not suggesting that home prices will fall another 40% in nominal terms, I wouldn't count it out over the next 5 or so years in real terms

TO BE NOTED: From EconomPic Data:

"Housing Bottom... Are the Hardest Hit There Yet?

In response to my post on the relationship between price and quantity of existing home sales, Sami commented:

ListingSupply.com has been showing that the supply of homes for sale nationwide has been dropping for several months now. I think home prices in the hardest hit areas like AZ, CA, and FL are pretty near the bottom.

In taking California as an example, I am not as sure. While the price has indeed fallen dramatically in both nominal and real terms, we see that is has still not corrected all the way in real terms. While I am not suggesting that home prices will fall another 40% in nominal terms, I wouldn't count it out over the next 5 or so years in real terms.



Though I will say that the second derivative has definitely, turned positive.

Source: S&P / BLS

Posted by Jake "

Allowing banks to have it both ways would give them added incentive to sell assets at low prices, even at a loss, the banks contend

From EconomPic Data:

"No EconomPic Needed to Explain this Greed

The WSJ reports:

Banking trade groups are lobbying the Federal Deposit Insurance Corp. for permission to bid on the same assets that the banks would put up for sale as part of the government's Public Private Investment Program.

PPIP was hatched by the Obama administration as a way for banks to sell hard-to-value loans and securities to private investors, who would get financial aid as an enticement to help them unclog bank balance sheets. The program, expected to start this summer, will get as much as $100 billion in taxpayer-funded capital. That could increase to more than $500 billion in purchasing power with participation from private investors and FDIC financing.

The lobbying push is aimed at the Legacy Loans Program, which will use about half of the government's overall PPIP infusion to facilitate the sale of whole loans such as residential and commercial mortgages.

Federal officials haven't specified whether banks will be allowed to both buy and sell loans, but a list released by the FDIC and Treasury Department of the types of financial firms likely to be buyers made no mention of banks.

Allowing banks to have it both ways would give them added incentive to sell assets at low prices, even at a loss, the banks contend. They claim it also would free up capital by moving the assets off balance sheets, spurring more lending.

"Banks may be more willing to accept a lower initial price if they and their shareholders have a meaningful opportunity to share in the upside," Norman R. Nelson, general counsel of the Clearing House Association LLC, wrote in a letter to the FDIC last month.

Off balance sheet only frees up capital because it hides risks. This is absolutely mind boggling. Not the fact that they are asking, but how is this even a remote possibility?

Posted by Jake "

Me:

Don said...

"Allowing banks to have it both ways would give them added incentive to sell assets at low prices, even at a loss, the banks contend."

This is, in fact, one positive note. It could mean that the banks feel that the loans will be a good value based on what they know. In other words, the banks are anxious to sell, even at a lower price.

Of course, they could be hoping to bid prices up or make it appear that they're ready to sell as well, I suppose.

However, if you believe that the government is already guaranteeing these assets, why not let them buy them at lower prices?

Don the libertarian Democrat

we see how a homeowner can sell their home more quickly... reduce the price!

TO BE NOTED: From EconomPic Data:

"Existing Homes Sales

AP reports:

A real estate group says sales of previously occupied homes rose modestly from March to April as buyers swooped in to take advantage of prices that were 15.4 percent below year-ago levels.

The National Association of Realtors said Wednesday that home sales rose 2.9 percent to an annual rate of 4.68 million last month, from a downwardly revised pace of 4.55 million in March.

The results slightly beat economists' forecasts. Sales had been expected to rise to an annual pace of 4.66 million units, according to Thomson Reuters.

The median sales price plunged to $172,000, down from $201,300 in the same month last year. That was the second-largest drop on record after January, when prices fell 17.5 percent.

Looking at the year over year change in price and quantity for the four regions below we see how a homeowner can sell their home more quickly... reduce the price!


Source: Realtor.org

Posted by Jake"

Consumer Confidence Spike: From EconomPic Data

TO BE NOTED: From EconomPic Data:

"Consumer Confidence Spike

Source: Conference Board

Posted by Jake "

Default (not going to happen... at least while we still own the printing press)

TO BE NOTED: From EconomPic Data:

"Can We Inflate Our Way out of this Mess?

Three ways the U.S. can decrease the level of nominal debt as a percent of GDP:

• Default (not going to happen... at least while we still own the printing press)
• Increase productivity (and GDP), while paying down or maintaining the debt load
• Inflate our way out of it (decreases the value of debt in real terms)

Of the three, in theory, inflating our way out of it will be the easiest, as it does not require true real economic growth. In Wolfgang Munchau's recent FT article 'We Cannot Inflate our Way out of this Crisis' he states that it may not be all that easy after all. Wolfgang details:

Of course, it can be done, but only for as long as the commitment to higher inflation is credible. Inflation is not some lightbulb that a central bank can switch on and off. It works through expectations. If the Fed were to impose a long-term inflation target of, say, 6 per cent, then I am sure it would achieve that target eventually. People and markets might not find the new target credible at first but if the central bank were consistent, expectations would eventually adjust. In the end, workers would demand wage increases of at least 6 per cent each year and companies would strive to raise their prices by that amount.

Yves at Naked Capitalism agrees that it is a challenge, but possibly due to a different reason:

You may have noticed a crucial assumption...."workers will demand wage increases." Pray tell, how? Workers have no bargaining power in the US. Merely goosing interest rates does not a a tight labor market make.

Stagflation was seen as impossible until it took place. I wonder if we could wind up with rising bond yields due to concerns about large fiscal deficits, with a lower rate of goods inflation due to the lack of cost push (wages are a significant component of the cost of most goods, save highly capital intensive ones). In fact, we could see stagnant nominal wages with mildly positive inflation, which means wage deflation. If that was also accompanied by high yields, you would have much of the bad effects of debt deflation per Irving Fisher (high real yields and reduced ability to service debt) since real incomes would be falling in the most indebted cohort.

The key point is that in the current environment, workers have no power. While we all know about the spike in the unemployment rate, the other side of the story is the cliff dive in the number of new job openings. The odd thing is I first became fully aware of this information in Sunday's NY Times article Bleak Picture, Yes, But Help Still Wanted that made the case that the market was actually FULL of opportunity.

Consider that in March, nearly 700,000 jobs disappeared. But now consider this: At the end of March, there were 2.7 million job openings. What tends to get lost in the data picture is that just as some companies are laying off workers, other companies are hiring. In fact, the business world is changing at such a dizzying rate that some companies are cutting and hiring workers at the same time.

Uh.... no. 2.7 million is down from 4.8 million openings as recent as the Summer of 2007; when 6 million less people were unemployed. In other words, the number of job openings has halved, while the number of those unemployed has doubled. That is not "bleak"... that is frightening.



This in turn has pushed the number of unemployed, as a percent of job openings, up more than three-fold to 500%. Yes, for each opening... 5 people want that job. That my friends is why, as Yves points out, workers don't have ANY bargaining power.



Thus, the concern I have is that inflation won't be driven through via wage increases (where at least workers salaries are keeping up), but by a spike in the price of commodities. If inflation concerns = dollar concerns = commodity spike, then that impossible stagflation may be possible once again.

Source: BLS

Posted by Jake"

Me:

Don said...

I think that defaulting on foreign debt is the easiest option politically,especially if you can convince your citizens that foreigners got you into your mess. Kind of like Ecuador today.Here, people would focus on China.

Inflation is problematic in that there will be losers in your own citizenry, and they vote.

Don the libertarian Democrat

we see the continued downward pressure in price levels

From EconomPic Data:

"CSPI" March

Swapping out the Owner's Equivalent Rent in the CPI with Case Shiller's Composite 10 Home Price Index, we see the continued downward pressure in price levels.



I make the case that this is more applicable a price index for someone looking to buy a home in the current market.

Posted by Jake "

If this 3.9% yield results in dissatisfaction for those risk taking investors, then it may mean a rotation to equities and/or higher risk assets.

TO BE NOTED: From EconomPic Data:

"High Quality Credit Risk vs. Duration Risk

As the yield on the 30 Year Treasury has spiked in recent months from a low of 2.5% all the way up to 4.3%, the yield to worst on the Barclays Aggregate Bond Index (i.e. formerly the Lehman Brothers Aggregate Bond Index - a blend of intermediate bonds made up by ~1/3 Agency Mortgage Bonds, ~1/3 Treasuries, ~1/3 Investment Grade Corporate Bonds) has tightened to 3.9% from over 5.5% as recently as October.



In other words, the appetite for "high quality spread" has increased relative to duration (i.e. interest rate) risk, thus bringing down the required return of intermediate bonds relative to the 30 year Treasury. If this 3.9% yield results in dissatisfaction for those risk taking investors, then it may mean a rotation to equities and/or higher risk assets.

While I personally am still vehemently opposed to investing in equities at this time (I can't look at the fundamentals of the economy in its current state and put my money at risk at the bottom of the capital structure REGARDLESS of valuation), the chart below tells a different story. The chart shows the difference between the 30 Year Treasury Bond's yield and the yield to worst for the Aggregate Bond Index, against the one year forward return on the S&P 500 and we do see a relationship.



When the spread turned negative (i.e. investors were less worried about duration risk, then taking on spread risk) it looks like equities underperformed in the ensuing 12 months, possibly as institutional investors reallocated from equities to greater yielding credit. On the other hand when the spread turned positive (such as today), investors became increasingly worried about duration risk and moved to equities.

There is, as always, a "this time is different" caveat. Much of the reason for this high quality spread tightening has been technical in nature as the Fed and Treasury continue to throw money at all the economy's problems. Both Agency MBS (the Fed is actively buying mortgages) and Investment Grade Bonds (think TARP injections to financials) have benefitted by this money at the margin.

And all that money comes at a cost... new Treasury sales and higher Treasury yields.

Posted by Jake"

Gross domestic product fell 3.5 percent in the year ended March 31, the most since records began in 1955

TO BE NOTED: From EconomPic Data:

"Japanese Economy Crashes... Hard

Can't wait to hear how this awful release contained some green shoots. My guess is "this marks a bottom", but don't count out "imports were down". Bloomberg details:

Japan’s economy shrank at a record 15.2 percent annual pace last quarter as exports collapsed and consumers and businesses cut spending.

The contraction followed a revised fourth-quarter drop of 14.4 percent, the Cabinet Office said today in Tokyo. Gross domestic product fell 3.5 percent in the year ended March 31, the most since records began in 1955, confirming that the recession is Japan’s worst in the postwar era.

Exports plunged an unprecedented 26 percent last quarter, forcing companies from Toyota Motor Corp. to Hitachi Ltd. to cut production, workers and wages. Stocks have gained 32 percent since reaching 26-year low in March on speculation worldwide interest-rate reductions and spending by governments will halt the slide in the world’s second-largest economy.

Two areas of "growth" were imports (or the lack thereof - i.e. addition by less subtraction) and government consumption (well... sorta - it's that small light blue speck).



My overall take... whenever exports detract 10% and 15%, in back to back quarters, from an "export nation", things are worrisome.

Source: esri.cao.go.jp

Posted by Jake "

Both have lost more than half their brand value in the space of one year

TO BE NOTED: From EconomPic Data:

"Bank Brand Value... Then and Now

Felix Salmon with the details:

The changes are staggering. Last year, the two most valuable financial brands in the world were Bank of America and Citi; this year, BofA is in 8th place, while Citi’s not even in the top ten any more. Both have lost more than half their brand value in the space of one year. Last year, four of the top five banks were US-based; this year, the top four comprise three Chinese banks and a fourth with the China-centric name of Hongkong and Shanghai Banking Corporation. Last year’s top 20 is this year’s top 15, despite the arrival of Visa (with a valuation which is now good for 5th place, but which would have got it only 10th place last year).

Below is a chart of the top 9 from 2008 (#10 was Deutsche Bank, which fell out of the top 15 in 2009) vs. 2009.

Posted by Jake "

Building permits, a sign of future construction, fell 3.3 percent to a record low pace of 494,000

TO BE NOTED: From EconomPic Data:

"Housing Starts at Record Low... Permits Follow

First of all, I think this is a good thing. With record inventory why are people rooting for additional supply? Bloomberg reports:

Builders broke ground on the fewest homes on record in April as work on multifamily units plunged, a sign that sales and home prices may have farther to fall before the housing market reaches a bottom.

The 13 percent decrease to an annual rate of 458,000 was led by a 46 percent decline in multifamily starts and followed a 525,000 pace the prior month, the Commerce Department said today in Washington. Building permits, a sign of future construction, fell 3.3 percent to a record low pace of 494,000.

Source: Census

Posted by Jake"

But the dollar isn’t the dominant reserve currency along the periphery of the eurozone.

TO BE NOTED: From EconomPic Data:

"Russia Sheds Dollars for Euros

The Moscow Times (via Brad Setser)

The euro's share in Russia's forex reserves, the world's third-largest, overtook that of the dollar last year as the country pressed on with a gradual diversification, the Central Bank's annual report showed.

The euro's share increased to 47.5 percent as of Jan. 1 from 42.4 percent a year ago, according to the report, which was submitted to the State Duma on Monday.

The dollar's share fell to 41.5 percent from 47 percent at the start of 2008 and 49 percent at the start of 2007.

As Brad points out:

It is often asserted that the dollar is the global reserve currency. It would be more accurate to say the dollar is the globe’s leading reserve currency.* The dollar is the dominant reserve currency in Northeast Asia. And the two big economies of Northeast Asia both happen to both hold far more reserves than either really needs. The dollar is also the reserve currency of the Gulf. And Latin America.**

But the dollar isn’t the dominant reserve currency along the periphery of the eurozone. Most European countries that aren’t part of the euro area now keep most of their reserves in euros. That makes sense. Most trade far more with Europe than the US – and some, especially in Eastern Europe, ultimately want to join the eurozone.

* The rise in global reserves means that the world’s central banks hold more euros as part of their reserves now than they held dollars in 2000. If demand for dollars hadn’t risen any more, the rise in demand for euro-denominated reserves would be a big story …

** Best that I can tell, South and Southeast Asia generally hold a far lower share of their reserves in dollars than the big countries in Northeast Asia.

Go read his whole piece here

Posted by Jake "

A massive reversal in the fixed income market with the high yield index up a WHOPPING 20%+ year to date

TO BE NOTED: From EconomPic Data:

"Fixed Income's Sharp Reversal

A massive reversal in the fixed income market with the high yield index up a WHOPPING 20%+ year to date.



What's so amazing is how fast the reversal has taken place considering most of the underperformance in the credit market didn't really occur until September 2008.



And now... the sell-off and rebound which was technical in nature (i.e. forced selling / opportunistic buying), now becomes a question as to the fundamental value of the security.

Source: Barclays Capital

Posted by Jake"

From a year ago, consumer prices fell 0.7 percent, the biggest decline since 1955.

TO BE NOTED: From EconomPic Data:

"YoY CPI Drops Most Since 1955

All in transportation, but disconcerting regardless. Bloomberg reports:

“Demand simply remains too weak for most businesses to find any success in pushing through price hikes at this point, Russell Price, a senior economist at Ameriprise Advisor Services in Detroit, said before the report. “Widespread price cuts however, are also unlikely especially given the recent evidence that the economy may be stabilizing.”

From a year ago, consumer prices fell 0.7 percent, the biggest decline since 1955. Excluding food and energy, prices climbed 1.9 percent from April 2008.

Contribution

By Category

Source: BLS

Posted by Jake"

Capacity utilization shrank in April to 69.1%, a historical low since records began in 1967

TO BE NOTED: From EconomPic Data:

"Capacity Utilization at Lowest Level Since 1967

WSJ reports:

U.S. industrial production tumbled a 15th time in 16 months during April, cut down by massive business inventory liquidation.

Industrial production decreased by 0.5% in April compared to the prior month, the Federal Reserve said Friday. Output fell 1.7% in March, revised from a previously estimated 1.5% decline.

Capacity utilization shrank in April to 69.1%, a historical low since records began in 1967. March capacity use was a revised 69.4%; originally, "cap-U" was estimated at 69.3% in March. The 1972-2008 average was 80.9%.

Industrial Production

Capacity Utilization

Source: Federal Reserve

Posted by Jake"

Trade Balance

TO BE NOTED: From EconomPic Data:

"Trade Balance Flat in March

Source: Census

Posted by Jake "

risk of sustained deflation in the world's third-largest economy is subsiding

TO BE NOTED: From EconomPic Data:

"Chinese CPI Still Negative

WSJ details:

China's main inflation measures remained in negative territory in April, new data issued Monday show, but economists said the risk of sustained deflation in the world's third-largest economy is subsiding as bank lending surges and other economic indicators start to show improvement.

But much of the current drop reflects a comparison with a huge price spike in the first half of 2008: inflation in April last year was 8.5%. Prices of raw materials have actually been picking up in recent weeks, though they remain below last year's highs.

That reflects increasing indications that China's economy is bottoming out: Growth in fixed-asset investment and industrial output accelerated significantly in March. Chinese banks are also pumping enormous amounts of liquidity into the economy, extending 4.58 trillion yuan (around $671 billion) of new yuan loans in the first three months of 2009, nearly as much as in all of last year.

Posted by Jake"

narrowing from a 25.7 percent dive in February, the worst slump in more than a decade

TO BE NOTED: From EconomPic Data:

"Chinese Exports: "Second Derivative" Turns Negative

If we're going to talk about EVERY second derivative (starting to really hate that term), here's one that doesn't bode well (though I will like to point out that the embedded margin of error makes this second derivative minuscule). But... the second derivative of Chinese exports has declined in April from March. Yves at Naked Capitalism with the details:

So much for the green shoots theory, at least as far as an early Chinese recovery is concerned. From AFP (hat tip reader Michael):

Chinese exports fell 22.6 percent in April from a year earlier in the sixth straight monthly decline, state media said Tuesday,... Exports from the world's third-largest economy totalled 91.94 billion dollars last month...

The drop was larger than that recorded in March, despite hopes that China's exports performance would start to improve.

Commerce ministry spokesman Yao Jian said in April that China was confident exports would improve "on the basis of the gradual recovery seen in the first quarter."

Exports in March fell by 17.1 percent year-on-year, narrowing from a 25.7 percent dive in February, the worst slump in more than a decade.

Posted by Jake "

Part Time Worker Spike

TO BE NOTED: From EconomPic Data:

"Unwanted Part Time Worker Spike

In response to my post Net Claims is What Matters, Locust responds:

For what it's worth...

I work as a W-2 employee on a project by project basis. One of the things I've noticed - and this seems to be a relatively new phenom - is that I am being contracted for fewer days. So what used to be a typical 5 week project (25 days) is now shaved down to 4.5 weeks (22 days).

Yeah, it's just 3 days. But multiply that times 100 people and it's a year of employment in man days that's gone poof.

That theme also plays out in the data.



Source: BLS

Posted by Jake"

Wages Show Biggest Drop Since 1950's

TO BE NOTED: From EconomPic Data:

"Deflation Alert: Wages Show Biggest Drop Since 1950's

Source: BEA

Posted by Jake at 11:24 AM ShareThis

business sector, where firms halted new investments, and shed workers and inventories at a dizzying pace

TO BE NOTED: From EconomPic Data:

"Q1 GDP Down 6.1%

Marketwatch reports:

The U.S. economy contracted violently again in the first quarter of the year as business investment declined at a record rate, the Commerce Department reported Wednesday. Real gross domestic product fell at a 6.1% annualized rate in the first quarter, nearly matching the 6.3% decline in the fourth quarter of 2008. The two-quarter contraction is the worst in more than 60 years. The big story for the first quarter was in the business sector, where firms halted new investments, and shed workers and inventories at a dizzying pace to bring down production and stockpiles to match the lower demand from U.S. and foreign markets.

Source: BLS

Posted by Jake at 5:33 AM ShareThis