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Wednesday, October 04, 2006

Surely You Jest, Ben!

I suspect Ben's trying to be gentle with us, but his latest is a bit strained:
"I think I would estimate that slowing housing construction will probably take about a percentage point off growth in the second half of the year and probably something going into next year as well," Bernanke said. It was "difficult to tell" how long the slump in construction would last, he said, because of buyers and sellers have moved to the sidelines. There are "some strong fundamental underpinnings" for the housing market including continued low mortgage rates.
Strong fundamentals? Affordability rates are at a post WWII historic low.... Suppose we had zero percent unemployment, and the median household income was $30,000. Would that support a median home price of $300,000? Now, really! To reduce housing inventory we need new buyers; people selling their old house and buying another with their RE funny money does not reduce real inventory even if they give up and rent the first for a while. You need affordability for new buyers to have strong fundamentals underpinning the housing market.

In other, more important news, ADP is forecasting sluggish employment growth in September, Walmart has corrected its same-store sales forecast for September down to 1.3%, and WCI (one of those homebuilders) has issued a very positive affirmation saying that it does expect to make some sort of profit in the third quarter, even though its home orders are down 80% year over year. With strong cash flow pressures, they announced that they are paying down debt and buying their own stock? Huh? My first reaction was that there probably was something about stock pricing in the compensation agreement; I haven't bothered to check that out. If you are thinking of buying Walmart stock on a downturn as a recession hedge, see Dr M's Walmart post before you buy. The Moody forecast on housing seemed to me to be more of a report on what has already happened than a forecast; see the HousingTracker.

Oh, yes, the ISM service index fell to 52.9% from 57% in August, neatly aligning with the manufacturing index for September. Gulp. Fourth quarter GDP growth at 1.3%? It sounds about right to me.... OPEC is going to cut oil production, because they are already down to about $55 for their "baskets". That price is not the same price as the spot market, which is always higher but still trending lower. As a wild guess, the news that US crude supplies rose again induced the latest step down, and that is no doubt related to the fact that by early summer there was an effective recession in some US localities; it would seem to be spreading rapidly. The reason is simple - in the second quarter, home equity cashouts slowed considerably, which messed up the magical housing money machine. (When you refi and take money to pay the cost of the refi, including perhaps the prepayment, that does not support consumption.) Just wait until construction actually slows and unemployment starts rising. Hoo-hah. Remember the Alamo.

This Week In Petroleum might serve as an excellent long forecast for the economy for the next six months; as consumption slows supply will tend to rise compared to historical norms. Some of that will be due to more production, but some of that will be due to less consumption. H-6 can be a good indicator too. In the last 12 months, M-2 rose 4.7%; but 4.5% of that was from May 2006 through August 2006. In the last 12 months, M-1 dropped 0.7%, but from May 2006 through August 2006 M-1 dropped 7.3%. M-2 includes M-1 (currency, checkings, NOWs, Traveller's checks) plus savings, money-markets, money-market mutuals and CD's under 100,000 less IRAs. These are the seasonally adjusted figures which seem to indicate a reversal of the spending craze.

If you are going to point to the stock market rise as a positive indicator, let me put it this way: A lot of real RE investment money came out of housing last year and early this year. It seems to have gone mostly into commodities, but that money is now shifting to stocks because commodities are down. It doesn't appear to be invested very well, either, making me think that this boomlet has a vicious undertow.

M-o-M, I've been scouting around a lot of the real estate bubble blogs, and a couple of them (like "Housing Panic" and "Marin Real Estate Bubble") are starting to sound like those We're-All-Gonna-Die-It's-All-Over-But-The-Screaming Survivalists of 20-25 years ago.

More and more repeating mantras like "Total Global Economic Collapse", "Worthless Government Fiat Currency", and "GOLD! GOLD! GOLD! GOLD! GOLD! GOLD! GOLD! GOLD! GOLD!" (Though still no sign of the Eighties' "When Push Comes To Shove, Your Best Food Source Will Be Human Flesh!" Yet.)

I'm about ready to pull a lawn chair up to where I've got a good view, put on a CD of "Eve of Destruction", and watch while I check my maps and figure out how to get to the Black Lady in Boulder without having to take I-15 past the Walkin' Dude in Vegas...

The Headless Unicorn Guy
(channelling Trashcan Man...)
Some of those blogs remind me of DU! It's not so much that they are afraid of disaster, it's more that they long for it. On a couple of them, I have run into dark speculations a la Al Gore about environmental disaster as well.

They don't seem to realize that disaster is not going to be profitable for them either. It's better for all of us if this unwinds as slowly as possible. There is a lot of fraud, greed and pure recklessness that's got be absorbed, but that is what markets do.
It's not so much that they are afraid of disaster, it's more that they long for it.

They're channelling Roberta Gregory's Third Little Pig: "We're All Gonna Die, There's No Way Out, The Vast Conspiracy Wins All Along, But I KNOW What's REALLY Going On! All Along! I WAS RIGHT! YOU'RE ALL WRONG! HA HA HA!" (Smirk smirk, smug smug...)

And with others, it's just a revenge fantasy -- "I don't care if I die too, AS LONG AS YOU GET YOURS!" (Similarity to suicide bombers and End Time Prophecy's Great Tribulation/Great White Throne a la Jack Chick noted...)

The Headless Unicorn Guy
Weeell, you're probably right. I've been avoiding a lot of these blogs because of this sort of thing. They are a good resource, because they post a lot of primary sources. But the smugness and *glee* you write of rubs me the wrong way.

I can't say that I'm hoping that the housing market reverses course and starts to appreciate. This HAD to end sometime. What could we do to keep it going? Offer an new mortgage that in the first two years, doesn't require payments and instead mails the borrower a monthly dividend check?

Sanity has to return, but I don't exactly look forward to it. A lot of very good people are going to get caught in the undertow.
Morning Mama; Did you see the revisions to Non Farm Paroll? Of course you did. 800k more jobs than everyone figured. And all the media can talk about was that last months was 50k ish below expectations? Anyway, pretty nice increase.
Yes, I did. Generally, when past months are revised strongly in one direction I assume that the latest figures will tend to see a similar revision, so my hunch is that the bad payroll figure will be revised upward. You don't have a one-month drop off like this except in the most unusual circumstances.

I was scratching a bit to try to figure out how these revisions came about. It might be very telling.

Many of the retail sales figures for September seemed very good. I don't think that's surprising, but it does show that the fall in gas prices is having a stimulating effect. (And that WalMart is not a good anti-recession bet.)

But then, CF, I do believe that the economy is currently very strong. Much stronger than it has been for some years, and if we could only see more rational capital flows, we might not avoid a recession, but we could sharply limit its extent.

But OC is going down, and too many parts of the MW rust belt are in deep. It will take some deep swallowing to work through the consequences of irrational investments over the last 8 years.
Afternoon, Mama. For what it's worth, we calculate the the drop in Oil, rally in Stocks, and the level of the Dollar to be worth the same as 75 basis points of easing by the fed. And some people think it could be worth quite a bit more. Your pal Uncle Al was on the tape saying the worst of housing is behind us. I never found him to be a very good forecaster.
I'd say it's more. There is nothing so bad for the economy as high energy prices. It's a productivity drag equal to no other. It's like VAT - it sucks the opportunity to make profits right out of the economic system.

On the employment numbers, I think the forecasted March adjustment might be a recession flag. That's the adjustment for state UI figures. The last time we saw such a sudden disproportion was in 2000, but that was .4, and the projection for March is .6.

However I think restricting the growth of illegal casual employment will be a benefit overall, because it keeps more money inside the US and raises wages. I would like to keep families within the US here and block many of the casual workers.

There is also a huge intangible strength to the US economy in its current state that I don't think has any historical parallel except perhaps during the days of the open frontier. That is the massive collapse of the knowledge capital premium that the growth of personal computers and the widespread dissemination of information on the internet has created.

Granted, initially it hasn't always been used rationally (think day-trading and various short-termish bubbly investing techniques), but that is normal for any new technology. We are a playful species.

But we are at a point in which knowledge workers can generally exploit the free resources available to them to produce very strong product with very little capital investment. This is such a sea change in the economy at large that it should not be underestimated.
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