Common Sense Forecaster

2011-02-27T10:22:00.002-07:00

Nomura Thinks the Price of Oil could Hit $220. What Do You Think?

Nomura's commodity team said oil prices risk vaulting to uncharted highs over coming weeks if chaos hits Algeria as well, reducing global spare capacity to the wafer-thin margins seen just before the first Gulf War.

On Wednesday, Brent crude rose more than 5pc to almost $112 a barrel, threatening levels that could derail the global economy. It closed at $111.25.

"We could see $220 a barrel should both Libya and Algeria halt oil production. We could be underestimating this as speculative activiites were largely not present in 1990-1991," said Michael Lo, the bank's oil strategist.

The warning came as Italy's ENI announced a suspension of supplies through Libya's gas pipeline, and a string of foreign companies evacuated staff and shut production. Libya holds Africa's biggest oil reserves and produces 1.6m barrels a day (b/d), mostly for export to Europe.

The German driller Winthershall halted its 100,000 b/d production in Libya, while ENI stopped at a string of sites, vastly reducing its flow of 550,000 b/d. A number of producers have declared "force majeure".

Barclays Capital said 1m b/d of Libyan output is "shut in", with the other 0.6m at risk. While Saudi Arabia can step in by raising output, this takes time and its oil is not a substitute for Libya's "sweet crude".

The escalating crisis set off further falls on global bourses. Wall Street was down 1pc in early trading and the FTSE 100 fell 1.2pc. The Dow has shed more than 300 points over the past three days to 12,075.

Nomura said a shut-down in both Libya and Algeria would cut global supply by 2.9m b/d and reduce OPEC spare capacity to 2.1m b/d, comparable with levels at the onset of the Gulf War and worse than during the 2008 spike, when prices hit $147.

Both price shocks preceeded – or triggered – a recession in Europe and the US. Fatih Birol, chief economist for the International Energy Agency, said the latest price rise had already become a "serious risk" for the fragile economies of the OECD bloc.

Some analysts fear the underlying picture is worse that officially recognised, doubting Saudi claims of ample spare capacity. A Wikileaks cable cited comments by a geologist for the Saudi oil giant Aramco that the kingdom's reserves had been overstated by 40pc. A second cable cited US diplomats asking whether the Saudis "any longer have the power to drive prices down for a prolonged period".

Nomura's report, which does not examine the catastrophic scenario of a full-blown Gulf crisis, said past oil shocks have shown a three-stage pattern, with a final blow-off in prices in the final phase. The current crisis is at stage one.

Surging oil prices create a nasty dilemma for central banks since they are inflationary if caused by robust global growth, but deflationary if caused by a supply crunch that acts as a tax on consuming nations. The big oil exporters tend to save extra revenues from price spikes at first, so the initial effect is to drain global demand.

The current picture contains elements of both, with an added twist of liquidity created by the US Federal Reserve that is leaking into the global system and playing havoc with commodity pricing.

US Treasury Secretary Tim Geithner said on Wednesday that the world economy is stong enough to "handle" the oil shock, insisting that central banks "have a lot of experience in managing these things".

The European Central Bank (ECB) responded to the oil spike in July 2008 by raising rates even though Germany and Italy were in recession by then. Nout Wellink, the ECB's Dutch governor, said this had been a policy error.

Circumstances are different this time yet also murky. ECB chief Jean-Claude Trichet signalled last month that the bank will "look through" the short-term price hump, but ECB rhetoric has since turned more hawkish. Fed doves will undoubtedly give more weight to the deflationary risks.

Jeremy Leggett, a leader of the UK industry task force on peak oil and energy security, said the Mid-East crisis "shows the extreme fragility of the global system. People don't realise how close we are to a potential precipice if this unrest reaches critical mass in enough OPEC countries. Governments need to draw up emergency plans and get cracking on proactive measures while we still have time," he said.

Charles Robertson at Renaissance Capital said the real concern nagging investors is what will happen in Saudi Arabia's oil-rich Eastern Province, the home of the kingdom's restless Shi'ite minority. The Saudis produce 11.6pc of world output, but a much higher share of exports.

"There is potential for serious tension, and not just among the Shia. High unemployment and the youth bulge means unrest could be country-wide. If Saudi Arabia or Iran are engulfed, we have a serious problem."

On Wednesday Saudi King Abdullah unveiled $11bn of welfare projects for his people.

2011-02-27T10:07:00.002-07:00

Q4 2010 Growth of the US Economy Reduced Due to Decline in Government Spending

From the BBC:

The US Department of Commerce has unexpectedly cut its estimate of fourth-quarter growth to an annualised 2.8%, from 3.2% previously.

Analysts had instead expected the figure to be revised up slightly to 3.3%.

Lower government spending than previously estimated was the main reason for the downward revision.

Economic growth for the whole of 2010 was also revised down slightly, from 2.9% to 2.8%.

As well as lower state and local government spending during the final three months of last year, consumer spending grew at a slower rate than previously estimated.

The latest figure for final-quarter growth is the second estimate - the figure will be revised again next month.

Revised figures also released on Friday showed that the UK economy shrank by 0.6% in the fourth quarter compared with the original estimate of a 0.5% contraction.

By way of comparison, on a non-annualised basis, the US growth figures were revised from 0.8% to 0.7%.

“Start Quote

Household spending accounts for about 70% of all spending in the US - even more than the UK - and international trade may not be able to fill the gap”

Robert GardnerChief economist, Nationwide

Despite the downward revision, US economic growth still picked up in the final quarter, as growth in the previous quarter was 2.6%.

A rise in consumer spending contributed to the growth, as did falling imports, rising exports and a rise in commercial real estate.

There are widespread concerns in the US that economic growth is not strong enough to bring down the high unemployment rate, which currently stands at 9%.

Earlier this month, Federal Reserve Chairman Ben Bernanke estimated it would take about 10 years for the unemployment rate to fall to a more sustainable 5%-6% at current economic growth rates.

The latest GDP revision figures could raise questions about future growth, analysts said, given the government's plans to cut spending in order to bring down the country's large budget deficit.

President Obama has outlined plans to cut $1.1tn (£620bn) from the deficit over the next 10 years.

The deficit - the amount by which government expenditure exceeds its income in any given year, expressed as a percentage of GDP - currently stands at 9%.

2011-02-24T05:54:00.003-07:00

26% of Home Sales in 2010 were Foreclosures

Just some interesting facts to keep in the back of your head. Just in case you were under the illusion that housing was turning around. From CNNMOney.com

Home prices are down but sales are up, somewhat contradictory trends.

Home prices fell nearly 6% during the six months ended Dec. 31, sending values to their lowest levels in the post-bubble period, S&P/Case-Shiller reported on Tuesday. On Wednesday, the National Association of Realtors reported that sales of existing homes rose for the third straight month.

"At least it's not a double whammy where both sales and prices are dropping," said Stuart Hoffman, chief economist for PNC Financial Services Group. "Deals are getting done."

That's because 26% of all homes sold last year were foreclosures and short sales, according to a RealtyTrac report released on Thursday. That's down slightly from 2009, but a jump compared to 2008.

Homes already foreclosed on and repossessed by banks, called REOs (real estate owned), sold for an average of 36% less than normal sales, RealtyTrac reported. Meanwhile, the discount for homes sold while they were still in the foreclosure process (short sales) was 15%.

"It's like the post-holiday sales at Macy's where they're trying to clear out unwanted inventory," said Anthony Sanders, a real estate professor at George Mason University.

Nevada had the highest percentage of distressed sales of any state at 57%. That was, however, less than 2009, when 67% of sales there were foreclosures. In Arizona, 49% of sales were distressed properties; in California, 44%; and in Florida, 36%.

Foreclosed properties sold for the biggest discount -- 50% off -- in New Jersey.

These homes have attracted bargain hunters, including individuals or groups looking to buy and hold properties, according to Hoffman. They hope to buy at such a good price that they can rent out the properties and make a profit.

"These folks are cash investors who are going in and offering very low bids," he said.

NAR reported that all-cash sales went up to 32% of the total, up from 26% a year earlier. It estimated the percentage of investor purchases hit 23%, up from 17% a year ago.

"Unprecedented levels of all-cash purchases -- primarily of distressed homes sold at deep discounts -- undoubtedly pulls the median price downward," said NAR president, Ron Phipps.

These investment opportunities are not going away. Nearly 30% of mortgage borrowers are underwater on their loans, owing more than their homes are worth, according to Stan Humphries, chief economist for Zillow, the real estate web site.

These owners are very vulnerable to foreclosure so the number of distressed properties that will go on sale only the next year or two will probably remained high.

2011-02-23T13:48:00.002-07:00

Home Prices Expected to Take Another Hit

Home prices took another hit in Q4 2010 and they are expected to decline another 10% - 25% depending on the location. This should not come as a big surprise. Without the tax credits for new buyers, the slow unwinding of Fannie and Freddie, and continued high unemployment there is very little demand for homes. Most people I speak to expect this to remain the same for at least the remainder of the decade. This process simplifies the home buying decision. A house no longer has any investment value, it is now purely a cash flow issue. Is it cheaper to rent or buy? Forget about the tax consequences. Only about 30% of homeowners are able to take the interest and tax deductions on tax forms. Besides those deductions could be going away in the inevitable changes in the tax code. So what is the value of owning your own home? Given the risk of further declines, I don't know. From CNNMoney:

Home prices took a big hit at the end of 2010, even as the rest of the economy gained steam.

National home prices fell 4.1% during the last three months of 2010, compared with 12 months earlier, according to the latest report from the S&P/Case-Shiller home price index, a closely watched indicator of market trends. They were down 1.9% compared with three months earlier.

"Despite improvements in the overall economy, housing continues to drift lower and weaker," said David Blitzer, spokesman for S&P.

And things may get a lot worse, said Robert Shiller, a Yale economist and half of the Case-Shiller team, in a web conference after the report's release.

"There's a substantial risk of home prices falling another 15%, 20% or 25% more," he said.

Shiller cited a few reasons for his bearish stance. The government is expected to reduce the presence of Fannie Mae and Freddie Mac in the housing market. These agencies currently provide loan guarantees for about two-thirds of mortgages. If they fade away, private mortgage money will have to fill the gap and the cost of mortgage borrowing will surely rise. That will hurt home prices.

There's also talk of possibly ending the mortgage interest tax deduction for many homeowners. Meanwhile, the weak economic recovery may be threatened by higher oil prices as a result of turmoil in the Mideast.

At the web conference, Shiller's index partner Karl Case wasn't much more optimistic.

"I see [the market] bouncing along the bottom with a slight negative trend," said Case, an economics professor emeritus at Wellesley College.

A widespread drop

On a seasonally adjusted basis, the national index surpassed the low it hit in the first quarter of 2009.

The decline was widespread, with 18 of the 20 large cities covered by a separate S&P/Case-Shiller index recording losses for the year. The only gains were posted by Washington, which was up 4.1%, and San Diego, which saw prices climb 1.7%.

The biggest loser for the year was Detroit, where prices dropped 9.1%.

"We're really close to being at the bottom again," said S&P's Maureen Maitland. "Last year's gains came courtesy of the tax incentives and the market is not holding up on its own."

The impact of homebuyer tax credits ended back last spring, and the two quarters of data since then reflect that. Prices fell steeply during the third quarter, down 3.3%. When the credit was in effect, prices rose consistently, up four out of five quarters starting in the second quarter of 2009.

S&P reported that both the company's 10- and 20-city indexes also fell month over month. In three cities, Detroit, Cleveland and Las Vegas, home prices have dropped below their January 2000 levels -- yes, you'd have to go back to the past millennium to find lower prices there.

Eleven markets, including New York and Chicago, have reached their lowest levels since home prices peaked in 2006 and 2007.

The losses were not unexpected, according to Brad Hunter, chief economist for Metrostudy, a housing market research firm.

"It's clear now that, going back to last fall, the apparent strength was a false strength," he said. "Now that the tax credits are gone, we're back to where the training wheels are off, to normal consumer demand."

He expects home prices to decline gradually throughout 2011, with markets picking up only when hiring increases substantially.

2011-02-22T04:05:00.002-07:00

The Average US Consumer Has Been Under Stress for 10 Quarters

I found the following site at nakedcapitalism.com while reading a article a friend of mine sent me. The index is interesting because it shows some of the stresses in the US economy, namely at the consumer level. The article indicates that in spite of all the rosy talk in the media about a recovery there are still parts of the economy that are really struggling. From CredAbility:

CredAbility, one of the leading nonprofit credit counseling and education agencies in the United States, today released the CredAbility Consumer Distress Index results for the 2010 fourth quarter. The Index, a quarterly measure that tracks the financial condition of the average US household, found that rising stock prices helped propel growth in consumers’ net worth. But lower scores in three of the index’s other four categories -- employment, housing and household budget – drove down the overall index. The health of household budgets declined each quarter in 2010 and is at the lowest level since the first quarter of 2009.

For the quarter ended December 31, 2010, American households scored a 64.3 on the Index’s 100-point scale, down slightly from 64.4 in the third quarter of 2010. For all of 2010, the index showed a small improvement, moving up from a score of 63.9 in 2009’s fourth quarter.

A score below 70 indicates a state of financial distress. The average US consumer has been in financial distress for 10 consecutive quarters, according to the Index. The last time the index was above 70 was in the second quarter of 2008.

According to the index, the 10 states ranked as the most financially distressed account for nearly 33 percent of the nation’s Gross Domestic Product. These states include California and Nevada in the West; Michigan and Indiana in the Midwest and Florida, Georgia, Alabama, North Carolina, South Carolina and Mississippi in the Southeast.

While US Gross Domestic Product (GDP) increased 3.2 percent in 2010’s fourth quarter, the CredAbility Consumer Distress Index indicates that the increased economic activity has not yet helped many Americans.

“The increase in the GDP in the fourth quarter and 2010 has not yet translated into improved financial health for many average American families,” said Mark Cole, CredAbility’s chief operating officer and the executive responsible for the CredAbility Consumer Distress Index.

“Improved stock prices have increased the value of 401(k) and other investment accounts in the average US household, but high unemployment continues to stifle income growth, causing many homeowners to miss mortgage payments,” Cole said. “While an increase in consumer spending helped the economy in the fourth quarter, the index showed that an increasing number of people failed to prudently manage their household budgets. This lack of savings could cause financial problems if they need to rely on their savings in the future.”

Based on the index’s data, Cole said that a tale of two different American families is developing in America. “The family with one or two stable jobs is seeing their investments grow again and is beginning to spend more of their household income,” he said. “But families that have lost a job or seen other income sources reduced, and who don’t have enough income to invest, have experienced increased financial distress.

“Unfortunately, millions of families are in the second category. In 2010, approximately 14.8 million people ended the year unemployed, more than 1 million families lost homes to foreclosure and 43.6 million Americans used food stamps to buy groceries.”

For the second straight quarter, Michigan posted the worst score on the Index with a 58.83. To see a detailed explanation of how the Index works and a national map, go to www.CredAbility.org/ConsumerDistressIndex. A link to the Index will also be posted on the CredAbility Twitter account, which can be found at http://twitter.com/CredAbility.

Other highlights from the fourth quarter index include:

Seven states, led by North Dakota (79.35) and South Dakota (76.94), scored above the distress threshold of 70 points. Others were Nebraska (74.84), Wyoming (74.09), New Hampshire (72.3), Vermont (71.3) and Iowa (70.05).
Seven more states and the District of Columbia are within two points of moving out of financial distress. These states are Massachusetts, Minnesota, Montana, Virginia, Utah, Connecticut and Colorado.
Among the most distressed states, Nevada moved from No. 6 to No. 3 and Florida moved from No. 7 to No. 5. For the first time in 2010, North Carolina moved into the top 10 most distressed states at No. 9.
Some states’ level of distress improved during the past quarter. Indiana, which had ranked as the No. 5 most distressed, is now No. 7. Ohio, which had ranked No. 8, is now No. 11.

Fourth quarter Index data by state:

	Q4 2010	Q3 2010	Q2 2010	Q1 2010	Q4 2009
National	64.32%	64.40%	65.23%	65.04%	63.96%

States
Michigan	58.83%	58.11%	61.01%	60.69%	60.47%
Mississippi	59.24%	58.76%	60.62%	60.57%	60.69%
Nevada	59.27%	60.71%	59.23%	59.16%	59.56%
Alabama	60.03%	60.23%	61.89%	61.60%	61.46%
Florida	60.21%	60.81%	61.01%	60.70%	60.48%
South Carolina	60.56%	60.10%	61.29%	60.63%	60.09%
Indiana	61.16%	60.68%	62.61%	62.27%	61.74%
Georgia	61.26%	61.24%	61.37%	61.24%	61.13%
North Carolina	61.38%	61.66%	62.28%	62.11%	61.53%
California	61.39%	61.31%	61.71%	61.36%	61.29%
Ohio	61.41%	60.83%	63.06%	62.60%	62.18%
Tennessee	61.53%	61.54%	62.26%	61.72%	60.97%
Kentucky	61.63%	61.72%	63.38%	62.83%	62.03%
Rhode Island	62.29%	62.57%	63.70%	63.33%	63.20%
Missouri	62.78%	62.43%	64.62%	64.37%	63.97%
West Virginia	63.76%	63.22%	64.50%	64.11%	63.39%
Arkansas	63.79%	63.94%	65.73%	65.24%	64.54%
Illinois	63.79%	63.01%	64.66%	64.45%	64.43%
Arizona	63.81%	63.98%	62.05%	61.75%	61.62%
Louisiana	64.00%	65.07%	67.64%	68.13%	68.59%
New Mexico	64.74%	65.35%	65.72%	65.64%	65.42%
Maine	64.80%	64.29%	66.04%	65.78%	65.46%
Washington	64.99%	64.88%	65.60%	65.59%	65.71%
Pennsylvania	65.07%	65.23%	66.99%	66.92%	66.61%
Delaware	65.23%	65.53%	66.96%	66.34%	66.00%
Hawaii	65.40%	65.51%	68.65%	67.96%	67.84%
Oregon	66.04%	65.88%	64.66%	64.29%	63.72%
Texas	66.07%	66.48%	65.89%	65.82%	65.36%
New York	66.25%	66.61%	67.79%	67.45%	67.35%
New Jersey	66.47%	66.44%	67.67%	67.42%	67.40%
Idaho	66.54%	67.28%	65.11%	64.51%	64.48%
Wisconsin	66.91%	66.27%	68.05%	67.48%	66.59%
Maryland	67.33%	67.58%	68.94%	68.94%	68.89%
Kansas	67.77%	68.41%	70.26%	69.79%	69.29%
Alaska	67.82%	67.31%	70.70%	70.68%	70.70%
Oklahoma	67.98%	66.88%	68.63%	69.02%	69.10%
Colorado	68.16%	68.23%	68.34%	68.31%	68.15%
Connecticut	68.29%	68.20%	69.23%	69.04%	68.96%
Utah	68.38%	68.58%	67.65%	67.79%	68.15%
Virginia	68.41%	68.50%	69.30%	69.16%	69.21%
Montana	69.20%	69.28%	69.51%	69.99%	69.75%
District of Columbia	69.31%	68.55%	64.64%	66.07%	65.72%
Minnesota	69.38%	69.30%	69.75%	69.01%	68.14%
Massachusetts	69.58%	68.96%	68.37%	68.18%	68.08%
Iowa	70.05%	69.91%	71.40%	70.97%	69.98%
Vermont	71.32%	70.88%	72.05%	71.63%	71.07%
New Hampshire	73.30%	72.77%	70.64%	69.26%	69.07%
Wyoming	74.09%	72.54%	72.80%	72.83%	72.76%
Nebraska	74.84%	74.87%	76.09%	75.47%	74.20%
South Dakota	76.94%	76.19%	77.43%	77.21%	75.62%
North Dakota	79.35%	79.45%	78.95%	78.89%	79.25%

2011-02-14T11:58:00.002-07:00

The Administration Outlines Its Plans to Phase-out Fannie-Mae and Freddie-Mac

This is going to take a while to accomplish and there will be a lot of pushing back and forth before all the dust settles, but the long and the short of it is housing is going to get tougher to buy because mortgages are going to get tougher to get and they could cost more. Fewer government guaranties, limits on mortgage purchases, limits on mortgage size, etc. will all conspire to make buying more difficult and will probably further depress prices. Text in bold is my emphasis. From the WSJ:

The Obama administration outlined on Friday its plans to begin shrinking the government's broad support of the nation's crippled mortgage market, a process that officials said could take several years and would include phasing out Fannie Mae and Freddie Mac.

Officials portrayed a housing-finance system that would include a role for both the public and private sectors, but would be different from the current system in that the government's role would be smaller, underwriting standards would be tighter, and borrowers would be required to hold larger amounts of equity in their homes.

The proposal offered a series of short-term steps that would help attract private capital into the mortgage market, including a reduction in the maximum loan sizes that Fannie and Freddie can purchase and gradual increases in the fees the mortgage companies charge lenders. Both of those steps could make it more attractive for lenders and investors to buy loans without government backing, but they could also raise borrowing costs for millions of Americans and weigh on the nation's home-building industry.

"The cost of mortgages is probably going to go up, and homeownership is probably going to go down," said Daniel Mudd, the former chief executive of Fannie Mae who is now CEO of Fortress Investment Group. "Both of those things arguably could be a good thing."

The administration said it would support allowing maximum loan limits to fall to $625,500 from $729,750 as scheduled on Oct 1. It also said it would push to increase minimum down payments to 10% on loans eligible for purchase by Fannie and Freddie. Insurance premiums charged on new loans backed by the Federal Housing Administration could also go up.

Administration officials said the process of transitioning to a post-Fannie and Freddie world would take at least five to seven years, in part because the housing market remains too fragile. Many analysts say the process, which includes dismantling, moving, or reassembling the firms' infrastructure, could take even longer.

The long-awaited proposal was thin on specifics about what would replace Fannie and Freddie, which the government took over in 2008, and which have racked up $134 billion in taxpayer losses. Instead, it outlined three options that were designed to frame what promises to be a prolonged and heated political debate over how to structure the nation's $10.6 trillion mortgage market.

The first of those would put the vast majority of the mortgage market in the hands of the private sector, where lenders would originate mortgages and securitize them without any government backing. The middleman role currently played by Fannie and Freddie would no longer exist.

The government's role would be limited to the FHA and a few other smaller housing agencies, and their reach would be sharply reduced from current levels. The FHA backed 20% of all new mortgages last year. Some conservatives have called for such a private market.

The second option, championed by a handful of economists, would also create a mostly private market with a limited government backstop that would primarily become active buying or guaranteeing loans in periods when private lenders retreated during financial shocks.

The third option would create new privately owned companies to buy mortgages from banks and sell them as securities. Those securities would be explicitly guaranteed by the government as long as they meet certain criteria. The government would collect fees for that backing, just as the Federal Deposit Insurance Corp. insures bank deposits and regulates banks.

These new companies would essentially replace some of the functions filled by Fannie and Freddie. An array of academics and industry groups have backed such a proposal, and senior Obama administration officials, such as Treasury Secretary Timothy Geithner, have publicly discussed its merits.

The housing industry greeted the proposal coolly, and some mortgage industry officials criticized the administration for not providing more detail. "It was a political football that they punted back onto Congress's side of the field," said Joseph J. Murin, the former president of Ginnie Mae, a government-owned corporation that guarantees payments on mortgages backed by federal agencies.

Producing three different options, instead of one clear recommendation, reflects the fact that there isn't a strong consensus within the administration or Congress, said Laurence Platt, a banking industry lawyer at K&L Gates in Washington. He described the proposals as "Goldilocks and the three options—one's too hot, one's too cold, one's just right, but everyone disagrees which one is which."

But the administration's approach did attract support from Republican lawmakers, who have said the White House has been slow to address Fannie and Freddie's future.

"On a number of these areas, we're going to be on the same page, and that was encouraging, and to see it in writing is equally encouraging," said Rep. Scott Garrett (R., N.J.).

Republicans face their own divisions over what kind of role the government should play in the market, while Democrats have generally said a federal backstop function is needed to ensure broad access to homeownership and the 30-year fixed-rate mortgage, in particular.

Many industrialized nations don't have institutions like Fannie and Freddie, and instead rely more heavily on their banking systems to fund mortgages.

But some economists have noted that the mistakes in the U.S. private sector were far greater than the mistakes made by Fannie and Freddie. For example, private-label mortgage securities, which are not government-backed, have performed more poorly than those backed by the mortgage giants. Nearly 45% of private-label loans originated in 2006 had been 90 days past due at least once, compared with 13% for Fannie and Freddie, according to a report from the firms' federal regulator published in September 2010.

"The part of the market that was the most private was also the worst," said Michael Barr, a former assistant Treasury secretary who left the Obama administration in December. He said the report should help remind lawmakers that the government has long had a role backstopping mortgages. "People seem to think there's a nostalgic world that we never had," he said.

Housing advocates voiced alarm over proposals designed to cede more of Fannie and Freddie's role to the private sector. "They're bringing the fox to the henhouse," said John Taylor, the CEO of the National Community Reinvestment Coalition.

The proposals are likely to set off a furious effort by the financial-services industry to protect generous subsidies and seek out new revenue sources. Investors haven't been willing to buy mortgages that don't have government backing primarily because there haven't been enough steps taken to overhaul the market for private-label securities, said Joshua Rosner, of investment-research firm Graham Fisher & Co. "Investors are on strike," he said.

His clients would buy securities without government backing "hand over fist" if the industry had adopted clear and transparent standards, said Mr. Rosner. "The industry isn't doing that, because it's playing for a guarantee."

2011-01-29T05:36:00.007-07:00

Raising the Debt Ceiling

There will be a vote this spring on raising the debt ceiling. If I am not mistaken that have about maxed-out the current ceiling. After all these years of raising the debt-ceiling, this is probably the first year this will watched as a sporting event. From CNNMoney.com:

Bond experts to Congress: Turn down the volume on the debt ceiling.

Some lawmakers are hoping to use the upcoming vote to raise the cap on federal borrowing as do-or-die time for fiscal responsibility. They say they will only support an increase if Congress goes along with spending cuts.

But bond experts say Congress is engaged in risky business. They say lawmakers should not use the debt ceiling as an artificial deadline for deficit reduction. Instead, lawmakers should focus on crafting a comprehensive long-term plan for fiscal responsibility.

The bond market wants to see a "vision on deficit reduction but not within a politically sensitive time frame," said Jim Vogel, head of interest rate strategies at FTN Financial.

The world's largest bond investor thinks the saber-rattling is ill-advised.

"It's the wrong way to do it. Obviously I'm all for a move to a balanced budget over time. But this is like imposing the death penalty for shoplifting," Bill Gross, founder of PIMCO, told the Associated Press.

Indeed, said William Larkin, fixed income portfolio manager at Cabot Money Management, "Politicians are not always aware of cause and effect. ... You don't want to create a firestorm."

Debt ceiling: What you need to know

The decision to raise the debt ceiling -- which governs how much the Treasury is allowed to borrow -- is often incorrectly equated with an agreement to spend more money. In fact, the need to raise the debt ceiling reflects prior legislative decisions that both Democrats and Republicans have made to spend more.

The bond experts CNNMoney spoke to still believe the debt limit will be raised eventually.

But the way it's raised matters, they say.

"A debt ceiling fight is going to confuse global investors not accustomed to the sometimes Byzantine fights in Washington," Vogel said.

If the market sees the fight as a temporary phenomenon it shouldn't have a major impact, said Calvin Sullivan, chief strategy officer of fixed-income capital markets at Morgan Keegan & Co.

But if the fight is long and ugly before the ceiling is raised, there could be fallout.

2011-01-27T10:29:00.003-07:00

More State Jobs on the Chopping Block

It looks like more state employees are at risk of losing their jobs. In addition there will be other cost reducing initiatives by some states. When will the same thing start happening to Federal employees and the military? I don't think the issue is if this will happen or should this happen. It is a matter of when it will happen. From CNNMoney.com for the complete article:

There will be lots more state workers joining the unemployment line this year.

Public employees are getting hit hard in the latest round of spending cuts as state officials look to close billion-dollar deficits. Governors across the nation are promising to eliminate thousands of positions and freeze or reduce salaries.

Texas lawmakers are proposing shedding 9,300 jobs, while Georgia's governor said he'd erase 14,000 positions. New York's governor is looking to lay off more than 10,000 workers and freeze salaries. And California's and Nevada's governors are proposing pay cuts of up to 10% and 5%, respectively.

Though state workers have suffered years of furloughs and downsizings, this year could prove to be the toughest yet. Federal stimulus money that kept many on the job is drying up, and some newly elected officials are bent on shrinking the role of the state.

"Many politicians have long talked about reducing the size of the government," said Georgia Gov. Nathan Deal in his State of the State address earlier this month. "My friends, we are doing it."

Public sector jobs were long thought to be more secure during economic downturns. But that's not been the case during the Great Recession. State and local governments have shed 397,000 jobs since August 2008, falling to their lowest level since the late 1980s, according to the Center on Budget and Policy Priorities. . . .

2011-01-27T05:35:00.004-07:00

S&P Cut Japan's Credit Rating

S&P reduced the credit rating of Japan. The sovereign debt of Japan stands at about 200% of GDP. In comparison the US public debt is about 96% of GDP. The full story can be found at the Financial Times:

- http://www.ft.com/cms/s/0/095efb70-29f3-11e0-997c-00144feab49a.html#ixzz1CEr9kG5Z

Standard & Poor’s has cut Japan’s sovereign debt rating for the first time since 2002, saying the government lacks a “coherent strategy” for dealing with its soaring state debt.

The cut, which puts S&P’s domestic and foreign ratings for Japan on a par with those of China, underscores concerns about the long-term fiscal prospects of the world’s third-largest economy.

While there are no signs that Japan faces an immediate debt crisis, and government bond yields remain very low by international standards, worries have been growing about the state’s ability to rein in a gross debt burden expected to soar above 200 per cent of gross domestic product this year. . . .

. . . . The cost of insuring Japan’s sovereign debt against default widened 4 basis points to close at 84 basis points in Tokyo, according to Markit. That is still some way off the record of 120 basis points. The downgrade generated fresh concerns in Europe where the spreads on Italian and Belgian sovereign CDS widened, Markit said.

The downgrade means S&P has a lower rating on Japan’s long-term debt than Moody’s, which currently has a rating of Aa2.

2010-10-03T10:52:00.009-06:00

Is Social Unrest Due to High Unemployment Possible?

Is social unrest due to high unemployment possible? I don't know. But the probability of social unrest due to high unemployment and largest concentration of wealth since the Great Depression ensures that the probability is greater than 0%. This situation is far from over. Wait until it dawns on a lot of people that their house could be under water in terms of value or no appreciating value for the rest of their lives. Text in bold is my emphasis. From the UK Telegraph:

America and Europe face the worst jobs crisis since the 1930s and risk "an explosion of social unrest" unless they tread carefully, the International Monetary Fund has warned.

"The labour market is in dire straits. The Great Recession has left behind a waste land of unemployment," said Dominique Strauss-Kahn, the IMF's chief, at an Oslo jobs summit with the International Labour Federation (ILO).

He said a double-dip recession remains unlikely but stressed that the world has not yet escaped a deeper social crisis. He called it a grave error to think the West was safe again after teetering so close to the abyss last year. "We are not safe," he said.

A joint IMF-ILO report said 30m (that is 30,000,000) jobs had been lost since the crisis, three quarters in richer economies. Global unemployment has reached 210m. "The Great Recession has left gaping wounds. High and long-lasting unemployment represents a risk to the stability of existing democracies," it said.

The study cited evidence that victims of recession in their early twenties suffer lifetime damage and lose faith in public institutions. A new twist is an apparent decline in the "employment intensity of growth" as rebounding output requires fewer extra workers. As such, it may be hard to re-absorb those laid off even if recovery gathers pace. The world must create 45m jobs a year for the next decade just to tread water.

Olivier Blanchard,

the IMF's chief economist, said the percentage of workers laid off for long stints has been rising with each downturn for decades but the figures have surged this time.
"Long-term unemployment is alarmingly high: in the US, half the unemployed have been out of work for over six months, something we have not seen since the Great Depression," he said.

Spain has seen the biggest shock, with unemployment near 20pc. Britain's rate has risen from 5.3pc to 7.8pc over the last two years, a slightly better record than the OECD average. This contrasts with the 1970s and early 1980s when Britain was notoriously worse. UK jobless today totals 2.48m.

Mr Blanchard c

alled for extra monetary stimulus as the first line of defence if "downside risks to growth materialise", but said authorities should not rule out another fiscal boost, despite debt worries. "If fiscal stimulus helps avoid structural unemployment, it may actually pay for itself," he said.

"Most advanced countries should not tighten fiscal policies before 2011: tightening sooner could undermine recovery," said the report, rebuking Britain's Coalition, Germany's austerity hawks, and US Republicans. Under French socialist Strauss-Kahn, the IMF has assumed a Keynesian flavour.

The report skirts the contentious issue of whether globalisation lets companies engage in "labour arbitrage", locating plant in low-wage economies such as China to ship products back to the West. Nor does it grapple with the trade distortions caused by China's currency policy, except to call on "surplus countries" to play their part in rebalancing.

The IMF said there may be a link between rising inequality within Western economies and deflating demand.

Historians say the last time that the wealth gap reached such skewed extremes was in 1928-1929. Some argue that wealth concentration may cause investment to outstrip demand, leading to over-capacity. This can trap the world in a slump.

2010-09-07T16:34:00.004-06:00

Should We Let the Housing Market Crash?

Many are firm believers in the free market? Will you still believe in the free market if the price of your home drops another 10% - 20%? How about 30% - 50%? The Administration is low on ammo when it comes to the housing market. Should the Administration spend its last remaining ammo on creating more jobs or propping up a dying asset class? This is a good game in which to be a spectator. Text in bold is my emphasis. From Yahoo:

The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.

Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.

As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.

When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.

“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”

The further the market descends, however, the more miserable one group — important both politically and economically — will be: the tens of millions of homeowners who have already seen their home values drop an average of 30 percent.

The poorer these owners feel, the less likely they will indulge in the sort of consumer spending the economy needs to recover. If they see an identical house down the street going for half what they owe, the temptation to default might be irresistible. That could make the market’s current malaise seem minor.

Caught in the middle is an administration that gambled on a recovery that is not happening.

“The administration made a bet that a rising economy would solve the housing problem and now they are out of chips,” said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. “They are deeply worried and don’t really know what to do.”

That was clear last week, when the secretary of housing and urban development, Shaun Donovan, appeared to side with current homeowners, telling CNN that the administration would “go everywhere we can” to make sure the slumping market recovers.

Mr. Donovan even opened the door to another housing tax credit like the one that expired last spring, which paid first-time buyers as much as $8,000 and buyers who were moving up $6,500. The cost to taxpayers was in the neighborhood of $30 billion, much of which went to people who would have bought anyway.

Administration press officers quickly backpedaled from Mr. Donovan’s comment, saying a revived credit was either highly unlikely or flat-out impossible. Mr. Donovan declined to be interviewed for this article. In a statement, a White House spokeswoman responded to questions about possible new stimulus measures by pointing to those already in the works.

“In the weeks ahead, we will focus on successfully getting off the ground programs we have recently announced,” the spokeswoman, Amy Brundage, said.

Among those initiatives are $3 billion to keep the unemployed from losing their homes and a refinancing program that will try to cut the mortgage balances of owners who owe more than their property is worth. A previous program with similar goals had limited success.

If last year’s tax credit was supposed to be a bridge over a rough patch, it ended with a glimpse of the abyss. The average home now takes more than a year to sell. Add in the homes that are foreclosed but not yet for sale and the total is greater still.

Builders are in even worse shape. Sales of new homes are lower than they were in the depths of the recession of the early 1980s, when mortgage rates were double what they are now, unemployment was pervasive and the gloom was at least as thick.

The deteriorating circumstances have given a new voice to the “do nothing” chorus, whose members think the era of trying to buy stability while hoping the market will catch fire — called “extend and pretend” or “delay and pray” — has run its course.

“We have had enough artificial support and need to let the free market do its thing,” said the housing analyst Ivy Zelman.

Michael L. Moskowitz, president of Equity Now, a direct mortgage lender that operates in New York and five other states, also advocates letting the market fall. “Prices are still artificially high,” he said. “The government is discriminating against the renters who are able to buy at $200,000 but can’t at $250,000.”

A small decline in home prices might not make too much of a difference to a slack economy. But an unchecked drop of 10 percent or more might prove entirely discouraging to the millions of owners who are just hanging on, especially those who bought in the last few years under the impression that a turnaround had already begun.

The government is on the hook for many of these mortgages, another reason policy makers have been aggressively seeking stability. What helped support the market last year could now cause it to crumble.

Since 2006, the Federal Housing Administration has insured millions of low down payment loans. During the first two years, officials now concede, the credit quality of the borrowers was too low.

With little at stake and a queasy economy, buyers bailed: nearly 12 percent were delinquent after a year. Last fall, F.H.A. cash reserves fell below the Congressionally mandated minimum, and the agency had to shore up its finances.

Government-backed loans in 2009 went to buyers with higher credit scores. Yet the percentage of first-year defaults was still 5 percent, according to data compiled by the research firm CoreLogic.

“These are at-risk buyers,” said Sam Khater, a CoreLogic economist. “They have very little equity, and that’s the largest predictor of default.”

This is the risk policy makers face. “If home prices begin to fall again with any serious velocity, borrowers may stay away in such numbers that the market never recovers,” said Mr. Glaser, a consultant whose clients include the National Association of Realtors. “Then we’re back to Depression-era problems.”

Those sorts of worries have a few people from the world of finance suggesting that the administration should do much more, not less.

William H. Gross, managing director at Pimco, a giant manager of bond funds, has proposed the government refinance at lower rates millions of mortgages it owns or insures. Such a bold action, Mr. Gross said in a recent speech, would “provide a crucial stimulus of $50 to $60 billion in consumption, as well as a potential lift of 5 to 10 percent in terms of housing prices.”

The idea has gained little traction. Instead, there is a sense that, even with much more modest notions, government intervention is not the answer. The National Association of Realtors, the driving force behind the credit last year, is not calling for a new round of stimulus.

Some members of the National Association of Home Builders say a new credit of $25,000 would spark demand, but they realize their chances of getting this through Congress are nonexistent.

“Our members are saying that if we can’t get a very large tax credit — one that really brings people off the bench — why use our political capital at all?” said David Crowe, the chief economist for the home builders.

That might give the Obama administration permission to take the risk of doing nothing.

2010-09-06T03:55:00.003-06:00

The American People Speak on the Economy and It Ain't Good

The American people as a group have always had a fairly good grasp of the condition of the US economy. They may not always be smart, but they know what they see. As we move into the mid-term elections the economy will weigh heavily on the elections. All the media hype about the Republicans re-capturing the Congress is necessarily true. Also in the final analysis it makes no difference for 2 reasons:

1. Uncle Sam and the Fed are largely out of policy options. After all how do you get the US consumer to start spending when they are tapped out and they face unemployment rates hovering around 10%? The cover story in the Investors Business Daily that came on Saturday states that at the current trend the unemployment rate would not return to pre-2008 levels until 2017.

2. Ultimately Washing DC is so out of touch with the American people. They don't know what to do.

Test in bold is my emphasis. From CNNMoney.com:

A new national poll released Sunday indicates that eight in 10 Americans say that the economy is in poor shape, and the number that say conditions are very poor is on the upswing after steady declines through the spring.

And according to a CNN/Opinion Research Corporation survey, more people blame the Republicans over the Democrats for the country's economic problems.

Eighty-one percent of the public rates the county's economic conditions as poor, with 18% describing the economy as good. Forty-four percent of people questioned describe economic conditions as very poor, up seven points from July.

The poll indicates that roughly half the country says that conditions have not improved in the past two years. The other half says that the economy has gotten better, but many of them expect things will get worse in the near future.

"Roughly a third of all Americans say that the economy has gotten better and will continue to do so," says CNN Polling Director Keating Holland. "But one in five say that things have gotten better but will take a turn for the worse in the months ahead -- essentially predicting the "double-dip" that many economists are worried about."

So which party gets the blame for the country's current economic problems?

According to the survey, more Americans hold the Republicans responsible than the Democrats, with 44% blaming the GOP and 35% picking the Democrats.

"And when George W. Bush's name is added to the mix, the number who blame the Republicans rises to 53%, with just a third saying that Barack Obama and his party are at fault. That indicates why the Democrats are likely to mention Bush's name every chance they get between now and election day," Holland said.

But according to numbers released Friday, just four in 10 Americans say they approve of the job President Barack Obama is doing on the economy.

The 40% who give Obama a thumbs up is a new low for the president on the economy in CNN polling.

The CNN/Opinon Research Corp. poll was conducted Wednesday and Thursday, with 1,024 adult Americans questioned by telephone. The survey's overall sampling error is plus or minus three percentage points.

2010-08-31T05:06:00.003-06:00

Gold - It Is Not That Its Back, It Never Left

Below is a summary of the recent gold activity and pricing. As the uncertainty in the markets and the economy continues more people are piling into gold as a pre-caution against weaker times. Actually, as the article points out if the economy weakens gold demand will increase. If the economy strengthens the demand for gold will also increase to satisfy jewelry demand. Heads I win and tails I win. The only question is how much gold should one carry in their portfolio? Text in bold is my emphasis. From Bloomberg.com:

Investors are accumulating enough bullion to fill Switzerland’s vaults twice over as gold’s most- accurate forecasters say the longest rally in at least nine decades has further to go no matter what the economy holds.

Analysts raised their 2011 forecasts more than for any other precious metal the past two months, predicting a 10th annual advance, data compiled by Bloomberg show. The most widely held option on gold futures traded in New York is for $1,500 an ounce by December, or 18 percent more than the record $1,266.50 reached June 21. Holdings through bullion-backed exchange-traded products are already at more than 2,075 metric tons, within 0.1 percent of the all-time high.

“Either a swift economic recovery or further dismal economic performance should bring new buyers into the market,” said Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt who was the most accurate forecaster in the first quarter and expects the metal to rise as high as $1,400 next year. “A stronger economy would create more jewelry demand. If the economy stays weak or gets worse, then investors will be looking for a safe haven.”

Investors added to their gold holdings through ETPs for three consecutive weeks, reflecting demand for assets typically favored in times of financial stress. Two-year Treasury yields fell to a record low of 0.4542 percent on Aug. 24 and the yen reached a 15-year high against the dollar the same day. Pacific Investment Management Co., Deutsche Bank AG and Citigroup Inc. have announced or are offering funds or traded instruments designed to guard against sudden market declines.

Buyers accumulated almost 278 tons of gold in 2010 across 10 ETPs tracked by Bloomberg, worth $10.4 billion at this year’s average price. Total holdings are almost twice Switzerland’s official reserves of 1,040 tons, data compiled by the World Gold Council show. ETP holdings reached a record 2,078 tons July 19, data compiled by Bloomberg show.

One of the biggest buyers has been Soros Fund Management LLC, which oversees about $25 billion. George Soros, who made $1 billion breaking the Bank of England’s defense of the pound in 1992, described gold as “the ultimate asset bubble” at the World Economic Forum’s January meeting in Davos, Switzerland. Buying at the start of a bubble is “rational,” he said.

Soros Fund Management sold 341,250 shares of the SPDR Gold Trust, the largest ETP backed by bullion, in the second quarter, according to an Aug. 16 Securities and Exchange Commission filing. That still left a holding of 5.24 million shares, equal to almost 16 tons. Soros declined to comment on the change, through a spokesman.

Gold may rise as high as $1,500 next year, 21 percent more than the $1,235 traded at 9 a.m. in London, according to the median in a Bloomberg survey of 29 analysts, traders and investors. Dan Brebner, an analyst at Deutsche Bank in London who is the most accurate forecaster so far this year, says the metal may reach $1,550.

Bullion gained 13 percent since January, beating an 8.4 percent return on Treasuries, an 8 percent decline in the MSCI World Index of shares and the 10 percent slump in the S&P GSCI Total Return Index of 24 raw materials.

Investors are concerned the recovery is weakening. Sales of new U.S. homes fell to an all-time low in July, the Commerce Department said Aug. 25. The U.S. economy grew at a 1.6 percent annual rate in the second quarter, less than previously calculated, the department said Aug. 27. U.S. growth will slow to 2.8 percent next year, compared with 3 percent in 2010, according to the median of as many as 69 economists’ forecasts compiled by Bloomberg.

People “fear another crisis and so they will diversify into gold,” said Thorsten Proettel, an analyst at Landesbank Baden-Wurttemberg in Stuttgart, Germany, who was also the most- accurate forecaster in the first quarter. He expects gold to trade as high as $1,350 next year. Anne-Laure Tremblay, an analyst at BNP Paribas SA in London whose forecast was also the best in the period, is estimating a 2011 high of $1,370.

Bullion’s four-fold rally since the end of 2000 has attracted fund managers Eric Mindich and John Paulson. Mindich’s $13 billion Eton Park Capital Management LP bought almost 6.58 million shares of the SPDR Gold Trust in the second quarter, according to an Aug. 16 SEC filing. That’s equal to about 20 tons of gold. Paulson & Co., managing $31 billion, held 31.5 million shares in the SPDR Gold Trust, making it the largest investor, an Aug. 16 SEC filing shows.

Astor Asset Management LLC, with about $570 million of assets, once had as much as 10 percent of its holdings in the SPDR Gold Trust, according to Bryan Novak, managing director of the Chicago-based company. The firm sold the stake at the end of last year for a profit and now owns silver, copper and a multicommodity ETP.

“We don’t believe we’re heading into a double-dip recession,” Novak said. “Gold carries some risk because a lot of people are piling into the trade.”

A plunge in equities may spur investors to sell their gold holdings to raise cash, he said. The Standard & Poor’s 500 Index dropped 14 percent since this year’s peak on April 26.

Investment demand of 1,901 tons last year exceeded jewelry consumption of 1,759 tons for the first time in three decades, according to London-based researcher GFMS Ltd. That trend continued into the second quarter, with total demand advancing 36 percent to 1,050.3 tons, the WGC in London said Aug. 25.

Earnings at Newmont Mining Corp., the largest U.S. gold producer, may increase 47 percent to $1.93 billion in 2010, according to the mean estimate of seven analysts’ forecasts compiled by Bloomberg. The 16-member Philadelphia Stock Exchange Gold and Silver Index advanced 8.7 percent since January.

Bets on gold may pay off even if economic recoveries strengthen. World growth will be 4.6 percent this year, the most since 2007, the International Monetary Fund said July 7. China, the second-biggest bullion buyer after India, will expand 10 percent in 2010, compared with 9.1 percent last year, according to the median of 24 economists’ forecasts compiled by Bloomberg.

Gold imports by India this year may total 600 tons to 625 tons, compared with an estimated 480 tons to 485 tons last year, according to Anjani Sinha, chief executive officer of National Spot Exchange Ltd., the country’s biggest bourse for trading physical gold.

While growth may curb investors’ appetite for gold to protect their wealth, it may also bolster purchases of jewelry, reviving demand that fell to a 21-year low in 2009, according to Jochen Hitzfeld, an analyst at UniCredit SpA in Munich and the best forecaster in the last three quarters. He’s predicting a 2011 high of $1,350.

Analysts are getting more bullish. Their median estimate for next year’s average gold price climbed 5.7 percent since June 16 to $1,242, according to 17 forecasts compiled by Bloomberg. That compares with a 2.6 percent gain in silver forecasts, 0.3 percent advance in platinum predictions and a 4.2 percent jump in their palladium outlook.

Gold averaged $1,166.37 since January, heading for a ninth consecutive year of higher average prices. That’s the longest streak since at least 1920.

Options traders are also betting on prices rallying. The biggest position is in call options expiring in November 2010, giving traders the right to buy the metal at $1,500 by then. The next biggest position is the call option for $2,000 expiring in November 2011, data from the Comex exchange in New York show.

“Investors’ interest is still growing and still hasn’t reached a reasonable part of their portfolio,” UniCredit’s Hitzfeld said. “Gold is still an under-owned asset, that’s perfectly clear.”

2010-08-29T12:41:00.004-06:00

Bernanke Lays Out Policy Options for US Economy

Ben Bernanke, Chairman of the Fed outlined his policy options to help the US economy in a speech on Friday. The stock market loved it as the DJIA closed up 165 points after starting off with some pretty sluggish prices earllier in the day. Allow me to go over these rather quickly:

1. Quantatitive easing - silly me I did not realize this was a choice. If Uncle Same can't sell its debt someone has to buy it.

2. Promising to keep rates low - you have to be kidding me. Promises are just that, promises. Maybe they will and maybe they won't.

3. Paying 0% interest of bank excess reserves at the Fed - we are basically there now.

4. Targeting higher interest rates - silly me I did not realize this was a choice. I assumed it was inevitable.

Don't get me wrong I think Ben Bernanke is doing the best he can. Besides I would rather have an expert on the Great Depression as Fed Chairman then a lot of people. But, the list tells me just how short of ammo the Fed really is. Text in bold is my emphasis. From The BBC:

Federal Reserve chairman Ben Bernanke has laid out four "unconventional" policy options to boost the US economy.

Top of the list is more "quantitative easing" - mass purchases of debt.

Speaking to fellow central bankers at the annual Jackson Hole symposium in Wyoming he said the recovery had slowed to "a pace somewhat weaker" than forecast. . . .

. . . . His speech came in the wake of a string of disappointing US economic data in the past month that point to a sharp slowdown in the second half of the year.

Earlier on Friday the US Commerce revised its estimate of second quarter GDP growth down to 1.6%, although this cut was much lower than most Wall Street analysts had expected. . . .

. . . ."The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation [a falling rate of inflation]," Mr Bernanke said.

He said the unorthodox policy options each contained risks and would only be used if the outlook worsened further.

Policy Option Pro Con

1. Quantatitive easing (buying up debts).
Worked during the crisis. Holds down long-term borrowing costs.
Hard to quantify effect, and may be less effective when markets are not under stress. Markets may worry about whether the Fed can safely exit its investments. Inflation risk.

2. Communication (promising to keep rates low for longer, or until certain conditions are met).
Should lower longer term interest rates.
Promises cannot be binding, and conditions for raising rates may be hard to pin down.

3. Paying zero interest on banks' excess reserves at the Fed.
Interest rate cuts are well understood.
The effect on borrowing costs would be small (0.1%-0.15%). A zero rate could undermine the functioning of money markets.

4. Targetting a higher inflation rate.
Could help reverse a prolonged period of deflation (falling prices) like in Japan.
Not popular at the Fed. Makes inflation expectations more uncertain. US is not in deflation yet, and the risk is low.

Mr Bernanke was keen to emphasise the apparent success of earlier quantitative easing - including the purchase of $1.25 trillion worth of mortgage debt - in lowering borrowing costs.

The Fed already decided to extend this policy on 10 August, when it announced that any mortgage repayments it received on its investment would be reinvested in US government bonds.

Other options included reducing to zero the interest paid on excess reserves held by banks with the Fed, and committing to maintain rates low for a longer period.

He also discussed the option of raising the Fed's inflation target - something proposed by some economists - though he said it had no support at the Fed.

In his review of the US economy, Mr Bernanke expressed particular surprise at the rise in the savings rate of US consumers, and the sharp rise in the US trade deficit.

He also noted that business investment in structures - such as commercial real estate - had failed to rebound.

In order for the recovery to be sustained, he said, consumer spending and business investment needed to pick up more quickly. (Isn't that the point business and the consumer lack sufficient demand to make the economy go.)

2010-08-27T08:07:00.005-06:00

Economic Growth in Q2 2010 was 1.6%

The Q2 2010 GDP numbers are revised downward by one-third in the most recent BEA revision. Revisions are to be expected in GDP numbers. What surprises me is that people get excited about the first press release of GDP numbers. Maybe now people will begine to realize on weak the economy really is. In addition the realization that the unemployment rate is going to remain at current levels for awhile because the economy is too weak to create jobs. From CNN Money.com:

The U.S. economy sputtered to a near stop in the second quarter, according to new estimates from the government released Friday, although the slowdown wasn't as bad as many had feared.

The nation's gross domestic product, the broadest measure on the amount of spending by consumers, businesses and government, was revised sharply lower to an annual growth rate of 1.6% in the three months ending in June. The initial reading had been for a 2.4% growth rate in the period.

The report fed into growing fears that the nation could be at risk of a new economic downturn known as a double-dip recession. While the economy is still growing, growth of less than 2% is considered too weak to prompt businesses to start hiring again.

"The case for more action from policymakers to support the recovery and return the job market to health is now overwhelming," said Josh Bivens, economist with the Economic Policy Institute, a labor-supported think tank.

The downward revision was mostly due to businesses doing less to restock their inventories than previously estimated in the face of weak consumer demand. Inventories grew by only $19 billion in the quarter, down $28 billion from the earlier estimate.

Construction spending also came in weaker than assumed at the time of the original reading, with non-residential building taking the biggest hit.

A bigger-than-expected trade gap also trimmed GDP, as rising imports and weaker exports both worked against output by U.S. businesses. . . . .

. . . . "The immediate reaction suggests an attitude shifting from the glass half empty to half full," said Jim Baird, chief investment strategist for Plante Moran Financial Advisors. "The bigger picture issue remains unchanged: there is simply not enough water in the glass to quench our thirst."

While the report might not be as bad as feared, one concern is that even weaker growth could lay ahead.

The economy continued to get a lift in the second quarter by spending authorized by the stimulus act passed at the start of 2009. The Congressional Budget Office recently estimated that added between 1.7 to 4.5 percentage points of growth in the second quarter, meaning the economy would have retreated without that spending. But that spending will fall off in the second half of this year.

In addition, the economy could lose more steam because of the weakening housing market. While investment in new homes shot up 27% in the second quarter due to a tax credit for home buyers that ended in June, more recent readings show home sales hitting record lows since the end of the second quarter.

"The second quarter wasn't as bad as the headline GDP figure looks but, unfortunately, that doesn't mean the third quarter is going to be any better," said Paul Ashworth, senior U.S. economist for Capital Economics in a note to clients. "It could easily be even worse."

2010-08-26T05:50:00.002-06:00

Shareholders Win Rights to Infuence Boards

I wonder how this will work out? Reminds me of the old Bob Dylan song, "Time They are A-Changing".
Text in bold is my emphasis. From Reuters:

Shareholders won more power on Wednesday to shake up corporate boards in the United States after the financial crisis exposed weaknesses in how companies were managed.

The Securities and Exchange Commission voted 3-2 to adopt a rule that gives shareholders an easier way to nominate company directors.

Activist shareholders who want more say on how companies are run have long sought the ability to place their nominees' names on company proxy statements.

That demand increased after the government used billions of tax dollars to prop up companies like American International Group Inc and Bank of America Corp.

"The market meltdown represented a massive failure of oversight by boards as well as by regulators," said Ann Yerger, executive director of the Council of Institutional Investors, which represents big investors.

"Proxy access gives investors a way to hold directors accountable so they will be motivated to do a better job of monitoring and, if necessary, reining in management," she said.

The business community, Republican lawmakers and two dissenting Republican SEC commissioners think the rule will harm capital markets and give fringe groups too much power.

Under the rule, shareholders must hold at least 3 percent of the company's stock for at least three years to nominate directors. Shareholders must hold the stock until the date of the meeting at which director elections are held. Shareholders would be allowed to nominate up to 25 percent of companies' boards. They would not be allowed to nominate a director if their intent were to take over or change control of the company.

Companies with less than $75 million in market capitalization would get a three-year delay in compliance, to give the SEC time to study implementation in larger companies and make adjustments, if necessary.

Shareholders meeting certain conditions would be allowed to submit proposals to change rules to make proxy access easier. The SEC rule would act as the minimum standard.

The rule will go into effect 60 days after publication in the government's federal register. Eligible shareholders most likely will be able to place their nominees on the corporate ballot at 2011 annual meetings, which typically take place in May.

In the past decade, two other SEC chairmen have tried to adopt proxy access rules with no success. This time, the SEC has backing from the Dodd-Frank financial reform bill, which affirms the agency's authority to adopt proxy access rules.

"As a matter of fairness and accountability, long-term significant shareholders should have a means of nominating candidates to the boards of the companies that they own," SEC Chairman Mary Schapiro said at a public agency meeting.

The legislation will help shield the SEC from some lawsuits. In the past, business lobby groups have threatened to challenge the SEC on grounds that the agency did not have the authority to adopt the rule.

Now, the business lobby will probe the rulemaking process and the rule for any weaknesses.

"We will use every available option" to fight the proxy access rule, said Tom Quaadman, a vice president with the U.S. Chamber of Commerce, the country's largest business lobby.

Republican Commissioner Kathleen Casey, who also voted against a proxy access rule in 2007, said today's rule was fundamentally flawed and she does not expect it to survive court scrutiny. Fellow Republican Commissioner Troy Paredes said the rule imposes a minimum right of access even if shareholders would prefer no proxy access -- an area that might be ripe for lawsuits.

The SEC had contemplated setting the holding period for stock ownership at one year, and creating a sliding scale ownership threshold between 1 percent and 5 percent.

Critics argued that the one-year holding period was too short and that requiring shareholders to own only 1 percent of a large company would make it too easy for companies to fall prey to special interest groups.

The Council of Institutional Investors, which represents investors that hold more than $3 trillion in assets, said 3 percent was a "very challenging but reasonable hurdle to impose on groups of long-term investors."

Before the SEC adopted the rule, shareholders could nominate directors but had to wage proxy fights to do so. That process is considered expensive and burdensome, according to activist shareholders.

2010-08-25T05:38:00.002-06:00

A View on Social Security

Social Security will plague us for a long time and it needs to be fixed. Unfortunately, it is so entangled in Washington that solutions are hard to come by. The author of this article has an interesting point of view. He is also the author of a new book “Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking” which could prove to be intersting. Text in bold is my emphasis. From Bloomberg:

Social Security just celebrated its 75th birthday. Love it or hate it, it has done its job and should retire. We need a new system, the Personal Security System, which retains Social Security’s best features, scraps the rest, and covers its costs.

Social Security’s objective -- forcing people to save for retirement -- is legit. Otherwise millions of us would seek handouts in our old age.

But Social Security has also played a central role in the massive, six-decade Ponzi scheme known as U.S. fiscal policy, which transfers ever-larger sums from the young to the old.

In so doing, Uncle Sam has assured successive young contributors that they would have their turn, in retirement, to get back much more than they put in. But all chain letters end, and the U.S.’s is now collapsing.

The letter’s last purchasers -- today’s and tomorrow’s youngsters -- face enormous increases in taxes and cuts in benefits. This fiscal child abuse, which will turn the American dream into a nightmare, is best summarized by the $202 trillion fiscal gap discussed in my last column.

The gap is the present value difference between future federal spending and revenue. Closing this gap via taxes requires doubling every tax we pay, starting now. Such a policy would hurt younger people much more than older ones because wages constitute most of the tax base.

What about cutting defense instead? Sadly, there’s no room there. The defense budget’s 5 percent share of gross domestic product is historically low and is projected to decline to 3 percent by 2020. And the $202 trillion figure already incorporates this huge defense cut.

The 3-Year-Old Vote

Reducing current benefits, most of which go to the elderly, is another option. But such a policy is highly unlikely. The elderly vote and are well-organized, whereas 3-year-olds can neither vote, nor buy Congressmen.

In contrast, cutting future benefits is politically feasible because it hits the young. And that’s where Congress is heading, starting with Social Security. The president’s fiscal commission will probably recommend raising Social Security’s full retirement age to 70 from 67, for those who are now younger than 45. This won’t change the ages at which future retirees can start collecting benefits. It will simply cut by one-fifth what they get.

Some political economists point to Social Security’s 2010 Trustees Report and say, “Leave it alone. The system won’t run short of cash until 2037.”

Misleading Accounting

Unfortunately, the Trustees’ cash-flow accounting, like all such accounting, is arbitrary and misleading. In fact, Social Security is broke. Its fiscal gap, which the Trustees measure correctly, is $16 trillion.

This gap is small compared with the U.S.’s overall $202 trillion shortfall, not because the Trustees treat Social Security’s $2.5 trillion trust fund as an asset (a questionable choice), but because they credit one-third of federal revenue to the program.

But dollars are dollars. If we re-label Social Security “payroll” taxes as “general revenue wage taxes,” Social Security’s fiscal gap increases by $60 trillion, and the fiscal gap of all other government activities falls by $60 trillion, leaving the overall $202 trillion gap unchanged.

Even by the Trustees’ measure, there’s a massive problem. Coming up with $16 trillion requires permanently raising revenue or cutting benefits by 26 percent, starting now. In other words, the program is 26 percent underfunded.

Hitting Young People

Now cutting benefits of new retirees by 20 percent, with an increase in the so-called full retirement age, starting 20 or so years from now isn’t the same as immediately cutting the benefits of all retirees by 26 percent. Hence, the fiscal commissioners will need to hit young people with an even bigger whammy if they really want to solve Social Security’s long-term woes.

Most likely, Washington will simply raise the retirement age and kick the can further down the road. This is what the Greenspan Commission did in 1983, knowing full well that by 2010 the system would be in even worse shape.

I say, retire Social Security and replace it with a version that works. Do this by freezing the current system, paying today’s retirees their benefits, while paying workers only what they have accrued so far once they retire.

Next, have all workers contribute 8 percent of their pay to the new system, with half going to a personal account and half to an account of a spouse or legal partner. The federal government would make matching contributions for the poor, the disabled and the unemployed, permitting the system to be as progressive as desired.

Going Global

All contributions would be invested in a global, market- weighted index of stocks, bonds, and real estate. The government would do the investing at very low cost and guarantee that contributors’ account balances at retirement would equal at least what was contributed, adjusted for inflation.

Between ages 57 and 67, each worker’s balances would gradually be swapped for inflation-indexed annuities sold by the government. Those dying before 67 would bequeath their account balances to their heirs.

While this plan has private accounts, Wall Street plays no role and makes no money. Additional contributions would be used to fund life- and disability-insurance pools.

Our nation is in terribly hot water. Business as usual is no answer. The only way to move ahead is to radically reform our retirement, tax, health-care and financial institutions to achieve much more for a lot less.

The Personal Security System is a major step in that direction. It meets all the legitimate goals of Social Security without the system’s waste and penchant for robbing the young.

2010-08-25T05:09:00.002-06:00

Economy to Remain Weak, Probability of a Double-Dip Remains High

President of the Chicago Fed, Charles Evans, maintains for the economy will remain weak for the foreseeable future and that the chances of a double-dip recession although low are increasing. Check out the last few sentences about financial education, the real diamond-in-the-rough in this article. Text in bold is my emphasis. From Reuters:

The risks of a double-dip U.S. recession have risen in the last six months, Chicago Federal Reserve Bank President Charles Evans said on Tuesday.

While a new contraction in the economy is still not the most likely scenario, high unemployment and a fractured housing sector make this recovery a fragile one, he said.

"A double dip is not the most likely outcome but I am concerned about how strong the recovery will be," Evans said at a housing event in Indianapolis.

Against that backdrop, Evans said the Fed's ultra-easy monetary policy is appropriate.

In response to the financial crisis of 2007-2009, the U.S. central bank cut short term interest rates to near zero, and also undertook a host of emergency measures such as U.S. Treasury bond and mortgage debt purchases to keep borrowing costs down.

The Fed announced earlier this month it would add to this stimulus by investing proceeds from maturing mortgages securities in its portfolio into Treasury debt.

Evans said unemployment, currently at 9.5 percent, is likely to remain uncomfortably high for the foreseeable future.

His comments came just before a report on existing home sales showed a record monthly drop in existing home sales to their lowest level in 15 years.

In his speech, Evans argued that the securitization process, in which mortgages are repackaged into bonds that are then sold to investors, reduces the incentive of lenders to modify troubled home loans.

In remarks that focused on the country's housing market weakness and various attempts to ease it, Evans said efforts to modify home loans to prevent foreclosure were a "drop in the bucket" compared with the problem at hand.

"The securitization process appears to have created conflicts between the interests of servicers and lenders," Evans said. "These and other impediments have kept the number of modifications lower than we might have hoped."

The U.S. housing market has been in a downturn for about three years now, with home construction running at less than a quarter of its boom-time peaks and prices down sharply across the country.

Many economists worry that, without housing as an engine of growth, the economy could take much longer than usual to recover.

Evans also cast some doubt on the value of financial education in preventing mortgage and other borrower distress, a break from Fed tradition.

"Staff members at the Chicago Fed have recently undertaken a thorough review of studies evaluating the effects of financial education. What they find is that the evidence on the effectiveness of education and counseling is rather mixed," he said.

2010-08-24T10:23:00.002-06:00

Existing Home Sales are Down 27% in July

The forecast for the July drop in existing home sales was supposed to be about 12%, instead it was 27%. Well, that will put a tamper on an already skiddish stock market. I wonder what the August numbers will bring before he head into the fall/winter doldrums for housing sales? Text in bold is my emphasis. From CNNMoney.com:

With home sales plunging to their lowest level in 15 years, economists warn that a double-dip in housing prices is just around the corner, threatening to further slow the overall recovery.

Existing home sales sank 27.2% in July, twice as much as analysts expected, to a seasonally adjusted annual rate of 3.83 million units. Much of that drop is attributed to the end of the $8,000 homebuyer tax credit.

That credit brought buyers out in droves, as they tried to sign home contracts before the April 30 deadline. Now, two months later, sales are 34% below April's tax incentive-induced peak.

"Home sales were eye-wateringly weak in July," said economist Paul Dales of Capital Economics. "It is becoming abundantly clear that the housing market is undermining the already faltering wider economic recovery. With an increasingly inevitable double-dip in housing prices yet to come, thing could get a lot worse."

The sales pace of all homes -- single-family homes, townhomes, condominiums and co-ops -- is at the lowest since NAR began tracking the figure in 1999. Sales of single-family homes, which account for a bulk of the transactions, are at the lowest level since May 1995.

"Consumers rationally jumped into the market before the deadline for the homebuyer tax credit expired," said Lawrence Yun, NAR's chief economist. "Since May, after the deadline, contract signings have been notably lower and a pause period for home sales is likely to last through September." (Once again overly optimistic comments from the NAR).

Price and inventory: The NAR report showed that the median price of homes sold in July was $182,600, up 0.7% from a year ago. Just under a third of homes sold during the month were distressed properties.

Total housing inventory rose 2.5% to 3.98 million existing homes for sale. That represents a 12.5-month supply at the current sales pace, up from a 8.9-month supply in June. A six-month of supply is considered normal.

Sales by property and region: Sales of single-family homes sank 27.1% in July compared to the prior month, while condominium and co-op sales tanked 28.1%.

The Midwest fared the worst last month, with sales dropping 35% to an annual pace of 800,000 units in July. that's 33.3% lower than a year earlier.

Resales in the Northwest dropped 29.5% from the previous month to an annual pace of 620,000 units.

They fell by 25% in the West and 22.6% in the South.

2010-08-24T05:05:00.002-06:00

Good Summary about Housing and Consumer Spending

Below is a good summary of the current housing and consumer spending activity in the US. Many economists/media pundits in the US are really stuck because they do understand how the economy can grow without the push of housing demand and consumer spending. I think it is really a good question. If the US consumer is not able to drive demand in the economy what do we do? Even if you increase the supply of goods, who is going to buy them? People say - make the banks lend more. What if people do not want or cannot borrow? What do you do with an economy when debt-driven demand is no longer an option? When you realize there are no real answers to these questions you come to understand that these are large structureal issues in the economy that will take a long time to resolve. All of sudden the "lost decade " seems a real possibility. Just food for thought.

Text in bold is my emphasis. From Bloomberg.com:

Housing led the U.S. out of seven of the last eight recessions. This time, it may kill the recovery.

Home sales collapsed after a federal tax credit for buyers expired in April. Since then, the manufacturing-led expansion, which began in the second half of 2009, has been waning, with jobless claims rising and factory orders falling.

“If foreclosures continue to mount and depress home prices, that could send the economy back into a recession,” said Celia Chen, an economist who tracks the industry for Moody’s Analytics Inc. “The housing market and the broader economy are closely intertwined.”

Spending on home construction and items such as furniture and stoves accounted for about 15 percent of gross domestic product in the second quarter, according to West Chester, Pennsylvania-based Moody’s Analytics. Real estate also can influence consumer spending indirectly. When values soared in the mid-2000s, people used the boost in equity to pay for cars and vacations. After prices fell, homeowners lost that cushion and curbed spending.

A report tomorrow by the Chicago-based National Association of Realtors will show July sales of existing homes plummeted 12.9 percent from June, the biggest monthly loss of 2010, according to the median estimate of economists surveyed by Bloomberg.

New-home sales, which account for less than a 10th of housing transactions, stayed at the second-lowest level on record last month, economists predict Commerce Department data will show on Aug. 25.

Housing in ‘Doldrums’

“Housing continues to be stuck in the doldrums,” said Jeffrey Frankel, a member of the business-cycle dating committee at the National Bureau of Economic Research, the arbiter of when U.S. recessions begin and end, and a professor at Harvard University in Cambridge, Massachusetts.

With 14.6 million Americans out of work, homeowners are struggling to hold onto their properties. One in seven mortgages were delinquent or in foreclosure during the first quarter, the highest in records dating to 1979, according to the Washington- based Mortgage Bankers Association. Foreclosures probably will top 1 million this year, said RealtyTrac Inc., an Irvine, California-based data company.

Federal efforts to help have had little success. Of 1.31 million loan modifications started under the Obama administration’s Home Affordable Modification Program, 48 percent were canceled by the end of July, the Treasury Department said Aug. 20. More than half of all modifications defaulted again within 12 months, the Office of the Comptroller of the Currency said June 23. (Let's not get too excited about these numbers. Experience has taught me that, "loan mods" are hard to justify and the success rate is only about 50%.)

Excess Supply

Shadow inventory, or the number of homes repossessed or in default that eventually will be offered for sale, stood at 7.3 million in the first quarter, according to Laurie Goodman, an analyst in New York at mortgage-bond broker Amherst Securities Group LP. As those properties hit the market, prices will come under pressure and buyers will wait for better deals.

“The only thing that’s going to fix the housing markets right now is a work-through of what excess supply is on the markets and improvement in unemployment,” Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said today in an interview on Bloomberg Television’s “In the Loop with Betty Liu.” “That process is a very, very long-term process.”

On the Sidelines

. . . . Home prices tumbled 33 percent from their July 2006 peak to the low in April 2009, according to the S&P/Case-Shiller 20-city index. They may drop another 20 percent by 2012 if the economy slips back into a recession, according to Chen, the Moody’s Analytics economist.

Gross domestic product increased less than 1.5 percent in the second quarter, the slowest rate since the recovery began, according to the median forecast by economists in a Bloomberg survey. That’s down from the 2.4 percent rate initially reported by the Commerce Department last month. Growth may ease to 1.3 percent by the first quarter of next year, according to the New York-based Conference Board.

‘Epidemic of Thrift

Consumer spending rose 1.6 percent in the second quarter, down from 1.9 percent in the previous three months. Purchases of home furnishings and appliances fell 1.7 percent to an annual pace of $256.5 billion in June from a 2010 high in April, according to the Bureau of Economic Analysis.

“There is an epidemic of thrift,” said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts. “Households and businesses are super-cautious right now. Sometime in the next 6 to 12 months, we’ll start to see more movement on home and car purchases and greater willingness on the part of businesses to hire.”

Federal Reserve policy makers on Aug. 10 made their first attempt to shore up the recovery by pledging to keep their holdings of securities and prevent money from draining out of the banking system. They said the economic expansion probably will be “more modest” than earlier anticipated. The Fed has held the target for its benchmark lending rate near zero since December 2008 and purchased $1.43 trillion worth of debt to keep rates low and bolster housing.
Buyers’ Survey

“Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit,” the Fed said in a statement.

The average U.S. rate for a 30-year fixed mortgage dropped to 4.44 percent in the second week of August, the lowest recorded by McLean, Virginia-based Freddie Mac, the second- largest mortgage buyer. A July survey by the Conference Board found 1.9 percent of the respondents planned to buy a home in the next six months, near December’s 27-year low of 1.7 percent.

A sustained economic recovery depends on the job growth required to boost consumer spending, said Behravesh of IHS. The unemployment rate may average 9.6 percent this year, based on the median estimate of economists in a Bloomberg survey. That would be the highest annual rate since 1983.

Past Not Repeated

Home construction and property sales led the way out of the previous seven recessions going back to 1960, according to PMI Group Inc., a mortgage insurer in Walnut Creek, California. New- home sales improved an average of eight months before the beginning of economic growth, and single-family housing starts improved seven months before recovery.

That didn’t happen in the last recession. Sales of new houses fell in five of the eight months before economic expansion began in 2009’s second half. Housing starts fell in two of seven months. . . .

2010-08-23T05:20:00.002-06:00

Housing is Probably Gone for a Long Time

Finally someone has published a realistic article about what is really occurring in the housing market. I do not consider the housing market dead, but I do think buying a home is a cash flow and liquidity decision: Cash flow - is it cheaper to rent or buy? Combined with Liquidity - how much of my assets do I want tied up in a potentially illiquid asset. Where I live it is cheaper to rent then buy, especially given the liquidity issue. If you want to be able to pick up and leave in a relatively short time period - don't buy a home. Comments in bold are my emphasis. From the NY Times:

Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.

The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.

More than likely, that era is gone for good.

“There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. “All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”

Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment.

Dean Baker, co-director of the Center for Economic and Policy Research, estimates that it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values will never catch up.

“People shouldn’t look at a home as a way to make money because it won’t,” Mr. Baker said.

If the long term is grim, the short term is grimmer. Housing experts are bracing themselves for Tuesday, when the sales figures for July will be released. The data is expected to show a drop of as much as 20 percent from last year.

The supply of homes sitting on the market might rise to as much as 12 months, about twice the level of a healthy market. That would push down prices as all those sellers compete to secure a buyer, adding to a slide that has already chopped off as much as 30 percent in home values.

Set against this dismal present and a bleak future, buying a home is a willful act of optimism. That explains why Adam and Allison Lyons are waiting to close on a $417,500 house in Deerfield, Ill.

“We’re trying not to think too far ahead,” said Ms. Lyons, 35, an information technology manager.

The couple’s first venture into real estate came in 2003 when they bought a condo in a 17-unit building under construction in Chicago. By the time they moved in two years later, it was already worth $50,000 more than they had paid. “We were thinking, great!” said Mr. Lyons, 34.

That quick appreciation started them on the same track as their parents, who watched the value of their houses ascend for decades. The real estate crash interrupted that pleasant dream. The couple cannot sell their condo. Unwillingly, they are becoming landlords.

“I don’t think we’re ever going to see the prosperity our parents did, but I don’t think it’s all doom and gloom either,” said Mr. Lyons, a manager at I.B.M. “At some point, you just have to say what the heck and go for it.”

Other buyers have grand and even grander expectations.

In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.

With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.

“People think it’s a law of nature,” said Mr. Shiller, who teaches at Yale.

For the first half of the 20th century, he said, expectations followed the opposite path. Houses were seen the way cars are now: as a consumer durable that the buyer eventually used up.

The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom. Demand was stoked as their bumper crop of children grew up and bought places of their own. The inflation of the 1970s, which increased the value of hard assets, and liberal tax policies both helped make housing a good bet. So did the long decline in mortgage rates from the early 1980s.

Despite all these tailwinds, prices rose modestly for much of the period. Real home prices increased 1.1 percent a year after inflation, according to Mr. Shiller’s research.

By the late 1990s, however, the rate was 4 percent a year. Happy homeowners were taking about $100 billion a year out of their houses, which paid for a lot of good times.

“The experience we had from the late 1970s to the late 1990s was an aberration,” said Barry Ritholtz of the equity research firm Fusion IQ. “People shouldn’t be holding their breath waiting for it to happen again.”

Not everyone views the notion of real appreciation in real estate as a lost cause.

Bob Walters, chief economist of the online mortgage firm Quicken, acknowledges that the recent collapse will create a “mind scar” just as the Great Depression did. But he argues that housing remains unique.

“You have to live somewhere,” he said. “In three or four years, people will resume a normal course, and home values will continue to increase.”

All homes are different, and some neighborhoods and regions will rebound more quickly. On the other hand, areas where there was intense overbuilding, like Arizona, will be extremely slow to show any sign of renewal.

“It’s entirely likely that markets like Arizona will not recover even in the 15- to 20-year time frame,” said Mr. Humphries of Zillow. “The demand doesn’t exist.”

Owners in those foreclosure-plagued areas consider themselves lucky if they are still solvent. But that does not prevent the occasional regret that a life-changing sum of money was so briefly within their grasp.

Robert Austin, a Phoenix lawyer, paid $200,000 for his home in 2000. Five years later, his neighbors listed a similar home for $500,000.

Freedom beckoned. “I thought, when my daughter gets out of school, I can sell the house and buy a boat and sail around the world,” said Mr. Austin, 56.

His home is now worth about what he paid for it. As for that cruise, “it may be a while,” Mr. Austin said. Showing the hopefulness that is apparently innate to homeowners, he added: “But I won’t rule it out forever.”