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The Mess has Moved!

Friday, March 26, 2010

Please update your bookmarks, RSS readers, or any other means that you might have used to read what is written here because The Mess That Greenspan Made has moved to:

It will look and feel pretty much the same, however, the URL is much shorter and it's a lot easier for me to tell people how to find it. The new RSS and Twitter feeds are as follows:

I have no intention of abandoning this blog as it contains five years worth of reference material that, hopefully, will persist for a very long time. Unless something goes haywire at the new blog (and, yes, there is reason for concern after this 2007 debacle), I won't be posting anything new here again, but it will likely generate new comments for years to come (as is the case for the Hummer post back in 2005).

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Five years and a new mess!

It's been exactly five years since publication began at this blog and, if all goes well, this will be the second-to-last post at this location since a new and better self-hosted blog has been taking shape over the last month and, quite frankly, your humble scribe has long since grown tired of double-posting everything.

Rest assured that the name will remain the same, however, the URL is shorter and it is a WordPress blog instead of a Blogger blog. After a few rough patches early on, Blogger has been quite good - very reliable and easy to use - but, after working with WordPress in recent weeks, it has become clear why everyone likes it so much. Anyway, here it is:

The new URL is: and the next (and last) post that you'll see here at this blog will have additional information about RSS, Twitter, and the like, though most of you can probably figure that stuff out on your own.

As for the five year anniversary, the previous item about our old rental house brought back some memories of working a full-time software job, writing the blog, and launching the investment website back in Southern California.

I must say, I'm happy to be out of there, though, I do sometimes miss the weather.

As has become the custom around here on this day, looking back to March 26th, 2005 we find this very first post on a Stephen Roach commentary, one that still rings true today.

An appropriate first post - Stephen Roach hits another home run with his latest missive The Test. The last paragraph serves as an excellent premise for this blog:
"It didn’t have to be this way. The big mistake, in my view, came when the Fed condoned the equity bubble in the late 1990s. It has been playing post-bubble defense ever since, fostering an unusually low real interest rate climate that has led to one bubble after another. And that has given rise to the real monster -- the asset-dependent American consumer and a co-dependent global economy that can’t live without excess US consumption. The real test was always the exit strategy."
Yes, it's easy on the way up. Ever increasing liquidity to meet every emerging problem and everyone gets rich - not rich in the old sense, of course, with higher real income and savings, but through higher asset prices for stocks and homes.
"Asset markets around the world are now quivering at just the hint of an unwinding of this house of cards. And they quiver with the real federal funds rate barely above zero. What happens to these markets and to an asset-dependent US economy should the Fed actually complete its nasty task of taking its policy rate into the restrictive zone? "
All aquiver, that's right. Paul Volker must be so proud of his successor ... about to bring down the whole house of cards with quarter point increases to the Fed Funds rate in the low single digits.
"I still don’t think America’s central bank is up to the task at hand. In the face of disruptive markets or growth disappointments, this Fed has repeatedly opted to err on the side of accommodation. I suspect that deep in its heart, the Federal Reserve knows what’s at stake for the US -- and for the world -- if the asset-dependent American consumer were to throw in the towel. "
This is my central belief on this issue, and the motivation for this blog - that given the choice of some economic pain and a long slow death by inflation, the Fed will opt for the latter. It will never be able to raise interest rates like Paul Volker did, in order to put this fiat currency system back on a track that is sustainable for another generation or two - instead, we will continue to swim out to the deep water and hope for the best.
Recall that, at the time, short-term rates had just begun to rise from 1.0 percent in mid-2004 and the housing bubble was entering new and more dangerous phases about every six months. This five-year old commentary seems all the more strange as many people are already talking about short-term rates beginning to rise once again sometime in the next year.

Dan, feel free to comment...

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Our old SoCal rental house is for sale

In a bit of irony that is quite appropriate for today, the five-year anniversary of this blog (more on that in an hour or so), it looks like the rental home in Southern California - where we spent more than three years during the middle of the last decade as the housing bubble reached its peak and where this blog was first written - is now up for sale.
IMAGE If memory serves, the owners paid $555K for it in late-2003 while it was still under construction and we moved in not long after, following the sale of our house a mile away.

That was back in the days when homebuilders could, basically, do as little as possible and people would still come with their "loan pre-approval" papers to buy real estate.

In this case, there was no landscaping provided, no window coverings, and not much of anything else, so the owners must have put about $50K into it at the start, bringing their cost basis up to around the current asking price of $599K which is about what Zillow says its worth.

You probably shouldn't feel sorry for the owners though. Not only are they very nice people but they own a ton of property in Santa Barbara and the only reason they bought this one was to do one of those tax exchange deals to reduce the tax owed on properties they sold up the coast where prices had gone parabolic.

I remember looking up houses in Santa Barbara on back then to see that you could get a 70-year old, 900 square foot two bedroom house - something like this - for about a million dollars. They're about half price now, which still seems way too high.

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Government should just get out of the way

Well, it looks like many more billions of dollars will be spent to aid the nation's housing market in what is, in large part, an ultimately futile attempt to keep home prices above where the market would like to take them.

Freakishly low interest rates and $8,000 or more in tax credits for homebuyers apparently hasn't done the trick, so the White House today is launching a new program to help homeowners who can't afford to stay in their house by lowering payments through government subsidized financing and, in some cases, reducing mortgage balances.

Not long ago, a commenter here noted the following:

I feel that another leg down is inevitable. I also think the government will try to intervene which may keep us in limbo for longer than necessary. The end could come and we could get back to business in a more stable, albeit lower price level, market if the government would just get out of the way. It is much harder to sell or rent in a market that is still trending downward or where there is a lot of lingering doubt. If we could reach a bottom and have prices stabilize on their own for a few months without any government action, it would become obvious to all that the worst truly is behind us and then all the pent up buying could come back. But as long as the market is being propped up superficially, the skeptics will continue to wait on the sidelines making recovery impossible. We need to bottom and start over so we can develop business models that will work. With the government involved and more bad news waiting in the wings, it is impossible to make long-term plans. The economy will just have to wait until the government gets out of the way, IMHO.
Unfortunately, that doesn't appear to be one of the options now being considered...

While I'm as sympathetic as anyone about a family down on their luck after job losses and a collapsing real estate market, this misplaced notion of the sanctity of homeownership and how people losing their houses to foreclosure is somehow such a terrible tragedy is ultimately doomed to make things much worse than they would otherwise be.

The vital lesson that, apparently, has not yet been learned through previous efforts at bailing out homeowners is that most of these people had no business buying the place in the first place and, while the feeling that "Banks got their bailout so I want mine too" is both understandable and pervasive, it is no reason to make a bad situation even worse.

Caroline Baum has some similar thoughts in today's column at Bloomberg:
Between them, the federal government and central bank can lower mortgage rates, modify mortgages, use their power to get private lenders to modify mortgages, and create incentives to move inventory, such as the first-time homebuyer’s tax credit.

What they can’t do is manufacture enough artificial demand for an asset that was artificially inflated to begin with. Prices will have to fall, which is how supply is allocated in a market economy. (An occasional reminder is in order given the current spend-money-to-save-money mindset.)
I’m all for charity and doing what makes sense. If a lender decides it’s in his self-interest to reduce the loan balance on underwater or delinquent mortgages -- if modification is cheaper than foreclosure -- that’s between management and shareholders.

With government programs, those who lived within their means, who bought a home they could afford, are being asked to pay for the mistakes of others. Bankers and insurance companies weren’t the only ones who were greedy.
Barry Ritholtz also had some thoughts on this, arguing we need more foreclosures, not less:
I have been dismayed about the latest actions out of Washington and Wall Street. The banks are now pushing all manner of mortgage mods and foreclosure abatements. These are little more than “extend & pretend” measures, designed to put off the day of reckoning. They are not only ineffective, they are counter-productive. They reward the reckless and punish the responsible, and create a moral hazard. Worse yet, they penalize middle America for the sake of giant Wall Street banks.

It may sound counter-intuitive, but the best thing for the nation (but not necessarily the banks) is to allow the foreclosure process to proceed unimpeded. We need more, not less foreclosures.
We should allow the real estate market to experience a healthy price normalization process. Even though home prices have fallen dramatically, they have yet to reach their historical means relative to income or the cost of renting. This is to say nothing of the usual careening past the median towards under-valuation that typically follows a massive mis-allocation of capital.
Yes folks, this is how you get a "lost decade", by again and again trying to: a) prop up assets that desperately want to return to levels supported by market fundamentals; b) keep insolvent banks solvent; and c) sustaining the misguided belief that a 70 percent homeownership rate is or ever was a desirable goal.

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More gold for the gold ETF

As compared to activity last year at this time it wasn't much, but recent additions to the gold holdings at the SPDR Gold Shares ETF (NYSE:GLD) are certainly a move in the right direction if ETF demand is to again play any sort of major role in the gold market.
IMAGE The "tonnes in the trust" rose by more than nine tonnes in just the last few days (circled in red) to 1125 tonnes, within striking distance of the all-time high set early last June at 1135 tonnes and then nearly equaled in late-December. The relative lack of ETF demand since the surge in early-2009 has been cause for concern and a new all-time high would certainly go a long way in allaying fears that investors have lost interest in this sector.

Full Disclosure: Long GLD at time of writing

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Friday morning links

EU Steers Greece to IMF, Pledges Loans as Last Resort - Bloomberg
Obama To Order Lenders To Cut mortgage Payments For Unemployed - HuffPo
JPMorgan, Lehman, UBS Named as Conspirators in Muni Bid-Rigging - Bloomberg
Whistleblower Speaks Out On Silver Market Manipulation, Reports to CFTC - Jesse's Cafe
Government Authorities are Looking Out for Themselves, As Should Everyone - Aucontrarian
Lower Home Prices Can Fix What Government Can’t - Baum, Bloomberg
Economics focus: Tricky Dick and the dollar - Economist
The US default-risk meme - Salmon, Reuters

Have these these links delivered to your inbox every weekday.

Oil Rises on Weaker Dollar, Asia Demand - Bloomberg
Gold rises as euro bounces; physicals active - Reuters
Thursday's session amounted to a 'key reversal day' - MarketWatch
Christian: CFTC Position Limits For Metals A ‘Bad Idea' - Hard Assets Investor
The Value of Gold Is as Artificial as Paper Money - Alternet
The history of commodity booms and busts - VoxEU

GDP Up Less Than Thought as Corporate Profits Dip - CNBC
What computer science can teach economics - MIT News
130,000 in Calif. due to lose jobless benefits - O.C. Register
Don’t Be Shocked by Jobs Boom Next Week - WSJ
Not a textbook rebound - EconBrowser

Currency controls and Gresham's law - Economist
Europe agrees IMF-EU rescue for Greece - Telegraph
China CEOs Join Obama in Supporting Yuan Appreciation - Bloomberg
Greece is likely to need far more financial aid than seems to be on offer - Economist
Europe puts the loaded gun on the table but no bailout - Credit Writedowns
Japan consumer-price data show deflation continues - MarketWatch
Chinese Yuan Will Quadruple Over Time: Rogers - CNBC
Crisis, What Crisis? - Economist

More Foreclosures, Please . . . - The Big Picture
Gov. signs new homebuyer tax credit - O.C. Register
Declining Mortgage Performance in Q409 Means More Foreclosures Ahead - Housing Wire
Cash Dwindling For No-Money Down Home Loan Program - WSJ
Half of U.S. Home Loan Modifications Default Again - Bloomberg

Countdown: Fed MBS Purchase Program - Calculated Risk
Bernanke: Fed Likely to Sell Some of Its Mortgages Eventually - WSJ
Alan Greenspan's Financial History for Lobotomy Victims - HuffPo
Fed's balance sheet rises to record in latest week - Reuters

Bank of China executive salaries halved - MarketWatch
Bono And Prince's Financial Woes Revealed - Stop the Presses!
DNA identifies new ancient human dubbed 'X-woman' - BBC
Docs Remove Boy's 11 Extra Toes And Fingers - Sky News


Peter Schiff on Alan Greenspan

Thursday, March 25, 2010

Left sitting in my draft folder for a few days are these thoughts from Peter Schiff about the former Fed chairman following his 48-page defense of monetary policy last week. Now seemed like a good time to hoist it up to the main page.

Peter starts off by noting, "He's not just the worst Fed chairman we've ever had, he's the worst American we've ever had" and then works himself up into a little bit of a lather from there on such subjects as the impact of long-term vs. short-term rates during the housing bubble and other topics.

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Alan Greenspan on Social Security

Toward the end of this New York Times story about the Social Security "trust fund" experiencing net withdrawals this year for the first time are a few words from former Fed chairman Alan Greenspan about the system that he helped "fix" back in the early 1980s.

Although Social Security is often said to have a “trust fund,” the term really serves as an accounting device, to track the pay-as-you-go program’s revenue and outlays over time. Its so-called balance is, in fact, a history of its vast cash flows: the sum of all of its revenue in the past, minus all of its outlays. The balance is currently about $2.5 trillion because after the early 1980s the program had surplus revenue, year after year.
Mr. Greenspan recalled in an interview that the sour economy of the late 1970s had taken the program close to insolvency when the commission he led set to work in 1982. It had no contingency reserve then, and the group had to work quickly. He said there were only three choices: raise taxes, lower benefits or bail out the program by tapping general revenue.

The easiest choice, politically, would have been “solving the problem with the stroke of a pen, by printing the money,” Mr. Greenspan said. But one member of the commission, Claude Pepper, then a House representative, blocked that approach because he feared it would undermine Social Security, changing it from a respected, self-sustaining old-age program into welfare.
Recall that payroll taxes were raised back in 1983 and the Federal Government has been spending the Social Security surplus every year since that time, in the process making the government's annual budget look a lot better than it actually is. This no doubt helped to make the former Fed chairman quite popular with elected officials, that is, until the whole financial system melted down a couple years ago.

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Potential shadow inventory now at 18 million?

Stan Humphries, the chief economist at talked to Aaron Task of Tech Ticker and inadvertently ended up generating the somewhat sensational headline that now accompanies the related story at Yahoo! Finance, a headline that has been embellished a bit above as detailed below. (Hopefully it's not too late already, but that Tech Ticker story begins playing the video automatically, something that I, for one, find quite annoying).

With the likely exception of real estate agents who are now working with hesitant buyers, no one really disputes the fact that there are a ton of houses that are likely to come on to the market over the next year or two both from distressed sales and from sellers who think the market has recovered enough that they'll get a decent price.

But, in the interview, Humphries was referring to the second category only and the 10 million figure came from a simple calculation that, based on a recent survey, eight percent of homeowners are very likely to sell their property if market conditions improve.

Take that potential 10 million and add it to the potential 8 million homeowners who are likely to lose their home through the foreclosure process as detailed in a number of recent reports on the "foreclosure pipeline" and you get a whopping 18 million for the shadow inventory.

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Californians to get $18,000 to buy a house

More evidence of how wacky things have become in today's real estate market comes via the overlap of the expiring Federal homebuyer tax credit of $8,000 with local versions of the same, in particular the one in California where another $10,000 in government money is being offered as detailed in this item at the WSJ real estate blog.

The $200 million program, split between first-time buyers of existing homes and new units, should keep the Golden State’s sales moving along post spring-selling season.

But, it might not get off to a peaceful start on May 1: Get ready for a stampede early on as some buyers rush to overlap with the federal tax credit that’s dangling as much as $8,000 to buyers. (Yes, that’s up to $18,000 for buying a house.)

For the federal incentive, contracts must be inked by April 30, while closings have to happen by June 30. The California credit covers closings on existing or new homes on or after May 1, leaving a short window for double dipping.
Since there is a dollar limit rather than a time limit for the California tax credits, don't be surprised if the same kind of mania develops as was seen last summer for the "Cash for Clunkers" program. Dangling not just $8,000 but a whopping $18,000 in front of someone who might be sitting on the fence is sure to have an extreme mood-altering affect.

Of course, unless either or both of the tax credit programs are extended, look for sales (and prices) to plummet after all the free money has run out.


The CFTC, metals trading, and prophylactics

The CFTC (Commodities Futures Trading Commission) is meeting today to discuss the trading of futures and options in metals markets and the possible use of prophylactics, but not the kind of prophylactics that you were probably thinking of as a simple search on "CFTC prophylactics" reveals this term is used frequently to describe action that the group might take to protect market participants from one thing or another.

You can watch or listen to the proceedings here and the two charts below showing the volume of gold and silver trading on exchanges around the world are from first panel that just included two CFTC officials. The second panel is now underway.
IMAGE As shown above, most of the gold futures trading is done in London via the LBMA (London Bullion Market Association), the world's leading gold market for centuries.

In contrast, more than half of the silver futures trading occurs at the COMEX in New York as shown below where JP Morgan traders have a big presence.
IMAGE It's possible that things could get interesting this afternoon as GATA Chairman Bill Murphy will be part of a panel discussion and, according to this BNN report from late yesterday, he may have a surprise or two in store in the form of someone who has come forward to reveal some sort of untoward market activity that might be aimed at suppressing prices.

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Thursday morning links

Merkel Sets Greek Terms, Calls IMF-EU Aid Last Resort - Bloomberg
European Central Bank Blasts Merkel on Greece - Spiegel Online
US CFTC faces naysayers on metals trade limit idea - Reuters
Behind Consumer Agency Idea, a Tireless Advocate - NY Times
California’s Tax Credit: Will Home Buyers Stampede for $18,000? - WSJ
Bank of America sued for not modifying mortgages - Reuters
Brown's Bottom Is an Enormous Issue In the UK - Jesse's Cafe
Why this is a rich man's recovery - MSN

Have these these links delivered to your inbox every weekday.

Oil inches up to near $81 as US crude stocks rise - AP
Gold firms as euro steadies; EU summit eyed - Reuters
Treasury Five-Year Notes Fall Most Since August After Auction - BusinessWeek
Business Booms and Depressions Since 1775 - The Big Picture
The Yen Collapse Has Only Just Started - Zero Hedge
Treasuries Rise as Surge in Yield Presents Buying Opportunity - Bloomberg0

New Jobless Claims Fall as Employment Picture Improves - CNBC
Social Security to See Payout Exceed Pay-In This Year - NY Times
New home sales stumble 2.2% in February to hit fresh low - LA Times
Study: Retired couple will need $250,000 for health care - AP
Is Inflation Coming Back? - Time

Germany: Any Greek bailout must bring in IMF - AP
Sale of residential land temporarily halted - China Daily
Dubai Offers Dubai World $9.5 Billion in New Funds - Bloomberg
Merkel May Emerge Victorious in EU Battle over Greece - Spiegel Online
Misconceptions on China's role in financing the U.S. deficit - MarketWatch
Toyota to realign Japan manufacturing ops: report - Reuters
Budget 2010: Failure to tackle deficit will be Labour's legacy - Telegraph
Budget 2010: The painful truth that Alistair Darling failed to mention - Telegraph
Geithner: China letting Fed set yuan's path - CNN/Money

More Markets Head Into Double Dip - ZillowBlog
How Bank of America’s Mortgage Write-Down Program Works - WSJ
Housing's Big "Shadow": Up to 10M More Homes Could Be for Sale - Tech Ticker
BofA to Reduce Principal in HAMP Mortgage Modifications - Housing Wire
Will Treasury Adopt a Mortgage Plan Like BofA's? - Olick, CNBC

Kohn: Research needed on combating bubbles - AP
The Fed as a Confidence Game: What They Were Saying in 2007 - Mises
Fed exit fraught with dangers, monetary experts say - Reuters
Fed’s Hoenig Endorses Volcker Rule, Leverage Limits - Bloomberg

New York bar to set menu prices like stocks - Reuters
Octomom gets foreclosure reprieve - O.C. Register
Clusterstock Editor John Carney Fired by Business Insider - Village Voice
An Open Letter to Dr. Laura Schlesinger - Naked Capitalism
Light Bends Matter, Surprising Scientists - LiveScience


Inflation, asset bubbles, and interest rates

Wednesday, March 24, 2010

The lone dissenter at the last two Fed meetings, Kansas City Federal Reserve President Thomas Hoenig, talks to Fox Business news about, among other things, the perils of short-term interest rates that are left "too low for too long".

Hoenig compares the last decade to the early 1970s noting, "we have had an extended period of negative real rates and we know what followed in the 70s. Now that's not necessarily what's going to follow now, but it is a concern."

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What if it was all just a big bubble?

One of the things that many people go through their entire lives without ever realizing is that conditions haven't always been the way they remember them to be. Due to the length of a typical lifetime and the number of those years that individuals are productive, it's reasonable to think that someone in their mid-60s could retire today and look back at the last 40 years only to conclude that what they just experienced was normal.

But, what if the last 40 years were anything but normal?

What if, in the world of finance and economics, it was all just a big bubble?

One look at the chart below from this recent Wall Street Journal story and it becomes instantly clear that stock market valuations over the last twenty years have been nowhere near normal. In fact, what were deemed "generational lows" for valuations at the peak of the financial market crisis a year ago look like nothing of the sort over the broad sweep of time.

IMAGE And when you consider what happened in the natural resource sector in the 1970s and then what followed in Japan in the 1980s, it's quite easy to come to the conclusion that, since the world left those last vestiges of sound money when Nixon closed the gold window in 1971, we live in a radically different world.

While some quickly dismiss ideas like this, reminding anyone who will listen that "correlation is not causation" while citing technological advances made during this time as just cause for the changes we've seen in financial markets, breakthroughs such as railroads and electricity a hundred or more years ago likely had a bigger impact on the world than computers, communication, and medical technology more recently.

The sad possibility that so few consider is that, what has happened in the last 40 years probably has much more to do with the financial system, credit, and debt than the technological advances themselves.

A brief stroll through history might be helpful in seeing just how accustomed we've become to bubbles and, as if we don't know it already, how dangerous the financial world has become.

The Era of Disco and Inflation

Having survived World War II and emerged as the only superpower in the West, the U.S. navigated the early years of the Cold War with aplomb before embarking on Great Society spending in the 1960s and then positioning themselves for defeat in Vietnam only to go stumbling into the 1970s with, perhaps, its best years already behind it.

The decisions made in the 1960s set off the first series of financial market bubbles during the previous secular bull market in the natural resource sector, an incompetent Arthur Burns at the helm of the Federal Reserve bending to political will and feeding an extended bout of inflation never before seen in the U.S.

As U.S. energy demand was soaring and U.S. oil fields were peaking, crises in the Middle East caused multiple oil price spikes and, by the end of the decade, a full-blown commodities bubble was in process.

The oil price moved from an inflation-adjusted $15 or $20 a barrel to $100 a barrel or more late in the decade and the gold price rose from its former $35 peg to a peak of over $800 just after the decade came to a close.

This was the first of many recent financial market bubbles in a new era of pure fiat money all around the world where rising and collapsing asset prices became an increasingly dominant theme, interrupted only briefly by the early-1980s "tough love" by a new, stern Fed chairman.

Not the Reagan Revolution You Thought

Many think that the main force behind the "Reagan Revolution" in the early-1980s was the embrace of free markets and a tilt toward conservatism, but, this only tells part of the story. Aided by the advancement of computer technology, credit markets in the U.S. and in other parts of world expanded by leaps and bounds and both public and private debt began to grow more quickly, bolstering economic growth.

Fed chairman Paul Volcker induced two debilitating recessions during Reagan's first few years, breaking the back of wage-driven inflation that came before the waves of cheap foreign imports and the removal of actual costs of homeownership (replaced with the nefarious "owners' equivalent rent") in the consumer price index that would forever distort the government's measure of inflation.

Bond markets saw their first large-scale excesses and the stage was set for a two-decade long bull market in U.S. stocks. Meanwhile, a housing "warm-up" bubble inflated in some parts of the country, aided by a Savings and Loan crisis that now looks almost quaint in comparison to the more recent banking crisis.

But, the real action in the 1980s was in Japan where both real estate and stock prices rose to heights that, even in comparison to recent events, are still quite impressive. As always seems to be the case, too few questions were asked during the inflation of the bubble and too few lessons were learned after it burst.

By the end of the decade, people everywhere were already becoming conditioned to expect financial market bubbles - periods of rapid price increases and heady economic growth that would only accelerate in the decades ahead.

Another "New Economy" Era

Major changes in retirement planning driven by the growing use of 401k plans, ongoing advancements in personal computing, and a rapidly growing financial services industry led to the greatest expansion in stock ownership in history during the 1990s and the U.S. was primed for a major stock market bubble of its own.

Widespread use of the internet by corporations early in the decade led to a similar adoption for residential users and the great broadband infrastructure roll-out provided high speed internet access to a growing number of individuals. Meanwhile, NASDAQ stocks began to climb at a dizzying pace.

Fed chairman Alan Greenspan, who had set the tone early in his tenure through both word and deed following the 1987 U.S. stock market crash, retreated from mid-decade "irrational exuberance" warnings to embrace the "New Economy" along with its new, higher stock prices.

After being credited with "saving the world" during the 1997 Asian financial crisis, the man once referred to as "the greatest central banker ever" watched as a new century was ushered in and NASDAQ stocks soared past the 5,000 mark only to find that this bubble too would finally meet its pin.

In what would soon become a recurring nightmare, many retirement dreams were dashed as investors of all stripes reflected on what they had just seen. Though Japan had experienced much the same thing the decade before, this was the first time that the American people participated broadly in the inflation and bursting of a major asset bubble and many of them were chastened. Unfortunately, many others were emboldened.

Bursting Bubbles Everywhere

In a previous era or under different circumstances, the 2000 stock market crash might have been followed by a long period of bubble-free reflection on what had just transpired as millions of Americans looked back at how they were so caught up in such ridiculous ideas as, but, that was not to be.

In a system of money and credit where there is virtually no limit on how much of the stuff can be created, there was a natural remedy for the economic downturn that followed the bursting of the internet bubble and the attacks that are now forever referred to as simply 9/11.

All through the 18-year bull market in stocks, the nation's housing market had been just sitting there waiting to be goosed, experiencing only short-lived, localized bouts of irrational exuberance and disappointment in such places as Houston during the U.S. oil boom and parts of California and Massachusetts later on.

Under the guiding hand of a revered Fed chairman, interest rates were slashed and a refinancing boom was kicked off only to be followed by some of the most outrageous excesses in mortgage lending the world has ever seen.

Despite signs that were obvious to many as early as 2002 and 2003, the housing bubble morphed into a broader credit bubble and the two proceeded to inflate to ever more dangerous levels as banks, hedge funds, governments, and the real estate industry joined forces to create the biggest and most dangerous bubble yet.

Beginning in 2006 and culminating with the global financial market crash in late-2008, another massive financial market bubble met its fate and, now, the world sits and waits.

Where to from Here?

No one's quite sure where we'll go from here, but an increasing number of people are beginning to wonder if this is the end of the road. That is, if the last forty years were all just one big money and credit bubble, temporarily misinterpreted as prosperity, that can produce no more bubbles except for the one that is most feared - another massive bubble in natural resources as a relatively fixed supply of goods meets up with an unlimited supply of paper money.

It's no coincidence that the almost non-stop sequence of financial bubbles over the last forty years followed the abandonment of anything resembling a system of sound money.

Contemporary economic thought posits that money is simply a "unit of account" and that there is no longer any need for it to maintain an intrinsic value of any sort. They say it's just "notations on paper" and that the world's economic and financial wizards, though set back a bit by their latest failure, have things squarely under control.

If you're anything like me, you don't believe that for a second.

In the fullness of time, the last forty years will likely be seen as an aberration - just one big bubble - as theories are abandoned and a more enlightened approach ultimately prevails.

Unfortunately, between now and then, things are likely to get worse before they get better.

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New home sales at record lows

The Commerce Department reports(.pdf) that new home sales reached all-time record lows last month, below the levels seen in early-2009 at the height of the financial market crisis.
IMAGE Sales of new homes fell from an upwardly revised annual rate of 315,000 in January to just 308,000 in February as homebuilders continue to lose the battle they've been waging with low-priced distressed property in many parts of the country and the urgency of the original December expiration of the homebuyer tax credit has long since faded.

As in yesterday's disappointing report on existing home sales, the "Months of Supply" metric is back on an upward path and this could be the beginning of another leg down for home prices. The expiration of the extended homebuyer tax credit in the months ahead should boost sales to some degree, however, there is a good deal of uncertainty as to how big a boost will be seen, the more important question being what happens after that.

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Somebody, do something!

It's at times like this for situations like the one in Greece where indecision seems to be more harmful than making any decision at all. Bail them out, kick them out, just do something. In this report, Reuters has the latest developments in the ongoing Greek tragedy:

European Commission President Jose Manuel Barroso made a new call on Wednesday for countries using the euro to create a safety net to help Greece if it needs financial assistance.

Barroso told the European Parliament that although the Greek debt situation was not on the formal agenda of a meeting of European Union leaders on Thursday and Friday, he could not imagine the issue would not be discussed.

"It is now appropriate to create, within the euro area, an instrument for coordinated action which could be used to provide assistance to Greece in case of need," Barroso said.

"The framework for coordinated action should be understood as a safety-net to be used only in the case that all other means to avoid a crisis have been exhausted, including first and foremost exhausting the scope for policy action at the domestic level."
The Germans continue to dig in their heels despite continued reports about being open to compromise. Elections that are quickly approaching in May and an adamant public that sees no reason to aid the spendthrift Greeks after they lied about their finances for years is no doubt making the problems even more difficult than they would otherwise be.

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Blytic does real estate (and more)

There's an interesting new website called Blytic that has all kinds of economic data for those who dabble in this sort of thing and, after speaking with its creator yesterday (who is also the author of the Paper Economy blog), it seemed like a good idea to share this chart with a somewhat surprising curve for home prices and give him a plug at the same time.

Shown below are the well known 20-City Case-Shiller Home Price Index (in blue) along with the less well known Radar Logic 25-city MSA Composite Index (in red) that appears to already be well into another leg down for property prices.
IMAGE Yes, the chart is a little blurry, but the neat thing is that you can click on the image above and you will be transported to a much larger interactive version of the same graphic at Blytic where you can fool with scaling and all sorts of other things via the options panel on the right. Apparently, some older browsers require a plug-in, but my versions of Firefox and MS Explorer interacted with the graphic immediately.

The latest Case-Shiller data will be released on Tuesday and there are more than a few people who think that the blue line in the chart will soon adopt the trend of the red line above it.

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Wednesday morning links

Fitch Downgrades Portugal on Budget Concerns - CNBC
Germany Seems to Signal a Compromise on Greece - NY Times
Bank of America to start reducing mortgage principal - Reuters
TARP watchdog slams Obama foreclosure program - CNN/Money
Those Who’ve Provided Intellectual Cover For The Bulls - Reformed Broker
Names at heart of free speech case - Nashua Telegraph
California To Home Buyers: Here’s $10,000 - WSJ
Americans... Hate... Everything - EconomPicData

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Oil falls under $81 as U.S. stocks build - Reuters
Gold Falls to One-Month Low as Stronger Dollar Curbs Demand - Bloomberg
BIG Short Position Building In Gasoline Futures - Hard Assets Investor
'Gold well supported at $1100, to hit $1,227 soon' - Commodity Online
Competing to Be the Greatest Fools - Financial Armageddon
10 reasons why this is not a bull market - MarketWatch

Durable-goods orders rise for 3rd straight month - MarketWatch
U.S. economic growth too slow to add jobs, forecast says - SF Gate
Stop panicking: Capitalism repeatedly recovers from financial crises - AidWatch
Post-bubble recessions unemployment by industry - iTulip
Moderate Inflation Versus Hyperinflation - Krugman, NY Times

Ten ways to spot a bubble in China - Credit Writedowns
Top German Economists Debate the Euro - Spiegel Online
Greece to Default ‘At Some Point,’ UBS’s Donovan Says - Bloomberg
Mutually beneficial U.S.-China relationship beginning to unravel - LA Times
Dealmakers meet to sort $26 billion Dubai World debt - Reuters
Explain why you sold Britain's gold, Gordon Brown told - Telegraph
"Short the China Bubble" Trend Is Spreading - China Stakes
Will Greece turn from euros to gyros? - CNN/Money

Huge Jump in Homes for Sale - Olick, CNBC
New and “Organic” Existing Home Sales Agree - Paper Economy
Home Prices Decline as Economist Sees Accelerated Double Dip - HousingWire
Are speculators back in the housing market? - O.C. Register

Fed's Plosser: Better rules needed to manage risk - Reuters
Homeowner Bailouts? Look Again - It's a Bank Bailout - Kid Dynamite
On Ben Bernanke's Pathological Inability To Learn Lessons Of The Past - Zero Hedge
Fed’s Yellen Plays Down Inflation Risks From Deficit, Fed Purchases - WSJ

Joe Biden's loose lips - BigPond
Health care reform and the Amish: What will it all mean? - Goshen News
What Can Economists Tell Us About Teenage Sexual Mores? - Freakonomics
California may vote on legalizing pot - LA Times


New highs for the gold price (in euros)

Tuesday, March 23, 2010

As usual, when the gold price languishes for a while, it tends to get bashed by those who don't understand it and think that, surely, after ten years and a 300+ percent gain, there can't be even higher prices in store. But, as shown below in the Kitco Gold Index, that feeling is a distinctly American one recently as new highs in terms of other currencies were seen as recently as two weeks ago.
IMAGE The two curves in the graphic are the gold price denominated in U.S. dollars (red) and the price in terms of the the U.S. Dollar Index (blue) which, for those of you who need a refresher, consists of about two-thirds the euro with smaller weightings for the Japanese yen, British pound, Canadian dollar, and a few other currencies.

The potentially very good news for American gold investors is that there appears to be a nice little "wedge" pattern developing over the last few months and these formations usually result in a big move up or down when they're complete.

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Germany spells out some details

Well, it looks like they're really going to have something to discuss this Thursday and Friday when the European Union meets to talk about what the group can and can not do to help Greece with their little debt problem. This story at Reuters makes clear that the Germans are open to offering some assistance, but, only as a last resort and only if the IMF is involved.

A senior German official spelled out Berlin's conditions for any aid mechanism ahead of an EU summit starting on Thursday:
  • Greece would have to be unable to access credit markets;
  • The IMF would have to contribute to any rescue;
  • European Union states would have to agree to negotiate "additional instruments" to enforce budget discipline, beyond existing rules that failed to prevent Athens running up huge debts and deficits that have shaken the euro zone.
"The condition for action, as a last resort, is that Greece's financing on the capital markets is exhausted," the official said.

"Furthermore, it would be necessary for the International Monetary Fund to provide a substantial contribution," he said, stressing there will be no decision on actual aid at the summit.
While the Germans hate the idea of a bailout, the rest of Europe hates the idea that the Washington-based IMF might have to come to the rescue, all of which makes the "polite default" mentioned by Martin Feldstein noted here earlier today that more likely.

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Existing home sales fall further in February

The National Association of Realtors reported that sales of existing homes fell 0.6 percent in February after a drop of more than 7 percent in January and sales are now at their lowest level in eight months.
IMAGE It's probably best not to make too much of the winter data for existing home sales because it is a very slow time of the year when seasonal adjustments can have a big impact on the data and the weather was bad last month, but, that "Months of Supply" metric certainly looks to be going in the wrong direction right now.

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Germany digs in against a Greek bailout

The Financial Times reports that Germany is not backing down from last week's tough talk about a bailout, recent charges by Greece that German banks are profiting from the crisis no doubt only making things worse.

Germany has set out three fundamental preconditions for any rescue package for Greece, including involvement of the International Monetary Fund, and a commitment by its European Union partners to tough new rules to control public debt and deficits in the eurozone – including necessary EU treaty changes.

A senior government official in Berlin said there would be no agreement at this week’s EU summit on a specific rescue package for the debt-strapped Greek government.

If there were to be agreement on a “mechanism” to provide such assistance, he said, it could only be triggered once Greece had exhausted its capacity to raise money on the international capital markets; the IMF had agreed to make a “substantial contribution” to a rescue package; and the EU members has agreed to negotiate new rules to prevent any reoccurrence of such a debt crisis.

The German position was revealed in response to growing pressure from the European Commission, and other EU member states, to reach agreement on the mechanics of a rescue package for Greece at the European Council meeting on Thursday and Friday.
It looks like the common currency will be moving down again this week, but, over the long-term, the pain that is now being endured in Europe could prove to be quite helpful in demonstrating that the eurozone is serious about a sound currency, that is, if it survives.

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Feldstein on the possibility of a double-dip

Martin Feldstein talks to Bloomberg News about, among many other things, the possibility for a double-dip recession in the U.S., an event that he believes is a "significant risk".

IMAGE Click to play in a new window.

It's a familiar story of higher savings by consumers whose balance sheets have been decimated by multiple bursting asset bubbles, all of which is leading to lower aggregate demand over the long-term and President Barack Obama apparently isn't helping:
This (healthcare) has been his one issue. It's almost as if he didn't know we had a deep recession. He would say, 'My number one concern is jobs', but then he would immediately turn to see what he could do to increase votes for the health care legilation.
On the Greek debt crisis he thinks they're headed for a "polite default", meaning that, instead of paying off holders of maturing bonds with euros, they'll just give them new bonds.

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Tuesday morning links

Greek Crisis May Provoke Fed-ECB Split as Euro Slides - Bloomberg
Senate panel passes sweeping financial-regulation bill - Washington Post
Servicers Streamlining Short Sales as HAFA Nears - Housing Wire
Treasury’s Geithner Urges End to Fannie, Freddie ‘Ambiguity’ - Bloomberg
Chase: Two-Thirds of WaMu Mortgages Impaired - Truth About Mortgage
China condemns decision by Google to lift censorship - BBC
Dear Evil Speculators, - The Reformed Broker
Kass: Moving On -

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Oil drifts near $81 on stronger dollar - AP
Gold eases below $1,100 as dollar firms - Reuters
Oil reserves 'exaggerated by one third' - Telegraph
Let’s Revisit Whether the Market is Being Manipulated - Sense on Cents
Investor demand for Gold ETFs collapsing - Commodity Online
Catching Pigs?! - Saut, Raymond James

Ten Million Jobs Needed - Ten Million Jobs That Need Doing - HuffPo
No recession for the rich: Tiffany 4Q profit quadruples - Bloomberg
Small-business owners unclear on health care impact - USA Today
Fewer bank stickups despite recession - CNN/Money
Austrian Economics on the Rise - Mises

Barroso says Greek aid not a bailout: report - Reuters
Frayed string for China's property balloon - MarketWatch
I.M.F. Is More Likely to Lead Efforts for Aid to Greece - NY Times
EU’s Van Rompuy Said to Seek Pre-Summit Greece Accord - Bloomberg
In Crrency War, China Can No Longer Take US Business Support for Granted - China Stakes
China Bubble Anxiety Doesn’t Mean Shun Stocks - Bloomberg
Is China on the verge of a commodities unwind? - FT AlphaVille
China to post $8 billion trade deficit in March: Wen - Reuters

In Housing, a Supply Problem of Epic Proportion - Housing Wire
3 Underground Real Estate Practices Moving the Market - My Budget 360
Our quagmire points to federal government's failures in housing -
Tax Credits Make It Difficult to Interpret Housing Data - WSJ

What part of Goldman Sachs is good for the Country? - Ward Report
Fed's Lockhart: Accommodative policy appropriate - MarketWatch
New York Fed Warehousing Junk Loans On Its Books: Examiner's Report - HuffPo
The Monetary Base During the Great Depression and Today - Jesse's Cafe
Evans Sees Accommodative Fed Stance Lasting at Least 6 Months - Bloomberg

The Party of Cruelty - Kunstler, CFN
Burglar enters NJ restaurant, cooks chicken, ignores cash - KomoNews
Kiss’s Simmons Says Wealthy Must ‘Know Your Choices’ - Bloomberg
Calories on menus -- do you really want to know? - LA Times


Financial market reform takes center stage

Monday, March 22, 2010

Given that the health care bill is about to be signed into law, the long hard slogging now all but done, attention turns to the financial reform legislation that, based on this exchange between Senators Bob Corker (R-TN) and Evan Bayh (D-IN), should be a whole lot friendlier.

Of course, the word "friendlier" in Washington is very much a relative term and the fact that, last week, Senator Chris Dodd (D-CN) broke off talks with the other side to submit his own bill and that his party no longer has a filibuster-proof majority creates a very different situation than what was seen over the weekend. Somehow, it seems that the two sides will find more than enough things to disagree on.

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Merkel halts at the Rubicon

Ambrose Evans-Pritchard's latest report on the Greek debt crisis in today's Telegraph is even more alarmist than usual and, if you're familiar with his writing, you'll know that's really saying something.

German and Dutch leaders have concluded in the nick of time that they cannot defy the will of their sovereign parliaments by propping up a country that lied about its deficits, or risk court defeats by breaching the no-bail-out clause in Article 125 of the EU Treaties.

Chancellor Angela Merkel has halted at the Rubicon. So has Dutch premier Jan Peter Balkenende, as well he might in charge of a broken government facing elections in a country where far-right leader Geert Wilders is the second political force, and where the Tweede Kamer has categorically blocked loans for Greece.

The failure of EU leaders to cobble together a plausible bail-out – if that is what occurs at this week’s Brussels summit – is a 'game-changer' in market parlance. Eurogroup chair Jean-Claude Juncker said last month that such an outcome would shatter the credibility of monetary union. It certainly shatters many assumptions.
According to the latest reports, Merkel is adamant about not discussing a Greek bailout at this week's EU meeting and this comes on the same day that the Greek government announced its economy is now contracting at an even faster pace than previously believed.

Grand plans about bolstering the European Union to make it more capable of handling crises such as the one in Greece now seem to be in doubt.
There will be no inevitable move to fiscal federalism; no EU treasury or economic government; no debt union. It is Stalingrad for the federalist camp and the institutions of the permanent EU government
Any euro crisis would force Europe to create the necessary machinery to make it work, acting as a catalyst for full-fledged union. Yet the moment of truth has come. There is no quantum leap. We have a Merkel pirouette.
IMAGE Paris is watching nervously. As Le Monde put it last week, “behind the question of aid to Greece is a France-Germany match that pitches two conceptions of Europe against each other.” The game is not going well for 'Les Bleus’. The whole point of the euro for the Quai D’Orsay was to lock Germany into economic fusion. Instead we have fission.

EU leaders may yet rustle up a rescue package that keeps the IMF at bay, but alliances are shifting fast. Even Italy has slipped into the pro-IMF camp, knowing that rescue costs can be shifted on to the US, Japan, Britain, Russia, China, and the Saudis, lessening the burden for Rome.

Besides, too much has been said over the last week that cannot be unsaid. Mrs Merkel’s speech to the Bundestag was epochal, a defiant warning that henceforth Germany would pursue the German national interest in EU affairs, capped by her call for treaty changes to allow the expulsion of fiscal sinners from Euroland. Nothing seems so permanent about the euro any more.

Days later, Thilo Sarrazin from the Bundesbank blurted out that if Greece cannot pay its bills “it should do what every debtor has to do and file for insolvency. This would be a suitably frightening example for every other potentially unsound state,” he said, pointedly excluding France from the list of sound countries.

Dr Sarrazin should be locked up in a Frankfurt Sanatorium...
Ultimately, Ambrose doesn't blame Greece or Germany for the current mess, but rather the European Union "elites" who apparently didn't know what they were getting themselves into when they first formed the common currency zone. A lot of good that does now...

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