The week's economic reports

A strong rebound in the labor market highlighted a week of otherwise disappointing news for both housing and manufacturing. Stocks and bonds ended the week with the S&P 500 Index up 2.0 percent to 1,557, now up 9.8 percent for the year at a new all-time high, and the yield of the 10-year U.S. Treasury note rose 7 basis points to 4.64 percent.

ISM Manufacturing Index: Manufacturing activity continued to expand in September, the ISM's manufacturing index registering 52.0, still slightly above the 50 mark that separates expansion from contraction. But, in a continuation of a trend now stretching out over three months, the rate of growth continues to slow after peaking in June when the ISM index registered 56.

New orders, production, prices, and inventories all declined in September, though the drop in inventories (from 45.4 to 41.6) may be beneficial in that lower inventories could spur future production. Costs fell (from 63.0 to 59.0) but remain the highest individual component in the index, down from over 70 during the last year. This is yet one more piece of evidence that the manufacturing rebound of earlier this year has about run its course as growth continues to slow.

Pending Home Sales: Pending home sales in August hit an all-time low, failing to even reach the level of September 2001 following the terrorist attacks in New York, Washington D.C., and Pennsylvania. The index of homes placed under contract fell 6.5 percent from July to August and now shows a year-over-year decline of 21.5 percent.

Quickly eroding consumer attitudes toward the purchase of real estate and the lack of available mortgage money have caused activity to slow to a crawl during what is normally a busy time of the year. The National Association of Realtors reported that 10 percent of sales contracts fell through at the last moment due to canceled loan commitments and, in some areas, 30 percent of signed contracts were canceled due to the credit crunch.

ISM Non-Manufacturing Index: Growth in service sector activity slowed only marginally in September, the ISM non-manufacturing index still showing healthy expansion at 54.8 after a reading of 55.8 in August. The employment component rose from 47.9 in August to 52.7 in September, another sign that the U.S. labor market, while not robust, continues to create jobs.

Employment Report: Employment in the U.S. rose 110,000 in September and the number of jobs created in August was revised upward, from 4,000 to 89,000, largely a result of a statistical fluke in the number of teaching jobs previously reported that has now been revised. On a year-over-year basis, nonfarm payrolls gained 1.2 percent in September, a decline from the 1.3 percent growth rate in August.

Interestingly, as part of the Labor Department's annual benchmark revision, job creation for the year ending in March 2007 was revised downward by 297,000. This is the first indication of what are likely to be large downward revisions for job creation during 2007 as the birth/death model estimates will surely prove to have been overly optimistic in predicting job creation due to the formation of new companies during weakening business conditions for the construction, manufacturing, and finance industries.

Over the last year, the birth/death adjustments have accounted for more than two-thirds of all new jobs, a sharp increase over the levels of previous years. Despite the rebound in September and prior to any future revisions, the multi-year trend in job creation remains the same - a steady decline in job growth since late-2005 as shown below.

September job gains were seen in Education and Health Care (+44, 000), Government (+37,000), Leisure and Hospitality (+35,000), and Professional and Business Services (+21,000) while Manufacturing (-18,000) and Construction (-14,000) both posted losses.

With nine months of data now in the books for 2007, health care is the clear leader in employment growth as shown below. Of the almost half million new jobs in the Education and Health Care Services category, only 91,000 of these are education related - the health care industry has created a whopping 377,000 new positions and is ahead of all other categories by a wide margin. Employment gains in food service, within the Leisure and Hospitality category above, come in second to health care with 240,000 new positions so far in 2007.

The rebound from August to September was expected and it will take some pressure off of Ben Bernanke and the Federal Reserve regarding monetary policy, lessening the probability of another interest rate cut later this month, however, the recent trend should be troubling to all policy makers - health care, food service, and government as the engines of employment growth can not be interpreted as a sign of a healthy economy.

Summary: Though there is a good deal of uncertainty in the labor report due to birth/death model estimates, massive revisions that are now routine, and other oddities, there can be no doubt that last month's 4,000 job loss was an anomaly rather than the beginning of a trend. Neither unemployment claims nor the ADP payroll data show any significant stress in the labor market today, though there is a clear trend downward in job growth over the last two years. Despite the questionable quality of that growth (health care, food service, and government jobs) these are still real jobs that pay real money, which should be supportive of consumer spending that drives economic growth.

Manufacturing continues to fall off from the spring highs with little indication of a rebound ahead and real estate statistics continue to plumb new lows. Bottom calling for the housing market has intensified over the last week or two after truly horrendous reports that reflected activity during the onset of the credit crunch in August.

Consistently high growth in consumer credit in recent months reflects the consumers' willingness to fund purchases via new credit card debt rather than home equity withdrawal, as the latter source of funding fades along with elevated home prices. Initial indications for the consumer spending component of third quarter economic growth show only a marginal slowdown in consumption, providing more evidence that counting out the American consumer is one of the longest running losing bets around - more will be known on this subject in a few weeks when the first look at third quarter GDP is released.

The Week Ahead: The week ahead will be highlighted by a report on retail sales on Friday. Also scheduled for release are the Fed meeting minutes on Tuesday, import/export prices and international trade on Thursday, and producer prices and consumer sentiment on Friday.

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Spending is fun, saving sucks

At some point in time, a "saving ethic" will re-emerge in this country. By the looks of this story from CNN/Money - Life and debt in suburbia - it won't be anytime soon.

Americans are apparently only going to go kicking and screaming back to the ways of their grandparents and great-grandparents as exemplified by free-spending Dave Mendell, one of the three subject families for the report, who noted "We're not penny pinchers, but we can't spend without thinking about it either. That would be a nice goal."

Without pulling back the veil of polite secrecy that neighbors maintain about their financial status, it's hard to tell.

This story helps pull back that veil on three families on a street called Willow Lane in an idyllic upper-middle-class American suburb.
...
The Wrights, the Steins and the Mendells are strikingly similar at first glance. They moved to town recently, are in their late thirties and early forties, grew up in middle-class families, graduated from good colleges, have professional jobs and are raising young kids. All three earn a comfortable living and borrowed about $300,000 to buy their homes.

In terms of their financial security, however, they are at quite different places. What's more, none of the families had an accurate picture of how they are doing, in part because they unconsciously measured themselves against their neighbors, and their assessment of those neighbors is wrong.

Reason number one why most people will never be wealthy (i.e., a high net worth) is that they care too much about what other people think.

Write that down - it's important - then read the story.

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A sense of humor at Countrywide

As evidenced by this memo posted on the front door of a Countrywide office in San Francisco, it is clear that at least one employee someone has maintained a sense of humor.

This comes from W. C. Varone's blog, via the ever helpful Patrick.net housing site.

Here's what it looked like to employees about to begin another day at work for the beleagured mortgage lender based in Calabasas, California.

As there were Countrywide offices all around my old neighborhood in Southern California - new ones springing up, old ones being expanded, new ones being acquired - the company's current troubles are of particular interest not only because of what must now be viewed as an overly optimistic expansion, but because of friends who work there.

Time to go to work.

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Healthy employment in health care

Employment in the U.S. rose 110,000 in September and the number of jobs created in August was revised upward, from 4,000 to 89,000, largely a result of a statistical fluke in the number of teaching jobs previously reported that has now been corrected.

Interestingly, as part of the Labor Department's annual benchmark revision, job creation for the year ending in March 2007 was revised downward by 297,000. Despite the statistical rebound in September, the multi-year trend in job creation remains the same - a steady decline in job growth since late-2005.

September gains were seen in Education and Health Care (+44, 000), Government (+37,000), Leisure and Hospitality (+35,000), and Professional and Business Services (+21,000) while Manufacturing (-18,000) and Construction (-14,000) both posted losses.

With nine months of data now in the books for 2007, health care is the clear leader in employment growth. Of the almost half million new jobs in the Education and Health Care Services category, only 91,000 new jobs are in education - the health care industry has created a whopping 377,000 new positions and is ahead of all other categories by a wide margin.

So far in 2007, a total of 240,000 new positions have been created in the Food Services and Drinking Establishment sub-category within the Leisure and Hospitality category shown above.

This continues a well-established trend in the U.S. employment data in recent years - a symbiosis, of sorts, between a food service industry that caters to a nation of over-eaters and added work in the health care industry as a result of record levels of obesity.

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Ensign Captain Bernanke

This cartoon fits so well with the "Ensign Bernanke" mention from the post earlier today that not sharing it here this afternoon would be a real shame.
The artist responsible is unknown (K. D??), however, the source of the cartoon was the JimmyDoomsday blog whose ad (an ad for a blog?) appeared in one of those Google ad boxes that flank my writing.

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An interview with Alan Greenspan

After repeated requests, at great personal expense, and after a series of logistical obstacles were somehow miraculously overcome, former Federal Reserve Chairman Alan Greenspan and I sat down for an interview the other day.

Tim Iacono: Good afternoon.

Alan Greenspan: Good afternoon. My assistant tells me you've been writing about me.

Iacono: A little. Let's get right to the point. Are you responsible for the housing bubble?

Greenspan: No.

Iacono: Would you care to elaborate on that?

Greenspan: There are many housing bubbles all around the world and they all have the same root cause - the fall of the Berlin Wall and the entry of hundreds of millions of low cost laborers into the global economy. This resulted in downward pressure on both inflation and long-term interest rates - we raised short-term rates in 2004 but we were powerless against the forces that kept long-term rates so low for so long.

Iacono: Is it really that simple? Long-term rates go below five percent, they don't move up when you raise short-term rates, and that's it? Game over?

Greenspan: It is much more complicated than that, but as it relates to my job as the Chairman of the Federal Reserve, it is indeed that simple. All we can do is control short-term interest rates.

Iacono: But short-term rates were an important factor in those obscenely low adjustable rate mortgages weren't they? And what about regulation in mortgage lending and your power to influence financial markets and individual investors? You spoke highly of adjustable rate mortgages and subprime lending back in 2004 - who knows how many individuals interpreted your comments as a sign of approval for those kinds of risky loans?

Greenspan: My power to influence is highly overrated. For example, Congress never listened to me when I pleaded with them to fix the entitlement problem.

Iacono: But that's an intractable problem that no one can really solve. Your comments about adjustable rate loans and subprime lending gave the green light to speculators who respected your opinion.

Greenspan: Oh I don't think so. As I said, my power to influence is highly overrated. We raised interest rates starting in 2004, but long-rates wouldn't budge - that's the real source of the problems we see in housing today - the Berlin Wall fell and hundreds of millions of ...

Iacono: Yes, yes, yes - we've been through the Berlin Wall thing. Do you take any responsibility for your role in the credit and housing market mess today? Short-term rates and lax regulation of mortgage lenders played a huge role in the housing bubble and the Fed is responsible for both - yet you keep saying "long-term rates were too low because the Berlin Wall fell".

Germany didn't have a housing bubble, mostly because lenders continued to require large down payments, and the Chinese government has repeatedly mandated higher down payments - yet you stood by and did nothing when all those "no-money-down" loans with "one percent teaser rates" were being made a few years ago. Were you unaware of these practices or did you choose to ignore them?

Greenspan: We weren't aware of what was happening in subprime lending until late 2005 or early 2006. When we did see it - very late in the game - we were surprised at some of the things that we saw.

Iacono: So, do you think you should have known how lending standards began to deteriorate earlier in the decade. It all started with Fannie Mae and Freddie Mac and their use of credit scoring and mortgage securitization and ...

Greenspan: And we fixed that problem!

Iacono: You fixed it? How?

Greenspan: By limiting the size of their portfolios. Mortgage securitization was moved to Wall Street where it belongs. Having the GSE's portfolios growing at the rate they were in 2003 posed a systemic risk and, after my pleading, Congress saw fit to reduce their role in mortgage lending.

Iacono: I thought you said your powers of persuasion were overrated.

Greenspan: Not on this occasion.

Iacono: But didn't that just leave Wall Street firms to take up where the GSEs left off? And they have no oversight at all. At least Fannie and Freddie had regulators looking over their shoulders from time to time - on Wall Street, it was like the Wild West with investment firms creating complex products that no one understood or knew how to rate.

As long as prices kept going up and profits kept rolling in, nobody asked questions. Wasn't that lack of regulation one of the major causes of the housing and credit market mess we see today?

Greenspan: When mortgage securitization was transferred to Wall Street, regulation became unnecessary. Investment firms, hedge funds, ratings agencies, and their ilk - these are all "self-regulating" entities. That's what you see today - these firms are all re-assessing risk and a new set of business practices is evolving.

People will lose money - investors and Wall Street firms have already lost a great deal of money - because of the problems we've had in the credit and housing markets.

But these are wealthy individuals - it won't really hurt them.

Iacono: What about the typical home buyer in 2005 who was swept up in the mania of rising home prices? They'll be hurt, wont' they? And they aren't wealthy. They can't just absorb the loss and go on - this will affect them for years.

With the collapse in the housing market and the decline in home prices, this looks like it's going to be just one more part of your legacy where the middle class finds itself worse off than in prior decades while the rich just get richer.

Greenspan: Young man, you simply don't understand the way modern economies work. While there are often unpleasant side effects, it is much better to allow markets go to excess from time to time than for a central bank to repeatedly stop those markets in their tracks - the economy as a whole benefits in the long run.

This euphoria that occurs from time to time - financial bubbles - these are good for an economy because even if a bubble bursts and some of the bad investments are liquidated - a process that can be quite painful for those involved - the economy and society are better off due to the advances that were achieved during the bubble.

If you examine the aftermath of financial bubbles through history, you'll see that in every case, the innovations that occurred and the technology that was left behind when the bubble burst - they leave behind a much better world.

I have been widely criticized for allowing the stock market bubble to expand and then burst a few years ago. But here we are today and broadband has never been so cheap, more people have access to more powerful, yet inexpensive computers than ever before and despite the turmoil earlier in the decade, the society has benefited.

Iacono: What benefits will the bursting of the housing bubble leave behind?

Greenspan: Well, that should be clear - entire neighborhoods have been revitalized, home building and renovation technology has been advanced, and millions of Americans who could never afford a home before are now homeowners because of innovations in mortgage finance and debt securitization.

Iacono: Hmmm... During the period when the Caine was towing targets, did you ever steam over your own tow line?

Greenspan: What? What are you talking about? I don't understand that question.

Iacono: Oops. I'm getting ahead of myself. Let's see... What about the Federal Open Market Committee meetings back around the beginning of the housing bubble - 2002 and 2003 - when interest rates were at 40-year lows? There have been comments from former Federal Reserve members that you would not tolerate dissent and that monetary policy decisions were already made prior to the policy meetings - that the meetings were just a formality.

Many analysts now think that you left short-term rates too low for too long.

Greenspan: I'm happy to dispose of this particular slander right now. We were facing the threat of deflation at that time - no one realized that you could have deflation in a fiat money system, but I did. Japan proved that it was possible and I took steps to avoid deflation - a powerful and destructive force whose danger no one else appreciated. As a result of my swift action we avoided that danger.

Iacono: But didn't you just inflate another bubble instead?

Greenspan: My unreliable staff at the Federal Reserve failed to warn me about that. But I saw the dangers at Fannie and Freddie - I was the only one to recognize that something had to be done about that. We avoided a systemic collapse that might have resulted had I not taken action.

Iacono: But weren't you distracted at the time? Didn't memories of your policy actions in 1992 - policy actions that many thought were responsible for the failed re-election campaign of George H. W. Bush - didn't these prior monetary policy actions affect your thinking in 2003? Weren't you just trying to right a wrong from twelve years before?

Greenspan: I don't recall.

Iacono: What about the inflation rate during that time - when you held interest rates at one or two percent from 2002 until June of 2004? Last year, Dallas Federal Reserve President Richard Fisher noted that the these figures were probably too low - that perhaps there really was no threat of deflation.

Greenspan: On that, my unreliable staff at the Federal Reserve failed me again. Had I been provided with accurate inflation data, interest rate policy may have been different, but after the stock market bubble had burst, I assumed command of a badly-handled ship. I tried to bring it into line.

Iacono: Didn't the late Ned Gramlich warn you of the dangers of subprime lending as far back as 2002 and didn't he propose tighter regulations and urge you to rein in the non-bank lenders?

Greenspan: I don't recall.

Iacono: Were all the members of the Federal Reserve Board disloyal?

Greenspan: I didn't say that. Some were disloyal.

Iacono: You co-wrote a report on mortgage equity withdrawal during your last year as Federal Reserve Chairman. This was your first paper in over ten years. Do you recognize it?

Greenspan: Yes, I do.

Iacono: Did you spend the better part of you last year trying to prove that home equity withdrawal due to the housing bubble would not have an adverse impact in the long run? That a reversal in mortgage equity withdrawal did not pose a threat to the economy?

Greenspan: I don't know what lies have been sworn to here, but I was trying to prove that the economy was functioning normally, but my disloyal staff failed me here too - the data was inconclusive.

Iacono: Wasn't the whole fuss over who would get blamed for the housing bubble? Weren't you told that the mess boys ate the berries? That there was no key?

Greenspan: The key was not imaginary. I don't know anything about the mess boys.

Iacono: Have you no recollection of a conversation with Ensign Bernanke in 2005? Didn't he tell you that the mess boys ate the strawberries?

Greenspan: I remember he was grateful for his transfer to the White House.

Iacono: Do you know where Ensign Bernanke is now? He's in Washington. He can be flown up here in three hours if necessary. Shall we have him testify?

Greenspan: No, I ... I don't see any need of that. Now that I recall, he might have said something about mess boys. I questioned many men, and Bernanke was not the most reliable officer.

Iacono: The defence has no other recourse than to produce Ensign Bernanke.

Greenspan: There's no need for that. He'll only tell you lies.

[Reaches for two silver balls and begins handling them]

All the officers were disloyal. They were always fighting me. If the crew wanted their shirt-tails out, they'd let them. Take the tow line ... defective equipment.

But they began spreading wild rumors about steaming in circles, and then "Old Yellowstain".

I was to blame for Maryk's incompetence. Maryk was the perfect officer, but not Queeg.

But the strawberries, that's where I had them.

I proved with geometric logic that a duplicate key to the icebox existed. I could have produced that key.

They were protecting some officer ...

Naturally, I can only cover these things from memory.

If I've left anything out, just ask me specific questions.

I'll be glad to answer them one by one.

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Guess the year-end price of oil and gold!

There is one week before entries close for the "Guess the price of oil and gold" contest. There's been little movement from last week when the third edition of this contest began.
Crude oil has moved from $81 to $80 and gold from $734 to $728 - the chart above shows the movement in both commodities since the last contest concluded in June.

The individual guessing nearest to the closing prices on December 31st will win a free one-year subscription to the companion investment website Iacono Research.

Entries may be made either by posting them in the comments section of this post or by sending mail to either tim-at-iaconoresearch.com or tliacono-at-yahoo.com. All entries must be received no later than October 10th - one week from today.

There will be a final reminder here next Wednesday and current subscribers can win a free one-year extension to their existing subscription.

Good luck to all!

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95832

Countrywide has a strong presence in California as evidenced by the 2847 (at last count) Countrywide Owned Properties in the Golden State. With no zip code information available at their website, it's impossible to know how many of these are in the 95832 zip code, the subject of the video below, but with well over 100 of their bank-owned properties listed as Sacramento, it's good bet that 95832 is well represented.

A tip of the hat to Telecommuting Millionaire via I Can't Sell My House.

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LENDSTRONG

Does Countrywide Financial (NYSE:CFC) have a blog? If they do, a comment similar to this one is likely to appear there sometime in the weeks ahead:

Hey Nation! It’s not too often I get really excited about a bracelet–what usually happens is they end up messing up circulation in my hand, then I can’t feel my hands, then I can’t really feel anything because I need my hands to feel in the first place–but I have to admit I’m pretty psyched to get myself one of Angelo's LENDSTRONG bracelets. And you better believe I’m taking it to my jeweler and getting a few more links put in that bracelet!

The above is a slightly modified comment that originally appeared at the Colbert Nation blog following the launch of the WRISTSTRONG campaign by Stephen Colbert of the Colbert Show after he sprained his wrist in a widely seen on-air slip.

He then saw fit to have some fun with the incident by promoting "wrist health".

Do the folks at Countrywide watch TV? Do they know that the last national campaign featuring plastic bracelets was from a comedy show and not cancer survivor Lance Armstrong who popularized the LIVESTRONG bracelet?

Apparently not.

You can still get a WRISTSTRONG bracelet here, as seen on many celebrities over the last few months - part of a running joke on the show.

Nation, the Wall Street Journal reported($) earlier today that the beleaguered mortgage lender , Countrywide Financial, has launched a PR campaign that involves issuing bracelets to employees who sign a pledge to help turn the company around:

Having suffered a barrage of negative headlines while battling to shore up its finances and shrink its work force of 60,000 by as much as 20%, the nation's largest home-mortgage lender is launching a PR blitz aimed at repairing its reputation. And it starts inside the company.

For the demoralized employees who remain, the new campaign means wristbands with the phrase "Protect Our House" and pep talks promising to keep "amply" rewarding the most successful among them amid a struggle with the sharp drop in mortgage lending as defaults soar and house prices decline.
...
Rick Simon, a Countrywide spokesman, said the transcript was sent to employees Friday. It says that employees are expected to sign a pledge to "demonstrate their commitment to our efforts," and Mr. Simon says about 11,000 have signed. Each employee who signs up receives the Protect Our House wristband made of green rubber. "We believe there's a great story about the strength of the business," says Mr. Simon.

Here's the transcript(.pdf) which appears to be in the free section of the WSJ - note the part about "manufacturing".

Our challenge today is managing our business in this new environment, meaning, we need to operate in a significantly reduced market, focusing more than ever on manufacturing quality, and at the same time preparing ourselves from continued, unwarranted attacks regarding our viability and what has ultimately come down to protecting our reputation.

Don't you just love it when a mortgage lender in our "over-financialized" economy describes what they do as "manufacturing"? Naturally, the whole bracelet thing was the much more interesting part of the story, but "manufacturing" at Countrywide gets an honorable mention.

Hmmm... no mention of fending off warranted attacks regarding their dumb internal PR campaign. Maybe that will come in the next memo.

And, with all the commotion of recent weeks, Countrywide President Angelo Mozilo has been remarkably restrained with his stock sales. It looks like about 15,00 options were exercised a couple weeks ago.

They were probably in the money and about to expire - completely understandable.

Full Disclosure: No position in CFC at time of writing.

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

UPDATE: 10/3/2007 at 9:10 AM

In writing on the same subject, David Gaffen at the WSJ Marketbeat blog recalled the 1990 hit by Twisted Sister, focusing on some of the very loud words in the memo rather than the bracelet ... interesting.

In a memo to employees, executive managing director of residential lending, Drew Gissinger, writes that “our ethics, morals, and what we stand for are being questioned,” and says (in all capital letters, mind you), “WE’RE NOT GOING TO TAKE IT!”

Dee Snider comparisons aside, what shouldn’t be ignored is that the sharp decline in shares has less to do with hurt feelings than with the falloff in earnings, concerns about funding, and the overall health of the housing and mortgage businesses.

“The people remaining at CountryWide are being asked to forget that their CEO has sold tens of millions of dollars in stock,” muses Doug McIntyre of 24/7 Wall Street.

But no matter, as it must be “personal,” as Mr. Gissinger puts it, even though nine of 15 Wall Street analysts have “hold” ratings on the stock, with the remaining six dividing equally between “buy” and “sell” recommendations.

In a note to David, I commented, "they really need another PR team looking over the work of the original PR team that is trying to restore the company's image."

Oh, and by my count, as depicted in the chart above, it's over $200 million in stock sales in 2007 alone, though, admittedly, some credit is due to Angelo Mozilo for showing remarkable restraint over the last month or so.

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Sell the IMF gold to China - it's a start

Here's a simple solution to the problem of China having too many dollars and the IMF not having enough - start selling the IMF gold to China.
Talk is heating up again about the International Monetary Fund selling 400 tonnes or so of its gold reserves in order to square its books after revenue shortfalls the last couple years.

It just so happens that there might be a buyer in Asia who would be interested in beefing up their bullion reserves - China is woefully short of the Euro-area recommended 15 percent of reserves that prudent central banks should hold as gold.

As shown in the annotated table above from the World Gold Council, the inventory at the streetTRACKS gold trust is about to overtake China in gold reserves (maybe this month at the current pace) and, the embarrassment of this event aside, China really does need more gold.

That 400 tonnes would fetch about $10 billion at today's gold price.

Hey, China could buy all of the IMF gold for less than $100 billion - this would barely make a dent in the $1.4 trillion they have amassed in foreign exchange reserves.

Is that math right?

That sounds like that's way too many dollars and way too little gold.

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Worse than September 2001

The National Assocaition of Realtors reported that pending home sales reached a record low last month, exceeding even the total from September of 2001. This story from CNN/Money fills in some of the details:

The meltdown in the mortgage market in August dried up the supply of buyers for homeowners looking to sell their homes, as an industry group report showed the lowest level of homes under contract on record.

The National Association of Realtors' pending home sales index fell to a record low of 85.5 from an upwardly revised 91.4 reading in July. That broke the previous low of 89.8 in September 2001, the period in which the terrorist attack shook buyer confidence. The trade group started the index in 2001.

This time the hit to home sales came from buyers having trouble finding the financing they needed to buy homes, coupled with the reluctance of some buyers to jump into the battered market.

Rather sobering assessments such as this are not likely to enable a speedy recovery:

Mike Larson, a real estate analyst with independent research firm Weiss Research, said that he would expect that the pending home sales might show some improvement going forward. But he doesn't believe it will be the sharp rebound seen after September 2001.

"I wouldn't be surprised to see a rebound from these truly awful numbers in the fall, in September or October," he said. "The credit markets are a little better than in August. But I'm certainly not expecting a strong, lasting surge. I think the existing home markets will stay weak into back half of 2008 and perhaps into 2009."

Larson said that economic fundamentals will be the next drag on home sales, as the Labor Department reported its first drop in four years in August of workers on U.S. payrolls, while economic growth is slowing.

Larson said that market psychology will also keep the pace of sales weak, as home shoppers who are having trouble getting what they want for their current home will pull out of the market, while other potential buyers decide to wait to see if the price of homes they want to buy continue to slide.

"It's the polar opposite of what we saw in '05 when people thought, 'If I don't buy now, I'll be priced out forever,'" he said. "Now they think it makes sense to wait."

With more and more observers pegging late-2008 or sometime in 2009 as the bottom, it seems increasingly unlikely that when a rebound does come, it will be anything more than a gradual turn after all the thrill of 2005 home buying has been expunged from the collective consumer psyche.

Of course, as they did when the housing bubble was inflating, mainstream media reports such as this will serve to exacerbate the current trend.

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Who's to blame for all the denial?

Econoblogs are in a tizzy now that one of their own has started pointing fingers in a search for blame in the current housing melt-down. One of the higher echelon dismal thinkers, Alan Blinder, professor of economics at Princeton and former vice chairman of the Federal Reserve points "Six Fingers of Blame in the Mortgage Mess".

In order, they are:

1. Households who borrowed recklessly to buy homes
2. Lenders who sold mortgage products that were inappropriate for customers
3. Bank regulators for not doing a better job of protecting consumers
4. Investors for not paying close attention to what they were buying
5. Investment bankers for creating CDOs and other exotic investment products
6. The rating agencies for failing to properly assess risk

As might be expected, there was nary mention of interest rates that may have been too low for too long, a Federal Reserve chairman with a big "bully pulpit" who encouraged risky behavior, or the decade-long transition of the business of mortgage lending away from regulated banks to the Wild West of Wall Street, aided and abetted by the Fed.

Normally level-headed (for an economist) James Hamilton at Econbrowser places the blame squarely on investors, without whom he says, none of the other fingers would matter:

A dumb borrower requires an even dumber lender. And if there is always an investor to dump the product off on, then of course there is an incentive for someone to originate and then sell off the loan.

Other econo-bloggers offer few no original thoughts of their own, however, some of the comments are interesting.

On Brad Delong's Grasping Reality, J writes:

Sir, We the lemmings have an unfortunate tendency to periodically jump en masse into the ocean (we don't swim). We are also unable to resist "free" mortgages. Knowing that, we elected a government of the soberest lemmings to keep us safe from ourselves. Our government failed to stop us, although later threw us paper to keep us afloat. Then I have to disagree with your finger pointing: we lemmings are built in such a way that not one of our twenty fingers can point toward ourselves. We, Sir, are innocent.

On Mark Thoma's Economist's View, S. Brennan writes:

I'm not following all of the above arguments. Low interest home loans should result from:

1. Low inflation
2. A Generous Fed
3. Excess capitol that needs to find a working home
4. An investment that seems sound.

1a] So the goverment created numbers [core inflation] that said we have no inflation...and Greenspan reported this with vigor.

2a] The Fed Chairman said, inflation is low, so low, I fear deflation...very bad...must lower prime to unheard of lows...deflation...very bad.

3a] Then the Fed Chairman said: "Hey it would be awful if the US continued to pay down it's debt...tax cuts for the wealthy will solve that." and suddenly a group of people who already had enough money had a lot more money every year...hear the sound of dollars sloshing around?

4a] People will always need a place to live and we have a govermental policy that favors homeowners over renters and a growing population.

What went wrong?

1] Greenspan lied 2] Greenspan lied 3] Greenspan lied 4] People are People, just as they always have been.

Why did Greenspan lie? Can you say political hack?

On Greg Mankiw's blog, Greg Mankiw's Blog, one commenter opines, "This article is just an embarrassment" and Daisy Navidson posted a link to the following YouTube video:

Like loyal subordinates to a retiring four-star General who led a military campaign whose disastrous consequences are only beginning to unfold, there is a remarkable absence of blame directed toward the highest level of leadership.

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Trouble at the high-end?

It seemed strange to see this in the back of the Friday edition of the Wall Street Journal, where the real estate section is normally filled with dreamy spots for that perfect vacation home in some resort community far away from bright city lights.


Bend, Oregon appears to be bulging with housing inventory - according to Realtor.com there are over 2,500 homes for sale. According to the Census Bureau, there only 149,000 people in the entire county - that sounds like a lot of homes for sale.

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A knack for buying at the bottom

The inventory vs. gold price chart for the streetTRACKS Gold Shares ETF (AMEX:GLD) has been shown here on many occasions previously, but the chart below showing the increase in inventory vs. the gold price is even more intriguing.
Check out those early-September purchases when the price of the yellow metal was under $700. Have a look at the relative dearth of new purchases over the last three weeks as the gold price soared to almost $750.

Why did they buy 33 tonnes as gold moved up $20 (from $680 to $700) but only 28 tonnes as gold moved $47 (from $700 to $747)?

Dunno.

Since the fund buys bullion on the open market in relatively large "baskets" based on demand for their shares (one share corresponds to one-tenth of an ounce), they are free to make purchases whenever they want to, presumably, as long as the inventory tracks the number of shares outstanding.

They seem to have a real knack for buying at the bottom.

Full Disclosure: Long GLD at time of writing.

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Shadow banking

Alan Greenspan claims not to have known the deleterious effects of having outsourced mortgage lending from the "traditional" banking system to unregulated Wall Street firms.

In his latest commentary, Bill Gross of Pimco describes how the former Fed chairman's successors are dealing with the mess now.

The modern financial complex has morphed into something unrecognizable to many astute market veterans and academics. Bernanke’s fellow governors and Hank Paulson’s staff at the Treasury spread their roots during an era in which traditional banking activity – lending out deposits backed by a certain level of reserves – was the accepted vehicle for liquidity creation. Remember those old economics textbooks that told you how a $1 deposit at your neighborhood bank could be multiplied by five or six times in a magical act of reserve banking? It still can, but financial innovation has done an end run around the banks. Derivatives and structures with three- and four-letter abbreviations – CDOs, CLOs, ABCP, CPDOs, SIVs (the world awaits investment banking’s next creation; perhaps IOU?) – can now take a “depositor’s” dollar and multiply it ten or 20 times. Reserve banking, and the Federal Reserve that regulates the system, appear anemic in comparison.

I’m sure that Bernanke, Paulson, and their cohorts understand this, but it isn’t yet clear how much they appreciate it. Alan Greenspan admits in his newly published book that he didn’t appreciate until recently the impact adjustable-rate mortgages and their subprime character, accompanied in some cases by outright fraud, would have on the housing market. If the Fed was so slow to grasp the role that subprime mortgages played in the housing boom and bust, do the Fed and the Treasury of today totally comprehend what happens when the nonbanking private system suddenly stops flooding the market with credit? Do they recognize that such a shutdown puts spending for housing and business investment at risk, and job growth as well? The Fed will have to adapt its monetary policy, and the Bush Treasury will have to adjust its fiscal policy to this brazen new world dominated more and more by private rather than public policies and proclivities. To overcome private-market caution, the Fed may need to put on a bold face marked by even more decisive cuts in short-term rates. To prevent a housing-market slump from metastasizing into a cancerous self-feeding tumor, Treasury Secretary Paulson will have to coordinate policies that lend a helping hand to homeowners in distress.
...
But if Paulson cannot prevent expected declines of 10-15% in national home prices over the next several years, it is problematic as to whether Bernanke can substantially cushion them either. First of all, the aforementioned lack of “appreciation” of a modern-day shadow banking system has put the Fed far behind the 8-ball in its reflexive duty to lower interest rates in an anticipatory fashion. Mortgage credit has been contracting on the ground level for all of 2007 with individual, small, and then national mortgage brokers and originators closing their doors.

The lingering question for the former Fed chairman is, "Was he naive and incompetent, or was he complicit and responsible?"

You can't really separate these two pairs of adjectives.

Wall Street banking and reckless hedge fund operations would not have progressed to the egregious levels that were the norm back in 2004 and 2005 had someone been thinking about the bigger picture. Like all manias - when everyone seems to be getting rich - not nearly enough questions were asked by the people who should have been asking questions.

With the bursting of each bubble, it is painfully understood once again that there are "no free lunches" and "perpetual motion machines" are fantasy.

Many times, during Congressional testimony in his last few years, the calm reassurances that the "traditional" banking system was showing "little sign of distress" were uttered by Alan Greenspan. And, when the subject turned to regulation of hedge funds, an adamant tone was heard praising the innovation that would not be possible with intrusive oversight.

Perhaps Senator Jim Bunning of Kentucky put it best when, during a series of inquiries earlier this year prior to the housing and credit market problems coming to full flower, he wondered about prior testimony at the height of the housing boom:

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

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

And, of course the video:

There is more related video by john67elco (author of the above) at YouTube.

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The quest to undo evolution

This came in the mail the other day from Fidelity Investments:

Somehow, the idea of undoing millions of years of evolution that is the bane of most ordinary investors who find themselves choosing "flight" over "fight" in increasingly volatile markets - this just doesn't seem like a plan that is going to work.

It works for me, but then I'm not your ordinary investor.

You can see for yourself what they recommend to the masses who will turn to the stock market to help make up for losses in a declining housing market as they edge closer to retirement. Good luck with that.

ooo

This week's cartoon from The Economist:

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