All the economic reports in the world pale in comparison to the insider buy/sell activity. If the prospects are good for a company, you would assume that insiders would be buying. They are selling at the boldest pace in 20 years. What do insiders know about the prospects for their companies?
TOP-LEVEL INSIDERS SELLING THEIR STOCK
By PAUL THARP
SALES DEPARTMENT: Execs led by the likes of Microsoft founder Bill Gates...
December 7, 2006 -- America's corporate chiefs are unloading their own stocks at one of the boldest paces in 20 years.
In cases of the very rich, such as Microsoft's Bill Gates and Google's top brass, the executives are selling a whopping $63 for each $1 of stock they bought, says a report by Bloomberg.
In November alone, leaders of public companies dumped $8.4 billion worth of stock they owned as insiders, most of it awarded as compensation, bonuses or other management incentives.
But the vast majority of the executives put their windfall cash to work elsewhere, with just $133 million being plowed back into purchases of more company stock.
Analysts say a take-the-money-and-run flight from their own companies signals a growing lack of confidence in the economy's future course, as well as fears of a possible global meltdown if the Iraq crisis escalates across borders.
It's also a good time to take profits, with the Dow Jones industrial average up nearly 15 percent this year, the S&P 500 ahead 13 percent, and the Nasdaq 11 percent higher.
Wall Street investors are displaying fresh worries that the Federal Reserve might pull the trigger too quickly on hiking rates again, possibly plunging the U.S. into a recession as the Fed did in 2000.
Just before the worst of the 2000 recession, insider sales were also at a near record.
Leading the latest wave of insider selling is Microsoft, with $594.2 million of stock sold by insiders during November, with Gates unloading $581.1 million.
Gates has been selling shares regularly - including $2.1 billion last year - as he whittles down his once mammoth stake, putting a big chunk of his wealth to work in a not-for-profit foundation that invests in a wide range of securities and other deals.
Billionaire Paul Allen also sold off 28 percent of his stake last month in DreamWorks Animation SKG for $224.2 million, keeping about 21 million shares.
Insiders at Seagate sold $311.8 million in November, while Google insiders unloaded $182.1 million in the four weeks.
Google's CEO Eric Schmidt and its co-founders Sergey Brin and Larry Page have usually led the insider-selling parade with sales of hundreds of millions as the stock rose steadily to break the $500 mark.
Wednesday, December 27, 2006
Friday, December 08, 2006
A Real Threat to U.S. Realtors
Zillow is for sales, not just snooping
The much-hyped website, which provides home values, now allows sellers to post listings.
By Annette Haddad, Times Staff Writer
December 7, 2006
Real estate website Zillow.com became an instant hit by telling homeowners — and their nosy neighbors — how much their houses might be worth.Now, the Seattle-based company will help owners get the word out about how much they want in a sale.
Starting today, Zillow Inc. joins a growing list of websites that allows homeowners and real estate agents to post virtual "For Sale" signs for free. The feature also plugs a hole on the site, which touts a database of more than 60 million U.S. residences but no information on what most viewers want to know: Is this home for sale?
The addition could pose yet another threat to the traditional system for buying and selling homes, analysts said.
"It's just one more chink in the armor of the established brokerage industry," said Steve Murray, an industry consultant based in Littleton, Colo. "It provides consumers with more choices."
But too much choice could work against Zillow, one of hundreds of real estate websites. Property listings are among the chief reasons consumers and advertisers seek out real estate sites, and those with the biggest inventories of homes for sale are capturing the most viewers. The No. 1 real estate site is Realtor.com, which is sponsored by the Realtor trade group and offers one of the largest collections of for-sale listings.
Adding a listings service was necessary for Zillow to bring in new viewers and bring back old ones, said Greg Sterling of Sterling Market Intelligence, a San Francisco-based research firm.
But Zillow needs to build inventory quickly to give viewers a full picture of the for-sale market, analysts said. Unlike some sites that aggregate listings from the industry's multiple-listing service, Zillow is depending on sellers to voluntarily post information.
"It's all contingent on people actually showing up and doing these things," Sterling said.
Co-founded by Richard Barton, the creator of consumer-travel website Expedia.com, Zillow was launched in February amid much hype about its potential to reshape the real estate transaction process into something more transparent and less costly.
Barton had already helped upend one industry and many figure that by applying the same formula — providing consumers access to information previously controlled by agents — Zillow will eventually lead to industrywide changes.
"The availability of this information online is starting to change expectations," Sterling said. "It doesn't mean an agent won't be involved in the transaction. But maybe there will be downward pressure on fees, or at least agents will be asked to justify their commissions."
David Andreone said he would probably use Zillow to help sell his Beverly Hills home, currently on the market for $1.6 million. Andreone is marketing the property himself on Forsalebyowner.com and not using a broker. He sold his previous home three years ago the same way and found the process easy and less expensive than using a traditional agent.
"I would definitely be interested if Zillow is doing this," said Andreone, who has used Zillow to check the values on his and his parents' homes.
Even without its new feature, Zillow had rocketed into the top 10 most-visited real estate sites. For the week that ended Saturday, Zillow was No. 7, with 2.1% of visits, among 1,766 real estate websites, according to research firm Hitwise.
By giving away free market data, including instant valuations and sale histories on individual homes, the website tapped into a potent consumer "snoop" factor that has made it Topic A at many cocktail parties and backyard barbecues. But some of the discussions weren't flattering; many of its valuations have been off the mark.
On Zillow, sellers working with or without brokers will be able to set a price, post photos and descriptions of their properties, link to other websites and communicate with potential buyers via e-mail. When a listing is posted, a flag will pinpoint its location on a community map.
Zillow executives said it already had lined up Realtors who were prepared to post their listings on the site.
Vince Malta, a former president of the California Assn. of Realtors and a San Francisco-based real estate agent, said he would probably use the site for his clients' listings.
Malta already checks out home values on Zillow, so he is prepared to answer questions from clients who have done the same. He also posts listings on Craigslist.com, which accepts them for free, and on the official multiple-listing service, which is accessible only to other agents.
The much-hyped website, which provides home values, now allows sellers to post listings.
By Annette Haddad, Times Staff Writer
December 7, 2006
Real estate website Zillow.com became an instant hit by telling homeowners — and their nosy neighbors — how much their houses might be worth.Now, the Seattle-based company will help owners get the word out about how much they want in a sale.
Starting today, Zillow Inc. joins a growing list of websites that allows homeowners and real estate agents to post virtual "For Sale" signs for free. The feature also plugs a hole on the site, which touts a database of more than 60 million U.S. residences but no information on what most viewers want to know: Is this home for sale?
The addition could pose yet another threat to the traditional system for buying and selling homes, analysts said.
"It's just one more chink in the armor of the established brokerage industry," said Steve Murray, an industry consultant based in Littleton, Colo. "It provides consumers with more choices."
But too much choice could work against Zillow, one of hundreds of real estate websites. Property listings are among the chief reasons consumers and advertisers seek out real estate sites, and those with the biggest inventories of homes for sale are capturing the most viewers. The No. 1 real estate site is Realtor.com, which is sponsored by the Realtor trade group and offers one of the largest collections of for-sale listings.
Adding a listings service was necessary for Zillow to bring in new viewers and bring back old ones, said Greg Sterling of Sterling Market Intelligence, a San Francisco-based research firm.
But Zillow needs to build inventory quickly to give viewers a full picture of the for-sale market, analysts said. Unlike some sites that aggregate listings from the industry's multiple-listing service, Zillow is depending on sellers to voluntarily post information.
"It's all contingent on people actually showing up and doing these things," Sterling said.
Co-founded by Richard Barton, the creator of consumer-travel website Expedia.com, Zillow was launched in February amid much hype about its potential to reshape the real estate transaction process into something more transparent and less costly.
Barton had already helped upend one industry and many figure that by applying the same formula — providing consumers access to information previously controlled by agents — Zillow will eventually lead to industrywide changes.
"The availability of this information online is starting to change expectations," Sterling said. "It doesn't mean an agent won't be involved in the transaction. But maybe there will be downward pressure on fees, or at least agents will be asked to justify their commissions."
David Andreone said he would probably use Zillow to help sell his Beverly Hills home, currently on the market for $1.6 million. Andreone is marketing the property himself on Forsalebyowner.com and not using a broker. He sold his previous home three years ago the same way and found the process easy and less expensive than using a traditional agent.
"I would definitely be interested if Zillow is doing this," said Andreone, who has used Zillow to check the values on his and his parents' homes.
Even without its new feature, Zillow had rocketed into the top 10 most-visited real estate sites. For the week that ended Saturday, Zillow was No. 7, with 2.1% of visits, among 1,766 real estate websites, according to research firm Hitwise.
By giving away free market data, including instant valuations and sale histories on individual homes, the website tapped into a potent consumer "snoop" factor that has made it Topic A at many cocktail parties and backyard barbecues. But some of the discussions weren't flattering; many of its valuations have been off the mark.
On Zillow, sellers working with or without brokers will be able to set a price, post photos and descriptions of their properties, link to other websites and communicate with potential buyers via e-mail. When a listing is posted, a flag will pinpoint its location on a community map.
Zillow executives said it already had lined up Realtors who were prepared to post their listings on the site.
Vince Malta, a former president of the California Assn. of Realtors and a San Francisco-based real estate agent, said he would probably use the site for his clients' listings.
Malta already checks out home values on Zillow, so he is prepared to answer questions from clients who have done the same. He also posts listings on Craigslist.com, which accepts them for free, and on the official multiple-listing service, which is accessible only to other agents.
Sunday, December 03, 2006
Boston Housing Crash Well Underway!
The numbers are starting to get ugly in Bubble Cities. Boston is leading the way but this is just the beginning. Watch California, Arizona, Florida,...etc all follow suit as housing price gains, experienced over the last few years, get wiped out. Reversion to the mean is the inescapable concept that house flippers chose to ignore, at their peril. The Shiller housing index suggests that we still have a long way to go before housing prices are reasonable from an inflation-adjusted historical context.
House prices plunge: All Hub gains since March ’04 vanish
By Jerry Kronenberg
Wednesday, November 29, 2006 - Updated: 04:19 AM EST
Boston house prices plunged last month at their fastest pace in more than 13 years, erasing all gains recorded since early 2004, new figures show.
Market tracker The Warren Group reported yesterday that median house-sale prices in Suffolk County, which mostly consists of Boston, fell to $325,950 - a stunning 13.31 percent decline from October 2005.
That drops prices back to May 2004 levels. It’s also the sharpest 12-month pullback since 1993.
“The October numbers continue a trend we’ve been seeing for some time now - a pronounced slowdown that’s affecting every facet of the housing market,” Warren Group CEO Tim Warren said.
Warren said Suffolk condos fared better, with median prices inching up 0.8 percent to $320,000 - the first gains since March.
Warren theorized condo values rose because some high-end developments came on the market in recent months, driving median prices higher.
Statewide, Warren reported median house prices fell at a 6.9 percent annual rate to hit $312,000. Median condo prices likewise declined 4.8 percent to $261,750.
Sales volume also dropped, with 14.9 percent fewer houses and 19.5 percent fewer condos changing hands. However, Warren said that’s better than the 20 percent-plus declines seen in July, August and September.
David Wluka, president of the Massachusetts Association of Realtors, said the smaller sales drop-offs show him that “the market correction may be about over.”
MAR, which tracks sales differently than Warren does, issued its own report yesterday showing median house prices fell just 2 percent statewide, while condo values declined 3.7 percent.
“We’re not at equilibrium, but we’re closer to it,” Wluka said.
But Wellesley College housing economist Karl Case is less optimistic. “All of the indicators - sales volume, prices, everything - are pointing downward,” he said.
Tuesday, November 28, 2006
Will This be the Ultimate Symbol of the Housing Bubble?
That's not the point.
What is the point?
What?
I loved that house.
Plus the schools.
The kids are three and one
They're gonna grow up
What?
Suzanne researched this!
This listing is special John, you guys can do this!
OK
Are you kidding?
This is awesome!
Did you see the size of that garage?
Yes!
Oh, that's great! Now let me get to work!
Homes Sales Up, Prices Down!
MSNBC News Services
WASHINGTON - Sales of existing homes posted a tiny increase in October, the first gain in eight months, but the median price of homes sold fell by a record amount.
The National Association of Realtors said Tuesday that existing home sales edged up 0.5 percent to a seasonally adjusted annual rate of 6.24 million. It was the first sales increase since February.
However, the median, or midpoint, price for a home sold dropped to $221,000 in October, a decline of 3.5 percent from a year ago. That was the biggest year-over-year price decline on record. It marked the third straight month that home prices have fallen compared to the same period a year ago, the longest stretch of such declines on record.
Michelle Meyer, an economist at Lehman Bros., said the rise in sales was partly a response to falling prices and a recent dip in mortgage rates
"The pickup in home sales reflects stabilization in demand and the first signs that the housing market is beginning to balance," she said in a note to clients.
Economist Joel Naroff of Naroff Economic Advisors said the report "does not point to a major housing meltdown," but he noted that there is a "huge" supply of unsold homes and condominiums on the market.
"The housing market is far from the bottom," he said in a research note. "Sellers will have to overcome their state of denial and start dropping prices even more to clear this market. And once that happens, we will then have to convince buyers that prices have stopped falling. We are a long way from that point."
The Federal Reserve, he said, is concerned that the housing market could sned the economy into a downturn, "but as of now that has not happened."
Fed Chairman Ben Bernanke was scheduled to speak on the outlook for the economy later Tuesday.
Analysts said it was likely that home prices will continue declining for the rest of this year as reluctant sellers, accustomed to the booming market conditions of previous years, finally cut their asking prices.
The once-booming housing market, which had been one of the economy’s standout performers for the past five years, has experienced a significant slowdown this year, which has dragged down overall economic growth.
Some analysts have worried that the correction in housing could be severe enough to drag the entire country into a recession. However, those fears have eased in recent months as a big fall in gasoline and other energy prices has provided support for consumer spending.
For October, sales were down 2.9 percent in the Northeast and 1.2 percent in the South. However, they rose by 6.4 percent in the West and were unchanged in the Midwest.
WASHINGTON - Sales of existing homes posted a tiny increase in October, the first gain in eight months, but the median price of homes sold fell by a record amount.
The National Association of Realtors said Tuesday that existing home sales edged up 0.5 percent to a seasonally adjusted annual rate of 6.24 million. It was the first sales increase since February.
However, the median, or midpoint, price for a home sold dropped to $221,000 in October, a decline of 3.5 percent from a year ago. That was the biggest year-over-year price decline on record. It marked the third straight month that home prices have fallen compared to the same period a year ago, the longest stretch of such declines on record.
Michelle Meyer, an economist at Lehman Bros., said the rise in sales was partly a response to falling prices and a recent dip in mortgage rates
"The pickup in home sales reflects stabilization in demand and the first signs that the housing market is beginning to balance," she said in a note to clients.
Economist Joel Naroff of Naroff Economic Advisors said the report "does not point to a major housing meltdown," but he noted that there is a "huge" supply of unsold homes and condominiums on the market.
"The housing market is far from the bottom," he said in a research note. "Sellers will have to overcome their state of denial and start dropping prices even more to clear this market. And once that happens, we will then have to convince buyers that prices have stopped falling. We are a long way from that point."
The Federal Reserve, he said, is concerned that the housing market could sned the economy into a downturn, "but as of now that has not happened."
Fed Chairman Ben Bernanke was scheduled to speak on the outlook for the economy later Tuesday.
Analysts said it was likely that home prices will continue declining for the rest of this year as reluctant sellers, accustomed to the booming market conditions of previous years, finally cut their asking prices.
The once-booming housing market, which had been one of the economy’s standout performers for the past five years, has experienced a significant slowdown this year, which has dragged down overall economic growth.
Some analysts have worried that the correction in housing could be severe enough to drag the entire country into a recession. However, those fears have eased in recent months as a big fall in gasoline and other energy prices has provided support for consumer spending.
For October, sales were down 2.9 percent in the Northeast and 1.2 percent in the South. However, they rose by 6.4 percent in the West and were unchanged in the Midwest.
Friday, November 17, 2006
UK Preparing for the Worst in Housing Prices!
Banks told to predict effects of a 40% crash in house prices
By Patrick Hosking, Banking and Finance Editor
BANKS in the UK have been ordered by financial regulators to assess how they would cope in the event of house prices crashing by 40 per cent.
The instruction to include a housing slump scenario in their stress-testing models comes after the Financial Services Authority found that some banks were failing to include gloomy enough assumptions in their modelling.
The FSA said yesterday that an “appropriate” benchmark was to assume property prices fell by 40 per cent and that 35 per cent of mortgages in default ended with homes being re-possessed. It stressed that this was not a forecast but a “severe but plausible scenario” and one that banks should examine when deciding how robust their balance sheets were.
In a speech to the British Bankers’ Association yesterday, Clive Briault, the FSA’s managing director for retail markets, remarked on banks’ differing views over the size and impact of a house market downturn, hence the need for reference points.
He also warned bankers to ensure that they have properly stress-tested their mortgage portfolios in the wake of decisions by some to lend people greater multiples of their incomes.
In a letter to bank chief executives last month the FSA accused some of failing to consider scenarios in which they might be forced into losses, dividend cuts or capital shortfalls.
“We were struck by how mild the firm-wide stress events were at some of the firms we visited,” wrote the FSA’s director of major retail groups, David Strachan.
A few banks were “weak in all respects” in stress-testing.
House prices fell about 15 per cent nationwide in 1989-1992, and in parts of East Anglia by 40 per cent, leading to repossessions, write-downs and bank losses.
Banks are obliged to stress-test hypothetical adverse movements in asset prices, interest rates and exchange rates to ensure that they have a sufficient capital cushion. But stress-testing is only as robust as the assumptions made.
The FSA move came as UK house prices grew at their fastest for four years, according to new figures from RICS.
By Patrick Hosking, Banking and Finance Editor
BANKS in the UK have been ordered by financial regulators to assess how they would cope in the event of house prices crashing by 40 per cent.
The instruction to include a housing slump scenario in their stress-testing models comes after the Financial Services Authority found that some banks were failing to include gloomy enough assumptions in their modelling.
The FSA said yesterday that an “appropriate” benchmark was to assume property prices fell by 40 per cent and that 35 per cent of mortgages in default ended with homes being re-possessed. It stressed that this was not a forecast but a “severe but plausible scenario” and one that banks should examine when deciding how robust their balance sheets were.
In a speech to the British Bankers’ Association yesterday, Clive Briault, the FSA’s managing director for retail markets, remarked on banks’ differing views over the size and impact of a house market downturn, hence the need for reference points.
He also warned bankers to ensure that they have properly stress-tested their mortgage portfolios in the wake of decisions by some to lend people greater multiples of their incomes.
In a letter to bank chief executives last month the FSA accused some of failing to consider scenarios in which they might be forced into losses, dividend cuts or capital shortfalls.
“We were struck by how mild the firm-wide stress events were at some of the firms we visited,” wrote the FSA’s director of major retail groups, David Strachan.
A few banks were “weak in all respects” in stress-testing.
House prices fell about 15 per cent nationwide in 1989-1992, and in parts of East Anglia by 40 per cent, leading to repossessions, write-downs and bank losses.
Banks are obliged to stress-test hypothetical adverse movements in asset prices, interest rates and exchange rates to ensure that they have a sufficient capital cushion. But stress-testing is only as robust as the assumptions made.
The FSA move came as UK house prices grew at their fastest for four years, according to new figures from RICS.
Wednesday, November 15, 2006
Las Vegas' Perfect Storm!
Yet another "Boom City" faces the harsh reality of the bursting of the housing bubble. Las Vegas experienced remarkable, unprecedented growth in the last few years but as a taxi driver remarked to me, during my July vacation, "Things have gone too crazy". When the taxi driver's "get it" better than the "flippers", you know you're at or near the end of the cycle.
Many factors affecting local real estate market
By NEIL SCHWARTZ
SPECIAL TO THE REVIEW-JOURNAL
I have read several articles recently about the current state of the Las Vegas real estate market. I now know why the public is totally confused.
After 18 years selling real estate both here and in Los Angeles, I have seen all the elements that affect a market. But never have I seen the problems facing us presently all coming together at the same time. It's like a perfect storm.
I believe if members of the public are well-informed with complete and accurate information, they themselves could help in solving this problem.
By getting a complete picture, they would better understand the problem and work toward a quicker solution.
Here are the elements:
1. We have an affordability problem in this town. They say that 5,000 to 7,000 people are moving in every month. So why do we have so many homes unsold on the market? Unfortunately, the wages being paid for the majority of jobs new and old are not high enough for the people to buy a home. You need approximately $57,000 of income to purchase a $211,000 home. Look around. Do you see many $211,000 homes? To solve this problem, either wages need to go up or prices need to come down. What's your guess?
2. Many investors who helped drive the prices up thinking they would make a killing are simply dumping their homes on the resale market to get out from under a mistake they made. They simply bought too late in the game to flip and they did not realize the $2,000 monthly payment can't be covered by a $1,200 monthly rental income. Because of the dumping of these properties on the resale market, the present inventory is more than 20,000 resale single-family homes and condos or townhomes. Fifty percent of the homes on the resale market are non-owner occupied. Who do you think is going to lead the market in pricing?
3. Some owners who have had their properties for a long time had built up some nice equity. Then interest rates dipped and they refinanced, increased the amount of their loan, bought cars, paid for vacations, etc., and now are finding out that with the market in somewhat of a decline, the value of their home is less than their loans. These people are trapped. These homeowners are the foreclosures of tomorrow.
4. Let's talk about loan fraud, which is occurring at an alarming rate. As sellers get backed up against the wall, they will be willing to listen to the few who will try to get something for nothing. A seller has his home on the market for three months at $400,000 and has not had any offers -- and along comes an offer of $460,000, but the buyer wants the seller to give him cash back of $60,000 after the close of escrow. Of course the lender won't know about this. After the deal closes and the buyer gets his $60,000, he is gone and never makes a payment on the mortgage. Here goes another one into foreclosure -- and since this scam is a federal crime, whoever they catch is going down, including the seller and almost everyone who touched the deal.
5. The public keeps hearing these reports from the experts that prices are not going down -- as a matter of fact, they are going up. Give me a break. What they don't say is that more and more sellers are giving incentives to buyers by paying all or part of the closing costs. This is legal, providing the lender is aware of it and limits the amount. So if a seller sells his home for $400,000 and gives the buyer 3 percent of the sales price for closing costs (that's $12,000), the seller really sold his home for $388,000. This is never mentioned when the experts report the real estate activity. The appraisers are required to make an adjustment for this incentive when they compare properties. The seller did not get $400,000, he got $388,000.
As I mentioned, all these elements are presently at work in the Las Vegas market. It's time for the media and the experts to take a day off and join an everyday working agent to see what all the facts are and report them accurately so the public can be well-informed and make good decisions.
Neil Schwartz is local real estate agent.
Many factors affecting local real estate market
By NEIL SCHWARTZ
SPECIAL TO THE REVIEW-JOURNAL
I have read several articles recently about the current state of the Las Vegas real estate market. I now know why the public is totally confused.
After 18 years selling real estate both here and in Los Angeles, I have seen all the elements that affect a market. But never have I seen the problems facing us presently all coming together at the same time. It's like a perfect storm.
I believe if members of the public are well-informed with complete and accurate information, they themselves could help in solving this problem.
By getting a complete picture, they would better understand the problem and work toward a quicker solution.
Here are the elements:
1. We have an affordability problem in this town. They say that 5,000 to 7,000 people are moving in every month. So why do we have so many homes unsold on the market? Unfortunately, the wages being paid for the majority of jobs new and old are not high enough for the people to buy a home. You need approximately $57,000 of income to purchase a $211,000 home. Look around. Do you see many $211,000 homes? To solve this problem, either wages need to go up or prices need to come down. What's your guess?
2. Many investors who helped drive the prices up thinking they would make a killing are simply dumping their homes on the resale market to get out from under a mistake they made. They simply bought too late in the game to flip and they did not realize the $2,000 monthly payment can't be covered by a $1,200 monthly rental income. Because of the dumping of these properties on the resale market, the present inventory is more than 20,000 resale single-family homes and condos or townhomes. Fifty percent of the homes on the resale market are non-owner occupied. Who do you think is going to lead the market in pricing?
3. Some owners who have had their properties for a long time had built up some nice equity. Then interest rates dipped and they refinanced, increased the amount of their loan, bought cars, paid for vacations, etc., and now are finding out that with the market in somewhat of a decline, the value of their home is less than their loans. These people are trapped. These homeowners are the foreclosures of tomorrow.
4. Let's talk about loan fraud, which is occurring at an alarming rate. As sellers get backed up against the wall, they will be willing to listen to the few who will try to get something for nothing. A seller has his home on the market for three months at $400,000 and has not had any offers -- and along comes an offer of $460,000, but the buyer wants the seller to give him cash back of $60,000 after the close of escrow. Of course the lender won't know about this. After the deal closes and the buyer gets his $60,000, he is gone and never makes a payment on the mortgage. Here goes another one into foreclosure -- and since this scam is a federal crime, whoever they catch is going down, including the seller and almost everyone who touched the deal.
5. The public keeps hearing these reports from the experts that prices are not going down -- as a matter of fact, they are going up. Give me a break. What they don't say is that more and more sellers are giving incentives to buyers by paying all or part of the closing costs. This is legal, providing the lender is aware of it and limits the amount. So if a seller sells his home for $400,000 and gives the buyer 3 percent of the sales price for closing costs (that's $12,000), the seller really sold his home for $388,000. This is never mentioned when the experts report the real estate activity. The appraisers are required to make an adjustment for this incentive when they compare properties. The seller did not get $400,000, he got $388,000.
As I mentioned, all these elements are presently at work in the Las Vegas market. It's time for the media and the experts to take a day off and join an everyday working agent to see what all the facts are and report them accurately so the public can be well-informed and make good decisions.
Neil Schwartz is local real estate agent.
U.S. Consumption Not Supported By Income
Economist at Morgan Stanley, Stephen Roach says,"I think we are coming to a critical point in the global business cycle, where an unbalanced world needs to get rebalanced and I think the key mechanism of that rebalancing will be slower rate of consumption by the US consumer. I think that’s been triggered as we speak by the bursting of the US housing bubble. I think it has global consequences for those economies that are heavily dependent on the US consumers."
Excerpts from an inerview given to CNBC-TV18
Q: Are you feeling bullish or bearish?
A: Both - I hate labels. The global business cycle is turning to a downside and that will certainly leave me bearish on prospects for world economic growth for 2007. The constructive comments that I have added to the debate in the last few months, have more to do with structural underpinnings of the global economy. And the fact that the so-called stewards of globalization - the G7 Finance Minister and the IMF are now mindful of the serious risks that could be caused by mounting global imbalances and are beginning a long process to do something about it. So, I have to take those legitimate concerns and efforts on board, in accessing my overall outlook for the global economy.
Q: I read in one of your recent reports that you are structurally positive but cyclically slightly pessimistic, what does that mean?
A: Again that is very much what I try to say. Cyclically, the world economy looks like it will disappoint next year, in terms of economic growth as the US housing bubble bursts, the US consumer and the construction industry feels the heat - it has global implications. Structurally, if the G7 and the IMF can get the architecture right in dealing with global imbalances, that could temper the downside and that will leave me a little less pessimistic than I might otherwise be.
Q: Are you convinced that structurally we have a lot to be positive about?
A: This is a glimmer that things may be getting better in terms of the global policy architecture, that is required to deal with mounting imbalances. We have an IMF meeting coming up very shortly, which will give us a further read, whether or not these global policymakers are truly up to the task.
Q: Do the cyclical factors really worry you?
A: It certainly was a possibility six years ago, plus an equity bubble popped and the world went into a mild recession at the end of 2000 and early 2001. We are now seeing the bursting of a major asset bubble in the US property market. It could well have equally profound implications on the US and what is still a US-centric global economy. We have to take these developments seriously and if an asset bubble six years ago gave us a recession - the question obviously is why can’t it do it again this time as well?
Q: You have seen the first signs of trouble in the housing market already - can we get away with or do you think it will be a really big problem?
A: There are two dimensions of the housing bubble response - there is the construction activity that is associated with building new homes and renovation of old homes and there is the price effect that has to deal with the value of the asset class. In the construction area, we are moving under recession right now, we are not going to get away with a mild slowing of growth rate. There is a huge backup of inventory of unsold homes - both new and existing sales are falling precipitously.
Ironically, construction activity is still being maintained at a high level in the residential construction sector because a lot of projects underway need to be completed but the pipeline is drying up and there will be a recession. In terms of house prices, the adjustments will hopefully be more moderate. We are hoping that there won't be a widespread price destruction and major declines in home prices. If that occurs, then the impact on wealth dependant, asset dependant American consumers will be particularly acute.
Q: How important is the US consumer as an engine of global economic growth?
A: I don’t want to sound too US-centric but the American consumer is by far the dominant consumer in the global economy. Last year, the US consumer spent close to USD 9 trillion that is 20% more than all consumers in Europe. It is more than three times the consumption levels in Japan. It's about 10 times consumption levels in China and it is 17 times consumption spending in India. So, the American consumer is clearly the most powerful consumer in the world. US consumption is a record 70% of US GDP and the consumption is not supported by income as I just eluded to.
It has been associated with record debt service ratios and negative saving rates for the first time since 1933. So, I think the case for consumption adjustment is compelling and unless some other brave consumer steps up somewhere else in the world and I am dubious of that, then I think there will be global consequences of the coming consolidation of the American consumer.
Q: If the US consumer does slow down, can the US get away with a non-recession like situation, a mild kind of growth which some of the economists tend to be veering towards?
A: I think in a post-housing boom climate, the US growth rate will be about 2% weaker then otherwise might have been the case. They will have their 1% point reduction coming from their construction impacts in the building area, and the other 1% point reduction coming from consumption. We have been growing about 3.25%-3.50% over the last few years, so if we take a couple of points off of that, then that will still leave you with a positive growth rate of say 1.25%-1.50% zone.
Q: If the US and China were to slow down at the same time, what happens to global commodities like crude, hard commodities, precious metals etc?
A: Commodity professionals have concluded that this sector is now in the early stages of a secular boom and everybody is talking about a super-cycle in commodities, and ignoring the possibility of downside pressures that would be evident, if China and the American consumer slows down.
China last year, accounted for a bulk of incremental demand in most of the major commodity prices. Here is a country that accounted for 5% of world GDP but consumed about 25% of all the aluminum in the world. Around 35%-40% of steel, iron, coal and nearly 50% of the cement in the world last year was poured into China. So, if China slows or if it tries to move to a more commodity efficient growth model, (which it has to do in order to deal with high cost of commodity prices) there could be a significant downside to global commodity prices.
Q: Will you be surprised if the Fed raises rates in the next quarter or so?
A: I wouldn’t be shocked at anything. The Fed has indicated that it does have concerns over the residue of inflationary pressure in the pipeline, but they are also mindful of the fact that their policy action impacts the economy. So, they do not want a tightening policy at a time when they are fearful that the business cycle maybe slipping. If the economy looks like it is coming back smartly, there is still a residue of inflationary pressure - then you could see some additional tightening by the US central bank. I don't suspect that would be the case but I could be wrong.
Q: What’s your best guess - will they cut interest rate down to 2.5%-3% or could it go lower than that?
A: Given the adjustments that I envision, I would find it very difficult to see them cutting the federal funds rate below 4% at any point in the next year or so.
Q: Where does it leave emerging markets though, what’s bad for the US, is it good for the emerging markets?
A: Emerging markets are very vulnerable in that regard. Our emerging market experts at Morgan Stanley, don’t agree with me for a second. They stress that their new fundamentals justify these narrow spreads. And I think to some extend their points are well taken because emerging markets have come a long way since the financial crises of 1997-98, in correcting many of the flaws that were evident back then.
But the next crisis is never like the last crisis and the next crisis could well be the loss of momentum by the American consumer, which is still the driver of the end market demand that supports most emerging market economies in the world. So I suspect, emerging markets could get hit on the shortfall of their major source of end market demand.
Q: Just to sum up you are saying that we have a tough couple of years ahead for the financial and commodity markets across the world?
A: I think we are coming to a critical point in the global business cycle, where an unbalanced world needs to get rebalanced and I think the key mechanism of that rebalancing will be slower rate of consumption by the US consumer. I think that’s been triggered as we speak by the bursting of the US housing bubble. I think it has global consequences for those economies that are heavily dependent on the US consumers.
Excerpts from an inerview given to CNBC-TV18
Q: Are you feeling bullish or bearish?
A: Both - I hate labels. The global business cycle is turning to a downside and that will certainly leave me bearish on prospects for world economic growth for 2007. The constructive comments that I have added to the debate in the last few months, have more to do with structural underpinnings of the global economy. And the fact that the so-called stewards of globalization - the G7 Finance Minister and the IMF are now mindful of the serious risks that could be caused by mounting global imbalances and are beginning a long process to do something about it. So, I have to take those legitimate concerns and efforts on board, in accessing my overall outlook for the global economy.
Q: I read in one of your recent reports that you are structurally positive but cyclically slightly pessimistic, what does that mean?
A: Again that is very much what I try to say. Cyclically, the world economy looks like it will disappoint next year, in terms of economic growth as the US housing bubble bursts, the US consumer and the construction industry feels the heat - it has global implications. Structurally, if the G7 and the IMF can get the architecture right in dealing with global imbalances, that could temper the downside and that will leave me a little less pessimistic than I might otherwise be.
Q: Are you convinced that structurally we have a lot to be positive about?
A: This is a glimmer that things may be getting better in terms of the global policy architecture, that is required to deal with mounting imbalances. We have an IMF meeting coming up very shortly, which will give us a further read, whether or not these global policymakers are truly up to the task.
Q: Do the cyclical factors really worry you?
A: It certainly was a possibility six years ago, plus an equity bubble popped and the world went into a mild recession at the end of 2000 and early 2001. We are now seeing the bursting of a major asset bubble in the US property market. It could well have equally profound implications on the US and what is still a US-centric global economy. We have to take these developments seriously and if an asset bubble six years ago gave us a recession - the question obviously is why can’t it do it again this time as well?
Q: You have seen the first signs of trouble in the housing market already - can we get away with or do you think it will be a really big problem?
A: There are two dimensions of the housing bubble response - there is the construction activity that is associated with building new homes and renovation of old homes and there is the price effect that has to deal with the value of the asset class. In the construction area, we are moving under recession right now, we are not going to get away with a mild slowing of growth rate. There is a huge backup of inventory of unsold homes - both new and existing sales are falling precipitously.
Ironically, construction activity is still being maintained at a high level in the residential construction sector because a lot of projects underway need to be completed but the pipeline is drying up and there will be a recession. In terms of house prices, the adjustments will hopefully be more moderate. We are hoping that there won't be a widespread price destruction and major declines in home prices. If that occurs, then the impact on wealth dependant, asset dependant American consumers will be particularly acute.
Q: How important is the US consumer as an engine of global economic growth?
A: I don’t want to sound too US-centric but the American consumer is by far the dominant consumer in the global economy. Last year, the US consumer spent close to USD 9 trillion that is 20% more than all consumers in Europe. It is more than three times the consumption levels in Japan. It's about 10 times consumption levels in China and it is 17 times consumption spending in India. So, the American consumer is clearly the most powerful consumer in the world. US consumption is a record 70% of US GDP and the consumption is not supported by income as I just eluded to.
It has been associated with record debt service ratios and negative saving rates for the first time since 1933. So, I think the case for consumption adjustment is compelling and unless some other brave consumer steps up somewhere else in the world and I am dubious of that, then I think there will be global consequences of the coming consolidation of the American consumer.
Q: If the US consumer does slow down, can the US get away with a non-recession like situation, a mild kind of growth which some of the economists tend to be veering towards?
A: I think in a post-housing boom climate, the US growth rate will be about 2% weaker then otherwise might have been the case. They will have their 1% point reduction coming from their construction impacts in the building area, and the other 1% point reduction coming from consumption. We have been growing about 3.25%-3.50% over the last few years, so if we take a couple of points off of that, then that will still leave you with a positive growth rate of say 1.25%-1.50% zone.
Q: If the US and China were to slow down at the same time, what happens to global commodities like crude, hard commodities, precious metals etc?
A: Commodity professionals have concluded that this sector is now in the early stages of a secular boom and everybody is talking about a super-cycle in commodities, and ignoring the possibility of downside pressures that would be evident, if China and the American consumer slows down.
China last year, accounted for a bulk of incremental demand in most of the major commodity prices. Here is a country that accounted for 5% of world GDP but consumed about 25% of all the aluminum in the world. Around 35%-40% of steel, iron, coal and nearly 50% of the cement in the world last year was poured into China. So, if China slows or if it tries to move to a more commodity efficient growth model, (which it has to do in order to deal with high cost of commodity prices) there could be a significant downside to global commodity prices.
Q: Will you be surprised if the Fed raises rates in the next quarter or so?
A: I wouldn’t be shocked at anything. The Fed has indicated that it does have concerns over the residue of inflationary pressure in the pipeline, but they are also mindful of the fact that their policy action impacts the economy. So, they do not want a tightening policy at a time when they are fearful that the business cycle maybe slipping. If the economy looks like it is coming back smartly, there is still a residue of inflationary pressure - then you could see some additional tightening by the US central bank. I don't suspect that would be the case but I could be wrong.
Q: What’s your best guess - will they cut interest rate down to 2.5%-3% or could it go lower than that?
A: Given the adjustments that I envision, I would find it very difficult to see them cutting the federal funds rate below 4% at any point in the next year or so.
Q: Where does it leave emerging markets though, what’s bad for the US, is it good for the emerging markets?
A: Emerging markets are very vulnerable in that regard. Our emerging market experts at Morgan Stanley, don’t agree with me for a second. They stress that their new fundamentals justify these narrow spreads. And I think to some extend their points are well taken because emerging markets have come a long way since the financial crises of 1997-98, in correcting many of the flaws that were evident back then.
But the next crisis is never like the last crisis and the next crisis could well be the loss of momentum by the American consumer, which is still the driver of the end market demand that supports most emerging market economies in the world. So I suspect, emerging markets could get hit on the shortfall of their major source of end market demand.
Q: Just to sum up you are saying that we have a tough couple of years ahead for the financial and commodity markets across the world?
A: I think we are coming to a critical point in the global business cycle, where an unbalanced world needs to get rebalanced and I think the key mechanism of that rebalancing will be slower rate of consumption by the US consumer. I think that’s been triggered as we speak by the bursting of the US housing bubble. I think it has global consequences for those economies that are heavily dependent on the US consumers.
Tuesday, November 14, 2006
Consumer Credit Plunges
MarketWatch is reporting U.S. consumer credit down by most since April 1992
Consumers may have finally "caved in". It remains to be seen whether or not this is finally a precursor to recession or just another step along the way.
U.S. consumer credit outstanding fell by the biggest amount since April 1992 in September as households took out fewer loans for items like automobiles and boats, the Federal Reserve said Tuesday. Total consumer credit fell by $1.20 billion in September, or by a seasonally adjusted annual rate of 0.61%, to $2.366 trillion, the Fed said. In April 1992, outstanding consumer credit fell by $1.78 billion, according to the Fed.
The decline was unexpected. Wall Street economists surveyed by MarketWatch were expecting consumer credit to grow by $5.4 billion in September. Most of the decline was in so-called nonrevolving credit, like loans for cars and boats. Nonrevolving credit fell by $4.05 billion, or by a seasonally adjusted annual rate of 3.21%, to $1.50 billion.
Consumers may have finally "caved in". It remains to be seen whether or not this is finally a precursor to recession or just another step along the way.
Friday, November 10, 2006
The Bulls Charge!
Excellent observations from Lew Rockwell:
"I’m not sure I want popular opinion on my side – I’ve noticed those with the most opinions often have the fewest facts."
~ Bethania McKenstry
Opinions are like noses: everyone has one. But a strange thing happened on the way to Dow 12,000 – the overwhelming majority of financial pundits sound like a broken record:
"I think we should put on another 100 points in the S&P 500 by next February and another 1000 points on the Dow."
~ Peter Canelo, Canelo & Associates, 10/13/06
"Our feeling is that the economy is slowing and this is good news for investors."
~ Abby Cohen, Goldman Sachs, 10/17/06
"The upside still outweighs the downside in our view… People forget – this isn’t like the late 1990s. This is like the mid-1990s."
~ Tony Dwyer, FTN Midwest Securities, 10/18/06
"I don't think the economy's 'landing.' I think the economy's doing great… It's better than Goldilocks quite honestly. This is the greatest global boom of all time."
~ Ed Yardeni, Oak Investments, 10/18/06
"Count me somewhere between bullish and very bullish. The U.S. stock market remains undervalued, in my opinion."
~ Bill Miller, Legg Mason, 10/21/06
"It simply is not remarked upon enough how unbelievably powerful, how unbelievably bullish this rally is."
~ James Cramer, CNBC’s "Mad Money," 10/27/06
Optimism is pervasive on Wall Street, yet some bulls, well aware of the laws of contrary opinion, claim too much pessimism as a reason to own stocks:
"The fact is we can't find enough to worry about, and that's usually a good time to find value in the stock market… Any red ink between now and the end of the year is an opportunity and not something for investors to run from."
~ Mike Williams, Tocqueville Asset Management, 10/13/06
"… I think bravado and optimism begets bad times and chronic cautiousness paints a beautiful picture for the future. [This] is a low-risk, high-return situation created by cautious players."
~ James Paulsen, Wells Capital Management, 10/20/06
"Could we have a big bear market? I don’t think so. Bear markets come from a combination of positive sentiment with bad surprises virtually no one anticipates… Today too many gloomsters and not that many big-time boomsters (like me) are around for this combination to occur."
~ Kenneth L. Fisher, Fisher Investments, 10/30/06
The bulls can’t possibly be running confidently and running scared at the same time. What are the "facts" regarding investor sentiment?
Guest commentary on CNBC (a.k.a. "Bubblevision") is universally upbeat, bordering on giddy.
Over the last 420 weeks the Investors Intelligence poll of investment newsletter editors has recorded more bears than bulls just 6 times.
The Hulbert Stock Newsletter Sentiment Index shows its sampling of short-term market timers with a 67.0% exposure to the stock market. According to Mark Hulbert, "the HSNSI's average reading since the bull market began on Oct. 9, 2002, has been just 29.5%, or less than half the current sentiment reading. In other words, the wall of worry that has on average existed during this more than four-year bull market has now evaporated."
Institutional investors have not deviated from their fully invested course. Mutual fund cash levels remain at a paltry 4.3%.
Short sellers are nearly extinct. An estimated $4 billion resides in bear fund assets against $5.5 trillion in stock fund assets. The Strunk Short Index used to follow 25 short bias hedge funds; that number has dwindled to 8 or 9 (there were over 9,200 hedge funds at last count).
In a twist of irony, many in the bear camp have resigned themselves to owning stocks (primarily energy and commodity-related) as a hedge against hyperinflation.
The investing public is all in. Equities account for 35.6% of household financial assets compared to the long-term average of 26.5% (since 1952). Money market fund balances are near an all-time low 21.3% of mutual fund assets
Ten of our favorite sentiment indicators are, on average, in the 73rd percentile of bullishness versus readings over the past ten years. Overall, 1996 to 2006 was a period of stock market ebullience, making the current level of enthusiasm all the more extreme.
Meanwhile, the Soft Landing crowd continues to turn a blind eye to a credit bubble about to go into an uncontrolled spin. Median existing home prices dropped 2.5% year-over-year, their worst showing in nearly four decades. Foreclosures in California have doubled in the past year and are up tenfold in Boston since 2004. Default rates on subprime loans were 7.35% in July from 5.51% a year earlier, according to Friedman Billings Ramsey. Michael Perry, CEO of Indymac Bank (one of the nation’s largest home lenders), thinks 4% of America's mortgaged homeowners might lose their homes to foreclosure in coming months, four times worse than the historical average. Subprime lender Accredited Home Lending, Washington Mutual (with a large exposure to subprime) and mortgage insurer Radian Group all witnessed sharp stock drops on disappointing 3rd quarter earnings releases. Since this rally began in mid-July, the Philadelphia Bank Index (BKX) looks exhausted, capturing just 54% of the gain of the S&P 500.
Never confuse a stampeding herd with the facts. Only in a bubble can the majority – utterly intolerant of dissent – delude itself into believing it is in the dissenting minority. We’re not sure whether such behavior is disingenuous or simply dysfunctional. Perhaps the old saw applies: "When everyone is thinking alike, no one is really thinking."
"I’m not sure I want popular opinion on my side – I’ve noticed those with the most opinions often have the fewest facts."
~ Bethania McKenstry
Opinions are like noses: everyone has one. But a strange thing happened on the way to Dow 12,000 – the overwhelming majority of financial pundits sound like a broken record:
"I think we should put on another 100 points in the S&P 500 by next February and another 1000 points on the Dow."
~ Peter Canelo, Canelo & Associates, 10/13/06
"Our feeling is that the economy is slowing and this is good news for investors."
~ Abby Cohen, Goldman Sachs, 10/17/06
"The upside still outweighs the downside in our view… People forget – this isn’t like the late 1990s. This is like the mid-1990s."
~ Tony Dwyer, FTN Midwest Securities, 10/18/06
"I don't think the economy's 'landing.' I think the economy's doing great… It's better than Goldilocks quite honestly. This is the greatest global boom of all time."
~ Ed Yardeni, Oak Investments, 10/18/06
"Count me somewhere between bullish and very bullish. The U.S. stock market remains undervalued, in my opinion."
~ Bill Miller, Legg Mason, 10/21/06
"It simply is not remarked upon enough how unbelievably powerful, how unbelievably bullish this rally is."
~ James Cramer, CNBC’s "Mad Money," 10/27/06
Optimism is pervasive on Wall Street, yet some bulls, well aware of the laws of contrary opinion, claim too much pessimism as a reason to own stocks:
"The fact is we can't find enough to worry about, and that's usually a good time to find value in the stock market… Any red ink between now and the end of the year is an opportunity and not something for investors to run from."
~ Mike Williams, Tocqueville Asset Management, 10/13/06
"… I think bravado and optimism begets bad times and chronic cautiousness paints a beautiful picture for the future. [This] is a low-risk, high-return situation created by cautious players."
~ James Paulsen, Wells Capital Management, 10/20/06
"Could we have a big bear market? I don’t think so. Bear markets come from a combination of positive sentiment with bad surprises virtually no one anticipates… Today too many gloomsters and not that many big-time boomsters (like me) are around for this combination to occur."
~ Kenneth L. Fisher, Fisher Investments, 10/30/06
The bulls can’t possibly be running confidently and running scared at the same time. What are the "facts" regarding investor sentiment?
Guest commentary on CNBC (a.k.a. "Bubblevision") is universally upbeat, bordering on giddy.
Over the last 420 weeks the Investors Intelligence poll of investment newsletter editors has recorded more bears than bulls just 6 times.
The Hulbert Stock Newsletter Sentiment Index shows its sampling of short-term market timers with a 67.0% exposure to the stock market. According to Mark Hulbert, "the HSNSI's average reading since the bull market began on Oct. 9, 2002, has been just 29.5%, or less than half the current sentiment reading. In other words, the wall of worry that has on average existed during this more than four-year bull market has now evaporated."
Institutional investors have not deviated from their fully invested course. Mutual fund cash levels remain at a paltry 4.3%.
Short sellers are nearly extinct. An estimated $4 billion resides in bear fund assets against $5.5 trillion in stock fund assets. The Strunk Short Index used to follow 25 short bias hedge funds; that number has dwindled to 8 or 9 (there were over 9,200 hedge funds at last count).
In a twist of irony, many in the bear camp have resigned themselves to owning stocks (primarily energy and commodity-related) as a hedge against hyperinflation.
The investing public is all in. Equities account for 35.6% of household financial assets compared to the long-term average of 26.5% (since 1952). Money market fund balances are near an all-time low 21.3% of mutual fund assets
Ten of our favorite sentiment indicators are, on average, in the 73rd percentile of bullishness versus readings over the past ten years. Overall, 1996 to 2006 was a period of stock market ebullience, making the current level of enthusiasm all the more extreme.
Meanwhile, the Soft Landing crowd continues to turn a blind eye to a credit bubble about to go into an uncontrolled spin. Median existing home prices dropped 2.5% year-over-year, their worst showing in nearly four decades. Foreclosures in California have doubled in the past year and are up tenfold in Boston since 2004. Default rates on subprime loans were 7.35% in July from 5.51% a year earlier, according to Friedman Billings Ramsey. Michael Perry, CEO of Indymac Bank (one of the nation’s largest home lenders), thinks 4% of America's mortgaged homeowners might lose their homes to foreclosure in coming months, four times worse than the historical average. Subprime lender Accredited Home Lending, Washington Mutual (with a large exposure to subprime) and mortgage insurer Radian Group all witnessed sharp stock drops on disappointing 3rd quarter earnings releases. Since this rally began in mid-July, the Philadelphia Bank Index (BKX) looks exhausted, capturing just 54% of the gain of the S&P 500.
Never confuse a stampeding herd with the facts. Only in a bubble can the majority – utterly intolerant of dissent – delude itself into believing it is in the dissenting minority. We’re not sure whether such behavior is disingenuous or simply dysfunctional. Perhaps the old saw applies: "When everyone is thinking alike, no one is really thinking."
Monday, October 30, 2006
David Dodge Takes Aim at CMHC
From Reuters. “Bank of Canada Governor David Dodge rapped the government housing agency last summer for fueling inflation with new mortgage insurance products, according to a letter released by the central bank on Monday.”
“Dodge told CMHC President Karen Kinsley he was dismayed with a June press release announcing the agency was offering mortgage insurance for interest-only loans and for amortizations of up to 35 years. ‘At a time when the housing market is already overheated, further fuelling demand through CMHC actions would only put further upward pressure on prices and thus make housing less, not more, affordable for Canadians,’ Dodge said in the letter.”
“The central bank explicitly said high housing prices were a key risk to its inflation outlook in July, when it updated its monetary policy report.”
“CMHC’s press release also hinted it would look for ways to reduce the cost of accessing financing for house buyers, a development Dodge said would be ‘very unhelpful’ at a time when housing prices are rising faster than all other items in the consumer price index. Dodge’s concerns dissipated after meeting with Kinsley, central bank and CMHC officials said.”
“Dodge told CMHC President Karen Kinsley he was dismayed with a June press release announcing the agency was offering mortgage insurance for interest-only loans and for amortizations of up to 35 years. ‘At a time when the housing market is already overheated, further fuelling demand through CMHC actions would only put further upward pressure on prices and thus make housing less, not more, affordable for Canadians,’ Dodge said in the letter.”
“The central bank explicitly said high housing prices were a key risk to its inflation outlook in July, when it updated its monetary policy report.”
“CMHC’s press release also hinted it would look for ways to reduce the cost of accessing financing for house buyers, a development Dodge said would be ‘very unhelpful’ at a time when housing prices are rising faster than all other items in the consumer price index. Dodge’s concerns dissipated after meeting with Kinsley, central bank and CMHC officials said.”
Tuesday, October 24, 2006
Dow 12,000 Perspective
As the markets celebrate the record Dow at 12,000, perhaps some perspective is needed to determine where we've been and how long it has take to get here since the prior peaks in the market.
A comparison of the U.S. markets to world markets is also a useful exercise.
graphics courtesy of NYT
A comparison of the U.S. markets to world markets is also a useful exercise.
graphics courtesy of NYT
Friday, September 08, 2006
Krugman: Housing Prices "Long way to fall"
On Bloomberg Video: Krugman of Princeton Says Home Prices Have a `Long Way to Fall'.
September 7 (Bloomberg) -- Paul Krugman, an economics professor at Princeton University, talks with Bloomberg's Rhonda Schaffler in New York about the outlook for the U.S. housing market, prospects for a recession and concern about the country's trade deficit. (Source: Bloomberg)
"I think we are looking at a housing cycle that we've never seen.
If history is any guide, housing prices have got a long way to fall and the housing industry is going to go through a long drought."
September 7 (Bloomberg) -- Paul Krugman, an economics professor at Princeton University, talks with Bloomberg's Rhonda Schaffler in New York about the outlook for the U.S. housing market, prospects for a recession and concern about the country's trade deficit. (Source: Bloomberg)
"I think we are looking at a housing cycle that we've never seen.
If history is any guide, housing prices have got a long way to fall and the housing industry is going to go through a long drought."
Monday, September 04, 2006
The housing collapse heard round the world
Do you think that the Canadian economy will be immune to the effects of a U.S. recession? Think again!
BARRIE MCKENNA
Globe and Mail Update
Real estate agent Andrea Gaus knew the market was out of whack when the price of a typical four-bedroom house near good schools in the leafy Maryland suburbs of Washington shot past the $1-million (U.S.) mark.
“It got to the point where appreciation was so high that it priced people out of the market,” Ms. Gaus said.
But the peak has passed, and the consequences of the deflating bubble are buffeting the housing market, in Washington and across the United States.
What sold in a weekend here last year is taking months to unload. And increasingly nervous home sellers are slashing prices to get rid of properties before their value sinks even further. One buyer recently threatened to walk away from a signed contract on a $1.6-million house unless the seller took $100,000 off the price to reflect the drop in value since the deal was struck. The seller quickly buckled, fearing the house might be worth even less if put back on the market today.
“Look how fast prices were going up. The same thing is happening on the way down,” observed Ms. Gaus, who's been selling homes in Potomac for 16 years.
“It's a very tough market.”
The once red-hot housing market has fizzled. And the topic du jour among economists, investors and policy makers is whether the end of the housing boom signals the beginning of the end of a long run for the world's mightiest economy, and by association, the rest of the planet.
The U.S. housing crash may prove to be the economic equivalent of the canary in the coal mine — a warning of impending danger in an economy that has surged too far, too fast. Many experts are now openly speculating about a possible U.S. recession next year, brought on by consumers reacting to the shrinking value of their nest egg. If they're right, the fallout could prove to be far nastier than the collapse of the technology bubble at the start of the decade.
“It could throw the economy into recession if consumers go into a shell,” worried economist Peter Morici, a business professor at the University of Maryland. “I don't see anything out there to compensate.”
The housing market has been a perfect conduit for economic activity, funnelling and leveraging billions of dollars worth of household wealth into consumer spending in recent years. The U.S. savings rate is negative now, but even a relatively modest shift toward savings now could have a dramatic effect on consumption, sending the economy into reverse. Joining a growing number of anxious forecasters, Prof. Morici puts the risk of recession in 2007 at 50-50.
“The wealth effect has been very important in fuelling the recovery,” he said. “It doesn't appear like that is going to be available any more. Housing prices have finally outrun incomes.”
Runaway real estate prices, which had been growing in double digits throughout much of the country, are now pricing potential homeowners right out of the market. The ability of Americans to afford a home is the worst it's been in two decades, according to the National Association of Realtors.
The past year has been rough on consumers. First, mortgage rates began to rise. Then, there was the jolt from sharply higher energy prices. And now the apparent end of the long real estate boom is at hand. It's all combined to make Americans feeling distinctly poorer, and less confident. Mirroring other recent surveys, the U.S. Conference Board reported last week that its consumer confidence index suffered its biggest one-month drop in August since the devastation of hurricane Katrina a year ago.
Think it all doesn't matter to you? Think again. For nearly a decade now, the United States has been the economic driver for much of the world — Canada included. The United States has been sucking up excess savings and consuming everything in sight, from cars to homes and everything that goes in them.
“It's hard to imagine that a U.S.-centric global economy wouldn't be at risk in the aftermath of a bursting of the U.S. housing bubble,” warned Morgan Stanley chief economist Stephen Roach, one of Wall Street's most outspoken worrywarts.
“The non-U.S. world remains heavily reliant on selling exports to wealth-dependent American consumers. As the United States comes to grips with the aftershocks of another post-bubble shakeout, so too must the rest of the world.”
As he put it: “If the American consumer sneezes, countries in both the developed and the developing world could easily catch a cold.”
How Potomac real estate became a leading indicator for the global economy is the story of a silent transformation of the U.S. economy.
In the early 1990s, when Ms. Gaus got into the real estate business, investment in residential real estate represented less than 3.5 per cent of the economy. Today, it makes up 6 per cent. Add in all the products and services tied to real estate — furniture, big-screen TVs, home improvements and financing — and the total contribution is much larger.
Housing has also emerged as an increasingly vital economic driver — for consumption, jobs and overall economic activity.
Economist David Rosenberg of Merrill Lynch & Co. Inc. estimated that construction activity, combined with surging home values, accounted for nearly half of U.S. economic growth over the past three years, or 1.5 percentage points of the 3.5-per-cent average annual GDP increase.
Encouraged by low interest rates, innovative mortgages and a tax system that favours maximum leverage, Americans have been using their homes as ATMs. Thanks to generous lines of credit and multiple refinancings, they've renovated, furnished their nests and moved up to ever-larger homes.
In the past decade, the percentage of U.S. household wealth tied up in homes has climbed to 48.5 per cent from 38.7 per cent.
Americans have also super-sized their abodes. From 1975 to 2005, the average size of new single-family homes grew by 48 per cent — from 1,645 square feet to 2,434 sq. ft. — even as families shrunk in size, according to new data from the U.S. Census Bureau.
These larger homes come with more bedrooms and more bathrooms, spawning a bevy of retail chains to help homeowners furnish all that space, such as Crate & Barrel, the Pottery Barn and Bed, Bath and Beyond. In 1975, only 4 per cent of homes had more than 1½ baths. Today, nearly half of new homes do.
That has changed the way Americans spend. Nearly 15 per cent of every dollar consumers spend now goes toward housing-related items. That compares with 11.5 per cent in the early 1990s.
So perhaps it's understandable that some forecasters may be underestimating the potential downside of this housing boom.
“The decline in housing will not be a mere sideshow,” warned Merrill Lynch's Mr. Rosenberg. “The housing correction has all the markings of a three-ring circus that has the potential to pull consumer spending to the brink.”
He's predicting that housing prices will fall by 5 per cent by next year, erasing $1-trillion worth of household wealth.
U.S. Federal Reserve Board chairman Ben Bernanke, for his part, has predicted an orderly deflation of the housing bubble, and a soft landing for the rest of the economy. But in the minutes of their Aug. 8 rate-setting meeting, Fed governors acknowledged that housing is “a downside risk” to the economic outlook. Prospects for the sector remain shrouded in “considerable uncertainty,” according to the minutes, released this week.
Part of the problem for economists is that while housing is now clearly in a slump, other parts of the economy are behaving as if nothing is wrong. Manufacturing, for example, continues to fair well, outside of the auto sector. Similarly, corporate profit and business investment are healthy and growing. Even retail sales and consumer spending aren't yet showing the impact of the slump.
But signs of stress are apparent. Major retailers, including Wal-Mart Stores Inc. and Costco Wholesale Corp., have warned of substantially weaker profit in the months ahead as consumers cut back.
The problem is even more apparent in the home finance business.
Foreclosures were up 18 per cent over last year in July, and are now running at rate of one for every 1,245 households. Banks also report that late payments are way up. And in some markets, homeowners who have seen the value of their property fall below what they still owe the bank are trying to coax lenders to write off part of the mortgage.
The current slowdown is “atypical” because it's being driven by a “less than once-in-a-lifetime housing market bubble,” suggested Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y.
“Traditional warning signals of impending slowdown are unlikely to work in their usual way,” he explained. “Investors need to focus on the housing numbers, which are fast becoming horrific, and on the implications of the drop in housing activity.”
But there may be a glimmer of hope in this sobering scenario, according to Morgan Stanley's Mr. Roach. He said the global economy, like the U.S. housing market, is badly out of kilter, and needs to be rebalanced to ensure its long-term health. The housing correction could go a long way to erasing these global imbalances.
And if there's a silver lining for Canada it is that we may not be as vulnerable to a U.S.-led recession as much of the rest of the world.
Economist Clement Gignac of National Bank Financial Inc. in Montreal argued that the price boom in oil and other commodities may keep Canada from following the United States into a recession. He said Canada escaped U.S.-driven downturns three times in the 1970s, and this time could be the same. He puts the odds of a U.S. recession at 40 per cent, but just 15 per cent north of the border.
In Potomac, Ms. Gaus lamented that too few people have fully adjusted to the harsh reality that it is now a buyer's market.
For sellers, that means accepting less, possibly waiting months to sell and being ready to make huge concessions.
“People just aren't prepared for what's happening,” she said.
Friday, September 01, 2006
Nightmare Mortgages!
As I have always said, bubbles are created out of credit. The more money is available to borrow, the higher the prices go. To keep things going, exotic loans were promoted to throw more gasoline on the fire. In the end, everybody suffers and someone has to pay the bill. The bubble bursts and credit disappears. The cycle continues.
From BusinessWeek:
For cash-strapped homeowners, it was a pitch they couldn't refuse: Refinance your mortgage at a bargain rate and cut your payments in half. New home buyers, stretching to afford something in a super-heated market, didn't even need to produce documentation, much less a downpayment.
Those who took the bait are in for a nasty surprise. While many Americans have started to worry about falling home prices, borrowers who jumped into so-called option ARM loans have another, more urgent problem: payments that are about to skyrocket
The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created. With its temptingly low minimum payments, the option ARM brought a whole new group of buyers into the housing market, extending the boom longer than it could have otherwise lasted, especially in the hottest markets. Suddenly, almost anyone could afford a home -- or so they thought.
The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.
The option ARM is "like the neutron bomb," says George McCarthy, a housing economist at New York's Ford Foundation. "It's going to kill all the people but leave the houses standing."
Wednesday, August 30, 2006
Tuesday, August 22, 2006
‘Hard landing' forecast for U.S.
Hold on to your hats. It may be time to turn your U.S. portfolio on its head.
That's because there's growing evidence that the U.S. economic cycle is more advanced than is generally recognized — and that there is a higher risk that the economy could be in for a hard landing, not a soft one.
This is the view of David Rosenberg, North American economist for investment dealer Merrill Lynch & Co. Inc. in New York.
“Practically every indicator at our disposal tells us that we are very late cycle, and the historical record also suggests that the next wave after the Fed has inverted the entire yield curve is either a hard landing or a very bumpy soft landing,” Mr. Rosenberg said in a commentary, referring to the U.S. Federal Reserve Board's interest rate policies. “Either way, the economy is going to have some sort of a ‘landing,' which is far different than a ‘takeoff.'”
Noting that the U.S. economy enjoyed a good “takeoff” in 2003-04, he added that he “would highly recommend that investors switch their portfolios to a complete inverse of what worked and didn't work at that earlier stage of the cycle.”
Economic models run by Merrill Lynch suggest the odds of the economy enduring a hard landing range from 40 to 80 per cent, well above the consensus view, which pegs them at just 27 per cent, Mr. Rosenberg said.
In a decision Aug. 8, the U.S. Fed left its benchmark federal funds rate unchanged at 5.25 per cent, following 17 consecutive hikes dating back to June, 2004. The rationale was that slowing economic growth will curb inflation.
A key element of the slowdown on which the Fed is banking, as it seeks to guide the U.S. economy to a soft landing, is an orderly turndown in the U.S. real estate market, where a housing boom has been a major driver of growth.
However, Mr. Rosenberg argued that a two-year low in housing starts reported last week, along with the first downturn in 15 years in the number of building permits issued and a record six-month decline in the National Association of Home Builders housing market index, means the slowdown is much more precipitous than the U.S. central bank wanted to see. “The real estate turndown is proving to be a tad less ‘orderly' than policy makers were hoping for,” he said.
In fact, Mr. Rosenberg cited a speech delivered last Wednesday by Dallas Federal Reserve Board president Richard Fisher, who, quoting what someone he called a friend and a major home builder had told him, said: “This is the roughest, most sudden correction we have seen in the housing market.”
The Merrill Lynch economist argues that the housing “recession” will last at least four more quarters and, through direct and indirect impacts, carve almost two percentage points of U.S. economic growth. “That may not be enough to generate an overall recession ... but seeing as such a pace of activity would take the unemployment rate back to over 5½ per cent, it sure would feel like a recession for a whole lot of folks,” he said.
The universe does not look quite so bleak to Tobias Levkovich, chief U.S. equity strategist at Citigroup Inc. in New York.
He noted Monday that although stocks in the utilities and telecommunications sectors tend to underperform following a plunge in the housing market index, those in the financial and consumer staples sectors tend to outperform.
“While it may be somewhat obvious that people still need to buy food and sundries and would defer more extravagant expenditures in the midst of a housing slowdown, it is encouraging that the stocks indeed trade the same way,” Mr. Levkovich said. “In contrast, consumer discretionary stocks can be hammered when things sour in the housing market.”
That's because there's growing evidence that the U.S. economic cycle is more advanced than is generally recognized — and that there is a higher risk that the economy could be in for a hard landing, not a soft one.
This is the view of David Rosenberg, North American economist for investment dealer Merrill Lynch & Co. Inc. in New York.
“Practically every indicator at our disposal tells us that we are very late cycle, and the historical record also suggests that the next wave after the Fed has inverted the entire yield curve is either a hard landing or a very bumpy soft landing,” Mr. Rosenberg said in a commentary, referring to the U.S. Federal Reserve Board's interest rate policies. “Either way, the economy is going to have some sort of a ‘landing,' which is far different than a ‘takeoff.'”
Noting that the U.S. economy enjoyed a good “takeoff” in 2003-04, he added that he “would highly recommend that investors switch their portfolios to a complete inverse of what worked and didn't work at that earlier stage of the cycle.”
Economic models run by Merrill Lynch suggest the odds of the economy enduring a hard landing range from 40 to 80 per cent, well above the consensus view, which pegs them at just 27 per cent, Mr. Rosenberg said.
In a decision Aug. 8, the U.S. Fed left its benchmark federal funds rate unchanged at 5.25 per cent, following 17 consecutive hikes dating back to June, 2004. The rationale was that slowing economic growth will curb inflation.
A key element of the slowdown on which the Fed is banking, as it seeks to guide the U.S. economy to a soft landing, is an orderly turndown in the U.S. real estate market, where a housing boom has been a major driver of growth.
However, Mr. Rosenberg argued that a two-year low in housing starts reported last week, along with the first downturn in 15 years in the number of building permits issued and a record six-month decline in the National Association of Home Builders housing market index, means the slowdown is much more precipitous than the U.S. central bank wanted to see. “The real estate turndown is proving to be a tad less ‘orderly' than policy makers were hoping for,” he said.
In fact, Mr. Rosenberg cited a speech delivered last Wednesday by Dallas Federal Reserve Board president Richard Fisher, who, quoting what someone he called a friend and a major home builder had told him, said: “This is the roughest, most sudden correction we have seen in the housing market.”
The Merrill Lynch economist argues that the housing “recession” will last at least four more quarters and, through direct and indirect impacts, carve almost two percentage points of U.S. economic growth. “That may not be enough to generate an overall recession ... but seeing as such a pace of activity would take the unemployment rate back to over 5½ per cent, it sure would feel like a recession for a whole lot of folks,” he said.
The universe does not look quite so bleak to Tobias Levkovich, chief U.S. equity strategist at Citigroup Inc. in New York.
He noted Monday that although stocks in the utilities and telecommunications sectors tend to underperform following a plunge in the housing market index, those in the financial and consumer staples sectors tend to outperform.
“While it may be somewhat obvious that people still need to buy food and sundries and would defer more extravagant expenditures in the midst of a housing slowdown, it is encouraging that the stocks indeed trade the same way,” Mr. Levkovich said. “In contrast, consumer discretionary stocks can be hammered when things sour in the housing market.”
Friday, August 18, 2006
Repeat After Me! There is no Inflation!
Things may cost a little more, but there is no inflation. Dual income families are struggling to keep up, but there is no inflation. In Canada, Statscan tells us that inflation is contained and in the U.S. the Bureau of Labor Statistics says that inflation is under control. The numbers don't lie!
We haven't seen a negative savings rate since the Great Depression and the current level of personal debt is unprecendented, but there is no inflation.
Statistics regarding inflation can always be manipulated but if you ask the "man on the street" if general prices are:
1) about the same as they were a few years ago
2) a little bit higher
3) a lot higher,
you'd get a true gauge of inflation.
For now, inflation remains the elephant in the room that nobody wants to talk about.
Thursday, August 17, 2006
Canadian Inflation Numbers Flawed?
Flawed CPI numbers from Statscan? Say it isn't so. As you know, inflation numbers are manipulated in so many ways that they are practically meaningless anyway. This type of admission is no big deal except for Canadians that rely on indexed pensions and other inflation-linked investments, to maintain a reasonable standard of living.
StatsCan admits past CPI data flawed
August 16, 2006 | Steven Lamb
Statistics Canada has revealed that it has been miscalculating the consumer price index for the past five years, understating inflation on average by 0.1% since early 2001. The understatement stems from a problem in the formula used to calculate price increases for hotel accommodation. Since 2001, StatsCan has calculated this element of the overall CPI to have fallen by 16%, when it actually rose 32%.
At least one economist says the effects will be limited.
"Although one doesn't want outright mistakes, the bigger picture is that inflation is only measured approximately — it may in fact overstate the cost of living for a number of reasons," says Avery Shenfeld, senior economist at CIBC World Markets. "No economic measure is reported with precision, but one does want to avoid creating errors beyond those inherent in measuring inflation."
He says investors holding real return instruments and workers whose earnings are indexed to inflation should not hold their breath waiting for any remedy, though.
"There will be some who will be disappointed that they were 'cheated' out of a small payment that they should have received," he says. "The CPI is not going to be revised. It's water under the bridge at this point."
People currently receiving pension benefits may fare a little better, but only if StatsCan factors the miscalculation into its next CPI report and adjusts the official rate of inflation to reflect the error.
"If they try to incorporate or reflect the miscalculation in the next CPI figures, there might be an impact, but we can't judge what that would be until we know if and by how they are going to readjust the number," says Karen DeBortoli, director of the Canadian research and innovation centre at Watson Wyatt Worldwide. "There is currently no information about that that I have seen."
Even then, any adjustment would be minimal, according to Steve Bonnar, principal of Towers Perrin.
"Those pension plans that provide automatic increases based on inflation will just do a one time catch-up next time around to reflect the error," he says. "Those sponsors that provide ad hoc increases periodically round so generously that a difference of 0.1% is just not going to be very meaningful."
Earlier this year, StatsCan admitted it had miscalculated national productivity. That error was traced back to an anomaly in the number of working days in 2005. Still, Shenfeld says StatsCan's reputation is pretty solid.
"To its credit, Statistics Canada on all of these occasions has admitted its error as opposed to masking a change in a revision," says Shenfeld. "One never knows if other statistical agencies are as forthcoming or if they present corrected data as 'revised' and not necessarily conceding that an error was made. Virtually everyone, at some point makes a mistake.
"Their reputation is quite solid and I don't think this will seriously sully their reputation."
Tuesday, August 15, 2006
Savings Accounts, Mutual Funds, Stocks, Bonds? Who Needs Them? We Own a House!
More use homes as main asset
Instead of building a nest egg for retirement, a growing number of homeowners are putting themselves in a debt trap.
Economists and investment advisers say that more Americans are relying on their homes as their primary asset for retirement. These retirees-to-be reckon they can always tap the expanding wealth in their residence to cover their leisure years.
The reasoning goes something like this: Need some cash? No problem, just get a home-equity line of credit. And because home values have skyrocketed in recent years in places such as the East Bay, homeowners figure they can replace the equity lost from taking out the loan within a year or two. Plus, down the road, they assume they can always just sell the house or get another loan to raise some quick cash for retirement.
"People are making the mistake of thinking they live inside a big piggy bank," said Libby Mihalka, president of Altamont Capital. "They don't realize it can all snowball out of control very quickly. Their house is not an ATM."
"This is a form of financial insanity," said Frank Fernandez, chief economist with the Securities Industry Association. "You are digging yourselves deeper into debt using an asset that could decline in value."
"Among my East Bay clients, I often see a person's retirement plan and equity in their home comprise well over 90 percent of their net worth," Valentine said. "Among Peninsula clients, it's only about 50 percent."
It's 1987 All Over Again!
Looking for similarities to the stock market crash of 1987? Look no further.
Bio: Nouriel Roubini, is a Professor of Economics at the Stern School of Business at New York University. His applied academic research includes seminal work in international macroeconomics, global macro policies, financial crises in emerging markets and their resolution, and the reform of the international financial architecture. As a leading economist in the field of international macroeconomics, Nouriel has had significant senior level policy experience. Numerous policy appointments include former assignments as Senior Economist for International Economics at the White House Council of Economic Advisors, Senior Advisor to the Under Secretary for International Affairs at the U.S. Treasury, Director of the Office of Policy Development and Review at the U.S. Treasury. He has been a policy and research consultant at the IMF since 1985, and is a member of many leading policy forums and organizations including the Bretton Woods Committee, the International Roundtable of the Council of Foreign Relations, the NBER and the CEPR. Nouriel is a consultant for a wide range of policy institutions, Central Banks, and a number of senior executives from major financial institutions.
Nouriel Roubini | Aug 12, 2006
In my recent “recession call” blog I made the observation that current economic and financial conditions in the U.S. eerily resemble those that led to the stock market crash in October 1987. Let me elaborate on the quite worrisome and scary similarities between 2006 and 1987.
In 1987, like in 2006, a new Fed Chairman had been chosen; then Alan Greenspan this year Ben Bernanke.
In 1987, the new Fed Chairman was initially viewed with skepticism by markets and investors; the same for Bernanke today. The lionization of Greenspan as the “Maestro” or his "God-on-Earth" reputation was a much later phenomenon that emerged only in the 1990s; in 1987 investors were extremely skeptical of his skills and ability to be a strong leader of the Fed in difficult times. Ditto for Bernanke today who still needs to establish his credibility and gain the full respect of markets and investors.
In 1987, Greenspan started his term in a period when inflation was rising and there were concerns about inflationary pressure becoming excessive. That is why in 1987 he started his term by raising the Fed Funds rate by 100bps. Ditto for Bernanke who inherited high and rising inflation and raised rates three times, by 75bps, since he became Fed Chairman earlier this year.
In 1987, the relatively inexperienced Greenspan did not know how to properly communicate his message and he rattled markets. He presented his views in the wrong forum by giving an interview to a Sunday television news show where he expressed his concerns about inflation; the next day stock markets sharply wobbled. He learned his lesson, realized the risks to his reputation, made a mea culpa, never gave again a TV interview for the following 20 years and became altogether Delphic in his public pronunciations. Ditto for Bernanke: after a congressional testimony on April 27th that was read by investors as dovish, he made the famous flap with CNBC anchor Maria Bartimoro telling her that he had been misunderstood and was more hawkish than market perceived him. The next day – when Bartimoro reported this – equity markets sharply contracted and Bernanke’s reputation was shaken. Bernanke then made his own public mea culpa and you can be sure that - like Greenspan - he will never speak again to any TV reporter, either in private or in public.
In 1987, the biggest external problem of the U.S. was the large current account deficit that had been the result of the twin deficits of the Reagan years. Unsustainable tax cuts and excessive military spending (remember the pie-in-the-sky Star Wars project) in the Reagan I administration led to a strong dollar and a large current account deficit; after 1985 the dollar started to fall driven by the unsustainable external imbalance. In 2006, we bear the consequences of the reckless fiscal policies – unsustainable tax cuts and runaway military spending in reckless foreign adventures like Iraq (pie-in-the-sky dreams of imposing "democracy" in the Middle East) – that led to large twin deficits since 2001. And since 2002 the dollar has started to fall under the pressure of the external imbalance.
In 1987, in spite of the fall of the dollar since the Plaza agreement of 1985, the current account deficit was still large because of the delayed – J-curve – effects of the depreciation and because the still large fiscal deficits and low private savings kept national savings low. Then, the U.S. started to blame its trading partners, Germany and Japan, and their "weak" currencies for being at fault for the continued US trade deficit. The political scare mongering in the US was that a rising export giant like Japan would leading to the hollowing out of the US manufacturing sector; trade frictions with Japan – on cars, semiconductors, etc. – became heated and accusations of “unfair” trade were rampant. Then, the US started to put pressure on Germany and Japan to let their currencies – the mark and the yen – to appreciate significantly more relative to the US dollar. Today, the scare mongering on “unfair” trade has China as its scapegoat and victim. The US, instead of blaming its own policies that led to low private and public savings for its external deficit, is blaming China and its currency policies for these external imbalances. As in 1987 there is the terror that China will hollow out the US traded sector with its unstoppable export boom. And trade tensions are boiling.
The tensions on trade came to a boil in October 1987 when the markets were already nervous about the economy, inflation, higher interest rates, an inexperienced and initially clumsy Fed Chairman and a soaring trade deficit. The announcement of a large U.S. trade deficit on October 14 was the tipping point. Following this news, Treasury Secretary James Baker strongly suggested the need for a fall in the dollar and made implicit threat that the reluctance of Germany and Japan to let the mark and yen to appreciate could be met with retaliatory trade actions. The following day – the infamous Black Monday of October 19th 1987, the stock market crashed: the Dow Jones Industrial Average went into a free fall, down 508 points, losing 22.6% of its total value. The S&P 500 collapsed by 20.4%, dropping from 282.7 to 225.06. This was the largest loss that Wall Street had ever experienced in a single day. Technical factors, such as the growth of derivative instruments trading and inappropriate risk management tools (delta hedging that could hedge little in a fat-tail event of systemic turmoil and instead exacerbated the herding reaction of the market) added to the disorderly financial meltdown.
Today, the tensions with China on the trade deficit and the RMB revaluation are reaching a similar tipping point. China is dragging its feet on the currency issue while its trade surplus with the US is rising; Hank Paulson was chosen as Treasury Secretary principally to nudge China into moving; Schumer is bringing his 27.5% China tariff bill to a vote by the end of September and the Treasury has to present another “China Manipulation” report in the fall; the economy is slowing and mid-term elections are increasing the protectionist mood of Congress both for what concerns trade in goods and asset protectionism (see the CNOOC-Unocal case, the Dubai Ports case; and the pressure to reform the CFIUS process in ways that will be highly restrictive towards inward FDI); markets are hedgy and nervous and investors more risk averse after the May-June financial markets turmoil; the growth of derivative instruments is much more massive than 20 years ago; and wishful and self-serving arguments that such derivative instruments allow to hedge and distribute risk rather than concentrate it more are even more senseless today than they were two decades ago. So, the risks of a systemic crisis are serious and grave.
In these conditions it usually takes little to rattle markets and trigger a meltdown. Hopefully Paulson will be smarter and more discrete than Baker in avoiding bullying China and the countries that are financing the US current account deficit; it is both bad manner to bite the hand that feeds you (or, as Italians say, to spit into the plate from which you are happily eating) and also reckless financial behavior as the US badly needs this cheap foreign financing. Markets are already hedgy on their own and international investors are increasingly risk averse. The US needs to borrow every year almost another trillion US dollars – on top of all the previous stock of past borrowing - to finance its still increasing external deficit. Thus, the risks that things will get out of hand and trigger a financial meltdown of the scale that was experienced in 1987 are serious.
Today you have trade protectionism and asset protectionism; hedgy and trigger-happy investors and rising geopolitical risks; the risk of a disorderly fall in the US dollar; a slush of financial derivatives that are a black box that no one truly understands (the operational risk in credit derivatives is only the tip of much larger systemic risk iceberg in these instruments, as the pricing of these instruments has not been tested in a real cycle of increasing corporate bankruptcies); increasing VARs and growing levels of leverage; frothy markets where years of too easy money have created bubbles galore - the latest in housing - that are ready to burst; a bubble of thousands of new hedge funds with inexperienced managers that have no supervision or regulation of their activities; risk management techniques in financial institutions that miserably fail to truly stress test for fat tail events; hedging strategies that – like in 1987 – can hedge nothing once everyone is rushing to the doors and dumping assets at the same time; and a housing markets whose rout may trigger systemic effects through the mortgage backed securities market and the non-transparent hedging activities of the GSEs.
This is a toxic and combustive mix of volatile elements that can lead to a financial explosion and meltdown. And it may take any small match to trigger it: a trade war scare mongering, scorning the foreigners that finance you with restrictions to inward FDI, talking down the dollar to bully China and the US trade partners, a flip-flopping monetary policy, a further spike in oil prices, an event of terrorism or a wider Mid East conflict, a housing market rout rattling the MBS market, the collapse of a large and systemically- relevant hedge fund or of another highly-leveraged financial institution, a Chapter 11 event for a major US corporation such as Ford or GM leading to systemic effects in the credit derivatives market. There is indeed an embarrassment of riches in terms of factors that can trigger a financial meltdown. A single factor among those discussed above may be enough to trigger it; and the risk that a variety of such factors may simultaneously emerge is increasing.
So, to paraphrase Bette Davis in "All About Eve": Fasten your seat belts; it’s gonna be a bumpy ride ahead for financial markets and the global economy…
Monday, August 14, 2006
Dissent at the Fed?
Missing a wingbeat
JEFFREY LACKER has held a vote on the rate-setting committee of America's Federal Reserve for less than a year. But on August 8th he did something no committee member has done since June 2003: he voted against the chairman, Ben Bernanke. Mr Lacker, head of the Richmond Fed, thought his fellow central bankers should raise interest rates for the 18th time in a row. Instead, they decided to pause in their long migration back to a temperate monetary policy, holding the federal funds rate at 5.25%.
This split decision was accompanied by a statement that might most charitably be described as “deliberative”. The Fed admitted core inflation was high (2.4% in the year to June, according to its preferred measure); it probably won't remain so, but if it does the Fed will start tightening again, falling in behind the man from Richmond.
Downsize Me!
Americans are carrying a lot of excess weight and desperately want to slim down. No, not their waistlines -- in the size of their homes.
"Steeply deteriorating." "Hard landing." "Kaput." These are some of the terms used by analysts to describe the slowing of the U.S. housing market. And with the glory days of home-price appreciation now over, some homeowners are declaring, "Downsize Me!"
A huge gap between the supply of homes for sale and demand for housing means prices are leveling off -- and could tumble.
David Horwitz and his wife, Diane, are the type of homeowners looking to streamline their expenses and unload their roomy homes for more humbler abodes.
The Horwitzes, both semi-retired, just moved into a 1,200 square-foot apartment on the Upper East Side of Manhattan after living in a 2,200 square-foot home in Scarsdale, New York.
"Our property taxes went down by 1,000 percent, the ConEd (bill) was cut by two-thirds and the cost of home maintenance was reduced by at least 50 percent," said David Horwitz. "No gardener, no roofer cleaning gutters, no tree spraying, no snow removal, no exterior painting every six or seven years."
The Horwitzes, who have no mortgage, plan to reside in the apartment for a while, so even if prices fall it is of little significance to them.
"Homeowners are probably sensing now may be the right time to get the best price before the market cools further," Ramirez said. "Some of these homebuyers are empty-nesters now finding their homes are larger than what they need and more than they can handle."
The average home size went from 1,500 square feet in 1970 to more than 2,400 square feet in 2005. During the same period, the average household size declined, from 3.11 to 2.59, he said.
"Steeply deteriorating." "Hard landing." "Kaput." These are some of the terms used by analysts to describe the slowing of the U.S. housing market. And with the glory days of home-price appreciation now over, some homeowners are declaring, "Downsize Me!"
A huge gap between the supply of homes for sale and demand for housing means prices are leveling off -- and could tumble.
David Horwitz and his wife, Diane, are the type of homeowners looking to streamline their expenses and unload their roomy homes for more humbler abodes.
The Horwitzes, both semi-retired, just moved into a 1,200 square-foot apartment on the Upper East Side of Manhattan after living in a 2,200 square-foot home in Scarsdale, New York.
"Our property taxes went down by 1,000 percent, the ConEd (bill) was cut by two-thirds and the cost of home maintenance was reduced by at least 50 percent," said David Horwitz. "No gardener, no roofer cleaning gutters, no tree spraying, no snow removal, no exterior painting every six or seven years."
The Horwitzes, who have no mortgage, plan to reside in the apartment for a while, so even if prices fall it is of little significance to them.
"Homeowners are probably sensing now may be the right time to get the best price before the market cools further," Ramirez said. "Some of these homebuyers are empty-nesters now finding their homes are larger than what they need and more than they can handle."
The average home size went from 1,500 square feet in 1970 to more than 2,400 square feet in 2005. During the same period, the average household size declined, from 3.11 to 2.59, he said.
Thursday, August 10, 2006
Charity Lending Scams!
IRS: Charity lending is scam -- Down-payment plans called misleading
Calling them scams, the Internal Revenue Service plans to revoke the charitable status of down-payment assistance programs that have fueled the business of Dominion Homes and other builders.
"So-called charities that manipulate the system do more than mislead honest homebuyers and ultimately jack up the cost of the home," IRS Commissioner Mark W. Everson said in a statement. "They also damage the image of honest, legitimate charities."
Federal law prohibits home builders from helping customers directly with down payments. For years, however, builders have partnered with charities to funnel money to buyers. The IRS is examining 185 such charities, which have helped hundreds of thousands of people buy homes with government-backed mortgages.
Typically, a charity gives the customer a down payment, and the builder reimburses the charity plus a processing fee. The programs offer a similarly popular service for individual home sellers, usually through their real-estate agents.
The programs help buyers with the 3 percent down payment required for a government-insured Federal Housing Administration mortgage. Many of those buyers get in over their heads financially and later lose their houses, studies show.
Nearly a third of FHA loans nationally last year involved charitable down-payment assistance to the tune of hundreds of millions of dollars.
Without their charitable status, down-payment assistance programs can't do business with the FHA.
A Dispatch series, "Brokered Dreams," in September detailed the risks to home buyers and taxpayers of such down-payment assistance. The stories focused on the partnership between Dublin-based Dominion and the Nehemiah Corp. of America, a California charity that pioneered the business strategy.
Nehemiah, the largest program, received $143 million in down-payment money from sellers in 2004, according to the most recent IRS filings. Seller "donations" accounted for more than 99 percent of Nehemiah's revenue.
David Dillen, president of Colony Mortgage, partnered with Dominion on hundreds of loans involving down-payment assistance. But Dillen said HUD was long overdue in shutting down the gift programs.
"What the hell took them so long?" he said. Colony followed HUD's rules but didn't agree with them. "It was a big scam."
Calling them scams, the Internal Revenue Service plans to revoke the charitable status of down-payment assistance programs that have fueled the business of Dominion Homes and other builders.
"So-called charities that manipulate the system do more than mislead honest homebuyers and ultimately jack up the cost of the home," IRS Commissioner Mark W. Everson said in a statement. "They also damage the image of honest, legitimate charities."
Federal law prohibits home builders from helping customers directly with down payments. For years, however, builders have partnered with charities to funnel money to buyers. The IRS is examining 185 such charities, which have helped hundreds of thousands of people buy homes with government-backed mortgages.
Typically, a charity gives the customer a down payment, and the builder reimburses the charity plus a processing fee. The programs offer a similarly popular service for individual home sellers, usually through their real-estate agents.
The programs help buyers with the 3 percent down payment required for a government-insured Federal Housing Administration mortgage. Many of those buyers get in over their heads financially and later lose their houses, studies show.
Nearly a third of FHA loans nationally last year involved charitable down-payment assistance to the tune of hundreds of millions of dollars.
Without their charitable status, down-payment assistance programs can't do business with the FHA.
A Dispatch series, "Brokered Dreams," in September detailed the risks to home buyers and taxpayers of such down-payment assistance. The stories focused on the partnership between Dublin-based Dominion and the Nehemiah Corp. of America, a California charity that pioneered the business strategy.
Nehemiah, the largest program, received $143 million in down-payment money from sellers in 2004, according to the most recent IRS filings. Seller "donations" accounted for more than 99 percent of Nehemiah's revenue.
David Dillen, president of Colony Mortgage, partnered with Dominion on hundreds of loans involving down-payment assistance. But Dillen said HUD was long overdue in shutting down the gift programs.
"What the hell took them so long?" he said. Colony followed HUD's rules but didn't agree with them. "It was a big scam."
Friday, July 21, 2006
Soft Landing?
Housing industry insiders are talking in California. “Leslie Appleton-Young is at a loss for words. The chief economist of the California Assn. of Realtors has stopped using the term ’soft landing’ to describe the state’s real estate market, saying she no longer feels comfortable with that mild label.”
“‘Maybe we need something new. That’s all I’m prepared to say,’ Appleton-Young said Thursday.”
“The Realtors association last month lowered its 2006 sales prediction. That was when Appleton-Young first told the San Diego Union-Tribune that she didn’t feel comfortable any longer using ’soft landing.’ ‘I’m sorry I ever made that comment,’ she said Thursday.”
“For real estate optimists, the phrase ’soft landing’ conveyed the soothing notion that the run-up in values over the last few years would be permanent.”
“The state Department of Real Estate recently reported that (there is) one agent for every 55 adults in the state. Appleton-Young had no qualms about predicting a hard landing here: ‘We’re expecting a fairly significant shakeout.’”
“D.R. Horton CEO Donald Tomnitz was telling analysts that the home builder’s sales in June ‘absolutely fell off the Richter scale.’ Horton, the nation’s largest builder of residential housing, has numerous projects in California.”
The Union Tribune. “In the latest signs of a softening local housing market, Del Mar-based Brookfield Homes reported a steep drop in revenue from home building yesterday while the nation’s largest home builder said business in San Diego has been particularly weak.”
“Both Brookfield and Texas-based D.R. Horton said they are experiencing an increase in cancellations across the country – where buyers who have entered a contract to purchase a home decide to walk away.”
“‘I know every time we’ve gone into a downturn in the home building industry, they’ve always been longer and deeper than we’ve all imagined,’ D.R. Horton CEO Tomnitz said. ‘So we’re preparing for the worst, and we think this one will be longer and deeper than just the last six months.’”
“DR Horton said that in the past 60 days it had cut the number of lots it has under contract in San Diego County and elsewhere earmarked for future development. The company didn’t say exactly how much deposit money it lost in San Diego County. But companywide, the home builder wrote off $57.2 million in the quarter for deposits on land that it now isn’t going to buy.”
“‘San Diego is our weakest market in California,’ Tomnitz told analysts. ‘California continues to be a challenging market for us. There continues to be a small percentage of affordability out there.’”
“‘We are experiencing the impact of the long-anticipated slowdown in housing markets, particularly in the San Diego and Washington, D.C., areas,’ said Ian Cockwell, Brookfield’s CEO.”
Monday, July 17, 2006
Saturday, July 15, 2006
Volcker Weighs in on Bernanke!
When legendary Fed chief Volcker says that Bernanke has a tougher job than he did when inflation was 13%, that's a pretty scary scenario.
Volcker Says Bernanke Faces Tougher Task Than When He Ran Fed
July 14 (Bloomberg) -- Paul Volcker, who took over the Federal Reserve a generation ago at a time of soaring prices and stagnant growth, said the current central bank chief, Ben S. Bernanke, faces an even tougher challenge.
``It was easier for me,'' Volcker, 78, said in an interview to be broadcast this weekend on ``Political Capital With Al Hunt,'' a Bloomberg television program. ``While the economic situation was much worse, it was easier to act because it was clear what the enemy was.''
Volcker, appointed by President Jimmy Carter in 1979, is credited with defeating inflation, which was 13 percent when he took the Fed's helm. Volcker raised the benchmark interest rate to a record, helping send the economy into recession.
He was succeeded by Alan Greenspan, who kept inflation in check and presided over the longest economic expansion on record. Before he left in January after almost two decades in the job, Greenspan set the Fed on a path of rate increases that Bernanke has continued. Rates have been nudged higher at every meeting of policy makers since June 2004, while core inflation over the last three months was the fastest since 1995.
The U.S. economy will slow from 5.6 percent growth in the first quarter to a pace of 2.8 percent in the second half of this year, according to the median forecast in a Bloomberg News survey of economists.
Consumer prices rose at an annual pace of 4.2 percent in May, up from 3.5 percent a month earlier. Excluding food and energy, prices rose 2.4 percent, compared with 2.3 percent in April.
``I worry about people getting too relaxed'' on inflation Volcker said. ``I don't think it's out of hand today, but it is obviously creeping up.''
Skeptical About Targets
Volcker was skeptical that inflation targeting, a device for anchoring inflation expectations embraced by Bernanke, would be helpful.
``That's a little too precise for me,'' he said. ``The inflation rate is bound to go up and down a little bit and it should go up and down a little bit. But I would like to see stability as the target.''
He suggested that Bernanke, who has championed better communication through transparency at the central bank, may be communicating too much.
``It's kind of ironic,'' said Volcker. ``Mr. Bernanke seems to be criticized for a little too much transparency.''
`Skating Along'
While he said the global economy is doing well, Volcker voiced concern that the good times can't last.
``We are skating along quite nicely,'' said Volcker, though ``the ice is not as thick as I would like it to be.''
The U.S. current-account deficit exceeded $208 billion in the first quarter. The figure, which includes trade as well as transfer payments and investment income, declined from $223 billion the previous quarter. It was still the second-largest on record and requires the U.S. to attract $2.3 billion in foreign capital each day fund the gap.
``We are consuming too much and investing too little,'' said Volcker, who also indicated that higher taxes may be needed to narrow the budget deficit.
This week the Bush administration cut its estimate of this year's budget deficit by 30 percent to $296 billion amid a surge in tax collections from corporations and wealthy individuals. Budget analysts say the shortfall will widen again as the aging U.S. population begins to stretch entitlement programs like Social Security and Medicare.
``Revenues have gotten too low'' relative to what the government wants to spend, Volcker said.
Because of U.S. dependence on foreign capital to fund trade and budget gaps, ``it is critical that we maintain confidence in our currency,'' said Volcker.
Caution on China
Some economists suggest the solution is a weaker dollar and stronger currencies for U.S. trade partners, especially China. Yet Volcker cautioned about pushing China to revalue its currency, which it has tightly controlled since abandoning a decade-old peg to the dollar a year ago.
China ``will move and should move when they find it in their interest,'' Volcker said. ``Pushing them to do things they don't want to do I'm not sure couldn't backfire in the end.''
Volcker led an investigation last year of a United Nations program that allowed former Iraqi dictator Saddam Hussein to sell oil to buy food and medicine. It found the program lacking in competence and accountability.
Volcker said this week that the probe's findings haven't resulted in much change yet at the UN.
``If they don't respond to what we found, the difficulties, including some corruption within the UN and outside the UN -- lots of it outside the UN -- and if that doesn't provoke some response, I don't know what will be the global response.''
He said the findings show the UN isn't up to running a similar program for North Korea to help resolve the standoff over the country's alleged use of nuclear technology for weapons.
Volcker Says Bernanke Faces Tougher Task Than When He Ran Fed
July 14 (Bloomberg) -- Paul Volcker, who took over the Federal Reserve a generation ago at a time of soaring prices and stagnant growth, said the current central bank chief, Ben S. Bernanke, faces an even tougher challenge.
``It was easier for me,'' Volcker, 78, said in an interview to be broadcast this weekend on ``Political Capital With Al Hunt,'' a Bloomberg television program. ``While the economic situation was much worse, it was easier to act because it was clear what the enemy was.''
Volcker, appointed by President Jimmy Carter in 1979, is credited with defeating inflation, which was 13 percent when he took the Fed's helm. Volcker raised the benchmark interest rate to a record, helping send the economy into recession.
He was succeeded by Alan Greenspan, who kept inflation in check and presided over the longest economic expansion on record. Before he left in January after almost two decades in the job, Greenspan set the Fed on a path of rate increases that Bernanke has continued. Rates have been nudged higher at every meeting of policy makers since June 2004, while core inflation over the last three months was the fastest since 1995.
The U.S. economy will slow from 5.6 percent growth in the first quarter to a pace of 2.8 percent in the second half of this year, according to the median forecast in a Bloomberg News survey of economists.
Consumer prices rose at an annual pace of 4.2 percent in May, up from 3.5 percent a month earlier. Excluding food and energy, prices rose 2.4 percent, compared with 2.3 percent in April.
``I worry about people getting too relaxed'' on inflation Volcker said. ``I don't think it's out of hand today, but it is obviously creeping up.''
Skeptical About Targets
Volcker was skeptical that inflation targeting, a device for anchoring inflation expectations embraced by Bernanke, would be helpful.
``That's a little too precise for me,'' he said. ``The inflation rate is bound to go up and down a little bit and it should go up and down a little bit. But I would like to see stability as the target.''
He suggested that Bernanke, who has championed better communication through transparency at the central bank, may be communicating too much.
``It's kind of ironic,'' said Volcker. ``Mr. Bernanke seems to be criticized for a little too much transparency.''
`Skating Along'
While he said the global economy is doing well, Volcker voiced concern that the good times can't last.
``We are skating along quite nicely,'' said Volcker, though ``the ice is not as thick as I would like it to be.''
The U.S. current-account deficit exceeded $208 billion in the first quarter. The figure, which includes trade as well as transfer payments and investment income, declined from $223 billion the previous quarter. It was still the second-largest on record and requires the U.S. to attract $2.3 billion in foreign capital each day fund the gap.
``We are consuming too much and investing too little,'' said Volcker, who also indicated that higher taxes may be needed to narrow the budget deficit.
This week the Bush administration cut its estimate of this year's budget deficit by 30 percent to $296 billion amid a surge in tax collections from corporations and wealthy individuals. Budget analysts say the shortfall will widen again as the aging U.S. population begins to stretch entitlement programs like Social Security and Medicare.
``Revenues have gotten too low'' relative to what the government wants to spend, Volcker said.
Because of U.S. dependence on foreign capital to fund trade and budget gaps, ``it is critical that we maintain confidence in our currency,'' said Volcker.
Caution on China
Some economists suggest the solution is a weaker dollar and stronger currencies for U.S. trade partners, especially China. Yet Volcker cautioned about pushing China to revalue its currency, which it has tightly controlled since abandoning a decade-old peg to the dollar a year ago.
China ``will move and should move when they find it in their interest,'' Volcker said. ``Pushing them to do things they don't want to do I'm not sure couldn't backfire in the end.''
Volcker led an investigation last year of a United Nations program that allowed former Iraqi dictator Saddam Hussein to sell oil to buy food and medicine. It found the program lacking in competence and accountability.
Volcker said this week that the probe's findings haven't resulted in much change yet at the UN.
``If they don't respond to what we found, the difficulties, including some corruption within the UN and outside the UN -- lots of it outside the UN -- and if that doesn't provoke some response, I don't know what will be the global response.''
He said the findings show the UN isn't up to running a similar program for North Korea to help resolve the standoff over the country's alleged use of nuclear technology for weapons.
US 'could be going bankrupt'
The United States is heading for bankruptcy, according to an extraordinary paper published by one of the key members of the country's central bank.
A ballooning budget deficit and a pensions and welfare timebomb could send the economic superpower into insolvency, according to research by Professor Laurence Kotlikoff for the Federal Reserve Bank of St Louis, a leading constituent of the US Federal Reserve.
Prof Kotlikoff said that, by some measures, the US is already bankrupt. "To paraphrase the Oxford English Dictionary, is the United States at the end of its resources, exhausted, stripped bare, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors," he asked.
According to his central analysis, "the US government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds''.
The budget deficit in the US is not massive. The Bush administration this week cut its forecasts for the fiscal shortfall this year by almost a third, saying it will come in at 2.3pc of gross domestic product. This is smaller than most European countries - including the UK - which have deficits north of 3pc of GDP.
Prof Kotlikoff, who teaches at Boston University, says: "The proper way to consider a country's solvency is to examine the lifetime fiscal burdens facing current and future generations. If these burdens exceed the resources of those generations, get close to doing so, or simply get so high as to preclude their full collection, the country's policy will be unsustainable and can constitute or lead to national bankruptcy.
"Does the United States fit this bill? No one knows for sure, but there are strong reasons to believe the United States may be going broke."
Experts have calculated that the country's long-term "fiscal gap" between all future government spending and all future receipts will widen immensely as the Baby Boomer generation retires, and as the amount the state will have to spend on healthcare and pensions soars. The total fiscal gap could be an almost incomprehensible $65.9 trillion, according to a study by Professors Gokhale and Smetters.
The figure is massive because President George W Bush has made major tax cuts in recent years, and because the bill for Medicare, which provides health insurance for the elderly, and Medicaid, which does likewise for the poor, will increase greatly due to demographics.
Prof Kotlikoff said: "This figure is more than five times US GDP and almost twice the size of national wealth. One way to wrap one's head around $65.9trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143pc."
The scenario has serious implications for the dollar. If investors lose confidence in the US's future, and suspect the country may at some point allow inflation to erode away its debts, they may reduce their holdings of US Treasury bonds.
Prof Kotlikoff said: "The United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century."
Paul Ashworth, of Capital Economics, was more sanguine about the coming retirement of the Baby Boomer generation. "For a start, the expected deterioration in the Federal budget owes more to rising per capita spending on health care than to changing demographics," he said.
"This can be contained if the political will is there. Similarly, the expected increase in social security spending can be controlled by reducing the growth rate of benefits. Expecting a fix now is probably asking too much of short-sighted politicians who have no incentives to do so. But a fix, or at least a succession of patches, will come when the problem becomes more pressing."
A ballooning budget deficit and a pensions and welfare timebomb could send the economic superpower into insolvency, according to research by Professor Laurence Kotlikoff for the Federal Reserve Bank of St Louis, a leading constituent of the US Federal Reserve.
Prof Kotlikoff said that, by some measures, the US is already bankrupt. "To paraphrase the Oxford English Dictionary, is the United States at the end of its resources, exhausted, stripped bare, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors," he asked.
According to his central analysis, "the US government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds''.
The budget deficit in the US is not massive. The Bush administration this week cut its forecasts for the fiscal shortfall this year by almost a third, saying it will come in at 2.3pc of gross domestic product. This is smaller than most European countries - including the UK - which have deficits north of 3pc of GDP.
Prof Kotlikoff, who teaches at Boston University, says: "The proper way to consider a country's solvency is to examine the lifetime fiscal burdens facing current and future generations. If these burdens exceed the resources of those generations, get close to doing so, or simply get so high as to preclude their full collection, the country's policy will be unsustainable and can constitute or lead to national bankruptcy.
"Does the United States fit this bill? No one knows for sure, but there are strong reasons to believe the United States may be going broke."
Experts have calculated that the country's long-term "fiscal gap" between all future government spending and all future receipts will widen immensely as the Baby Boomer generation retires, and as the amount the state will have to spend on healthcare and pensions soars. The total fiscal gap could be an almost incomprehensible $65.9 trillion, according to a study by Professors Gokhale and Smetters.
The figure is massive because President George W Bush has made major tax cuts in recent years, and because the bill for Medicare, which provides health insurance for the elderly, and Medicaid, which does likewise for the poor, will increase greatly due to demographics.
Prof Kotlikoff said: "This figure is more than five times US GDP and almost twice the size of national wealth. One way to wrap one's head around $65.9trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143pc."
The scenario has serious implications for the dollar. If investors lose confidence in the US's future, and suspect the country may at some point allow inflation to erode away its debts, they may reduce their holdings of US Treasury bonds.
Prof Kotlikoff said: "The United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century."
Paul Ashworth, of Capital Economics, was more sanguine about the coming retirement of the Baby Boomer generation. "For a start, the expected deterioration in the Federal budget owes more to rising per capita spending on health care than to changing demographics," he said.
"This can be contained if the political will is there. Similarly, the expected increase in social security spending can be controlled by reducing the growth rate of benefits. Expecting a fix now is probably asking too much of short-sighted politicians who have no incentives to do so. But a fix, or at least a succession of patches, will come when the problem becomes more pressing."
Thursday, July 13, 2006
Federal Reserve Policy Destroys the Value of Your Savings
Congressman Ron Paul is at it again. With next week's appearance by current Fed Chairman Ben Bernanke before the Senate Banking Committee and House Financial Services Committed, it seems Congressman Paul wanted to let the new guy know exactly what's been on his mind lately regarding the nations money and how little it buys these days.
July 10, 2006
For years officials at the Federal Reserve Bank, including Chairman Bernanke himself, have assured us that inflation is under control and not a problem-- even as the price of housing, energy, medical care, school tuition, gold, and other commodities skyrockets.
The Treasury department parrots the Fed line that consumer prices, as measured by the consumer price index (CPI), are under control. But even many mainstream economists now admit that CPI grossly understates true inflation. The most glaring problem is that CPI excludes housing prices, instead tracking rents. Everyone knows the cost of purchasing a home has increased dramatically in the last ten years; in many regions housing prices have more than doubled in just five years. So price inflation certainly is alive and well when to comes to the largest purchase most Americans make.
When the Federal Reserve increases the supply of dollars in circulation, both paper and electronic, prices must rise eventually. What other result it possible? The supply of dollars has risen much faster than the supply of goods and services being chased by those dollars. Fed policy makers have more than doubled the money supply in less than ten years. While Treasury printing presses can print unlimited dollars, there are natural limits to economic growth. This flood of newly minted US currency can only increase consumer prices in the long term.
Mr. Bernanke has stated quite candidly that he will use government printing presses to stimulate the economy as necessary. He is famous for joking that he would endorse dropping money from helicopters if needed to prevent an economic slowdown. This is nothing short of an express policy to destroy our money by inflation. Every new dollar erodes the value of existing dollars based on simple supply and demand. Does anyone really believe the Treasury can make us rich simply by printing more money?
The coming dollar crisis is not likely to be “fixed” by politicians who are unwilling to make hard choices, admit mistakes, and spend less money. Demographic trends will place even greater demands on Congress to maintain benefits for millions of older Americans who are dependent on the federal government.
Faced with uncomfortable financial realities, Congress will seek to avoid the day of reckoning by the most expedient means available-- and the Federal Reserve undoubtedly will accommodate Washington by printing more dollars to pay the bills. The Fed is the enabler for the spending addicts in Congress, who would rather spend new fiat money than face the political consequences of raising taxes or borrowing more abroad.
The irony is that many of the Fed’s biggest cheerleaders are the same supposed capitalists who denounced centralized economic planning when practiced by the former Soviet Union. Large banks and Wall Street firms love the Fed’s easy money policy, because they profit at the front end from the resulting loan boom and artificially high equity prices. It’s the little guy who loses when the inflated dollars finally trickle down to him and erode his buying power. Someday Americans will understand that Federal Reserve bankers have no magic ability-- and certainly no legal or moral right-- to decide how much money should exist and what the cost of borrowing money should be.
Friday, July 07, 2006
Eye-Popping Prices for Calgary Housing
Eye-popping prices for Calgary housing
Average cost of typical 2-storey home rockets 54.6%
Toronto resales lag at 4.4% in moderating market
Jul. 6, 2006. 01:00 AM
TONY WONG
BUSINESS REPORTER
If you're suffering from sticker shock on housing-price increases in Toronto, think Calgary.
The average price of a standard two-storey resale home rocketed an unprecedented 54.6 per cent to $397,867 in the second quarter of 2006, compared with a year earlier, according to a quarterly report Royal LePage Real Estate Services released yesterday.
"Since we started doing this report in the '70s, we've never seen this kind of price appreciation in one year, ever," Phil Soper, president and chief executive of Royal LePage, said in an interview.
Alberta's oil-rich economy has meant severe housing shortages and major price increases in the western provinces.
"The Alberta housing market is truly reacting to the fact it is by far the best-performing economy in Canada," Century 21 Canada president Don Lawby said in an interview.
Edmonton was in second place with a 39 per cent increase, while Vancouver, which is looking forward to the 2010 Winter Olympics, saw a 20 per cent increase.
In the east, things were much less frenzied as real estate agents reported fewer bidding wars, and even price reductions on some listings.
"We're moving to a more transitional summer market in Toronto, so you'll see volume dropping off from a great market to a good market, and certainly nothing like Alberta," Lawby said.
House prices in Toronto increased by a solid but not spectacular 4.4 per cent in the second quarter of 2006, compared to the same time last year, as the market continued to moderate, according to the LePage report. The average price of a standard two-storey home — the most sought-after type of property — rose to $474,766.
The two-storey home in the survey also has three bedrooms, a detached garage and full basement but no recreation room and totals 1,500 square feet.
Meanwhile, a detached bungalow averaged $373,504, up 5.5 per cent. Condominiums showed the most appreciation, rising 6.7 per cent to $256,178.
"We saw the market move from a seller's market to a more balanced market at the end of the fourth quarter of last year, so buyers should be able to get a better shake," Soper said.
Royal LePage is forecasting that the average price increase for all types of property in Toronto should be in the 5.6 per cent range by the end of the year.
Century 21 is slightly more optimistic in its Toronto forecast, which predicts price increases in the 6 to 7 per cent range.
Still, both forecasts are well below the national pace forecast by Lepage, which expects increases of 9.2 per cent by the end of 2006.
However, neither real estate firm is expecting sales in the Toronto area to break last year's record.
"We can't have record-breaking sales every year. But I've been wrong before," said Lawby, noting that most analysts thought the market would have wound down in 2005, compared with the year before. Sales continued to defy expectations by going up as interest rates remained affordable and job numbers were stronger than expected.
Of the 23 Toronto neighbourhoods surveyed by LePage, Riverdale showed the highest year-over-year appreciation. A shortage of listings meant the standard two-storey home hit $350,000, up 14.8 per cent.
Richmond Hill and Markham also had strong growth, with prices for a standard two-storey up 13.3 per cent and 11.7 per cent respectively.
Meanwhile, areas such as the Beach district and Cabbagetown, which have posted stellar appreciation, took a breather. In Cabbagetown, the two-storey was up only 1.9 per cent; in the Beach, down 0.7 per cent.
Average cost of typical 2-storey home rockets 54.6%
Toronto resales lag at 4.4% in moderating market
Jul. 6, 2006. 01:00 AM
TONY WONG
BUSINESS REPORTER
If you're suffering from sticker shock on housing-price increases in Toronto, think Calgary.
The average price of a standard two-storey resale home rocketed an unprecedented 54.6 per cent to $397,867 in the second quarter of 2006, compared with a year earlier, according to a quarterly report Royal LePage Real Estate Services released yesterday.
"Since we started doing this report in the '70s, we've never seen this kind of price appreciation in one year, ever," Phil Soper, president and chief executive of Royal LePage, said in an interview.
Alberta's oil-rich economy has meant severe housing shortages and major price increases in the western provinces.
"The Alberta housing market is truly reacting to the fact it is by far the best-performing economy in Canada," Century 21 Canada president Don Lawby said in an interview.
Edmonton was in second place with a 39 per cent increase, while Vancouver, which is looking forward to the 2010 Winter Olympics, saw a 20 per cent increase.
In the east, things were much less frenzied as real estate agents reported fewer bidding wars, and even price reductions on some listings.
"We're moving to a more transitional summer market in Toronto, so you'll see volume dropping off from a great market to a good market, and certainly nothing like Alberta," Lawby said.
House prices in Toronto increased by a solid but not spectacular 4.4 per cent in the second quarter of 2006, compared to the same time last year, as the market continued to moderate, according to the LePage report. The average price of a standard two-storey home — the most sought-after type of property — rose to $474,766.
The two-storey home in the survey also has three bedrooms, a detached garage and full basement but no recreation room and totals 1,500 square feet.
Meanwhile, a detached bungalow averaged $373,504, up 5.5 per cent. Condominiums showed the most appreciation, rising 6.7 per cent to $256,178.
"We saw the market move from a seller's market to a more balanced market at the end of the fourth quarter of last year, so buyers should be able to get a better shake," Soper said.
Royal LePage is forecasting that the average price increase for all types of property in Toronto should be in the 5.6 per cent range by the end of the year.
Century 21 is slightly more optimistic in its Toronto forecast, which predicts price increases in the 6 to 7 per cent range.
Still, both forecasts are well below the national pace forecast by Lepage, which expects increases of 9.2 per cent by the end of 2006.
However, neither real estate firm is expecting sales in the Toronto area to break last year's record.
"We can't have record-breaking sales every year. But I've been wrong before," said Lawby, noting that most analysts thought the market would have wound down in 2005, compared with the year before. Sales continued to defy expectations by going up as interest rates remained affordable and job numbers were stronger than expected.
Of the 23 Toronto neighbourhoods surveyed by LePage, Riverdale showed the highest year-over-year appreciation. A shortage of listings meant the standard two-storey home hit $350,000, up 14.8 per cent.
Richmond Hill and Markham also had strong growth, with prices for a standard two-storey up 13.3 per cent and 11.7 per cent respectively.
Meanwhile, areas such as the Beach district and Cabbagetown, which have posted stellar appreciation, took a breather. In Cabbagetown, the two-storey was up only 1.9 per cent; in the Beach, down 0.7 per cent.
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