The week's economic reports

Following is a summary of last week's economic reports. While job creation reported by the BLS remains steady and the rebound in manufacturing continues, the housing market showed more signs of weakness. Stocks and bonds ended the week with the S&P 500 Index up 1.8 percent at 1,530, now up 7.9 percent on the year, and the yield of the 10-year U.S. Treasury Note up 16 basis points to 5.19 percent.


ISM Manufacturing Index: The Institute for Supply Management reported stronger manufacturing activity in June, the ISM manufacturing index measuring 56.0, the fourth increase in the last five months after bottoming in January at 49.3. Strength was seen in production (up from 58.3 to 62.9) and new orders (up from 59.6 to 60.3) while prices paid declined (down from 71.0 to 68.0) but remained at elevated levels due to higher commodity prices.

The increase in production is an indication that manufacturers are anticipating stronger demand in the months ahead, but as Asha Bangalore at Northern Trust(.pdf) notes, "Consumer spending grew at an annual rate of 4.2% in the fourth quarter of 2006 and the first quarter of 2007. Incoming data point to below 2.0% growth in consumer spending in the second quarter and projections for the rest of 2007 do not show robust gains. Given this deceleration in consumer spending, why would factories undertake to raise production?" Good question.

ISM Non-Manufacturing Index: After bottoming in March at 52.4, a four-year low at the time, the ISM non-manufacturing index has surged over the last three months to breach the 60 level for the first time in a year. April's reading of 56 was surpassed by May's 59.7 level, which was topped by the most recent reading of 60.7 in June.

This index averaged in the low 60s during 2004 and 2005 and then settled into the high 50s for most of 2006 before plunging earlier this year. The recent improvement is consistent with other ISM data and regional manufacturing reports indicating a pronounced improvement in recent months leading to a widely expected rebound in second quarter economic growth.

Pending Home Sales: The pending home sales index published by the National Association of Realtors declined for the fourth time in the last five months, further evidence that housing is not likely to rebound anytime soon. Falling 3.5 percent in May after declining about the same amount in April, the index is now down 13.3 percent on a year-over-year basis.

The chart below, also from Northern Trust(.pdf), shows the relationship between pending home sales and existing home sales with the clear message that further weakness in home sales should be expected over the summer.

Employment Situation: The Bureau of Labor Statistics reported 132,000 new jobs created in June and a huge upward revision to the data for prior months. The original April estimate of 80,000 was revised upward to 122,000 and May's increase of 157,000 rose to 190,000. Strength was seen in the usual areas - health and education services added 59,000 jobs, leisure and hospitality (mostly food service) added 39,000 positions, and government employment rose by 40,000.

Surprisingly, construction added 12,000 jobs and manufacturing lost 18,000. Both the gains in construction employment and the losses in manufacturing are inconsistent with nearly every other economic report for these two sectors of the economy. With homebuilding in a virtual freefall and a significant rebound in manufacturing underway during the second quarter, these two figures would make much more sense if they were reversed. This only adds to the continuing doubt regarding both the accuracy and the relevance of the monthly nonfarm payrolls data from the BLS.

The unemployment rate held steady at 4.5 percent, hourly earnings increased by 0.3 percent as expected, and the workweek was flat at 33.9 hours. The long-term picture in the chart below paints a picture of stability and of a leveling-off after employment rebounded in 2004 following the technology and stock market induced slowdown earlier in the decade, but the reality of the labor market will likely not be known for some time to come, due to the extraordinary difficulties in divining meaning from the real-time BLS data.


In addition to the outsized impact that the declining teenage labor participation rate is having on the unemployment rate and the reality that, more than ever before, workers are facing dramatic reductions in income when changing jobs (e.g., auto workers), there are additional factors involving the birth-death model adjustment and benchmark revisions that could make the current stream of jobs data all but meaningless.

Analogous to the 800,000+ increase seen in the benchmark revision reported earlier this year (applied to the March 2005 to March 2006 data), next year's revision for the March 2006 to March 2007 period is likely to show an adjustment in the opposite direction, in large part due to falling construction employment that has yet to show up in a meaningful way in the monthly reports. Recall that the Bureau of Labor Statistics uses the birth-death model to estimate the formation of new businesses (and hence new jobs) for its monthly reports and then, once a year, they go back and update their prediction model based on actual business "births" and "deaths" and the entire dataset for the year is revised.

Back in 2005 when both the economy and the housing market were booming, employment was underestimated as a result of using models based on previous, weaker trends. Similarly, as the economy slowed in 2006 and as homebuilding continued to decline in 2007, it will likely be revealed early next year that employment was overestimated in 2006 and early 2007 as a result of using models based on previous, stronger trends.

All of this, when combined with the routinely large revisions to prior month's data (nonfarm payrolls for April and May were revised upward a combined 75,000 in this report) makes the employment report from the BLS not nearly as respected or as relevant as it once was.

Summary: The manufacturing rebound continues and housing shows no signs of a turnaround anytime soon. This has been pretty much the same story for about the last three months and there is no indication that anything is going to change anytime soon. It seems more likely that the manufacturing rebound will level-off or falter before the housing market picks up, simply due to the many more forward-looking indicators for housing, all of which remain dim.

The employment data thrilled those observers looking for good economic news amid all the subprime and housing woes, however, employment has always been a lagging indicator and, given the recent history of revisions, this indicator now lags by as much as two years (i.e., the January 2008 benchmark revision will tell us what the employment situation was really like between early 2006 and early 2007).

The Week Ahead: Economic reports in the week ahead will be highlighted by retail trade on Friday, a report that will be heavily scrutinized for continuing signs of a consumer retrenchment. Also scheduled for release are reports on consumer credit on Tuesday, international trade on Thursday, and both consumer sentiment and import/export prices on Friday.

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Continuing to grapple with gold

Two pieces from yesterday's Wall Street Journal - one a lengthy editorial and the other just a few paragraphs in the Ahead of the Tape column - are continuing evidence that, generally speaking, the mainstream media (and particularly economists) still doesn't really know what to make of the price of gold midway through 2007.

(Unfortunately, both of these appear to be behind the subscription wall.)

First, the short wondering-out-loud about why gold hasn't gone higher when consumer prices appear to be on the rise everywhere but in reading on core inflation.

Digging for the Reasons Why Investors Don't Rush to Gold
By SCOTT PATTERSON

The dollar is weak, crude oil is back up above $70 a barrel, geopolitical turmoil in the Middle East is on an upswing and economic jitters abound. You would think it would be time to buy gold, but the market doesn't.

Gold is often seen as an attractive investment during uncertain times or as a hedge against inflation. But gold prices have been weak in the past few months, losing more than 5% since nearing $700 in late April. It hit $655 on Tuesday. Shares of gold miners such as Newmont Mining also have lost ground this year, another bad sign.

It isn't completely clear why gold prices are stagnating. One explanation: Core measures of inflation have been modest, even though oil prices are high and food prices are rising. That gives investors less of a reason to own gold as a hedge. Meanwhile, momentum seekers in the precious metal might also be tiring of the trade. Bill Frejlich, a commodity broker at Fox Investments in Chicago, thinks gold could bounce between $600 and $700 for the rest of the year.

On the editorial page, two economists ruminate on the historical relationship between "inflation" and the price of gold.

Money Meltdown
By DAVID RANSON and PENNY RUSSELL

Interest rates are on the rise in the Eurozone, Great Britain and Japan, as well as in India and China. But the Federal Reserve has again elected to keep its target rate on hold despite repeated assertions that inflation risk is still its predominant concern. Are central banks abroad recognizing a threat that their American counterpart has yet to acknowledge?

The Fed seems to believe that inflation has something to do with "excessive" demand. Although it admits that inflation is already running at an unacceptable pace, the majority of its policy officials cling to the belief (or hope) that the U.S. economy is slowing down, alleviating the inflation threat. Both of these assumptions are inconsistent with historical evidence.

What's more, the recent rise in the euro and sterling relative to the dollar has obscured the fact that the world economy has embarked on another classic "run" on paper currencies that is driving inflation up everywhere. For several years now, as was the case in the 1970s, all the world's currencies have been depreciating relative to stable benchmarks such as gold. Since the end of 2001, these declines have ranged from 38% (in the case of the euro) to nearly 60% (in the case of the dollar).

Why then has the pace of consumer-price inflation to date been so much less noteworthy than the pace of currency depreciation against gold? The answer lies in the timing: Gold is a fast-moving leading indicator, whereas consumer-price indices are slow-moving indicators that lag far behind. We all learned in the period between 1975 and 1985 that consumer prices do eventually catch up. It is the size of the move in the gold price, rather than in the consumer price index, that is a true and timely indicator of the magnitude of the inflation problem.

Since at least one individual has already been thoroughly confused by my added commentary today, readers will be provided with no further assistance regarding what to make of this all.

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The labor report: an infinte loop

According to Wikipedia, an infinite loop is "a sequence of instructions in a computer program which loops endlessly, either due to the loop having no terminating condition or having one that can never be met."

That's how the labor report from the Bureau of Labor Statistics has seemed in recent months. It's pretty much been the same thing over and over and over - just when you think that it might exit the current loop, you just get more of the same.

In Basic, an infinite loop would look something like this:

• 10 x = x + 1
• 20 Print x
• 30 GoTo 10

In the nonfarm payrolls report, it looks like this:

• 10 Manufacturing = Manufacturing - 15K
• 20 Construction = Construction
• 30 Health Care = Health Care + 50K
• 40 Food Services = Food Services + 35K
• 50 Government = Government + 30K
• 60 Other = Other + 30K
  
• 70 Print
  
• 80 GoTo 10

At first glance, that sort of output wouldn't seem likely to be the foundation for a self-sustaining economy but, so far, it is.

In chart form, it looks like this:


Steady as she goes.

In addition to June's 132,000 new spots at hospitals, fast-food joints, and city hall, another 85,000 jobs showed up in the April and May reports. April's initial total of 80,000 was revised upward to 122,000 and May's 157,000 first count increased to 190,000.

Naturally, the unemployment rate remained at a freakishly low 4.5 percent and hourly earnings rose only modestly - a sure sign that current trends can be sustained indefinitely into the future. They could probably cut the BLS staff in half given the repetitive nature of recent reports, but that might hurt the government employment stats.

With underlying inflation now falling - the core rate of inflation is now within the Fed's "comfort zone" of between one and two percent - the economy seems to be back on an even keel.

Pay no attention to the price of oil or the turmoil in the housing market.

This economy could go on like this forever.

Who pays the salaries for all these new jobs?

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Twice duped during the housing bubble

Say what you will about every individual being responsible for their own decisions and that the free market must be allowed to work unfettered, but it does seem unfair that a large segment of the home buying public is getting fleeced twice during the current housing bubble - first when they took out their subprime loan to purchase a home and then again when they thought they were saving it from foreclosure.

This story in the New York Times goes a long way in explaining what those ubiquitous little "Stop Foreclosure" and "We Buy Houses" signs that you see by the side of the road are really all about - they're all over the place in California and they almost all Habla Espanol.

New Scheme Preys on Desperate Homeowners
By GRETCHEN MORGENSON and VIKAS BAJAJ

With the housing market in decline, financial predators are finding yet another way to take advantage of people who fall behind on their payments.

The schemes take various forms and often involve promises to distressed homeowners of cash upfront, free monthly rent and a chance to retain their houses in the long run. But in the process, someone else takes over the deed, borrows as much as possible against the value of the house and pockets the cash. And, almost always, the homeowners still end up losing their homes.

There are no nationwide numbers on this common fraud, known as equity stripping, but it has turned up in almost every state. Seven states have passed laws to try to stop it. Still, with foreclosure rates rising rapidly, it will be a growing problem, consumer advocates say.

“Conditions now are perfect for these scams,” said Lauren K. Saunders, managing attorney at the National Consumer Law Center in Washington. “We are at the end of a period of rising real estate prices, so a lot of people have equity in their homes. But we also have a foreclosure crisis.”

Historic highs in home equity and foreclosures - imagine that.

Sometimes you have to wonder how so many pundits can keep a straight face when they marvel at all the "wealth" that has been created in the last five years.

It's like a cruel joke for millions and millions of people who really had no clue of the bigger picture and not only achieved their dream of home ownership but thought they were gonna be rich too!

It's now ending in tears for many of them who were just doing what everyone else was doing - at least they'll have company when they tell their housing stories in the years ahead, "Yeah, I bought a house in 2006 too. I thought I was gonna get rich. Didn't happen."

Victims are becoming more plentiful as homeowners fall behind on payments and find that they cannot refinance, with mortgage rates rising. The Mortgage Bankers Association recently disclosed that nearly 19 percent of all loans to less-creditworthy consumers, or 1.1 million mortgages, were either delinquent by more than 30 days or in foreclosure. At the end of 2006, the figure among these loans was 17.9 percent.

When a property enters foreclosure, it appears on a list at the county clerk’s office. Individuals and companies in equity-stripping schemes monitor the lists closely, contacting troubled homeowners either by phone, by mail or by knocking on their doors.

These companies advertise heavily in target areas. “Are you losing sleep because of mounting debt and harassing bill collectors?” asked one flier from a “foreclosure specialist,” Equitable Real Estate Solutions.

"Equity-stripping". Another addition to the early 21st century vernacular - following "flipping" and "subprime".

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The meaning of the median

Rich Toscano over at Piggington.com and The Voice of San Diego had this chart up the other day comparing San Diego median home prices as reported by Sandicor (the regional MLS) to the Case-Shiller Home Price Index through the month of May April.


Recall that the Case-Shiller Index is like a super-OFHEO home price index where only repeat sales of the same home are included and the difference in price between sales is used to calculate a year-over-year rate of change. The OFHEO index includes only loans serviced by Fannie Mae and Freddie Mac whereas the Case-Shiller Index includes all single-family home sales.

The problem with the median price, as reported in the LA Times here a short time ago, is that the relative strength of the upper end of the market versus the lower end of the market has pushed the median price higher than it would otherwise be. Since the median price is simply the price at which half of the homes sold are more expensive and the other half are less expensive, fewer sales of cheaper homes moves the median higher, all else being equal.

The chart below from the LA Times demonstrates the recent change in sales volume by price range in dramatic fashion for all of Southern California.


Rich writes:

The divergence between the median home price and the Case-Shiller Home Price Index continues.

According to the HPI, which compares same-home sales and is thus a far better price metric than the median sales price, San Diego home prices were still declining as of April.

If Professors Shiller and Case are to be believed, San Diego single family home prices have dropped 6.7 percent since April 2006 and 7.1 percent since the November 2005 peak.

You can look at charts for all of the individual markets that the Case-Shiller Index covers over at Macro Markets. Here's the chart for San Diego showing about a seven percent decline since the peak in 2005.


Remember that the cost of the massive wave of home improvements over the last few years is not factored into either index.

The Case-Shiller Index attempts to account for major remodeling, but according to the index methodology document, your run-of-the-mill kitchen and bath upgrades costing tens of thousands of dollars are not taken into account when calculating the index.

Admittedly, it would be difficult to accurately represent this in a home price index, but neither should it just be ignored when trying to understand what is happening to home prices.

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The WSJ on price reductions

In this Wall Street Journal housing report($) on rising inventory, the chart below could be found if you clicked on the link below where it says "MORE" on the main page of the story.

It appears that sellers are finally getting the message that there are few ways to move property when inventory is so high and sentiment is so low - at least sellers of Bank Owned Property are getting the message.

Total listing of homes for sale were up 2.5 percent from May to June, a time of the year when, historically, inventory declines but a period that has seen inventory increase in the last few years. The data was compiled by ZipRealty Inc. and includes all listings for single-family homes, condos, and townhouses on multiple-listing services.

The continued growth in supply suggests further downward pressure on house and condo prices in parts of the country. After soaring in the first half of this decade, prices in many markets have been flat to lower over the past two years amid a supply glut and more-cautious mortgage lending.

Thomas Lawler, a housing economist based in Vienna, Va., predicted that the S&P/Case-Shiller home-price index, a national measure, will decline about 7% this year. He said that the housing market is unlikely to start recovering before mid-2008 at the earliest and that the recovery probably will be gradual. Among the wild cards is whether builders will slash production, which would reduce the glut of homes.

Mr. Lawler appears to be brutally honest about the recovery - a year from now at the earliest - but why do they always pick on the homebuilders?

David Lereah's replacement as chief economist at the National Association of Realtors, Lawrence Yun, said the same thing not more than a month or two ago - if only the homebuilders would stop building, then maybe things would turn around.

Sales of new homes only account for about one-sixth of the total number of homes on the market. Before you know it they'll be saying, "If banks would slash the number of foreclosed properties they're putting back on the market, we'd see a rebound in housing".

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More reasons to own gold coins

This story in the London Telegraph from the rarely disappointing Ambrose Evans-Pritchard, formerly of The Economist, makes you think that you just might not have enough of your personal wealth in gold coins.

Credit crunch will 'shred investment portfolios to ribbons'
By Ambrose Evans-Pritchard

The near collapse of two Bear Stearns hedge funds has lifted the rock on our 21st century mutant capitalism, exposing the bugs beneath to a rare shock of naked light.

When creditors led by Merrill Lynch forced a fire-sale of assets, they inadvertently revealed that up to $2 trillion of debt linked to the crumbling US sub-prime and "Alt A" property market was falsely priced on books.

Even A-rated securities fetched just 85pc of face value. B-grades fell off a cliff. The banks halted the sale before "price discovery" set off a wider chain-reaction.

"It was a cover-up," says Charles Dumas, global strategist at Lombard Street Research. He believes the banks alone have $750bn in exposure. They may have to call in loans.
...
Why has such excess happened? Because global liquidity flooded the bond markets in 2005, 2006, and early 2007, compressing yields to wafer-thin levels. It created an irresistible incentive to use debt.

What is the source of this liquidity? Take your pick. Goldman Sachs says oil exporters armed with $1,250bn in annual revenues have been the silent force, sinking wealth into bonds; China is recycling $1.3 trillion of reserves into global credit, a by-product of its policy to cap the yuan; Japan's near-zero rates have spawned a "carry trade", injecting $500bn of Japanese money into Anglo-Saxon bonds, and such; the Swiss franc carry trade has juiced Europe, financing property booms in the ex-Communist bloc. And, all the while, cheap Asian manufactures have doused inflation, masking the monetary bubble.

The deeper reason is the ultra-loose policy of the world's central banks over a decade. They "fixed" the price of money too low in the 1990s, prevented a liquidation purge to clear the dotcom excesses, then kept rates too low again from 2003 to 2006. Belated tightening has yet to catch up.

Don't blame capitalism. This is a 100pc-proof government-created monster. Bureaucrats (yes, Alan Greenspan) have distorted market signals, leading to the warped behaviour we see all around us.

As the BIS notes tartly in its warning on the nexus of excess, this blunder has official fingerprints all over it. "Behind each set of concerns lurks the common factor of highly accommodating financial conditions" it said.

Rebuking the Fed, it said Japan and Europe have turned sceptical of the orthodoxy that central banks can safely let asset booms run wild, merely stepping in afterwards to "clean-up".

The strategy leads to serial bubbles, creates an addiction to easy money, and transfers wealth from savers to debtors, "sowing the seeds for more serious problems further ahead".
...
On it goes. Perhaps governments should simply stop trying to rig the price of money in the first place.

You never have to worry about one-ounce American Eagles, Canadian Maple Leafs, or South African Krugerrands being "marked to model".

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I got my eye on you!

It's the Fourth of July - time for a slight diversion from the usual fare. While everyone is trying to figure out what to do when the Fourth falls on a Wednesday, allow me to bring to your attention a great new show on HBO - John from Cincinnati.

No one really knew what to make of this series when it first began a month ago, but now, four episodes in, it's pretty clear that there's something special about it.

Set in Imperial Beach, California, just north of the Mexican border, the lives of three generations of the legendary, yet dysfunctional, Yost surfing family are affected by a mysterious, seemingly mentally-challenged stranger named John who claims to be from Cincinnati.

Strange and miraculous things begin happening to nearly everyone - that's John to the right in the photo below.


The series was created by David Milch of "Deadwood" fame and "surf-noir" novelist Kem Nunn who both have a hand in the writing, the influence of "Deadwood" clearly being seen in soliloquies by former "Married with Children" star Ed O'neill.

For some time now, "In Praise of Deadwood" has been the working title for a post to pay homage to the HBO series that concluded its third season late last year.

Though not officially canceled, its future is now uncertain as options for the cast and crew reportedly expired last year. Fans may see more of the show on HBO in a different format sometime in the future.

Despite its over-the-top profanity, this program received great critical notice, particularly for the realism that was obvious to anyone who watched a single episode - muddy streets and general lack of sanitary conditions in the 19th century West rarely appear in Hollywood westerns.

Gunsmoke, for example, was very much an idealized version of the Old West where teeth were almost always white and straight and both Matt Dillon and Kitty, the marshal and the saloon keeper, were both prim and proper.

Set in the Black Hills Gold Rush days of the late 19th century the added element of historical relevance to today's world of money and finance made Deadwood all the more fascinating to watch. Unfortunately, the foul language becomes distracting very quickly (making the Sopranos look tame by comparison) and many viewers will not likely get past the first 15 minutes of the first episode.

If you have a chance to catch either Deadwood (either on DVD or in reruns) or John from Cincinatti, it is well worth the time.

Here are a couple of clips from the new show.

John from Cincinnati Promo #6

The Making of John from Cincinnati

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Schiff vs. Luskin - an ugly draw

After listening to the effervescent Bob Pisani's absolutely giddy description of the triple-digit gain in the Dow yesterday, Peter Schiff was almost declared the winner over Donald Luskin in yesterday's CNBC face-off, but, in the end, it was just an ugly draw.

The video is available at both of their websites - the quality is much better at Schiff's Europac site but there's follow-up commentary on Luskin's blog.

This discussion (if you can call it that) actually does a good job at capturing the debate between bulls and bears on the near-term fate of both the U.S. economy and equity markets - no clear winners, both sides have good points, but neither side is interested in what the other side has to say.

Kind of like politics.

Here are a few highlights:

Luskin: It's the bears who are delusional. Here's the explanation for why stocks were up so much today. Pick up a copy of the New York Times, go to the opinion pages, look at Paul Krugman's column - he's got this end-of-the-world column about how the subprime mess is going to drag the whole economy down. He even quotes Bill Gross saying the same thing. If there was ever a buy signal, we got it. You want to buy 'em with both hands here my friend.


Schiff: If you want to lose money go ahead and do that, but you're right, you are delusional. We didn't get off to a good start. Look what happened to the dollar today - a 26-year low against the pound, a 20-year low against the Australian dollar. The dollar is breaking down, oil prices are reflecting the weakness of the dollar, we're breaking out in the price of oil. I think we're very close to a major collapse in the value of the dollar and that's going to send commodity prices, consumer prices, and interest rates spiraling, and that's going to compound the problems in the housing market that are just getting started.

It quickly degenerates into a shouting match from there.

Kind of like politics.

Favorite exchange:

Schiff: We are a burden that the world has to bear. The problem is that Americans are not producing enough, all we're doing is consuming and borrowing ... when the rest of the world lets the dollar collapse, and their currencies rise, all of a sudden consumer goods that people around the world can't afford suddenly become affordable and a lot of the capital that was squandered on American consumption is going to be available to them.

Luskin: Wait, wait, wait - this just can't go on. I feel like I'm debating Michael Moore here. America is not a burden on the world ... We are the engine of innovation for the entire world ... Because our money is so valuable, because our credit is accepted world-wide, billions of peasants world-wide are willing to work in poorly-lit, poorly-ventilated factories, just to get our paper money, because it's that precious.

Message to Luskin: Housing is worse than you think and there's no bottom in sight.

Message to Schiff: You're missing out on great U.S. energy and basic material stocks.

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A disturbingly accurate housing forecast?

Years ago, when fellow Hummer reporter Erik Ustin would visit my "veal pen" (otherwise known as a cubicle - thanks DW) at our former employer early in the morning before any of the other calves arrived at work, we would ruminate on the fate of the housing market.

Back around 2004, when millions of doe-eyed real estate "investors" were talking about flipping condos or snatching up that dreamy vacation home, we were far ahead of our time as we pondered the fate of the raw materials then being used to construct residential housing that the proud new homeowners clearly would not have been able to afford during any other era and stood little chance of holding onto for more than a couple years during the current one.

Already attuned to rising commodity prices and always in search of new and different business opportunities, we wondered whether it would ever be profitable to strip homes of their raw materials and sell them for scrap before the owners were booted out the door for failing to make their monthly mortgage payment and one more house joined the ranks of "Bank Owned Real Estate".

There's a lot of copper in a typical single family residence - almost 500 pounds according to some statistics, twice that for a McMansion - and at between $3 and $4 per pound, a blow torch and a little hard work could result in a healthy cash flow for an ambitious businessman seizing an opportunity that few others even knew existed.

Former homeowners about to re-join the ranks of renters would surely see no downside in accepting a couple hundred dollars for leaving the door open on their final exit, allowing the blow-torch crew to quickly enter for the purpose of extracting the base metal that has become increasingly precious.

After all, with house prices plummeting, whatever money they did put down on the house (if any at all) is long gone and their credit will be impaired for a few years regardless of the condition in which they left the house.

Why not get a little extra "walking around money"?

For an ambitious businessman, the copper haul would probably just be the base level of extraction - the guaranteed return on a meager investment - since nearly all homes have copper pipes and wiring. The bonus would lie in those other things with resale value that are still attached to the house when the former homeowner heads out the front door for the last time.

Light fixtures, sinks, toilets, built-in appliances - even if you sold the stuff for pennies on the dollar, you could probably still remove enough in a single afternoon to make it worthwhile - maybe net $500-$1,000 when all was said and done.

Multiply this by a thousand or tens of thousands and it's easy to see how American ingenuity could make lemonade out of lemons one more time as the once-great housing boom continues to go bust.

Down Under

Erik is in New Zealand now, the former engineer purportedly eying a new career as either a shepherd, coffee importer, or tourist guide but seemingly in no hurry to return to work as he too took profits in California real estate while the takin' was good a few years back.

He does keep up on the housing news in the U.S. however, and found time to forward the article excepted below, an early indication that perhaps the entrepreneurial spirit may still be alive and well in the Rust Belt.

Foreclosures: Hardest hit ZIP codes

In the Rust Belt, it was the ripple effects of a dying industrial economy instead of rampant speculation that crushed the finances of many borrowers in states like Michigan, Ohio and Indiana.
...
According to Cleveland city councilman, Tony Branchatelli, who represents the district, more than 600 homes in the neighborhood are vacant and boarded up. Many have little value because the rehabilitation costs would exceed their selling prices. Some have had their plumbing, wiring and other hardware stripped.

Erik's comment:

Well, it happened! Wow we were good.

Yes, and we still are.

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Under Greenspan's watch

A link to this video was posted here yesterday and it's worth another look. It's blurry, and that kind of looks like Christopher Dodd of Connecticut but I don't think that's who it is.

Don't know who that first guy is either testifying about "risk layering" - he sounds pretty flummoxed. This must have been from the hearings earlier this year.

It's going to be difficult to change the name of this blog just when everyone else is realizing what seemed crystal clear to some of us back in 2004.

I'm amazed, sitting here listening to all of our colleagues on the committee and forgetting who used to come here before this committee and brag about the housing market carrying the economy. None other than our former Chairman of the Federal Reserve Alan Greenspan.

He was in charge of bank regulation at the time when all these sophisticated mortgages came into being. And I didn't hear him say a word about these when he was here. And now I hear him criticizing everybody that's in the business of lending.

What are the odds that Greenspan gets called in to testify again before Congress?

Wouldn't that be fun?

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Jim Rogers on investing in women

Commodity bull Jim Rogers was on Bloomberg Video this morning (does he still appear on those loopy Fox business infotainment shows on weekends?) and he's looking for ways to invest in the opposite sex.


Oh yeah, he also mentioned that he's in the process of dumping all his emerging market stocks except for ... wait for it ... China.

A few highlights:

On agricultural commodities

I'm long nearly all agricultural commodities - about 20 of them - because that's the place to be. It's better than the stock market, the bond market, or any other market that I know of right now. Dramatic fundamental changes are taking place for the better - it's one of the great places to make money in the next few years.

On supply/demand and global warming

Supply and demand is enough. If we start having global warming, that'll make it even better. Remember that we haven't had a world-wide drought for many years. We used to have world-wide droughts with some regularity. If we start having droughts again, who knows how high the price of agriculture will go.

On selling during bull markets

You should be very wary of selling anything when you're in a secular bull market. This bull market in commodities, including metals, has at least another decade to go. Prices are going to go up higher than any of us can imagine, including me, and I'm the bull.

On emerging market stocks

I've sold out of nearly all emerging markets. Right now, as we speak, there are probably ten thousand young MBAs out there flying around from one emerging market to another. They're all overexploited so I sold out. I didn't want to sell out of many of them - I'm hoping that when the next big correction comes, I'm smart enough to buy them back. The only one I didn't sell was China - I don't ever want to sell China, but if China doubles again this year, then it's a full-fledged bubble and I'll have to sell. I hope that something makes it go down so I can buy more - I don't want to have to sell China, but you have to sell when a bubble develops.

On investing in the shortage of Asian women

There's a huge shortage of women developing right now. In Korea, for every 100 girls, there are 120 sixteen year old boys. The same is happening in China, the same is happening in Japan, India. I have not found any good ways to invest in this - it's going to change education, it's going to change travel, it's going to change everything. You should become a divorce lawyer. Divorces are going to skyrocket in Asia as 26-year old women figure out that they don't have to be abused by their husbands anymore or their employers. The status of women is going to change dramatically and someone is going to make a lot of money off of it.

An equal allocation of Asian divorce lawyer and gay bar stocks would appear to be a prudent long-term investment strategy.

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The dollar is falling again

It looks like the U.S. Dollar Index is heading back down toward 81. Should anyone be worried? Are all those new FOREX traders with their late-night infomercial study guides and charting tools going drive the dollar over the edge?

That chart looks bad and appears to be getting worse - just in the last few weeks. The euro is now clear of $1.36 again and the pound has retaken $2.01.

Where does the buck go from here?

Many pundits would have you believe that "technical factors" make the 80-81 area on the chart very dangerous. A "technical breakdown" could result in much lower numbers, very quickly.

Last Tuesday, everyone saw what a technical breakdown looked like when silver plunged six percent in just a couple hours.


Silver looks to be rebounding nicely today, thanks in part to the dollar weakness.

One thing to remember about the greenback is that the world's worst bankers and economists are still at the controls of the printing presses over there in Japan and the Yen is still a huge part of the U.S. Dollar Index.

Whenever you think that things might be getting bad for the buck, remember that there's a worse currency out there and that it accounts for 14 percent of the U.S. Dollar Index as currently constructed.

Remember too that there are literally no limits to which Japanese central bankers will not go to continue to carry out whatever misguided monetary policy they embarked upon twenty-some years ago when they impressed the rest of the world with their booming economy that quickly turned into one of the greatest financial bubbles in history.

We seem to have had a lot of financial bubbles in recent history.

They are still recovering from those mistakes (or attempting to) and don't appear to be anywhere close to "normal", though, in a world increasingly awash with easy money, easy credit, low interest rates, and high prices everywhere but in government statistics, it's hard to know what "normal" is anymore.

According to a Bloomberg report earlier today, the Yen just dropped to a 22-year low against the currencies of its major trading partners, an all-time low against the Euro, and almost a five year low against the dollar. It looks like deflation is back in Tokyo, one of the world's most expensive cities with one of the world's most undervalued currencies in the eyes of everyone but the local central bankers.

Maybe Japan should just get kicked out of the world economy for failing grades.

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The real reason for the change

One of the many reasons for switching over to a new blog (see Bad Macro) is to be able to show a few photos now and then without people having to ask what pine trees have to do with Alan Greenspan.

Answer: Nothing.

From an elevation of over 8,000 feet, only about ten miles north of Yosemite Valley as the crow flies, come these latest pics (click any of them to enlarge).

First, Lukens Lake.


The view of Half Dome from Olmsted Point.


Tenaya Lake looking back toward Olmsted Point.


Tuolumne Meadows.


Oh Dear!

ooo

This week's cartoon from The Economist:

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