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Saturday, May 31, 2008

Feb/Mar Gas Supplied

An update with the latest two month figures. Last months Jan/Feb totals were about equal to '96 figures. Feb/Mar totals are much closer to '95 figures. We probably will get there this year.

Does anyone want to vote for '94 levels by the end of '08 yet? Check the figures here.

Total crude and petroleum supplied is falling too. For the first three months of 2008, the totals were between 2003 and 2004 levels. But if you look at March figures, they are a lot closer to 2003 than the previous months' figures....

So a lot of state governments are earning ever less on gas taxes. Makes me think that the feverish talk about raising those taxes is more about revenue than concern over the environment! Let me just refer you to the Rockefeller Inst. May flash report (a preview of Q1 2008 data due in June). As they write:
For the states reporting so far, the overall level of sales tax collections fell slightly – the first time such revenues have not grown in six years.
Sales tax revenues only went negative one quarter in the 2001-2003 recession, and that was at the depth in first quarter 2002. You can download a spreadsheet with that data here. The figures adjusted for legislative changes and inflation really tell the tale, and you can download a spreadsheet with those figures here.

Friday, May 30, 2008

Return To Sender

Iowahawk's look at the evolution of a GOP Congressman has been prettified and published at The Weekly Standard. It's hilarious, if you haven't seen it. IMO all politicians have a shelf life and you have to roll your stock if you don't want it to go bad in office.

BlameBush looks askance at the UK proposal to give citizens a carbon allowance.

Ferdy the Conservative Cat expresses deep thoughts about projection. But are they true? Not for Congressmen. See Iowahawk.

SC&A publishes a somewhat bawdy cartoon that tells a few home truths about male/female power structures. Perhaps it should be entitled "What Freud Did Not Realize, But We Do". The "we" there is southern gals.

Shrinkwrapped assures me that indeed male envy shows up in psychiatry, especially in cases in which girls are brought up as lower class citizens in a family. I'm sure he's right, but I just haven't met any southern women with that syndrome. I'm sure some exist.

Serious: I am brooding about this Shrinkwrapped post regarding Obama and Masochistic Omnipotence.

Personal Income And Outlays

BEA released today. This is what caught my eye:
Goods-producing industries' payrolls decreased $11.4 billion, in contrast to an increase of $4.5 billion; manufacturing payrolls decreased $5.1 billion, in contrast to an increase of $2.5 billion. Services-producing industries' payrolls decreased $6.8 billion, in contrast to an increase of $22.4 billion. Government wage and salary disbursements increased $3.7 billion, compared with an increase of $3.4 billion.
Proprietors' income decreased $0.9 billion in April, compared with a decrease of $4.9 billion in March. Farm proprietors' income was unchanged in April; farm proprietors' income decreased $4.9 billion in March. Nonfarm proprietors' income decreased $1.0 billion in April; nonfarm proprietors' was unchanged in March.
As for incomes, on a YoY basis the growth in WIET tax receipts has continued to decline pretty steadily this year, and it appears that we are approaching the no-growth range.

Real disposable income and real personal consumption are also flattening in this report. However the nominal figures are showing some growth that I think may be a bit unrealistic. Either way, consumer spending will be constrained even if it weren't for the pressures involved in basic needs inflation. It's not a catastrophic collapse - there are upward vectors - but overall the picture is of continued and broadening decline.

All the European consumer confidence surveys show significant drops in consumer confidence. Well, we can certainly sympathize. The UK was the latest, and it is not good for Brown's government. Confidence was about at the level at which Thatcher exited stage right.

The USD continued its rise against the Euro, but crude took back some of yesterday's fall.

I continue to spend most of my time trying to get a grip on the Asian situation, especially India. There are entirely different reading skills needed for other cultures. Here's a clue in this article about India's 8.1% inflation:
"Prices of commodities produced in India are certainly moderating, but prices of anything that is globally traded and we import are not declining... All I can say is food prices may moderate, it is very difficult to hazard a guess whether non-food prices will moderate," he said.
Unless, non-food prices actually decline, it is very difficult to hazard a guess about decline in overall inflation, he said.

Referring to "relentless rise" in global crude oil prices, that is trading around 126 dollars a barrel on Friday, Chidambaram said unless there is some relief on crude oil prices, it would be difficult to say whether headline inflation would decline or not.
But the measures, we have taken, have contained inflation. We are confident that we will gain mastery over this inflation and inflation will be contained over time," he said.

However, moderation in inflation depends on global crude oil and commodity prices, he said, adding, "Surely, we are still in full control over the situation."
Here is your international reading quiz. What is the minister saying?
A. The Indian government is in full control of inflation and will lower it.
B. The Indian government has little control over remaining inflation, although it has been successful at pushing down prices of domestically-produced commodities.
C. The Indian government has no control over inflation,, and doesn't see any way it can control inflation, and expects inflation to continue rising because the measures to control inflation it has implemented can only be temporarily effective.

If you invest in emerging markets, the ability to get the correct answer is important! Answer in comments.

Update: Back to the US. Chicago PMI for May was released, showing marginal improvement and essentially a three month flat result. Under the circumstances this is darned good:

Thursday, May 29, 2008

Real VS Relative Value

The preliminary GDP release should strike a note of caution in the hearts of investors. With preliminary we get the first assessment of corporate profits for the quarter, and here are the numbers stated by change from the preceding period (Table 12):
Corporate profits with inventory valuation adjustment:
Q2 2007: +101.2
Q3 2007: -17.4
Q4 2007: -48.9
Q1 2008: -162.6
By domestic industry category:
Financial Industry:
Q2 2007: +53.4
Q3 2007: -32.2
Q4 2007: -73.9
Q1 2008: -21.6
Nonfinancial Industry:
Q2 2007: +31.0
Q3 2007: -11.6
Q4 2007: -30.7
Q1 2008: -145.9
Yergle. Yikes. With the magic of capital and inventory consumption adjustments, a miracle happens and the quarterly change becomes positive, but the bottom line is that these companies are going to have to cut expenditures, which means that gross private domestic investment will continue to be negative a while longer, which means that not only are we in a recession, we aren't getting out of it any time soon. Which brings us to the employment release, which duly shows more weakening.

NSA and SA initial claims rose. NSA continuing claims dropped, but SA continuing claims rose. NSA continuing claims are running over 25% ahead of last year's. This is bad enough to create continuing downward momentum in the consumer side of the economy.

The Federal Unemployment Tax (FUT) receipts are showing a pronounced YoY drop. This is quite a change from just a few months ago. I expected them to go negative in May due to the increasing impact of construction at this time of year, but the amplitude of the decline indicates that a much broader weakness is evidencing itself.

I expect the next employment report to show an escalating unemployment rate. Eventually, perhaps years later, Business Employment Dynamics numbers will be in and employment figures will be revised downward for this period. The last release for Q3 07 showed 235,000 in net job losses for that quarter, which is a strong indication of recession.

How does this square with yesterday's rather good durables report? Well, freight figures continue to show that the production side of the economy improved beginning last year, but the consumer side of the economy is on a long, determined downward slope. So both can be true at once, but the consumer side of the economy is far more than 50% of the economy. Investment in production appears to be high, but investment on the consumer side is dropping. I believe we are in a very long period of rebalancing and that consumer consumption as a proportion of GDP will drop for years to come.

In terms of real value (i.e. internal comparisons) stock valuations are way too high. But if I look around the world, it appears to me that the US is greatly favored in comparison to most other markets, and that the US market is undervalued in comparison to many. Therefore on a relative value basis I expect the USD to strengthen and equities to continue to do relatively well. The Eurozone indicators look particularly weak, disturbingly so. It remains to see what is going to happen to the German/French expansion. Germany's unemployment rose, surprising many. There is a fuel price rebellion in France spreading to the UK, so maybe the EU will come to its senses and reduce some of the fuel taxes. This would be wise, and it would cut inflation!!!

Is the Fed going to raise rates? No. The Fed has, however, dusted off the Inflation Hawk suit and sent a member to fly around in it for a few months. I continue to believe that the Fed will hold rates through this year, and then probably drop next year to combat global conditions.

GDP is distorted as an economic measure by the inflation adjustments relating to energy. A better measure of what the economy is actually doing right now would be GNP. GDP for the last two quarters is now 16.8 > 26.2. GNP reverses that trend with 54.5 > 31.6. However net domestic product is rising over that period moving from 9.6 to 19.3, and I think that is the real trend.

There is an epic battle over fuel subsidies going on India. The fuel companies want to raise rates and have the government drop export duties. Several of them expect to be out of money this summer and unable to buy oil, which would cause a helluva problem a la Jimmy Carter. The Petroleum Minister has been duking it out with the Finance Minister, who had promised to control inflation and so couldn't afford to have a fuel hike. The PM was hoping to stave the problem off long enough to scrape by in the elections. We'll see about the May 31st decisioni date! The latest claim by the energy companies is that they are losing about 580 crore daily, which is about 136 million USD at the average exchange rate of the last few days. I believe the Indian banks are going to start refusing more financing.

There are constant power outages any way in quite a few areas of India due to development exceeding infrastructure. It was reported that the energy companies had resorted to capping deliveries to some customers and refusing new connections, but then that was denied. This global game of chicken with commodity prices is heading right to the wall.

Wednesday, May 28, 2008

A Surprisingly Good Durable Goods Report

It's true that overall new orders dropped again, but when you strip out transport, and especially motor vehicles, it's clear that other industrial segments are really picking up. Full advance report in pdf.

There has been parts supplier strike which is messing up the data for motor vehicles a bit, but it looks like we are getting close to drawing down motor vehicle inventories enough to see a bottom in a couple of months.

Comparing 2008 to 2007 YTD:
Motor vehicles:
Unfilled Orders: -12.7
Inventories: -7.1
Shipments: -11.8
Apr Shpmts: -2.9

Fabricated Metals:
Unfilled Orders: 8.2
Inventories: 2.3
Shipments: 1.1
Apr Shpmts: 1.2

Primary Metals:
Unfilled Orders: 3.1
Inventories: 3.2
Shipments: 8.8
Apr Shipmts: 2.4

Non Defense Capital Goods Ex-Aircraft:
Unfilled Orders: 8.8
Inventories: 5.6
Shipments: 3.8
Apr Shipmts: 0.5
It's a picture of surprising strength when you exclude motor vehicles. Non defense aircraft orders appear to have peaked and begun a decline, with new orders down 2.3% YTD compared to 2007. The big backlog in orders is still there, so the pace of production shouldn't slow this year. Computers and electronic products are still showing YoY increases.

Tuesday, May 27, 2008

Kitchen Knives And Cargo Cults

Whenever I see another mention of the recommendations by various British groups to ban kitchen knives in order to control the growth of violence, I think of cargo cults.

The connection is that cargo cults usually involve some sort of sympathetic behavior. The adherents want the goods, so they build airstrips and fake air control towers, as an example. It's a confusion between cause and effect.

The kitchen knife ban theory is based on the reality that a lot of recent murders have been committed with them. Of course, since the banning of other types of knives, these are the most available:
A team from West Middlesex University Hospital said violent crime is on the increase - and kitchen knives are used in as many as half of all stabbings.
The use of knives is particularly worrying amongst adolescents, say the researchers, reporting that 24% of 16-year-olds have been shown to carry weapons, primarily knives.

The study found links between easy access to domestic knives and violent assault are long established.
First the murderous guns were banned, then murderous hunting knives and so forth. Next up, bans on murderous cricket bats and sharpened sticks? It's pretty easy to make a knife.

Cargo cults have lasted a surprisingly long time, so there's no knowing when the Brits will wake up and figure this one out.

A close relative to cargo cults and criminal kitchen knives seem to be those confused realtors still wailing for a return to loose lending standards. The realtors claim that since all was well when those standards were in effect, the way to stop foreclosures, boost home values and generate sales is to return to no-doc, 100 percent mortgage loans.

Headlines VS Details

Conference Board consumer confidence is just as bad as the headlines say, with the details actually a bit glummer than the overall reading:

Not that anyone could blame consumers with these prices.

New Home Sales are reported to have risen on an SA basis, and the supply to have dropped. But what leaped out at me in this report was that there was a sharp drop off in the number of completed homes that sold in April. Last year in April 31,000 completed homes sold. This year only 19,000 homes sold, and that is down from 25,000 in March. Furthermore, median months for sale keeps rising and now stands at 8 months, compared to 5.8 months last April. The number of completed homes for sale at the end of April was 180,000 compared to last year's 181,000. I see no cause for optimism in this report.

The reason I am concentrating on these indicators instead of the total number of homes for sale is because of the cancellation problem. We don't know how many sold, then cancelled, new homes for sale are out there, because once they are reported sold they drop off this report forever. We do know that these cancellation numbers have been running at very high levels for several years now. My guess is that once the YoY inventory of completed homes for sale starts to drop and median months for sale starts to drop it will be safe to assume that the total inventory of new homes for sale is dropping. Until then, I think it is very likely to be rising.

This report is very bad news for banks stuck with loans to builders, because it looks as if a lot of inventory is just stuck, not moving at all, and that the implementation of jumbo GSE loans didn't do much to change the situation.

My guess is that source of what seems like a drastic change are REOs in new developments that are now underpricing builder sales. You'd have to be kind of stupid to pay a hundred thou more to buy a never-lived-in home from a builder when you can buy a very similar, never-lived-in home from the bank in the same development.

This report also contained a strong signal relating to the financial company meltdown. The northeast now has by far the worst YoY drop off in sales at -58%.

Monday, May 26, 2008

Memorial Day 2008

There are no countries that survive in the world unless someone, somewhere, is willing to fight for them when necessary. There are a lot of graves of US soldiers that have died fighting for someone else's country too.

Don't forget, because the best way to keep those graves to the necessary minimum is to remember them. Peace is not the natural state of mankind, and peace dies the day there are no more soldiers.

Update: Shrinkwrapped posted a similar short comment on the day, and his sourcing was questioned in the comments. That led me to a spate of industrious googling and Orwell's Notes on Nationalism. This essay is acutely relevant to the current attitude among some of the elitist types in the US. Orwell defined nationalism as blind partisanship:
The reason for the rise and spread of nationalism is far too big a question to be raised here. It is enough to say that, in the forms in which it appears among English intellectuals, it is a distorted reflection of the frightful battles actually happening in the external world, and that its worst follies have been made possible by the breakdown of patriotism and religious belief.
As Orwell uses the term "nationalism", it stands for blind adherence to any cause:
By 'nationalism' I mean first of all the habit of assuming that human beings can be classified like insects and that whole blocks of millions or tens of millions of people can be confidently labelled 'good' or 'bad'.[See note, below] But econdly--and this is much more important--I mean the habit of identifying oneself with a single nation or other unit, placing it beyond good and evil and recognising no other duty than that of advancing its interests.
He then went on to distinguish it from patriotism:
By 'patriotism' I mean devotion to a particular place and a particular way of life, which one believes to be the best in the world but has no wish to force on other people. Patriotism is of its nature defensive, both militarily and culturally. Nationalism, on the other hand, is inseparable from the desire for power.
The difference between the two forms of identification is that one stands for the positive desire to seek one's own welfare, and thus is ultimately rational and self-limiting, whereas the other is merely a desire for conquest:
It is also worth emphasising once again that nationalist feeling can be purely negative. There are, for example, Trotskyists who have become simply enemies of the U.S.S.R. without developing a corresponding loyalty to any other unit. When one grasps the implications of this, the nature of what I mean by nationalism becomes a good deal clearer. A nationalist is one who thinks solely, or mainly, in terms of competitive prestige. He may be a positive or a negative nationalist--that is, he may use his mental energy either in boosting or in denigrating--but at any rate his thoughts always turn on victories, defeats, triumphs and humiliations.
In other words, it is a very perverted form of tribalism. Orwell then proceeds to skewer the type of pacifism among British intellectuals which he considered to fall under his definition of "transferred nationalism":
PACIFISM. The majority of pacifists either belong to obscure religious sects or are simply humanitarians who object to the taking of life and prefer not to follow their thoughts beyond that point. But there is a minority of intellectual pacifists whose real though unadmitted motive appears to be hatred of western democracy and admiration of totalitarianism. Pacifist propaganda usually boils down to saying that one side is as bad as the other, but if one looks closely at the writings of younger intellectual pacifists, one finds that they do not by any means express impartial disapproval but are directed almost entirely against Britain and the United States. Moreover they do not as a rule condemn violence as such, but only violence used in defence of western countries. The Russians, unlike the British, are not blamed for defending themselves by warlike means, and indeed all pacifist propaganda of this type avoids mention of Russia or China. It is not claimed, again, that
the Indians should abjure violence in their struggle against the British. Pacifist literature abounds with equivocal remarks which, if they mean anything, appear to mean that statesmen of the type of Hitler are preferable to those of the type of Churchill, and that violence is perhaps excusable if it is violent enough. After the fall of France, the French pacifists, faced by a real choice which their English colleagues have not had to make, mostly went over to the Nazis, and in England there appears to have been some small overlap of membership between the Peace Pledge Union and the Blackshirts. Pacifist writers have written in praise of Carlyle, one of the intellectual fathers of Fascism. All in all it is difficult not to feel that pacifism, as it appears among a section of the intelligentsia, is secretly inspired by an admiration for power and successful cruelty.
Anyone who cannot see how the above-described attitudes are not still governing a segment of the leftist elite should worry more about removing the rocks from his or her head than the flag pin from his or her lapel. See a spirited debate at NOFP on the topic.

And this is our Jimmy Carter, the man who feels that dictators speak for their people, the man who never met a dictator he didn't like, nor a fixed foreign election over which he did not coo, a man who can ignore bodies, unless they can be laid in some fashion at the feet of an American serviceman.

For some reason I have never understood, many of the pacifists of this type are anti-Semites, which may or may not be why they hate Joe Lieberman with such a passion. Of course, Joe does ask difficult questions, and maybe they just hate him for those.

Friday, May 23, 2008

Existing Home Sales

Hmm. Month over month off 1%. Months of supply up to 11.2, which pretty much rebuts the idea that home prices are going to stop falling any time soon. Calculated Risk will probably have a post on supply up today.

As expected, sales are relatively strongest in the west, where prices were highest, the most REO is on the market, and prices have fallen the most. The price drops are opening up the housing market to many more individuals quite rapidly, and because prices were so high, the rate of homeownership was lowest in the west. Needless to say, anyone not forced to sell does not have a home on the market during such times, so as the months of supply stat shoots up like this, you can count on pent-up sales building up behind the scenes.

Months of supply for single family are a depressing 10.2, but there are 14.2 months of supply for condos. A commenter over on Calculated Risk laughed at me last year when I wrote that Fitch's MBS rating presumption that condo prices were more stable than single family was forcing me into the fetal position. Well, here's why sucking my thumb seemed like the only rational response. What were those people smoking? Needless to say, condo sales are falling faster than single-family.

At this point, national median and average prices have relatively little meaning except in the grossest sense. However, FWIW:
YoY Median Prices:
Single family: -8.0%
Condos: -3.7%
YoY Average Prices:
Single family: -8.1%
Condos: -2.0%
This does not mean that condo prices are actually more stable than single-family prices. What it means is that more condos are selling in pricier areas than in lower-priced areas, in which the market for condos has in some cases totally collapsed. But this is always true. In areas in which condos are a disfavored affordability option, when housing prices shift lower, condo sales plummet. In areas in which condos are the primary housing supply (metro, for example), when prices shift lower, sales remain more stable. Thus the seeming statistical stability of condo prices is a function of changing regional mixes in sales.

That's why these types of statistics are so darned dangerous when applied as assumptions to project loan performances on pools or portfolios.

NAR (I can't bear to link to their drivel) went on in their press release to talk about recent mortgage easing supporting the US market. I doubt it. In the last analysis investors have to buy mortgages, and they will insist on getting something that isn't going to collapse in value on them. The ever-creeping default surge crept from subprime to Alt-A, and is now moving into the prime and jumbo prime world.

You may or may not find this funny, but some of the worst, most outlying condos will have price drops in excess of 70%!!! The best (top 15%) might average about 20% decreases. Death by condo is a recurring theme in real estate.

Death by jumbo condo-secured mortgage is about to become a reality. I have the awful feeling that FHA is going to end up stuck with Congress Critter pandering on the topic.

Slowing Growth

The ECB bank lending survey earlier forecast weakness. The combined European manufacturing and services survey showed a real slackening in the first quarter:
A preliminary estimate of Royal Bank of Scotland Group Plc's composite index fell to 51.1 from April's 51.9, NTC Economics Ltd, which carries out the survey, reported today.
``All forward-looking indicators are very weak,'' said Sunil Kapadia, an economist at UBS Ltd. in London. ``The economy will continue to deteriorate. Banks will continue to tighten credit. We expect real disposable income to shrink in 2008.''
Not surprising. The UK is not in great shape:
Gross domestic product rose 0.4 percent in the three months through March, the Office for National Statistics said in London today.
``Firms have cut back on investment sharply, and that's only natural when you have the biggest financial shock since the Great Depression,'' said Dominic White, an economist at ABN Amro Holding NV in London and a former U.K. Treasury official. ``We're looking at a weak picture, and the odds of a negative second quarter are fairly high.''
Investment dropped 1.6 percent in the first quarter from the previous three month after economists in a Bloomberg survey forecast a gain of 0.2 percent.
The drop in investment is a bad sign. Industrial production contracted 0.2% from the previous quarter, and imports dropped 0.6%. For more on the UK economy, I strongly recommend the UK Bubble blog. This post and graph caught my attention earlier in the week:

This one made me suspect that times are going to be tougher in London for a while than I had thought:

Spanish GDP slowed to 0.3% in the first quarter from 0.8% in the fourth quarter. The construction slackening has more relative effect on Spain than most other economies, since at least 13% of employees were working in that sector. As securitized mortgage delinquencies mount, it appears that construction will continue to slow.

In Europe it looks like countries that have been the most dependent on housing are the worst affected, although inflation is hitting them all. European economists have been somewhat dour:
Economists from Dresdner Kleinwort were less than optimistic about the euro zone's growth outlook, saying that actual figures are likely to disappoint.

"The Eurozone is likely to see on-going growth divergence by country," they continued. "The one economy where our 2009 GDP forecast is above consensus is Germany. But, we continue to highlight the substantial imbalances that exist in other countries, especially with banks continuing to tighten lending standards. Not just Spanish GDP could disappoint, but also Italy's and that of France."
Italian GDP rose in the first quarter, though. It had been slack last year.

Irish economic news hasn't been good and appears to be worsening:
"One can't rule out the possibility...(of) Ireland posting its first negative average (GDP) growth rate for the year as a whole since 1983," said Bloxham Chief Economist Alan McQuaid.
"With construction sector activity falling off sharply, the last thing the economy needs now is a significant retrenchment in consumer spending," McQuaid said.
"But that's how it looks at the moment, and despite a healthy performance from exports in the opening quarter of this year, the Irish economy is set for a hard landing in 2008," he said.
There is an excellent roundup of current stats for many of the major Euro countries in this CEP article. The hefty drop in May's service PMI was the big surprise. Those readings can be quite volatile, but in general a drop from 52.0 to 50.6 in one month would make economists and banks twitchy. Germany is the standout but even Germany saw minor declines in May; France's manufacturing improved but services dropped.

Elsewhere in the enlarged Europe the major threat appears to be runaway inflation.

I realize that most people have better things to do than read hours of boring economic articles a day, so I just wanted to mention the overall recent depressive tone that is emerging from national assessments. For example, Japan:
Speaking to multiple newswires, Bank of Japan Governor Maasaki Shirakawa said that, given uncertainties in the global financial marketplaces, it was impossible to determine the future of monetary policy and that the bank would consequently have to asses incoming upside and downside risks.
Commenting on the recent spike in global prices, including oil, he said that conducting monetary policy to address soaring global prices was not a good idea and that central banks should instead focus on how asset prices affected the economy.

"Our objective is to achieve sustainable economic growth under price stability and we also pay attention to how strongly asset price moves affect the economy," he said.
Japan has almost been begging for looser monetary policies in the major developed economies in recent months. This is the penalty Japan pays for having such huge exports - it is dependent on other countries to keep importing.
Sentance of BofE:
...Andrew Sentance, Bank of England monetary policy committee member, said that while the BOE was not forecasting a recession in the UK, one could not be ruled out. He went on to say that a significant slowdown was to be expected.
He said that, as consumer spending slowed, the economy would probably become more dependent on the export sector.
That last means that the UK is somewhat dependent on world growth.

The quandary for countries such as Poland is that export growth seems threatened, and so further efforts to control inflation are felt to be a bit risky:
"In the opinion of the majority of the Council...the risk of a fall in economic growth in Poland and of an excessive appreciation of the zloty exchange rate, both of which would be reducing inflation in the medium term, justified no interest rate change at the current (April) meeting," the minutes said.
"They assessed that the deceleration of economic growth in Western European countries, in combination with the zloty appreciation observed over the past months, may be lowering the growth rate of Polish exports and, consequently, have a negative impact on GDP growth in Poland," the minutes said.
The zloty has been flirting with an all-time high and is some 30 percent up since Poland joined the European Union in 2004.
In April alone, the zloty firmed 1.8 percent against the euro. The Czech economy is still doing quite well, but has slowed somewhat in the first quarter (to 5.5%) according to the flash GDP estimate.

Tighter bank lending standards might do more to suppress inflation than any central bank moves at this point. The key is to support healthy businesses while not throwing money at marginal enterprises.

Thursday, May 22, 2008

It's Thursday, So Let's Look At Employment

But first, since under no circumstances would I wish to make the title of this post too much of a clue to the contents, let's look at oil!

Yesterday the oil executives were summoned to testify before the Congress Critters, and they pointed out that barring most domestic oil production was going to make the Saudis laugh at bids to sue. The executives suggested that maybe unblocking internal energy production might be a nice step toward a free market and lower oil prices. Some of the oil price moves seem to be due to speculation and trading moves, and this will be tested by the fact that more supply is coming on line quite quickly. See this Telegraph article for a nice summary:
The world's finely balanced market for crude has been creeping into surplus for several weeks. Opec's monthly report says that demand this quarter will average 85.75m BPD. Supply was 86.8m BPD in April. The fresh output from Nigeria, Iraq and Saudi Arabia may push it significantly further into surplus.

The signs are already surfacing in global inventories. Opec says that stocks held by the OECD club of rich countries are above their five-year average, with "comfortable" cover for 53 days' use. US stocks have edged up for the last four months, though they fell last week.
The US Energy Information Agency says non-Opec supply will edge up by 600,000 BPD over coming months as Brazil, Azerbaijan and the Sudan raise production. By next year, the US itself will be producing enough extra oil to shave its import needs.
There is a lot of detail in the article, which also discusses the trading situation and the question of a commodity bubble. I do believe that there is a commodity bubble, but regardless, current prices are not sustainable on the world market and thus will not persist forever. The article also touches on the impact on Asian countries, soaring inflation, and the fact that we seem to be nearing a global recession by some forecasts:
What we know is that the International Monetary Fund has cut its forecast for world growth for 2008 three times since last autumn to 3.7pc, and the United Nations is predicting just 1.8pc - technically, a global recession. The major oil forecasters have halved their estimates for crude demand growth to 1.2m BPD.
In any case, the US urgently needs to cut energy imports in order to redress its trade deficit, and therefore we should be exerting all efforts to build internal energy production.

Now to US jobs. Initial claims are in the same basic range this weak. SA claims dropped a bit, but SA continuing claims did not change at all, although NSA continuing claims rose a bit. Both of these measures are and have been running at levels consistent with recession for quite a while.

The more interesting release was the publication of the Business Employment Dynamics (BED) survey for Q3 07. As I have written before, I believe we shifted into recession last year. I published a graph showing why - both gross private domestic investment and the Rockefeller adjusted state tax receipts had fallen into negative territory by the end of the year. Rockefeller went negative in the 3rd quarter, which does not happen unless we are in recession. For all of 2007, gross private domestic investment was negative.

BED for Q3 07 showed a net decline in employment, which also doesn't happen outside of recessionary periods. See table 2. The net job losses were widely spread in industry groups, supporting that this is a recession. See table 3.

BED is used to adjust BLS employment figures, so more substantial revisions remain ahead. These figures also feed in somewhat to income, etc, and I believe most economists will eventually acknowledge that the recession began in 2007.

We still have most of the impact of the credit crunch ahead for consumers, and we are just feeling now the full impact of the crunch on construction. But all is not lost, and the Gloom 'n Doom crowd should try to understand that this has been an odd period of very slow retraction, Since recessions are, economically speaking, periods of reallocation of resources, slow is better than fast. Slow allows the adjustments to occur more gradually, and one thing about the US economy is that it is very dynamic indeed, and adjusts well to new circumstances.

Wednesday, May 21, 2008

Weeeell, The Other Shoe Done Dropped

We'll have to see how this plays out in practice, but energy prices and the impact of energy subsidies is causing currencies like India's rupee to depreciate:
The rupee hovered near 13-month lows on Wednesday as concerns of a widening trade deficit intensified after world oil prices climbed to a record above $130 a barrel.
India's oil import bill shot up by more than a third in 2007/08 because of soaring prices, and the trade deficit widened by a similar percentage. Capital flows into the local stock market, a key support for the rupee, have also been eroded after a global financial crisis triggered net outflows of $2.7 billion this year.

In 2007, inflows had hit a record of $17.4 billion.
This is a very bad problem which is affecting other countries as well, and inflicting real pain on lower-income consumers in those countries. It certainly affects lower-income cohorts in developed countries as well. It's now mostly about energy import/export balances for many of these countries.

Another way to look at this is that energy subsidies were in themselves subsidized for a while by capital inflows on expectation of growth, which created additional infrastructure investment which may or may not have been efficient. But as fuel-related worries rise, capital inflow is threatened, and the only cure for some of these countries is to adjust energy subsidies down. This then impacts the population, which tends to suppress purchasing power for parts of the population.

The underlying problem is that demographics alone in many well-developed countries suggest that demand for most consumer goods should be stagnant, and the demand for consumer goods has to be picked up by other classes of countries.

High investments in commodity and fuel production are generally good for the very highly developed countries which manufacture high end stuff like ag machinery, factory machinery and oil drilling equipment. But they are not necessarily good for less-developed countries unless those countries can produce commodities.

As inflation shifts into Asia, it should continue to transmit back to highly developed countries in the form of consumer goods pricing.

Tuesday, May 20, 2008

Twas A Dark And Rainy Day

Ughh. The news about Kennedy brought back some highly unpleasant memories, because I have had several people in my family die of gliomas. I will definitely be keeping them in my prayers.

It seems that this election year is just bound to heap unpleasantness upon unpleasantness. Well, maybe this will be a reminder to us all that there are people involved. Yes, flawed people and imperfect people, but PEOPLE. Human beings. People must always be taken seriously. People put the light into the world for us, and some few become vicious destroyers of that light for reasons which we really do not understand.

I am also praying for Viola's family members. Her aunt had just gotten remarried about a year ago to a man who had lost his wife four years previously. That left him with three motherless daughters. One may guess that it was a great relief when Viola's aunt and he met and joined their lives. Very suddenly, this gentleman died leaving the entire extended family in shock and leaving those three daughters, who have now lost both their parents, in deep shock. Viola says they are not doing well. Your prayers would be appreciated.

Monday, May 19, 2008

Magic Muni Munificence

The Supreme Court finally issued the muni ruling, which allows states to tax income from the muni bonds of other states while exempting their own bonds. This will be very good for munis in some states!!! Bloomberg article.

One thing to note is that the SC didn't address taxation of non-government bonds, which are sometimes issued under state imprimatur by a private venture the state wants to lure (a manufacturer, a sports team). The reasoning used to excuse government bonds from the Commerce clause here might not hold for such bonds:
The logic that a government function is not susceptible to standard dormant Commerce Clause scrutiny because it is likely motivated by legitimate objectives distinct from simple economic protectionism applies with even greater force to laws favoring a State’s municipal bonds, since issuing debt securities to pay for public projects is a quintessentially public function, with a venerable history.
The actual ruling (55 pages) as published on the SC website. Kennedy dissented, joined by Alito, and Kennedy's dissent is scathing, but the overall majority was 7-2.

This is a very important ruling. Consider, for example, California. It has a high state income tax, and therefore a big advantage in marketing muni bonds to local residents. California is not the most creditworthy state by a long shot, and some of its municipalities are in deep fiscal trouble. Therefore if government issues had to compete with bonds across the nation, many issues would probably have to increase the rates paid in order to compete with bonds of other states. A state with a lower tax rate has less comparative advantage internally.

The Future

You rarely see anyone discuss the JOLTS (Job Openings and Labor Turnover Survey), but does prove useful. Jolts measures job openings and job departures. As you might guess, in bad job markets employees tend to leave jobs less, so both tend to turn down together. While JOLTS hasn't varied much recently, there has been a notable slackening beginning in 2007:
The job openings rate remained essentially flat from August 2006 through September 2007 then began trending downward; the rate in March was at the lowest point since mid-2005. The hires rate has had an overall downward trend since July 2006, and has reached the lowest level since early 2004. The separations rate has had an overall downward trend since November 2006. (See tables 1, 2, and 3.)
There has been an obvious change in private hiring:
Over the year, the job openings rate (not seasonally adjusted) rose significantly only for federal government. The rate fell over the year for total nonfarm (to 2.7 percent) and total private (2.9 percent) as well as in several industries, including construction (1.4 percent); durable goods manufacturing (1.8 percent); wholesale trade (2.2 percent); transportation, warehousing, and utilities (1.9 percent); information (1.7 percent); and finance and insurance (2.7 percent). Two industries--wholesale trade and information--have experienced exceptionally steep declines in the job openings rate over the past year. The job openings rate for whole-sale trade fell from 3.8 percent in March 2007 to 2.2 percent in March 2008; the rate for information fell from 4.5 percent in March 2007 to 1.7 percent in March 2008.Regionally, the job openings rate fell over the year in the Northeast (2.3 percent) and in the South (2.8 percent).
The wholesale trade trend is because retail margins are very tight and volumes are dropping. As I kept explaining last year, the volume trends in shipping are most related to employment in trade & transport. The explosion of banking and lending businesses had accounted for many information openings during recent years, and therefore it's no surprise that this industry would be affected.

There's lots more data at the survey. According to rail data, we should have a sharper downturn coming along at almost any time in wholesale and retail. Trucking data confirms this theory.

Therefore I do not believe that the emerging economic consensus for a slow improvement in the economy is correct. Gas and diesel prices are exerting an inexorable downward pressure on disposable incomes, and the consumer side of the economy will trend downward, placing further pressure on employment.

Furthermore, the weakening in German and Japanese exports is not a good sign for US manufacturers. US currency is giving a competitive edge to domestic producers, but it is an edge for what seems to be a declining market.

I have written somewhat about the Indian situation, and their economy seems to me to be in considerable travail, and I am not the only individual with these concerns, although the debate rages. But the major problem affecting the Indian economy is likely to stem from infrastructure pressures. It is quite significant that their energy companies want to cap LPG quotas to existing customers and limit new connections in order to stem their losses. In another move, energy companies are trying to bypass their losses on price-controlled motor fuels by ceasing to provide them and substituting their brands, which are not price-controlled.

I cannot believe that current energy price trends can last much longer without inflicting a severe blow on international trade. India is a relatively strong economy and an economy with significant domestic energy production, so I take it as a middle Asian case. Yet inflation is soaring, its currency is depreciating, and costs to consumers are unlikely to be curbed.

In such an environment, imposing a carbon cap and trade scheme could inflict a severe blow on world trade. The price controls and subsidies so common in Asian countries come along with energy inefficiency, and such schemes will end up being a massive tariff. Both McCain and Obama seem now to be supporting policies which are extremely economically risky. The US is dependent on growing demand in other countries just as those other countries depend on our consumption.

Thursday, May 15, 2008

US Domestic

Empire State Index stalled out:

The general business conditions index fell below zero, to -3.2. The new orders index remained close to zero, and the shipments index, while positive, declined markedly. The prices paid index exceeded its earlier record high by a wide margin, reaching 69.6, while the prices received index dipped several points.
Expectations by firms were that they would be raising prices considerably more than last year in 2008. Input cost increases were not recovered in the earlier period, and some of that should show up this year. Expectations were for input costs to continue to rise.

Initial Claims, while not dire, are still increasing on a seasonally adjusted (SA) basis. On an NSA basis they continue to decline. The same pattern holds true for continuing claims, which dropped over 123,000 for May 3rd (continuing claims run a week behind initial claims). The level of claims is consistent with recession. To understand the impact, compare May 3rd's continuing claims this year (
2,833,473 NSA) to the comparable week in 2007 (2,290,364), or a YoY increase of 23.7%. Needless to say this does not help the economy. It equates to an NSA insured employment increase of 0.4%, which is significant.

One of the weaknesses of measuring insured employment is that after six months unemployed individuals drop off the rolls.

Although May treasury receipts could recover, the deposit pattern for FUT (Federal Unemployment Tax) compared to May 2007 is markedly worse. I did expect to see this, but not quite as emphatically. As we move into the spring and summer months building is at its height and therefore the change in employment indicators should be emphasized for this period.

April G.17
: Industrial production dropped 0.7, and the numbers look very similar to February. Of most concern is the 1.1% drop in business equipment. That is a very bad sign, and markedly worse than February. Based on that figure, one might suspect that Q2 GDP will be negative. On a YoY basis, industrial production has managed to climb 0.2%. Hardly strong. The positive subcategories on a YoY basis are business equipment (3.0), materials (1.3), mining (3.1), and utilities (.8). And for April the changes were business equipment (-1.1), materials (-.7), mining (-.8), and utilities (+.3).

Capacity utilization dropped to 79.7. Compare that to the lows for the previous two recessions, which were 78.6 for 91 and 73.6 for 01 (with the bottoms occurring later in those cycles). So the technical economic description of this report should be "piss-poor". April was quite cold, which would have driven up the demand for utilities.

Philly Fed: (the theme is great expectations; note the 2001 pattern)

The effect of the rebate checks on the general economy will probably be muted. I expect utility companies and credit card companies to see better payment patterns and lower delinquencies. I would expect some benefit to the Walmarts of the retailing world, as people who have been avoiding spending on clothing go in and spend on jeans and the like. But consumer psychology is not going to change at these gas and food price levels, so very few will spend most of it in the stores, and continued increases in food and gas prices indicate that the essentials will suck up this money from Washington for the majority of the recipients.

The major story for the US consumer economy over the next six months will be high prices for essentials and much more conservative spending by consumers. Also, the major impact of the home price debacle is due to hit this year. Refinance money usually provides at least a one year cushion for consumer spending, and the restrictions on HELOCs and home equity loans are quite recent. The major tightening on CC standards dates to last fall. Thus we are moving into the period in which 80% of the consumer credit restrictions are due to show up in economic numbers. The Wall Street layoffs are also moving some of the economic impact to a previously immune area with high incomes.

On gas consumption: I have seen estimates of the current drop YoY between 5.8% and 6.0%. However the pattern will accentuate through the year because of the marked drop in construction activity. Also, service businesses aimed at consumers such as home remodeling and lawn maintenance are due to have a tough season. Construction workers drive trucks and transport a lot of materials, so consumption falls should accelerate. The vehicle replacement effect is cumulative over time and will keep building.

One little-discussed aspect of the US economy, especially with respect to employment, is the impact of replacement of illegal workers. I suppose it is simply too politically incorrect to discuss.

The US economic numbers would look much worse and consumer consumption would be much worse if it were not for a very strong replacement of illegal workers by legal workers that is taking place. Because many illegal workers were trying to send money to foreign countries to support families, the consumption effect of illegal employment is very low, and may in fact be overbalanced by consumption of social services. This has some offsets for the US economy, which are preventing more dire numbers at this time.

It is almost certain that the relative impact of replacement of illegal workers with legal workers is providing more impetus to the US economy than the stimulus checks. Also, it will continue for longer. It is not just the replacement of workers, but the effect of removing underbidding for labor. A US worker simply cannot compete by bidding for wages sufficient to support him- or herself along with dependents in this country compared to an individual who is supporting dependents in a country with much lower living costs.

Wednesday, May 14, 2008

The Domestic Story Of The Day Is Polar Bears

Internationally, it's probably the Ashkelon attack. Ms. Rice was taken off to the scene to survey the damage. Israel suspects that the Grad rockets, which are capable of reaching further into Israel, are coming from Iran. In any case, Israel is going to have to go back into Gaza.

But domestically, it's polar bears. They will be named an endangered species, but apparently Interior is changing a few things:
In making the announcement, Kempthorne said, “I am also announcing that this listing decision will be accompanied by administrative guidance and a rule that defines the scope of impact my decision will have, in order to protect the polar bear while limiting the unintended harm to the society and economy of the United States.”
“Listing the polar bear as threatened can reduce avoidable losses of polar bears. But it should not open the door to use of the ESA to regulate greenhouse gas emissions from automobiles, power plants, and other sources,” said Kempthorne. “That would be a wholly inappropriate use of the ESA law. The ESA is not the right tool to set U.S. climate policy.”
To make sure the ESA is not misused to regulate global climate change, Kempthorne promised the following actions:

* The U.S. Fish and Wildlife Service is proposing a 4(d) rule that states that if an activity is permissible under the stricter standards of the Marine Mammal Protection Act, it is also permissible under the ESA with respect to the polar bear. This rule, effective immediately, will ensure the protection of the bear while allowing us to continue to develop our natural resources in the arctic region in an environmentally sound way.
* Director Hall will issue guidance to staff that the best scientific data available today cannot make a causal connection between harm to listed species or their habitats and greenhouse gas emissions from a specific facility, or resource development project or government action.
* The Department will issue a Solicitor’s Opinion further clarifying these points.
* The Department will propose common sense modifications to the existing ESA regulatory language to prevent abuse of this listing to erect a back-door climate policy outside our normal system of political accountability.
And let the lawsuits begin! Hall's three page letter ruling out greenhouse gas emissions as an issue requiring consultation is here. The Sierra Club is correct in pointing out that allowing this to stand would greatly weaken ESA, so I think it's back to court:
“The Bush administration’s sham plan also proposes changes that could gut the Endangered Species Act and prevent it from ever being used to actually protect the polar bear or address global warming—which is precisely what is pushing the bear toward extinction.

“We don’t need to sacrifice polar bears and other wildlife just so Big Oil can add to their tens of billions in record profits. America already has the technology and the will to embrace a clean energy economy that will end our dangerous dependence on oil, fight global warming, and leave wild, pristine places like the Arctic intact.
This will be the issue that eventually breaks the back of the extreme wingers in the environmental movement by forcing Congress to impose some common sense limitations to the ability to sue forever. Because the wingers now have the law on their side; they will win in court on the basis of the SC's ruling about CO2. All of that work would be wasted if this interpretation sticks, so it's all of the non-rich population of the US against the wingers now. There are more non-rich US citizens than wingers.

If you love polar bears, don't worry. They'll do fine either way. It's wacky environmentalism that is now the endangered species!

God, I'm tired. Hopefully I'll get back to more blogging tomorrow. I'm sorry for not answering the comments and things. Everyone has their limitations.

Update: The 2007 CO2 case was Mass vs EPA, and the decision is here in pdf.
Further Update: The Anchoress turns her face to the wall and the wife chart, Dust My Broom provides an example of the "clean energy technology" the Sierra Club is advocating, Dr M points out tangentially that the Republicans do not get it, which they don't, and SC&A discovers that some people think environmental problems are the fault of the world-destroying Jews, enabled by the world-destroying Americans.

Tuesday, May 13, 2008

Retail & ECB Bank Lending

Advance retail clocked an overall decline of 0.2% from March to April and an annual increase of 2.0%. On an annual basis that is well below the inflation rate.

Overall spending on gas dropped, even though gas prices increased. The pinch is really hitting now.

On an annual basis, some selected figures:
Motor vehicle dealers: -8.0%
Groceries: +6.1%
Gasoline: +16.3%

According to the ECB lending survey, banks plan to tighten business and household credit by the highest margins in 5 years (the length of the survey). The four future questions showed tightening quite similar to 2003, a year in which GDP in the core EU countries grew at less than 0.5%. So one would say that the European slowdown is underway.

The consumer outlier was purchase money mortgages, for which 32% of respondents intended to tighten. This is significantly higher than the previous height of 25% recorded in January 2004.

The business outlier was loans to large enterprises. 54% of respondents expected to tighten in the next quarter, whereas only 33% expected to tighten for small to medium enterprises. Short term lending was less affected, with only 33% expecting to tighten, whereas 53% of respondents intended to tighten long term.

There is a steep 3-quarter rise in tightening shown for all categories of lending. The trajectory for long term business loans beginning Jan 2007 through April 2008:
Jan 07: 3%
Apr 07: 8%
Jul 07: 10%
Oct 07: 34%
Jan 08: 35%
Apr 08: 53%
That is going to show up in the economy, no ifs, ands or buts. The percentage of respondents tightening short term business credit increased 10% points between January and April. In general European companies tend to be more dependent on bank lending than US companies.

In 2003 the tightening bias was easing throughout the year. I would say that Europe will be in recession by the end of this year. Inflation does have some masking effect there as well as in the US, but these are intimidating numbers.

Monday, May 12, 2008

Consider It Kenneth Fisherism In Action

WSJ has this story charting the progress of a California family now going into Chapter 7. They will lose their home, of course. They owe more than $500,000 on that home and they have five kids. He's a truck driver and she's a clerk. They also have more than $100,000 of other debt. According to the article the BK total is $670,000 including CC, auto, etc.

Act 1: In 1995 they buy a house for $170,000. The downpayment is $11,000. Even figuring high closing costs, they couldn't have started out with a balance over $165,000. So, they must have pulled out somewhere around $340,000 on that house in twelve years to get to their current mortgage balance. That's over $28,000 a year.

Act 2: In 1999 he had a knee operation and was out of work for six months. They ended up filing bankruptcy and made payments for a couple of years. Needless to say, that was rough (they really don't allow you much to live on). I'm guessing that was the motive for...

Act 3: The 2001 refi. I'm sure they pulled cash out, plus financed some hefty fees. Obviously it was a high interest mortgage, because they must have been in BK at the time. Maybe they paid off the rest of their creditors. It must have felt good, and so set the stage for

Act 4: In 2003 they refinanced. I'm sure they rolled everything in. Needless to say the mortgage was probably more than they could really pay then, and so I'm sure they charged up some stuff, leading to

Act 5: In 2005 she was pregnant and went part-time, and they refinanced:
At the time, their house was appraised at $610,000. They took out a $505,000 loan -- roughly $452,000 went to pay off their prior loan, about $15,600 went to other outstanding debts and fees and the Floyds took out almost $23,000 in cash.
Before the last refi, in ten years they had managed to build up their mortgage balance to the tune of at least $290,000. It looks like they tried again in 2007, but no dice. They stopped paying the mortgage in April 2007, and the house is set to be sold in May 2008. Here is where this gets quite bizarre.
By December, the Floyds monthly payments, including back payment fees, reached $5,600. Mrs. Floyd has since asked Option One for loan modification. The couple also contacted Hope Now, a coalition of mortgage companies, investors and credit counselors. But the group said that they couldn't help the Floyds because they'd missed too many months of payments.
Yeah, and they don't have the income to pay a bleeping 500K mortgage! The interest rate is not their real problem. If they were paying IO on this at 7% (prime I-O) their mortgage payment would be over $35,000, plus taxes and insurance. Their joint incomes probably aren't more than 80K, and they have 5 kids, so that makes it effectively 70K max. Hoo-hah.

They didn't have the income to pay this mortgage in 2005, either. But of course Option One did not care, because it looked like they had plenty of equity margin. Option One knew this couple was going to lose the home sooner or later. Option One just didn't think Option One would be taking a loss on it when they did lose it.

FWIW, the 2005 appraisal is suspect. However they probably could have sold it then for about $550,000, and walked away after costs with more than the cash they got out then. They probably had at least $90,000 equity, and they might have been able to exit with 50K to pay all their bills. They would have been way ahead, aside from the rent-free feature of CA RE nowadays. You can pretty much count on getting 8 months free.

So why was this couple even thinking they had a chance to keep the house? This is the quote that got to me:
"I want to pay my debt. I pay my federal and state taxes like I'm supposed to, I go to work, and I just can't find any help," said Ms. Floyd. "It just isn't fair."
It isn't fair? This couple really can't afford a mortgage over 240K, and 210K would be a lot more achievable. To return these people to the ability to pay their mortgage, they need to be bailed out to the tune of 50%. After that Hope Now would probably have to hire a Vinnie to follow them around and break their fingers if they tried to use their credit cards or buy a new car. I don't even know how to express what I am thinking.

You don't want to pay your debt when you have $670,000 of it, less than 80K in annual income, and 5 kids. Obviously that is not this couple truly desires. They want to feed, clothe and raise their kids in an intact family, plus to stay in this house. Which is not going to happen, because the current value of the home is far above what this family can afford to pay on a mortgage. No lender is going to write the loan down more than it would cost to foreclose. The lender should come out at least $150,000 ahead by foreclosing, so that's what is going to happen.

There appear to be so many darned people who lived off their houses in the bubble markets and got themselves in trouble like this.

This is why I got so mad about Kenneth Fisher's screed claiming that subprime lenders were doing a wonderful thing:
If you look at the history of subprime loans, they tend to average about a ten percent default rate. Now we're up around 14 percent. So all this brouhaha is about the increase from that historic ten percent default rate to today's rate of 14 percent.

But a ten percent default rate means that 90 percent of the people who got these loans ended up owning homes that they wouldn't otherwise have been able to buy. The question is: Do we want more people to have homes or do we want fewer people to have homes? My view is more people owning homes is moral and good. Fewer people owning homes is immoral and bad.

We should be encouraging subprime loans. Because it's the way these people get homes.
It's not moving into a home that improves a family's position. It's being able to live there long-term. Most subprime loans out there are really refis, and the current default rate on 2/28s seems to be about at 50% for some portfolios.

Subprime lending is only moral and good if it stops at the point at which the borrowers have a reasonable chance of paying off their loans. Beyond that, it's just predatory lending.

I don't believe that Congress or any agency should be in any way paying off lenders like this. They need to be driven out of business. I cannot say that this couple was faultless - they would have lost their home far earlier if they hadn't been given all this credit - but I will say that although they are obviously economic doofuses and subprime as subprime gets, it was still not moral or good to load them up with debt past the point at which they could emerge from the situation.

The endpoint for this family is that now they cannot find a rental and the family will be split up. That is what Kenneth Fisherism has created.

There are many similar cases. I find it unutterably tragic that people who could not afford to remain in their homes but did have significant equity essentially had that equity siphoned off by the loan industry. There comes a point for many people when they need to let go of the house and walk with the equity they have. That nest egg helps them find a rental, keep reasonable credit, and continue their lives.

The Obligation

The transcript of Obama's speech in WV was interesting. The topic was veterans, and most of it was the type of thing which any politician must say, whether he or she believes it or not (I do not mean to imply that Obama does not believe what he said). Almost nobody in public life quarrels with most of this stuff:
The brave Americans who fight today believe deeply in this country. And no matter how many you meet, or how many stories of heroism you hear, every encounter reminds that they are truly special. That through their service, they are living out the ideals that stir so many of us as Americas – pride, duty, and sacrifice.

Some of the most inspiring are those you meet at places like Walter Reed Army Medical Center. They are young men and women who may have lost a limb or even their ability to take care of themselves, but they will never lose the pride they feel for their country. They’re not interested in self-pity, but yearn to move forward with their lives. And it’s this classically American optimism that makes you realize the quality of person we have serving in the United States Armed Forces.

This, after all, is what led them to wear the uniform in the first place – their unwavering belief in the idea of America. The idea that no matter where you come from, or what you look like, or who your parents are, this is a place where anything is possible; where anyone can make it; where we look out for each other, and take care of each other; where we rise and fall as one nation – as one people. It’s an idea that’s worth fighting for – an idea for which so many Americans have given that last full measure of devotion.
There was one point at which my eyes opened quite wide:
When our troops go into battle, they serve no faction or party; they represent no race or region. They are simply Americans. They serve and fight and bleed together out of loyalty not just to a place on a map or a certain kind of people, but to a set of ideals that we have been striving for since the first shots rang out at Lexington and Concord – the idea that America could be governed not by men, but by laws; that we could be equal in the eyes of those laws; that we could be free to say what we want and write what want and worship as we please; that we could have the right to pursue our individual dreams but the obligation to help our fellow citizens pursue theirs.
Actually, the obligation to help our fellow citizens pursue their dreams was never part of the deal. By their nature dreams are often grandiose and uncertain, and vary widely. A lot about the social freedom to go your own way involves letting other people go their own ways.

I read McCain's carbon speech. I'm really not sure that he understands the difference between pollution and carbon dioxide emissions; I know he's got the science wrong; I know he's playing with fire with the idea of carbon cap trading systems. He seemed to be waffling a bit on nuclear energy. It seems to me that there is little meaningful difference between his plans and Obama's, and no need to worry about Mrs. Also-Ran's plans any more.

We aren't going to get a meaningful choice on some of the most important political issues of our times in this presidential race, and that's a pity. The same is true of immigration, etc. Everything seems dominated by the current political CW, and I fear that CW will turn out to be just as facile and ultimately destructive as the theory that handing out mortgages like popcorn would lead to widespread prosperity.

So how much change will Mr. Change be bringing to DC? If he shares essentially the same positions as this very long-time Washington insider, where is the change? Just asking.

Very Expensive Myths

There was recently a meltdown in arctic ice, but the arctic ice expanse is right back this year. (For what is really happening, go to this blog post.) There, is in fact, no evidence that the world is getting warmer, and considerable evidence that the short-term trend is one of cooling. But truth moves slowly at federal levels, and in DC the Arctic icecap is almost gone, taking the polar bears with it. One is tempted to suggest that we should ask the Canadian government to give them up, because when Canada ruled on the status of the polar bears it said there were plenty.

It may or may not surprise us all that a shift in sunspot cycles has occurred and now we are getting cooler. That is the historical correlation; if you graph sunspot cycles by intensity and length, when the cycles get low and slow, the earth cools. We are now in the extended interim between cycle 23 and 24. 23 keeps hanging around; 24 has popped a few sunspots but can't seem to get going, and we're chilly. We are so chilly that a big chunk of planned US corn may not have been planted due to conditions in the upper midwest. Timing is important on corn.

In any case, while only Al is left looping the world in his jet, making speeches with frenetic arm motions bewailing the demise of the polar bears, an environmentalist group has gone to court to make the Interior Dept declare the polar bear threatened by global warming. That would make it a matter of federal law that CO2 emissions directly threaten the polar bear.

They don't, of course, because the polar bear has been around during periods with temperatures significantly warmer than ours. But facts no longer matter.

I'm hoping that the inevitable happens, because all our energy decisions are now controlled by courts and leftist environmental nutcases. This will not end until the population rebells, and REBELLION IS ON THE WAY!

Here's an article in an Alaskan paper regarding the judge's order. The way this works is that since the Supreme Court ruled that CO2 is a pollutant, if the polar bear is endangered, and if the polar bear is endangered because of global warming, then almost any type of energy project or any project using energy can be blocked.

Also, the law mandates all federal agencies not to do anything that harms the environment of endangered species. This will have many interesting results, because almost anything emits CO2. Did you know that making concrete emits a great deal of CO2 into the atmosphere?

I have been laughing for days about this. Consider what might have happened if polar bears had been ruled endangered and the SC had ruled CO2 a pollutant, oh, say ten years ago:

The FEMA caravan for relief of a drowned New Orleans after Katrina would have been awesome. The bicycle convoy would have extended for hundreds of miles, and we'd all have had a great deal of time to cheer it as it went through our communities. I'm sure the first shipments of medical supplies and water would have reached the people in slightly under 3 weeks.

This is real, and hilarious.

Sunday, May 11, 2008

Happy Mother's Day!!

(To all the mothers out there.)

I do believe that I've got to mow the lawn, so don't expect much from me today.

Saturday, May 10, 2008

The Real Mortgage News

MGIC significantly tightens its criteria for mortgage insurance. The latest changes go into effect June 1st. The March changes became obsolete quite quickly, didn't they?

First, the entire states of New Jersey, Kentucky and Michigan go on the declining list (MGIC calls it restricted). Congratulations to the lucky winners!!! We know you worked hard for that honor....

Jumbos get hard hit. Max $ insurable amount is $650,000 or GSE buy. In a restricted market, max CLTV is 85%, whereas it is 90% in an unrestricted market. Min FICO for all markets is 700.

General: No cash-outs, no 3-4 units, no non-warrantable condos, no condotels, it looks like no EAs, no low-docs, no low-doc Alt-As, no option-ARMs. Min 5% dp, min 3% borrower funds on a purchase. No non-owner occupied. <720 requires two months PITI reserves.

If the appraiser describes the market as declining, the loan automatically goes into the restricted bucket. Also DU declining, or lender-identified declining. In other words, if the underwriter or appraiser IDs it as declining then MGIC IDs it as restricted. This is important, because it is unlimited, and because the lender cannot ignore the matter. If the loan ever defaulted and the lender hadn't used the right category, MGIC could and would refuse to pay.

The new restricted list (which automatically expands whenever a particular lender expands their own list) is here, and now contains either portions or the entire area of 30 (thirty) states.

The much-coveted distinction of having your entire state be restricted is still for a select few:
New Jersey
Okay, okay, GA is not on that list. However, if you look at the MSA and county details, you'll see that GA is pulling long and strong, as are states like VA. So those of you who have won the laurel crown can not afford to rest easy on your laurels. We're right on your heels.

And do you receive for having made the list? There's a surcharge for your MI. DC is unaccountably not included in the surcharge list, possibly because it might irritate too many Congress Critters and/or their favorite prostitutes.

After looking at the list, I'd say that MGIC might write insurance for maybe 40-50 90% CLTV jumbos in the second half of 2008. Everything else will be at 85%.

You need a 680 credit score for a purchase or refi in restricted markets (700 for jumbo). There's an across-the-board surcharge of 10 bps for rate/term refis as of June. MGIC will no longer write any insurance for condos or attached housing in Florida.

Barney Frank was threatening lenders last week because jumbo rates were still so high; he'd better start threatening mortgage insurance companies. As it is these guidelines are still too lax in some markets. Sure, you get a $105,000 downpayment on that $700,000 home, but when it winds up defaulting in 2010 and selling for $450,000, that's a nasty loss. Hard to make a profit this way, and FICOs aren't going to help.

Friday, May 09, 2008

A Pretty Good Column On Inflation

Sesit at Bloomberg, explaining why monetary policy won't affect food and fuel inflation very much.

The one main contribution to the pot left out for fuel is that many of the Asian economies with rapidly growing demand subsidize fuel costs substantially. This keeps fuel price-insensitive for a time.

The other factor involving food inflation not discussed are biofuels, which are driving up food costs by draining ag capacity to produce fuels from relatively energy-thin base materials (the exception being palm oil).

Eventually it will break, but the probability is that the near-term break will occur when various countries have to cut back on their fuel subsidies due to rising budget deficits. In India's case, the cost of the subsidy is hidden in the form of bonds issued by the fuel companies to cover their operating losses. These bonds are backed by the government. In countries such as Indonesia, the subsidy is paid from the government budget.

As background I suggest this 2005 Asia Times article reviewing the situation in Singapore, Malaysia, Indonesia and Thailand. The situation has already forced some changes in govenrment.

In the last week the current Indonesian president announced that Indonesia would be raising fuel prices:
Officials have yet to say how large the price rise will be, but President Susilo Bambang Yudhoyono has said his advisers were talking about a 20 to 30 percent hike.
Budget committee chairman Haris Azhar Azis said the fuel price hike was necessary to prevent even greater damage to the economy in future.

"With a 30 percent rise, inflation may jump from the government's target of 6.5 percent to 11.1 percent this year. But if we do not do anything it may reach 13.2 percent," Azis was quoted by AFP as saying.
Indonesia's economic growth is expected to slow as a result, of course, but the alternative is an even worse hit to the economy. The reason is that the amount of the subsidies had gotten so high that Indonesia's currency, the rupiah, was beginning to lose value as money left, which of course raises the cost of all of their imports.
The subsidies have become increasingly expensive as the price of oil has surged, and are projected to nearly triple this year to 126.8 trillion rupiah (13.8 billion dollars).

That amounts to about 12 percent of the state budget, based on a revised oil price of 95 dollars per barrel -- although black gold hit nearly 124 dollars on Thursday.
So the government has no option. To maintain growth it has to cut the money spent on subsidies.

Now consider the impact on all those who consume products exported from Indonesia. Some of that additional inflation will transfer through via the products. The Indonesian government is still hoping for about 6% GDP growth in 2008, but the vectors indicate slackening growth to be sure.

As consumers absorb the impact of these increases, they will, like US consumers, have to cut back on discretionary spending.

Malaysia is reviewing its fuel subsidies and says it expects to make a change by 2009. Among other measures, the government is trying to figure out how to stop subsidizing foreigners. Singapore does not subsidize fuel substantially, but then it can afford not to. Average percentages of income spent on food:
Singapore: 8%
Malaysia: 15%
Indonesia: 26%
Thailand: 26%
China: ~28% (hard to get good figures)
India: 33%
Vietnam: 40%
Pakistan: 40%.
Needless to say rising food prices are adding more pressures in many of these countries. The heavy subsidizers with growing consumer sectors are going to have to figure out how to target their subsidies more efficiently.

As inflation in the region moves steadily upward (averaging well over 7% so far), it is a fallacy to think that we won't see it abroad. Thus the near-term global future is for higher inflation transmitted in bumps and starts. Global growth is pressured downwards as a result.

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