The California SUV fill up index is back!

It's been while, but the California SUV fill up index is back! What began here long ago in August of 2005, when the price for a gallon of gasoline was $2.70 in these parts, continues today, twenty-one months later.

With local prices comfortably topping $3.40 for unleaded regular, the pledge to update the index with every ten cent increase in price now resumes nearly a year after last May's update at $3.30.

(It's not clear whether local prices breached the $3.40 mark last summer or not - if so, then this update is eight or nine months late. Sorry.)


What is equally unclear is what model year vehicles appear in the chart above. They are either 2005s or 2006s and while some of these models and tanks sizes may no longer be available in dealer showrooms, they are certainly out there on the road.

And yes, the Hummer H1 runs on diesel, but for obvious reasons, it needs to be there at the top of the list.

Having been out and about for most of the day today, $3.40 for regular is actually a bargain if you can find it. Though no prices starting with the number four were spotted, some premium petrol was not far below that psychologically important level (of course they said that $3 a gallon was psychologically important too).

From the looks of demand and refinery output, there will be opportunities in the days ahead to more thoroughly review this data.

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Woodstock for Capitalists

It sounds like Warren Buffet's succession plan is going to be a little bit like Donald Trump's TV series The Apprentice. Hopefully he'll have a more normal speaking voice when addressing the candidates in the boardroom - surely he won't have as many bad hair days.

The Associated Press reported that, among other notable events at the annual shareholders meeting also known as "Woodstock for Capitalists", the Berkshire Hathaway Chairman said he plans to split his duties into three positions and hire one or more candidates on a trial basis. The position of investment manager was the first to be announced.

When he returns to the office Monday, Buffett will encounter the 600 to 700 applications he's already received for that post, and the mail will likely bring more.

Buffett said the investment managers he hires won't necessarily be expected to live in Omaha where he and the company's 19-person headquarters are based.

"My notion would be to let them live wherever they feel best about life," Buffett said. "Wherever you can think best, the information is readily available."

Of the three or four investment managers Buffett plans to hire, he has said one, or maybe two, would eventually become Berkshire's chief investment officer.

Aside from the controversy surrounding Berkshire's stake in PetroChina, which a few investors claim indirectly supports the genocide in Darfur, it sounds like it was the usual cheery affair.

According to the WSJ MarketBeat blog, a one-on-one match against Cleveland Cavalier's star LeBron James (which Buffet handily won) and a visit from a "distant cousin" who sang "Margaritaville" highlighted the fun.

As the owner of Fruit of the Loom, pictures like this are just part of the job.


Over 27,000 shareholders showed up at the Qwest Center in Omaha, Nebraska, just down the street from where the world's second richest man makes his modest home. Along with Vice Chairman Charlie Munger, questions from the audience were fielded for much of the day on Saturday. Following are a few highlights from accounts in the Wall Street Journal and the Associated Press:

On Derivatives - Mr. Buffett told shareholders that he expects derivatives and borrowing, or leverage, would inevitably end in huge losses for many financial participants.

"The introduction of derivatives has totally made any regulation of margin requirements a joke," said Mr. Buffett, referring to federal rules limiting the amount of borrowed money an investor can apply to each trade. "I believe we may not know where exactly the danger begins and at what point it becomes a super danger. We don't know when it will end precisely, but...at some point some very unpleasant things will happen in markets."

On Investments for Amateurs - Buffett recommends stock index funds as one of the best investments because they'll match the growth of the stock market without charging high fees for a fund manager. "Index funds are going to beat the results of most investors," Buffett said.

On finding the right investments - The cash is coming faster than the ideas," Buffett said. Buffett and Munger both said they'd like to add more international assets to the company. That's why Buffett told international shareholders Saturday to let him know about companies in their own countries that might appeal to Berkshire.

"They're all longshots, but we believe in throwing a lot of hooks in the water," Buffett said Sunday. "If we can pull one in, we hope it's a whale."

On countries to avoid when investing - "If the whole country is a kleptocracy, it's hard to be a rational investor there," Munger said.

On getting married - Buffett said his small, private wedding last August on his birthday was a bit like when Berkshire buys stocks. "We were going to keep it very quiet until it was done," he said. Buffett said marrying his longtime companion, Astrid Menks, agreed with him. "I hope I look better than I did last year, and if I do, I give Astrid full credit."

Warren Buffet will someday be missed dearly. The 76-year old has been an inspiration to many, continuing to make clear-headed sense as the rest of the financial world seems to lose its head on a regular basis.

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Can't this wait until Monday?

This is not what Los Angeles area homeowners want to see on the front page of the local paper when they wake up on a Sunday morning. Can't the newspaper just wait until Monday morning to provide yet more bad news about the local housing market?


The online version of the story carries an even more dour title, "Better-heeled failing home economics too", all of this sure to spoil the coffee-drinking, lounging-around in slippers sort of mood that many look forward to at this time of the week.

The inland empire is apparently ground-zero for foreclosures in the greater Los Angeles area - the last area to inflate in price is also the first to run into serious trouble.

Last summer when we were through that area on the way to Las Vegas they still had those "No Money Down, Easy Qualifying" signs sprinkled liberally throughout the desert. We'll be through there again next week and will take note of any change in the signage, though it is unlikely that we'll stop and have a look around.

It all sounds a bit depressing.

Of all the ways to lose your home, few are as shameful as having the sheriff lock you out. Yet Strickland regularly sees such people.

"They say, 'You're really going to evict me? I'm going to lose my house? How can you do that?' I say, 'I've got a court order,' " the deputy says.

He recently went to do an eviction at a gated community in Chino Hills. The foreclosed owner, not realizing he was out of time and luck, was still trying to sell the place.

As soon as he noticed Strickland, he jumped in his car and drove off, leaving a prospective buyer bewildered at the curb.

Isn't there some cheerier news to fill up the front page with?

Why, there it is right next to the story about foreclosures - Johnny Depp and the Pirates of the Caribbean. Everybody loves Johnny Depp - and lovable movie pirates too.

The newspaper really should consider what kind of an effect they might be having on a reading public who view real estate wealth as a birthright.


Next time, they should really just expand the pirate story to take up the space occupied by the "more bad news about housing" story - everyone will be better off for it. Otherwise, they're going to get blamed for making the problems in housing even worse.

Few complained about local newspapers helping to push home prices higher by simply reporting what they saw going on around them, but many are likely to object to this coverage now that people are getting booted out of homes they never really could afford and prices are going in the other direction.

ooo

Doing everything that can be done here to help brighten the day, admittedly a bit late on Sunday afternoon, here's this week's cartoon from The Economist:

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The week's economic reports

Following is a summary of last week's economic reports. Stronger than expected manufacturing activity and wage growth were more than offset by the weakest nonfarm payrolls total since 2004, though this seemed to make little difference to equity investors.

Stocks and bonds ended the week with the S&P 500 Index rising 0.8 percent to 1506, now up 6.1 percent on the year, and the yield of the 10-year U.S. Treasury note down 6 basis points to 4.64 percent.


Personal Income and Spending: Personal income increased 0.7 percent in March matching the upwardly revised gain from February with the important "wages and salaries" component rising 0.7 percent as well. On a year-over-year basis incomes have risen 5.7 percent, well above reported inflation, but not enough for many to keep pace with rising costs such as energy and medical care. The personal savings rate (total disposable income minus consumption) remained in negative territory at -0.8 percent but was an improvement over last month's -1.2 percent. The personal savings rate has been negative for more than two years.

Though the headline number for personal spending was plus 0.3 percent in March following a 0.6 percent increase in February, inflation adjusted spending fell 0.2 percent. This was only the second decline in real spending over the last eighteen months and the lowest reading since Hurricane Katrina. Overall consumer prices as measured by the PCE (personal consumption expenditures) price index were unchanged at 0.4 percent.

ISM Manufacturing Index: The Institute for Supply Management's manufacturing survey rose from 50.9 in March to 54.7 in April, its highest reading since April of last year. Particular strength was seen in new orders (up from 52.6 to 58.5), backlog orders (up from 47.0 to 54.5), and employment (up from 48.7 to 53.1), however, rising prices (up from 65.5 to 73.0) once again played a big role in the overall increase, largely driven by higher energy costs.

This is certainly a good sign for the manufacturing sector as the nation's broadest measure of manufacturing activity has been below the 50 level (indicating contraction) twice in the last six months. Most recent regional manufacturing reports have been weak, so it is not known with any certainty whether this was a one-off event related to inventory adjustments or the start of a trend.

Pending Home Sales: Influenced by unseasonably cold weather during the reporting period, pending home sales saw their steepest drop in a year falling 4.9 percent in March after a modest 0.7 percent increase in February. On a year-over-year basis the pending home sales index is down 10.5 percent.

Factory Orders: Factory orders rose 3.1 percent in March following an upwardly revised gain of 2.3 percent in February. Orders for durable goods rose 3.7 percent, exceeding the 3.4 percent increase indicated in last week's durable goods report, and orders for nondefense capital goods (excluding aircraft) rose 4.8 percent, the sharpest increase since October of 2004. This was a particularly good report coming at a time when serious doubts continue to develop about manufacturing activity and the willingness of consumers to continue purchasing big ticket items.

ISM Non-Manufacturing Index: The Institute for Supply Management's non-manufacturing index rebounded sharply from a four-year low of 52.4 in March to 56.0 in April. Strength was seen in new orders and employment while price rose only modestly.

Productivity and Labor Costs: Productivity grew at an annualized rate of 1.7 percent during the first quarter following a 2.1 percent increase in the fourth quarter. The increase in unit labor costs slowed sharply from a 6.6 percent annualized pace in the fourth quarter to just 0.6 percent. The wage data in this report is at odds with the personal income reported earlier in the week painting a confusing picture of labor compensation trends during the first quarter, a time when bonuses and government pay increases also play a role.

Labor Report: Overall, nonfarm payrolls increased by 88,000 in April, the smallest increase since late-2004. This is part of a continuing decline in the number of new jobs added each month since averaging close to 200,000 per month from 2004 to 2006 and peaking at 351,000 per month in late-2005.

For the first time in a very long while, there were downward revisions to the previous two months of data, the February total being revised from 113,000 down to 90,000 and the count in March falling from 180,000 to 177,000. In the first four months of the year, the average monthly increase has been 129,000.

The health care industry provided the bulk of the job gains with 47,400 new positions while governments and restaurants each added another 25,000. Professional and business services added 24,000 spots highlighted by over 11,000 each for computer systems designers and technical consultants.

Posting net job losses for the month were retail trade (-26,000), manufacturing (-19,000), construction (-11,000), and financial activities (-11,000). Within the retail trade category, a whopping 41,000 positions were lost at department stores and general merchandise stores.

The household survey showed a tiny increase in the unemployment rate, rising from 4.4 percent to 4.5 percent, and average hourly earnings rose 0.2 percent to $17.25.

Summary: Rising income and a rebound in manufacturing and services activity were offset by a disappointing employment report where the number of jobs created fell to a two and a half year low. Though initial jobless claims have fallen back in recent weeks, it is still likely that further weakness in employment will develop in the months ahead as the long-awaited construction layoffs finally show up in the labor statistics.

Perhaps of more importance in the most recent employment report were the steep job losses in retail trade. While this is a volatile category, it may be signaling a slowdown in consumer spending where higher consumer prices in recent months may have painted a misleading of the health of the consumer sector (i.e., paying higher prices for fewer goods boosts overall spending but requires fewer workers).

The Week Ahead: The Federal Open Market Committee meets on Wednesday and no changes are expected for interest rates or the Fed's policy outlook. Economic reports in the week ahead will be highlighted by retail sales on Friday. Also scheduled for release are consumer credit on Monday, import/export prices and international trade on Thursday, and producer prices on Friday.

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The week in charts

Another week and four more all-time highs for the Dow. Ho-hum. Larry Kudlow is happy but somehow most of America would probably have lower gas prices than a higher Dow.

Filling up very infrequently these days, it was surprising to see unleaded regular at $3.60. According to GasBuddy.com, you could do a little better than that around here, but not much. A quick search of this blog reveals that the last time the SUV Fill Up Index was updated was about a year ago when regular was only $3.30.

That seems cheap now - it's time for an update.

For those of us who pay more attention to the price of stocks than the price of regular unleaded, it was a good week all around. Just about everything went up, including the model portfolio at Iacono Research, now back at a comfortable +9.0 percent on the year (though the major U.S. indices have been catching up lately, now all over six percent).

To have a look at recent market commentary and see what's in a model portfolio of natural resource investments, click here for a no obligation two-week free trial.

Oil sure didn't go up this week. The oil inventory has been piling up in recent weeks because they just can't get enough of the black stuff through the refineries and out to the gas stations - hence the higher gas prices. Word came late this week that when refineries are back to normal, they'll have more than enough crude oil to make gasoline over the summer - hence the lower oil prices. We'll see.


Wholesale gasoline prices actually fell this week and along with a falling oil price you'd think that energy stocks would suffer a little bit but that was not the case.


Gold tested the $670 level twice and bounced back up both times finishing the week strong. Does anybody else get the feeling that just when gold is set to break out again that equities will correct and gold will go down along with them?


The gold miners showed some life this week after the plunge on Tuesday - it looks like traders were just waiting for the $670 level to be tested and then they came back in.


And the dollar pretty much took the week off, hanging around between 81.5 and 82.0, buoyed by manufacturing reports early in the week before being dragged back down a little after the weak labor report. Don't be surprised if it stays between 81 and 82 for a little while - is anyone really ready for the move below 80?


Well, the "sell in May and go away" adage would not have benefited investors on Tuesday, Wednesday, or Thursday. Whether it would have been best to cash in today will be revealed next week.

Jeremy Grantham has probably sold a few shares this week if his April note is any indication. See this Bloomberg story for details - It’s Everywhere, In Everything: The First Truly Global Bubble.

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Not much of a plunge

The labor report was released a short time ago. That little bitty rightmost bar hanging below the zero level in the chart below was all that materialized after yesterday's guess at a plunge in construction jobs.

A total of 139,000 new construction jobs were reported by state unemployment agencies in April and the birth/death model added 49,000 for a grand total of 188,000. After seasonal adjustments, the net result was minus 11,000.

Oh well, so much for the theory of early April weather causing a plunge.


Apparently, if any construction workers were let go last month, it was just the illegals who don't show up in the Bureau of Labor Statistics data.

Overall, nonfarm payrolls increased by 88,000 last month, the lowest total since late-2004 and part of a continuing decline in the number of new jobs added since peaking at over 300,000 per month in 2005.

The household survey showed a tiny increase in the unemployment rate, rising from 4.4 percent to 4.5 percent, and average hourly earnings rose 0.2 percent to $17.25.


For the first time in a very long while, there were downward revisions to the previous two months of data. The February total was revised from 113,000 down to 90,000 and the count in March fell from 180,000 to 177,000.

No one on CNBC was heard subtracting the 26,000 revision from the 88,000 new jobs in April for a "more accurate" monthly change of 62,000, as was routinely the case when upward revisions were the norm.

The health care industry provided the bulk of the job gains with 47,400 new positions while governments and restaurants each added another 25,000. Professional and business services added 24,000 spots highlighted by over 11,000 each for computer systems designers and technical consultants.

Posting net job losses for the month were retail trade (-26,000), manufacturing (-19,000), construction (-11,000), and financial activities (-11,000). Within the retail trade category, a whopping 41,000 positions were lost at department stores and general merchandise stores.

In the little noticed "personal and laundry services" category almost 6,000 jobs were added along with a similar amount for "membership associations and organizations".

Overall, it's probably a good thing that Americans continue to dine out and drink as much as they do - this results in a continuing stream of new jobs at "food service and drinking establishments" along with positions in "health services" to help deal with the long-term consequences of humungous portion sizes and overly-generous bartenders.

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Ready for a plunge in construction jobs?

When the labor report for March came out about a month ago, it was noted here that the combination of erratic weather and seasonal adjustments could produce a quite unexpected result next month. Well, the April data comes out tomorrow morning - get ready for a possibly very big surprise to the downside in construction hiring.

Here's the chart along with the pertinent discussion from a month ago.

So, in the March report, a total of 181,000 new construction jobs were reported/estimated and of that total 27,000 were derived from the birth/death model, meaning that 154,000 new construction jobs were reported by state unemployment insurance agencies.

The seasonally adjusted total, however, only comes to 56,000 and herein lies the intrigue. As shown in the chart above, March is the first month of the year when the seasonally adjusted number is less than the reported/estimated number, the prior six months always showing the opposite effect in order to help "smooth" out the data (e.g., January 2007 saw 289,000 construction jobs lost, but the seasonally adjusted total was +34,000).

What does this mean?

This is a particularly strange time of the year as seasonal adjustments combined with erratic weather patterns can play havoc with the data. The next three months of construction hiring will provide a much clearer indication of what is in store for the rest of the year since, understandably, April through June are the peak months for construction hiring and are seasonally adjusted downward more than any other months.

If the recent cold snap depresses construction hiring in parts of the country for next month's report, look for a truly horrible construction number in the April data.

According to the BLS website, the establishment survey is based on data collected by the labor department from state employment agencies during the week that contains the 12th of the month.

Looking at historical weather data at the informative Weather Underground website, it's easy enough to see that the survey week in March was a lot warmer than the survey week in April in the entire Northeast.

My hometown in Pennsylvania had highs in the 60s in March but during the same week in April, high temperatures only reached the 40s.

Whatever number is arrived at after the BLS takes their state agency sample and factors in the birth/death adjustment, according to the chart above, roughly 210,000 will be subtracted from that total to get the seasonally adjusted number.

Stated another way, if actual construction hiring was flat, the seasonally adjusted number will be minus 210,000.

Given the continuing problems faced by homebuilders with inventory piling up at alarming rates amid tighter lending standards and an increasingly skittish group of homebuyers, get ready for a plunge in construction hiring tomorrow.

Then again, given the recent history of employment reporting by the Bureau of Labor Statistics, don't be surprised if another 56,000 jobs are added.

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Interesting editorial choices at Money Magazine

Usually working my way through the print edition at a leisurely pace throughout the month, it came as somewhat of a surprise to see the collection of stories in the back of the May issue of Money Magazine - "Scenes from a bubble".

Here's the online version (links to the stories are just below the graphic):

• The buyers: The Quams and the too-good-to-be-true mortgage
• The brokers: Would you get your mortgage from this man?
• The appraisers: Price estimates made to order
• The investors: How to get rich trading "idiot" loans

What's interesting is that the staff spent a fair amount of time in researching and writing these four stories, but chose to minimize their importance in both the print and online versions of the magazine by not only relegating them to the back, but by providing relatively fewer and smaller photos and graphics.

Here's the online table of contents that goes along with the "REAL ESTATE NOW" cover with the lead story "TRADE UP: Why It's Time to Make Your Move". The lead story happens to be the first story below "Buyer's Market", featuring the happy young family pictured below and gracing the magazine's cover.


The group of four "bubble" stories is circled above - after the requisite real estate/stock comparison and lengthy home renovation section containing pages and pages of glossy, full page photos.

One of the reasons that this issue was not reviewed more quickly and more carefully here was a result of a quick read of the lead story - tales of how buyers are scoring big by negotiating lower prices now that the tide had turned and home buyers have the upper hand over sellers.

"We don't often have a buyer's market like we have now," says Ned Marrs, a longtime broker in Colorado Springs. "Every decade it happens for a year if we're lucky. Then it's a seller's market for another nine years."

Gene Trinks, 35, moved to the San Francisco Bay area in 2002, but the engineer couldn't bring himself to buy a house in that frenzied atmosphere. "People were just overbidding wildly," he says. "There was a danger of paying too much without regard for what a house is really worth."

In January, though, he and his girlfriend closed on a four-bedroom home in Oakland, paying $880,000 for a house originally listed at $979,000.

"We were the only offer, we bid below ask, and they accepted without any counters, which is a great position to be in as a buyer," says Trinks. "We could be a little bit more in control of the process."

Broker Ned in Colorado Springs surely has his numbers wrong (one year in ten? in Colorado?) and having been an engineer not more than a couple months ago, the chances that Gene and his family have overextended themselves with what appears to be a first-time home purchase at $880,000 (in Oakland?) loom large.

Their victory dance may also be premature as $980,000 homes that turn into $880,000 homes just might have a way of turning into $780,000 homes (or worse).

Having now gotten past what really appears to be a "fluff" piece with families grinning from ear to ear, the stories in the back, with much smaller photos where chagrins have replaced smiles, will now be studied carefully.

These are interesting, though not surprising, editorial choices at Money Magazine.

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On his departure, watch the gold price soar

Having recently stumbled across this post from over a year and a half ago during a routine look at the site statistics for this blog, it was just too interesting not to share again.

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THURSDAY, SEPTEMBER 15, 2005

The Time Is Surely Not Far Off

As gold makes attempt after attempt to once again surpass and hold the $450 per ounce mark and then take out the $457 level that marked a new 18 year high last December, more and more commentaries about the yellow metal are popping up in all sorts of places. Somehow these recent commentaries are different.

It used to be that there were only two sides to the gold story - the story told by economists and the story told by gold bugs.

The economists would say that gold is a "barbarous relic" that pays no interest and has been relegated to its proper place as but a footnote in history - that today's financial wizards are wholly capable of managing fiat money and that the world is a better place without the restrictions on money creation that were in place when money was linked to gold.

The gold bugs would respond by pointing out that today's fiat money has no intrinsic value because it is backed by nothing other than confidence in the government and the central bank which issues it - that ultimately, it will revert to its intrinsic value because of promises politicians can not keep and the hubris of central bankers.

Today there seems to be a growing middle ground when it comes to gold. Some question the current relationship between the oil price and the gold price and note that it is far from historical norms. Others wonder why gold has nearly doubled in value since the technology boom went bust and real estate became the world's primary driver of wealth creation.

An excellent example of this new middle ground is this Buttonwood column that appeared in The Economist the other day. This excerpt makes clear that at least one economist at The Economist is a bit perplexed with his current understanding of gold's place in the world. The writer seems less perplexed about gold's future.

Just as inflation has, until now, lain low, and gold with it, America’s dollar has also been resisting arrest. Gold is after all a monetary metal, an alternative to the paper currency that replaced it at the heart of the world’s trading system, when times are tough. But they haven’t seemed tough so far. Despite America’s famous twin deficits, everyone else’s currency has been even less appealing, and big exporters such as China have had their own reasons for propping up the dollar. Now, as Katrina heaps billions on a national debt that is already close to $8 trillion, might that perception change? The time is surely not far off.

For at the end of the day, the price of gold reflects confidence, more than anything. When people are confident that their central banks will control inflation while permitting the economy to grow, when they believe that paper assets are worth something approaching their face value, they buy gold to wear but not to put in a safe. Alan Greenspan has achieved the remarkable feat of suspending disbelief in America’s gerrymandered finances for the past few years. On his departure, watch the gold price soar.

What do we think? We think everyone should own at least two one ounce gold coins so that occasionally they can be held in one hand - to appreciate the density and the weight, to admire the luster, and to hear the sound that is made when precious metal comes in contact with precious metal.

We also think a number of coins far greater than two would be preferable to just two.

As this is written today, gold has once again topped the $450 mark and looks to soon be making new 18-year highs. Then it's on to new 25-year highs in the $500 range, at which point, we sense that the world will start noticing gold in a big way, regardless of what economists say.

Got gold?

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Of course the reason why the timing of this post is so intriguing is the chart below - the red arrow indicates the original publication date, just before Ben Bernanke was nominated to replace Alan Greenspan, a few months before his term expired in January of 2006.

The economist at The Economist was right - not more than 45 days after Chairman Greenspan stepped down the gold price soared.

Don't be surprised if it soars again soon.

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Worth reading for the section on housing

A new book by Daniel Gross will be out next week. With an eye-catching 60's era cover and an intriguing title, Pop! Why Bubbles Are Great For The Economy, the real suspense lies in what the Slate columnist has to say about what some call the biggest one of them all - the world-wide housing bubble.

The premise appears to be that, despite the mania associated with rapid economic change, where businessmen, investors, and much of the populace lose their collective heads bidding up share prices for railroad companies or dot coms, technological innovation proceeds at a rapid pace and after the inevitable popping, something good is left behind.

While it is clear that better transportation and low-cost broadband for all have had a beneficial impact after all the gains and losses had been tallied and the last teary eye had been dried, the lasting good after speculative manias in tulip bulbs and, more recently, housing is less certain.

Bubbles—from hot stocks in the 1920s to hot stocks in the 1990s—are much-lamented features of contemporary economic life. Time and again, American investors, seduced by the lures of quick money, new technologies, and excessive optimism, have shown a tendency to get carried away. Time and again, they have appeared foolish when the bubble burst. The history of finance is filled with tragic tales of shattered dreams, bankruptcies, and bitter recriminations.

But what if the I-told-you-so lectures about bubbles tell only half the story? What if bubbles accomplish something that can only be seen in retrospect? What if the frenzy of irrational economic enthusiasm lays the groundwork for sober-minded opportunities, growth, and innovation? Could it be that bubbles wind up being a competitive advantage for the bubble-prone U.S. economy?

In this entertaining and fast-paced book—you'll laugh as much as you cry—Daniel Gross convincingly argues that every bubble has a golden lining. From the 19th-century mania for the telegraph to the current craze in alternative energy, from railroads to real estate, Gross takes us on a whirlwind tour of reckless investors and pie-in-the-sky promoters, detailing the mania they created—but also the lasting good they left behind.

In one of the great ironies of history, Gross shows how the bubbles once generally seen as disastrous have actually helped build the commercial infrastructures that have jump-started American growth. If there is a secret to the perennial resilience and exuberance of the American economy, Gross may just have found it in our peculiar capacity to blow financial bubbles—and successfully clean up the mess.

Well, that was a fine choice of words - millions of us wondering how the mess that Greenspan made is going to be successfully cleaned up. Many observers are willing to give the former Fed chairman a pass on the whole late-1990s technology boom because of all the fiber optic cable that was left laying around is now being put to good use.

Despite all the hand-wringing, something good was left behind.

But what good can be expected to linger after all the bad real estate loans are called in and activity in the homebuilding industry reverts back to levels where ordinary people buy ordinary houses just one at a time?

When the history is written, it is more likely that the housing bubble will be seen as just an easy-money fling for the stock-averse majority of the population who just sat, watched, and wondered about Amazon.com and their ilk in the late 1990s.

The Financial Times provided this review:

But could it be that the cassandras have it all wrong and that bubbles are actually a blessing, not a curse? This is the heretical idea advanced in a provocative book, Pop! Why Bubbles are Great for the Economy, which sketches out a history of the bubbles that have swept through America over the past 150 years. . . . an entertaining primer on market madness. . . thoroughly accessible to a broad audience. . . But brutal or not, Gross’s thesis is a thought-provoking one for modern investors, particularly given that the bubble phenomenon shows no sign of disappearing.

The suspense is just killing me.

Aside from being an after-effect of some other event, such as late 19th century land booms when the next leg of the railroad was announced and towns sprung up out of nowhere, how is a real estate bubble great for an economy?

Does it have something to do with granite countertops?

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Second home sales declined in 2006

The National Association of Realtors reported that overall second home sales declined in 2006, falling from 40 percent of all homes sold to just 36 percent - still relatively high by historical comparison.

Sales of vacation homes increased 4.7 percent while sales of investment property plunged 28.9 percent, part of a broader trend that has seen speculators flee the real estate market over the last year. In chart form, along with the three prior years of sales data culled from the NAR website, the situation looks like this.


David Lereah, outgoing NAR chief economist, says he saw this coming, noting that many of the Casey Serins of the world (soon to be living out of his car?) left the business of real estate investing in 2006 while recent vacation-home sales were based on "strong demographics and lifestyle factors".

Either that or last year's vacation home purchasers just hadn't yet heard that real estate prices don't always go up.

There were a number of interesting statistics released as part of the report. It doesn't take that much effort to whip up a couple of chart or tables - why don't they do that instead of providing an all-text news release?

The typical vacation-home buyer in 2006 was 44 years old, had a median household income of $102,200, and purchased a property that was a median of 215 miles from their primary residence; 42 percent of vacation homes were closer than 100 miles and 32 percent were 500 miles or further.

“The demographics favor vacation-home sales because large numbers of consumers are in the prime buying ages, and buyers want recreational property for personal use – investment is a secondary consideration,” Lereah said.
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In listing the reasons for purchasing a vacation home, 79 percent of buyers wanted to use the home for vacation or as a family retreat; 34 percent to diversify investments; 28 percent to use as a primary residence in the future; 25 percent for the tax benefits; 22 percent for use by a family member, friend or relative; 21 percent because they had extra money to spend and 18 percent to rent to others.

The full set of data has been requested from the NAR - there are probably some great multi-year mood swings that can be better represented graphically.

Investment-home buyers last year were a median age of 39, earned an income of $90,250, and bought a home that was fairly close to their primary residence – a median of 22 miles.

When asked about the most important reasons for their purchase of an investment home, 46 percent said to provide rental income; 43 percent to diversify investments; 23 percent for tax benefits; 18 percent to use for vacations or as a family retreat; 15 percent because they had extra money to spend; 13 percent for use by a family member, friend or relative; and 12 percent to use as a primary residence in the future.
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Twenty-five percent of vacation-home buyers paid cash for their property, as did 32 percent of investment buyers. An unusually high number of respondents in this survey report purchasing new homes: 44 percent of vacation-home buyers and 36 percent of investment-home buyers.

The median price of a vacation home in 2006 was $200,000, down 2.0 percent from $204,100 in 2005. The typical investment property cost $150,000 last year, down 18.3 percent from $183,500 in 2005.

“The drop in investment prices comes as no surprise, but for vacation-home prices to edge down in a record market is a bit puzzling,” Lereah said. “It may result from a large dumping of inventory on the market by speculators, especially in the condo sector, with long-term, second-home buyers taking advantage of the glut and buying at negotiated discounts. This underscores that housing should always be viewed as a long-term investment, providing solid returns over time."

This survey is performed only once a year. The 2007 data should really be interesting - even without the comments provided by their current chief economist.

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The global bubble in paper continues

It's hard to read the news these days and not come away with the impression that a well formed, global bubble in money and credit is now reaching some sort of danger point. The news is full of the same kind of reports from all around the world.

China clamps down on credit growth
China has ordered banks for the second time this month to hold more of their deposits in reserve in the latest attempt to prevent credit and investment growth from destabilising the world's fourth-largest economy.

The People's Bank of China said on its Web site that big banks would have to hold 11 percent of their deposits in reserve at the central bank as from May 15, up from 10.5 percent now.
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Over the past year, the central bank has also raised interest rates three times -- most recently on March 17 -- and economists said the decision to hoist required reserves made another increase in borrowing costs unlikely in the short term.
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The central bank has been struggling to mop up, or sterilise, a torrent of cash flowing in from China's record trade surplus, which doubled to $46.4 billion in the first quarter from a year earlier, and from capital inflows betting on a stronger yuan.

A former Morgan Stanley economist warns of big trouble ahead but, as many others have opined, maybe not until after next year's Beijing Olympics.

Andy Xie warns of China crash
Morgan Stanley former star economist Andy Xie warned of an imminent stock market crash in China -- but still hopes to raise money to invest in the country.

Xie, who attracted a wide following while he was at Morgan Stanley because of his often contrarian views on China's economy and stock markets, also warned that the global boom in equities would be over by 2008 and that this would coincide with a worldwide recession.

The recession would start from the United States and spiral down into Asia where exporters would be hit, Xie, 46, told Reuters in a telephone interview.

"I think it's going to be bust very soon," Xie said, adding that a combination of excess liquidity, rising inflation and rich valuations would result in a global crash soon.
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"College students are putting their tuition money into the market...stroke-stricken retirees get wheeled into branches of securities firms to trade," Xie said in his SCMP article.

"People are not paying attention to anything else," Xie told Reuters.

In parts of the world where overall money supply figures are still released, things seem to be getting out of hand. Isn't there something inherently wrong with the logic of double digit money supply growth when "inflation" is purportedly just a few percent?

Eurozone money supply hits new high in March
Growth in the eurozone money supply -- as measured by the broad M3 indicator -- rose more than expected in March, bolstering expectations for a further rise in interest rates.

M3 growth stood at 10.9 percent on an annualised basis in March, up from 10.0 percent in February, the Eueopean Central Bank said Monday.

M3 covers cash, overnight deposits, other short-term deposits, repurchase agreements, shares and units in money market funds and debt securities with a maturity of up to two years and is the ECB's preferred indicator of medium-term inflationary trends in the eurozone economy.

Analysts polled by financial news agency Thomson Financial had predicted a 9.8-percent rise in March.
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The ECB is expected to approve an increase in its benchmark interest rate in June to 4.0 percent from 3.75 percent.

The move is likely to make the euro more attractive to investors, thereby increasing its value and unsettling certain eurozone governments that fear an appreciating euro will harm growth prospects.

With a burgeoning financial center in London, the U.K. is now one of the more important "global bubble epicenters". Remember how their housing bubble was supposed to pop sometime last year? After a short pause and a preemptive rate cut that was quickly reversed, it is reinflating again.

U.K. Hometrack House Prices Gain Most Since 2003
U.K. house prices advanced the most in almost four years in April as London properties changed hands at a faster pace, according to a survey by Hometrack Ltd.

The average cost of a home in England and Wales rose an annual 6.8 percent, the most since June 2003, to 174,600 pounds ($350,000), the London-based research company said today. Prices rose 0.7 percent on the month. The figures are based on a survey of 3,500 real-estate agents.

London, where some property hunters stood in line for five hours to reserve new canal-side apartments last week, is leading the increase nationwide as bankers and wealthy foreigners pour money into real estate. Sellers in the capital unloaded properties at the quickest pace since at least 2001, Hometrack said.

``We've got a supply and demand imbalance,'' said Richard Donnell, director of research at Hometrack. ``We've had a very strong uptick in London in the past 18 months. As long as the world economy continues to do well and the city does well, there will always be a certain buoyancy in some areas.''

Even Canada is getting into the act now.

Canada Outgrows China as Newest Market for Worldwide Borrowers
From Reykjavik to Wellington, the queue in Toronto is making Canada the fastest-growing market for international borrowers. Not even China's burgeoning bond sales can keep up with the pace of foreign debt being issued in Canadian dollars.

Canada's supremacy as the capital market of choice for companies as diverse as New Zealand's Telecom Corp. and Iceland's Kaupthing Bank hf has a lot to do with the Ottawa-based government's obsession with balanced budgets, some of the lowest interest rates available anywhere, a sinking currency against the euro and a 2-year-old law that lets pension funds own as much foreign debt as they want without a tax penalty.

While the C$21.3 billion ($19.1 billion) of so-called Maple bonds represent 10 percent of the Yankee debt sold by international issuers in the U.S. last year, the Canadian market is growing twice as fast and may exceed C$50 billion in 2007. For RBC Capital Markets and Merrill Lynch & Co., the firms that have arranged more than half of the new offerings, which were scarce prior to 2005, the fees from these deals will top C$160 million, according to data compiled by Bloomberg.

Of course, much of the trouble on "Planet Leverage" originated here in the U.S..

As Funds Leverage Up, Fears of Reckoning Rise($)
Hedge-fund manager John Paulson made $1 billion using a complex financial instrument to pump up a bet that the subprime-mortgage market would crater. The parent company of retail giant Sears made $74 million using a similar device to boost its wager that a basket of stocks would rise in value.

Both were playing with leverage -- the magical power that allows investors to make big investments without putting big money on the table. These days, they have lots of company. Thanks to advances in financial engineering, investors have never had so many different ways to make commitments that exceed their bankrolls. And never before has leverage wormed its way into so many nooks of the financial world.

We're living on planet leverage, and regulators and market gurus are growing nervous.

How did this happen? For starters, hedge funds and leveraged-buyout funds have proliferated. They're pioneers in boosting returns using borrowed money, the most traditional form of leverage. Also, investment banks are pumping out newfangled leveraging tools such as derivatives, complex securities that allow hedge funds and other investors to add leverage without borrowing money.

Finally, mainstream America has gotten into the act. Once-conservative institutions are copying hedge-fund tactics. The Pennsylvania State Employees' Retirement System has begun dabbling in derivatives. Mutual-fund companies such as Easton Vance Corp. and Federated Investors Inc. have launched funds that rely heavily on derivatives. Garden-products maker Scotts Miracle-Gro Co. and other public companies have loaded up on debt to improve returns.

This may not end well. This may also continue for a lot longer than many people think.

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