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This should be interesting. If nothing else, Peter Schiff's run for Chris Dodd's Senate seat will be like Ron Paul's campaign last year in that it makes people stop and think a little bit.
How can the U.S. economy expand if consumer credit continues to contract? Good question. And not one that stands any better chance of being answered in light of the most recent data on credit card and auto loan amounts outstanding as reported by Bloomberg.
Consumer credit in the U.S. declined in June for a fifth straight month as banks maintained tough lending terms and households remained reluctant to borrow money for major purchases.Importantly, consumer credit contains no housing related debt at all. One can only imagine how sharply outstanding home equity lines of credit and home equity loans are contracting these days. Is this data collected and published anywhere aside from at individual banks? Read more...Consumer credit fell $10.3 billion, or 4.92 percent at an annual rate, to $2.5 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $5.38 billion in May, more than previously estimated. The series of declines is the longest since 1991.
Stagnant wages and falling home values mean consumer spending, about 70 percent of the economy, will take time to recover even as the recession eases.
...
“This string of declining credit should continue as long as the economy eliminates workers at an elevated pace,” said Richard Yamarone, director of economic research at Argus Research Corp. in New York. “We’re 20 months into the recession and the economy is still losing a quarter-of-a-million jobs per month.”
Today's Wall Street Journal carries three stories that are real signs of the times.
While Congress gets a half billion dollars in cushy new airplanes for even more air travel at taxpayer expense, bankers have a growing pot of billions to divvy up based on surprising gains in toxic assets, and the little guy gets $4,500 off a new car, one that comes with a whole new set of car payments.
In a guest article at the The Economist, in response to at least three less-than-flattering assessments of the profession in recent weeks, Chicago University Economic Professor Robert Lucas defends economic models and their contributions to Mankind.
How about throwing out all of the failed models along with efficient market theory and setting a modest goal of looking at how asset prices and people interact in an effort to spot the next giant speculative bubble before it destroys the world?One thing we are not going to have, now or ever, is a set of models that forecasts sudden falls in the value of financial assets, like the declines that followed the failure of Lehman Brothers in September. This is nothing new. It has been known for more than 40 years and is one of the main implications of Eugene Fama’s “efficient-market hypothesis” (EMH), which states that the price of a financial asset reflects all relevant, generally available information. If an economist had a formula that could reliably forecast crises a week in advance, say, then that formula would become part of generally available information and prices would fall a week earlier.
The Labor Department reported a decline of 247,000 in nonfarm payrolls during the month of July, an improvement from a revised job loss total of 443,000 in June, and the unemployment rate fell slightly from 9.5 percent to 9.4 percent. 
While the headline paints a rosy picture of an improving labor market, the underlying data is skewed to the upside by odd seasonal adjustments in auto manufacturing, so, don't get too excited about a dramatic rebound in employment just yet.
Since many auto industry job cuts were carried out earlier in the year as Chrysler and GM entered and exited bankruptcy, there are fewer job losses during the summer when workers are normally laid off temporarily as factories retool for the new model year. In fact, within the motor vehicles and parts sector, seasonally adjusted payrolls actually increased by 28,000 in July, a figure that is four times higher than the largest previous increase in a data series that goes back almost 20 years.
As shown below, manufacturing payrolls declined by 53,000 on a seasonally adjusted basis, the smallest loss for this category since a year ago in August, however, on an unadjusted basis, manufacturing job losses of 61,000 were the fewest since 1965. Based on the relationship between the adjusted and unadjusted data in recent years, removing these effects would push July job losses to over 300,000.
The decline in July nonfarm payrolls was nonetheless a big improvement over the first half of the year and recent data continues to be revised upward, the initially reported decline of 322,000 in May revised to 303,000 and the June total from 467,000 to 443,000.
By historical measures, however, job losses remain severe. While this was the best reading for nonfarm payrolls in 11 months, it would rank as the fourth worst month of job losses during the last recession, not far behind the peak decline of 325,000 in nonfarm payrolls following the September 11th attack in 2001.
The unemployment rate dipped slightly to 9.4 percent and the broader measure of "underemployment", including marginally attached workers and involuntary part-time workers, fell from 16.5 percent in June to 16.3 percent in July.
In another indication that the improvement in the headline figures belie the underlying persistent weakness in the labor market, the number of long-term unemployed (those who have been jobless for 27 weeks or more) rose by 584,000 in July, a month when 1 in 3 unemployed persons were jobless for 27 weeks or more.
TOP STORIES
China shares fall on credit contraction fears - AP
Inside G.E., a Little Bit of Enron - Norris, NY Times
Fannie Mae seeks $10.7B more after another big loss - AP
With Senate Vote, Congress Refuels 'Clunkers' Program - Wash. Post
California's universities in trouble: Before the fall - Economist
Citigroup may set loose its $100 million man - Reuters
Old Banks, New Lending Tricks - BusinessWeek
The History of the Stock Market - Mint Life
Fixing Fannie Mae - Wash. Post
From the Tom Toles collection at the Washington Post.
After hearing a lot of talk in recent days about hopeful signs for the U.S. economy and how it is vital that consumers regain their confidence in order for a recovery to truly take hold, it struck me once again that the U.S. economy, more so than most other economies around the world, is really just a "confidence game".
As in ... a hustle.
As in ... Paul Newman.
As in ... not a good long-term plan (unless, of course, you're the one running the swindle) because, at its foundation, the game is fraudulent.
From Merriam-Webster:
confidence gameNow, this is not some short-term hustle where some guy standing on a street corner signals his partner with a tap on his nose - this is a multi-generational scam that has as much to do with flawed concepts about how economies should operate as it does with fading empires and their tendency to transition from manufacturing powerhouses to centers of finance and money shuffling where, over time, the masses are duped into borrowing and spending their way to oblivion and the government does much the same simply because it thinks it has no other choice.
noun
a scheme in which the victim is cheated out of his money after first gaining his trust
It's now rising like a phoenix and, while that may be a good (and very necessary) thing for one's personal finances, it is definitely not a good thing for the economy in the short-term.
Stateside, the government's finances - dominated as they are by entitlements such as Medicare and Social Security - appear to be much more of a Ponzi scheme than a confidence game, though, there are surely some characteristics of both.Ponzi SchemeLet's face it, when you and your employer each have 6.2 percent of your wages sent directly to Uncle Sam and deposited into the social security "trust fund", you are "investing" this money in the biggest Ponzi ever perpetrated because your money goes directly back out to recipients and, to make things even worse, what's left over is spent by the government.
noun
an investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks
In fact, that peak you see above in 2007 may represent a generational high in asset prices since so much of this increase was fueled by a massive expansion of credit enabled by lax lending practices that have now unraveled over just the last couple years.It's August...
Congress is on a break, half of Wall Street has already started their summer vacation, the stock market continues to charge relentlessly higher as if it's on auto-pilot, the days are still long and warm, and there are a lot less people sitting in front of their computers as football camps open all around the country and Labor Day nears.
To be perfectly honest, I'm a little bored.
Surely, there's something that we can do around here that would be a break from the usual fare...
What could it be?
Well, here's an idea...
As most of you probably know, a good portion of the material that appears here at this blog also shows up over at Seeking Alpha and, some time ago, the folks over there instituted a system where readers can "Follow" authors, meaning that you get alerts via email when that particular author has something new (and perhaps other handy features that I'm not really aware of).
Authors are then "ranked" based on the number of followers, what you see above being the top five Seeking Alpha authors with the complete list maintained here
Since my stuff has been published there for years now, I've been ranked in the top 50 or so and, as shown below, am currently in position 37 with 689 "Followers".
While that's all well and good, surely, with a little help from readers here, we can do better - maybe a whole lot better.
If you have a little free time on your hands between now and the time you take your summer vacation, here's what I'm asking you to do.
If you've already registered at Seeking Alpha, click the "Follow" button beneath my mug on my author page.
If you're not already registered, all you have to do is click on the Login button at the bottom left of any page (it should take all of about a minute to complete) and then go click on the Follow button as described above.
You'll get emails about once a day when new material is published there and, to my knowledge, they don't send out anything more.
I had been moving up steadily in recent weeks but, with a little help from you, maybe I can leap-frog a handful of authors and make it all the way into that left hand column above.
Whadda you think?
[Note: Pay no attention to Confucius who once said: "Do not be desirous of having things done quickly. Do not look at small advantages. Desire to have things done quickly prevents their being done thoroughly. Looking at small advantages prevents great affairs from being accomplished."]
Yesterday, Deutsche Bank released a new report on housing that is, to put it mildly, "at odds" with the more mainstream view that green shoots are popping up everywhere in the nation's housing market. This report at Reuters provides a summary of the findings.
About half of mortgages seen underwater by 2011The year 2011 is about five or six years from the peak of the housing bubble a few years back, meaning that the average period of home ownership (seven years?) will soon be a major factor in turning "prime borrowers" into "walk away" candidates.
The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.
"We project the next phase of the housing decline will have a far greater impact on prime borrowers," Deutsche analysts Karen Weaver and Ying Shen said in the report.
Of prime conforming loans, 41 percent will be "underwater" by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties' value, up from 29 percent, it said.
Back to the Reuters story with an alarming forecast for home prices - one that politicians, policymakers, and homeowners across the land are sure not to like...Covering 100 U.S. metropolitan areas, Deutsche Bank in June forecast home prices would fall 14 percent through the first quarter of 2011, for a total drop of 41.7 percent.Haven't heard that phrase for a while - "affordability products".
The drop in home prices is fueling a vicious cycle of foreclosures as it eliminates homeowner equity and gives borrowers an incentive to walk away from their mortgages. The more severe the negative equity, the more likely are defaults, since many borrowers believe prices will not recover enough.
Homeowners with the riskiest mortgages taken out during the housing boom have seen the greatest erosion in equity, in part because they were "affordability products" originated at the housing peak, Deutsche said. They include subprime loans, of which 69 percent will be underwater in 2011, up from 50 percent in March, Deutsche said,
Of option adjustable-rate mortgages -- which cut payments by allowing principal balances to rise -- 89 percent will be underwater in 2011, up from 77 percent, the report said.
Regions suffering the worst negative equity are areas in California, Florida, Arizona, Nevada, Ohio, Michigan, Illinois, Wisconsin, Massachusetts and West Virginia. Las Vegas and parts of Florida and California will see 90 percent or more of their loans underwater by 2011, it added.
"For many, the home has morphed from piggy bank to albatross," the analysts said.
Yale economist Robert Shiller was on Bloomberg yesterday talking about the need for more action by the U.S. government to ward off a dreaded "double-dip" recession.
TOP STORIES
BoE takes big step to boost UK economy, holds rates - Reuters
Judge doesn't sign off on BofA, SEC settlement - AP
China Warns Developed Nations of Inflation, Currency Threats - Bloomberg
Goldman Sachs facing compensation, derivative inquiries - AP
High-Frequency Trading Grows, Shrouded in Secrecy - Time
US 'clunker' sales top 180,000- US DOT - Reuters
Senate to vote today on "cash for clunkers" - Reuters
The debt-inflation myth, debunked by UBS - FT AlphaVille
After millions of factory workers were sent packing late last year as manufacturing jobs were slashed following the collapse of global trade, the Chinese migrant labor market has made a miraculous recovery, creating almost 16 million jobs in just seven months!
At least, that's what the government implies in this report from CHINADaily:
China's jobless situation is "very grave", with more than 16.5 million people out of work due to the global crisis, a senior labor official said yesterday.If you didn't quite follow the math there, you are not alone - they've obviously learned a thing or two from watching the U.S. government's Bureau of Labor Statistics. Read more...The Ministry of Human Resources and Social Security, however, is "confident" that the unemployment rate will remain below 4.6 percent this year, which would still make it the highest level of unemployment since 1980, said Wang Yadong, deputy director of the employment promotion department.
...
The jobless rate does not include the country's 240 million migrant workers, who make up the main workforce in the labor-intensive industries of the coastal regions and are the most vulnerable during an economic slowdown.
"Less than 3 percent of the migrant workers are seeking jobs in cities," Wang said. This means that only 4.5 million migrant workers are unemployed, because the total number of the migrant workers in cities is about 150 million, including 10 million in the past six months, according to the ministry's figures.
It should be another fun-filled Friday morning this week when the BLS (Bureau of Labor Statistics) reports the July jobs data with markets likely to cheer the loss of another quarter million or so jobs as one more sign that the U.S. economy is improving.
This morning, ADP reported(.pdf) the loss of 371,000 private sector jobs last month, slightly higher than expected, as companies continued to pare staff, unsure of the timing or the strength of a rebound. The BLS and ADP data for the services sector are shown below.
ADP reported that the overall decline in July employment was the smallest since last October, proving once again that "when you've been down so long, even the loss of hundreds of thousands of jobs starts to look like up".
Just don't tell that to the millions of unemployed whose jobless benefits are about to run out.
Tim Duy's latest Fed Watch offering is worth a read:
Never underestimate the power of money. Especially lots of money coming on top of a cyclical recovery that is almost textbook at least as far as the timing is concerned. To be sure, you can question the sustainability of the recovery, the breadth or health of the recovery, the nature of job growth. I have questioned all repeatedly and fail to see that the conditions that have dominated the US economic story for the past 25 years - primarily, a continued reliance on consumer spending to propel growth - can continue in the face of massive household debt burdens and stiffer (or, more accurately, realistic underwriting conditions). But regardless of these concerns, evidence is clearly pointing to a shift in economic conditions for the better. Moreover, I suspect it will take at least two more quarters at a minimum - and maybe closer to two more years - before the more pessimistic or optimistic visions of the future will come into clear view. Until then, it seems likely the appetite for risk will continue to climb, and all the liquidity - liquidity fueled by new guarantees that massive financial institutions are too big too fail - has to go somewhere.As hard as it might be to believe, it appears the Fed and other central banks around the world are on their way to creating an even more massive bubble to replace the one that just burst. Read more...
Which is to say that no matter how pessimistic you are in the medium and longer term, you need to recognize the potential for massive moves in markets as risk taking perpetuates more risk taking. And as long as that risk taking flows in directions that do not fundamentally change the US jobs and, by extension, wage picture, it is difficult to imagine the Federal Reserve will do anything but let the party role on.
More news from China about the miraculous recovery in the nation's real estate market comes via this Bloomberg report.
Record bank lending in China drove average prices for new homes 6.3 percent higher in June in 36 large and medium-sized Chinese cities, according to government data. That gain came even as urban unemployment rose and wage growth for workers in Chinese cities slowed.As a point of reference, going back more than 20 years in the U.S. Case-Shiller 10-City Home Price Index, the largest monthly price increase was just over two percent in July 1988. Read more...“The government should do something to effectively control the speed of growth of the real estate market,” Han said. “The housing price in Shanghai is already too high. We must prevent excessive inflation of home prices in this market.”
Chinese banks made 7.37 trillion yuan ($1.07 trillion) of new loans in the first six months of 2009 as the government sought to bolster economic growth that slowed to the weakest in almost a decade in the first quarter.
It must be fun to sit around and think these things up...
TOP STORIES
Senate Poised to Add $2 Billion to ‘Clunkers’ - Bloomberg
Guard troops may be needed in troubled Ala. county - AP
Disarray hobbles U.S. financial regulation effort - Reuters
336,173 Foreclosure Filings Reported in June 2009 - RealtyTrac
Fed Plans to Build on Sham Stress Tests for Regulation - Naked Capitalism
Cash for Clunkers Is Just a Broken Windshield - Bloomberg
No quick end to China's fiscal stimulus - Reuters
Consumer bankruptcies jump 34% - CNN/Money
Sean Tucker files this report at Yahoo! Autos listing the top ten "Cash for Clunkers" trade-in models and the top ten models for new purchases, a list that is headed by the Ford Focus.
We bought a new 1993 Ford Explorer and kept it for nine years - never really had any problems with it. This was long before the SUV craze really took hold, in fact, we didn't really know how hip we were 16 years ago as there were only a few SUV models on the road.
The side-by-side photos shown below first appeared here back in January when it was learned that The Treasury Secretary used TurboTax on tax returns years ago, failing to report a significant amount of income, only correcting the mistake as his nomination hearing neared.
Seven months ago, these thoughts were offered:
I don't know. If you ask me, Tim Geithner still looks an awful lot like Billy Bibbit (played by Brad Dourif) from the 1976 classic One Flew Over the Cuckoo's Nest.After a disastrous first major press conference that suffered from an unwarranted build-up by newly elected President Obama, Geithner seemed to have righted the ship for a few months there up until recently.
| The Daily Show With Jon Stewart | Mon - Thurs 11p / 10c | |||
| Home Crisis Investigation | ||||
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Treasury Secretary Timothy Geithner blasted top U.S. financial regulators in an expletive-laced critique last Friday as frustration grows over the Obama administration's faltering plan to overhaul U.S. financial regulation, according to people familiar with the meeting.The thought of Geithner laying into this group during a Washington D.C., oak table setting is odd enough, but with the absence of a video tape, my mind naturally avers to the imagery of Billy Bibbit delivering the expletive-filled tirade.
The proposed regulatory revamp is one of President Barack Obama's top domestic priorities. But since it was unveiled in June, the plan has been criticized by the financial-services industry, as well as by financial regulators wary of encroachment on their turf.
Mr. Geithner told the regulators Friday that "enough is enough," said one person familiar with the meeting. Mr. Geithner said regulators had been given a chance to air their concerns, but that it was time to stop, this person said.
Among those gathered in the Treasury conference room were Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro and Federal Deposit Insurance Corp. Chairman Sheila Bair.
Friday's roughly hourlong meeting was described as unusual, not only because of Mr. Geithner's repeated use of obscenities, but because of the aggressive posture he took with officials from federal agencies generally considered independent of the White House. Mr. Geithner reminded attendees that the administration and Congress set policy, not the regulatory agencies.
A short time ago, the following appeared over at Matt Taibbi's blog, now it's gone. What you see below is from an RSS feed, a mechanism that is often slow to update deleted material. Recall that this follows yesterday's dust-up between Taibbi and CNBC's Charlie Gasparino.
Thanks, Charlie GasparinoInteresting... Read more...A bigger issue lost in all the back-and-forth about the firm’s connections, trading habits, and where Lloyd Blankfein was the night of September 15, 2008 when Lehman went bust, is that the American taxpayer is right this very moment subsidizing Goldman’s risk taking. That’s a scandal no one seems to want to talk about.A lot of people are writing to me wondering when I’m going to respond to Charlie Gasparino, who took time out between martinis recently to take a shot at me in the above column.
via Stop Blaming Goldman Sachs - The Daily Beast.
As it happens I was already beginning work on a chapter on CNBC for my next book, as in recent weeks I’ve had several Wall Street executives call me to complain about certain practices at that network that should probably be shared with the public. So I’m working on that, and I think that is the appropriate forum in which to talk not only about Gasparino but about the other excellent reporters in the CNBC stable, who as we all know did such a terrific job standing up to their advertisers and exposing the dangers that lay ahead in the years leading up to the financial crisis.
In the meantime, here’s a little taste of the tactics CNBC uses to suck up to its potential interview subjects. The network, for instance, likes to brag to its pals on Wall Street about what a good job it does beating up on the poor. Here’s an email Dennis Kneale sent to a buddies list that includes some Wall Street executives:From: Kneale, Dennis (NBC Universal)Beneath which Kneale included a link to a clip in which he argues, basically, that the poor are not suffering because 65% of poor families own their own washing machine, according to some idiotic study or other. Hell, with stats like that, who needs to actually interview people?
[mailto:Dennis.Kneale@nbcuni.com]
Sent: Wednesday, July 22, 2009 6:12 PM
To: Kneale, Dennis (NBC Universal)
Subject: fight night at 8pm on cnbc
hey guys, thought i’d show you a politically correct moment on my show last night: the poor are better off than you think. take a look! best, dk
Anyone else out there who has CNBC stories is invited to write in, especially if you’ve had dealings with the network’s producers.
Spotted over at Calculated Risk, Jim the Realtor tours tony Encinitas Ranch north of San Diego examining how quickly high-end home prices are falling.
From the story Can China Save the World? in the the current issue of Time Magazine come the following alarming China statistics for the day.
Is it my imagination or does the estimate of the amount of new lending that has found its way into stocks and real estate just keep going up?The speed and relative success so far of China's stimulus stands in stark contrast with that of the U.S. According to a recent study by the World Bank, Beijing's government spending will generate more than 80% of the country's overall economic growth this year.
...
There are certainly signs that some aspects of China's recovery are ephemeral. Part of the reason China's stock market has soared is that Chinese companies have received so much cheap financing that they have dumped proceeds into the equity market for lack of better alternatives. Andrew Barber, Asia strategist at Research Edge, a New Haven, Conn., investment-research firm, estimates that up to 30% of new bank lending this year has wound its way into equities.
It's a good thing the U.S. government owns a printing press and knows how to use it because, from the looks of these revenue curves (hoisted from this AP story), the chance that new borrowing will cover all the nation's spending grows slimmer by the day.
A curve for the government's recently increased spending added to the ones for revenue above would make for an even more dismal looking chart.
Some details:The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation's plate and struggling to find money to pay the tab.
Under the new worst case scenario for social security (which may already be outdated), the "trust fund" goes into deficit in just four years and runs out of money in 2029.
The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.
Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.
The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression.
"Our tax system is already inadequate to support the promises our government has made," said Eugene Steuerle, a former Treasury Department official in the Reagan administration who is now vice president of the Peter G. Peterson Foundation.
"This just adds to the problem."
The current thinking is that we'll "grow" our way of our current problems...
TOP STORIES
Can China Save the World? - Time
Federal tax revenues plummeting - AP
BofA Among Worst for U.S. Mortgage Modifications - Bloomberg
BofA settles Merrill bonus case with SEC for $33 mln - Reuters
How I Learned to Stop Worrying & Love Goldman Sachs - Max Keiser
The New Financial Media - Real Property Alpha
Few Gains, Big Losses - Wash. Post
Hunky Dory - Kunstler, CFN
Anyone asking this particular question about the housing market in recent days would stand a pretty good chance of winding up here for this story from last week. 
Interestingly, that nine month old LA Times story in position number three tells of San Diego economist Ryan Ratcliff who had just bought a foreclosure for about 25 percent off the 2006 sale price. A quick check at White Pages and Zillow show that his assessment of "close enough that I'm comfortable" for the housing market bottom is holding up OK so far.
Charlie Gasparino's take-down of Matt Tiabbi and his Rolling Stone article about evil Goldman Sachs contains the following paragraph about getting the blessing of the ratings agencies for subprime mortgages and shorting those same securities.
The childish "try proving that one" rebuttal to the securities fraud allegation aside, it is the logic regarding the ratings agencies that escapes me here...Later, he went as far as to say that Goldman likely committed "securities fraud" because it later shorted the same mortgage bonds tied to subprime loans after it knew that billions it underwrote all those years were going bad (try proving that one), and that Goldman somehow forced the bond raters—Moody's, Standard & Poor's, and Fitch—to place all those Triple-A ratings on subprime bonds. (Given the huge fees for rating mortgage debt, I know for a fact that Goldman hardly had to twist any arms on this one.)
It hasn't taken long for the global financial system to begin creating new and, perhaps, even more dangerous bubbles in the aftermath of last year's market shellacking. If this story in the Associated Press is anywhere close to being an accurate portrayal of the mood in China, we're in for quite a ride in the period ahead.
China's stimulus-fueled stock boom alarms BeijingWe'll see soon enough how adept the Chinese government is in dealing with all of this.The middle-aged crowd in the packed Guosen Securities office jostle around buzzing printers that spit out receipts for their share buys, hoping to cash in on China's stimulus-fueled stock market boom.
"The central government has to fulfill their promise of 8 percent economic growth," said Wu Jun, 62, a retired civil servant who invested part of his life savings of 50,000 yuan ($7,300) and lives on a 2,000 yuan-a-month ($290 a month) pension. "They'll come up with measures to keep the market in good shape."
But while investors expect the market — up more than 80 percent this year — to keep rising, Chinese leaders are alarmed. They worry that too much of the $1 trillion lending binge by state banks that paid for China's nascent revival was diverted into stocks and real estate, raising the danger of a boom and bust cycle and higher inflation less than two years after an earlier stock market bubble burst.
What comes next in this sequence should be obvious, however, its timing is anything but.Economists say as much as 15 percent or 1 trillion yuan ($145 billion) of that money has been diverted into stocks and real estate despite government rules that say banks should lend only for productive investment.This is not likely to end well, though it may take quite some time to discover that...
The Finance Ministry says it found some companies played the market with money borrowed for stimulus projects. It gave no details but Chinese companies frequently are accused of violating China's already lax financial controls by diverting money from borrowing or their core business into stocks in hopes of making a quick profit when the market is rising.
...
Thousands of investors have jumped into the market. The number of new trading accounts soared to a weekly record of 108,932 last week, according to the Securities Depository and Clearing Corp., an arm of China's two stock exchanges.
The corporation did not report a total for the number of individual Chinese investors but said they owned 127.8 million trading accounts as of the end of June — the equivalent of one for every 10 of China's 1.3 billion people.
The government is trying to put the brakes on lending without knocking down stock prices.
China's bank regulator spooked investors last week by issuing a statement reminding institutions not to finance speculation. But after that caused the market to plunge by 5 percent, the central bank issued its own statement promising investors its "relaxed monetary policy" would continue.
...
Wang Zhijun, a 58-year-old retiree, calls himself a market veteran and says he lost more than 10,000 yuan ($1,400) in the last stock plunge. He said he is more cautious this time but exuded optimism about the market benchmark's continued rise.
"Maybe next year it can go as high as 8,000 points," or more than double the current level, Wang said as he joined the throng in Guosen Securities. A friend standing nearby said that was unlikely, and Wang shot back, "5,000 at least."
Today's "must-read" housing story comes via this Wall Street Journal article($) about how the high-end has been a noticeable non-participant in the recent improvement in home sales in most of the nation's real estate market.
High-End Homes Frozen Out of Budding Housing ReboundAmid all the confusing press reporting and realtor talk about the housing market these days there are two very important sets of factors that are all too easily overlooked by the population in general - sales volume vs. price direction and low-end versus high-end.
Housing is fast dividing into two markets: Sales of low- and moderately priced homes are picking up and values have stopped falling in some parts of the nation. But on the upper end, sales remain mired in a deep slump and price declines are expected to accelerate.
Signs of the divide are visible across the country, including in suburban Chicago. In middle-class Schaumburg, Ill., which had a median income of $65,000 in 2007, sales were up 41% in June from the depressed level of a year earlier and bidding wars have broken out on some properties. "I can't even tell you how many I've been in over the last two months," says Joe Stacy, a local real-estate agent.
But 25 miles away in the affluent town of Kenilworth, with a median income of $230,000, home sales have stalled. While there are 65 homes on the market, just 13 have sold this year. "We're extremely oversupplied," says Sherry Molitor, a local real-estate agent. "Sellers are struggling to realize that we're back to 2001-02 prices."
While subprime mortgages sparked the first round of housing problems two years ago, now "troubles are lurking further up the food chain," says Joshua Shapiro, chief U.S. economist at MFR Inc. White-collar job losses have accelerated while more adjustable-rate loans to prime borrowers are resetting to higher payments. "You put all that together, it leads me to believe that the next leg down on home prices is going to come from the top," he says.Around here (Bend, Oregeon), the supply of unsold homes priced at over $400,000 stretches into the years - and not just one or two years.To be sure, the affluent housing market is substantially smaller than the mass market. Sales of existing homes priced over $750,000 accounted for 2.3% of all sales in the first quarter of this year, compared to 4.4% of the housing market in 2007, according to the National Association of Realtors.
Still, the distress in high-end market has implications for consumer spending: the top 10% of U.S. households in terms of income accounted for 23% of consumer spending in 2007, according to government statistics. As those households watch their home equity evaporate, they are more reluctant to spend on housing upgrades or other items.
Inventory of expensive homes is rising. Overall, the inventory of unsold homes in June was enough to last 9.4 months at the current selling pace, down from 11 months a year ago, according to the NAR. But the supply of unsold homes priced above $750,000 swelled to around 17 months in June, up from a 14.5-month backlog one year ago. A recent forecast by analysts at J.P. Morgan Chase & Co. said it would take until at least 2012 for the expensive-home market to recover and that peak-to-trough declines could surpass 60%, compared to 40% for the rest of the market.
Defaults are rising, too. Among prime mortgages, jumbo mortgages are now leading delinquencies and defaults and are the fastest-rising category for defaults of all types of mortgages. The rate of 60-day delinquencies on prime-jumbo mortgages jumped to 7.4% in May, from 4.5% in November, according to First American CoreLogic. By comparison, 60-day delinquencies on prime-conforming loans reached 4.9% in May, from 3.6% in November.
A recent survey by the NAR found nearly three-quarters of real-estate agents said buyers were purchasing smaller houses due to tighter credit requirements. "We're in a 'trade-down' environment for the first time since the 1930s," says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.
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