post here.
EleBlog take: The words above are SO common-sensical, so logical, and so obvious that I am humiliated to have not thought it up months ago. And I'm also feeling a bit stupid about playing catch-up with a blog entry that's more than 40 days old!
27 Feb, 2008
Here's what Morgan Stanley's Richard Berner -- an economist, I think -- posted to the company's
Global Economic Forum on 2/19. I've taken the liberty of posting the whole comment, as (a) it backs up what I've been thinking and even posting here, and (b) hey, it might be an accurate outlook.
Recession is about to claim its next victim: Commercial construction. A downturn in such activity would represent a significant turnaround from last year’s boom: Although nonresidential or structures investment accounted for only 3.4% of (nominal) GDP, the 16% jump in real outlays contributed half a point to overall real GDP growth over the four quarters of 2007. Such a gain — the sharpest 4-quarter rise since 1984 — is unsustainable, and we think this economic asset is about to turn into a liability. Tighter financial conditions, uncertain tenancy, rents, and property values all will contribute to a downturn in office, retail and warehouse activity. Soaring construction costs are also a negative. Weakness is already showing: Nonresidential construction starts tumbled 13% from a year ago in January, according to Reed Construction Data.
Despite these hurdles, we think that the contraction in outlays will be shallow by historical comparison. The key factor limiting the downturn in traditional commercial construction is that the overall growth in supply for much of this expansion has been modest by historical standards. The “capital discipline” theme that governed corporate spending in this expansion partly extended to construction as well. For example, commercial construction excluding healthcare facilities rose by only 3.9% annualized over the past five years.
But discipline seems to have faded over the past year, when construction accelerated in virtually all categories, and with the slowdown in business activity, vacancy rates have begun to rise. There are clear pockets of excess in financial services office building and in retail and lodging. A slowdown in office employment and shakeouts in retail and wholesale activity may pressure rents just as lenders and investors tighten credit availability and raise its price. However, mining, power, and healthcare construction may buck the trend.
Because nonresidential construction includes a broad variety of structures, it’s important to distinguish among them to assess vulnerability. In my view, the commercial, lodging, manufacturing, and amusement areas, comprising 45% of total nonresidential outlays, are the most vulnerable to the forces described above. Commercial building proper — including offices, facilities for retailers, restaurants and warehouses — accounted for 28.8% of private nonresidential outlays last year, and hotels, amusements, and manufacturing consumed 7.6%, 2.4% and 6.1% of outlays, respectively. Two other categories were much bigger than these last three, and look much less vulnerable: Spending on power generation and communications structures represented 12.2%, while mining and exploration accounted for fully one-quarter of the total. Slower growth is likely; annualized gains in those two infrastructure components of 16.6% and 17.9% over the past two years are unsustainable. But given the needs, downturns seem unlikely. Religious, educational and farm spending made up the remainder.
The tightening in financial conditions for commercial real estate is manifest both in reduced availability and in higher cost of credit. Regarding availability, according to the Fed’s January Senior Loan Officer Opinion Survey of 56 domestic banks and 23 foreign-owned banking institutions, some 80% of domestic banks reported tightening their lending standards on commercial real estate loans over the past three months— the highest since the Fed introduced this question in 1990. Most banks in the latest survey said that they had required higher debt service coverage ratios and lower loan-to-value ratios on commercial real estate loans in 2007, and nearly half reduced the maximum loan sizes that they were willing to grant over the past twelve months. Further stark evidence of the evaporation of credit availability comes from the securitization market: Until last week, no commercial mortgage-backed securities (CMBS) had been issued so far this year —the longest such dry spell since October 1990.
Indeed, the CMBS market has been under intense pressure so far this year. Spreads for the highest-quality names at the top of the capital structure (AAA super senior securities) have widened by 100 bp or more to 225-240 bp over Libor just in the past month. The buyers’ strike in the CMBS market is understandable: Investors are afraid that a recession will trigger soaring delinquencies and defaults. Several years of rising property values convinced issuers to add leverage to their operations, and encouraged the rating agencies to maintain or boost ratings based on property values rather than the ability of cash flows to cover debt service. As a result, investors see CMBS as much more vulnerable to losses than in the past.
Beyond the tightening in financial conditions, the fundamental outlook is darkening for commercial construction. Tenancy, rents and property values all face a highly uncertain economic and financial backdrop. Office employment growth has decelerated over the past two years from 2.6% to 1.8%, and further declines seem likely. Retailing is clearly under pressure as consumers trim spending gains. And some large hotel chains are lowering their expectations for revenue per available room (REVPAR) this year. On the supply side, real outlays for office construction rose at an 18.6% annual rate over the past two years. In the fourth quarter alone, more than 19 million square feet of new office space came on the market according to Reis, Inc., the most since the fourth quarter of 2000. In 2008 Reis expects about 75 million square feet of new office space to come online in the 79 markets it tracks, up from 53 million square feet finished in 2007. Real construction spending for multi-merchandise shopping and lodging increased 10.3% and 53.7%, respectively, over the past 8 quarters.
The emerging imbalance between supply and demand is beginning to show up in rising vacancy rates. The national office vacancy rate rose to 12.6% in the fourth quarter — the first increase in four years. Some markets are still strong. Effective rents in Boston jumped 4.9% in the fourth quarter, and in New York City, they rose by 3.9%. But vacancy rates jumped by 1.9 percentage points in San Bernardino/Riverside, California; 1.7 pp in Orange County, Calif. and Fort Lauderdale; and 1.6 pp in Las Vegas. Smaller increases were evident in Salt Lake City, Tacoma, Austin, Hartford, Phoenix and the Maryland suburbs of Washington. Vacancy rates don’t yet reflect sublease space coming available as mortgage lenders go out of business. They will soon.
As if those imbalances weren’t enough, construction costs are soaring. True, the overall price index for nonresidential construction in the National Income and Product Accounts rose by just 5.1% last year following two years of double-digit gains. This deceleration may not last, as steel and copper prices are rising again. Domestic mills are hiking steel quotes, reflecting supply problems, increased exports, and limited imports. Copper futures jumped to $3.62 per pound last week, 20% higher than a month ago. The International Copper Study Group reports that global copper consumption rose 7.2% in the first 10 months of last year. Severe snowstorms in China might have disrupted copper production there. Rising energy costs, especially for diesel fuel, are also contributing to the surge in overall construction costs. Such price hikes are driving up costs and hurting builders’ budgets, and thus will be another hurdle to construction activity this year.
For investors in the CMBS market, the battering in values over the past two months must seem reminiscent of the subprime meltdown. CMBS spreads are now pricing in significant weakness in real estate fundamentals bordering on a record-setting collapse. We disagree with this outlook. Defaults will rise over the next two years, especially where leverage is excessive, but they aren’t likely to be as severe as in 1990. Thus, we think that the CMBS market is oversold, especially at the top of the capital structure. According to Ahsim Khan of Morgan Stanley’s CMBS trading unit, based on historical loss severities, virtually every loan in AAA super senior CMBS would have to default for the securities to default That seems highly unlikely.
Downside risks predominate for construction activity, reflecting the tightening in financial conditions. The uncertain economic and financial backdrop may mean that lenders will tighten further. But while the credit cycle is only beginning, and buyers should be selective, investors may look back on this episode as a reasonable buying opportunity in the highest-quality securities. That’s especially the case as the market forces discipline on developers by cutting new construction and thus supply.
27 Feb, 2008
What became apparent (to me, today) is that the future direction of the economy is going to depend on how average people "feel" as they get their rebate checks from the fedgov in the coming months.
I saw a couple of talking heads on CNBC this morning saying that the rebate checks would boost GDP. Maybe. It's hard to imagine $150 billion having a big impact in a $13 trillion economy. If 70% of GDP is in the consumer sector, then the consumer piece is $9 trillion.
Does $150 billion add up to a bigger percentage of $9 trillion than I think? It's 1.67%.
Let's forget math for a moment. I think the continuing (and worsening?) housing decline could completely override whatever "good feeling" $150 billion engenders. This
Reuters report -- on Economy.com data -- is positively frightening:
One-tenth of U.S. homeowners hold mortgages that are larger than the worth of their homes, Moody's Economy.com said on Friday.
Nearly 8.8 million homeowners, or 10.3 percent, are in over their heads, its chief economist, Mark Zandi, estimates.
As a result, millions of U.S. homeowners have the incentive to abandon their properties.
Now, add to that these facts:
a. As posted here earlier, Kasriel of Northern Trust computes that a 21.7% decline in housing prices is likely before the worst is over.
b. As of 12/31/07, we'd seen only 8% of that decline.
c. Add in this (from a
Marketwatch.com report)
"Ceaseless talk of a recession continues to dampen the mood of
consumers in general, whether or not a recession actually occurs. For
home buyers, we believe this drumbeat, coupled with concerns over
mortgages, the direction of home prices, and foreclosures, has kept
pent-up demand on the sidelines," said Robert I. Toll, chairman and
chief executive, in a statement.
EleBlog take: If Economy.com is correct (and I've previously said that Mark Zandi of that site is one of my favorite economists), and Kasriel is right, we could well be headed to a situation in which 15% or 20% of American homeowners -- perhaps 15 million families -- owe more on their mortgages than the houses in which they live are worth. People are not stupid. Handing someone in such a situation a check for $1,000 isn't going to materially improve his perception of his own situation.
. . . especially if his neighbor gets laid off (which might happen in a recession).
It's possible that many people getting these rebate things will -- FINALLY -- do something prudent, and either pay use them to pay off credit card debt, put money away for a rainy day, drop it into an account for the kid's future education, or pay down the debt on the car (a lot of people are "upside down" on their car loans, too).
While I am sure that these things are "the right thing to do" -- for smart people -- and I AM sure these things would be good (in the long term) for the economy, I don't think they help stave off a recession.
Of course, I could be wrong. Perhaps 85% of the foks who get the money will run out and spend it. That still seems like a drop in the bucket to me!
(More)
26 Feb, 2008
Paul Kasriel of Northern Trust is probably the one economist I follow most closely -- whether I agree with him or not. [I also follow Paul Krugman of the
New York Times closely -- but he's a liberal, and I typically agree with him].
Unfortunately, I don't get the chance to read Kasriel's stuff as it's posted to the web (
here) -- so right now I'm involved in catching up with stuff he (and others at his shop) have written going back to December.
His Dec. 17th "Econtrarian" column included the graphic and comments below:
To get some idea how much the price of your house might fall, consider the implications of how much the price of your house has risen relative to your income (Chart 8). Between 1980 and 2000, the price of your house averaged about 337% of your income.
Then, according to former Fed Chairman Greenspan, came the delayed effect of the fall of the Berlin Wall, and the price of your house soared to 469% of your income – a record high for the 1968 through 2006 period. Assuming, optimistically, that your income increases by 4.05% in 2007 and 2008, the rate at which your income increased in 2006, by what percentage would the price of your house have to fall from its 2006 level to get the price/income ratio back to 337% average in 2008?
The answer is 21.7%.
From 1968 through 2006, the median price of an existing home never fell on a year-to-year basis. So, we are in uncharted waters here.
EleBlog take: According to the economists I saw at the NAHB press conference on 2/13/08, housing prices were down (national average) about 8% in 2007. If Kasriel's figuring above is somehow related to reality, we're not yet halfway home.
22 Feb, 2008
A post on SeekingAlpha.com (a site on which I am increasingly relying, by the way) purports to look at "the next five years" of
Peak Oil developments. It offered two charts, of which the prettiest is below:
This chart is from Matthew Simmons, apparently. I've been a big fan of his ever since reading his (incredibly detailed) book --
Twilight In The Desert . . . which is about the realities of the future of oil production in Saudi Arabia (based on research, not mouthing off!).
From the SeekingAlpha.com piece's conclusion:
Simmons maintains that the difference between peak
oil believers and peak oil optimists is that the former focus on flow
rates and the latter on hydrocarbons in the ground. Industry people
tend to believe that there are plenty of hydrocarbons around and
increasing flow rates is a relatively straightforward matter of
applying sufficient capital to get the hydrocarbons into production and
that higher oil prices will do the trick.
The clear implications of the graph of IEA projected flows and the
actually less optimistic graph by Sadad Al-Husseini - neither of which
are thought of as peak oil adherents - is that there will be a serious
supply problem by 2011.
EleBog take: This is going to -- eventually -- accelerate the government's role in our lives (on the energy side, at least) . . . and electricity's role in transportation. Among other things, the likely end results (by 2015 or long before) will include:
1 -- government regulation of how existing buildings are run and how much energy they use. Right now, many cities are putting regulations into place requiring that newly constructed buildings be "Green" and featured reduced energy use (lower energy use per sq. ft.). But the opportunity to make an impact on this is in EXISTING buildings . . . I gave a presentation yesterday, for example, that said there are 5M existing buildings, of which only 10% have direct digital control of their HVAC systems.
2 -- I also see an incredible boom in PHEVs -- plug-in hybrid electric vehicles. This will enable people doing "in-town" driving to use electricity to power their cars.
There's more. We'll get to it over time. One thing is certain: If oil is $100 a barrel today -- which a quasi-recession going on in the U.S. -- we can't imagine what the price will be (given that the details in the SeekingAlpha.com piece becomes facts over time). $150 a barrel? $200 a barrel? What's your guess for 2012?
15 Feb, 2008
Three telling indicators:
- From
the 2/14 Wall
Street Journal --
The Port Authority of New
York and New
Jersey's interest rate jumped Tuesday to 20% from about
4.2% when bidders didn't show up at an auction of its securities by Goldman
Sachs Group Inc. For the next week at least -- until the rate is reset again
in the next auction -- the Port Authority, which oversees New York-area
transportation facilities such as bridges and tunnels, will have to pay close to
$390,000 in interest payments to holders of the securities. That is up from
$83,611 the week before, said a Port Authority spokesman.
I've since seen another story indicating that this auction-market problem is worsening.
- CMBS
Issuance in January = Zero
January appears to be the
first month without issuance under the current market format, or since the
Resolution Trust Corp stopped issuing CMBS in 1995, he said.
http://blog.retailtrafficmag.com/retail_traffic_court/2008/01/30/cmbs-issuance-for-january-000/
Note: CMBS = commercial mortgage-backed securities.
I'm a regular reader of
Retail Traffic magazine's electronic offerings. From my reading of the
commercial Real estate market, this
is scaring the crap out of some people. It should, right?
- Single-Family
Housing starts -- Drop of 55% from Peak to (Latest Forecast) Bottom....(????)
2004 actual:
1,604,000
2005 actual:
1,719,000
2006 actual:
1,474,000
2007 estimated: 1,040,000
2008 forecast:
769,000
Data – including estimate
+ forecast – from Natl. Assn. of Home Builders. Updated per David Seiders (chief
economist) handout at press conference 2/13/08 in Orlando at NAHB annual convention.
I would guess the 2007
estimate is pretty good. The forecast for this year calls for a 26% drop. If Seiders' forecast is
correct, the drop from peak (2005) to anticipated trough is
55%.
(More)
11 Feb, 2008
According to
wikipedia, the 5 steps in the Kubler-Ross model of the way that people deal with tragedy are:
- Denial: The initial stage: "It can't be happening."
- Anger: "Why me? It's not fair."
- Bargaining: "Just let me live to see my children graduate."
- Depression: "I'm so sad, why bother with anything?"
- Acceptance: "It's going to be OK.
I've detected a new trend in the past week on the economic front: We're moving out of Denial. Here's some of evidence (I've limited myself here):
A. An article in the
Houston Chronicle on experts pronouncing on the housing market. One of the two experts quoted is Robert Shiller -- a hero of mine. He's the guy who called the stock market insanely overvalued in 1999, just before the bubble popped. The article isn't that long, but you might not make it to the real gold . . . these two paragraphs from the very end of the thing:
Conversations with world leaders at the World Economic Forum in
Davos, Switzerland, last month convinced Shiller that officials are
more worried about the subprime fallout than they are letting on.
"In face-to-face conversations, they were expressing a lot more
doubts than you were seeing in the newspapers," Shiller said. "I think
it's instinctive for many people to want to show confidence, but I
heard a lot of worries."
B. Every week, I read Doug Nolan's
Credit Bubble Bulletin. Every week, without fail -- it's a weekend ritual. It a very long FREE Internet posting, consisting of news items Noland has clipped during the week -- ones that he thinks are particularly revealing. What follows that is analysis from Noland.
The column is new every week, and if you are reading this BEFORE 2/15,
this link will take you to the latest column (not the one to which I am referring). Instead, if you're late -- go to
the Archive and look for the first coluimn posted in February.
Noland has NOT been in denial. But this week's final paragraph was, to me -- as a regular reader (going back to 2000!) -- particularly revealing. I've highlighted the words that set off an atomic bomb in my brain, but you might do well to read the whole damn thing (by following one of the links). Note that I've divided the final paragraph a bit (to help readability) and that the boldfacing below is MINE.
Going forward, I expect a foundering leveraged speculating
community to be At The Heart of Deepening Monetary Disorder. The initial victims appear the fragile global
equities market Bubbles and the U.S. Corporate Credit market. Forced deleveraging of hedge fund corporate
debt and derivatives is in the process of creating a massive overhang of
securities to sell, in the process profoundly curtailing Credit Availability
and Marketplace Liquidity throughout.
The ramifications for our finance-based Bubble Economy are
momentous.
As an economic and financial
analyst (as opposed to “fear-monger”), I feel it is imperative to highlight
that it is more “technically” accurate to categorize the unfolding scenario in
the historical context of an economic “depression” rather than
“recession.” This is certainly not
shaping up as a short-term inventory-led economic adjustment or “mid-cycle”
slowdown.
Instead, we have now entered
the very initial stages of what will likely prove a deep, prolonged and arduous
adjustment to the underlying structure of our Credit and economic systems.
(More)
30 Jan, 2008
Jim Haughey, Ph.D., director of research & analystics and chief economist at Reed Construction Data, writes regularly. I recently got an electronic copy of the 6-page 1/08 RCD newsletter, Executive Insights - Construction Industry Update. There's a lot in here, but let me quote only what he says about office space:
"Weaker economic growth is already beginning to slow the growth in space needs. The still-booming office market will be slowed by layoffs to come in finance and real estate. Materials suppliers should be ready for more cancelled projects in 2008."
30 Jan, 2008
Yesterday's economic data -- a seriously good durable good report -- allayed (at least for a moment) fears of an economic slowdown. From Bloomberg.com:
1. "Copper jumped the most in three weeks . . . [it] dropped 1.6% last week on concern the U.S. will fall into a recession . . . copper futures for March delivery gained 10.95 cents, or 3.4%, to $3.299 a pound on the Comex."
As of this moment (6:15am Weds 1/30), a pound of copper is $3.269 bid.
2. From another 1/29 Bloomberg.com item:
"Aluminum rose the most in 11 months in London, and lead and zinc also climbed, as power cuts disrupted production in South Africa and China . . . aluminum for delivery in three months increased . . . 4%, to $2.612 a metric ton, as of 1:40 p.m. on the London Metal Change, the biggest jump since Feb. 13."
After hovering for what seemed like forever in the $1.06-$1.12 area, aluminum at this moment (spot market) is bid at $1.1898 per pound.
3. And even before yesterday's day, yesterday's Financial Times (the edition of 1/29) -- I'm a subscriber -- included this page 4 headline: "Asia coal prices hit high amid acute shortages . . . weekly prices for the regional benchmark Australia's Newcastle coal rose to a record high of $93.35 a tonne, up almost 75% in the past year . . . prices were above $100 a tonne yesterday [1/28]."
EleBlog take: Here's what all this MIGHT add up to:
A. Combined with inflation in food prices (leading to shortages and foot riots in many places around the globe), it's impossible to baldly say there is no inflation. There obviously IS inflation.
B. It's everywhere. And it's getting worse.
C. The U.S. government numbers on CPI and PPI are full of stuff.
D. KEY: In the midst of this, the Fed cut inflation rates 75 bps last week, and might do something almost as stupid today.
(More)
28 Jan, 2008
I was surprised to find on the front page of Sunday's
Washington Post (my local newspaper) a story, "Region's Builders Rein In Visions" -- about how "civic leaders and developers are scaling back ambitions and dramatically altering -- if not killing -- vast projects."
First, it's creditable to the
Post to run a local "business" story on its front page (altho one would expect it would be bad news).
Second, putting it on the front page itself is unusual. And the story jumps to a nearly full page of information and graphics, including a run down of nine major projects with a status report on each. It's 1,698 words, all told.
- - - - -
Third -- and this is not doubt the MOST relevant -- the Washington area has been a boom town. There are a number of reasons for that, but the main one is that the rest of the country sends its money here. Tax dollars, of course, are routed to the IRS here, and allocated by the Congress and the President. Thanks to the activities of the latter, lobbyists come here to tell Congress what to do (and money to pay the lobbyists comes here via associations and other means).
. . . so it's surprising to see Washington suffering from any national debacle.
- - - - -
The
Post keeps some of its stuff online free for a few days, then shuts it off behind a firewall. I'm not sure you'll find this online, even for free. Here are some telling slices:
And on Route 50 in Loudoun County, some civic leaders fear that economic turbulence will defer plans for turning the highway into an inviting gateway to their world, one lined with shops and cafes and offices.
"It's like a traffic accident with the rubber-necking -- everybody has slowed down," said Douglas Jemal, a developer who has postponed plans to build an office building across from the Washington Nationals' new stadium.
"You're taking a harder look before you go into the ground right now," said Jemal, among the leaders in the rebuilding of the District's downtown Seventh Street corridor. "Anyone who tells you different is lying."
And
A sampling of statistics tells part of the story. In the District, nearly 2,000 units of housing were slated for construction in 2007, roughly a third less than the previous year's total. In Prince George's County, developers sought 78 subdivision permits last year, while more than 500 plans were submitted in 2005.
Across the region, there were just over 20,000 residential building permits issued in 2007, about half the number issued in 2005 and the fewest since 1991, when 16,500 were granted, according to an analysis of U.S. Census figures by Stephen S. Fuller, a professor at George Mason University.
And
On the Web site for Manassas Park, city officials tout their community as Virginia's "newest city," though its downtown is defined by auto repair shops, warehouses and towing firms.
In
2005, Manassas Park officials and Clark Realty joined forces to change
the city's image. The centerpiece of their vision was 30 acres of
industrial terrain they hoped to turn into townhouses, condos, retail
and office buildings, all of it across from a train station. A new city
hall would anchor the site, which planners promised would draw
pedestrians and commuters to work, shop and play.
By last May,
the housing slump forced the developer to redraw the plan. Instead of
condos, there would be 274 apartments. Instead of stand-alone
commercial buildings, the offices and retail would sit beneath the
apartments.
City officials and the developer say they remain
committed to the development, though they said it will now take at
least two years longer. "We're deferring it because the market is not
there," said Jay Sotos, Clark's managing director.
12 Jan, 2008
One of the things that "gets" me about the current economic crisis, which stems from the housing market -- and, really, from the mortgage finance business -- is that They All Knew.
Who they? The housing people. The mortgage finance people. The economists. The home builders. The mortgage brokers. The banks. The realtors. Fannie Mae. Freddie Mac. ALL of them.
Is this starting to sound like a conspiracy theory? Well, it's not. There are facts.
In the past few weeks, I've been cleaning out my files . . . making room for more stuff, of course. It's an annual holiday-season effort. In doing this, I waded into a file cabinet drawer that consisted almost entirely of presentations from various economic forecasting conferences. There are 3 that I've tried to attend annually, held here in D.C. -- one sponsored by McGraw-Hill Construction, one by the National Association of Home Builders, and another by Reed Construction Data.
While sorting this stuff out (the discards get recycled) . . . I came across a handout from David Berson, vice president & chief econmist for Fannie Mae, from 10/30/02. Here's the title: "Housing Prices: Is There a Bubble" -- !!!
In other words: Even back at the end of 2002, people "inside" the mortgage finance business -- you can't get much deeper "inside" than Fannie Mae! -- were openly discussing whether or not there was a bubble in housing prices. Berson, of course, DENIED that there was a bubble in 2002.
I'm saving the bloody thing, as an artifact.
05 Dec, 2007
Common Sense: On the Attack!
I've noticed lately the raging of Common Sense in much of what's being discussed (at least) in the U.S.
Most obviously, there is the ongoing discussion of whether or not the U.S. government should bail out all of the people who did stupid things in the 2002-06 period in terms of buying houses, financing houses, packaging mortgages, and so forth. There are people who bit at 2/28 ARMs when they could have opted for 30-year mortgages; there are people who bought 3,200-sq.-ft. houses, when they could (and perhaps should) have gone for the 2,200-sq.-ft. versions.
Various and sundry people on the left and right are proposing a number of ways to help and bail out these people. Yet I am talking with people on the phone who agree with me (i.e., I could have done these things, I didn't, why should I have to pay -- via my government -- to bail out the morons?). In the past week, CNBC-TV raised this very issue and endured a firestorm of anger (from people like me) on a blog.
Other Common Sense stuff involves things like waste. I was reviewing an article about waste in an Asian city last night. It talked about how the city had been cleaned up with, among other things, a per-bag disposal fee. I can remember writing (and editing) articles about per-bag disposal fees in the 1980s, when I was Editor of Waste Age magazine. There's a huge amount of Common Sense in asking people to pay for how much garbage they dispose (I guess you'd have to make exceptions for those with big families -- like The Brady Bunch, or something).
With per-bag disposal, you pay only for the trash you create. This encourages: (a) recycling; (b) avoidance of waste; (c) creativity.
Along similar lines, I just read a short piece on FacilitiesNet -- "
linking design and maintenance." Some of what's in there is so OBVIOUS, the reaction I had was . . . "no kidding?" But it's another sign of the return of Common Sense (maybe?).
I'm not declaring the Victory of Common Sense -- for one thing, I don't believe it's going to happen. But it's encouraging to see it wage a counterattack, after so many years in which it's been . . . absent.
28 Nov, 2007
Industry Week posted a short-but-sweet item (dated 11/01) on the
hiring outlook for Q4. It seems optimistic. But the problem with this (and a lot of other business/economics reporting) is that there are NO comparisons in the thing. The article needed to put next to the Q4 07 expectations the following:
...what were the Q4 06 expectations?
...and how did that pan out (did the previous expectations result in actual hiring?)...???
02 Nov, 2007
I came across a thick PowerPoint from Jeffry H. Taylor, chief economist for the Associated Builders & Contractors -- Construction Industry & Economic Outlook 2007-2008.
Here's the problem: It's dated 7-11-07 -- before all of the fit hit the shan. I am certain Mr. Taylor has since revised his figures. However, here's what he has on the slide, Construction Spending Forecast 2008:
total spending to rise by 6%
non-residential buildings spending to rise by 8%
residential construction spending to increase by 5%
Taylor's presentation was made in the Carolinas. There's some data in the PPT on those states.
01 Nov, 2007
Stock Buybacks Aren't Working
A columnist at Index Universe asks: "Why are the companies doing these buybacks underperforming the market?"
Back in August, I wrote a column (posted here) about Home Depot’s big buyback, and the fact that it wasn’t working. As an investor, I generally think a buyback by a company is a bad sign.
01 Nov, 2007
Dollar's Fall to Continue
From
Industry Week comes this quote from MAPI, a manufacturers' group which emits quarterly forecasts of exports (among other things):
MAPI predicts that the dollar is in the
midst of an extended period of decline.Waldman writes that the dollar
will decline by 5% against the currencies of industrialized trading
partners during the fourth quarter of 2007. Following that, the dollar
is expected to fall by 5% during the first quarter of 2008 and by 3%
during the second and third quarters of 2008, but will remain flat in
the fourth quarter.
"As the dollar undergoes an extended period of depreciation,
trade will be an increasingly positive contributor to U.S. growth,"
Waldman said. "But, in the short term, the dollar's decline generates
inflation risks at home and economic growth risks for the economies of
key trading partners.
Down from here? For three more quarters before flattening out? Wow!
28 Oct, 2007
That's what Ambrose Evans-Pritchard -- a writer for a U.K. newspaper -- writes on his blog. Here's a slice:
Well, excuse me. The sky has fallen. The median price of US houses has crashed from a peak of $262,600 in March to $211,700 in September. This is an 18pc drop nationwide.
From what I've been able to determine, the $262,600 number is the peak median price of NEW homes. 18pc = 18%.
19 Oct, 2007
That's the title of a column I wrote -- posted this week to
TEDMAG.com.
16 Oct, 2007
Housing Recovery -- 2 to 3 Years?
While I've written here (numerous times) that the residential market doesn't generate the same amount of work for electrical contractors as nonresidential, Housing is important to the country. An article from Sunday's
Orange County Register (OC in California) -- coverage of a state realtors' convention -- provides
some startling perspectives.
1. Headline: "Housing recovery expected in 2 to 3 years."
That's painful. 2. As is always the case, when you dig into such an article, you get even-more-shocking stuff. Read these two paragraphs:
Jack Kyser, chief economist for the Los Angeles County Economic
Development Corp., was the most optimistic panelist, foreseeing a
recovery starting in early 2009, or just 14 or 15 months from now.
Richard
Green, the Oliver T. Carr Jr. Chair of Real Estate & Finance at
George Washington University, cautioned real estate agents that they
may need to wait longer. "Just try to hang on for three years," he said.
So the most optimistic person says "early 2009," and someone detached from the industry (an academic) -- who could easily be WRONG, but . . . -- says "three years." Yeek.
3. A reader comment at the article's foot notes: "Wow. If the realtors are this downbeat, imagine how bad it really is." You can't argue with that. Generally, realtors (as a group) paint a very optimistic picture -- all of the time. I would characterize it as UNrealistic (all of the time). So if the article (read the thing by clicking the link above) contains as much negative stuff, both from the convention's panel and from those in the audience . . . well, WOW. Things
must be pretty bad in Calfornia.
16 Oct, 2007
I enjoy reading the weekly newsletter
(and more) provided by John Mauldin. Here's something from his 10/5 piece that,
if yo uthink about it, makes one heck of a lot of sense . . . a kind of
"economic preview," if you will. The graphic below is from his article as well.
As these subprime mortgages hit their reset periods and the mortgage payment
goes up, many homeowners who were expecting to be able to refinance their homes
are not going to be able to, as the value of their homes will be below what
they owe on their current mortgages. In a lot of cases, they will not be able
to make the higher payment, which can rise by over a thousand month. They can
either simply put up with the higher payment if they are able, or walk away
from the mortgage. Not everyone will be in that predicament, but about 20% of
recent subprime borrowers are expected to end up in foreclosure.
Now, government officials say they want lenders to work with borrowers to come
up with ways to allow homeowners to keep their homes. In a rational world, a
lender is better off taking a 20% loss and keeping someone in the home than
losing 40%. The problem is, how does a distressed homeowner negotiate with the
CDO (Collateralized Debt Obligation) which owns their mortgage, which is in
turn owned by European institutions or the Chinese government?
The original mortgage bank, if it still exists, is simply servicing the loan.
More than likely, they even sold off the servicing of the loan, as that is not
a high-margin business. There are now 161 mortgage banks that are either
bankrupt or their lending ability is severely impaired.
Hundreds of thousands of homes are going to come back onto the market in the
form of foreclosures over the next year. Those of us who live in Texas
have seen this movie before.
What does all of this prove? The graphic shows the due-date of "resets" on various adjustable-rate mortgages, and the gross amount of mortgages that will be reset each month. This isn't a picture of the whole problem our economy has right now with debt . . . it's just a slice of the pie.
07 Oct, 2007
Is the credit crisis over? The rebound in the U.S. stock market might lead one to so believe. The frenzy over what was happening in August has come out of the newspaper articles and other reporting about this; even Jim Cramer is no longer hysterical.
But . . . maybe it's premature to celebrate. Someone named Satyajit Das has given at least one interview and written at least one public article worth your time. I don't know this person. I don't know if he is correct. But I think what he is saying is worth some thought. Here's what I'm talking about:
The Credit Crisis Could Be Just Beginning -- a 9/21 TheStreet.com article (1,517 words) based on an interview with Das. First, the article is by Jon Markman, a writer I've found to be reliable in his reporting. Second, in the article, Das said the credit crisis isn't in the first inning, nor the second inning (of a baseball game). He thinks "we're actually still in the middle of the national anthem," according to Markman. Wow!
Credit Crunch - The New Diet Snack for Financial Markets -- a 9/5 article by Das, it weighs in at 6,700 words -- and includes graphics, footnotes, and more. This is a tour de force, and it might take more than one read. It seems very worthwhile.
Das might be wrong. Strength of statement and volume of words doesn't make one right! The reason to look these articles over is simple . . . the answer you come to in your own mind to the question, "holey moley, what if this guy is right?"
01 Oct, 2007
Inflation: Disbelief Spreads
As close readers might remember, I penned a three-part column on TEDMAG recently, solely devoted to the topic of
Inflation. The columns ran 9/5, 9/12, and 9/19.
Now, there are smart people out there "following" my lead. Actually, it has nothing whatsoever to do with me! But check out this stuff:
[note: the Slate and Newsweek pieces were written by the same guy]
Bloomberg (opinion): CPI's Lie On Household
Inflation Doesn't Wash
[in the first piece, BR presents some info and then comes to this quick conclusion: "This means that the Fed is "inflating" at a rate
faster today than it did right after 9/11, or during the deflationary scare of 2003."]
(More)
28 Sep, 2007
Retail Real Estate: Price Drop?
Is the
credit crunch hurting things? Some people will tell you NO. Retail Traffic magazine seems to be thinking "maybe." Here's a slice of a 9/19 article:
Stephannie Mower, executive vice president with PM Realty Group, a
Houston-based real estate services firm, reports that this July the
firm experienced a 14 percent drop in sales activity across all asset
classes, the worst performance in five years.
She says many of her institutional clients are
purposefully staying away from acquisitions right now, not because they
don't have the cash, but because they figure that prices will soon
begin to drop on even the best quality assets. Across the board, they
expect to see a discount of 15 percent before year's end.
Troubles in the debt markets are crippling
leveraged buyers. Conduit lenders especially have stumbled, unable to
sell loans they originated at terms they used six months ago into a
secondary market suddenly squeamish about risk. From 2006 to August
2007, spreads to 10-year Treasuries on AA-rated fixed-rate CMBS loans,
for example, more than doubled, jumping 122 basis points in all to 211
basis points from 89 basis points in 2006, according to RBS Greenwich
Capital. Meanwhile, spreads on A-rated loans rose 162 basis points, to
261 basis points, and spreads on BBB-rated loans rose 262 basis points,
to 396 basis points.
25 Sep, 2007
One of the economic issues on which I waver is whether or
not the Federal Reserve Board matters. I think it does matter – at least when
it comes to the value of the U.S. dollar. On the other hand, the global economy
is so huge (and the U.S.
just a small part of it, really) . . . that it could lead on to believe that
the Fed Doesn’t Matter.
Weighing in on the “doesn’t matter” side of the scale a few
weeks ago was a respected commentator, John Hussman. Here’s a small piece of
his weekly market comment of 9/10/07:
Moreover, it's unclear exactly how
changes in the Federal Funds rate presumably cause changes in market interest
rates – statistically, market rates lead and Fed Funds typically follow. We can
of course argue that, well, the markets are anticipating the Fed. But why do we
really need so badly to believe that a government entity that influences an
overnight interest rate on a $41 billion pool of money (this is the entire
amount of U.S bank reserves) is actually in tight control of a $13.8 trillion
economy?
Think about it. The full range of
variation in the U.S.
monetary base (including both bank reserves and currency in circulation)
typically amounts to only about $50 billion annually. Over the past year,
foreign holdings of U.S.
government debt have increased by $300 billion – more than six times the
fluctuation in the monetary base, and over a hundred times the amount by which
U.S. bank reserves have changed.
It might seem that Fed must have
an effect because periods of easing are typically followed by subsequent
economic recovery, and periods of tightening are typically followed by economic
softness, albeit with a “long and variable lag.” But that's a lot like saying
the sun comes up because the rooster crows. The Fed generally only raises the Fed
Funds rate when the economy is near full capacity and continues until the
economy softens. It lowers the Fed Funds rate when the economy is already
weakening and continues until the economy recovers. The Fed is “effective” as
surely as economic softness follows strength and strength follows softness.
24 Sep, 2007
TEDMAG has recently posted a three-part series on Inflation. Boy, my timing could NOT have been better -- with the Fed cutting rates by 50 basis points, the euro nearing $1.41, oil bouncing up over $80/barrel, and gold surging to $730 and more. Here's where to find what I wrote:
Inflation: What It IsPart 2Where It's Going
19 Sep, 2007
INFLATION - Wheat, Oil, Etc.
Wheat has doubled in price in the past year. Last week, it hit an all-time record high in price -- $9 per bushel. According to a Washington Post (9/15) report, the Bureau of Labor Statistics shows food prices increased by 2.2% in 2006, but 4.2% in the 12 months ended 7/31/07.
Of course, the stock market bounced yesterday based on a Fed interest rate cut. But the price of gold soared to new 2007 highs -- and oil made an all-time high, too, above $82/barrel.
The gist: Inflation is here. It's everywhere. And it's likely to get worse, and eat away further at consumer pocketbooks and business operating expenses, before it gets better.
06 Sep, 2007
I recently re-read a Q-and-A to the Knowledge@Wharton website with Prof. Jeremy Siegel, who says stocks are a great investment. The EleBlog take on Prof. Siegel: He's been wrong, he's wrong now, and he's going to be wrong in the future. Here's a bit of the interview:
Knowledge@Wharton: Talking about burners, oil has
been quite inexpensive. The prices have come down to the 50s -- quite a
change from the prices that we had earlier last year. What's your
outlook on energy prices? And what do you think their impact will be on
the stock market?
Siegel: Yeah, in fact we saw it dip below $50, into
the 40s for a few seconds, last week. This is very good news for the
consumer. In fact, my feeling is that the lower oil prices are
sustaining the economy, in spite of the housing decline. We're going to
speak about that later.
Basically lower oil prices are almost like a tax cut. It increases
the disposable income of consumers; it is keeping consumer spending on
target. It is very important. It doesn't have to be in the 40s. I'd
like to see it stay in the 50s, and in the low 50s for the next six
months or eight months. That could keep the economy on track. Oil is
very, very important for the economy.
I note that the spot price of crude oil today is $75.67. If you take what Siegel says above and extend it, the net-net of prices running up from the $40s and $50 level when he was interviewed (the thing posted 1/24/07) on up to the mid-$70s today -- without a damaging hurricane hitting the oil belt -- is A Tax Increase.
Right?
06 Sep, 2007
How Inflation Spreads Its Wings
Thanks to a reading of an old issue of the weekly
Credit Bubble Bulletin, I stumbled across a 7/10 article in
The Wall Street Journal that demonstrates how inflation spreads from one market to another.
Government efforts to reduce U.S. reliance on imported oil are forcing up prices for another indispensable commodity: soap.
Soap and detergent makers say they are being hurt by a
double whammy of federal subsidies and mandates that has reduced the
supply and pushed up the costs of a key ingredient, beef tallow. The
steeply rising price of corn, driven by a federal requirement to use
more ethanol, has pushed up corn prices, making animal feed more
expensive and prompting farmers to blend the less-expensive tallow and
other fats into their feed.
The upshot: In the past year, beef-tallow prices have doubled.
(More)
03 Sep, 2007
Credit Crunch . . . ? ? ?
I've been reading a lot about the "credit crunch" and what's actually going on in markets -- and what might happen. I could provide dozens of links here. On SeekingAlpha.com, I found
Mortgage Originated Credit Curnch May Just Be Beginning. I read the thing, because -- after reading all of this stuff -- it's kind of how I feel. There's not "another shoe" yet to drop; there are hundreds of potential shoes. A lot could go wrong. Here is an important paragraph:
Now here is the key point. Under the new market structure today, fixed
interest fund managers are not in the mortgage lending business like
the banks were. They have no compelling business or other persuasive
reasons to remain in this market when the going gets tough. Cheap loans
from the discount window are irrelevant to them. They don’t have to buy
mortgages. They could just as soon hold treasuries. Envision what would
happen if most of the world’s big fixed interest fund managers suddenly
decide to go risk adverse, and sharply slow, or even stop purchasing
mortgage securities. The entire global mortgage market would seize up.
This would be a credit crunch of a higher order than has ever been seen.
That sounds like it's designed to panic the reader (especially that last line). But the whole paragraph sums things up (as far as it goes) pretty well. There is a lot else to say, but the key is this: What the Federal Reserve Board has done so far ain't much. What it can do in the near future -- i.e., cut interest rates sharply -- might not "work" to solve the problems (and is certain to create new ones).
Along these lines, you might want to read the following:
23 Aug, 2007
Three-plus weeks ago, I started a 3-part TEDMAG.com column on the housing market. The original idea was overtaken by events, and Part 3 ended up being more about the overall economy -- and an important choice that is in the process of being made -- than housing itself.
Part One --
Does Housing's Collapse Matter?Part Two --
What They're Saying -- quoting homebuilders, from the transcripts of recently analyst conference calls.
Part Three --
What's Going On Here? -- this part was supposed to look into the future of housing, but instead it ended up being about the government's choice (which will be made by the Federal Reserve Board) about our future. Are we going to take the pain that comes with a capitalist system? Or are we going to seek the easy way out -- and shape a future that's potentially a lot more painful?
20 Aug, 2007
From the
Washington Post, 8/17: "
Fannie Mae Predicts Price Decline Will Accelerate in '08." Some notes:
1. I think the
Post keeps links live + free for 2 weeks. So click through now to read the article, or forever hold your peace.
2. I've sat through presentations from a Fannie Mae economist on the housing market when it was in the "up" mode. I didn't think he knew what he was talking about then (he sure as heck didn't see THIS coming, I can tell you that). Therefore, I don't recommend this as reliable forecasting.
3. The specific prediction, as incorporated in the newspaper's lead:
"[FNM] predicted that housing prices
will decline by 2 percent on average this year and by 4 percent next
year as mortgage delinquencies rise, lenders tighten borrowing
standards and the volume of unsold homes approaches record levels."
4. Here's your self-applied Quiz for today: If The EleBlog thinks Fannie Mae is full of stuff, and it predicts housing prices will fall by 4% in 2008, by how much will they actually decline?
a. 0%.
b. 12%
c. 18%
d. 6%
. . . ? ? ?
13 Aug, 2007
Opinion: Copper & Markets
With all of the chaos in all of the markets of late, it's worth making a couple of points (most of which are slanted toward electrical readers of the EleBlog):
a. The stock market went UP last week. That's right,
it was up for the week. What's all of the hysteria about? Honestly, it makes one wonder. See
Paul Kedrosky's weekend reading for a revealing (all GREEN on the bottom line) table.
b. As of right now, the Dow Jones Industrial Average is within a few percentage points of its recent all-time high. Decline? Big freakin' whoop, right? The Standard & Poor's 500 had a recent closing high of 1,553 (7/19).
The S&P 500 stands now at 1,453. That's a dip of 100 points -- 6.44%. Big deal, right? So -- why is everyone so upset? I have an answer: The national financial picture is so fragile that people like Jim Cramer fear that the whole thing could fall apart.
And: They're right!
c. The conventional wisdom is almost always wrong. I heard a guy on ESPN say that if the Red Sox got Eric Gagne, it would be over (it, in this case, being the AL East pennant race in baseball). Hey --
it's not over; Gagne blew two games this past weekend agains the Orioles (each seemed to be "in the bag" for the Sox) . . .
and the Yankees keep on coming. Similarly, folks in the financial markets (including government officials and ex-gov bigwhigs) keep saying "the housing market has bottomed." Well, it hasn't; not yet, and perhaps not until 2009.
Finally, with a big injection of cash, the central banks of the world have acted to prevent a freezing-up of the financial markets. Lots of people think that it [it being the market chaos] is over. Perhaps. But perhaps not. If the gyrations and declines are NOT over, we might well see the central banks combining to inject more and more money. At some point, however, they'll have to stand aside -- once it's been proven to them that the cash injections are NOT working, and in fact are hurting. Stay tuned!
------
d. Copper's price closed today above $3.55/pound. Considering all of the insanity, and the possibility that the U.S. (at least) has entered a recession (at least!) . . . that is amazing. See the
Kitco Base Metals page here; it has the current copper spot price (top left) and selected (Dec '07 and Sept. '08) futures prices.
e. Some folks access information better if it's presented graphically, rather than numerically. Here's another Kitco page, which contains
charts for copper -- from 24 hours to 5 years.
f. Finally, the commodity folks trade copper futures. For reasons at which I can't guess, the furthest-out copper future is 24 months. You can see recent/current prices for
copper futures on this Yahoo page. Note that, as of the 7/25 close, the January '09 copper futures were gong for $3.096.
13 Aug, 2007
Understanding The Credit Picture
You probably don't understand what's going on in the world's markets right now. I actually DO -- the result of several years of subscribing to, and reading, the biweekly newsletter, Grant's Interest Rate Observer. The newsletter goes for $740/year. Is it worth it? I understand what a CDO is, and I have a pretty good idea what a "CDO squared" is.
Am I lording it over you? Hell, no. There's a blog post online, from Barry Ritholtz, that helps. If you have time, print the thing out, including the comments. Read the comments. I've been spending a lot of time reading Ritholtz's blog lately, and I've found that the comments are generally helpful (and that mostly there's not a lot of tit-for-tat crap between posters).
Here's the link to
Understand Credit's Alphabet Soup.
I've become inordinately fond of Ritzholtz of late. He's appearing on Larry Kudlow's TV show on CNBC. Despite the fact that I think Kudlow is an idiot, I have watched the show sometimes when Ritholtz is scheduled; he makes sense. I also enjoy and recommend the
weekly Linkfest B.R. posts to TheStreet.com -- it's a compilation of topical links (some of which go to his blog) from the week previous.
02 Aug, 2007
Opinion: Home Depot Buyback
As an investor, I am generally AGAINST stock buy-backs by companies. Home Depot is planning to engage in a massive stock buy-back. Despite the fact that the company has designated a price range of $39 to $44 per share for its repurchases, HD stock is trading BELOW the low end of the range (it closed yesterday at $37.77, and -- in yesterday's trading -- made a new recent low of $36.55.
I've posted an opinion piece about the HD buyback -- which is more about
philosophy about buy-backs in general. Click on that link to download the 5-page PDF.
(More)
21 Jul, 2007
Doug Noland, who writes "The Credit Bubble Bulletin" each week at
www.prudentbear.com, put an astounding note into one of his recent columns.
"To get some perspective on potential income gains, let's assume a $2.0 trillion (or so) industry -- [he's talking here about the hedge fund industry] -- enjoys returns of 10%.
"With the industry standard 20% incentive payouts, hedge fund manages would enjoy a $40 billion windfall -- $2.0 trillion x 10% = $200 billion x 20% = $40 billion."
Wowser!
15 Jun, 2007
A recent column on TEDMAG.com (by yours truly)
calls into question a lot of government data, and the value of same.
The 6/7
weekly commentary on the site of Comstock Partners -- a group of folks who are bearish right now -- includes this:
The employment market, too, is weaker than it seems on first glance. Even
the dubious figures supplied in the establishment payroll report show a
year-over-year jobs increase of only 1.4%, a number usually preceding
economic recessions. In the first five months of the year average monthly jobs rose by only 132,000, compared to 201,000 in 2006. In addition the increase of 157,000 jobs in May showed construction jobs virtually unchanged. However, the BLS birth/death adjustment added a mythical 40,000 construction jobs to achieve that figure. Given the condition of the housing industry, we find that hard to believe.
No, the folks at Comstock aren't agreeing with me. They added fuel to the fire.
30 May, 2007
Housing: Going In Circles
It's reasonable to suspect (as I do) that the statistical apparatus of the U.S. government AND private industry (including the financial folks), combined, can't get a good handle on what's actually happening in the housing market. I ran across this, from a person I've never previously read: "Message to Fed: Housing is Falling Much Faster Than Reported."
See the piece -
CLICK HERE. The writer asks: If the Mortgage Bankers Association's measure of the # of people filling out loan applications to buy a home is down 18% from its peak (which came in 9/05) -- how the F can sales have fallen by LESS than 18%?
OK -- I added the F.
Here's a datapoint: The S&P/Case-Shiller U.S. National Home price Index showed a 1.4% drop in the first quarter. Boy, that doesn't seem like much. See the Associated Press report -
CLICK HERE.
CLICK HERE to see a release from Pulte Homes, which is reducing its workforce by 16%. That's not bad, but according to a news write-up (
HERE)
, Pulte had already shaved its workforce by 25%. That means, compared to the peak, the company's headcount is at about 62%.
Maybe it will take a long time to unwind the house market. And maybe the process of unwinding won't be enjoyable to watch. Further, perhaps there will be damage to parts of the economy that as yet aren't paying attention to And still: I suspect that I will end up paying for the stupidity of lenders and borrowers, as I'll be taxed to pay for the U.S. government bail-out of people and institutions that (in my opinion) KNEW BETTER!
16 May, 2007
Infrastructure Investment - Elsewhere
I'm a subscriber to
Grant's Interest Rate Observer. You've probably seen Jim Grant, the editor, on TV from time to time, or read his stuff (he's a contributor to
Forbes, among other things). The NL has twice-yearly investment conferences, with speakers that (generally speaking) embrace the bearish point-of-view. The 5/4 newsletter issue included write-ups of some of what the speakers said at the spring event.
Included in there is the opinion of Bruce Flatt, CEO of Brookfield Asset Management. He says: "We think there's $35 trillion of new infrastructure to be funded in the next 25 years." According to the write-up: "Of the $35 trillion penciled in for investment in the next quarter-century, he said, just $11 trillion is destined for the 'developed' world, the rest for China, India, and other such nations on the move."
Assuming Flatt knows something, that's $14 trillion in infrastructure construction and equipment purchases in the next 25 years in developing nations. That averages out to $560 billion/year.
22 Apr, 2007
I can reasonably be accused of being "bearish" on the economy. To avoid a long story: It's true -- and I'm right.
However, even if you disagree with me, you probably have not stumbled across two recent facts that are hard to explain if everything is so damn hunky-dory:
1. Tax receipts in California "completely bombed" in March.
CLICK HERE to see the Wall Street Examiner blog.
2. Inflation is confined to the rest of the world, according to us here in the U.S. See especially the Bill King "sardonic" comment appended at the end of this short item.
CLICK HEREGo 'splain those things.
17 Apr, 2007
Why Interest Rates Are Low
Let's pretend you are the kind of guy who can borrow $1 million in Japanese yen.
1. You borrow 119 million yen (the exchange rate is now 119 yen = $1). At an interest rate of a hair over 1.5%/year, you have to pay back 123 million yen in two years.
2. You convert the borrowed funds into $1 million via a moneychanger.
3. With leverage, that enables you to buy $10 million of government securities (i.e, you "borrow" $9 million). There are actually higher levels of leverage available in the bond market, but let's stick with 90% leverage for the sake of discussion.
3. You use the funds to buy $10 million worth of 2-year Treasure notes, yielding 4.7%.
4. You hold on to the notes for 2 years, and collect (roughly) $940,000.
5. Bad news: The yen declines in the 2-year period to 110 to the dollar.
6. The notes come due. You close the transaction (instead of rolling it over).
7. Your account is credited with $1 million that you initially posted (now returned by the government), plus $940,000 interest.
7. You need to pay back the 123 million yen. But the exchange rate is now 110 yen = $1. So you have to convert $1.118 million into yen to repay the Japanese loan,
8. After paying back the yen loan, you still have $822,000 (or thereabouts) in your account.
9. That's your profit -- $822,000. Perhaps in real life it is somewhat less, for there are transaction costs all along the way; but if you're able to trade in such large amounts, the transaction costs probably are minimal.
If you wonder why our interest rates do not take inflation into account, THIS is the reason. For the people involved in this trade, the "real" rate of inflation -- which bothers me, at the very least -- is not relevant.
= = = = =
Further: You can manipulate the math, change the assumptions, and fool around with these numbers. But it takes an unreal increase in the yen-dollar exchange rate to make this trade a loser. For example, were the yen to fall to 83 yen = $1, it would take almost $1.49 million to pay back the original loan in yen. But (*assuming all of my math is correct*) . . . you're still making money here. If the dollar's value vs. the yen tumbles by 30% (a fall from 119 to 83 yen), you STILL make roughly $450,000 on the trade outlined above!
For all intents and purposes, it is "risk-free."
Nothing, of course, is entirely free of risk. The "hazard" here is that the Japanese money market will become more expensive. But that doesn't affect the money you've already borrowed (unless you got the $ from the Japanese lender at an adjustable rate -- which seems dumb). It might affect your ability to roll the money over, and borrow more and more -- at some future date.
But that's then. For right now, if you are able to borrow money denominated in yen, you should do it. And the people who are able to do it . . . apparently are doing it. And buying U.S. government securities.
Conclusion: For the foreseeable future, U.S. interest rates will have little or nothing to do with inflation. Unless there's something really BIG wrong with my math.
(More)
17 Apr, 2007
In the three months ended 3/31, inflation in the U.S. -- at a seasonally adjusted annual rate (INCLUDING food + energy) -- rose by 4.7%. That's the true inflation rate.
Right now, the 10-year bond (according to Yahoo! Finance) is yielding 4.7%. In essence, there is NO yield premium to inflation. Your yield on the 10-year is zero. Short-term rates are also around 4.7%, so if you give your money over to the USG . . . you're settling for ZERO return.
In other words: You've got to be an idiot to invest in U.S. Treasury notes or bonds, unless you think a major economic downturn is coming (and therefore bonds will increase in price, as their yields decline).
Here are some selections from today's Inflation report form the Bureau of Labor Statistics:
- "for the first three months of 2007, consumer prices increased at a SAAR of 4.7%. That compared with an increase of 2.5% for all of 2006."
- "the index for food at home, which increased 1.1% in February, rose 0.4% in March." Note that March's one-month rate averages out to nearly 5% over a year.
- "medical care costs rose 0.1% in March and are 4.0% higher than a year ago." I find this a bit hard to believe, don't you?
- The CPI for Urban Wage Earners and Clerical Workers increased 0.8% in March. Unadjusted, for the 12 months ended 3/07, the all-item rate (excluding nothing) was 2.7%. Unadjusted, the 3-month Urban/Clerical rate (compounded to present it as an annual rate) for Jan-Feb-March was 5.2%.
To summarize:
1. The inflation rate over the past three months, influenced by higher energy and food costs, increased by 4.7% or 5.2%, depending on how you want to look at it. The "core rate" increase of 2.3% should be disregarded by those who have brains.
2. Some components of the CPI are clearly understated. I could get into an explanation of the "hedonic adjustments" in these figures, and in GDP, but let's just take a look at the idea that medical care costs have increased by only 4.0% in the 12 months to 3/31, laugh heartily, and come to a collective guess that REAL inflation is higher than 5% on an annualized basis right now.
3. You've got to be out of your mind -- or have some really special financial situation (as in, be able to borrow in yen at 1.5%) -- to consider investing in U.S. Treasury securities that boast of yields roughly equal to the official inflation rate (and below the REAL inflation rate).
16 Apr, 2007
Fed Prediction: Right So Far
If you trouble to read the Predictions column (from 12/6/06 --
CLICK HERE), you'll see the #1 prediction, which reads as follows:
1. The Federal
Reserve Board will find it impossible to do anything in 2007, unless it summons
up its collective courage to raise rates a notch or two.
The business media have been a-buzz about how soon the Fed
will cut rates, and how many times – and when it will start. But my
understanding of economics tells me that the Fed is in a box.
If it lowers rates, the U.S. economy will be further
punished by a decline in the value of the dollar. A series of interest rate
cuts might well do the dollar in . . . by which I mean it could send the
dollar’s value plummeting to previously unimaginable low cross-valuations.
If it raises rates, the economy could tank. Yet a raise is
actually more likely! Why? As you’ve
read here previously, the skyrocketing prices of aluminum, copper, gold, oil,
silver, tin, zinc (etc.) are more about plummeting U.S. dollar valuations than
anything else.
The Fed might be forced to raise rates . . . to keep
inflation at bay.
It's not December 31, 2007, so this prognostication is not yet "right" -- and it might not prove out. Yet a number of economists, commentators, and CNBC talking heads who had predicted rate cuts have now come over to the point of view delineated above. Essentially, the Fed is in a box, as I wrote above.
Of course, I'm happy to be right about anything, and I'm aware that one rate cut will invalidate the crystal-ball-gazing above. However, what really makes me smile is the fact that the analysis above is based on my view of the economic world (as influenced by the various analysts and commentators that I read -- folks outside of the mainstream).
There are economic developments and results that flow form that economic view. I've invested so as to take advantage of them on down the road. That's the real reason I'm happy to be "right" . . . so far, anyway.
10 Apr, 2007
Inventory & Construction's Prospects
Most economists -- almost all of them, in fact -- are relentlessly Positive about the economy's future. I don't remember all that many calling for a decline in late 1999 and early 2000 (Robert Schiller is the notable exception). This is especially true, I've found, when the economist in question is employed by a company that sells advertising (i.e., a publishing co.).
So I was surprised to find this headline today when I cruised over to check out the latest from Jim Haughey, economist for Reed: "Factory Inventory Surpluses Are A Threat To 2008 Construction Volume."
CLICK HERE to see it. Here's just a slice of Haughey's analysis:
The serious consequence for construction is that the business attitude
toward investment has soured. This is ominous for space and facility
needs later this year and in 2008. Manufacturers and their distributors
see their own inventory surplus problems as more serious in the context
of housing demand and oil price problems that threaten to further trim
demand for their products and worsen their inventory problems.
Incidentally, if you're wondering how to pronounce Jim's name, it's "Hoy." I verified that in person when I met him last fall.
10 Apr, 2007
If you journey over to the Base Metals section of www.kitco.com -- specifically, to the "historical" copper price charts,
CLICK HERE -- you'll see that the price of a pound of copper is up roughly ONE DOLLAR in the past 60 days, from about $2.40/lb. to roughly $3.40/lb. today.
That's a monster move -- more than 40%.
Here's the best part, for me: I told you so.
CLICK HERE To see a Jan. 24 column -- written back when commodity market analysts were writing off copper. It posted to TEDMAG.com, and the headline is "Copper's Fall Isn't About . . . Copper."
And right here on The EleBlog -- on Feb. 23 -- I wrote that "Copper Isn't A Dead Cat."
CLICK HERE.
I'm no economist or commodity market player. My frame of reference dictates my "outlook" -- and it's simple to understand: The U.S. dollar is as weak as a kitten (weaker, maybe).
How that's different from the folks who (so far) are -- again -- wrong, wrong, wrong on copper: If your viewpoint is strictly U.S.-based, the huge rise in copper prices makes no sense . . . isn't the housing market drying up?, they'll ask. Well, sure. But that doesn't matter!
If you understand that the driving force for copper consumption -- and the buying and use of one heck of a lot else -- is coming from Asia, you can comprehend how copper can be up a buck in two months. And you also can get some insight into why the price is up: China has pegged its currency to the dollar, and the dollar is weak/weaker than a kitten. Thus a demand increase doesn't have to be huge to drive the price through the ceiling.
. . . which leads me to the "something else to worry about" category . . .
If you think about it for a second, you can see that sooner or later -- assuming the boom there continues -- the Chinese are going to become interested in decoupling their currency from the dollar. Right now, they are paying roughly 26.3 yuan for a pound of copper. If their currency really IS 40% undervalued, they could be paying as little as 15.8 yuan for the same pound of the stuff!
So . . . what do you think might happen over here if and when that decoupling really does happen?
27 Mar, 2007
As part of my various writing jobs, every week I print and read This Week In Petroleum, a free newsletter from the Energy Information Administration (unit, Dept. of Energy). It is often informative, and often boring.
In the March 21 edition, the lead item provides an interesting look at the difference between EIGHT grades of crude oil, and the $-per-barrel prices changes in each. If you wonder what the difference between WTI (West Texas Intermediate) and "Brent" -- and what comes out of places like Dubia, the North Slope of Alaska, and Nigeria -- you might find this interesting reading.
Click here.
27 Mar, 2007
Attention is sometimes focused on The Yen Carry Trade. I believe we'll pay a lot more attention to that in the coming years, as it "unwinds." But if you want to think about such things, first you have to understand what you are talking about. A piece in the Global Money Trends newsletter provides a concise, understandable (I think) -- and simplified -- look:
The “yen carry” trade is primarily a simple game of interest rate
arbitrage.
Step 1: Borrow yen at 0.5% and convert the yen into $9,000
US dollars.
Step 2: With $9,000 from Japan and $1,000 of your own
money, invest $10,000 in US Treasury notes at 5.00%.
Step 3: Collect
$500 in interest from the US Treasury, and pay $45 to the Japanese
lender.
Step 4: Pocket the $455 difference as a profit, for a rate of
return of 45.5% on your original $1,000.
Step 5: Sell the US Treasury
note, and convert the US dollars back into Japanese yen to pay off your
loan.
You can find the piece from which this is taken by clicking here.
18 Jan, 2007
Inflation: Highest Since '01
On page 2 of today's release on the Consumer Price Index from the Bureau of Labor Statistics, there is a table summing up 12-month changes in various inflation indicators for the years 1999 to 2006.
I'm not sure the major media will report this, but the figure for inflation for "all items less food and energy" for 2006 was 2.6%. Here are the figures for this subindex for the years reported:
1999 -- 1.9%
2000 -- 2.7%
2001 -- 2.6%
2002 -- 1.9%
2003 -- 1.1%
2004 -- 2.2%
2005 -- 2.2%
2006 -- 2.6%
I have serious quibbles with these numbers. I think REAL inflation is significantly higher. For example, the cost of housing is supposedly up by 27% from 1998 to 2006. That's so stupid I can't find the words to curse it. And housing makes up 23% of CPI when BLS calcualtes it!
The medical care line on that page-2 table shows higher numbers for each year (than does housing or overall inflation). But still, the increase from 1998 to 2006 is less than 39%. I don't closely monitor medical costs, but I am willing to bet YOUR medical care costs (holding things like your family's illnesses, etc. constant) have gone up by more than 39% since calendar 1998.
There are other problems in these numbers. I'm going to skip over them, but they exist. I believe REAL inflation is more like 5%.
However, the bottom line is this: Even the "less food and energy" number, supposedly "core" inflation, is running at its highest rate in a while. Given the accuracy of any calculation suchas this, the 2.6% number for 2006 might well be the HIGHEST figure (yes, even higher than the 2.7% of 2000) on that short list above.
REMEMBER: CPI calculations aren't precise. This is an ESTIMATE based on a world of variables, and so 0.1 percentage points over a seven-year period is not significant.
At the very least, we can say that the BLS estimate of inflation in 2006 is bumping up near the top of what we've experienced lately -- and that's without food and energy added in. I don't think this is a good sign. If the Federal Reserve Board finds a way to cut interest rates in this environment, they need to be sent to a re-education camp.
My forecast is slower growth (perhaps much slower) with higher inflation, in 2007 . . . getting worse (on both counts) in 2008. Yes, that sure is gloomy. But better face reality than shy away from what's really happening only to get run over by it!
To see the BLS 12/06 CPI report yourself, download the 24-page PDF by
clicking here.
05 Jan, 2007
As the new year turns, trade magazines and other business news sources reliably will run two types of stories:
a. A look back at the old year.
b. A forecast for the new year.
I enjoy (a) -- and put more credence in such stories -- in preference to (b). No one really knows what's going to happen, but there should be little dispute about what DID happen.
ThomasNet's "Industrial Market Trends" online publication has a piece, "Manufacturing's Mark on 2006," which brings to light facts and figures on how well U.S. manufacturing -- which many people believe is dead -- did in 2006. For example, didjaknow that manufacturing productivity rose 6.7% in Q3/2006?
See the piece (don't ignore the links at the bottom)
here.
05 Jan, 2007
Nonresidential construction growth will continue this year, accoridng to Jim Haughey, the economist at Reed Construction Data. His article goes segment-by-segment; two tables provide numbers (for 2007) and a look at construction of auditoriums, fire stations, gymnasiums, and libraries in major cities. Yes, the selection of those 4 submarkets DOES seem weird.
Find the piece here.
05 Jan, 2007
The Manufacturers Alliance/MAPI claims "the world's economy appears to have netered the early stages of a slowdown" in an outlook that covers Q4/2006 to Q4/2008.
Find the release here.
01 Nov, 2006
Economy Worse Than You Think
"The Big Picture," an econo-blog, has a great post on how weak the economy actually IS. For one thing, the recent GDP report -- you know, the Q3 estimate that put growth at a 1.6% annual rate in the quarter -- OVERstated growth significantly.
Read the post here.
30 Sep, 2006
Lots of folks are starting to get louder about their suspicions about U.S. inflation data – and how they understate the case. I have been saying, for some time, that they understate the case dramatically. I am not the only one, and I can’t claim to be leading this charge . . . I read people like Bill Fleckenstein and John Williams (Shadow Government Statistics is his site).
However, some folks are starting to catch up.
From the construction industry, there’s “Government Inflation Statistics Don’t Reflect Reality” – the 9/25 editorial in Engineering News-Record (online here, if it’s still available free). In the conclusion, ENR combined the ridiculously understated consumer price index numbers with the coming worker shortage:
“And the most startling changes may yet be coming. Construction craft and other project labor has been a sleeping giant for much of the past decade. But that giant is stirring, and for good reason. Because the real cost of living in the U.S. is not reflected by the CPI, employers that rely on it as a measure are in for trouble.
“When it comes time for workers to assess compensation in relation to the demand for their skills and how much it really costs to live, decisions will reflect reality, not a statistic. Some employers already are in shock and many more will be in the future.”
You perhaps have not heard of Caroline Baum, but you know about the Bloomberg financial service and Bloomberg.com. Baum writes a bond-market column, available free online, 3x/week. Her 9/15 offering: “ U.S. Inflation Measure May Be Rotten at the Core” (click here to see it). Here’s a bit from Baum:
“Let's go to the video tape. The consumer price index was running at about 2 percent year-over-year during the deflation scare in the middle of 2003. Crude oil prices were hovering near $30 a barrel.
“Three years later, with crude oil prices hitting a record $78.40 in July, the CPI was rising 4.1 percent. In all that time, the price of something else should have fallen to offset the higher oil prices. The fact that it didn't means our friendly central bank was accommodating the oil-price increase, printing enough money to prevent that from happening.
“For the record, the core inflation rate has almost doubled to 2.7 percent in July from 1.5 percent three years earlier."
Additionally, a guy named Martin Weiss calls the number-manipulating in D.C. “the greatest scam of all time” (follow this link). Here’s a piece of his contention:
“Almost every number coming out of Washington has been thoroughly massaged and greatly distorted, almost always with a bias toward sweeping the dirt under the carpet and sugarcoating the truth.
“This is not a conspiracy. It just happens naturally. But that doesn't diminish the potential impact on your money. It's easily the greatest scam of all time.”
And then there’s Barry Ritholtz, a guy I am reading more and more of these days. He calls his blog “The Big Picture” – and here’s something out of a recent entry, “What Is Wealth II” (see the whole thing here):
“Let's all agree on two things: First, Human progress is inevitable, with each generation benefiting from improvements in medical are, technology, etc.; Second, there is a systemic bias built into the government reporting machinery that understates the declining purchasing power of the US dollar.
“The more the Fed prints, the less its worth -- that's basic law of supply and demand at work. That's something I would hope ‘one of the country’s leading macroeconomists’ would understand.”
It’s been “Case Closed” for me on REAL inflation for a long time. Fleckenstein, who is my investing guru, considers all government data to be humorous! I’m glad to now see more attention paid to this by people closer to the mainstream.
Consider: It’s not what you make, it’s what you keep – and the value of that! No matter how much you save, or how successfully you invest (unless your Buffet or Soros), your wealth and earnings BOTH lose value due to inflation. Think about it.
24 Sep, 2006
'The Slowdown Is Deepening'
That's what David Seiders, chief economist for the Natl. Assn. of Home Builders, writes in his latest column (he puts two of them online each month). He's normally been a fairly optimistic guy; but then again, times have been good for housing for a very long time . . . see Seiders' comments here.
For historical data on housing starts in the U.S., go here. Early in the 1990s, the 1.5 million starts/year level seemed great . . . we haven't been that low for 8 years.
22 Sep, 2006
You've probably seen it or heard it somewhere -- there's a debate on whether the fall in housing is minor or a collapse, and whether the "soft" or "hard" landing will have an impact on the broader economy. One of the free economic/market opinions I read regularly is a short weekly brief from Comstock Partners, Inc.
These guys are bearish. Summarizing quickly, they don't think the market fall of 2000-2002 went far enough. They think there's more to come.
On 9/14, the headline on their weekly piece was "The Hard Landing For Housing Is Already Here." They gathered up the facts and presented them as bullet points. You can read it by clicking here.
The bullet that got to me: "10% of all home owners have no equity in their homes." If that's true (and I assume it is -- these guys aren't stupid) -- that's 10% of ALL homeowners across the U.S., not 10% of last year's buyers.
That's frightening.
(More)
06 Sep, 2006
One of the economists that I "follow" -- which means read religiously, as his stuff is free -- is Paul Kasriel of Northern Trust. You'll see Kasriel quoted quite frequently, in a lot of places. A main reason I read Kasriel is that I don't always agree with him.
I saved his July 18 commentary, headlined: "Homebuilding and Retailing Stock Indices Speak Volumes."
In it, Kasriel displayed charts of the Philadelphia Stock Exchange Housing Sector Index and the S&P Retailing Index. The document, including the charts, can be found here(page down to click on the July 18 link, which will get you a PDF).
If you're not going to look, I can sum up how the charts look:
- Housing Sector Index -- sick.
- Retailing Index -- sicker.
After yesterday's stock-market decline (albeit a minor one), I went back this morning to check on the health of these indices. Here's the performance:
Housing Sector Index -- 190.88 when Kasriel charted it; now 199.46.
You can track the HGX on Yahoo! Finance, here: http://finance.yahoo.com/q?s=%5EHGX
Retailing Index -- 412.82 when Kasriel said it was "speaking volumes" -- now, 437.60
The S&P Retailing Index is here on Yahoo!: http://finance.yahoo.com/q?s=%5ERLX
I'm not a "technical analyst" of the stock markets (or commodities, for that matter). It's possible that all that's happened here is that these awful-performing indices have "bounced off of their lows."
But for the record, the Housing index is up 4.5% since the 7/17 date Kasriel grabb
