.comment-link {margin-left:.6em;}
Visit Freedom's Zone Donate To Project Valour

Wednesday, May 25, 2011

It COULD be Doom Day

Let's see. No surprise, FHFA housing price index showed steady price declines. This has major implications for FHA's unfortunate risk exposures, and FHA's risk exposures have major implications for home sales in 2012 and 2013 in the US. Guys, the annual FHA insurance tariff is up to 1.10% and 1.15% for 30 year mortgages, and if mortgage rates were to increase very much, FHA loan affordability would be very poor. We are chasing a receding target.

Crude inventories. AIIEEEIIIAIAEEEE. And you can quote that!
Total products supplied over the last four-week period has averaged nearly 18.5 million barrels per day, down by 5.3 percent compared to the similar period last year. Over the last four weeks, motor gasoline product supplied has averaged nearly 9.0 million barrels per day, down by 2.1 percent from the same period last year. Distillate fuel product supplied has averaged 3.8 million barrels per day over the last four weeks, down by 3.9 percent from the same period last year. Jet fuel product supplied is 0.9 percent lower over the last four weeks compared to the same four-week period last year.
There should be some blippage from the flooding and so forth, but in general, when diesel YoY goes negative, we are in a recession. The only doubt here is because of the flooding, which should have disrupted transport. But the trend was declining before this.

For comparison purposes, at the end of December 2007, four week diesel was still up 5.7% YoY, but it fell off very rapidly and by the end of March 2008 had collapsed to a drop of 4%. So don't call me Shirley!!!

I'm very close to calling this. The peak was in March and it looks like the recession may have started in April. But that's preliminary. I thought for sure that it couldn't happen until June (two years, exactly), but it appears the Japanese events were enough to precipitate the collapse of the Fed's sand pile.

Btw, the Fed did this. It had help from Congress, but the Fed constructed this one all on its very own. Trying to help. Please, Mr. Fed Banker, stop trying to help.

PS: A question asked in another place caused me to realize that I really don't explain myself very well sometimes, nor justify some of the stuff I put in here.

Historically there is a very strong correlation between oil supplied and Non Ag Wage and Salary Workers (employed):

That graph combines US product supplied with LNS12032187 (Seasonally adjusted non-agriculture wage and salary workers). In order to show how tight the correlation is, I have normed employment numbers to oil.

US product supplied goes only through February at the current time. However by following crude inventories in the weekly reports, and most especially the 4 week running averages, you can generally project very accurately how employment is moving if it is moving significantly.

Here is the same graph with the scale changed to show more detail:
It really is a tightly fitted curve.

So when I said that last month's establishment report was off somewhat because of the gas, this is what I was referring to.

Note that over time the US economy has become more oil efficient; the gap between the two has narrowed over time. However, if we shift back to manufacturing, which we will, we will consume more oil for each job.

Should you wish to play with this (I guess this means you, Mark of the graphs), oil here; Table A historical series here (I use A-8). You will notice that the oil trend changes precede the employment trend changes. In climate science that would mean that fewer employees driving caused oil demand to drop. However this is not climate science, so shifts in oil consumption transfer through to the general economy, not the other way around.

Last, here is the detail of the 2004-2009 series:

We actually shifted into recession territory in the late summer of 2007, but the first part of the cycle is generally so slow people don't notice it. It snowballs and gains force.

Oh, yeah, and here's the third horseman of the apocalypse:
Venezuela’s largest Jewish advocacy group has protested to the government a state-run radio broadcast that positively referenced the anti-Semitic "Protocols of the Elders of Zion."

In a formal complaint filed this week with the Public Ministry, the Venezuelan Confederation of Israelite Associations denounced the broadcast in which journalist Cristina Gonzalez read the infamous text and suggested that listeners also should read it.
Because it is so very, very credible. See, we really can't have fun and games until we beat up the Jews, now can we?

Doom is a good word to describe residential RE. Cash investors buying foreclosures for rental are in many areas renting out these properties by the room or to groups similar to college area rentals. Older suburban neighborhoods become infected with section 8,high turnover and poorly maintained properties leading to significant neighborhood lifestyle declines. When the cash investor whats to unload these properties they will be in terrible condition and require significant upgrading but local property values will not support further investment. Just one of many sidebars in RE.
The Fed has no "Plan B" should the S&P have a 20% correction. After all, evidence of "Plan A" working was always the stock market rally. So what will they do if it falls (and, needless to say, the recovery stalls)?

One option is to come back with more QE. Would anyone care? I doubt even the stock market would get fooled again (and they are some pretty naive folks!). Option 2 is an inflation target. Option 3 is they admit they are powerless.

I'd bet on option 2. We get the Fed financing fiscal deficits as far as the eye can see, and little real growth to show for it.
I can understand the Congressional contribution, but I am unclear on why you say the "Fed caused it". I would have thought all the money printing and quantitative easing would have let the Fed off the hook for causing a recession.
Rick - look at the graphs I added.

There was no way for the money the Fed inserted into the economy to diffuse through the economy, so it pretty much all ended up in assets.

The Fed wandered around boasting about raising stock prices. Probably it expected to raise home prices. However this did not improve the economy, because commodities are also assets, and a great deal of the money the Fed inserted went to commodities.

When commodities shoot up like that, real incomes of workers fall, so the Fed created a recession for the bottom half of the population, hoping that what it inserted into the very top 20% of the population would somehow help the economy.

Not likely.

Then Congress and our progressive???? pres kind of threw the kitten on the bonfire by passing a very steeply progressive tax CUT (which was actually a tax increase on the lowest 40% of earners). Not to mention that they cut off unemployment benefits for a lot of people.

So the bottom line is that right now, probably almost 70% of the population is in an income recession, but the top 15% is doing well. This utterly masks the price signals going through the informational system.

Now commodity bubbles (think silver!) feed on themselves. As one round of profits is taken, the next is plowed in. Thus it cycles up. A six month insertion campaign was an open invitation to run hogwild, and indeed everyone did.

Not surprisingly, housing prices haven't bubblized, because by the time you scrape off transportation and basics, most of the would-be new home buyers are not in a very good position to buy.

But there were also foreign factors. The Fed's campaign (deflate the dollar, inflate assets nominally) eventually forced China to revalue up a bit against the dollar, and indeed the dollar devalued against most currencies. This produced a second order inflationary effect, which was greatly exacerbated by the fact that we already had inflation in the pipeline in India and China because of previous stimulus efforts.

Thus we now sit with either stagnant or declining employment, most of the population with declining real incomes, and a big inflationary pulse hitting this summer from external sources.

Well it is blowing up with considerable force. Nor does this help the Europeans, and we can just hope that this round of the excellent money adventure game doesn't end with Italy's financing blowing up, because at that point the Euro is in trouble.

There is some chance - I don't know how big a chance - that the global move we are seeing will smack around the globe strongly enough to add weight to the Euro crisis and turn it into a Euro banking crisis.

And China - well, Chinese financials are more of an entertaining read than ever.

"Should you wish to play with this (I guess this means you, Mark of the graphs), oil here; Table A historical series here (I use A-8)."

Oops. I thought it was musical tribute day! Now you tell me! ;)

I am a complete believer in your last comment.

My word verification is "inginghg".

If ING Direct offers a double leveraged savings account for investors wishing to partake in a "mercury rising" economy, I'll be pulling my money out. ;)
One more thought.

Don't expect anything soon, but I intend to seasonally adjust your "oil supplied and Non Ag Wage and Salary Workers" charts using the X-12-Arima program.

Since the data is so seasonally noisy, it should make it much easier to spot recent trends.
I figured you'd want to smooth out the oil. However don't smooth out the workers, because that is already seasonally adjusted.
OK, thanks for the graphs and the explanation. I knew the money went into commodities, but I did not make the leap to declining real incomes. So, if we get QE3 in another Keynesian attempt to right the economy, we can expect further declining real wages and probably increased unemployment.

Next I get to read about the ugly economic data. I did hear Kudlow and CNBC spinning when I was at the gym. The spinning increases my aerobic efforts.
Post a Comment

Links to this post:

Create a Link

<< Home

This page is powered by Blogger. Isn't yours?