For government inflation, home prices were a "non-factor"

Below are the long-awaited updates to the charts for OER (owners' equivalent rent) and the S&P Case-Shiller HPI (Home Price Index). First, almost a year after the original chart was created, OER and the HPI side by side.
Note that the original chart now appears in Kevin Phillips' Bad Money, currently #83 at Amazon.com (see Good Sources in "Bad Money"). When this chart first appeared, in last summer's How owners' equivalent rent duped the Fed, the home price decline fit within a lower scale of minus 5 percent with room to spare - now it's at minus 15.3 percent and still moving down.

Of course, owners' equivalent rent has been rock-solid all during the housing boom and bust at between two and four percent - just what you want if your aim is to report only modest "inflation" (the aim of most governments with a fiat money system).

In the chart below, "official" inflation is shown alongside inflation with the HPI substituted for OER. Inflation with home prices included was soaring back when there was little "official" inflation and, today, when everyone is complaining about soaring consumer prices, there's a little dip into negative territory for inflation with home prices instead of OER.
Yes, as noted every time this has been done before, this is an imperfect substitution as OER is intended to reflect the overall costs of owning a home including such things as mortgage interest rates, property taxes, etc.

This exercise is conducted mostly just to demonstrate how ridiculous home ownership costs in the government's inflation statistic looks next to home prices in the real world.

Why is OER such a big deal?

This New York Times graphic shows how big a component OER is in the Bureau of Labor Statistic's inflation calculation. It's there at the bottom - you can't miss it.
That little phrase, "What homeowners would pay if they were renting their homes", is sure to show up in the history books when historians discuss the current era.

To calculate core inflation - the preferred measure of inflation for any Fed economist worth his salt (well, at least up until lately) - the whole pie above is shrunk down to remove both the food and energy components (all the stuff that's going up in price) and OER becomes an even bigger slice of the overall pie.

If the Case Shiller Home Price Index is substituted for owners' equivalent rent in core inflation, then you get outright "DE-flation" today - and not just a little.
These charts go a long way in explaining why things are such a mess these days. For government reported inflation, home prices were a non-factor during the housing boom and bust - they probably shouldn't have been.

There is another handful of charts where the home price index is laid up against all sorts of other economic statistics like employment, consumer spending, Countrywide's stock price, etc. - they should appear here tomorrow.

Read more...

Home prices - how low can you go?

Standard and Poor's released the March data (.pdf) for the S&P/Case-Shiller Home Price Indices showing a 14.4 percent year-over-year decline for the 20-City Composite Index, the steepest decline on record. Indices for individual cities are shown below:On their current trajectories, Los Angeles and Miami should overtake Washington D.C. and New York within a few months.

David M. Blitzer, Chairman of the Index Committee at Standard & Poor's noted:

The steep downturn in residential real estate continues. There are very few silver linings that one can see in the data. Most of the nation appears to remain on a downward path, with 19 of the 20 metro areas reporting annual declines, and six of those now at negative rates exceeding -20%. Looking closely at these returns, you can see that 15 of the metro areas are also reporting record lows, and eleven are in double digit decline, with Chicago being the latest metro area to join these ranks.

The monthly data paints a similar picture, with 18 of the metro areas reporting at least seven consecutive months of negative returns. For the first time in as many months, we finally saw monthly price appreciation in two of the metro areas – Charlotte was up 0.2% in March over February, and Dallas was up 1.1%.

In tabular form, the data looks like this:
Charlotte remains the only metropolitan area in the index with a gain from year ago levels with a modest 0.8 percent increase, down from last months year-over-year gain of 1.5 percent.

Read more...

Greenspan recession probability update alert!

It's been at least a few weeks since the former Fed chairman weighed in on the likelihood of a recession in the U.S. This report from Reuters confirms what many former Fed watchers have suspected - there's still better than a 50-50 chance.

"I still believe there is a greater than 50 percent probability of recession," Greenspan told the Financial Times in an interview published on the newspaper's website.

"(But) that probability has receded a little and I think the probability of a severe recession has come down markedly," said Greenspan.
He said it was "too soon to tell" whether the worst of the financial crisis was over as this would depend on what happened to house prices.

The Financial Times said Greenspan estimated house prices would fall by another 10 percent from their February levels, for a total peak-to-trough decline of roughly 25 percent.

Too sharp of an increase in the savings rate (after tax income minus consumption) was cited as the main risk to his current economic forecast.

Translation: if people start living within their means, we're in real trouble.

Read more...

Oh Dear! Politicians may make things worse!

Ambrose Evans Pritchard notes in this Telegraph UK report that the German government is about to make things worse in world energy markets.

German leaders are to propose a worldwide ban on oil trading by speculators, blaming the latest spike in crude prices on manipulation by hedge funds.

It is the most drastic proposal to date amid escalating calls from Europe, the US and Asia for controls on market forces, underscoring the profound shift in the political climate since the credit crunch began. India has already suspended futures trading of five commodities.

Uwe Beckmeyer, transport chief for Germany's Social Democrats, said his party would call for joint measures by the G8 powers to prohibit leveraged trading on energy contracts. "It's an extreme step but it has to be done," he told the Berlin media.

Mr Beckmeyer said the last 25pc rise in the price of oil to $135 a barrel had nothing to do with underlying supply and demand. “It’s pure speculation,” he said.

Well, pure speculation plus the fact that the world now consumes more oil than it can produce and that is likely to be the case for years to come.

Is there an election in Germany this year?

Read more...

Fun with the Michael Masters report

Among many other things that Michael Masters might have you believe is that soaring commodity prices are somehow unprecedented in history. The chart below was an integral part of his congressional testimony (.pdf) last week when he asserted that institutional investors "are one of, if not the primary, factors affecting commodities prices today."
Look at those level prices up until the point that institutional investors starting moving money out of stocks and bonds and into commodities. That's some pretty convincing chart-work there.

Get the pitchforks! We'll teach those "index speculators" a thing or two.

But didn't commodity prices rise sharply back in the 1970s?

Apparently not - at least not according to the "S&P GSCI Spot Price Commodity Index", an index that is new to me. The venerable CRB Index seems to tell a little different story about commodity prices over the last 40 years.
In fact, that move from 1972 to 1980 makes the recent move look a little tame by comparison. Note that the chart above is a year or so old - the CRB currently stands at about 430 which is a little over double the level in 2002.

By comparison, the index more than tripled from 1972 to 1980.

Maybe it's just the index - "spot" GSCI versus CRB - that accounts for such a big discrepancy. Using data from Dr. Craig Israelson's paper The Benefits of Low Correlation, this is what a $10,000 investment in the "non-spot" GSCI would look like since 1970.
That looks like a pretty steady progression over the last 40 years with a big surge over the last decade.

But, as I learned long ago and discussed in "Fun with multi-decade charts", for a single curve going back almost 40 years, you really should use a log scale.
Wow - that's a completely different curve than the first one in this post - the one that was presented to Congress last week as "proof positive" of the undue influence of speculators on commodity prices.

You know, I've got a couple speaking gigs under my belt now, maybe I should see if I can present my data before some Senate panel. Maybe we can talk about Alan Greenspan and fiat money while we're at it.

Note: There will likely be more on the Masters report later in the week.

-----------------------------------

UPDATE: Monday, May 25th, 1 PM PST

Here's the CRB "spot" index going all the way back to the 1960s - it tells much the same story as the CRB Index above. When it rises another 30 percent or so we can all say, "Gee - that's as big as the increase in commodity prices from back in the 1970s (when there were no index speculators)".

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

Read more...

Increasingly sensible commodities "bubble" talk

Justin Lahart at the Wall Street Journal adds to the increasingly sensible talk about whether or not we are currently experiencing a "commodities bubble". This report is just one more reason why the Journal continues to be about the smartest newspaper around.

Commodity Prices Soar, But Are They in a Bubble?

After being buffeted by the dot-com, housing and credit bubbles -- not to mention the Chinese stock-market bubble -- there is a readiness by people on Wall Street and elsewhere to ascribe the term "bubble" to all sorts of things. But when it comes to commodities like crude oil and corn, that may be off the mark.
...
In commodity markets, what is traded aren't physical commodities but contracts that are essentially bets on where prices will go, Harvard's Mr. Mankiw says. The final effect of the bets is limited unless they encourage speculation in the commodity itself -- encouraging, say, a coffee broker to warehouse coffee in hopes of getting a higher price later.

And that is what is happening, according to Mr. Mankiw's Harvard colleague Jeffrey Frankel, who says such speculative behavior is due to the sharp reduction in interest rates by the U.S. Federal Reserve. Low rates encourage commodity stockpiling, he says, by making it less attractive to sell commodities and put the proceeds into bonds and other debt instruments.

Critics of Mr. Frankel's theory say the expected rise in commodity inventories hasn't shown up. Mr. Frankel has acknowledged that, but also notes that perhaps oil producers are leaving those inventories in the ground. That could be one reason why the Saudi king rebuffed U.S. President George W. Bush's request for increased oil production earlier this month.

While appearing in this report only in passing, the possible connection between soaring energy prices and "peak oil" now shows up much more frequently than ever before in the financial media.

The odds didn't look too good a few months ago, but Matt Simmons' prediction that peak oil would be a bigger 2008 election issue than global warming is looking better with each passing week and with each $10 increase in the price of crude oil.

Read more...

The Economist notices inflation

Sometimes it seems that the graphic artists at The Economist are a wee bit sharper than the magazine's writing staff, particularly in the area of, uh, economics. Take note of the guy with the huge nose in the middle of the cover above who complains, "It seems the price of everything is going up!!!"

There are two stories in the current issue about inflation, however, as might be expected when the authors are economists, you get the standard take on inflation in the West in the cover story Inflation's back:

By slashing interest rates as inflation has climbed, has the Fed sowed the seeds of a new inflationary era? That case looks hard to prove in the rich world. Inflation rates of 3.9% in America and 3.3% in the euro area are far higher than central banks want, and inflation expectations are rising. If growth in the euro area remains robust, the ECB should certainly worry more about inflation. Yet so far there is little sign that higher food and oil prices are pushing up other prices in the rich economies.

Yes, inflation at three or four percent pales in comparison to what we saw back in the 1970s but the way the inflation number is calculated also pales in comparison.

The other report An old enemy rears its head deals with inflation in emerging economies and while I haven't gotten around to reading that one yet, I'll add to this post sometime later today if anything interesting appears.

That's one of the best magazine covers in quite some time.

ooo

This week's cartoon:

Read more...