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The 52-week results in the right-most column still favor the trade-weighted U.S. dollar and gold, the latter seeming to rise from the dead last week. They really should add treasuries and short funds to this list from the WSJ, just to make it a little more interesting.
Feel free to let loose some crocodile tears for the occasion...
Bloomberg reports that assets from Bear Stearns that wound up at the Federal Reserve are souring fast and the central bank may need some TARP money to cover the losses.
That image is not from the article but, rather, the number one result for a Google image search on "toxic assets". Does anyone else find it disturbing that such a warning label exists? It appears to be genuine and may just one more bit of evidence that Devo was correct. Read more...The Federal Reserve took on more than $74 billion in subprime mortgages, depreciating commercial leases and other assets after Bear Stearns Cos. and American International Group Inc. collapsed.
In its biggest disclosure of the securities accepted to stabilize capital markets, the Fed said yesterday it had unrealized losses of $9.6 billion on the assets as of Dec. 31. The bonds, swaps and notes were taken in from Bear Stearns, once the fifth-biggest Wall Street firm by capitalization, and AIG, which had been the world’s largest insurer.
The losses on securities backed by assets such as home loans in Florida and California signal that U.S. taxpayers may be forced to reimburse the central bank through the Troubled Asset Relief Program, according to Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics.
The Census Bureau reported that new home sales fell 0.6 percent last month, from a seasonally adjusted annual rate of 358,000 in February to 356,000 in March, still at a level that the phrase "historically low" fails to adequately describe.
The March total is still a full 23 percent below this pace!
While a bottom may indeed be forming after the relative stability of the last four months, these are the lowest levels of sales in the 46 years since this data series began and an improvement of some 29 percent from the current level is required just to equal the worst reading since JFK was sitting in the White House.
You can almost see the headlines later this year - New home sales surge 20 percent.
What will most likely be omitted from the story is that sales will have to increase by almost another ten percent just to better the level seen at the depths of the economic downturn in Ronal Reagan's first term.
Lower mortgage rates and tax credits for first time home buyers spurred sales in March helping to reduce builder inventory as the months of supply metric fell from 11.2 months to 10.7 months. This is down from a high of 12.5 months in January but still almost triple what would be considered normal.
Still highly distorted by sales incentives and other give-aways by increasingly desperate homebuilders, the median price fell from $208,700 in February to $201,400 in March, down 12.2 percent on a year-over-year basis, and is now at its lowest level since late-2003.
Word comes from across the Pacific this morning that China has been increasing their gold reserves and finally decided to let the world know about it. Here's the list of the world's top holders of gold, updated to reflect China's new total and the SPDR Gold ETF holdings.
Hu Xiaolian, head of the State Administration of Foreign Exchange, announced the hefty increase which was attributed to domestic purchases and scrap supplies. China overtook South Africa last year as the word's leading producer of gold and, apparently, a good portion of that output is finding its way into central bank vaults, though, as a percent of total reserves, it's still just a pittance.
TOP STORIES
• U.S. Said to Seek a Chrysler Plan for Bankruptcy - NY Times
• Banks May Struggle for Funds as Bad Assets Triple - Bloomberg
• U.S. pressured BofA to complete Merrill deal - Reuters
• Edgy Banks Start to Get Word Today on Stress Tests - NY Times
• The world economy: A glimmer of hope? - Economist
• Borrowing puts UK's AAA rating in danger after Budget 2009 - Telegraph
• HSBC’s Absolute Return Fund Buys Gold, Seeking to Diversify - Bloomberg
• Property in America: Commercial break - Economist
MARKETS/INVESTING
• Gold Rises as China Increases Reserves - Bloomberg
• U.S. first-quarter earnings exceed expectations - Reuters
• Central Bankers cannot prevail in war against gold - Mineweb
• Apple Powers Nasdaq 100 Performance - AP
• Gold miners could surprise on costs due to oil - Reuters
• Retest of March 9 low coming? - MarketWatch
ECONOMY
• U.S. durable goods orders fall 0.8 percent in March - Reuters
• Automakers teeter on verge of industry shutdown - USA Today
• U.S. Existing Home Sales Dropped More Than Forecast - Bloomberg
• Economic outlook remains bleak as world leaders gather - USA Today
• Geithner says downturn may be easing - Reuters
INTERNATIONAL
• Spain's jobless rate jumps to 17.4 percent - AP
• China gold reserves apparently doubled - MarketWatch
• Germany's slump risks 'explosive' mood, new banking crisis looms - Telegraph
• Analysts hike forecasts for China's economic growth - MarketWatch
• British economy: Sharpest decline since '79 - CNN/Money
• Britain after the budget: Hubris and nemesis - Economist
• Economics focus: Not quite so SAFE - Economist
• Dubai: A new world - Economist
HOUSING
• Outlook for Home Prices Clouded by Spat Over Historical Trends - WSJ
• So. Florida remains conflicted: Sales soaring, but prices plunging - Sun Sentinel
• Foreclosures Huff, Puff, and Blow Housing Market Down - Motley Fool
• Buttonwood: Down and out - Economist
FED/TREASURY/BANKING
• Fed reports huge balance sheet jump - CNN/Money
• Bernanke and Paulson look foolish if Lewis is right - MarketWatch
• Fed data shows big losses on Bear Stearns deal - Reuters
• Tim Geithner: Baptism of fire - Economist
INTERESTING
• Countrywide name to vanish from U.S. - Trading Markets
• Elton John’s Wealth Drops 26% in Crisis - Bloomberg
• How Bernie did it - CNN/Money###
A short interview with Faheed Zakaria at CNN with some frightening thoughts at the end: "We expect this all to be over because that's what we're use to ... The idea that this could last for years is beyond most peoples' imagination".
In this report from the Wall Street Journal, David Wessel looks at the prospects for an economic recovery and concludes that the "L" shaped variety is most likely.
There is no doubt where the economy is now. "By any measure, this downturn represents by far the deepest global recession since the Great Depression," the International Monetary Fund declared Wednesday.There's a good deal of detail provided on the possible paths and, in the process, some cold water gets splashed on the whole idea of a strong rebound commensurate with the rate of decline experienced over the last six or eight months.
...
The alphabet can help to imagine the possibilities and the path of the economy. There's the letter V: the kind of quick rebound that usually follows a deep recession. Or U: a longer recession and slow recovery. There is L: years of painfully slow growth. And W: a temporary upturn as the economy feels the jolt of fiscal stimulus that quickly wears off. Finally, there's the big D, not the shape but another Great Depression.
The odds of the V: 15%That sounds about right, unfortunately.
...
The odds of the big D: 20%.
...
An unfolding depression could scare Congress to act boldly, but the L is less ominous -- and perhaps more likely as a result. There would be months when the economy appeared to be strengthening so the temptation to wait-and-see would be strong.
Put the odds of the L at 55%. That adds to 90%. So put 10% odds on the U, less pleasant than the euphoric V but far less painful than a Lost Decade. That's the rough consensus of economic forecasters; it means U.S. unemployment grows for another year and a half.
Felix Salmon thinks the money "velocity" problem in the U.S. (where plenty of money exists, it's just not being spent fast enough) could be quickly solved if the Treasury Department would apply a "Use on or before" date to the dollar as the Reserve Bank of Zimbabwe does.
Makes sense. I'm just dying to know where these Zimbabwe bills end up on the day or two before they expire. Somebody's got to get stuck with them. Don't they? Can you just swap them at a bank on December 31st?
This report by Ben Rooney at CNN/Money takes a few rather ambivalent comments by impartial analysts and combines them with more drivel from a National Association of Realtors shill, interpreting it all as a hopeful sign for the housing market.
Despite last month's decline, existing home sales appear to be stabilizing, according to Ian Shepherdson, economist at High Frequency Economics.Yes, and they flattened out last year too before falling off a cliff (see chart from previous post), back when distressed sales accounted for a much smaller portion of overall sales.
"Sales are volatile month-to-month, but the trend appears to be flattening off," Shepherdson said in a research note.
Between this sort of optimism and word of bidding wars on foreclosed properties (discussed here yesterday and reported again in the Wall Street Journal today), this is probably a very good indication that there is much more pain to come in the housing market. Read more...First-time buyers made up 53% of existing home sales in March. Charles McMillan, NAR's president, said first-time buyers are "crucial" to a recovery in the overall housing market.
"The housing market always heals from the bottom up, and with large numbers of first-time buyers entering the market it will become a little easier for sellers to trade up or down," McMillan said in a statement.
The National Association of Realtors reported sales of existing homes fell 3.0 percent in March after a gain of 4.9 percent in February. More than ever before, sales are being driven by foreclosures and short sales that now account for over half of the overall sales total.
The decrease in total sales was paced by an 8 percent slump in the Northeast and purchases also fell in both the West and in the South while Midwest home sales were flat.
After five months of sharply lower sales volume following the credit market crisis last fall, it would appear that a new bottom in sales may be forming at about the 4.5 million mark.
Supply remained at about double the normal level at 9.8 months, up from 9.7 months, and the median sales price rose from $168,200 in February to $175,200 in March. This represents a decline of 12.4 percent from year-ago levels.
Lawrence Yun, NAR chief economist noted the following:The share of lower priced home sales has trended up, indicating a return of many first-time buyers, which we also see in a parallel member survey. Sales in the upper price ranges remain stalled because of higher interest rates on jumbo loans.
One thing to keep an eye on this year is the changing mix in real estate sales as an increasing number of higher-priced homes are sold after moving through the foreclosure process.
Buyer traffic has been rising, and real estate offices are getting phone inquires about the tax credit. By early summer we should be seeing a positive impact on home sales from record-low mortgage interest rates in addition to the stimulus provisions.
According to RealtyTrac, a California based provider of mortgage default data, a total of 803,489 properties entered some stage of foreclosure during the first quarter, and a growing number of these properties are more expensive homes.
As these distressed properties are sold at reduced prices, it will provide support to the "median" sales price, simply due to the manner in which the median is calculated (i.e., the point above and below which half the samples fall).
Look to the S&P Case-Shiller Home Price Index for a better gauge of which way property values are moving throughout 2009.
TOP STORIES
• GM plans to close 15 plants for 9 weeks - USA Today
• Lewis testified that U.S. urged silence on Merrill deal - Reuters
• U.S. Weighs Revealing Each Bank’s Capital Needs - Bloomberg
• Mortgage Bondholders Form Battle Lines Over Housing Plan - Bloomberg
• Golden State Mortgage Defaults Jump to Record High - DataQuick
• Obama To Push for End ‘Deceptive’ Credit Card Policies - Bloomberg
• Dire straits for state budgets - CNN/Money
• The Reeducation of Tim Geithner - Portfolio.com
MARKETS/INVESTING
• Oil Gains as Weaker Dollar Spurs Inflation Hedging - Bloomberg
• Gold inches up, faces resistance as ETF buys stall - Reuters
• Chinese demand only hope for oil sector in 2009 - Business 24/7
• Akshaya Tritiya & India's mad gold rush - Commodity Online
• An emerging opportunity in U.S. housing - Reuters
• US Natural Gas Prices: "The Fix is Underway" - The Oil Drum
ECONOMY
• New jobless claims rise more than expected to 640K - AP
• US Senators vote for economic crisis probe - AFP
• Those doing the layoffs can feel lingering stress - USA Today
• Feldstein: U.S. Inflation Danger After 2010 - Bloomberg
• Wells CFO: California economy close to bottom - LA Land
INTERNATIONAL
• Global recession worst since Depression, IMF says - AP
• U.K Financial Bailout Reaches 1.4 Trillion Pounds - Bloomberg
• Japan Pays Foreign Workers to Go Home - NY Times
• Russia Cuts Benchmark Rates to Spur Stumbling Economy - Bloomberg
• IMF: Asia could see 'modest recovery' in 2010 - AP
• China Stocks Are ‘Overvalued,’ Says Morgan Stanley - Bloomberg
• Why London bullion market is booming - Commodity Online
• Carney to Give Extra Stimulus Rules Today - Bloomberg
HOUSING
• Mortgage defaults rise but homeowners stay put - LA Times
• Where to Get the Most Rental Income for the Money - BusinessWeek
• Home Prices Gain 0.7% in February From January - Bloomberg
• Housing Prices May Have Stopped Falling - Seeking Alpha
FED/TREASURY/BANKING
• Home Vacancies Give Fed Extra Time - Bloomberg
• Tim Geithner Thumbs His Nose at Congress - Time
• Wall Street’s 1929 Scams Return in Geithner Plan - Bloomberg
• Is the next bubble the Fed balance sheet? - O.C. Register
INTERESTING
• Breakthroughs That Will Change Everything - LiveScience
• Detroit woman's underwire bra deflects bullet - AP
• Darien, CT Home Transformed for “Revolutionary Road” - Zillow Blog###>
Is it significant that the dollar and gold now look like they might be moving together again? Dunno. But, the last two times a similar move upward was seen, it signaled a flight to safety as indicated in blue. October and February were not kind to stocks.
As if the average 401k investor doesn't already have enough on his plate these days, word comes in this WSJ report($) that more than two-thirds of managed funds - the foundation of nearly every company retirement plan - underperform the index they are measured against.
Investors in actively managed mutual funds for the past five years have reason to wonder what they have been paying for: A new study from Standard & Poor's finds that 70% of large-cap fund managers who use the S&P 500-stock index as a benchmark for comparison have failed to match the performance of the index over that time.It's been a while since I've looked at any 401k plan offerings - any ETFs in there yet? Read more...
That is double-bad news, given that the index was down 19% in the five years that ended Dec. 31. The failure of active management is replicated across almost all categories, not only U.S. stock funds but also bond funds and even emerging-markets funds.
What's more, those numbers are similar to the previous five-year cycle. From the close of Dec. 31, 2003 to Dec. 31, 2008, the S&P 500 fell 18.8%, but still beat 71.9% of U.S. actively managed large-capitalization funds, according to S&P Index Services.
Here's a very good indication that a bottom in home prices is still far off in the distance. According to this report in Forbes, some sellers are underpricing their homes in order to generate a bidding war and the speculative fervor in real estate is apparently returning, albeit on a small scale - this is not how markets make bottoms.
Author Matt Woolsey correctly opines that this is not an indication that the clock has been turned back to 2005, going on to note that another big leg down in prices is likely.Two weeks ago, Joyti Goundar, an agent at Redfin, a residential real estate brokerage, entered a bid of $420,000 for a three-bedroom, 1,625-square-foot La Crescenta home outside of L.A., listed at $299,000. When she lost the bid, she wasn't surprised. In July of 2008, Goundar bid $559,000 for a two-bedroom Arcadia house, also outside L.A., listed by Wells Fargo for $459,900. That one received 105 bids, driving the price up to $628,000, according to Los Angeles County records.
"Sellers want to generate a bidding war, and it's working," she says.
The folks at the IMF are telling a much different story about the health of the global banking system than the one told yesterday by Treasury Secretary Tim Geithner.
The new U.K. budget announced a short time ago is being greeted with boos and catcalls as taxes are being raised and debts continue to mount - they sound a bit like the state of California with the important distinction that the Golden State doesn't own a printing press.
This report in the Telegraph provides the details:
Alistair Darling has pledged to hit Britain’s richest workers and savers with a smattering of new taxes to help support the UK through its worst recession since the 1930s.It seems that almost every developed nation in the world is now in the process of turning Japanese in that national debt relative to GDP is rapidly approaching parity. In the U.S., we'll reach that point before you know it.
In what is likely to go down in history as the most downbeat and depressed Budget in peacetime history, the Chancellor pledged to raise the income tax rate for those earning over £150,000 to 50pc, hearkening back to the high tax rates imposed by Governments in the 1960s and 1970s.
He also confirmed that the Government will be forced to borrow £175bn this year and £173bn the next, and would have to increase the size of the national debt from recent levels of below 40pc to almost 80pc within the next five years.
Britain will be stuck in recession for another year as consumers reeling from the housing crash cut back their spending, the International Monetary Fund warns today – undermining Alistair Darling's budget claim that growth will resume at the end of the year.Somehow, given the way things have deteriorated over the last six months, it wouldn't be surprising to see even the IMF forecast prove to be too optimistic. Read more...
In its twice-yearly World Economic Outlook, the IMF predicts that recession in the UK will be "quite severe", with the economy shrinking by 4.1% this year, and continuing to contract, by 0.4%, in 2010. In the budget, Darling forecast 1.25% growth in 2010.
WUSA reports that David Kellermann, Senior Vice President and acting CFO at Freddie Mac, was found dead this morning in the basement of his home, an apparent suicide.
TOP STORIES
• World economy in severe recession, IMF says - Reuters
• AP Exclusive: Fed tests harder on regional banks - AP
• Yahoo profit tumbles, restructuring continues - MarketWatch
• Fannie, Freddie Defaults Rise - Bloomberg
• Housing Bubble Smackdown: Bigger Crash Ahead - InfoWars
• We Fought A.I.G. and A.I.G. Won - NY Times
• Freddie Mac CFO found dead - CNN/Money
• The business of water - Fortune
MARKETS/INVESTING
• Oil hovers under $49 ahead of US inventory report - AP
• Inflows to gold ETFs hits all-time high in Q1: WGC - Reuters
• Banks' Quarterly Earnings Are Misleading - Huffington Post
• Jim Rogers Bares Secrets of Investing - Bloomberg
• Gold's confusing behavior - MarketWatch
• Commodities Boom and Bust - Metal Miner
ECONOMY
• How economics lost sight of real world - Financial Times
• Soaring U.S. Budget Deficit Will Mean Billions in Bond Sales - Bloomberg
• Why the ‘green shoots’ of recovery could yet wither - Financial Times
• Gold Standard and the Definition of Price Stability - Seeking Alpha
• Call This Deflation? - 24h Gold
INTERNATIONAL
• China's economic outlook brightens - CNN/Money
• Budget 2009: Rich face 50% top tax rate above £150,000 - Guardian
• Budget 2009: IMF contradicts Darling's growth claim - Guardian
• Japan's March trade surplus decimated by exports - MarketWatch
• Steinbrueck May Offer $1.1 Trillion Toxic-Asset Plan - Bloomberg
• Central bank darkens view of recession - Globe & Mail
• Canada Cuts Rate to 0.25%, May Keep It There for Year - Bloomberg
• Sweden cuts rates to record low of 0.5% - Financial Times
HOUSING
• Las Vegas tops foreclosure list - CNN/Money
• An Effort to Save a City by Shrinking It - NY Times
• Mortgage rates likely to stay down all year - MarketWatch
• For Housing Crisis, the End Probably Isn’t Near - NY Times
FED/TREASURY/BANKING
• Big bank profits are bogus! Massive public deception! - Money and Markets
• 'Cult of finance' still protecting failed banks, economist says - MarketWatch
• Regarding Wall Street's REIT Bait-And-Switch - Zero Hedge
• Fed's Hoenig: Let insolvent financial firms fail - Reuters
INTERESTING
• More Wii Warriors Are Playing Hurt - NY Times
• South Korea's 'seal men' suffer in downturn - LA Times
• World's major rivers 'drying up' - BBC###
More confusing news from the financial media for a bewildered and weary public - explaining how falling prices are a bad thing...
Among the many other sad, interesting, and inspiring developments over the last week or so, the car that we purchased with the help of that initial wave of home equity money back in 2002 was sold in preparation for our move to Oregon.
It was cause for reflection as so much has changed in those seven years.
Recall that, back in early-2002, the nation was still trying to recover from the effects of the September 11th attacks and short-term interest rates were just below two percent on their way to one and a housing bubble was in its gestation phase, the seeds being sown for the mess that is all around us today.
Home prices were rising, but they had been rising for years.
In the Los Angeles area, starting in about 1998, real estate prices began climbing at a rate of about 10 percent a year which, given the severe downturn earlier in the decade - an overall decline of more than 25 percent from 1991 to 1996 - seemed like a normal sort of rebound.
Having (mostly) unwittingly purchased a house near the bottom in 1995, by the time 2002 rolled around we had oodles of home equity and when the banks started pestering us to refinance or "tap" some of our gains, we went along, hesitantly.
We needed a new car and, between the $15,000 that was just sitting around in a savings account earning a measly two percent and an equal amount that could be quickly "extracted" from our house, it was kind of a "no-brainer".
According to recent sales in the neighborhood at the time, there would be plenty of home equity left over after that withdrawal and, for the first time ever, we began to think of our house as if it was a savings account.
I'm just glad that we never became dependent on that method of financing purchases in the years ahead as so many others did.
After making another equity withdrawal or two to buy some "dumb 'ol gold coins" we soon began thinking about our long term plans and, after refinancing when rates hit rock bottom in 2003, we sold our place and became renters not long thereafter.
I hasten to think what our lives would be like now if we did what so many others did at the time and opted to upgrade our lifestyle by simply repeating this process over and over until the bubble burst.
When we finally did sell our house, we actually felt bad about our loan amount being higher than where it began in 1995 by a few thousand dollars, but knowing that some of that debt was converted into real money at less than $400 an ounce made this a bit easier to take.
It's funny to think about how much the world has changed since 2002.
The seven year old Nissan Maxima shown below was in perfect working order and the only reason we got rid of it is that we need an all-wheel drive vehicle since, wherever we finally end up calling home, we are sure to be driving around in snow during the winter.
Selling it now, before we move, makes that whole process a bit easier and, lest anyone forget, there's no sales tax in Oregon. Coming from a state where you can add 10 percent to the final negotiated price of a new car will make our next purchase, where a simple $200 charge gets tacked on for four years of registration fees, feel like we won the lottery.
That era has now come to an inglorious end for most people.
Listening to Treasury Secretary Tim Geithner's opening remarks today before a congressional oversight panel on the government’s financial-rescue program, one couldn't help but be reminded of Amy Poehler in the debut of Parks and Recreation last week when she opted for a filibuster at a town hall meeting rather than face the wrath of the audience.
Interestingly, when the questioning did begin, Ms. Warren went right to the issue of the disparity between how the banking and auto industry were being treated throughout the long bailout process.
Naturally, the reply was less than confidence inspiring as the retort, "we have to get the financial industry working to get the rest of the economy working again" has long outworn its welcome amongst elected officials and the population in general.
Bloomberg filed this report focusing on whether big banks will require more bailout money, providing the answer that stock market investors were clamoring to hear.Treasury Secretary Timothy Geithner said the “vast majority” of U.S. banks have more capital than needed, stoking a rally in stocks as investors await results of stress tests on the balance sheets of the biggest lenders.
Can't wait for those stress test results.
“Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators,” Geithner said in testimony to a congressional oversight panel on the government’s financial-rescue program. He added that there will be a “series of options” for lenders deemed to need additional money at the conclusion of the tests.
Spain, the U.K., Luxembourg, Portugal, Ireland - who's next to succumb to the scourge of deflation? Yesterday, the New York Times reported that Spanish merchants have been slashing prices with abandon, auguring in the possibility of a dreaded "deflation death spiral".
Once again, falling prices are characterized as the potential source of much bigger problems ahead, as if the world had something even remotely close to "sound money" where currency maintained its value over long periods of time as it did in the U.S. prior to the creation of the Federal Reserve in 1913.Prices dipped everywhere, from restaurants and fashion retailers to pharmacies and supermarkets in March.
...
With the combination of rising unemployment and falling prices, economists fear Spain may be in the early grip of deflation, a hallmark of both the Great Depression and Japan’s lost decade of the 1990s, and a major concern since the financial crisis went global last year.
Deflation can result in a downward spiral that can be difficult to reverse. As unemployment rises sharply and consumers cut spending, companies cut prices. But if sales do not pick up, then revenue can decline further, forcing more cuts in workers or wages.
“It doesn’t mean it will spread here to the U.S., but we need to look closely at Spain and other places to understand the dynamic,” says Simon Johnson, a professor at the Sloan School of Management at the Massachusetts Institute of Technology and a former chief economist for the International Monetary Fund. “It’s like the front line of a new virus outbreak.”If only economists would spend more time examining how they failed the world so miserably over the last few years instead of at a 19th century phenomenon, we'd all be better off.
The Retail Prices Index (RPI) measure of inflation fell to -0.4pc in March, indicating that prices paid by consumers last month were lower than a year ago - a trend not seen since March 1960.If health care costs in the U.K. are anything like those in the U.S., there are probably a lot of irate senior citizens.
RPI inflation, which includes housing and mortgage costs, has been driven down by the the series of aggressive interest rate cuts from the Bank of England which have triggered lower variable rate mortgage repayments .
...
The economy is expected to remain in deflationary territory for many months, which will mean pensioners will receive the lowest possible increase of 2.5pc next year, adding just £2.40 to the full weekly pension, an amount criticised as "derisory and pathetic" by campaigners.
1. It causes consumers and businesses to feel concerned about spending. Why buy that £400 television this week when you are confident it will be cut in price to £350 next month? The same applies to businesses – why invest in new machinery, or software when you think it will fall in price? Deflation can, if it becomes entrenched, cause the whole economy to grind to a halt.Wage cuts, tumbling asset prices, and making debt service more expensive are all legitimate arguments but falling consumer prices really don't belong in this discussion unless it's something more than volatile energy prices and, in the case of the U.K.-style deflation, lower interest rates caused by the central banks that, ironically, are desperately trying to avoid seeing consumer prices move lower.
2. Deflation causes wage cuts. Employers can argue that they do not need to give their staff a pay rise, because their staff can buy more goods with the same salary. Many companies are freezing pay and started cutting wages in some cases.
3. In theory, falling wages should not matter if the price of goods and services fall as well. But in practice it is very damaging psychologically. People paid £30,000 one year do not like being paid £29,000 the following year even if they can buy the same amount of goods. Everyone feels less wealthy, especially home owners whose main asset is falling in price. And when they feel less wealthy, they spend less, causing a vicious downward spiral in the economy.
4. Deflation causes the value of people's debts to mount. A £100,000 mortgage might cost £4,000 to service each year, but the value of the house could fall by £4,000 or more – a dispiriting experience, but you will still need to keep on servicing the debt.
Uber-bank analyst Meredith Whitney talks about the one-time and technical factors that contributed to the recent stellar earnings by big banks during the first quarter.
TOP STORIES
• U.S. to give Chrysler, GM new aid - Reuters
• IMF: Losses from global credit crisis mounting - AP
• Re-inflation falsehoods, fantasies, fabrications, and fake-outs - iTulip
• Treasury asset plan vulnerable to abuse: watchdog - AP
• Stanford Points Fingers in Fraud Case - NY Times
• Dealers prepare for worst if GM files Chapter 11 bankruptcy - USA Today
• Why Commodities Are Still In a Bull Market - SafeHaven
• Note: Hope = Truth - Kunstler, CFN
MARKETS/INVESTING
• Oil edges lower on weak earnings, supplies forecast - MarketWatch
• Gold Rises on Jewelry Demand, Hedge Against Stocks - Bloomberg
• Strategizing a retirement rebound - CNN/Money
• T. Boone Pickens sees oil at $75 at end-year - Reuters
• A Nice Set Up - Butler, Investment Rarities
• “He Said – We Said” - Saut, Raymond James
ECONOMY
• End of economic gloom? - Roubini, Project Syndicate
• (Un)Intended Consequences: Uncertainty, Inflation and Inflexibility - SafeHaven
• Choosing alternatives to layoffs - LA Times
• GM layoffs reported coming over next few days - MarketWatch
• Leading economic indicators slip 0.3% - CNN/Money
INTERNATIONAL
• China, Russia make major breakthrough in energy cooperation - CHINADaily
• Japan reportedly to slash GDP outlook to 3% fall - MarketWatch
• Spain’s Falling Prices Fuel Deflation Fears in Europe - NY Times
• Japan Eases Recession Pain as Wage Cuts Support Jobs - Bloomberg
• China to start building 5 nuclear power plants - CHINADaily
• British economy falls into deflation for first time since 1960 - Telegraph
• China to launch more stimulus investment in second quarter - CHINADaily
• India central bank cuts rates by 0.25 points to 4.75% - MarketWatch
HOUSING
• Demand for O.C. homes back at 2005 levels - O.C. Register
• Study: Nation’s Housing Market Undervalued - The Truth About Mortgage
• Western builder optimism at 6-month high. Why? - O.C. Register
• Don’t Even Say the Words - NY Times
FED/TREASURY/BANKING
• Stress tests present Catch-22 for Treasury - MarketWatch
• Regulators Give Greater Weight to Loan Quality - Bloomberg
• The Subprime Bubble in Living Color - VDare
• Recession is easing - Fed vice chairman - CNN/Money
INTERESTING
• Reporter wins Pulitzer months after being laid off - AP
• U.S. "home invasions" up as thugs seek Mexico drug cash - Reuters
• Al Capone’s Chicago Home for Sale - Zillow Blog###
An interview with Matthew Lynn related to this morning's article at Bloomberg that some thought was advertising the sale of the hottest new financial blog - goldmansachs666.
Though the former Fed chief is the master at this fine art, current Federal Reserve Vice Chairman Donald Kohn does a pretty good impersonation of an innocent bystander during the inflation and bursting of the most recent asset bubble in this speech from earlier today.
For a number of years earlier in the decade, U.S. economic growth was supported importantly by rapid increases in consumption and housing, which, in turn, were fueled by an extended surge of global credit. Housing demand was propelled, in part, by persistently low long-term interest rates, loose underwriting standards on mortgages, and, for a while, expectations of continuing increases in house prices that resulted in the building of too many houses and the elevation of home prices to unsustainable levels. These same developments fed a surge in consumption through the effects on wealth of rising house prices and through various financial innovations that allowed many households to liquefy their housing wealth. Financial intermediaries were further exposed by generally inadequate compensation for risk and increased leverage. As the housing boom petered out and then reversed, both households and lenders found themselves overextended, developments that led to a mutually reinforcing pullback in spending and lending. The dynamics of this adjustment, which coincided with the collapse of the global credit boom, helped push the U.S. economy into deep recession.If only there was something they could have done earlier in the decade... Read more...
Economic policymakers have moved aggressively to counter the threat to economic stability by, in effect, filling some of the gap in private lending and spending with government lending and spending.
This is pretty funny, though not timely. A number of prominent companies have reportedly pulled back from the outsourcing craze of earlier in the decade as U.S. job losses mount.
Anyone who has listened closely over the last few years to what any of the wonks at the Federal Reserve have been saying about what the future holds should be wary of any assurances that inflation will remain under control should "the chain catch the sprocket" as many fear is inevitable, after trillions of dollars have been or will soon be created out of thin air and pushed into the banking system.
John Hilsenrath writes in this WSJ report($) that an exit strategy is right there at the top of the Fed's To Do list, right after saving the global economy from further implosion.
The focus on the issue comes with the Fed's next policy meeting, set for next week. With so many programs already in train, the central bank looks unlikely to take dramatic new actions at the meeting. Assessing signs of improvement in the economy, contingency planning and deliberations on long-term exit strategies are likely to be important parts of the discussions.Did anyone know the Fed had a policy meeting next week?
Inflation might seem like a distant worry today. Last week, the Labor Department reported that consumer prices in March fell year over year for the first time in 54 years. Rising unemployment and idle factory floors mean businesses have little incentive or capacity to raise wages or the prices they charge customers. There's a risk, in fact, that if the economy weakens much more, the opposite of inflation -- deflation -- could become a serious threat.It's hard to imagine that they will do anything other than err on the side of being too late in fighting inflation for fear of halting the recovery.
That's why the Fed's goal for now is to get inflation higher, not lower. It has effectively been printing money as part of its rescue efforts. When it buys mortgage-backed securities or makes commercial-paper loans, as it has been doing, it electronically credits its counterparty banks with cash in return, which pumps new cash into the financial system.
At some point when the economy recovers from recession, the Fed is going to have to withdraw this money and raise interest rates. Because the Fed is still ramping up many of its programs, the amount of money it will have to withdraw some day is sure to be even higher than today's astronomic levels.
...
But Paul Kasriel, chief economist of Northern Trust of Chicago, isn't so sure the central bank will get it right. He's not worried about what the Fed has done to date. He's worried the Fed will take too long to make the decision to unwind it.
"The Fed is going to want to make sure that the economy has started on a sustained growth path, and of course there will be a lot of uncertainty about that," Mr. Kasriel says. The real risk, he says, is that the Fed overstays its accommodative policies, "for fear of choking off a recovery."
The 2006 documentary America: Freedom to Fascism by the late Aaron Russo is probably worth another look after the events of the last eighteen months.
There have been more than a few comments left here by readers over the years about families with big salaries and/or bonuses carping about how tough it is to get by on just a couple hundred thousand dollars a year in income.
Always of modest means, never having had to foot the bill for little ones around the house, and having avoided living and working in the Bay Area, my view of things is probably a bit slanted in the other direction but, to me, a quarter million dollars a year looks to be a huge opportunity to sock money away for retirement.
Via the Wall Street Journal comes this tale of the difficulty some have in making ends meet.
Ellen Parnell and her husband, Donald Parnell Jr., seem like the kind of well-off couple President Barack Obama has in mind when he suggests raising taxes on families earning more than $250,000 a year. A surgeon at Fort Sanders Sevier Medical Center in Sevierville, Tenn., he drives an Infiniti. They vacation at a beach resort every year.While not familiar with the local real estate market at all, clearly, you can get a lot of house for not too much money in Sevierville.
Yet, right now he is working seven days a week. The car is more than a decade old, the vacation home in Sandestin, Fla., comes at a moderate weekly rate because members of Ms. Parnell's extended family own it. Her family of five would like more room than they have in their 2,500-square-foot home, yet they can't afford anything larger. The downturn has them skittish about paying for renovations.
"I'm not complaining, but the reality is Obama may call me wealthy, but I thought we were just good old middle class," says Ms. Parnell. "Our needs are being met, but we don't have a load of cash to cover wants."The Parnells should probably take a basic personal finance class or two and many of their problems might quickly be solved - that $4,000 a month in mortgage payments for a house that's too small
...
Wealth and comfort "depends on where you're coming from," said Lois Avitt, a sociologist and founding director of the Institute for Socio-Financial Studies in Charlottesville, Va. To a family earning $50,000, $250,000 is well off, but for the family earning $250,000, rising college and medical costs and dropping home values make the perception debatable.
The reasons for the insecurity are that net worth is declining at the same time that expenses like education and health care, two of the biggest concerns cited by members of that income group, are going up faster than wages and income, says Heidi Shierholz, an economist at the Economic Policy Institute in Washington. "Those are the biggies. They are huge parts of the set of middle-class aspirations, and the prices of those have increased way faster than income." The bursting of the housing bubble makes that more stark.
...
San Jose, Calif., Mayor Chuck Reed calls a family living in Silicon Valley earning $250,000 "upper working class." That is about what two engineers working at a technology firm can expect to make, but "a family earning $250,000 a year can't buy a home in Silicon Valley," he said.
James Duran owns a human-resources company in Silicon Valley and is president of the Hispanic Chamber of Commerce in California. He supported Mr. Obama, but is worried about the tax proposals. He has laid off some employees in recent months and has been wondering how he can fund an extension of those workers' health-care benefits.
Mr. Duran said he and his wife earn about $400,000 annually, but "I'm barely getting by." They have high property and state taxes, as well as college tuition and savings to cover. "I'm an Obama man, but this side of him is a difficult pill for me," he said.
...
For the Parnells, their perception of themselves is based on the math. The value of their house is down $60,000. Ms. Parnell says the couple's gross income last year was about $260,000. Taxes, premiums for medical care and deductions for Social Security and their 401(k) contributions cut the gross to about $12,000 per month. The family tithes $1,300 a month at their church. Their mortgage, second mortgage and payment on land they bought is nearly $4,000 a month. Other expenses, including their family car payment, insurance and college funds, as well as basics like food, utilities and donations to charities, leave them with about $1,200 left over each month.
"I'm not after sympathy. We are blessed. What I want is a reality check on what rich means," Ms. Parnell says. "I can pay my mortgage and I can buy some clothes. I'm not going without, but I'm not living a life of luxury."
A lot has happened since the yellow metal was last talked about here. The flow of gold bars into the ETFs has reversed direction and, after a surge in scrap supplies and a buying strike, bullion has stopped moving out of India and imports have resumed.
As might be expected, prices have plunged, but things are looking up today. In this Business Bullet from the Telegraph, at least a few analysts think higher prices might be ahead.
Charles Gibson, a gold expert at Edison Investment Research, argues in a new report that negative real interest rates (below inflation) in the US and beyond has upset the "leasing" machinery in the gold industry and led to a sustained market squeeze.The gold market needs something to revive it these days. Read more...
This is what occurred in the late 1970s, driving gold prices to $850 and ounce – roughly $1,560 in today's terms. Gold finished last week at $870.
Mr Gibson said the powerful dynamic could lead to a second leg of this gold bull market, even though the metal has already enjoyed a torrid run over the last eight years.
In normal times, gold mining companies sell – or "hedge" – a chunk of their output in advance through bullion banks. These banks cover their positions by leasing gold from central banks. This bread-and-butter trade created excess supply of 500 tonnes each year until the start of this decade.
Low real interest rates have caused the process to reverse, creating a shortfall of about 500 tonnes. The process accelerates as rates turn negative, leading to a scramble by market players to find physical gold.
TOP STORIES
• BofA Profit Rises on Housing, Trading Gain - Bloomberg
• With IBM out, Oracle jumps in to buy Sun for $7.4B - Yahoo! Tech
• Citigroup Credit Losses Rising Rapidly, Goldman Says - Bloomberg
• U.S. May Convert Banks’ Bailouts to Equity Share - NY Times
• Idea of quick GM bankruptcy filing meets with skepticism - USA Today
• Gold yields an annual average return of 26%: WGC - Commodity Online
• Goldman Sachs Love Blog Is Now for Sale to Anyone - Bloomberg
• Gold price could hit $1,500 - Telegraph
MARKETS/INVESTING
• Oil falls below $48 as investors eye US earnings - AP
• Gold steady near 3-mth low, ETF falls for second day - Reuters
• EMs have the potential to raise Crude to $72 - Commodity Online
• Gloom about gold, except among the radical bugs - MarketWatch
• Funds try to spot the great oil rebound - Telegraph
• Wishful Thinking - Hussman Funds
ECONOMY
• US economy facing 'substantial risks' - Telegraph
• Some lose a job and become an entrepreneur - USA Today
• Southern California office market is hammered by recession - LA Times
• As General Growth Stumbles, Region Joins Retail Slump - Wash. Post
• What Good Are Economists Anyway? - BusinessWeek
INTERNATIONAL
• A Bigger, Bolder Role Is Imagined For the IMF - Wash. Post
• Just sketch out the route ahead, Mr Darling - Telegraph
• China sovereign wealth fund may invest in Europe - AFP
• Australia’s Producer Prices Unexpectedly Decline 0.4% - Bloomberg
• Number of workers in overdraft 'doubles in two years' - Telegraph
• Toyota Banks on Big Being Better in China - Bloomberg
• Canadians frugal, but less fretful - Globe & Mail
• Darling looks beyond the recession - Guardian
HOUSING
• Housing Data Could Signal If Bust Is Over - Wash. Post
• Chancellor's £50bn home loans boost - Guardian
• The Housing Pox: Is It Nearing an End? - Kiplinger
• Is the housing market about to recover? - BBC
FED/TREASURY/BANKING
• The Fed is now peddling inflation - MSN Money
• Zero Percent on Treasury Bills as China, Fed Converge - Bloomberg
• U.S. bank lending drops in February despite bailouts - Reuters
• Volcker: Fed Authority Probably to Be Reviewed - Bloomberg
INTERESTING
• Layoffs are driving change among the Amish - LA Times
• CalPERS, CalSTRS award big bonuses despite losses - SacBee
• Iraq Stock Exchange goes electronic - USA Today###
A tip of the hat to ES for sending this my way.
The Harper's image and title on this subject are much more compelling than the ones below, but The Economist provides a timely update on the now-familiar story in this report.
Shelter, or burden?The National Association of Realtors still touts that, don't they?
The social benefits of home ownership look more modest than they did and the economic costs much higher
IN A scene from the film “It’s a Wonderful Life”, a happy couple is about to enter their new home. Jimmy Stewart, whose firm has sold them the mortgage, reflects that there is “a fundamental urge…for a man to have his own roof, walls and fireplace.” He offers them bread, salt and wine so “joy and prosperity may reign for ever”.That embodies the Anglo-Saxon world’s attitude to home ownership. Owning your own roof, walls and fireplace, it is thought, is good for householders because it helps them accumulate wealth.
It is good for the economy because it encourages people to save. And it is good for society because homeowners invest more in their neighbourhoods, engage more in civic activities and encourage their children to do better at school than do renters. Home ownership, in short, benefits everyone—not just the homeowner—and the more there is of it, the better. Which is why it is usually encouraged by the government. In America, Ireland and Spain, homeowners can deduct mortgage-interest payments from taxable income.Yes, conventional wisdom is often wrong...
Yet the worldwide crash was bound up in this supposed miracle of social policy.
Read more...
TOP STORIES
• China's Wen says key currency countries need watching - Reuters
• US economy still facing 'substantial risks' - AFP
• Should the U.S. bail out California too? - LA Times
• Housing: Building castles of sand - Economist
• VC investment in startups keeps falling - SF Gate
• Inflation Doves Put Faith in Output-Gap Religion - Baum, Bloomberg
• Off the Shelf: Free-Market Flaws, Exposed - NY Times
• Why central banks refuse to sell gold? - Commodity Online
MARKETS/INVESTING
• Obama may not sanction IMF gold sale - Commodity Online
• Does This Market Rally Have Legs? - NY Times
• India’s gold imports pick up - Commodity Online
• Finding a financial road map - LA Times
• Wall Street: Plan for a storm - CNN/Money
• Indian housewives beat top biz brains - Commodity Online
ECONOMY
• Preview: Goods Orders, Home Sales Probably Fell - Bloomberg
• More plant closings, job cuts due at GM - CNN/Money
• When financial ruin is one misstep away - LA Times
• Volcker: Recovery will be a 'long slog' - CNN/Money
• State unemployment rate highest since 1941 - SF Gate
INTERNATIONAL
• The world economy: Buckle down - Economist
• Dubai Index Rises as Ruler Says ‘Worst Is Over’ - Bloomberg
• China's economy: Bamboo shoots of recovery - Economist
• Chancellor's £50bn home loans boost - Guardian
• ECB’s Trichet Won’t Exclude Cut, Says Zero Rates Inappropriate - Bloomberg
• China seeks oversight of reserve currency issuers - MarketWatch
• Germany's bail-out: Too little, and late - Economist
• Bloom or bust? - Globe & Mail
HOUSING
• When will the housing market hit bottom? - The Independent
• When the Real Estate Game Cost $9.95 - NY Times
• Home sellers seek help from a saint - LA Times
• Home ownership: Shelter, or burden? - Economist
FED/TREASURY/BANKING
• Fed officials suggest worst of recession is over - Reuters
• It May Be Time for the Fed to Go Negative - NY Times
• Bank bailout plan's 'stress tests' already causing stress - LA Times
• Kohn: Fed is helping - CNN/Money
INTERESTING
• Bogus waiter tricks customers at 2 NJ restaurants - AP
• Dividing debts in divorce - LA Times
• Arguing the size of the "tea party" protest - CSM###
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