Friday Lite

The labor department reported 121,000 new jobs for the month of June, well below expectations near 200,000. Despite the hope inspired by the ADP employment report on Wednesday, where 368,000 new private sector jobs were forecast, today's report provided more evidence of a slowing economy.

After averaging between 150,00 and 180,000 new jobs per month for the previous five quarters, payroll growth for the second quarter averaged only 108,000, in large part due to the decline in new positions for construction and retail trade - housing and consumption.

Accounting for an average of more than 30,000 new payroll spots per month for much of the last few years, construction employment gains have averaged less the 3,000 in the last four months, actually declining in June, most of this a result of a slowing residential housing market.

Retail trade employment has slowed even more dramatically. After generating an average of over 15,000 new positions each month during 2004 and 2005, the first six months of this year have seen an average decline of 13,000.

Government hiring led the way in the most recent report with 31,000 new jobs followed by education and health services with 26,000. Some found solace in the half percent increase in hourly wages yielding a year-over-year gain of 3.9 percent, the highest annual increase since 2001. But, overall this was a very disappointing report and provides more credence to the case for a pause or cessation in interest rate increases.

With these interesting developments in housing and consumption related employment, it's probably about time to whip up some new charts to see how the numbers look over a period of years - since housing began to boom. That, however, will be left for another day, for now it is on to the unbearable liteness that is Friday.

Rising Inflation and Interest Rates Around the World

It seems the U.S. isn't the only country in the world that has rising inflation and rising interest rates. A couple weeks ago it was Turkey, South Africa, and South Korea, and now Japan seems set to join the party. Yesterday the Bank of England and the European Central Bank both kept rates level but hinted at further increases, while Bloomberg reports that Iceland's Central Bank has taken the gloves off.

Iceland's central bank raised its benchmark interest rate by three-quarters of a point to 13 percent, more than expected, to cool inflation that is accelerating at more than three times the bank's target pace.
...
Inflation in Iceland's $13 billion economy quickened in each of the past four months, stoked by the krona's 23 percent decline against the euro this year.
...
Inflation will probably accelerate to 8.5 percent this month from 8 percent in June, Siegenthaler estimates. He sees inflation quickening to 9 percent in August.

It's as if Paul Volcker has come out of retirement - thirteen percent! That's what happens when a tiny nation of less than 300,000 citizens plugs into an over-liquefied world and exposes their freely floating currency to the forces that are the Global Economy 2006 World Tour.

The Housing Bubble Arrives in Calgary

Tar sands fever seems to have awoken a slumbering housing market in Alberta, Canada. Having driven through this area not more than a few years ago, it was surprising to see signs that said, "From the $140,000s". According to this report, they are now doing a 2005 Bakersfield boom, similar to the near exponential rise experienced by the real estate market of this central California town with the brown summer sky that also has oil nearby.

The average price of a standard two-storey resale home rocketed an unprecedented 54.6 per cent to $397,867 in the second quarter of 2006, compared with a year earlier, according to a quarterly report Royal LePage Real Estate Services released yesterday.

"Since we started doing this report in the '70s, we've never seen this kind of price appreciation in one year, ever," Phil Soper, president and chief executive of Royal LePage, said in an interview.

Alberta's oil-rich economy has meant severe housing shortages and major price increases in the western provinces. "The Alberta housing market is truly reacting to the fact it is by far the best-performing economy in Canada," Century 21 Canada president Don Lawby said in an interview.

Of course the big difference between Calgary and Bakersfield is that they have plenty of oil left in Northern Alberta, as compared to the pump-jacks bobbing up and down around Bakersfield. The George H. W. Bush family actually lived in Bakersfield for a short time many, many years ago, George W. Bush was a just a toddler at the time, however they've recently transformed the house they lived in into a tourist attraction.

"I'd Like to Teach the World To Steal ..."

Remember those Coke commercials from decades ago where young people with long hair held hands on a mountain top and sang about doing good things in the world? According to this report, the crew that stole secret formulas from Coca Cola in order to sell them to Pepsi Cola were not yet even teenagers at the time.

Three people have been arrested and charged with stealing confidential information about drink recipes from The Coca-Cola Co. and trying to sell it to rival PepsiCo Inc., federal prosecutors said Wednesday.

The suspects include an executive administrative assistant at Atlanta-based Coke, Joya Williams, who is accused of rifling through corporate files and stuffing documents and a new Coca-Cola product into a personal bag.

Williams, 41, of Norcross, Georgia; 30-year-old Ibrahim Dimson, of New York; and 43-year-old Edmund Duhaney of Decatur, Georgia, are charged with wire fraud and unlawfully stealing and selling Coke trade secrets, federal prosecutors said.

Of course, Atlanta does have one of the highest foreclosure rates in the country, so maybe they were just trying to save their McMansions. How times have changes in just a few decades.

Vladimir's Got a Computer (and Maybe Giant Humanoid Robots)

This story from China Daily tells of a live internet conference aired by the BBC where Russian President Vladimir Putin answered questions online regarding such topics as North Korea, Iran, and natural gas supplies, but deftly avoided sensitive subjects such as border protection.

Answering only a few of the thousands of questions that dealt with personal details or quirky issues such as whether Russia would deploy giant humanoid robots to protect its borders, Putin also defended devastating military campaign in Chechnya, saying Russia would do all it can to preserve its territorial integrity.

"Of course it was worth it," Putin said of the war that Moscow launched when he was prime minister in 1999, the second Moscow has waged against separatist militants in the mostly Muslim southern region since the Soviet breakup.

The emotional outburst regarding Chechnya was widely perceived by attendees of the event as just a means to distract attention from the giant humanoid robot issue that has dogged Putin leading up to the G-8 summit, hosted by Russia later this month.

As if GM Didn't Have Enough to Worry About ...

While they still need to work on both their car models and their advertising models (as evidenced by the photo below), China's fledgling automobile industry should not be discounted - let them do the discounting. According to this report they've reserved space at Detroit's next Auto Show in January.

At least four Chinese automakers are expected to take display space at the 2007 North American International Auto Show in Detroit, US media reported.

In January 2006, China's Geely Automobile made debut by a Chinese carmaker at the US auto show. It exhibited a $10,000 small sedan to reporters only in a booth outside the show's main hall. This year, Geely will come back.

Moreover, three other companies, including Hunan Chang Feng Group, Great Wall Motor Company and Hebei Zhongxing Automobile Company, are also in talks for display space in Cobo Hall of the January 2007 show, said the Detroit News.

The Chery Automobile, an independent Chinese carmaker based in East China's Anhui Province, hopes to enter the US market in 2008, the newspaper said.

Americans can make fun of the Chery at their own peril - it is likely that none of the 35,000 GM workers accepting early retirement are laughing much or sleeping well at night with the prospect of their retirement income being derived from income GM earns when competing against this new auto manufacturer in the years and decades ahead.

Microsoft's Two Bits

News comes from The Onion that Microsoft has taken a bold step to protect the company's intellectual property by securing patents for the numbers zero and one - digits that are crucial to the proper functioning of the binary system used throughout the computer industry. According to this story, with the upcoming departure of CEO Bill Gates the move was deemed necessary to maintain their competitive advantage in a changing software market.

With the patent, Microsoft's rivals are prohibited from manufacturing or selling products containing zeroes and ones—the mathematical building blocks of all computer languages and programs—unless a royalty fee of 10 cents per digit used is paid to the software giant.

"Microsoft has been using the binary system of ones and zeroes ever since its inception in 1975," Gates told reporters. "For years, in the interest of the overall health of the computer industry, we permitted the free and unfettered use of our proprietary numeric systems. However, changing marketplace conditions and the increasingly predatory practices of certain competitors now leave us with no choice but to seek compensation for the use of our numerals."

A number of major Silicon Valley players, including Apple Computer, Netscape and Sun Microsystems, said they will challenge the Microsoft patent as monopolistic and anti-competitive, claiming that the 10-cent-per-digit licensing fee would bankrupt them instantly.

Rumor has it that Google has already perfected the ternary system and has plans to announce this new computing platform that will render all binary systems obsolete (now, if they could only get Ebay to accept their new payment system instead of PayPal).

Bored at Work?

This Duck Computer Mouse will entertain you for hours. Designed and built by Now, a Swiss manufacturer of precision computer pointing equipment, this goodie will help you pass the hours until quittin' time.

Their innovative design makes Now mice a perfect gift for anybody working with a computer. Attractively wrapped in a specially designed box, these trendy “desk pets” are a temptation not many can resist.

Splish-splash, how about taking a bath? The Duck mouse is Now’s perfect accessory for mermaids, non-swimmers and bathtub captains. This unique mouse with a free-floating duck is sure to brighten up a long day at work.

Either that, or you can pass the time by reading blogs, or, better yet by writing one.

Read more...

Defining Real Estate Broadly

This interview with Kenneth Heebner, manager of the $1.2 billion CGM Realty Fund, appeared in yesterday's Wall Street Journal. It is notable for several reasons, the most interesting of which was surely lost on the vast majority of those who read the article.

Of course what's interesting and what's not all depends on your perspective and for most people these days who are fretting over the value of their home or the cost of their debt service, what probably struck a nerve was the dire prediction regarding real estate prices.

What caught our attention here we'll get to in a few minutes, but first, another real estate pro tells it like he sees it and not because he gets paid to see it a particular way.

After catching a few minutes of a CNBC program on real estate over the long weekend, where none other than National Association of Realtors Chief Economist David Lereah and the President of Century 21 were acting as though everything were hunky-dory, it was refreshing to see someone who manages a billion dollar real estate fund talking about "a significant decline in prices" in residential real estate in the hottest markets where home values "could fall 50% from their peaks".

After going through a litany of what ails real estate today - from risky mortgages and too little money down to rising inventory amid rising interest rates - it all seems so obvious when coming out of the mouth of someone well connected within the real industry, who can also speak freely.

"A significant decline in prices" and "could fall 50% from their peak".

There was this question by interviewer Gregory Zuckerman, who appears to have had some coaching from someone like David Lereah and was trying to elicit soothing words like "soft landing" from his subject, but got the exact opposite instead.

WSJ: More than 25% of homeowners don't have a home mortgage because they own their property outright. Won't this keep problems in check?

Mr. Heebner: Most people won't have problems and much of the country will be fine. I don't think anything will go wrong in places like Texas, Iowa City or Minneapolis. ... But prices are being set by a minority of participants in the market, [those who have borrowed the most and used the most aggressive types of mortgages]. There will be a loud pop in inflated markets. It's where prices were artificially inflated by people buying houses with risky mortgages that we'll see problems. ... The person who feels the pinch is the person who used an aggressive mortgage and is struggling to meet the mortgage payments.

What a stupid question from someone who works at the Wall Street Journal - prices are set at the margin. Shouldn't that be something that they go over with you early on, like when you're choosing a health care provider during orientation?

Now that a soft landing is ruled out, how bad might things get for the rest of the economy? Once again, Mr. Zuckerman zigs and Mr. Heebner zags.

WSJ: Given the big size of some of the markets that you see as inflated, won't the regional 'pops' reverberate throughout the economy?

Mr. Heebner: The pops will reduce the growth rate of the economy, but they won't precipitate a downturn. The economy only turns down when the Federal Reserve takes aggressive action to cause a downturn. I think the current pattern of higher interest rates reflects a decision to normalize rates after taking them to abnormally low levels to stave off potential deflation. When the extent of the housing slowdown becomes apparent, I think the Fed will pause, rather than take rates to a level that threatens an economic downturn. The only real threat to the economy is an overly aggressive Fed, and not a downturn in the housing market, which won't by itself push the economy down. In fact, it provides an insurance policy against the Fed becoming overly aggressive.

Some interesting points here - the Fed causes economic slowdowns, they will pause when a housing slowdown becomes apparent, and a slowing housing market is an insurance policy against overtightening.

Too bad about the monetary policy lag of six months or more, waiting for higher interest rates to work their way through the system - that's why the Fed always overtightens - the "running into a ditch" problem that Federal Reserve Board member have spoken of in recent months.

As for insurance against overtightening, maybe that's why they brought Henry Paulson in from Goldman Sachs to run the Treasury Department - maybe they're going to create some sort of "overtightening derivative" for the Fed where they can hedge their position on interest rate hikes like owners of mortgage backed securities lay off their credit default and interest rate risk.

That would likely work better as insurance than a housing market that is taking its sweet time in working back toward price levels that are not so outrageous. In many parts of the country, real estate prices have been so high for so long, that people have begun to think that this is normal.

But enough monetary policy small talk, what are you buying?

WSJ: How are you allocating investments in your real-estate fund?

Mr. Heebner: We define real estate broadly; it includes mining companies, because of the land they use. Today we have about 25% of the fund in mining stocks. The stocks are attractive, but I also see significant opportunity in real-estate investment trusts, which comprise 69% of the portfolio. We also have 6% in commercial real-estate brokers.

Yes, if you're going to manage a real estate fund in the middle of this decade, be sure to own lots of mining companies - roughly $300 million of mining companies for this real estate fund. Although it would be hard to figure it out from reading the prospectus for CGM Realty (CGMRX), mining companies do own real estate so therefore they qualify.

Coal mining is mentioned elsewhere in the article, but who knows what other types of mining companies they've got in there - maybe some aluminum, copper, zinc, maybe even gold. And owning the commodity itself would probably qualify for this fund, since coal and metals are real estate.

Owning mining companies in a real estate fund can sure help the performance of your fund, as is the case for CGM Realty, which is up 32% in the last year.

As for more traditional forms of "real estate" investment, rising rents have been spotted across the land and therein lies a great opportunity.

Mr. Heebner: We're investing in office and apartment REITs, like Archstone-Smith Trust, Essex Property Trust Inc., SL Green Realty Corp. and AvalonBay Communities Inc. Apartment rents are going higher [as rising interest rates makes homes less affordable for many consumers, and a strong economy encourages rent increases].

In many parts of the country, like Texas, when demand goes up, companies can do more building of rental apartments. But the greatest supply constraints are in parts of the Northeast and California. And that's where the apartment REITs we own are focused.

In the office sector we like Vornado Realty Trust as well as SL Green, which have great management and are in Manhattan, one of the most supply-constrained areas in the country.

WSJ: Many apartment-REIT stocks already have climbed. Aren't rent increases baked into the stock price?

Mr. Heebner: Yes, people assume rents are going up, but the question is the magnitude of the increases. Consensus appears to assume 5% increases in the next year but I think the increases will be a lot more than that. Demand will grow, but supply of apartments won't because construction costs are increasing significantly and supply constraints will limit new developments in California and parts of the Northeast.

In what might be one of the more ironic of all possible outcomes for the real estate craziness of the current decade, the possibility of an apartment rental boom may be dead ahead.

With some of the millions of renters who were cajoled into becoming homeowners in recent years now doing an about-face back to apartment living, at the same time that the last of the condo conversions are being sold to first time buyers who still think real estate is a safe bet - all this has led to an oversupply of renters and a shortage of apartments, and naturally, rising rents.

Of course, just like homeownership in recent years, the apartment rental imbalance can not be resolved quickly, so in the interim, y0u guessed it, prices rise.

The apartment dweller, turned homeowner, turned renter again is sure to be delighted with the prospect of rising rental costs in the years ahead following the rising adjustable rate mortgage costs that prompted his return to the housing choice he happily accepted five years ago.

Read more...

Central Banks Buy the Dips

An economist high in the Chinese government has advised purchasing gold bullion for their central bank on any upcoming weakness in the price, while a similar "buy the dip" strategy has been adopted by both their resource rich neighbors to the north and the oil-rich nation of the United Arab Emirates.

It seems that the world's exporters are becoming increasingly tired of accumulating paper money or its electronic equivalent in exchange for their hard work in manufacturing or their good fortune in sitting atop vast natural resources.

~~~~~~~~~~~~~~~~~~~~~~~~~~Advertisement~~~~~~~~~~~~~~~~~~~~~~~~~

Due to popular demand, and some poor timing where the initial introductory offer expired over the Fourth of July weekend, the lifetime rate guarantee offer for the Iacono Research website has been extended.

The model portfolio has rebounded nicely in recent weeks and with market activity so far this week, gains now sit at about 20 percent on the year. To learn more about this unique investment website, click here.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

According to the most recent statistics from the World Gold Council, China holds a mere 1.4 percent of its foreign reserves in gold while Russia holds slightly more on a percent basis, lagging in absolute terms. The UAE, however is nowhere to be found - not in the top twenty, not among the 110 nations that showed up on this list.
Apparently, even the tiny central African nation of Burundi which comes in last at #110 on the list with a grand total of 0.0 tonnes (after rounding) has a central bank that thinks more highly of the yellow metal than does the central bank of UAE., the world's #10 producer and #6 exporter of crude oil.

But China, with its near trillion dollars of foreign reserves, appears likely to have the most impact on gold demand in the years to come. According to this story, yet another prominent official is recommending that they stop stuffing their vaults with so much paper and get something more tangible.

China should take advantage of any weakness in bullion prices to build up its official gold holdings as part of a strategy for diversifying its foreign exchange reserves, a senior government economist said Monday.

Xia Bin, head of the financial research institute of the Development Research Center, a think tank under the Cabinet, also proposed that Beijing allow the yuan to fluctuate within a wider range against the dollar.

"It is practical for China to increase its holdings of gold by choosing an appropriate time to buy, because compared with other big trading countries the percentage of gold in China's reserves is seriously low," Xia said in an article on his agency's Web site.

Over in the Middle East, in the wake of the failed Dubai ports deal, another central banker sees the benefits to reducing their exposure to the U.S. dollar. According to this report, they plan to go from zero to maybe ten percent.

The UAE Central Bank Governor this week gave his strongest hint yet that the emirates will shortly enter the gold market and also purchase euros as a diversification of the national currency reserves presently held in US dollars. With the US dollar ripe for devaluation this seems a timely initiative.

The Governor of the UAE Central Bank, Sultan bin Nasser Al Suwaidi told reporters this week that the bank was preparing to convert up to 10 per cent of its currency reserves into gold, although he said that the bank currently held very little gold in its reserves.

'I don't think it is appropriate to buy gold now - it is too expensive. The appropriate time might come very soon. We could go up to 10 per cent,' he said.

Gold analysts predict a choppy market for the yellow metal over the summer months with a rally likely in the autumn. This is the pattern that gold trading has followed over the past five years, with the second half stronger than the first, although the $725 spike in gold prices this year almost broke this pattern before the recent sell-off.

Don't be surprised if the seasonal pattern for gold prices turns out to be permanently broken - it has been dominated by jewelry fabrication demand, that while still accounting for over half of all gold demand, is declining relative to investment demand.

With a strong rebound since the correction that started in May, there are more and more buyers taking the same view of a dip that looks more and more like it's not going to be dipping much longer.

Surely there will be other dips in the months ahead - they just may originate from higher levels.

This report by Ambrose Evans-Pritchard, former Economist writer and favorite of this blog, notes the recent spike in the gold price then turns to recent announcements by the Russian central bank of a similar "buy the dip" approach.

The Russian central bank has a similar strategy of raising reserves to 10pc, buying the dips each time gold falls back from a speculative surge - a policy that quickly puts a floor under each correction.

Gold reached $730 an ounce in early May before crashing 24pc in the sharpest drop since the bull market began in 2001. The metal has since shown extraordinary resilience, regaining half the ground lost.

To say that the metal has shown extraordinary resilience is really quite something since the "barbarous relic" really doesn't do anything more than just sit there. It is rather a matter of weakness or loss of confidence in paper money relative to gold that causes the price of gold measured in dollar terms to rise, for without such factors, gold would be irrelevant save for having something shiny to wear on wrists and necks.

It is only with the recent questions raised about the durability of paper money, the amount of it created and the potential for so much more to be created to cure economic ills around the world, that central banks and pension funds have been purchasing the stuff.

Buy the dips.

Read more...

Feeling Small

These pictures came in the mail the other day. They have nothing to do with the Fourth of July, Alan Greenspan, economics, or financial markets, but they do demonstrate just how insignificant fireworks and money really are in the grand scheme of things.

There are similar cases to be made for time and space, a small book atop the Empire State building representing man's time on earth serving well for the former, the latter being nearly impossible for any human to comprehend - too few individuals have a proper appreciation for any of this.

Click on any of the pictures to enlarge.

=======================================

UPDATE: Sept. 7, 2006 - 9:15 PM PST

As stated in the original post, these images came in the mail. No source was cited by the sender. Now that someone has indentified their origin, I'm happy to provide the link at Rense, lest anyone remain under the mistaken impression that I photographed these myself.

Read more...

Too Good to Last?

For many, many months some Americans have been skeptical of high real estate prices, concerned over the perhaps transient nature of the wealth that has been created for ordinary homeowners across the land. They have looked overseas at other Anglo Saxon nations in an attempt to divine their fate - nations that earlier in the decade led the way in what became a worldwide housing boom.

Housing in the United Kingdom, a sort of miniature United States with an outsized budget deficit to accompany an exceedingly large trade deficit, led The States up in price until sometime last year when things began to cool noticeably, but popping sounds were largely absent.

In this story($) from The Economist, they consider the possibility that real estate prices in the U.K., and around the world have reached a permanently high plateau.

The housing market appears to have stabilised at much higher valuations than were previously reckoned possible. A common measure of affordability is the ratio of average house prices to average earnings, since income must ultimately pay for the acquisition of a property financed with a loan. Looked at this way, homes are even more overvalued than they were at the peak of the boom in the late 1980s: the ratio stands at 6.0, compared with 5.2 in the third quarter of 1989. Much the same message emerges from another valuation method, which, rather like the price-to-dividends ratio for equities, measures the relationship of house prices to rents.

Yet such yardsticks are not the final word. When homebuyers work out whether a property is affordable or not, the cost of servicing a new mortgage as a chunk of take-home pay is more salient. On this basis, valuations are also stretched, but homes are still considerably more affordable than they were at the end of the 1980s (see second chart).

The decline in borrowing costs over the past decade goes a long way to explaining why house prices have proven so irrepressible. Most of the fall in interest rates has arisen from the collapse in consumer-price inflation. In itself, that makes no difference to the real cost of servicing a loan over its lifetime. It does affect the timing, though. When inflation is high, the burden is “front-loaded” in the early years of the loan, but then eases as the real value of the debt is swiftly eroded. When inflation is low, the initial payments are more bearable but more of the real debt persists, which shunts a bigger share of the costs into the later years of the loan.

It seems that the collapse in consumer price inflation, to a large extent driven by cheap imports from Asian trading partners with inflexible currencies, has lulled much of the West into believing that perhaps the best of all possible worlds has been achieved - permanently high housing prices and interest rates that will remain benign until the end of time.

For, without interest rates that are still low by historical standards, there surely would be popping sounds heard as one homeowner after another became unable to service their housing debt amid wages that have stagnated in recent years.

But, how long will interest rates stay low?

Monetary policy around the world is tightening to keep inflation at bay. The Bank for International Settlements—the central banks' bank—said on June 26th that the squeeze must continue. The Bank of England is expected to push the base rate back up to 4.75% later this year.

Britain's homebuyers are vulnerable to quite small increases in the cost of mortgages because they have taken on so much debt during the good times. Overall household borrowing has risen from 110% of disposable income in 2000 to 150% at the start of 2005. The burden of repaying so much more debt means that the total servicing charge is high even at low interest rates.

The most frightening words in the financial lexicon are that it's different this time. This refrain, a favourite of boomsters, was much in vogue at the time of the dotcom bubble. It remains just as suspect when applied to a housing market that is unnervingly priced to perfection.

It seems that much of what we have come to depend upon in the global economy is predicated on low interest rates - low interest rates that allow ordinary individuals to take on extraordinary amounts of debt in order to buy large houses and then fill them with cheap imported goods, somehow still making ends meet month after month.

But how long can this continue if interest rates continue to rise?

Isn't this really too good to last, and shouldn't we all have realized this some time ago?

Read more...